BIOMERICA INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes thereto included in Part I, Item 1 of this Report and the audited consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023 (our 2023 Annual 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 our 2023 Annual 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, development, commercialization and in certain cases regulatory approval, of patented, diagnostic-guided therapy (“DGT”) products to treat gastrointestinal diseases, such as irritable bowel syndrome (“IBS”), and other inflammatory diseases. These inFoods ® based products are directed at chronic inflammatory illnesses that are widespread and common, and as such address very large markets. Our inFoods® IBS product uses a simple blood sample to identify patient-specific foods that, when removed from the patient’s diet, may alleviate IBS symptoms such as pain, bloating, diarrhea, and constipation. Instead of broad and difficult to manage dietary restrictions, the inFoods® IBS product works by identifying a patient’s above normal immunoreactivity to a panel of specific foods that have been shown to often be problematic to IBS suffers. A food identified as positive, and causing an abnormally high immune response in the patient is simply removed from the diet to help alleviate IBS symptoms. During fiscal 2022, we completed an endpoint determination clinical trial on our inFoods® IBS product. This trial was 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. This double blinded, placebo-controlled trial monitored IBS patients over an 8-week treatment period to determine the efficacy of our inFoods® IBS product to improve the patients’ IBS symptoms or endpoints. The trial was designed to determine the difference in the improvement in IBS symptoms for patients in the treatment arm, versus patients in the placebo arm of the trial. The top-line trial results were reported in February 2022. Multiple endpoints demonstrated statistically significant improvements for participants in the treatment arm, indicating that the elimination of specific foods may meaningfully reduce the symptoms of IBS in each patient subtype (including patients with IBS-Constipation, IBS-Diarrhea & IBS-Mixed). The greatest clinical improvements, including but not limited to abdominal pain and bloating, were seen in patients diagnosed with IBS-Mixed and IBS-Constipation, in the top line data. The purpose of the endpoint study was to validate the efficacy of the product, and to determine the primary symptom endpoint, or endpoints to be used in a possible final pivotal trial that would be conducted to attain the validation data needed to apply for U.S. Food and Drug Administration (“FDA”) product clearance. We are continuing to review and refine the complete dataset and have selected the final endpoint that we would intend to use in a possible final pivotal trial. We are identifying the trial protocol for submission to the FDA, and once approved the trial would be run thereafter. The trial is expected to include the large medical institution participants that conducted the endpoint clinical trial, in addition to other new institutions and a Clinical Research Organization. 13 Following the successful completion and positive statistical results from the Company’s inFoods® IBS clinical trial, Biomerica received interest from Gastroenterology (“GI”) physicians who would like to order the inFoods® IBS test for their patients. In fiscal 2023, we worked to set up the inFoods® IBS test to be performed in a CLIA certified, and College of American Pathologists (“CAP”) accredited high-complexity laboratory facility and offered as a laboratory developed test (“LDT”). During the quarter ended February 28, 2023, the CLIA lab completed all validation testing necessary for the inFoods® IBS product to be offered as an LDT and, as of February 28, 2023, patient samples were being accepted. We also worked to optimize the process for GI physicians to order the inFoods® IBS test, send patient blood samples to the CLIA lab, and receive the test results for their patients. We believe ease of order and workflow for physicians, with easy to understand and actionable results for patients, is critical to our success. During the fiscal third quarter, we also set up customer service and payment systems, along with a dedicated website for patients to receive answers to questions they may have about the test and attain information about how to eliminate a specific food identified as needing to be eliminated from their diet. This is especially important for foods that are ingredients in common processed foods like milk, eggs, and wheat. As of the end of the fiscal third quarter, we trial launched this product with one large GI physician group that are now offering this product to their patients. We have also recently hired an internal sales force to sign up additional GI physician groups who are interested in offering this product to their patients. As such, we are expecting material growth in revenues from the launch of our inFoods ® IBS product in coming quarters. We are also beginning the work of selecting and validating one new disease (such as ulcerative colitis or migraines), where there is evidence that certain foods can trigger or contribute to the symptoms found in these indications. We expect any new disease we target will follow a similar development pathway as inFoods® IBS in simultaneously seeking FDA clearance of the product while also launching the product as an LDT. We will also continue to evaluate partnership/licensing opportunities, as they arise, with U.S and multinational companies that could help us commercialize, or accelerate revenue growth of, the inFoods® products in the United States and overseas. Our existing medical diagnostic products are sold worldwide primarily in two markets: 1) clinical laboratories and 2) point-of-care (physicians’ offices and OTC at Walmart, CVS Pharmacy, Amazon, etc.). The diagnostic test kits are used to analyze blood, urine, nasal, or fecal specimens from patients in the diagnosis of various diseases, food intolerances 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 developing COVID-19 products to indicate if a person has been infected by COVID-19 or is currently infected. While we initially offered a COVID-19 antibody diagnostic test to determine if a person has previously been infected by the COVID-19 virus, all of our COVID-19 revenues in fiscal 2022 and 2023 have come from international sales of our COVID-19 antigen tests that use a patient’s nasal fluid sample to detect if the patient is currently infected with the virus. Due to falling demand, there were no sales of our COVID-19 related products in the three months ended August 31, 2023. As such, our COVID-19 product sales have caused significant swings in our revenues over the past eight quarters. During fiscal 2022, we finalized development of our H. Pylori diagnostic test that indicates if a patient is infected with the H. Pylori bacteria. H. Pylori infection is extremely common, and if left untreated, can lead to ulcers and possibly stomach cancers. During our fourth quarter of fiscal 2022, we applied for FDA clearance of this product though a 510(k) premarket submission. We have been in communication with the FDA answering certain follow-up questions and providing additional data as requested. Working with the FDA, in August 2023, we completed one additional set of in-lab tests that the FDA requested prior to making their final determination on clearance of the product. This set of data was sent to the FDA and our 510(k) for the H. Pylori product was resubmitted to the FDA in September 2023. Once cleared, we will begin marketing the product in the U.S. market. We have also begun discussions with international distributors for this product and expect to see revenues both in the U.S. market and through these international channels during 2024. The majority of our research and development efforts are focused on development and commercialization of non-COVID related products such as our H. Pylori product, and our inFoods® IBS product. Our existing products that contributed to our fiscal 2023 revenues 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 United States by the FDA. 14 RESULTS OF OPERATIONS Net Sales and Cost of Sales The following is a breakdown of revenues according to markets to which the products are sold: Three Months Ended August 31, Increase (Decrease) 2023 2022 $ % Clinical lab $ 1,289,000 $ 1,146,000 $ 143,000 12 % Over-the-counter 303,000 213,000 90,000 42 % Contract Manufacturing 117,000 95,000 22,000 23 % Physician’s office 4,000 183,000 (179,000 ) -98 % Total $ 1,713,000 $ 1,637,000 $ 76,000 5 % Consolidated net sales was approximately $1,713,000 for the three months ended August 31, 2023, as compared to $1,637,000 for the three months ended August 31, 2022, an increase of approximately $76,000, or 5%. This increase for the three months ended August 31, 2023, was driven primarily by demand for our clinical lab products in Asia and OTC products in the United States which was partially offset by a reduction in Physician’s office sales associated to COVID products. Periodic and infrequent orders may cause volatility in quarterly sales. Consolidated cost of sales was approximately $1,301,000, or 76% of net sales, for the three months ended August 31, 2023, as compared to $1,692,000, or 107% of net sales, for the three months ended August 31, 2022, a decrease of approximately $391,000, or 23%. The decrease for the three months ended August 31, 2023, was driven primarily by the decrease in volume of COVID products and related inventory write-offs. Operating Expenses The following is a summary of operating expenses: Three Months Ended August 31, 2023 2022 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 1,172,000 68 % $ 1,654,000 101 % $ (482,000 ) -29 % Research and Development $ 472,000 28 % $ 361,000 22 % $ 111,000 31 % Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $1,172,000 for the three months ended August 31, 2023, as compared to $1,654,000 for the three months ended August 31, 2022, a decrease of approximately $481,000, or 29%. The decrease in the three months ended August 31, 2023, was primarily due to approximate decreases in bad debt expense of $220,000, share-based compensation of $123,000, and legal expense of $170,000. Research and Development Consolidated research and development expenses were approximately $472,000 for the three months ended August 31, 2023, as compared to $361,000 for the three months ended August 31, 2022, an increase of approximately $111,000, or 31%. The increase in the three months ended August 31, 2023, was primarily due to R&D wages. Interest and Dividend Income Interest and dividend income were approximately $123,000 for the three months ended August 31, 2023, as compared to $0 for the three months ended August 31, 2022, an increase of $123,000, or 100%. The $123,000 increase was due to market interest rates on our cash balance, which, on August 31, 2022, the cash balance had not been invested. 15 LIQUIDITY AND CAPITAL RESOURCES The following are the principal sources of liquidity: August 31, 2023 May 31, 2023 Cash and cash equivalents $ 7,988,000 $ 9,719,000 Working capital including cash and cash equivalents $ 9,828,000 $ 10,852,000 As of August 31, 2023 and May 31, 2023, the Company had cash and cash equivalents of approximately $7,988,000 and $9,719,000, respectively. As of August 31, 2023 and May 31, 2023, the Company had working capital of approximately $9,828,000 and $10,852,000, 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, beyond next year, we are working on increasing sales, reducing expenses and may seek to raise additional financing through debt and equity financing. Operating Activities During the three months ended August 31, 2023, cash used in operating activities was approximately $1,674,000. The primary factors that contributed to this were a loss of approximately $1,132,000, non-cash expenses of $122,000, primarily associated with depreciation and amortization, share-based compensation, inventory reserves and amortization of right-of-use assets. This was partially offset by changes in asset and liability accounts of $664,000. During the three months ended August 31, 2022, cash used in operating activities was approximately $1,573,000. The primary factors that contributed to this were a loss of approximately $2,072,000, non-cash expenses of $766,000, primarily associated with depreciation and amortization, share-based compensation, account receivables provision, and inventory reserves . This was partially offset by changes in asset and liability accounts of $267,000. Investing Activities During the three months ended August 31, 2023, cash used in investing activities was approximately $63,000. During the three months ended August 31, 2023, the Company purchased approximately $21,000 of property and equipment and had $42,000 in expenditures related to patents. During the three months ended August 31, 2022, cash used in investing activities was approximately $34,000 for purchases of property and equipment. Financing Activities During the three months ended August 31, 2023, cash provided by financing activities was $0, with no net proceeds from the sale of common stock or from stock option exercises. During the three months ended August 31, 2022, cash provided by financing activities was approximately $1,778,000 which was a result of net proceeds from the sale of common stock of $1,764,000, and stock option exercises of $14,000. OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of August 31, 2023. CRITICAL ACCOUNTING POLICIES The preparation of 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 reserves, 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. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2023. 16 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.