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 designed to provide efficacy data for 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. No date has yet been set for commencing this final trial. 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 patient samples are now being run at the lab. In late fiscal 2023, we trial launched this product with one large GI physician group that is now offering this product to their patients. During fiscal 2024, we are working 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. 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 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. 14 We are also evaluating and pursuing partnership/licensing opportunities 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, Walgreens, 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. We began selling these COVID-19 related diagnostic tests during fiscal 2021, and we experienced significant revenues from such sales during fiscal 2021 and 2022 with lesser sales in fiscal 2023. Due to falling demand, there were no sales of our COVID-19 related products in the three months ended November 30, 2023. As such, our COVID-19 product sales have caused significant swings in our revenues over the past nine quarters. 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. On December 18, 2023, the Company received FDA clearance for the H. Pylori product to be sold in the US. Subsequently, we have now begun 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 products such as our H. Pylori product, improving and expanding the inFoods IBS product, developing other new products that utilize the inFoods platform, and developing new diagnostic products with outside medical diagnostic companies that we intend to manufacture for them. 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. RESULTS OF OPERATIONS Three months ended November 30, 2023 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 November 30, Increase (Decrease) 2023 2022 $ % Clinical lab $ 992,000 $ 902,000 $ 90,000 10 % Over-the-counter 443,000 466,000 (23,000 ) -5 % Contract manufacturing 131,000 52,000 79,000 152 % Physician’s office 1,000 62,000 (61,000 ) -98 % Total $ 1,567,000 $ 1,482,000 $ 85,000 6 % Consolidated net sales were approximately $1,567,000 for the three months ended November 30, 2023, as compared to $1,482,000 for the three months ended November 30, 2022, an increase of approximately $85,000, or 6%. This increase for the three months ended November 30, 2023, was driven primarily by larger sales in the food intolerance products and increased contract manufacturing billings. Periodic and infrequent orders may cause volatility in quarterly sales. 15 Consolidated cost of sales were approximately $1,242,000, or 79% of net sales, for the three months ended November 30, 2023, as compared to $1,130,000, or 76% of net sales, for the three months ended November 30, 2022, an increase of approximately $112,000, or 10%. The increase for the three months ended November 30, 2023, was driven primarily by correlated increased sales for the quarter. Operating Expenses The following is a summary of operating expenses: Three Months Ended November 30, 2023 2022 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 1,521,000 97 % $ 1,556,000 105 % $ (35,000 ) -2 % Research and Development $ 412,000 26 % $ 462,000 31 % $ (50,000 ) -11 % Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $1,521,000 for the three months ended November 30, 2023, as compared to $1,556,000 for the three months ended November 30, 2022, a decrease of approximately $35,000, or 2%. For the three months ended November 30, 2023, the decrease was primarily due to an approximate $209,000 reduction in bad debt expense related to a customer in Vietnam, a $158,000 decrease in share-based compensation expenses, and a $128,000 decrease in legal expenses. These decreases were partially offset by a $160,000 increase in marketing expenses for the recent CVS retail launch, a $124,000 increase in salaries and wages for the sales and marketing team, and a $92,000 increase in expenses for marketing outside services. Research and Development Consolidated research and development expenses were approximately $412,000 for the three months ended November 30, 2023, as compared to $462,000 for the three months ended November 30, 2022, a decrease of approximately $50,000, or 11%. The decrease in the three months ended November 30, 2023, was primarily due to an approximate decrease of $59,000 in inFoods research expenses. Interest and Dividend Income Interest and dividend income were approximately $109,000 for the three months ended November 30, 2023, as compared to $41,000 for the three months ended November 30, 2022, an increase of $68,000, or 166%. The increase was primarily driven by higher market interest rates on our cash and cash equivalents. 16 Six months ended November 30, 2023 Net Sales and Cost of Sales The following is a breakdown of revenues according to markets to which the products are sold: Six Months Ended November 30, Increase (Decrease) 2023 2022 $ % Clinical lab $ 2,283,000 $ 2,048,000 $ 235,000 11 % Over-the-counter 745,000 679,000 66,000 10 % Contract manufacturing 248,000 147,000 101,000 69 % Physician’s office 5,000 245,000 (240,000 ) -98 % Total $ 3,281,000 $ 3,119,000 $ 162,000 5 % Consolidated net sales were approximately $3,281,000 for the six months ended November 30, 2023, as compared to $3,119,000 for the six months ended November 30, 2022, an increase of approximately $162,000, or 5%. This increase for the six months ended November 30, 2023, was primarily driven by an increase in demand for our food intolerance products and contract manufacturing billings, which was partially offset by a reduction in Physician’s office sales associated with COVID products. Periodic and infrequent orders may cause volatility in quarterly sales. Consolidated cost of sales were approximately $2,541,000, or 77% of net sales, for the six months ended November 30, 2023, as compared to $2,822,000, or 90% of net sales, for the six months ended November 30, 2022, a decrease of approximately $281,000, or 10%. The decrease for the six months ended November 30, 2023, was primarily driven by a $90,000 increase in salary and wages for the production team, that was more than offset by a $332,000 decrease in costs associated with reduced sales of our COVID-19 products. Operating Expenses The following is a summary of operating expenses: Six Months Ended November 30, 2023 2022 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 2,696,000 82 % $ 3,210,000 103 % $ (514,000 ) -16 % Research and Development $ 883,000 27 % $ 823,000 26 % $ 60,000 7 % 17 Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $2,696,000 for the six months ended November 30, 2023, as compared to $3,210,000 for the six months ended November 30, 2022, a decrease of approximately $514,000, or 16%. For the six months ended November 30, 2023, the decrease was primarily due to an approximate $429,000 reduction in bad debt expense related to a customer in Vietnam, a $327,000 decrease in share-based compensation expenses, and a $297,000 decrease in legal expenses. These decreases were partially offset by a $160,000 increase in marketing expenses for the recent CVS retail launch, a $174,000 increase in salaries and wages for the sales and marketing team, and a $61,000 increase in expenses for marketing outside services. Research and Development Consolidated research and development expenses were approximately $883,000 for the six months ended November 30, 2023, as compared to $823,000 for the six months ended November 30, 2022, an increase of approximately $60,000, or 7%. The increase for the six months ended November 30, 2023, was primarily due to an increase in salaries and wages of $104,000, partially offset by a decrease in share-based compensation expenses of $21,000 and lab supplies expenses of $15,000. Interest and Dividend Income Interest and dividend income were approximately $231,000 for the six months ended November 30, 2023, as compared to $41,000 for the six months ended November 30, 2022, an increase of $190,000, or 463%. The increase was primarily driven by higher market interest rates on our cash and cash equivalents. LIQUIDITY AND CAPITAL RESOURCES The following are the principal sources of liquidity: November 30, 2023 May 31, 2023 Cash and cash equivalents $ 7,134,000 $ 9,719,000 Working capital including cash and cash equivalents $ 8,443,000 $ 10,852,000 As of November 30, 2023 and May 31, 2023, the Company had cash and cash equivalents of approximately $7,134,000 and $9,719,000, respectively. As of November 30, 2023 and May 31, 2023, the Company had working capital of approximately $8,443,000 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. 18 Operating Activities During the six months ended November 30, 2023, cash used in operating activities was approximately $2,516,000. The primary factors that contributed to this was a loss of approximately $2,639,000, non-cash expenses of $294,000, primarily associated with depreciation and amortization, provision for allowance on accounts receivable, inventory reserves, share-based compensation, and amortization of right-of-use assets . This was partially offset by changes in asset and liability accounts of approximately $171,000. During the six months ended November 30, 2022, cash used in operating activities was approximately $2,786,000. The primary factors that contributed to this was a loss of approximately $3,698,000, non-cash expenses of $1,101,000, primarily associated with share-based compensation and provision for allowance on accounts receivable . This was partially offset by changes in asset and liability accounts of approximately $189,000. Investing Activities During the six months ended November 30, 2023, cash used in investing activities was approximately $27,000 for purchases of property and equipment, and $48,000 in expenditures related to patents. During the six months ended November 30, 2022, cash used in investing activities was approximately $58,000 for purchases of property and equipment. Financing Activities During the six months ended November 30, 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 six months ended November 30, 2022, cash provided by financing activities was approximately $2,015,000 which was a result of net proceeds from the sale of common stock of $1,937,000, and stock option exercises of $79,000. OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of November 30, 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 condition 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. 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.