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 AND AS CURRENTLY CONTINUE, 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, INCLUDING EUA CLEARANCE FROM THE FDA FOR THE COMPANY’S COVID-19 PRODUCTS; Regional or global pandemics, GOVERNMENT RESPONSES TO SUCH PANDEMICS, and the economic and social disruptions these cause ESPECIALLY IN THE HEALTHCARE INDUSTRY IN WHICH WE OPERATE; SHUTDOWNS OR DISRUPTIONS IN OUR MANUFACTURING DUE TO WIDESPREAD ILLNESS, OR OTHER ISSUES; 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 CUSTOMERS; inability to successfully control our margins which are affected by many factors including RAW MATERIALS, 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”, “we”, “our”) 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, saliva, nasal fluids 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 disruptive, 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 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 antigen (viral) and antibody (serology) diagnostic products. The Company’s first COVID-19 diagnostic product, which was launched in March 2020, was a disposable rapid finger-prick blood antibody test that was designed to detect within ten minutes if the patient has certain IgG/IgM antibodies that were created as part of their body’s immune response to a COVID-19 infection, even if the infection was asymptomatic. Given the lack of COVID-19 viral antigen tests early in the pandemic, COVID-19 antibody tests were an alternative option to identify patients that had been infected with the virus. As viral antigen tests became more available, the sales of our disposable rapid finger-prick blood antibody tests slowed in the fourth quarter of 2020 as distributors stated that government health agencies remain focused on viral antigen testing that is now more readily available. Concurrently, the Company also focused on COVID-19 antigen tests to detect if the COVID-19 antigen is present in a person’s nasal fluids, indicating that the patient may still be actively infected and infectious to others. In January 2021, the Company received a CE Mark which enables us to sell our nasal swab antigen test throughout the EU. Sales of our antigen tests in the EU accounted for substantially all of our COVID-19 related product revenues during the three months ended February 28, 2021. As the spread of COVID-19 continues, we are working to develop other markets beyond the EU to expand sales of our nasal swab and antigen tests. In June 2020, we submitted an initial emergency use authorization (“EUA”) application to the FDA for a lab-scale, high throughput ELISA COVID-19 antibody test kit that could be sold to U.S. labs and hospitals. The Company also anticipates selling this ELISA antibody test kit outside of the U.S. under a CE Mark. This ELISA lab test kit can be run using blood drawn by a medical professional or by a patient using our proprietary “at-home” blood collection kit, that the patient sends directly to an ELISA lab for processing. In November 2020, we amended our EUA application for this ELISA test to include the use of the at-home blood collection kit. The FDA has now assigned an examiner to review this submission and the Company is actively working with the FDA to attain EUA clearance. The Company manufactures the COVID-19 ELISA antibody test at its California facility on its automated equipment which is also used to produce serology antibody tests for other diseases. COVID-19 vaccines that are designed to create antibodies in individuals that will enable them to avoid serious illness when exposed to the COVID-19 virus are now becoming available in the market. Our ELISA antibody test detects the spike protein antibody that is the same antibody produced in individuals following vaccination using the RNA based vaccine made by Pfizer, Moderna and others. 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. Mayo Clinic, 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 are participating in our clinical trials for this product. 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. 13 Table of Contents Upon demonstrating efficacy and obtaining FDA clearance, we believe the long-term revenue opportunities for the patented 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. Five patents have also been issued internationally 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. RESULTS OF OPERATIONS Consolidated net sales for Biomerica were $3,628,638 for the three months ended February 28, 2021 as compared to $1,176,889 for the three months ended February 29, 2020. This represents an increase of $2,451,749 or 208%. Consolidated net sales for Biomerica were $6,144,970 for the nine months ended February 28, 2021 as compared to $3,967,712 for the nine months ended February 29, 2020. This represents an increase of $2,177,258, or 55%. The increase for the three and nine months ended February 28, 2021 as compared to the three and nine months ended February 29, 2020 was primarily due to the sale of approximately $2,300,000 in COVID-19 nasal swab antigen tests. Consolidated cost of sales for Biomerica were $3,667,143 for the three months ended February 28, 2021 as compared to $964,910 for the three months ended February 29, 2020. This represents an increase of $2,702,233 or 280%. Consolidated cost of sales for Biomerica were $5,639,103 for the nine months ended February 28, 2021 as compared to $2,919,557 for the nine months ended February 29, 2020. This represents an increase of $2,719,546, or 93%. The percentage of cost of sales relative to sales for the three months ended February 28, 2021 increased from 82% in the prior year to 101%. The percentage of cost of sales relative to sales for the nine months ended February 28, 2021 increased from 74% in the prior year to 92%. The Company’s cost of sales for the three and nine months ended February 28, 2021, included a reserve for slower moving COVID-19 disposable rapid finger-prick blood antibody tests and materials of approximately $1,405,000, not related to the Company’s ELISA Antibody or Antigen tests. Without the inventory reserve the Company’s gross margin would have been 38% for the three months ended February 28, 2021 and 31% for the nine months ended February 28, 2021. The Company continues its focus on producing and selling its COVID-19 nasal swab antigen test and preparing to launch its ELISA antibody test. Consolidated selling, general and administrative expenses for Biomerica were $1,278,393 for the three months ended February 28, 2021 as compared to $653,585 for the three months ended February 29, 2020. This represents an increase of $624,808 or 96%. Consolidated selling, general and administrative expenses for Biomerica were $3,697,804 for the nine months ended February 28, 2021 as compared to $1,714,543 for the nine months ended February 29, 2020. This represents an increase of $1,983,261, or 116%. The increase in the three and nine month periods ended February 28, 2021 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 increased personnel costs as the Company is expanding and strengthening its management team in sales, marketing, and administration. Consolidated research and development expenses for Biomerica were $563,216 for the three months ended February 28, 2021 as compared to $473,279 for the three months ended February 29, 2020. This represents an increase of $89,937, or 19%. Consolidated research and development expenses for Biomerica were $1,824,312 for the nine months ended February 28, 2021 as compared to $1,248,599 for the nine months ended February 29, 2020. This represents an increase of $575,713, or 46%. The increase in the three and nine month periods ended February 28, 2021 was primarily a result of increases in costs related to the research, development and validation of COVID-19 tests, and the initiation costs at Mayo Clinic, University of Houston Texas, and Methodist Hospital in Texas for clinical trials for our InFoods® IBS product. Interest and dividend income were $37,943 for the three months ended February 28, 2021 as compared to $53,964 for the three months ended February 29, 2020. This represents a decrease of $16,021, or 30%. Interest and dividend income were $54,017 for the nine months ended February 28, 2021 as compared to $62,515 for the nine months ended February 29, 2020. This represents a decrease of $8,498, or 14%. 14 Table of Contents LIQUIDITY AND CAPITAL RESOURCES As of February 28, 2021 and May 31, 2020, the Company had cash and cash equivalents in the amount of $5,272,565 and $8,641,027 and working capital of $9,432,853 and $13,289,670, respectively. During the nine months ended February 28, 2021, the Company’s operations used cash of $4,244,064 compared to cash used in operations of $802,911 in the nine months ended February 29, 2020. Cash used by operations increased year-to-date in fiscal 2021 compared to year-to-date fiscal 2020 primarily due to operating losses of $4,973,889, growth in accounts receivable of $690,691, growth in inventory of $1,446,766 driven by an increase in COVID-19 inventory of approximately $1,557,000 partially offset by a reduction in prepaids of $734,966, which was primarily driven by a repayment of an advance the Company had with one of our suppliers, a decrease in accounts payable and accrued expenses of $230,575 and non-cash adjustments related to increases in inventory and accounts receivable reserve of $1,437,547 and $578,438, respectively. Approximately, $1,405,000 of the inventory reserve increase was related to a market downturn in our COVID-19 disposable rapid finger-prick blood antibody test and materials, as the market shifted to COVID-19 PCR viral and antigen tests. Of the accounts receivable increase, $559,369 related to our sale to a South American distributor in fiscal 2020. Cash used in investing activities year to date in fiscal 2021 was $106,760 for purchases of property and equipment and $116,881 for increased intangibles. Cash provided by financing activities in fiscal year 2021 to date was $1,107,930 which was a result of stock option exercises of $96,455 and proceeds from the sale of common stock of $1,011,475. Cash provided by financing activities in fiscal year 2020 to date was $2,563,672 which was a result of stock option exercises of $79,828, proceeds from the sale of common stock of $366,258, proceeds from the sale of convertible preferred stock of $1,917,586 and proceeds from equity financing from an officer of $200,000. We have been working on new products that address large markets for the gastroenterology sector. Patent applications for these new products have been filed and seven patents have been issued (two in the USA and five internationally). The Company has been working on obtaining additional patents and U.S. regulatory approvals for these products. Due to the significant revenue opportunities these products represent, the Company has been spending substantial funds on research, development, patents and related costs, and expects this will continue in order to strengthen and expand our patent protection, and attain regulatory approvals of these products. 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 that may be issued from time to time up to 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 shelf registration statement became effective September 30, 2020. The Company intends to use the net proceeds from any offerings that may be issued under this Shelf registration 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. For the nine months ended February 28, 2021, net proceeds of $1,011,475 were raised from this registration. OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of February 28, 2021. 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 under the current conditions; 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. 15 Table of Contents 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.