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 revenue potential to the Company is significant. We recently 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 trial monitored IBS patients over an 8-week period to determine the efficacy of our InFoods® IBS product to improve the patients’ IBS symptoms. The top-line trial results were reported in February 2022. Multiple endpoints demonstrated statistically significant improvements, indicating that the elimination of specific foods may meaningfully reduce the symptoms of IBS in all patient subtypes (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 to determine the symptom endpoint, or endpoints to be used in a final pivotal trial that will be conducted to attain the validation data needed to apply for FDA clearance for the product. We are now in the process of reviewing the complete data-set and selecting the target endpoint(s) to be used in the pivotal trial. We are also writing the protocols for this trial and expect to present these protocols to the FDA over the next several months, with the intention of beginning the trial in calendar year 2022. The trial is expected to include the large medical institution participants that conducted the endpoint trial, in addition to other new institutions and a Clinical Research Organization. We are also beginning the work of selecting and validating at least 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 seeking FDA clearance of the diagnostic guided therapy. We will also continue to evaluate partnership/licensing opportunities, as they arise, with U.S and multinational companies that could help us commercialize the InFoods products in the U.S and overseas. 14 Table of Contents Our existing 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, or is currently infected. 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 COVID-19 antigen tests that use a patient’s nasal fluid sample to detect if the patient is currently infected with the virus. 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. 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 nine months ended February 28, 2021, 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 nine months ended February 28, 2021 have been restated. Three months ended February 28, 2022 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 February 28,, Increase (Decrease) 2022 2021 $ % Physician's office $ 6,518,000 $ 2,384,000 $ 4,134,000 173% Clinical lab 731,000 967,000 (236,000) -24% Over-the-counter 244,000 148,000 96,000 65% Contract manufacturing 167,000 130,000 37,000 28% Total $ 7,660,000 $ 3,629,000 $ 4,031,000 111% Consolidated net sales were approximately $7,660,000 for the three months ended February 28, 2022, as compared to $3,629,000 for the three months ended February 28, 2021. This represents an increase of approximately $4,031,000 or 111%. The increase for the three months ended February 28, 2022, as compared to the three months ended February 28, 2021, was primarily due to the sale of our COVID-19 product to distributors in Asia and Europe. Consolidated cost of sales was approximately $5,987,000 or 78% of net sales, for the three months ended February 28, 2022, as compared to $3,702,000 or 102% of net sales, for the three months ended February 28, 2021. This represents an increase of approximately $2,285,000 or 62%. The increase for the three months ended February 28, 2022, as compared to the three months ended February 28, 2021, was primarily due to the sale of our COVID-19 product to distributors in Asia and Europe. 15 Table of Contents Operating Expenses The following is a summary of operating expenses: Three Months Ended February 28, 2022 2021 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 1,324,000 17% $ 1,528,000 42% $ (204,000) -13% Research and Development $ 457,000 6% $ 564,000 16% $ (107,000) -19% Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $1,324,000 for the three months ended February 28, 2022, as compared to $1,528,000 for the three months ended February 28, 2021. This represents a decrease of approximately $204,000 or 13%. The decrease in the three months ended February 28, 2022, was primarily due to a reduction of bad debt expense, partially offset by increases in compensation and outside services expense. Research and Development Consolidated research and development expenses were approximately $457,000 for the three months ended February 28, 2022, as compared to $564,000 for the three months ended February 28, 2021. This represents a decrease of approximately $107,000 or 19%. The decrease in the three months ended February 28, 2022, was primarily a result of decreases in costs related to the research, development, and validation of COVID-19 tests. Interest and Dividend Income Interest and dividend income were approximately $6,000 for the three months ended February 28, 2022, as compared to $38,000 for the three months ended February 28, 2021. This represents a decrease of $32,000 or 84%. Nine months ended February 28, 2022 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 February 28, Increase (Decrease) 2022 2021 $ % Physician's office $ 10,134,000 $ 2,735,000 $ 7,399,000 271% Clinical lab 2,259,000 2,441,000 (182,000) -7% Over-the-counter 857,000 605,000 252,000 42% Contract manufacturing 319,000 364,000 (45,000) -12% Total $ 13,569,000 $ 6,145,000 $ 7,424,000 121% Consolidated net sales were approximately $13,569,000 for the nine months ended February 28, 2022, as compared to $6,145,000 for the nine months ended February 28, 2021. This represents an increase of approximately $7,424,000 or 121%. The increase for the nine months ended February 28, 2022, as compared to the nine months ended February 28, 2021, was primarily due to the sale of our COVID-19 product to distributors in Asia and Europe. Consolidated cost of sales was approximately $11,213,000 or 83% of net sales, for the nine months ended February 28, 2022, as compared to $5,792,000 or 94% of net sales, for the nine months ended February 28, 2021. This represents an increase of approximately $5,421,000 or 94%. The increase for the nine months ended February 28, 2022, as compared to the nine months ended February 28, 2021, was primarily due to the sale of our COVID-19 product to distributors in Asia and Europe. 16 Table of Contents Operating Expenses The following is a summary of operating expenses: Nine Months Ended February 28, 2022 2021 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 3,618,000 27% $ 4,239,000 69% $ (621,000) -15% Research and Development $ 1,515,000 11% $ 1,892,000 31% $ (377,000) -20% Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $3,618,000 for the nine months ended February 28, 2022, as compared to $4,239,000 for the nine months ended February 28, 2021. This represents a decrease of approximately $621,000 or 15%. The decrease in the nine months ended February 28, 2022, was primarily due to a reduction of bad debt expense, partially offset by increases in compensation and outside services expense. Research and Development Consolidated research and development expenses were approximately $1,515,000 for the nine months ended February 28, 2022, as compared to $1,892,000 for the nine months ended February 28, 2021. This represents a decrease of approximately $377,000 or 20%. The decrease in the nine months ended February 28, 2022, was primarily a result of decreases in costs related to the research, development, and validation of COVID-19 tests. Interest and Dividend Income Interest and dividend income were approximately $20,000 for the nine months ended February 28, 2022, as compared to $54,000 for the nine months ended February 28, 2021. This represents a decrease of $34,000 or 63%. LIQUIDITY AND CAPITAL RESOURCES The following are the principal sources of liquidity: February 28, 2022 May 31, 2021 Cash and cash equivalents $ 10,174,000 $ 4,199,000 Working capital including cash and cash equivalents $ 8,533,000 $ 7,931,000 As of February 28, 2022 and May 31, 2021, we had cash and cash equivalents of approximately $10,174,000 and $4,199,000, respectively, and working capital of approximately $8,533,000 and $7,931,000, respectively. As a result of cash and cash equivalents on hand at February 28, 2022, 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 $3,777,000 during the nine months ended February 28, 2022, reflects a net loss of approximately $2,772,000 and non-cash adjustments of $705,000 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 $5,844,000 primarily driven by an increase in advances from customers and accounts payable. For the nine months ended February 28, 2021, cash used by operating activities of approximately $4,244,000 reflects a net loss of $5,735,000 and non-cash adjustments of $3,307,000 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 $1,816,000 primarily driven by an increase in inventory. Investing Activities Cash used in investing activities for the nine months ended February 28, 2022, was approximately $33,000 for purchases of property and equipment and $113,000 for increased intangibles. Cash used in investing activities for the nine months ended February 28, 2021, was approximately $107,000 for purchases of property and equipment and $117,000 for increased intangibles. 17 Table of Contents Financing Activities Cash provided by financing activities for the nine months ended February 28, 2022, was approximately $2,356,000 which was a result of stock option exercises of $39,000 and net proceeds from the sale of common stock of $2,317,000. Cash provided by financing activities for the nine months ended February 28, 2021, was approximately $1,108,000 which was a result of stock option exercises of $96,000 and proceeds from the sale of comment stock of $1,011,000. OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of February 28, 2022. 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. 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.