Biomerica(BMRA) - 2021 Q1 - Quarterly Report

PART I Financial Information Item 1. Financial Statements For the three months ended August 31, 2020, Biomerica reported a net loss of $1.65 million, a significant increase from the $0.51 million loss in the prior-year period. The balance sheet shows a decrease in total assets to $15.89 million and a reduction in shareholders' equity to $12.58 million. Cash flow from operations was a net use of $1.60 million, driven by the operating loss and an increase in inventory. Condensed Consolidated Statements of Operations and Comprehensive Loss The company's net sales slightly decreased by 4.2% year-over-year to $1.14 million. However, a significant increase in operating expenses, particularly in SG&A and R&D, led to a widened net loss of $1.65 million, or ($0.14) per share, compared to a net loss of $0.51 million, or ($0.05) per share, in the same quarter of the previous year. | Financial Metric | Three Months Ended Aug 31, 2020 | Three Months Ended Aug 31, 2019 | | :--- | :--- | :--- | | Net Sales | $1,143,806 | $1,194,415 | | Gross Profit | $182,876 | $367,304 | | Total Operating Expense | $1,839,257 | $876,863 | | Loss from Operations | ($1,656,381) | ($509,559) | | Net Loss | ($1,649,415) | ($506,296) | | Diluted Net Loss per Share | ($0.14) | ($0.05) | Condensed Consolidated Balance Sheets As of August 31, 2020, total assets stood at $15.89 million, down from $17.26 million at May 31, 2020, primarily due to a decrease in cash and cash equivalents. Total liabilities increased to $3.31 million from $3.05 million, while total shareholders' equity decreased from $14.21 million to $12.58 million. | Balance Sheet Item | August 31, 2020 | May 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $6,964,314 | $8,641,027 | | Total Current Assets | $13,120,072 | $14,766,817 | | Total Assets | $15,892,490 | $17,259,878 | | Total Current Liabilities | $1,801,459 | $1,477,147 | | Total Liabilities | $3,311,865 | $3,046,825 | | Total Shareholders' Equity | $12,580,625 | $14,213,053 | Condensed Consolidated Statement of Shareholders' Equity Shareholders' equity decreased by $1.63 million during the three months ended August 31, 2020. The decline was primarily driven by the net loss of $1.65 million for the period, slightly offset by proceeds from the exercise of stock options. - Total Shareholders' Equity decreased from $14,213,053 at May 31, 2020, to $12,580,625 at August 31, 2020[14] - The primary driver for the decrease was the net loss of $1,649,415 recorded during the quarter[14] Condensed Consolidated Statements of Cash Flows For the quarter, the company used $1.60 million in cash from operating activities, a significant increase from the $8,154 used in the prior-year period. Investing activities used $92,746, while financing activities provided $14,900. The company's cash and cash equivalents decreased by $1.68 million to end the period at $6.96 million. | Cash Flow Activity | Three Months Ended Aug 31, 2020 | Three Months Ended Aug 31, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | ($1,597,146) | ($8,154) | | Net cash used in investing activities | ($92,746) | ($14,271) | | Net cash provided by financing activities | $14,900 | $146,636 | | Net (decrease) increase in cash | ($1,676,713) | $120,769 | | Cash at end of period | $6,964,314 | $807,554 | Notes to Condensed Consolidated Financial Statements The notes detail significant accounting policies, including revenue recognition and inventory valuation. Key disclosures include a high concentration of credit risk, with two distributors accounting for 40.1% of net sales. The company also disclosed an SEC investigation related to its COVID-19 test announcement and subsequent events, including a new sales agreement in Ukraine. - The company has significant customer concentration risk. For the quarter ended August 31, 2020, two distributors accounted for 40.1% of net consolidated sales. As of the same date, two distributors accounted for 62.1% of gross accounts receivable[22] | Revenue by Market | Three Months Ended Aug 31, 2020 | Three Months Ended Aug 31, 2019 | | :--- | :--- | :--- | | Clinical lab | $581,708 | $890,152 | | OTC | $184,908 | $199,209 | | Physician's office | $197,331 | $45,222 | | Contract Manufacturing | $179,859 | $59,832 | | Total | $1,143,806 | $1,194,415 | - On July 2, 2020, the company received a notice of investigation and subpoena from the SEC related to its March 17, 2020 announcement regarding its COVID-19 IgG/IgM Rapid Test[35] - Subsequent to the quarter end, on October 5, 2020, the company entered into a four-year sales agreement with a Ukrainian distributor valued at $480,000[36] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 4.2% decrease in net sales to lower demand in Asia and the Middle East, partially offset by increased sales in Europe, including COVID-19 tests. The significant increase in net loss was driven by a 130% rise in SG&A expenses (due to legal fees for the SEC inquiry and consulting costs) and an 82.1% increase in R&D expenses (related to COVID-19 tests and InFoods® IBS clinical trials). The company's cash position decreased due to the operating loss and increased inventory for COVID-19 products. A new $90 million S-3 shelf registration was filed to support future capital needs. Results of Operations Net sales for the quarter decreased by 4.2% to $1.14 million. Cost of sales as a percentage of sales increased from 69.2% to 84.0% due to unfavorable manufacturing variances from facilities not running at full capacity. SG&A expenses surged by 130% to $1.16 million, and R&D expenses grew by 82.1% to $0.67 million, contributing to the wider operating loss. - Net sales decreased by $50,609 (4.2%) YoY, primarily due to a $355,000 decrease in Asia and the Middle East, partially offset by a $290,000 increase in Europe from contract manufacturing and COVID-19 tests[40] - SG&A expenses increased by 130% ($658,167) due to legal expenses related to the SEC inquiry, a higher allowance for doubtful accounts, and increased consulting and personnel costs[40] - R&D expenses increased by 82.1% ($304,227) due to costs for the development and validation of COVID-19 tests and clinical trial initiation costs for the InFoods® IBS product[40] Liquidity and Capital Resources The company's liquidity decreased, with cash and cash equivalents falling to $6.96 million from $8.64 million at the end of the prior fiscal year. Working capital also declined to $11.32 million. The primary use of cash was to fund operating losses and build inventory, particularly for COVID-19 products. To ensure future funding, the company filed a new $90 million Form S-3 shelf registration statement, which became effective on September 30, 2020. | Liquidity Metric | August 31, 2020 | May 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $6,964,314 | $8,641,027 | | Working Capital | $11,318,613 | $13,289,670 | - Cash used in operations increased significantly to $1,597,146 for the quarter, compared to $8,154 in the prior year period, driven by operating losses and a $1.25 million growth in inventory[41] - On July 21, 2020, the Company filed a new Form S-3 "Shelf" registration statement for a maximum aggregate offering amount of $90,000,000, which became effective September 30, 2020[41] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Biomerica is not required to provide quantitative and qualitative disclosures about market risk. - The company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information under this item[45] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded that they were effective at the "reasonable assurance" level as of August 31, 2020. There were no material changes in internal control over financial reporting during the quarter. - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective at the "reasonable assurance" level[46] - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[46] PART II Other Information Item 1. Legal Proceedings The company states it is not involved in any material legal proceedings arising in the ordinary course of business. However, it reiterates the disclosure of an ongoing investigation by the SEC's Division of Enforcement concerning the company's March 17, 2020 announcement about its COVID-19 rapid test. The company is cooperating with the investigation and cannot predict its outcome. - On July 2, 2020, the Company received a notice of investigation and a subpoena from the SEC related to its March 17, 2020 announcement about commencing shipping of its COVID-19 IgG/IgM Rapid Test[48] - The company is cooperating fully with the SEC's investigation and is unable to predict its duration, scope, or outcome at this time[48] Item 1A. Risk and Uncertainties This section highlights significant business risks, with a primary focus on the adverse effects of the COVID-19 pandemic. Key risks include supply chain disruptions, potential loss of customers, and government restrictions. The company also faces challenges related to gaining market acceptance and regulatory approval for its COVID-19 tests amidst intense competition. Other general risks include regulatory compliance, reliance on key distributors, and the ability to manage future growth. - The business is susceptible to widespread public health epidemics like COVID-19, which can cause supply chain disruptions, loss of customers, and financial risks from uncollectible receivables[49] - There are significant risks that the company's COVID-19 tests may not gain market acceptance due to competition, questions of efficacy, or failure to receive necessary regulatory approvals from agencies like the FDA[50] - The company faces competition from a large number of companies making and selling COVID-19 tests, many from low-cost manufacturing regions in Asia, leading to supply and price competition[50] Item 2. Unregistered Sales of Equity Securities & Use of Proceeds The company reported no unregistered sales of equity securities or specific use of proceeds during the reporting period. - None[51] Item 3. Defaults upon Senior Securities The company reported no defaults upon senior securities. - None[52] Item 4. Mine Safety Disclosures This item is not applicable to the company. - None[53] Item 5. Other Information The company did not report any other information under this item. - None[54] Item 6. Exhibits The report lists the exhibits filed, which include certifications by the CEO and CFO as required by Sections 302 and 906 of the Sarbanes-Oxley Act, and interactive data files (XBRL). | Exhibit No. | Description | | :--- | :--- | | 31.1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act — Zackary S. Irani | | 31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act — Steve Sloan | | 32.1 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act — Zackary S. Irani | | 32.2 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act — Steve Sloan | | 101 | Interactive data files pursuant to Rule 405 Regulation S-T |