EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS 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. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR THE COMPANY'S PRODUCTS, AVAILABILITY OF RAW MATERIALS, THE STATE OF THE ECONOMY, RESULTS OF RESEARCH AND DEVELOPMENT ACTIVITIES AND THE CONTINUED ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND APPROVALS REQUIRED. THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

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.





OVERVIEW

Biomerica, Inc. and Subsidiaries (which includes wholly owned subsidiaries, Biomerica de Mexico and BioEurope GmbH) develop, manufacture, and market medical diagnostic products designed for the early detection and monitoring of chronic diseases and medical conditions. Our medical diagnostic products are sold worldwide in two markets: 1) clinical laboratories and 2) point of care (physicians' offices and over-the-counter drugstores). 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.





RESULTS OF OPERATIONS

Consolidated net sales for Biomerica were $1,596,408 for the three months ended November 30, 2019 as compared to $1,500,791 for the same period in the previous year. This represents an increase of $95,617 or 6.4%. For the six-month period ended November 30, 2019 as compared to 2018, net sales were $2,790,823 as compared to $2,773,661. This represents an increase of $17,162 or 0.6%. The increase for the three and six-month periods was primarily due to increased sales to Asia and several orders to the Middle East.

For the three months ended November 30, 2019 as compared to November 30, 2018, cost of sales decreased as a percentage of sales from 72.8% of sales, or $1,092,731, to 70.6% of sales, or $1,127,536. For the six months ended November 30, 2019 as compared to 2018, cost of sales decreased as a percentage of sales from 73.1% of sales, or $2,028,378 to 70.0% of sales, or $1,954,647. Decreases to cost of sales as a percentage of sales for the three and six months were due to lower scrap as well as fixed costs in relationship to higher sales.

For the three months ended November 30, 2019 compared to 2018, selling, general and administrative expenses increased by $41,169, or 8.0%. For the six-month period ended November 30, 2019 as compared to 2018, these expenses increased by $148,138, or 16.1%. The increase in the three and six-month period was primarily due to increased wages primarily due to increased wages classified as administrative and the addition of a sales manager in Europe.

For the three months ended November 30, 2019, compared to 2018, research and development expenses increased by $23,449 or 6.1%. For the six-month period ended November 30, 2019 as compared to 2018, these expenses increased by $2,134, or 0.3%. The increase for the three months was primarily a result of higher wages as compared to the same period in prior fiscal year. The total research and development expense for the six months as compared to the prior fiscal year was relatively constant.

For the three months ended November 30, 2019 as compared to November 30, 2018, dividend and interest income decreased from $8,693 to $4,488. For the six months ended November 30, 2019 as compared to November 30, 2018, dividend and interest income decreased from $11,786 to $8,551.


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LIQUIDITY AND CAPITAL RESOURCES

As of November 30, 2019 and May 31, 2019, the Company had cash and cash equivalents in the amount of $850,989 and $686,785 and working capital of $2,526,597 and $3,230,535, respectively.

During the six months ended November 30, 2019, the Company's operations used cash of $365,994 as compared to $1,001,068 in the same period of the prior fiscal year. The cash used by operations for the six months ended November 30, 2019 was primarily a result of a net loss of $991,553, which was offset by a decrease in accounts receivable of $168,133, and increases in accounts payable and accrued expenses of $345,211, depreciation and amortization of $65,545, and amortization of right-of-use asset of $157,356 as compared to cash used by operations for the six months ended November 30, 2018 which resulted from a net loss of $928,984 and increased receivables of $473,799 which were offset by an increase in accounts payable and accrued expenses of $109,163 and depreciation and amortization of $89,013. Cash used in investing activities in the six months ended November 30, 2019 was $21,331, $6,323 of which was for purchases of property and equipment as compared to the six months ended November 30, 2018 during which cash used for property and equipment was $53,080. Cash provided by financing activities for the six months ended November 30, 2019 was a result of the exercise of stock options of $48,928, proceeds from the sale of common stock of $307,686 and $200,000 from an equity financing deposit from an officer,

compared to $75,200 from the exercise of stock options and the proceeds from the sale of common stock of $936,702 in the prior fiscal year.

We have been working on new products for the gastroenterology and inflammatory disease markets. Multiple patent applications for the new products have been filed and two patents have been issued (USA and Korea). The Company is working on obtaining additional patents and U.S. regulatory approvals for certain of these products. The Company has been spending significant funds on the research, development, clinical trials, patents and related costs, and expects this will continue in order to obtain the desired patents and regulatory approvals. These new products address very large addressable markets, and management believes these current expenses will create significant future value for the Company's shareholders.

As described in the Company's Form 10Q, filed with the Securities and Exchange Commission on April 15, 2019, the Form 10K report, filed with the Securities and Exchange Commission on August 29, 2019, the Form 10Q filed with the Securities and Exchange Commission on October 14, 2019 and the Form S-3 Registration Statement and Prospectus filed on June 30, 2017 and December 4, 2017, respectively, the Company entered into an At Market Issuance Sales Agreement, whereby, the Company may raise additional working capital and funds for continued development of current research projects. These funds will be needed to fund current research and development projects and bring them to the next state of completion. Management expects to raise additional funds throughout the year from the At Market Issuance Agreement to fund operations as necessary. During the quarter that ended November 30, 2019, the Company received $195,078 in net proceeds from the sale of its common stock through this Agreement. During the six months that ended November 30, 2019, the Company received $307,686 in net proceeds from the sale of its common stock through this Agreement.

The Company anticipates raising additional capital through this or other methods in order to continue to fund research and development projects, clinical trials, patent expenses and other operating needs.

OFF BALANCE SHEET ARRANGEMENTS - None.

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.


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In February 2016, the FASB issued an accounting standards update which requires lessees to recognize most leases on the balance sheet with a corresponding right-of-use asset. Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term. Leases are classified as financing or operating which will drive the expense recognition pattern. For lessees, the statement of operations presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and operating leases, respectively. The Company has elected to exclude short-term leases. The update also requires additional disclosures that will better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance as of June 1, 2019, the required effective date, using the effective date transition method. As permitted under the effective date transition method, financial information and disclosure for periods prior to the date of initial application will not be updated. An adjustment to the opening accumulated deficit was not required in conjunction with our adoption. For additional information, see Note 6 - Leases. We have elected not to reassess whether expired or existing contracts contain leases, nor did we reassess the classification of existing leases as of the adoption date. The Company leases office space and copy machines, all of which are operating leases. Most leases include the option to renew and the exercise of the renewals options is at the Company's sole discretion. Options to extend or terminate a lease are considered in the lease term to the extent that the option is reasonably certain of exercise. The leases do not include the options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term.

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