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 have successfully launched the inFoods IBS test with numerous GI physician groups across multiple states and regions. While our initial efforts have yielded success within the GI specialty, we are keenly aware of the opportunity to expand across the application of our product to other physician segments. We are convinced that forming partnerships in these other segments is the most effective strategy for market penetration. Currently, we are engaging in discussions with several potential partners. This strategy enables our newly formed sales team to focus on building strong relationships within the GI segment, capitalizing on the distinct advantages of the inFoods IBS product. In tandem with our expansion efforts, we are drawing from key learnings from the initial launch to enhance the ordering experience. We are now driving improvements to optimize the process for physicians to order the inFoods IBS test, send patient blood samples to the CLIA lab, and receive the test results for their patients. These improvements are directly informed by our experience and feedback from the field, ensuring a smoother and more efficient experience for both physicians and patients. With these strategic initiatives in place, grounded in our understanding of market dynamics and user needs, we anticipate continued growth in revenues from the rollout of our inFoods IBS product in the 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 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 February 29, 2024. As such, our COVID-19 product sales have caused significant swings in our revenues over the last four years. Our newly developed H. pylori diagnostic test is a pivotal addition to our product portfolio, offering vital insights into patients’ H. pylori infection status. This bacterium’s prevalence underscores the critical need for accurate diagnosis, given its potential to precipitate ulcers and, in severe cases, stomach cancers if left untreated. Additionally, on December 18, 2023, we achieved a significant milestone with FDA clearance for the H. pylori diagnostic test, paving the way for its commercialization in the United States. Leveraging this regulatory approval, we have initiated marketing efforts targeting the U.S. market, poised to capitalize on the pressing demand for reliable diagnostic solutions. Furthermore, recognizing the global significance of H. pylori infection, we have initiated discussions with international distributors to expand our market reach beyond U.S. borders. Anticipating traction in both domestic and international markets, we expect a favorable revenue trajectory 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 2024 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 February 29, 2024 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 Increase (Decrease) February 29, 2024 February 28, 2023 $ % Clinical lab $ 404,000 $ 532,000 $ (128,000 ) -24 % Over-the-counter 329,000 292,000 37,000 13 % Contract manufacturing 281,000 284,000 (3,000 ) -1 % Physician’s office 3,000 3,000 - 0 % Total $ 1,017,000 $ 1,111,000 $ (94,000 ) -8 % Consolidated net sales were approximately $1,017,000 for the three months ended February 29, 2024, as compared to $1,111,000 for the three months ended February 28, 2023, a decrease of approximately $94,000, or 8%. This decrease for the three months ended February 29, 2024, was primarily attributed to reduced sales in food intolerance products. Sales in this segment are subject to periodic and infrequent orders, contributing to potential volatility in quarterly sales. Consolidated cost of sales were approximately $1,166,000, or 115% of net sales, for the three months ended February 29, 2024, as compared to $991,000, or 89% of net sales of net sales, for the three months ended February 28, 2023, an increase of approximately $175,000, or 18%. The increase for the three months ended February 29, 2024 was predominantly driven by the complexities of international shipping logistics, rather than fluctuations in material and labor costs associated with our product. 15 Operating Expenses The following is a summary of operating expenses: Three Months Ended February 29, 2024 February 28, 2023 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 1,508,000 148 % $ 1,379,000 124 % $ 129,000 9 % Research and Development $ 343,000 34 % $ 392,000 35 % $ (49,000 ) -13 % Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $1,508,000 for the three months February 29, 2024, as compared to $1,379,000 for the three months ended February 28, 2023, an increase of approximately $129,000, or 9%. For the three months ended February 29, 2024, the increase was primarily driven by the establishment of a new sales force, resulting in a rise in total salaries and marketing expenses amounting to $212,000. However, these increases were partially offset by a decrease in legal expenses of $87,000. Research and Development Consolidated research and development expenses were approximately $343,000 for the three months ended February 29, 2024, as compared to $392,000 for the three months ended February 28, 2023, a decrease of approximately $49,000, or 13%. The reduction in expenses for the three months ended February 29, 2024, was primarily driven by a reduction of salary and compensation costs for the research and development team. Interest and Dividend Income Interest and dividend income were approximately $86,000 for the three months ended February 29, 2024, as compared to $36,000 for the three months ended February 28, 2023, an increase of $50,000, or 139%. The increase was primarily driven by higher market interest rates on our cash and cash equivalents. Nine months ended February 29, 2024 Net Sales and Cost of Sales The following is a breakdown of revenues according to markets to which the products are sold: Nine Months Ended Increase (Decrease) February 29, 2024 February 28, 2023 $ % Clinical lab $ 2,683,000 $ 2,580,000 $ 103,000 4 % Over-the-counter 1,078,000 971,000 107,000 11 % Contract manufacturing 530,000 431,000 99,000 23 % Physician’s office 8,000 249,000 (241,000 ) -97 % Total $ 4,299,000 $ 4,231,000 $ 68,000 2 % Consolidated net sales were approximately $4,299,000 for the nine months ended February 29, 2024, as compared to $4,231,000 for the nine months ended February 28, 2023, an increase of approximately $68,000, or 2%. This increase for the nine months ended February 29, 2024, shows growth across all non-COVID product lines underscoring the Company’s resilience despite the absence of COVID-related sales compared to the previous year. The growth was primarily attributed to an increase in sales of our food intolerance products, EZ Detect, Aware, and contract manufacturing activities. Notably, this growth highlights the effectiveness of our post-pandemic strategic initiatives focusing on our diverse product segments. Consolidated cost of sales were approximately $3,708,000, or 86% of net sales, for the nine months ended February 29, 2024, as compared to $3,814,000, or 90% of net sales, for the nine months ended February 28, 2023, a decrease of approximately $106,000, or 3%. The decrease for the nine months ended February 29, 2024, was primarily driven by a $160,000 decrease in costs associated with reduced sales of our COVID-19 products. 16 Operating Expenses The following is a summary of operating expenses: Nine Months Ended February 29, 2024 February 28, 2023 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 4,204,000 98 % $ 4,589,000 108 % $ (385,000 ) -8 % Research and Development $ 1,226,000 29 % $ 1,215,000 29 % $ 11,000 1 % Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $4,204,000 for the nine months ended February 29, 2024, as compared to $4,589,000 for the nine months ended February 28, 2023, a decrease of approximately $385,000, or 8%. The decrease in the nine months ended February 29, 2024, was primarily driven by reductions of $384,000 in legal expenses, and $330,000 in share-based compensation expenses. Notably, these operating expense reductions were partially offset by investments in key areas of our business. This included an increase in marketing expenses for the recent CVS Pharmacy retail launch and the expansion of our sales team. Despite these increases, overall cost reductions compared to last year demonstrate our focus on strategically allocating our capital and maintaining financial discipline while pursuing growth opportunities. Research and Development Consolidated research and development expenses were approximately $1,226,000 for the nine months ended February 29, 2024, as compared to $1,215,000 for the nine months ended February 28, 2023, an increase of approximately $11,000, or 1%. The increase for the nine months ended February 29, 2024, was primarily driven by salaries and wages of $80,000, partially offset by a decrease in share-based compensation expenses of $32,500 and lab supplies expenses of $22,800. We have taken proactive measures to address the increased expenses in research and development. Over the last three months, we have worked on cost optimization resulting in reductions in salaries and compensation costs of $63,000 per quarter. Interest and Dividend Income Interest and dividend income were approximately $317,000 for the nine months ended February 29, 2024, as compared to $77,000 for the nine months ended February 28, 2023, an increase of $240,000, or 312%. 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: February 29, 2024 May 31, 2023 Cash and cash equivalents $ 5,319,000 $ 9,719,000 Working capital including cash and cash equivalents $ 6,855,000 $ 10,852,000 As of February 29, 2024 and May 31, 2023, the Company had cash and cash equivalents of approximately $5,319,000 and $9,719,000, respectively. As of February 29, 2024 and May 31, 2023, the Company had working capital of approximately $6,855,000 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 or equity financing. Operating Activities During the nine months ended February 29, 2024, cash used in operating activities was approximately $4,317,000. The primary factors that contributed to this was a loss of approximately $4,557,000, non-cash expenses of $723,000, 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 $483,000. 17 During the nine months ended February 28, 2023, cash used in operating activities was approximately $4,511,000. The primary factors that contributed to this were a net loss of approximately $5,348,000, partially offset by non-cash expenses of $1,100,000, primarily associated with stock-based compensation and account receivables provisions. Investing Activities During the nine months ended February 29, 2024, cash used in investing activities was approximately $27,000 for purchases of property and equipment, and $64,000 in expenditures related to patents. During the nine months ended February 28, 2023, cash used in investing activities was approximately $64,000 for purchases of property and equipment. Financing Activities During the nine months ended February 29, 2024, cash provided by financing activities was $0, with no net proceeds from the sale of common stock or from stock option exercises. During the nine months ended February 28, 2023, cash provided by financing activities was approximately $2,040,000 which was a result of net proceeds from the sale of common stock of $1,961,000, and stock option exercises of $79,000. OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of February 29, 2024. 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, credit losses, inventory overhead application, inventory reserves, right-of-use assets and lease liabilities and share-based compensation. 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.