Biomerica(BMRA) - 2022 Q4 - Annual Report

Part I Business Biomerica is a biomedical technology company focused on developing and marketing diagnostic and therapeutic products, with a strategic emphasis on its InFoods® IBS therapy Business Overview Biomerica focuses on developing and marketing diagnostic and therapeutic products, prioritizing the commercialization of its InFoods® IBS product as an LDT while pursuing FDA clearance - The company's primary focus is on its patented InFoods® IBS product, designed to identify specific foods that may alleviate IBS symptoms when removed from a patient's diet[5] - In February 2022, the company reported positive top-line results from its InFoods® IBS endpoint determination clinical trial conducted at major institutions like the Mayo Clinic and a Harvard Medical School Teaching Hospital. The company is now preparing for a final pivotal trial to seek FDA clearance[5] - While pursuing FDA clearance, Biomerica plans to launch the InFoods® IBS product as a Laboratory Developed Test (LDT) and expects to generate revenue from it by December 31, 2022[5] - In Q4 FY2022, the company applied for FDA 510(k) clearance for its H. Pylori diagnostic test. Additionally, Walmart has begun selling the Aware® Breast Self Exam product on its online platform[6] Production, R&D, and Operations Biomerica manufactures diagnostic kits in California and Mexico, with FY2022 R&D expenses of $1.8 million focused on InFoods® IBS and H. Pylori - Manufacturing and assembly operations are located in Irvine, CA, and Mexicali, Mexico, and are regulated by FDA Good Manufacturing Practices, CE Mark, and ISO standards[7] Research & Development Expenses | Expense Category | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Research & Development | $1,812,000 | $2,194,000 | - R&D efforts in FY2022 were concentrated on the InFoods® IBS product and a proprietary H. Pylori test, which was submitted to the FDA for clearance in Q4 FY2022[8] Markets, Distribution, and Customer Concentration Biomerica markets products to clinical labs and point-of-care, with significant customer concentration as two distributors accounted for 65% of FY2022 net sales - The company targets two main markets: clinical laboratories and point-of-care testing (physicians' offices and over-the-counter)[9] - Significant customer concentration exists. In FY2022, two distributors accounted for 65% of net sales (up from 60% in FY2021). The largest distributor alone made up 55% of net sales[10] - As of May 31, 2022, one distributor in Asia accounted for 50% of the total gross accounts receivable of approximately $927,000[10] - The company's order backlog increased significantly to approximately $754,000 at the end of FY2022, up from $85,000 in FY2021, primarily consisting of orders to a distributor in Asia[11] Competition and Regulation Biomerica competes in a highly regulated immunodiagnostics market, subject to FDA and international regulations, and is transitioning to new EU IVDR requirements - The company competes with hundreds of global companies, many of which are larger and have greater resources. Biomerica competes on the basis of product uniqueness, quality, speed, patents, and pricing[14] - The company's products are primarily Class I or Class II medical devices, subject to FDA regulations, including the Quality System Regulation (QSR) and Medical Device Reporting (MDR)[15] - For sales in Europe, the company must comply with EU directives and is transitioning to the new, more stringent In Vitro Diagnostic Medical Device Regulation (IVDR) 2017/746. The company has received an extended CE Certificate effective until May 26, 2025, providing time to update technical documentation to meet the new IVDR requirements[16] Intellectual Property Biomerica's IP strategy focuses on patents, trademarks, and trade secrets, with 12 granted patents and over 100 pending applications for its InFoods® technology platform - The company's most important patent family pertains to the InFoods® technology platform, which is a method for diagnosing and treating symptoms of various inflammatory diseases[24] - Biomerica has been granted 12 patents for its InFoods® IBS product in countries including the United States (2), Japan (3), Korea (2), and Australia (1), and has over 100 additional international and USPTO patent applications pending[24] - The company has licensed CRISPR-based technology from the University of California for a potential COVID-19 test, though no product launch from this collaboration is imminent[22] Risk Factors The company faces significant operational, product, market, regulatory, IP, and financial risks, including a history of losses and reliance on key distributors Business and Operational Risks Biomerica faces operational risks including a history of losses, reliance on a few key distributors, COVID-19 impacts, and international business complexities - The company is susceptible to widespread public health epidemics like COVID-19, which can cause supply chain disruptions, loss of customers, and other negative impacts[29] - The company has a history of net losses and cannot assure future profitability or positive cash flow[30] - There is a high concentration of revenue from a few key distributors. In FY2022, two distributors accounted for 65% of net sales, and one distributor in Asia represented 50% of accounts receivable as of May 31, 2022[33] - The manufacturing facility in Mexico presents risks associated with international business, including economic and political instability and currency fluctuations[32] Product, Market, and Clinical Trial Risks Success depends on overcoming product, market, and clinical trial risks, including uncertain trial outcomes, intense competition, and market acceptance of new products - Clinical trials are an expensive and uncertain process, and there is no assurance of positive results or that they will lead to regulatory clearance[37] - The diagnostic industry is highly competitive, with numerous larger competitors that have substantially greater financial, technical, and marketing resources[41] - Market acceptance of new products by healthcare providers and physicians is uncertain and critical for future revenue growth[39] - Reliance on third-party CROs and clinical sites for trials presents risks. If these parties fail to perform their duties, it could compromise clinical data and delay commercialization[47] Regulatory, IP, and Financial Risks Biomerica faces significant regulatory, IP, and financial risks, including the need for additional funding, stock price volatility, and limitations on NOL utilization - The company's business is highly regulated, and failure to receive or maintain regulatory approvals (e.g., from the FDA or for the new EU IVDR) could negatively affect operations[41][32] - The company faces risks of third-party claims of IP infringement, which could be costly and require product redesigns or licensing fees[36] - The company may need to raise additional funds to finance future operations, which could result in dilution for existing stockholders. An S-3 shelf registration for up to $90 million is in place[37][51] - The company has significant federal ($17.1 million) and California state ($10.8 million) net operating loss carryforwards, but their future use may be limited by IRC Section 382 ownership change rules[53] Properties Biomerica operates from leased facilities, including a 22,000 sq. ft. headquarters in Irvine, CA, and an 8,100 sq. ft. manufacturing plant in Mexicali, Mexico - The company leases its 22,000 sq. ft. corporate headquarters in Irvine, CA. The lease was extended in April 2021 for five years, until August 2026[57] - The Mexican subsidiary leases an 8,100 sq. ft. manufacturing space in Mexicali under a 10-year lease that began in November 2016[57] Legal Proceedings As of May 31, 2022, Biomerica had no pending legal proceedings, though it may be involved in ordinary course litigation - There were no legal proceedings pending as of May 31, 2022[58] Part II Market for Common Equity and Related Stockholder Matters Biomerica's common stock trades on Nasdaq (BMRA); the company does not pay dividends and had 2,321,616 outstanding stock options as of May 31, 2022 - The company's common stock trades on the Nasdaq Capital Market under the symbol BMRA[59] - The company has not paid and does not plan to pay cash dividends, intending to retain earnings for business operations and expansion[60] Equity Compensation Plan Information (as of May 31, 2022) | Equity Compensation Plan Information (as of May 31, 2022) | Value | | :--- | :--- | | Securities to be Issued Upon Exercise of Outstanding Options | 2,321,616 | | Weighted-Average Exercise Price of Outstanding Options | $3.72 | | Securities Remaining Available for Future Issuance | 102,801 | Management's Discussion and Analysis (MD&A) FY2022 net sales increased 162% to $18.9 million driven by COVID-19 tests, improving gross profit but still resulting in a $4.5 million net loss Overview Management's overview highlights the dual strategy for InFoods® IBS commercialization (LDT launch and FDA clearance) and the role of COVID-19 test sales in FY2022 revenue - The company's primary focus is the research, development, and commercialization of its patented InFoods® IBS product[64] - After positive clinical trial results, the company plans to launch the InFoods® IBS product as an LDT, expecting to generate revenue by December 31, 2022, while simultaneously working towards FDA clearance[65] - All COVID-19 revenues in fiscal 2022 came from international sales of COVID-19 antigen tests[66] Results of Operations FY2022 net sales surged 162% to $18.9 million, driven by physician's office sales, leading to an improved 16% gross margin despite flat operating expenses Net Sales by Market | Net Sales by Market | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Physician's office | $14,259,000 | $2,801,000 | 409% | | Clinical lab | $3,064,000 | $3,077,000 | 0% | | Over-the-counter | $1,089,000 | $766,000 | 42% | | Contract manufacturing | $459,000 | $555,000 | -17% | | Total | $18,871,000 | $7,199,000 | 162% | - Cost of sales as a percentage of revenue improved to 84% in FY2022 from 95% in FY2021. The prior year's figure was elevated by a non-recurring inventory allowance[68] Operating Expenses | Operating Expenses | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Selling, General & Administrative | $5,699,000 | $5,672,000 | 0% | | Research and Development | $1,812,000 | $2,194,000 | -17% | Liquidity and Capital Resources As of May 31, 2022, Biomerica had $5.9 million in cash and $7.4 million in working capital, with cash used in operations significantly improving to ($0.5 million) Liquidity Metrics | Liquidity Metrics | May 31, 2022 | May 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,917,000 | $4,199,000 | | Working capital | $7,416,000 | $7,931,000 | Cash Flow Summary | Cash Flow Summary | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($486,000) | ($5,252,000) | | Net Cash Used in Investing Activities | ($170,000) | ($296,000) | | Net Cash Provided by Financing Activities | $2,395,000 | $1,114,000 | - Financing activities in FY2022 were primarily driven by $2.3 million in net proceeds from the sale of common stock through an at-the-market (ATM) offering[74] - Subsequent to year-end, the company sold an additional 523,977 shares for net proceeds of approximately $1,765,000 under its ATM program[76] Critical Accounting Policies Critical accounting policies involve significant estimates for revenue recognition, bad debts, inventory valuation, and share-based compensation using the Black-Scholes model - Key critical accounting policies requiring significant management estimates include revenue recognition, bad debts, inventory overhead and reserves, lease liabilities, and share-based compensation[79] - Revenue from product sales is recognized at the time of shipment (FOB shipping point), when control transfers to the customer[80] - Share-based compensation is calculated using the Black-Scholes model. For FY2022, key assumptions included expected volatility of 102.5% - 105.5% and an expected term of 5.5 - 6.25 years[81][150] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of May 31, 2022, with no material changes identified - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of May 31, 2022[83] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of May 31, 2022[85] Part III Directors, Executive Officers, Compensation, and Other Matters Information for Items 10-14, covering directors, executive compensation, and related matters, is incorporated by reference from the company's 2022 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's proxy statement for its 2022 Annual Meeting of Stockholders[87][88][89] Financial Statements and Notes Independent Auditor's Report The independent auditor issued an unqualified opinion on the FY2022 financial statements, highlighting 'Evaluation of Inventory Reserves' as a critical audit matter - The auditor issued an unqualified opinion on the FY2022 consolidated financial statements[106] - The 'Evaluation of Inventory Reserves' was identified as a Critical Audit Matter due to the subjective and complex judgments required by management in forecasting future demand[108][109] Consolidated Financial Statements FY2022 consolidated financial statements show total assets of $11.4 million, a net loss of $4.5 million (improved from $7.4 million), and revenues of $18.9 million Selected Balance Sheet Data (in thousands) | Selected Balance Sheet Data (in thousands) | May 31, 2022 | May 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $9,428 | $9,231 | | Total Assets | $11,374 | $11,819 | | Total Current Liabilities | $2,011 | $1,300 | | Total Liabilities | $3,050 | $2,592 | | Total Shareholders' Equity | $8,325 | $9,227 | Selected Statement of Operations Data (in thousands) | Selected Statement of Operations Data (in thousands) | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net Sales | $18,871 | $7,199 | | Gross Profit | $2,977 | $366 | | Loss from Operations | ($4,534) | ($7,500) | | Net Loss | ($4,531) | ($7,446) | | Basic and Diluted Net Loss Per Share | ($0.36) | ($0.62) | Selected Cash Flow Data (in thousands) | Selected Cash Flow Data (in thousands) | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Cash Flow from Operations | ($481) | ($5,252) | | Cash Flow from Investing | ($170) | ($296) | | Cash Flow from Financing | $2,395 | $1,114 | Notes to Consolidated Financial Statements Notes detail significant customer and vendor concentrations, stock-based compensation expense of $1.3 million, operating lease commitments, and licensing agreements - The company has significant customer and vendor concentration. In FY2022, two distributors accounted for 65% of net sales, and one vendor accounted for 84% of raw material purchases[136][138] - Inventory reserves decreased to $846,000 in FY2022 from $1,617,000 in FY2021, primarily due to the disposal of previously reserved COVID-19 antibody inventory[144] - The company recognized approximately $1,260,000 in stock-based compensation expense in FY2022. As of May 31, 2022, there was $1,982,000 of total unrecognized compensation cost related to non-vested stock options[148][171][173] - Subsequent to the fiscal year-end, the company entered into a General Merchandise Supplier Agreement with Walmart for its Aware® Breast Self Exam product to be sold in Walmart's retail system[190]