SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Feb. 28, 2023

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

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 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 experience 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 global and economic disruptions caused by the Coronavirus global 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 certain of 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 pandemic, war and geopolitical 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 $40.4 million as of February 28, 2023. Management expects to continue to incur significant costs as it advances its clinical trials, product launches, and product development activities. As of February 28, 2023, the Company had cash and cash equivalents of approximately $3,345,000 and working capital of approximately $5,087,000.

On July 21, 2020, the Company filed with the SEC a “shelf” registration statement on Form S-3. The registration statement registers common shares that may be issued by the Company in a maximum aggregate amount of up to $90,000,000.  Shares of the Company’s common stock may be sold from time to time under this registration statement for up to three years from the filing date. On January 22, 2021, the Company filed a prospectus supplement for the sale of up to $15,000,000 of shares of our common stock in an at-the-market offering (“ATM Offering”) under the shelf registration statement, of which approximately $9,400,000, remained available for sale under the prospectus supplement as of the third quarter ended February 28, 2023. 

Following the end of the third quarter, the Company closed a public offering on March 7, 2023 of an aggregate of 3,333,333 shares of its common stock, par value $0.08 per share at a price to the public of $2.40 per share for total gross proceeds of $8 million, before deducting underwriting discounts and commissions and other offering-related expenses payable by the Company. In conjunction with the public offering of shares of the Company’s common stock, the Company suspended its at-the-market sales agreement.

The Company intends to use the net proceeds from the prior sale of shares under the at-the-market agreement 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.

The sales agent under the ATM Offering had agreed 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 had no obligation to sell any of the shares under the ATM Offering, and maintained the ability to suspend offers under, or terminate the ATM Offering.

During the nine months ended February 28, 2023, the Company sold 573,889 shares of its common stock at prices ranging from $3.15 to $4.26 under its ATM Offering which resulted in gross proceeds of approximately $2,014,000 and net proceeds to the Company approximately of $1,961,000 after deducting commissions for each sale and legal, accounting, and other fees related to the ATM Offering.

As a result of cash and cash equivalents on hand at February 28, 2023, plus the net proceeds from the public offering of common shares which closed in early March 2023, management believes the Company has sufficient funds to operate through at least September 2024.

CONCENTRATION OF CREDIT RISK

The Company’s primary banking partners are Bank of America and Merrill Lynch. The Company maintains cash balances in accounts at financial institutions in excess of amounts insured by federal agencies, as well as substantial cash reserves in investment grade money market accounts and in U.S. treasury bills. As of February 28, 2023, the Company had approximately $3,095,000 of uninsured cash. The Company does not believe it is exposed to any significant credit risks.

For the three months ended February 28, 2023, the Company had one key customer who is located in Asia which accounted for 22%. For the three months ended February 28, 2022, the Company had three key customers who are located in Asia and the United States which accounted for 79% of net consolidated sales. For the nine months ended February 28, 2023, the Company had one key customer who is located in Asia which accounted for 38%. For the nine months ended February 28, 2022, the Company had three key customers who are located in Asia and the United States which accounted for 75% of net consolidated sales.

Total gross receivables on February 28, 2023 and May 31, 2022 were approximately $772,000 and $927,000, respectively. On February 28, 2023, the Company had two customers which accounted for a total of 44% of gross receivables. On May 31, 2022 the Company had one key customer which accounted for a total of 50% of gross receivables.

For the three months ended February 28, 2023, the Company had two key vendors which accounted for 31% of the purchase of raw materials. For the three months ended February 28, 2022, the Company had one key vendor which accounted for 92% of the purchase of raw materials.

For the nine months ended February 28, 2023, there was no individual vendor that comprised more than 10% of the Company’s purchases.. For the nine months ended February 28, 2022, the Company had one key vendor which accounted for 85% of the purchase of raw materials.

As of February 28, 2023, the Company had one key vendor which accounted for 18% of accounts payable. As of May 31, 2022, the Company had two key vendors which accounted for 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

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.

As of February 28, 2023 and May 31, 2022, the Company has established a reserve of approximately $17,000 and $153,000, respectively, for doubtful accounts. During the quarter ended February 28, 2023, the Company reduced gross accounts receivable and the allowance for doubtful accounts by $465,000 for a 2022 COVID product related customer that is not expected to be collected.

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, 2023 and May 31, 2022, the prepaid expenses and other were approximately $318,000 and $320,000, respectively, composed of prepayments to 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 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. As of February 28, 2023, and May 31, 2022, inventory reserves were approximately $808,000 and $846,000, respectively.

Net inventories are approximately the following:

	February 28, 2023		May 31, 2022
Raw materials	$	1,714,000	$	1,717,000
Work in progress		924,000		763,000
Finished products		234,000		782,000
Total gross inventory	$	2,872,000	$	3,262,000
Inventory reserves		(808,000)		(846,000)
Total	$	2,064,000	$	2,416,000

Reserves for inventory obsolescence and/or inventory that management believes is in excess of an amount that can be sold in the near future, are recorded as necessary to reduce obsolete and excess inventory to estimated net realizable value or to specifically reserve for obsolete inventory.

PROPERTY AND EQUIPMENT, NET

Property and equipment are stated at cost. Expenditures for additions and major improvements are capitalized. Repair 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 $15,000 and $26,000 for the three months ended February 28, 2023 and 2022, respectively, and approximately $51,000 and $80,000 for the nine months ended February 28, 2023 and 2022, respectively. 

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 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 20 years for patents, 18 years for marketing and distribution rights, and 10 years for purchased technology use rights. Amortization expenses were approximately $3,000 and $8,000 for the three months ended February 28, 2023 and 2022, respectively, and approximately $15,000 and $22,000 for the nine months ended February 28, 2023 and 2022, respectively. Amortizing intangible assets are tested for impairment if management determines that events or changes in circumstances indicate that the asset might be impaired.

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. As of February 28, 2023 and 2022, an impairment adjustment was made of $6,000 and $0, respectively.

INVESTMENTS

The Company has made investments in privately held companies. These investments represent the Company’s investment in a Polish distributor, which is primarily engaged in distributing medical products and devices, including the distribution of the products sold by the Company. The Company invested approximately $165,000 into the Polish distributor and owns approximately 6% of the investee.

Equity holdings in nonmarketable unconsolidated entities in which the Company is not able to exercise significant influence ("Cost Method Holdings") are accounted for at the Company's initial cost, minus any impairment (if any), plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar holding or security of the same issuer. Dividends received are recorded as other income.

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 February 28, 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 February 28, 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 following summary presents the options granted, exercised, expired, canceled and outstanding for the nine months ended February 28, 2023:

	Option Shares	Exercise Price Weighted Average
Outstanding May 31, 2022	2,321,616	$	3.72
Granted	146,000		3.37
Exercised	(46,500)		1.73
Cancelled or expired	(107,750)		4.76
Outstanding February 28, 2023	2,313,366	$	3.69

During the nine months ended February 28, 2023, options to purchase 46,500 shares of common stock were exercised at prices ranging from $0.82 to $2.68. Total net proceeds for the Company were approximately $79,000.

During the nine months ended February 28, 2023, the Company granted 146,000 options to purchase common stock at an average purchase price of $3.37, with the majority of those options issued to the Company’s new Chief Commercial Officer, who is managing the commercialization and roll-out of the InFoods IBS test.

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 nine months ended February 28, 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.  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.

As of February 28, 2023, the Company had approximately $138,000 of advances from certain foreign customers. The majority of these advances are prepayments on orders that are expected to ship during our fourth fiscal quarter ending May 31, 2023.

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,
	2023		2022		2023		2022
Clinical lab	$	532,000	$	731,000	$	2,580,000	$	2,259,000
Over-the-counter		292,000		244,000		971,000		857,000
Contract manufacturing		284,000		167,000		431,000		319,000
Physician's office		4,000		6,518,000		249,000		10,134,000
Total	$	1,112,000	$	7,660,000	$	4,231,000	$	13,569,000

See Note 4 for additional information regarding geographic 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 $392,000 and $387,000 of research and development costs during the three months ended February 28, 2023 and 2022, respectively, and approximately $1,215,000 and $1,317,000 of research and development costs during the nine months ended February 28, 2023 and 2022, respectively.

INCOME TAXES

The Company has provided a full valuation allowance on net deferred income tax assets of approximately $8,088,000 and $6,967,000 as of February 28, 2023 and May 31, 2022, respectively.  

FOREIGN CURRENCY TRANSLATION

The subsidiary located in Mexico operates primarily using the Mexican peso. The subsidiary located in Germany operates primarily using the U.S. dollar, with an immaterial amount of transactions occurring using the Euro. Accordingly, assets and liabilities of these subsidiaries are translated using exchange rates in effect at the end of the period, and revenues and costs are translated using average exchange rates for the period. The resulting translation adjustments to assets and liabilities are presented as a separate component of accumulated other comprehensive loss. There are no foreign currency transactions that are included in the condensed consolidated statements of operations for the three and nine months ended February 28, 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 of 12 months or less, and as a result, those lease payments are recognized in operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.  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 on February 28, 2023 and 2022 was 2,313,366 and 2,336,116, respectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This ASU will require 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 Securities and Exchange Commission to fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The Company is currently reviewing the requirements of this ASU to determine its impact on the Company’s consolidated results of operations and financial position.

Other recent Accounting Standards Updates (”ASU's”) issued by the Financial Accounting Standards Board (“FASB”) and guidance issued by the SEC did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.

RECLASSIFICATIONS

Certain comparative figures in the February 28, 2022 condensed consolidated statement of operations have been reclassified to conform to the current period presentation.