BIOMERICA INC 10-Q

ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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, INCLUDING THE RISK FACTORS CONTAINED THEREIN. OVERVIEW Biomerica, Inc. 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. 12 Table of Contents 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 patient’s blood sample to detect if the patient has certain antibodies to COVID-19 that were created as part of their body’s 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 Company’s second quarter of fiscal 2021 assuming we receive EUA clearance. The Company manufactures this COVID-19 ELISA test on its automated equipment at the Company’s 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 country’s regulatory agency. In addition, some products are cleared for sale in the U.S. by the FDA. 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 patient’s 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, Crohn’s Disease, ulcerative colitis, gastroesophageal reflux disease (“GERD”), migraine headaches, and osteoarthritis. 13 Table of Contents RESULTS OF OPERATIONS 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 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 Company’s standard margin on products sold was similar to previous periods. However, during the three months ended August 31, 2020 the manufacturing facilities weren’t running at 100% capacity due to the negative impact COVID-19 had on sales of the Company’s 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 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 Company’s 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. 14 Table of Contents OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of August 31, 2020. CRITICAL ACCOUNTING POLICIES The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions. We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These relate to revenue recognition, bad debts, inventory overhead application, inventory reserve, lease liabilities and right-of-use assets. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial conditions or results of operations. We suggest that our significant accounting policies be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Please refer to Note 2 for information on Significant Accounting Policies. ITEM 3 . QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.