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). FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, contained in this Quarterly Report are forward-looking statements. Such statements include declarations regarding our intent, belief, or current expectations, and those of our management. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should, ””could,” “contemplates,” “expects,” “intends,” “plans,” “targets,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks, uncertainties and other factors, some of which are beyond our control. Actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, those risks and uncertainties identified under “Risk Factors,” in our 2024 Annual Report on Form 10-K and the other risks detailed from time-to-time in our reports and registration statements filed with the Securities and Exchange Commission, or SEC. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 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. 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 research and development efforts is our patented diagnostic-guided therapy (“DGT”) product, developed on the inFoods® technology platform. This innovative technology 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. 16 We began commercializing our inFoods® product with select gastroenterology (“GI”) physician groups in various states and regions, including collaboration with one of the largest GI groups in the U.S. This initial phase was focused on gathering real-world feedback, optimizing physician engagement, and validating operational processes. Feedback from GI specialists has been generally positive, and we are continuing to expand our network by onboarding additional physician practices. Our dedicated sales team is focused on building strong relationships within the GI segment while selectively exploring opportunities to introduce inFoods® to other medical specialties, including integrated health practices and primary-care providers. These efforts are intended to lay the groundwork for broader adoption by showcasing the distinct clinical value of inFoods® across multiple healthcare channels. Concurrently, we are evaluating distribution, partnership, and licensing opportunities with U.S.companies to support a scalable, broad market launch. These potential collaborations could significantly enhance the commercialization trajectory of inFoods® products, both domestically and internationally. As we continue pursue commercial opportunities in both U.S. and international markets, we remain attentive to evolving global economic conditions, including uncertainties related to international trade policies, tariffs, and supply chain dynamics. Although these factors have not had a material impact on our operations to date, future changes in trade regulations, tariff structures, or logistical constraints could influence the cost, availability, or timing of materials and components used in our manufacturing processes. We continue to monitor these developments closely and are actively implementing contingency plans, including alternative sourcing strategies and supplier diversification, to support supply chain continuity, maintain operational efficiency, and help mitigate potential future impacts. We are also focusing on alternative manufacturing and shipping strategies of our products through our European subsidiary (BioEurope), and our Mexican subsidiary (BioMexico), to mitigate some of the risk these policies may have on our revenues and operations. 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 working 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 executed 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 year, which incurred costs such as severance, impacting typical cost trends and margins. Additionally, we raised $2,015,000 in net proceeds from the ATM offering filed in May 2024, providing additional liquidity to support our operations. The Company is actively exploring strategic opportunities to enhance and create shareholder value. RESULTS OF OPERATIONS Three months ended February 28, 2025 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) February 28, 2025 February 29, 2024 $ % Clinical lab $ 627,000 $ 404,000 $ 223,000 55 % Over-the-counter 170,000 329,000 (159,000 ) -48 % Contract manufacturing 320,000 281,000 39,000 14 % Physician’s office 2,000 3,000 (1,000 ) -33 % Total $ 1,119,000 $ 1,017,000 $ 102,000 10 % Consolidated net sales were approximately $1,119,000 for the three months ended February 28, 2025, as compared to $1,017,000 for the three months ended February 29, 2024, an increase of approximately $102,000 or 10%. This increase for the three months ended February 28, 2025, was primarily attributed to increased sales of our food intolerance products, reflecting a growing interest and engagement in this category. Sales in this segment are subject to periodic and infrequent orders, contributing to potential volatility in quarterly sales. Consolidated cost of sales were approximately $1,100,000, or 98% of net sales, for the three months ended February 28, 2025, as compared to $1,166,000, or 115% of net sales, for the three months ended February 29, 2024, a decrease of approximately $66,000, or 6%. The decrease for the three months ended February 28, 2025 was primarily driven by the reduction in force (“RIF”) executed in July 2024, which helped to decrease labor costs for the quarter. 17 Operating Expenses The following is a summary of operating expenses: Three Months Ended February 28, 2025 February 29, 2024 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 1,012,000 90 % $ 1,508,000 148 % $ (496,000 ) -33 % Research and Development $ 217,000 19 % $ 343,000 34 % $ (126,000 ) -37 % Selling, General and Administrative Expenses For the three months ended February 28, 2025, consolidated selling, general, and administrative expenses amounted to approximately $1,012,000, representing a significant reduction of $496,000 or 33%, compared to $1,508,000 for the corresponding period in 2024. This reduction was primarily due to a $225,000 decrease in stock compensation for the administration and a Reduction in Force (RIF) implemented in July 2024, which resulted in a $183,000 decrease in payroll expenses. Additionally, legal expenses were reduced by $46,000. These efforts demonstrate our focus on operating discipline and cost optimization as we align our cost structure with near-term business priorities, while preserving the resources needed to support long-term growth. Research and Development For the three months ended February 28, 2025, consolidated research and development (“R&D”) expenses totaled approximately $217,000, representing a decrease of 37% from $343,000 in the same period of 2024. This $126,000 reduction was primarily driven by a $64,000 decline in R&D wages due to a RIF executed in July 2024, and a reduction of $39,000 in expenses related to clinical trial studies. Interest and Dividend Income For the three months ended February 28, 2025, interest and dividend income totaled approximately $43,000, compared to $86,000 for the corresponding period in 2024, representing a decrease of $43,000, or 50%. This reduction was primarily attributable to lower market interest rates affecting our lower cash balances, which had decreased by February 28, 2025. Nine months ended February 28, 2025 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) February 28, 2025 February 29, 2024 $ % Clinical lab $ 2,683,000 $ 2,683,000 $ - 0 % Over-the-counter 952,000 1,078,000 (126,000 ) -12 % Contract manufacturing 920,000 530,000 390,000 74 % Physician’s office 7,000 8,000 (1,000 ) -13 % Total $ 4,562,000 $ 4,299,000 $ 263,000 6 % For the nine months ended February 28, 2025, consolidated net sales reached approximately $4,562,000, marking a 6% increase or $263,000 from $4,299,000 in the same period of 2024. This growth was largely driven by enhanced contract manufacturing billings and increased demand for our inFoods® IBS product. Although there was a decline in over-the-counter (OTC) sales due to reduced retail market activity, and some volatility in clinical laboratory sales, the company successfully maintained a positive sales trajectory through strategic diversification and bolstered demand in key sectors. For the nine months ended February 28, 2025, consolidated cost of sales was approximately $3,820,000, representing 84% of net sales, compared to $3,708,000, or 86% of net sales, for the same period in 2024. This 3% increase, amounting to $112,000, was primarily driven by expanded contract manufacturing sales. Notably, the implementation of a RIF in July 2024 effectively reduced direct labor costs, thereby contributing to improved gross margins. 18 Operating Expenses The following is a summary of operating expenses: Nine Months Ended February 28, 2025 February 29, 2024 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 3,544,000 78 % $ 4,204,000 98 % $ (660,000 ) -16 % Research and Development $ 771,000 17 % $ 1,226,000 29 % $ (455,000 ) -37 % For the nine months ended February 28, 2025, consolidated selling, general, and administrative expenses totaled approximately $3,544,000, compared to $4,204,000 for the same period in 2024. This represents a decrease of $660,000, or 16%. This notable reduction in expenses reflects our strategic financial management and can be attributed to multiple factors: the absence of a sales reserve for OTC products from the previous year, reducing costs by $175,000; a $262,000 decrease in stock compensation; and a $172,000 in payroll savings following a RIF implemented in July 2024. Furthermore, we reduced advertising expenses by $50,000. These overall cost reductions demonstrate our commitment to strategically allocating capital and maintaining financial discipline as we continue to pursue growth opportunities. Research and Development For the nine months ended February 28, 2025, consolidated R&D expenses were approximately $771,000, a decrease of 37% from $1,226,000 during the same period in 2024. This $455,000 reduction was largely due to a $303,000 decrease in R&D wages following a RIF implemented in July 2024. As part of our strategic cost-cutting initiatives, several clinical trials were scaled back, leading to lower expenditures. Furthermore, with the commercialization of inFoods® IBS, we strategically reduced R&D funding in this area, which accounted for an additional $75,000 decrease in related expenses. Interest and Dividend Income For the nine months ended February 28, 2025, interest and dividend income totaled approximately $140,000, compared to $317,000 for the corresponding period in 2024, representing a decrease of $177,000, or 56%. This reduction was primarily attributable to lower market interest rates affecting our lower cash balances, which had decreased by February 28, 2025 LIQUIDITY AND CAPITAL RESOURCES The following are the principal sources of liquidity: February 28, 2025 May 31, 2024 Cash and cash equivalents $ 3,058,000 $ 4,170,000 Working capital including cash and cash equivalents $ 4,555,000 $ 5,527,000 As of February 28, 2025 and May 31, 2024, the Company had cash and cash equivalents of approximately $3,058,000 and $4,170,000, respectively. As of February 28, 2025 and May 31, 2024, the Company had working capital of approximately $4,555,000 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; ● Our ability to retain key employees and maintain critical operations with a substantially reduced workforce; and ● Certain SEC regulations that limit the amount of capital the Company can raise through issuance of its equity. Management has analyzed the Company’s cash flow requirements through May 2026 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. 19 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 issuance of 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 are executing significant cost-cutting measures to extend our cash runway and work towards increasing revenues to cover overhead costs. These measures included 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 new “shelf” registration statement on Form S-3 with the SEC, to replace the expiring S-3 that was filed in July 2020, 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, 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 7,798,345 shares per day and the high and low trading price of our stock during the same period of time was $0.27 and $1.03, 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. During the nine months ended February 28, 2025, the Company sold 3,525,359 shares of its common stock at prices ranging from $0.36 to $1.04 pursuant to the May 2024 ATM Offering, which resulted in gross proceeds of approximately $2,143,000 and net proceeds to the Company of $2,015,000 after deducting commissions for each sale and legal, accounting, and other fees related to offering in the amount of $128,000. 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 nine months ended February 28, 2025, cash used in operating activities totaled approximately $3,180,000. The primary contributors to this outflow were a net loss of approximately $3,429,000, an increase in accounts receivable of $327,000, a decrease in accounts payable and accrued expenses totaling $506,000, and a reduction in lease liabilities of $242,000. These cash outflows were partially offset by a decrease in inventories of $766,000 and non-cash expenses of $610,000. The non-cash expenses included depreciation and amortization, provision for allowance on accounts receivable, inventory reserves, share-based compensation, and amortization of right-of-use assets. 20 During the nine months ended February 29, 2024, cash used in operating activities was approximately $4,317,000. The primary factors that contributed to this was a loss of approximately $4,557,000, non-cash expenses of $723,000, primarily associated with depreciation and amortization, provision for allowance on accounts receivable, inventory reserves, share-based compensation, and amortization of right-of-use assets. This was partially offset by changes in asset and liability accounts of approximately $483,000. Importantly, we have made significant progress in reducing our underlying cost structure. When excluding the positive impact of proceeds from the ATM offering, our current quarterly cash burn has improved to approximately $800,000 compared to approximately $1,800,000 in the same period of last year. This reduction reflects our disciplined execution of cost saving initiatives, stronger sales from a more diverse portfolio, and tighter management of working capital. Investing Activities During the nine months ended February 28, 2025, cash used in investing activities was $0 for purchases of property and equipment, and $37,000 in expenditures related to patents. During the nine months ended February 29, 2024, cash used in investing activities was approximately $27,000 for purchases of property and equipment, and $64,000 in expenditures related to patents. Financing Activities During the nine months ended February 28, 2025, net cash provided by financing activities amounted to approximately $2,116,000. This influx was primarily driven by net proceeds from the sale of common stock totaling $2,015,000 and proceeds from the exercise of stock options amounting to $16,000. These contributions were partially offset by deferred offering costs of $85,000. During the nine months ended February 29, 2024, cash provided by financing activities was $0, with no net proceeds from the sale of common stock or from stock option exercises. OFF BALANCE SHEET ARRANGEMENTS There were no off-balance sheet arrangements as of February 28, 2025. 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, credit losses, inventory overhead application, inventory reserves, right-of-use assets and lease liabilities and share-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 condition 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, 2024. 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.