BIOMERICA INC 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our consolidated financial statements and the accompanying notes thereto included in Part II, Item 8 of this Report. This discussion and analysis contains forward-looking statements that are based on our management’s current beliefs and assumptions, which statements are subject to substantial risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those discussed in “Risk Factors” included in Part I, Item 1A of this Report. OVERVIEW Biomerica, Inc. and its subsidiaries (which includes wholly-owned subsidiaries, Biomerica de Mexico and BioEurope GmbH), 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, nasal 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 products to treat gastrointestinal diseases, such as irritable bowel syndrome, 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. Food and Drug Administration, we believe the revenues potential to the Company is significant. The Company is currently finalizing an endpoint determination clinical trial on it’s InFoods ® IBS product. This trial is and has been conducted at Mayo Clinics in Florida and Arizona, Beth Israel Deaconess Medical Center Inc., a Harvard Medical School Teaching Hospital, University of Texas Health Science Center at Houston, Houston Methodist, the University of Michigan and other institutions . We expect all patients to be either enrolled or completed by the end of our second fiscal quarter of 202 2, with trial results reported shortly thereafter. During fiscal 2022, we also expect to be entertaining partnership/licensing discussions with pharmaceutical and technology companies that could help us commercialize the product, including obtaining FDA clearance. Our medical diagnostic products are sold worldwide primarily in two markets: 1) clinical laboratories and 2) point-of-care (physicians' offices and over-the-counter drugstores). The diagnostic test kits are used to analyze blood, urine, or fecal specimens from patients in the diagnosis of various diseases and other medical complications, by measuring or detecting the existence and/or level of specific bacteria, hormones, antibodies, antigens or other substances, which may exist in a patient’s body, stools, or blood, often in extremely small concentrations. Due to the global 2019 SARS-CoV-2 novel coronavirus 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. During fiscal 2021, we sold 2 primary types of COVID-19 tests; 1) antibody diagnostic tests that 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, and 2) COVID-19 antigen tests that use a patient’s nasal fluid sample to detect if a patient is currently infected with the virus. During the year, the Company sold these products outside of the U.S. under a CE Mark (European Conformity). Because individual orders for these tests have been large in size, this has created volatility and material fluctuations in our monthly and quarterly revenues. Although sales in these products have slowed, the company continues to receive and fill orders for our COVID-19 test products. Aside from the COVID-19 products we offer, the other products we sell are primarily focused on gastrointestinal diseases, food intolerances and certain esoteric tests. These diagnostic test products utilize immunoassay technology. Most of 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. 24 While sales continue to occur in our COVID-19 products, by fiscal year end, the majority of our research and development efforts have returned to a focus on development and commercialization of non-COVID related products such as our H. Pylori product, and our InFoods ® IBS product. As such, the Company expects to file for 510K clearance with the FDA for its H. Pylori laboratory diagnostic test during our second fiscal quarter of 2022. If approved by the FDA, we will commence sales of this product in the U.S. We also intend to sell this product internationally including in the European Union (“EU”) under a CE Mark. International sales could commence earlier than U.S. sales. The Company has also recently added several new employees in its sales and marketing department in order to increase sales of existing non-COVID products during fiscal 2022. Through these efforts, our EZ Detect colon disease home screening test is seeing a significant increased interest from retailers and distributors. RESULTS OF OPERATIONS Net Sales and Cost of Sales Our consolidated net sales were $7,199,027 for fiscal 2021 compared to $6,692,711 for fiscal 2020. This represents an increase of $506,316, or 8% . This increase in annual sales is primarily attributable to sales of COVID-19 tests, which offset decreases in other product lines that were negatively impacted by the COVID-19 pandemic and related national and international mandates affecting consumers. Our consolidated net sales were $1,054,057 for the fiscal fourth quarter 2021, compared to $2,725,000 for fiscal fourth quarter of 2020. The lower sales in the fiscal fourth quarter 2021 were due to lower COVID-19 sales. Consolidated cost of sales in fiscal 2021 as compared to fiscal 2020 increased from $4,910,935 to $6,702,046, or by $1,791,111. The percentage of cost of sales in 2020 was 73%. In 2021, this increased to 93%, due to various factors, primarily the establishment of an inventory reserve for slow moving COVID-19 antibody products. Our cost of goods sold for the fiscal fourth quarter 2021 were $1,062,943, or 101%, compared to $1,991,378, or 73%, for the fourth quarter of 2020. In fourth quarter 2021, the higher COGS was due to an approximate $100,000 increase in COVID-19 reserves and slower production in our factory. Selling, General and Administrative Expenses Consolidated selling, general and administrative costs increased in fiscal 2021 as compared to fiscal 2020 from $2,274,415 to $4,608,950, or by $2,334,535, or 103%. The increase was due to an approximate increase of $766,000 in allowance for doubtful accounts, $884,000 in personnel costs as the Company is expanding its team, $520,000 in legal fees related to the SEC investigation, and $145,000 in consulting fees. Our consolidated selling, general and administrative expenses were $911,146 for the fiscal fourth quarter 2021, compared to $559,872 for the fourth quarter of 2020. The fourth quarter increase was primarily due to an approximate increase of $200,000 in allowance for doubtful accounts, and $100,000 in additional personnel costs as the Company is expanding its team. Research and Development Consolidated research and development expense was $2,410,506 in fiscal 2021 as compared to $1,910,209 in fiscal 2020, an increase of $500,297, or 26%, primarily as a result of increases in costs related to the research, development and validation of COVID-19 tests, and increased costs related to our clinical trials and patents for our InFoods® IBS product. See “Research and Development” for a more extensive description of the research being conducted. Our consolidated research and development expenses were $586,194 for the fourth quarter of 2021, compared to $661,610 for the fourth quarter of 2020. Interest Expense Interest expense increased in fiscal 2021 to $367 as compared to $9 in fiscal 2020. Interest and dividend income for those same years decreased to $66,862 from $71,193, respectively. LIQUIDITY AND CAPITAL RESOURCES As of May 31, 2021, the Company had cash and cash equivalents in the amount of $4,199,311 as compared to $8,641,027 of cash and cash equivalents as of May 31, 2020. As of May 31, 2021 and 2020, the Company had working capital of $7,930,687 and $13,289,670, respectively. We believe that the aggregate of our existing cash and cash equivalents is sufficient to meet our operating cash requirements and strategic objectives for growth for at least the next year. To satisfy our capital requirements, including ongoing future operations, we may seek to raise additional financing through debt and equity financings. 25 Operating Activities During fiscal 2021, cash used in operating activities was $5,251,748 as compared to $4,297,498 in fiscal 2020. The primary factors that contributed to this were a loss of $6,469,036, an increase in accounts receivable of $455,614, and an increase in inventories of $1,906,013, and paydown of accounts payable and accrued expenses of $403,331. These were primarily offset by a decrease in prepaid expenses of $1,138,793, which was a result of a refund of the prepayment from the prior year, a non-cash stock option expense of $377,391, an increase in inventory reserves of $1,550,594, and an increase in the allowance on accounts receivable of $766,434. During fiscal 2020, the Company had a net loss of $2,339,054, an increase in accounts receivable of $309,090, an increase in inventories of $717,460, and an increase in prepaid expenses of $1,306,681. These were offset by an increase in accrued compensation of $51,798, a non-cash stock option expense of $200,470 and depreciation and amortization of $129,172. Investing Activities During fiscal 2021, cash used in investing activities was $295,583 as compared to $118,927 in fiscal 2020. During fiscal 2021, the Company purchased $135,856 of property and equipment and had $159,727 in increased intangible assets related to patents. During fiscal 2020, the Company purchased $33,608 of property and equipment and $85,319 in increased intangible assets related to patents. Financing Activities Cash provided by financing activities in fiscal 2021 was $1,113,730 as compared to $12,373,977 in fiscal 2020. In fiscal 2021 and 2020, the Company had proceeds from the exercise of stock options of $102,255 and $223,534, respectively. During fiscal 2021 and 2020, the Company received $1,011,475 and $10,232,857, respectively, in net proceeds from the sale of common stock through the two S-3 Registration Statements filed by the company, net of subscriptions receivable. In fiscal 2020, the Company also had proceeds from the sale of convertible preferred stock, net, in the amount of $1,917,586. The common stock sold and issued in fiscal 2020 was issued under the S-3 “shelf” Registration Statement base prospectus filed with the Securities and Exchange Commission on June 30, 2017 and declared effective by the SEC on July 20, 2017, and under the prospectus supplement and At Market Issuance Sales Agreement, filed with the SEC on December 4, 2017, and the prospectus supplement filed with the SEC on March 20, 2020. The common stock sold and issued in fiscal 2021 was issued under the S-3 “shelf” Registration Statement base prospectus filed with the SEC on July 21, 2020 (the “2020 Shelf Registration Statement”) and declared effective by the SEC on September 30, 2020, and under the prospectus supplement and At Market Issuance Sales Agreement, filed with the SEC on January 22, 2021. (See Shareholders’ Equity and Subsequent Events in the notes to the consolidated financial statements for further details about SEC registrations). The 2020 Shelf Registration Statement registers common shares that may be issued by the Company in a maximum aggregate amount of up to $90,000,000. On January 22, 2021, we filed a prospectus supplement (“2021 Prospectus Supplement”) for the sale of up to $15,000,000 of shares of our common stock in an at-the-market offering under the 2020 Shelf Registration Statement, of which $12,984,273 remains available for sale under the 2021 Prospectus Supplement. On August 27, 2021, the date on which this Annual Report on Form 10-K for the fiscal year ended May 31, 2021 is filed with the SEC, our 2020 Registration Statement became subject to the offering limits set forth in General Instruction I.B.6 of Form S-3 because our public float is less than $75 million. For so long as the Company's public float is less than $75 million, the aggregate market value of securities sold by the Company under the 2020 Shelf Registration Statement pursuant to Instruction I.B.6 to Form S-3 during any 12 consecutive months may not exceed one-third of the Company’s public float. We have not offered any securities pursuant to General Instruction I.B.6 of Form S-3 in the 12 calendar months preceding the date of filing this Annual Report on Form 10-K. For purposes of this limitation, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was $47,283,738, based on 11,151,825 shares of our outstanding common stock held by non-affiliates and a price of $4.24 per share, which was the price at which our common stock was last sold on The Nasdaq Capital Market on August 23, 2021 (a date within 60 days of the date hereof), calculated in accordance with General Instruction I.B.6 of Form S-3. After giving effect to the $15,761,246 offering limit imposed by General Instruction I.B.6 of Form S-3, we may offer and sell from time to time up to the full amount of the $12,984,273 remaining under the 2021 Prospectus Supplement. On February 24, 2020, Biomerica, Inc. entered into and closed on 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 Company’s Series A 5% Convertible Preferred Stock, $0.08 par value per share for a purchase price of approximately $2,000,000, or $3.50 per Series A Preferred Share. Under the terms of the Stock Purchase Agreement, each share of issued Convertible Preferred Stock can be converted at any time by Palm into one share of the Company’s common stock. On March 24, 2020, Palm converted 250,000 shares of Convertible Preferred Stock into 250,000 shares of unregistered common stock. The Company received approximately $1,917,586 in net proceeds from this sale. On September 30, 2020, these 250,000 unregistered shares became fully registered shares. 26 In January 2021, Palm Global Small Cap Master Fund LP converted 321,429 preferred shares into 321,429 fully registered common shares. Following this conversion, Palm Global Small Cap Master Fund LP no longer owns any preferred stock, and Biomerica currently has no preferred shares outstanding. The Company intends to use the net proceeds from these offerings 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. SUBSEQUENT EVENTS Subsequent to May 31, 2021, options to purchase 1,500 shares of Biomerica common stock were exercised at the exercise price of $2.68 per share. Proceeds to the Company were approximately $4,000. Subsequent to May 31, 2021, the Company sold 201,553 shares of its common stock under its S-3 “shelf” Registration statement. The average sale price was $4.16 per share. Net proceeds to the Company were approximately $824,000. On June 21, 2021, the Company signed an exclusive distribution and marketing agreement in Canada for its Helicobacter Pylori (H. Pylori) test. In June 2021, the Company received a patent in Japan (#6902526) for the System and Method for a Digital Health System Providing a Food Recommendation Based on Food Sensitivity Testing. This technology is designed to allow for easier implementation of the dietary restrictions that result from InFoods® diagnostic testing. This method describes using a smartphone or similar technology to identify prepared or packaged foods that contain restricted food ingredients, using barcodes or product labels. In August 2021 the Company received a notice of allowance for a patent in Japan whose claims cover the use of the InFoods® technology to diagnose and treat depression, and covers the compositions, devices and methods of depression sensitivity testing. OFF BALANCE SHEET ITEMS There were no off-balance sheet arrangements as of May 31, 2021. 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 of America. Note 2 of the Consolidated Financial Statements describe the significant accounting policies essential to the consolidated financial statements. The preparation of these consolidated financial statements requires estimates and assumptions that affect the reported amounts and disclosures. In general, the critical accounting policies that may require judgments or estimates relate specifically to Revenues, Allowance for Doubtful Accounts, Inventory Reserves, Stock-Based Compensation, Income Taxes, Right-of-Use Asset and Lease Liability. 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. Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, which is when transfer of control of goods has occurred and at which point title passes. An allowance is established, if necessary, for estimated returns as revenue is recognized. Services for some contract work are invoiced and recognized for work that has been performed as the project progresses. 27 An 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 not probable and have established specific reserves, but to the extent collection is made, the allowance will be released. Additionally, if 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. We measure stock-based compensation costs at fair value, including estimated forfeitures, and recognize the expense over the period that the recipient is required to provide service in exchange for the award, which generally is the vesting period. We use the Black-Scholes option pricing model to measure the fair value of our stock options. In determining the amount of expense to be recorded, we also estimate forfeiture rates for all awards based on historical experience to reflect the probability that employees will complete the required service period. Employee retention patterns could vary in the future and result in a change to our estimated forfeiture rate which would directly impact stock-based compensation expense. We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. We assess our deferred tax assets annually under more likely than not scenarios in which they may be realized through future income. We have determined that although we believe our net deferred tax assets of $5,590,000 will be utilized at a future date, based on our recent losses and plans to continue our research and development, we have established a valuation allowance of $5,590,000, which fully covers the asset. Leases During the year ended May 31, 2020, the Company adopted ASC 842, Leases. As a result, the existing deferred rent liability was netted against the Right-of-Use Asset which was capitalized at that time. REVENUE RECOGNITION The Company has various contracts with customers. All of the contracts specify that revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, which is when the transfer of control of goods has occurred and at which point title passes. The Company does not allow for returns except in the event of defective merchandise and therefore does not establish an allowance for returns. In addition, the Company has contracts with customers wherein they receive purchase discounts for achieving specified sales volumes. The Company evaluated the status of these contracts as of May 31, 2021 and 2020 and does not believe that any additional discounts will be given through the end of the contract periods. Services for some contract work are invoiced and recognized for work that has been performed as the project progresses. The Company sells clinical lab products to domestic and international distributors, including hospitals and clinical laboratories, medical research institutions, medical schools and pharmaceutical companies. OTC products are sold directly to drug stores and e-commerce customers as well as to distributors. Physicians’ office products are sold to physicians and distributors, all of whom are categorized below according to the type of products sold to them. We also manufacture certain components on a contract basis for domestic and international manufacturers. RECENT ACCOUNTING PRONOUNCEMENTS See Note 2 to our consolidated financial statements for a listing of adopted and soon to be adopted accounting pronouncements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Exhibit 99.3, "Biomerica, Inc. and Subsidiaries Consolidated Financial Statements" is incorporated herein by this reference. 28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.