| SIGNIFICANT ACCOUNTING POLICIES | NOTE
2: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES
OF CONSOLIDATION The
condensed consolidated financial statements include the accounts of Biomerica, Inc. as well as its German subsidiary (BioEurope GmbH)
and Mexican subsidiary (Biomerica de Mexico). All significant intercompany accounts and transactions have been eliminated in consolidation. ACCOUNTING
ESTIMATES The
preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and
the reported amounts of revenues and expenses during the reported period. Estimates that are made include the allowance for doubtful
accounts, which is estimated based on current as well as historical practices with a customer; stock option forfeiture rates, which are
calculated based on historical data; inventory obsolescence, which is based on projected and historical usage of materials; and lease
liability and right-of-use assets, which are calculated based on certain assumptions such as borrowing rate, the likelihood of lease
extensions to occur, asset valuation, among other things; and other items that may be necessary to estimate using current, historical
and judgment based information. Actual results could materially differ from those estimates. MARKETS
AND METHODS OF DISTRIBUTION The
majority of the Company’s revenues come from the sale of products that the company manufactures in the U.S. and in Mexico. Some
of the raw materials used in manufacturing come from Asia and other regions of the world. Finally, most of the Company’s revenues
are generated from the international sales of its products. Due to global and economic disruptions caused by the COVID-19 pandemic, the
ongoing war in Ukraine, and tensions between the country of China and the United States, the Company’s operations have been negatively
impacted. The Company has faced disruptions in the following areas, and may face further challenges from supply chain disruptions, cost
inflation, loss of contracts and/or customers, closure of the facilities of the Company’s suppliers, partners and customers, travel,
shipping and logistical disruptions, government responses of all types, international business risks in countries where the Company makes
and/or sells its products, loss of human capital or personnel at the Company, its partners and its customers, interruptions of production,
customer credit risk, and general economic calamities. The Company’s current sales and marketing focus is on the sale of the inFoods ®
LIQUIDITY The
Company has incurred net losses and negative cash flows from operations and has an accumulated deficit of approximately $ 43.3 7,988,000 9,828,000 On
July 20, 2020, the Company filed with the Securities and Exchange Commission (“SEC”) a Form S-3 shelf registration statement
and base prospectus which was declared effective by the SEC on September 30, 2020. This shelf registration statement registered the sale
of up to $ 90,000,000 Under
the Company’s outstanding Registration Statement, on March 7, 2023, the Company sold 3,333,333 2.40 700,000 7,300,000 To
replace the shelf registration statement that was set to expire on September 30, 2023, on September 27, 2023, the Company filed with
the SEC a new Form S-3 shelf registration statement and base prospectus which was declared effective by the SEC on September 29, 2023.
This new shelf registration statement registers the sale of up to $ 20,000,000 The
Company intends to use the net proceeds from past offerings and any future offerings for general corporate purposes, including, without
limitation, sales and marketing activities, clinical studies, product development, making acquisitions of assets, businesses, companies
or securities, capital expenditures, and for working capital needs. Management
has analyzed the cash requirements of the Company’s business through at least November 2024. As a result of cash and cash equivalents
on hand on August 31, 2023, largely from the public offering, and the ability to raise additional funds if needed through the sale of
shares of the Company’s common stock, management believes the Company has sufficient funds to operate through at least November
2024. CONCENTRATION
OF CREDIT RISK The
Company maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies. From time to time,
the Company has uninsured balances. The Company does not believe it is exposed to any significant credit risks. Consolidated
net sales were approximately $ 1,713,000 1,637,000 59% 64% Total
gross receivables on August 31, 2023 and May 31, 2023 were approximately $ 1,459,000 751,000 67% 35% For
the three months ended August 31, 2023 and 2022, the Company had one key vendor which accounted for 12% 9% 47% 23% CASH
AND CASH EQUIVALENTS Cash
and cash equivalents consist of demand deposits and money market accounts with original maturities of less than three months. ACCOUNTS
RECEIVABLE, NET The
Company extends unsecured credit to its customers on a regular basis. International accounts are usually required to prepay until they
establish a history with the Company and at that time, they are extended credit at levels based on a number of criteria. Based on various
criteria, initial credit levels for individual distributors are approved by designated officers and managers of the Company. All increases
in credit limits are also approved by designated upper-level management. The
Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses Occasionally
certain long-standing customers, who routinely place large orders, will have unusually large receivables balances relative to the total
gross receivables. Management monitors the payments for these large balances closely and very often requires payment of existing invoices
before shipping new sales orders. As
of August 31, 2023 and May 31, 2023, the Company has established a reserve of approximately $ 29,000 PREPAID
EXPENSES AND OTHER The
Company occasionally prepays for items such as inventory, insurance, and other items. These items are reported as prepaid expenses and
other, until either the inventory is physically received, or the insurance and other items are expensed. As
of August 31, 2023 and May 31, 2023, the prepaids were approximately $ 279,000 300,000 INVENTORIES,
NET The
Company values inventory at the lower of cost (determined using a combination of specific lot identification and the first-in, first-out
methods) or net realizable value. Management periodically reviews inventory for excess quantities and obsolescence. Management evaluates
quantities on hand, physical condition, and technical functionality as these characteristics may be impacted by anticipated customer
demand for current products and new product introductions. The reserve is adjusted based on such evaluation, with a corresponding provision
included in cost of sales. Abnormal amounts of idle facility expenses, freight, handling costs and wasted material are recognized as
current period charges and the allocation of fixed production overhead is based on the normal capacity of the production facilities.
Net
inventories are approximately the following: SCHEDULE
OF NET INVENTORIES
August
31, 2023 May
31, 2023
Raw materials $ 1,454,000 $ 1,677,000
Work in progress 793,000 869,000
Finished products 162,000 182,000
Total gross inventory 2,409,000 2,728,000
Inventory reserves (532,000 ) (672,000 )
Net
inventory $ 1,877,000 $ 2,056,000 Reserves
for inventory obsolescence are recorded as necessary to reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory. As of August 31, 2023, and May 31, 2023, inventory reserves were approximately $ 532,000 672,000 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 10 16,000 20,000 INTANGIBLE
ASSETS, NET Intangible
assets include trademarks, product rights, technology rights and patents, and are accounted for based on Accounting Standards Codification
(“ASC”), ASC 350 Intangibles – Goodwill and Other (“ASC 350”). In that regard, intangible assets that have
indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Intangible
assets are being amortized using the straight-line method over the useful life, not to exceed 18 10 20 5,000 9,000 The
Company assesses the recoverability of these intangible assets by determining whether the amortization of the asset’s balance over
its remaining life can be recovered through projected undiscounted future cash flows. The Company uses a qualitative assessment to determine
whether there was any impairment. During the three months ended August 31, 2023 and 2022, an impairment adjustment was made of $ 0 6,000 INVESTMENTS The
Company has made investments in a privately held Polish distributor, which is primarily engaged in distributing medical products and
devices, including the distribution of the products sold by the Company. The Company invested approximately $ 165,000 6% Equity
holdings in nonmarketable unconsolidated entities in which the Company is not able to exercise significant influence (“Cost Method
Holdings”) are accounted for at the Company’s initial cost, minus any impairment (if any), plus or minus changes resulting
from observable price changes in orderly transactions for the identical or a similar holding or security of the same issuer. Dividends
received are recorded as other income. The
Company assesses its equity holdings for impairment whenever events or changes in circumstances indicate that the carrying value of an
equity holding may not be recoverable. Management reviewed the underlying net assets of the Company’s equity method holding as
of August 31, 2023 and determined that the Company’s proportionate economic interest in the entity indicates that the equity holding
was not impaired. There were no observable price changes in orderly transactions for identical or a similar holding or security of the
Company’s Cost Method Holdings during the period ended August 31, 2023. SHARE-BASED
COMPENSATION The
Company follows the guidance of ASC 718, Share-based Compensation (“ASC 718”), which requires the use of the fair-value based
method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments
(options). The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses
assumptions for expected volatility, expected dividends, expected forfeiture rate, expected term, and the risk-free interest rate. The
Company has not paid dividends historically and does not expect to pay them in the foreseeable future. Expected volatilities are based
on weighted averages of the historical volatility of the Company’s common stock estimated over the expected term of the options.
The expected forfeiture rate is based on historical forfeitures experienced. The expected term of options granted is derived using the
“simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term as
historically the Company had limited exercise activity surrounding its options. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant for the period of the expected term. The grant date fair value of the award is recognized under
the straight-line attribution method. The
Company expensed approximately $ 170,000 304,000 The
following summary presents the options granted, exercised, expired, canceled and outstanding for the three months ended August 31, 2023: SUMMARY
OF OPTIONS ACTIVITY
Option
Shares Weighted Average Exercise Price
Options Outstanding at May
31, 2023 2,342,616 $ 3.52
Granted 68,000 1.18
Exercised - -
Cancelled or expired (47,500 ) 3.31
Options Outstanding
at August 31, 2023 2,363,116 $ 3.45 REVENUE
RECOGNITION The
Company has various contracts with customers. All of the contracts specify that revenues from product sales are recognized at the time
the product is shipped, customarily FOB shipping point, which is when the transfer of control of goods has occurred and at which point
title passes. The
Company does not typically allow for returns from customers except in the event of defective merchandise and therefore does not establish
an allowance for returns. In addition, the Company has contracts with customers wherein customers receive purchase discounts for achieving
specified sales volumes. The Company evaluated the status of these contracts during the three months ended August 31, 2023 and 2022 and
does not believe that any additional discounts will be given through the end of the contract periods. Services
for contract work performed by the Company for others are invoiced and recognized as that work has been performed and as the project
progresses. The Company sells clinical lab products to domestic and international distributors, including hospitals and clinical laboratories,
medical research institutions, medical schools and pharmaceutical companies. OTC products are sold directly to drug stores and e-commerce
customers as well as to distributors. Physician’s office products are sold to physicians and distributors, all of whom are categorized
below according to the type of products sold to them. We also manufacture certain components on a contract basis for domestic and international
manufacturers. As
of August 31, 2023, the Company had approximately $ 60,000 Disaggregation
of revenue: The
following is a breakdown of revenues according to markets to which the products are sold: SCHEDULE OF DISAGGREGATION REVENUE
2023 2022
Three Months Ended August 31,
2023 2022
Clinical lab $ 1,289,000 $ 1,146,000
Over-the-counter 303,000 213,000
Contract manufacturing 117,000 95,000
Physician’s office 4,000 183,000
Total $ 1,713,000 $ 1,637,000 See
Note 4 for additional information regarding revenue concentrations. SHIPPING
AND HANDLING FEES The
Company includes shipping and handling fees billed to customers in net sales. RESEARCH
AND DEVELOPMENT Research
and development costs are expensed as incurred. The Company expensed approximately $ 472,000 361,000 INCOME
TAXES The
Company had income tax expense for the three months ended August 31, 2023 of approximately $ 23,000 The
Company’s policy is to recognize any interest and penalties related to unrecognized tax benefits as a component of income tax expense.
For the three months ended August 31, 2023, the Company had no accrued interest or penalties related to uncertain tax positions. ADVERTISING
COSTS The
Company reports the cost of advertising as expense in the period in which those costs are incurred. Advertising costs were approximately
$ 30,000 18,000 FOREIGN
CURRENCY TRANSLATION The
subsidiary located in Mexico operates primarily using the Mexican peso. The subsidiary located in Germany operates primarily using the
U.S. dollar, with an immaterial amount of transactions occurring using the Euro. Accordingly, assets and liabilities of these subsidiaries
are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average exchange
rates for the period. The resulting translation adjustments to assets and liabilities are presented as a separate component of accumulated
other comprehensive loss. There are no foreign currency transactions that are included in the consolidated statements of operations for
the three months ended August 31, 2023 and 2022. RIGHT-OF-USE
ASSETS AND LEASE LIABILITY Right-of-use
assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent our obligation
to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date
based on the estimated present value of fixed lease payments over the lease term. Leases are classified as financing or operating which
will drive the expense recognition pattern. The Company has elected to exclude short-term leases. The Company leases office space and
copy machines, all of which are operating leases. Most leases include the option to renew and the exercise of the renewal options is
at the Company’s sole discretion. Options to extend or terminate a lease are considered in the lease term to the extent that the
option is reasonably certain of exercise. The leases do not include the options to purchase the leased property. The depreciable life
of assets and leasehold improvements are limited by the expected lease term. NET
LOSS PER SHARE Basic
loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted loss
per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible
securities using the treasury stock method. The total amount of anti-dilutive stock options not included in the loss per share calculation
at August 31, 2023 and 2022 was 2,363,116 2,388,616 RECENT
ACCOUNTING PRONOUNCEMENTS Recent
ASU’s issued by the FASB and guidance issued by the SEC did not, or are not believed by the management to, have a material
effect on the Company’s present or future consolidated financial statements. In
June 2016, the FASB issued ASU 2016-13. This ASU requires the measurement of all expected credit losses for financial assets, including
trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.
The guidance was initially effective for the Company for annual reporting periods beginning after December 15, 2019, and interim periods
within those fiscal years. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Losses (Topic 326), Derivatives
and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which, among other things, defers the effective date of ASU
2016-13 for public filers that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December
15, 2022, including interim periods within those years. Early adoption is permitted. The Company adopted ASU 2016-03 on June 1, 2023,
and the adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements. |
