BIOMERICA INC 10-Q

ITEM 1. FINANCIAL STATEMENTS BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) August 31, 2023 May 31, 2023 Assets Current Assets: Cash and cash equivalents $ 7,988,000 $ 9,719,000 Accounts receivable, net 1,430,000 722,000 Inventories, net 1,877,000 2,056,000 Prepaid expenses and other 279,000 300,000 Total current assets 11,574,000 12,797,000 Property and equipment, net of accumulated depreciation and amortization 218,000 213,000 Right-of-use assets, net of accumulated amortization of $ 688,000 and $ 617,000 as of August 31, 2023 and May 31, 2023, respectively 964,000 1,035,000 Investments 165,000 165,000 Intangible assets, net of accumulated amortization 202,000 165,000 Other assets 96,000 79,000 Total Assets $ 13,219,000 $ 14,454,000 Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable and accrued expenses $ 713,000 $ 892,000 Accrued compensation 667,000 696,000 Advance from customers 60,000 60,000 Lease liabilities, current portion 306,000 297,000 Total current liabilities 1,746,000 1,945,000 Lease liabilities, net of current portion 705,000 785,000 Total Liabilities 2,451,000 2,730,000 Commitments and contingencies (Note 6) - - Shareholders’ Equity: Preferred stock, Series A 5% convertible, $ 0.08 par value, 571,429 shares authorized, none issued and outstanding as of August 31, 2023 and May 31, 2023 - - Preferred stock, undesignated, no par value, 4,428,571 shares authorized, none issued and outstanding as of August 31, 2023 and May 31, 2023 - - Preferred stock, value - - Common stock, $ 0.08 par value, 25,000,000 shares authorized, 16,821,646 issued and outstanding at August 31, 2023 and May 31, 2023, respectively 1,346,000 1,346,000 Additional paid-in-capital 52,875,000 52,705,000 Accumulated other comprehensive loss ( 104,000 ) ( 110,000 ) Accumulated deficit ( 43,349,000 ) ( 42,217,000 ) Total Shareholders’ Equity 10,768,000 11,724,000 Total Liabilities and Shareholders’ Equity $ 13,219,000 $ 14,454,000 The accompanying notes are an integral part of these statements. 1 BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) 2023 2022 For the Three Months Ended August 31, 2023 2022 Net sales $ 1,713,000 $ 1,637,000 Cost of sales ( 1,301,000 ) ( 1,692,000 ) Gross profit (loss) 412,000 ( 55,000 ) Operating expenses: Selling, general and administrative 1,172,000 1,654,000 Research and development 472,000 361,000 Total operating expenses 1,644,000 2,015,000 Loss from operations ( 1,232,000 ) ( 2,070,000 ) Other income: Interest and dividend income 123,000 - Total other income 123,000 - Loss before income taxes ( 1,109,000 ) ( 2,070,000 ) Provision for income taxes ( 23,000 ) ( 2,000 ) Net loss $ ( 1,132,000 ) $ ( 2,072,000 ) Basic net loss per common share $ ( 0.07 ) $ ( 0.16 ) Diluted net loss per common share $ ( 0.07 ) $ ( 0.16 ) Weighted average number of common and common equivalent shares: Basic 16,821,646 13,100,407 Diluted 16,821,646 13,100,407 Net loss $ ( 1,132,000 ) $ ( 2,072,000 ) Other comprehensive income (loss), net of tax: Foreign currency translation 6,000 ( 13,000 ) Comprehensive loss $ ( 1,126,000 ) $ ( 2,085,000 ) The accompanying notes are an integral part of these statements. 2 BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED) For the Three Months Ended August 31, 2022 Shares Amount Capital Loss Deficit Equity Common Stock Additional Paid in Accumulated Other Comprehensive Accumulated Total Shareholders’ Shares Amount Capital Loss Deficit Equity Balances at May 31, 2022 12,867,924 $ 1,029,000 $ 42,447,000 $ ( 74,000 ) $ ( 35,077,000 ) $ 8,325,000 Exercise of stock options 15,000 1,000 13,000 - - 14,000 Net proceeds from ATM 523,977 42,000 1,722,000 - - 1,764,000 Shares issued in connection with public offering - - - - - - Foreign currency translation - - - ( 13,000 ) - ( 13,000 ) Share-based compensation - - 304,000 - - 304,000 Net loss - - - - ( 2,072,000 ) ( 2,072,000 ) Balances at August 31, 2022 13,406,901 $ 1,072,000 $ 44,486,000 $ ( 87,000 ) $ ( 37,149,000 ) $ 8,322,000 For the Three Months Ended August 31, 2023 Common Stock Additional Paid in Accumulated Other Comprehensive Accumulated Total Shareholders’ Shares Amount Capital Loss Deficit Equity Balances at May 31, 2023 16,821,646 $ 1,346,000 $ 52,705,000 $ ( 110,000 ) $ ( 42,217,000 ) $ 11,724,000 Balances 16,821,646 $ 1,346,000 $ 52,705,000 $ ( 110,000 ) $ ( 42,217,000 ) $ 11,724,000 Exercise of stock options - - - - - - Net proceeds from ATM - - - - - - Shares issued in connection with public offering - - - - - - Foreign currency translation - - - 6,000 - 6,000 Share-based compensation - - 170,000 - - 170,000 Net loss - - - - ( 1,132,000 ) ( 1,132,000 ) Balances at August 31, 2023 16,821,646 $ 1,346,000 $ 52,875,000 $ ( 104,000 ) $ ( 43,349,000 ) $ 10,768,000 Balances 16,821,646 $ 1,346,000 $ 52,875,000 $ ( 104,000 ) $ ( 43,349,000 ) $ 10,768,000 The accompanying notes are an integral part of these statements. 3 BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 2023 2022 For the Three Months Ended August 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 1,132,000 ) $ ( 2,072,000 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 21,000 29,000 Provision for allowance on accounts receivable - 230,000 Inventory reserve ( 140,000 ) 136,000 Share-based compensation 170,000 304,000 Amortization of right-of-use asset 71,000 67,000 Changes in assets and liabilities: Accounts receivable ( 708,000 ) ( 388,000 ) Inventories 319,000 358,000 Prepaid expenses and other 21,000 82,000 Other assets ( 17,000 ) 2,000 Accounts payable and accrued expenses ( 179,000 ) ( 301,000 ) Accrued compensation ( 29,000 ) ( 55,000 ) Advance from customers - 100,000 Reduction in lease liabilities ( 71,000 ) ( 65,000 ) Net cash used in by operating activities ( 1,674,000 ) ( 1,573,000 ) Cash flows from investing activities: Purchases of property and equipment ( 21,000 ) ( 34,000 ) Expenditures related to intangibles ( 42,000 ) - Net cash used in investing activities ( 63,000 ) ( 34,000 ) Cash flows from financing activities: Gross proceeds from sale of common stock - 1,811,000 Costs from sale of common stock - ( 47,000 ) Proceeds from exercise of stock options - 14,000 Net cash provided by financing activities - 1,778,000 Effect of exchange rate changes in cash 6,000 ( 13,000 ) Net decrease (increase) in cash and cash equivalents ( 1,731,000 ) 158,000 Cash and cash equivalents at beginning of year 9,719,000 5,917,000 Cash and cash equivalents at end of the period $ 7,988,000 $ 6,075,000 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Income taxes $ 23,000 $ 2,000 Non-cash investing and financing activities: Write off of intangible assets, cost $ - $ 6,000 Write off of intangible assets, accumulated amortization $ - $ 1,000 The accompanying notes are an integral part of these statements. 4 BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: BASIS OF PRESENTATION 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 based on our inFoods ® Technology platform that treat gastrointestinal diseases, such as irritable bowel syndrome (“IBS”), and other inflammatory diseases. These inFoods ® based products are directed at chronic inflammatory illnesses that are widespread and common, and as such address very large markets. The first product we are launching using this patented inFoods Technology is our inFoods ® IBS product which uses a simple blood sample to identify patient-specific foods that, when removed from their diet, may alleviate IBS symptoms such as pain, bloating, diarrhea, cramping and constipation. Instead of broad and difficult to manage dietary restrictions, the inFoods® IBS product works by identifying a patient’s above normal immunoreactivity to a panel of specific foods that have been shown to often be problematic to IBS sufferers. A food identified as positive (causing an abnormally high immune response in the patient) is simply removed from the diet to help alleviate IBS symptoms. We have launched this product with certain large gastroenterology (“GI”) physician groups that are now offering this product to their patients. We have also recently hired an internal sales force to sign up additional GI physician groups who are interested in offering this product to their patients. As such, we are expecting material growth in revenues from the launch of our inFoods ® IBS product in coming quarters. Our other 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 at Walmart, Amazon, and Walgreens). The diagnostic test kits are used to analyze blood, urine, nasal or fecal specimens from patients in the diagnosis of various diseases, food intolerances and other medical complications, by measuring or detecting the existence and/or level of specific bacteria, hormones, antibodies, antigens, or other substances, which may exist in a patient’s body, stools, or blood, often in extremely small concentrations. Due to the global 2019 SARS-CoV-2 novel coronavirus pandemic, in March 2020 we began developing COVID-19 products to indicate if a person has been infected by COVID-19 or is currently infected. While we initially offered a COVID-19 antibody diagnostic test to determine if a person has previously been infected by the COVID-19 virus, all of our COVID-19 revenues in fiscal 2022 and 2023 have come from international sales of our COVID-19 antigen tests that use a patient’s nasal fluid sample to detect if the patient is currently infected with the virus. Due to falling demand, there were no sales of our COVID-19 related products in the three months ended August 31, 2023. As such, our COVID-19 product sales have caused significant swings in our revenues over the past eight quarters. Our non-COVID-19 products that accounted for all of our revenues during the three months ended August 31, 2023, are primarily focused on gastrointestinal diseases, colorectal 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. The unaudited condensed consolidated financial statements herein have been prepared by management pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited consolidated financial statements for the latest fiscal year ended May 31, 2023. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended August 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2024. For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended May 31, 2023 included in the Company’s Annual Report on Form 10-K filed with the SEC on August 25, 2023. Management has evaluated all subsequent events and transactions through the date of filing this report. 5 NOTE 2: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of Biomerica, Inc. as well as its German subsidiary (BioEurope GmbH) and Mexican subsidiary (Biomerica de Mexico). All significant intercompany accounts and transactions have been eliminated in consolidation. ACCOUNTING ESTIMATES The preparation of the condensed 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 condensed 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 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 liability and right-of-use assets, which are calculated based on certain assumptions such as borrowing rate, the likelihood of lease extensions to occur, asset valuation, 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. MARKETS AND METHODS OF DISTRIBUTION The majority of the Company’s revenues come from the sale of products that the company manufactures in the U.S. and in Mexico. Some of the raw materials used in manufacturing come from Asia and other regions of the world. Finally, most of the Company’s revenues are generated from the international sales of its products. Due to global and economic disruptions caused by the COVID-19 pandemic, the ongoing war in Ukraine, and tensions between the country of China and the United States, the Company’s operations have been negatively impacted. The Company has faced disruptions in the following areas, and may face further challenges from supply chain disruptions, cost inflation, loss of contracts and/or customers, closure 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. The Company’s current sales and marketing focus is on the sale of the inFoods ® IBS product within the U.S. As such, going forward, the Company hopes to see reduced disruptions from the issues listed above. LIQUIDITY The Company has incurred net losses and negative cash flows from operations and has an accumulated deficit of approximately $ 43.3 million as of August 31, 2023. Management expects to continue to incur significant costs as it advances its clinical trials, product development, and commercial product launch activities. As of August 31, 2023, the Company had cash and cash equivalents of approximately $ 7,988,000 and working capital of approximately $ 9,828,000 . On July 20, 2020, the Company filed with the Securities and Exchange Commission (“SEC”) a Form S-3 shelf registration statement and base prospectus which was declared effective by the SEC on September 30, 2020. This shelf registration statement registered the sale of up to $ 90,000,000 of the Company’s equity securities during the three years ended September 30, 2023. Under the Company’s outstanding Registration Statement, 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. To replace the shelf registration statement that was set to expire on September 30, 2023, on September 27, 2023, the Company filed with the SEC a new Form S-3 shelf registration statement and base prospectus which was declared effective by the SEC on September 29, 2023. This new shelf registration statement registers the sale of up to $ 20,000,000 of the Company’s equity securities during the three years ending September 29, 2026. The Company intends to use the net proceeds from past offerings and any future 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. 6 Management has analyzed the cash requirements of the Company’s business through at least November 2024. As a result of cash and cash equivalents on hand on August 31, 2023, largely from the public offering, and the ability to raise additional funds if needed through the sale of shares of the Company’s common stock, management believes the Company has sufficient funds to operate through at least November 2024. 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. Consolidated net sales were approximately $ 1,713,000 for the three months ended August 31, 2023, as compared to $ 1,637,000 for the three months ended August 31, 2022. For the three months ended August 31, 2023 and 2022, the Company had one and two key customers who are located in foreign countries which accounted for 59 % and 64 % of net sales, respectively. Total gross receivables on August 31, 2023 and May 31, 2023 were approximately $ 1,459,000 and $ 751,000 , respectively. On August 31, 2023 and May 31, 2023, the Company had one key customer, who are located in foreign countries which accounted for a total of 67 % and 35 % , respectively, of gross accounts receivable. For the three months ended August 31, 2023 and 2022, the Company had one key vendor which accounted for 12 % and 9 % of the purchases of raw materials, respectively. As of August 31, 2023 and May 31, 2023, the Company had one key vendor which accounted for 47 % and 23 % , respectively, of accounts payable. 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. Based on various 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. The Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (codified as Accounting Standards Codification (“ASC”) 326) on June 1, 2023. ASC 326 adds to U.S. GAAP the current expected credit loss (“CECL”) model, a measurement model based on expected losses rather than incurred losses. Prior to the adoption of ASC 326, the Company evaluated receivables on a quarterly basis and adjusted the allowance for doubtful accounts accordingly. Balances over ninety days old were usually reserved for unless collection was reasonably assured. Under the application of ASC 326, the Company’s historical credit loss experience provides the basis for the estimation of expected credit losses, as well as current economic and business conditions, and anticipated future economic events that may impact collectability. In developing its expected credit loss estimate, the Company evaluated the appropriate grouping of financial assets based upon its evaluation of risk characteristics, including consideration of the types of products and services sold. Account balances are written off against the allowance for expected credit losses after all means of collection have been exhausted and the potential for recovery is considered remote. 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 August 31, 2023 and May 31, 2023, the Company has established a reserve of approximately $ 29,000 for credit losses. PREPAID EXPENSES AND OTHER The Company occasionally prepays for items such as inventory, insurance, and other items. These items are reported as prepaid expenses and other, until either the inventory is physically received, or the insurance and other items are expensed. As of August 31, 2023 and May 31, 2023, the prepaids were approximately $ 279,000 and $ 300,000 , respectively, composed of prepayments to insurance and various other suppliers. 7 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. Net inventories are approximately the following: SCHEDULE OF NET INVENTORIES August 31, 2023 May 31, 2023 Raw materials $ 1,454,000 $ 1,677,000 Work in progress 793,000 869,000 Finished products 162,000 182,000 Total gross inventory 2,409,000 2,728,000 Inventory reserves ( 532,000 ) ( 672,000 ) Net inventory $ 1,877,000 $ 2,056,000 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 August 31, 2023, and May 31, 2023, inventory reserves were approximately $ 532,000 and $ 672,000 , respectively. 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 was approximately $ 16,000 and $ 20,000 for the three months ended August 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. 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 expense was approximately $ 5,000 and $ 9,000 for the three months ended August 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 three months ended August 31, 2023 and 2022, an impairment adjustment was made of $ 0 and $ 6,000 , respectively. 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. 8 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 August 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 Holdings during the period ended August 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 $ 170,000 and $ 304,000 of share-based compensation during the three months ended August 31, 2023 and 2022, respectively. The following summary presents the options granted, exercised, expired, canceled and outstanding for the three months ended August 31, 2023: SUMMARY OF OPTIONS ACTIVITY Option Shares Weighted Average Exercise Price Options Outstanding at May 31, 2023 2,342,616 $ 3.52 Granted 68,000 1.18 Exercised - - Cancelled or expired ( 47,500 ) 3.31 Options Outstanding at August 31, 2023 2,363,116 $ 3.45 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 three months ended August 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. Physician’s 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 August 31, 2023, the Company had approximately $ 60,000 of advances from certain foreign customers. The majority of these advances are prepayments on orders that are expected to ship during our second fiscal quarter ended November 30, 2023. 9 Disaggregation of revenue: The following is a breakdown of revenues according to markets to which the products are sold: SCHEDULE OF DISAGGREGATION REVENUE 2023 2022 Three Months Ended August 31, 2023 2022 Clinical lab $ 1,289,000 $ 1,146,000 Over-the-counter 303,000 213,000 Contract manufacturing 117,000 95,000 Physician’s office 4,000 183,000 Total $ 1,713,000 $ 1,637,000 See Note 4 for additional information regarding 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 $ 472,000 and $ 361,000 of research and development costs during the three months ended August 31, 2023 and 2022, respectively. INCOME TAXES The Company had income tax expense for the three months ended August 31, 2023 of approximately $ 23,000 , consisting of state minimum and foreign miscellaneous taxes. During the three months ended August 31, 2023, the Company had a net operating loss (“NOL”) that generated deferred tax assets for NOL carryforwards. Deferred income tax assets and liabilities are recognized for temporary differences between the financial statements and income tax carrying values using tax rates in effect for the years such differences are expected to reverse. Due to uncertainties surrounding our ability to generate future taxable income and consequently realize such deferred income tax assets, the Company has determined that it is more likely than not that these deferred tax assets will not be realized. Accordingly, the Company has established a full valuation allowance against its deferred tax assets as of August 31, 2023. The Company’s policy is to recognize any interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the three months ended August 31, 2023, the Company had no accrued interest or penalties related to uncertain tax positions. ADVERTISING COSTS The Company reports the cost of advertising as expense in the period in which those costs are incurred. Advertising costs were approximately $ 30,000 and $ 18,000 for the three months ended August 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 period, and revenues and costs are translated using average exchange rates for the period. The resulting translation 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 three months ended August 31, 2023 and 2022. RIGHT-OF-USE ASSETS AND LEASE LIABILITY 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. 10 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 amount of anti-dilutive stock options not included in the loss per share calculation at August 31, 2023 and 2022 was 2,363,116 and 2,388,616 , respectively. RECENT ACCOUNTING PRONOUNCEMENTS Recent ASU’s issued by the FASB and guidance issued by the SEC did not, or are not believed by the 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. This ASU requires 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 SEC to fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company adopted ASU 2016-03 on June 1, 2023, and the adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements. NOTE 3: SHAREHOLDERS’ EQUITY During the three months ended August 31, 2022, the Company sold 523,977 shares of its common stock at prices ranging from $ 3.15 to $ 3.55 under its Form S-3 Registration Statement and ATM Offering which resulted in gross proceeds of approximately $ 1,811,000 and net proceeds to the Company of approximately $ 1,764,000 after deducting commissions for each sale and legal, accounting, and other fees related to the ATM Offering. In March 2023, we terminated the ATM offering agreement and sold 3,333,333 shares of our common stock in a firm commitment public offering under the Company’s shelf registration statement. Shares sold in the underwritten public offering were sold at a gross sales price of $ 2.40 per share, resulting in net proceeds from the offering, after deducting issuance fees and expenses, of approximately $ 7,300,000 . On August 31, 2023, the Company did not have an open ATM offering in place. No shares of common stock or other equity securities of the Company were sold under the shelf registration statement during the three months ended August 31, 2023. NOTE 4: GEOGRAPHIC INFORMATION The Company operates as one segment. Geographic information regarding net sales is approximately as follows: SCHEDULE OF GEOGRAPHIC INFORMATION 2023 2022 Three Months Ended August 31, 2023 2022 Revenues from sales to unaffiliated customers: Asia $ 1,026,000 $ 814,000 Europe 327,000 552,000 North America 355,000 268,000 South America 5,000 3,000 Revenues from sales to unaffiliated customers total $ 1,713,000 $ 1,637,000 As of August 31, 2023 and May 31, 2023, approximately $ 610,000 and $ 626,000 of Biomerica’s gross inventory was located in Mexicali, Mexico, respectively. As of August 31, 2023 and May 31, 2023, approximately $ 16,000 and $ 17,000 of Biomerica’s property and equipment, net of accumulated depreciation and amortization, was located in Mexicali, Mexico, respectively. NOTE 5: LEASES The Company leases its facilities. On August 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, which it has been leasing since 2009. The lease for its headquarters expired on August 31, 2016. The Company had an option to extend the term of its lease for two additional sixty-month periods. On November 30, 2015, the Company exercised its option to extend its lease for an additional sixty-month period and entered into the First Amendment to Lease wherein it extended its lease until August 31, 2021. On April 9, 2021, the Company exercised its second option to extend its lease for an additional five years. When the Company extended its lease in April 2021, it was also granted an additional five-year lease extension option . 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 one manufacturing process. 11 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 three months ended August 31, 2023 and 2022: SCHEDULE OF OPERATING LEASES 2023 2022 Three Months Ended August 31, 2023 2022 Operating lease cost $ 88,000 $ 88,000 Variable lease cost 3,000 - Short-term lease cost 5,000 4,000 Total lease cost $ 96,000 $ 92,000 The approximate maturity of lease liabilities as of August 31, 2023 are as follows: SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS Year Ending August 31: Operating Leases 2024 $ 359,000 2025 368,000 2026 378,000 2027 6,000 Thereafter - Total minimum future lease payments $ 1,111,000 Less: imputed interest 100,000 Total operating lease liabilities $ 1,011,000 The following table summarizes the Company’s other supplemental lease information for the three months ended August 31, 2023 and 2022: SCHEDULE OF OTHER SUPPLEMENTAL LEASE INFORMATION 2023 2022 Three Months Ended August 31, 2023 2022 Cash paid for operating lease liabilities $ 87,000 $ 86,000 Weighted-average remaining lease term (years) 3.02 4.02 Weighted-average discount rate 6.50 % 6.50 % The Company also has various insignificant leases for office equipment. NOTE 6: COMMITMENTS AND CONTINGENCIES LITIGATION The Company is, from time to time, involved in legal proceedings, claims and litigation arising in the ordinary course of business. There were no legal proceedings pending as of August 31, 2023. NOTE 7: SUBSEQUENT EVENTS On September 15, 2023 the Company submitted to the FDA the final H. Pylori data set requested by the FDA during the FDA’s recent review of the 510-K filed by the Company. The Company received confirmation from the FDA that the data was received. The Biomerica hp+detect™ diagnostic test is designed to detect the presence of the H. pylori bacteria which infects approximately 35% of the U.S. population. 12