BIOMERICA INC 10-K

ITEM 1. BUSINESS BUSINESS OVERVIEW THE COMPANY Biomerica, Inc. ("Biomerica," the "Company," "we," “us,” or "our") was incorporated in Delaware in September 1971 as Nuclear Medical Systems, Inc., and later changed its name to Biomerica, Inc. The Company has two wholly owned subsidiaries, Biomerica de Mexico, which is used for assembly/manufacturing, and BioEurope GmbH, which acts as a distributor of Biomerica products in certain markets. We are a global biomedical technology company that develops, patents, manufactures and markets advanced diagnostic and therapeutic products used at the point-of-care (in home and in physicians' offices) and in hospital/clinical laboratories for detection and/or treatment of medical conditions and diseases. Our 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, and other inflammatory diseases. These products are directed at chronic inflammatory illnesses that are widespread and common, and as such address very large markets. Our InFoods® IBS product uses a simple blood sample and is designed to identify patient-specific foods that, when removed from the diet, may alleviate Irritable Bowel Syndrome (“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 a patient’s above normal immunoreactivity to specific foods. A food identified as positive, and causing an abnormal immune response in the patient is simply removed from the diet to help alleviate IBS symptoms. During fiscal 2022, we completed an endpoint determination clinical trial on our InFoods® IBS product. This trial was conducted at Mayo Clinics in Florida and Arizona, Beth Israel Deaconess Medical Center Inc., a Harvard Medical School Teaching Hospital, University of Texas Health Science Center at Houston, Houston Methodist, the University of Michigan and other institutions. This trial monitored IBS patients over an 8-week period to determine the efficacy of our InFoods® IBS product to improve the patients’ IBS symptoms or endpoints. The top-line trial results were reported in February 2022. Multiple endpoints demonstrated statistically significant improvements, indicating that the elimination of specific foods may meaningfully reduce the symptoms of IBS in all patient subtypes (including patients with IBS-Constipation, IBS-Diarrhea & IBS-Mixed). The greatest clinical improvements, including but not limited to abdominal pain and bloating, were seen in patients diagnosed with IBS-Mixed and IBS-Constipation, in the top line data. The purpose of the endpoint study was to determine the primary symptom endpoint, or endpoints to be used in a final pivotal trial that will be conducted to attain the validation data needed to apply for U.S. Food and Drug Administration (“FDA”) clearance for the product. We are now in the process of reviewing the complete dataset and selecting the target endpoint(s) to be used in the pivotal trial. We are also writing the protocols for this trial and expect to present these protocols to the FDA during fiscal 2023, with the intention of beginning the trial by the end of fiscal 2023, or May 31, 2023. The trial is expected to include the large medical institution participants that conducted the endpoint trial, in addition to other new institutions and a Clinical Research Organization. Following the successful completion and positive results from the Company’s InFoods ® IBS clinical trial we’ve seen significant interest from Gastroenterology (“GI”) physicians who would like to provide the InFoods ® IBS Product to for their patients immediately. Therefore, while we are proceeding with the work needed to seek FDA clearance for this product, we also are currently preparing to launch the InFoods ® IBS product through a CLIA-certified, high-complexity laboratory facility and offering the product as a laboratory developed test (“LDT”). Our expectation is that we will begin to generate revenues from this product by the end of December 31, 2022. In preparation for the launch of this LDT, we are in negotiations with large physician groups that would like to offer the LDT to their IBS patients. We are also beginning the work of selecting and validating at least one new disease (such as ulcerative colitis or migraines), where there is evidence that certain foods can trigger or contribute to the symptoms found in these indications. We expect any new disease we target will follow a similar development pathway as InFoods IBS in simultaneously seeking FDA clearance of the product while also launching the product as an LDT. We will also continue to evaluate partnership/licensing opportunities, as they arise, with U.S. and multinational companies that could help us commercialize, or accelerate revenue growth of, the InFoods products in the United States and overseas. 4 Our existing medical diagnostic products are sold worldwide primarily in two markets: 1) clinical laboratories and 2) point-of-care (physicians' offices and over-the-counter drugstores like Walmart and 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. During fiscal 2022, we finalized development of our H. Pylori diagnostic test that indicates if a patient is infected with the H. Pylori bacteria. H. Pylori infection is extremely common, and if left untreated, can lead to ulcers and possibly stomach cancers. During our fourth quarter of fiscal 2022, we applied for FDA clearance of this product though a 510(k) premarket submission. We have been in communications with the FDA answering certain follow-up questions and providing additional data as requested. We are currently awaiting FDA clearance of the product. Once cleared, we will begin marketing the product in the U.S. market. Following fiscal year-end, we announced that Walmart has begun selling our Aware ® Breast Self Exam product through their on-line retailing platform, Walmart.com. We are also in final discussions with Walmart to offer this product in their U.S. based retail stores. We have added new employees in our sales and marketing department in order to increase sales of existing products during fiscal 2022. Through these efforts, our EZ Detect colon disease home screening test and our Aware ® Breast Self Exam product are seeing an increased interest from retailers such as Walmart, distributors, and screening programs in other countries. 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 offer 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 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. While sales continue to occur in our COVID-19 products, the majority of our research and development efforts are focused on development and commercialization of non-COVID related products such as our H. Pylori product, and our InFoods® IBS product. The other existing products that contributed to our 2022 revenues are primarily focused on gastrointestinal diseases, food intolerances, and certain esoteric tests. These diagnostic test products utilize immunoassay technology. Most of our products are CE marked and/or sold for diagnostic use where they are registered by each country’s regulatory agency. In addition, some products are cleared for sale in the United States by the FDA. Technological advances in medical diagnostics have made it possible to perform diagnostic tests within the home and the physician's office (the point-of-care), rather than in the clinical laboratory. One of our objectives also has been to develop and market rapid diagnostic tests that are accurate, employ easily obtained specimens, and are simple to perform without instrumentation. Our over-the-counter (home use) and professional use (doctor’s office, clinics, etc.) rapid diagnostic products help to manage existing medical conditions and may save lives through early detection and prompt diagnosis. Typically, tests of this kind require the services of medical technologists and sophisticated instrumentation. Further, results are often not available until at least the following day. We believe that rapid point-of-care tests can be as accurate as laboratory tests when used properly, require limited to no instrumentation, give reliable results in minutes and can be performed with confidence in the home or the physician's office. We expend considerable funds in research and development of certain new products that diagnose and, in certain cases, are designed to be used as a therapy for several major medical diseases. These products are both internally developed and licensed from others. We employ experienced and highly trained technical personnel (including Ph.D.’s and scientists) to develop new products and evaluate and implement technology technical transfer activities. Our technical staff, many of whom have been previously employed at large diagnostic manufacturing companies, has extensive industry experience. We also rely on our Scientific Advisory Board of leading medical doctors and clinicians to assist in guiding our clinical studies and product development. Biomerica maintains its headquarters in Irvine, California, where it houses administration, finance, regulatory compliance, product development, sales and marketing, customer services and its primary manufacturing operations. Biomerica maintains manufacturing and assembly operations in Mexicali, Mexico, in order to reduce the cost of manufacturing and compete more effectively worldwide. Biomerica also has a legal entity in Europe, BioEurope GmbH, for the purpose of selling certain products internationally. Additional information about Biomerica is available on our website at www.biomerica.com. The content on any website referred to in this Form 10-K is not a part of or incorporated by reference in this Form 10-K unless expressly noted. Our Annual Report on Form 10-K, Quarterly Reports on Forms 10-Q, Current Reports on Forms 8-K, Proxy Statements and all other filings we make with the Securities and Exchange Commission (“SEC”) are available on our website, free of charge, as soon as reasonably practical after we file them with or furnish them to the SEC and are also available online at the SEC’s website at www.sec.gov . 5 PRODUCTION Most of our diagnostic test kits are manufactured and/or assembled at our facilities in Irvine, California and in Mexicali, Mexico. We established our manufacturing facility in Mexicali, Mexico in fiscal 2003 and moved a significant portion of our diagnostic packaging and assembly to that facility. Production of diagnostic tests can involve formulating component antibodies and antigens in specified concentrations, attaching a tracer to the antigen, filling components into vials, packaging and labeling. We continually engage in quality control procedures to assure the consistency and quality of our products and to comply with applicable FDA and international regulations. Our manufacturing operations and facilities are regulated by the FDA Good Manufacturing Practices for medical devices. We have an internal quality department that monitors and evaluates product quality and output. We also have an internal Quality Systems department whose goal is to ensure that our operating procedures are in compliance with current FDA, CE Mark and International Organization for Standardization (“ISO”) regulations. We either produce our own antibodies and antigens or purchase these materials from qualified vendors. We have alternate, approved sources for most critical raw materials and are working to procure alternate sources for the few that we do not have. RESEARCH AND DEVELOPMENT During most of the fiscal year, in addition to our focus on development our InFoods ® IBS product, we also focused a portion of our Research and Development (“R&D”) resources on developing a H. Pylori diagnostic test. Our research and development spending are due to our focus on these tests and outside clinical studies intended to demonstrate the feasibility of FDA clearance for such tests. We also utilize technical personnel, with Ph.D. and other degrees and extensive experience in development and production of health diagnostic tests, to conduct other development activities and improve existing products, as well as explore potential new technologies that we may wish to develop and commercialize. Research and development expenses include the costs of materials, supplies, personnel, consultants, facilities, outside clinical trial sites and equipment as well as outside contract services. Consolidated research and development expenses incurred by Biomerica for the years ended May 31, 2022 and 2021, aggregated to approximately $1,812,000, and $2,194,000, respectively. As Biomerica moves forward with development, validation and commercialization of additional key products that address diseases with large market opportunities, research and development expenses are expected to increase during upcoming quarters. We’ve developed a unique diagnostic-guided therapy that is designed to allow physicians to identify patient-specific foods (e.g. pork, milk, onions, sugar, chickpeas, etc.), that when removed from the patient’s diet, may alleviate or improve their symptoms of IBS. The United States Patent and Trademark Office (“USPTO”) has issued the Company two patents with broad claims that protect this InFoods® IBS product. Patents have also been issued in the countries of Australia, Japan, Korea, Mexico, and Singapore. Additional patent application pertaining to the InFoods ® IBS product have been filed in the United States and in other countries. We are also developing and have filed patents for products that target other diseases utilizing the InFoods ® technology platform which include: Functional Dyspepsia, Crohn’s disease, Ulcerative Colitis, Gastroesophageal Reflux disease (“GERD”), Migraine Headaches, Depression and Osteoarthritis. Our first patent to be allowed for a disease/illness other than IBS was allowed in Japan in August 2021. This patent covers the use of our InFoods® technology to diagnose and treat persons suffering from depression. We are planning to pursue FDA Clearance through a De Novo submission with the FDA rather than a Premarket Approval Application (“PMA”) or 510(k) for the InFoods® IBS product. During the fourth quarter of fiscal 2022, we also submitted our proprietary H. Pylori test to the FDA for clearance through a 510(k) submission. The clinical studies for our H. Pylori were conducted at the University of Southern California (“USC”), a European University and several other U.S. locations. Biomerica’s test is designed to provide highly accurate sensitivity and specificity for H. pylori testing and for monitoring of treatment. 6 MARKETS AND METHODS OF DISTRIBUTION Biomerica has approximately 250 current customers for its diagnostic business, of which approximately 80 are foreign distributors, 10 are domestic distributors and the balance are primarily domestic hospital and clinical laboratories, medical research institutions, medical schools, pharmaceutical companies, chain drugstores, wholesalers, physicians' offices, and e-commerce customers. We employ a director of sales and marketing for Europe and South America who is headquartered in Germany. She has over 20 years of experience selling and marketing diagnostic and life science products across multiple diagnostics technologies and disciplines. She possesses broad international business experience, with communication skills in German, English, Spanish, French and Portuguese, and scientific and technical understanding of gastrointestinal diagnostic products. She also has strong relationships with key strategic entities in Europe, Eastern Europe, Latin America, Canada and the United States and we expect that she will continue to help Biomerica add new distributors for existing products and add new product-lines for future distribution by us. We rely on affiliated and unaffiliated distributors, advertising in medical and trade journals, exhibitions at trade shows, direct mailings and an internal sales staff to market our diagnostic products. We target two main markets: (a) clinical laboratories and (b) point-of-care testing (physicians' offices and over-the-counter drug stores). Due to the Coronavirus global pandemic, our operations have been negatively impacted. We have 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 our manufacturing or distribution facilities or of the facilities of our suppliers, partners and customers, travel, shipping and logistical disruptions, government responses of all types, international business risks in countries where we make and/or sell our 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 can materially negatively impact our operations and financial performance and may continue to have significant material negative impacts on us. Our net sales were approximately $18,871,000 for fiscal 2022 compared to $7,199,000 for fiscal 2021. For the fiscal years ended May 31, 2022 and 2021, the Company had two distributors, which accounted for a total of 65% and 60% of our net sales, respectively. Of this, for the fiscal years ended May 31, 2022 and 2021, the largest of the distributors mentioned above accounted for 55% and 33%, respectively, of net sales. Total gross receivables at May 31, 2022 and 2021 were approximately $927,000 and $2,292,000, respectively. As of May 31, 2022 and 2021, the Company had one distributor and two distributors, respectively, which accounted for a total of 50% and 73%, respectively, of gross accounts receivable. Of the 50% as of May 31, 2022, 50% was owed by a distributor in Asia. BACKLOG On May 31, 2022 and 2021, Biomerica had a backlog of unshipped orders of approximately $754,000 and $85,000, respectively. On May 31, 2022, this consisted primarily of orders to a distributor in Asia. RAW MATERIALS The principal raw materials utilized by Biomerica consist of various chemicals, serums, reagents and packaging supplies. Almost all of our raw materials are available from several sources, and we are not dependent upon any single source of supply or a few suppliers. However, due to the limited number of suppliers of some materials, especially those such as antibodies, there is always the possibility that we may encounter difficulty in the future obtaining key raw materials for its manufacturing processes or that such materials may be exceedingly costly. For the fiscal years ended May 31, 2022 and 2021, the Company had one vendor, which accounted for 84% and 58%, respectively of our purchases of raw materials. Our inventory consists of various types of materials including antibodies, antigens, bottles, boxes, various chemicals and reagents utilized in the manufacture of our test kits as well as products in various stages of completion. Our sourcing and receiving of raw materials have been negatively impacted due to the global COVID-19 pandemic. Many of our suppliers have been impacted by plant shut-downs, state or national mandated or recommended shut-downs, restrictions and constraints on distribution channels including ship freight, air freight and trucking, among other things. These suppliers are also experiencing their own disruptions in sourcing raw materials. It is unclear to what extent raw material availability will be impacted in the foreseeable future, and how that will impact our production and sales. 7 INFLATION Due to the global and domestic supply chain disruptions, and overall inflationary pressures in the economy, we have experienced material increases in the cost of our raw materials and in our operating and labor costs. While we have attempted to respond by increasing the selling price of our own products, the gross margins on our products sold have been negatively impacted. COMPETITION Immunodiagnostic products, including COVID-19 products, are currently produced globally by hundreds of companies. Biomerica is not a significant player in the overall market for most of the product categories in which we compete. However, we do have certain proprietary products, such as our EZ Detect colon disease home test, the Aware Breast Self Exam product and our InFoods ® IBS that do not have significant competition from tests offered by competitors, and that do not have the features and benefits of our tests. Our competitors vary greatly in size. Many are divisions or subsidiaries of well-established medical and pharmaceutical companies which are much larger than Biomerica and expend substantially greater amounts than we do for research and development, manufacturing, advertising, and marketing. The primary competitive factors affecting the sale of diagnostic products are uniqueness, technology, quality of product, performance, price, service, and marketing. We believe we compete primarily on the basis of the uniqueness of our products, the quality of our products, the speed of our test results, our patent position, our pricing and our prompt shipment of orders. We offer a broad range of products but have had limited marketing capability. However, during the past 18 months, we have expanded our sales and marketing capability, through marketing and strategic cooperation with larger companies and distributors and by hiring new employees with marketing and sales expertise. GOVERNMENT REGULATION OF OUR DIAGNOSTIC BUSINESS Our primary business consists of selling products that are generally legally defined to be in vitro diagnostic medical devices and medical devices. As a result, we are considered to be an in vitro diagnostic medical devices and medical device manufacturer, and as such are subject to the regulations of numerous governmental entities. These agencies include the FDA, Environmental Protection Agency, Federal Trade Commission, Occupational Safety and Health Administration, U.S. Department of Agriculture ("USDA"), and Consumer Product Safety Commission, as well as European Government agencies. These activities are also regulated by various agencies of the states and localities in which our products are sold. These regulations govern the introduction of new in vitro diagnostic medical devices and medical devices, the observance of certain standards with respect to the manufacture and labeling of medical devices, the maintenance of certain records, the reporting of potential product problems, and other matters. The Food, Drug & Cosmetic Act of 1938 (the "FDCA") regulates medical devices in the United States by classifying them into one of three classes based on the extent of regulation believed necessary to ensure safety and effectiveness. Class I devices are those devices for which safety and effectiveness can reasonably be assured through general controls, such as device listing, adequate labeling, and adherence to the Quality System Regulation ("QSR") as well as Medical Device Reporting (“MDR”), labeling and other regulatory requirements. Some Class I medical devices are exempt from the requirement of Pre-Market Notification or clearance. Class II devices are those devices for which safety and effectiveness can reasonably be ensured through the use of special controls, such as performance standards, post-market surveillance and patient registries, as well as adherence to the general controls’ provisions applicable to Class I devices. Class III devices are devices that generally must receive clearance prior to marketing by the FDA pursuant to a pre-market approval to ensure their safety and effectiveness. Generally, Class III devices are limited to life-sustaining, life-supporting or implantable devices. However, this classification can also apply to novel technology or new intended uses or applications for existing devices. Our products are primarily either Class I or Class II medical devices. Pursuant to FDA requirements, we have registered our manufacturing facility with the FDA as a medical device manufacturer and listed the medical devices we manufacture. We are also subject to inspection on a routine basis for compliance with FDA regulations. This includes the QSR, which requires that we manufacture our products and maintain our documents in a prescribed manner with respect to issues such as design controls, manufacturing, testing and validation activities. Further, we are required to comply with other FDA requirements with respect to labeling and MDR regulation which requires that we provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of our products, as well as product malfunctions that are likely to cause or contribute to death or serious injury if the malfunction were to recur. We believe that we are currently in material compliance with all relevant QSR and MDR requirements. 8 In addition, our facility is required to have a California Medical Device Manufacturing License. The license is not transferable and must be renewed biannually. Our current license is valid until November 19, 2022. Through compliance with FDA and California regulations, we can market some of our medical devices throughout the United States. International sales of medical devices are also subject to the regulatory requirements of each country. In Europe, the directives of the European Union (“EU’) require that a device have a CE Mark in order to be sold in EU countries. We comply with In Vitro Diagnostic Medical Devices Directive (“IVDD”) 98/79/EC and Medical Devices Regulation 2017/745 (“MDR”). We also comply with ISO 13485:2016 Medical Devices Quality Management Systems - Requirements for Regulatory Purposes. At present, outside the EU the regulatory international review process varies from country to country. We work with our distributors and sales representatives in the foreign countries in which we market our products to ensure that we comply with the regulatory laws of those countries. We believe that our international sales to date have been in compliance with the laws of all foreign countries in which we have made sales. Exports of most medical devices are also subject to certain FDA regulatory controls. The designing, development, manufacturing, marketing, post-market surveillance, distribution, advertising and labeling of Biomerica’s immunoassay in vitro diagnostic (“IVD”) medical device products are subject to regulation in the United States by the Center for Devices and Radiological Health of the FDA and state agencies. FDA regulations require that some new products have pre-marketing clearance or approval by the FDA and require these products to be manufactured in accordance with the FDA’s current Good Manufacturing Practice (cGMP) regulations, to be extensively tested and to be properly labeled to disclose test results and performance claims and limitations. After a product that is subject to FDA regulation is placed on the market, numerous regulatory requirements apply, including, for example, the requirement that we comply with recordkeeping and reporting requirements, such as the FDA’s medical device reporting regulations and reporting of corrections and removals. The FDA enforces these requirements by inspection and post -market surveillance. The last FDA announced inspection was in November 2019 and no observations were noted. We believe that all Biomerica products sold in the United States comply with the FDA and state regulations. We are an FDA regulated and ISO 13485:2016 certified In Vitro Diagnostic Medical Devices company. Our goal is to provide high quality medical diagnostic products that generally meet or exceed customer requirements and comply with all applicable regulatory requirements: FDA 21 CFR Part 820 Quality Management System, ISO 13485:2016, Medical Devices Quality Management Systems - Requirements for Regulatory Purposes, In Vitro Diagnostic Medical Devices Directive 98/79/EC & and Medical Device Regulation 2017/745, Guidelines related to Medical Devices Directive/Regulation and Guidance on CE Marking, etc. Biomerica involves its employees in a continuous improvement process to increase productivity, improve quality and maintain the suitability, adequacy, and effectiveness of our quality management system. The new EU In Vitro Diagnostic Medical Device Regulation (“IVDR”) 2017/746 was effective on May 26, 2022. Manufacturers need to update their technical documentation and processes to meet the new, more stringent regulatory requirements of the European Union. Notified Bodies can begin certifying devices to the new IVDR requirements once they have been designated under IVDR by their Competent Authority. Since August 19, 2021, our Notified Body is officially designated under the IVDR and listed in the European Commission NANDO database. We are working closely with our Notified Body to update our technical documentation to comply with these new and more stringent IVDR requirements. Per IVDR 2017/746 Amendment 2021/0323 (COD), devices with a CE certificate that was issued in accordance with IVDD may be placed on the market or put into service until May 26, 2025. Exceptional Renewal of CE Certificate for IVDD Quality System was granted to Biomerica. Biomerica received an extended CE Certificate on May 24, 2022, which remains effective until May 26, 2025. Biomerica has until May 26, 2025, to update the technical documentation and processes to meet the new, more stringent regulatory requirements of IVDR 2017/746. Per IVDR 2017/746 Amendment 2021/0323 (COD), devices without a CE certificate that was issued in accordance with IVDD, for which a declaration of conformity was drawn up prior to May 26, 2022, per IVDD and for which the conformity assessment procedure pursuant to IVDR requires the involvement of a Notified Body, may be placed on the market or put into service until the following dates. Biomerica also has until the following dates to update the technical documentation and processes to meet the new, more stringent regulatory requirements of IVDR 2017/746: 9 (1) May 26, 2025, for class D devices; (2) May 26, 2026, for class C devices; (3) May 26, 2027, for class B devices; and (4) May 26, 2027, for class A devices placed on the market in sterile condition. SEASONALITY OF BUSINESS Our businesses have not been subject to significant seasonal fluctuations. INTERNATIONAL BUSINESS The following table sets forth the dollar volume of revenue attributable to sales to domestic customers and foreign customers during our last two fiscal years: For the year ended May 31, 2022 2021 Asia $ 13,375,000 71% $ 1,908,000 26% Europe 4,339,000 23% 4,301,000 60% North America 997,000 5% 548,000 8% South America 90,000 1% 250,000 3% Middle East 70,000 0% 192,000 3% Total $ 18,871,000 100% $ 7,199,000 100% We recognize that our foreign sales could be subject to some special or unusual risks, which are not present in the ordinary course of business in the United States. Changes in economic factors, government regulations, terrorism, tariffs, embargos, trade wars, import/export restrictions, disruptions in shipping and distribution channels and drop in demand for our products due to regional or national shut-downs from the COVID-19 pandemic, and other disease outbreaks that cause patients’ fear or refusal to visit hospitals and healthcare providers due to the pandemic where our products are sold and used, the erosion of economic conditions in those countries, and many other factors all could impact sales within certain foreign countries. In addition, these factors could also impact our ability to collect foreign accounts receivable. Foreign countries have licensing requirements applicable to the sale of diagnostic products, which vary substantially from domestic requirements; depending upon the product and the foreign country, these may be more or less restrictive than requirements within the United States and may change without notice. Foreign sales of our diagnostic products are made primarily through a network of approximately 80 independent distributors in approximately 30 countries. The COVID-19 related factors mentioned above and in “Risk Factors” negatively impacted domestic and international sales of our non-COVID-19 products during fiscal 2022 and may continue to negatively impact our sales into the foreseeable future. INTELLECTUAL PROPERTY We regard the protection of our methodologies, designs, product formulations, manufacturing processes, diagnostic procedures, copyrights, service marks, trademarks, and trade secrets as important to our future success. We rely on a combination of copyright, trademark, patent, service mark and trade secret laws and contractual restrictions to establish and protect our proprietary rights in products and services. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with most of our fulfillment partners and strategic partners to limit access to and disclosure of proprietary information. We cannot be certain that these contractual arrangements or the other steps taken by us to protect our intellectual property will prevent misappropriation of our technology. We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks, patents, trade secrets, or copyrighted material, to third parties. While we attempt to ensure that the quality of our product brands is maintained by such licensees, we cannot be certain that such licensees will not take actions that might hurt the value of our proprietary rights or reputation. 10 LICENSE OF THIRD-PARTY INTELLECTUAL PROPERTY On occasion, we in-licensed both exclusive and non-exclusive rights to intellectual property and patents owned by third parties. These license agreements typically require royalties and other payments. We have a royalty agreement in which we obtained rights to manufacture and market an ACTH test (used to detect chronic metabolic conditions). Royalty expense of approximately $19,000 and $11,000, respectively, is included in cost of sales for this agreement for the fiscal years ended May 31, 2022 and 2021. Sales of products manufactured under this agreement are not material to total sales for the fiscal years ended May 31, 2022 and 2021, respectively. We may license other products or technology in the future as it deems necessary or opportunistic for conducting business. In May 2020, we signed an exclusive license agreement with The Regents of the University of California, to license patents pertaining to a CRISPR-based technology that we may use to produce a more accurate rapid test for the COVID-19 virus, that could be used to test individuals to determine if they are currently infected with the COVID-19 virus. This agreement requires the payment of certain milestone payments and a royalty on all sales that utilize the licensed technology. Collaboration efforts on a CRISPR product that may be commercialized using this technology continues, however, there are no imminent plans to launch a product from this collaboration. Some of the products that we manufacture, sell or use may be covered by claims in issued patents held by other persons or entities, and as such, upon notice from such persons or entity we may be required to pay a license fee or may be required to cease all manufacture, sale or use of such products, which could negatively impact us. While we have not been notified of any such claims by third parties, we cannot guarantee that such claims will not be made in the future. BRANDS AND TRADEMARKS We occasionally register our tradenames with the U.S. Patent and Trademark Office (“USPTO”). Of note, we registered the tradename “InFoods” on December 24, 2016. Our unregistered tradenames are "EZ Detect," "EZ-H.P.," and "EZ-PSA". A trademark for "Aware" was issued and assigned in 2001, renewed in 2011 and 2021. On January 11, 2020, the USPTO renewed our “FORTEL” trademark for another ten years. The laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Effective copyright, trademark and trade secret protection may not be available in such jurisdictions. PATENTS AND INFOODS TECHNOLOGY We have filed over 100 international and Patent Corporation Treaty patents and have over 10 provisional and non-provisional patents currently filed with the USPTO. Some of these patent applications pertain to COVID-19 and other products, however, the majority of our patents that are pending, allowed or issued pertain to the InFoods® technology platform. Our most important family of patent applications pertains to our InFoods ® technology platform, which is a new method of diagnosing and treating symptoms of many different inflammatory diseases. Our first planned product launch using this technology is the InFoods ® IBS product which is designed to diagnose and treat IBS. Using a patient blood sample, a physician or lab can run our test to identify specific foods (e.g., pork, milk, shrimp, broccoli, eggs) that, if eliminated from an IBS patient’s diet, can alleviate or reduce the individual's IBS symptoms, including, but not limited to, constipation, diarrhea, bloating, cramping, severe pain and indigestion. We have filed many patent applications with the USPTO and with other such similar agencies in other countries outside of the United States pertaining to this InFoods ® technology. These patent applications include claims that address the diagnosis and treatment of several disease states including IBS, functional dyspepsia, Crohn’s disease, ulcerative colitis, gastroesophageal reflux disease, osteoarthritis, psoriasis, migraine headaches and depression. These applications include the use of this technology in both humans and animals. The first InFoods ® patents filed by us pertained to IBS. Several of the patents pertaining to the InFoods ® IBS technology have been issued and many more are in active review and prosecution. In August 2018, we received our first patent from the Korean Intellectual Property Office, covering our InFoods® IBS product. Since then we have been granted an additional 11 patents; 3 in Japan, 2 in the United States, 2 in Korea, 1 in Singapore, 1 in Mexico, 1 in Canada, and 1 in Australia. Additionally, we have filed for over 100 international and USPTO patents. 11 We believe the claims in these issued InFoods® IBS patents and claims in our pending patents that protect the use of the InFoods® technology to diagnose and treat various diseases, provide us with broad protections from other companies making or selling competing products in this highly disruptive new field of medicine. In addition to the use of our own patents, we have acquired from third parties the rights to manufacture and sell certain products that are protected by patents or intellectual property owned by these third parties. In some cases, royalties are paid on the sales of these products. We anticipate that we will license or purchase the rights to other products or technologies in the future. We recently completed an endpoint determination clinical trial on our InFoods® IBS product. Our business model for this product includes the possible out-licensing of this product and the related patents to a large international life sciences or technology company that would commercialize the product or assist us with the commercialization. EMPLOYEES As of May 31, 2022 and 2021, we employed a total of 64 and 67 employees, respectively, in the United States, Mexico, and Germany, of which 64 and 67 were full-time employees, respectively. Various employees listed in the production department also perform research and development duties as a routine function of their job. We occasionally employs temporary employees when needed. 12 The following is a breakdown of employees by departments: May 31, 2022 2021 Administrative 8 10 Research & Development 8 8 Sales & Marketing 6 5 Production & Operations 42 44 Total 64 67 We also engage the services of many outside Ph.D.’s, M.D.’s and other types of industry expert consultants and organizations as well as medical institutions for technical support, regulatory advisors, marketing and public relations advisors, financial advisors, contract product development and manufacturing organization, and other advisors on a regular basis. We try to protect the Company with the use of confidentiality, intellectual property ownership and indemnifications agreements. However, we cannot guarantee that the use of such experts will fully protect the Company from third-party claims or from theft of our intellectual property.