-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PggZIuHDipTdv2NJsepIXLrPoUivtXHNPeSOCxmnycqKaPH6un6aTEKJr2Dfovdm sndxc9T1E9N7HceFU94uyA== 0001019687-05-002865.txt : 20051024 0001019687-05-002865.hdr.sgml : 20051024 20051024163839 ACCESSION NUMBER: 0001019687-05-002865 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050831 FILED AS OF DATE: 20051024 DATE AS OF CHANGE: 20051024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMERICA INC CENTRAL INDEX KEY: 0000073290 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 952645573 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-08765 FILM NUMBER: 051152387 BUSINESS ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 BUSINESS PHONE: 9496452111 MAIL ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 FORMER COMPANY: FORMER CONFORMED NAME: NMS PHARMACEUTICALS INC DATE OF NAME CHANGE: 19871130 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR MEDICAL SYSTEMS INC DATE OF NAME CHANGE: 19830216 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR INSTRUMENTS INC DATE OF NAME CHANGE: 19720508 10QSB 1 biomerica_10q-083105.txt 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 August 31, 2005 Commission File No. 0-8765 --------------- ------ BIOMERICA, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2645573 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1533 Monrovia Avenue, Newport Beach, California 92663 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (949) 645-2111 - -------------------------------------------------------------------------------- (Not applicable) - -------------------------------------------------------------------------------- (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: 5,753,931 shares of common stock as of October 15, 2005. BIOMERICA, INC. INDEX PART I Item 1. Consolidated Financial Statements: Consolidated Statements of Operations and Comprehensive Loss (unaudited) - Three Months Ended August 31, 2005 and 2004..........................................1 & 2 Consolidated Balance Sheet (unaudited) - August 31, 2005...................................................3 & 4 Consolidated Statements of Cash Flows (unaudited) - Three Months Ended August 31, 2005 and 2004...........................5 Consolidated Statement of Changes in Shareholders' Equity (unaudited) - Three Months Ended August 31, 2005...............6 Notes to Consolidated Financial Statements (unaudited) ............7-17 Item 2. Management's Discussion and Analysis of Financial Condition and Selected Financial Data.......................................18-22 Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 23 Item 4. Controls and procedures..............................................23 PART II Other Information....................................................24 Item 1. Legal Proceedings....................................................24 Item 2. Changes in Securities and Use of Proceeds............................24 Item 3. Defaults upon Senior Securities......................................24 Item 4. Submission of Matters to a Vote of Security Holders..................24 Item 5. Other Information....................................................24 Item 6. Exhibits and Reports on Form 8-K.....................................24 Signatures...........................................................25 PART I - FINANCIAL INFORMATION SUMMARIZED FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) Three Months Ended August 31, 2005 2004 ----------- ----------- Net sales .......................................................... $ 2,322,144 $ 2,184,437 Cost of sales ................................................. (1,579,936) (1,506,496) ----------- ----------- Gross profit .................................................. 742,208 677,941 ----------- ----------- Operating Expenses: Selling, general and administrative ........................... 753,160 710,063 Research and development ...................................... 84,777 71,049 ----------- ----------- 837,937 781,112 ----------- ----------- Operating loss from continuing operations .......................... (95,729) (103,171) ----------- ----------- Other Expense (income): Interest expense .............................................. 11,013 8,118 Other income, net ............................................. (37,897) (13,435) ----------- ----------- (26,884) (5,317) ----------- ----------- Loss from continuing operations, before minority interest in net loss of consolidated subsidiaries and income taxes ... (68,845) (97,854) Minority interest in net losses of consolidated subsidiaries ....... 132,236 47,709 ----------- ----------- Income (loss) from continuing operations, before income taxes ...... 63,391 (50,145) Income tax expense ................................................. 0 0 ----------- ----------- Net income (loss) from continuing operations ....................... 63,391 (50,145) =========== =========== 1 BIOMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE GAIN (LOSS) - Continued (UNAUDITED) Discontinued operations: Income (loss) from discontinued operations, net ................. -- -- ------------- ------------- Net income (loss) ................................................. 63,391 (50,145) Other comprehensive gain (loss), net of tax Unrealized (loss) on available-for-sale securities .............. (3,358) (5,590) ------------- ------------- Comprehensive gain (loss) ......................................... $ 60,033 $ (55,735) ============= ============= Basic net gain (loss) per common share: Net gain (loss) from continuing operations ................... $ .01 $ (.01) Net gain (loss) from discontinued operations ................. .00 .00 ------------- ------------- Basic net gain (loss) per common share ............................ $ .01 $ (.01) ============= ============= Diluted net gain (loss) per common share: Net gain (loss) from continuing operations ................... $ .01 $ (.01) Net gain (loss) from discontinued operations ................. .00 .00 ------------- ------------- Diluted net gain (loss) per common share .......................... $ .01 $ (.01) ============= ============= Weighted average number of common and common equivalent shares: Basic ........................................................ 5,753,686 5,752,431 ============= ============= Diluted ...................................................... 6,620,621 -- ============= ============= The accompanying notes are an integral part of these statements. 2 BIOMERICA, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) August 31, 2005 ---------- Assets Current Assets Cash and cash equivalents ............................................... $ 226,702 Available for-sale securities ........................................... 4,822 Accounts receivable, less allowance for doubtful accounts of $185,944 ... 1,788,711 Inventories, net ........................................................ 2,248,798 Notes receivable ........................................................ 7,169 Prepaid expenses and other .............................................. 115,822 ---------- Total Current Assets .............................................. 4,392,024 Inventory, non-current ...................................................... 611,000 Property and Equipment, net of accumulated depreciation and amortization .... 941,107 Intangible assets, net of accumulated amortization .......................... 11,644 Other Assets ................................................................ 62,240 ---------- $6,018,015 ========== The accompanying notes are an integral part of these statements. 3 BIOMERICA, INC. CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED) August 31, 2005 ------------ Liabilities and Shareholders' Equity Current Liabilities Line of credit ................................................ $ 25,000 Accounts payable and accrued liabilities ...................... 1,142,570 Accrued compensation .......................................... 584,195 Current portion of shareholder loan ........................... 295,026 Net liabilities from discontinued operations .................. 104,579 ------------ Total Current Liabilities ................................ 2,151,370 Minority interest .................................................. 2,803,104 ------------ Shareholders' Equity Common stock, $0.08 par value authorized 25,000,000 shares, subscribed or issued and outstanding 5,753,931 .............. 460,313 Additional paid-in-capital .................................... 17,057,801 Accumulated other comprehensive gain .......................... (2,832) Accumulated deficit ........................................... (16,451,741) ------------ Total Shareholders' Equity ......................................... $ 1,063,541 ------------ Total Liabilities and Equity ....................................... $ 6,018,015 ============ The accompanying notes are an integral part of these statements. 4 BIOMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the three months ended August 31, 2005 2004 --------- --------- Cash flows from operating activities: Net loss from continuing operations .............................. $ 63,391 $ (50,145) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization ............................... 37,644 45,597 Amortization of warrant expense for extension of loan ....... -- 10,400 Minority interest in net loss of consolidated Subsidiary ................................................ (132,236) (47,709) Gain on sales of marketable securities ...................... -- (2,068) Common stock, warrants and options issued for services rendered .................................................. 234 -- Provision for losses on accounts receivable ................. 17,143 (4,991) Changes in current assets and liabilities: Accounts Receivable ....................................... (83,641) (74,830) Inventories ............................................... (158,620) (195,319) Prepaid expenses and other current assets ................. (8,347) (6,852) Accounts payable and other accrued liabilities ............ 59,644 80,506 Accrued compensation ...................................... (9,985) 71,169 --------- --------- Net cash used in operating activities ............................ (214,773) (174,242) --------- --------- Cash flows from investing activities: Sales of available-for-sale securities ...................... -- 2,068 Purchases of property and equipment ......................... (160,043) (61,585) --------- --------- Net cash used in investing activities ............................ (160,043) (59,517) --------- --------- Cash flows from financing activities: Change in minority interest ................................. 20,500 22,500 Increase (decrease) in shareholder loan ..................... (6,061) -- Exercise of stock options ................................... 398 -- Decrease in line of credit at subsidiary .................... (150,000) -- Common stock to be issued at subsidiary ..................... 384,800 -- --------- --------- Net cash provided by financing activities ........................ 249,637 22,500 --------- --------- Net cash used in discontinued operations ......................... -- -- --------- --------- Net decrease in cash and cash equivalents ........................ (125,179) (211,259) Cash and cash equivalents at beginning of period ................. 351,881 352,374 --------- --------- Cash and cash equivalents at end of period ....................... $ 226,702 $ 141,115 ========= ========= Supplemental disclosures on non-cash investing and financing activity: Change in unrealized holding loss on available-for-sale securities $ ( 3,358) $ (5,590) ========= ========= Change in minority interest due to subsidiary stock issuance ... $ (50,185) $ (4,100) ========= ========= The accompanying notes are an integral part of these statements. 5 BIOMERICA, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED AUGUST 31, 2005 Common Stock Accumulated Number Additional Other of Paid-in Comprehensive Accumulated Shares Amount Capital Gain (loss) Deficit Total ------------ ------------ ------------ ------------ ------------ ------------ Balance at May 31, 2005 .......... 5,752,431 $ 460,193 $ 17,107,474 526 $(16,515,132) $ 1,053,061 Exercise of stock Options .............. 1,500 120 278 398 Change in unrealized gain on available for sale securities ... (3,358) (3,358) Expense related to issuance of options ... 234 234 Issuance of stock at subsidiary ......... (50,185) (50,185) Net gain ............... 63,391 63,391 ------------ ------------ ------------ ------------ ------------ ------------ 5,753,931 $ 460,313 $ 17,057,801 $ (2,832) $(16,451,741) $ 1,063,541 ============ ============ ============ ============ ============ ============
6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) August 31, 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, 2005, for a summary of significant accounting policies utilized by the Company. (2) As of August 31, 2005, the Company had cash and available-for-sale securities in the amount of $231,524 and working capital of $2,240,654. Cash and working capital totaling $176,933 and $2,007,549, 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. Of the total working capital, negative working capital of $104,579 relates to the discontinued operation, ReadyScript. These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has operating and liquidity concerns due to historically reporting net losses and negative cash flows from operations. Biomerica's shareholder's line of credit expired on September 13, 2003 and was not renewed. The unpaid principal and interest was converted into a note payable ($313,318) bearing interest at 8% and payable September 1, 2004. The due date on this note was extended until September 1, 2005 and on August 20, 2005 was extended until September 1, 2006 at the same terms. Minimum payments of $4,000 per month plus an additional $3,500 per month, depending on quarterly results of the Company, are being made. The Company has suffered substantial recurring losses from operations over the last several years. Biomerica has funded its operations through debt and equity financings, and may have to do so in the future. ReadyScript operations were discontinued in May 2001. ReadyScript was a contributor to the Company's losses in prior fiscal years. During the fiscal years ended May 31, 2005 and 2004, certain liabilities were forgiven and thus income from discontinued operations for the years then ended was recorded. The subsidiary is being reported in the financial statements as a discontinued operation because it is no longer an operating entity. In the last several years the Company has been focusing on reducing costs where possible and concentrating on its core business in Lancer and Biomerica to increase sales. Management believes that cash flows from the current diagnostics operations is sufficient to fund the diagnostics operations for at least the next twelve months. Should the Company have a downturn in sales or unanticipated, increased expenses, the result for the Company could be the inability to continue as a going concern. The Company will continue to have limited cash resources. Biomerica, as a parent entity, has no open or existing, operating line of credit or loans on which it can draw any new or additional debt financing. The Lancer line of credit expired October 15, 2005. Management at Lancer is in the process of negotiating a renewal of the existing line of credit. There is no assurance that Lancer management will be able to renew that line of credit or obtain other such financing. Our independent registered public accounting firm has concluded that there is substantial doubt as to the Company's ability to continue as a going concern for a reasonable period of time, and have, therefore modified their report for the year ended May 31, 2005 in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "ACCOUNTING FOR STOCK-BASED COMPENSATION," which defines a fair value based method of accounting for stock-based compensation. However, SFAS 123 allows an entity to continue to measure compensation cost related to stock and stock options issued to employees using the intrinsic method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Entities electing to remain with the accounting method of APB 25 must make pro forma disclosures of net (loss) income and (loss) earnings per share, as if the fair value method of accounting defined in SFAS 123 had been applied. The Company has elected to account for its stock-based compensation to employees under APB 25. 7 In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT TO SFAS NO. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method on accounting for stock-based employee compensation. The Company currently does not intend to adopt SFAS No. 123 and the implementation of SFAS No. 148 did not have a material effect on the Company's consolidated financial position or results of operations. The Black Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option vesting period. Adjustments are made for options forfeited prior to vesting. The effect on compensation expense, net loss, and net loss per share (basic and diluted) had compensation costs for the Company's stock option plans been determined based on fair value on the date of grant consistent with the provisions of SFAS 123 are as follows: (3) AUGUST 31, 2005 2004 - -------------------------------------------------------------------------------- Net income (loss) from continuing operations, as reported $ 63,391 $ (50,145) Plus: Stock-based employee compensation expense included in reported net income (loss) -- -- Less: Stock-based employee compensation expense determined using fair value based method (14,692) (3,892) ------------------------------------------------------------------------------- Net income (loss) from continuing operations, pro forma $ 48,699 $ (54,037) ================================================================================ Pro forma net income (loss) from continuing operations per share - basic $ 0.01 $ (0.01) ================================================================================ Pro forma net income from continuing operations per share - diluted $ 0.01 $ (0.01) ================================================================================ Net income (loss) from discontinued operations, as reported $ -- -- Plus: Stock-based employee compensation expense included in reported net loss -- -- Less: Stock-based employee compensation expense determined using fair value based method -- -- - -------------------------------------------------------------------------------- Net income(loss) from discontinued operations, pro forma $ -- $ -- ================================================================================ Pro forma net income (loss) from discontinued operations per share - basic $ .00 $ 0.00 ================================================================================ Pro forma net income (loss) from discontinued operations per share - diluted $ .00 $ 0.00 ================================================================================ 8 (4) The following summary presents the options granted, exercised, expired, and outstanding as of August 31, 2005: Weighted Average Number of Options and Warrants Exercise Employee Non-employee Total Price ---------- ---------- ---------- ---------- Outstanding May 31, 2005 1,427,808 174,829 1,602,637 $ .90 Granted 111,000 -- 111,000 .53 Exercised (1,500) -- (1,500) .27 Expired (112,000) -- (112,000) 2.03 ---------- ---------- ---------- ---------- Outstanding August 31, 2005 1,425,308 174,829 1,600,137 $ .72 ========== ========== ========== ========== (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. (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, 2005, 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, 2005, for information on commitments and contingencies. (9) Aggregate cost exceeded market value of available-for-sale securities by approximately $2,832 at August 31, 2005. (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. 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 Three Months Ended August 31, 2005 -------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------ ------------ ------------ Basic EPS - Income from continuing operations ...................... $ 63,391 -- $ .01 Income from discontinued operations ..................... -- -- .00 ------------ ------------ ------------ $ 63,391 5,753,686 $ .01 ============ ============ ============ Diluted EPS - Income attributable to common share - holders $ 63,391 6,620,621 $ .01 ============ ============ ============ For the Three Months Ended August 31, 2004 -------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------ ------------ ------------ Basic EPS - Loss from continuing operations ...................... $ (50,145) -- $ (.01) Income from discontinued operations ...................... -- -- .00 ------------ ------------ ------------ $ (50,145) 5,752,431 $ (.01) ============ ============ ============ Diluted EPS - Loss attributable to common share - holders $ (50,145) 5,752,431 $ (.01) ============ ============ ============
The computation of diluted loss per share in fiscal 2005 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. (11) 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. 10 In December 2004, FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets- An Amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application was permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material effect on the Company's results of operations or financial position. In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). FAS No. 123R revised SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R will require compensation costs related to share-based payment transactions to be recognized in the financial statement (with limited exceptions). The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. In March 2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, and the disclosures in MD&A subsequent to the adoption. The Company will provide SAB No. 107 required disclosures upon adoption of SFAS No. 123R on June 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company's financial condition, results of operations, and cash flows. In April 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for SFAS No. 123R. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company will adopt SFAS No. 123R on June 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company's results of operations. In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impractical.APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No.154 improves the financial reporting because its requirements enhance the consistency of financial reporting between periods. The Company does not believe the adoption of this standard will have an impact on its results of operations. 11 (12) Financial information about foreign and domestic operations and export sales is as follows: For the Three Months Ended 8/31/05 8/31/04 ---------- ---------- Revenues from sales to unaffiliated customers: United States $ 932,000 $1,029,000 Asia 127,000 71,000 Europe 777,000 616,000 South America 143,000 89,000 Middle East 38,000 78,000 Oceania 141,000 160,000 Other 164,000 141,000 ---------- ---------- $2,322,000 $2,184,000 ========== ========== No other geographic concentrations exist where net sales exceed 10% of total net sales. (13) During fiscal 2005, Lancer obtained a new line of credit with Community National Bank (formerly Cuyamaca Bank). As of August 31, 2005, borrowings were made at prime plus 2.0% (8.5% at August 31, 2005) and were for borrowing up to $400,000 which is limited to 80% of accounts receivable less than 90 days old. The outstanding balance at August 31, 2005 was $25,000 and the unused portion available at August 31, 2005 was approximately $340,000. The line of credit is collateralized by substantially all the assets of Lancer, including inventories, receivables, and equipment. The lending agreement for the line of credit requires, among other things, that Lancer maintain a balance sheet net worth of $2,700,000 and that a zero outstanding balance be maintained for 30 consecutive days during the term. The agreement prohibits the advancing of funds to Biomerica. Lancer is not required to maintain compensating balances in connection with this lending agreement. Lancer was in compliance with its debt covenants at August 31, 2005. The Lancer line of credit expired October 15, 2005. Lancer management is currently negotiating a renewal of the existing line of credit. There is no assurance that Lancer management will be able to renew that line of credit or obtain other such financing. Biomerica, Inc. entered into an agreement for a line of credit agreement on September 12, 2000 with a shareholder whereby the shareholder would loan to the Company, as needed, up to $500,000 for working capital needs. The line of credit bore interest at 8%, was secured by accounts receivable and inventory, and expired September 13, 2003. In March 2004 the Company signed a note payable for the principal and interest due at that time of $313,318 and agreed to a forbearance of any payments for the length of the agreement. A warrant for 40,000 shares of restricted common stock exercisable at a price of $.51 per share was awarded as compensation for the forbearance. The note payable is secured by all the Company's assets except for the Lancer common stock owned by Biomerica. The note was due September 1, 2004. On November 19, 2004, the Company entered into an agreement entitled "Amendment of the Note, Loan and Modification Agreement" and "Amended And Restated Promissory Note" which were included as exhibits to the Form 10QSB filed April 14, 2004. The Amendment of the Note, Loan And Modification Agreement was filed as an exhibit to a Form 8K filed November 24, 2004. The agreement extended the maturity date of the note until August 31, 2005 and allows for minimum payments of $4,000 per month and additional contingent payments of up to $3,500 per month based on the Company's quarterly performance. Collateral remains the same under The Amendment. There was $297,087 of outstanding principal and $0 of interest payable under this note payable at August 31, 2005. As of October 17, 2005, the Company was not in compliance with the terms of the above agreements. Additional contingent payments totaling $10,500 that were due after the filing of the Company's Form 10KSB for the year ended May 31, 2005, have not been paid. (14) During 2004, the Company sold 202,000 shares of common stock at a selling price of $0.25 per share. Proceeds to the Company were $50,500. Warrants to purchase 202,000 shares of the Company's restricted common stock at an exercise price of $0.25 were also granted as part of the private placement. 12 During 2004, the Company granted 210,000 and 32,000 warrants to employees and non-employees, respectively to purchase restricted shares of the Company's stock. Of the warrants granted, 202,000 were granted to investors in the private placement and 40,000 were granted as compensation related to the shareholder promissory note. The purchase price of the warrants ranges from $0.25 to $0.51. Management recorded $47,442 and $0, respectively during the year ended May 31, 2004 of expense related to the granting of warrants to employees and non-employees. These warrants were not granted through one of the employee stock option plans. During 2004 the Company issued 10,000 shares of its common stock as the result of an exercise of options granted in prior years. Proceeds to the Company were $2,000. During fiscal 2005, Biomerica granted 169,000 stock options to purchase shares of common stock at an exercise price of $.33 to select employees and consultants of the Company. The options vest over four years, and have a term of five years. Management assigned a value of $3,500 to these options. These options were granted under the Company's existing 1995 and 1999 Stock Option and Restricted Stock Plan. During fiscal 2005, Biomerica granted 75,000 stock options to purchase shares of common stock at an exercise price of $.40 to outside directors and the President. The options vest over four years, and have a term of five years. Management assigned a value of $0 to these options. During fiscal 2006 an employee of the Company exercised a stock option for 750 shares at the purchase price of $.20 per share and 750 shares at the purchase price of $.33 per share. The total proceeds to the Company was $398. In June 2005 the Company granted 111,000 stock options to purchase shares of common stock at an exercise price of $.53 to several of the Company's officers. The options vest over four years and have a term of five years. Management assigned a value of $0 to these options. On September 14, 2005, the Company granted 10,000 stock options to purchase shares of common stock at an exercise price of $.47 to an employee of the Company. The options vest over four years and have a term of five years. Management assigned a value of $0 to these options. Options and warrants granted to employees are assigned values of $0 if the options are granted at current market value as quoted on Yahoo Finance as of the date of grant. If options or warrants are granted at a price which is below market value, the option or warrant is assigned a value according to the amount per share it is above market value times the number of shares granted. Options or shares granted to non-employees are assigned values according to current market value, using the Black-Sholes model for option valuation. The term used in the calculation of the options or warrants is the vesting period. A discount rate equivalent to five-year (or other life of the option or warrant) Treasury constant maturity interest rates is utilized. The historical volatility of the stock is calculated using weekly historical closing prices for the prior year as reported by Yahoo Finance. For purposes of the SFAS 123 footnote disclosure, the Black-Sholes Model is also used for calculating employee options and warrants valuations. When shares are issued for services or other non-cash consideration, fair value is measured using the current market value on the day of the board approval of such issuance. SUBSIDIARY SALE OF STOCK During the years ended May 31, 2005 and 2004 the Company recognized a reduction in its additional paid in capital in the amount of $31,494 and $112,719, respectively, resulting from a decrease in its ownership percentage of Lancer as a result of Lancer's sale of common stock. During the first quarter of fiscal 2006 the Company recognized a reduction in its additional paid in capital in the amount of $50,185, resulting from a decrease in its ownership percentage of Lancer as a result of Lancer's sale of common stock and for shares issued to employees in lieu of wages. The Company has treated this reduction in its equity of the subsidiary as an equity transaction in the accompanying consolidated statement of stockholder's equity. 13 SUBSIDIARY OPTIONS, WARRANTS AND STOCK ACTIVITY During fiscal 2004, Lancer issued 91,346 shares of its common stock valued at $29,000 to its Chief Executive Officer for services rendered from January 2002 to December 2003. During fiscal 2004, Lancer agreed to issue 13,541 shares of its common stock to the Chairman Of the Board of Lancer for services rendered from January 2002 to December 2003. During fiscal 2004, Lancer agreed to issue 13,541 shares of its common stock to the Chairman of the Board of Lancer for services rendered from January 2004 to May 2004 and 31,250 shares of common stock to the Chief Executive Officer for services rendered per agreement. At May 31, 2004, these shares were reported as subscribed stock on Lancer's balance sheet. The Lancer Board of Directors approved a private offering of common stock, effective March 23, 2004, and ending April 12, 2004. The offering, to officers, board members, and key employees resulted in the sale of 450,000 new shares at $0.60 per share with total proceeds received of $270,000. In addition, one warrant exercisable for each share purchased (450,000 warrants) was issued at $0.85 per share. These warrants shall be exercisable until April 12, 2009. During fiscal 2004, Lancer granted its Chief Executive Officer 75,000 stock options to purchase shares of Lancer's common stock at an exercise price of $0.43. The options vest over three years and have a term of five years. Management assigned a value of $0 to the options. During fiscal 2004, Lancer granted its directors 52,500 options to purchase shares of Lancer's common stock at an exercise price of $0.43. The options vest over two years and have a term of five years. Management assigned a value of $0 to the options. During fiscal 2004, Lancer granted 120,000 options to purchase shares of Lancer's common stock at an exercise price of $0.43 per share pursuant to terms of the employment agreement between Lancer and Dan Castner, Vice President of Sales and Marketing at Lancer. The options vest over four years and have a term of five years. Management assigned a value of $0 to the options. During fiscal 2004, Lancer granted 40,000 stock options to purchase shares of Lancer's common stock at an exercise price of $0.57 to an employee of Lancer for services rendered. The options vest over four years and have a term of five years. Management assigned a value of $0 to these options. During fiscal 2004, Lancer granted 17,500 stock options to purchase shares of Lancer's common stock at an exercise price of $.60 to a new member of the board of directors. The options vest over two years and have a term of five years. Management assigned a value of $0 with respect to the options. During fiscal 2004, Lancer granted 8,000 stock options to purchase shares of Lancer's common stock at an exercise price of $0.50 to an employee of Lancer for services rendered. The options vest over 3 years beginning June 30, 2004 and have a term of five years. Management assigned a value of $0 to the options. During fiscal 2004, Lancer issued 450,000 warrants to officers, directors and key employees who purchased 450,000 shares of the Company's common stock in a private placement. The warrants have an exercise price of $0.85 and have a term of five years. During fiscal 2005, the Board of Directors of Lancer granted 27,500 stock options to purchase shares of Lancer's common stock at an exercise price of $.75 to certain employees of Lancer for services rendered. The options vest over four years and have a term of ten years. Management assigned a value of $0 to the options. During fiscal 2005, the Board of Directors of Lancer granted 100,000 stock options to purchase shares of Lancer's common stock at an exercise price of $.70 to Lancer's President, Dan Castner. The options expire February 1, 2010 and vest 4,167 shares on the first day of each calendar month he is employed by Lancer, commencing March 1, 2005. Management assigned a value of $0 to the options. During fiscal 2005, an employee of Lancer exercised a stock option for 4,500 shares at the purchase price of $.26 per share. Proceeds to Lancer were $1,170. 14 During the first quarter of fiscal 2006, the Chief Executive Officer of Lancer was granted a stock option for 100,000 shares of Lancer common stock at the purchase price of $.65 per share. The options are exercisable one quarter per year, with the first quarter exercisable immediately, and have a term of five years. During the first quarter of fiscal 2006, a total of 31,538 shares valued at $20,500 were accrued to be issued to the Chief Executive Officer/Director and Chairman of the Board of Lancer for services rendered. Neither Director is taking a cash salary. In the first quarter of fiscal 2006 Lancer conducted a private placement, the purpose of which was to raise funds to proceed with the terms of the Lingualcare agreement. Lancer sold 592,000 shares of restricted common stock at the price of $.65 per share. Total gross proceeds to Lancer were $384,800. The stock was sold primarily to management and directors of Lancer (the directors are also directors of Biomerica). This private placement further reduced Biomerica's direct control and ownership percentage in Lancer. As of the date of this quarterly report, Biomerica's management has not made any determination whether, as a result of Lancer's most recent equity private placement (or of any subsequent issuances of Lancer's common stock), Biomerica will continue to consolidate Lancer's financial statements. During September 2005 Lancer sold an additional 130,769 shares of restricted common stock at a price of $.65 per share, as part of the private placement. Total gross proceeds were approximately $85,000. The stock was sold to a director of Lancer. (15) Reportable business segments for the quarter ended August 31, 2005 and 2004 are as follows: 2005 2004 ------------------------------------------------------------ Domestic sales: Orthodontic products $ 748,000 $ 831,000 ============================================================ Medical diagnostic products $ 184,000 $ 198,000 ============================================================ Foreign sales: Orthodontic products $ 629,000 $ 650,000 ============================================================ Medical diagnostic products $ 761,000 $ 505,000 ============================================================ Net sales: Orthodontic products $ 1,377,000 $ 1,481,000 Medical diagnostic products 945,000 703,000 ------------------------------------------------------------ Total $ 2,322,000 $ 2,184,000 ============================================================ Operating gain (loss): Orthodontic products $ (188,000) $ (81,000) Medical diagnostic products 92,000 (22,000) ------------------------------------------------------------ Total $ (96,000) $ (103,000) ============================================================ Operating loss from discontinued segment: ReadyScript -- -- ------------------------------------------------------------ Total $ -- $ -- ============================================================ Domestic long-lived assets: Orthodontic products $ 576,000 $ 498,000 Medical diagnostic products 110,000 120,000 ------------------------------------------------------------ Total $ 686,000 $ 618,000 ============================================================ 15 Foreign long-lived assets: Orthodontic products $ 245,000 $ 111,000 Medical diagnostic products 10,000 13,000 ------------------------------------------------------------ Total $ 255,000 $ 124,000 ============================================================ Total assets: Orthodontic products $ 4,268,000 $ 4,185,000 Medical diagnostic products 1,750,000 1,464,000 ------------------------------------------------------------ Total $ 6,018,000 $ 5,649,000 ============================================================ Depreciation and amortization expense: Orthodontic products $ 20,000 $ 26,000 Medical diagnostic products 18,000 20,000 ------------------------------------------------------------ Total $ 38,000 $ 46,000 ============================================================ Capital expenditures: Orthodontic products $ 156,000 $ 62,000 Medical diagnostic products 4,000 -- ------------------------------------------------------------ Total $ 160,000 $ 62,000 ============================================================ The net sales as reflected above consist of sales of unaffiliated customers only as there were no significant intersegment sales during the quarter ended August 31, 2005 and 2004. (16) 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 $0.38 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. The agreement also called for the grant of a stock option for 100,000 shares at fair market value at the time of grant, to be granted no later than May 31, 2005. These options were granted in February 2005 at an exercise price of $.70 per share. The agreement was filed as an exhibit to a Form 8-K filed by Lancer November 30, 2004. (17) 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. (18) On July 29, 2005, Biomerica entered into an agreement for the research, development and transfer of certain technology. The total of the project is estimated to be $55,000. (19) On August 20, 2005, the Company and the holder of the Note payable-shareholder agreed to the extension of the note due date until September 1, 2006, at the same terms and conditions as the previous agreement. (20) In July 2005, Lancer signed a large contract manufacturing agreement with an orthodontic reseller, wherein the reseller has committed to purchase at least $960,000 of product from Lancer during the period of July 1, 2005 to October 1, 2006. 16 (21) 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 August 31, 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 and to provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of August 31, 2005. (22) SUBSEQUENT EVENTS In August and September (these replace agreements entered into July 21, 2005) Lancer entered into three equipment finance leases for the purchase of manufacturing equipment for the Lingualcare project. The lease payments begin in September and October and have a total of $424,574 due and minimum payments per month of $8,845. The term of the leases is forty-eight months. These agreements have varying financing terms. The Lancer line of credit expired October 15, 2005. Lancer management is in the process of negotiating a renewal of the existing line of credit. The Biomerica facilities lease will expire October 31, 2005. Management is currently negotiating an extension of that lease. 17 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 ABILITY OF THE COMPANY TO MAINTAIN REQUIREMENTS TO BE LISTED ON NASDAQ, 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 $2,322,144 for the first quarter of fiscal 2006 as compared to $2,184,437 for the same period in the previous year. This represents an increase of $137,707, or 6.3%. Of the total consolidated net sales for fiscal 2006, $1,377,098 is attributable to Lancer, and $945,046 to Biomerica. Lancer sales decreased by $103,765 over the same period in the previous fiscal year. The decrease in sales at Lancer was primarily due to a restructure of the sales force and distributor network, both of which Lancer is currently rebuilding. Biomerica sales increased by $241,472 primarily due to increased sales to foreign distributors. Cost of sales as a percentage of sales decreased from 69.0% to 68.0%. Lancer's cost of sales as a percentage of sales increased from 72.4% to 77.3%. This increase was attributable to lower sales without a comparable decrease in overhead. Biomerica's costs decreased from 62.9% of sales to 55.4% due primarily to more products being manufactured at the lower cost Mexico manufacturing operation and higher sales volume in relationship to fixed costs. Selling, general and administrative costs increased by $43,096, or 6.1%. Lancer had increased selling, general and administrative costs of $18,466 primarily due to an increase in domestic marketing labor expenses, and an increase in the bad debt reserve, which were offset by lower administrative labor expenses. Biomerica had an increase of $24,630, which was due to higher accounting costs and wages. Research and development increased by $13,728, or 19.3%. Lancer had a decrease in research and development costs of $6,952 due to one project being moved to production. Biomerica had increased research and development costs of $20,680 primarily due to the expense of a contract research project. For the three months ended August 31, 2005, other income of $37,897 was realized as compared to $13,435 in the prior year, which resulted in an increase of $24,462. Lancer had an increase of $1,143 and Biomerica had an increase of $23,319, primarily due to non-sale income recognized from a contract from a customer. Interest expense increased from $8,118 to $11,013 due to higher line of credit balances at Lancer. Please refer to Note 3 in the Notes to the Consolidated Financial Statements in the Company's report on Form 10-KSB for the year ended May 31, 2005, for a more in-depth discussion of subsidiaries. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY The following is the condensed unconsolidated balance sheet for Biomerica, Inc. as of August 31, 2005, and the condensed unconsolidated statements of operations for the quarters ended August 31, 2005 and 2004. 18 CONDENSED UNCONSOLIDATED BALANCE SHEET (UNAUDITED) AUGUST 31, 2005 --------------------------------------------------------------------------- ASSETS CURRENT ASSETS: CASH $ 49,769 AVAILABLE-FOR-SALE SECURITIES 4,822 ACCOUNTS RECEIVABLE, NET 467,490 INVENTORIES 1,023,686 NOTES RECEIVABLE 7,169 PREPAID EXPENSES AND OTHER 44,778 --------------------------------------------------------------------------- TOTAL CURRENT ASSETS 1,597,714 INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED SUBSIDIARY, RESTRICTED 667,373 INVENTORY, NON-CURRENT 18,000 PROPERTY AND EQUIPMENT, NET 120,000 INTANGIBLE ASSETS 11,644 OTHER ASSETS 13,419 --------------------------------------------------------------------------- $ 2,428,150 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES $ 509,318 ACCRUED COMPENSATION 455,686 CURRENT PORTION OF NOTES PAYABLE-SHAREHOLDER 295,026 --------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 1,260,030 --------------------------------------------------------------------------- EQUITY IN LOSSES OF UNCONSOLIDATED SUBSIDIARIES, NET OF ADVANCES, UNRESTRICTED 104,579 --------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: COMMON STOCK 460,313 ADDITIONAL PAID-IN CAPITAL 17,057,801 ACCUMULATED OTHER COMPREHENSIVE INCOME (2,832) ACCUMULATED DEFICIT (16,451,741) --------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 1,063,541 --------------------------------------------------------------------------- $ 2,428,150 =========================================================================== CONDENSED UNCONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) AUGUST 31, 2005 2004 --------------------------------------------------------------------------- NET SALES $ 945,046 $ 703,575 COST OF SALES (523,856) (442,694) --------------------------------------------------------------------------- GROSS PROFIT 421,190 260,881 --------------------------------------------------------------------------- OPERATING EXPENSES: SELLING, GENERAL AND ADMINISTRATIVE 272,148 247,518 RESEARCH AND DEVELOPMENT 64,621 43,941 --------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 336,769 291,459 --------------------------------------------------------------------------- OPERATING INCOME (LOSS) 84,421 (30,578) OTHER INCOME (EXPENSE) 19,389 (3,926) --------------------------------------------------------------------------- 19 INCOME (LOSS) FROM OPERATIONS BEFORE INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES AND INCOME TAXES 103,810 (34,504) INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES 40,419 15,641 INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARIES - DISCONTINUED OPERATIONS -- -- INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 63,391 (50,145) INCOME TAX EXPENSE -- -- --------------------------------------------------------------------------- NET INCOME (LOSS) $ 63,391 $ (50,145) =========================================================================== LIQUIDITY AND CAPITAL RESOURCES As of August 31, 2005, the Company had cash and available-for-sale securities in the amount of $231,524 and working capital of $2,240,654. Cash and working capital totaling $176,933 and $2,007,549, 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. Of the total working capital, negative working capital of $104,579 relates to the discontinued operation, ReadyScript. These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has operating and liquidity concerns due to historically reporting net losses and negative cash flows from operations. Biomerica's shareholder's line of credit expired on September 13, 2003 and was not renewed. The unpaid principal and interest was converted into a note payable ($313,318) bearing interest at 8% and payable September 1, 2004. The due date on this note was extended until September 1, 2005 and on August 20, 2005 was extended until September 1, 2006 at the same terms. Minimum payments of $4,000 per month plus an additional $3,500 per month, depending on quarterly results of the Company, are being made. The Company has suffered substantial recurring losses from operations over the last several years. Biomerica has funded its operations through debt and equity financings, and may have to do so in the future. ReadyScript operations were discontinued in May 2001. ReadyScript was a contributor to the Company's losses in prior fiscal years. During the fiscal years ended May 31, 2005 and 2004, certain liabilities were forgiven and thus income from discontinued operations for the years then ended was recorded. The subsidiary is being reported in the financial statements as a discontinued operation because it is no longer an operating entity. In the last several years the Company has been focusing on reducing costs where possible and concentrating on its core business in Lancer and Biomerica to increase sales. Management believes that cash flows from current diagnostics operations is sufficient to fund diagnostics operations for at least the next twelve months. Should the Company have a downturn in sales or unanticipated, increased expenses, the result for the Company could be the inability to continue as a going concern. The Company will continue to have limited cash resources. Biomerica, as a parent entity, has no open or existing, operating line of credit or loans on which it can draw any new or additional debt financing. The Lancer line of credit expired October 15, 2005. Lancer management is currently negotiating the renewal the existing line of credit. There is no assurance that Lancer management will be able to renew that line of credit or obtain other such financing. Our independent registered public accounting firm has concluded that there is substantial doubt as to the Company's ability to continue as a going concern for a reasonable period of time, and have, therefore modified their report for the year ended May 31, 2005 in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 20 During the quarter ended August 31, 2005, the Company operations used cash of $214,773. This compares to cash provided by operations of $174,242 in the same period in the prior fiscal year. Of this there was cash used in operations of $194,316 and $115,654 at the Lancer subsidiary for the period ended August 31, 2005 compared to 2004. Cash provided by financing activities was $249,637 as compared to $22,500 in the prior fiscal year. The increase was primarily due to $384,800 received in the Lancer private placement, which was offset by $150,000 paid by Lancer to reduce the outstanding balance on the line of credit. Cash used in investing activities in fiscal 2006 was $160,043 compared to $59,517 for fiscal 2005. Of this, $156,164 was from purchases of property and equipment at Lancer. The balance of $3,879 was for purchases of property and equipment at Biomerica. The change in cash and cash equivalents at August 31, 2005 compared to August 31, 2004 was a decrease of $125,179. Of this Biomerica had a decrease of $24,952 and Lancer had a decrease of $100,227. Various factors contributed to the decrease at Lancer, among which were the pay down of the line of credit of $150,000, increased inventories of $61,537 and increased receivables of $28,325. Biomerica's decrease was attributable to various factors also, among which were increased receivables of $48,611, increased inventories of $112,536, which was offset by increased payables of $26,337 and net income before subsidiary of $103,810. During fiscal 2005, Lancer obtained a new line of credit with Community National Bank (formerly Cuyamaca Bank). Borrowings were made at prime plus 2.0% (8.5% at August 31, 2005) and were for borrowing up to $400,000 which is limited to 80% of accounts receivable less than 90 days old. The outstanding balance at August 31, 2005 was $25,000 and the unused portion available at August 31, 2005 was approximately $340,000. The line of credit is collateralized by substantially all the assets of Lancer, including inventories, receivables, and equipment. The lending agreement for the line of credit requires, among other things, that Lancer maintain a balance sheet net worth of $2,700,000 and that a zero outstanding balance be maintained for 30 consecutive days during the term. The agreement prohibits the advancing of funds to Biomerica. Lancer is not required to maintain compensating balances in connection with this lending agreement. The Company was in compliance with its debt covenants at August 31, 2005. The Lancer line of credit expired October 15, 2005. Lancer management is currently negotiating a renewal of the existing line of credit. There is no assurance that Lancer management will be able to renew that line of credit or obtain other such financing. Biomerica, Inc. entered into an agreement for a line of credit agreement on September 12, 2000 with a shareholder whereby the shareholder would loan to the Company, as needed, up to $500,000 for working capital needs. The line of credit bore interest at 8%, was secured by accounts receivable and inventory, and expired September 13, 2003. In March 2004 the Company signed a note payable for the principal and interest due at that time of $313,318 and agreed to a forbearance of any payments for the length of the agreement. A warrant for 40,000 shares of restricted common stock exercisable at a price of $.51 per share was awarded as compensation for the forbearance. The note payable is secured by all the Company's assets except for the Lancer common stock owned by Biomerica. The note was due September 1, 2004. On November 19, 2004, the Company entered into an agreement entitled "Amendment of the Note, Loan and Modification Agreement" and "Amended And Restated Promissory Note" which were included as exhibits to the Form 10QSB filed April 14, 2004. The Amendment of the Note, Loan And Modification Agreement was filed as an exhibit to a Form 8K filed November 24, 2004. The agreement extended the maturity date of the note until August 31, 2005 and allows for minimum payments of $4,000 per month and additional contingent payments of up to $3,500 per month based on the Company's quarterly performance. Collateral remains the same under The Amendment. There was $297,087 of outstanding principal and $0 of interest payable under this note payable at August 31, 2005. As of October 17, 2005, the Company was not in compliance with the terms of the above agreements. Additional contingent payments totaling $10,500 that were due after the filing of the Company's Form 10KSB for the year ended May 31, 2005, have not been paid. 21 CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Note 2 of the Notes to Consolidated Financial Statements contained in the Company's annual report on Form 10KSB for the period ended May 31, 2005, describes the significant accounting policies essential to the consolidated financial statements. The preparation of these financial statements requires estimates and assumptions that affect the reported amounts and disclosures. We believe the following to be critical accounting policies as they require more significant judgments and estimates used in the preparation of our consolidated financial statements. Although we believe that our judgments and estimates are appropriate and correct, actual future results may differ from our estimates. In general the critical accounting policies that may require judgments or estimates relate specifically to the Allowance for Doubtful Accounts, Inventory Reserves for Obsolescence and Declines in Market Value, Impairment of Long-Lived Assets, Stock Based Compensation and Income Tax Accruals. Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, at which point title passes. An allowance is established for estimated returns as revenue is recognized. 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. The Company has classified certain inventory as long-term since it is estimated that it will not be used within the next year. Biomerica currently has $18,000 classified as long-term and Lancer has $593,000. In general, we have been 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 August 31, 2005, all of our deferred tax assets were reserved. Accruals are made for specific tax exposures and are generally not material to our operating results or financial position, nor do we anticipate material changes to these reserves in the near future. Please refer to the annual report on Form 10-KSB for the period ended May 31, 2005 for an in-depth discussion of risk factors. FACTORS THAT MAY AFFECT FUTURE RESULTS You should read the following factors in conjunction with the factors discussed elsewhere in this and our other filings with the SEC and in materials incorporated by reference in these filings. The following is intended to highlight certain factors that may affect the financial condition and results of operations of Biomerica, Inc. and are not meant to be an exhaustive discussion of risks that apply to companies such as Biomerica, Inc. Like other businesses, Biomerica, Inc. is susceptible to macroeconomic downturns in the United States or abroad, as were experienced in fiscal year 2002, that may affect the general economic climate and performance of Biomerica, Inc. or its customers. 22 Aside from general macroeconomic downturns, the additional material factors that could affect future financial results include, but are not limited to: Terrorist attacks and the impact of such events; diminished access to raw materials that directly enter into our manufacturing process; shipping labor disruption or other major degradation of the ability to ship out products to end users; inability to successfully control our margins which are affected by many factors including competition and product mix; protracted shutdown of the U.S. border due to an escalation of terrorist or counter terrorist activity; the operating and financial covenants contained in Lancer's credit line which could limit our operating flexibility; any changes in our business relationships with international distributors or the economic climate they operate in; any event that has a material adverse impact on our foreign manufacturing operations may adversely affect our operations as a whole; failure to manage the future expansion of our business could have a material adverse affect on our revenues and profitability; possible costs in complying with government regulations and the delays in receiving required regulatory approvals or the enactment of new adverse regulations or regulatory requirements; numerous competitors, some of which have substantially greater financial and other resources than we do; potential claims and litigation brought by patients or dental or medical professionals alleging harm caused by the use of or exposure to our products; quarterly variations in operating results caused by a number of factors, including business and industry conditions and other factors beyond our control. All these factors make it difficult to predict operating results for any particular period. 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, the additional material factors that could affect future financial results include, but are not limited to: Terrorist attacks and the impact of such events; diminished access to raw materials that directly enter into our manufacturing process; shipping labor disruption or other major degradation of the ability to ship our products to end users; inability to successfully control our margins which are affected by many factors including competition and product mix; protracted shutdown of the U.S. Border due to an escalation of terrorist or counter terrorist activity; any changes in our business relationships with international distributors or the economic climate they operate in; any event that has a material adverse impact on our foreign manufacturing operations may adversely affect our operation as a whole; failure to manage the future expansion of our business could have an adverse affect on our revenues and profitability; possible costs in complying with government regulations and the delays in receiving required regulatory approvals or the enactment of new adverse regulations or regulatory requirements; numerous competitors, most of which have substantially greater financial and other resources than we do; potential claims and litigation brought by patients or medical professionals alleging harm caused by the use of or exposure to our products; quarterly variations in operating results caused by a number of factors, including business and industry conditions and other factors beyond our control. All of these factors make it difficult to predict operating results for any particular period. Item 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer (the Company's principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of August 31, 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 August 31, 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. 23 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. (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. 24 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: October 24, 2005 BIOMERICA, INC. By: /S/ Zackary S. Irani ----------------------------- Zackary S. Irani Chief Executive Officer 25 EX-31.1 2 biomerica_10q-ex3101.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Zackary S. Irani, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Biomerica, Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this 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-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of our internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or other persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 24, 2005 /s/ Zackary S. Irani - --------------------------- Zackary S. Irani Chief Executive Officer EX-31.2 3 biomerica_10q-ex3102.txt EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of our internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or other persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 24, 2005 /s/ Janet Moore - --------------------------- Janet Moore Chief Financial Officer EX-32.1 4 biomerica_10q-ex3201.txt EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Biomerica, Inc. (the "Company") on Form 10-QSB for the period ending August 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Zackary Irani, Chief Executive Officer of the Company, certify, to the best of my knowledge, Pursuant to Exchange Act Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002, i. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and ii. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Zackary S. Irani - --------------------------- Zackary S. Irani Chief Executive Officer Date: October 24, 2005 EX-32.2 5 biomerica_10q-ex3202.txt EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Biomerica, Inc. (the "Company") on Form 10-QSB for the period ending August 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Janet Moore, Chief Financial Officer of the Company, certify, to the best of my knowledge, Pursuant to Exchange Act Rule 15d-14(b) and 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002, iii. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and iv. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Janet Moore - --------------------------- Janet Moore Chief Financial Officer Date: October 24, 2005 -----END PRIVACY-ENHANCED MESSAGE-----