BIOMERICA INC 10-Q

ITEM 1. FINANCIAL STATEMENTS BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS February 28, 2022 (Unaudited) May 31, 2021 Assets Current Assets: Cash and cash equivalents $ 10,173,808 $ 4,199,311 Accounts receivable, less allowance for doubtful accounts of $ 20,293 and $ 837,415 as of February 28, 2022 and May 31, 2021, respectively 1,158,738 1,455,051 Inventories, net 3,231,430 3,206,255 Prepaid expenses and other 667,129 370,290 Total current assets 15,231,105 9,230,907 Property and equipment, net of accumulated depreciation and amortization of $ 2,046,612 and $ 1,972,357 as of February 28, 2022 and May 31, 2021, respectively 263,048 310,520 Right of use assets, net of accumulated amortization of $ 658,773 and $ 469,077 as of February 28, 2022 and May 31, 2021, respectively 1,367,863 1,553,081 Investments 165,324 165,324 Intangible assets, net of accumulated amortization of $ 49,253 and $ 126,769 as of February 28, 2022 and May 31, 2021, respectively 386,013 294,830 Other assets 146,980 264,151 Total Assets $ 17,560,333 $ 11,818,813 Liabilities and Shareholders' Equity Current Liabilities: Accounts payable and accrued expenses $ 2,608,840 $ 583,380 Accrued compensation 537,284 388,896 Advances from customers 3,213,052 - Lease liability, current portion 338,744 327,944 Total current liabilities 6,697,920 1,300,220 Lease liability, net of current portion 1,104,611 1,291,570 Total Liabilities 7,802,531 2,591,790 Commitments and contingencies (Notes 1 and 6) Shareholders' Equity: Preferred stock, Series A 5% convertible, $ 0.08 par value, 571,429 shares authorized, none issued and outstanding as of February 28, 2022 and May 31, 2021 - - Preferred stock, undesignated, no par value, 4,428,571 shares authorized, none issued and outstanding as of February 28, 2022 and May 31, 2021 - - Common stock, $ 0.08 par value, 25,000,000 shares authorized, 12,851,924 and 12,307,157 issued and outstanding at February 28, 2022 and May 31, 2021, respectively 1,028,152 984,571 Additional paid-in-capital 42,108,865 38,836,743 Accumulated other comprehensive loss ( 60,857 ) ( 47,956 ) Accumulated deficit ( 33,318,358 ) ( 30,546,335 ) Total Shareholders' Equity 9,757,802 9,227,023 Total Liabilities and Shareholders' Equity $ 17,560,333 $ 11,818,813 The accompanying notes are an integral part of these statements. 1 Table of Contents BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) Three Months Ended February 28, Nine Months Ended February 28, 2022 2021 (As Restated) 2022 2021 (As Restated) Net sales $ 7,660,501 $ 3,628,638 $ 13,569,188 $ 6,144,970 Cost of sales ( 5,987,277 ) ( 3,702,069 ) ( 11,213,175 ) ( 5,791,593 ) Gross profit (loss) 1,673,224 ( 73,431 ) 2,356,013 353,377 Operating expenses: Selling, general and administrative 1,323,725 1,527,947 3,618,258 4,238,737 Research and development 456,998 563,967 1,515,384 1,892,033 Total operating expense 1,780,723 2,091,914 5,133,642 6,130,770 Loss from operations ( 107,499 ) ( 2,165,345 ) ( 2,777,629 ) ( 5,777,393 ) Other income: Dividend and interest income 6,019 37,687 19,740 53,761 Loss before income taxes ( 101,480 ) ( 2,127,658 ) ( 2,757,889 ) ( 5,723,632 ) (Provision) benefit for income taxes ( 2,688 ) 3,117 ( 14,134 ) ( 11,401 ) Net loss $ ( 104,168 ) $ ( 2,124,541 ) $ ( 2,772,023 ) $ ( 5,735,033 ) Basic net loss per common share $ ( 0.01 ) $ ( 0.18 ) $ ( 0.22 ) $ ( 0.49 ) Diluted net loss per common share $ ( 0.01 ) $ ( 0.18 ) $ ( 0.22 ) $ ( 0.49 ) Weighted average number of common and common equivalent shares: Basic 12,820,481 11,905,492 12,611,760 11,802,803 Diluted 12,820,481 11,905,492 12,611,760 11,802,803 Net loss $ ( 104,168 ) $ ( 2,124,541 ) $ ( 2,772,023 ) $ ( 5,735,033 ) Other comprehensive loss, net of tax: Foreign currency translation ( 2,538 ) ( 5,437 ) ( 12,901 ) ( 8,687 ) Comprehensive loss $ ( 106,706 ) $ ( 2,129,978 ) $ ( 2,784,924 ) $ ( 5,743,720 ) The accompanying notes are an integral part of these statements. 2 Table of Contents BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) For the Nine Months Ended February 28, 2021 (As Restated) Common Stock Series A 5% Convertible Preferred Stock Additional Accumulated Other Comprehensive Accumulated Shares Amount Shares Amount Paid-in Capital Loss Deficit Total Balances, May 31, 2020, restated 11,740,089 $ 939,205 321,429 $ 25,714 $ 36,388,056 $ ( 39,841 ) $ ( 23,100,081 ) $ 14,213,053 Exercise of stock options 81,750 6,540 - - 89,915 - - 96,455 Net proceeds from ATM 158,889 12,711 - - 998,764 - - 1,011,475 Foreign currency translation - - - - - ( 8,687 ) - ( 8,687 ) Conversion of preferred to common stock 321,429 25,714 ( 321,429 ) ( 25,714 ) - - - - Compensation expense in connection with options granted - - - - 1,022,320 - - 1,022,320 Net loss - - - - - - ( 5,735,033 ) ( 5,735,033 ) Balances, February 28, 2021, restated 12,302,157 $ 984,170 - $ - $ 38,499,055 $ ( 48,528 ) $ ( 28,835,114 ) $ 10,599,583 For the Nine Months Ended February 28, 2022 Common Stock Series A 5% Convertible Preferred Stock Additional Accumulated Other Comprehensive Accumulated Shares Amount Shares Amount Paid-in Capital Loss Deficit Total Balances, May 31, 2021 12,307,157 $ 984,571 - $ - $ 38,836,743 $ ( 47,956 ) $ ( 30,546,335 ) $ 9,227,023 Exercise of stock options 23,500 1,880 - - 37,295 - - 39,175 Net proceeds from ATM 521,267 41,701 - - 2,275,459 - - 2,317,160 Foreign currency translation - - - - - ( 12,901 ) - ( 12,901 ) Compensation expense in connection with options granted - - - - 959,368 - - 959,368 Net loss - - - - - - ( 2,772,023 ) ( 2,772,023 ) Balances, February 28, 2022 12,851,924 $ 1,028,152 - $ - $ 42,108,865 $ ( 60,857 ) $ ( 33,318,358 ) $ 9,757,802 The accompanying notes are an integral part of these statements. 3 Table of Contents BIOMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended February 28, 2021 (As Restated) 2022 Cash flows from operating activities: Net loss $ ( 2,772,023 ) $ ( 5,735,033 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 102,272 94,550 Change in allowance on accounts receivable ( 817,122 ) 578,438 Inventory reserve 270,805 1,437,547 Stock option expense 959,368 1,022,320 Amortization of right-of-use asset 189,696 173,919 Changes in assets and liabilities: Accounts receivable 1,113,435 ( 690,691 ) Inventories ( 295,980 ) ( 1,446,766 ) Prepaid expenses and other ( 296,839 ) 734,966 Reduction in lease liability ( 180,637 ) ( 156,384 ) Other assets 117,171 ( 114,664 ) Accounts payable and accrued expenses 2,025,460 ( 230,575 ) Accrued compensation 148,388 88,309 Advances from customers 3,213,052 - Net cash provided by (used in) operating activities 3,777,046 ( 4,244,064 ) Cash flows from investing activities: Increase in intangibles ( 113,436 ) ( 116,881 ) Purchases of property and equipment ( 32,547 ) ( 106,760 ) Net cash used in investing activities ( 145,983 ) ( 223,641 ) Cash flows from financing activities: Proceeds from sale of common stock, net 2,317,160 1,011,475 Proceeds from exercise of stock options 39,175 96,455 Net cash provided by financing activities 2,356,335 1,107,930 Effect of exchange rate changes in cash ( 12,901 ) ( 8,687 ) Net increase (decrease) in cash and cash equivalents 5,974,497 ( 3,368,462 ) Cash and cash equivalents at beginning of period 4,199,311 8,641,027 Cash and cash equivalents at end of period $ 10,173,808 $ 5,272,565 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Income taxes $ 13,334 $ 13,730 Non-cash investing and financing activities: Increase in right-of-use asset due to lease extension or establishment $ 4,478 $ - Increase in lease liability due to lease extension or establishment $ 4,478 $ - The accompanying notes are an integral part of these statements. 4 Table of Contents BIOMERICA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: BASIS OF PRESENTATION Biomerica Inc. and subsidiaries (collectively the “Company”, “Biomerica”, “we”, “us”, or “our”) develops, patents, manufactures and markets advanced diagnostic and therapeutic products used at the point-of-care (in home and physicians' offices) and in hospital/clinical laboratories for detection and/or treatment of medical conditions and diseases. 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, and regulatory approval of patented, diagnostic-guided therapy (“DGT”) products to treat gastrointestinal diseases, such as irritable bowel syndrome, 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 existing medical diagnostic products that are in the market are sold worldwide primarily in two markets: 1) clinical laboratories and 2) point-of-care (physicians' offices and drugstores like Walmart and Walgreens). Our 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 the Company does offer a COVID-19 antibody diagnostic test, all of our COVID-19 revenues in fiscal 2022 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. The other products we sell are primarily focused on gastrointestinal diseases, food intolerances, and certain esoteric tests. These diagnostic test products utilize immunoassay technology. Most of our commercial 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 U.S. by the FDA. The information set forth in these condensed consolidated financial statements is unaudited and reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the consolidated results of operations of Biomerica, Inc. and subsidiaries, for the periods indicated. It does not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. All adjustments that were made are of a normal recurring nature. The unaudited, condensed consolidated financial statements and notes are presented as permitted by the requirements for Form 10-Q and do not contain certain information included in the annual financial statements and notes. The condensed consolidated balance sheet data as of May 31, 2021 was derived from restated, audited financial statements. The accompanying interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on August 27, 2021 for the fiscal year ended May 31, 2021, which have been restated as described in our Form 10-K/A as filed on October 14, 2021. The results of operations for the interim periods are not necessarily indicative of results to be achieved for the full fiscal year. CORRECTION OF AN ERROR As disclosed in our Form 10-K/A for the year ended May 31, 2021, filed on October 14, 2021, during the process of preparing our financial statements for the quarter ended August 31, 2021, we determined that our calculation of non-cash stock-based compensation expense related to issued stock options in previously issued financial statements was incorrect. Our calculation applied forfeiture adjustments to both vested and unvested outstanding options, including those for which the employee had provided the requisite service, which resulted in an understatement of stock compensation expense. Additionally, our calculation expensed the option at vesting dates versus pro-rata over the period the requisite service was provided. As a result of these errors, certain previously reported amounts in the condensed consolidated statement of operations, condensed consolidated statement of stockholders’ equity and condensed consolidated statement of cash flows for the periods ended February 28, 2021, were materially misstated; accordingly, we have restated the prior period financial statements. See Note 8 to these Financial Statements. 5 Table of Contents 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 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 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 Due to the Coronavirus global pandemic, the Company’s operations have been negatively impacted. The Company has faced disruptions in certain of the following areas, and may face further challenges from 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 ongoing pandemic related disruptions have materially negatively impacted 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 $ 33.3 million as of February 28, 2022. Management expects to continue to incur significant costs as it advances its clinical trials and product development activities. On January 22, 2021, the Company filed a prospectus supplement for purposes of raising up to $ 15,000,000 to the base prospectus filed with the SEC on July 21, 2020 and included in the registration statement on Form S-3 (File No. 333-239980) that was declared effective by the SEC on September 30, 2020. The shares included in the prospectus supplement may be sold pursuant to the terms of an At-The- Market Issuance Sales Agreement between the Company and B. Riley Securities, Inc., as sales agent, the ATM Agreement. The Company intends to use the net proceeds from such offering for general corporate purposes, including, without limitation, sales and marketing activities, clinical studies and product development, making acquisitions of assets, businesses, companies or securities, capital expenditures, and for working capital needs. Under an ATM Agreement, sales of shares are deemed to be sold “at the market offerings” as defined in Rule 415 promulgated under the Securities Act. The sales agent under the ATM Agreement agrees to use 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 sales agent and the Company. The Company has no obligation to sell any of the shares under the ATM Agreement, and may at any time suspend offers under, or terminate the ATM Agreement. As a result of cash and cash equivalents on hand at February 28, 2022, and the ability to raise additional funds through the ATM Agreement noted above, management believes the Company has sufficient funds to operate through May 2023. CONCENTRATION OF CREDIT RISK The Company maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies. As of February 28, 2022, the Company had approximately $ 9,765,000 of uninsured cash. The Company does not believe it is exposed to any significant credit risks. 6 Table of Contents For the nine months ended February 28, 2022 and 2021, the Company had three and two key customers who are located in foreign countries which accounted for 75 % and 66 % of net consolidated sales, respectively. At February 28, 2022 and May 31, 2021, the Company had one and two key customers who are located in foreign countries which accounted for a total of 67 % and 73 %, respectively, of gross accounts receivable. For the nine months ended February 28, 2022 and 2021, the Company had one k ey vendor which accounted for 85 % and 62 % of the purchases of raw materials, respectively. As of February 28, 2022 and May 31, 2021, the Company had one key vendor which accounted for 80 % and 17 %, 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 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. 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. The Company has established a reserve of approximately $ 20,000 for doubtful accounts as of February 28, 2022. 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 February 28, 2022 and May 31, 2021, the prepaid expenses and other were approximately $ 667,000 and $ 370,000 , respectively . The prepaid expenses and other balance were composed of prepayments to raw materials suppliers, 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 inventory reserve (as described below) 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: February 28, 2022 May 31, 2021 Raw materials $ 1,360,000 $ 1,583,000 Work in progress 714,000 1,006,000 Finished products 1,157,000 617,000 Total $ 3,231,000 $ 3,206,000 Reserves for inventory obsolescence are recorded as necessary to reduce obsolete inventory carrying value to estimated realizable value or to specifically reserve for obsolete inventory that the Company intends to dispose of. As of February 28, 2022 and May 31, 2021, inventory reserves were approximately $ 1,888,000 and $ 1,617,000 , respectively. Of the inventory reserve as of February 28, 2022, approximately $ 1,686,000 was related to a market downturn in our COVID-19 antibody test and materials, as the market shifted to COVID-19 PCR viral tests and antigen tests. 7 Table of Contents 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 were approximately $ 26,000 for the three months ended February 28, 2022 and 2021, and approximately $ 80,000 and $ 78,000 for the nine months ended February 28, 2022 and 2021, respectively. INTANGIBLE ASSETS, NET Intangible assets include trademarks, product rights, technology rights and patents, and are accounted for based on Accounting Standards Codification, 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 20 years for patents. Amortization was approximately $ 8,000 and $ 4,000 for the three months ended February 28, 2022 and 2021 and approximately $ 22,000 and $ 16,000 for the nine months ended February 28, 2022 and 2021, 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. No impairment adjustment was required as of February 28, 2022 or 2021. INVESTMENTS From time-to-time, the Company makes investments in privately-held companies. The Company determines whether the fair values of any investments in privately-held entities have declined below their carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considers any such decline to be other than temporary (based on various factors, including historical financial results, and the overall health of the investee’s industry), a write-down to estimated fair value is recorded. Investments represent the Company’s equity investment in a Polish-based distribution company which is primarily engaged in distributing medical products and devices, including those manufactured by the Company, and in certain cases, manufacturing the products they sell. The Company currently has not written down the investment and has no information that would indicate the carrying value is greater than the fair value. The Company owns approximately 6 % of the Polish distribution company, and accordingly, applies the cost method to account for the investment. Under the cost method, investments are recorded at cost, with gains and losses recognized as of the sale date, and income recorded when received. SHARE-BASED COMPENSATION The Company follows the guidance of the accounting provisions of Accounting Standards Codification 718, Share-based Compensation, which requires the use of the fair-value based method to determine compensation expense for all arrangements under which employees, directors and others are granted shares of the Company’s common stock or equity instruments (stock 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 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 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. 8 Table of Contents The following summary presents the options and warrants granted, exercised, expired, canceled and outstanding for the nine months ended February 28, 2022: Option Shares Exercise Price Weighted Average Outstanding May 31, 2021 2,081,366 $ 3.59 Granted 307,000 4.44 Exercised ( 23,500 ) 1.71 Cancelled or expired ( 28,750 ) 3.49 Outstanding February 28, 2022 2,336,116 $ 3.72 During the nine months ended February 28, 2022, options to purchase 23,500 shares of common stock were exercised at prices ranging from $ 1.20 to $ 3.62 . Total net proceeds to the Company were $ 39,175 . During the nine months ended February 28, 2022, the Company granted 307,000 options to purchase common stock at an average purchase price of $ 4.44 . 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 international customers except in the event of defective merchandise and therefore does not establish an allowance for returns. The Company does allow for a return merchandise allowance of approximately one percent of sales to certain domestic retailers. This allowance reduces revenue recognition by approximately one percent, and is included in sales discounts. In addition, the Company has contracts with customers wherein they receive purchase discounts for achieving specified sales volumes. The Company evaluated the status of these contracts as of February 28, 2022 and 2021, and does not believe that any additional discounts will be given through the end of the contract periods. Services for contract works performed by the Company for others are invoiced and recognized as work that has been performed 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. During the quarter ended February 28, 2022, the Company had approximately $ 3,213,000 of advances from certain foreign customers. The majority of these advances are prepayments on orders that are expected to ship during our fourth quarter ended May 31, 2022. Disaggregation of revenue: The following is a breakdown of revenues according to markets to which the products are sold: Three Months Ended February 28, Nine Months Ended February 28, 2022 2021 2022 2021 Physician's office $ 6,518,000 $ 2,384,000 $ 10,134,000 $ 2,735,000 Clinical lab 731,000 967,000 2,259,000 2,441,000 Over-the-counter 244,000 148,000 857,000 605,000 Contract manufacturing 167,000 130,000 319,000 364,000 Total $ 7,660,000 $ 3,629,000 $ 13,569,000 $ 6,145,000 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. 9 Table of Contents RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. The Company expensed approximately $ 457,000 and $ 564,000 of research and development costs during the three months ended February 28, 2022 and 2021 and approximately $ 1,515,000 and $ 1,892,000 during the nine months ended February 28, 2022 and 2021, respectively. INCOME TAXES The Company has provided a valuation allowance on deferred income tax assets of approximately $ 6,479,000 and $ 5,904,000 as of February 28, 2022 and May 31, 2021, 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 adjustments to assets and liabilities are presented as a separate component of accumulated other comprehensive loss. There are no adjustments to foreign currency loss that are included in the consolidated statements of operations for the three and nine months ended February 28, 2022 and 2021. RIGHT-OF-USE ASSETS AND LEASE LIABILITY The Company follows the guidance of ASC 842, Leases, 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 the obligation to make lease payments arising from the lease. The Company leases office space and copy machines, all of which are operating leases. The Company has elected to exclude short-term 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. 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 February 28, 2022 and 2021 was 2,336,116 and 1,360,192 , respectively. RECENT ACCOUNTING PRONOUNCEMENTS Recent ASUs issued by the Financial Accounting Standards Board and guidance issued by the Securities and Exchange Commission (“SEC”) did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements. NOTE 3: SHAREHOLDERS’ EQUITY Stock option expense during the nine months ended February 28, 2022 and 2021 was approximately $ 959,000 and $ 1,022,000 (as restated, see Note 8 to these Financial Statements), respectively. During the nine months ended February 28, 2022, the Company sold 521,267 shares of its common stock at prices ranging from $ 4.02 to $ 5.63 under its January 22, 2021 prospectus supplement and the ATM Agreement (see Note 2 to these Financial Statements) which resulted in gross proceeds of approximately $ 2,402,000 and net proceeds to the Company of approximately $ 2,317,000 after deducting commissions for each sale and legal, accounting and other fees related to the filing of the Form S-3. 10 Table of Contents NOTE 4: GEOGRAPHIC INFORMATION The Company operates as one segment. Geographic information regarding net sales is approximately as follows: Three Months Ended February 28, Nine Months Ended February 28, 2022 2021 2022 2021 Revenues from sales to unaffiliated customers: Asia $ 4,877,000 $ 756,000 $ 8,925,000 $ 1,653,000 Europe 2,416,000 2,611,000 3,683,000 3,781,000 North America 286,000 133,000 820,000 374,000 South America 81,000 64,000 87,000 146,000 Middle East - 65,000 54,000 191,000 $ 7,660,000 $ 3,629,000 $ 13,569,000 $ 6,145,000 As of February 28, 2022 and May 31, 2021, a pproximately $ 142,000 and $ 803,000 of Biomerica’s gross inventory was located in Mexicali, Mexico, respectively. As of February 28, 2022 and May 31, 2021, approximately $ 19,000 and $ 25,000 of Biomerica’s property and equipment, net of accumulated depreciation and amortization, was located in Mexicali, Mexico, respectively. NOTE 5: LEASES On June 18, 2009, the Company entered into an agreement to lease a building in Irvine, California. The lease commenced September 1, 2009 and ended August 31, 2016 . On November 30, 2015, the Company entered into the First Amendment to Lease wherein it exercised its option to extend its lease until August 31, 2021 . The initial base rent for the lease extension was $ 21,000 per month, increasing to $ 23,637 through August 31, 2021. On April 9, 2021, the Company exercised its second option to extend its lease for an additional five years through August 2026. The Company was also granted an additional five years lease extension option through August 2031. The rent is currently $ 25,588 per month. The security deposit of $ 22,078 remains the same. In November 2016, the Company’s subsidiary, Biomerica de Mexico, entered into a ten-year lease for approximately 8,104 square feet at a monthly rent of $ 2,926 . The Company has one 10-year option to renew at the end of the initial lease period. The yearly rate is subject to an annual adjustment for inflation according to the United States Bureau of Labor Statistics Consumer Price Index for All Urban Consumers. The monthly rate is currently $ 3,438 . Biomerica, Inc. is not a guarantor of such lease. Biomerica de Mexico also leases a smaller unit on a month-to-month basis for use in one 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. Rent expense in the U.S. for the nine months ended February 28, 2022 and 2021 was approximately $ 230,000 and $ 227,000 , respectively. Rent expense for the Mexico facility for the nine months ended February 28, 2022 and 2021 was approximately $ 31,000 . 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 option 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 liability. 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 liability but are instead recognized as variable lease expense in the Consolidated Statements of Operations and Comprehensive Loss when they are incurred. Supplemental cash flow information related to leases for the nine months ended February 28, 2022: Operating cash flows from operating leases $ 252,252 Right-of-use assets obtained in exchange for new operating lease liabilities $ - Weighted average remaining lease term (in years) 4.53 Weighted average discount rate 6.50 % 11 Table of Contents The approximate maturity of lease liabilities as of February 28, 2022 are as follows: Less than 1 year $ 349,000 1 to 2 years 359,000 2 to 3 years 370,000 3 to 4 years 381,000 4 to 5 years 201,000 Total undiscounted lease payments 1,660,000 Less imputed interest 217,000 Total operating lease liabilities $ 1,443,000 According to the terms of the lease in Irvine, the Company is also responsible for routine repairs of the building and for certain increases in property tax. 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 February 28, 2022. CONTRACTS AND LICENSING AGREEMENTS None NOTE 7: SUBSEQUENT EVENTS None. NOTE 8: RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS During September 2021, the Company determined that errors were included in the previously issued financial statements as described below. As a result, we restated our financial statements for the periods ended February 28, 2021. The Company discovered the errors listed below. The restatement corrects these errors. Our non-cash stock-based compensation expenses calculation applied forfeiture adjustments to both vested and unvested outstanding options, including those for which the employee had provided the requisite service and vesting had occurred, which resulted in an understatement of stock compensation expense. Additionally, our calculation expensed all issued options at vesting dates versus pro- rata over the period the requisite service was provided. Stock-based compensation expense shown on the statement of operations is a non-cash expense, and impacts accumulated deficit and additional paid-in capital on the balance sheet. However, this does not impact the Company’s cash, revenues or other aspects of ongoing operations. The restatement for the quarter ended February 28, 2021 resulted in no changes in the provision for income taxes. 12 Table of Contents The effect of the restatement on the consolidated statement of operations for the three months ended February 28, 2021 is as follows: As Previously Reported Adjustments As Restated Cost of sales $ 3,667,143 $ 34,926 $ 3,702,069 Gross Profit ( 38,505 ) ( 34,926 ) ( 73,431 ) Operating Expenses: Selling, general and administrative 1,278,393 249,554 1,527,947 Research and development 563,216 751 563,967 Total operating expense 1,841,609 250,305 2,091,914 Loss from operations ( 1,880,114 ) ( 285,231 ) ( 2,165,345 ) Loss before income taxes ( 1,842,427 ) ( 285,231 ) ( 2,127,658 ) Net loss $ ( 1,839,310 ) $ ( 285,231 ) $ ( 2,124,541 ) Basic net loss per common share $ ( 0.15 ) $ ( 0.03 ) $ ( 0.18 ) Diluted net loss per common share $ ( 0.15 ) $ ( 0.03 ) $ ( 0.18 ) Comprehensive loss $ ( 1,844,747 ) $ ( 285,231 ) $ ( 2,129,978 ) The effect of the restatement on the consolidated statement of operations for the nine months ended February 28, 2021 is as follows: As Previously Reported Adjustments As Restated Cost of sales $ 5,639,103 $ 152,490 $ 5,791,593 Gross Profit 505,867 ( 152,490 ) 353,377 Operating Expenses: Selling, general and administrative 3,697,804 540,933 4,238,737 Research and development 1,824,312 67,721 1,892,033 Total operating expense 5,522,116 608,654 6,130,770 Loss from operations ( 5,016,249 ) ( 761,144 ) ( 5,777,393 ) Loss before income taxes ( 4,962,488 ) ( 761,144 ) ( 5,723,632 ) Net loss $ ( 4,973,889 ) $ ( 761,144 ) $ ( 5,735,033 ) Basic net loss per common share $ ( 0.42 ) $ ( 0.07 ) $ ( 0.49 ) Diluted net loss per common share $ ( 0.42 ) $ ( 0.07 ) $ ( 0.49 ) Comprehensive loss $ ( 4,982,576 ) $ ( 761,144 ) $ ( 5,743,720 ) 13 Table of Contents The effect of the restatement on the consolidated statement of cash flows for the period ended February 28, 2021 is as follows: As Previously Reported Adjustments As Restated Cash flows from operating activities: Net loss $ ( 4,973,889 ) $ ( 761,144 ) $ ( 5,735,033 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock option expense 261,176 761,144 1,022,320 Net cash used in operating activities ( 4,244,064 ) - ( 4,244,064 ) Cash and cash equivalents at end of period $ 5,272,565 $ - $ 5,272,565