BIOMERICA INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our consolidated financial statements and the accompanying notes thereto included in Part II, Item 8 of this 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 this Report. OVERVIEW Biomerica, Inc. and its subsidiaries (which includes wholly-owned subsidiaries, Biomerica de Mexico and BioEurope GmbH), is a global biomedical technology company that develops, patents, manufactures and markets advanced diagnostic and therapeutic products. 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. 23 Our extensive range of medical diagnostic products is sold worldwide, primarily in two markets: clinical laboratories and point-of-care settings, including physicians’ offices and over-the-counter sales at major retailers such as Walmart, CVS Pharmacy, and Amazon. Our diagnostic test kits analyze blood, urine, nasal, or fecal specimens from patients to diagnose various diseases, food intolerances, and other medical conditions. They measure or detect the presence and levels of specific bacteria, hormones, antibodies, antigens, and other substances in the body, often in extremely small concentrations. Most of our products are Conformite Europeenne (“ CE”) marked and/or registered with regulatory agencies in various countries for diagnostic use, with several also cleared for sale in the United States by the FDA. Due to the global SARS-CoV-2 novel coronavirus (“COVID-19”) pandemic, we began developing, marketing, and selling COVID-19 diagnostic tests in March 2020. We started selling these tests in fiscal 2021, generating significant revenues during fiscal 2021 and 2022. However, we experienced a substantial drop in sales in fiscal 2023, followed by no sales of our COVID-19-related products in fiscal 2024 due to falling demand. Consequently, our COVID-19 product sales have caused significant fluctuations in our revenues over the past four years. In contrast, our non-COVID-19 products, which accounted for approximately 100% and 96% of our revenues during the fiscal years ended May 31, 2024, and 2023, respectively, and have been our core focus. Technological advances in medical diagnostics have enabled diagnostic tests to be performed not only in clinical laboratories but also at home and at the point-of-care in physicians’ offices. One of our key objectives has been to develop and market rapid diagnostic tests that are accurate, utilize easily obtained patient specimens, and are simple to perform without the need for complex instrumentation. Our over-the-counter (home use) and professional use (physicians’ office, clinics, etc.) rapid diagnostic test products help manage existing medical conditions and may save lives through early detection and diagnosis of specific diseases. Traditionally, such tests required the expertise of medical technologists and sophisticated equipment, with results often not available for days. We believe that rapid point-of-care tests, when properly developed and used, can be as accurate as laboratory tests. They require limited to no instrumentation, deliver reliable results in minutes, and can be performed with confidence in the home or physician’s office. We invest considerable resources in the research and development of new products designed to diagnose and, in some cases, treat several major medical diseases. These products are both internally developed and obtained licensed from others. Our experienced and highly trained technical personnel, including Ph.D. holders and other scientists, are dedicated to developing new products and managing technology transfer activities. Our technical staff, many of whom have extensive experience from previous employment at large diagnostic manufacturing companies, bring a wealth of industry knowledge. Additionally, we rely on our Scientific Advisory Board, comprised of leading medical doctors and clinicians, to guide our clinical studies and product development efforts. A key outcome of our recent research and development efforts is our patented diagnostic-guided therapy (“DGT”) product, developed on the inFoods ® technology platform. This innovative product is designed to treat gastrointestinal conditions such as irritable bowel syndrome (“IBS”) and other inflammatory diseases, targeting chronic inflammatory illnesses that are widespread and prevalent in large markets. We have launched the inFoods ® IBS product, which leverages this patented technology. The inFoods® IBS product utilizes a simple blood test to identify patient-specific foods that, when eliminated from the diet, may alleviate IBS symptoms such as pain, bloating, diarrhea, cramping, and constipation. Unlike broad and difficult-to-manage dietary restrictions, the inFoods® IBS product pinpoints a patient’s heightened immunoreactivity to specific foods known to frequently trigger IBS symptoms. By removing the foods identified as problematic, patients can achieve relief from their IBS symptoms. We have launched our inFoods® product across numerous gastroenterology (“GI”) physician groups in various states and regions, including collaboration with one of the largest GI groups in the U.S. Feedback from GI specialty physicians have generally been positive, and we are actively expanding our network by onboarding additional physician practices. These GI practices are beginning to prescribe inFoods® IBS to their patients. Our dedicated sales team is deepening relationships within the GI segment and strategically targeting opportunities to introduce inFoods® to other medical specialties. By leveraging their expertise and building strong partnerships, our sales team is now working to engage with key physician groups outside the GI field such as integrated health practices and primary-care general practitioners. These efforts aim to broaden our market reach and enhance the overall adoption of inFoods® across various healthcare sectors and to capitalize on the distinct advantages of inFoods® for a strong foundation of meaningful growth in the future. We are also continuing to evaluate distribution, partnership and licensing opportunities with U.S. and multinational companies, which have the potential to significantly aid in the commercialization and accelerated growth of inFoods® products both domestically and internationally. 24 Beyond our inFoods ® product line, our additional efforts have led to a significant milestone by receiving FDA clearance in December 2023 for hp+detect ™ , a new diagnostic test for detecting Helicobacter pylori (“H. pylori”) bacteria in the gastrointestinal tract. H. pylori is a widespread infection, affecting an estimated 35% of the U.S. population and 45% of the population in Europe’s five largest countries. This bacterium is recognized as the strongest known risk factor for gastric cancer, which is the third most common cause of cancer-related deaths globally. The hp+detect ™ test provides physicians and medical centers with a reliable tool for diagnosing H. pylori infections and monitoring the effectiveness and safety of treatments. The diagnostic test is marketed directly to laboratories, where patient samples are analyzed, and diagnoses are made. To support the launch and distribution of hp+detect ™ , we are actively promoting the test to large end-customer labs. This strategic initiative aims to enhance patient care by enabling timely and accurate detection of H. pylori infections. Due to slower-than-expected launch of the Company’s key products, inFoods ® IBS and hp+detect ™ , the Company has initiated significant cost-cutting measures to extend its cash runway and work towards increasing revenues to cover overhead costs. These measures include a workforce reduction of nearly 15%. In addition, the Company is actively exploring strategic opportunities to enhance and create shareholder value. 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: Year Ended May 31, Increase (Decrease) 2024 2023 $ % Clinical lab $ 3,236,000 $ 3,310,000 $ (74,000 ) -2 % Over-the-counter 1,426,000 1,169,000 257,000 22 % Contract manufacturing 741,000 610,000 131,000 21 % Physician’s office 12,000 250,000 (238,000 ) -95 % Total $ 5,415,000 $ 5,339,000 $ 76,000 1 % For fiscal 2024, our net sales were approximately $5,415,000, representing an increase of $76,000, or 1%, compared to $5,339,000 for fiscal 2023. When comparing fiscal 2024 net sales excluding COVID-19 test sales from fiscal 2023, there is an increase of $290,000, or 5%. This growth was primarily attributable to the $257,000 increase in OTC Product sales that were within the UAE market, reflecting stronger demand and expanded distribution channels in the region. Additionally, a $131,000 increase in revenues from Contract Manufacturing projects contributed positively to our overall sales performance. These increases were partially offset by a $214,000 decline in sales of COVID-19 tests as the global pandemic situation stabilized. Consolidated cost of sales for fiscal 2024 was approximately $4,804,000, or 89% of net sales, compared to $4,893,000, or 92% of net sales, for fiscal 2023, reflecting a slight decrease of $89,000, or 2%. The decrease was primarily driven by a $171,000 reduction due to the absence of COVID-related sales. However, this decline was partially offset by a $32,000 increase in OTC product costs and a $56,000 rise in contract manufacturing costs, reflecting higher sales in both categories during fiscal year 2024. Operating Expenses The following is a summary of operating expenses: Year Ended May 31, 2024 2023 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 5,487,000 101 % $ 6,085,000 114 % $ (598,000 ) -10 % Research and Development $ 1,491,000 28 % $ 1,584,000 30 % $ (93,000 ) -6 % 25 Selling, General and Administrative Expenses Our selling, general, and administrative expenses were approximately $5,487,000 for fiscal 2024, compared to $6,085,000 for fiscal 2023, a decrease of $598,000, or 10%. The reduction in fiscal 2024 was primarily due to decreases of $822,000 in legal expenses, $399,000 in bad debt expenses, and $247,000 in share-based compensation. These significant operating expense reductions were partially offset by strategic investments in key areas of our business, including a $535,000 expansion of our sales team, a $136,000 increase in sales commission expenses, and a $171,000 increase in outside services for sales and administration. Despite these increases, the overall cost reductions from the previous year underscore our commitment to strategically allocating capital and maintaining financial discipline while pursuing growth opportunities. Research and Development Our research and development expenses were approximately $1,491,000 for fiscal 2024 compared to $1,584,000 for fiscal 2023, a decrease of $93,000, or 6%. The decrease in fiscal 2024 was primarily driven by a reduction in share-based compensation expenses, which decreased by $45,000, and cost optimizations in our inFoods ® R&D projects, resulting in savings of $47,000. For a detailed discussion of our ongoing research initiatives and their potential market impacts, please refer to the ‘Research and Development’ section in Item 1. Dividend and Interest income Dividend and interest income for fiscal 2024 and 2023 was approximately $431,000 and $133,000, respectively. The $298,000 increase was primarily driven by higher market interest rates on our cash and cash equivalents. LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN The following are the principal sources of liquidity: Year Ended May 31, 2024 2023 Cash and cash equivalents $ 4,170,000 $ 9,719,000 Working capital including cash and cash equivalents $ 5,527,000 $ 10,852,000 As of May 31, 2024 and 2023, the Company had cash and cash equivalents of approximately $4,170,000 and $9,719,000, respectively. As of May 31, 2024 and 2023, the Company had working capital of approximately $5,527,000 and $10,852,000, respectively. The Company’s ability to continue as a going concern over the next twelve months is influenced by several factors, including: ● Our need and ability to generate additional revenue from international opportunities and our new product launches; ● Our need to access the capital and debt markets to meet current obligations and fund operations; ● Our capacity to manage operating expenses and maintain gross margins as we grow; and ● Our ability to retain key employees and maintain critical operations with a substantially reduced workforce. Management has analyzed the Company’s cash flow requirements through August 2025 and beyond. Based on this analysis, we believe our current cash and cash equivalents are insufficient to meet our operating cash requirements and strategic growth objectives for the next twelve months. To address our capital needs and sustain operations beyond the next year, we are actively pursuing strategies to increase sales, reduce expenses, sell non-core assets, seek additional financing through debt or equity, and seek other strategic alternatives. As part of our efforts to reduce costs, we have initiated significant cost-cutting measures to extend our cash runway and work towards increasing revenues to cover overhead costs. These measures include a workforce reduction of nearly 15% and a substantial reduction in other operating expenses. As part of our financing plan, on September 28, 2023, we filed a “shelf” registration statement on Form S-3 with the SEC, allowing the Company to issue up to $20,000,000 in common shares. Under this registration statement, shares of our common stock may be sold from time to time for up to three years from the filing date. On May 10, 2024, the Company filed a prospectus supplement with the SEC, as part of the registration statement filed on September 28, 2023, which was declared effective on September 29, 2023. This supplement was intended to facilitate the sale of up to $5,500,000 in common stock through ATM offerings, as defined in Rule 415 under the Securities Act. As part of this transaction, the Company incurred $81,000 in deferred offering costs. The amount of capital that we can raise under the ATM offering is highly dependent upon the trading volume and the trading price of our stock. The average trading volume of our stock over the last three full calendar months is approximately 229,000 shares per day and the high and low trading price of our stock during the same period of time was $1.25 and $0.50, respectively. If our stock continues to trade at low volumes and price, the amount of capital that we can raise under the ATM offering will be constrained. The Company intends to use the net proceeds from this offering for general corporate purposes, including, but not limited to, sales and marketing activities, clinical studies and product development, acquisitions of assets, businesses, companies, or securities, capital expenditures, and working capital needs. While we are committed to these plans, there is no assurance that these efforts will be successful or sufficient to meet our capital requirements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Our future viability depends on the successful execution of our strategic plans, securing additional financing, and achieving profitable operations. In addition, our business is subject to additional risks and uncertainties, including, but not limited to, those described in Item 1A. “Risk Factors”. 26 Operating Activities During fiscal 2024, cash used in operating activities was approximately $5,361,000, compared to $5,474,000 for fiscal 2023. The primary factors contributing to this were a loss of approximately $5,978,000, a decrease in inventory reserves of $205,000, an increase in accounts receivable of $215,000, an increase in inventories of $115,000 and a decrease in lease liability of $297,000. These were partially offset by an increase in accounts payable and accrued expenses of $246,000, and non-cash expenses of approximately $1,211,000. During fiscal 2023, cash used in operating activities was approximately $5,474,000. The primary factors that contributed to this were a loss of approximately $7,140,000, an increase in accounts receivable of $291,000, a decrease in inventory reserves of $174,000, and a decrease in accounts payable and accrued expenses of $80,000 and a decrease in lease liability of $297,000. These were partially offset by an increase in the allowance on accounts receivable of $342,000, a decrease in inventories of $534,000, and non-cash expenses of approximately $1,536,000. Investing Activities During fiscal 2024, cash used in investing activities was approximately $115,000, as compared to $78,000 for fiscal 2023. During fiscal 2024, the Company purchased approximately $51,000 of property and equipment and had $64,000 in expenditures related to patents. During fiscal 2023, the Company purchased approximately $64,000 of property and equipment and had $14,000 in expenditures related to patents. Financing Activities Cash used in financing activities for fiscal 2024 was approximately $81,000, compared to cash provided by financing activities of $9,390,000 in fiscal 2023. In fiscal 2024, the Company did not receive any proceeds from the exercise of stock options, whereas in fiscal 2023, the Company received approximately $81,000 from such exercises. During fiscal 2024 and 2023, the Company received approximately $0 and $9,309,000, respectively, in net proceeds from the sale of common stock. The common stock sold and issued in fiscal 2023 was issued under the Company’s shelf registration statement filed with the SEC on July 21, 2020 (the “2020 Shelf Registration Statement”) and declared effective by the SEC on September 30, 2020, and under the prospectus supplement filed with the SEC on January 22, 2021 (“2021 Prospectus Supplement”), and the prospectus supplement filed in conjunction with the Company’s underwritten public offering of common shares on March 7, 2023 (the “2023 Prospectus Supplement”) (See Shareholders’ Equity in the notes to the consolidated financial statements for further details about SEC registration statements). The 2020 Shelf Registration Statement registers common shares that may be issued by the Company in a maximum aggregate amount of up to $90,000,000. On January 22, 2021, we filed the 2021 Prospectus Supplement for the sale of up to $15,000,000 of shares of our common stock in an at-the-market offering under the 2020 Shelf Registration Statement, of which $5,290,000 was issued through March 7, 2023. In March 2023, we terminated the at-the-market offering and sold 3,333,333 shares of our common stock in a firm commitment public offering under the 2020 Shelf Registration Statement at a price to the public of $2.40 per share, for total gross proceeds of $8,000,000, before deducting underwriting discounts and commissions and other offering-related expenses payable by the Company. As of August 28, 2024, the date on which this Annual Report on Form 10-K for the fiscal year ended May 31, 2024, is filed with the SEC, our 2023 Registration Statement remains subject to the offering limits set forth in General Instruction I.B.6 of Form S-3 because our public float is less than $75 million. For so long as the Company’s public float is less than $75 million, the aggregate market value of securities sold by the Company under the 2023 Shelf Registration Statement pursuant to Instruction I.B.6 to Form S-3 during any 12 consecutive months may not exceed one-third of the Company’s public float. We have not sold any of our common stock pursuant to General Instruction I.B.6 of Form S-3 in the 12 calendar months preceding the date of filing this Annual Report on Form 10-K. For purposes of this limitation, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was $7,037,587, based on 15,639,082 non-restricted shares of our outstanding common stock held by non-affiliates and a price of $0.45 per share, which was the price at which our common stock was last sold on the Nasdaq Capital Market on July 2, 2024 (a date within 60 days of the date hereof), calculated in accordance with General Instruction I.B.6 of Form S-3. After giving effect to the $2,345,862 offering limit imposed by General Instruction I.B.6 of Form S-3, and after deducting the shares we sold within the preceding 12 months, as of the date of filing this Annual Report, we may sell $2,345,862 shares of our common stock at this time under the 2023 Shelf Registration Statement. 27 SUBSEQUENT EVENTS As part of our ongoing efforts to reduce costs, we have implemented significant cost-cutting measures, including a workforce reduction of nearly 15% in July 2024. OFF BALANCE SHEET ITEMS There were no off-balance sheet arrangements as of May 31, 2024. CRITICAL ACCOUNTING ESTIMATES 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, inventory overhead application, inventory reserve 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 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 of the Company’s consolidated financial statements for information on Significant Accounting Policies. REVENUE RECOGNITION The Company has various contracts with customers, and these contracts specify the recognition of revenue based on the nature of the transaction. Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, which is when the transfer of control of goods has occurred and title passes. This applies to clinical lab products sold to domestic and international distributors, including hospitals, clinical laboratories, medical research institutions, medical schools, and pharmaceutical companies. OTC products are sold directly to drug stores, e-commerce customers, and distributors, while physicians’ office products are sold to physicians and distributors. The Company does not allow for returns except in the event of defective merchandise and, therefore, does not establish an allowance for returns. Additionally, the Company has contracts with customers that provide purchase discounts for achieving specified sales volumes. The Company regularly evaluates the status of these contracts and does not believe any discounts will be given through the end of the contract periods. For diagnostic testing services sold directly to patients or physician offices that require processing by a third-party CLIA-certified lab, we recognize revenue once the lab has completed the test results. For services related to contract manufacturing, revenue is recognized when the service has been performed. Services for some contract work are invoiced and recognized as the project progresses. 28 SHARE-BASED COMPENSATION The Company follows the guidance of ASC 718, Share-based Compensation (“ASC 718”), which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (options). The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses assumptions for expected volatility, expected dividends, expected forfeiture rate, expected term, and the risk-free interest rate. The Company has not paid dividends historically and does not expect to pay them in the foreseeable future. Expected volatilities are based on weighted averages of the historical volatility of the Company’s common stock estimated over the expected term of the options. The expected forfeiture rate is based on historical forfeitures experienced. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term as historically the Company had limited exercise activity surrounding its options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The grant date fair value of the award is recognized under the straight-line attribution method. VALUATION OF INVENTORIES, NET Our inventories are made up of raw materials, work in progress, and finished goods and are valued at the lower of cost (determined using a combination of specific lot identification and the first-in, first-out methods) or net realizable value. We record valuation reserves for inventory items with excess quantities and obsolescence exposure. These reserves are estimates of a reduction in value to reflect inventory valuation at the lower of cost or net realizable value. Management evaluates quantities on hand, physical condition, and technical functionality as these characteristics may be impacted by anticipated customer demand for current products and new product introductions. Our inventory valuation reserves totaled $467,000 and $672,000 as of May 31, 2024 and 2023, representing approximately 16% and 25% of our inventory, respectively. RECENT ACCOUNTING PRONOUNCEMENTS Recent ASU’s issued by the FASB and guidance issued by the SEC did not, or are not believed by the management to, have a material effect on the Company’s present or future consolidated financial statements. In June 2016, the FASB issued ASU 2016-13. This ASU requires the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance was initially effective for the Company for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which, among other things, defers the effective date of ASU 2016-13 for public filers that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company adopted ASU 2016-03 on June 1, 2023, and the adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements. In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, “Improvements to Reportable Segment Disclosures.” The ASU includes enhanced disclosure requirements, primarily related to significant segment expenses that are regularly provided to and used by the chief operating decision maker (“CODM”). The amendments are to be applied retrospectively to all prior periods presented in the financial statements. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. We are currently evaluating the effect of adopting this pronouncement on our financial statements and disclosures. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The ASU includes enhanced disclosure requirements, primarily related to the rate reconciliation and income taxes paid information. The amendments are to be applied prospectively in the financial statements. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the effect of adopting this pronouncement on our financial statements and disclosures. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required.