-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IAREK8rY5JDWGRRd5gNLVZZGDTCet6bLxIznXabBR/zWEPKy/BCc84RiKl8F9eo8 WQRyTRhdSIwdTJNh3H7mhA== 0001019687-07-001090.txt : 20070416 0001019687-07-001090.hdr.sgml : 20070416 20070416161718 ACCESSION NUMBER: 0001019687-07-001090 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20070228 FILED AS OF DATE: 20070416 DATE AS OF CHANGE: 20070416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMERICA INC CENTRAL INDEX KEY: 0000073290 STANDARD INDUSTRIAL CLASSIFICATION: DENTAL EQUIPMENT & SUPPLIES [3843] IRS NUMBER: 952645573 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-08765 FILM NUMBER: 07768371 BUSINESS ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 BUSINESS PHONE: 9496452111 MAIL ADDRESS: STREET 1: 1533 MONROVIA AVENUE CITY: NEWPORT BEACH STATE: CA ZIP: 92663 FORMER COMPANY: FORMER CONFORMED NAME: NMS PHARMACEUTICALS INC DATE OF NAME CHANGE: 19871130 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR MEDICAL SYSTEMS INC DATE OF NAME CHANGE: 19830216 FORMER COMPANY: FORMER CONFORMED NAME: NUCLEAR INSTRUMENTS INC DATE OF NAME CHANGE: 19720508 10QSB 1 biomerica_10qsb-022807.txt FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended February 28, 2007 Commission File No. 0-8765 ----------------- ------ BIOMERICA, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2645573 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1533 Monrovia Avenue, Newport Beach, California 92663 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (949) 645-2111 - -------------------------------------------------------------------------------- (Not applicable) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as Defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 5,939,214 shares of common stock as of April 13, 2007. 1 BIOMERICA, INC. INDEX PART I Item 1. Consolidated Financial Statements: Consolidated Statements of Operations and Comprehensive Loss (unaudited) - Three and Nine Months Ended February 28, 2007 and 2006........................................3 & 4 Consolidated Balance Sheet (unaudited) - February 28, 2007.................................................5 & 6 Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended February 28, 2007 and 2006......................7 & 8 Notes to Consolidated Financial Statements (unaudited).............9-22 Item 2. Management's Discussion and Analysis of Financial Condition and Selected Financial Data.......................................23-24 Item 3. Quantitative and Qualitative Disclosures about Market Risk...........25 Item 4. Controls and procedures..............................................25 PART II Other Information....................................................26 Item 1. Legal Proceedings....................................................26 Item 2. Changes in Securities and Use of Proceeds............................26 Item 3. Defaults upon Senior Securities......................................26 Item 4. Submission of Matters to a Vote of Security Holders..................26 Item 5. Other Information....................................................26 Item 6. Exhibits and Reports on Form 8-K.....................................26 Signatures...........................................................27 2 THE DECONSOLIDATION OF LANCER ORTHODONTICS FROM BIOMERICA OCCURRED DECEMBER 1, 2005. THEREFORE, THE NINE MONTHS ENDED FEBRUARY 28, 2006, INCLUDES THE OPERATIONS OF BIOMERICA FOR THE NINE MONTHS THEN ENDED AND SIX MONTHS OF OPERATIONS FOR LANCER ORTHODONTICS. THE NINE MONTHS ENDED FEBRUARY 28, 2007 INCLUDES THE OPERATIONS OF BIOMERICA ONLY. THE THREE MONTHS ENDED FEBRUARY 28, 2007 AND 2006 INCLUDES THE OPERATIONS OF BIOMERICA ONLY. IN ORDER TO UNDERSTAND HOW THE BIOMERICA OPERATIONS COMPARE, PLEASE REFER TO NOTE 2 FOR A BREAKDOWN OF THE RESULTS BY COMPANY FOR THE PERIOD ENDED FEBRUARY 28, 2006. PART I - FINANCIAL INFORMATION SUMMARIZED FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) (SEE NOTE 2) Nine Months Ended Three Months Ended February 28, February 28, 2007 2006 2007 2006 ----------- ----------- ----------- ----------- Net sales ..................................................... $ 3,797,051 $ 5,717,260 $ 1,311,609 $ 998,070 Cost of sales ............................................ (2,427,578) (3,820,715) (836,204) (649,468) ----------- ----------- ----------- ----------- Gross profit ............................................. 1,369,473 $ 1,896,545 $ 475,405 $ 348,602 ----------- ----------- ----------- ----------- Operating Expenses: Selling, general and administrative ...................... 943,601 1,866,470 308,403 272,890 Research and development ................................. 170,759 193,360 71,246 38,779 ----------- ----------- ----------- ----------- 1,114,360 2,059,830 379,649 311,669 ----------- ----------- ----------- ----------- Operating income (loss) from continuing operations ............ 255,113 (163,285) 95,756 36,933 ----------- ----------- ----------- ----------- Other Expense (income): Interest expense ......................................... 22,626 36,751 6,385 7,248 Other income, net ........................................ (40,040) (45,575) (40,005) (730) ----------- ----------- ----------- ----------- (17,414) (8,824) (33,620) 6,518 ----------- ----------- ----------- ----------- Income (loss) from continuing operations, before minority interest in net loss of consolidated subsidiaries and income taxes ............................... 272,527 (154,461) 129,376 30,415 Minority interest in net losses of consolidated subsidiary .... -- 251,670 -- -- ----------- ----------- ----------- ----------- Income from continuing operations, before income taxes ......................................... 272,527 97,209 129,376 30,415 Income tax expense ............................................ 8,006 2,400 8,006 800 ----------- ----------- ----------- ----------- Net income from continuing operations ......................... 264,521 94,809 121,370 29,615 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. PLEASE REFER TO NOTE 2. 3 BIOMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS - Continued (UNAUDITED) (SEE NOTE 2) Nine Months Ended Three Months Ended February 28, February 28, 2007 2006 2007 2006 ------------ ------------ ------------ ------------ Discontinued operations: Income from discontinued operations, net ....................... (27,869) -- -- -- ------------ ------------ ------------ ------------ Net income ................................................ 292,390 94,809 121,370 29,615 Other comprehensive loss, net of tax: Unrealized loss on available-for-sale securities .................................................... (36,868) (240,100) (8,662) (236,286) ------------ ------------ ------------ ------------ Comprehensive income (loss) income ............................... $ 255,522 $ (145,291) $ 112,708 $ (206,671) ============ ============ ============ ============ Basic net income per common share: Net income from continuing operations ................ $ .04 $ .01 $ .02 $ .00 Net income from discontinued operations .............. .00 .00 .00 .00 ------------ ------------ ------------ ------------ Basic net income per common share ......................... $ .04 $ .01 $ .02 $ .00 ============ ============ ============ ============ Diluted net income per common share Net income from continuing operations ................ $ .04 $ .01 $ .02 $ .00 Net income from discontinued operations .............. .00 .00 .00 .00 ------------ ------------ ------------ ------------ Diluted net income per common share ....................... $ .04 $ .01 $ .02 $ .00 ============ ============ ============ ============ Weighted average number of common and common equivalent shares: Basic ....................................................... 5,925,860 5,753,831 5,939,214 5,752,912 ============ ============ ============ ============ Diluted ..................................................... 6,368,245 6,617,955 6,371,192 6,604,035 ============ ============ ============ ============ THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. PLEASE REFER TO NOTE 2. 4 BIOMERICA, INC. BALANCE SHEET (UNAUDITED) February 28, 2007 ---------- Assets Current Assets Cash and cash equivalents ............................................. $ 66,491 Available for-sale securities ......................................... 588 Accounts receivable, less allowance for doubtful accounts of $23,415 .. 674,484 Inventories, net of reserve of $2,864 ................................. 1,411,066 Notes receivable ...................................................... 2,850 Prepaid expenses and other ............................................ 57,356 Net assets from discontinued operations ............................... 598 ---------- Total Current Assets ............................................ 2,213,433 Inventory, non-current .................................................... 20,529 Available-for-sale securities ............................................. 375,959 Property and Equipment, net of accumulated depreciation and amortization .. 179,514 Intangible assets, net of accumulated amortization ........................ 3,882 Other Assets .............................................................. 13,419 ---------- $2,806,736 ========== The accompanying notes are an integral part of these financial statements. 5 BIOMERICA, INC. CONSOLIDATED BALANCE SHEET - Continued (UNAUDITED) February 28, 2007 ------------ Liabilities and Shareholders' Equity Current Liabilities Accounts payable and accrued liabilities ...................... $ 720,580 Accrued compensation .......................................... 487,451 Current portion of shareholder loan ........................... 234,426 Capital lease - short-term portion ............................ 4,054 ------------ Total Current Liabilities ................................ 1,446,511 Capital lease-long-term portion .................................... 5,512 Shareholders' Equity Common stock, $0.08 par value authorized 25,000,000 shares, subscribed or issued and outstanding 5,939,214 .............. 475,136 Additional paid-in-capital .................................... 17,135,886 Accumulated other comprehensive loss .......................... (263,839) Accumulated deficit ........................................... (15,992,470) ------------ Total Shareholders' Equity ......................................... 1,354,713 ------------ Total Liabilities and Equity ....................................... $ 2,806,736 ============ The accompanying notes are an integral part of these financial statements. 6 BIOMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine months ended February 28, 2007 2006 --------- --------- Cash flows from operating activities: Net income from continuing operations ................................... $ 264,521 $ 94,809 Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization ...................................... 41,896 107,597 Minority interest in net loss of consolidated subsidiary ........... -- (251,670) Common stock, warrants and options issued for services rendered .... 5,357 3,739 Provision for losses on accounts receivable ........................ 16,385 16,092 (Gain) loss on disposal of equipment ............................... (40,000) 1,704 Provision for losses on inventory .................................. -- (714) Changes in current assets and liabilities: Accounts receivable .............................................. (130,149) (417,219) Inventories ...................................................... (303,565) (311,394) Prepaid expenses and other current assets ........................ (2,538) (22,098) Accounts payable and other accrued liabilities ................... 139,813 340,800 Accrued compensation ............................................. 4,143 2,065 --------- --------- Net cash (used in) operating activities ................................. (4,137) (436,289) --------- --------- Cash flows from investing activities: Purchases of property and equipment ................................ (100,138) (247,577) Proceeds from sale of equipment .................................... 50,000 -- --------- --------- Net cash used in investing activities ................................... (50,138) (247,577) --------- --------- Cash flows from financing activities: Payments on capital lease .......................................... (2,722) -- Change in minority interest ........................................ -- 37,250 Decrease in shareholder loan ...................................... (26,516) (33,485) Exercise of stock options .......................................... 5,130 398 Increase in line of credit at subsidiary ........................... -- 65,000 Payments of capital leases at subsidiary ........................... -- (25,799) Private placement at subsidiary .................................... -- 469,800 Proceeds from sale of common stock ................................. 24,960 -- --------- --------- Net cash provided by financing activities ............................... 852 513,164 --------- --------- Net decrease in cash and cash equivalents ............................... (53,423) (170,702) Net decrease in cash-reclassification of Lancer Orthodontics Inc. to the cost method ......................... -- (134,003) Cash at beginning of period ............................................. 119,914 351,881 --------- --------- Cash at end of period ................................................... $ 66,491 $ 47,176 ========= ========= Supplemental Disclosure of Cash Flow Information Cash Paid During The Year For: Interest ........................................................... $ 21,675 $ 36,751 ========= ========= Income taxes ....................................................... $ 1,600 $ 2,400 ========= ========= Supplemental disclosures on non-cash investing & financing activity Change in unrealized holding loss on available-for-sale securities .... $ (36,868) $(240,626) ========= ========= Change in minority interest due to subsidiary stock issuance .......... $ -- $ (57,769) ========= ========= Capital lease for purchase of fixed assets ............................ $ 12,841 $ 360,593 ========= ========= Increase in investment due to de-consolidation of Lancer .............. $ -- $ 632,732 ========= ========= The accompanying notes are an integral part of these financial statements. 7 BIOMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine months ended February 28, 2007 2006 ----------- ----------- Changes due to de-consolidation of Lancer Accounts Receivable ......................... $ -- $ 1,590,504 Inventories .................................. -- 1,838,698 Prepaid expenses and other current assets .... -- 90,676 Net fixed assets ............................. -- 1,197,310 Other ........................................ -- 48,821 ----------- ----------- Subtotal assets ................................... -- 4,766,009 ----------- ----------- Accounts payable and other accrued liabilities -- 899,483 Line of credit ............................... -- 240,000 Capital lease ................................ -- 334,794 Subscribed stock ............................. -- 85,850 Common stock ................................. -- 5,670,565 Accumulated deficit .......................... -- (2,330,680) ----------- ----------- Subtotal liabilities & equity ..................... -- (4,900,012) ----------- ----------- Net decrease in cash ............................. $ -- $ (134,003) =========== =========== The accompanying notes are an integral part of these financial statements. 8
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) February 28, 2007 (1) Reference is made to Note 2 of the Notes to Consolidated Financial Statements contained in Biomerica, Inc.'s (the "Company") Annual Report on Form 10-KSB for the fiscal year ended May 31, 2006, for a summary of significant accounting policies utilized by the Company. (2) As of February 28, 2007 the Company had cash and available-for-sale securities in the amount of $67,079 and working capital of $766,922. The Company also has $375,959 of long term available-for-sale securities of Lancer Ortho- dontics. This stock is restricted and should the Company desire to sell this stock on the open market, it may be subject to certain trading restrictions as imposed by the Federal Securities Act of 1933. These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has had operating and liquidity concerns due to historically reporting net losses and negative cash flows from operations. Biomerica's shareholder's line of credit expired on September 13, 2003 and was not renewed. The unpaid principal and interest was converted into a note payable in the amount of $313,318 bearing interest at 8% and payable September 1, 2004. The due date on this note has been extended each year and is currently due September 1, 2007. This loan has been subordinated to the Commercial Bank of California loans dated February 20, 2007. Minimum payments are $4,000 per month plus an additional $2,000 per month (reduced from $3,500 per month at September 1, 2006), depending on quarterly results of the Company. The Company is currently out of compliance with this agreement due to the fact that of the additional payments for fiscal 2006 and 2007, only $5,250 has been paid. As of February 28, 2007 $234,426 in principal was owed. Until two years ago Biomerica had suffered substantial recurring losses from operations. Biomerica has funded its operations through profits as well as debt and equity financings for the past three years and has recently obtained a commercial line of credit from a bank which will help fund operations and growth. Operations of ReadyScript, which was a contributor to the Company's consolidated losses in prior fiscal years, were discontinued in May 2001. Since then, certain ReadyScript liabilities were forgiven and thus income from discontinued operations was recorded. The subsidiary is being reported in the financial statements as a discontinued operation because it is no longer an operating entity. In the last several years the Company has been focusing on reducing costs where possible and concentrating on its core business to increase sales. Management believes that cash flows from current operations will be sufficient to fund operations for at least the next twelve months. Should the Company have a downturn in sales or unanticipated, increased expenses, the result for the Company could be the inability to continue as a going concern. Our independent registered public accounting firm has concluded that there is substantial doubt as to the Company's ability to continue as a going concern for a reasonable period of time, and have, therefore modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 9 The following tables present on a pro forma basis a breakdown by company of the Statement of Operations for the nine months ended February 28, 2006 in order that the operations of Biomerica for that period may be compared to the nine months ended February 28, 2007 on pages 3 and 4. PRO FORMA STATEMENT OF OPERATIONS BY COMPANY (UNAUDITED) Nine Months Ended February 28, 2006 ----------------- Intercompany Pro-forma Actual Eliminations Lancer Biomerica - --------------------------------------------------------------------------------------------------------------------------- NET SALES $ 5,717,260 -- $ (2,925,038) $ 2,792,222 COST OF SALES 3,820,715 15,780 (1) (2,190,495) 1,646,000 - --------------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 1,896,545 (15,780) (1) (734,543) 1,146,222 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: SELLING, GENERAL AND ADMIN 1,866,470 -- (1,029,059) 837,411 RESEARCH AND DEVELOPMENT 193,360 -- (42,470) 150,890 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 2,059,830 -- (1,071,529) 988,301 - --------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) (163,285) (15,780) (1) 336,986 157,921 OTHER EXPENSE (INCOME) Interest 36,751 -- (14,456) 22,295 Other expense (income) (45,575) (15,780) (2) 33,096 (28,259) - --------------------------------------------------------------------------------------------------------------------------- (8,824) (15,780) (2) 18,640 (5,964) - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS BEFORE INTEREST IN NET INCOME (LOSS) OF CONSOLIDATED SUBSIDIARIES AND INCOME TAXES (154,461) -- 318,346 163,885 MINORITY INTEREST IN NET LOSS (INCOME) OF LANCER 251,670 (319,146) (3) -- -- 67,476 (4) - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 97,209 (251,670) 318,346 163,885 - --------------------------------------------------------------------------------------------------------------------------- INCOME TAX EXPENSE 2,400 -- (800) 1,600 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 94,809 $ (251,670) $ 319,146 $ 162,285 =========================================================================================================================== (1) To record the charge for rent by Lancer at the manufacturing facility in Mexico which was eliminated in consolidation. (2) To record the income from Biomerica received by Lancer for rent at the Mexico facility, which was eliminated in consolidation. (3) To de-consolidate Lancer's loss. (4) Elimination of Biomerica's portion of Lancer's operations as if the termination of the voting agreement occurred May 31, 2005. 10
(3) In December 2004, the Financial Accounting Standards Board ("FASB") Issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting For Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statement (with limited exceptions). The amount of compensation cost is measured based on the grant- date fair value of the equity or liability instruments issued. Compensation cost is recognized over the period that an employee provides service in exchange for the award. As of the beginning of fiscal 2007, June 1, 2006, the Company was required to account for stock-based compensation using this method. The Black Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. If the Company had accounted for its options in accordance with SFAS 123(R) in fiscal 2006, the total value of options granted during the nine month period ended February 28, 2006 would have been expensed over the vesting period of the options. Thus, the Company's consolidated net income would have been as follows: Net Income 2006 - ------------------------------------------------------------------------------- As reported $ 94,809 Add: Stock-based employee compensation expense included in reported net income 702 Less: Stock-based employee compensation expense determined using fair value based method for all awards (17,483) - ------------------------------------------------------------------------------- Pro forma $ 78,028 =============================================================================== Pro forma net income from continuing operations per share - basic $ .01 =============================================================================== Pro forma net income from continuing operations per share - diluted $ .01 =============================================================================== For the nine months ended February 28, 2007, the Company expensed approximately $5,357 of stock option expense due to SFAS 123(R) in its financial statements. 11 (4) The following summary presents the options granted, exercised, expired, and outstanding as of February 28, 2007: Weighted Average Number of Options and Warrants Exercise Employee Non-employee Total Price ---------- ---------- ---------- -------- Outstanding May 31, 2006 1,748,284 152,666 1,900,950 $ 0.64 Granted 60,000 -- 60,000 0.56 Exercised (16,533) (16,533) 0.31 Expired or cancelled (190,668) ( 4,000) (194,668) 0.69 ---------- ---------- ---------- -------- Outstanding February 28, 2007 1,601,083 148,666 1,749,749 $ 0.60 ========== ========== ========== ======== (5) The information set forth in these condensed consolidated statements is unaudited and may be subject to normal year-end adjustments. The information reflects all adjustments which, in the opinion of management, are necessary to present a fair statement of the consolidated results of operations of Biomerica, Inc., for the periods indicated. It does not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flow in conformity with generally accepted accounting principles. (6) Consolidated results of operations for the interim periods covered by this report may not necessarily be indicative of results of operations for the full fiscal year. (7) Reference is made to Note 3 of the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 2006, for a description of the investments in affiliates and consolidated subsidiaries. (8) Reference is made to Notes 5 & 9 of the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 2006, for information on commitments and contingencies. (9) Aggregate cost exceeded market value of available-for-sale securities by approximately $263,839 at February 28, 2007. (10) Earnings Per Share In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE ("EPS"). SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. 12 The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted EPS computations. Nine Months Ended Three Months Ended February 28, 2007 2006 2007 2006 - ---------------------------------------------------------------------------------------------------------- Numerator: Income from continuing operations $ 264,521 $ 94,809 $ 121,370 $ 29,615 Income from discontinued operations 27,869 -- -- -- - ------------------------------------------------------------------------------------------------------- Numerator for basic and diluted net income per common share $ 292,390 94,809 121,370 29,615 ======================================================================================================= Denominator for basic net income per common share 5,925,860 5,753,791 5,939,214 5,752,912 Effect of dilutive securities: Options and warrants 442,385 864,164 431,978 851,123 - ------------------------------------------------------------------------------------------------------- Denominator for diluted net income per common share 6,368,245 6,617,955 6,371,192 6,604,035 ======================================================================================================= Basic net income per common share: Income from continuing operations $ .04 $ .01 $ .02 $ -- Income from discontinued operations -- -- -- -- - ------------------------------------------------------------------------------------------------------- Basic net income per common share $ .04 $ .01 $ .02 $ -- ======================================================================================================= Diluted net income per common share: Income from continuing operations $ .04 $ .01 $ .02 $ -- Net income from discontinued operations -- -- -- -- - ------------------------------------------------------------------------------------------------------- Diluted net income per common share $ .04 $ .01 $ .02 $ -- =======================================================================================================
(11) In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS No. 123R). SFAS No. 123R revised SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R requires compensation costs related to share-based payment transactions to be recognized in the financial statement (with limited exceptions). The amount of compensation cost ismeasured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost is recognized over the period that an employee provides service in exchange for the award. 13 In March 2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107 ("SAB No. 107"), Share-Based Payment, providing guidance on option valuation methods, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, and the disclosures in MD&A subsequent to the adoption. The Company has provided SAB No. 107 required disclosures upon adoption of SFAS No. 123R on June 1, 2006. In April 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for SFAS No. 123R. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company adopted SFAS No. 123R on June 1, 2006. In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Errors Corrections, a replacement of APB Opinion No. 20 and FAS No. 3. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impractical. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No.154 improves the financial reporting because its requirements enhance the consistency of financial reporting between periods. The Company does not believe the adoption of this standard will have an impact on its results of operations. In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140 ("SFAS, 155"). This statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interest in Securitized Financial Assets. SFAS No. 155: a) permits fair value remeasurement for any hybrid financial instrument that contains an imbedded derivative that otherwise would require bifurcation; (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; (c) establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an imbedded derivative requiring bifurcation; (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, (e) eliminates restriction on a qualifying special-purpose entity's ability to hold passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. SFAS No. 155 also requires presentation within the financial statements that identifies those hybrid financial instruments for which the fair value election has been applied and information on the income statement impact of the changes in fair value of those instruments. The Company is required to apply SFAS No. 155 to all financial instruments acquired, issued or subject to a remeasurement event beginning June 1, 2007. The Company does not expect the adoption of SFAS No. 155 to have a material impact on the Company's financial statements. 14 In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). This Statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. This Statement permits, but does not require, the subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value. The Company would be required to adopt this statement as of June 1, 2007. The Company has not yet determined the impact, if any, of adopting SFAS 156 on its consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, Defining Fair Value Measurement. The purpose of SFAS No. 157 is to eliminate the diversity in practice that exists due to the different definitions of fair value and the limited guidance for applying those definitions in GAAP that are dispersed among the many accounting pronouncements that require fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not yet determined the impact, if any, of adopting SFAS 157 on its consolidated financial statements. In September 2006, the FASB issued SFAS No. 158, Employers' Accounting For Defined Benefit Pension and Other Postretirement Plans. Effective in calendar- year 2006 (with certain exceptions) for public companies and calendar-year 2007 (with certain exceptions) for private companies, SFAS No. 158 represents the "first phase" of a planned "two-phased" project where the FASB is working on improving financial reporting related to pension and other postretirement (OPB) plans. SEC registrants have been required to disclose the "expected impact" of implementing SFAS No. 158 in filings made after September 30, 2006 and before the effective date of SFAS No. 158. The Company does not expect the adoption of SFAS No. 158 to have a material impact on the Company's financial statements. In July 2006, the FASB issued FIN 48, entitled Accounting for Uncertainty in Income Taxes. FIN 48 interprets the guidance in SFAS No. 109, entitled Accounting for Income Taxes. Through the interpretive guidance, the FASB clarifies the accounting for uncertainty in income taxes, provides recognition and measurement guidance related to accounting for income taxes, and provides guidance related to classification and disclosure of income tax-related financial statement components. The Company has not yet determined the impact, if any, of adopting FIN 48 on its consolidated financial statements. 15 (12) Financial information about consolidated foreign and domestic operations and export sales is as follows. The period ended February 28, 2007, includes nine months of sales for Biomerica. The period ended February 28, 2006 shows consolidated sales for the nine months ended February 28, 2006, as well as a breakdown by company: For the nine months ended 2/28/07: Consolidated Lancer Biomerica ------------ ----------- ----------- Revenues from sales to unaffiliated customers: United States $ 994,000 -- $ 994,000 Asia 387,000 -- 387,000 Europe 1,854,000 -- 1,854,000 South America 56,000 -- 56,000 Oceania 447,000 -- 447,000 Other 59,000 -- 59,000 ----------- ----------- ----------- $ 3,797,000 -- $ 3,797,000 =========== =========== =========== For the nine months ended 2/28/06: Consolidated Lancer Biomerica ------------ ----------- ----------- Revenues from sales to unaffiliated customers: United States $ 2,286,000 ($1,584,000) $ 702,000 Asia 267,000 (23,000) 244,000 Europe 2,010,000 (678,000) 1,332,000 South America 441,000 (379,000) 62,000 Oceania 427,000 (17,000) 410,000 Other 286,000 (244,000) 42,000 ----------- ----------- ----------- $ 5,717,000 ($2,925,000) $ 2,792,000 =========== =========== ===========
No other geographic concentrations exist where net sales exceed 10% of total net sales. (13) During fiscal 2006 an employee of the Company exercised a stock option for 750 shares at the purchase price of $.20 per share and 750 shares at the purchase price of $.33 per share. The total proceeds to the Company was $398. Options for an additional 12,750 shares were exercised at the end of February 2006. Of these shares, 9,000 were at the purchase price of $.20 per share and 3,750 were at a price of $.33 per share. The proceeds to the Company for these options was $3,038. In June 2005 the Company granted 111,000 stock options to purchase shares of common stock at an exercise price of $.53 to several of the Company's officers. The options vest over four years and have a term of five years. Management assigned a value of $37,405 to these options. 16 On September 14, 2005, the Company granted 10,000 stock options to purchase shares of common stock at an exercise price of $.47 to an employee of the Company. The options vest over four years and have a term of five years. Management assigned a value of $3,200 to these options. On February 28, 2006, the Company granted 20,000 stock options to purchase shares of common stock at an exercise price of $.48 to employees of the Company. The options vest over four years and have a term of five years. Management assigned a value of $5,520 to these options. In May 2006 the Company granted 498,500 stock options to purchase shares of common stock at an exercise price of $.40 per share to various employees, consultants, officers and directors. The options vest over three years, and have a term of five years. Management assigned a value of $118,643 to these options. In May 2006 the Company granted warrants to purchase 52,000 shares of restricted common stock at an exercise price of $.65 as part of the private placement conducted at that time. The options vested immediately and have a term of five years. Management assigned a value of $9,880 to these warrants. In July 2006 the board of directors granted a stock option for 10,000 options to an employee of the Company. The options vested one quarter immediately and then will vest one quarter per year thereafter. The option is at the exercise price of $.50 per share and expires in five years. Management assigned a value of $2,830 to this option. In February 2007 the board of directors granted a stock option for 50,000 options to directors of the Company. The options vested one quarter immediately and one quarter vesting in May 2007. One quarter will vest each year thereafter on the grant date. The exercise price is $.57 per share and the option expires in five years. Management assigned a value of $15,900 to these options. Options or warrants granted are assigned values according to current market value, using the Black-Scholes model for option valuation. The term used in the calculation of the options or warrants is the vesting period. A discount rate equivalent to five-year (or other life of the option or warrant) Treasury constant maturity interest rates is utilized. The historical volatility of the stock is calculated using weekly historical closing prices for the prior year as reported by Yahoo Finance. For purposes of the SFAS 123 footnote disclosure, the Black-Scholes Model is also used for calculating employee options and warrants valuations. When shares are issued for services or other non-cash consideration, fair value is measured using the current market value on the day of the Board of Directors approval of such issuance. During the quarter ended February 28, 2006, the Company recognized an increase in its accumulated other comprehensive loss in the amount of $236,286 which was a result of the write-down of the stock which the Company owns in Lancer Orthodontics. This occurred because the Company de-consolidated its financials from Lancer, as discussed in Note 1, and the investment was written down to current market value as reported on Yahoo Finance (Lancer is traded on the Pink Sheets under the symbol LANZ.PK). Previous to that time, the investment was eliminated in consolidation. 17 (14) Reportable business segments for the nine months and three months ended February 28, 2007 and 2006 are as follows. THE NINE MONTH FIGURES FOR FISCAL 2006 INCLUDE SIX MONTHS OF SALES FOR LANCER ORTHODONTICS SINCE DECONSOLIDATION OCCURRED DECEMBER 1, 2005. THE NINE MONTHS ENDED FEBRUARY 28, 2007 AND THE THREE MONTHS ENDED FEBRUARY 28, 2007 AND 2006 INCLUDE SALES FOR BIOMERICA ONLY. Nine Months Three Months Ended February 28, Ended February 28, --------------------------- ---------------------------- 2007 2006 2007 2006 ----------- ----------- ------------ ----------- Domestic sales: Orthodontic products $ -- $ 1,584,000 $ -- $ -- =========== =========== ============ =========== Medical diagnostic products $ 994,000 $ 702,000 $ 284,000 $ 323,000 =========== =========== ============ =========== Foreign sales: Orthodontic products $ -- $ 1,341,000 $ -- $ -- =========== =========== ============ =========== Medical diagnostic products $ 2,803,000 $ 2,090,000 $ 1,028,000 $ 675,000 =========== =========== ============ =========== Net sales: Orthodontic products $ -- $ 2,925,000 $ -- $ -- Medical diagnostic products 3,797,000 2,792,000 1,312,000 998,000 ----------- ----------- ------------ ----------- Total $ 3,797,000 $ 5,717,000 $ 1,312,000 $ 998,000 =========== =========== ============ =========== Operating gain (loss) income: Orthodontic products $ -- $ (321,000) $ -- $ -- Medical diagnostic products 255,000 158,000 96,000 37,000 ----------- ----------- ------------ ----------- Total $ 255,000 $ (163,000) $ 96,000 $ 37,000 =========== =========== ============ =========== Gain from discontinued segment: ReadyScript $ 27,869 $ -- $ -- $ -- ----------- ----------- ------------ ----------- Total $ 27,869 $ -- $ -- $ -- =========== =========== ============ ===========
18 As of February 28, 2007 2006 ---------- ---------- Domestic long-lived assets: Medical diagnostic products $ 150,000 $ 103,000 ---------- ---------- Total $ 150,000 $ 103,000 ========== ========== Foreign long-lived assets: Medical diagnostic products $ 30,000 $ 20,000 ---------- ---------- Total $ 30,000 $ 20,000 ========== ========== Total assets: Medical diagnostic products $2,807,000 $2,346,000 ---------- ---------- Total $2,807,000 $2,346,000 ========== ========== Capital expenditures: Orthodontics products $ -- $ 575,000 Medical diagnostic products 100,000 33,000 ---------- ---------- Total $ 100,000 $ 608,000 ========== ========== The net sales as reflected above consist of sales of unaffiliated customers only as there were no significant intersegment sales during the nine months ended February, 2007 and 2006. (15) In April 2003, Lancer de Mexico entered into a manufacturing subcontractor agreement with Biomerica, Inc., to provide manufacturing services in Mexicali, Mexico. The agreement requires reimbursement from Biomerica for discrete expenses such as payroll, shipping, and customs fees; the lease is $2,335 and service fees are approximately $2,900 per month. (16) On July 29, 2005, Biomerica entered into an agreement for the research, development and transfer of certain technology. The total of the project is estimated to be $55,000. (17) In August 2006, the Company and the holder of the Note payable- shareholder agreed to the extension of the note due date until September 1, 2007, at the same terms and conditions as the previous agreement except that additional payments of $3,500 per month, contingent upon certain earnings, have been reduced to $2,000 per month. 19 (18) Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a directors and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of February 28, 2007. The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, and customers, landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of February 28, 2007. As a result of the Company's deconsolidation of Lancer which occurred December 1, 2005, both companies have been required to purchase their own Directors' and Officers' insurance, rather than have a combined policy. (19)Commitments and Contingencies The Company entered into an agreement with the Commercial Bank of California for a commercial line of credit dated February 20, 2007. The maximum principal amount on the line of credit is $200,000. The principal balance owed on the loan will be due September 1, 2008 with monthly interest payments of all unpaid accrued interest at the rate of 9.75%. The loan is collateralized by all assets of the Company. The Company has not yet borrowed any funds on this line of credit. The Company entered into an agreement with the Commercial Bank of California for an equipment line of credit dated February 20, 2007. The maximum principal amount on this line of credit shall be $200,000. Nine monthly consecutive interest payments, beginning April 1, 2007, with an initial interest rate of 9.500% shall be due on the loan balance. For a balance of $200,000 forty seven monthly consecutive principal and interest payments in the initial amount of $5,038.21 each, beginning January 1, 2008 will be due. The line of credit shall be used for equipment. As of April 16, 2007 the Company has drawn $61,670 on this line which has been used as a down-payment on equipment which will be delivered later in the year. The Company also signed a Subordination Agreement dated February 20, 2007 wherein the Company and the Company's existing note payable holder agreed that the collateral for the note payable of $234,426 will be subordinate to the $200,000 line of credit with the Commercial Bank of California. The Company signed a Second Amendment of the Note, Loan and Modification Agreement with a shareholder/officer/director ("Moore") dated February 20, 2007, wherein Moore agreed to enter into the Subordination Agreement with the Commercial Bank of California, and the Company agreed to increase the existing collateral to include the Lancer common stock (all of which is subordinated to the bank per the Subordination Agreement). In addition, the Company agreed to bring the past due amounts on the existing note payable agreement up to date by August 31, 2007. Moore also was granted the right to approve of any increase in the line of credit which may be offered in the future (while the shareholder note payable is unpaid). Amounts due on the note that are contingent upon certain performance by the Company have been reduced from $3,500 per month to $2,000. 20 According to the terms of the agreement with Commercial Bank of California, the Company must comply with the following financial covenants and ratios: Cash flow/Current Maturity (LTD) Ratio: Maintain a ratio of Cash Flow/Current Maturity (LTD) in excess of 1.300 to 1.000. Debt/Worth Ratio: Maintain a ratio of Debt/Worth not in excess of 2.000 to 1.000. (20) 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. The preparation of these consolidated financial statements requires estimates and assumptions that affect the reported amounts and disclosures. 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. Although we believe that our judgments and estimates are appropriate and correct, actual future results may differ from our estimates. In general the critical accounting policies that may require judgments or estimates relate specifically to the recognition of revenue, the Allowance for Doubtful Accounts, Inventory Reserves for Obsolescence and Declines in Market Value, Impairment of Long-Lived Assets, Stock Based Compensation and Deferred Income Tax Valuation, Valuation of Available-for-sale Securities and Allowances. We recognize product revenues when an arrangement exists, delivery has occurred, the price is determinable and collection is reasonably assured. The 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 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. In the past we have been in a loss position for tax purposes, and have established a valuation allowance against deferred tax assets, as we do not believe it is likely that we will generate sufficient taxable income in future periods to realize the full benefit of our deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment. At February 28, 2007, all of our deferred tax assets were reserved. Accruals are made for specific tax exposures and are generally not material to our operating results or financial position, nor do we anticipate material changes to these reserves in the near future. We have provided a full valuation reserve related to our substantial deferred tax assets. In the future, if sufficient evidence of our ability to generate sufficient future taxable income in certain tax jurisdictions becomes apparent, we may be required to reduce our valuation allowances, resulting in income tax benefits in our consolidated statement of operations. We evaluate the realizability of the deferred tax assets and assess the need for valuation allowance quarterly. The utilization of the net operating loss carryforwards could be substantially limited due to restrictions imposed under federal and state laws upon a change of ownership. (21) Risks and Uncertainties License Agreements - Certain of the Company's sales of products are governed by license agreements with outside third parties. All of such license agreements to which the Company currently is a party, are for fixed terms which will expire after ten years from the commencement of the agreement or upon the expiration of the underlying patents. After the expiration of the agreements or the patents, the Company is free to use the technology that had been licensed. There can be no assurance that the Company will be able to obtain future license agreements as deemed necessary by management. The loss of some of the current licenses or the inability to obtain future licenses could have an adverse affect on the Company's financial position and operations. Historically, the Company has successfully obtained all the licenses it believed necessary to conduct its business. 21 Distribution - The Company has entered into various exclusive and non-exclusive distribution agreements (the "Agreements") which generally specify territories of distribution. The agreements range in term from one to five years. The Company may be dependent upon such distributors for the marketing and selling of its products worldwide during the terms of these agreements. Such distributors are generally not obligated to sell any specified minimum quantities of the Company's product. There can be no assurance of the volume of product sales that may be achieved by such distributors. Government Regulations - The Company's products are subject to regulation by the FDA under the Medical Device Amendments of 1976 (the "Amendments"). The Company has registered with the FDA as required by the Amendments. There can be no assurance that the Company will be able to obtain regulatory clearances for its current or any future products in the United States or in foreign markets. European Community - The Company is required to obtain certification in the European Community to sell products in those countries. The certification requires the Company to maintain certain quality standards. The Company has been granted certification on certain products. The Company recently had its yearly CE Mark Surveillance Audit and has been notified that it has been recommended for recertification. There is no assurance that the Company will be able to retain its certification in future years. Risk of Product Liability - Testing, manufacturing and marketing of the Company's products entail risk of product liability. The Company currently has product liability insurance. There can be no assurance, however, that the Company will be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect the Company against losses due to product liability. An inability to maintain such insurance at a reasonable cost or in sufficient amounts could prevent or inhibit the commercialization of the Company's products. In addition, a product liability claim or recall could have a material adverse effect on the business or financial condition of the Company. Subsequent Events On March 13, 2007 the Company made a commitment of $181,200 to purchase equipment to be utilized in production. An initial down-payment of $61,670 was made with the order, with another 50% due upon acceptance of the equipment and 15% due twenty days after delivery. The equipment line of credit with Commercial Bank of California may be used to fund this purchase. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND SELECTED FINANCIAL DATA ITEM 2. CERTAIN INFORMATION CONTAINED HEREIN (AS WELL AS INFORMATION INCLUDED IN ORAL STATEMENTS OR OTHER WRITTEN STATEMENTS MADE OR TO BE MADE BY BIOMERICA) CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING, SUCH AS STATEMENTS RELATING TO ANTICIPATED FUTURE REVENUES OF THE COMPANY AND SUCCESS OF CURRENT PRODUCT OFFERINGS. SUCH FORWARD-LOOKING INFORMATION INVOLVES IMPORTANT RISKS AND UNCERTAINTIES THAT COULD SIGNIFICANTLY AFFECT ANTICIPATED RESULTS IN THE FUTURE, AND ACCORDINGLY, SUCH RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY OR ON BEHALF OF BIOMERICA. THE POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS. THESE RISKS AND UNCERTAINTIES ALSO INCLUDE THE SUCCESS OF THE COMPANY IN RAISING NEEDED CAPITAL, THE CONTINUAL DEMAND FOR THE COMPANY'S PRODUCTS, COMPETITIVE AND ECONOMIC FACTORS OF THE MARKETPLACE, AVAILABILITY OF RAW MATERIALS, HEALTH CARE REGULATIONS AND THE STATE OF THE ECONOMY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS. RESULTS OF OPERATIONS Nine and Three Months Comparison for the period ended February 28, 2007 versus 2006. LANCER ORTHODONTICS WAS DECONSOLIDATED FROM BIOMERICA ON DECEMBER 1, 2005. THEREFORE, THE NINE MONTH PERIOD ENDED FEBRUARY 28, 2006 INCLUDES SIX MONTHS OF RESULTS FOR LANCER ORTHODONTICS (JUNE 1, 2005 THROUGH NOVEMBER 30, 2005). THE THREE MONTHS ENDED FEBRUARY 28, 2007 AND 2006 INCLUDES RESULTS FROM BIOMERICA DIAGNOSTICS ONLY. Consolidated net sales for Biomerica were $3,797,051 for the nine months ended February, 2007 as compared to $5,717,260 for the same period in the prior fiscal year. This represents a decrease of $1,920,209, or 33.6% for the nine month period. The overall decrease in sales from February 28, 2007 compared to February 28, 2006 is a result of the deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis, the sales of Biomerica increased from $2,792,222 to $3,797,051, or $1,004,829 (36.0%) for the nine months ended February 28, 2007 as compared to 2006. For the three months ended February 28, 2007 and 2006, sales increased by $313,539, or 31.4%. Sales increased due to higher sales to foreign distributors, as well as increased sales of certain product lines. For the nine months of fiscal 2007 compared to 2006, cost of sales as a percentage of sales decreased from 66.8% of sales to 63.9% of sales. For the nine months of fiscal 2007 compared to 2006, Biomerica on a stand-alone basis had an increase from 58.9% to 63.9%. For the three months ended February 28, 2007 compared to 2006, cost of goods as a percentage of sales decreased from 65.1% to 63.8%. This decrease was primarily due to the higher sales volume relative to some fixed costs. Selling, general and administrative costs decreased by $922,869, or 49.4% for the nine months ended 2007. The overall decrease in selling, general and administrative costs from February 28, 2006 to 2007 is a result of the deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis the selling, general and administrative expenses of Biomerica increased from $837,411 to $943,601, which represents an increase of $106,190, or 12.7%. Selling, general and administrative expenses increased by $35,513 for the quarter ended February 28, 2007. The increases at Biomerica for the nine and three month periods were attributable to increased wages and advertising. Research and development expenses decreased by $22,601, or 11.7%, for the nine months ended February 28, 2007. The overall decrease in research and development expenses from February 28, 2006 to 2007 is a result of the deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis, the research and development expenses of Biomerica increased by $19,869, primarily due to materials and personnel required for new research projects. For the three months ended February 28, 2007 research and development expenses increased by $32,467 (83.7%) for the same reason that these expenses increased for the nine months. 23 For the nine months ended February 28, 2007, other income decreased from $45,575 to $40,040, compared to the same period in the prior year. The overall decrease in other income from February 28, 2006 to 2007 is a result of the deconsolidation of Lancer as of December 1, 2005. On a stand-alone basis, Biomerica's other income increased by $11,781 due to the non-sale income realized from a contract with a customer in fiscal 2006 as compared to the one time sale of some equipment which had been purchased in fiscal 2007. For the three months ended February 28, 2007, other income increased by $39,275, which was due to the one time sale of equipment which had been purchased in fiscal 2007. Interest expense decreased by $14,125 (38.4%) for the nine months ended February 28, 2007 compared to the previous year. On a stand-alone basis, Biomerica had increased interest expense of $331. For the three months ended February 28, 2007 as compared to 2006 interest expense decreased by $863, which was due to the reduced shareholder note payable which was offset by the small equipment leases. Net income from continuing operations for the nine months ended February 28, 2007 was $264,521 as compared to $94,809 for the same period in the prior fiscal year. On a stand-alone basis, net income for the nine month period was $264,521 as compared to $162,285, an increase of $102,236, or 63.0%. Net income from continuing operations for the three months ended February 2007 was $121,370 as compared to $29,615 for the three months ended February 2006. This represents an increase of $91,755, or 309.8%. LIQUIDITY AND CAPITAL RESOURCES As of February 28, 2007 the Company had cash and available-for-sale securities in the amount of $67,079 and working capital of $766,922. The Company also has $375,959 of long term available-for-sale securities of Lancer Ortho- dontics. This stock is restricted and should the Company desire to sell this stock on the open market, it may be subject to certain trading restrictions as imposed by the Federal Securities Act of 1933. These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has had operating and liquidity concerns due to historically reporting net losses and negative cash flows from operations. Biomerica's shareholder's line of credit expired on September 13, 2003 and was not renewed. The unpaid principal and interest was converted into a note payable in the amount of $313,318 bearing interest at 8% and payable September 1, 2004. The due date on this note has been extended each year and is currently due September 1, 2007. This loan has been subordinated to the Commercial Bank of California loans dated February 20, 2007. Minimum payments are $4,000 per month plus an additional $2,000 per month (as revised from $3,500 per month), depending on quarterly results of the Company. The Company is currently out of compliance with this agreement due to the fact that of the additional payments due for fiscal 2006 and 2007, only $5,250 has been paid. As of February 28, 2007, $234,426 in principal was owed. Until two years ago Biomerica had suffered substantial recurring losses from operations. Biomerica has funded its operations through profits as well as debt and equity financings for the past three years and has recently obtained a commercial line of credit from a bank which will help fund operations and growth. Operations of ReadyScript, which was a contributor to the Company's consolidated losses in prior fiscal years, were discontinued in May 2001. Since then, certain ReadyScript liabilities were forgiven and thus income from discontinued operations was recorded. The subsidiary is being reported in the financial statements as a discontinued operation because it is no longer an operating entity. In the last several years the Company has been focusing on reducing costs where possible and concentrating on its core business to increase sales. Management believes that cash flows from current operations will be sufficient to fund operations for at least the next twelve months. Should the Company have a downturn in sales or unanticipated, increased expenses, the result for the Company could be the inability to continue as a going concern. Our independent registered public accounting firm has concluded that there is substantial doubt as to the Company's ability to continue as a going concern for a reasonable period of time, and have, therefore modified their report in the form of an explanatory paragraph describing the events that have given rise to this uncertainty. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 24 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. You should read the following factors in conjunction with the factors discussed elsewhere in this and our other filings with the SEC 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 and are not meant to be an exhaustive discussion of risks that apply to companies such as Biomerica. Like other businesses, Biomerica is susceptible to macroeconomic downturns in the United States or abroad, that may affect the general economic climate and performance of Biomerica or its' customers. Aside from general macroeconomic downturns, the additional material factors that could affect future financial results include, but are not limited to: Terrorist attacks and the impact of such events; diminished access to raw materials that directly enter into our manufacturing process; shipping labor disruption or other major degradation of the ability to ship our 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 operation as a whole; failure to manage the future expansion of our business could have an adverse affect 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, most 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; quarterly variations in operating results caused by a number of factors, including business and industry conditions and other factors beyond our control. All of these factors make it difficult to predict operating results for any particular period. Item 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer (the Company's principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of February 28, 2007, that the design and operation of the Company's "disclosure controls and procedures" (as defined in rules 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act") are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by the Company under the Exchange Act is accumulated, recorded, processed, summarized and reported to the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding whether or not disclosure is required. During the quarter ended February 28, 2007, there were no changes in the Company's "internal controls over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 25 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. Inapplicable. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Inapplicable. Item 3. DEFAULTS UPON SENIOR SECURITIES. Inapplicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. Item 5. OTHER INFORMATION. Inapplicable. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. Inapplicable. (a) Exhibits 31.1 Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Business Loan Agreement dated February 20, 2007 with Commercial Bank of California. 99.2 Commercial Security Agreement (loan #0100000250) dated February 20, 2007 with Commercial Bank of California. 99.3 Promissory Note (loan #0100000250) dated February 20, 2007 with Commercial Bank of California. 99.4 Promissory Note (loan #0100000251) dated February 20, 2007 with Commercial Bank of California. 99.5 Subordination Agreement (loan #0100000250) dated February 20, 2007 with Commercial Bank of California and Janet Moore Trust. 99.6 Second Amendment of the Note, Loan and Mofication Agreement dated March 9, 2007 between Biomerica and Janet Moore Trust. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: April 13, 2007 BIOMERICA, INC. By: /S/ Zackary S. Irani ----------------------- Zackary S. Irani Chief Executive Officer 27 EX-31.1 2 biomerica_10qsb-ex3101.txt Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Zackary S. Irani, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Biomerica, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of our internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 13, 2007 /s/ Zackary S. Irani - ----------------------- Chief Executive Officer EX-31.2 3 biomerica_10qsb-ex3102.txt Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Janet Moore, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Biomerica, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of our internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 13, 2007 /s/ Janet Moore - ----------------------- Chief Financial Officer EX-32.1 4 biomerica_10qsb-ex3201.txt Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Zackary S. Irani, certify that the Quarterly Report on Form 10-QSB for the fiscal quarter ended February 28, 2007, fully complies with the requirements in Sections 13(a) Or 15(d) of the Securities Exchange Act of 1934, and that the information contained In such quarterly report fairly presents, in all material respects, the financial Condition and results of operations of Biomerica, Inc. for the periods being presented. /s/ Zackary S. Irani ----------------------- Zackary S. Irani Chief Executive Officer April 13, 2007 EX-32.2 5 biomerica_10qsb-ex3202.txt Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Janet Moore, certify that the Quarterly Report on Form 10-QSB for the fiscal quarter ended February 28, 2007, fully complies with the requirements in Sections 13(a) Or 15(d) of the Securities Exchange Act of 1934, and that the information contained In such quarterly report fairly presents, in all material respects, the financial Condition and results of operations of Biomerica, Inc. for the periods being presented. /s/ Janet Moore ----------------------- Janet Moore Chief Financial Officer April 13, 2007 EX-99.1 6 biomerica_10qex99-1.txt BUSINESS LOAN AGREEMENT EXHIBIT 99.1 COMMERCIAL BANK Of California BUSINESS LOAN AGREEMENT - ------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call/Coll Account Officer Initials - ------------------------------------------------------------------------------------------ $200,000.00 02-20-2007 09-01-2008 0100000250 04A/03 111 - ------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ------------------------------------------------------------------------------------------ Borrower: BIOMERICA, INC. Lender: COMMERCIAL BANK OF CALIFORNIA 1533 MONROVIA AVENUE 695 TOWN CENTER DRIVE, SUITE 100 NEWPORT BEACH, CA 92663 COSTA MESA, CA 92626 ==========================================================================================
THIS BUSINESS LOAN AGREEMENT dated February 20, 2007, is made and executed between BIOMERICA, INC. ("Borrower") and COMMERCIAL BANK OF CALIFORNIA ("Lender") on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement ("Loan"). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement. TERM. This Agreement shall be effective as of February 20, 2007, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement. ADVANCE AUTHORITY. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: ZACKARY IRANI; and JANET MOORE. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender's Security Interests; (4) evidence of insurance as required below; (5) subordinations; (6) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Borrower maintains an office at 1533 MONROVIA AVENUE, NEWPORT BEACH, CA 92663. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower's state of organization or any change in Borrower's name. Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None. Authorization. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of (a) Borrower's articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's properties. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all liens and security interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will: Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. BUSINESS LOAN AGREEMENT Loan No.: 0100000250 (Continued) Page 2 ================================================================================ Financial Records. Maintain its books and records in accordance with accounting principles acceptable to Lender, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with the following: Annual Statements. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant. Interim Statements. As soon as available, but in no event later than 45 days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared by Borrower. Tax Returns. As soon as available, but in no event later than 15 days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by a certified public accountant satisfactory to Lender. Additional Requirements. As soon as available, but in no event later than 45 days after the end of each quarter, Borrower's accounts receivable and accounts payable aging for the quarter ended, prepared by Borrower. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. Financial Covenants and Ratios. Comply with the following covenants and ratios: Minimum Income and Cash flow Requirements. Borrower shall comply with the following cash flow ratio requirements: Cash Flow / Current Maturity (LTD) Ratio. Maintain a ratio of Cash Flow / Current Maturity (LTD) in excess of 1.300 to 1.000. The ratio "Cash Flow / Current Maturity (LTD)" means Borrower's Net Profits plus Depreciation divided by Borrower's Current Portion of Long Term Indebtedness. Tangible Net Worth Requirements. Borrower shall comply with the following net worth ratio requirements: Debt / Worth Ratio. Maintain a ratio of Debt / Worth not in excess of 2.000 to 1.000. The ratio "Debt / Worth" means Borrower's Total Liabilities divided by Borrower's Tangible Net Worth. This leverage ratio will be evaluated as of quarter-end. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with accounting principles acceptable to Lender; applied on a consistent basis, and certified by Borrower as being true and correct. Subordination. Prior to disbursement of any Loan proceeds, deliver to Lender subordination agreements on Lender's forms, executed by Borrower's creditors named below, subordinating all of Borrower's indebtedness to such creditors, or such lesser amounts as may be agreed to by Lender in writing, and any security interests in collateral securing that indebtedness to the Loans and security interests of Lender. Name of Creditor Total Amount of Debt ---------------- -------------------- THE JANET MOORE TRUST DATED $234,426.00 AUGUST 21, 1998 and JANET MOORE Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any Change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner. Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at ail reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such' purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: BUSINESS LOAN AGREEMENT Loan No.: 0100000250 (Continued) Page 3 ================================================================================ Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower's stock, or purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Agreements. Borrower will not enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower's obligations under this Agreement or in connection herewith. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan advances or to disburse Loan proceeds if: (A) Borrower or any guarantor is in default under the terms of this Agreement or any other agreement that Borrower or any guarantor has with Lender; (B) Borrower or any guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any guarantor, or in the value of any collateral securing any Loan; or (D) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Payment Default. Borrower fails to make any payment when due under the Loan. Other Default. Borrower fails to comply with any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents. Default in Favor of Third Parties. Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay the Loans or perform Borrower's obligations under this Agreement or any related document. False Statements. Any representation or statement made by Borrower to Lender is false in any material respect. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. ARBITRATION. Borrower and Lender agree that all disputes, claims and controversies between them whether individual, joint, or class in nature, arising from this Agreement or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association in effect at the time the claim is filed, upon request of either party. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Borrower and Lender agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. BUSINESS LOAN AGREEMENT Loan No.: 0100000250 (Continued) Page 4 ================================================================================ DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement: Advance. The word "Advance' means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement. Agreement. The word "Agreement' means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower means BIOMERICA, INC. and includes all co-signers and co-makers signing the Note and all their successors and assigns. Collateral. The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. GAAP. The word "GAAP" means generally accepted accounting principles. Grantor. The word "Grantor" means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Loan. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means COMMERCIAL BANK OF CALIFORNIA, its successors and assigns. Loan. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on Any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means any and all of Borrower's indebtedness to Lender and is used in the most comprehensive sense and means and include any and all of Borrower's liabilities, obligations and debts to Lender, now existing or hereinafter incurred or created, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitution for the Related Documents. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total debt. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED FEBRUARY 20, 2007. BORROWER: BIOMERICA, INC. By: /s/ Zackary Irani ----------------------------------------- ZACKARY IRANI, Chief Executive Officer of BIOMERICA, INC. LENDER: COMMERCIAL BANK OF CALIFORNIA By: /s/ Anthony Sands ----------------------------------------- ANTHONY SANDS, Vice President EX-99.2 7 biomerica_10qex99-2.txt COMMERCIAL SECURITY AGREEMENT Exhibit 99.2 COMMERCIAL BANK Of California COMMERCIAL SECURITY AGREEMENT - ------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call/Coll Account Officer Initials - ------------------------------------------------------------------------------------------ $200,000.00 02-20-2007 09-01-2008 0100000250 04A/03 111 - ------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ------------------------------------------------------------------------------------------ Borrower: BIOMERICA, INC. Lender: COMMERCIAL BANK OF CALIFORNIA 1533 MONROVIA AVENUE 695 TOWN CENTER DRIVE, SUITE 100 NEWPORT BEACH, CA 92663 COSTA MESA, CA 92626 ==========================================================================================
THIS COMMERCIAL SECURITY AGREEMENT dated February 20, 2007, is made and executed between BIOMERICA, INC. ("Grantor") and COMMERCIAL BANK OF CALIFORNIA ("Lender"). GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest In the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. COLLATERAL DESCRIPTION. The word "Collateral" as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement: All inventory, equipment, accounts (including but not limited to all health-care-insurance receivables), chattel paper, instruments (including but not limited to all promissory notes), letter-of-credit rights, letters of credit, documents, deposit accounts, investment property, money, other rights to payment and performance, and general intangibles (including but not limited to all software and all payment intangibles); all oil, gas and other minerals before extraction; all oil, gas, other minerals and accounts constituting as-extracted collateral; all fixtures; all timber to be cut; all attachments, accessions, accessories, fittings, increases, tools, parts, repairs, supplies, and commingled goods relating to the foregoing property, and all additions, replacements of and substitutions for all or any part of the foregoing property; all insurance refunds relating to the foregoing property; all good will relating to the foregoing property; all records and data and embedded software relating to the foregoing property, and all equipment, inventory and software to utilize, create, maintain and process any such records and data on electronic media; and all supporting obligations relating to the foregoing property; all whether now existing or hereafter arising, whether now owned or hereafter acquired or whether now or hereafter subject to any rights In the foregoing property; and all products and proceeds (including but not limited to all insurance payments) of or relating to the foregoing property. In addition, the word "Collateral" also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (A) All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether added now or later. (B) All products and produce of any of the property described in this Collateral section. (C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Collateral section. (D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgment, settlement or other process. (E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated, whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations,,-and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable. (Initial Here _____) FUTURE ADVANCES. In addition to the Note, this Agreement secures all future advances made by Lender to Grantor regardless of whether the advances are made' a) pursuant to a commitment or b) for the same purposes. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that: Perfection of Security Interest. Grantor agrees to take whatever actions are requested by Lender to perfect and continue Lender's security interest in the Collateral, Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender. Notices to Lender. Grantor will promptly notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor's name; (2) change in Grantor's assumed business name(s); (3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor's principal office address; (6) change in Grantor's state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor's name or state of organization will take effect until after Lender has received notice. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing. COMMERCIAL SECURITY AGREEMENT Loan No: 0100000250 (Continued) Page 2 Location of the Collateral. Except in the ordinary course of Grantor's business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor's address shown above or at such other locations as are acceptable to Lender. Upon Lender's request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located. Removal of the Collateral. Except in the ordinary course of Grantor's business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender's prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certification of title for the vehicles outside the State of Delaware, without Lender's prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral. Inspection of Collateral. Lender and Lender's designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located. Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, reasonable attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized. Compliance with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify and defend shall survive the payment of the Indebtedness and the satisfaction of this Agreement. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral if the estimated cost of repair or replacement exceeds 10,000.00, whether or not such casualty or loss is covered by insurance. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. Financing Statements. Grantor authorizes Lender to file a UCC financing statement, or alternatively, a copy of this Agreement to perfect Lender's security interest. At Lender's request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect, and continue Lender's security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement. If Grantor changes Grantor's name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify the Lender of such change. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any COMMERCIAL SECURITY AGREEMENT Loan No: 0100000250 (Continued) Page 3 ================================================================================ Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor's failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Payment Default. Grantor fails to make any payment when due under the Indebtedness. Other Defaults. Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor's property or Grantor's or any Grantor's ability to repay the Indebtedness or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Grantor's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the Indebtedness or guarantor, endorser, surety, or accommodation party dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Adverse Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Cure Provisions. If any default, other than a default in payment is curable and if Grantor has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured if Grantor, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Delaware Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender's own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person's right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender's right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver. Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender's discretion transfer any Collateral into Lender's own name or that of Lender's nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Election of Remedies. Except as may be prohibited by applicable law, all of Lender's rights and remedies, whether evidenced by this COMMERCIAL SECURITY AGREEMENT Loan No: 0100000250 (Continued) Page 4 ================================================================================ Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement, No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Arbitration. Grantor and Lender agree that all disputes, claims and controversies between them whether individual, joint, or class in nature, arising from this Agreement or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association in effect at the time the claim is filed, upon request of either party. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; Invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, Including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, !aches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including Lender's reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's reasonable attorneys' fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Lender may also recover from Grantor all court, alternative dispute resolution or other collection costs (including, without limitation, fees and charges of collection agencies) actually incurred by Lender. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Governing Law. With respect to procedural matters related to the perfection and enforcement of Lender's rights against the Collateral, this Agreement will be governed by federal law applicable to Lender and to the extent not preempted by federal law, the laws of the State of Delaware. In all other respects, this Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of California without regard to its conflicts of law provisions. However, if there ever Is a question about whether any provision of this Agreement is valid or enforceable, the provision that is questioned will be governed by whichever state or federal law would find the provision to be valid and enforceable. The loan transaction that Is evidenced by the Note and this Agreement has been applied for, considered, approved and made, and all necessary loan documents have been accepted by Lender in the State of California. Choice of Venue. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of ORANGE County, State of California. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors. Power of Attorney. Grantor hereby appoints Lender as Grantor's irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. Successors and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor's interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor's successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness. Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor's Indebtedness shall be paid in full. Time is of the Essence. Time is of the essence in the performance of this Agreement. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Borrower. The word "Borrower" means BIOMERICA, INC. and includes all co-signers and co-makers signing the Note and all their successors and assigns. Collateral. The word "Collateral" means all of Grantor's right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement. Default. The word "Default" means the Default set forth in this Agreement in the section titled "Default". Environmental Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. COMMERCIAL SECURITY AGREEMENT Loan No: 0100000250 (Continued) Page 5 ================================================================================ Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. Grantor. The word "Grantor" means BIOMERICA, INC.. Guaranty. The word "Guaranty" means the guaranty from guarantor, endorser, surety, or accommodation party to Lender, including without limitation a guaranty of all or part of the Note. Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Specifically, without limitation, Indebtedness includes the future advances set forth in the Future Advances provision, together with all interest thereon and all amounts that may be indirectly secured by the Cross-Collateralization provision of this Agreement. Lender. The word "Lender" means COMMERCIAL BANK OF CALIFORNIA, its successors and assigns. Note. The word "Note" means any and all of Borrower's indebtedness to Lender and is used in the most comprehensive sense and means and include any and all of Borrower's liabilities, obligations and debts to Lender, now existing or hereinafter incurred or created, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitution for the Related Documents. Property. The word "Property" means all of Grantor's right, title and interest in and to all the Property as described in the "Collateral Description" section of this Agreement. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 20, 2007. THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW. BORROWER: BIOMERICA, INC. By: /s/ Zackary Irani ----------------------------------------- ZACKARY IRANI, Chief Executive Officer of BIOMERICA, INC. LENDER: COMMERCIAL BANK OF CALIFORNIA By: /s/ Anthony Sands ----------------------------------------- ANTHONY SANDS, Vice President EX-99.3 8 biomerica_10qex99-3.txt PROMISSORY NOTE Exhibit 99.3 COMMERCIAL BANK Of California PROMISSORY NOTE - ------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call/Coll Account Officer Initials - ------------------------------------------------------------------------------------------ $200,000.00 02-20-2007 09-01-2008 0100000250 04A/03 111 - ------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ------------------------------------------------------------------------------------------ Borrower: BIOMERICA, INC. Lender: COMMERCIAL BANK OF CALIFORNIA 1533 MONROVIA AVENUE 695 TOWN CENTER DRIVE, SUITE 100 NEWPORT BEACH, CA 92663 COSTA MESA, CA 92626 ========================================================================================== Principal Amount: $200,000.00 Initial Rate: 9.750% Date of Note: February 20, 2007
PROMISE TO PAY. BIOMERICA, INC. ("Borrower") promises to pay to COMMERCIAL BANK OF CALIFORNIA ("Lender"), or order, in lawful money of the United States of America, the principal amount of Two Hundred Thousand & 00/100 Dollars ($200,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on September 1, 2008. In addition, Borrower will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning April 1, 2007, with all subsequent interest payments to be due on the same day of each month after that. Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; then to any late charges; and then to any unpaid collection costs. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the WALL STREET JOURNAL PRIME RATE (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each DAY. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 8.250%. The interest rate to be applied to the unpaid principal balance during this Note will be at a rate of 1.500 percentage points over the Index, resulting in an initial rate of 9.750%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $100.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment on full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: COMMERCIAL BANK OF CALIFORNIA, Loan Department, 695 TOWN CENTER DRIVE, SUITE 100 COSTA MESA, CA 92626. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $5.00, whichever is greater. INTEREST AFTER DEFAULT. Upon default, the interest rate on this Note shall, if permitted under applicable law, immediately increase by adding a 5.000 percentage point margin ("Default Rate Margin"). The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no default. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: Payment Default. Borrower fails to make any payment when due under this Note. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the related documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. Insecurity. Lender in good faith believes itself insecure. Cure Provisions. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and PROMISSORY NOTE Loan No: 0100000250 (Continued) Page 2 ================================================================================ appeals. Borrower also will pay any court costs, in addition to all other sums provided by law. GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of California without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of California. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of ORANGE County, State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in ail Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. COLLATERAL. Borrower acknowledges this Note is secured by the following collateral described in the security instrument listed herein: inventory, chattel paper, accounts, equipment and general intangibles described in a Commercial Security Agreement dated February 20, 2007. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or as provided in this paragraph. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: ZACKARY IRANI; and JANET MOORE. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. ARBITRATION. Borrower and Lender agree that all disputes, claims and controversies between them whether individual, joint, or class in nature, arising from this Note or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association in effect at the time the claim is filed, upon request of either party. No act to take or dispose of any collateral securing this Note shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or 'exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral securing this Note, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing this Note, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Borrower and Lender agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Note shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: BIOMERICA, INC. By: /s/ Zackary Irani ----------------------------------------- ZACKARY IRANI, Chief Executive Officer of BIOMERICA, INC. EX-99.4 9 biomerica_10qex99-4.txt PROMISSORY NOTE Exhibit 99.4 COMMERCIAL BANK Of California PROMISSORY NOTE - ------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call/Coll Account Officer Initials - ------------------------------------------------------------------------------------------ $200,000.00 02-20-2007 12-01-2011 0100000251 04A/03 111 - ------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ------------------------------------------------------------------------------------------ Borrower: BIOMERICA, INC. Lender: COMMERCIAL BANK OF CALIFORNIA 1533 MONROVIA AVENUE 695 TOWN CENTER DRIVE, SUITE 100 NEWPORT BEACH, CA 92663 COSTA MESA, CA 92626 ========================================================================================== Principal Amount: $200,000.00 Initial Rate: 9.500% Date of Note: February 20, 2007
PROMISE TO PAY. BIOMERICA, INC. ("Borrower") promises to pay to COMMERCIAL BANK OF CALIFORNIA ("Lender"), or order, in lawful money of the United States of America, the principal amount of Two Hundred Thousand & 00/100 Dollars ($200,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in accordance with the following payment schedule: 9 monthly consecutive interest payments, beginning April 1, 2007, with interest calculated on the unpaid principal balances at an interest rate based on the WALL STREET JOURNAL PRIME RATE (currently 8.250%) plus a margin of 1.250 percentage points, resulting in an initial rate of 9.500%; 47 monthly consecutive principal and interest payments in the initial amount of $5,038.21 each, beginning January 1, 2008, with interest calculated on the unpaid principal balances at an interest rate of 9.500%; and one principal and interest payment of $5,038.46 on December 1, 2011, with interest calculated on the unpaid principal balances at an interest rate of 9.500%. This estimated final payment is based on the assumption that all payments will be made exactly as scheduled and that the index does not change; the actual final payment will be for all principal and accrued interest not yet paid, together with any other unpaid amounts under this Note. Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; then to any unpaid collection costs; and then to any late charges. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the WALL STREET JOURNAL PRIME RATE (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each DAY. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 8.250%. The interest rate to be applied to the unpaid principal balance during this Note will be at a rate of 1.250 percentage points over the Index, resulting in an initial rate of 9.500%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $100.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: COMMERCIAL BANK OF CALIFORNIA, Loan Department, 695 TOWN CENTER DRIVE, SUITE 100 COSTA MESA, CA 92626. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $5.00, whichever is greater. INTEREST AFTER DEFAULT. Upon default, the interest rate on this Note shall, if permitted under applicable law, immediately increase by adding a 5.000 percentage point margin ("Default Rate Margin"). The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no default. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: Payment Default. Borrower fails to make any payment when due under this Note. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. Insecurity. Lender in good faith believes itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law. GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of California without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of California. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of ORANGE County, State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided in this paragraph. COLLATERAL. Borrower acknowledges this Note is secured by the following collateral described in the security instrument listed herein: inventory, chattel paper, accounts, equipment and general intangibles described in a Commercial Security Agreement dated February 20, 2007. LINE OF CREDIT. This Note evidences a straight line of credit. Once the total amount of principal has been advanced, Borrower is not entitled to further loan advances. Advances under this Note may be requested either Orally or in writing by Borrower or as provided in this paragraph. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: ZACKARY IRANI; and JANET MOORE. Borrower agrees to be liable for ell sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. ARBITRATION. Borrower and Lender agree that all disputes, claims end controversies between them whether individual, joint, or class in nature, arising from this Note or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association in effect at the time the claim is filed, upon request of either party. No act to take or dispose of any collateral securing this Note shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral securing this Note, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing this Note, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Borrower and Lender agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Note shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: BIOMERICA, INC. By: /s/ Zackary Irani ----------------------------------------- ZACKARY IRANI, Chief Executive Officer of BIOMERICA, INC. EX-99.5 10 biomerica_10qex99-5.txt SUBORDINATION AGREEMENT Exhibit 99.5 COMMERCIAL BANK Of California SUBORDINATION AGREEMENT - ------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call/Coll Account Officer Initials - ------------------------------------------------------------------------------------------ $200,000.00 02-20-2007 09-01-2008 0100000250 04A/03 111 - ------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - ------------------------------------------------------------------------------------------ Borrower: BIOMERICA, INC. Lender: COMMERCIAL BANK OF CALIFORNIA 1533 MONROVIA AVENUE 695 TOWN CENTER DRIVE, SUITE 100 NEWPORT BEACH, CA 92663 COSTA MESA, CA 92626 Creditor: JANET MOORE, Trustee of THE JANET MOORE TRUST DATED AUGUST 21, 1998 JANET MOORE, Individual 1533 MONROVIA AVENUE NEWPORT BEACH, CA 92663 ==========================================================================================
THIS SUBORDINATION AGREEMENT dated February 20, 2007, is made and executed among BIOMEIRICA, INC.; 1533 MONROVIA AVENUE; NEWPORT BEACH, CA 92663 ("Borrower"); JANET MOORE, Trustee of THE JANET MOORE TRUST DATED AUGUST 21, 1998 under the provisions of a trust agreement dated August 21, 1998; and JANET MOORE, Individually; 1533 MONROVIA AVENUE; NEWPORT BEACH, CA 92663 ("Creditor"); and COMMERCIAL BANK OF CALIFORNIA, 695 TOWN CENTER DRIVE, SUITE 100, COSTA MESA, CA 92626 ("Lender"). REQUESTED FINANCIAL ACCOMMODATIONS. Creditor and Borrower each want Lender to provide financial accommodations to Borrower in the form of (A) new credit or loan advances, (B) an extension of time to pay or other compromises regarding all or part of Borrower's present indebtedness to Lender, or (C) other benefits to Borrower. Borrower and Creditor each represent and acknowledge to Lender that Creditor will benefit as a result of these financial accommodations from Lender to Borrower, and Creditor acknowledges receipt of valuable consideration for entering into this Agreement. Based on the representations and acknowledgments contained in this Agreement, Borrower and Creditor agree with Lender as follows: SUBORDINATED INDEBTEDNESS. The words "Subordinated Indebtedness" as used in this Agreement mean the following specific indebtedness from Borrower to Creditor, including all renewals, extensions, modifications and substitutions for the indebtedness, including principal, interest, and all costs and attorneys' fees, relating to the indebtedness: $234,426.00. SUPERIOR INDEBTEDNESS. The words "Superior Indebtedness" as used in this Agreement mean and include all present and future indebtedness, obligations, liabilities, claims, rights, and demands of any kind which may be now or hereafter owing from Borrower to Lender. The term "Superior Indebtedness" is used in its broadest sense and includes without limitation all principal, all interest, all costs, attorneys' fees, all sums paid for the purpose of protecting Lender's rights in security (such as paying for insurance on collateral if the owner fails to do so), all contingent obligations of Borrower (such as a guaranty), all obligations arising by reason of Borrower's accounts with Lender (such as an overdraft on a checking account), and all other obligations of Borrower to Lender, secured or unsecured, of any nature whatsoever. SUBORDINATION. All Subordinated Indebtedness of Borrower to Creditor is and shall be subordinated in all respects to all Superior Indebtedness of Borrower to Lender. If Creditor holds one or more Security Interests, whether now existing or hereafter acquired, in any of Borrower's real property or personal property, Creditor also subordinates all Creditor's Security Interests to all Security Interests held by Lender, whether now existing or hereafter acquired. PAYMENTS TO CREDITOR. Borrower will not make and Creditor will not accept, at any time while any Superior Indebtedness is owing to Lender, (A) any payment upon any Subordinated Indebtedness, (B) any advance, transfer, or assignment of assets to Creditor in any form whatsoever that would reduce at any time or in any way the amount of Subordinated Indebtedness, or (C) any transfer of any assets as security for the Subordinated Indebtedness, except upon Lender's prior written consent. In the event of any distribution, division, or application, whether partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of Borrower's assets, or the proceeds of Borrower's assets, in whatever form, to creditors of Borrower or upon any indebtedness of Borrower, whether by reason of the liquidation, dissolution or other winding-up of Borrower, or by reason of any execution sale, receivership, insolvency, or bankruptcy proceeding, assignment for the benefit of creditors, proceedings for reorganization, or readjustment of Borrower or Borrower's properties, then and in such event, (A) the Superior Indebtedness shall be paid in full before any payment is made upon the Subordinated Indebtedness, and (B) all payments and distributions, of any kind or character and whether in cash, property, or securities, which shall be payable or deliverable upon or in respect of the Subordinated Indebtedness shall be paid or delivered directly to Lender for application in payment of the amounts then due on the Superior Indebtedness until the Superior Indebtedness shall have been paid in full. In order that Lender may establish its right to prove claims and recover for its own account dividends based on the Subordinated Indebtedness, Creditor does hereby assign all its right, title, and interest in such claims to Lender. Creditor further agrees to supply such information and evidence, provide access to and copies of such of Creditor's records as may pertain to the Subordinated Indebtedness, and execute such instruments as may be required by Lender to enable Lender to enforce all such claims and collect all dividends, payments, or other disbursements which may be made on account of the Subordinated Indebtedness. For such purposes, Creditor hereby irrevocably authorizes Lender in its discretion to make and present for or on behalf of Creditor such proofs of claims on account of the Subordinated Indebtedness as Lender may deem expedient and proper and to vote such claims in any such proceeding and to receive and collect any and all dividends, payments, or other disbursements made thereon in whatever form the same may be paid or issued and to apply the same on account of the Superior Indebtedness. Should any payment, distribution, security, or proceeds thereof be received by Creditor at any time on the Subordinated Indebtedness contrary to the terms of this Agreement, Creditor immediately will deliver the same to Lender in precisely the form received (except for the endorsement or assignment of Creditor if necessary), for application on or to secure the Superior Indebtedness, whether it is due or not due, arid until so delivered the same shall be held in trust by Creditor as property of Lender. In the event Creditor fails to make any such endorsement or assignment, Lender, or any of its officers on behalf of Lender, is hereby irrevocably authorized by Creditor to make the same. CREDITOR'S NOTES. Creditor agrees to deliver to Lender, at Lender's request, all notes of Borrower to Creditor, or other evidence of the Subordinated Indebtedness, now held or hereafter acquired by Creditor, while this Agreement remains in effect. At Lender's request, Borrower also will execute and deliver to Creditor a promissory note evidencing any book account or claim now or hereafter owed by Borrower to Creditor, which note also shall be delivered by Creditor to Lender. Creditor agrees not to sell, assign, pledge or otherwise transfer any of such notes except subject to all the terms and conditions of this Agreement. CREDITOR'S REPRESENTATIONS AND WARRANTIES. Creditor represents and warrants to Lender that: (A) no representations or agreements of any kind have been made to Creditor which would limit or qualify in any way the terms of this Agreement; (B) this Agreement is executed at Borrower's request and not at the request of Lender; (C) Lender has made no representation to Creditor as to the creditworthiness of Borrower; and (D) Creditor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Creditor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Creditor's risks under this Agreement, and Creditor further agrees that Lender shall have no obligation to disclose to Creditor information or material acquired by Lender in the course of its relationship with Borrower. CREDITOR'S WAIVERS. Creditor waives any right to require Lender: (A) to make, extend, renew, or modify any loan to I3orrower or to grant any other financial accommodations to Borrower whatsoever; (B) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Superior Indebtedness or of any nonpayment related to any Security Interests, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Superior Indebtedness, or in connection with the creation of new or additional Superior Indebtedness; (C) to resort for payment or to proceed directly or at once against any person, including Borrower; (D) to proceed directly against or exhaust any Security Interests held by Lender from Borrower, any other guarantor, or any other person; (E) to pursue any other remedy within Lender's power; or (F) to commit any act or omission of any kind, at any time, with respect to any matter whatsoever. LENDER'S RIGHTS. Lender may take or omit any and all actions with respect to the Superior Indebtedness or any Security Interests for the Superior Indebtedness without affecting whatsoever any of Lender's rights under this Agreement. In particular, without limitation, Lender may, without notice of any kind to Creditor, (A) make one or more additional secured or unsecured loans to Borrower; (B) repeatedly alter, compromise, renew, extend, accelerate, or otherwise change the time for payment or other terms of the Superior Indebtedness or any part thereof, including increases and decreases of the rate of interest on the Superior Indebtedness; extensions may be repeated and may be for longer than the original loan term; (C) SUBORDINATION AGREEMENT Loan No: 0100000250 (Continued) Page 2 ================================================================================ take and hold Security Interests for the payment of the Superior Indebtedness, and exchange, enforce, waive, and release any such Security Interests, with or without the substitution of new collateral; (D) release, substitute, 'agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or guarantors on any terms or manner Lender chooses; (E) determine how, when and what application of payments and credits, shall be made on the Superior Indebtedness; (F) apply such security and direct the order or manner of sale thereof, as Lender in its discretion may determine; and (G) assign this Agreement in whole or in part. DEFAULT BY BORROWER. If Borrower becomes insolvent or bankrupt, this Agreement shall remain in full force and effect. DURATION AND TERMINATION. This Agreement will take effect when received by Lender, without the necessity of any acceptance by Lender, in writing or otherwise, and will remain in full force and effect until Creditor shall motify Lender in writing at the address shown above to the contrary. Any such notice shall not affect the Superior Indebtedness owed Lender by Borrower at the time of such notice, nor shall such notice affect Superior Indebtedness thereafter granted in compliance with a commitment made by Lender to Borrower prior to receipt of such notice, nor shall such notice affect any renewals of or substitutions for any of the foregoing. Such notice shall affect only indebtedness of Borrower to Lender arising after receipt of such notice and not arising from financial assistance granted by Lender to Borrower in compliance with Lender's obligations under a commitment. Any notes lodged with Lender pursuant to the section titled "Creditor's Notes" above need not be returned until this Agreement has no further force or effect. OTHER TERMS AND CONDITIONS. The following provisions are a part of this Agreement: Borrower may make payments to Creditor so long as Borrower is not in default under any agreement between Lender and Borrower. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Arbitration. Borrower and Creditor and Lender agree that all disputes, claims and controversies between them whether individual, joint, or class in nature, arising from this Agreement or otherwise, including without limitation contract and tort disputes, shall be arbitrated pursuant to the Rules of the American Arbitration Association in effect at the time the claim is filed, upon request of either party. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; invoking a power of sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Borrower and Creditor and Lender agree that in the event of an action for judicial foreclosure pursuant to California Code of Civil Procedure Section 726, or any similar provision in any other state, the commencement of such an action will not constitute a waiver of the right to arbitrate and the court shall refer to arbitration as much of such action, including counterclaims, as lawfully may be referred to arbitration. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. Attorneys' Fees; Expenses. Creditor agrees to pay upon demand elf of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Creditor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Creditor also shall pay all court costs and such additional fees as may be directed by the court. Authority. The person who signs this Agreement as or on behalf of Creditor represents and warrants that he or she has authority to execute this Agreement and to subordinate the Subordinated Indebtedness and the Creditor's security interests in Creditor's property, if any. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of California without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the State of California. Choice of Venue. If there is a lawsuit, Creditor agrees upon Lender's request to submit to the jurisdiction of the courts of ORANGE County, State of California. Interpretation. In all cases where there is more than one Creditor, then all words used in this Agreement in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Creditor named in this Agreement or when this Agreement is executed by more than one , the words "Creditor" shall mean all and any one or more of them. Reference to the phrase "Creditor" includes the heirs, successors, assigns, and transferees of each of them. Successors and Assigns. This Agreement shall be understood to be for the benefit of Lender and for such other person or persons as may from time to time become or be the holder or owner of any of the Indebtedness or any interest therein, and this Agreement shall be transferable to the same extent and with the same force and effect as any such Indebtedness may be transferable. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement: No prior waiver by Lender, nor any course of dealing between Lender and Creditor, shall constitute a waiver of any of Lender's rights or of any of Creditor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code: Agreement. The word "Agreement" means this Subordination Agreement, as this Subordination Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Subordination Agreement from time to time. Borrower. The word "Borrower" means BIOMERICA, INC. and includes all co-signers and co-makers signing the Note and all their successors and assigns. Creditor. The word "Creditor" means JANET MOORE, Trustee of THE JANET MOORE TRUST DATED AUGUST 21, 1998 under the provisions of a trust agreement dated August 21, 1998; and JANET MOORE, Individually. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means COMMERCIAL BANK OF CALIFORNIA, its successors and assigns. Note. The word "Note" means any and all of Borrower's indebtedness to Lender and is used in the most comprehensive sense and means and include any and all of Borrower's liabilities, obligations and debts to Lender, now existing or hereinafter incurred or created, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitution for the Related Documents. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Interest. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. SUBORDINATION AGREEMENT Loan No: 0100000250 (Continued) Page 3 ================================================================================ Subordinated Indebtedness. The words "Subordinated Indebtedness" mean the indebtedness described in the section of this Agreement titled "Subordinated Indebtedness". Superior Indebtedness. The words "Superior Indebtedness" mean the indebtedness described in the section of this Agreement titled "Superior Indebtedness". BORROWER AND CREDITOR EACH ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS SUBORDINATION AGREEMENT, AND BORROWER AND CREDITOR EACH AGREE TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 20, 2007. BORROWER: BORROWER: BIOMERICA, INC. By: /s/ Zackary Irani ----------------------------------------- ZACKARY IRANI, Chief Executive Officer of BIOMERICA, INC. CREDITOR: /s/ Janet Moore - --------------------------------------------- JANET MOORE, Trustee of THE JANET MOORE TRUST DATED AUGUST 21, 1998 under the provisions of a Trust Agreement dated August 21, 1998 /s/ Janet Moore - --------------------------------------------- JANET MOORE, Individually EX-99.6 11 biomerica_10qex99-6.txt SECOND AMENDMENT OF THE NOTE EXHIBIT 99.6 SECOND AMENDMENT of the Note, Loan and Modification Agreement This Second Amendment of the Note, Loan and Modification Agreement (this "AMENDMENT") is effective as of March 9, 2007 by and among BIOMERICA, INC., a Delaware corporation ("BORROWER") and Janet Moore as Trustee of the JANET MOORE TRUST DATED AUGUST 21, 1998 ("LENDER") and JANET MOORE, as an individual ("MOORE"). Recitals -------- A. Under the Loan Agreement, dated September 12, 2000 between Borrower and Lender, as modified by the Loan Modification, Forbearance and Security Agreement dated March 12, 2004 among Borrower, Lender and Moore and by the Amendment of the Note, Loan and Modification Agreement dated as of September 1, 2004 (collectively, as amended, restated, otherwise modified or extended from time to time, the "LOAN AGREEMENT"), Lender agreed to make a loan (the "LOAN") to Borrower. The Loan is evidenced by the Amended and Restated Promissory Note, dated March 19, 2004, in principal amount of $313,318.00, as the same may have been further amended or extended from time to time (the "NOTE" and, together with the Loan Agreement and any and all other agreements, instruments or documents executed in connection with the Loan, the "LOAN DOCUMENTS"). This Amendment is a Loan Document. B. As of the date of this Agreement, the outstanding principal balance of the Loan is $234,426, plus accrued interest accrued from February 28, 2007. C. As of the date of this Agreement, Borrower has failed to pay to Lender in the amount of $53,250 (the "OVERDUE PRINCIPAL"), which is due and payable under the Loan Agreement. Accordingly, Borrower is currently in default under the Loan Agreement and the other Loan Documents. D. Borrower has requested Lender and Moore to enter into the Subordination Agreement dated March 9, 2007 (the "COMMERCIAL SUBORDINATION AGREEMENT") among Borrower, Lender, Moore and Commercial Bank of California ("COMMERCIAL"), in connection with one or more loans or extensions of credit (the "COMMERCIAL LOAN") between Borrower and Commercial. Commercial's agreement to provide the Commercial Loan to Borrower is conditioned upon, among other things, the execution and delivery of the Commercial Subordination Agreement. E. In order to induce Lender and Moore to enter into the Commercial Subordination Agreement and to waive certain defaults under the Loan Documents, the parties have agreed to enter into this Agreement, as set forth below. NOW THEREFORE, in consideration of the premises, the mutual agreements herein contained, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree to modify the Loan Documents as follows: Agreement --------- 1. RECITALS. Borrower, Lender and Moore agree that the Recitals above are true and correct and are a part of this Agreement. 2. REAFFIRMATION OF LOAN. Borrower reaffirms all of its obligations arising under or with respect to the Loan, and Borrower acknowledges that it has no claims, offsets or defenses with respect to the payment of sums due under the Note, the Loan Agreement or any other Loan Documents. 3. DEFAULTS. Lender agrees that any and all defaults or events of default which may have occurred solely as a result of Borrower's failure to repay the Overdue Principal when due are hereby waived, but Lender expressly reserves any and all rights and remedies of Lender with respect to any other defaults or events of default which may have occurred and may now be continuing or which may occur after the date hereof. 4. EXISTING COLLATERAL. Borrower hereby ratifies, affirms and restates the security interests previously granted to Borrower to Lender as collateral for the Loan, in all of Borrower's right, title and interest in and to the assets of the Borrower, as provided in the Loan Agreement (the "EXISTING COLLATERAL"). 5. PLEDGE OF LANCER STOCK. In addition to the Existing Collateral, Borrower is hereby granting to Lender, and Lender shall have security interest in and to, any capital stock owned or held by Borrower as of the date of this Agreement in Lancer Orthodontics, Inc., a California corporation ("LANCER"), or any rights of any kind or nature arising from or incidental to ownership of said capital stock, including, without limitation, any rights to cash, stock and other property, dividends and any rights issued or paid on account of or with respect to such capital stock or proceeds thereof (the "LANCER COLLATERAL" and together with the Original Collateral, the "COLLATERAL"). In the event Borrower defaults under this Agreement or any other Loan Documents, Lender shall have all rights and remedies under the Loan Documents and applicable law. Borrower hereby irrevocably authorizes Lender at any time and from time to time to file any financing statements, amendments thereto and continuation statements as authorized by applicable law, to establish and maintain the validity, perfection and priority of the security interests in the Collateral granted in this Amendment and other Loan Documents. 6. PAYMENTS BY BORROWER TO LENDER. This Amendment establishes the following payments from the Borrower to the Lender for the Overdue Principal: 2 Borrower shall pay Lender the total back payments due of $53,250 no later than August 31, 2007. In addition, Borrower shall pay to Lender all other accrued interest, principal and other amounts in strict accordance with the Loan Documents. 7. ADDITIONAL INDEBTEDNESS. Borrower agrees not to have or incur, any indebtedness or obligations in favor of Commercial or its successors or assigns which is senior in priority of payment of security under the terms of the Commercial Subordination Agreement to the indebtedness of Borrower to Lender, except for, directly or indirectly, the indebtedness incurred under the Commercial Loan in the aggregate principal amount of Two Hundred Thousand Dollars ($200,000) and interest and expenses payable with respect to such loan. Borrower agrees not to amend, extend or modify the Commercial Loan without the prior consent of Lender. 9. On August 15, 2006, Lender agreed to an extension of the due date for the Note until September 1, 2007. Lender further agreed that, effective with the quarter ended November 30, 2006, the payments of $3,500 per month which are due upon the achievement of certain financial results as described in such Note, shall be reduced to $2,000 per month upon the achievement of the same results. 10. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender and Moore as follows: a. All representations and warranties made and given by Borrower in the Loan Documents are true, accurate and correct. b. The execution of and performance under the Loan Documents (including this Amendment) and the terms of the Commercial Loan, and the consummation of the transactions contemplated thereby and hereby will not conflict with, result in any breach of, adversely affect, or prevent Borrower from entering into, any agreement in connection with Borrower's payments of rent currently due. 11. FEES. Borrower shall pay to Moore, in immediately available funds, up to $750 in legal costs incurred by Moore in connection with the preparation, review and negotiation of this Amendment and the Commercial Subordination Agreement and related agreements, assignments and documents. Furthermore, Borrower shall indemnify and reimburse Lender and Moore for any liabilities, losses, claims, actions, costs and expenses (including reasonable legal costs and expenses) in connection with the Commercial Subordination Agreement, the enforcement thereof and any other costs and expenses of Lender or Moore required under the Commercial Subordination Agreement. 12. OTHER TERMS. All other terms of the Note, the Loan Agreement and the other Loan Documents not specifically modified by this Amendment remain in full force and effect. 3 [Signatures on the Following Page] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized representatives, effective as of the day and year first above written. Borrower Lender - -------- ------ BIOMERICA, INC. JANET MOORE, as Trustee of the JANET MOORE TRUST DATED AUGUST 21, 1998 By: /s/ Zackary S. Irani By: /s/ Janet Moore -------------------------- --------------------------- Name: Zack S. Irani Janet Moore, as Trustee and not Title: Chief Executive Officer individually Moore - ----- /s/ Janet Moore - --------------- JANET MOORE, as an individual 5 -----END PRIVACY-ENHANCED MESSAGE-----