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, 2002 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,258,475 shares of common
stock as of January 10, 2003.
BIOMERICA, INC.
INDEX
PART I
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and Comprehensive Loss
(unaudited) - Six Months and Three Months Ended November
30, 2002 and 2001................................................ 2-3
Consolidated Balance Sheet (unaudited) - November 30, 2002....... 4-5
Consolidated Statements of Cash Flows (unaudited) Six Months
Ended November 30, 2002 and 2001................................. 6-7
Consolidated Statement of Changes in Shareholders' Equity
(unaudited) Six Months Ended November 30, 2002................... 8
Notes to Consolidated Financial Statements....................... 9-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data...................................... 17-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 19
Item 4. Procedures and controls.......................................... 19
PART II Other Information................................................ 20
Signatures....................................................... 21-25
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
Six Months Ended Three Months Ended
November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales ............................................ $ 4,226,038 $ 4,138,255 $ 2,136,529 $ 2,211,187
Cost of sales ................................... 2,952,354 2,826,192 1,517,924 1,389,423
------------ ------------ ------------ ------------
Gross profit .................................... 1,273,684 1,312,063 618,605 821,764
------------ ------------ ------------ ------------
Operating
Expenses:
Selling, general and administrative ............. 1,457,869 1,640,076 701,711 851,954
Research and development ........................ 110,206 88,650 62,329 30,815
------------ ------------ ------------ ------------
1,568,075 1,728,726 764,040 882,769
------------ ------------ ------------ ------------
Operating loss from continuing operations ............ (294,391) (416,663) (145,435) (61,005)
------------ ------------ ------------ ------------
Other Expense (income):
Interest expense ................................ 17,700 15,253 6,903 9,043
Other (income) expense, net ..................... (51,922) 12,120 (3,942) 17,761
------------ ------------ ------------ ------------
(34,222) 27,373 2,961 26,804
------------ ------------ ------------ ------------
Loss from continuing operations, before minority
interest in net loss of consolidated subsidiaries
and income taxes ................................ (260,169) (444,036) (148,396) (87,809)
------------ ------------ ------------ ------------
Minority interest in net losses (profits)
of consolidated subsidiaries ......................... (17,867) 38,880 (19,871) (49,955)
------------ ------------ ------------ ------------
Loss (income) from continuing operations, before
income taxes ......................................... (278,036) (405,156) (168,267) (137,764)
Income Tax Expense ................................... 1,794 1,600 194 1,600
------------ ------------ ------------ ------------
Net (loss) income from continuing operations ......... (279,830) (406,756) (168,461) (139,364)
2
Six Months Ended Three Months Ended
November 30, November 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations, net............. 38,531 39,242 14,437 2,636
------------ ------------ ------------ ------------
Net loss ............................................. (318,361) (445,998) (182,898) (142,000)
Other comprehensive loss, net of tax
Unrealized loss on available-for-
sale securities.................................... (1,757) (5,186) (317) (1,484)
------------ ------------ ------------ ------------
Comprehensive loss.................................. $ (320,118) $ (451,184) $ (183,215) $ (143,484)
============ ============ ============ ============
Basic net loss per common share:
Net loss from continuing operations................ $ (.05) $ (.08) $ (.03) $ (.03)
Net loss from discontinued operations.............. (.01) (.01) (.00) (.00)
------------ ------------ ------------ ------------
Basic net loss per common share....................... $ (.06) $ (.09) $ (.03) $ (.03)
============ ============ ============ ============
Diluted net loss per common share:
Net loss from continuing operations................ $ (.05) $ (.08) $ (.03) $ (.03)
Net loss from discontinued operations.............. (.01) (.01) (.00) (.00)
------------ ------------ ------------ ------------
Diluted net loss per common share $ (.06) $ (.09) $ (.03) $ (.03)
============ ============ ============ ============
Weighted average number of common and common
equivalent shares:
Basic and diluted................................ 5,208,818 4,999,466 5,245,673 5,031,349
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
November 30,
2002
-----------
Assets
Current Assets
Cash and cash equivalents ........................................... $ 489,963
Available-for-sale securities ....................................... 775
Accounts receivable, less allowance for doubtful accounts of $195,532 1,285,097
Inventory, net ...................................................... 2,695,669
Prepaid expenses and other .......................................... 118,443
-----------
Total Current Assets .......................................... 4,589,947
Inventory, non-current .................................................. 15,000
Note receivable ......................................................... 2,419
Property and Equipment, net of accumulated depreciation and amortization 255,482
Intangible assets, net of accumulated amortization ...................... 98,786
Other Assets ............................................................ 35,546
-----------
$4,997,180
===========
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED), CONTINUED
November 30,
2002
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Liabilities and Shareholders' Equity
Current Liabilities
Line of credit ............................................ $ -0-
Accounts payable and accrued liabilities .................. 860,037
Accrued compensation ...................................... 348,791
Shareholder loan........................................... 322,950
Net liabilities from discontinued operations .............. 362,423
-------------
Total Current Liabilities ............................ 1,894,201
Minority interest .............................................. 2,113,260
Shareholders' Equity
Common stock, $0.08 par value authorized 25,000,000 shares,
subscribed or issued and outstanding 5,376,657 .......... 462,277
Additional paid-in-capital ................................ 17,056,374
Accumulated other comprehensive loss ...................... (21,994)
Accumulated deficit ....................................... (16,506,938)
-------------
Total Shareholders' Equity ..................................... 989,719
-------------
Total Liabilities and Shareholders' Equity ..................... $ 4,997,180
=============
The accompanying notes are an integral part of these statements.
5
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED NOVEMBER 30, 2002 AND 2001
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss from continuing operations ....................... $(279,830) $(406,756)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization ........................ 72,650 107,891
Realized gain on sale of available for-sale securities -- (3,626)
Minority interest in net gain (loss) of consolidated
subsidiaries ....................................... 28,368 (38,880)
Common stock issued for services rendered ............ 66,767 42,625
Provision for losses on accounts receivable .......... (920) (361)
Warrants and options issued for services rendered .... 32,364 35,308
Changes in current assets and liabilities:
Accounts Receivable ................................ 220,167 39,424
Insurance claim receivable ......................... -- --
Inventories ........................................ 225,343 (87,470)
Prepaid expenses and other current assets .......... 4,031 (7,062)
Accounts payable and other accrued liabilities ..... (46,153) 49,402
Accrued compensation ............................... 40,809 40,757
---------- ----------
Net cash provided by (used in) operating activities ....... 363,596 (228,748)
---------- ----------
Cash flows from investing activities:
Sale of available for-sale securities ................ -- 26,670
Purchases of property and equipment .................. (60,910) (9,890)
Other assets ......................................... -- 3,220
Purchases of intangible assets ....................... (21,986) (10,591)
---------- ----------
Net cash (used in) provided by investing activities ....... (82,896) 9,409
---------- ----------
Cash flows from financing activities:
Private placement net of offering costs .............. -- 10,199
Exercise of stock options ............................ -- 1,128
Increase (decrease) in line of credit ................ (65,669) 32,845
Increase (decrease) in shareholder loan .............. (52,050) 165,000
---------- ----------
6
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
SIX MONTHS ENDED NOVEMBER 30, 2002 AND 2001
2002 2001
---------- ----------
Net cash (used in) provided by financing activities........ (117,719) 209,172
---------- ----------
Net cash used in discontinued operations................... (2,295) (72,204)
Net increase (decrease) in cash and cash equivalents....... 160,686 (82,371)
Cash at beginning of period................................ 329,277 136,299
---------- ----------
Cash at end of period...................................... $ 489,963 $ 53,928
========== ==========
The accompanying notes are an integral part of these statements.
7
BIOMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED NOVEMBER 30, 2002
Common Stock
Common Stock Subscribed
-------------------------- ---------------------------
Accumulated
Number Additional Other
of Paid-in Comprehensive Accumulated
Shares Amount Capital Shares Amount Loss (Deficit) Total
------------- ----------- ------------- ------------ ------------- ----------- ------------- -------------
Balance at
May 31, 2002 5,172,364 $ 413,788 $ 16,981,982 28,333 $ 23,750 $ (20,237) $(16,188,577) $ 1,210,706
Compensation
expense in
connection with
options and
warrants granted 32,364 32,364
Change in unrealized
gain on available
for sale securities (1,757) (1,757)
Common stock
subscribed for 10,000 4,500 4,500
Services
Common stock
Issued for
services 67,778 5,422 35,245 40,667
Common stock 18,333 1,467 6,783 (18,333) (8,250) --
Issued
Common stock
Subscribed for
services 98,182 21,600 21,600
Net loss (318,361) (318,361)
------------- ----------- ------------- ------------ ------------- ----------- ------------- -------------
Balance at
November 30,
2002 5,258,475 $ 420,677 $ 17,056,374 118,182 $ 41,600 (21,994) $(16,506,938) $ 989,719
============= =========== ============= ============ ============= =========== ============= =============
8
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
November 30, 2002
(1) Reference is made to Note 2 of the Notes to Financial Statements
contained in the Company's Annual Report on Form 10-KSB for the fiscal
year ended May 31, 2002, for a summary of significant accounting
policies utilized by the Company.
(2) The information set forth in these 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 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.
(3) 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.
(4) Reference is made to Note 3 of the Notes to Financial Statements
contained in the Company's Annual Report on Form 10-KSB for the fiscal
year ended May 31, 2002, for a description of the investments in
affiliates and consolidated subsidiaries.
(5) Reference is made to Notes 5 & 10 of the Notes to Financial Statements
contained in the Company's Annual Report on Form 10-KSB for the fiscal
year ended May 31, 20012 for information on commitments and
contingencies.
(6) Aggregate cost of available-for-sale securities exceeded aggregate
market value by approximately $21,994 at November 30, 2002.
(7) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 128,
EARNINGS PER SHARE ("EPS"). SFAS No. 128 requires dual presentation of
basic EPS and diluted EPS on the face of all income statements issued
after December 15, 1997 for all entities with complex capital
structures. Basic EPS is computed as net income divided by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible
securities. For all periods presented, no common stock equivalents have
been included in the computation of diluted earnings per share as they
were determined to be anti-dilutive.
9
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and
diluted EPS computations.
For the Six Months Ended November 30, 2002
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing operations ... $ (279,830) $ (.05)
Loss from discontinued operations . (38,531) (.01)
------------ ------------ ------------
(318,361) 5,208,818 (.06)
Diluted EPS -
Loss from continuing operations - $ (279,830) $ (.05)
Loss from discontinued operations . (38,531) (.01)
------------ ------------ ------------
$ (318,361) 5,208,818 $ (.06)
============ ============ ============
For the Six Months Ended November 30, 2001
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing operations ... $ (406,756) $ (.08)
Loss from discontinued operations . (39,242) (.01)
------------ ------------ ------------
$ (445,998) 4,994,466 (.09)
Diluted EPS -
Loss from continuing operations ... $ (406,756) $ (.08)
Loss from discontinued operations . (39,242) (.01)
------------ ------------ ------------
$ (445,998) 4,994,466 $ (.09)
============ ============ ============
For the Three Months Ended November 30, 2002
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing operations ... $ (168,461) $ (.03)
Loss from discontinued operations . (14,437) (.00)
------------ ------------ ------------
(182,898) 5,245,673 (.03)
Diluted EPS -
Loss from continuing operations ... $ (168,461) $ (.03)
Loss from discontinued operations . (14,437) (.00)
------------ ------------ ------------
$ (182,898) 5,245,673 $ (.03)
============ ============ ============
For the Three Months Ended November 30, 2001
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Income from continuing operations . $ (139,364) $ (.03)
Loss from discontinued operations . (2,636) (.00)
------------ ------------ ------------
$ (142,000) 5,031,349 (.03)
Diluted EPS -
Loss from continuing opertions .... $ (139,364) $ (.03)
Loss from discontinued operations . (2,636) (.00)
------------ ------------ ------------
$ (142,000) 5,031,349 $ (.03)
============ ============ ============
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was antidilutive due to losses
incurred by the Company.
10
As of November 30, 2002, there was a total of 2,983,345 potentially
dilutive shares of common Stock.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 will have a
material impact on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill And Intangible Assets", which revises the
accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be amortized
and will be tested for impairment annually. SFAS 142 is effective for fiscal
years beginning after December 15, 2001, with earlier adoption permitted. The
adoption of FASB 142 did not have a material impact on the Company's financial
position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
FAS No. 143 ("SFAS 143"), "Accounting for Asset Retirement Obligations." This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to all entities and legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal operations of long-lived
assets, except for certain obligations of leases. This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
Management has not yet determined the impact of the adoption of SFAS No. 143 on
the Company's financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets, " or SFAS No. 144 requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. The
adoption of SFAS 144 did not have a material impact on the Company's financial
position or results of operations.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4 and 64, Amendment of
FASB State- ment No. 13, and Technical Corrections, "to update, clarify and
simplify existing accounting pronouncements. FASB Statement No. 4, which
required all gains and losses from debt extinguishments to be aggregated and, if
material, classified as an extraordinary item, net of related tax effect, was
rescinded. Consequently, FASB Statement No. 64, which amended FASB Statement No.
4, was rescinded because it was no longer necessary. The adoption of SFAS 145
did not have a material impact on the Company's financial position or results of
operations.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 addresses accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit An Activity (Including Certain Costs Incurred in a Restructuring). "SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value when the liability
is incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. We do not
expect the adoption of this statement to have a material effect on our financial
statements.
11
(8) Financial information about foreign and domestic operations and export
sales is as follows:
For the Six Months Ended
11/30/02 11/30/01
---------- ----------
Revenues from sales to unaffiliated customers:
United States $2,362,000 $1,964,000
Asia 117,000 115,000
Europe 954,000 1,151,000
South America 167,000 285,000
Oceania 208,000 183,000
Other 418,000 440,000
---------- ----------
$4,226,000 $4,138,000
========== ==========
No other geographic concentrations exist where net sales exceed 10% of total net
sales.
12
(9) On January 15, 2002, the Company had received a Nasdaq Staff Determination
indicating that the Company failed to comply with the net tangible assets or
shareholders' equity requirements for continued listing set forth in Marketplace
Rule 4310(c)(2)(B), and that its securities were, therefore, subject to
delisting from the Nasdaq SmallCap Market effective January 23, 2002. The
Company requested a hearing before a Nasdaq Listing Qualifications Panel to
review the Staff De- termination. The request for a hearing stayed the delisting
of the Company's securities pending the Panel's decision. On February 21, 2002,
the hearing took place. In response to the hearing, on March 25, 2002, the
Company received a Nasdaq Staff Determination Letter stating their decision with
respect to the continued listing of the Company's securities. The Panel
determined to continue the listing of the Company's securities on the Nasdaq
SmallCap Market via an exception from the net tangible assets requirement. While
the Company failed to meet this requirement, the Company was granted a temporary
exception from the standard subject to the Company meeting certain conditions by
specified deadlines.
The Company was unable to satisfy the conditions within the deadlines
established by the Panel. 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 securitites were immediately eligible to trade
on the OTC Bulletin Board and are traded under the symbol BMRA.OB.
On February 14, 2002, the Company received a Nasdaq Staff Determination
letter indicating that the Company failed to comply with the minimum $1.00 per
share requirement for continued inclusion of its common stock under Marketplace
Rule 4310(c)(4), and therefore was subject to delisting from the Nasdaq SmallCap
Market. In accordance with Marketplace Rule 4310(c)(8)(D), the Company would
have been provided 180 calendar days, or until August 13, 2002, to regain
compliance. However, prior to that time, the Company was delisted according to
the above mentioned reasons.
Shares traded on the OTC Bulletin Board are not as liquid as those traded
on Nasdaq National market or the Nasdaq SmallCap market.
The 1-for-3 reverse stock split approved by shareholders at the 2001 share-
holders' meeting for the purpose of increasing the price per share of the common
stock will not be implemented.
(10) 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. ReadyScript was a primary contributor to the
Company's losses. The Company also plans to reduce operating costs through
certain cost reduction efforts and concentrate on its core business in Lancer
and Biomerica to increase sales. There can be no assurances 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.
13
As of November 30, 2002, the Company had cash and available-for-sale
securities in the amount of $490,738 and working capital of $2,695,746. Cash and
working capital totaling $434,312 and $2,889,348, 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. Biomerica, Inc. and its subsidiaries, are expected
to fund their operations for at least the next twelve months through their
existing available financing, working capital, and its shareholder line of
credit.
During the six months ended November 30, 2002, the Company operations
provided cash of $363,596. This compares to cash used in operations of $228,748
in the same period in the prior fiscal year. Cash used by financing activities
was $117,719, which resulted from the payment on the line of credit at Lancer of
$65,669 and payment of the share- holder loan at Biomerica of $52,050.
(11) Lancer has a $400,000 line of credit with GE Capital Healthcare Financial
Services, expiring October 24, 2003. Borrowings are made at prime plus 2.0%, in
no event less than 8.0%, (8.0% at November 30, 2002) 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, 2002 was $.00 and the unused portion
available was approximately $336,000.
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables and equipment. The lending agreement
requires, among other things, that Lancer maintain a tangible net worth of
$2,100,000 and that receivables payments be sent to a controlled lockbox. In
addition to interest, a management 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.
(12) Biomerica, Inc. entered into a line of credit agreement on September 12,
2000 with a shareholder whereby the shareholder will loan to the Company, as
needed, up to $500,000 for working capital needs. The line of credit bears
interest at 8%, is secured by Biomerica accounts receivable and inventory and
expires September 12, 2003. The unused portion of the line of credit at November
30, 2002, was $187,050. Additionally, the Company received a $10,000 unsecured
loan from a different shareholder. Such amount is included in shareholder loan
in the accompanying financial statements.
(13) In July 2002, 67,778 shares of Biomerica restricted common stock (at $0.60
per share), were approved for issuance in payment of accrued salary for two
officers/directors. In connection with this issuance, Biomerica recorded
compensation expense of $40,667, the fair market value of the stock at the time
of issuance. During the six months ended November 30, 2002, 10,000 shares of
Biomerica's restricted common stock valued at $4,500 were earned in payment to
its Chief Executive Officer for certain management services.
(14) On September 24, 2002, the Company agreed to issue 20,000 options at the
then fair market value of $.30 per share to employees. These options will vest
over four years. No compensation expense was recorded for this transaction.
(15) The Company agreed to a bonus plan for employees of 10% to 20% of the
profit of the diagnostics' division for the year ending May 31, 2003.
(16) On April 10, 2002, the Company filed a Form S-4 for the proposed
registration of between 488,200 and 984,274 shares of Biomerica common stock.
The shares were to be issued for the purchase of the assets of the subsidiary
Lancer Orthodontics, Inc. Due to market conditions, both boards of directors
have agreed not to proceed with the proposed purchase and in July 2002 Biomerica
requested that the registration statement be withdrawn.
(17) In June of 2002 the Company signed a distribution agreement with a company
in Japan for the distribution of certain kits. The Company received a deposit of
$35,000, which is included in other liabilities, in the month of June 2002
related to this agreement.
(18) On September 24, 2002, the Board of Directors approved the grant of a stock
option for 7,000 shares of Biomerica common stock at an exercise price of $.30
per share to an outside consultant. The Company also entered into a one year
consulting agreement with this consultant whereby the consultant will help with
business develop- ment and other services during that period and upon
achievement of certain milestones has the opportunity to be granted two
additional 7,000 share options at a fifteen percent discount to market.
14
(19) On November 12, 2002, the Board of Directors approved the issuance of
98,182 shares of restricted common stock at the price of $.22 per share in lieu
of $21,600 in accrued salary to two officers/directors.
(20)During the six months ended November 30, 2002, $32,364 was recorded as
amortization expense for previously issued warrants and options.
(21)Lancer Orthodontics, Inc. issued non-qualified options granted to the Chief
Executive Officer to purchase 113,000 shares of Common Stock at $.30. These
options were granted on December 1, 2001 and are exercisable at the rate of
one-third per year and have a term of five years.
(22)For the six months ended November 30, 2002, other income of $52,655 was
realized from the insurance claim settlement of $134,413 for the theft of
inventory at the Lancer Orthodontics, Inc.'s Mexicali facility, less $81,758
insurance claim receivable valued at cost.
(23) Lancer Orthodontics, Inc. issued non-qualified stock options to three
employees totaling 70,000 shares during the quarter ended November 30, 2002. The
shares are at $.28 per share and expire in five years.
(24) In October 2002 the Company signed an agreement with Medical Device Safety
Service GmbH ("MDSS") wherein MDSS will act as the Company's Authorized
Representative for the purpose of obtaining a CE-Mark in Europe.
(25) Reportable business segments for the six months and quarter ended November
30, 2002 and 2001 are as follows:
Six Months Three Months
Ended November 30, Ended November 30,
2002 2001 2002 2001
------------------------------------------------------------
Domestic sales:
Orthodontic products $1,566,000 $1,476,000 $ 812,000 $ 734,000
============================================================
Medical diagnostic products 796,000 488,000 $ 269,000 $ 363,000
============================================================
Foreign sales:
Orthodontic products $1,224,000 $1,588,000 $ 693,000 $ 896,000
============================================================
Medical diagnostic products 640,000 586,000 $ 363,000 $ 218,000
============================================================
Net sales:
Orthodontic products $2,790,000 $3,064,000 $1,505,000 $1,629,000
Medical diagnostic products 1,436,000 1,074,000 632,000 582,000
------------------------------------------------------------
Total $4,226,000 $4,138,000 $2,137,000 $2,211,000
============================================================
Operating profit (loss):
Orthodontic products $ (20,379) $ (27,766) $ 25,252 $ 98,109
Medical diagnostic products (274,012) (388,897) (170,687) (159,114)
------------------------------------------------------------
Total $(294,391) $ (416,663) $ (145,435) $ (61,005)
============================================================
Operating loss from discontinued segment:
AIT $ -0- $ 43,946 $ -0- $ 21,973
ReadyScript 38,531 (4,704) 14,437 (19,337)
------------------------------------------------------------
Total $ 38,531 $ 39,242 $ 14,437 $ 2,636
============================================================
Domestic long-lived assets:
Orthodontic products $ 52,464 $ 21,038 $ 52,464 $ 21,038
Medical diagnostic products 183,723 218,630 183,723 218,630
------------------------------------------------------------
Total $ 236,187 $ 239,668 $ 236,187 $ 239,668
============================================================
Foreign long-lived assets:
Orthodontic products $ 19,295 $ 26,549 $ 19,295 $ 26,549
Medical diagnostic products -0- -0- -0- -0-
------------------------------------------------------------
Total $ 19,295 $ 26,549 $ 19,295 $ 26,549
============================================================
Total assets:
Orthodontic products $3,532,523 $3,717,208 $3,532,523 $3,717,208
Medical diagnostic products 1,464,657 1,484,151 1,464,657 1,484,151
------------------------------------------------------------
Total $4,997,180 $5,201,359 $4,997,180 $5,201,359
============================================================
Depreciation and amortization
expense:
Orthodontic products $ 48,234 $ 53,712 $ 24,117 $ 26,856
Medical diagnostic products 24,417 54,179 12,647 30,136
------------------------------------------------------------
Total 72,650 107,891 $ 36,764 $ 56,992
============================================================
Capital expenditures:
Orthodontic products $ (35,609) -0- $ (33,545) $ -0-
Medical diagnostic products (25,302) (9,890) (24,400) -0-
------------------------------------------------------------
Total $ (60,911) $ (9,890) $ (57,945) $ -0-
============================================================
15
The net sales as reflected above consist of sales of unaffiliated customers
only as there were no significant intersegment sales during the six months or
quarter ended November 30, 2002 and 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS
Consolidated net sales for Biomerica were $4,226,038 for the six months
ended November 30, 2002 as compared to $4,138,255 for the same period in the
previous year. This represents an increase of $87,783, or 2%. For the quarter
then ended sales were $2,136,529 as compared to $2,211,187 for the same period
in the prior fiscal year. This represents a decrease of $74,658, or 3%. The
increases for the six months were attributable to an increase in the diagnostic
product's sales of $361,501 which was offset by lower orthodontics sales of
$273,718. For the quarter sales in the diagnostics' area increased by $49,771.
With respect to orthodontics, sales were lower by $124,429 due to lower
international sales, particularly in Europe and South America.
Cost of sales for the six months increased as a percentage of sales from
68% to 70% and for the three months increased from 63% to 71%. The increase at
Lancer was attributable to higher production costs. For the six months, cost of
sales at Biomerica were constant between the two periods. Increases at Biomerica
during the quarter were attributable to a lower margin sales mix and certain
costs that remain fixed.
Selling, general and administrative costs decreased by $182,207, or 11%
for the six months and by $150,243, or 18% for the three months ended November
30, 2001. Lancer had a decrease of $195,084 for the six months and $104,183 for
the three months due to a decrease in marketing support personnel. At Biomerica
these expenses increased by $12,877 for the six months and decreased by $46,060
for the three months. This decrease was due to lower wages, rent, consulting
expenses and other cost cutting measures.
Research and development increased by $21,556, or 24% for the six months
and $31,514, or 103% for the three months. The increases were due to increases
at Lancer of $31,182 and $15,996 for the six and three months, respectively, a
result of resumption of product development at Lancer. Biomerica had decreases
of $9,626 for the six months and an increase of $15,518 for the three months due
to the hiring of new employees in the research and development during the second
quarter, where earlier in the year there had been cutbacks.
Interest expense increased by $2,447 for the six months and $2,140 for
the three months compared to the previous year due to borrowings on the line of
credit at Biomerica offset by reduction of borrowing on the line of credit at
Lancer.
16
At November 30, 2002, the Company retained a direct 31.1% interest in
Lancer Orthodontics. The Company maintains a 53.76% indirect voting control over
Lancer Orthodontics via agreements with certain shareholders. The Company also
retains an 88.9% interest in ReadyScript. Please refer to Note 3 in the Notes to
the Consolidated Financial Statements in the report on Form 10-KSB for the year
ended May 31, 2002, for a more in-depth discussion of subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
As of November 30, 2002, the Company had cash and available-for-sale
securities in the amount of $490,738 and working capital of $2,695,746. Cash and
working capital totaling $434,312 and $2,889,348, 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. Biomerica, Inc. and its subsidiaries, are expected
to fund their operations for at least the next twelve months through their
existing available financing, working capital, and its shareholder line of
credit.
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. ReadyScript was a primary contributor
to the Company's losses. The Company also plans to reduce operating costs
through certain cost reduction efforts and concentrate on its core business in
Lancer and Biomerica to increase sales. There can be no assurances 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.
During the six months ended November 30, 2002, the Company used net cash
in operations of $363,596. This compares to net cash provided by operations of
$228,748 in the same period in the prior fiscal year. Cash used by financing
activities was $117,719, which resulted from the payment on the line of credit
at Lancer of $65,669 and payment of the shareholder loan at Biomerica of
$52,050.
On January 15, 2002, the Company had received a Nasdaq Staff Determination
indicating that the Company failed to comply with the net tangible assets or
shareholders' equity requirements for continued listing set forth in Marketplace
Rule 4310(c)(2)(B), and that its securities were, therefore, subject to
delisting from the Nasdaq SmallCap Market effective January 23, 2002. The
Company requested a hearing before a Nasdaq Listing Qualifications Panel to
review the Staff De- termination. The request for a hearing stayed the delisting
of the Company's securities pending the Panel's decision. On February 21, 2002,
the hearing took place. In response to the hearing, on March 25, 2002, the
Company received a Nasdaq Staff Determination Letter stating their decision with
respect to the continued listing of the Company's securities. The Panel
determined to continue the listing of the Company's securities on the Nasdaq
SmallCap Market via an exception from the net tangible assets requirement. While
the Company failed to meet this requirement, the Company was granted a temporary
exception from the standard subject to the Company meeting certain conditions by
specified deadlines.
The Company was unable to satisfy the conditions within the deadlines
established by the Panel. 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.
On February 14, 2002, the Company received a Nasdaq Staff Determination
letter indicating that the Company failed to comply with the minimum $1.00 per
share requirement for continued inclusion of its common stock under Marketplace
Rule 4310(c)(4), and therefore was subject to delisting from the Nasdaq SmallCap
Market. In accordance with Marketplace Rule 4310(c)(8)(D), the Company would
have been provided 180 calendar days, or until August 13, 2002, to regain
compliance. However, prior to that time, the Company was delisted according to
the above mentioned reasons.
Shares traded on the OTC Bulletin Board are not as liquid as those traded
on Nasdaq National market or the Nasdaq SmallCap market.
17
Lancer has a $400,000 line of credit with GE Capital Healthcare Financial
Services, expiring October 24, 2003. Borrowings are made at prime plus 2.0%, in
no event less than 8.0%, (8.0% at November 30, 2002) 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, 2002 was $.00 and the unused portion
available was approximately $336,000.
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables and equipment. The lending agreement
requires that receivables payments be sent to a controlled lockbox. In addition
to interest, a management fee of .0425% on the average monthly unused portion
available are required. Lancer is not required to maintain compensating balances
in connection with this lending agreement. Proceeds from this line cannot be
used to support the operations of Biomerica.
Biomerica, Inc. entered into a line of credit agreement on September 12,
2001 with a shareholder whereby the shareholder will loan to the Company, as
needed, up to $500,000 for working capital needs. The line of credit bears
interest at 8%, is secured by Biomerica accounts receivable and inventory and
expires September 12, 2003. The unused portion of the line of credit at November
30, 2002, was $187,050. Additionally, the Company received a $10,000 unsecured
loan from a different shareholder. Such amount is included in shareholder loan
in the accompanying financial statements.
WE MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED SECURITIES
MEASURES IN RESPONSE TO TERRORISM:
Our business depends on the free flow of products and services through the
channels of commerce. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial or other services could have a material adverse
effect on our business, results of operations and financial condition.
Furthermore, we may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of the activities and
potential activities. We may also experience delays in receiving payments from
payers that have been affected by the terrorist activities and potential
activities. The U.S. economy in general is being adversely affected by the
terrorist activities and potential activities and any economic downturn could
adversely impact our results of operations, impair our ability to raise capital
or otherwise adversely affect our ability to grow our business.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. A discussion
of the Company's exposure to, and management of, market risk appears in Item 2
of this Form 10-QSB under the heading "Management's Discussion and Analysis of
Financial Condition and Selected Financial Data."
Item 4. PROCEDURES AND CONTROLS. Within the 90 days prior to the date of this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls to the date of their evaluation.
18
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS. Inapplicable.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Inapplicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
Item 5. OTHER INFORMATION. Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. A report on Form 8-K was filed
with the Securities and Exchange Commission on June 6, 2002.
(a) Exhibits
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant To 18 U.S.C., Section 1350, as adopted pursuant to Section 302
and 906 of the Sarbanes-Oxley Act of 2002.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: January 21, 2003
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------------
Zackary Irani
Chief Executive Officer
20
STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY PRINCIPAL
EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER REGARDING FACTS AND
CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Janet Moore, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Biomerica, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and Maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14 for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and;
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 21, 2003
/s/ Janet Moore
-------------------------------
Chief Financial Officer
21
STATEMENT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 BY PRINCIPAL
EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER REGARDING FACTS AND
CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Zackary Irani, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Biomerica, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and;
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 21, 2003
/s/ Zackary S. Irani
-------------------------------
Chief Executive Officer
22