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Item 2. Management’s Discussion and Analysis

2020-10-15 compared with 2020-04-14 · 104 added, 60 removed, 25 unchanged (87% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS FORM 10-Q MAY BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 27A OF THE SECURITIES ACT OF 1933.

EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 27A OF THE SECURITIES ACT OF 1933.

FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES WHICH MAY CAUSE BIOMERICA'S RESULTS IN FUTURE PERIODS TO DIFFER MATERIALLY FROM FORECASTED RESULTS.

THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR THE COMPANY'S PRODUCTS, AVAILABILITY OF RAW MATERIALS, THE STATE OF THE ECONOMY, RESULTS OF RESEARCH AND DEVELOPMENT ACTIVITIES AND THE CONTINUED ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND APPROVALS REQUIRED.

THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

PLEASE REFER TO THE ACCOMPANYING RISK FACTORS UNDER ITEM 1A OF THIS REPORT AS WELL AS MORE EXTENSIVE RISK FACTORS AS DESCRIBED IN THE COMPANYS REPORT ON FORM 10K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 2019.

IN ADDITION TO THE ABOVE, THE COMPANY ALSO HAS RISKS PERTAINING TO THE CORONAVIRUS PANDEMIC OR ANY FUTURE PANDEMIC, AND THE SOCIETAL, GOVERNMENT AND INDIVIDUAL RESPONSES TO THIS PANDEMIC.

THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, SUPPLY CHAIN DISRUPTIONS, LOSS OF CONTRACTS AND/OR CUSTOMERS, CLOSURE OF THE COMPANYS MANUFACTURING OR DISTRIBUTION FACILITIES OR OF THE FACILITIES OF THE COMPANYS PARTNERS AND CUSTOMERS, TRAVEL, SHIPPING AND LOGISTICAL DISRUPTIONS, GOVERNMENT RESPONSES OF ALL TYPES, INTERNATIONAL BUSINESS RISKS IN COUNTRIES WHERE THE COMPANY MAKES AND/OR SELLS ITS PRODUCTS, LOSS OF HUMAN CAPITAL OR PERSONNEL AT THE COMPANY, ITS PARTNERS AND ITS CUSTOMERS, INTERUPTIONS OF PRODUCTION, CUSTOMER CREDIT RISK, AND GENERAL ECONOMIC CALAMITIES.

Like other businesses, THE COMPANY IS susceptible to macroeconomic downturns in the United States or abroad, as were experienced recently, that may affect the general economic climate and OUR performance or OUR customers.

Aside from general macroeconomic downturns, the additional material factors, RISKS AND UNCERTAINTIES that could affect future financial results include, but are not limited to:

THE CONTINUED DEMAND FOR THE COMPANY'S PRODUCTS;

AVAILABILITY OF RAW MATERIALS;

RESULTS OF RESEARCH AND DEVELOPMENT ACTIVITIES;

THE ABILITY TO RETAIN KEY EMPLOYEES AND CUSTOMERS;

THE ABILITY TO COLLECT RECEIVABLES FROM CUSTOMERS;

THE CONTINUED ABILITY OF THE COMPANY TO ATTAIN AND MAINTAIN THE LICENSES AND APPROVALS REQUIRED;

Regional or global pandemics and the economic and social disruptions these cause;

terrorist attacks and the impact of such events;

existing and potential increase in trade tariffs, especially with China;

diminished or no 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;

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 effect 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 medical professionals alleging harm caused by the use of or exposure to our products;

recalls of products;

inability to obtain FDA clearance on products or excessive costs incurred in order to obtain such approvals;

regulatory actions taken by government agencies such as the FDA, SEC, USDA and other regulators;

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.

EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, WE MAY NOT UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS AND THE LACK OF SUCH UPDATE DOES NOT IMPLY THAT ACTUAL EVENTS ARE AS ORIGINALLY EXPRESSED BY SUCH FORWARD-LOOKING STATEMENTS.

YOU SHOULD READ THE DISCLOSURES IN THIS REPORT AND OTHER REPORTS WHICH WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION.

YOU SHOULD READ THE DISCLOSURES IN THIS REPORT AND OTHER REPORTS, WHICH WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE RISK FACTORS CONTAINED THEREIN.

Biomerica, Inc.

and Subsidiaries (which includes wholly owned subsidiaries, Biomerica de Mexico and BioEurope GmbH) develop, manufacture, and market medical diagnostic products designed for the early detection and monitoring of chronic diseases and medical conditions.

Our medical diagnostic products are sold worldwide in two markets:

1) clinical laboratories and 2) point of care (physicians' offices and over-the-counter drugstores).

and its subsidiaries (which includes wholly-owned subsidiaries, Biomerica de Mexico and BioEurope GmbH), (the Company) is a biomedical technology company that develops, patents, manufactures and markets advanced diagnostic and therapeutic products used at the point-of-care (physicians' offices and over-the-counter through drugstores and online) and in hospital/clinical laboratories for detection and/or treatment of medical conditions and diseases .

Our diagnostic test kits are used to analyze blood, urine or fecal material from patients in the diagnosis of various diseases, food intolerances and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances, which may exist in the human body in extremely small concentrations.

The Company's products are designed to enhance the health and well-being of people, while reducing total healthcare costs.

Our primary focus is the research and development of revolutionary, patented diagnostic-guided therapy (DGT) products to treat gastrointestinal diseases, such as irritable bowel syndrome (IBS), and other inflammatory diseases.

These products are directed at chronic inflammatory illnesses that are widespread and common, and as such address very large markets.

If these DGT products prove effective in their clinical trials, and are ultimately cleared for sale by the U.S.

FDA, management believes the revenue potential to the Company is very significant.

Due to the global 2019 SARS-CoV-2 novel coronavirus (COVID-19) pandemic, in March 2020 we began redirecting and focusing a majority of our resources to develop, test, validate, seek regulatory approval for, and sell diagnostic products that indicate if a person has been infected by COVID-19.

These diagnostic tests use a patients blood sample to detect if the patient has certain antibodies to COVID-19 that were created as part of their bodys immune response to a COVID-19 infection, even if the infection was asymptomatic.

During the fourth quarter of fiscal 2020 we began marketing and selling outside of the U.S.

a disposable rapid finger-prick blood test, which detects COVID-19 IgG/IgM antibodies within 10 minutes.

This test is designed to be performed by trained professionals anywhere (e.g.

airports, schools, work, pharmacies and doctors offices).

Following fiscal 2020 year-end we submitted to the FDA an application under an Emergency Use Authorization (EUA) to sell in the U.S.

a lab-scale, high throughput ELISA COVID-19 antibody test kit that would be sold to labs and hospitals to perform COVID-19 antibody testing.

The Company also anticipates selling this test kit outside of the U.S.

under a CE Mark (European Conformity).

Initial sales for this product are expected during the Companys second quarter of fiscal 2021 assuming we receive EUA clearance.

The Company manufactures this COVID-19 ELISA test on its automated equipment at the Companys California facility that is also used to produce serology antibody tests for other diseases.

Since we did not receive FDA clearance for this product during our first quarter of 2021, we did not record any sales in the U.S.

for our COVID-19 ELISA products.

Further, sales of our disposable rapid finger prick blood test, which is only authorized for sale outside of the U.S., were slower in the first quarter as we are told by customers that most government health agencies are focused on viral testing (determining who is currently infected) while the infection rates in the territories we serve showed lower overall cases.

However, we believe that as vaccines become available in the market, demand for serology (antibody) tests, like those we produce, will greatly increase.

In addition, the infection rates in the territories we serve have increased, which we believe will result in a higher demand for both antibody and viral testing.

Vaccines are designed to create antibodies in individuals that will enable them to avoid serious illness when exposed to the COVID-19 virus.

Therefore, following vaccination, patients will want to know if the vaccination worked and they have produced adequate levels of antibodies to the COVID-19 virus.

Further, at various points following vaccination (i.e.

3 months, 6 months, 9 months, etc.), we anticipate people will want to receive an antibody test to determine if the level of, antibodies produced from the vaccine are still adequate to fight off a serious infection.

Therefore, we believe demand for COVID-19 antibody testing will remain strong into the foreseeable future, even after demand for actual virus testing begins to fall.

Aside from the current focus on COVID-19 products in research, development and clinical trials, the products we continue to sell are primarily focused on gastrointestinal diseases, food intolerances, diabetes and certain esoteric tests.

These diagnostic test products utilize immunoassay technology.

Our products are CE marked and/or sold for diagnostic use where they are registered by each countrys regulatory agency.

In addition, some products are cleared for sale in the U.S.

Finally, the Company continues to see progress in completing the testing required to attain FDA clearance for our patented InFoods® IBS DGT product that is designed to diagnose and treat sufferers of IBS.

Recently we added most of the Mayo Clinic sites to our clinical trials for this product.

Mayo Clinic joins Beth Israel Deaconess Medical Center Inc., a Harvard Medical School teaching hospital, University of Texas Health Science Center at Houston, Houston Methodist and the University of Michigan as other sites conducting the trials.

InFoods® IBS is a unique, patented product that can allow physicians to identify specific foods (e.g.

pork, milk, onions, sugar, chickpeas, etc.) for each IBS patient, that when removed from that patients diet, may alleviate or improve their IBS symptoms and suffering.

Upon demonstrating efficacy and obtaining FDA approval, we believe the long-term opportunities for the InFoods IBS product could be comparable to any of the major drugs currently used to treat IBS.

Further, the United States Patent and Trademark Office (USPTO) has issued the Company two patents with broad claims that protect the InFoods® IBS product.

Patents have also been issued in the countries of Japan, Korea and recently Singapore with many other patents still pending globally.

Additional patents have also been filed for other diseases that utilize the InFoods® DGT technology platform which include:

functional dyspepsia, Crohns Disease, ulcerative colitis, gastroesophageal reflux disease (GERD), migraine headaches, and osteoarthritis.

RESULTS OF OPERATIONS

Consolidated net sales for Biomerica were $1,176,889 for the three months ended February 29, 2020 as compared to $1,261,161 for the three-month period ended February 28, 2019.

This represents a decrease of $84,272 or 6.7%.

For the nine-month period ended February 29, 2020 as compared to the nine-month period ended February 28, 2019, net sales were $3,967,712 as compared to $4,034,822.

Consolidated net sales for Biomerica were $1,143,806 for the three months ended August 31, 2020 as compared to $1,194,415 for the same period in the previous year.

This represents a decrease of $50,609, or 4.2%.

The decrease for the three-month period and for the nine-month period was primarily due to lower sales to China as a result of the coronavirus in China during the quarter ended February 29, 2020.

For the three months ended February 29, 2020 as compared to the three months ended February 28, 2019, cost of sales increased as a percentage of sales from 71.0% of sales, or $895,237, to 82.0% of sales, or $964,910.

For the nine months ended February 29, 2020 as compared to February 28, 2019, cost of sales as a percentage of sales increased from 72.5% of sales, or $2,923,615 to 73.6% of sales, or $2,919,557.

The increase to cost of goods as a percentage of sales for the three and nine months were due to increased material costs, higher wages and benefits costs as well as fixed costs in relation to lower sales during the quarter and nine months ended February 29, 2020.

For the three months ended February 29, 2020 compared to February 28, 2019, selling, general and administrative expenses increased by $77,515, or 13.5%.

For the nine months ended February 29, 2020 as compared to February 28, 2019, selling, general and administrative expenses increased by $225,653, or 15.2%.

The increase for the quarter and nine months ended February 29, 2020 as compared to February 28, 2019, was primarily due to an increase of non-cash option expense, and increased wages and consulting fees.

For the three months ended February 29, 2020 as compared to February 28, 2019, research and development expenses decreased by $23,823, or 4.8%.

For the nine-month period ended February 29, 2020 as compared to February 28, 2019, these expenses decreased by $21,689, or 1.7%.

The decrease for both periods was due in part to lower patent legal fees related to patent protection.

For the three months ended February 29, 2020 as compared to February 28, 2019, dividend and interest income increased from $28,502 to $53,964.

For the nine months ended February 29, 2020 as compared to February 28, 2019, dividend and interest income increased from $40,288 to $62,515.

The decrease was primarily due to decreased demand of approximately $355,000 in Asia and the Middle East which was due to lower sales to certain distributors and timing of certain orders.

This was partially offset by an increase in sales of approximately $290,000 in Europe of contract manufacturing and COVID-19 tests.

Sales in the U.S.

were up by approximately $19,000 primarily due to increased sales to our drug store customers in the current quarter.

The Company believes revenues during the quarter for sales of non-COVID-19 products were negatively impacted by the world-wide pandemic.

Consolidated cost of sales for the three months ended August 31, 2020 as compared to August 31, 2019 increased from $827,111 to $960,930, or by $133,819.

The percentage of cost of sales relative to sales increased from 69.2% to 84.0%.

The Companys standard margin on products sold was similar to previous periods.

However, during the three months ended August 31, 2020 the manufacturing facilities werent running at 100% capacity due to the negative impact COVID-19 had on sales of the Companys non-COVID-19 products.

This generated unfavorable manufacturing variances within our reported cost of sales.

Consolidated selling, general and administrative expense for the three months ended August 31, 2020 as compared to August 31, 2019 increased from $506,397 to $1,164,564, or by $658,167, or 130%.

The increase was primarily due to legal expenses related to responding to the SEC inquiry discussed in Part II, as well as an increase in the allowance for doubtful accounts, additional consulting fees, and partly to increased personnel costs as the Company is expanding and strengthening its management team in sales, marketing, and administration.

Consolidated research and development expense for the three months ended August 31, 2020 as compared to August 31, 2019 increased from $370,466 to $674,693, or by $304,227, or 82.1%, primarily as a result of increases in costs related to the research, development and validation of COVID-19 tests, and increased costs related to initiation costs at Mayo Clinic, University of Houston Texas, and Methodist Hospital for clinical trials for our InFoods® IBS product.

Interest and dividend income for the three months ended August 31, 2020 as compared to August 31, 2019 increased from $4,063 to $8,091 for the same period.

LIQUIDITY AND CAPITAL RESOURCES

As of February 29, 2020 and May 31, 2019, the Company had cash and cash equivalents in the amount of $2,391,732 and $686,785, and working capital of $3,829,331 and $3,230,535, respectively.

During the nine months ended February 29, 2020, the Companys operations used cash of $802,911 as compared to $1,257,708 in the same period of the prior fiscal year.

Cash used by operations for the nine months ended February 29, 2020 was primarily a result of a net loss of $1,852,482, which was offset by a decrease in accounts receivables of $488,759, an increase in accounts payable of $268,069, depreciation and amortization of $94,772 and stock option expense of $192,917.

Cash used by operations for the nine months ended February 28, 2019 resulted from a net loss of $1,607,730 and increased receivables of $290,727 which were offset by an increase in accounts payable of $197,386 and depreciation and amortization of $128,114 and stock option expense of $146,514.

The reduction in cash between the two periods primarily resulted from a decrease in accounts receivable of $488,759 for the period ended February 29, 2020 as compared to an increase in accounts receivable of $290,727 for the period ended February 28, 2019, which resulted in a $779,485 increase in fiscal 2020 versus 2019.

Cash used in investing activities in the nine months ended February 29, 2020 was $51,657, $27,724 of which was for purchases of property and equipment and $23,933 for the increase in intangibles as compared to the nine months ended February 28, 2019 during which cash used for property and equipment was $72,947 and $46,226 for the increase in intangibles.

Cash provided by financing activities for the nine months ended February 29, 2020 was a result of the exercise of stock options of $79,828 and plus proceeds from the sale of common stock of $366,258, plus net proceeds from the sale of preferred stock of $1,917,586, minus the amount of common stock subscribed of $1,156,311(sales of common stock for which the proceeds were received after February 29, 2020), as compared to $82,990 from the exercise of stock options and the proceeds from the sale of common stock of $1,011,636 in the prior fiscal year nine month period.

As described in the Companys Form 10Q and 10K reports, filed with the Securities and Exchange Commission from April 16, 2018,through November 2019 and the Form S-3 Registration Statement and Prospectus filed on June 30, 2017 and December 4, 2017, respectively, the Company entered into an At Market Issuance Sales Agreement (the Agreement), whereby, the Company may raise $7,000,000 in additional working capital and funds for continued development of current research projects.

The Company sold shares for the full amount available for sale under the December 4, 2017 prospectus supplement as of March 18, 2020.

On March 20, 2020, the Company filed a new prospectus supplement to the base prospectus dated July 20, 2017 for purposes of raising up to $12,500,000 from time to time pursuant to the terms of the At Market Issuance Agreement.

These funds will be needed to fund current research and development projects and bring them to the next state of completion, as well as being used for general corporate purposes.

Management expects to raise additional funds throughout the year from the At Market Issuance Agreement to fund operations as necessary.

During the nine months that ended February 29, 2020, the Company received $366,258 in net proceeds from the sale of its common stock through this Agreement.

On February 21, 2020, Biomerica, Inc.

(the Company) entered into a Stock Purchase Agreement (the Stock Purchase Agreement) with Palm Global Small Cap Master Fund LP (Palm) pursuant to which the Company agreed to sell and issue to Palm, and Palm agreed to purchase from the Company, 571,429 shares of the Companys Series A 5% Convertible Preferred Stock, $0.08 par value per share for a purchase price (the Purchase Price) of approximately $2 million, or $3.50 per Series A Preferred Share (such transaction, the Share Issuance).

The Company incurred approximately $82,000 in issuance costs associated with this stock purchase.

The Company will use the proceeds from the sale of the Series A 5% Convertible Preferred Shares for general corporate purposes of the Company.

OFF BALANCE SHEET ARRANGEMENTS - None.

As of August 31, 2020 and May 31, 2020, the Company had cash and cash equivalents in the amount of $6,964,314 and $8,641,027 and working capital of $11,318,613 and $13,289,670, respectively.

During the three months ended August 31, 2020, the Companys operations used cash of $1,597,146 compared to cash used in operations of $8,154 in the same period of the prior fiscal year.

Cash used by operations increased year to date in fiscal 2021 compared to year to date fiscal 2020 primarily due to cash related operating losses of $1,349,400, growth in inventory of $1,250,568 driven partly by an increase in COVID-19 inventory of $1,189,427, partially offset by a reduction in prepaids of $1,038,149 which was primarily driven by a repayment of an advance the Company had with one of our suppliers.

Cash used in investing activities year to date in fiscal 2021 was $39,588 for purchases of fixed assets and $53,158 for increased intangibles compared to year to date in fiscal 2020 of $2,171, which was the result of property and equipment purchases and $12,100, for increases of intangibles.

Cash provided by financing activities in fiscal year 2021 to date was $14,900 which was a result of stock option exercises, as compared to $34,028 in stock option exercises and $112,608 from the net proceeds from the sale of common stock in fiscal 2020.

We have been working on new products for the gastroenterology market.

Patent applications for the new products have been filed and five patents have been issued (two in the USA and one each in Japan, Korea and Singapore).

The Company has been working on obtaining additional patents and U.S.

regulatory approvals.

The Company has been spending significant funds on the research, development, patent and related costs and expects this will continue in order to obtain the desired patents and approvals.

On July 21, 2020, the Company filed with the SEC a new Form S-3 Shelf registration statement to replace the registration statement that expired on July 20, 2020.

The new registration statement registers common shares to be issued in a maximum aggregate amount of $90,000,000.

Included in this registration statement was the registration of all of the common shares issued, or to be issued, to Palm Global Small Cap Master Fund LP upon conversion of their convertible Preferred stock into common shares.

This S-3 registration statement became effective September 30, 2020.

The Company intends to use the net proceeds from this offering for general corporate purposes, including, without limitation, sales and marketing activities, clinical studies and product development, making acquisitions of assets, businesses, companies or securities, capital expenditures, and for working capital needs.

OFF BALANCE SHEET ARRANGEMENTS

There were no off-balance sheet arrangements as of August 31, 2020.

CRITICAL ACCOUNTING POLICIES

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Please refer to Note 2 for information on Significant Accounting Policies.

In February 2016, the FASB issued an accounting standards update which requires lessees to recognize most leases on the balance sheet with a corresponding right-of-use asset.

Right-of-use assets represent the Companys right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term.

Leases are classified as financing or operating which will drive the expense recognition pattern.

For lessees, the statement of operations presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and operating leases, respectively.

The Company has elected to exclude short-term leases.

The update also requires additional disclosures that will better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted this guidance as of June 1, 2019, the required effective date, using the effective date transition method.

As permitted under the effective date transition method, financial information and disclosure for periods prior to the date of initial application will not be updated.

An adjustment to the opening accumulated deficit was not required in conjunction with our adoption.

For additional information, see Note 6 Leases.

We have elected not to reassess whether expired or existing contracts contain leases, nor did we reassess the classification of existing leases as of the adoption date.

The Company leases office space and copy machines, all of which are operating leases.

Most leases include the option to renew and the exercise of the renewals options is at the Companys sole discretion.

Options to extend or terminate a lease are considered in the lease term to the extent that the option is reasonably certain of exercise.

The leases do not include the options to purchase the leased property.

The depreciable life of assets and leasehold improvements are limited by the expected lease term.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis