FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 2003 Commission File No. 0-8765
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BIOMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 Monrovia Avenue, Newport Beach, California 92663
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (949) 645-2111
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(Not applicable)
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
Defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,752,431 shares of common
stock as of January 14, 2004.
1
BIOMERICA, INC.
INDEX
PART I
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Statements of Operations and
Comprehensive Loss (unaudited) - Three and six Months Ended
November 30, 2003 and 2002........................................3 & 4
Condensed Consolidated Balance Sheet (unaudited) -
November 30, 2003.................................................5 & 6
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended November 30, 2003 and 2002...........................7
Condensed Consolidated Statement of Changes in Shareholders'
Equity (unaudited) - Six Months Ended November 30, 2003...............8
Notes to Consolidated Financial Statements.........................9-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data.......................................19-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk........21-22
Item 4. Controls and procedures..............................................22
PART II Other Information....................................................23
Item 1. Legal Proceedings....................................................23
Item 2. Changes in Securities and Use of Proceeds............................23
Item 3. Defaults upon Senior Securities......................................23
Item 4. Submission of Matters to a Vote of Security Holders..................23
Item 5. Other Information....................................................23
Item 6. Exhibits and Reports on Form 8-K.....................................23
Signatures...........................................................24
2
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
Six Months Ended Three Months Ended
November 30, November 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales .................................................. $ 4,434,215 $ 4,226,038 $ 2,269,856 $ 2,136,529
Cost of sales ......................................... 3,137,829 2,952,354 1,611,118 1,517,924
------------ ------------ ------------ ------------
Gross profit .......................................... 1,296,386 1,273,684 658,738 618,605
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative ................... 1,594,873 1,457,869 720,473 701,711
Research and development .............................. 141,753 110,206 67,412 62,329
------------ ------------ ------------ ------------
1,736,626 1,568,075 787,885 764,040
------------ ------------ ------------ ------------
Operating loss from continuing operations .................. (440,240) (294,391) (129,147) (145,435)
------------ ------------ ------------ ------------
Other Expense (income):
Interest expense ...................................... 15,376 17,700 4,915 6,903
Other income, net ..................................... (33,258) (51,922) (26,247) (3,942)
------------ ------------ ------------ ------------
(17,882) (34,222) (21,332) 2,961
------------ ------------ ------------ ------------
Loss from continuing operations, before minority interest
in net loss of consolidated subsidiaries and
income taxes ............................................ (422,358) (260,169) (107,815) (148,396)
Minority interest in net gain (losses) of consolidated sub.. 93,819 (17,867) 2,761 (19,871)
------------ ------------ ------------ ------------
Loss from continuing operations, before income taxes ....... (328,539) (278,036) (110,576) (168,267)
Income tax expense ......................................... -- 1,794 -- 194
------------ ------------ ------------ ------------
Net loss from continuing operations ........................ (328,539) (279,830) (110,576) (168,461)
3
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS - Continued (UNAUDITED)
Six Months Ended Three Months Ended
November 30, November 30,
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Discontinued operations:
Income (loss) from discontinued operations, net ............. (2,944) 38,531 (3,020) 14,437
-------------- -------------- ------------- --------------
Net loss ...................................................... (331,483) (318,361) (113,596) (182,898)
Other comprehensive gain (loss), net of tax
Unrealized gain (loss) on available-for-sale securities ..... 22,362 (1,757) (19,141) (317)
-------------- -------------- ------------- --------------
Comprehensive loss ............................................ $ (309,121) (320,118) (132,737) $ (183,215)
============== ============== ============= ==============
Basic net loss per common share:
Net loss from continuing operations ...................... $ (.06) $ (.05) $ (.02) $ (.03)
Net loss from discontinued operations .................... (.00) (.01) (.00) (.00)
-------------- -------------- ------------- --------------
Basic net loss per common share ............................... $ (.06) $ (.06) $ (.02) $ (.03)
============== ============== ============= ==============
Diluted net loss per common share
Net loss from continuing operations ...................... $ (.06) $ (.05) $ (.02) $ (.03)
Net loss from discontinued operations .................... (.00) (.01) (.00) (.00)
-------------- -------------- ------------- --------------
Diluted net loss per common share ............................. $ (.06) $ (.06) $ (.02) $ (.03)
============== ============== ============= ==============
Weighted average number of common and common equivalent shares:
Basic and diluted ........................................ 5,675,890 5,208,818 5,752,431 5,245,673
============== ============== ============= ==============
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
November 30,
2003
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Assets
Current Assets
Cash and cash equivalents ............................................. $ 296,939
Available for-sale securities ......................................... 35,474
Accounts receivable, less allowance for doubtful accounts of $126,053.. 1,355,874
Inventories, net of reserve of $187,371 ............................... 2,655,486
Notes receivable ...................................................... 1,619
Prepaid expenses and other ............................................ 175,570
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Total Current Assets ............................................ 4,520,962
Inventory, non-current .................................................... 26,000
Property and Equipment, net of accumulated depreciation and amortization .. 593,427
Intangible assets, net of accumulated amortization ........................ 50,831
Other Assets .............................................................. 62,904
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$5,254,124
===========
The accompanying notes are an integral part of these statements.
5
BIOMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
November 30,
2003
------------
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit ............................................... $ --
Accounts payable and accrued liabilities ..................... 1,115,202
Accrued compensation ......................................... 491,226
Current portion of shareholder loan .......................... 86,400
Net liabilities from discontinued operations ................. 367,299
-------------
Total Current Liabilities ............................... 2,060,127
Shareholder loan .................................................. 237,185
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Total Liabilities ................................................. 2,297,312
-------------
Minority interest ................................................. 2,058,422
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Shareholders' Equity
Common stock, $0.08 par value authorized 25,000,000 shares,
subscribed or issued and outstanding 5,752,431 ............. 460,193
Additional paid-in-capital ................................... 17,211,165
Accumulated other comprehensive gain ......................... 12,705
Accumulated deficit .......................................... (16,785,673)
-------------
Total Shareholders' Equity ........................................ 898,390
-------------
Total Liabilities and Equity ...................................... $ 5,254,124
=============
The accompanying notes are an integral part of these statements.
6
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended November 30, 2003 2002
---------- ----------
Cash flows from operating activities:
Net loss from continuing operations ........................................... $(328,463) $(279,830)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ............................................ 57,449 72,650
Minority interest in net loss of consolidated
Subsidiary ............................................................. (93,819) 17,867
Common stock, warrants and options issued for services
rendered ............................................................... 55,172 99,131
Provision for losses on accounts receivable .............................. 6,008 (920)
Provision for losses on inventory ........................................ 45,000 --
Changes in current assets and liabilities:
Accounts Receivable .................................................... 301,354 220,167
Inventories ............................................................ (51,554) 225,343
Prepaid expenses and other current assets .............................. (5,766) 4,031
Accounts payable and other accrued liabilities ......................... (164,932) (46,153)
Accrued compensation ................................................... 158,326 40,809
---------- ----------
Net cash (used in) provided by operating activities ........................... (21,225) 353,095
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment ...................................... (244,948) (60,910)
Other assets ............................................................. (19,504) --
Purchases of intangibles ................................................. -- (21,986)
---------- ----------
Net cash used in investing activities ......................................... (264,452) (82,896)
---------- ----------
Cash flows from financing activities:
Change in minority interest .............................................. 6,180 10,501
Increase (decrease) in shareholder loan .................................. 20,035 (52,050)
Private placement, net of offering costs ................................. 30,500 --
Exercise of stock options ................................................ 2,000 --
Decrease in line of credit ............................................... (426) (65,669)
---------- ----------
Net cash provided by (used in) financing activities ........................... 58,289 (72,395)
---------- ----------
Net cash used in discontinued operations ...................................... (840) (2,295)
---------- ----------
Net (decrease) increase in cash and cash equivalents .......................... (228,228) 160,686
Cash at beginning of period ................................................... 525,167 329,277
---------- ----------
Cash at end of period ......................................................... $ 296,939 $ 489,963
========== ==========
Supplemental disclosures on non-cash financing activity
Issuance of common stock at market value in exchange for
settlement of accrued wages and shareholder loan ......................... $ 20,000 $ --
========== ==========
The accompanying notes are an integral part of these statements.
7
BIOMERICA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED November 30, 2003
Common Stock
Common Stock Subscribed
--------------------------- ---------------------------
Accumulated
Number Additional Other
of Paid-in Comprehensive Accumulated
Shares Amount Capital Shares Amount Gain (loss) Deficit Total
------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at
May 31, 2003 5,522,431 $ 441,793 $ 17,117,393 18,000 $ 4,500 $ (9,657) $(16,454,190) 1,099,839
Exercise of stock
Options 10,000 800 1,200 2,000
Change in
unrealized
gain on available 22,362 22,362
for sale securities
Net proceeds from
private placement 220,000 17,600 37,400 (18,000) (4,500) 50,500
Compensation
expense related
to the fair
value of common stock
and warrants
issued to employees
in excess of con-
sideration received 55,172 55,172
Net loss (331,483) (331,483)
------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance at 5,752,431 $ 460,193 $ 17,211,165 -- -- $ 12,705 $(16,785,673) $ 898,390
November 30, 2003 ============= ============= ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these statements.
8
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
November 30, 2003
(1) Reference is made to Note 2 of the Notes to Consolidated Financial
Statements contained in Biomerica, Inc.'s (the "Company") Annual Report on
Form 10-KSB for the fiscal year ended May 31, 2003, for a summary of
significant accounting policies utilized by the Company.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP"), requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements, and the report amounts of revenues and expenses during the
reporting period. Significant estimates made by Biomerica's and Lancer's
management include, but are not limited to, allowances for doubtful
accounts, allowances for sales returns, valuation of inventories,
realizability of property and equipment through future operations and
realizability of deferred tax assets. Actual results could materially
differ from those estimates.
(2) As of November 30, 2003, the Company had cash and available-for-sale
securities in the amount of $332,413 and working capital of $2,460,835.
Cash and working capital totaling $224,237 and $2,477,013, respectively,
relates to the Lancer subsidiary. Lancer's line of credit restricts
Biomerica's ability to draw on Lancer's resources and, as such, said cash,
working capital and equity are not available to Biomerica.
The Company has suffered substantial recurring losses from operations over
the last couple of years. The Company has funded its operations through
debt and equity financings, and may have to do so in the future.
ReadyScript operations were discontinued in May 2001 and Allergy Immuno
Technologies, Inc. was sold in May 2002. ReadyScript and Allergy Immuno
Technologies were previously contributors to the Company's losses. The
Company has reduced operating costs through certain cost reduction efforts
and plans to concentrate on its core business in Lancer and Biomerica to
increase sales. There can be no assurance that the Company will be able to
become profitable, generate positive cash flow from operations or obtain
the necessary equity or debt financing to fund operations in the future.
Should the Company be unable to reduce costs adequately or should the
Company be unable to secure additional financing, the result for the
Company could be the inability to continue operations.
The Company will continue to have limited cash resources. Although the
Company's management recognizes the imminent need to secure additional
financing there can be no assurance that the Company will be successful in
consummating any such transaction or, if the Company does consummate such
transaction, that the terms and conditions of such financing will not be
unfavorable to us.
Our independent certified public accountants have concluded that these
factors, among others, raise substantial doubt as to the Company's ability
to continue as a going concern for a reasonable period of time, and have,
therefore modified their audit report on the Company's annual consolidated
financial statements as of and for the year ended May 31, 2003, in the form
of an explanatory paragraph describing the events that have given rise to
this uncertainty. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company operating.
9
These consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative
cash flows from operations. Biomerica's shareholder's line of credit
expired September 13, 2003. The unpaid principal and interest of $337,835
was converted into a note payable bearing interest at 8% and payable in
monthly installments over four years. The monthly payments required to pay
the loan off in four years would be $8,248. The Company is currently making
payments of $7,200 per month. The terms of the note are currently being
negotiated. The note is secured by inventory and accounts receivable of
Biomerica.
During the quarter ended November 30, 2003, the Company's operations used
cash of $21,225. This compares to cash provided by operations of $363,596
in the same period in the prior fiscal quarter. Cash provided by financing
activities was $58,289, which resulted in part from a private placement at
Biomerica of $30,500, an increase in shareholder loan of $20,035, exercise
of stock options of $2,000 and change in minority interest of $6,180.
(3) In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based
Compensation - Transition And Disclosure," which amended FAS No. 123
"Accounting for Stock-Based Compensation." The new standard provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation.
Additionally, the statement amends the disclosure requirements of FAS No.
123 to require prominent disclosures in the annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
statement is effective for financial statements for fiscal years ending
after December 15, 2002. In compliance with FAS No. 148, we have elected to
continue to follow the intrinsic value method in accounting for our
stock-based employee compensation plan as defined by APB No. 25,
"Accounting for Stock Issued to employees."
The Black Sholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuations models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options. For purposes of pro forma disclosure, the estimated
fair value of the options is amortized to expense over the options vesting
period. Adjustments are made for options forfeited prior to vesting. The
effect on compensation expense, net loss, and net loss per common share had
compensation costs for the Company's stock option plans been determined
based on a fair value at the date of grant consistent with the provisions
of SFAS 148, for the six months and quarter ended November 30 is as
follows:
Six Months Ended Three Months Ended
November 30, 2003 2002 2003 2002
---------------------------------------------------------------------------------------
Net loss from continuing
operations, as reported $(328,539) $(279,830) $(110,576) $(168,461)
Plus: Stock-based employee compensation
expense included in reported net loss 55,172 32,364 7,092 65,818
Less: Stock-based employee compensation
expense determined using fair value
based method (12,575) (24,288) (6,269) (12,144)
---------------------------------------------------------------------------------------
Net loss from continuing operations,
pro forma $(285,942) $(271,754) $(109,753) $(114,787)
=======================================================================================
Pro forma net loss from
continuing operations
per share - basic $ (0.03) $ (0.02) $ (.02) $ (.03)
=======================================================================================
Pro forma net loss from
continuing operations
per share - diluted $ (0.03) $ (0.02) $ (.02) $ (.03)
=======================================================================================
10
(4) The following summary presents the options granted, exercised, expired, and
outstanding as of November 30, 2003:
Weighted
Average
Number of Options Exercise
Employee Non-employee Total Price
-------- ------------ ----- -----
Outstanding
May 31, 2003 990,386 75,000 1,065,386 $0.99
Granted -- -- -- 0.00
Exercised -- (10,000) (10,000) 0.20
Expired (2,250) -- (2,250) 0.85
Cancelled (3,000) -- (3,000) 0.40
---------- ---------- ---------- ----------
Outstanding
November 30, 2003 985,136 65,000 1,050,136 $1.00
========== ========== ========== ==========
Weighted
Average
Number of Warrants Exercise
Employee Non-employee Total Price
-------- ------------ ----- -----
Outstanding
May 31, 2003 1,285,688 1,131,746 2,417,434 $2.79
Granted 170,000 32,000 202,000 0.25
Exercised -- -- -- 0.00
Expired -- -- -- 0.00
---------- ---------- ---------- ----------
Outstanding
November 30, 2003 1,455,688 1,163,746 2,619,434 $2.60
========== ========== ========== ==========
(5) The information set forth in these condensed consolidated statements is
unaudited and may be subject to normal year-end adjustments. The
information reflects all adjustments which, in the opinion of management,
are necessary to present a fair statement of the consolidated results of
operations of Biomerica, Inc., for the periods indicated. It does not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flow in conformity with
generally accepted accounting principles. Please see the Company's Annual
Report on Form 10-KSB for the fiscal year ended May 31, 2003 for more
detailed footnotes.
(6) Consolidated results of operations for the interim periods covered by this
report may not necessarily be indicative of results of operations for the
full fiscal year.
(7) Reference is made to Note 3 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2003, for a description of the investments in
affiliates and consolidated subsidiaries.
(8) Reference is made to Notes 5 & 11 of the Notes to Consolidated Financial
Statements contained in the Company's Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2003, for information on commitments and
contingencies.
(9) Aggregate market value exceeded cost of available-for-sale securities by
approximately $12,705 at November 30, 2003.
11
(10) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE ("EPS"). SFAS No. 128 requires dual presentation of basic EPS and
diluted EPS on the face of all income statements issued after December 15,
1997 for all entities with complex capital structures. Basic EPS is
computed as net income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities.
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding
common stock options and warrants because their effect was antidilutive due
to losses incurred by the Company.
As of November 30, 2003, there was a total of 3,669,570 potential dilutive
shares of common stock outstanding.
(11) In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS", which requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it
is incurred with the associated asset retirement costs being capitalized as
a part of the carrying amount of the long-lived asset. SFAS No. 143 also
includes disclosure requirements that provide a description of asset
retirement obligations and reconciliation of changes in the components of
those obligations. The statement is effective for fiscal years beginning
after June 15, 2002. The Company does not expect the adoption of SFAS No.
143 to have a material effect on the Company's consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES," which updates accounting and
reporting standards for personnel and operational restructurings. The
Company was required to adopt SFAS No. 146 for exit, disposal or other
restructuring activities that are initiated after December 31, 2002, with
early application encouraged. The Company adoption of SFAS No. 146 did not
have a material effect on the Company's consolidated financial position or
results of operations.
In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or
modified after June 30, 2003. The adoption of this statement is not
expected to have a significant effect on the Company's consolidated
financial position or results of operations.
In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into
or modified after May 31, 2003. The adoption of SFAS No. 150 did not have a
significant effect on the Company's consolidated financial position,
results of operations, or cash flows.
In November 2002, FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
12
guarantee. The initial recognition and initial measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
applicable for financial statements of interim periods ending after
December 15, 2002. The adoption of FIN 45 did not have a material impact on
the Company's financial position, results of operations or cash flows.
In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," relating to consolidation of certain entities. FIN 46 will
require identification of the Company's participation in variable interests
entities ("VIEs"), which are defined as entities with a level of invested
equity that is not sufficient to fund future activities to permit them to
operation on a stand-alone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. For entities
indentified as VIEs, FIN 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any,
bears a majority of the exposure to its expected losses, or stands to gain
from a majority of its expected returns. FIN 46 also sets forth certain
disclosures regarding interests in VIEs that are deemed significant, even
if consolidation is not required. The adoption of FIN 46 did not have a
material impact on the Company's financial position, results of operations
or cash flows.
(12) Financial information about foreign and domestic operations and export
sales is as follows:
For the Six Months Ended
11/30/03 11/30/02
-------- --------
Revenues from sales to unaffiliated
customers:
United States $2,168,000 $2,362,000
Asia 100,000 117,000
Europe 1,196,000 954,000
South America 248,000 167,000
Oceania 286,000 208,000
Other 436,000 418,000
---------- ----------
$4,434,000 $4,226,000
========== ==========
No other geographic concentrations exist where net sales exceed 10% of
total net sales.
(13) Pursuant to a decision by the Nasdaq Listing Qualifications Panel, the
Company's common stock was delisted from the Nasdaq Stock Market effective
June 20, 2002, for failure to comply with the net tangible assets or
shareholders' equity requirements as set forth in Marketplace Rule
4310(c)(2)(B). The Company's securities were immediately eligible to trade
on The OTC Bulletin Board and are traded under the symbol BMRA.OB.
(14) Lancer has a $400,000 line of credit with a financial institution, which
expires January 24, 2004. Borrowings are made at prime plus 2.0%, in no
event less than 8.0%, (8.0% at November 30, 2003), and are limited to 80%
of accounts receivable less than 90 days old with a liquidity factor of
94%. The outstanding balance at November 30, 2003 was $0 and the unused
portion available was approximately $326,000.
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment. The lending
agreement for the line of credit requires, among other things, that Lancer
maintain a tangible net worth ratio of $2,100,000 and that receivables'
payments be sent to a controlled lockbox. In addition to interest, a
management fee of .25% of the average monthly outstanding loan balance and
an unused balance fee of .0425% on the average monthly unused portion
available are required. Lancer is not required to maintain compensating
balances in connection with this lending agreement. Proceeds from this line
cannot be used to support the operations of Biomerica.
13
In October 2003 the line of credit was extended to January 24, 2004 by GE
Capital Healthcare Financial Services so that Lancer could explore other
financing options. An agreement with another financing institution is in
the process of being finalized.
Biomerica entered into an agreement for a line of credit agreement on
September 12, 2000 with a shareholder whereby the shareholder would loan to
the Company, as needed, up to $500,000 for working capital needs. The line
of credit bore interest at 8%, was secured by accounts receivable and
inventory, and expired September 13, 2003. The outstanding principal and
interest on September 12, 2003 was $337,835, including principal of
$288,050 and interest of $48,985, all of which was converted into a note
payable bearing interest at 8% with interest and principal due monthly. The
monthly payments required to pay the loan off in four years would be
$8,248. The Company is currently paying $7,200 per month toward interest
and principal. The terms of the note are currently being negotiated. The
remaining unpaid principal and interest, if any, are due September 12,
2007. The note is secured by inventory and accounts receivable of
Biomerica.
(15) In June 2003, the Company issued 202,000 shares of restricted common stock
in a private placement to insiders and qualified investors. The stock was
sold at $.25 per share and had one warrant for the purchase of restricted
common stock attached to each share of common stock purchased. During the
three months ended August 31, 2003, $48,080 was recorded as compensation
expense for the excess in the market value of the issued common stock and
warrants over the consideration received. The warrants vest immediately,
expire in five years, and are exercisable at $.25 per share.
On June 2, 2003, Lancer granted 52,500 stock options to purchase shares of
Lancer common stock at an exercise price of $.43 per share to directors of
the Lancer for services rendered. The options vest over two years and have
a term Of five years.
On June 2, 2003, Lancer granted 75,000 stock options to purchase shares of
Lancer common stock at an exercise price of $.43 per share to its Chief
Executive Officer in lieu of salary. The options vest over three years and
have a term of five years.
On June 2, 2003, Lancer granted 120,000 stock options to purchase shares of
the Lancer's common stock at an exercise price of $.43 per share as
pursuant to terms of the Employment agreement between Lancer and Dan
Castner, the Vice President of Sales and Marketing. The options vest over
four years and have a term of five years.
(16) Reportable business segments for the six months and quarter ended November
30, 2003 and 2002 are as follows:
Six Months Three Months
Ended November 30, Ended November 30,
2003 2002 2003 2002
---------------------------------------------------------------------------------------
Domestic sales:
Orthodontic products $1,518,000 $1,566,000 $ 784,000 $ 812,000
=======================================================================================
Medical diagnostic products $ 650,000 $ 796,000 $ 256,000 $ 269,000
=======================================================================================
Foreign sales:
Orthodontic products $1,366,000 $1,224,000 $ 782,000 $ 693,000
=======================================================================================
Medical diagnostic products $ 900,000 $ 640,000 $448,000 $ 363,000
=======================================================================================
14
Six Months Three Months
Ended November 30, Ended November 30,
2003 2002 2003 2002
---------------------------------------------------------------------------------------
Net sales:
Orthodontic products $2,884,000 $2,790,000 $1,566,000 $1,505,000
Medical diagnostic products 1,550,000 1,436,000 704,000 632,000
---------------------------------------------------------------------------------------
Total $4,434,000 $4,226,000 $2,270,000 $2,137,000
=======================================================================================
Operating (loss) income:
Orthodontic products $ (147,000) $ (20,000) $ (2,000) $ 25,000
Medical diagnostic products (293,000) (274,000) (127,000) (170,000)
---------------------------------------------------------------------------------------
Total $ (440,000) $ (294,000) $ (129,000) $ (145,000)
=======================================================================================
Operating loss from discontinued segment:
ReadyScript $ 2,944 $ 38,531 $ 3,020 $ 14,437
---------------------------------------------------------------------------------------
Total $ 2,944 $ 38,531 $ 3,020 $ 14,437
=======================================================================================
Domestic long-lived assets:
Orthodontic products $ 317,000 $ 52,000
Medical diagnostic products 137,000 184,000
---------------------------------------------------
Total $ 454,000 $ 236,000
===================================================
Foreign long-lived assets:
Orthodontic products $ 122,000 $ 19,000
Medical diagnostic products 17,000 --
---------------------------------------------------
Total $ 139,000 $ 19,000
===================================================
Total assets:
Orthodontic products $ 3,622,000 $3,532,000
Medical diagnostic products 1,632,000 1,465,000
-----------------------------------------------------------------------
Total $ 5,254,000 $4,997,000
=======================================================================
Depreciation and amortization
expense:
Orthodontic products $ 25,000 $ 48,000
Medical diagnostic products 32,000 25,000
-----------------------------------------------------------------------
Total $ 57,000 $ 73,000
=======================================================================
Capital expenditures:
Orthodontic products $ 227,000 $ 36,000
Medical diagnostic products 18,000 25,000
---------------------------------------------------
Total $ 245,000 $ 61,000
===================================================
The net sales as reflected above consist of sales of unaffiliated customers
only as there were no significant intersegment sales during the quarter
ended November 30, 2003 and 2002.
15
(17) Pursuant to the terms of the employment agreement between Lancer and Dan
Castner, the Vice President of Sales and Marketing of Lancer, dated May 20,
2003, Lancer agreed to pay Mr. Castner an annual base salary of $135,000.
In addition, Lancer granted Mr. Castner stock options on June 2, 2003, to
purchase an aggregate of 120,000 shares of Lancer's common stock at an
exercise price of $.43 per share. The stock options have a term of five
years and will vest over four years as follows: (i) 25% vesting on the
first anniversary of the date of grant; (ii) 25% vesting on the second
anniversary of the date of grant; (iii) the remaining 50% vesting as to
one-twenty fourth (1/24th) per month each month thereafter for the next two
years. Should Lancer be purchased by an affiliated third party, the options
shall vest 100%.
(18) In April 2003, Lancer de Mexico entered into a manufacturing subcontractor
agreement with Biomerica, Inc., to provide manufacturing services in
Mexicali, Mexico. The agreement requires reimbursement from Biomerica for
discrete expenses such as payroll, shipping, and customs fees; lease and
security deposits of approximately $2,000 and $1,100 per month,
respectively; and service fees of approximately $2,900 per month.
(19) Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the
officer or director's serving in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The
maximum potential amount of future payments the Company could be required
to make under these indemnification agreements is unlimited. However, the
Company has a directors and officer liability insurance policy that limits
its exposure and enables it to recover a portion of any future amounts
paid.
As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal and has
no liabilities recorded for these agreements as of November 30, 2003. The
Company enters into indemnification provisions under (i) its agreements
with other companies in its ordinary course of business, typically with
business partners, contractors, and customers, landlords and (ii) its
agreements with investors. Under these provisions the Company generally
indemnifies and hold harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities
or, in some cases, as a result of the indemnified party's activities under
the agreement. These indemnification provisions often include
indemnifications relating to representations made by the Company with
regard to intellectual property rights. These indemnification provisions
generally survive termination of the underlying agreement. In addition, in
some cases, the Company has agreed to reimburse employees for certain
expenses and to provide salary continuation during short-term disability.
The maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is unlimited. The
Company has not incurred material costs to defend lawsuits or settle claims
related to these indemnification agreements. As a result, the Company
believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements
as of November 30, 2003."
(20) The Chief Executive Officer and Chief Financial Officer of Biomerica are
not currently taking a cash salary. Their wages are being recorded as an
administrative expense and reported as part of accrued wages on the balance
sheet.
(21) Included in accounts payable is $115,699 due for rental of the Company's
facilities according to the terms of the lease. All of this amount is past
due.
(22) CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these consolidated financial
statements requires estimates and assumptions that affect the reported
amounts and disclosures.
We believe the following to be critical accounting policies as they require
more significant judgments and estimates used in the preparation of our
consolidated financial statements. Although we believe that our judgments
and estimates are appropriate and correct, actual future results may differ
from our estimates.
16
In general the critical accounting policies that may require judgments or
estimates relate specifically to the recognition of revenue, the Allowance
for Doubtful Accounts, Inventory Reserves for Obsolescence and Declines in
Market Value, Impairment of Long-Lived Assets, Stock Based Compensation and
Deferred Income Tax Valuation and Allowances.
We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.
The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments.
The assessment of specific receivable balances and required reserves is
performed by management and discussed with the audit committee. We have
identified specific customers where collection is probably and have
established specific reserves, but to the extent collection is made, the
allowance will be released. Additionally, of the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. Reserves are
provided for excess and obsolete inventory, which are estimated based on a
comparison of the quantity and cost of inventory on hand to management's
forecast of customer demand. Customer demand is dependent on many factors
and requires us to use significant judgment in our forecasting process. We
must also make assumptions regarding the rate at which new products will be
accepted in the marketplace and at which customers will transition from
older products to newer products. Once a reserve is established, it is
maintained until the product to which it relates is sold or otherwise
disposed of, even if in subsequent periods we forecast demand for the
product.
In general, we are in a loss position for tax purposes, and have
established a valuation allowance against deferred tax assets, as we do not
believe it is likely that we will generate sufficient taxable income in
future periods to realize the benefit of our deferred tax assets.
Predicting future taxable income is difficult, and requires the use of
significant judgment. At November 30, 2003, all of our deferred tax assets
were reserved. Accruals are made for specific tax exposures and are
generally not material to our operating results or financial position, nor
do we anticipate material changes to these reserves in the near future.
We have adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
for Disclosure purposes. Under SFAS No. 123, we measure compensation for
our stock- based employee compensation plan using the intrinsic value
method prescribed in Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
We provide pro forma disclosure of the effect on net income or loss as if
the fair value based method prescribed in SFAS No. 123 has been applied in
measuring compensation expense.
We have provided a full valuation reserve related to our substantial
deferred tax assets. In the future, it sufficient evidence of our ability
to generate sufficient future taxable income in certain tax jurisdictions
becomes apparent, we may be required to reduce our valuation allowances,
resulting in income tax enefits in our consolidated statement of
operations. We evaluate the realiza- bility of the deferred tax assets and
assess the need for valuation allowance quarterly. The utilization of the
net operating loss carryforwards could be substantially limited due to
restrictions imposed under federal and state laws upon a change of
ownership.
(23) Risks and Uncertainties
License Agreements - Certain of the Company's sales of products are
governed by license agreements with outside third parties. All of such
license agreements to which the Company currently is a party, are for fixed
terms which will expire after ten years from the commencement of the
agreement or upon the expiration of the underlying patents. After the
expiration of the agreements or the patents, the Company is free to use the
technology that had been licensed. There can be no assurance that the
Company will be able to obtain future license agreements as deemed
necessary by management. The loss of some of the current licenses or the
inability to obtain future licenses could have an adverse affect on the
Company's financial position and operations. Historically, the Company has
successfully obtained all the licenses it believed necessary to conduct its
business.
17
Distribution - The Company has entered into various exclusive and
non-exclusive distribution agreements (the "Agreements") which generally
specify territories of distribution. The agreements range in term from one
to five years. The Company may be dependent upon such distributors for the
marketing and selling of its products worldwide during the terms of these
agreements. Such distributors are generally not obligated to sell any
specified minimum quantities of the Company's product. There can be no
assurance of the volume of product sales that may be achieved by such
distributors.
Government Regulations - The Company's products are subject to regulation
by the FDA under the Medical Device Amendments of 1976 (the "Amendments").
The Company has registered with the FDA as required by the Amendments.
There can be no assurance that the Company will be able to obtain
regulatory clearances for its current or any future products in the United
States or in foreign markets.
European Community - The Company is required to obtain certification in the
European Community to sell products in those countries. The certification
requires the Company to maintain certain quality standards. The Company has
been granted certification on certain products. However, there is no
assurance that the Company will be able to retain its certification in the
future.
Risk of Product Liability - Testing, manufacturing and marketing of the
Company's products entail risk of product liability. The Company currently
has product liability insurance. There can be no assurance, however, that
the Company will be able to maintain such insurance at a reasonable cost or
in sufficient amounts to protect the Company against losses due to product
liability. An inability could prevent or inhibit the commercialization of
the Company's products. In addition, a product liability claim or recall
could have a material adverse effect on the business or financial condition
of the Company.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND SELECTED FINANCIAL DATA
CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL
STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS
STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED
FUTURE REVENUES OF THE COMPANY AND SUCCESS OR CURRENT PRODUCT OFFERINGS. SUCH
FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT
COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY,
SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING
RESULTS. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY
IN RAISING NEEDED CAPITAL, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS,
COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW
MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH
SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $4,434,215 for the six months ended
November 30, 2003 as compared to $4,226,038 for the same period in the prior
fiscal year. This represents an increase of $208,177, or 4.9% for the six month
period. Of this increase $93,356 was attributable to an increase in sales at
Lancer. Consolidated net sales for the quarter then ended were $2,269,856 as
compared to $2,136,529 for the same period in the previous year. This represents
an increase of $133,327, or 6.2%. Of this quarterly increase $$60,748 was
attributable to sales at Lancer. The increase in sales at Lancer was primarily
attributable to increases In sales in Central and South America. Domestic sales
at Lancer decreased by $49,258 and $28,778 for the six month and quarter,
respectively. Increases in sales at Biomerica were a result of sales of new
products and an increase in foreign sales.
Cost of sales as a percentage of sales increased from 69.9% to 70.8% for the six
months remained consistent at 71.0% for the quarter. Lancer's cost of sales as a
percentage of sales increased from 70.9% to 72.0% for the six months and for the
quarter increased from 70.1% to 70.3%. These increases were attributable to
increased production costs and reserve for obsolete inventory. Biomerica's cost
of sales as a percentage of sales increased for the six months from 67.9% to
68.4%. For the quarter Biomerica's cost of sales decreased from 73.3% to 72.4%.
The increase for the six month was due to the start up of the Mexico facility,
whereas the decrease for the three months was attributable to lower wage costs.
Selling, general and administrative costs increased by $137,004, or 9.4% for the
six months and increased by $18,762, or 2.7% for the quarter. Lancer had
increased selling, general and administrative costs of $29,565 for the six
months and $93,165 for the quarter. Lancer had increased labor costs in
marketing which was partially offset by decreased labor and professional fees in
the administrative department. Administrative expenses at Biomerica increased
due to a variety of expense increases, Such as consulting, utilities and
insurance.
Research and development increased by $31,547, or 28.6% for the six months and
by $5,083 for the three months. Lancer had an increase in research and
development costs of $28,679 and $11,362 for the six and three months,
respectively. These expenses were attributable to the development of a new
product line. Biomerica had increased costs of $2,868 and decreased costs of
$6,278 for the six and three months, respectively. The increase for the six
months was due to higher wages and the decrease for the quarter was due to lower
material costs.
19
For the six months ended November 30, 2003, other income of $33,258 was realized
as compared to $51,992 in the prior year which was a result of the insurance
claim settlement of $47,981 for the theft of inventory at the Lancer
Orthodontics Inc.'s Mexicali facility. For the three months, other income was
$26,247 as compared to $3,942. The increase was primarily due to the sale of
securities by Biomerica.
Interest expense decreased by $2,324 (13.1%) for the six months compared to the
previous year and by $1,988 for the quarter. The decrease was primarily due to
use of cash instead of line of credit at Lancer for part of the year.
Please refer to Note 3 in the Notes to the Consolidated Financial Statements in
the Company's report on Form 10-KSB for the year ended May 31, 2003, for a more
in-depth discussion of subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2003, the Company had cash and available-for-sale securities
in the amount of $332,413 and working capital of $2,460,835. Cash and working
capital totaling $224,237 and $2,477,013 respectively, relates to the Lancer
subsidiary. Lancer's line of credit restricts Biomerica's ability to draw on
Lancer's resources and, as such, said cash, working capital and equity are not
available to Biomerica.
The Company has suffered substantial recurring losses from operations over the
last couple of years. The Company has funded its operations through debt and
equity financings, and may have to do so in the future. ReadyScript operations
were discontinued in May 2001 and Allergy Immuno Technologies was sold in May
2002. ReadyScript and Allergy Immuno Technologies were previously contributors
to the Company's losses. The Company has reduced operating costs through certain
cost reduction efforts and plans to concentrate on its core business in Lancer
and Biomerica to increase sales. There can be no assurance that the Company will
be able to become profitable, generate positive cash flow from operations or
obtain the necessary equity or debt financing to fund operations in the future.
Should the Company be unable to reduce costs adequately or should the Company be
unable to secure additional financing, the result for the Company could be the
inability to continue operations.
The Company will continue to have limited cash resources. Although the Company's
management recognizes the imminent need to secure additional financing there can
be no assurance that the Company will be successful in consummating any such
transaction or, if the Company does consummate such transaction, that the terms
and conditions of such financing will not be unfavorable to us.
Our independent certified public accountants have concluded that these factors,
among others, raise substantial doubt as to the Company's ability to continue as
a going concern for a reasonable period of time, and have, therefore modified
their audit report on the Company's annual consolidated financial statements as
of and for the year ended May 31, 2003 in the form of an explanatory paragraph
describing the events that have given rise to this uncertainty. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
These consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has operating and
liquidity concerns due to historically reporting net losses and negative cash
flows from operations. Biomerica's shareholder's line of credit expired
September 13, 2003. The unpaid principal and interest of $337,835 was converted
into a note payable bearing interest at 8% and payable in monthly installments
over four years. The monthly payments required to pay the loan off would be
$8,248 per month. The Company is currently making payments of $7,200 per month.
The terms of the note are currently being negotiated. The note is secured by
inventory and accounts receivable.
20
During the six months ended November 30, 2003, the Company operations used cash
of $21,225. This compares to cash provided by operations of $363,596 in the same
period in the prior fiscal year. The Lancer subsidiary used cash in operations
of $53,281 during this fiscal year and provided cash of $407,005 in the last
fiscal year. Cash provided by financing activities was $58,289, which resulted
from a private placement of $30,500, increase in shareholder loan of $20,035,
change in minority interest of $6,180 and exercise of stock option of $2,000.
The Company purchased $244,948 in fixed assets during the first six month of
this fiscal year. Of this, $227,378 was a result of expenditures at the Lancer
subsidiary.
The Chief Executive Officer and Chief Financial Officer of Biomerica are not
currently taking a cash salary. Their wages are being recorded as an
administrative expense and reported as part of accrued wages on the balance
sheet.
Pursuant to a decision by the Nasdaq Listing Qualifications Panel, the Company's
common stock was delisted from the Nasdaq Stock Market effective June 20, 2002,
for failure to comply with the net tangible assets or shareholders' equity
requirements as set forth in Marketplace Rule 4310(c)(2)(B). The Company's
securities were immediately eligible to trade on the OTC Bulletin Board and are
traded under the symbol BMRA.OB.
At November 30, 2003, Lancer had a $400,000 line of credit with a financial
Institution, which expires January 24, 2003. Borrowings are made at prime plus
2.0% (8.0% at November 30, 2003) and are limited to 80% of accounts receivable
less than 90 days old with a liquidity factor of 94%. The outstanding balance at
November, 2003 was $0 and the unused portion available was approximately
$326,000.
The line of credit is collateralized by substantially all the assets of Lancer,
including inventories, receivables, and equipment. The lending agreement for the
line of credit requires, among other tings, that Lancer maintain a tangible net
worth ratio of $2,100,000, which was met, and that receivables' payments be sent
to a controlled lockbox. In addition to interest, a management fee of .25% of
the average monthly outstanding loan balance and an unused balance fee of .0425%
on the average monthly unused portion available are required. Lancer is not
required to maintain compensating balances in connection with this lending
agreement. Proceeds from this line cannot be used to support the operations of
Biomerica.
In October 2003 the line of credit was extended to January 24, 2004 by GE
Capital Healthcare Financial Services so that Lancer could explore other
financing options. An agreement with another financing institution is in the
process of being finalized.
Biomerica, Inc. entered into a line of credit agreement on September 12, 2000
with a shareholder whereby the shareholder would loan to the Company, as needed,
up to $500,000 for working capital needs. The line of credit expired September
12, 2003. The outstanding principal and interest on September 12, 2003 was
$337,835, including principal of $288,850 and interest of $48,985, all of which
was converted into a note payable bearing interest at 8% with interest and
principal due monthly. The remaining principal and interest, if any, are due
September 12, 2007. The monthly payments required to pay the loan off in four
years would be $8,248 per month. The Company is currently paying $7,200 per
month. The terms of the note are currently being negotiated. The note is secured
by inventory and accounts receivables of Biomerica.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
You should read the following factors in conjunction with the factors discussed
elsewhere in this and our other filings with the SEC and in materials
incorporated by reference in these filings. The following is intended to
highlight certain factors that may affect the financial condition and results of
operations of Biomerica and are not meant to be an exhaustive discussion of
risks that apply to companies such as Biomerica. Like other businesses,
Biomerica is susceptible to macroeconomic downturns in the United States or
21
abroad, as were experiences in fiscal year 2002, that may affect the general
economic climate and performance of Biomerica or its' customers. Aside from
general macroeconomic downturns, the additional material factors that could
affect future financial results include, but are not limited to: Terrorist
attacks and the impact of such events; diminished access to raw materials that
directly enter into our manufacturing process; shipping labor disruption or
other major degradation of the ability to ship our products to end users;
inability to successfully control our margins which are affected by many factors
including competition and product mix; protracted shutdown of the U.S. Border
due to an escalation of terrorist or counter terrorist activity; any changes in
our business relationships with international distributors or the economic
climate they operate in; any event that has a material adverse impact on our
foreign manufacturing operations may adversely affect our operation as a whole;
failure to manage the future expansion of our business could have an adverse
affect on our revenues and profitability; possible costs in complying with
government regulations and the delays in receiving required regulatory approvals
or the enactment of new adverse regulations or regulatory requirements; numerous
competitors, most of which have substantially greater financial and other
resources than we do; potential claims and litigation brought by patients or
medical professionals alleging harm caused by the use of or exposure to our
products; quarterly variations in operating results caused by a number of
factors, including business and industry conditions and other factors beyond our
control. All of these factors make it difficult to predict operating results for
any particular period.
In October 2003 the line of credit at Lancer was extended to January 24, 2004 by
GE Capital Healthcare Financial Services so that Lancer could explore other
financing options. An agreement with another financing institution is in the
process of being finalized.
Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (the Company's
principal executive officer and principal financial offier, respectively) have
concluded, based on their evaluation as of November 30, 2003, that the design
and operation of the Company's "disclosure controls and procedures" (as defined
in rules 13a-15(e) under the Securities Exchange Act of 1934, as amended
("Exchange Act") are effective to ensure that information required to be
disclosed by the Company in the reports filed or submitted by the Company under
the Exchange Act is accumulated, recorded, processed, summarized and reported to
the Company's management, including the Company's principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding whether or not disclosure is required.
During the quarter ended November 30, 2003, there were no changes in the
Company's "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
22
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Inapplicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. The following shares of
Restricted common stock were issued during the six months Ended
November 30, 2003:
Class or Persons Price
Date Title Amount Sold to Per Share Total
---- ----- ------ ------- --------- -----
6/5/03 common 46,000 qualified investors $.25 $11,500
6/6/03 common 8,000 qualified investor $.25 2,000
6/9/03 common 8,000 qualified investor $.25 2,000
6/17/03 common 100,000 qualified investor $.25 25,000
and insider
6/23/03 common 20,000 qualified investor $.25 5,000
6/26/03 common 20,000 qualified investor $.25 5,000
The exemption relied upon for the issuance of the unregistered shares
was that the shares were issued to qualified investors within the
meaning of Securities and Exchange Commission Rule 501, Regulation D.
Item 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The 2002 Annual Meeting of the Company's stockholders was held on
September 2, 2003. Two matters were voted on at the meeting, as set
Forth in the proxy statement dated June 26, 2003, as filed with the
Securities and Exchange Commission pursuant to Rule 14 under the
Securities Act of 1934. The following summarizes the voting:
Proposal No. 1: Election of Directors
Name For Votes Withheld
---- --- --------------
Barbieri 4,745,095 230,842
Cano 4,745,095 230,842
Irani 4,744,305 232,184
Moore 4,744,705 231,232
Orlando 4,745,095 230,842
All directors were elected.
Proposal No. 2: Proposal to Ratify and Approve the Company's 2002
Stock Incentive Plan
For Against Abstain
--- ------- -------
1,870,275 400,481 70,483
Proposal No. 2 did not receive a plurality of the votes and therefore
was not approved.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable.
(a) Exhibits
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant To 18 U.S.C., Section 1350, as adopted pursuant to Section 302
and 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 20, 2004
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------------
Zackary S. Irani
Chief Executive Officer
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