Biomerica(BMRA) - 2020 Q4 - Annual Report

Part I Item 1. Business Biomerica develops and markets diagnostic and therapeutic products, focusing on DGT for GI diseases and COVID-19 tests Business Overview * Biomerica develops, manufactures, and markets advanced diagnostic and therapeutic products for point-of-care and clinical laboratory use[5] * The company's primary strategic focus is on developing patented diagnostic guided therapy (DGT) products, such as InFoods® IBS, for gastrointestinal and other inflammatory diseases[5] * In March 2020, the company pivoted to focus resources on developing and selling COVID-19 antibody diagnostic tests, beginning sales of a rapid finger-prick test outside the U.S. and submitting an EUA application to the FDA for a lab-based ELISA test[5] Production * The company manufactures and assembles most diagnostic test kits at its facilities in Irvine, California, and Mexicali, Mexico[7] * Manufacturing operations are regulated by FDA Good Manufacturing Practices, with compliance to CE Mark and ISO regulations maintained[8] Research and Development R&D Expenses | Fiscal Year | R&D Expense | | :--- | :--- | | 2020 | $1,910,209 | | 2019 | $1,679,098 | * R&D spending increased due to a focus on developing COVID-19 diagnostic tests and pursuing regulatory approval for gastrointestinal market tests, including the InFoods® IBS product[9] * The InFoods® IBS product is undergoing clinical studies at major institutions like the Mayo Clinic and a Harvard Medical School Teaching Hospital, pursuing a de novo 510(k) clearance pathway[9][10] * Since March 2020, a majority of R&D resources have been dedicated to developing COVID-19 antibody and antigen tests, including submitting an EUA application to the FDA for a lab-scale ELISA test[10] Markets and Methods of Distribution * The company has approximately 400 customers, including 75 foreign and 40 domestic distributors, targeting clinical laboratories and point-of-care markets[11] * A high concentration of sales and receivables exists with a few key distributors, with three distributors accounting for 57.2% of net sales and 80.0% of gross accounts receivable in fiscal 2020[13] * The COVID-19 pandemic has caused significant operational disruptions, including supply chain issues, and is expected to materially impact financial performance[12] Backlog Order Backlog | Date | Backlog Amount | | :--- | :--- | | May 31, 2020 | $727,000 | | May 31, 2019 | $207,000 | Raw Materials * The company faces significant supplier concentration risk, with one vendor accounting for 59.3% of raw material purchases in fiscal 2020, up from 23.8% in fiscal 2019[15] * The COVID-19 pandemic has negatively impacted the sourcing and receiving of raw materials due to supplier plant shutdowns and distribution channel restrictions[15] Government Regulation * The company's products are classified as in vitro diagnostic and medical devices (primarily Class I or Class II) and are subject to extensive FDA regulation, including Quality System Regulation (QSR) and Medical Device Reporting (MDR)[18] * International sales require compliance with local regulations, including the CE Mark in the European Union, with ongoing efforts to comply with the new, more stringent EU Medical Device Regulation (MDR) and In Vitro Diagnostic Medical Device Regulation (IVDR)[18][19] * The last FDA inspection in November 2019 noted no observations, and the company believes it is in material compliance with all relevant regulations[19] International Business Revenue by Geographic Region | Region | 2020 Revenue | 2019 Revenue | | :--- | :--- | :--- | | Europe | $2,434,000 (36.4%) | $1,694,000 (32.6%) | | United States | $445,000 (6.6%) | $523,000 (10.1%) | | Asia | $1,867,000 (27.9%) | $2,514,000 (48.3%) | | S. America | $1,615,000 (24.1%) | $256,000 (4.9%) | | Middle East | $314,000 (4.7%) | $214,000 (4.1%) | | Other foreign | $18,000 (0.3%) | -- | | Total Sales | $6,693,000 | $5,201,000 | * Foreign sales are subject to special risks, including economic factors, government regulations, tariffs, and disruptions from the COVID-19 pandemic, which have negatively impacted non-COVID-19 product sales[22] Intellectual Property * The company relies on patents, trademarks, and trade secrets to protect its proprietary rights, having filed over 100 international and PCT patents, with 22 currently filed with the USPTO[23][27] * The most important patent family pertains to the InFoods® IBS technology platform, with patents issued in the U.S., Korea, and Japan[27] * The company has licensed technology from third parties, including from the Icahn School of Medicine at Mount Sinai for its ELISA COVID-19 test and from the University of California for a CRISPR-based COVID-19 test technology[24][25] Employees Employee Headcount (U.S. and Europe) | Department | 2020 | 2019 | | :--- | :--- | :--- | | Administrative | 5 | 4 | | Research and Development | 9 | 8 | | Marketing & Sales | 3 | 4 | | Production and Operations | 28 | 23 | | Total | 45 | 39 | * In addition to its U.S. and European employees, Biomerica de Mexico employs 20 people at its Mexico facility[28] Item 1A. Risk Factors The company faces significant risks from the COVID-19 pandemic, reliance on key distributors, competition, regulatory compliance, and capital needs * Business & Operational Risks: The COVID-19 pandemic poses significant risks, including supply chain disruptions, loss of customers, and financial risks from receivables, with uncertain market acceptance and regulatory approval for its COVID-19 tests amidst strong competition[31][33][34] * Financial & Strategic Risks: The company is highly dependent on a few key distributors, with three accounting for 57.2% of sales in FY2020, and additional capital will be needed for future growth, potentially leading to stockholder dilution[42][44] * Regulatory & Legal Risks: The business is subject to extensive government regulation (FDA, etc.), with non-compliance potentially leading to loss of certifications or manufacturing shutdowns, alongside risks from intellectual property infringement claims and product liability[38][43][51] * Market & Stock Risks: The diagnostic market is highly competitive, the company's stock price is volatile, and future sales of common stock, including from a new $90 million shelf registration, could lower the market price[49][60][61] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC * None[69] Item 2. Properties The company leases all its facilities, including its 22,000 sq. ft. corporate headquarters in Irvine, CA, and an 8,100 sq. ft. manufacturing facility in Mexico * The company leases its 22,000 sq. ft. corporate headquarters in Irvine, CA, with the current lease expiring on August 31, 2021[70] * The Mexican subsidiary, Biomerica de Mexico, leases an 8,100 sq. ft. manufacturing facility under a 10-year lease that began in November 2016[70] Item 3. Legal Proceedings The company received an SEC subpoena on July 2, 2020, regarding its March 2020 COVID-19 rapid test announcement, and is cooperating with the unpredictable investigation * The company received a subpoena from the SEC on July 2, 2020, regarding its March 17, 2020 announcement about its COVID-19 IgG/IgM Rapid Test[71] * The company is cooperating with the SEC investigation and cannot predict its duration, scope, or outcome at this time[71] Item 4. Mine Safety Disclosures This item is not applicable to the company * Not applicable[73] Part II Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq (BMRA), has not paid dividends, and raised $6.8 million via ATM sales in FY2020, with a new $90 million shelf registration filed in July 2020 * The company's common stock trades on the Nasdaq Capital Market under the symbol BMRA[74] * The company raised approximately $6.8 million in gross proceeds under an ATM prospectus supplement filed in March 2020, and a new S-3 'Shelf' registration for up to $90 million was filed in July 2020[74] Equity Compensation Plan Information as of May 31, 2020 | Plan Category | Securities to Be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,789,251 | $2.75 | 799,041 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FY2020 net sales increased 28.7% to $6.7 million driven by COVID-19 tests, resulting in a $2.3 million net loss, while liquidity significantly improved to $8.6 million cash from $12.4 million in financing activities Results of Operations Fiscal Year 2020 vs. 2019 Performance | Metric | FY 2020 | FY 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $6,692,711 | $5,200,682 | +28.7% | | Gross Profit | $1,781,776 | $1,292,014 | +37.9% | | R&D Expense | $1,910,209 | $1,679,098 | +13.8% | | SG&A Expense | $2,274,415 | $2,025,706 | +12.3% | | Net Loss | ($2,339,054) | ($2,393,060) | -2.3% | * The increase in annual sales was primarily driven by sales of COVID-19 tests during the fourth quarter, offsetting declines in other product lines negatively impacted by the pandemic[81] * Gross margin improved from 24.8% in FY2019 to 26.6% in FY2020, with cost of sales as a percentage of sales decreasing from 75.2% to 73.4%, mainly due to higher margins on COVID-19 products[81] Liquidity and Capital Resources Liquidity Position | Metric | May 31, 2020 | May 31, 2019 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $8,641,027 | $686,785 | | Working Capital | $13,289,670 | $3,230,535 | * Cash used in operating activities was $4.3 million in FY2020, compared to $2.2 million in FY2019[84] * Cash provided by financing activities was $12.4 million in FY2020, primarily from $10.2 million in net proceeds from common stock sales and $1.9 million from a convertible preferred stock sale[84] Subsequent Events * Filed a new S-3 'Shelf' registration statement for up to $90 million on July 20, 2020[86] * Received a notice of allowance from the USPTO for a second key patent for the InFoods® IBS product in August 2020[86] * Appointed a new Chief Financial Officer, Steven Sloan, and a new board member, Cathy Coste, effective September 3, 2020[86][88] Critical Accounting Policies * Management identifies critical accounting policies as those requiring significant judgments and estimates, including Revenues, Allowance for Doubtful Accounts, Inventory Reserves, Stock-Based Compensation, Income Taxes, and Right-of-Use Asset and Lease Liability[90] * The company adopted ASC 842, Leases, on June 1, 2019, resulting in the recognition of a right-of-use asset of $1,942,999 and a lease liability of $1,980,970[93] * A full valuation allowance of $3,175,000 has been established against the company's net deferred tax assets due to recent losses[92] Item 9A. Controls and Procedures Management concluded the company's disclosure controls and internal control over financial reporting were effective at a 'reasonable assurance' level as of May 31, 2020, with no material changes identified * Management concluded that as of May 31, 2020, the company's disclosure controls and procedures were effective at the 'reasonable assurance' level[97] * Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of May 31, 2020[101] * No changes in internal control over financial reporting occurred during the last fiscal year that have materially affected, or are reasonably likely to affect, these controls[98] Part III Items 10-14, covering Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Related Transactions, are incorporated by reference from the Company's 2020 proxy statement * Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Company's 2020 proxy statement[102][103][104] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists documents filed with the Form 10-K, including consolidated financial statements and an index of exhibits, with financial statement schedules omitted * This section provides a list of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and required certifications[107][112] * The consolidated financial statements are filed with the report, while all financial statement schedules have been omitted[108] Consolidated Financial Statements Consolidated Balance Sheets As of May 31, 2020, total assets increased to $17.3 million (from $5.2 million) driven by cash, total liabilities were $3.0 million, and shareholders' equity rose to $14.2 million from stock issuances Consolidated Balance Sheet Highlights (as of May 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $8,641,027 | $686,785 | | Total current assets | $14,766,817 | $4,494,929 | | Total Assets | $17,259,878 | $5,245,364 | | Liabilities & Equity | | | | Total current liabilities | $1,477,147 | $1,264,394 | | Total Liabilities | $3,046,825 | $1,264,394 | | Total Shareholders' Equity | $14,213,053 | $3,980,970 | Consolidated Statements of Operations and Comprehensive Loss For FY2020, net sales reached $6.7 million, with gross profit at $1.8 million, resulting in a net loss of $2.34 million or ($0.23) per share, a slight improvement from prior year Statement of Operations Summary (for the year ended May 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Net sales | $6,692,711 | $5,200,682 | | Gross Profit | $1,781,776 | $1,292,014 | | Loss from Operations | ($2,402,848) | ($2,412,790) | | Net Loss | ($2,339,054) | ($2,393,060) | | Basic and Diluted Net Loss per Share | ($0.23) | ($0.26) | Consolidated Statements of Cash Flows For FY2020, net cash used in operations was $4.3 million, offset by $12.4 million from financing activities, resulting in an $8.0 million net increase in cash, bringing the year-end balance to $8.6 million Cash Flow Summary (for the year ended May 31) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($4,297,498) | ($2,244,039) | | Net cash used in investing activities | ($118,927) | ($171,111) | | Net cash provided by financing activities | $12,373,977 | $1,907,427 | | Net increase (decrease) in cash | $7,954,242 | ($518,118) | Notes to Consolidated Financial Statements The notes detail accounting policies, including ASC 842 adoption, customer/supplier concentrations, deferred tax asset valuation, stock incentive plans, $2 million convertible preferred stock issuance, and various clinical trial and COVID-19 licensing agreements * Customer and Supplier Concentration: In FY2020, three distributors accounted for 57.2% of net sales, and one vendor accounted for 59.3% of raw material purchases[139] * Shareholders' Equity: In February 2020, the company issued 571,429 shares of Series A 5% Convertible Preferred Stock for approximately $2 million, and raised over $10.2 million in net proceeds from common stock sales under its ATM agreements[183][187] * Commitments and Contingencies: The company is engaged in multiple clinical trial agreements for its InFoods® IBS and H. pylori products with institutions like the University of Michigan and the Mayo Clinic, and entered into licensing agreements for COVID-19 test technology[206][209][210] * Income Taxes: The company has significant federal ($9.2 million) and state ($5.0 million) net operating loss carryforwards but has recorded a full valuation allowance of $3.175 million against its deferred tax assets[190][193]