BIOMERICA INC 10-Q

ITEM 1. FINANCIAL STATEMENTS BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) August 31, 2024 May 31, 2024 Assets Current Assets: Cash and cash equivalents $ 2,820,000 $ 4,170,000 Accounts receivable, net 1,551,000 947,000 Inventories, net 1,942,000 2,376,000 Prepaid expenses and other 132,000 238,000 Total current assets 6,445,000 7,731,000 Property and equipment, net of accumulated depreciation and amortization 184,000 201,000 Right-of-use assets, net of accumulated amortization of $ 986,000 and $ 910,000 as of August 31, 2024 and May 31, 2024, respectively 666,000 742,000 Investments 165,000 165,000 Intangible assets, net of accumulated amortization of $ 53,000 and $ 48,000 as of August 31, 2024 and May 31, 2024, respectively 207,000 212,000 Other assets 203,000 203,000 Total Assets $ 7,870,000 $ 9,254,000 Liabilities and Shareholders’ Equity Current Liabilities: Accounts payable and accrued expenses $ 1,089,000 $ 1,138,000 Accrued compensation 643,000 655,000 Advances from customers 85,000 85,000 Lease liabilities, current portion 334,000 326,000 Total current liabilities 2,151,000 2,204,000 Lease liabilities, net of current portion 373,000 459,000 Total Liabilities 2,524,000 2,663,000 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, 2024 and May 31, 2024 - - Preferred stock, undesignated, no par value, 4,428,571 shares authorized, none issued and outstanding as of August 31, 2024 and May 31, 2024 - - Preferred stock, value - - Common stock, $ 0.08 par value, 25,000,000 shares authorized, 16,821,646 issued and outstanding at August 31, 2024 and May 31, 2024, respectively 1,346,000 1,346,000 Additional paid-in capital 53,619,000 53,542,000 Accumulated other comprehensive loss ( 108,000 ) ( 102,000 ) Accumulated deficit ( 49,511,000 ) ( 48,195,000 ) Total Shareholders’ Equity 5,346,000 6,591,000 Total Liabilities and Shareholders’ Equity $ 7,870,000 $ 9,254,000 The accompanying notes are an integral part of these statements. 1 BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) 2024 2023 For the Three Months Ended August 31, 2024 2023 Net sales $ 1,807,000 $ 1,713,000 Cost of sales ( 1,518,000 ) ( 1,301,000 ) Gross profit 289,000 412,000 Operating expenses: Selling, general and administrative 1,360,000 1,172,000 Research and development 297,000 472,000 Total operating expense 1,657,000 1,644,000 Loss from operations ( 1,368,000 ) ( 1,232,000 ) Other income: Dividend and interest income 56,000 123,000 Total other income 56,000 123,000 Loss before income taxes ( 1,312,000 ) ( 1,109,000 ) Provision for income taxes ( 4,000 ) ( 23,000 ) Net loss $ ( 1,316,000 ) $ ( 1,132,000 ) Basic net loss per common share $ ( 0.08 ) $ ( 0.07 ) Diluted net loss per common share $ ( 0.08 ) $ ( 0.07 ) Weighted average number of common and common equivalent shares: Basic 16,821,646 16,821,646 Diluted 16,821,646 16,821,646 Net loss $ ( 1,316,000 ) $ ( 1,132,000 ) Other comprehensive loss, net of tax: Foreign currency translation ( 6,000 ) 6,000 Comprehensive loss $ ( 1,322,000 ) $ ( 1,126,000 ) 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, 2023 Shares Amount Capital Comprehensive Loss Deficit Equity Common Stock Additional Paid-in Accumulated Other Accumulated Total Stockholders’ Shares Amount Capital Comprehensive 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 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 For the Three Months Ended August 31, 2024 Common Stock Additional Paid-in Accumulated Other Accumulated Total Stockholders’ Shares Amount Capital Comprehensive Loss Deficit Equity Balances at May 31, 2024 16,821,646 $ 1,346,000 $ 53,542,000 $ ( 102,000 ) $ ( 48,195,000 ) $ 6,591,000 Balances 16,821,646 $ 1,346,000 $ 53,542,000 $ ( 102,000 ) $ ( 48,195,000 ) $ 6,591,000 Foreign currency translation - - - ( 6,000 ) - ( 6,000 ) Share-based compensation - - 77,000 - - 77,000 Net loss - - - - ( 1,316,000 ) ( 1,316,000 ) Balances at August 31, 2024 16,821,646 $ 1,346,000 $ 53,619,000 $ ( 108,000 ) $ ( 49,511,000 ) $ 5,346,000 Balances 16,821,646 $ 1,346,000 $ 53,619,000 $ ( 108,000 ) $ ( 49,511,000 ) $ 5,346,000 The accompanying notes are an integral part of these statements. 3 BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended August 31, 2024 2023 Cash flows from operating activities: Net loss $ ( 1,316,000 ) $ ( 1,132,000 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 21,000 21,000 Provision for allowance for credit losses 12,000 - Inventory reserve 5,000 ( 140,000 ) Share-based compensation 77,000 170,000 Amortization of right-of-use asset 76,000 71,000 Changes in assets and liabilities: Accounts receivable ( 616,000 ) ( 708,000 ) Inventories 429,000 319,000 Prepaid expenses and other 106,000 21,000 Other assets - ( 17,000 ) Accounts payable and accrued expenses ( 49,000 ) ( 179,000 ) Accrued compensation ( 11,000 ) ( 29,000 ) Advances from customers - - Reduction in lease liabilities ( 78,000 ) ( 71,000 ) Net cash used in operating activities ( 1,344,000 ) ( 1,674,000 ) Cash flows from investing activities: Purchases of property and equipment - ( 21,000 ) Expenditures related to intangibles - ( 42,000 ) Net cash used in investing activities - ( 63,000 ) Effect of exchange rate changes in cash ( 6,000 ) 6,000 Net decrease in cash and cash equivalents ( 1,350,000 ) ( 1,731,000 ) Cash and cash equivalents at beginning of year 4,170,000 9,719,000 Cash and cash equivalents at end of year $ 2,820,000 $ 7,988,000 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Income taxes $ 4,000 $ 23,000 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 global 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 products utilize immunoassay technology to analyze blood, urine, nasal, or fecal material from patients in the diagnosis of various diseases, food intolerances and other medical complications, and to measure the level of specific hormones, antibodies, antigens, or other substances, which may exist in the human body in extremely small concentrations. Our other existing products are primarily focused on gastrointestinal diseases, food intolerances, and certain esoteric tests. 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, common, and 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 an 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: a) clinical laboratories and b) point-of-care (physicians’ offices and over-the-counter drugstores such as Walmart and CVS Pharmacy). Most of our products are Conformite Europeenne (“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, 2024. 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, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending May 31, 2025. For further information, refer to the audited consolidated financial statements and notes thereto for the fiscal year ended May 31, 2024 included in the Company’s Annual Report on Form 10-K filed with the SEC on August 28, 2024. Management has evaluated all subsequent events and transactions through the date of filing this report. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of Biomerica, Inc. and its wholly-owned subsidiaries Biomerica de Mexico and BioEurope GmbH. All significant intercompany accounts and transactions have been eliminated in consolidation. 5 ACCOUNTING ESTIMATES In order to prepare our consolidated financial statements in conformity with GAAP, we must make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Different assumptions or conditions may cause actual results to differ materially from these estimates. We monitor significant estimates made during the preparation of our financial statements on an ongoing basis. We believe our estimates and assumptions are reasonable under the current conditions; however, actual results may differ from these estimates under different future conditions. We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These relate to revenue recognition, bad debts, inventory overhead application, inventory reserves, lease liabilities, right-of-use assets and share based compensation. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial conditions or results of operations. We suggest that our significant accounting policies be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q. MARKETS AND METHODS OF DISTRIBUTION The majority of the Company’s revenues come from the sale of products it manufactures in the U.S. and Mexico, with certain raw materials sourced from Asia and other regions. The Company’s diagnostic business serves a diverse customer base that includes both domestic and international distributors, as well as hospitals, clinical laboratories, medical research institutions, pharmaceutical companies, drugstores, wholesalers, physicians’ offices, and e-commerce customers. A significant portion of the Company’s revenues are derived from international sales. The Company employs a Director of Sales and Marketing for Europe and South America, based in Germany, who has over 20 years of experience in diagnostics and life sciences. This individual’s international business experience and multilingual capabilities have facilitated strong relationships across Europe, Eastern Europe, Middle East, Latin America, Canada, and the U.S. The Company expects continued growth through the addition of new distributors and product lines in these regions. The Company markets its diagnostic products through distributors, advertising in medical and trade journals, trade show exhibitions, direct mailings, and its internal sales team. The two primary markets the Company targets are clinical laboratories and point-of-care testing, including physicians’ offices and over-the-counter drug stores. LIQUIDITY AND GOING CONCERN The Company has incurred net losses and negative cash flows from operations and has an accumulated deficit of approximately $ 49.5 million as of August 31, 2024. As of August 31, 2024, the Company had cash and cash equivalents of approximately $ 2,820,000 and working capital of approximately $ 4,294,000 . On July 21, 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. The 2020 Shelf Registration Statement registered common shares that could be issued by the Company in a maximum aggregate amount of up to $ 90,000,000 . 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 “2021 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 2021 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 offering in the amount of $ 53,000 . 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 . As a result of this public offering, the Company terminated the 2021 ATM Offering. As part of our financing plan, on September 28, 2023, we filed a “shelf” registration statement on Form S-3 with the SEC, which was declared effective on September 29, 2023, allowing the Company to issue up to $ 20,000,000 in common shares. Under this registration statement, shares of our common stock may be sold from time to time for up to three years from the filing date. On May 10, 2024, the Company filed a prospectus supplement with the SEC to facilitate the sale of up to $ 5,500,000 in common stock through ATM offerings, as defined in Rule 415 under the Securities Act. As part of this transaction, the Company incurred $ 81,000 in deferred offering costs. The amount of capital that we can raise under the ATM offering is highly dependent upon the trading volume and the trading price of our stock. The average trading volume of our stock over the last three full calendar months is 83,068 shares per day and the high and low trading price of our stock during the same period of time was $ 0.59 and $ 0.28 , respectively. If our stock continues to trade at low volumes and price, the amount of capital that we can raise under the ATM offering will be constrained. The Company intends to use the net proceeds from this offering for general corporate purposes, including, but not limited to, sales and marketing activities, clinical studies and product development, acquisitions of assets, businesses, companies, or securities, capital expenditures, and working capital needs. 6 Management assesses whether the Company has sufficient liquidity to fund its costs for the next twelve months from each financial statement issuance date to determine if there is a substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern over the next twelve months is influenced by several factors, including: ● Our need and ability to generate additional revenue from international opportunities and our new product launches; ● Our need to access the capital and debt markets to meet current obligations and fund operations; ● Our capacity to manage operating expenses and maintain gross margins as we grow; and ● Our ability to retain key employees and maintain critical operations with a substantially reduced workforce. Management has analyzed the Company’s cash flow requirements through November 2025 and beyond. Based on this analysis, we believe our current cash and cash equivalents are insufficient to meet our operating cash requirements and strategic growth objectives for the next twelve months. To address our capital needs and sustain operations beyond the next year, we are actively pursuing strategies to increase sales, reduce expenses, sell non-core assets, seek additional financing through debt or equity, and seek other strategic alternatives. While we are committed to these plans, there is no assurance that these efforts will be successful or sufficient to meet our capital requirements. As part of our efforts to reduce costs, we have initiated significant cost-cutting measures to extend our cash runway and work towards increasing revenues to cover overhead costs. These measures include a workforce reduction of nearly 15% in July 2024 and a substantial reduction in other operating expenses. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Our future viability depends on the successful execution of our strategic plans, securing additional financing, and achieving profitable operations. The Company’s consolidated financial statements as of August 31, 2024 were prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. 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. Consolidated net sales were approximately $ 1,807,000 for the three months ended August 31, 2024, compared to $ 1,713,000 for the same period in 2023. For the three months ended August 31, 2024, the Company had two key customers located in North America and Asia, respectively, who collectively accounted for 55 % of net sales. For the three months ended August 31, 2023, the Company had one key customer located in a Asia, accounting for 59 % of net sales. As of August 31, 2024, and May 31, 2024, total gross receivables were approximately $ 1,582,000 and $ 966,000 , respectively. On these dates, the Company had two and four key customers, respectively, located in Asia and Europe. These customers accounted for 67 % and 64 % of the gross accounts receivable, respectively. For the three months ended August 31, 2024, and 2023, two and one key vendors accounted for 34 % and 12 % of the purchases of raw materials, respectively. As of August 31, 2024, and May 31, 2024, one and two key vendors represented 24 % and 69 % of the Company’s accounts payable, respectively. 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. Initial credit levels for individual distributors are approved by designated officers and managers of the Company based on various criteria. 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 90 days old were usually reserved 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 receivable 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, 2024 and May 31, 2024, the Company has established a reserve of approximately $ 31,000 and $ 19,000 respectively, 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, 2024 and May 31, 2024, the prepaids were approximately $ 132,000 and $ 238,000 , respectively, comprised 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, 2024 May 31, 2024 Raw materials $ 1,442,000 $ 1,519,000 Work in progress 756,000 1,145,000 Finished products 216,000 179,000 Total gross inventory 2,414,000 2,843,000 Inventory reserves ( 472,000 ) ( 467,000 ) Net inventory $ 1,942,000 $ 2,376,000 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, 2024, and May 31, 2024, inventory reserves were approximately $ 472,000 and $ 467,000 , 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 $ 17,000 and $ 16,000 for the three months ended August 31, 2024 and 2023, respectively. INTANGIBLE ASSETS, NET Intangible assets include trademarks, product rights, technology rights and patents, and are accounted for based on ASC 350 Intangibles – Goodwill and Other, 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 patents are based on their individual useful lives which average around 15 years. Amortization expense was approximately $ 4,000 and $ 5,000 for the three months ended August 31, 2024 and 2023, 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 is any impairment. During the three months ended August 31, 2024, and 2023, there were no impairment adjustments. 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, 2024 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, 2024. SHARE-BASED COMPENSATION The Company follows the guidance of ASC 718, Share-based Compensation, 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 $ 77,000 and $ 170,000 of share-based compensation during the three months ended August 31, 2024 and 2023, respectively. The following summary presents the options granted, exercised, expired, canceled and outstanding for the three months ended August 31, 2024: SUMMARY OF OPTIONS ACTIVITY Option Shares Weighted Average Exercise Price Options Outstanding at May 31, 2024 3,479,616 $ 2.53 Granted 67,000 0.44 Cancelled or expired ( 240,500 ) 2.03 Options Outstanding at August 31, 2024 3,306,116 $ 2.53 REVENUE RECOGNITION The Company has various contracts with customers, and these contracts specify the recognition of revenue based on the nature of the transaction. 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 title passes. This applies to clinical lab products sold to domestic and international distributors, including hospitals, clinical laboratories, medical research institutions, medical schools, and pharmaceutical companies. OTC products are sold directly to drug stores, e-commerce customers, and distributors, while physicians’ office products are sold to physicians and distributors. The Company does not allow returns except in cases of defective merchandise, and therefore, does not establish an allowance for returns. Additionally, the Company has contracts with customers that provide purchase discounts contingent on achieving specified sales volumes. These contracts are regularly evaluated, and the Company does not anticipate granting any discounts through the end of the contract period. Furthermore, the Company offers margin guarantees to certain retail drug store customers to ensure a minimum profit margin. Should pricing adjustments cause these margins to fall below the agreed-upon thresholds, the Company is committed to compensating for the shortfall. This arrangement introduces variable consideration into our revenue recognition process. These considerations are estimated monthly based on actual sales and potential price reductions, ensuring accurate and compliant revenue reporting. For diagnostic testing services sold directly to patients or physician offices that require processing by a third-party CLIA-certified lab, we recognize revenue once the lab has completed the test results. For services related to contract manufacturing, revenue is recognized when the service has been performed. Services for some contract work are invoiced and recognized as the project progresses. As of August 31, 2024, the Company had approximately $ 85,000 in advances from domestic customers, which are prepayments on orders for future shipments. 9 Disaggregation of revenue: The following is a breakdown of revenues according to markets to which the products are sold: SCHEDULE OF DISAGGREGATION REVENUE Three Months Ended August 31, 2024 2023 Clinical lab $ 1,278,000 $ 1,289,000 Over-the-counter 187,000 303,000 Contract manufacturing 339,000 117,000 Physician’s office 3,000 4,000 Total $ 1,807,000 $ 1,713,000 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 $ 297,000 and $ 472,000 of research and development costs during the three months ended August 31, 2024 and 2023, respectively. INCOME TAXES The Company had income tax expense for the three months ended August 31, 2024 of approximately $ 4,000 , consisting of state minimum and foreign miscellaneous taxes. During the three months ended August 31, 2024, 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, 2024. 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, 2024, 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 $ 14,000 and $ 30,000 for the three months ended August 31, 2024 and 2023, 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 condensed consolidated statements of operations for the three months ended August 31, 2024 and 2023. RIGHT-OF-USE ASSETS AND LEASE LIABILITY 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. 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, 2024 and 2023 was 3,306,116 and 2,363,116 , 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 November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, “Improvements to Reportable Segment Disclosures.” The ASU includes enhanced disclosure requirements, primarily related to significant segment expenses that are regularly provided to and used by the chief operating decision maker (“CODM”). The amendments are to be applied retrospectively to all prior periods presented in the financial statements. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. We are currently evaluating the effect of adopting this pronouncement on our financial statements and disclosures. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The ASU includes enhanced disclosure requirements, primarily related to the rate reconciliation and income taxes paid information. The amendments are to be applied prospectively in the financial statements. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the effect of adopting this pronouncement on our financial statements and disclosures. NOTE 3: SHAREHOLDERS’ EQUITY On September 28, 2023, the Company filed a “shelf” registration statement on Form S-3 with the SEC, which was declared effective on September 29, 2023, allowing the Company to issue up to $ 20,000,000 in common shares. Under this registration statement, shares of our common stock may be sold from time to time for up to three years from the filing date. On May 10, 2024, the Company filed a prospectus supplement with the SEC to facilitate the sale of up to $ 5,500,000 in common stock through ATM offerings, as defined in Rule 415 under the Securities Act. 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, 2024. NOTE 4: GEOGRAPHIC INFORMATION The Company operates as one segment. Geographic information regarding net sales is approximately as follows: SCHEDULE OF GEOGRAPHIC INFORMATION Three Months Ended August 31, 2024 2023 Revenues from sales to unaffiliated customers: Asia $ 817,000 $ 1,026,000 Europe 470,000 327,000 North America 427,000 355,000 Middle East 90,000 - South America 3,000 5,000 Total $ 1,807,000 $ 1,713,000 As of August 31, 2024 and May 31, 2024, approximately $ 575,000 and $ 537,000 of Biomerica’s gross inventory was located in Mexicali, Mexico, respectively. As of August 31, 2024 and May 31, 2024, approximately $ 13,000 and $ 14,000 of Biomerica’s property and equipment, net of accumulated depreciation and amortization, was located in Mexicali, Mexico, respectively. 11 NOTE 5: LEASES The Company leases facilities in Irvine, California and Mexicali, Mexico. As of August 31, 2024, 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 three months ended August 31, 2024 and 2023: SCHEDULE OF OPERATING LEASES Three Months Ended August 31, 2024 2023 Operating lease cost $ 88,000 $ 88,000 Variable lease cost 2,000 3,000 Short-term lease cost 2,000 5,000 Total lease cost $ 92,000 $ 96,000 The approximate maturity of lease liabilities as of August 31, 2024 are as follows: SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS Year Ending May 31: Operating Leases 2025 (excluding the three months ended August 31, 2024) $ 368,000 2026 378,000 2027 7,000 Total minimum future lease payments 753,000 Less: imputed interest 46,000 Total operating lease liabilities $ 707,000 The following table summarizes the Company’s other supplemental lease information for the three months ended August 31, 2024 and 2023: SCHEDULE OF OTHER SUPPLEMENTAL LEASE INFORMATION Three Months Ended August 31, 2024 2023 Cash paid for operating lease liabilities $ 90,000 $ 87,000 Weighted-average remaining lease term (years) 2.02 3.02 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. 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 August 31, 2024. NOTE 7: SUBSEQUENT EVENTS Note noted. 12