FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended February 28, 2005 Commission File No. 0-8765
----------------- ------
BIOMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-2645573
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1533 Monrovia Avenue, Newport Beach, California 92663
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (949) 645-2111
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(Not applicable)
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(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
Defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,752,431 shares of common
stock as of April 14, 2005.
1
BIOMERICA, INC.
INDEX
PART I
Item 1. Consolidated Financial Statements:
Consolidated Statements of Operations and
Comprehensive Loss (unaudited) - Three and Nine Months Ended
February 28, 2005 and 2004........................................3 & 4
Consolidated Balance Sheet (unaudited) -
February 28, 2005.................................................5 & 6
Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended February 28, 2005 and 2004..........................7
Consolidated Statement of Changes in Shareholders'
Equity (unaudited) - Nine Months Ended February 28, 2005..............8
Notes to Consolidated Financial Statements (unaudited).............9-19
Item 2. Management's Discussion and Analysis of Financial Condition
and Selected Financial Data.......................................20-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........24
Item 4. Controls and procedures..............................................24
PART II Other Information....................................................25
Item 1. Legal Proceedings....................................................25
Item 2. Changes in Securities and Use of Proceeds............................25
Item 3. Defaults upon Senior Securities......................................25
Item 4. Submission of Matters to a Vote of Security Holders..................25
Item 5. Other Information....................................................25
Item 6. Exhibits and Reports on Form 8-K.....................................25
Signatures...........................................................26
2
PART I - FINANCIAL INFORMATION
SUMMARIZED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS (UNAUDITED)
Nine Months Ended Three Months Ended
February 28 February 29, February 28, February 29,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales ...................................................... $ 6,691,509 $ 6,899,088 $ 2,344,536 $ 2,464,873
Cost of sales ............................................. (4,461,838) (4,784,264) (1,563,917) (1,646,437)
------------ ------------ ------------ ------------
Gross profit .............................................. $ 2,229,671 $ 2,114,824 780,619 818,436
------------ ------------ ------------ ------------
Operating Expenses:
Selling, general and administrative ....................... 2,195,439 2,250,086 659,421 655,211
Research and development .................................. 203,816 207,123 61,309 65,370
------------ ------------ ------------ ------------
2,399,255 2,457,209 720,730 720,581
------------ ------------ ------------ ------------
Operating loss from continuing operations ...................... (169,584) (342,385) 59,889 97,855
------------ ------------ ------------ ------------
Other Expense (income):
Interest expense .......................................... 28,692 24,120 11,113 8,744
Other (income) expense, net ............................... (19,501) (54,514) 3,472 (21,256)
------------ ------------ ------------ ------------
9,191 (30,394) 14,585 (12,512)
------------ ------------ ------------ ------------
(Loss) gain from continuing operations, before minority
interest in net (loss) gain of consolidated subsidiary and
income taxes ................................................ (178,775) (311,991) 45,304 110,367
Minority interest in net (loss) gain of consolidated
subsidiary ................................................... (127,270) (48,069) (27,170) 45,750
------------ ------------ ------------ ------------
(Loss) gain from continuing operations, before income taxes .... (51,505) (263,922) 72,474 64,617
Income tax expense ............................................. 1,938 26 338 26
------------ ------------ ------------ ------------
Net (loss) gain from continuing operations ..................... (53,443) (263,948) 72,136 64,591
The accompanying notes are an integral part of these statements.
3
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS - Continued (UNAUDITED)
Nine Months Ended Three Months Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
-------------- -------------- -------------- --------------
Discontinued operations:
Gain (loss) income from discontinued operations, net ........ 6,600 (4,359) 0 (1,415)
-------------- -------------- -------------- --------------
Net (loss) gain ............................................... (46,843) (268,307) 72,136 63,176
Other comprehensive (loss) gain, net of tax
Unrealized (loss) gain on available-for-sale securities ..... (12,904) 35,580 (5,462) 13,018
-------------- -------------- -------------- --------------
Comprehensive (loss) gain ..................................... $ (59,747) $ (232,727) $ 66,674 $ 76,194
============== ============== ============== ==============
Basic net (loss) gain per common share:
Net (loss) gain from continuing operations ............... $ (.01) $ (.05) $ .01 $ .01
Net gain (loss) from discontinued operations ............. .00 (.00) .00 (.00)
-------------- -------------- -------------- --------------
Basic net (loss) gain per common share ........................ $ (.01) $ (.05) $ .01 $ .01
============== ============== ============== ==============
Diluted net (loss) gain per common share
Net (loss) gain from continuing operations ............... $ (.01) $ (.05) $ .01 $ .01
Net loss from discontinued operations .................... .00 (.00) .00 (.00)
-------------- -------------- -------------- --------------
Diluted net (loss) gain per common share ...................... $ (.01) $ (.05) $ .01 $ .01
============== ============== ============== ==============
Weighted average number of common and common equivalent shares:
Basic .................................................... 5,752,431 5,726,993 5,752,431 5,752,431
Diluted .................................................. 5,752,431 5,726,993 6,568,121 5,752,431
============== ============== ============== ==============
The accompanying notes are an integral part of these statements.
4
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
February 28,
2005
-----------
Assets
Current Assets
Cash and cash equivalents ................................................ $ 221,046
Available for-sale securities ............................................ 13,216
Accounts receivable, less allowance for doubtful accounts of $110,988 .... 1,759,797
Inventories, net of reserve of $281,193 .................................. 2,837,486
Notes receivable ......................................................... 2,919
Prepaid expenses and other ............................................... 120,220
----------
Total Current Assets ............................................... 4,954,684
Inventory, non-current ....................................................... 18,000
Property and Equipment, net of accumulated depreciation and amortization ..... 789,772
Intangible assets, net of accumulated amortization ........................... 14,860
Other Assets ................................................................. 62,240
----------
$5,839,556
==========
The accompanying notes are an integral part of these statements
5
BIOMERICA, INC.
CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED)
February 28,
2005
-------------
Liabilities and Shareholders' Equity
Current Liabilities
Line of credit ............................................ $ 195,415
Accounts payable and accrued liabilities .................. 1,109,551
Accrued compensation ...................................... 548,632
Shareholder loan .......................................... 317,318
Net liabilities from discontinued operations .............. 271,951
------------
Total Current Liabilities ............................ 2,442,867
Minority interest .............................................. 2,546,323
------------
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 ................................ 17,108,845
Accumulated other comprehensive gain ...................... 5,562
Accumulated deficit ....................................... (16,724,234)
------------
Total Shareholders' Equity ..................................... 850,366
------------
Total Liabilities and Equity ................................... $ 5,839,556
============
The accompanying notes are an integral part of these statements.
6
BIOMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended February 28, February 29,
2005 2004
---------- ----------
Cash flows from operating activities:
Net loss from continuing operations .................................... $ (53,443) $(263,948)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ..................................... 120,747 95,075
Realized gain on sale of available-for-sale security .............. (8,888) 15,115
Minority interest in net (loss) gain of consolidated subsidiary ... (127,270) (48,069)
Common stock, warrants and options issued for services rendered ... 10,400 55,172
Common stock issued by subsidiary for services rendered ........... 58,250 --
Provision for losses on accounts receivable ....................... (61,414) 45,663
Warrant and options issued for services rendered .................. 312 --
Loss on disposal of fixed assets .................................. 1,258 --
Changes in current assets and liabilities:
Accounts Receivable ............................................. (181,100) (128,705)
Inventories ..................................................... (162,643) 12,737
Prepaid expenses and other current assets ....................... 58,622 15,094
Accounts payable and other accrued liabilities .................. 126,772 (75,116)
Accrued compensation ............................................ 82,709 129,811
---------- ----------
Net cash used in operating activities ................................. (135,688) (147,171)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment ............................... (177,950) (339,016)
Other assets ...................................................... (13,419) (19,504)
---------- ----------
Net cash used in investing activities .................................. (191,369) (358,520)
---------- ----------
Cash flows from financing activities:
Sale of available for sale securities ............................. 8,888 --
Issuance of shares by subsidiary .................................. -- 7,750
Increase in shareholder loan ..................................... -- 2,666
Private placement, net of offering costs .......................... -- 50,500
Exercise of stock options at subsidiary ........................... 1,170 2,000
Increase (decrease) in line of credit ............................. 195,415 (426)
Increase in term loan ............................................. -- 97,931
---------- ----------
Net cash provided by financing activities ............................. 205,473 160,421
---------- ----------
Net cash used in discontinued operations ............................... (9,744) (974)
---------- ----------
Net (decrease) in cash and cash equivalents ........................... (131,328) (346,244)
Cash at beginning of period ............................................ 352,374 525,167
---------- ----------
Cash at end of period .................................................. $ 221,046 $ 178,923
========= =========
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
Change in minority interest due to subsidiary stock issuance ......... (26,872) --
========= =========
The accompanying notes are an integral part of these statements.
7
BIOMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED February 28, 2005
Common Stock
---------------------------
Accumulated
Number Additional Other
of Paid-in Comprehensive Accumulated
Shares Amount Capital Gain (loss) Deficit Total
------------- ------------- ------------- ------------- ------------- -------------
Balance at
May 31, 2004 5,752,431 $ 460,193 $17,125,005 $ 18,466 $ (16,677,391) $ 926,273
Change in
unrealized
gain on available
for sale securities (12,904) (12,904)
Expense related to
issuance of warrants
for extension of note 10,400 10,400
Compensation
expense in connection
with options
and warrants
issued 312 312
Issuance of stock
at subsidiary (26,872) (26,872)
Net loss (46,843) (46,843)
------------- ------------- ------------- ------------- --------------- -------------
Balance at 5,752,431 $ 460,193 $17,108,845 $ 5,562 $(16,724,234) $ 850,366
February 28, 2005 ============= ============= ============= ============= =============== =============
The accompanying notes are an integral part of these statements.
8
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
February 28, 2005
(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, 2004, 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 reported amounts of revenues and expenses
during the reported 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 February 28, 2005, the Company had cash and available-for-sale
securities in the amount of $234,262 and working capital of $2,511,817.
Cash and working capital totaling $203,408 and $2,631,992, 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. Biomerica has funded its operations
through debt and equity financings, and may have to do so in the future.
ReadyScript operations were discontinued in May 2001 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 or
increase sales adequately or should the Company be unable to secure
additional financing, the result for the Company could be the inability
to continue as a going concern.
The Company will continue to have limited cash resources. Biomerica, as a
parent entity, has no open or existing, operating line of credit or loans
on which it can draw any new or additional debt financing. The Company is
currently in negotiations to obtain a line of credit for product
acquisition financing. However, this line of credit would not be
available for general operations. 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 the
Company.
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,
2004, 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
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.
9
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. In March 2004 the Company
signed a note payable for the principal and interest due at that time of
$313,318 and agreed to a forbearance of any payments for the length of
the agreement. A warrant for 40,000 shares of restricted common stock
exercisable at a price of $.51 per share was awarded as compensation for
the forbearance. The note payable is secured by all of the Company's
assets except for the Lancer common stock owned by Biomerica. The note
was due September 1, 2004. There was $313,318 of outstanding principal
and $104 interest payable under this note payable at February 28, 2005.
On November 19, 2004, the Company entered into an agreement entitled
"Amendment of the Note, Loan and Modification Agreement". This amends the
"Loan Modification, Forbearance and Security Agreement" and "Amended and
Restated Promissory Note" which were included as exhibits to the Form
10QSB filed April 14, 2004. The Amendment of the Note, Loan and
Modification Agreement was filed as an exhibit to a Form 8K filed
November 24, 2004. The agreement extends the maturity date of the note
until August 31, 2005 and allows for minimum payments of $4,000 per month
and additional contingent payments of up to $3,500 per month based on the
Company's quarterly performance. Collateral remains the same under the
amendment.
(3) In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosures - an amendment to
SFAS No. 123". SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. The implementation of SFAS No. 148 did
not have a material effect on the Company's consolidated financial
position or results of operation.
In December 2004, FASB issued SFAS No. 123 (revised 2004) "Share Based
Payments" (SFAS No. 132R), a revision to Statement No. 123, Accounting
for Stock-Based Compensation which supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. The revised SFAS 123 eliminates
the alternative to use Opinion 25's intrinsic value method of accounting,
and instead, requires entities to recognize the costs of employee
services received in exchange for awards of equity instruments based on
the grant-date fair value of those awards. Furthermore, public entities
are required to measure liabilities incurred to employees in share-based
payment transactions at fair value as well as estimate the number of
instruments for which the requisite service is expected to be rendered.
Any incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair values before
and after the modification. The Company has yet to determine the effect
SFAS No. 123R may have in its financial statements, if any.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option 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 fair value at the date of
grant consistent with the provisions of SFAS 148, for the quarter ended
February 28 is as follows:
10
Nine Months Ended Three Months Ended
2/28/05 2/29/04 2/28/05 2/29/04
------------------------------------------------------------------------------------------
Net (loss) gain from continuing
operations, as reported $ (53,443) $(263,948) $ 72,136 $ 64,591
Plus: Stock-based employee compensation
expense included in reported net gain
(loss) 312 55,172 69 9,684
Less: Stock-based employee compensation
expense determined using fair value
based method (22,960) (18,918) (8,731) (6,269)
------------------------------------------------------------------------------------------
Net (loss) gain from continuing operations,
pro forma $ (76,091) $(227,694) $ 63,474 $ 68,006
==========================================================================================
Pro forma net (loss) gain from
continuing operations
per share - basic $ (.01) $ (0.04) $ .01 $ .01
==========================================================================================
Pro forma net (loss) gain from
continuing operations
per share - diluted $ (.01) $ (0.04) $ .01 $ .01
==========================================================================================
(4) The following summary presents the options granted, exercised, expired,
and outstanding as of February 28, 2005:
Weighted
Average
Number of Options and Warrants Exercise
Employee Non-employee Total Price
-------- ------------ ----- -----
Outstanding
May 31, 2004 2,428,808 1,228,829 3,657,637 $2.17
Granted 155,000 14,000 169,000 .33
Exercised -- -- -- --
Expired (72,000) (1,048,000) (1,120,000) 2.96
Cancelled -- -- -- --
---------- ------------ ------------ ----------
Outstanding
February 28, 2005 2,511,808 194,829 2,706,637 $ 1.80
========== ============ ============ ==========
(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, 2004 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, 2004, for a description of the
investments in affiliates and consolidated subsidiaries.
(8) Reference is made to Notes 5 & 10 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, 2004, for information on
commitments and contingencies.
(9) Aggregate market value exceeded cost of available-for-sale securities
by approximately $5,562 at February 28, 2005.
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 following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and
diluted EPS computations.
For the Nine Months Ended February 28, 2005
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ (53,443) - $ (.01)
Gain (loss) from discontinued
operations ...................... 6,600 - .00
------------ ------------ ------------
$ (46,843) 5,752,431 $ (.01)
============ ============ ============
Diluted EPS -
Loss attributable to common share -
holders .......................... $ (46,843) 5,752,431 $ (.01)
============ ============ ============
For the Nine Months Ended February 29, 2004
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ (263,948) - $ (.05)
Gain (loss) from discontinued
operations ..................... (4,359) - (.00)
------------ ------------ ------------
$ (268,307) 5,726,993 $ (.05)
Diluted EPS -
Loss attributable to common share -
holders .......................... $ (268,307) 5,726,993 $ (.05)
============ ============ ============
For the Three Months Ended February 28, 2005
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Gain (loss) from continuing
operations ...................... $ 72,136 - $ .01
Gain (loss) from discontinued
operations ..................... - - .00
------------ ------------ ------------
$ 72,136 5,752,431 $ .01
============ ============ ============
Diluted EPS -
Weighted average number of
common and common equivalent
shares used for calculating
diluted EPS ..................... - 5,752,431 -
Weighted average number of
dilutive common and common
equivalent shares used for
calculating diluted EPS ........ - 815,690 -
------------ ------------ ------------
Gain attributable to common
shareholders ................... $ 72,136 6,568,121 $ .01
============ ============ ============
12
For the Three Months Ended February 29, 2004
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
Basic EPS -
Loss from continuing
operations ...................... $ 64,591 - $ .01
Gain (loss) from discontinued
operations ..................... (1,415) - (.00)
------------ ------------ ------------
$ 63,176 5,258,475 $ .01
============ ============ ============
Diluted EPS -
Weighted average number of
common and common equivalent
shares used for calculating
Basic EPS ...................... - 5,258,475 -
Weighted average number of dilutive
Common and common equivalent
shares Used for calculating
diluted EPS .................... - - -
------------ ------------ ------------
Gain attributable to common
shareholders ................... $ 63,176 5,258,475 $ .01
============ ============ ============
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding
common stock options and warrants because their effect was antidilutive
due to losses incurred by the Company.
As of February 28, 2005, there was a total of 815,690 potential dilutive
shares of common stock outstanding.
(11) In October 2001, the FASB issued SFAS No. 144, "Accounting for the
impairment or disposal of long-lived assets." 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. This standard
was effective for the Company's consolidated financial statements
beginning June 1, 2002. The implementation of SFAS No. 144 did not have a
material impact on the Company's consolidated financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 44
and 64, Amendment of SFAS No. 13, and Technical Corrections," to update,
clarify and simplify existing accounting pronouncements. SFAS No. 4,
which required all gains and losses from debt extinguishment to be
aggregated and, if material, classified as an extraordinary item, net of
related tax effect, was rescinded. Consequently, SFAS No. 64, which
amended SFAS No. 4, was rescinded because it was no longer necessary. The
adoption of this statement did not have a material effect on the
Company's consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of
this statement did not have a material effect on the Company's
consolidated financial position or results of operations.
In November 2002, FIN No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," was issued. FIN 45 requires that upon issuance
of a guarantee, a guarantor must recognize a liability for the fair value
of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for guarantees issued
after December 31, 2002, while the disclosure requirements were effective
for financial statements for periods ending after December 15, 2002. The
adoption of FIN 45 did not have a material impact on the Company's
consolidated financial position or results of operations.
13
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities". In December 2003, FIN 46
was replaced by FASB Interpretation No. 46R, "Consolidation of Variable
Interest Entities." FIN 46R clarifies some of the provisions of FIN 46
and exempts certain entities from its requirements. FIN 46R was effective
at the end of the first interim period ending March 15, 2004. Entities
that have adopted FIN 46 prior to this date can continue to apply
provisions of FIN 46 until the effective date of FIN 46R or early
election of FIN 46R. This interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
relating to consolidation of certain entities. FIN No. 46 requires
identification of the Company's participation in variable interests
entities ("VIEs"), which are defined as entities with a level of invested
equity that is not sufficient to fund future activities to permit them to
operate on a stand-alone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. For entities
identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any,
bears a majority of the exposure to its expected losses, or stands to
gain from a majority of its expected returns. FIN No. 46 also sets forth
certain disclosures regarding interests in VIE that are deemed
significant, even if consolidation is not required. The adoption of FIN
No. 46 did not have a material impact on the Company's financial position
or results of operations.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or
modified after June 30, 2003. The adoption of this statement did not have
a significant effect on the Company's consolidated financial position or
results of operations.
In May 2003, SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" was issued. This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities
and equity. This statement is effective for financial instruments entered
into or modified after May 31, 2003. The adoption of SFAS No. 150 did not
have a significant effect on the Company's consolidated financial
position, results of operations, or cash flows.
(12) Financial information about foreign and domestic operations and export
sales is as follows:
For the Nine Months Ended
2/28/05 2/29/04
-------- --------
Revenues from sales to unaffiliated customers:
United States $2,915,000 $3,229,000
Asia 184,000 157,000
Europe 2,065,000 2,063,000
South America 299,000 330,000
Oceania 493,000 377,000
Other 736,000 743,000
---------- ----------
$6,692,000 $6,899,000
========== ==========
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.
14
On January 13, 2005 Lancer filed a Form 15-12g (Certification and Notice
of Termination of Registration under Section 12(g) of the Securities
Exchange Act of 1934 or Suspension of Duty to File Reports under Sections
13 and 15(d) of the Securities Exchange Act of 1934. Lancer's duty to
file reports with the Securities and Exchange Commission has terminated
or suspended according to Rule 12g-4(a)(1)(i) & (ii) and Rule
12h-3(b)(1)(i) & (ii). Lancer's stock is now traded on the pink sheets
under the symbol LANZ.
(14) At February 28, 2005, Lancer has a $400,000 line of credit with Community
National Bank (formerly Cuyamaca Bank). Borrowings are made at prime plus
2.0% (7.50% at February 28, 2005), and are limited to 80% of domestic
accounts receivable less than 90 days old. The outstanding balance at
February 28, 2005 was $195,415 and the unused portion available was
approximately $144,585. Lancer requested that Community National Bank
reserve $60,000 of its available Credit line as a guarantee of credit
with a European supplier. Lancer was in compliance with its debt
covenants at February 28, 2005.
The line of credit is collateralized by substantially all the assets of
Lancer, including inventories, receivables, and equipment. The lending
agreement for the line of credit requires, among other things, that
Lancer maintain a tangible net worth ratio of $2,700,000 and a zero
balance be maintained for 30 consecutive days during the term. Lancer is
not required to maintain compensating balances in connection with this
lending agreement. Proceeds from this line cannot be used to support the
operations of Biomerica.
The Lancer line of credit expired January 8, 2005 and was renewed until
October 15, 2005.
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. In March 2004 the Company
signed a note payable for the principal and interest due at that time of
$313,318 and agreed to a forbearance of any payments for the length of
the agreement. A warrant for 40,000 shares of restricted common stock
exercisable at a price of $.51 per share was awarded as compensation for
the forbearance. The note payable is secured by all of the Company's
assets except for the Lancer common stock owned by Biomerica. The note
was due September 1, 2004.
On November 19, 2004, the Company entered into an Agreement entitled
"Amendment of the Note, Loan and Modification Agreement". This amends the
"Loan Modification, Forbearance and Security Agreement" and "Amended and
Restated Promissory Note" which were included as exhibits to the Form
10QSB filed April 14, 2004. The Amendment of the Note, Loan and
Modification Agreement was filed as an exhibit to a Form 8K filed
November 24, 2004. The agreement extends the maturity date of the note
until August 31, 2005 and allows for minimum payments of $4,000 per month
and additional contingent payments of up to $3,500 per month based on the
Company's quarterly performance. Collateral remains the same under the
amendment. There was $313,318 of outstanding principal and $104 interest
payable under this note payable at February 28, 2005.
(15) During fiscal 2005, Biomerica granted 169,000 stock options to purchase
shares of common stock at an exercise price of $0.33 to select employees
and consultants of the Company. The options vest over four years, and
have a term of five years. Management assigned a value of $3,500 to these
options. These options were granted under the Company's existing 1995 and
1999 Stock Option and Restricted Stock Plan. During the quarter ended
February 28, 2005 the Company has recognized an expense of $234
attributable to these options, with the remaining value of these options
to be amortized over the options vesting period.
During fiscal 2004, the Company sold 202,000 shares of restricted common
stock in a private placement to insiders and qualified investors at a
selling price of $.25 per share. Warrants to purchase 202,000 shares of
the Company's restricted common stock at an exercise price of $.25 were
also granted as part of the private placement. 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.
15
During fiscal 2004, the Company issued 10,000 shares of its common stock
as the result of the exercise of options granted in prior years. Proceeds
to the Company were $2,000.
Subsidiary Sale of Stock
During the year ended May 31, 2004, the Company recognized a reduction in
its additional paid capital in the amount of $112,719 resulting from a
decrease in its ownership percentage of Lancer as a result of Lancer's
sale of common stock.
During the quarter ended August 31, 2004, the Company recognized a
reduction in its additional paid in capital in the amount of $4,100
resulting from a decrease in its ownership percentage of Lancer as a
result of Lancer issuing shares of common stock during the quarter.
During the quarter ended November 30, 2004, the Company recognized a
reduction in its additional paid in capital in the amount of $11,413
resulting from a decrease in its ownership percentage of Lancer as a
result of Lancer issuing shares of Common stock during the quarter.
During the quarter ended February 28, 2005, the Company recognized a
reduction in its additional paid in capital in the amount of $11,359
resulting from a decrease in its ownership percentage of Lancer as a
result of Lancer issuing shares of Common stock during the quarter.
Subsidiary Options, Warrants and Stock Activity
During the year ended May 31, 2004, Lancer granted 120,000 options to
purchase shares of Lancer's common stock at an exercise price of $0.38
per share as pursuant to terms of the employment agreement between Lancer
and Dan Castner, the Vice President of Sales and Marketing at Lancer. The
options vest over four years and have a term of five years. Management
assigned a value of $0 to the options.
During the year ended May 31, 2004, Lancer granted 52,500 stock options
to purchase shares of Lancer's common stock at an exercise price of $0.38
per share to directors of the Lancer for services rendered. The options
vest over two years and have a term of five years. Management assigned a
value of $0 to the options.
During the year ended May 31, 2004, Lancer granted 75,000 stock options
to purchase shares of Lancer's common stock at an exercise price of $0.38
per share to its Chief Executive Officer in lieu of salary. The options
vest over three years and have a term of five years. Management assigned
a value of $0 to the options.
During the year ended May 31, 2004, Lancer granted 8,000 stock options to
purchase shares of Lancer's common stock at an exercise price of $0.50 to
an employee of Lancer for services rendered. The options vest over 3
years beginning June 30, 2004 and have a term of five years. Management
assigned a value of $0 to the options.
During the year ended May 31, 2004, Lancer granted 40,000 stock options
to purchase shares of Lancer's common stock at an exercise price of $0.57
to an employee of Lancer for services rendered. The options vest over
four years and have a term of five years. Management assigned a value of
$0 to the options.
During the year ended May 31, 2004, Lancer granted 17,500 stock options
to purchase shares of Lancer's common stock at an exercise price of $0.60
to a new member of its Board of Directors for services to be rendered.
The options vest over 2 years and have a term of five years. Management
assigned a value of $0 to the options.
During fiscal 2004, Lancer issued 91,346 shares of its common stock
valued at $29,000 to its Chief Executive Officer for services rendered
from January 2002 to December 2003. At May 31, 2003, 69,471 of these
shares were reported as subscribed stock.
During fiscal 2004, Lancer agreed to issue 13,541 shares of its common
stock to the Chairman of the Board of Lancer for services rendered from
January 2004 to May 2004 and 31,250 shares of common stock to the Chief
Executive Officer for services rendered per agreement.
16
During fiscal 2004, the Board of Directors of Lancer approved a private
offering of common stock, effective March 23, 2004 and ending April 12,
2004. The offering, to officers, board members, and key employees
resulted in the sale of 450,000 new shares at $.60 per share with total
proceeds received of $270,000. In addition, one warrant exercisable for
each share purchased (450,000 warrants) was issued at $.85 per share.
These warrants shall be exercisable until April 12, 2009.
During fiscal 2005, the Board of Directors of Lancer approved the
issuance of 6,972 shares of common stock to a consultant.
During fiscal 2005, the Board of Directors of Lancer granted 27,500 stock
options to purchase shares of Lancer's common stock at an exercise price
of $.75 to certain employees of Lancer for services rendered. The options
vest over four years and have a term of ten years. Management assigned a
value of $0 to the options.
During fiscal 2005, the Board of Directors of Lancer approved the
issuance of 62,500 shares of its restricted common stock valued at
$37,500 to its Chief Executive Officer for services rendered during the
current fiscal year. An additional 20,000 shares have been accrued as
common stock subscribed. During fiscal 2005 14,584 shares have been
accrued for the Chairman as common stock subscribed.
During fiscal 2005, the Board of Directors of Lancer granted 100,000
stock options to purchase shares of Lancer's common stock at an exercise
price of $.70 to Lancer's President, Dan Castner. The options expire
February 1, 2010 and vest 4,167 shares on the first day of each calendar
month he is employed by Lancer, commencing March 1, 2005. Management
assigned a value of $0 to the options.
During fiscal 2005, an employee at Lancer exercised a stock option for
4,500 shares at the purchase price of $.26 per share. Proceeds to Lancer
were $1,170.
(16) Reportable business segments for the nine months and quarter ended
February 28, 2005 and February 29, 2004 are as follows:
Nine Months Ended Three Months Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------------------------------------------------------------------------------------------
Domestic sales:
Orthodontic products $2,245,000 $2,351,000 $ 682,000 $ 833,000
=============================================================================================
Medical diagnostic products $ 670,000 $ 878,000 $ 271,000 $ 228,000
=============================================================================================
Foreign sales:
Orthodontic products $2,117,000 $2,172,000 $ 789,000 $ 806,000
=============================================================================================
Medical diagnostic products $1,660,000 $1,498,000 $ 603,000 $ 598,000
=============================================================================================
Nine Months Ended Three Months Ended
February 28, February 29, February 28, February 29,
2005 2004 2005 2004
---------------------------------------------------------------------------------------------
Net sales:
Orthodontic products $4,362,000 $4,523,000 $1,471,000 $1,639,000
Medical diagnostic products 2,330,000 2,376,000 874,000 826,000
---------------------------------------------------------------------------------------------
Total $6,692,000 $6,899,000 $2,345,000 $2,465,000
=============================================================================================
Operating (loss) income:
Orthodontic products $ (198,000) $ (92,000) $ (37,000) $ 56,000
Medical diagnostic products 28,000 (250,000) 97,000 42,000
---------------------------------------------------------------------------------------------
Total $ (170,000) $ (342,000) $ 60,000 $ (98,000)
=============================================================================================
17
Operating gain (loss) from discontinued
Segment: ReadyScript $ 6,600 $ (4,359) $ 0 $ (1,415)
---------------------------------------------------------------------------------------------
Total $ 6,600 $ (4,359) $ 0 $ (1,415)
=============================================================================================
Depreciation and amortization
expense:
Orthodontic products $ 70,000 $ 48,000 $ 20,000 $ 22,000
Medical diagnostic products 51,000 44,000 16,000 11,000
----------------------------------------------------------------------------------------------
Total $ 121,000 $ 92,000 $ 36,000 $ 33,000
==============================================================================================
Domestic long-lived assets:
Orthodontic products $ 555,000 $ 387,000
Medical diagnostic products 118,000 134,000
---------------------------------------------------
Total $ 673,000 $ 521,000
===================================================
Foreign long-lived assets:
Orthodontic products $ 102,000 $ 121,000
Medical diagnostic products 15,000 17,000
---------------------------------------------------
Total $ 117,000 $ 659,000
===================================================
Total assets:
Orthodontic products $4,208,000 $3,837,000
Medical diagnostic products 1,632,000 1,704,000
-----------------------------------------------------------------------
Total $5,840,000 $5,541,000
=======================================================================
Capital expenditures:
Orthodontic products $ 149,000 $ 297,000
Medical diagnostic products 29,000 18,000
---------------------------------------------------
Total $ 178,000 $ 315,000
===================================================
The net sales as reflected above consist of sales of unaffiliated
customers only as there were no significant intersegment sales during the
quarter ended and nine months ended February 28, 2005 and February 29,
2004.
(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%.
On November 29, 2004, the Board of Directors of Lancer approved a new
employment agreement and the promotion of Mr. Castner to President. The
agreement is for a term of two years. Mr. Castner's salary shall be
$155,000 for the first year with a possible merit increase after the
first year. Mr. Castner shall also receive a stock option for 100,000
shares at fair market value at the time of grant to be granted no later
than May 31, 2005. These options were granted in February at an exercise
price of $.70 per share. The agreement was filed as an exhibit to a Form
8-K filed by Lancer November 30, 2004.
18
(18) On November 19, 2004 the Board of Directors at Lancer resolved that
effective January 1, 2005 , the compensation for Lancer's Chairman shall
be reduced to $30,000 per year. The Directors also resolved that
effective December 1, 2004, Lancer's Chief Executive Officer's
compensation is to be reduced from 31,250 shares of common stock per
quarter to 20,000 shares per quarter.
On January 20, 2005 the Board of Directors at Lancer resolved that the
compensation for Lancer's Chairman will be reduced to stock only of
12,000 shares of common stock per quarter.
(19) In April 2003, Lancer de Mexico entered into a manufacturing
subcontractor agreement with Biomerica, Inc., to provide manufacturing
services in Mexicali, Mexico. The agreement requires reimbursement from
Biomerica for discrete expenses such as payroll, shipping, and customs
fees; and service fees of approximately $2,900 per month and a lease of
$2,000 per month.
(20) Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the
officer or director's serving in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The
maximum potential amount of future payments the Company could be required
to make under these indemnification agreements is unlimited. However, the
Company has a directors and officer liability insurance policy that
limits its exposure and enables it to recover a portion of any future
amounts paid.
As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal and
has no liabilities recorded for these agreements as of February 28, 2005.
The Company enters into indemnification provisions under (i) its
agreements with other companies in its ordinary course of business,
typically with business partners, contractors, and customers, landlords
and (ii) its agreements with investors. Under these provisions the
Company generally indemnifies and hold harmless the indemnified party for
losses suffered or incurred by the indemnified party as a result of the
Company's activities or, in some cases, as a result of the indemnified
party's activities under the agreement. These indemnification provisions
often include indemnifications relating to representations made by the
Company with regard to intellectual property rights. These
indemnification provisions generally survive termination of the
underlying agreement. In addition, in some cases, the Company has agreed
to reimburse employees for certain expenses. The maximum potential amount
of future payments the Company could be required to make under these
indemnification provisions is unlimited. The Company has not incurred
material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the
estimated fair value of these agreements is minimal. Accordingly, the
Company has no liabilities recorded for these agreements as of February
28, 2005."
(21) The Chief Executive Officer and Chief Financial Officer of Biomerica are
currently deferring part of their cash wages. Their wages are being
recorded as an administrative expense, with deferred amounts being
recorded as part of accrued compensation on the balance sheet. The
balance due them as of February 28, 2005 was $264,284.
On January 20, 2005 the Board of Directors at Biomerica resolved that an
additional $30,000 of the total compensation for the Company's Chief
Executive Officer will be accrued by Biomerica, rather than by the Lancer
subsidiary, since he is now spending more of his time at Biomerica.
(22) Included in accounts payable at February 28, 2005 is $117,153 due for
rental of the Company's facilities according to the terms of the lease.
All of this amount is past due and the Company is in default of the
lease.
(23) The lease for the Company's facilities expires October 31, 2005. The
Company's management has requested an extension of that lease and is
waiting for a response from the landlords regarding that request. There
is no assurance that the management will be able to obtain an extended
lease.
19
(24) On December 7, 2004 the Company entered into an agreement with an
investment banking company to raise financing of between one million and
two million dollars in the form of debt on a best effort basis. There can
be no assurance that the Company will be successful in raising such
funds.
(25) CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based on the consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these consolidated financial
statements requires estimates and assumptions that affect the reported
amounts and disclosures.
We believe the following to be critical accounting policies, as they
require more significant judgments and estimates used in the preparation
of our consolidated financial statements. Although we believe that our
judgments and estimates are appropriate and correct, actual future
results may differ from our estimates.
In general the critical accounting policies that may require judgments or
estimates relate specifically to the recognition of revenue, the
Allowance for Doubtful Accounts, Inventory Reserves for Obsolescence and
Declines in Market Value, Impairment of Long-Lived Assets, Stock Based
Compensation and Deferred Income Tax Valuation and Allowances.
We recognize product revenues when an arrangement exists, delivery has
occurred, the price is determinable and collection is reasonably assured.
The Allowance for Doubtful Accounts is established for estimated losses
resulting from the inability of our customers to make required payments.
The assessment of specific receivable balances and required reserves is
performed by management and discussed with the audit committee. We have
identified specific customers where collection is probably and have
established specific reserves, but to the extent collection is made, the
allowance will be released. Additionally, of the financial condition of
our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Reserves are provided for excess and obsolete inventory, which are
estimated based on a comparison of the quantity and cost of inventory on
hand to management's forecast of customer demand. Customer demand is
dependent on many factors and requires us to use significant judgment in
our forecasting process. We must also make assumptions regarding the rate
at which new products will be accepted in the marketplace and at which
customers will transition from older products to newer products. Once a
reserve is established, it is maintained until the product to which it
relates is sold or otherwise disposed of, even if in subsequent periods
we forecast demand for the product.
In general, we are in a loss position for tax purposes, and have
established a valuation allowance against deferred tax assets, as we do
not believe it is likely that we will generate sufficient taxable income
in future periods to realize the benefit of our deferred tax assets.
Predicting future taxable income is difficult, and requires the use of
significant judgment. At February 28, 2005, all of our deferred tax
assets were reserved. Accruals are made for specific tax exposures and
are generally not material to our operating results or financial
position, nor do we anticipate material changes to these reserves in the
near future.
In the future, if sufficient evidence of our ability to generate
sufficient future taxable income in certain tax jurisdictions becomes
apparent, we may be required to reduce our valuation allowances,
resulting in income tax benefits in our consolidated statement of
operations. We evaluate the realizability 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.
20
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.
The Company has yet to determine the effect SFAS No. 123R may have in its
financial statements, if any. The revised SFAS 123R eliminates the
alternative to use Opinion 25's intrinsic value method of accounting, and
instead, requires entities to recognize the costs of employee services
received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. The revised SFAS 123R also
requires that public entities measure liabilities incurred to employees
in share-based payment transactions at fair value and estimate the number
of instruments for which the requisite service is expected to be
rendered. Any incremental compensation cost for a modification of the
terms or conditions of an award is to be measured by comparing the fair
values before and after the modification.
(26) 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.
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.
21
(27) Subsequent Events
On March 16, 2005 management of Lancer Orthodontics signed a strategic
marketing, sales and manufacturing agreement with Lingualcare, Inc. The
terms of the agreement provide for Lancer to manufacture Lingualcare's
products in Lancer's Mexicali facilities, and for Lancer to assist in
introducing, marketing and promoting Lingualcare's orthodontic products.
Lancer shall be paid for the manufacturing of the products, and shall
further receive shares of Lingualcare's common stock and warrants to
purchase additional shares of common stock. The vesting of the Shares and
Warrants shall be based on certain milestones to be achieved over a three
to four year period. This agreement will require Lancer to invest in new
manufacturing equipment and upgrade its facility, and invest into sales
and marketing expenditures. Lancer's board anticipates that Lancer will
raise the capital necessary for this venture through the sale of
restricted common shares of Lancer's stock through a private placement.
The private placement is expected to occur in the fiscal fourth quarter
of 2005. This private placement will result in the further dilution of
Biomerica's ownership in Lancer and could result in Biomerica's
controlling ownership (through direct shares owned combined with shares
owned by Biomerica's board members) in Lancer to fall below 50%. At this
point Lancer's financials would no longer be consolidated with those of
Biomerica.
On April 5, 2005, the Board of Directors of Lancer granted stock options
for 67,500 shares of Lancer common stock to two employees and three
directors. The exercise price of the options are $.75 per share. The
options vest over four years and are exercisable one quarter immediately,
and one quarter per year thereafter.
On April 5, 2005, the Board of Directors of Lancer voted to add Lea
Nesbit, Chief Executive Officer of Lingualcare, as a member of the board
of directors, effective immediately.
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 $6,691,509 for the nine months ended
February 29, 2004 as compared to $6,899,088 for the same period in the prior
fiscal year. This represents a decrease of $207,579 or 3.0% for the nine-month
period. Of this decrease $160,329 was attributable to a decrease in sales at
Lancer. Consolidated net sales for the quarter then ended were $2,344,536 as
compared to $2,464,873 for the same period in the previous year. This represents
a decrease of $120,337, or 4.9%. Of this quarterly decrease $167,422 was
attributable to sales at Lancer. Biomerica had an increase by $47,085 due to
sales to new distributors. The nine-month decrease in sales at Lancer was
primarily attributable to decreased domestic sales. Increases in sales at
Biomerica were a result of sales of new products and an increase in foreign
sales.
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Cost of sales as a percentage of sales decreased for the nine months from 69.3%
to 66.7% and increased from 66.5% to 66.7% for the quarter. Lancer's cost of
sales as a percentage of sales decreased from 71.3% to 70.8% for the nine months
and for the quarter increased from 70.1% to 71.2%. The Lancer percentage
decrease in cost of goods sold for the nine months was attributable to an
increase in the domestic sales prices. Lancer had increased cost of goods sold
for the quarter due to production and promotion expenses, which was offset by
domestic price increases. Biomerica's cost of sales as a percentage of sales
decreased for the nine months from 65.6% to 60.0%. For the quarter Biomerica's
cost of sales remained constant at 60.2% to 60.2%. For the nine months the
decrease was primarily due to higher costs in the prior year during the transfer
of manufacturing to Mexico.
Selling, general and administrative costs decreased by $54,647, or 2.4% for the
nine months and increased by $4,210, or .6% for the quarter. Lancer had
increased selling, general and administrative costs of $96,157 for the nine
months and $32,330 for the quarter due to the expense of stock compensation for
officers and labor, brochures and samples in the selling and marketing
departments. Biomerica's expenses for the nine months decreased by $150,804 and
for the three months decreased by $28,120. Biomerica's expenses decreased for
the nine months due to lower commissions, wages, rent, accounting and trade show
expenses.
Research and development decreased by $3,307, or 1.6% for the nine months and
decreased by $4,061 for the three months. Lancer had a decrease in research and
development costs of $14,482 and decreased costs of $5,498 for the nine and
three months, respectively due to a decrease in labor costs charged to research
and development. Biomerica had increased research and development costs of
$11,175 for the nine months and of $1,437 for the three months due to higher
wages and materials.
For the nine months ended February 28, 2005, other income (expense) of $19,501
was realized as compared to $54,514 in the prior year. In the prior year Lancer
had higher other income due to bad debt recovery.. In this fiscal year Biomerica
realized proceeds from the sale of marketable securities. For the three months,
other income (expense) was ($3,472) as compared to $21,256. The decrease was
primarily due to the sale of securities by Biomerica in the prior fiscal year.
Interest expense increased by $4,572 (19.0%) for the nine months compared to the
previous year and increased by $2,369 (27.1%) for the quarter. The increase was
primarily due to higher borrowings on the line of credit at Lancer.
LIQUIDITY AND CAPITAL RESOURCES
As of February 28, 2005, the Company had cash and available-for-sale securities
in the amount of $234,262 and working capital of $2,511,817. Cash and working
capital totaling $203,408 and $2,631,992, 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 or
increase sales adequately or should the Company be unable to secure additional
financing, the result for the Company could be the inability to continue as a
going concern.
The Company will continue to have limited cash resources. Biomerica, as a parent
entity, has no open or existing, operating line of credit or loans on which it
can draw any new or additional debt financing. The Company is currently in
negotiations to obtain a line of credit for product acquisition financing,
however, this line of credit would not be available for general operations.
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 the Company.
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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, 2004, 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 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 entered into an agreement for a line of credit agreement on September
12, 2000 with a shareholder whereby the shareholder would loan to the Company,
as needed, up to $500,000 for working capital needs. The line of credit bore
interest at 8%, was secured by accounts receivable and inventory, and expired
September 13, 2003. In March 2004 the Company signed a note payable for the
principal and interest due at that time of $313,318 and agreed to a forbearance
of any payments for the length of the agreement. A warrant for 40,000 shares of
restricted common stock exercisable at a price of $.51 per share was awarded as
compensation for the forbearance. The note payable is secured by all of the
Company's assets except for the Lancer common stock owned by Biomerica. The note
was due September 1, 2004. There was $313,318 of outstanding principal and $104
interest payable under this note payable at February 28, 2005. On November 19,
2004, the Company entered into an agreement entitled "Amendment of the Note,
Loan and Modification Agreement". This amends the "Loan Modification,
Forbearance and Security Agreement" and "Amended and Restated Promissory Note"
which were included as exhibits to the Form 10QSB filed April 14, 2004. The
Amendment of the Note, Loan and Modification Agreement was filed as an exhibit
to a Form 8K filed November 24, 2004. The agreement extends the maturity date of
the note until August 31, 2005 and allows for minimum payments of $4,000 per
month and additional contingent payments of up to $3,500 per month based on the
Company's quarterly performance. Collateral remains the same under the
Amendment.
During the nine months ended February 28, 2005 and February 29, 2004, the
Company's net cash and cash equivalents decreased by $131,328 and $346,244,
respectively. Cash provided by financing activities was $205,473, which resulted
from borrowings on the Lancer line of credit of $195,415, proceeds from an
exercise of stock options at Lancer, and proceeds of $8,888 from the sale of
marketable securities at Biomerica.
At February 28, 2005, Lancer has a $400,000 line of credit with Community
National Bank (formerly Cuyamaca Bank). Borrowings are made at prime plus 2.0%
(7.50% at February 28, 2005), and are limited to 80% of domestic accounts
receivable less than 90 days old. The outstanding balance at February 28, 2005
was $195,415 and the unused portion available was approximately $144,585. Lancer
requested that Community National Bank reserve $60,000 of its available Credit
line as a guarantee of credit with a European supplier.
The line of credit is collateralized by substantially all the assets of Lancer,
including inventories, receivables, and equipment. The lending agreement for the
line of credit requires, among other things, that Lancer maintain a tangible net
worth ratio of $2,700,000 and a zero balance be maintained for 30 consecutive
days during the term. Lancer is not required to maintain compensating balances
in connection with this lending agreement. Proceeds from this line cannot be
used to support the operations of Biomerica. Lancer was in compliance with its
debt covenants at February 28, 2005.
The Lancer line of credit expired January 8, 2005 and was renewed until
October 15, 2005.
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During the nine months ended February 28, 2005, the Company's operating
activities used cash of $135,688 and $147,171 for the periods ended February 28,
2005 and February 29, 2004. Included in this was depreciation and amortization
of $120,747, and $95,075. Depreciation and amortization increased over the prior
year due to the recent purchases of equipment, in particular at Lancer where
they are purchasing equipment for manufacture of new products. The minority
interest in the losses at Lancer was $127,270 as compared to $48,069 in the
prior year. Lancer had increased losses this fiscal year. Common stock, warrants
and options issued for services rendered decreased from $55,172 to $10,400 due
to less compensation being paid in the form of equity at Biomerica. Common
stock, warrants and options issued for services rendered at Lancer was $58,250
for the first nine months of fiscal 2005. Provisions for losses on accounts
receivable decreased for the nine months ended February 28, 2005, due to the
write-off of certain bad debts at Biomerica. Gross accounts receivable have
increased by $181,100 for the first nine months of fiscal 2005. Of this, $94,965
was attributable to the timing of accounts receivable collections at Lancer. The
balance of $86,135 is attributable to increased sales, and therefore higher
receivables, at Biomerica. Inventories increased for the nine months ended
February 28, 2005 by $162,643. Of this, $104,336 was due to increases at Lancer
due to lower sales. Prepaid expenses decreased for the nine months ended
February 28, 2005 by $58,622. Lancer had decreased prepaids of $59,271 and
Biomerica had increased prepaids of $649. The movement in prepaid expenses was
primarily due to prepaid inventory orders at both Lancer in the prior year.
Accounts payable increased by $126,772 for first nine months of fiscal 2005. Of
this $35,680 was attributable to Lancer and $91,092 to Biomerica. Lancer's
accounts payable increased due to inventory shipments that were received at the
end of the quarter ended February 28, 2005 and Biomerica's increased due to the
purchase of inventory due to higher sales. Accrued compensation increased by
$82,709 for the nine months ended February 28, 2005 due to the accrual of wages
at Biomerica for the CEO and CFO.
Cash provided by financing activities was $263,723, which resulted from
borrowings on the Lancer line of credit of $195,415, the sale of marketable
securities of $8,888 at Biomerica, shares issued by Lancer for wages of $58,250
(Lancer is paying its part-time CEO and Chairman in the form of restricted
common stock) and the exercise of stock options at Lancer of $1,170.
Lancer has been investing in equipment to manufacture new products. Of the
$177,950 of purchases of property and equipment for the period ended February
28, 2005, $149,263 relates to Lancer. Lancer has used the new equipment to build
inventory in anticipation of higher sales. The inventory at Lancer has increased
by $104,336 for the nine months ended February 28, 2005. Lancer has had to draw
on its line of credit due to these expenses.
The Chief Executive Officer and Chief Financial Officer of Biomerica are
currently deferring part of their salaries. Their salaries are being recorded as
an administrative expense. All deferred salaries are being recorded as part of
the accrued compensation 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
You should read the following factors in conjunction with the factors discussed
elsewhere in this and our other filings with the SEC and in materials
incorporated by reference in these filings. The following is intended to
highlight certain factors that may affect the financial condition and results of
operations of Biomerica and are not meant to be an exhaustive discussion of
risks that apply to companies such as Biomerica. Like other businesses,
Biomerica is susceptible to macroeconomic downturns in the United States or
abroad, that may affect the general economic climate and performance of
Biomerica or its' customers. Aside from general macroeconomic downturns,
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
25
international distributors or the economic climate they operate in; any event
that has a material adverse impact on our foreign manufacturing operations may
adversely affect our operation as a whole; failure to manage the future
expansion of our business could have an adverse affect on our revenues and
profitability; possible costs in complying with government regulations and the
delays in receiving required regulatory approvals or the enactment of new
adverse regulations or regulatory requirements; numerous competitors, most of
which have substantially greater financial and other resources than we do;
potential claims and litigation brought by patients or medical professionals
alleging harm caused by the use of or exposure to our products; quarterly
variations in operating results caused by a number of factors, including
business and industry conditions and other factors beyond our control. All of
these factors make it difficult to predict operating results for any particular
period.
Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (the Company's
principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluation as of February 28, 2005, that the design
and operation of the Company's "disclosure controls and procedures" (as defined
in rules 13a-15(e) under the Securities Exchange Act of 1934, as amended
("Exchange Act") are effective to ensure that information required to be
disclosed by the Company in the reports filed or submitted by the Company under
the Exchange Act is accumulated, recorded, processed, summarized and reported to
the Company's management, including the Company's principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding whether or not disclosure is required.
During the quarter ended February 28, 2005, 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.
26
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. Inapplicable.
Exhibits
----
99.1 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant To 18 U.S.C., Section 1350, as adopted pursuant to Section 302
and 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 14, 2005
BIOMERICA, INC.
By: /S/ Zackary S. Irani
-----------------------------
Zackary S. Irani
Chief Executive Officer
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