BIOMERICA INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Attached as exhibits to this Form 10-K are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) that are required in accordance with Rule 13a-14 of the Exchange Act. This “Disclosure Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. 29 EVALUATION OF DISCLOSURE CONTROLS Our management evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act as of the end of the period covered by this report. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Our CEO and CFO concluded that our disclosure controls and procedures are effective at a reasonable assurance level as of May 31, 2023. Based on that evaluation the CEO and CFO concluded that information required to be disclosed in the reports that we file and submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms; and (2) accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Company management, including the CEO and CFO concluded that, as of May 31, 2023, the Company’s internal control over financial reporting was effective. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the quarter ended May 31, 2023, that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Company management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements. The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures. Because of these inherent limitations, internal control over financial reporting cannot provide absolute assurance regarding the reliability of financial reporting and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Company management, with the participation of the CEO and the CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on this assessment, management, with the participation of the CEO and CFO, believes that, as of May 31, 2023, the Company’s internal control over financial reporting was effective based on those criteria. Company management will continue to monitor and evaluate the effectiveness of its disclosure controls and procedures and its internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing improvements, as necessary and as funds allow. 30 Note: This 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this 10-K. ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE The information required by this item will be disclosed in our definitive proxy statement on Schedule 14A (the “Proxy Statement”) for our 2023 Annual Meeting of Stockholders and is incorporated by reference herein. Our Proxy Statement will be filed with the SEC within 120 days after the end of the Company’s fiscal year ended May 31, 2023, pursuant to Regulation 14A under the Exchange Act. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item will be disclosed in the Proxy Statement and is incorporated herein by reference. PART IV ITEM 15. EXHIBITS LIST AND FINANCIAL SCHEDULES The following documents are filed as part of this Annual Report on Form 10-K: 1. Consolidated Financial Statements Reference is made to the Index to the consolidated financial statements as set forth on page FS-1 of this Annual Report on Form 10-K. 2. Consolidated Financial Statement Schedules All schedules have been omitted as the pertinent information is either not required, not applicable, or otherwise included in the financial statements and notes thereto. 3. Exhibits See below. 31 Exhibit No. Description 3.1 First Amended and Restated Certificate of Incorporation of Registrant filed with the Secretary of State of Delaware on August 1, 2000 (incorporated by reference to Exhibit 3.8 filed with the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended May 31, 2000). 3.2 Amended and Restated Bylaws, as adopted on July 24, 2023 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed July 26, 2023). 4.1 Specimen Stock Certificate of Common Stock of Registrant (incorporated by reference to Exhibit 4.1 filed with Registrant’s Registration Statement on Form SB-2, Commission No. 333-87231 filed on September 16, 1999). 4.2 Description of Capital Stock. 10.1 Standard Industrial/Commercial Single-Tenant Lease, dated June 18, 2009, by and between Registrant and CNH, LLC for 17571 Von Karman Avenue, Irvine, CA 92614 (incorporated by reference to Exhibit 10.1 of the Company’s August 31, 2009 Form 10-Q filed October 16, 2009). 10.2 2014 Stock Incentive Plan of Registrant (incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on September 29, 2014). 10.3 2017 Stock Incentive Plan of Registrant (incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on September 28, 2017). 10.4 2020 Stock Incentive Plan of Registrant (incorporated by reference to Exhibit A of the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on September 25, 2020). 10.5 Form of Executive Stock Option Agreement (attached herein). 10.6 Employment Agreement, dated March 1, 2023, by and between Biomerica, Inc. and Gary Lu. 21.1 List of Subsidiaries (attached herein). 23.1 Consent of Independent Registered Public Accounting Firm (Haskell & White LLP). 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended. 99.3 Registrant and Subsidiaries Consolidated Financial Statements. 101.INS Inline XBRL Instance Document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). The certifications attached as Exhibits 32.1 and 32.2 accompany this Annual Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing. 32 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMERICA, INC. Registrant By /s/ Zackary S. Irani Zackary S. Irani, Chief Executive Officer Dated: August 25, 2023 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature and Capacity /s/ Zackary S. Irani Date: August 25, 2023 Zackary S. Irani Director, Chief Executive Officer /s/ Gary Lu, CPA Date: August 25, 2023 Gary Lu, CPA Chief Financial Officer /s/ Allen Barbieri Date: August 25, 2023 Allen Barbieri Director, Vice-Chairman /s/ Jane Emerson, M.D., Ph.D. Date: August 25, 2023 Jane Emerson, M.D., Ph.D. Director /s/ David Moatazedi Date: August 25, 2023 David Moatazedi Director /s/ Catherine Coste, CPA Date: August 25, 2023 Catherine Coste, CPA Director 33 BIOMERICA, INC. AND SUBSIDIARIES TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm (PCAOB ID 0200 ) FS-2 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets as of May 31, 2023 and 2022 FS-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended May 31, 2023 and 2022 FS-4 Consolidated Statements of Shareholders’ Equity for the Years Ended May 31, 2023 and 2022 FS-5 Consolidated Statements of Cash Flows for the Years Ended May 31, 2023 and 2022 FS-6 Notes to Consolidated Financial Statements FS-7 – FS-20 FS- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Biomerica, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Biomerica, Inc. (the “Company”) as of May 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of May 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Inventory Valuation Critical Audit Matter Description As described in Note 2 to the Company’s consolidated financial statements, the Company values inventory at the lower of cost or net realizable value with cost inclusive of estimates for reasonable allocations of labor and overhead costs. Also, management periodically reviews inventory for excess quantities and obsolescence. Management evaluates quantities on hand, physical condition, and technical functionality as these characteristics may be impacted by anticipated customer demand for current products and new product introductions. Auditing the Company’s estimates for capitalized labor and overhead was challenging due to the extensive use of estimates throughout this process, including the quantity of labor time allocable to each inventory item. Auditing the Company’s estimates for slow-moving and obsolete inventories was challenging due to the inherently judgmental nature of forecasting future sales and usage of a significant number of diverse inventory items. How the Critical Audit Matter Was Addressed in the Audit To test the valuation of the Company’s inventory, we performed the following audit procedures: ● Obtained an understanding of the methodologies and policies used by management to estimate capitalized labor and overhead and inventory reserves; we obtained an understanding of key internal controls and assessed their overall appropriateness; ● Tested the reasonableness of the production labor and overhead cost pools and the quantities produced and recalculated the allocable labor and overhead rate per unit; we recalculated the amount of capitalized labor and overhead based on quantities on hand at the end of the fiscal year; and ● Tested the accuracy of key data inputs that are the primary drivers for determining the quantitative inventory reserves; these inputs included inventory quantities on hand, approximate age of the inventory quantities, and estimated inventory reserve percentages. HASKELL & WHITE LLP We have served as the Company’s auditor since 2022. Irvine, California August 25, 2023 FS- 2 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS 2023 2022 May 31, 2023 2022 Assets Current Assets: Cash and cash equivalents $ 9,719,000 $ 5,917,000 Accounts receivable, net 722,000 774,000 Inventories, net 2,056,000 2,416,000 Prepaid expenses and other 300,000 320,000 Total current assets 12,797,000 9,427,000 Property and equipment, net of accumulated depreciation and amortization 213,000 214,000 Right-of-use assets, net of accumulated amortization of $ 617,000 and $ 725,000 as of May 31, 2023 and 2022, respectively 1,035,000 1,302,000 Investments 165,000 165,000 Intangible assets, net of accumulated amortization 165,000 170,000 Other assets 79,000 96,000 Total Assets $ 14,454,000 $ 11,374,000 Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable and accrued expenses $ 892,000 $ 972,000 Accrued compensation 696,000 647,000 Advance from customers 60,000 51,000 Lease liabilities, current portion 297,000 341,000 Total current liabilities 1,945,000 2,011,000 Lease liabilities, net of current portion 785,000 1,038,000 Total Liabilities 2,730,000 3,049,000 Commitments and contingencies (Note 9) - - Shareholders’ Equity: Preferred stock, Series A 5% convertible, $ 0.08 par value, 571,429 shares authorized, none issued and outstanding as of May 31, 2023 and 2022 - - Preferred stock, undesignated, no par value, 4,428,571 shares authorized, none issued and outstanding as of May 31, 2023 and 2022 - - Preferred stock, value - - Common stock, $ 0.08 par value, 25,000,000 shares authorized, 16,821,646 and 12,867,924 issued and outstanding at May 31, 2023 and 2022, respectively 1,346,000 1,029,000 Additional paid-in-capital 52,705,000 42,447,000 Accumulated other comprehensive loss ( 110,000 ) ( 74,000 ) Accumulated deficit ( 42,217,000 ) ( 35,077,000 ) Total Shareholders’ Equity 11,724,000 8,325,000 Total Liabilities and Shareholders’ Equity $ 14,454,000 $ 11,374,000 See accompanying notes to consolidated financial statements FS- 3 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS 2023 2022 For the Year Ended May 31, 2023 2022 Net sales $ 5,339,000 $ 18,871,000 Cost of sales ( 4,893,000 ) ( 15,894,000 ) Gross profit 446,000 2,977,000 Operating expenses: Selling, general and administrative 6,085,000 5,699,000 Research and development 1,584,000 1,812,000 Total operating expense 7,669,000 7,511,000 Loss from operations ( 7,223,000 ) ( 4,534,000 ) Other income: Dividend and interest income 133,000 27,000 Other income 1,000 - Total other income 134,000 27,000 Loss before income taxes ( 7,089,000 ) ( 4,507,000 ) Provision for income taxes ( 51,000 ) ( 24,000 ) Net loss $ ( 7,140,000 ) $ ( 4,531,000 ) Basic net loss per common share $ ( 0.50 ) $ ( 0.36 ) Diluted net loss per common share $ ( 0.50 ) $ ( 0.36 ) Weighted average number of common and common equivalent shares: Basic 14,154,269 12,673,245 Diluted 14,154,269 12,673,245 Net loss $ ( 7,140,000 ) $ ( 4,531,000 ) Other comprehensive loss, net of tax: Foreign currency translation ( 36,000 ) ( 26,000 ) Comprehensive loss $ ( 7,176,000 ) $ ( 4,557,000 ) See accompanying notes to consolidated financial statements FS- 4 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED MAY 31, 2023 AND 2022 Common Stock Shares Amount Additional Paid-in-Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholder’s Equity Balances at May 31, 2021 12,307,157 $ 985,000 $ 38,837,000 $ ( 48,000 ) $ ( 30,546,000 ) $ 9,228,000 Exercise of stock options 39,500 3,000 74,000 - - 77,000 Net proceeds from ATM 521,267 41,000 2,276,000 - - 2,317,000 Foreign currency translation - - - ( 26,000 ) - ( 26,000 ) Share-based compensation - - 1,260,000 - - 1,260,000 Net loss - - - - ( 4,531,000 ) ( 4,531,000 ) Balances at May 31, 2022 12,867,924 1,029,000 42,447,000 ( 74,000 ) ( 35,077,000 ) 8,325,000 Balance 12,867,924 1,029,000 42,447,000 ( 74,000 ) ( 35,077,000 ) 8,325,000 Exercise of stock options 46,500 4,000 77,000 - - 81,000 Net proceeds from ATM 573,889 46,000 1,915,000 - - 1,961,000 Shares issued in connection with public offering, net of offering costs 3,333,333 267,000 7,081,000 - - 7,348,000 Foreign currency translation - - - ( 36,000 ) - ( 36,000 ) Share-based compensation - - 1,185,000 - - 1,185,000 Net loss - - - - ( 7,140,000 ) ( 7,140,000 ) Balances at May 31, 2023 16,821,646 $ 1,346,000 $ 52,705,000 $ ( 110,000 ) $ ( 42,217,000 ) $ 11,724,000 Balance 16,821,646 $ 1,346,000 $ 52,705,000 $ ( 110,000 ) $ ( 42,217,000 ) $ 11,724,000 See accompanying notes to consolidated financial statements. FS- 5 BIOMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS 2023 2022 For the Year Ended May 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 7,140,000 ) $ ( 4,531,000 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 84,000 339,000 Loss on disposal of property and equipment - 53,000 Provision for allowance on accounts receivable 342,000 ( 684,000 ) Inventory reserve ( 174,000 ) ( 772,000 ) Share-based compensation 1,185,000 1,260,000 Amortization of right-of-use asset 267,000 256,000 Changes in assets and liabilities: Accounts receivable ( 291,000 ) 1,365,000 Inventories 534,000 1,562,000 Prepaid expenses and other 20,000 50,000 Other assets 18,000 169,000 Accounts payable and accrued expenses ( 80,000 ) 389,000 Accrued compensation 49,000 258,000 Advance from customers 9,000 51,000 Reduction in lease liabilities ( 297,000 ) ( 244,000 ) Net cash used in operating activities ( 5,474,000 ) ( 479,000 ) Cash flows from investing activities: Expenditure related to intangibles ( 14,000 ) ( 113,000 ) Purchases of property and equipment ( 64,000 ) ( 57,000 ) Net cash used in investing activities ( 78,000 ) ( 170,000 ) Cash flows from financing activities: Gross proceeds from sale of common stock 10,014,000 2,402,000 Costs from sale of common stock ( 705,000 ) ( 85,000 ) Proceeds from exercise of stock options 81,000 77,000 Net cash provided by financing activities 9,390,000 2,394,000 Effect of exchange rate changes in cash ( 36,000 ) ( 26,000 ) Net increase in cash and cash equivalents 3,802,000 1,719,000 Cash and cash equivalents at beginning of year 5,917,000 4,199,000 Cash and cash equivalents at end of year $ 9,719,000 $ 5,917,000 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Income taxes $ 51,000 $ 24,000 Non-cash investing and financing activities: Increase in right-of-use asset due to lease extension or establishment $ - $ 4,000 Increase in lease liability due to lease extension or establishment $ - $ 4,000 Write off of fixed assets, cost $ 40,000 $ 820,000 Write off of fixed assets, accumulated depreciation $ 40,000 $ 767,000 Write off of intangible assets, cost $ 6,000 $ 247,000 Write off of intangible assets, accumulated amortization $ 6,000 $ 37,000 See accompanying notes to consolidated financial statements FS- 6 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2023 AND 2022 NOTE 1: ORGANIZATION 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 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, development, commercialization and in certain cases regulatory approval, of patented, diagnostic-guided therapy (“DGT”) products to treat gastrointestinal diseases, such as irritable bowel syndrome (“IBS”), and other inflammatory diseases. These products are directed at chronic inflammatory illnesses that are widespread and common, and as such address very large markets. Our InFoods® IBS product 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, and constipation. Instead of broad and difficult to manage dietary restrictions, the InFoods® IBS product works by identifying specific foods that may be causing an abnormally high immune response in the patient. A food identified as positive, which is causing the abnormal immune response in the patient, is simply removed from the diet to help alleviate IBS symptoms. Our existing medical diagnostic products are sold worldwide primarily in two markets: 1) clinical laboratories and 2) point-of-care (physicians’ offices and over-the-counter drugstores like Walmart and CVS Pharmacy). The diagnostic test kits are used to analyze blood, urine, nasal, or fecal specimens from patients in the diagnosis of various diseases, food intolerances, and other medical complications, by measuring or detecting the existence and/or level of specific bacteria, hormones, antibodies, antigens, or other substances, which may exist in a patient’s body, stools, or blood, often in extremely small concentrations. Due to the global COVID-19 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, we generated revenues from the international sale of our COVID-19 antigen tests. However, in fiscal 2023, due to the decline in severity of COVID-19 and the corresponding lower sales volumes, we no longer sell these products. Due to the relatively high volume of sales from these products in fiscal 2021 and fiscal 2022, we have seen significant fluctuations in quarterly revenues over the past twelve quarters. The other existing products that contributed to our 2023 revenues 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. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements for the years ended May 31, 2023 and 2022, include the accounts of Biomerica, Inc. (“Biomerica”) as well as its wholly-owned German subsidiary (“BioEurope GmbH”) and Mexican subsidiary (“Biomerica de Mexico”). All significant intercompany accounts and transactions have been eliminated in consolidation. FS- 7 ACCOUNTING ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported period. Estimates that are made include the allowance for doubtful accounts, which is estimated based on current as well as historical past practices with a customer; stock option forfeiture rates, which are calculated based on historical data; inventory obsolescence, which is based on projected and historical usage of materials; and lease liabilities and right-of-use assets, which are calculated based on certain assumptions such as the borrowing rate on the lease commencement date and, the likelihood of lease extensions to occur, asset valuations, among other things; and other items that may be necessary to estimate using current, historical and judgment based information. Actual results could materially differ from those estimates. Due to the global COVID-19 pandemic, the Company’s operations have been negatively impacted. The Company has faced disruptions in the following areas, (and may face further challenges): supply chain disruptions, loss of contracts and/or customers, closure of the Company’s manufacturing or distribution facilities or of the facilities of the Company’s suppliers, partners and customers, travel, shipping and logistical disruptions, government responses of all types, international business risks in countries where the Company makes and/or sells its products, loss of human capital or personnel at the Company, its partners and its customers, interruptions of production, customer credit risk, and general economic calamities. These pandemic related disruptions can materially negatively impact the Company’s operations and financial performance and may continue to have significant material negative impacts on the Company. LIQUIDITY The Company has incurred net losses and negative cash flows from operations and has an accumulated deficit of approximately $ 42 million as of May 31, 2023. Management expects to continue to incur significant costs as it advances its trials and development activities. As of May 31, 2023, the Company had cash and cash equivalents of approximately $ 9,719,000 and working capital of approximately $ 10,852,000 . On January 22, 2021, the Company filed a prospectus supplement to the base prospectus included in a registration statement filed with the SEC on July 21, 2020, and declared effective by the SEC on September 30, 2020, for purposes of selling up to $ 15,000,000 in “at-the-market” offerings, as defined in Rule 415 promulgated under the Securities Act (the “ATM Offering”). Under the ATM Offering, the sales agent uses commercially reasonable efforts to sell on the Company’s behalf all the shares requested to be sold from time to time by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the agent and the Company. The Company has no obligation to sell any shares under the ATM Offering, and may at any time suspend offers under, or terminate the ATM Offering. During the year ended May 31, 2023, the Company sold 573,889 shares of its common stock at prices ranging from $ 3.15 to $ 4.26 pursuant to the ATM Agreement, which resulted in gross proceeds of approximately $ 2,014,000 and net proceeds to the Company of $ 1,961,000 , after deducting commissions for each sale and legal, accounting, and other fees related to offering in the amount of $ 53,000 . During the year ended May 31, 2022, the Company sold 521,267 shares of its common stock at prices ranging from $ 4.02 to $ 5.63 pursuant to the ATM Offering, which resulted in gross proceeds of approximately $ 2,402,000 and net proceeds to the Company of $ 2,317,000 , after deducting commissions for each sale and legal, accounting, and other fees related to the offering in the amount of $ 85,000 . On March 7, 2023, the Company sold 3,333,333 shares of common stock in a firm commitment public offering at a gross sales price of $ 2.40 per share, with net total proceeds, after deducting issuance fees and expenses of $ 700,000 , of approximately $ 7,300,000 . Since the closing of the March 7, 2023 offering, the ATM has been withdrawn and is not active. The Company intends to use the net proceeds from such offerings for general corporate purposes, including, without limitation, sales and marketing activities, clinical studies, product development, making acquisitions of assets, businesses, companies or securities, capital expenditures, and for working capital needs. Management has analyzed the cash requirements of the Company’s business through at least August 2024. As a result of cash and cash equivalents on hand on May 31, 2023, largely from the public offering, and the ability to raise additional funds through another new ATM agreement, management believes the Company has sufficient funds to operate through at least August 2024. FS- 8 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has financial instruments whereby the fair market value of the financial instruments could be different than that recorded on a historical basis. The Company’s consolidated financial instruments consist of its cash and cash equivalents, accounts receivable, and accounts payable. The carrying amounts of the Company’s financial instruments approximate their fair values. The Company also maintains an investment in privately held company (see below). CONCENTRATION OF CREDIT RISK The Company maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies. From time to time, the Company has uninsured balances. The Company does not believe it is exposed to any significant credit risks. The Company provides credit in the normal course of business to customers throughout the United States and in foreign markets. The Company performs ongoing credit evaluations of its customers and requires accelerated prepayment in some circumstances. Our net sales were approximately $ 5,339,000 for fiscal 2023 compared to $ 18,871,000 for fiscal 2022. For the fiscal years ended May 31, 2023 and 2022, the Company had one and two distributors, respectively, which accounted for a total of 35 % and 65 % of our net sales, respectively. Of this, for the fiscal years ended May 31, 2023 and 2022, the largest of the distributors mentioned above accounted for 35 % and 55 %, respectively, of net sales. Total gross receivables on May 31, 2023 and 2022 were approximately $ 751,000 and $ 927,000 , respectively. On May 31, 2023 and 2022, the Company had one distributor which accounted for a total of 36 % and 50 %, respectively, of gross accounts receivable. Of the 36 % as of May 31, 2023, 100 % was owed by a distributor in Asia. For the fiscal year ended May 31, 2023, the Company did not have any significant concentration of vendor spend for raw materials. For the fiscal year ended May 31, 2022, the Company had one vendor, which accounted for 84 % of our purchases of raw materials largely related to COVID-19 products. GEOGRAPHIC CONCENTRATION As of May 31, 2023 and 2022, approximately $ 626,000 and $ 621,000 , respectively, of Biomerica’s gross inventory was located in Mexicali, Mexico, respectively. As of May 31, 2023 and 2022, approximately $ 17,000 of Biomerica’s property and equipment, net of accumulated depreciation and amortization, was located in Mexicali, Mexico. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of demand deposits and money market accounts with original maturities of less than three months. ACCOUNTS RECEIVABLE, NET The Company extends unsecured credit to its customers on a regular basis. International accounts are usually required to prepay until they establish a history with the Company and at that time, they are extended credit at levels based on a number of criteria. Initial credit levels for individual distributors are approved by designated officers and managers of the Company. All increases in credit limits are also approved by designated upper-level management. Management evaluates receivables on a quarterly basis and adjusts the allowance for doubtful accounts accordingly. Balances over ninety days old are usually reserved for unless collection is reasonably assured. Occasionally certain long-standing customers, who routinely place large orders, will have unusually large receivables balances relative to the total gross receivables. Management monitors the payments for these large balances closely and very often requires payment of existing invoices before shipping new sales orders. As of May 31, 2023 and 2022, the Company has established a reserve of approximately $ 29,000 and $ 153,000 , respectively, for doubtful accounts. FS- 9 PREPAID EXPENSES AND OTHER The Company occasionally prepays for items such as inventory, insurance, and other items. These items are reported as prepaids, until either the inventory is physically received or the insurance and other items are utilized. As of May 31, 2023 and 2022, the prepaids were approximately $ 300,000 and $ 320,000 , respectively, composed of prepayments to insurance and various other suppliers. INVENTORIES, NET The Company values inventory at the lower of cost (determined using a combination of specific lot identification and the first-in, first-out methods) or net realizable value. Management periodically reviews inventory for excess quantities and obsolescence. Management evaluates quantities on hand, physical condition, and technical functionality as these characteristics may be impacted by anticipated customer demand for current products and new product introductions. The reserve is adjusted based on such evaluation, with a corresponding provision included in cost of sales. Abnormal amounts of idle facility expenses, freight, handling costs, and wasted material are recognized as current period charges and the allocation of fixed production overhead is based on the normal capacity of the production facilities. The following is a summary of approximate net inventories: SCHEDULE OF NET INVENTORIES 2023 2022 May 31, 2023 2022 Raw materials $ 1,677,000 $ 1,717,000 Work in progress 869,000 763,000 Finished products 182,000 782,000 Total gross inventory $ 2,728,000 $ 3,262,000 Inventory reserve ( 672,000 ) ( 846,000 ) Net inventory $ 2,056,000 $ 2,416,000 Reserves for inventory obsolescence are recorded as necessary to reduce obsolete inventory to estimated net realizable value or to specifically reserve for obsolete inventory. As of May 31, 2023 and 2022, inventory reserves were approximately $ 672,000 and $ 846,000 , respectively. The Company has fully reserved COVID-19 antibody inventory in fiscal 2023. PROPERTY AND EQUIPMENT, NET Property and equipment are stated at cost. Expenditures for additions and major improvements are capitalized. Repairs and maintenance costs are charged to operations as incurred. When property and equipment are sold, retired, or otherwise disposed of, the related cost and accumulated depreciation or amortization are removed from the accounts, and gains or losses from sales, retirements, and dispositions are credited or charged to income. Depreciation and amortization are provided over the estimated useful lives of the related assets, ranging from 5 to 10 years, using the straight-line method. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Depreciation and amortization expense on property and equipment amounted to approximately $ 66,000 and $ 100,000 for the years ended May 31, 2023 and 2022, respectively. INTANGIBLE ASSETS, NET Intangible assets include trademarks, product rights, technology rights, and patents, and are accounted for based on Accounting Standards Codification (“ASC”), ASC 350 Intangibles – Goodwill and Other (“ASC 350”). In that regard, intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. FS- 10 Intangible assets are being amortized using the straight-line method over the useful life, not to exceed 18 years for marketing and distribution rights, 10 years for purchased technology use rights, and 20 years for patents. Amortization amounted to approximately $ 18,000 and $ 239,000 for the years ended May 31, 2023 and 2022, respectively. The Company assesses the recoverability of these intangible assets by determining whether the amortization of the asset’s balance over its remaining life can be recovered through projected undiscounted future cash flows. The Company uses a qualitative assessment to determine whether there was any impairment. During the year ended May 31, 2023, there was no impairment of intangible assets. During the year ended May 31, 2022, an impairment adjustment was made of $ 210,000 . INVESTMENTS The Company has made investments in a privately held Polish distributor, which is primarily engaged in distributing medical products and devices, including the distribution of the products sold by the Company. The Company invested approximately $ 165,000 into the Polish distributor and owns approximately 6 % of the investee. Equity holdings in nonmarketable unconsolidated entities in which the Company is not able to exercise significant influence (“Cost Method Holdings”) are accounted for at the Company’s initial cost, minus any impairment (if any), plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar holding or security of the same issuer. Dividends received are recorded as other income. The Company assesses its equity holdings for impairment whenever events or changes in circumstances indicate that the carrying value of an equity holding may not be recoverable. Management reviewed the underlying net assets of the Company’s equity method holding as of May 31, 2023 and determined that the Company’s proportionate economic interest in the entity indicates that the equity holding was not impaired. There were no observable price changes in orderly transactions for identical or a similar holding or security of the Company’s Cost Method Holding during the year ended May 31, 2023. SHARE-BASED COMPENSATION The Company follows the guidance of ASC 718, Share-based Compensation (“ASC 718”), which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (options). The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses assumptions for expected volatility, expected dividends, expected forfeiture rate, expected term, and the risk-free interest rate. The Company has not paid dividends historically and does not expect to pay them in the foreseeable future. Expected volatilities are based on weighted averages of the historical volatility of the Company’s common stock estimated over the expected term of the options. The expected forfeiture rate is based on historical forfeitures experienced. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term as historically the Company had limited exercise activity surrounding its options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The grant date fair value of the award is recognized under the straight-line attribution method. The Company expensed approximately $ 1,185,000 and $ 1,260,000 of share-based compensation during the years ended May 31, 2023 and 2022, respectively. In applying the Black-Scholes option-pricing model, the following assumptions used in the valuation of awards issued for period ending May 31, 2023 and 2022: SCHEDULE OF SHARE-BASED PAYMENT AWARD, STOCK OPTIONS, VALUATION ASSUMPTIONS For the year ended May 31, 2023 2022 Dividend yield 0 % 0 % Expected volatility 98.81 - 101.77 % 102.54 - 105.48 % Risk free interest rate 3.12 - 3.35 % 0.97 - 2.75 % Expected term 6.25 years 5.50 - 6.25 years FS- 11 REVENUE RECOGNITION The Company has various contracts with customers. All of the contracts specify that revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, which is when the transfer of control of goods has occurred and at which point title passes. The Company does not typically allow for returns from customers except in the event of defective merchandise and therefore does not establish an allowance for returns. In addition, the Company has contracts with customers wherein customers receive purchase discounts for achieving specified sales volumes. The Company evaluated the status of these contracts during the years ended May 31, 2023 and 2022 and does not believe that any additional discounts will be given through the end of the contract periods. Services for contract work performed by the Company for others are invoiced and recognized as that work has been performed and as the project progresses. The Company sells clinical lab products to domestic and international distributors, including hospitals and clinical laboratories, medical research institutions, medical schools, and pharmaceutical companies. OTC products are sold directly to drug stores and e-commerce customers as well as to distributors. Physicians’ office products are sold to physicians and distributors, all of whom are categorized below according to the type of products sold to them. We also manufacture certain components on a contract basis for domestic and international manufacturers. As of May 31, 2023, the Company had approximately $ 60,000 of advances from certain foreign customers. These advances are prepayments on orders that are expected to ship during our second fiscal quarter ending November 30, 2023. Disaggregation of revenue: The following is an approximate breakdown of revenues according to primary markets to which the products are sold: SCHEDULE OF DISAGGREGATION REVENUE 2023 2022 For the Year Ended May 31, 2023 2022 Clinical lab $ 3,310,000 $ 3,064,000 Over-the-counter 1,169,000 1,089,000 Contract manufacturing 610,000 459,000 Physician’s office 250,000 14,259,000 Total $ 5,339,000 $ 18,871,000 See Note 8 for additional information regarding geographic revenue concentrations. SHIPPING AND HANDLING FEES The Company includes shipping and handling fees billed to customers in net sales. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. The Company expensed approximately $ 1,584,000 and $ 1,812,000 of research and development costs during the years ended May 31, 2023 and 2022, respectively. INCOME TAXES The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years and the benefits of net operating loss and tax credit carryforwards. These temporary differences and the benefits of net operating loss and tax credit carryforwards are measured using enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets to the extent that management considers it is more likely than not that a deferred tax asset will not be realized. In determining the valuation allowance, the Company considers factors such as the reversal of deferred income tax assets, projected taxable income, and the character of income tax assets and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense. As of May 31, 2023 and 2022, in accordance with ASC 740, the Company has a valuation allowance for substantially all of its net deferred tax assets. During the year ended May 31, 2023, this valuation allowance was increased to $ 8,940,000 , which fully covers the net deferred tax asset of $ 8,940,000 . FS- 12 The Company accounts for its uncertain tax provisions by using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, based solely on the technical merits, that the position will be sustained in an audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the appropriate amount of the benefit to recognize. The amount of benefit to recognize is measured as the maximum amount which is more likely than not to be realized. The tax position is derecognized when it is no longer more likely than not capable of being sustained. On subsequent recognition and measurement, the maximum amount which is more likely than not to be recognized at each reporting date will represent the Company’s best estimate, given the information available at the reporting date, although the outcome of the tax position is not absolute or final. The Company elected to follow an accounting policy to classify accrued interest related to liabilities for income taxes within the “Interest expense” line and penalties related to liabilities for income taxes within the “Other expense” line of the consolidated statements of operations and comprehensive loss. ADVERTISING COSTS The Company reports the cost of all advertising as expense in the period in which those costs are incurred. Advertising costs were approximately $ 156,000 and $ 76,000 for the years ended May 31, 2023 and 2022, respectively. FOREIGN CURRENCY TRANSLATION The subsidiary located in Mexico operates primarily using the Mexican peso. The subsidiary located in Germany operates primarily using the U.S. dollar, with an immaterial amount of transactions occurring using the Euro. Accordingly, assets and liabilities of these subsidiaries are translated using exchange rates in effect at the end of the year, and revenues and costs are translated using average exchange rates for the year. The resulting adjustments to assets and liabilities are presented as a separate component of accumulated other comprehensive loss. There are no foreign currency transactions that are included in the consolidated statements of operations for the years ended May 31, 2023 and 2022. RIGHT-OF-USE ASSETS AND LEASE LIABILITIES In February 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which requires lessees to recognize most leases on the balance sheet with a corresponding right-of-use asset. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of fixed lease payments over the lease term. Leases are classified as financing or operating which will drive the expense recognition pattern. The Company has elected to exclude short-term leases. The Company leases office space and copy machines, all of which are operating leases. Most leases include the option to renew and the exercise of the renewal options is at the Company’s sole discretion. Options to extend or terminate a lease are considered in the lease term to the extent that the option is reasonably certain of exercise. The leases do not include the options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term. For additional information, see Note 9-Commitments and Contingencies. NET LOSS PER SHARE Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities using the treasury stock method. The total amounts of anti-dilutive stock options not included in the loss per share calculation for the years ended May 31, 2023 and 2022 were 2,342,616 and 2,321,616 , respectively. SEGMENT REPORTING ASC 280, Segment Reporting (“ASC 280”), establishes standards for reporting, by public business enterprises, information about operating segments, products and services, geographic areas, and major customers. The Company’s operations are analyzed by management and its chief operating decision maker as being part of a single industry segment: the design, development, marketing, and sales of diagnostic kits. FS- 13 REPORTING COMPREHENSIVE LOSS Comprehensive loss represents net loss and any revenues, expenses, gains and losses that, under GAAP, are excluded from net loss and recognized directly as a component of shareholders’ equity. Items of other comprehensive loss consist solely of foreign currency translation adjustments for the years ended May 31, 2023 and 2022. RECENT ACCOUNTING PRONOUNCEMENTS Except as follows, recent ASU’s issued by the FASB and guidance issued by the SEC did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance was initially effective for the Company for annual reporting periods beginning after December 15, 2019, and interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which, among other things, defers the effective date of ASU 2016-13 for public filers that are considered smaller reporting companies as defined by the Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company is currently reviewing the requirements of this ASU to determine its impact on the Company’s consolidated results of operations and financial position. NOTE 3: PROPERTY AND EQUIPMENT, NET The following is an approximate breakdown of property and equipment, net of accumulated depreciation: SCHEDULE OF PROPERTY AND EQUIPMENT, NET 2023 2022 May 31, 2023 2022 Equipment $ 1,333,000 $ 1,292,000 Furniture, fixtures and leasehold improvements 211,000 227,000 Less accumulated depreciation ( 1,331,000 ) ( 1,305,000 ) Net property and equipment $ 213,000 $ 214,000 NOTE 4: INTANGIBLE ASSETS, NET The following is an approximate breakdown of intangible assets, net of accumulated amortization: SCHEDULE OF INTANGIBLE ASSETS, NET 2023 2022 May 31, 2023 2022 Patents 196,000 189,000 Less accumulated amortization-patents ( 31,000 ) ( 19,000 ) Intangible assets, net $ 165,000 $ 170,000 FS- 14 Expected amortization of intangible assets for the years ending May 31: SCHEDULE OF EXPECTED AMORTIZATION OF INTANGIBLE ASSETS 2024 $ 13,000 2025 13,000 2026 13,000 2027 13,000 2028 13,000 Thereafter 100,000 Total $ 165,000 NOTE 5: ACCOUNTS PAYABLE AND ACCRUED EXPENSES The following is an approximate breakdown of accounts payable and accrued expenses balances: SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2023 2022 May 31, 2023 2022 Accounts payable $ 344,000 $ 736,000 Accrued expenses 548,000 236,000 Total $ 892,000 $ 972,000 As of May 31, 2023, the Company had one vendor which accounted for 23 % of accounts payable. As of May 31, 2022, the Company had two vendors which accounted for 69 % of accounts payable. NOTE 6: SHAREHOLDERS’ EQUITY STOCK OPTION AND RESTRICTED STOCK PLANS In December 2014, the Company adopted and shareholders approved a stock option and restricted stock plan (the “2014 Plan”). Subsequently, in December 2017, the Company adopted and shareholders approved an stock option and restricted stock plan (the “2017 Plan”). In February 2020, the Board approved the 2020 Stock Incentive Plan (the “2020 Plan”, and collectively with the 2014 Plan and 2017 Plan, the “Equity Incentive Plans”) and on December 11, 2020, the shareholders of the Company approved the 2020 Plan. The Equity Incentive Plans provide that non-qualified options and incentive stock options and restricted stock may be granted to directors, affiliates, employees, or consultants of the Company. The Equity Incentive Plans authorize awards representing up to 850,000 , 900,000 and 900,000 shares of the Company’s common stock to be issued under the 2014 Plan, 2017 Plan, and 2020 Plan, respectively. Awards granted under the Equity Incentive Plans typically vest over 4 years. Options granted under the Equity Incentive Plans will be granted at prices not less than 80 % of the then fair market value of the common stock and will expire not more than 10 years after the date of grant. The 2014 Plan expires in December 2024, the 2017 Plan expires in December 2027, and the 2020 Plan expires in December 2030. Stock-based compensation expense for the years ended May 31, 2023 and 2022 is as follows: SCHEDULE OF STOCK BASED COMPENSATION EXPENSE 2023 2022 For the Year Ended May 31, 2023 2022 Cost of sales $ 143,000 $ 159,000 Selling, general and administrative 971,000 1,021,000 Research and development 71,000 80,000 Total stock option expense $ 1,185,000 $ 1,260,000 FS- 15 Activity as to aggregate stock options outstanding is as follows: SCHEDULE OF ACTIVITY TO AGGREGATE STOCK OPTIONS Number of Stock Options Weighted Average Exercise Price Aggregate Intrinsic Value Options Outstanding at May 31, 2021 2,081,366 $ 3.59 $ 2,132,000 Options granted 344,000 $ 4.43 Options exercised ( 39,500 ) $ 1.99 $ 90,000 Options canceled or expired ( 64,250 ) $ 4.41 Options Outstanding at May 31, 2022 2,321,616 $ 3.72 $ 1,838,000 Options granted 243,000 $ 2.70 Options exercised ( 46,500 ) $ 1.73 $ 90,000 Options canceled or expired ( 175,500 ) $ 5.56 Options Outstanding at May 31, 2023 2,342,616 $ 3.52 $ 146,000 Options vested and exercisable at May 31, 2023 1,841,933 $ 3.38 $ 146,000 The weighted average grant date fair value of options granted during 2023 and 2022 were $ 2.19 and $ 4.43 , respectively. On May 31, 2023, total compensation cost related to non-vested stock option awards not yet recognized totaled approximately $ 1,145,000 . The weighted-average period over which this amount is expected to be recognized is 2.52 years. The weighted average remaining contractual term of options that were exercisable on May 31, 2023 was 4.97 years. The weighted average remaining contractual term of options that were vested, exercisable, or expected to vest on May 31, 2023 was 5.67 years. COMMON STOCK ACTIVITY On January 22, 2021, the Company filed a prospectus supplement to the base prospectus included in a registration statement filed with the SEC on July 21, 2020, and declared effective by the SEC on September 30, 2020, for purposes of selling up to $ 15,000,000 in “at-the-market” offerings, as defined in Rule 415 promulgated under the Securities Act (the “ATM Offering”). On May 21, 2021, in conjunction with the Company’s 2020 Stock Incentive Plan, that was approved by shareholders at the Company’s annual meeting in December 2020, the Company filed an S-8 Registration Statement to register up to 900,000 shares of the Company’s common stock that could be issued under this Plan. Under the ATM Offering, the sales agent uses commercially reasonable efforts to sell on the Company’s behalf all of the shares requested to be sold from time to time by the Company, consistent with its normal trading and sales practices, on mutually agreed terms between the agent and the Company. The Company has no obligation to sell any of the shares under the ATM Offering, and may at any time suspend offers under, or terminate the ATM Offering. During the year ended May 31, 2023, the Company sold 573,889 shares of its common stock at prices ranging from $ 3.15 to $ 4.26 pursuant to the ATM Offering, which resulted in gross proceeds of approximately $ 2,014,000 and net proceeds to the Company of $ 1,961,000 , after deducting commissions for each sale and legal, accounting, and other fees related to the offering in the amount of $ 53,000 . During the year ended May 31, 2022, the Company sold 521,267 shares of its common stock at prices ranging from $ 4.02 to $ 5.63 pursuant to the ATM Offering, which resulted in gross proceeds of approximately $ 2,402,000 and net proceeds to the Company of $ 2,317,000 , after deducting commissions for each sale and legal, accounting, and other fees related to the offering in the amount of $ 85,000 . On March 7, 2023, the Company closed on an underwritten sale of 3,333,333 shares of our registered common stock through an investment banking firm, which shares were issued under our shelf registration. In this offering, the Company sold the registered shares at a gross sales price of $ 2.40 per share, with net proceeds, after deducting issuance fees and expenses of $ 700,000 , of approximately $ 7,300,000 . PREFERRED STOCK ACTIVITY On February 24, 2020, the Company entered into and closed on a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Palm Global Small Cap Master Fund LP (“Palm”) pursuant to which the Company agreed to sell and issue to Palm, and Palm agreed to purchase from the Company, 571,429 shares of the Company’s Series A 5% Convertible Preferred Stock, $ 0.08 par value per share for a purchase price of approximately $ 2 million, or $ 3.50 per Series A Convertible Preferred Stock. Under the terms of the Stock Purchase Agreement, each share of issued Convertible Preferred Stock can be converted at any time by Palm into one share of the Company’s common stock, subject to certain adjustments. FS- 16 The Series A 5% Convertible Preferred Stock accrued annual preferred dividends at a rate of $ 0.175 per Series A 5% Convertible Preferred Share. However, accruing dividends were payable only when, as, and if declared by the Board and the Company had no obligation to pay such accruing dividends. On March 24, 2020, Palm converted 250,000 shares of Convertible Preferred Stock into 250,000 shares of unregistered common stock. On July 21, 2020, the Company filed with the SEC a registration statement on Form S-3, that among other things, registered 571,429 common shares issued, or to be issued, to Palm upon conversion of the Convertible Preferred Stock into common shares. On September 30, 2020, the Company received a Notice of Effectiveness from the Securities and Exchange Commission for registration of these shares. On January 21, 2021, Palm Converted their remaining 321,429 Convertible Preferred Shares into registered common shares. On May 30, 2021, the Company had no shares of Preferred Stock outstanding. Under the terms of the Preferred Stock Purchase Agreement, none of the cumulative dividends were paid to Palm during the period they owned the Preferred Stock. Once converted to common shares, Palm lost all rights to receive any past cumulative dividends. NOTE 7: INCOME TAXES Provision for income taxes for the years ended May 31 consists of the following: SCHEDULE OF PROVISION FOR INCOME TAXES 2023 2022 For the Year Ended May 31, 2023 2022 Current: U.S. Federal $ - $ - Foreign Taxes Subsidiaries ( 50,000 ) ( 23,000 ) State and local ( 1,000 ) ( 1,000 ) Total current ( 51,000 ) ( 24,000 ) Deferred: U.S. Federal - - State and local - - Total deferred - - Income tax expense $ ( 51,000 ) $ ( 24,000 ) Provision for income taxes differs from the amounts computed by applying the U.S. Federal income tax rate applicable for each year ( 21 % for 2023 and 2022) to pretax income as a result of the following: SCHEDULE OF EFFECTIVE INCOME TAX RECONCILIATION 2023 2022 For the Year Ended May 31, 2023 2022 Computed “expected” tax benefit $ 1,490,000 947,000 Increase (reduction) in income taxes resulting from: Change in valuation allowance ( 1,973,000 ) ( 1,022,000 ) State income taxes, net of federal benefit 583,000 300,000 Research and development tax credits - 50,000 Permanent tax differences and other ( 17,000 ) ( 197,000 ) Stock based compensation benefit ( 5,000 ) 11,000 Foreign taxes of subsidiaries ( 129,000 ) ( 113,000 ) Income tax expense $ ( 51,000 ) $ ( 24,000 ) FS- 17 The tax effect of significant temporary differences is presented below: SCHEDULE OF DEFERRED TAX ASSETS 2023 2022 May 31, 2023 2022 Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $ 8,000 $ 43,000 Inventory valuation 188,000 237,000 Compensated absences 118,000 120,000 Net operating loss carryforwards 5,817,000 4,349,000 Tax credit carryforwards 1,239,000 1,096,000 Deferred rent expense/Capitalized leases 11,000 20,000 Stock Options 1,296,000 1,035,000 Sec 174 capitalized costs 284,000 - Losses of foreign subsidiaries & other, net - 41,000 Accumulated depreciation and amortization ( 21,000 ) 26,000 Total deferred tax assets 8,940,000 6,967,000 Less valuation allowance ( 8,940,000 ) ( 6,967,000 ) Net deferred tax asset $ - $ - The Company has provided a valuation allowance of approximately $ 8,940,000 and $ 6,967,000 as of May 31, 2023 and 2022, respectively. The net change in the valuation allowance for the years ended May 31, 2023 and 2022 was an increase of $ 1,973,000 and $ 1,063,000 , respectively. On May 31, 2023, the Company has Federal income tax net operating loss carryforwards of approximately $ 21,958,000 . On May 31, 2023, the Company has California state income tax net operating loss carryforwards of approximately $ 17,269,000 . For tax reporting purposes, operating loss carryforwards are available to offset future taxable income; such carryforwards expire in varying amounts beginning in 2024 and 2038 for federal and state purposes, respectively. Federal net operating losses beginning in 2018 have no expiration date. On May 31, 2023, the Company has Federal research and development tax credit carryforward of approximately $ 817,000 . The Federal credits begin to expire in 2028. The Company also had similar credit carryforwards for state purposes of $ 533,000 on May 31, 2023, which do not expire. Pursuant to Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss (“NOL”) and credit carryforwards may be limited by statute because of a cumulative change in ownership of more than 50%. Pursuant to Sections 382 and 383 of the IRC, the annual use of the Company’s NOLs and credit carryforwards would be limited if there is a cumulative change of ownership (as that term is defined in Section 382(g) of the IRC of greater than 50% in a three-year period). Management has not performed an analysis to determine if the Company has had a cumulative change in ownership of greater than 50%. For the year ended May 31, 2023, the Company performed an analysis and has not identified any uncertain tax positions as defined under ASC 740. Should such position be identified in the future, and should the Company owe interest and penalties as a result of this, these would be recognized as interest expense and other expense, respectively, in the consolidated financial statements. The Company is no longer subject to any significant U.S. federal tax examinations by tax authorities for years before fiscal 2018. FS- 18 NOTE 8: GEOGRAPHIC INFORMATION The Company operates as one segment. Geographic information regarding net sales is approximately as follows: SCHEDULE OF GEOGRAPHIC INFORMATION 2023 2022 For the Year Ended May 31, 2023 2022 Revenues from sales to unaffiliated customers: Asia $ 2,021,000 $ 13,375,000 Europe 1,798,000 4,339,000 North America 1,470,000 997,000 Middle East 39,000 70,000 South America 11,000 90,000 Total $ 5,339,000 $ 18,871,000 NOTE 9: COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases facilities in Irvine, California and Mexicali, Mexico. As of May 31, 2023, the Company had approximately 22,000 square feet of floor space at its corporate headquarters at 17571 Von Karman Avenue in Irvine, California. The lease for its headquarters expires in August 2026. The Company has the option to extend the lease for an additional five-year term . The Company made a security deposit of approximately $ 22,000 . In November 2016, the Company’s Mexican subsidiary, Biomerica de Mexico, entered into a 10 -year lease for approximately 8,100 square feet of manufacturing space. The Company has one 10 -year option to renew at the end of the initial lease period. Biomerica de Mexico also leases a smaller unit on a month-to-month basis for use in the Company’s manufacturing process. In addition, the Company leases a small office in Lindau, Germany on a month-to-month basis, as headquarters for BioEurope GmbH, its Germany subsidiary. For purposes of determining straight-line rent expense, the lease term is calculated from the date the Company first takes possession of the facility, including any periods of free rent and any renewal options periods that the Company is reasonably certain of exercising. The Company’s office and equipment leases generally have contractually specified minimum rent and annual rent increases are included in the measurement of the right-of-use asset and related lease liabilities. Additionally, under these lease arrangements, the Company may be required to pay directly, or reimburse the lessors, for some maintenance and operating costs. Such amounts are generally variable and therefore not included in the measurement of the right-of-use asset and related lease liabilities but are instead recognized as variable lease expense in the consolidated statements of operations and comprehensive loss when they are incurred. The following table presents information on our operating leases for the years ended May 31, 2023 and 2022: SCHEDULE OF OPERATING LEASES 2023 2022 Year Ended May 31, 2023 2022 Operating lease cost $ 353,000 $ 352,000 Short-term lease cost 5,000 5,000 Total lease cost $ 358,000 $ 357,000 FS- 19 The future minimum lease payments of the Company’s operating lease liabilities by fiscal year are as follows: SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS Year Ending May 31: Operating Leases 2024 $ 356,000 2025 366,000 2026 376,000 2027 101,000 Thereafter - Total minimum future lease payments $ 1,199,000 Less: imputed interest 117,000 Total operating lease liabilities $ 1,082,000 The following table summarizes the Company’s other supplemental lease information for the years ended May 31, 2023 and 2022: SCHEDULE OF OTHER SUPPLEMENTAL LEASE INFORMATION 2023 2022 Year Ended May 31, 2023 2022 Cash paid for operating lease liabilities $ 347,000 $ 338,000 Weighted-average remaining lease term (years) 3.27 4.28 Weighted-average discount rate 6.50 % 6.50 % The Company also has various insignificant leases for office equipment. RETIREMENT SAVINGS PLAN Effective September 1, 1986, the Company established a 401(k) plan for the benefit of its employees. The plan permits eligible employees to contribute to the plan up to the maximum percentage of total annual compensation allowable under the limits of IRC Sections 415, 401(k) and 404. The Company, at the discretion of its Board of Directors, may make contributions to the plan in amounts determined by the Board each year. No contributions by the Company have been made since the plan’s inception. LITIGATION The Company is, from time to time, involved in legal proceedings, claims, and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims, and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. There were no legal proceedings pending as of May 31, 2023. CONTRACTS Contracts and Licensing Agreements The Company has one royalty agreement in which it has obtained rights to manufacture and market certain products for the life of the products. Royalty expense of approximately $ 13,000 and $ 19,000 is included in cost of sales for the agreement for each of the years ended May 31, 2023 and 2022, respectively. Sales of products manufactured under these agreements comprise approximately 2.1 % and 1.5 % of total sales for the years ended May 31, 2023 and 2022, respectively. The Company may license other products or technology in the future as it deems necessary for conducting business. The Company has other royalty agreements however they are not considered material. Clinical Trial Agreements In September 2017, the Company signed a Clinical Samples Agreement with the University of Southern California for the purpose of providing clinical samples for use by the Company in conducting future clinical trials for one of the products which the Company is developing. The initial budget was estimated to be approximately $ 82,000 . The work started in October 2017 with charges for work performed being invoiced and paid monthly. This study ended in February 2020. Approximately $ 17,000 in fees has been accrued for unbilled charges as of May 31, 2022. There are no unbilled charges as of May 31, 2023. The Company entered into a Clinical Trial Agreement with a research institute for the purpose of conducting a clinical trial of the Biomerica InFoods® product. The term of the agreement shall be until completion of the work outlined and the charges will be invoiced monthly for work performed in the previous month. The maximum budgeted costs will be approximately $ 107,000 . This study ended in March 2022. Approximately $ 28,000 in fees has been accrued for unbilled charges as of May 31, 2022. There are no unbilled charges as of May 31, 2023. NOTE 10: SUBSEQUENT EVENTS On August 3, 2023, the Company announced it had entered into a sales agreement with CVS Pharmacy wherein the Company’s EZ Detect™ colorectal disease screening test will be offered at approximately 7,000 CVS Pharmacy retail stores . Biomerica has shipped the EZ Detect product to CVS Health distribution centers in the United States, and the product is projected to be on store shelves in September. FS- 20