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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 and import 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, patients’ fear or refusal to visit hospitals and healthcare provides 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 the ability of the Company 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.States and may change without notice. Foreign diagnostic sales at Biomerica are made primarily through a network of approximately 100 independent distributors in approximately 65 countries.

The COVID-19 related factors mentioned above have also negatively impacted domestic sales of our non-Covid-19 products and may continue to negatively impact our domestic and international 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, patents,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 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.

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.

The Company has a royalty agreement in which it has obtained rights to manufacture and market an ACTH test (used to detect chronic metabolic conditions). Royalty expense of approximately $15,000 and $19,000, respectively, is included in cost of sales for this agreement for the fiscal years ended May 31, 2020 and 2019. Sales of products manufactured under this agreement are non-material to total sales for the fiscal years ended May 31, 2020 and 2019, respectively. The Company may license other products or technology in the future as it deems necessary or opportunistic for conducting business.

In April 2020, we signed two license agreements with the Icahn School of Medicine at Mount Sinai, a New York not-for-profit education corporation, pertaining to certain technology that we have used to develop our ELISA COVID-19 serology test. This agreement requires a royalty payment on all sales of products that utilize the licensed technology.

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 hope to use to produce a 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.   

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 the Company. 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.

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BRANDS AND TRADEMARKS PATENTS, LICENSES

We registered theoccasionally register our tradenames "Fortel", "Isletest", and "GAP" with the Office of Patents and Trademarks on December 31, 1985. WeTrademarks. Of note, we registered the tradename “InFoods” on December 24, 2016. Our unregistered tradenames are "EZ-Detect""EZ Detect", "EZ-H.P." and "EZ-PSA". A trademark for "Aware" was issued and assigned in November 2001 and renewed in 2011. Biomerica has acquired from third partiesOn January 11, 2020, the rights to manufacture and sell certain products. In some cases, royalties are paid onUSPTO renewed the sales of these products. Biomerica anticipates that it will license or purchase the rights to other products or technologies in the future.  Biomerica has filed twenty-two provisional patent applications with regard to new tests to identify possible triggersCompany’s “FORTEL” trademark for causing specific symptoms to multiple diseases.  The International Search Authority (ISA) has deemed that for one of Biomerica’s patents pertaining to Irritable Bowel Syndrome (IBS), all the International Patent Application claims for its composition and methods to identify trigger foods for IBS are novel and non-obvious.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 U.S. Effective copyright, trademark and trade secret protection may not be available in such jurisdictions. Our efforts

PATENTS AND INFOODS TECHNOLOGY

The Company has filed over 100 international and PCT patents, and has 22 provisional and non-provisional patents currently filed with the USPTO. Some of these patent applications pertain to protect our intellectual property rights may not prevent misappropriationCOVID-19 and other products. However, the majority of our content. In addition, there can be no assurancepatents that Biomerica is not violating any third-party patents.are pending pertain to the InFoods® IBS technology platform.

Our most important family of patent applications pertains to our InFoods® IBS technology platform, which is a revolutionary and disruptive new method of the symptoms of many different diseases. Our first planned product launch using this technology is the InFoods® IBS product which diagnoses and treats Irritable Bowel Syndrome. 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 the patient’s diet, can alleviate or reduce the individual's IBS symptoms, including, but not limited to, constipation, diarrhea, bloating, 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® IBS 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, migraine headaches, osteoarthritis, psoriasis and others. These applications include the use of this technology in both humans and animals.  The first patents filed by us pertained to IBS. The International Search Authority (“ISA”) has deemed that for one of Biomerica’s key patent applications pertaining to IBS, all of the International Patent Application claims for its composition and methods to identify trigger foods for IBS are novel and non-obvious.  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, the Korean Intellectual Property Office (KIPO)(“KIPO”) issued a Certificate of Patent (#10-1887545) covering Biomerica’s compositions, devices and methods ofour InFoods® IBS sensitivity testingproduct (entitled “COMPOSITIONS, DEVICES, AND METHODS OF IBS SENSIVITY TESTING”). The patent specifically applies to Biomerica’s InFoods® IBS product, which is currently in a clinical study in the U.S.  This patent iswas the first for the InFoods® patent portfolio, providing patent protection for InFoods® IBS in Korea until November 13, 2035.

The CompanyIn June 2019, we received our first issued patent from the USPTO (#15/526,240) pertaining to our InFoods® IBS product, with claims that covers the test kit that is used to determine patient food intolerances. 

In May 2020, the Japanese Patent Office issued our first InFoods® IBS patent in that country (JP,6681907,B) which covers the compositions, devices and methods of IBS sensitivity testing.

In August 2020, we received notice of allowance from the USPTO for our second patent for the InFoods® IBS product (#16/385,322) that expands our claims to include the method for identifying and setting the antibody cut-off values for each individual food to determine if a person has one royalty agreementan intolerance to that food.

We believe the claims in which itthese issued InFoods IBS patents, and claims in pending patents that protect the use of the InFoods® IBS  technology to diagnose and treat other 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, Biomerica has obtainedacquired from third parties the rights to manufacture and marketsell certain products forthat are protected by patents or intellectual property owned by these third parties. In some cases, royalties are paid on the lifesales of these products. Biomerica anticipates that it will license or purchase the products. Royalty expense of approximately $19,000 is included in cost of sales for this agreement for the years ended May 31, 2019 and 2018. Sales of products manufactured under this agreement comprises approximately 2.9% and 2.6% of total sales for the years ended May 31, 2019 and 2018, respectively. The Company may licenserights to other products or technologytechnologies in the future as it deems necessary or opportunistic for conducting business.future. 

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U.S. PATENT ALLOWANCE

The United States Patent and Trademark Office (USPTO) has issued a Notice of Allowance for Biomerica’s first U.S. patent pertaining to the Company’s InFoods® IBS product. Specifically, this allowed application (#15/526,240) contains numerous claims that broadly cover a product that enables physicians to identify patient specific foods (e.g. pork, milk, shrimp, broccoli, chickpeas, etc.), that when removed, may alleviate or improve an individual's IBS symptoms, including but not limited to constipation, diarrhea, bloating, pain and indigestion. This patent is the first US patent allowed for the InFoods® IBS product, providing patent protection for InFoods® IBS in the U.S. until November, 2035. The Company is pursuing patents for the InFoods® platform technology in several other disease states as well as increasing the coverage for the IBS product.  

EMPLOYEES

As of May 31, 20192020 and 2018,2019, the Company employed 45 and 39 employees.employees, respectively, in the U.S. and Europe. Various employees listed in the production department also perform research and development duties as a routine function of their job. The Company also employed four people in 2019 and three people in 2018 who are working on a contractual basis.occasionally employs temporary employees when needed. The following is a breakdown betweenof employees by departments:

In addition, Biomerica de Mexico employs 1520 people at its Mexico facility.

We also engage the services of variousmany outside Ph.D. and M.D. and other types of industry expert consultants 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 are not a partytry to any collective bargaining agreementprotect the Company with the use of confidentiality, intellectual property ownership and have never experienced a work stoppage. We considerindemnifications agreements. However, we cannot guarantee that the use of such third parties will fully protect the Company from third-party claims or from theft of our employee relations to be good.intellectual property.

ITEM 1A.   RISK FACTORS

The risks described below are not the only ones we face. Additional risks and uncertainties we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks.risks and uncertainties. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained or incorporated by reference into this annual report on Form 10-K, including our consolidated financial statements and related notes.

RISKS RELATED TO OUR BUSINESS

Our business could be adversely affected by the effects of widespread public health epidemics.

We are susceptible to a widespread outbreak of an illness or other health issue, such as the recent COVID-19 Coronavirus outbreak first reported in Wuhan, Hubei Province, China in December 2019 and subsequently spreading throughout the world resulting in millions of confirmed cases worldwide and many deaths. The outbreak of the COVID-19 virus has caused the various governments, including the U.S., to implement quarantines, various restrictions on travel causing airlines to suspend international and certain domestic flights, shelter in place orders and other restrictions. Governments have also implemented work restrictions that prohibit many employees from going to work, and for businesses that are allowed to remain open, many employees are electing to remain at home to avoid spread of the disease. As a result of this COVID-19 virus outbreak and potential future pandemic outbreaks, the Company faces significant risks including, but not limited to: a) supply chain disruptions making it difficult for the Company to contract and receive materials needed for production of its products, and needed to ship finished products to our end customers, b) loss of contracts and customers from the financial strains or other disruptions they are experiencing as a result of the pandemic, c) financial risks pertaining to receivables due from customers that may fall into insolvency or otherwise be unable to pay their bills, d) government responses including orders that make it difficult to remain open for business, restrict imports of raw materials or exports of finished goods, refusal to allow the Company’s product to be licensed for sale in their countries, and other seen and unforeseen actions taken by government agencies, e) absenteeism or loss of employees at the Company, or at our partner’s companies, due to health reasons or government restrictions, that are needed to develop, validate, manufacture and perform other necessary functions for our operations, f) equipment failures, loss of utilities and other disruptions that could impact our operations or render them inoperable, g) litigation or government actions against the Company pertaining to existing products new products sold by the Company that are directed at limiting or treating the spread of the pandemic outbreak, h) a local or global recession or depression that could harm the international banking system, limit demand for all products including those made by the Company,  i) a drop in demand for our products, that are all medical related, due to patients’ reluctance or refusal to visit hospitals, labs, and doctors’ offices where our products are used due to their fear of contracting a disease, and many other seen and unforeseen events and circumstances, all of which could negatively impact the Company.

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If our COVID-19 tests are unable to gain acceptance in the market, proves to be ineffective or less effective than expected, and/or we do not receive regulatory approvals for our COVID-19 tests to be sold, our results of operation could be materially harmed.

Although we believe that our COVID-19 tests represent promising tests to detect prior COVID-19 virus exposure, the tests may never gain significant acceptance in the marketplace and therefore may never generate substantial revenue or profits for us. We will need to establish a market for our COVID-19 antibody tests. Gaining acceptance in medical communities requires increasing awareness of our COVID-19 tests and their benefits.  Also, there are a large number of companies around the world now making and selling COVID-19 tests that compete with our COVID-19 tests. Many of these competitor products are made in China and other parts of Asia where manufacturing costs are low. As such, we are seeing supply and price competition which could make it difficult for the Company to compete.  Other risks pertaining to these products include: 

•          our ability to demonstrate the efficacy, speed and cost competitiveness of our COVID-19 tests;

•          whether healthcare providers and governmental agencies believe our COVID-19 tests are sufficiently safe, effective, and accurate;

•          our ability to transfer, further develop, integrate and use third-party licensed technology;

•          our ability to manufacture and scale commercial products;

•          our ability to source required raw materials in a cost effective and timely manner;

•          development of effective vaccines to the Covid-19 virus that reduce the need to do antibody testing;

•          mutations in the COVID-19 virus that render our tests ineffective;

•          receipt of regulatory approvals necessary prior to commercialization of our products;

•          the FDA or other regulatory agencies retracting their prior approval for our products to be sold in their market or changing regulations for approval; and

•          whether the medical community accepts our COVID-19 tests as a supplement to, alternative to, or complimentary to, current PCR or other tests for COVID-19 infection.

In addition, each country in which we wish to sell these tests has its own regulatory approval requirements.  We will need to comply with the regulatory requirements of each country before we are permitted to sell in that country.  There can be no assurance that governmental agencies, including the FDA, will provide clearance of our COVID-19 tests to be sold in their markets.  Failure to achieve widespread market acceptance of our COVID-19 tests, or failure to achieve regulatory clearance of our COVID-19 tests, could materially harm our business, financial condition, and results of operations.  Our COVID-19 tests are new tests that only generated revenue during the last two months of our fiscal year. It is uncertain how long we will be able to generate revenues from these tests, and what level of sales, if any, we will attain in the future.

Our operating results may fluctuate adversely as a result of many factors that are outside our control, which may negatively impact our stock price. Fluctuations in our operating results, for any reason, could cause our growth or operating results to fall below the expectations of investors and securities analysts.

We base the scope of our operations and related expenses on our estimates of future revenues. A significant portion of our operating expenses are fixed, and we may not be able to rapidly adjust our expenses if our revenues fall short of our expectations. Our revenue estimates for future periods are based, among other factors, on estimated end-user demand for our products. If end-user consumption is less than estimated, revenues from our distribution partners and other distribution channels would be expected to fall short of expectations, and because such a significant portion of our costs are fixed, could result in operating losses.

Factors that are beyond our control and that could affect our operating results in the future include:

•        regulatory clearance;

•        changes in the level of competition, such as would occur if one of our competitors introduced a new, better performing or lower priced product to compete with one or more of our products;

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•        changes in the reimbursement systems or reimbursement amounts that end-users may rely upon in choosing to use our products;

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•        changes in economic conditions in our domestic and international markets, such as economic downturns, decreased healthcare spending, reduced consumer demand, inflation and currency fluctuations; changes in government laws and regulations affecting our business; reluctance for consumers to visit healthcare providers;

•        lower than anticipated market penetration of our new or more recently introduced products;

•        significant quantities of our product or that of our competitors in our distributors’ inventories or distribution channels;

•        changes in distributor buying patterns;

•        government mandated shelter-in-place or other lock-down orders;

•        continued spread of the COVID-19 virus or mutations of the virus; and

•        changes in the healthcare market including consolidation in our customer base.

To remain competitive, we must continue to develop, obtain and protect our proprietary technology rights; otherwise, we may lose market share or need to reduce prices as a result of competitors selling technologically superior products that compete with our products.

Our ability to compete successfully in the diagnostic market depends on continued development and introduction of new products, technology and the improvement of existing technology. If we cannot continue to improve upon or develop, obtain and protect our technology, our operating results could be adversely affected.

Our competitive position is heavily dependent on obtaining and protecting our own proprietary technology or obtaining licenses from others. Our ability to obtain patents and licenses, and their benefits, is uncertain.

The Company is required to obtain government or regulatory certification in many countries and the European community to sell its products in those countries.countries or regions.  There is no assurance that the Company will be able to retain its certification in the future.

Since aSignificant government regulation exists in countries in which we conduct business. A large part of the Company’s sales are to distributors in Europe, China and other countries, which require us to maintain certain certifications to sell our products.  Failure to comply with current governmental regulations and quality assurance guidelines could cause the loss of this certification in any of the countriesthese certifications, which could materially adversely affect the results of the Company.  Loss of certifications could lead to temporary manufacturing shutdowns, product recalls, product shortages or delays in product manufacturing and a decline in sales.

The Company maintains a manufacturing plant in Mexico which presents risks to the Company including risks associated with doing business outside the United States.

The Company has a significant investment in its manufacturing facility in Mexico through its subsidiary, Biomerica de Mexico.  Mexico   There is significant riskare a number of risks associated with doing business in operating facilities in a foreign countryMexico, including, exposure to local economic and there ispolitical conditions, social unrest, including risks of terrorism or other hostilities, export and import restrictions, the possibility that there may bepotential for shortages of trained labor, and the possible effects of currency exchange rate fluctuations.These risks could lead to additional costs involved with these risks that we cannot foresee at this time.time and may materially adversely impact our business, results of operations and financial condition.

We use hazardous materials in our research and production that may result in unexpected and substantial claims against us relating to handling, storage or disposal.

We use hazardous materials in our research and production. The risk of accidental contamination or injury from these materials cannot be completedcompletely eliminated. In the event of such an accident, the Company could be held liable for any harm or damages that result and any such liability could exceed the resources of the Company.  The Company may incur substantial costs to comply with environmental regulations.

If any governmental authorities were to impose new environmental regulations requiring compliance in addition to that required by existing regulations, or alter their interpretation of the requirements of such existing regulations, such environmental and safety regulations could impair our research, development or production efforts by imposing additional, and possibly substantial, costs, restrictions or compliance procedures on our business. In addition, because of the nature of the penalties provided for in some of these environmental and safety regulations, we could be required to pay sizable fines, penalties or damages in the event of noncompliance with regulations and environmental laws. Any environmental or safety violation or remediation requirement could also partially or completely shut down our research and manufacturing facilities and operations, which would have a material adverse effect on our business. The risk of accidental contamination or injury from these hazardous materials cannot be completely eliminated and exposure of individuals to these materials could result in substantial fines, penalties or damages that aremay not be covered by insurance.

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In order to remain competitive, we must expend considerable resources to research new technologies and products and develop new markets, and there is no assurance our efforts to develop new technologies, products or markets will be successful or such technologies, products or markets will be commercially viable.

We devote a significant amount of financial and other resources to researching and developing new technologies, new products and new markets. The development, manufacture and sale of diagnostic products require a significant investment of resources. The development of new products and markets also requires a substantial investment of resources, such as new employees, offices and manufacturing facilities.facilities, consultants and clinical trials. No assurances can be given that our efforts to develop new technologies or products will be successful, that such technologies and products will be commercially viable, or our expansion into new markets will be profitable.

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There is also no guarantee that our new products, including our InFoods® IBS products, will get approval and be well accepted into the marketplace.

Our operations will be adversely affected if our operating results do not correspondingly increase with our increased expenditures or if our technology, product and market development efforts are unsuccessful or delayed. Furthermore, our failure to successfully introduce new technologies or products and develop new markets could have a material adverse effect on our business and prospects.

We rely on a limited number of key distributors that account for a substantial majority of our total revenue. The loss of any key distributor or an unsuccessful effort by us to directly distribute our products could lead to reduced sales.

As ofFor the fiscal years ended May 31, 20192020 and 2018, the Company had two customers which accounted for 46.3% and 43.3%, respectively, of consolidated net sales. As of May 31, 2019, the Company had three and two customers whodistributors, respectively, which accounted for a total of 57.2% and 46.3% of our sales, respectively. Of this, for the fiscal years ended May 31, 2020 and 2019, one of the distributors mentioned above accounted for 25.7% and 36.3%, respectively, of net consolidated sales. 

At May 31, 2020 and 2019, the Company had three distributors and two distributors which accounted for a total of 80.08% and 68.1%, respectively, of gross accounts receivable. As of May 31, 2018, the Company had one customer which accounted for 53.3% of gross accounts receivable. The loss of these sales to these accounts could adversely impact the results of the Company. In addition, lossesOf the 80.0% as of May 31, 2020, 43.9% was owed by a distributor in Ecuador. Total gross receivables for fiscal 2020 and 2019 were $1,836,852 and $1,527,762, respectively. Adverse changes in our relationships with these distributors and other partners, or adverse developments in their financial condition, performance or purchasing patterns, could adversely affect our business and consolidated financial statements. 

We extend credit to customers outside the U.S. which can be difficult to collect.

We extend credit to many of our customers including those outside of the U.S. It is often difficult to obtain adequate credit information on these customers. Further, our ability to collect receivables from these customers through the accounts receivablecourt systems in those countries can be more difficult than here in the U.S.  Our inability to collect on receivables from customers outside of the U.S. could negatively impact the Company. The Company also has key distributors in Europe, the loss of which could adversely impact sales and results.

If we are not able to manage our growth strategy our operating results may be adversely affected.

Our business strategy contemplates further growth, which would likely result in expanding the scope of operating and financial systems and the geographical area of our operations, including further expansion outside the U.S., as new products and technologies are developed and commercialized or new geographical markets are entered. Because we have a small executive staff, acquisitions and other future growth may divert management’s attention from other aspects of our business, and place a strain on existing management and our operational, financial and management information systems. Furthermore, we may expand into markets in which we have less experience or incur higher costs.

Intellectual property risks and third-party claims of infringement, misappropriation of proprietary rights or other claims against us could adversely affect our ability to market our products, require us to redesign our products or attempt to seek licenses from third parties, and materially adversely affect our operating results. In addition, the defense of such claims could result in significant costs and divert the attention of our management and other key employees.

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Companies in or related to our industry often aggressively protect and pursue their intellectual property rights. There are often intellectual property risks associated with developing and producing new products and entering new markets, and we may not be able to obtain, at reasonable cost or upon commercially reasonable terms, if at all, licenses to intellectual property of others that is alleged to be part of such new or existing products.

We have hired and will continue to hire individuals or contractors who have experience in medical diagnostics and these individuals or contractors may have confidential trade secret or proprietary information of third parties. We cannot assure you that these individuals or contractors will not use this third-party information in connection with performing services for us or otherwise reveal this third-party information to us. Thus, we could be sued for misappropriation of proprietary information and trade secrets. Such claims are expensive to defend and could divert our attention and result in substantial damage awards and injunctions that could have a material adverse effect on our business, financial condition or results of operations. In addition, to the extent that individuals or contractors apply technical or scientific information independently developed by them to our projects, disputes may arise as to the proprietary rights to such data and may result in litigation.

The defense and prosecution of patent and trade secret claims are both costly and time consuming. We or our customers may be sued by other parties that claim that our products have infringed their patents or misappropriated their proprietary rights or that may seek to invalidate one or more of our patents. An adverse determination in any of these types of disputes could prevent us from manufacturing or selling some of our products, limit or restrict the type of work that employees involved with such products may perform for us, increase our costs and expose us to significant liability.

As a general matter, our involvement in litigation or in any claims to determine proprietary rights, as may arise from time to time, could materially and adversely affect our business, financial condition and results of operations for reasons such as:

•        pending litigation may of itself cause our distributors or end-users to reduce or terminate purchases of our products;

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•        it may consume a substantial portion of our managerial and financial resources;

•        its outcome would be uncertain and a court may find any third-party patent claims valid and infringed by our products (issuing a preliminary or permanent injunction) that would require us to procure costly licensing arrangements from third parties or withdraw or recall such products from the market, redesign such products offered for sale or under development or restrict employees from performing work in their areas of expertise;

•        governmental agencies may commence investigations or criminal proceedings against our employees, former employees and us relating to claims of misappropriation or misuse of another party’s proprietary rights;

•        an adverse outcome could subject us to significant liability in the form of past royalty payments, penalties, special and punitive damages, the opposing party’s attorneys' fees, and future royalty payments significantly affecting our future earnings; and

•        failure to obtain a necessary license (upon commercially reasonable terms, if at all) upon an adverse outcome could prevent us from selling our current products or other products we may develop.

In addition to the foregoing, we may also be required to indemnify some customers, distributors and strategic partners under our agreements with such parties if a third party alleges or if a court finds that our products or activities have infringed upon, misappropriated or misused another person’s proprietary rights. Further, our products may contain technology provided to us by other parties such as contractors, suppliers or customers. We may have little or no ability to determine in advance whether such technology infringes the intellectual property rights of a third party. Our contractors, suppliers and licensors may not be required or financially able to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify us only up to a maximum amount, above which we would be responsible for any further costs or damages.

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 our financial results or operations. We cannot guarantee that such claims will not be made in the future.

We need to continue to raise additional funds to finance our future capital or operating needs, which could have adverse consequences on our operations and the interests of our stockholders.

We need to continue to raise funds through public or private debt or sale of equity to achieve our business strategy. When we raise funds or acquire other technologies or businesses through issuance of equity, this dilutes the interests of our stockholders. Moreover, the availability of additional capital, whether debt or equity from private capital sources (including banks) or the public capital markets, fluctuates as our financial condition and industry or market conditions in general change. There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources on favorable terms, if at all. We can give no assurance as to the terms or availability of additional capital.

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Our inability to raise additional funds to finance our future capital or operating needs could force us to delay, reduce or eliminate our development programs or commercialization efforts.

Costs related to development projects and approvals are hard to estimate due to factors that are unknown to us at this time. These costs could be much higher than anticipated and current operations may not be able to cover these costs.

Clinical trials involve a lengthy and expensive process with an uncertain outcome, and results of studies and trials may not be predictive of future trial results.

Clinical trials are expensive, time consuming and difficult to design and implement. Regulatory agencies may analyze or interpret the results differently than we do. Even if the results of our clinical trials are favorable, the clinical trials for a number of our product candidates may take a significant amount of time to complete. Regulatory authorities, including state and local authorities, may suspend, delay or terminate our clinical trials at any time, require us to conduct additional clinical trials, require a particular clinical trial to continue for a longer duration than originally planned, or require a change to our development plans such that we conduct clinical trials for a product candidate in a different order.  There is no assurance that the results of the clinical trials will be positive.  A negative clinical trial could affect our ability to obtain regulatory clearances and/or potential licensing partners.  There is also no assurance that our clinical trials will not be delayed or will be completed.  Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

Our results of operations and financial conditions may be adversely affected by the financial soundness of our customers, distributors and suppliers.

If our customers’ or suppliers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, our customers may not be able to pay, or may delay payment of, accounts receivable owed to us, and our suppliers may restrict credit or impose different payment terms or reduce or terminate production of products they supply to us.us, or may cease all operations. Any inability of customers to pay us for our products and services, or any demands by suppliers for different payment terms, or inability for such suppliers to continue operations may adversely affect our operating results and financial condition. Additionally, both state and federal government sponsored and private payers, as a result of budget deficits or reductions, may seek to reduce their healthcare expenditures by renegotiating their contracts with us.cutting or eliminating reimbursements for, or cutting purchase of our products. Any reduction in payments by such government sponsored or private payers may adversely affect our earnings and cash flow. Declining economic conditions may also increase our costs.

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We may not achieve market acceptance of our new products among healthcare providers and physicians, and this would have a negative effect on future sales.

The CompanyWe believe our ability to introduce new products that gain acceptance among healthcare providers and physicians is developing certainan important part of our ability to grow our revenue in future periods. However, any new products we introduce may not gain market acceptance to the extent we anticipate or project. The acceptance of which in the medical community is unpredictable at this time. In addition, the Company will need to spend considerable funds in order to introduce the products into the marketplace. Sales, if any, of these products in the future are uncertain.  In addition, our competitors may offer different products and product formats at suggested prices that are lower than for our products or are more accurate than our products. We can provide no assurances that the medical community will purchase our products or that they will not prefer to purchase a competitive product. 

The industry and market segments in which we operate are highly competitive, and intense competition with other providers of diagnostic products may reduce our sales and margins.

Our diagnostic tests compete with similar products made by our competitors. There are a large number of multinational and regional competitors making investments in competing technologies and products. We also face competition from our distributors as some have created, and others may decide to create, their own products to compete with ours. A number of our competitors have a potential competitive advantage because they have substantially greater financial, technical, research and other resources, and larger, more established marketing, sales, distribution and service organizations than we have. Moreover, some competitors offer broader product lines and have greater name recognition than we have. If our competitors’ products are more effective than ours or take market share from our products through more effective marketing or competitive pricing, our operating results could be materially and adversely affected.

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In addition, there has been a trend toward industry consolidation in our markets over the last few years. We may not be able to compete successfully in an increasingly consolidated industry. We expect this trend toward industry consolidation may continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations.

Our business and products are highly regulated by various governmental agencies. Our results of operations would be negatively affected by failures or delays in the receipt of regulatory approvals or clearances, the loss of previously received approvals or other changes to the existing laws and regulations that adversely impact our ability to manufacture and market our products.

The testing, manufacture and sale of our products are subject to regulation by numerous governmental authorities in the U.S., principally the FDA and corresponding state and foreign regulatory agencies. Our future performance depends on, among other matters, if, when and at what cost we will receive regulatory approval for new products.products, and if we can continue to comply with the many regulatory requirements that enable us to manufacture and sell medical related products and tests. Regulatory review can be a lengthy, expensive and uncertain process, making the timing and costs of clearances and approvals difficult to predict. Meeting all regulatory requirements, laws and mandates, and maintaining compliance with such in order to manufacture and sell medical products can be difficult and expensive. Our results of operations would be negatively affected by failures or delays in the receipt of regulatory approvals or clearances, the loss of previously received approvals or clearances, or the placement of limits on the marketing and use of our products, and restrictions on our ability to manufacture our products.

Changes in government policy could adversely affect our business and potential profitability.

Changes in government policy could have a significant impact on our business by increasing the cost of doing business, affecting our ability to sell our products and negatively impacting our profitability. Such changes could include tariffs or modifications to existing legislation, such as U.S. tax policy, or entirely new legislation, such as the Affordable Healthcare Act ("AHA") in the U.S. Although weWe cannot fully predict the many ways that healthcare reform might affect our business. It is unclear whether and to what extent, if at all, other anticipated developments, including changes due to new presidential administration priorities, or changes resulting from healthcare reform, such as a change in the number of people with health insurance, may impact us.

We are subject to numerous government regulations in addition to FDA regulation, and compliance with laws, including changed or new laws, could increase our costs and adversely affect our operations.  There is also the risk that our facilities could fail to get the proper licensing at our next inspection or renewal.

In addition to FDA and other regulations referred to above, numerous laws relating to such matters as safe working conditions, manufacturing practices, data privacy, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances impact our business operations. If these laws or their interpretation change or new laws regulating any of our businesses are adopted, the costs of compliance with these laws could substantially increase our overall costs. Failure to comply with any laws, including laws regulating the manufacture and marketing of our products, could result in substantial costs and loss of sales or customers. Because of the number and extent of the laws and regulations affecting our industry, and the number of governmental agencies whose actions could affect our operations, it is impossible to reliably predict the full nature and impact of future legislation or regulatory developments relating to our industry and our products. To the extent the costs and procedures associated with meeting new or changing requirements are substantial, our business, results of operations and financial condition could be adversely affected.

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Our total revenue could be affected by third-party reimbursement policies and potential cost constraints.

The end-users of our products are primarily physicians, labs and other healthcare providers. In the U.S., healthcare providers such as hospitals and physicians who purchase diagnostic products generally rely on third-party payers, principally private health insurance plans, federal Medicare and state Medicaid, to reimburse all or part of the cost of the procedure. Use of our products would be adversely impacted if physicians and other healthcare providers do not receive adequate reimbursement for the cost of our products by their patients’ third-party payers.payers both in the U.S. and in foreign markets. Our total revenue could also be adversely affected by changes or trends in reimbursement policies of these governmental or private healthcare payers. We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services. Given the efforts to control and reduce healthcare costs in the U.S. in recent years, currently available levels of reimbursement may not continue to be available in the future for our existing products or products under development. Third-party reimbursement and coverage may not be available or adequate in either the U.S. or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, regulation or reimbursement policies of third-party payers may reduce the demand for our products or adversely impact our ability to sell our products on a profitable basis.

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Unexpected increases in, or inability to meet, demand for our products could require us to spend considerable resources to meet the demand or harm our reputation and customer relationships if we are unable to meet demand.

Our inability to meet customer demand for our products, whether as a result of manufacturing problems or supply shortfalls, could harm our customer relationships and impair our reputation within the industry. In addition, our product manufacturing of certain product lines is concentrated in one or more of our two manufacturing sites. Weather, natural disasters (including pandemics), fires, terrorism, political change, failure to follow specific internal protocols and procedures, equipment malfunction, environmental factors or damage to one or more of our facilities could adversely affect our ability to manufacture our products. This, in turn, could have a material adverse effect on our business.

If we experience unexpected increases in the demand for our products, we may be required to expend additional capital resources to meet these demands. These capital resources could involve the cost of new machinery or even the cost of new manufacturing facilities. This would increase our capital costs, which could adversely affect our earnings and cash resources. If we are unable to develop or obtain necessary manufacturing capabilities in a timely manner, our total revenue could be adversely affected. Failure to cost-effectively increase production volumes, if required, or lower than anticipated yields or production problems, including those encountered as a result of changes that we may make in our manufacturing processes to meet increased demand or changes in applicable laws and regulations, could result in shipment delays as well as increased manufacturing costs, which could also have a material adverse effect on our business, operating results and financial condition.

Unexpected increases in demand for our products could also require us to obtain additional raw materials in order to manufacture products to meet the demand. Some raw materials require significant ordering lead time and we may not be able to timely access sufficient raw materials in the event of an unexpected increase in demand, particularly those obtained from a sole supplier or a limited group of suppliers.

If one or more of our products is claimed to be defective, or does not meet the performance criteria we claim in our marketing materials we could be subject to claims of liability and harm to our reputation that could adversely affect our business.

A claim of a defect in the design or manufacture of our products could have a material adverse effect on our reputation in the industry and subject us to claims of liability for injuries and otherwise. Further, a claim that one of our products is defective or does not actually meet the performance criteria we claim in our marketing materials, could have a substantial impact on our revenues and financial performance. Any substantial underinsured loss resulting from such a claim would have a material adverse effect on our operating results and financial conditions and the damage to our reputation or product lines in the industry could have a material adverse effect on our business.

We are exposed to business risks which, if not covered by insurance, could have an adverse effect on our results of operations. We face potential product liability exposure, and, if claims brought against us are successful, we could incur substantial liabilities.

We face a number of business risks, including exposure to product liability claims, employment law claims, claims that the Company or its officers, directors or employees have engaged in illegal or wrongful acts, claims of violation of environmental laws and many other possible claims. Although we maintain insurance for a number of these risks, we may face claims for types of damages, or for amounts of damages, that are not covered by our insurance. For example, although we currently carry product liability insurance for liability losses, there is a risk that product liability or other claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of our policy. Also, our existing insurance may not be renewed at the same cost and level of coverage as currently in effect, or may not be renewed at all. Further, we do not currently have insurance against many environmental risks we confront in our business. If we are held liable for a claim against which we are not insured or for damages exceeding the limits of our insurance coverage, whether arising out of product liability matters, cybersecurity matters, or from some other matter, that claim could have a material adverse effect on our results of operations.

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We may rely on third parties to conduct or be part of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to seek or obtain regulatory approval for or commercialize our product candidates.

We rely on third-party contract research organizations or CROs, Universities/(“CROs”), Universities or/clinical sites or software companies (“Vendors”), we are working to coordinate, and monitor theand conduct of our clinical trials and to manage data for our clinical programs. We, our Vendors, and our clinical sites are required to comply with current Good Clinical Practices, or GCPs,Practices(“GCPs”), regulations and guidelines issued by the FDA and by similar governmental authorities in other countries where we are conducting clinical trials. We have an ongoing obligation to monitor the activities conducted by our Vendors and at our clinical sites to confirm compliance with these requirements. In the future, if we, our Vendors or our clinical sites fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. If our Vendors do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols, regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our financial results and the commercial prospects for our product candidates would be harmed, our costs could increase, and our ability to generate revenue could be delayed.

Failures in our information technology and storage systems could significantly disrupt our business or force us to expend excessive costs.

We utilize complex information technology systems to support our business and store information. We cannot be sure that our systems will meet our future business needs or that necessary upgrades will operate as designed, which could result in excessive costs or disruptions in portions of our business. In particular, any disruptions, delays or deficiencies caused by our enterprise resource planning system could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business. In addition, despite the implementation of security measures, information technology systems are vulnerable to damage from a variety of sources, including computer viruses, unauthorized access, telecommunications or network failures, malicious human acts, terrorism and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our systems, sustained or repeated system failures that interrupt our ability to generate and maintain data, could result in a material disruption in our operations. Furthermore, to the extent that any disruption or security breach resulted in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information, we could face a variety of negative consequences, including regulatory actions or litigation, fines or penalties, adverse publicity, increased cybersecurity protection costs, and lost revenue.

There is a risk that our measures to protect our systems from cyber attackcyber-attack are not sufficient to avoid attacks by new sources and methods.

Our business could be negatively affected by the loss of or the inability to hire key personnel.

Our future success depends in part on our ability to retain our key technical, sales, marketing and executive personnel and our ability to identify and hire additional qualified personnel. Competition for these personnel is intense, both in the industry in which we operate and where our operations are located. Further, we expect to grow our operations, and our needs for additional management and other key personnel are expected to increase. If we are not able to retain existing key personnel, or timely identify and hire replacement or additional qualified personnel to meet expected growth, our business could be adversely impacted. In addition, the loss of any of our key personnel, particularly key research and development personnel, could harm our business and prospects and could impede the achievement of our research and development, operation or strategic objectives.

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We face risks relating to our international sales, including inherent economic, political and regulatory risks, which could impact our financial performance, cause interruptions in our current business operations and impede our growth strategy.

Our products are primarily sold internationally, with the majority of our international sales to our distributors in Asia, Europe and Europe.South America. We currently sell and market our products through distributor organizations and sales agents. Theseagents which creates foreign risks include, among others:

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•        compliance with multiple different registration requirements and new and changing registration requirements, our inability to benefit from registration for our products inasmuch as registrations may be controlled by a distributor, and the difficulty in transitioning our product registrations;

•        compliance with complex foreign and U.S. laws and regulations that apply to our international operations, including U.S. laws such as import/export limitations, the Foreign Corrupt Practices Act, and local laws;

•        tariffs or other barriers as we continue to expand into new countries and geographic regions, especially related to China as tariffs are changing constantly;

•        exposure to currency exchange fluctuations against the U.S. dollar;

•        longer payment cycles, generally lower average selling prices and greater difficulty in accounts receivable collection;

•        lack of ability to enforce receivables collections contracts in foreign legal courts;

•        reduced, or lack of, protection for, and enforcement of, intellectual property rights;

•        political and economic instability in some of the regions where we currently sell our products or that we may expand into in the future;

•        complex and potentially adverse tax consequences; and

•        diversion to the U.S. of our products sold into international markets at lower prices.

Currently, allmost of our international sales are negotiated for and paid in U.S. dollars. Nonetheless, these sales are subject to currency risks, since changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. These exchange rate fluctuations could negatively impact international sales of our products, as could changes in the general economic conditions in those markets. In order to maintain a competitive price for our products internationally, we may have to continue to provide discounts or otherwise effectively reduce our prices, resulting in a lower margin on products sold internationally. Continued change in the values of the Euro, the Mexican peso and other foreign currencies could have a negative impact on our business, financial condition and results of operations.

In addition, we have certain supply agreements with foreign vendors whereby we share the foreign currency exchange fluctuation risk. We may, in the future, enter into similar arrangements.

Sales of our common stock in the public market could lower the market price for our common stock and adversely impact the trading price of our securities.

WeFuture sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may needoccur, could adversely affect the then prevailing market price of our common stock and could make it more difficult for us to seek additional capital. Ifraise funds in the future through a public offering of our securities.

On July 21, 2020, we filed with the SEC a new “Shelf” registration statement on Form S-3. The new registration statement registers our common shares to be issued in a maximum aggregate amount of $90,000,000.  Shares of our common stock may be sold from time to time under this additional financingregistration statement once it is obtained through the issuance of equity securities, debt convertible into equity or options or warrants to acquire equity securities, our existing stockholders could experience significant dilution upon the issuance, conversion or exercise of such securities.declared effective.

The issuance of additional shares of our common stock, or issuances of additional securities, could dilute the ownership interest of our common stockholders and could depress the market price of shares of our common stock and impair our ability to raise capital through the sale of additional equity securities. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock.

We also have a number of stockholders who own large blocks of our common stock. If one or more of these stockholders were to sell large portions of their holdings in a relatively short time, for liquidity or other reasons, the prevailing market price of shares of our common stock could be negatively affected.

The price of our stock may fluctuate unpredictably in response to factors unrelated to our operating performance.

The stock market periodically experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may cause the market price of our common stock to drop. In particular, the market price of securities of smaller medical device companies, like ours,our common stock has been very volatile and unpredictable and may vary substantially in the future in response to:

•       announcements by us or our competitors concerning technological innovations;

•       introductions of new products;

•       FDA, SEC, FINRA and foreign regulatory actions;actions against the Company;

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•       developments or disputes relating to patents or proprietary rights;

•       failure to meet the expectations of stock market analysts and investors;

•       changes in stock market analyst recommendations regarding our common stock;

•       changes in healthcare policy in the U.S. or other countries;

•          lawsuits or liability claims from shareholders or other parties; and

•       general stock market conditions and other factors unrelated to our operating performance.

A sale of a substantial number of shares of the common stock by the Company may cause the price of our common stock to decline.

Trading of our common stock is not significant, therefore sales of a larger volume of the stock could adversely affect the stock price.

As of August 26, 2016, the Company's stock has been traded on the Nasdaq Capital Market.  Trading of the Company's stock is limited and liquidation of the Company’s stock may be difficult as there is a limited market for the Company’s stock.

Our ability to use our net operating loss carry forwards in the future may be subject to limitation.

Although the Company has Federal income tax net operating loss carryforwards of approximately $9,213,000 and California state income tax net operating loss carryforwards of approximately $5,025,000, use of these loss carryforwards will depend on future income in relationship to expirations dates of these carryforwards.

We do not anticipate declaring any cash dividends on our common stock.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

The Company leases its office facilities. At May 31, 2019,2020, the Company had approximately 22,000 square feet of floor space at its corporate headquarters at 17571 Von Karman Avenue in Irvine, California, 92614 which it has been leasing since 2009. The lease for its headquarters expired on August 31, 2016.  The Company had an option to extend the term of its lease for two additional sixty-month periods. On November 30, 2015, the Company exercised its option to extend its lease for an additional sixty-month period and entered into the First Amendment to Lease wherein it extended its lease until August 31, 2021. The initial base rent for the lease extension iswas $21,000 per month, increasing to $23,637 through August 31, 2021. The rent is currently $22,279$22,948 per month and will increase on September 1, 2020 to $23,637 per month.  The security deposit of $22,080 remains the same. In November 2016, the Company’s Mexican subsidiary, Biomerica de Mexico, entered into a 10-year lease for approximately 8,100 square feet of manufacturing space with initial base rent of $2,926/$2,926 per month. The Company has one 10-year option to renew at the end of the initial lease period. The rent is currently $3,140$3,239 per month.  Biomerica de Mexico also leases a smaller unit on a month-to-month basis for use in one manufacturing process. In addition, the Company leases a small office in Lindau, Germany on a month-to-month basis, as headquarters for BioEurope GmbH, its Germany subsidiary.

ITEM 3.      LEGAL PROCEEDINGS

None.On July 2, 2020, we received a notice of investigation and subpoena to produce information and documents from the Division of Enforcement of the SEC. The subpoena seeks information and documents related to events and circumstances leading up to our March 17, 2020 announcement that we had commenced shipping samples of our COVID-19 IgG/IgM Rapid Test to countries outside of the United States, and had initiated the application process with the United States Food and Drug Administration under the COVID-19 Emergency Use Authorization for approval to market and sell the test in the United States. The subpoena also seeks information and documents about the identity of any persons who were aware of the substance of the March 17, 2020 announcement prior to that date, as well as certain corporate policies and documentation. We are cooperating and intend to continue cooperating fully with the SEC’s investigation. At this time, we are unable to predict the duration, scope or outcome of this investigation.

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ITEM 4.      MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Since June 20, 2002,On August 2, 2016, the Company'sCompany’s common stock had been quotedbecame listed and began trading on the Nasdaq Capital Market stock exchange where it trades under the symbol BMRA.  Previous to that date, the Company’s stock traded on the OTC Bulletin Board under the symbol "BMRA". On August 23, 2016, Nasdaq (National Association of Securities Dealers Automated Quotations) approved the Company’s application to list its common stock on The Nasdaq Capital Market. The Company trades under the trading symbol BMRA. The Company’s common stock started trading on Nasdaq on August 26, 2016.Board.

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The following table shows the high and low bid prices for Biomerica's common stock for the periods indicated, based upon data reported by Yahoo Finance. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.

As of May 31, 2019,2020, the number of holders of record of Biomerica's common stock was approximately 815,810, excluding stock held in street name. The number of record holders does not bear any relationship to the number of beneficial owners of the common stock.stock as most of the Company’s common stock is held in street name at securities brokerage firms.

The Company has not paid any cash dividends on its common stock in the past and does not plan to pay any cash dividends on its common stock in the foreseeable future. The Company's Board of Directors (“Board”) intends, for the foreseeable future, to retain any earnings to finance the continued operation and expansion of the Company's business.

On June 30, 2017, the Company filed an S-3 Registration Statement with the SEC primarily for the purposes of raising capital to support is research, development and intellectual property projects. The registration statement became effective on July 20, 2017. A prospectus supplement to the Form S-3 Registration Statement was filed December 1,4, 2017 which stated that up to $7,000,000 of funds would be raised from time to time under the Form S-3 Registration Statement through an At Market Issuance Sales Agreement (“ATM”) with B. Riley, FBR, acting as the agent for these transactions. As of May 31, 2019,2020, a total of $3,054,072approximately $6,997,935 in netgross proceeds had been raised.raised under this prospectus supplement.

On March 20, 2020, the Company filed a second prospectus supplement to the base prospectus dated July 20, 2017 for purposes of raising up to $12,500,000 from time to time pursuant to the terms of the ATM. As of May 31, 2020, a total of $6,817,329 in gross proceeds had been raised under this prospectus supplement.  No additional shares will be sold under this prospectus supplement.

On July 21, 2020, the Company filed with the SEC a new “Shelf” registration statement on Form S-3 to replace the registration statement that expired the day before. The new registration statement registers common shares to be issued in a maximum aggregate amount of $90,000,000.  Our shares of common stock may be sold from time to time under this registration statement once it is declared effective.

We did not purchase any of our shares of common stock or other securities during our fiscal year ended May 31, 2019.2020.

The table below provides information relating to our equity compensation plans as of May 31, 2019:

2020:

17There were no sales of unregistered equity securities during the year ended May 31, 2020 except as described in Note 5-Shareholders’ Equity- of the Consolidated Financial Statements.

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ITEM 6.      SELECTED FINANCIAL DATA

Not required.

ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K MAY BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND SECTION 27A OF THE SECURITIES ACT OF 1933. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES WHICH MAY CAUSE BIOMERICA'S RESULTS IN FUTURE PERIODS TO DIFFER MATERIALLY FROM FORECASTED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS, THE CONTINUED DEMAND FOR THE COMPANY'S PRODUCTS, AVAILABILITY OF RAW MATERIALS, THE STATE OF THE ECONOMY, RESULTS OF RESEARCH AND DEVELOPMENT ACTIVITIES AND THE CONTINUED ABILITY OF THE COMPANY TO MAINTAIN THE LICENSES AND APPROVALS REQUIRED. THESE AND OTHER RISKS ARE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, WE MAY NOT UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS AND THE LACK OF SUCH UPDATE DOES NOT IMPLY THAT ACTUAL EVENTS ARE AS ORIGINALLY EXPRESSED BY SUCH FORWARD-LOOKING STATEMENTS. YOU SHOULD READ THE DISCLOSURES IN THIS REPORT AND OTHER REPORTS WHICH WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION.

Overview

Biomerica, Inc. and Subsidiaries (which includes wholly owned subsidiaries, Biomerica de Mexico and BioEurope GmbH) develop, manufacture, and market medical diagnostic products designed for the early detection and monitoring of chronic diseases and medical conditions. Our medical diagnostic products are sold worldwide in two markets: 1) clinical laboratories and 2) point of care (physicians' offices and over-the-counter drugstores). Our diagnostic test kits are used to analyze blood, urine or fecal material from patients in the diagnosis of various diseases, food intolerances and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances, which may exist in the human body in extremely small concentrations.

RESULTS OF OPERATIONS

Our consolidated net sales were $5,200,682 for fiscal 2019 compared to $5,564,185 for fiscal 2018. This represents a decrease of $363,503, or 6.5%. The primary reasons for the sales decrease was a result of decreased sales in Europe ($328,356) and the U.S. ($162,031) which were offset by increases in other areas such as South America ($42,000) and the Middle East ($82,000). The decrease in sales in Europe was primarily due to a decrease of certain kits sold in Italy and the decrease in the U.S. was a result of lower purchases by drug stores which did not do screening programs utilizing the EZ Detect product compared to the prior fiscal year.

Consolidated cost of sales in fiscal 2019 as compared to fiscal 2018 increased from $3,809,785 to $3,908,668, or by $98,883. The percentage of cost of sales relative to sales increased from 68.5% to 75.2%, due to various factors, primarily due to increased material costs, a larger percent of expenses being capitalized into inventory at May 31, 2018 we well as fixed costs in relationship to lower sales during the year ended May 31, 2019.

Consolidated selling, general and administrative costs increased in fiscal 2019 as compared to fiscal 2018 from $1,837,787 to $2,025,706, or by $187,919, or 10.2%. The increase was due to increases in sales and marketing expenses due to the hiring of a Director of Sales and Marketing in Europe and an increase in administrative expenses due to a non-cash option expense of $143,299 in fiscal 2019 compared to $14,613 in the prior fiscal year.

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Consolidated research and development expense was $1,679,098 in fiscal 2019 as compared to $1,398,368 in fiscal 2018, an increase of $280,730, or 20.1%, primarily as a result of increased costs related to the possible FDA clearance of new gastrointestinal products and feasibility. See “Research and Development” for a more extensive description of the research being conducted.

Interest expense remained constant in fiscal 2019 at $47 as compared to $37 in fiscal 2018. Interest and dividend income decreased from $47,764 to $44,014.

LIQUIDITY AND CAPITAL RESOURCES

As of May 31, 2019, the Company had cash and cash equivalents in the amount of $686,785 as compared to $1,204,903 of cash and cash equivalents as of May 31, 2018.  As of May 31, 2019, and 2018, the Company had working capital of $3,230,536, and $3,587,221, respectively.

Operating Activities

During fiscal 2019, cash used in operating activities was $2,224,039 as compared to $1,174,217 in fiscal 2018. The factors that contributed to this were a loss of $2,393,060 and an increase in accounts receivable of $670,126.  These were offset by an increase in accounts payable and accrued expenses of $343,994, and a non-cash stock option expense of $151,224 and depreciation and amortization of $162,905.  During fiscal 2018, the Company had a net loss of $1,465,828, an increase in inventory of $457,269 and an increase in prepaids of $104,652.  These were offset by an increase in accounts payable and accrued expenses of $319,169, a decrease in accounts receivables of $252,505 and non-cash depreciation and amortization of $186,601.

Investing Activities

During fiscal 2019, cash used in investing activities was $171,111 as compared to $130,347 in fiscal 2018. During fiscal 2019 the Company purchased $101,137 of property and equipment and had $69,974 in increased intangible assets related to patents. During fiscal 2018 the Company purchased $130,347 of property and equipment.

Financing Activities

Cash provided by financing activities in fiscal 2019 was $1,907,427 as compared to $1,294,307 in fiscal 2018.  In fiscal 2019 and 2018, the Company had proceeds from the exercise of stock options of $121,790 and $27,436, respectively. During fiscal 2019, the Company received $1,776,575 in net proceeds from the sale of common stock through the S-3 Registration Statement and $1,266,871 in 2018 in net proceeds from the sale of common stock through the S-3 Registration Statement, net of subscriptions receivable.

On June 30, 2017, the Company filed an S-3 Registration Statement for the sale up to $7 million of the Company’s Securities to the public. We received $1,776,575 in fiscal 2019 and $1,266,871 in net proceeds from the sale of common stock under this Registration Statement during fiscal 2018. The proceeds are being used for working capital and general corporate purposes, and in particular, for research, development and costs related to securing intellectual property rights. The funds are also being used for capital expenditures, sales and marketing and general and administrative expenses. We may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to our own, although we have no current plans, commitments or agreements with respect to any such acquisitions or investments as of the date of this prospectus.

The Company anticipates raising additional capital through this or other methods in order to continue to fund research and development projects and other operating needs.

OFF BALANCE SHEET ITEMS

There were no off-balance sheet arrangements as of May 31, 2019.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 2 of the Consolidated Financial Statements describe the significant accounting policies essential to the consolidated financial statements. The preparation of these consolidated financial statements requires estimates and assumptions that affect the reported amounts and disclosures.

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In general, the critical accounting policies that may require judgments or estimates relate specifically to Revenues, Allowance for Doubtful Accounts, Inventory Reserves, Stock-Based Compensation, and Income Taxes.

We believe the following to be critical accounting policies as they require more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, at which point title passes. Revenues are recognized only when collection is reasonably assured. An allowance is established if necessary for estimated returns as revenue is recognized. The Company has performed an analysis and taken the new Revenue Recognition policy, ASC 606, into consideration when recording revenue. The Company has identified contract with customers and determined that revenue should be recognized at the time the ownership rights to the goods have been transferred to the customer (at the time of shipment). The Company does not receive progress or installment payments. Any incentives earned are given in the form of free product at the time they are earned.

An allowance for doubtful accounts is established for estimated losses resulting from the inability of our customers to make required payments. The assessment of specific receivable balances and required reserves is performed by management and discussed with the audit committee. We have identified specific customers where collection is not probable and have established specific reserves, but to the extent collection is made, the allowance will be released. Additionally, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to management's forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for the product.

We measure stock-based compensation costs at fair value, including estimated forfeitures, and recognize the expense over the period that the recipient is required to provide service in exchange for the award, which generally is the vesting period. We use the Black-Scholes option pricing model to measure the fair value of our stock options. In determining the amount of expense to be recorded, we also estimate forfeiture rates for all awards based on historical experience to reflect the probability that employees will complete the required service period. Employee retention patterns could vary in the future and result in a change to our estimated forfeiture rate which would directly impact stock-based compensation expense.

We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weight is given to evidence that can be objectively verified. We assess our deferred tax assets annually under more likely than not scenarios in which they may be realized through future income. We have determined that although we believe our deferred tax assets will be utilized at a future date, based on our recent losses and plans to continue our research and development, we have established a valuation allowance of $2,143,000.

FACTORS THAT MAY AFFECT FUTURE RESULTS

You should read the following factors in conjunction with the factors discussed elsewhere in this and our other filings with the Securities and Exchange Commission and in materials incorporated by reference in these filings. The following is intended to highlight certain factors that may affect the financial condition and results of operations of Biomerica, Inc. and Subsidiaries and are not meant to be an exhaustive discussion of risks that apply to companies such as Biomerica, Inc. and Subsidiaries. Like other businesses, Biomerica, Inc. and SubsidiariesWE are susceptible to macroeconomic downturns in the United States or abroad, as were experienced recently, that may affect the general economic climate and OUR performance of Biomerica, Inc. and Subsidiaries or itsOUR customers.

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Aside from general macroeconomic downturns, the additional material factors, RISKS AND UNCERTAINTIES that could affect future financial results include, but are not limited to: TerroristTHE CONTINUED DEMAND FOR THE COMPANY'S PRODUCTS; AVAILABILITY OF RAW MATERIALS; RESULTS OF RESEARCH AND DEVELOPMENT ACTIVITIES; THE ABILITY TO RETAIN KEY EMPLOYEES AND CUSTOMERS; THE ABILITY TO COLLECT RECEIVABLES FROM CUSTOMERS; THE CONTINUED ABILITY OF THE COMPANY TO ATTAIN AND MAINTAIN THE LICENSES AND APPROVALS REQUIRED,.Regional or global pandemics and the economic and social disruptions these cause; terrorist attacks and the impact of such events; existing and potential increase in trade tariffs, especially with China, diminished or no access to raw materials that directly enter into our manufacturing process; shipping labor disruption or other major degradation of the ability to ship out products to end users; inability to successfully control our margins which are affected by many factors including competition and product mix; protracted shutdown of the U.S. border due to an escalation of terrorist or counter terrorist activity; any changes in our business relationships with international distributors or the economic climate they operate in; any event that has a material adverse impact on our foreign manufacturing operations may adversely affect our operations as a whole; failure to manage the future expansion of our business could have a material adverse effect on our revenues and profitability; possible costs in complying with government regulations and the delays in receiving required regulatory approvals or the enactment of new adverse regulations or regulatory requirements; numerous competitors, some of which have substantially greater financial and other resources than we do; potential claims and litigation brought by patients or medical professionals alleging harm caused by the use of or exposure to our products; recalls of products; inability to obtain FDA clearance on products or excessive costs incurred in order to obtain such approvals; regulatory actions taken by government agencies such as the FDA, SEC, USDA and other regulators; quarterly variations in operating results caused by a number of factors, including business and industry conditions; and other factors beyond our control. All these factors make it difficult to predict operating results for any particular period.

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EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, WE MAY NOT UPDATE OR REVISE OUR FORWARD-LOOKING STATEMENTS AND THE LACK OF SUCH UPDATE DOES NOT IMPLY THAT ACTUAL EVENTS ARE AS ORIGINALLY EXPRESSED BY SUCH FORWARD-LOOKING STATEMENTS. YOU SHOULD READ THE DISCLOSURES IN THIS REPORT AND OTHER REPORTS, WHICH WE FILE WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE RISK FACTORS CONTAINED THEREIN.

Overview

Biomerica, Inc. and its subsidiaries (which includes wholly-owned subsidiaries, Biomerica de Mexico and BioEurope GmbH), is a biomedical technology company that develops, patents, manufactures and markets advanced diagnostic and therapeutic products used at the point-of-care (physicians' offices and over-the-counter through drugstores and online) and in hospital/clinical laboratories for detection and/or treatment of medical conditions and diseases. Our diagnostic test kits are used to analyze blood, urine or fecal material from patients in the diagnosis of various diseases, food intolerances and other medical complications, or to measure the level of specific hormones, antibodies, antigens or other substances, which may exist in the human body in extremely small concentrations. The Company's products are designed to enhance the health and well-being of people, while reducing total healthcare costs.

Our primary focus is the research and development of revolutionary, patented diagnostic-guided therapy 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. If these DGT products prove effective in their clinical trials, and are ultimately cleared for sale by the FDA, the revenues potential to the Company is significant. 

Due to the global COVID-19 pandemic, in March 2020 we began redirecting and focused a majority of our resources to develop, test, validate, seek regulatory approval for, and sell diagnostic products that indicate if a person has been exposed to COVID-19. These diagnostic tests use a patient’s blood sample to determine if the patient has certain antibodies to COVID-19 that were created as part of their body’s immune response to a COVID-19 infection. During the fiscal fourth quarter, we began marketing and selling outside of the U.S. a disposable rapid finger-prick blood test, which detects COVID-19 IgG/IgM antibodies within 10 minutes. This test is designed to be performed by trained professionals anywhere, e.g. airports, schools, work, pharmacies and doctors’ offices. Following fiscal 2020 year-end we submitted to the FDA an application under an EUA to sell in the U.S. a lab-scale, high throughput ELISA COVID-19 antibody test kit that would be sold to labs and hospitals to perform COVID-19 antibody testing. The Company also anticipates selling this test kit outside of the U.S. under a CE Mark. Initial sales for this product are expected during the Company’s second quarter of fiscal 2021 upon EUA clearance. The Company manufactures this COVID-19 ELISA test on its automated equipment at the Company’s California facility that is also used to produce serology antibody tests for other diseases. These antibody tests are designed to detect if a person has been infected by COVID-19 and mounted an immune response even if the infection was asymptomatic.

RESULTS OF OPERATIONS

Our consolidated net sales were $6,692,711 for fiscal 2020 compared to $5,200,682 for fiscal 2019. This represents an increase of $1,492,029, or 28.7%. This increase in annual sales is primarily attributable to sales of COVID-19 tests during the last quarter of the fiscal year, which offset decreases in other product lines that were negatively impacted by the COVID-19 pandemic and related national and international mandates affecting consumers. Our consolidated net sales were $2,725,000 for the fiscal fourth quarter 2020, compared to $1,165,860 for fiscal fourth quarter of 2019.

Consolidated cost of sales in fiscal 2020 as compared to fiscal 2019 increased from $3,908,668 to $4,910,935, or by $1,002,267. The percentage of cost of sales relative to sales decreased from 75.2% to 73.4%, due to various factors, primarily due to higher margins on the COVID-19 products. Our cost of goods sold for the fiscal fourth quarter 2020 were $1,991,378, or 73.0%, compared to $985,053, or 84.4%, for the fourth quarter of 2019.

Consolidated selling, general and administrative costs increased in fiscal 2020 as compared to fiscal 2019 from $2,025,706 to $2,274,415, or by $248,709, or 12.3%. The increase was due to increases in legal and consulting fees, personnel costs as the Company is expanding and strengthening its management team in sales and marketing, and an increase in administrative expenses due to a non-cash option expense of $156,750 in fiscal 2020 compared to $143,299 in the prior fiscal year. Our consolidated selling, general and administrative expenses were $559,872 for the fiscal fourth quarter 2020, compared to $536,816 for the fourth quarter of 2019.

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Consolidated research and development expense was $1,910,209 in fiscal 2020 as compared to $1,679,098 in fiscal 2019, an increase of $231,111, or 13.8%, primarily as a result of increases in costs related to the research, development and validation of COVID-19 tests, and increased costs related to our clinical trials for our InFoods® IBS product.  See “Research and Development” for a more extensive description of the research being conducted. Our consolidated research and development expenses were $661,610 for the fourth quarter of 2020, compared to $408,810 for the fourth quarter of 2019. These costs increased in fiscal 2020 due to additional research on COVID-19 products.

Interest expense remained constant in fiscal 2020 at $9 as compared to $47 in fiscal 2019. Interest and dividend income for those same years increased from $44,014 to $71,193, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of May 31, 2020, the Company had cash and cash equivalents in the amount of $8,641,027 as compared to $686,785 of cash and cash equivalents as of May 31, 2019.  As of May 31, 2020 and 2019, the Company had working capital of $13,289,670 and $3,230,535, respectively.

Operating Activities

During fiscal 2020, cash used in operating activities was $4,297,498 as compared to $2,244,039 in fiscal 2019. The factors that contributed to this were a loss of $2,339,054, an increase in accounts receivable of $309,090, an increase in inventories of $717,460, and an increase in prepaid expenses of $1,306,681, which was a result of prepayments for inventory purchase orders.  These were offset by an increase in accrued compensation of $51,798, a non-cash stock option expense of $200,470 and depreciation and amortization of $129,172.  During fiscal 2019, the Company had a net loss of $2,393,060 and an increase in accounts receivable of $670,126.  These were offset by an increase in accounts payable and accrued expenses of $343,994, a non-cash stock option expense of $151,224 and depreciation and amortization of $162,905.

Investing Activities

During fiscal 2020, cash used in investing activities was $118,927 as compared to $171,111 in fiscal 2019. During fiscal 2020, the Company purchased $33,608 of property and equipment and had $85,319 in increased intangible assets related to patents. During fiscal 2019, the Company purchased $101,137 of property and equipment and $69,974 in increased intangible assets related to patents.

Financing Activities

Cash provided by financing activities in fiscal 2020 was $12,373,977 as compared to $1,907,427 in fiscal 2019.  In fiscal 2020 and 2019, the Company had proceeds from the exercise of stock options of $223,534 and $121,790, respectively. During fiscal 2020 and 2019, the Company received $10,232,857 and $1,776,575, respectively, in net proceeds from the sale of common stock through the S-3 Registration Statement, net of subscriptions receivable. The common stock issued in fiscal 2020 and fiscal 2019 was issued under the S-3 “shelf” Registration Statement base prospectus filed with the SEC on June 30, 2017 and declared effective by the SEC on July 20, 2017, and under the prospectus supplement and At Market Issuance Sales Agreement, filed with the SEC on December 4, 2017 and the prospectus supplement filed with the SEC on March 20, 2020. (See Shareholders’ Equity and Subsequent Events in the notes to the consolidated financial statements for further details about SEC registrations).

On February 24, 2020, Biomerica, Inc. (the “Company”) entered into and closed on a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Palm Global Small Cap Master Fund LP (“Palm”) pursuant to which the Company agreed to sell and issue to Palm, and Palm agreed to purchase from the Company, 571,429 shares of the Company’s Series A 5% Convertible Preferred Stock, $0.08 par value per share for a purchase price of approximately $2 million, or $3.50 per Series A Preferred Share. Under the terms of the Stock Purchase Agreement, each share of issued Convertible Preferred Stock can be converted at any time by Palm into one share of the Company’s common stock. On March 24, 2020, Palm converted 250,000 shares of Convertible Preferred Stock into 250,000 shares of unregistered common stock. The Company received approximately $1,917,586 in net proceeds from this sale.

The Company intends to use the net proceeds from this offering for general corporate purposes, including, without limitation, sales and marketing activities, clinical studies and product development, making acquisitions of assets, businesses, companies or securities, capital expenditures, and for working capital needs.

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Subsequent Events

On June 16, 2020, the Company announced it had submitted to the U.S. FDA an EUA application for an ELISA lab-based serology blood test for the detection of antibodies that identify if a person has been infected with COVID-19.  This is the third COVID-19 antibody test introduced by the Company. The other two, which are finger-prick rapid tests, are only being sold outside of the US. The Company also intends to obtain a CE Mark to allow the sale and marketing of this ELISA laboratory test outside of the US.

On July 20, 2020, the Company filed with the SEC an S-3 registration statement that among other things registered all of the common shares issued, or to be issued, to Palm upon conversion of the Convertible Preferred Stock into common shares. The Company anticipates this registration statement shall become effective promptly following the filing of this annual report on Form 10-K with the SEC.

On July 20, 2020, the Company’s outstanding Securities and Exchange Commission (“SEC”) Form S-3 “Shelf” registration statement dated July 20, 2017 expired. This prior registration statement registered an indeterminant number of shares equating to a maximum aggregate offering amount of $45,000,000 of shares.

On July 20, 2020, the Company filed with the SEC a new Form S-3 “Shelf” registration statement to replace the registration statement that expired on that day. The new registration statement registers common shares to be issued in a maximum aggregate amount of $90,000,000. On July 27, 2020 the Company received notice from the SEC that they did not intend to review this new registration statement, and as such the Company expects this Form S-3 registration statement to be declared effective promptly following the filing of this Form 10-K. The Company filed for a larger maximum issuance amount in anticipation of the approaching completion of the Company’s clinical trials for its InFoods® IBS product and the subsequent product launch that may require raising significant capital associated with this substantial opportunity to grow revenues and profits. Further, the Company’s current data shows that the InFoods technology platform has great promise in diagnosing and treating several other disease states outside of IBS. The pursuit of this expanded portfolio of disease states and other opportunities may also require significant capital in the future.     

On August 7, 2020, the Company received notice of allowance from the USPTO of a key patent pertaining to the Company’s InFoods IBS Product. This is the second patent issued in the U.S. for the InFoods® IBS technology, and contains broad issued claims that the Company believes create strong protection for the InFoods® IBS product that is in clinical trials with several major medical institutions including Mayo Clinic, University of Texas Houston, Michigan Medicine University of Michigan, Houston Methodist and Beth Israel Deaconess Medical Center, a Harvard teaching hospital. The Company has also been issued patents for the InFoods® IBS product in Japan and Korea, and has numerous InFoods® IBS patents in review and prosecution in other countries. In addition, the Company has also filed several patents, both in the U.S. and internationally, for the InFoods® IBS technology platform that include broad claims protecting the uses of the Infoods Technology to diagnose and treat other disease states outside of IBS. Several of these patents are currently in active prosecution and review.

On August 3, 2020, the Company hired Steven Sloan, whom the Board intends to appoint as Chief Financial Officer (“CFO”) on September 3, 2020, following the filing of this Form 10K.  In approximately December 2019, Janet Moore, the Company’s current CFO, announced to the Board her desire to retire from the Company at some point in the future once a suitable replacement could be found and hired. As such, the Company conducted an exhaustive search for a new CFO, and having determined Mr. Sloan to be an excellent candidate, hired Mr. Sloan on August 3, 2020.  At the Board meeting held on August 27, 2020, the Board officially appointed and approved Mr. Sloan to serve as the Company’s CFO effective September 3, 2020.  Mr. Sloan’s background and experience includes 13 years at General Electric with roles in internal audit, corporate finance and manufacturing finance.  Most recently, Mr. Sloan spent 10 years with medical device maker Medtronic.  At Medtronic, Mr. Sloan worked in four divisions over the 10 years, and most recently served as a divisional finance director.  The Board is excited to have Mr. Sloan join the company as an executive officer. Janet Moore will remain an employee of the Company during a transition period.

On August 27, 2020, at a Board meeting held on that day, the Board nominated, unanimously approved and elected Cathy Coste to join the Board of Directors as a member of the Board effective September 3, 2020. Ms. Coste was elected to serve as a Board member until the Company’s annual meeting in December 2020, at which time she will stand for re-election along with several other members of the Board. Ms. Coste is replacing Janet Moore, the Company’s current CFO and Board member who, as previously stated, has announced her retirement from the Company and the Board and will not be standing for re-election at the upcoming annual meeting in December 2020. Cathy Coste is in the process of retiring from Deloitte and Touche where she is currently a senior partner and is an industry executive leader in Deloitte’s life sciences group. During her career at Deloitte, Ms. Coste has been directly involved with over 30 life science corporations, the majority of which were large-cap and medium-cap public corporations. Ms. Coste also has extensive public company Board experience, often attending multiple Board and Board Committee meetings per month. Ms. Coste also has extensive experience in Sarbanes-Oxley compliance, corporate risk analysis and management, cyber risk assessment, fraud prevention, IT systems analysis and upgrades, internal controls and corporate governance.

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On August 27, 2020, at a Board meeting held on that day, Board Member, Allen Barbieri, agreed to change from independent outside director status to become an executive director. Further, Mr. Barbieri’s title was changed to Executive Vice- Chairman. As the Company’s many new products, projects and opportunities have expanded, the CEO and the other members of the Board felt it was necessary to have additional executive support with managing the strategic transactions, operations and affairs of the Company, and to manage communications between the Board and management. Mr. Barbieri agreed to take on this additional responsibility.

On August 27, 2020, at a Board of Directors meeting held on that day, with the election of Ms. Coste as a member of the Board, and the designation of Mr. Barbieri as an executive Board member, the Board deemed it necessary to make certain changes to the Committees of the Board. As such, effective September 3, 2020, the following Board members will be serving in the following Board committees;  1) Audit Committee: Cathy Coste, Mark Sirgo and Jane Emerson, with Cathy Coste as the Chair of the Committee,  2) Compensation Committee: Mark Sirgo, Francis Cano and Jane Emerson, with Mark Sirgo as the Chair of the Committee,  3) Nominating and Corporate Governance Committee: Francis Cano, Cathy Coste and Jane Emerson, with Francis Cano as Chair of the Committee.

OFF BALANCE SHEET ITEMS

There were no off-balance sheet arrangements as of May 31, 2020.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note 2 of the Consolidated Financial Statements describe the significant accounting policies essential to the consolidated financial statements. The preparation of these consolidated financial statements requires estimates and assumptions that affect the reported amounts and disclosures.

In general, the critical accounting policies that may require judgments or estimates relate specifically to Revenues, Allowance for Doubtful Accounts, Inventory Reserves, Stock-Based Compensation, Income Taxes, Right-of-Use Asset and Lease Liability.

We believe the following to be critical accounting policies as they require more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, which is when transfer of control of goods has occurred and at which point title passes. An allowance is established, if necessary, for estimated returns as revenue is recognized. Services for some contract work are invoiced and recognized for work that has been performed as the project progresses.

An allowance for doubtful accounts is established for estimated losses resulting from the inability of our customers to make required payments. The assessment of specific receivable balances and required reserves is performed by management and discussed with the audit committee. We have identified specific customers where collection is not probable and have established specific reserves, but to the extent collection is made, the allowance will be released. Additionally, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity and cost of inventory on hand to management's forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Once a reserve is established, it is maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for the product.

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We measure stock-based compensation costs at fair value, including estimated forfeitures, and recognize the expense over the period that the recipient is required to provide service in exchange for the award, which generally is the vesting period. We use the Black-Scholes option pricing model to measure the fair value of our stock options. In determining the amount of expense to be recorded, we also estimate forfeiture rates for all awards based on historical experience to reflect the probability that employees will complete the required service period. Employee retention patterns could vary in the future and result in a change to our estimated forfeiture rate which would directly impact stock-based compensation expense.

We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard.  In making such judgments, significant weight is given to evidence that can be objectively verified. We assess our deferred tax assets annually under more likely than not scenarios in which they may be realized through future income. We have determined that although we believe our net deferred tax assets of $3,175,000 will be utilized at a future date, based on our recent losses and plans to continue our research and development, we have established a valuation allowance of $3,175,000, which fully covers the asset.

Leases

During the year ended May 31, 2020, the Company adopted ASC 842, Leases. As a result, the existing deferred rent liability was netted against the Right-of-Use Asset which was capitalized at that time.

In February 2016, the Financial Accounting Standards Board issued an accounting standards 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 will be classified as financing or operating which will drive the expense recognition pattern.  For lessees, the statement of operations presentation and expense recognition pattern for financing and operating leases is similar to the current model for capital and operating leases, respectively.  The Company has elected to exclude short-term leases.  The update also requires additional disclosures that will better enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.  The Company adopted this guidance as of June 1, 2019, the required effective date, using the effective date transition method.  As permitted under the effective date transition method, financial information and disclosure for periods prior to the date of initial application will not be updated. An adjustment to opening accumulated deficit was not required in conjunction with adoption. The adoption of this statement resulted in a right-of-use asset being recorded in the amount of $1,942,999 and a lease liability being recorded in the amount of $1,980,970. Both will be amortized over the life of the underlying leases. For additional information, see Note 8-Commitments and Contingencies. The Company has elected not to reassess whether expired or existing contracts contain leases, or reassess the classification of existing leases as of the adoption date. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to our consolidated financial statements for a listing of adopted and soon to be adopted accounting pronouncements.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Exhibit 99.3, "Biomerica, Inc. and Subsidiaries Consolidated Financial Statements" is incorporated herein by this reference.

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ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.   CONTROLS AND PROCEDURES

Attached as exhibits to this Form 10-K are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) that are required in accordance with Rule 13a-14 of the Exchange Act. This “Disclosure Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications.

EVALUATION OF DISCLOSURE CONTROLS

Our management evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act as of the end of the period covered by this report.  Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  The disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives and the CEO and CFO have concluded that our disclosure controls and procedures are effective at the “reasonable assurance” level. Based on that evaluation the CEO and CFO concluded that information required to be disclosed in the reports that we file and submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms; and (2) accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

For the reasons discussed in "Management's Report on Internal Control over Financial Reporting" below, Company management, including the CEO and CFO concluded that, as of May 31, 2019,2020, the Company's internal control over financial reporting was effective. Management has concluded that the consolidated financial statements included in this annual report present fairly, in all material respects, the Company's financial position, results of operations, and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal year that hashave materially affected, or that isare reasonably likely to affect, our internal control over financial reporting.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Company management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable assurance to the Company's management and Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

A Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating the controls and procedures. Because of these inherent limitations, internal control over financial reporting cannot provide absolute assurance regarding the reliability of financial reporting and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Company management, with the participation of the CEO and the CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”) in Internal Control - Integrated Framework (2013). Based on this assessment, management, with the participation of the CEO and CFO, believes that, as of May 31, 2019,2020, the Company's internal control over financial reporting was effective based on those criteria.

Company management will continue to monitor and evaluate the effectiveness of its disclosure controls and procedures and its internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing improvements, as necessary and as funds allow.

Note: This 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this 10-K.

ITEM 9B.   OTHER INFORMATION.

None.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE. 

This information is incorporated by reference to the Company's proxy statement for its 20192020 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2019.2020.

ITEM 11.    EXECUTIVE COMPENSATION

This information is incorporated by reference to the Company's proxy statement for its 20192020 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2019.2020.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Other information regarding related transactions is incorporated by reference to the Company's proxy statement for its 20192020 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company's fiscal year ended May 31, 2019.2020.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Please refer to the Company’s proxy statement for its 20192020 Annual Meeting of Stockholders, which will be filed not later than 120 days after the end of the Company’s fiscal year ended May 31, 2019.2020.

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PART IV

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25The certifications attached as Exhibits 32.1 and 32.2 accompany this Annual Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the registrant for purposes of Section 18 of the Exchange Act and are not to be incorporated by reference into any of the registrant’s filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature and Capacity

BIOMERICA, INC.  AND SUBSIDIARIES

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BIOMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED MAY 31, 20192020 AND 20182019

1.    ORGANIZATION

Biomerica Inc. and Subsidiaries (collectively "the Company"the “Company”, “we”, “us”, or “our”) are primarily engaged in the development, manufacture and marketing of medical diagnostic products. 

The Company develops, patents, manufactures and markets medicaladvanced diagnostic and therapeutic products designed forused at the early detection and monitoring of chronic diseases and other medical conditions. The Company’s medical diagnostic products are sold worldwide in two markets: 1) clinical laboratories and 2) point of care (physicians'point-of-care (physicians' offices and over-the-counter drugstores). Thethrough drugstores and online) and in hospital/clinical laboratories for detection and/or treatment of medical conditions and diseases. Our diagnostic test kits are used to analyze blood, urine or fecal samplesmaterial from patients in the diagnosis of various diseases, food intolerances and other medical complications, by measuring or detectingto measure the existence and/or level of specific bacteria, hormones, antibodies, antigens or other substances, which may exist in a patient’sthe human body stools, or blood, often in extremely small concentrations. The Company's products are designed to enhance the health and well-being of people, while reducing total healthcare costs.

Our primary focus is the research and development of revolutionary, 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. If these DGT products prove effective in their clinical trials, and are ultimately cleared for sale by the U.S. Food and Drug Administrations (“FDA”), the revenues potential to the Company is significant. 

Due to the global 2019 SARS-CoV-2 novel coronavirus (“COVID-19”) pandemic, in March 2020 we began redirecting and focused a majority of our resources to develop, test, validate, seek regulatory approval for, and sell diagnostic products that indicate if a person has been exposed to COVID-19.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The enclosed consolidated financial statements for the years ended May 31, 20192020 and 20182019 include the accounts of Biomerica, Inc. ("Biomerica") 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 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reported period. Estimates that are made include the reserveallowance for bad debt,doubtful accounts, which is estimated based on current as well as historical historypast practices with a customer; stock option forfeiture rates, which are calculated based on historical data; and inventory reserves,obsolescence, which are 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, 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). Actual results could materially differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has financial instruments whereby the fair market value of the financial instruments could be different than that recorded on a historical basis. The Company's financial instruments consist of its cash and cash equivalents, accounts receivable, and accounts payable. The carrying amounts of the Company's financial instruments approximate their fair values.

CONCENTRATION OF CREDIT RISK

The Company maintains cash balances at certain financial institutions in excess of amounts insured by federal agencies.  As of May 31, 2019,2020, the Company had approximately $406,000$8,595,241 of uninsured cash. The Company does not believe it is exposed to any significant credit risks.

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The Company provides credit in the normal course of business to customers throughout the United States and in foreign markets.  For the year ended May 31, 2019 the Company had two customers which accounted for 46.3% of consolidated net sales and for the year ended May 31, 2018 the Company had one customer which accounted for 43.3% of consolidated net sales.  The Company performs ongoing credit evaluations of its customers and requires accelerated prepayment in some circumstances.

For the years ended May 31, 2020 and 2019, the Company had three distributors and two distributors which accounted for a total of 57.2% and 46.3% of our net consolidated sales, respectively. Of this, for the years ended May 31, 2020 and 2019 one of the distributors mentioned above accounted for 25.7% and 36.3%, respectively, of net consolidated sales.  At May 31, 2020 and 2019, the Company had three distributors and two customersdistributors which accounted for a total of 80.0% and 68.1%, respectively, of gross accounts receivable. AtOf the 80.0% as of May 31, 2018, one customer accounted for 53.3% of2020, 43.9% was owed by a distributor in Ecuador. Total gross accounts receivable.receivables at May 31, 2020 and 2019 were $1,836,852 and $1,527,762, respectively.

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For the year ended May 31, 2019,2020, one vendor accounted for 23.8%59.3% of the purchases of raw materials. For the year ended May 31, 2018,2019, two vendors accounted for 27.7a total of 23.8 % of the purchases of raw materials. As of May 31, 2019 and 2018 the Company had one vendor which accounted for 32.1% and 29.1%, respectively, of accounts payable.

GEOGRAPHIC CONCENTRATION

As of May 31, 2020 and 2019, approximately $613,000 and 2018, approximately $665,000 and $657,000 of Biomerica's gross inventory and approximately $39,000$31,000 and $41,000,$39,000, of Biomerica's property and equipment, net of accumulated depreciation, was located in Mexicali, Mexico, respectively.

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 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.

INVENTORIES

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.

Inventories approximate the following at May 31: