| SIGNIFICANT ACCOUNTING POLICIES | NOTE
2: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES
OF CONSOLIDATION The
condensed consolidated financial statements include the accounts of Biomerica, Inc. and its wholly-owned subsidiaries Biomerica de Mexico and BioEurope GmbH. All significant intercompany accounts and transactions have been eliminated in consolidation. ACCOUNTING
ESTIMATES In order to prepare our consolidated financial statements in conformity with GAAP, we must make a number of estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting
period. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.
Different assumptions or conditions may cause actual results to differ materially from these estimates. We monitor significant estimates
made during the preparation of our financial statements on an ongoing basis. We believe our estimates and assumptions are reasonable under
the current conditions; however, actual results may differ from these estimates under different future conditions. We
believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations,
in that they require subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These relate to revenue recognition, bad debts, inventory overhead application, inventory reserves, lease liabilities,
right-of-use assets and share based compensation. We believe estimates and
assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences
result in unanticipated consequences, there could be a material impact on our future financial conditions or results of operations. We
suggest that our significant accounting policies be read in conjunction with this Management’s Discussion and Analysis of Financial
Condition and Results of Operations of this Quarterly Report on Form 10-Q. MARKETS
AND METHODS OF DISTRIBUTION The
majority of the Company’s revenues come from the sale of products it manufactures in the U.S. and Mexico, with certain raw
materials sourced from Asia and other regions. The Company’s diagnostic business serves a diverse customer base that includes both domestic and international distributors, as
well as hospitals, clinical laboratories, medical research institutions, pharmaceutical companies, drugstores, wholesalers, physicians’
offices, and e-commerce customers. A significant portion of the Company’s revenues are derived from international sales. The
Company employs a Director of Sales and Marketing for Europe and South America, based in Germany, who has over 20 years of
experience in diagnostics and life sciences. This individual’s international business experience and multilingual capabilities
have facilitated strong relationships across Europe, Eastern Europe, Middle East, Latin America, Canada, and the U.S. The Company
expects continued growth through the addition of new distributors and product lines in these regions. The Company
markets its diagnostic products through distributors, advertising in medical and trade journals,
trade show exhibitions, direct mailings, and its internal sales team. The two primary markets the Company targets are clinical laboratories
and point-of-care testing, including physicians’ offices and over-the-counter drug stores. LIQUIDITY
AND GOING CONCERN The
Company has incurred net losses and negative cash flows from operations and has an accumulated deficit of approximately $ 49.5 2,820,000 4,294,000 On
July 21, 2020, the Company filed with the Securities and Exchange Commission (“SEC”) a Form S-3 shelf registration statement
and base prospectus which was declared effective by the SEC on September 30, 2020. The 2020 Shelf Registration Statement registered common
shares that could be issued by the Company in a maximum aggregate amount of up to $ 90,000,000 On
January 22, 2021, the Company filed a prospectus supplement to the base prospectus included in a registration statement filed with the
SEC on July 21, 2020, and declared effective by the SEC on September 30, 2020, for purposes of selling up to $ 15,000,000 During
the year ended May 31, 2023, the Company sold 573,889 3.15 4.26 2,014,000 1,961,000 53,000 On March 7, 2023,
the Company sold 3,333,333 2.40 700,000 7,300,000 As
part of our financing plan, on September 28, 2023, we filed a “shelf” registration statement on Form S-3 with the SEC,
which was declared effective on September 29, 2023, allowing the Company to issue up to $ 20,000,000 5,500,000 81,000 83,068 0.59 0.28 The
Company intends to use the net proceeds from this offering for general corporate purposes, including, but not limited to, sales and marketing
activities, clinical studies and product development, acquisitions of assets, businesses, companies, or securities, capital expenditures,
and working capital needs. Management assesses whether the Company has sufficient liquidity to fund its costs for the next twelve months from
each financial statement issuance date to determine if there is a substantial doubt about the Company’s ability to continue as a
going concern. The
Company’s ability to continue as a going concern over the next twelve months is influenced by several factors, including:
● Our
need and ability to generate additional revenue from international opportunities and our new product launches;
● Our
need to access the capital and debt markets to meet current obligations and fund operations;
● Our
capacity to manage operating expenses and maintain gross margins as we grow; and
● Our
ability to retain key employees and maintain critical operations with a substantially reduced workforce. Management
has analyzed the Company’s cash flow requirements through November 2025 and beyond. Based on this analysis, we believe our current
cash and cash equivalents are insufficient to meet our operating cash requirements and strategic growth objectives for the next twelve
months. To
address our capital needs and sustain operations beyond the next year, we are actively pursuing strategies to increase sales, reduce
expenses, sell non-core assets, seek additional financing through debt or equity, and seek other strategic alternatives. While we are
committed to these plans, there is no assurance that these efforts will be successful or sufficient to meet our capital requirements. As part of our efforts to reduce costs, we have initiated significant cost-cutting measures to extend our cash runway
and work towards increasing revenues to cover overhead costs. These measures include a workforce reduction of nearly 15% in July 2024
and a substantial reduction in other operating expenses. These
factors raise substantial doubt about the Company’s ability to continue as a going concern. Our future viability depends on the
successful execution of our strategic plans, securing additional financing, and achieving profitable operations. The
Company’s consolidated financial statements as of August 31, 2024 were prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the normal course of business. CONCENTRATION
OF CREDIT RISK The
Company maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies. From time to time,
the Company has uninsured balances. The Company does not believe it is exposed to any significant credit risks. The
Company provides credit in the normal course of business to customers throughout the United States and in foreign markets. The Company
performs ongoing credit evaluations of its customers and requires accelerated prepayment in some circumstances. Consolidated
net sales were approximately $ 1,807,000 1,713,000 55 59 As
of August 31, 2024, and May 31, 2024, total gross receivables were approximately $ 1,582,000 966,000 67 64 For the three months ended August 31, 2024, and 2023, two and one key vendors
accounted for 34 12 24 69 CASH
AND CASH EQUIVALENTS Cash
and cash equivalents consist of demand deposits and money market accounts with original maturities of less than three months. ACCOUNTS
RECEIVABLE, NET The
Company extends unsecured credit to its customers on a regular basis. International accounts are usually required to prepay until
they establish a history with the Company and at that time, they are extended credit at levels. Initial credit levels for individual
distributors are approved by designated officers and managers of the Company based on various criteria. All increases in credit limits are also approved by
designated upper-level management. The
Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (codified as
Accounting Standards Codification (“ASC”) 326) on June 1, 2023. ASC 326 adds to U.S. GAAP the current expected credit loss
(“CECL”) model, a measurement model based on expected losses rather than incurred losses. Prior to the adoption of ASC 326,
the Company evaluated receivables on a quarterly basis and adjusted the allowance for doubtful accounts accordingly. Balances over 90
days Occasionally,
certain long-standing customers who routinely place large orders will have unusually large receivable balances relative to the total
gross receivables. Management monitors the payments for these large balances closely and very often requires payment of existing invoices
before shipping new sales orders. As
of August 31, 2024 and May 31, 2024, the Company has established a reserve of approximately $ 31,000 19,000 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, 2024 and May 31, 2024, the prepaids were approximately $ 132,000 238,000 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, 2024 May
31, 2024
Raw
materials $ 1,442,000 $ 1,519,000
Work
in progress 756,000 1,145,000
Finished
products 216,000 179,000
Total
gross inventory 2,414,000 2,843,000
Inventory
reserves (472,000 ) (467,000 )
Net
inventory $ 1,942,000 $ 2,376,000 Reserves
for inventory obsolescence are recorded as necessary to reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory. As of August 31, 2024, and May 31, 2024, inventory reserves were approximately $ 472,000 467,000 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
to 10
years, using the straight-line method. Leasehold
improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Depreciation and amortization
expense on property and equipment was approximately $ 17,000
and $ 16,000 INTANGIBLE
ASSETS, NET Intangible
assets include trademarks, product rights, technology rights and patents, and are accounted for based on ASC 350 Intangibles –
Goodwill and Other, In that regard, intangible assets that have indefinite useful lives are not amortized but are tested at least
annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be
impaired. Intangible
assets are being amortized using the straight-line method over the useful life, not to exceed 18 10 15 4,000 5,000 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 is any impairment. During the three months ended August 31, 2024, and 2023, there were no 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, 2024 and determined that the Company’s proportionate economic interest in the entity indicates that the equity holding
was not impaired. There were no observable price changes in orderly transactions for identical or a similar holding or security of the
Company’s Cost Method Holdings during the period ended August 31, 2024. SHARE-BASED
COMPENSATION The
Company follows the guidance of ASC 718, Share-based Compensation, which requires the use of the fair-value based
method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments
(options). The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses
assumptions for expected volatility, expected dividends, expected forfeiture rate, expected term, and the risk-free interest rate. The
Company has not paid dividends historically and does not expect to pay them in the foreseeable future. Expected volatilities are based
on weighted averages of the historical volatility of the Company’s common stock estimated over the expected term of the options.
The expected forfeiture rate is based on historical forfeitures experienced. The expected term of options granted is derived using the
“simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term as
historically the Company had limited exercise activity surrounding its options. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant for the period of the expected term. The grant date fair value of the award is recognized under
the straight-line attribution method. The
Company expensed approximately $ 77,000 170,000 The
following summary presents the options granted, exercised, expired, canceled and outstanding for the three months ended August 31, 2024: SUMMARY OF OPTIONS ACTIVITY
Option
Shares Weighted Average Exercise Price
Options
Outstanding at May 31, 2024 3,479,616 $ 2.53
Granted 67,000 0.44
Cancelled
or expired (240,500 ) 2.03
Options
Outstanding at August 31, 2024 3,306,116 $ 2.53 REVENUE
RECOGNITION The
Company has various contracts with customers, and these contracts specify the recognition of revenue based on the nature of the transaction. Revenues
from product sales are recognized at the time the product is shipped, customarily FOB shipping point, which is when the transfer of control
of goods has occurred and title passes. This applies to clinical lab products sold to domestic and international distributors, including
hospitals, clinical laboratories, medical research institutions, medical schools, and pharmaceutical companies. OTC products are sold
directly to drug stores, e-commerce customers, and distributors, while physicians’ office products are sold to physicians and distributors.
The Company does not allow returns except in cases of defective merchandise, and therefore, does not establish an allowance for returns.
Additionally, the Company has contracts with customers that provide purchase discounts contingent on achieving specified sales volumes.
These contracts are regularly evaluated, and the Company does not anticipate granting any discounts through the end of the contract period. Furthermore,
the Company offers margin guarantees to certain retail drug store customers to ensure a minimum profit margin. Should pricing adjustments
cause these margins to fall below the agreed-upon thresholds, the Company is committed to compensating for the shortfall. This arrangement
introduces variable consideration into our revenue recognition process. These considerations are estimated monthly based on actual sales
and potential price reductions, ensuring accurate and compliant revenue reporting. For
diagnostic testing services sold directly to patients or physician offices that require processing by a third-party CLIA-certified lab,
we recognize revenue once the lab has completed the test results. For
services related to contract manufacturing, revenue is recognized when the service has been performed. Services for some contract work
are invoiced and recognized as the project progresses. As
of August 31, 2024, the Company had approximately $ 85,000 Disaggregation
of revenue: The
following is a breakdown of revenues according to markets to which the products are sold: SCHEDULE OF DISAGGREGATION REVENUE
Three
Months Ended August 31,
2024 2023
Clinical
lab $ 1,278,000 $ 1,289,000
Over-the-counter 187,000 303,000
Contract
manufacturing 339,000 117,000
Physician’s
office 3,000 4,000
Total $ 1,807,000 $ 1,713,000 See
Note 4 for additional information regarding revenue concentrations. SHIPPING
AND HANDLING FEES The
Company includes shipping and handling fees billed to customers in net sales. RESEARCH
AND DEVELOPMENT Research
and development costs are expensed as incurred. The Company expensed approximately $ 297,000 472,000 INCOME
TAXES The
Company had income tax expense for the three months ended August 31, 2024 of approximately $ 4,000 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, 2024, the Company had no accrued interest or penalties related to uncertain tax positions. ADVERTISING
COSTS The
Company reports the cost of advertising as expense in the period in which those costs are incurred. Advertising costs were approximately
$ 14,000 30,000 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 condensed
consolidated statements of operations for the three months ended August 31, 2024 and 2023. RIGHT-OF-USE
ASSETS AND LEASE LIABILITY In
February 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which requires lessees
to recognize most leases on the balance sheet with a corresponding right-of-use asset. Right-of-use assets represent the Company’s
right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from
the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value
of fixed lease payments over the lease term. Leases are classified as financing or operating which will drive the expense recognition
pattern. The Company has elected to exclude short-term leases. The Company leases office space and copy machines, all of which are operating
leases. Most leases include the option to renew and the exercise of the renewal options is at the Company’s sole discretion. Options
to extend or terminate a lease are considered in the lease term to the extent that the option is reasonably certain of exercise. The
leases do not include the options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited
by the expected lease term. NET
LOSS PER SHARE Basic
loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted loss
per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible
securities using the treasury stock method. The total amount of anti-dilutive stock options not included in the loss per share calculation
at August 31, 2024 and 2023 was 3,306,116 2,363,116 RECENT
ACCOUNTING PRONOUNCEMENTS Recent
ASU’s issued by the FASB and guidance issued by the SEC did not, or are not believed by the management to, have a material effect
on the Company’s present or future consolidated financial statements. In
November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, “Improvements to Reportable Segment
Disclosures.” The ASU includes enhanced disclosure requirements, primarily related to significant segment expenses that are regularly
provided to and used by the chief operating decision maker (“CODM”). The amendments are to be applied retrospectively to
all prior periods presented in the financial statements. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023,
with early adoption permitted. We are currently evaluating the effect of adopting this pronouncement on our financial statements and
disclosures. In
December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The ASU includes
enhanced disclosure requirements, primarily related to the rate reconciliation and income taxes paid information. The amendments are
to be applied prospectively in the financial statements. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024,
with early adoption permitted. We are currently evaluating the effect of adopting this pronouncement on our financial statements and
disclosures. |
