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, 2024 (our 2024 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 of operations 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 2024 Annual Report. OVERVIEW We are 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 . They can also be used to measure or detect the presence and levels of specific bacteria, hormones, antibodies, antigens and other substances, which may exist in the human body in extremely small concentrations. Our products are designed to enhance the health and well-being of people, while reducing total healthcare costs. 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. 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 by the FDA for sale in the United States. 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 home use (over-the-counter) 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 our rapid point-of-care tests, when properly used, can be as accurate as laboratory tests. Our products require limited to no instrumentation, deliver reliable results in minutes, and can be performed with confidence at home or in a physician’s office. We invest resources in the research and development of new products designed to diagnose and, in some cases, treat several major medical diseases. These products are either internally developed or 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 from 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. The DGT product targets 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. 13 We 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. Beyond the inFoods® product line, the Company has achieved a significant milestone with the development of hp+detect™, a diagnostic test designed to detect Helicobacter pylori (“H. pylori”) bacteria in the gastrointestinal tract. H. pylori is a prevalent infection, affecting approximately 35% of the U.S. population and 45% of the population in Europe’s largest countries. This bacterium is the strongest known risk factor for gastric cancer, which remains one of the leading causes of cancer-related deaths worldwide. The hp+detect™ test offers physicians and medical centers a reliable tool for diagnosing H. pylori infections and monitoring treatment efficacy. The test is marketed directly to laboratories, where patient samples are processed to provide timely and accurate diagnoses. To support the widespread adoption and distribution of hp+detect™, the Company is actively engaging with large reference laboratories, aiming to improve patient outcomes through early detection and effective treatment of H. pylori infections. Due to the 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% during this fiscal quarter, which incurred one-time labor costs such as severance, impacting typical cost trends and margins. 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: Three Months Ended Increase (Decrease) August 31, 2024 August 31, 2023 $ % Clinical lab $ 1,278,000 $ 1,289,000 $ (11,000 ) -1 % Over-the-counter 187,000 303,000 (116,000 ) -38 % Contract manufacturing 339,000 117,000 222,000 190 % Physician’s office 3,000 4,000 (1,000 ) -25 % Net Sales $ 1,807,000 $ 1,713,000 $ 94,000 5 % For the three months ended August 31, 2024, consolidated net sales reached approximately $1,807,000, compared to $1,713,000 for the same period in 2023, representing an increase of $94,000, or 5%. This growth was largely driven by a $222,000 increase in higher demand from new and existing customers as well as new contract manufacturing agreements. However, over-the-counter (“OTC”) sales in the retail market declined by $116,000. In 2023, OTC sales benefited from the rollout of our products with CVS, which included large upfront orders. Additionally, this quarter’s performance was impacted by timing delays in clinical lab orders from our distributor in Asia. For the three months ended August 31, 2024, consolidated cost of sales amounted to approximately $1,518,000, or 84% of net sales, compared to $1,301,000, or 76% of net sales, for the same period in 2023, representing an increase of $217,000, or 17%. A key driver of the cost increase was directly correlated to the growth in contract manufacturing sales. Additionally, direct labor costs were significantly impacted by one-time severance expenses related to the reduction in force (“RIF”) executed in July, which elevated labor costs and negatively impacted gross margins. Gross margin was negatively impacted by 12% by the one-time RIF expenses within the fiscal quarter. Excluding these RIF-related costs, gross margins are consistent with the prior period. Operating Expenses The following is a summary of operating expenses: Three Months Ended August 31, 2024 2023 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 1,360,000 75 % $ 1,172,000 68 % $ 188,000 16 % Research and Development $ 297,000 16 % $ 472,000 28 % $ (175,000 ) -37 % Selling, General and Administrative Expenses For the three months ended August 31, 2024, consolidated selling, general, and administrative expenses were approximately $1,360,000, compared to $1,172,000 for the same period in 2023, reflecting an increase of $188,000, or 16%. This increase was primarily driven by one-time severance expenses related to the July RIF and introduction of a sales force, which did not exist in the prior year. The new sales team added $146,000 in additional costs compared to the prior period. Legal expenses also rose by $64,000, as the prior year benefited from a one-time discount on legal fees related to settlement work. Excluding this discount, legal spending would have been consistent with historical levels. Research and Development For the three months ended August 31, 2024, consolidated research and development (“R&D”) expenses totaled approximately $297,000, representing a decrease of 37% from $472,000 in the same period of 2023. This $175,000 reduction was primarily driven by an $86,000 decline in R&D wages resulting from the one-time severance expenses associated with the RIF executed in July. In line with the Company’s strategic initiatives for cost-cutting measures, several clinical trials were reduced, resulting in decreased expenditures. Additionally, with the commercialization of inFoods® IBS, there has been a deliberate reduction in R&D allocations to this area, contributing to an overall decrease of $80,000 in related expenses. Interest and Dividend Income For the three months ended August 31, 2024, interest and dividend income totaled approximately $56,000, compared to $123,000 for the corresponding period in 2023, representing a decrease of $67,000, or 54%. This reduction was primarily attributable to lower market interest rates affecting our lower cash balances, which had decreased by August 31, 2024. 14 LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN The following are the principal sources of liquidity: August 31, 2024 May 31, 2024 Cash and cash equivalents $ 2,820,000 $ 4,170,000 Working capital including cash and cash equivalents $ 4,294,000 $ 5,527,000 As of August 31, 2024 and May 31, 2024, the Company had cash and cash equivalents of approximately $2,820,000 and $4,170,000, respectively. As of August 31, 2024 and May 31, 2024, the Company had working capital of approximately $4,294,000 and $5,527,000, 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 November 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. While we are committed to these plans, there is no assurance that these efforts will be successful or sufficient to meet our capital requirements. 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% in July 2024 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 Securities and Exchange Commission (“SEC”), which was declared effective on September 29, 2023, allowing us 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 we filed a prospectus supplement with the SEC to facilitate the sale of up to $5,500,000 in common stock through at-the-market (“ATM”) offerings, as defined in Rule 415 under the Securities Act. As part of this transaction, we 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 83,068 shares per day and the high and low trading price of our stock during the same period of time was $0.59 and $0.28, 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. We intend to use the net proceeds from the ATM 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 our 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. Operating Activities During the three months ended August 31, 2024, cash used in operating activities was approximately $1,344,000. The primary factors that contributed to this were a loss of approximately $1,316,000, an increase in accounts receivable of $616,000, and a decrease in lease liability of $78,000. These were partially offset by a decrease in inventories of $429,000, a decrease in prepaid expenses and other of $106,000, and non-cash expenses of approximately $191,000 . 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. Investing Activities During the three months ended August 31, 2024, we did not acquire any new property, equipment, or patents. 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, we purchased approximately $21,000 of property and equipment and had $42,000 in expenditures related to patents. 15 Financing Activities During the three months ended August 31, 2024, and 2023, the Company did not have any cash provided by financing activities, with no net proceeds from the sale of common stock or stock option exercises. OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of August 31, 2024. CRITICAL ACCOUNTING POLICIES AND 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 may affect the reported amounts of revenues and expenses during the reporting period. We evaluate and base our estimates and assumptions on historical experience and various other factors and circumstances that we believe to be reasonable. Different assumptions or conditions may cause actual results to differ materially from these estimates. We continue to monitor significant estimates made during the preparation of our financial statements. 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. There have been no significant changes to our critical accounting policies from those disclosed in our 2024 Annual Report. 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. 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, as amended (the “Exchange Act”) and are not required to provide the information under this item.