Biomerica : Annual Report for Fiscal Year Ending May 31, 2026 (Form 10-K)

About this update from Biomerica, Inc.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that are based on our management team's expectations, beliefs, intentions, strategies, estimates and assumptions, which statements are subject to substantial risks and uncertainties. Our actual results may differ materially from those expressed or implied by these forward-looking statements as a result of many factors, including those discussed in the sections titled "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" appearing elsewhere in this Annual Report on Form 10-K. OVERVIEW We are a global biomedical technology company that develops, patents, manufactures and markets advanced diagnostic and therapeutic products. Our diagnostic test kits are used to analyze blood, urine, nasal, or fecal material from patients to aid in the diagnosis of diseases, food intolerances, and other medical conditions. These tests detect and measure the presence and levels of specific bacteria, hormones, antibodies, antigens and other substances that may exist in the human body at extremely low concentrations. Our products are designed to enhance patient outcomes and well-being while reducing total healthcare costs. We sell our portfolio of diagnostic products worldwide, primarily to clinical laboratories and in point-of-care settings, including physicians' offices and over-the-counter channels. We also provide contract development and manufacturing services to third parties that utilize the technology underlying our products. In addition, we are commercializing our inFoods® IBS product through physician-directed and laboratory-based channels, including third-party reimbursement pathways. Most of our products carry a Conformité Européenne ("CE") marking and/or are registered with regulatory agencies in various countries for diagnostic use, with several also cleared by the United States Food and Drug Administration ("FDA") for sale in the United States. Technological advances in medical diagnostics have enabled diagnostic tests to be performed not only in clinical laboratories but also at home and at the point-of-care in physicians' offices. We strive to develop and market diagnostic products that are accurate, utilize easily obtained patient specimens and, where appropriate, can be performed without complex instrumentation. Our home use (over-the-counter) and professional use (physicians' office, clinics, etc.) rapid diagnostic test products help manage existing medical conditions and may save lives through early detection and diagnosis of specific diseases. Traditionally, such tests required the expertise of medical technologists and sophisticated equipment, with results often not available for days. We believe our rapid point-of-care tests, when properly used, can be as accurate as laboratory tests. We invest resources in the research and development of new diagnostic products and technologies designed to address a range of medical conditions and unmet clinical needs. Our research and development activities include the development and optimization of immunoassays, enzyme-linked immunosorbent assays ("ELISAs"), rapid diagnostic tests, and related diagnostic technologies. These products are either internally developed or developed under contract for customers. Our experienced and highly trained technical personnel, including Ph.D. level scientists and other scientific and technical professionals, are engaged in new product development, product improvement, contract development projects, and technology transfer activities. Many members of our technical staff have extensive experience in diagnostic product development and manufacturing, including prior experience at large diagnostic companies. We also utilize our Scientific Advisory Board, which includes physicians and clinicians with relevant areas of expertise, to provide scientific and clinical input regarding certain product development programs and clinical studies. A key outcome from our research and development efforts is our patented diagnostic-guided therapy ("DGT") product, developed on the inFoods® technology platform. This innovative technology is designed to aid in the management of gastrointestinal conditions such as irritable bowel syndrome ("IBS") and other inflammatory diseases. The DGT product targets chronic inflammatory illnesses that are widespread and prevalent in large markets. We have launched the inFoods® IBS product, which leverages this patented technology. The inFoods® IBS product utilizes a simple blood test to identify patient-specific foods that, when eliminated from the diet, may help reduce IBS symptoms such as pain, bloating, diarrhea, cramping, and constipation. Unlike broad and difficult to manage dietary restrictions, the inFoods® IBS product pinpoints a patient's heightened immunoreactivity to specific foods known to frequently trigger IBS symptoms. By removing the foods identified as problematic, patients can achieve relief from IBS symptoms. During fiscal 2026, we continued the phased commercialization of our inFoods® IBS product, focusing primarily on gastroenterology ("GI") physician practices in multiple states and regions. During the year, we obtained a dedicated CPT® Proprietary Laboratory Analyses ("PLA") code for inFoods® IBS and continued to advance our reimbursement strategy. The Centers for Medicare & Medicaid Services established a national Medicare payment rate of $300 for inFoods® IBS, applicable to approved claims with dates of service beginning January 1, 2026. In addition, the applicable Medicare Administrative Contractor confirmed that claims for inFoods® IBS may be considered on an individual, claim-by-claim basis. We also entered into a marketing services agreement with Henry Schein to support the introduction and commercialization of inFoods® IBS to physicians in the United States. Our dedicated sales team is focused on building strong relationships within the GI segment and increasing physician adoption and utilization of inFoods® IBS, while selectively exploring opportunities to introduce inFoods® IBS to other medical specialties, including integrated health practices and primary-care providers. These efforts are intended to support broader adoption of inFoods® IBS across multiple healthcare channels. Concurrently, we are pursuing distribution, partnership, and licensing opportunities with U.S. companies to support broader commercialization of inFoods® IBS. These efforts include our previously announced marketing services agreement with Henry Schein, which supports the introduction of inFoods® IBS to physicians in the United States. We may also pursue additional commercial relationships domestically and internationally. During fiscal 2026, we engaged with the applicable Medicare Administrative Contractor regarding coverage and reimbursement for inFoods® IBS. While the establishment of the $300 Medicare payment rate does not guarantee coverage, utilization, or payment, management believes it represents an important step toward broader market access. Following fiscal year-end, our partner lab began submitting initial Medicare claims for inFoods® IBS under the applicable PLA code. Initial valid claims submitted to date have been paid at the full CMS price of $300. Claims are currently considered on an individual basis, and payment of any particular claim is not guaranteed. As Medicare reimbursement develops, we may pursue reimbursement with private payer insurance companies over time. We believe reduced out-of-pocket costs could support increased adoption and utilization of inFoods® IBS. As we continue to pursue commercial opportunities in both U.S. and international markets, we remain attentive to evolving global economic conditions, including uncertainties related to international trade policies, tariffs, and supply chain dynamics, wars and other political strife. Although these factors have not had a material impact on our operations to date, future changes in trade regulations, tariff structures, or logistical constraints could influence the cost, availability, or timing of materials and components used in our manufacturing processes, and our ability to sell our finished products into international markets. We continue to monitor these developments closely and are actively implementing contingency plans, including alternative sourcing strategies and supplier diversification, to support supply chain continuity, maintain operational efficiency, and help mitigate potential future impacts. We are also focusing on alternative manufacturing and shipping strategies of our products through BioEurope GmbH, our European subsidiary, and Biomerica de Mexico, our Mexican subsidiary, to mitigate some of the risk that tariffs and other policies may have on our revenues and operations. In addition, in December 2023 we received FDA clearance for hp+detect™, a diagnostic test designed to detect Helicobacter pylori (H. pylori) bacteria in the gastrointestinal tract. H. pylori is a prevalent infection, affecting approximately 35% of the United States population and 45% of the population in Europe's largest countries. This bacterium is recognized as the strongest known risk factor for gastric cancer, which remains one of the leading causes of cancer-related deaths globally. The hp+detect™ test is marketed directly to laboratories and is intended to provide physicians and medical centers with a reliable tool for diagnosing H. pylori infections and monitoring treatment effectiveness. In February 2026, hp+detect™ received registration from the United Kingdom Medicines and Healthcare products Regulatory Agency ("MHRA"). During fiscal 2026, we received our first commercial order for hp+detect™ from a large clinical laboratory chain for the United Kingdom market. We continue to market hp+detect™ to laboratories in the United States and Europe and pursue opportunities for broader commercial adoption. We continue to balance revenue generated from our established diagnostic products and contract manufacturing services with investments in newer diagnostic products, including inFoods® IBS and hp+detect™. Management believes this diversified portfolio approach provides opportunities to generate revenue from our existing business while advancing newer commercial initiatives. We also continue to pursue contract development and manufacturing opportunities that leverage our existing manufacturing, quality and technical infrastructure and may provide incremental revenue without requiring significant additional fixed infrastructure. In May 2026, we entered into a Master Services Agreement with a life sciences company for the development of proprietary in vitro diagnostic assays. The agreement carries an initial contract development target fee of over $1,750,000, to be earned on a milestone-completion basis across multiple Statements of Work under the MSA over an estimated 19 to 25 months period. All development work will be performed at the Company's FDA-licensed, ISO 13485-certified facility in Irvine, California, utilizing existing personnel, equipment and infrastructure. The engagement is expected to require minimal incremental costs, and management believes it may support improved utilization of the Company's existing manufacturing infrastructure and provide incremental revenue. Revenue is recognized with executed Statement of Work and accepted milestone deliverables. During fiscal 2026, we continued to manage operating expenses and allocate resources toward activities supporting commercialization, reimbursement and revenue generation. Selling, general and administrative expenses increased modestly, primarily reflecting higher regulatory fees, sales-related compensation and commercial support costs, partially offset by lower sales commissions for certain products. Research and development expenses decreased primarily due to lower labor allocations to research and development activities and reduced spending on certain research and development projects. Overall operating expenses increased slightly compared with fiscal 2025, reflecting higher selling, general and administrative expenses, partially offset by lower research and development spending. Additionally, during the year ended May 31, 2026, we received net proceeds of approximately $1,827,000 from sales of our common stock under the ATM offering. Net cash used in operating activities also decreased to approximately $3,421,000 during fiscal 2026 from approximately $3,842,000 during fiscal 2025. We are also actively exploring strategic opportunities to enhance and create shareholder value. RESULTS OF OPERATIONS Net Sales and Cost of Sales The following is a breakdown of revenues according to markets to which the products are sold: Year Ended May 31, Increase (Decrease) 2026 2025 $ % Clinical lab $ 2,732,000 $ 3,181,000 $ (449,000 ) -14 % Contract Manufacturing 891,000 1,070,000 (179,000 ) -17 % Over-the-counter 821,000 1,049,000 (228,000 ) -22 % Physician's office 9,000 11,000 (2,000 ) -18 % Total $ 4,453,000 $ 5,311,000 $ (858,000 ) -16 % For the fiscal year ended May 31, 2026, our net sales were approximately $4,453,000, representing a decrease of $858,000, or 16%, compared to $5,311,000 for the fiscal year ended May 31, 2025. The decrease was primarily attributable to lower clinical laboratory sales, reflecting variability in the timing and periodic nature of customer orders, as well as reduced over-the-counter sales resulting from lower retail market activity from international distributors, including the impact of uncertainties related to tariffs and international trade. Net sales were also impacted by lower contract manufacturing revenue following the completion of a prior research and development project. These decreases were partially offset by increased demand for the inFoods® IBS product; however, revenues from inFoods® IBS remained in the early stages of commercialization and only partially offset the declines in our established product and contract manufacturing businesses. Consolidated cost of sales for the fiscal year ended May 31, 2026 was approximately $4,091,000, or 92% of net sales, compared to $4,813,000, or 91% of net sales, for the fiscal year ended May 31, 2025. The decrease in cost of sales was primarily attributable to lower sales volumes in our clinical laboratory and contract manufacturing markets, resulting in lower product costs and manufacturing activity. Cost of sales as a percentage of net sales remained relatively consistent year over year, with the modest increase primarily attributable to changes in product mix and lower overall sales volume, which resulted in reduced absorption of fixed manufacturing costs. We believe increased sales volumes, including from inFoods® IBS and contract manufacturing activities, could provide greater utilization of our existing manufacturing infrastructure and improved absorption of fixed production costs. Operating Expenses The following is a summary of operating expenses: Year Ended May 31, 2026 2025 Increase (Decrease) Operating Expense As a % of Total Revenues Operating Expense As a % of Total Revenues $ % Selling, General and Administrative Expenses $ 4,894,000 110 % $ 4,612,000 87 % $ 282,000 6 % Research and Development $ 788,000 18 % $ 1,023,000 19 % $ (235,000 ) -23 % Selling, General and Administrative Our selling, general and administrative expenses were approximately $4,894,000 for the fiscal year ended May 31, 2026, compared to $4,612,000 for the fiscal year ended May 31, 2025, an increase of $282,000, or 6%. The increase was primarily attributable to a $179,000 increase in legal fees, a $126,000 increase in regulatory fees, a $27,000 increase in sales team compensation, and a $25,000 increase in outside services related to inFoods® IBS sales and marketing activities, partially offset by an $88,000 decrease in sales commissions. The year-over-year increase reflects continued investment in regulatory, sales and commercialization activities, while overall selling, general and administrative expenses remained relatively stable compared with fiscal 2025. Research and Development Our research and development expenses were approximately $788,000 for the fiscal year ended May 31, 2026, compared to $1,023,000 for the fiscal year ended May 31, 2025, a decrease of $235,000, or 23%. The decrease was primarily driven by approximately $199,000 of lower payroll and related personnel costs and approximately $39,000 of lower costs associated with our inFoods® IBS research and development activities. The decrease reflects the progression of certain programs, including inFoods® IBS and hp+detect™, from development activities toward commercialization, as well as the allocation of personnel and resources toward manufacturing and commercial activities. We continue to invest in research and development activities supporting our existing products, potential new applications of the inFoods® technology platform, product improvements and contract development opportunities. For additional information regarding our research and development activities, see "Research and Development" under Item 1. Business. Dividend, Interest, and Other Income Dividend, interest, and other income was approximately $1,233,000 for the fiscal year ended May 31, 2026, compared to $165,000 for the fiscal year ended May 31, 2025, an increase of $1,068,000, or 648%. This increase was primarily attributable to $1,100,000 related to the Employee Retention Credit ("ERC"), a refundable payroll-tax credit established under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The ERC was available to eligible employers for wages paid during calendar year 2021 in response to the global COVID-19 pandemic. Unrealized Holding Gain on Equity Investment We recognized an unrealized holding gain on our equity investment of approximately $335,000 for the fiscal year ended May 31, 2026, compared to no such gain for the fiscal year ended May 31, 2025. The increase was due to the remeasurement of our investment in Diagnosis S.A. based on the purchase price set forth in the Securities Purchase Agreement entered into in May 2026. Provision for Income Taxes Our provision for income taxes was approximately $23,000 for the fiscal year ended May 31, 2026, compared to approximately $1,000 for the fiscal year ended May 31, 2025. The increase was primarily attributable to foreign income taxes. We continue to maintain a full valuation allowance against our net deferred tax assets. LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN The following are the principal sources of liquidity: Year Ended May 31, 2026 2025 Cash and cash equivalents $ 1,308,000 $ 2,399,000 Working capital including cash and cash equivalents $ 1,535,000 $ 3,135,000 As of May 31, 2026 and 2025, we had cash and cash equivalents of approximately $1,308,000 and $2,399,000, respectively. As of May 31, 2026 and 2025, we had working capital of approximately $1,535,000 and $3,135,000, respectively. We have experienced variability in our revenue and a reduction in our cash position in recent periods, which has impacted our liquidity. The decrease in cash during fiscal 2026 primarily reflects approximately $3,400,000 of cash used in operating activities, partially offset by proceeds from sales of common stock under our 2024 ATM Offering and $500,000 of proceeds received under the secured promissory note described below. Our ability to continue as a going concern over the next twelve months from the date these financial statements are available to be issued is influenced by several factors, including: ● Our need and ability to generate additional revenue from international opportunities and sales within the United States of existing products, and from our new product launches; ● Our need and ability to raise additional capital through equity and/or debt markets to meet current obligations and fund operations; ● Our capacity to manage operating expenses and maintain gross margins; ● Our ability to retain key employees and maintain critical operations; and ● Certain SEC regulations that limit the amount of capital we can raise through issuance of our equity. These factors raise substantial doubt about our ability to continue as a going concern. Our future viability depends on the successful execution of our strategic plans, securing additional financing, and achieving profitable operations. Management has analyzed our cash flow requirements through August 2027 and beyond. Based on this analysis, we believe our current cash and cash equivalents are insufficient to meet our operating cash requirements and strategic growth objectives for the next twelve months from the date these consolidated financial statements are issued. Prior to year-end, the Company entered into a Master Services Agreement for CDMO services with initial target fees exceeding $1,750,000. Subsequent to year-end, the Company completed the Private Placement (as defined below) yielding approximately $2,230,000 in gross proceeds (see Note 11 of our consolidated financial statements). Management believes these transactions, combined with the Company's other strategic initiatives, may address near-term capital needs; however, there can be no assurance that these efforts will be sufficient to satisfy the Company's capital requirements. To address our capital needs and sustain operations beyond the next year, we are actively pursuing strategies to increase sales, reduce expenses, sell non-core assets, seek additional financing through debt or equity, and seek other strategic alternatives. If we are unable to generate sufficient cash flows from operations or obtain additional financing, we may be required to delay or reduce certain operating activities and expenditures. As part of our financing plan, on September 28, 2023, we filed the Shelf Registration Statement allowing us to issue up to $20,000,000 in shares of our common stock. On May 10, 2024, the Company filed a prospectus supplement to the Shelf Registration Statement on Form S-3. This prospectus supplement was intended to facilitate the sale of up to $5,500,000 in common stock through the 2024 ATM Offering. During the year ended May 31, 2026, we sold 580,452 shares of our common stock at prices ranging from $2.20 to $4.02 pursuant to the ATM Offering, which resulted in gross proceeds of approximately $1,874,000 and net proceeds to us of $1,827,000 after deducting commissions, legal, and other offering costs totaling approximately $47,000. We intend to use the net proceeds from the ATM Offering for general corporate purposes, including, but not limited to, sales and marketing activities, clinical studies and product development, acquisitions of assets, businesses, companies, or securities, capital expenditures, and working capital needs. In addition, on May 29, 2026, we entered into a Securities Purchase Agreement to sell our investment in Diagnosis S.A. for an aggregate purchase price of $500,000 in a related-party transaction involving our Chief Executive Officer and other purchasers. Pending completion of the applicable share transfers and required procedures under Polish law, the purchasers advanced the $500,000 purchase price to us in exchange for a secured promissory term note. The note bears interest at 8% per annum, matures twelve months from May 29, 2026, and is secured by our rights and interests in the Diagnosis S.A. shares. The arrangement is intended to facilitate the monetization of this non-core investment while the applicable share-transfer process is completed. The share transfer is expected to be completed during the second quarter of fiscal 2027, subject to completion of the applicable procedures required under Polish law. While we are committed to addressing our capital needs and sustaining operations beyond the next year, there is no assurance that these efforts will be successful or sufficient to meet our capital requirements. In addition, our business is subject to additional risks and uncertainties, including, but not limited to, those described in Item 1A. "Risk Factors". Operating Activities During the fiscal year ended May 31, 2026, net cash used in operating activities was approximately $3,421,000, compared to $3,842,000 for the fiscal year ended May 31, 2025, representing an improvement of approximately $421,000, or 11%. The improvement primarily reflected a lower net loss in fiscal 2026, partially offset by less favorable working capital movements compared with the prior year. Cash used in operating activities during fiscal 2026 included increases in inventories and accounts receivable of approximately $140,000 and $66,000, respectively, a decrease in accrued compensation of approximately $162,000, and reductions in lease liabilities of approximately $363,000. These uses of cash were partially offset by an increase in accounts payable and accrued expenses of approximately $499,000 and net non-cash adjustments of approximately $496,000, primarily consisting of share-based compensation and amortization of right-of-use assets, partially offset by an unrealized holding gain on our equity investment and a recovery of inventory reserves. During the fiscal year ended May 31, 2025, net cash used in operating activities was approximately $3,842,000, compared to $5,361,000 for the fiscal year ended May 31, 2024. Cash used in operating activities during fiscal 2025 primarily reflected our net loss of approximately $4,973,000 and decreases in accounts payable and accrued expenses and lease liabilities of approximately $467,000 and $327,000, respectively. These uses of cash were partially offset by an approximately $882,000 decrease in inventories, approximately $209,000 of favorable accounts receivable activity, and net non-cash adjustments of approximately $872,000, primarily consisting of share-based compensation, amortization of right-of-use assets, and depreciation and amortization. Investing Activities During the fiscal year ended May 31, 2026, net cash used in investing activities was approximately $1,000, compared to $37,000 for the fiscal year ended May 31, 2025. Investing activities in both periods primarily consisted of expenditures related to patents, which were approximately $1,000 in fiscal 2026 and $37,000 in fiscal 2025. Financing Activities Cash provided by financing activities was approximately $2,334,000 for the fiscal year ended May 31, 2026, compared to approximately $2,111,000 for the fiscal year ended May 31, 2025. During fiscal 2026, financing activities primarily consisted of approximately $1,874,000 of gross proceeds from sales of our common stock under our 2024 ATM Offering, partially offset by approximately $39,000 of cash offering costs, and $500,000 of proceeds received under a secured promissory note in a related-party transaction. By contrast, during fiscal 2025, financing activities primarily consisted of approximately $2,143,000 of gross proceeds from sales of our common stock, partially offset by approximately $44,000 of offering costs and $3,000 of deferred offering costs, together with approximately $15,000 of proceeds from the exercise of stock options. During the fiscal years ended May 31, 2026 and 2025, we received approximately $1,827,000 and $2,015,000, respectively, in net proceeds from sales of our common stock pursuant to the ATM program. The shares sold during fiscal 2026 were issued under the Shelf Registration Statement. On May 10, 2024, we filed a prospectus supplement to the Shelf Registration Statement providing for the sale of up to $5,500,000 of common stock through ATM offerings under Rule 415 of the Securities Act. In connection with the establishment of the ATM program, we incurred approximately $81,000 of deferred offering costs during the year ended May 31, 2024 and which were fully expensed as of May 31, 2026. As of August 31, 2026, the date on which this Annual Report on Form 10-K for the fiscal year ended May 31, 2026 was filed with the SEC, our Shelf Registration Statement remains subject to the offering limitations set forth in General Instruction I.B.6 of Form S-3 because our public float is less than $75,000,000. For so long as our public float remains below $75,000,000, the aggregate market value of securities sold by us pursuant to General Instruction I.B.6 of Form S-3 during any 12-calendar-month period may not exceed one-third of our public float. For purposes of this limitation, the aggregate market value of our outstanding common stock held by non-affiliates, or public float, was $9,174,674, based on 4,287,231 non-restricted shares of our outstanding common stock held by non-affiliates and a price of $2.14 per share, which was the price at which our common stock was last sold on the Nasdaq Capital Market on August 28, 2026 (a date within 60 days of the date hereof), calculated in accordance with General Instruction I.B.6 of Form S-3. After giving effect to the $3,058,225 offering limit imposed by General Instruction I.B.6 of Form S-3, and after deducting the shares we sold within the preceding 12 months, as of the date of filing this Annual Report, we may sell $2,123,163 shares of our common stock at this time under the Shelf Registration Statement . SUBSEQUENT EVENTS On December 12, 2025, our stockholders approved an amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 25,000,000 to 300,000,000 shares. On June 10, 2026, we filed the Certificate of Amendment with the Secretary of State of the State of Delaware, at which time the amendment became effective. Following the effectiveness of the amendment, we are authorized to issue 300,000,000 shares of common stock and 5,000,000 shares of preferred stock. On August 20, 2026, we entered into entered into a Securities Purchase Agreement (the "B. Riley Purchase Agreement") with certain institutional and individual investors identified on the signature pages thereto, which included among others B. Riley Principal Capital, LLC and all the members of our Board of Directors and our Chief Executive Officer (collectively, the "Purchasers"), pursuant to which we agreed to issue and sell an aggregate of 1,393,705 shares of our common stock, par value $0.08 per share (the "Shares"), at a purchase price of $1.60 per Share, for aggregate gross proceeds of approximately $2,230,000 (the "Private Placement"). The closing of the Private Placement occurred on August 26, 2026 (the "Closing Date"). The Shares have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and were offered and sold in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated thereunder. In connection with the Private Placement, on August 20, 2026, we entered into a Registration Rights Agreement with the Purchasers (the "Registration Rights Agreement"), pursuant to which we agreed to file with the Securities and Exchange Commission (the "SEC") a registration statement to register and provide for the resale of the Shares and to use commercially reasonable efforts to cause such registration statement to become effective and remain effective for the periods specified therein. We are required to file such registration statement within 30 calendar days of the Closing Date and to use its commercially reasonable efforts to have such registration statement declared effective within 30 calendar days of the closing date (or 60 calendar days in the event of a "full review" by the SEC). If we fail to satisfy certain filing or effectiveness obligations under the Registration Rights Agreement, we are obligated to pay the Purchasers liquidated damages equal to 1.0% of the aggregate purchase price paid by such Purchaser, subject to a maximum aggregate cap of 5.0% of such Purchaser's subscription amount. OFF BALANCE SHEET ITEMS There were no off-balance sheet arrangements as of May 31, 2026. CRITICAL ACCOUNTING ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable under the current conditions; however, actual results may differ from these estimates under different future conditions. We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These relate to revenue recognition, inventory overhead application, inventory reserve and share based compensation. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial condition or results of operations. We suggest that our significant accounting policies be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations. Please refer to Note 2 of our consolidated financial statements for information on Significant Accounting Policies. REVENUE RECOGNITION We have various contracts with customers, and these contracts specify the recognition of revenue based on the nature of the transaction. Revenues from product sales are recognized at the time the product is shipped, customarily FOB shipping point, which is when the transfer of control of goods has occurred, and title passes. This applies to clinical lab products sold to domestic and international distributors, including hospitals, clinical laboratories, medical research institutions, medical schools, and pharmaceutical companies. OTC products are sold directly to e-commerce customers, and distributors, while physicians' office products are sold to physicians and distributors. We do not allow for returns except in the event of defective merchandise and, therefore, we do not establish an allowance for returns. Additionally, we have contracts with customers that provide purchase discounts for achieving specified sales volumes. We regularly evaluate the status of these contracts and do not believe any discounts will be given through the end of the contract periods. For diagnostic testing services sold directly to patients or physician offices that require processing by a third-party CLIA-certified lab, we recognize revenue once the lab has completed and the test results are made available to the ordering physician on behalf of the patient. For services related to contract manufacturing, revenue is recognized when the service has been performed. Services for some contract works are invoiced and recognized as the project progresses. SHARE-BASED COMPENSATION We follow the guidance of ASC 718, "Share-based Compensation" ("ASC 718"), which requires the use of the fair-value based method to determine compensation for all arrangements under which employees and others receive shares of stock or equity instruments (options). The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses assumptions for expected volatility, expected dividends, expected forfeiture rate, expected term, and the risk-free interest rate. We have not paid dividends historically and do not expect to pay them in the foreseeable future. Expected volatilities are based on weighted averages of the historical volatility of our common stock estimated over the expected term of the options. The expected forfeiture rate is based on historical forfeitures experienced. The expected term of options granted is derived using the "simplified method" which computes expected term as the average of the sum of the vesting term plus the contract term as historically we had limited exercise activity surrounding its options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term. The grant date fair value of the award is recognized under the straight-line attribution method. VALUATION OF INVENTORIES, NET Our inventories are made up of raw materials, work in progress, and finished goods and are valued at the lower of cost (determined using a combination of specific lot identification and the first-in, first-out methods) or net realizable value. We record valuation reserves for inventory items with excess quantities and obsolescence exposure. These reserves are estimates of a reduction in value to reflect inventory valuation at the lower of cost or net realizable value. 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. Our inventory valuation reserves totaled $394,000 and $471,000 as of May 31, 2026 and 2025, representing approximately 19% and 24% of our inventory, respectively. RECENT ACCOUNTING PRONOUNCEMENTS Recent ASU's issued by the Financial Accounting Standards Board ("FASB") and guidance issued by the SEC did not, or are not believed by the management to, have a material effect on our present or future consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." The ASU enhances income tax disclosures, primarily related to the rate reconciliation and income taxes paid. The amendments are effective for public business entities for annual periods beginning after December 15, 2024 and are applied prospectively, with retrospective application permitted. We adopted ASU 2023-09 during the fiscal year ended May 31, 2026. The adoption did not have a material impact on our consolidated financial statements but resulted in additional income tax disclosures (see Note 7 of our consolidated financial statements). In November 2024, the FASB issued ASU 2024-03, "Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses," as subsequently clarified by ASU 2025-01. The amendments require additional disclosure of certain expense categories, including purchases of inventory, employee compensation, depreciation, intangible asset amortization and other specified expenses included within relevant income statement captions. For public business entities, the amendments are effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption is permitted. We are currently evaluating the effect of adopting this guidance on our disclosures. In July 2025, the FASB issued ASU 2025-05, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets." The amendments provide a practical expedient for all entities when estimating expected credit losses on current accounts receivable and current contract assets arising from transactions accounted for under Topic 606. The amendments are effective for annual reporting periods beginning after December 15, 2025, including interim periods within those annual reporting periods, with early adoption permitted. The Company may adopt the guidance beginning in fiscal 2027 and is currently evaluating its impact on its consolidated financial statements and disclosures. In December 2025, the FASB issued ASU 2025-11, "Interim Reporting (Topic 270): Narrow-Scope Improvements." The amendments clarify and consolidate interim disclosure requirements and establish a disclosure principle regarding events and changes occurring since the most recent annual reporting period that have a material effect on an entity. For public business entities, the amendments are effective for interim reporting periods within annual reporting periods beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the effect of adopting this guidance on our interim financial statement disclosures.

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