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Item 2. Management’s Discussion and Analysis

2022-10-13 compared with 2022-04-14 · 76 added, 99 removed, 53 unchanged (77% of the section changed)

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.

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, 2022 (our 2022 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 this Report.

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 .

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 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.

Our primary focus is the research, development, commercialization and in certain cases regulatory approval, of patented, diagnostic-guided therapy (“DGT”) products based on our InFoods ® Technology platform that treat gastrointestinal diseases, such as irritable bowel syndrome, 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.

The first product we are launching using this patented InFoods Technology is our InFoods® IBS product which uses a simple blood sample and is designed to identify patient-specific foods that, when removed from the diet, may alleviate IBS symptoms such as pain, bloating, diarrhea, cramping 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 specific foods.

A food identified as positive and causing an abnormal immune response in the patient is simply removed from the diet to help alleviate IBS symptoms.

We are currently in discussions with key gastroenterology (GI) physician groups who are interested in offering this product to their patients.

As such, we are expecting to begin generating revenues from the launch of our InFoods ® IBS product during our fiscal third quarter.

During fiscal 2022, we completed an endpoint determination clinical trial on our InFoods® IBS product.

This trial was conducted at the Mayo Clinic centers 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 or endpoints.

The top-line trial results were reported in February 2022.

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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 purpose of the endpoint study was to validate efficacy, and determine the primary 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 U.S.

Food and Drug Administration (“FDA”) clearance for the product.

We are now in the process of reviewing the complete dataset and selecting the target endpoint(s) to be used in the pivotal trial.

We are also preparing the protocols for this trial and expect to present these protocols to the FDA during fiscal 2023, with the intention of beginning the trial by June 30, 2023.

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.

Following the successful completion and positive results from the Company’s InFoods ® IBS clinical trial, we’ve seen significant interest from Gastroenterology (GI) physicians who would like to provide the InFoods ® IBS Product to their patients immediately.

Therefore, while we are proceeding with the work needed to seek FDA clearance for this product, we also are currently preparing to launch the InFoods ® IBS product through a CLIA-certified, high-complexity laboratory facility that will be offering the product as a laboratory developed test (LDT).

Our expectation is that we will begin to generate revenues from this product during our fiscal third quarter.

In preparation for the launch of this LDT, we are in negotiations with large physician groups that would like to offer the LDT to their IBS patients.

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.

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 initially launching the product as an LDT.

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.

Our existing medical diagnostic products are sold worldwide primarily in two markets:

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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.

During fiscal 2022, we finalized development of our H.

Pylori diagnostic test that indicates if a patient is infected with the H.

Pylori bacteria.

Pylori infection is extremely common, and if left untreated, can lead to ulcers and possibly stomach cancers.

During our fourth quarter of fiscal 2022, we applied for FDA clearance of this product though a 510(k) premarket submission.

We have been in communications with the FDA answering certain follow-up questions and providing additional data as requested.

We are currently awaiting FDA clearance of the product.

Once cleared, we will begin marketing the product in the U.S.

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.

While we initially offered a COVID-19 antibody diagnostic test to determine if a person has previously been infected by the COVID-19 virus, all our COVID-19 revenues in fiscal 2022 and 2023 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.

Due to falling demand, less than 12% of our revenues during the three months ended August 31, 2022 were from sales of our COVID-19 related products.

While limited sales continue to occur in our COVID-19 products, virtually all our research and development efforts are focused on development and commercialization of non-COVID-19 related products such as our H.

Pylori product, and our InFoods® IBS product.

Our non-COVID-19 products that accounted for over 88% of our revenues during the three months ended August 31, 2022, 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.

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.

In addition, some products are cleared for sale in the United States by the FDA.

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

Three months ended August 31, 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,,

Three Months Ended August 31,

Increase (Decrease)

Physician's office

Over-the-counter

Contract manufacturing

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%.

Operating Expenses

The following is a summary of operating expenses:

Three Months Ended

Increase (Decrease)

Operating Expense

Total Revenues

Operating Expense

Total Revenues

Selling, General and

Administrative Expenses

Research and Development

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

Increase (Decrease)

Physician's office

Over-the-counter

Contract Manufacturing

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%.

Consolidated net sales were approximately $1,637,000 for the three months ended August 31, 2022, as compared to $1,262,000 for the three months ended August 31, 2021, an increase of approximately $375,000, or 30%.

This increase for the three months ended August 31, 2022, was driven primarily by demand for our clinical lab products in Asia and OTC products in the United States.

Periodic and infrequent orders may cause volatility in quarterly sales.

Consolidated cost of sales were approximately $1,692,000, or 103% of net sales, for the three months ended August 31, 2022, as compared to $1,351,000, or 107% of net sales, for the three months ended August 31, 2021, an increase of approximately $342,000, or 25%.

The increase for the three months ended August 31, 2022, was driven primarily by an increase in volume of our food intolerance product and product cost inflation.

Operating Expenses

The following is a summary of operating expenses:

Nine Months Ended

Three Months Ended August 31,

Increase (Decrease)

Operating Expense

Total Revenues

As a % of Total Revenues

Operating Expense

Total Revenues

Selling, General and

Administrative Expenses

As a % of Total Revenues

Selling, General and Administrative Expenses

Research and Development

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.

Consolidated selling, general and administrative expenses were approximately $1,654,000 for the three months ended August 31, 2022, as compared to $1,070,000 for the three months ended August 31, 2021, an increase of approximately $584,000, or 55%.

The increase in the three months ended August 31, 2022, was primarily due to approximate increases in bad debt expense of $300,000, compensation of $73,000, and legal expense of $65,000.

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.

Consolidated research and development expenses were approximately $361,000 for the three months ended August 31, 2022, as compared to $381,000 for the three months ended August 31, 2021, a decrease of approximately $20,000, or 5%.

The decrease in the three months ended August 31, 2022, was primarily due to a reduction in COVID-19 research.

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%.

Interest and dividend income were approximately $0 for the three months ended August 31, 2022, as compared to $7,000 for the three months ended August 31, 2021, a decrease of $7,000, or 100%.

The $7,000 decrease was due to lower dividend payment from our investment.

LIQUIDITY AND CAPITAL RESOURCES

The following are the principal sources of liquidity:

August 31, 2022

Cash and cash equivalents

Working capital including cash and cash equivalents

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.

As of August 31, 2022 and May 31, 2022, the Company had cash and cash equivalents of approximately $6,075,000 and $5,917,000, respectively.

As of August 31, 2022 and May 31, 2022, the Company had working capital of approximately $7,410,000 and $7,416,000, 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 beyond the next year, including ongoing future operations, we may seek to raise additional financing through debt and equity financings, including use of our ATM offering.

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.

During the three months ended August 31, 2022, cash used in operating activities was approximately $1,573,000.

The primary factors that contributed to this was a loss of approximately $2,072,000, non-cash expenses of $766,000, primarily associated with stock-based compensation, account receivables provision, and inventory reserves .

This was partially offset by changes in asset and liability accounts of $(267,000).

During the three months ended August 31, 2021, cash provided by operating activities was approximately $76,000.

The primary factors that contributed to this was a loss of approximately $1,543,000, non-cash expenses of $502,000, primarily associated with stock-based compensation and inventory reserves .

In addition, we benefited from a decrease in accounts receivable of $778,000, and changes in other asset and liability accounts of $339,000.

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.

During the three months ended August 31, 2022, cash used in investing activities was approximately $34,000 for purchases of property and equipment.

During the three months ended August 31, 2021, cash used in investing activities was approximately $78,000 for purchases of property and equipment, and expenditures related to patents.

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.

During the three months ended August 31, 2022, cash provided by financing activities was approximately $1,778,000 which was a result of net proceeds from the sale of common stock of $1,764,000, and stock option exercises of $14,000.

During the three months ended August 31, 2021, cash provided by financing activities was approximately $805,000 which was a result of net proceeds from the sale of common stock of $801,000, and stock option exercises of $4,000.

OFF BALANCE SHEET ARRANGEMENTS

There were no off-balance sheet arrangements as of February 28, 2022.

There were no off-balance sheet arrangements as of August 31, 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.

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.

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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.

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;

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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.

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, 2022.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis