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, 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 our 2022 Annual 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 (physicians' offices and over-the-counter (“OTC”) 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. 13 Table of Contents 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 are designed to treat gastrointestinal diseases, such as irritable bowel syndrome (“IBS”), 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 the 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 causing an abnormal immune response in the patient is simply removed from the diet to help alleviate IBS symptoms. Following the successful completion and positive statistical results from the Company’s InFoods IBS clinical trial mentioned below, Biomerica received interest from Gastroenterology (GI) physicians who would like to order the InFoods IBS test for their patients even prior to the product receiving FDA Clearance. Given this, during the third quarter ended February 28, 2023, we worked to set up the InFoods® IBS test to be performed in a CLIA-certified, and CAP accredited high-complexity laboratory facility and offered as a laboratory developed test (LDT). During the quarter, the CLIA lab completed all validation testing necessary for the InFoods IBS product to be offered as an LDT and, as of quarter end, is now accepting patient samples. We also worked to optimize the process for GI physicians to order the InFoods IBS test, send patient blood samples to the CLIA lab and receive the test results for their patients. We believe ease of order and workflow for physicians, with easy to understand and actionable results for patients, is critical to our success. During the quarter, we also set up customer service and payment systems, along with a dedicated website for patient to receive answers to questions they may have about the test and attain information about how to eliminate a specific food from their diet. This is especially important for foods that are ingredients in common processed foods like milk, eggs and wheat. As of the end of the fiscal third quarter, the product is now available to physicians and their patients. Due to the proprietary (patented) nature of this product and the size of the market, we believe our InFoods IBS product has the potential to become a significant revenue opportunity. 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. Multiple endpoints demonstrated statistically significant improvements, indicating that the elimination of specific foods identified by our InFoods ® IBS product 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 evaluate the product and to determine the primary symptom endpoint, or endpoints that could 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 a follow-on pivotal trial. We are also determining the protocols for this trial. The trial is expected to include the large medical institution participants that conducted the endpoint trial, in addition to other new institutions along with a clinical research organization. We are also beginning the work of selecting 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 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: 1) clinical laboratories and 2) point-of-care (physicians' offices and OTC 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. During fiscal 2022, we finalized development of our H. Pylori diagnostic test that indicates if a patient is infected with the H. Pylori bacteria. H. 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 communication with the FDA answering certain follow-up questions and providing additional data as requested. We are currently collecting and providing additional data as requested from the FDA. Once cleared, we will begin marketing the product in the U.S. market. 14 Table of Contents 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. In fiscal 2022 and 2023 we generated revenues from the international sale 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 for such tests, the Company generated no revenues during the three months ended February 28, 2023 from the sale of COVID-19 related products. Further, during the nine months ended February 28, 2023 0% of our sales were generated from our COVID-19 related products, as compared to 80% of our revenue during the nine months ended February 28, 2022. Our research and development efforts are substantially focused on development and commercialization of our H. Pylori product, our InFoods® IBS product, and certain other diagnostic products that we are developing for others under contract R&D agreement, where we expect to be the contract manufacturers for these third-party diagnostic companies. Our products that accounted for approximately 87% of our revenues during the nine months ended February 28, 2023, 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 United States by the FDA. RESULTS OF OPERATIONS Three months ended February 28, 2023 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) 2023 2022 $ % Clinical lab $ 532,000 $ 731,000 $ (199,000) -27% Over-the-counter 292,000 244,000 48,000 20% Contract manufacturing 284,000 167,000 117,000 70% Physician's office 4,000 6,518,000 (6,514,000) -100% Total $ 1,112,000 $ 7,660,000 $ (6,548,000) -85% Consolidated net sales were approximately $1,112,000 for the three months ended February 28, 2023, as compared to $7,660,000 for the three months ended February 28, 2022 , a decrease of approximately $6,548,000, or 85%. This decrease for the three months ended February 28, 2023, was driven primarily by lower demand for our physician’s office COVID-19 product in Asia. Excluding COVID-19 product sales, consolidated net sales were approximately $1,108,000 for the three months ended February 28, 2023, as compared to $1,316,000 for the three months ended February 28, 2022 , a decrease of approximately $174,000, or 13%. Periodic and infrequent orders may cause volatility in quarterly sales. Consolidated cost of sales was approximately $991,000, or 89% of net sales, for th e three months ended February 28, 2023, as compared to $5,987,000, or 78% of net sales, for the three months ended February 28, 2022, a decrease of approximately $4,996,000, or 83%. The decrease for the three months ended February 28, 2023, was driven primarily by a decrease in volume of our COVID-19 product. Operating Expenses The following is a summary of operating expenses: Three Months Ended February 28, 2023 2022 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 1,379,000 124% $ 1,394,000 18% $ (15,000) -1% Research and Development $ 392,000 35% $ 387,000 5% $ 5,000 1% Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $1,379,000 for the three months ended February 28, 2023, as compared to $1,394,000 for the three months ended February 28, 2022, a decrease of approximately $15,000, or 1%. 15 Table of Contents Research and Development Consolidated research and development expenses were approximately $392,000 for the three months ended February 28, 2023, as compared to $387,000 for the three months ended February 28, 2022, an increase of approximately $5,000, or 1%. Interest and Dividend Income Interest and dividend income were approximately $36,000 for the three months ended February 28, 2023, as compared to $6,000 for the three months ended February 28, 2022, an increase of $30,000, or 500%. The increase was primarily driven by higher interest yields on our cash and cash equivalents. Nine months ended February 28, 2023 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) 2023 2022 $ % Clinical lab $ 2,580,000 $ 2,259,000 $ 321,000 14% Over-the-counter 971,000 857,000 114,000 13% Contract manufacturing 431,000 319,000 112,000 35% Physician's office 249,000 10,134,000 (9,885,000) -98% Total $ 4,231,000 $ 13,569,000 $ (9,338,000) -69% Consolidated net sales were approximately $4,231,000 for the nine months ended February 28, 2023, as compared to $13,569,000 for the nine months ended February 28, 2022, a decrease of approximately $9,338,000, or 69%. This decrease for the nine months ended February 28, 2023, was driven primarily by lower demand for our physician’s office COVID-19 product in Asia. Excluding COVID-19 product sales, consolidated net sales were approximately $3,982,000 for the nine months ended February 28, 2023, as compared to $3,435,000 for the nine months ended February 28, 2022 , an increase of approximately $547,000, or 16%. Periodic and infrequent orders may cause volatility in quarterly sales. Consolidated cost of sales was approximately $3,814,000, or 90% of net sales, for the nine months ended February 28, 2023, as compared to $11,213,000, or 82% of net sales, for the nine months ended February 28, 2022, a decrease of approximately $7,399,000, or 66%. The decrease for the nine months ended February 28, 2023, was driven primarily by a decrease in volume of our COVID-19 product. Operating Expenses The following is a summary of operating expenses: Nine Months Ended February 28, 2023 2022 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 4,589,000 108% $ 3,817,000 28% $ 772,000 20% Research and Development $ 1,215,000 29% $ 1,317,000 10% $ (102,000) -8% Selling, General and Administrative Expenses Consolidated selling, general and administrative expenses were approximately $4,589,000 for the nine months ended February 28, 2023, as compared to $3,817,000 for the nine months ended February 28, 2022, an increase of approximately $772,000, or 20%. The increase in the nine months ended February 28, 2023, was primarily due to approximate increases in bad debt expense of $428,000 related to a Vietnam customer, legal expenses of $105,000 related to patent activity, and consulting services of $136,000 related to our online presence at Amazon and Walmart. 16 Table of Contents Research and Development Consolidated research and development expenses were approximately $1,215,000 for the nine months ended February 28, 2023, as compared to $1,317,000 for the nine months ended February 28, 2022, a decrease of approximately $102,000, or 8%. The decrease in the months ended February 28, 2023, was primarily due to lower research expenditures. Interest and Dividend Income Interest and dividend income were approximately $77,000 for the nine months ended February 28, 2023, as compared to $20,000 for the nine months ended February 28, 2022, an increase of $57,000, or 285%. The increase was primarily driven by interest income on our cash and cash equivalents that resulted from higher current period interest rates. LIQUIDITY AND CAPITAL RESOURCES The following are the principal sources of liquidity: February 28, 2023 May 31, 2022 Cash and cash equivalents $ 3,345,000 $ 5,917,000 Working capital including cash and cash equivalents $ 5,087,000 $ 7,416,000 As of February 28, 2023 and May 31, 2022, the Company had cash and cash equivalents of approximately $3,345,000 and $5,917,000, respectively. As of February 28, 2023 and May 31, 2022, the Company had working capital of approximately $5,087,000 and $7,416,000, respectively. We believe that the aggregate of our existing cash and cash equivalents held at the end of the fiscal third quarter, combined with the approximate $7.4 million in net proceeds from the public offering of common shares that was closed in early March 2023, is sufficient to meet our operating cash requirements and strategic objectives for growth for at least the next 18 to 24 months. To satisfy our capital requirements beyond that point, including ongoing future operations, we may seek to raise additional financing through debt and equity financing. Operating Activities During the nine months ended February 28, 2023, cash used in operating activities was approximately $4,511,000. The primary factors that contributed to this were a net loss of approximately $5,348,000, partially offset by non-cash expenses of $1,100,000, primarily associated with stock-based compensation and account receivables provisions . During the nine months ended February 28, 2022, cash provided by operating activities was approximately $3,777,000. The primary factors that contributed to this was a loss of approximately $2,772,000, non-cash expenses 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. Investing Activities During the nine months ended February 28, 2023, cash used in investing activities was approximately $64,000 for purchases of property and equipment. During the nine months ended February 28, 2022, cash used in investing activities was approximately $33,000 for purchases of property and equipment, and $113,000 expenditures related to patents. Financing Activities During the nine months ended February 28, 2023, cash provided by financing activities was approximately $2,040,000 which was a result of net proceeds from the sale of common stock of $1,961,000, and stock option exercises of $79,000. During the nine months ended February 28, 2022, cash provided by financing activities was approximately $2,356,000 which was a result of net proceeds from the sale of common stock of $2,317,000, and stock option exercises of $39,000. 17 Table of Contents OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of February 28, 2023. CRITICAL ACCOUNTING POLICIES 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, 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. 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. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2022. 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.