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 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 biomedical technology company that develops, patents, manufactures and markets advanced diagnostic and therapeutic products used at the point-of-care (in home and physicians' offices) and in hospital/clinical laboratories for detection and/or treatment of medical conditions and diseases . 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 and development of revolutionary, patented, diagnostic-guided therapy, or DGT, products to treat gastrointestinal diseases, such as irritable bowel syndrome, and other inflammatory diseases. These products are directed at chronic inflammatory illnesses that are widespread and common, and as such address very large markets. If these DGT products prove effective in their clinical trials, and are ultimately cleared for sale by the U.S. Food and Drug Administration, we believe the revenues potential to the Company is significant. We are currently finalizing an endpoint determination clinical trial on our InFoods ® IBS product. This trial is and has been 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 trial monitors IBS patients over an 8-week period to determine the efficacy of our InFoods® IBS product to improve the patients’ IBS symptoms. We have completed the trial, and we expect top-line trial results to be reported at or around the end of January 2022 . During the next six months, we also expect to be entertaining partnership/licensing discussions with pharmaceutical and technology companies that could help us commercialize the product, including assisting with obtaining final FDA clearance. Our medical diagnostic products are sold worldwide primarily in two markets: 1) clinical laboratories and 2) point-of-care (physicians' offices and over-the-counter drugstores like Walmart and Walgreens). 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. While the Company does offer a COVID-19 antibody diagnostic test, all of our COVID-19 revenues in fiscal 2022 have come from international sales of our antigen tests that use a patient’s nasal fluid sample to detect if the patient is currently infected with the virus. These COVID-19 antigen tests have accounted for approximately 60% of our revenues during the first six months of fiscal 2022. The other products we sell 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 U.S. by the FDA. 14 Table of Contents While sales continue to occur in our COVID-19 products, the majority of our research and development efforts are focused on development and commercialization of non-COVID related products such as our H. Pylori product, and our InFoods® IBS product. We also recently added several new employees in our sales and marketing department in order to increase sales of existing products during fiscal 2022. Through these efforts, our EZ Detect colon disease home screening test is seeing a significant increased interest from retailers such as Walmart, distributors, and screening programs in other countries. RESULTS OF OPERATIONS As disclosed in Note 8 of Item 1 to these unaudited condensed consolidated financial statements, during the fiscal quarter ended November 30, 2021, we determined that our calculation of non-cash stock-based compensation expense related to issued stock options in previously issued financial statements was incorrect. Our calculation applied forfeiture adjustments to both vested and unvested outstanding options, including those for which the employee had provided the requisite service, which resulted in an understatement of stock compensation expense. Additionally, our calculation expensed the option at vesting dates versus pro rata over the period the requisite service was provided. These errors resulted in an understatement of stock compensation expense during the six months ended November 30, 2020, and periods prior to May 31, 2020, resulting in a cumulative adjustment to equity accounts. As a result, our previously issued financial statements for the six months ended November 30, 2020 have been restated. Three months ended November 30, 2021 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) 2021 2020 $ % Physician's office $ 3,359,000 $ 153,000 $ 3,206,000 2095% Clinical lab 642,000 893,000 (251,000) -28% Over-the-counter 534,000 272,000 262,000 96% Contract manufacturing 112,000 55,000 57,000 104% Total $ 4,647,000 $ 1,373,000 $ 3,274,000 238% Consolidated net sales were approximately $4,647,000 for the three months ended November 30, 2021, as compared to $1,373,000 for the three months ended November 30, 2020. This represents an increase of approximately $3,274,000 or 238%. The increase for the three months ended November 30, 2021, as compared to the three months ended November 30, 2020, was primarily due to the sale of our COVID-19 product to distributors in Asia and Europe. Consolidated cost of sales was approximately $3,875,000 or 83% of net sales, for the three months ended November 30, 2021, as compared to $1,064,000 or 78% of net sales, for the three months ended November 30, 2020. This represents an increase of approximately $2,811,000 or 264%. The increase for the three months ended November 30, 2021, as compared to the three months ended November 30, 2020, was primarily due to the sale of our COVID-19 product to distributors in Asia and Europe. Operating Expenses The following is a summary of operating expenses: Three Months Ended November 30, 2021 2020 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 1,282,998 28% $ 1,404,846 102% $ (121,848) -9% Research and Development $ 618,522 13% $ 616,561 45% $ 1,961 0% Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $1,283,000 for the three months ended November 30, 2021, as compared to $1,405,000 for the three months ended November 30, 2020. This represents a decrease of approximately $122,000 or 9%. The decrease in the three months ended November 30, 2021, was primarily due to a reduction of legal expense and bad debt expense. 15 Table of Contents Research and Development Consolidated research and development expenses were approximately $619,000 for the three months ended November 30, 2021, as compared to $617,000 for the three months ended November 30, 2020. This represents an increase of approximately $2,000 or 0%. Interest Income Interest and dividend income were $6,916 for the three months ended November 30, 2021, as compared to $7,983 for the three months ended November 30, 2020. This represents a decrease of $1,067 or 13%. Six months ended November 30, 2021 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) 2021 2020 $ % Physician's office $ 3,616,000 $ 351,000 $ 3,265,000 930% Clinical lab 1,528,000 1,475,000 53,000 4% Over-the-counter 613,000 457,000 156,000 34% Contract manufacturing 152,000 233,000 (81,000) -35% Total $ 5,909,000 $ 2,516,000 $ 3,393,000 135% Consolidated net sales were approximately $5,909,000 for the six months ended November 30, 2021, as compared to $2,516,000 for the six months ended November 30, 2020. This represents an increase of approximately $3,393,000 or 135%. The increase for the six months ended November 30, 2021, as compared to the six months ended November 30, 2020, was primarily due to the sale of our COVID-19 product to distributors in Asia and Europe. Consolidated cost of sales was approximately $5,226,000 or 88% of net sales, for the six months ended November 30, 2021, as compared to $2,090,000 or 83% of net sales, for the six months ended November 30, 2020. This represents an increase of approximately $3,136,000 or 150%. The increase for the six months ended November 30, 2021, as compared to the six months ended November 30, 2020, was primarily due to the sale of our COVID-19 product to distributors in Asia and Europe. Operating Expenses The following is a summary of operating expenses: Six Months Ended November 30, 2021 2020 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 2,294,533 39% $ 2,710,790 108% $ (416,257) -15% Research and Development $ 1,058,386 18% $ 1,328,066 53% $ (269,680) -20% Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $2,295,000 for the six months ended November 30, 2021, as compared to $2,711,000 for the six months ended November 30, 2020. This represents a decrease of approximately $416,000 or 15%. The decrease in the six months ended November 30, 2021, was primarily due to a reduction of legal expense and bad debt expense. Research and Development Consolidated research and development expenses were approximately $1,058,000 for the six months ended November 30, 2021, as compared to $1,328,000 for the six months ended November 30, 2020. This represents a decrease of approximately $270,000 or 20%. The decrease in the six months ended November 30, 2021, was primarily a result of decreases in costs related to the research, development, and validation of COVID-19 tests. 16 Table of Contents Interest Income Interest and dividend income were $13,721 for the six months ended November 30, 2021, as compared to $16,074 for the six months ended November 30, 2020. This represents a decrease of $2,353 or 15%. LIQUIDITY AND CAPITAL RESOURCES The following are the principal sources of liquidity: November 30, 2021 May 31, 2021 Cash and cash equivalents $ 7,199,172 $ 4,199,311 Working capital including cash and cash equivalents $ 7,662,477 $ 7,930,687 As of November 30, 2021 and May 31, 2021, we had cash and cash equivalents of approximately $7,199,000 and $4,199,000, respectively, and working capital of approximately $7,662,000 and $7,931,000, respectively. As a result of cash and cash equivalents on hand at November 30, 2021, and our ability to raise additional funds through our ATM Agreement, management believes we have sufficient funds to operate through the next twelve months or more. Operating Activities Cash provided by operating activities of approximately $1,419,000 during the six months ended November 30, 2021, reflects a net loss of approximately $2,668,000 and non-cash adjustments of $201,000 primarily associated with depreciation, amortization, stock-based compensation, adjustments to allowance for doubtful accounts, and inventory reserves. In addition, we realized an increase in net working capital of approximately $3,886,000 primarily driven by an increase in advance from customers, and decrease in accounts receivable. For the six months ended November 30, 2020, cash used by operating activities of approximately $2,880,000 reflects a net loss of $3,610,000 and non-cash adjustments of $1,102,000 primarily associated with depreciation, amortization, stock-based compensation, and inventory reserves. The non-cash adjustments were partially offset by a decline in net working capital of approximately $371,000 driven by an increase in inventory, which was partially offset by a decrease in prepaid expenses. Investing Activities Cash used in investing activities for the six months ended November 30, 2021, was approximately $18,000 for purchases of property and equipment and $109,000 for increased intangibles. Cash used in investing activities for the six months ended November 30, 2020, was approximately $62,000 for purchases of property and equipment and $62,000 for increased intangibles. Financing Activities Cash provided by financing activities for the six months ended November 30, 2021, was approximately $1,719,000 which was a result of stock option exercises of $35,000 and net proceeds from the sale of common stock of $1,684,000. Cash provided by financing activities for the six months ended November 30, 2020, was approximately $49,000 which was a result of stock option exercises of $49,000. OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of November 30, 2021. CRITICAL ACCOUNTING POLICIES The preparation of condensed 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. 17 Table of Contents 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, accounts receivable reserves, inventory valuation, lease liabilities, right-of-use assets, and stock- 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. See Note 2 to these Financial Statements 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 and are not required to provide the information under this item.