Exhibit 10.1

LightPath Technologies, Inc.

 

Avidbank Corporate Finance,

a division of Avidbank

 

LOAN AND SECURITY AGREEMENT

 

 

 

 

This Loan And Security Agreement is entered into as of September 30, 2013, by
and between Avidbank Corporate Finance, a division of Avidbank (“Bank”) and
LightPath Technologies, Inc. (“Borrower”).

 

Recitals

 

Borrower wishes to obtain credit from time to time from Bank, and Bank desires
to extend credit to Borrower. This Agreement sets forth the terms on which Bank
will advance credit to Borrower, and Borrower will repay the amounts owing to
Bank.

 

Agreement

 

The parties agree as follows:

 

1.           Definitions and Construction.

 

1.1           Definitions. As used in this Agreement, the following terms shall
have the following definitions:

 

“Accounts” means all presently existing and hereafter arising accounts, contract
rights, payment intangibles, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower’s Books relating
to any of the foregoing.

 

“Advance” or “Advances” means a cash advance or cash advances under the
Revolving Facility.

 

“Affiliate” means, with respect to any Person, any Person that owns or controls
directly or indirectly such Person, any Person that controls or is controlled by
or is under common control with such Person, and each of such Person’s senior
executive officers, directors, and partners.

 

“Bank Expenses” means all: reasonable costs or expenses (including reasonable
attorneys’ fees and expenses) incurred in connection with the preparation,
negotiation, administration, and enforcement of the Loan Documents; reasonable
Collateral audit fees; and Bank’s reasonable attorneys’ fees and expenses
incurred in amending, enforcing or defending the Loan Documents (including fees
and expenses of appeal), incurred before, during and after an Insolvency
Proceeding, whether or not suit is brought.

 

“Borrower’s Books” means all of Borrower’s books and records including: ledgers;
records concerning Borrower’s assets or liabilities, the Collateral, business
operations or financial condition; and all computer programs, or tape files, and
the equipment, containing such information.

 

“Borrowing Base” means an amount equal to eighty percent (80%) of Eligible
Accounts, as determined by Bank with reference to the most recent Borrowing Base
Certificate delivered by Borrower.

 

“Borrower’s Knowledge” and terms and phrases of similar import, whether or not
capitalized, means (i) actual knowledge, awareness or belief possessed by the
executive officers and directors of Borrower, and (ii) the knowledge, awareness
or belief that the executive officers and directors would have possessed by
using reasonable care and diligence under the circumstances.

 

“Business Day” means any day that is not a Saturday, Sunday, or other day on
which banks in the State of California are authorized or required to close.

 

 

 

 

“Change in Control” shall mean a transaction in which any “person” or “group”
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient number
of shares of all classes of stock then outstanding of Borrower ordinarily
entitled to vote in the election of directors, empowering such “person” or
“group” to elect a majority of the Board of Directors of Borrower, who did not
have such power before such transaction.

 

“Chinese Subsidiary” means Borrower’s wholly owned Subsidiary named LightPath
Optical Instrumentation (Shanghai) Co., Ltd. formed under the laws of China.

 

“Closing Date” means the date of this Agreement.

 

“Code” means the California Uniform Commercial Code.

 

“Collateral” means the property described on Exhibit A attached hereto.

 

“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another;
(ii) any obligations with respect to undrawn letters of credit, corporate credit
cards, or merchant services issued or provided for the account of that Person;
and (iii) all obligations arising under any agreement or arrangement designed to
protect such Person against fluctuation in interest rates, currency exchange
rates or commodity prices; provided, however, that the term “Contingent
Obligation” shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by Bank in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.

 

“Copyrights” means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof.

 

“Credit Extension” means each Advance, Equipment Advance or any other extension
of credit by Bank for the benefit of Borrower hereunder.

 

“Current Liabilities” means, as of any applicable date, all amounts that should,
in accordance with GAAP, be included as current liabilities on the consolidated
balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the
extent not already included therein, all Obligations owing under the Revolving
Facility.

 

“Daily Balance” means the amount of the Obligations owed at the end of a given
day.

 

“Debt Service Coverage Ratio” means, as of any date of determination, a ratio of
(a) the sum of (i) earnings after tax annualized for the preceding three (3)
months plus interest and non-cash (i.e., depreciation and amortization, stock
compensation and change in the fair value of warrants) expenses agreed upon by
Bank, annualized for the preceding three (3) months to (b) the sum of (i)
current portion of long term debt and capitalized leases plus (ii) interest
expense, annualized for the preceding three (3) months.

 

“Draw Period” means a three month period, with the first period beginning on the
Closing Date and ending on the 90th day after the Closing Date, the second
period beginning on the 91st day after the Closing Date and ending on the 182nd
day after the Closing Date, the third period beginning on the 183rd day after
the Closing Date and ending on the 274th day after the Closing Date, and the
fourth period beginning on the 275th day after the Closing Date and ending on
the first anniversary of the Closing Date.

 

“Eligible Accounts” means those Accounts that arise in the ordinary course of
Borrower’s business that comply with all of Borrower’s representations and
warranties to Bank set forth in Section 5.4; provided, that standards of
eligibility may be fixed and revised from time to time by Bank in Bank’s
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts
shall not include the following:

 

 

 

 

(a)           Accounts that the account debtor has failed to pay within ninety
(90) days of invoice date;

 

(b)           Accounts with respect to an account debtor, twenty-five percent
(25%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;

 

(c)           Accounts with respect to which the account debtor is an officer,
employee, or agent of Borrower;

 

(d)           Accounts with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, demo or
promotional, or other terms by reason of which the payment by the account debtor
may be conditional;

 

(e)           Accounts with respect to which the account debtor is an Affiliate
of Borrower;

 

(f)           Accounts with respect to which the account debtor does not have
its principal place of business in the United States, except for Eligible
Foreign Accounts;

 

(g)           Accounts with respect to which the account debtor is the United
States or any department, agency, or instrumentality of the United States,
except for Accounts of the United States if the payee has assigned its payment
rights to Bank, the assignment has been acknowledged under the Assignment of
Claims Act of 1940 (31 U.S.C. Section 3727), and such assignment otherwise
complies with the Assignment of Claims Act to Bank's reasonable satisfaction in
the exercise of its reasonable credit judgment;

 

(h)           Accounts with respect to which Borrower is liable to the account
debtor for goods sold or services rendered by the account debtor to Borrower or
for deposits or other property of the account debtor held by Borrower, but only
to the extent of any amounts owing to the account debtor against amounts owed to
Borrower;

 

(i)           Accounts with respect to an account debtor, including Subsidiaries
and Affiliates, whose total obligations to Borrower exceed thirty percent (30%)
of all Accounts, to the extent such obligations exceed the aforementioned
percentage, except as approved in writing by Bank;

 

(j)           Accounts that have not yet been billed to the account debtor or
that relate to deposits (such as good faith deposits) or other property of the
account debtor held by Borrower for the performance of services or delivery of
goods which Borrower has not yet performed or delivered;

 

(k)           Prebillings, retention billings, progress billings or bonded
receivables;

 

(l)           Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; or

 

(m)          Accounts which Bank reasonably determines to be unsatisfactory for
inclusion as an Eligible Account.

 

“Eligible Foreign Accounts” means Accounts with respect to which the account
debtor does not have its principal place of business in the United States and
that (i) are supported by one or more letters of credit in an amount and of a
tenor, and issued by a financial institution, reasonably acceptable to Bank,
(ii) covered in full by credit insurance reasonably satisfactory to Bank, less
any deductible, or (iii) that Bank approves on a case-by-case basis.

 

“Equipment” means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

 

 

 

 

“Equipment Advance” or “Equipment Advances” means each a cash advance or cash
advances under Section 2.1(b).

 

“Equipment Maturity Date” means, with respect to all Equipment Advances made
during any particular Draw Period, the 10th day of the thirty-sixth month
following the end of such Draw Period, and in any event, no later than the
fourth anniversary of the Closing Date.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder.

 

“Event of Default” has the meaning assigned in Article 8.

 

“GAAP” means generally accepted accounting principles as in effect from time to
time.

 

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.

 

“Insolvency Proceeding” means any proceeding commenced by or against any person
or entity under any provision of the United States Bankruptcy Code, as amended,
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

 

“Intellectual Property” means all of Borrower’s right, title, and interest in
and to the following: Copyrights, Trademarks and Patents; all trade secrets, all
design rights, claims for damages by way of past, present and future
infringement of any of the rights included above, all licenses or other rights
to use any of the Copyrights, Patents or Trademarks, and all license fees and
royalties arising from such use to the extent permitted by such license or
rights; all amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and all proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.

 

“Inventory” means all inventory in which Borrower has or acquires any interest,
including work in process and finished products intended for sale or lease or to
be furnished under a contract of service, of every kind and description now or
at any time hereafter owned by or in the custody or possession, actual or
constructive, of Borrower, including such inventory as is temporarily out of its
custody or possession or in transit and including any returns upon any accounts
or other proceeds, including insurance proceeds, resulting from the sale or
disposition of any of the foregoing and any documents of title representing any
of the above, and Borrower’s Books relating to any of the foregoing.

 

“Investment” means any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.

 

“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.

 

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

 

“Loan Documents” means, collectively, this Agreement, any note or notes executed
by Borrower, any guarantees by third parties, and any other agreement entered
into in connection with this Agreement or any other credit facilities or
services provided by Bank to Borrower (including pursuant to that certain
Lockbox Service Agreement between Borrower and Bank dated as of August 6, 2013
and as amended from time to time), all as amended or extended from time to time.

 

“Material Adverse Effect” means a material adverse effect on (i) the business
operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents or
(iii) the value or priority of Bank’s security interests in the Collateral.

 

 

 

 

“Negotiable Collateral” means all letters of credit of which Borrower is a
beneficiary, notes, drafts, instruments, securities, documents of title, and
chattel paper, and Borrower’s Books relating to any of the foregoing.

 

“Obligations” means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.

 

“Patents” means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.

 

“Periodic Payments” means all installments or similar recurring payments that
Borrower may now or hereafter become obligated to pay to Bank pursuant to the
terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrower and Bank.

 

“Permitted Indebtedness” means:

 

(a)           Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;

 

(b)           Indebtedness existing on the Closing Date and disclosed in the
Schedule;

 

(c)           Indebtedness secured by a lien described in clause (c) of the
defined term “Permitted Liens,” provided (i) such Indebtedness does not exceed
the lesser of the cost or fair market value of the equipment financed with such
Indebtedness and (ii) such Indebtedness (excluding such Indebtedness in favor of
Bank) does not exceed $250,000 in the aggregate at any given time;

 

(d)           Subordinated Debt;

 

(e)           Indebtedness incurred in connection with the terms of any lease
agreement for facilities to which Borrower or its foreign Subsidiary is
currently a party to or any lease agreement hereinafter entered into by Borrower
or its foreign Subsidiary in the ordinary course of business, including, but not
limited to any tenant improvements; and

 

(f)           Indebtedness incurred in connection with the extension, renewal or
refinancing of the indebtedness described in clauses (a) through (e) above,
provided that the principal amount of the indebtedness being extended, renewed
or refinanced does not increase or the terms modified do not impose more
burdensome terms upon Borrower or its Subsidiary, as the case may be.

 

“Permitted Investment” means:

 

(a)           Investments, including the ownership of Shares, existing on the
Closing Date and disclosed in the Schedule; and

 

(b)           (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having rating of at least A-2 or P-2 from either
Standard & Poor’s Corporation or Moody’s Investors Service, (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank and (iv) Borrower’s money market accounts at Bank or
disclosed in the Schedule (provided that such accounts are subject to account
control agreement(s) in form and substance satisfactory to Bank).

 

 

 

 

“Permitted Liens” means the following:

 

(a)           Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;

 

(b)           Liens for taxes, fees, assessments or other governmental charges
or levies, either not delinquent or being contested in good faith by appropriate
proceedings, provided the same have no priority over any of Bank’s security
interests;

 

(c)           Liens (i) upon or in any equipment which was not financed by Bank
acquired or held by Borrower or any of its Subsidiaries to secure the purchase
price of such equipment or indebtedness incurred solely for the purpose of
financing the acquisition of such equipment, (ii) existing on such equipment at
the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment or (iii) upon or in any equipment which was leased by Borrower as
disclosed in the Schedule or is leased hereafter; and

 

(d)           Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.

 

“Person” means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.

 

“Prime Rate” means the variable rate of interest, per annum, that appears in The
Wall Street Journal from time to time, whether or not such announced rate is the
lowest rate available from Bank. If the Prime Rate is no longer published in the
Wall Street Journal or is otherwise no longer available, Bank will choose a new
index within its reasonable discretion that is determined by the Bank to be
based upon comparable information.

 

“Required Approvals” means the filing of an application and registration with,
and the approval by the Ministry of Commerce, the State Administration for
Industry and Commerce, the foreign exchange authority and other applicable
governmental agencies of the Peoples Republic of China required for the grant,
creation, attachment, perfection and enforceability of a security interest in
the equity interests of the Chinese Subsidiary.

 

“Responsible Officer” means each of the Chief Executive Officer and the Chief
Financial Officer of Borrower.

 

“Revolving Facility” means the facility under which Borrower may request Bank to
issue Advances, as specified in Section 2.1(a) hereof.

 

“Revolving Line” means a credit extension of up to One Million Dollars
($1,000,000).

 

“Revolving Maturity Date” means the first anniversary of the Closing Date.

 

“Schedule” means the schedule of exceptions attached hereto and approved by
Bank, if any.

 

“Shares” is one hundred percent (100%) of the issued and outstanding capital
stock, membership units or other securities owned or held of record by a
Borrower or any Subsidiary of Borrower, in any direct or indirect domestic
Subsidiary; and sixty five percent (65%) of the issued and outstanding capital
stock, membership units or other securities owned or held of record by a
Borrower or any Subsidiary of Borrower, in any direct or indirect foreign
Subsidiary; provided however the Shares shall not include any shares of the
Chinese Subsidiary (the “PRC Shares”) until the Required Approvals have been
obtained.

 

 

 

 

“Subordinated Debt” means any debt incurred by Borrower that is subordinated to
the debt owing by Borrower to Bank on terms acceptable to Bank (and identified
as being such by Borrower and Bank).

 

“Subsidiary” means any corporation, company or partnership in which (i) any
general partnership interest or (ii) more than 50% of the stock or other units
of ownership which by the terms thereof has the ordinary voting power to elect
the Board of Directors, managers or trustees of the entity, at the time as of
which any determination is being made, is owned by Borrower, either directly or
through an Affiliate.

 

“Trademarks” means any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks.

 

1.2           Accounting Terms. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
“financial statements” shall include the notes and schedules thereto.

 

2.           Loan and Terms Of Payment.

 

2.1           Credit Extensions.

 

Borrower promises to pay to the order of Bank, in lawful money of the United
States of America, the aggregate unpaid principal amount of all Credit
Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest
on the unpaid principal amount of such Credit Extensions at rates in accordance
with the terms hereof.

 

(a)          Revolving Advances.

 

(i)           Subject to and upon the terms and conditions of this Agreement,
Borrower may request Advances in an aggregate outstanding amount not to exceed
the lesser of (i) the Revolving Line or (ii) the Borrowing Base. Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving
Maturity Date, at which time all Advances under this Section 2.1(a) shall be
immediately due and payable. Interest hereunder shall be due and payable on the
last business day of each month during the term hereof. Borrower may prepay any
Advances without penalty or premium.

 

(ii)           Whenever Borrower desires an Advance, Borrower will notify Bank
by email, facsimile transmission or telephone no later than 2:00 p.m. Pacific
Time, on the Business Day that is one day before the Business Day the Advance is
to be made. Each such notification shall be promptly confirmed by a Borrowing
Base Certificate in substantially the form of Exhibit C hereto. Bank is
authorized to make Advances under this Agreement, based upon instructions
received from a Responsible Officer or a designee of a Responsible Officer, or
without instructions if in Bank’s discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any email or telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer or a designee thereof, and Borrower shall
indemnify and hold Bank harmless for any damages or loss suffered by Bank as a
result of such reliance. Bank will credit the amount of Advances made under this
Section to Borrower’s deposit account at Bank.

 

(b)          Equipment Advances.

 

(i)           Subject to and upon the terms and conditions of this Agreement, at
any time from the date hereof through the first anniversary of the Closing Date,
Bank agrees to make Equipment Advances to Borrower, each in a minimum amount of
$100,000, and in an aggregate amount not to exceed One Million Dollars
($1,000,000). Each Equipment Advance shall not exceed one hundred percent (100%)
of the invoice amount of Equipment and software approved by Bank from time to
time (which Borrower shall, in any case, have closed the purchase within 90 days
of the date of the corresponding Equipment Advance), and not more than twenty
five percent (25%) of each Equipment Advance being used for taxes, shipping,
warranty charges, freight discounts and installation expense and other soft
costs.

 

 

 

 

(ii)           Interest shall accrue from the date of each Equipment Advance at
the rate specified in Section 2.3, and shall be payable monthly on the tenth day
of each month so long as any Equipment Advances are outstanding. Equipment
Advances made during any particular Draw Period shall be payable in thirty six
(36) equal monthly installments of principal, plus all accrued interest,
beginning on the tenth day of the month following the end of such Draw Period,
and continuing on the tenth day of each month thereafter through the Equipment
Maturity Date, at which time all amounts owing under this Section 2.1(b) and any
other amounts owing under this Agreement shall be immediately due and payable.
Equipment Advances, once repaid, may not be reborrowed. Borrower may prepay any
Equipment Advances without penalty or premium.

 

(iii)           When Borrower desires to obtain an Equipment Advance, Borrower
shall notify Bank (which notice shall be irrevocable) by electronic mail or
facsimile transmission to be received no later than 3:00 p.m. Pacific time three
(3) Business Days before the day on which the Equipment Advance is to be made.
Such notice shall be substantially in the form of the Equipment Advance Request
Form attached hereto as Exhibit B. The notice shall be signed by a Responsible
Officer or its designee and include a copy of the invoice and proof of payment
of such invoice for any Equipment to be financed and such other information as
Bank may reasonably request.

 

2.2          Overadvances. If the aggregate amount of the outstanding Advances
exceeds the lesser of the Revolving Line or the Borrowing Base at any time,
Borrower shall immediately pay to Bank, in cash, the amount of such excess.

 

2.3          Interest Rates, Payments, and Calculations.

 

(a)           Interest Rates.

 

(i)           Except as set forth in Section 2.3(b), the Advances shall bear
interest, on the outstanding Daily Balance thereof, at a per annum rate equal to
one percent (1%) above the Prime Rate.

 

(ii)           Except as set forth in Section 2.3(b), the Equipment Advances
shall bear interest, on the outstanding Daily Balance thereof, at a per annum
rate equal to one and one half percent (1.5%) above the Prime Rate.

 

(b)          Late Fee; Default Rate. If any payment is not made within ten (10)
days after the date such payment is due, Borrower shall pay Bank a late fee
equal to the lesser of (i) five percent (5%) of the amount of such unpaid amount
or (ii) the maximum amount permitted to be charged under applicable law. All
Obligations shall bear interest, from and after the occurrence and during the
continuance of an Event of Default, at a rate equal to five (5) percentage
points above the interest rate applicable immediately prior to the occurrence of
the Event of Default.

 

(c)          Payments. Bank shall, at its option, charge such interest, all Bank
Expenses, and all Periodic Payments against any of Borrower’s deposit accounts
or against the Revolving Line, in which case those amounts shall thereafter
accrue interest at the rate then applicable hereunder. Any interest not paid
when due shall be compounded by becoming a part of the Obligations, and such
interest shall thereafter accrue interest at the rate then applicable hereunder.
All payments shall be free and clear of any taxes, withholdings, duties,
impositions or other charges, to the end that Bank will receive the entire
amount of any Obligations payable hereunder, regardless of source of payment.

 

(d)          Lockbox. After an Event of Default has occurred: (i) upon Bank’s
request, Borrower shall cause all account debtors to wire any amounts owing to
Borrower to such account (the “Bancontrol Account”) as Bank shall specify, and
to mail all payments made by check to a post office box under Bank’s control.
All invoices shall specify such post office box as the payment address; (ii)
Bank shall have sole authority to collect such payments and deposit them to the
Bancontrol Account; (iii) if Borrower receives any amount despite such
instructions, Borrower shall immediately deliver such payment to Bank in the
form received, except for an endorsement to the order of Bank and, pending such
delivery, shall hold such payment in trust for Bank; and (iv) within two (2)
Business Days after clearance of any checks, Bank may, in its sole discretion,
credit any amounts paid into the Bancontrol Account first against any amounts
outstanding under the Revolving Line, and then any remaining balance of such
amount shall be credited to Borrower’s operating account maintained at Bank.
Bank may, at its option, conduct a credit check of the Account Debtor for each
Eligible Account requested by Borrower for inclusion in the Borrowing Base. Bank
may also verify directly with the respective account debtors the validity,
amount and other matters relating to the Eligible Accounts, and notify any
account debtor of Bank’s security interest in the Borrower’s Accounts.

 

 

 

 

(e)           Computation. In the event the Prime Rate is changed from time to
time hereafter, the applicable rate of interest hereunder shall be increased or
decreased, effective as of the day the Prime Rate is changed, by an amount equal
to such change in the Prime Rate. All interest chargeable under the Loan
Documents shall be computed on the basis of a three hundred sixty (360) day year
for the actual number of days elapsed.

 

2.4          Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment shall be immediately applied to conditionally
reduce Obligations, but shall not be considered a payment on account unless such
payment is of immediately available federal funds or unless and until such check
or other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Bank after 12:00 noon Pacific Time shall be deemed to have been received by
Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of such
extension.

 

2.5          Fees. Borrower shall pay to Bank the following:

 

(a)           Facility Fees. On the Closing Date, a facility fee equal to
$5,000, which shall be fully earned and nonrefundable; and

 

(b)           Bank Expenses. On the Closing Date, all Bank Expenses incurred
through the Closing Date, including reasonable attorneys’ fees and expenses and,
after the Closing Date, all Bank Expenses, including reasonable attorneys’ fees
and expenses, as and when they are incurred by Bank.

 

2.6           Term. This Agreement shall become effective on the Closing Date
and, subject to Section 12.8, shall continue in full force and effect for so
long as any Obligations remain outstanding or Bank has any obligation to make
Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Credit Extensions under
this Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank’s Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.

 

3.           Conditions of Loans.

 

3.1          Conditions Precedent to Initial Credit Extension. The obligation of
Bank to make the initial Credit Extension is subject to the condition precedent
that Bank shall have received, in form and substance reasonably satisfactory to
Bank, the following:

 

(a)           this Agreement;

 

(b)           a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;

 

(c)           UCC National Form Financing Statement;

 

 

 

 

(d)          an intellectual property security agreement;

 

(e)           landlord waiver with respect to Borrower’s leased locations in
Florida;

 

(f)           certificate(s) of insurance naming Bank as loss payee and
additional insured for insurance policies of Borrower and its domestic
Subsidiaries;

 

(g)           payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof;

 

(h)          current financial statements of Borrower as disclosed in Borrower’s
Form 10-K;

 

(i)           unconditional guaranty duly executed by Borrower’s wholly owned
Subsidiary, GELTECH INC., and a certificate of the Secretary of such entity with
respect to incumbency and resolutions authorizing the execution and delivery of
the guaranty;

 

(j)           delivery of the share certificates representing the Shares, if
certificated, and stock powers held by Borrower;

 

(k)          an audit of the Collateral, the results of which shall be
satisfactory to Bank;

 

(l)           execution of lockbox agreements and related arrangements with
respect to the Bancontrol Account; and

 

(m)         such other documents, and completion of such other matters, as Bank
may reasonably deem necessary or appropriate.

 

3.2          Conditions Precedent to all Credit Extensions. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:

 

(a)           timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and

 

(b)           the representations and warranties contained in Section 5 shall be
true and correct in all material respects on and as of the date of Borrower’s
request for such Credit Extension and on the effective date of each Credit
Extension as though made at and as of each such date, and no Event of Default
shall have occurred and be continuing, or would exist after giving effect to
such Credit Extension. The making of each Credit Extension shall be deemed to be
a representation and warranty by Borrower on the date of such Credit Extension
as to the accuracy of the facts referred to in this Section 3.2.

 

4.           Creation of Security Interest.

 

4.1           Grant of Security Interest. Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof (subject only to Permitted Liens that
are permitted pursuant to the terms of this Agreement to have superior priority
to Bank’s Lien in this Agreement, and, with respect to the PRC Shares, subject
to the obtainment of the Required Approvals).

 

4.2           Delivery of Additional Documentation Required. Borrower shall from
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue the
perfection of Bank’s security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
Borrower from time to time may deposit with Bank specific time deposit accounts
to secure specific Obligations. Borrower authorizes Bank to hold such balances
in pledge and to decline to honor any drafts thereon or any request by Borrower
or any other Person to pay or otherwise transfer any part of such balances for
so long as the Obligations are outstanding.

 

 

 

 

4.3           Right to Inspect. Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower’s usual business hours but no more than twice a year (unless an
Event of Default has occurred and is continuing), to inspect Borrower’s Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower’s financial condition or the amount, condition of, or
any other matter relating to, the Collateral.

 

4.4           Pledge of Shares. Borrower hereby pledges, assigns and grants to
Bank, a security interest in all the Shares, together with all proceeds and
substitutions thereof, all cash, stock and other moneys and property paid
thereon, all rights to subscribe for securities declared or granted in
connection therewith, and all other cash and noncash proceeds of the foregoing,
as security for the performance of the Obligations. On the Closing Date, or, to
the extent not certificated as of the Closing Date, within ten (10) days of the
certification of any Shares, the certificate or certificates for the Shares will
be delivered to Bank, accompanied by an instrument of assignment duly executed
in blank by Borrower. To the extent required by the terms and conditions
governing the Shares, Borrower shall cause the books of each entity whose Shares
are part of the Collateral and any transfer agent to reflect the pledge of the
Shares. Upon the occurrence of an Event of Default hereunder, Bank may effect
the transfer of any securities included in the Collateral (including but not
limited to the Shares) into the name of Bank and cause new (as applicable)
certificates representing such securities to be issued in the name of Bank or
its transferee. Borrower will execute and deliver such documents, and take or
cause to be taken such actions, as Bank may reasonably request to perfect or
continue the Shares. Unless an Event of Default shall have occurred and be
continuing, Borrower shall be entitled to exercise any voting rights with
respect to the Shares, to give consents, waivers and ratifications in respect
thereof, and receive and retain any and all dividends and other distributions
paid with respect to the Shares, provided that no vote shall be cast or consent,
waiver or ratification given or action taken which would be inconsistent with
any of the terms of this Agreement or which would constitute or create any
violation of any of such terms. All such rights to vote and give consents,
waivers and ratifications shall terminate upon the occurrence and continuance of
an Event of Default.

 

5.           Representations and Warranties.

 

Borrower represents and warrants as follows:

 

5.1           Due Organization and Qualification. Borrower and each Subsidiary
is a corporation duly existing under the laws of its state of incorporation and
qualified and licensed to do business in any state in which the conduct of its
business or its ownership of property requires that it be so qualified in which
the failure to so qualify could reasonably be expected to have a Material
Adverse Effect.

 

5.2           Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower’s powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower’s Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any material agreement to which it is a party or by which it is bound.

 

5.3           No Prior Encumbrances. Borrower has good and marketable title to
its property, free and clear of Liens, except for Permitted Liens.

 

5.4           Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The property and services giving rise to such Eligible
Accounts has been delivered or rendered to the account debtor or to the account
debtor’s agent for immediate and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.

 

 

 

 

5.5           Merchantable Inventory. All Inventory is in all material respects
of good and marketable quality, free from all material defects, except for
Inventory for which adequate reserves have been made.

 

5.6           Intellectual Property. Borrower is the sole owner of the
Intellectual Property, except for non-exclusive licenses granted by Borrower to
its customers in the ordinary course of business and those exclusive licenses
granted by Borrower and disclosed in the Schedule. Each of the Patents is valid
and enforceable, and no part of the Intellectual Property has been judged
invalid or unenforceable, in whole or in part, and to Borrower’s Knowledge, no
written claim has been made that any part of the Intellectual Property violates
the rights of any third party. Except as set forth in the Schedule, Borrower’s
rights as a licensee of intellectual property do not give rise to more than five
percent (5%) of its gross revenue in any given month, including without
limitation revenue derived from the sale, licensing, rendering or disposition of
any product or service. Borrower is not a party to, or bound by, any agreement
that restricts the grant by Borrower of a security interest in Borrower’s rights
under such agreement.

 

5.7           Name; Location of Chief Executive Office. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof; or, in the past five (5) years, changed
its jurisdiction of formation, corporate structure, organizational type, or any
organizational number assigned by its jurisdiction. The chief executive office
of Borrower is located at the address indicated in Section 10 hereof. All
Borrower’s Inventory and Equipment is located only at the locations set forth in
the Schedule.

 

5.8           Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency which would, if there were an unfavorable
decision, has or could reasonably be expected to result in a Material Adverse
Effect.

 

5.9           No Material Adverse Change in Financial Statements. All
consolidated and consolidating financial statements related to Borrower and any
Subsidiary that Bank has received from Borrower fairly present in all material
respects Borrower’s financial condition as of the date thereof and Borrower’s
consolidated and consolidating results of operations for the period then ended.
There has not been a material adverse change in the consolidated or the
consolidating financial condition of Borrower since the date of the most recent
of such financial statements submitted to Bank.

 

5.10         Solvency, Payment of Debts. Borrower is solvent and able to pay its
debts (including trade debts) as they mature.

 

5.11         Regulatory Compliance. Borrower and each Subsidiary have met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA, and no event has occurred resulting from Borrower’s failure to
comply with ERISA that could result in Borrower’s incurring any material
liability. Borrower is not an “investment company” or a company “controlled” by
an “investment company” within the meaning of the Investment Company Act of
1940. Borrower is not engaged principally, or as one of the important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulations T and U of the Board of
Governors of the Federal Reserve System). Borrower and each Subsidiary have
complied in all material respects with all the provisions of the Federal Fair
Labor Standards Act. Borrower and each Subsidiary have not violated any material
statutes, laws, ordinances or rules applicable to it.

 

5.12         Environmental Condition. None of Borrower’s or any Subsidiary’s
properties or assets has ever been used by Borrower or any Subsidiary or, to
Borrower’s Knowledge, by previous owners or operators, in the disposal of, or to
produce, store, handle, treat, release, or transport, any hazardous waste or
hazardous substance other than in accordance with applicable law; to Borrower’s
Knowledge, none of Borrower’s properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as a
hazardous waste or hazardous substance disposal site, or a candidate for closure
pursuant to any environmental protection statute; no lien arising under any
environmental protection statute has attached to any revenues or to any real or
personal property owned by Borrower or any Subsidiary; and neither Borrower nor
any Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.

 

 

 

 

5.13         Taxes. Borrower and each Subsidiary have filed or caused to be
filed all tax returns required to be filed, and have paid, or have made adequate
provision for the payment of, all taxes reflected therein.

 

5.14         Subsidiaries. Except as set forth on the Schedule, Borrower does
not own any stock, partnership interest or other equity securities of any
Person, except for Permitted Investments.

 

5.15         Government Consents. Borrower and each Subsidiary have obtained all
material consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower’s business as currently
conducted, except in each case as could not have or reasonably be expected to
result in a Material Adverse Effect.

 

5.16         Operating, Depository and Investment Accounts. As of the Closing
Date, all of Borrower’s or any Subsidiary’s operating, depository and investment
accounts are listed on the Schedule (collectively, the “Permitted Accounts”). On
and after the 45th day following the Closing Date, none of Borrower’s nor any
domestic Subsidiary’s accounts are maintained or invested with a Person other
than Bank, except as permitted under Section 6.8.

 

5.17         Shares. Subject to the satisfaction of and obtaining the Required
Approvals and compliance with applicable laws as to the PRC Shares, Borrower has
full power and authority to create a first lien on the Shares and no disability
or contractual obligation exists that would prohibit Borrower from pledging the
Shares pursuant to this Agreement. To Borrower’s Knowledge, there are no
subscriptions, warrants, rights of first refusal or other restrictions on
transfer relative to, or options exercisable with respect to the Shares. The
Shares have been and will be duly authorized and validly issued, and are fully
paid and non-assessable. To Borrower’s Knowledge, the Shares are not the subject
of any present or threatened suit, action, arbitration, administrative or other
proceeding, and Borrower knows of no reasonable grounds for the institution of
any such proceedings. Borrower shall use commercially reasonable efforts to make
any filings or registrations or obtain any approvals that are required in
connection with the grant and creation of the security interest in the PRC
Shares as soon as reasonably practicable following request from Bank.

 

5.18         Full Disclosure. To Borrower’s Knowledge, no representation,
warranty or other statement made by Borrower in any certificate or written
statement furnished to Bank contains any untrue statement of a material fact or
omits to state a material fact necessary in order to make the statements
contained in such certificates or statements not misleading.

 

5.19         PRC Shares. Notwithstanding anything in this Agreement to the
contrary, all representations and warranties with respect to any matter related
to the Chinese Subsidiary, including, without limitation, any representation or
warranty regarding the grant, creation, attachment, perfection or enforceability
of a security interest in any of the PRC Shares are subject to the satisfaction
of and obtaining the Required Approvals and compliance with applicable laws as
to the PRC Shares.

 

6.           Affirmative Covenants.

 

Borrower shall do all of the following:

 

6.1           Good Standing. Borrower shall maintain its and each of its
Subsidiaries’ corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to do so could reasonably be expected to have a Material Adverse Effect.
Borrower shall maintain, and shall cause each of its Subsidiaries to maintain,
in force all licenses, approvals and agreements, the loss of which could
reasonably be expected to have a Material Adverse Effect.

 

6.2           Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect.

 

 

 

 

6.3           Financial Statements, Reports, Certificates. Borrower shall
deliver the following to Bank: (a) within thirty (30) days after the last day of
each month, aged listings of accounts receivable and accounts payable, together
with a deferred revenue listing and a Borrowing Base Certificate signed by a
Responsible Officer in substantially the form of Exhibit C hereto; (b) as soon
as available, but in any event within forty-five (45) days after the end of each
month, a Compliance Certificate signed by a Responsible Officer in substantially
the form of Exhibit D hereto; (c) as soon as available, but in any event within
(45) days after the end of each quarter, a Borrower prepared consolidated and
consolidating balance sheet, income, and cash flow statement covering Borrower’s
consolidated operations during such period, prepared in accordance with GAAP,
consistently applied, in a form reasonably acceptable to Bank; provided,
however, that the filing of such financial statements with the Securities and
Exchange Commission through EDGAR will satisfy Borrower’s delivery obligations
hereunder upon notice to Bank of such filings; (d) as soon as available, but in
any event within one hundred twenty (120) days after the end of Borrower’s
fiscal year, audited consolidated and consolidating financial statements of
Borrower prepared in accordance with GAAP, consistently applied, together with
an unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; provided, however that the
filing of such financial statements and opinion of an independent certified
public accounting firm with the Securities and Exchange Commission through EDGAR
will satisfy Borrower’s delivery obligations hereunder upon notice to Bank of
such filings; (e) unless complete copies of the following are not available on
EDGAR, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt; (f) promptly upon receipt of notice thereof, a report of any legal actions
pending or threatened against Borrower or any Subsidiary that could result in
damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars
($100,000) or more, or any commercial tort claim (as defined in the Code)
acquired by Borrower; (g) within 30 days following the end of each month, copies
of all bank statements with respect to all accounts of Borrower or any
Subsidiary; and (h) such budgets, sales projections, operating plans, other
financial information including information related to the verification of
Borrower’s Accounts as Bank may reasonably request from time to time. For the
avoidance of doubt, all information disclosed by Borrower, or any of its
Subsidiaries, to Bank pursuant to this Section 6.3, shall be kept confidential
by Bank in accordance with Section 12.9.

 

6.4           Audits. Bank shall have a right from time to time hereafter to
audit Borrower’s Accounts and appraise Collateral at Borrower’s expense,
provided that such audits will be conducted no more often than every twelve (12)
months unless an Event of Default has occurred and is continuing.

 

6.5           Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement. Borrower shall promptly
notify Bank of all returns and recoveries and of all disputes and claims, where
the return, recovery, dispute or claim involves more than One Hundred Thousand
Dollars ($100,000).

 

6.6           Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.

 

6.7           Insurance.

 

 (a)           Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower’s
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower’s business, ownership and use of the Collateral in amounts
and of a type that are customary to businesses similar to Borrower’s.

 

 

 

 

(b)           All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank. All such
policies of property insurance insuring property located in the United States
shall contain a lender’s loss payable endorsement, in a form reasonably
satisfactory to Bank, showing Bank as an additional loss payee thereof, and all
liability insurance policies issued to Borrower or its domestic Subsidiaries
shall show the Bank as an additional insured and shall specify that the insurer
must give at least twenty (20) days’ notice to Bank before canceling its policy
for any reason. Upon Bank’s request, Borrower shall deliver to Bank certified
copies of such policies of insurance and evidence of the payments of all
premiums therefor. All proceeds payable under any such policy shall, at the
option of Bank, be payable to Bank to be applied on account of the Obligations.
Notwithstanding the foregoing, (x) so long as no Event of Default has occurred
that is continuing, Borrower shall have the option of applying the proceeds of
any casualty policy up to One Million Dollars ($1,000,000) in the aggregate for
all losses under all casualty policies in any one year, toward the replacement
or repair of destroyed or damaged property; provided that any such replaced or
repaired property shall be of equal or like value as the replaced or repaired
Collateral and shall be deemed Collateral in which Bank has been granted a first
priority security interest, and (y) after the occurrence and during the
continuance of an Event of Default, all proceeds payable under such casualty
policy shall, at the option of Bank, be payable to Bank on account of the
Obligations. Borrower shall give Bank prompt written notice (which shall in no
event be greater than ten (10) days following such occurrence) of the occurrence
of any casualty affecting the Collateral or properties covered by the insurance
policies required by this Section 6.7(b) or any portion thereof.

 

6.8         Operating, Depository and Investment Accounts. On and after the 45th
day following the Closing Date, Borrower shall maintain and shall cause each of
its domestic Subsidiaries to maintain its primary depository and operating
accounts with Bank. For each operating, depository or investment account,
including each Permitted Account, that Borrower maintains outside of Bank,
Borrower shall either: (a) cause the applicable bank or financial institution at
or with which any such account is maintained to execute and deliver an account
control agreement or other appropriate instrument in form and substance
reasonably satisfactory to Bank; or (b) maintain an account balance in each such
Permitted Account in an amount not to exceed Ten Thousand Dollars ($10,000) at
any given time.

 

6.9         Financial Covenants.

 

(a)           Minimum Quick Ratio. Borrower shall maintain at a ratio of
unrestricted cash and cash equivalents (not including any cash held in
Bancontrol Account) plus all accounts receivable to Current Liabilities of at
least 1.50 to 1.00, measured on a quarterly basis.

 

(b)           Debt Service Coverage Ratio. Borrower’s Debt Service Coverage
Ratio, measured on a quarterly basis, shall be at least 1.25 to 1.00.

 

6.10        Intellectual Property Rights.

 

(a)           Protect, defend and maintain the validity and enforceability of
its Intellectual Property; (ii) promptly advise Bank in writing of material
infringements of its Intellectual Property; and (iii) not allow any Intellectual
Property material to Borrower’s business to be abandoned, forfeited or dedicated
to the public without Bank’s written consent.

 

(b)           Borrower shall promptly give Bank written notice of any
applications or registrations of intellectual property rights filed with the
United States Patent and Trademark Office, including the date of such filing and
the registration or application numbers, if any. Borrower shall (i) give Bank
not less than thirty (30) days prior written notice of the filing of any
applications or registrations with the United States Copyright Office, including
the title of such intellectual property rights to be registered, as such title
will appear on such applications or registrations, and the date such
applications or registrations will be filed, and (ii) prior to the filing of any
such applications or registrations, shall execute such documents as Bank may
reasonably request for Bank to maintain its perfection in such intellectual
property rights to be registered by Borrower, and upon the request of Bank,
shall file such documents simultaneously with the filing of any such
applications or registrations. Upon filing any such applications or
registrations with the United States Copyright Office, Borrower shall promptly
provide Bank with (i) a copy of such applications or registrations, without the
exhibits, if any, thereto, (ii) evidence of the filing of any documents
requested by Bank to be filed for Bank to maintain the perfection and priority
of its security interest in such intellectual property rights, and (iii) the
date of such filing.

 

 

 

 

(c)           Bank may audit Borrower's Intellectual Property to confirm
compliance with this Section, provided such audit may not occur more often than
twice per year, unless an Event of Default has occurred and is continuing. Bank
shall have the right, but not the obligation, to take, at Borrower's sole
expense, any actions that Borrower is required under this Section to take but
which Borrower fails to take, after fifteen (15) days' notice to Borrower.
Borrower shall reimburse and indemnify Bank for all reasonable costs and
reasonable expenses incurred in the reasonable exercise of its rights under this
Section.

 

6.11         Further Assurances. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.

 

7.           Negative Covenants.

 

Borrower will not do any of the following:

 

7.1           Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a “Transfer”), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business; or (iii) Transfers of worn-out
or obsolete Equipment which was not financed by Bank.

 

7.2           Change in Business; Change in Control or Executive Office. Engage
in any business, or permit any of its Subsidiaries to engage in any business,
other than the businesses currently engaged in by Borrower and any business
substantially similar or related thereto (or incidental thereto); cease to
conduct business substantially in the manner conducted by Borrower as of the
Closing Date; or suffer or permit a Change in Control; or without thirty (30)
days prior written notification to Bank, relocate its chief executive office or
state of incorporation or change its legal name; or without Bank’s prior written
consent, change the date on which its fiscal year ends.

 

7.3           Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, provided
however, that Borrower may acquire all or substantially all of the capital stock
or property of another Person with prior notice to Bank (but without the prior
written consent of Bank) if each the following conditions is applicable: (i) no
Event of Default has occurred, is continuing or would exist after giving effect
to such transactions, (ii) such transactions do not result in a Change in
Control, (iii) Borrower is the surviving entity, and (iv) after giving effect to
such transaction, Borrower remains in full compliance with all financial
covenants set forth herein.

 

7.4           Indebtedness. Create, incur, guarantee, assume or be or remain
liable with respect to any Indebtedness, or permit any Subsidiary so to do,
other than Permitted Indebtedness.

 

7.5           Encumbrances. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens, or enter into any agreement
with any Person other than Bank not to grant a security interest in, or
otherwise encumber, any of its property, or permit any Subsidiary to do so.

 

7.6           Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock, or permit any of its Subsidiaries to do so, except that Borrower may
repurchase the stock of former employees pursuant to stock repurchase agreements
as long as an Event of Default does not exist prior to such repurchase or would
not exist after giving effect to such repurchase, and the aggregate amount of
such repurchase does not exceed $100,000 in any fiscal year.

 

 

 

 

7.7           Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments; or maintain or invest any of its property with
a Person other than Bank or permit any of its Subsidiaries to do so unless such
Person has entered into an account control agreement with Bank in form and
substance reasonably satisfactory to Bank (provided however that Borrower and
its Chinese Subsidiary may maintain accounts with foreign financial institutions
that are not subject to an account control agreement in favor of Bank,
consistent with past practices and in the ordinary course of business); or
suffer or permit any Subsidiary to be a party to, or be bound by, an agreement
that restricts such Subsidiary from paying dividends or otherwise distributing
property to Borrower.

 

7.8           Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for (i) transactions that are in the ordinary course of Borrower’s business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm’s length transaction with a non-affiliated Person; and
(ii) transactions with Chinese Subsidiary pursuant to transfer pricing
arrangements consistent with past practices and in the ordinary course of
business.

 

7.9           Subordinated Debt. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank’s
prior written consent.

 

7.10         Inventory and Equipment. Store the Inventory or the Equipment with
a bailee, warehouseman, or other third party unless the third party has been
notified of Bank’s security interest and Bank (a) has received an acknowledgment
from the third party that it is holding or will hold the Inventory or Equipment
for Bank’s benefit or (b) is in pledge possession of the warehouse receipt,
where negotiable, covering such Inventory or Equipment. Store or maintain any
Equipment or Inventory at a location other than the locations set forth in the
Schedule.

 

7.11         Compliance. Become an “investment company” or be controlled by an
“investment company,” within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could reasonably be expected to have a Material
Adverse Effect, or a material adverse effect on the Collateral or the priority
of Bank’s Lien on the Collateral, or permit any of its Subsidiaries to do any of
the foregoing.

 

8.           Events of Default.

 

Any one or more of the following events shall constitute an Event of Default by
Borrower under this Agreement:

 

8.1           Payment Default. If Borrower fails to pay, when due, any of the
Obligations;

 

8.2           Covenant Default.

 

 (a)           If Borrower fails to perform any obligation under Article 6 other
than Section 6.1, 6.2, or 6.10(a) or violates any of the covenants contained in
Article 7 of this Agreement; or

 

 (b)           If Borrower fails or neglects to perform or observe any provision
of Section 6.1, 6.2, 6.10(a) or any other material term, provision, condition,
covenant contained in this Agreement, in any of the Loan Documents, or in any
other present or future agreement between Borrower and Bank and as to any
default under such other term, provision, condition or covenant that can be
cured, has failed to cure such default within twenty (20) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within the
twenty (20) day period or cannot after diligent attempts by Borrower be cured
within such twenty (20) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional reasonable
period (which shall not in any case exceed an additional twenty (20) days) to
attempt to cure such default, and within such reasonable time period the failure
to have cured such default shall not be deemed an Event of Default but no Credit
Extensions will be made.

 

 

 

 

8.3           Material Adverse Effect. If there occurs any circumstance or
circumstances that could reasonably be expected to have a Material Adverse
Effect;

 

8.4           Attachment. If any portion of Borrower’s assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within twenty (20) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any part of its business affairs, or if a judgment or other claim
becomes a lien or encumbrance upon any portion of Borrower’s assets, or if a
notice of lien, levy, or assessment is filed of record with respect to any of
Borrower’s assets by the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or governmental
agency, and the same is not paid within twenty (20) days after Borrower receives
notice thereof, provided that none of the foregoing shall constitute an Event of
Default where such action or event is stayed or an adequate bond has been posted
pending a good faith contest by Borrower (provided that no Credit Extensions
will be required to be made during such cure period);

 

8.5           Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within forty five (45) days
(provided that no Credit Extensions will be made prior to the dismissal of such
Insolvency Proceeding);

 

8.6           Other Agreements. If there is a default or other failure to
perform in any agreement to which Borrower is a party or by which it is bound
resulting in a right by a third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of One
Hundred Thousand Dollars ($100,000) or which could reasonably be expected to
have a Material Adverse Effect;

 

8.7           Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent the payment is allowed under any
subordination agreement entered into with Bank;

 

8.8           Judgments. If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of at least One Hundred Thousand
Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of twenty (20) days (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment);

 

8.9           Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document; or

 

8.10         Guaranty. If any guaranty of all or a portion of the Obligations (a
“Guaranty”) ceases for any reason to be in full force and effect, or any
guarantor fails to perform any obligation under any Guaranty or a security
agreement securing any Guaranty (collectively, the “Guaranty Documents”), or any
event of default occurs under any Guaranty Document or any guarantor revokes or
purports to revoke a Guaranty, or any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
in any Guaranty Document or in any certificate delivered to Bank in connection
with any Guaranty Document, or if any of the circumstances described in Sections
8.3 through 8.8 occur with respect to any guarantor or becomes subject to any
criminal prosecution, or any circumstances arise causing Bank, in good faith, to
become insecure as to the satisfaction of any of any guarantor’s obligations
under the Guaranty Documents.

 

 

 

 

9.           Bank’s Rights and Remedies.

 

9.1           Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:

 

(a)           Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in
Section 8.5, all Obligations shall become immediately due and payable without
any action by Bank);

 

(b)           Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement or under any other agreement between Borrower and
Bank;

 

(c)           Make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Borrower agrees
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which in Bank’s determination appears to be prior
or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower’s owned premises, Borrower
hereby grants Bank a license to enter into possession of such premises and to
occupy the same, without charge, in order to exercise any of Bank’s rights or
remedies provided herein, at law, in equity, or otherwise;

 

(d)           Set off and apply to the Obligations any and all (i) balances and
deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to or
for the credit or the account of Borrower held by Bank;

 

(e)           Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral. Bank is hereby granted a license or other right, solely pursuant to
the provisions of this Section 9.1, to use, without charge, Borrower’s labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank’s
exercise of its rights under this Section 9.1, Borrower’s rights under all
licenses and all franchise agreements shall inure to Bank’s benefit;

 

(f)           Dispose of the Collateral by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places (including
Borrower’s premises) as Bank determines is commercially reasonable, and apply
any proceeds to the Obligations in whatever manner or order Bank deems
appropriate;

 

(g)           Bank may credit bid and purchase at any public sale; and

 

(h)           Any deficiency that exists after disposition of the Collateral as
provided above will be paid immediately by Borrower.

 

9.2           Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank’s designated officers, or employees) as Borrower’s true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank’s security interest in the Accounts; (b) notify all
account debtors with respect to the Accounts to pay Bank directly; (c) sign
Borrower’s name on any invoice or bill of lading relating to any Account, drafts
against account debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to account debtors; (d) make, settle, and adjust all
claims under and decisions with respect to Borrower’s policies of insurance; (e)
demand, collect, receive, sue, and give releases to any account debtor for the
monies due or which may become due upon or with respect to the Accounts and to
compromise, prosecute, or defend any action, claim, case or proceeding relating
to the Accounts; (f) settle and adjust disputes and claims respecting the
accounts directly with account debtors, for amounts and upon terms which Bank
determines to be reasonable; (g) sell, assign, transfer, pledge, compromise,
discharge or otherwise dispose of any Collateral; (h) receive and open all mail
addressed to Borrower for the purpose of collecting the Accounts; (i) endorse
Borrower’s name on any checks or other forms of payment or security that may
come into Bank’s possession; (j) execute on behalf of Borrower any and all
instruments, documents, financing statements and the like to perfect Bank's
interests in the Accounts and Collections and file, in its sole discretion, one
or more financing or continuation statements and amendments thereto, relative to
any of the Collateral; and (k) do all acts and things necessary or expedient, in
furtherance of any such purposes; provided however Bank may exercise such power
of attorney with respect to any actions described in clause (j) above,
regardless of whether an Event of Default has occurred. The appointment of Bank
as Borrower’s attorney in fact, and each and every one of Bank’s rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank’s obligation to
provide Credit Extensions hereunder is terminated.

 

 

 

 

9.3           Accounts Collection. In addition to the foregoing, at any time
after the occurrence of an Event of Default, Bank may notify any Person owing
funds to Borrower of Bank’s security interest in such funds and verify the
amount of such Account. Borrower shall collect all amounts owing to Borrower for
Bank, receive in trust all payments as Bank’s trustee, and immediately deliver
such payments to Bank in their original form as received from the account
debtor, with proper endorsements for deposit.

 

9.4           Bank Expenses. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following after
reasonable notice to Borrower: (a) make payment of the same or any part thereof;
(b) set up such reserves under a loan facility in Section 2.1 as Bank deems
necessary to protect Bank from the exposure created by such failure; or
(c) obtain and maintain insurance policies of the type discussed in Section 6.7
of this Agreement, and take any action with respect to such policies as Bank
deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.

 

9.5           Bank’s Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.

 

9.6           Shares. Borrower recognizes that Bank may be unable to effect a
public sale of any or all the Shares, by reason of certain prohibitions
contained in federal securities laws and applicable state and provincial
securities laws or otherwise, and may be compelled to resort to one or more
private sales thereof to a restricted group of purchasers which will be obliged
to agree, among other things, to acquire such securities for their own account
for investment and not with a view to the distribution or resale thereof.
Borrower acknowledges and agrees that any such private sale may result in prices
and other terms less favorable than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall be
deemed to have been made in a commercially reasonable manner. Bank shall be
under no obligation to delay a sale of any of the Shares for the period of time
necessary to permit the issuer thereof to register such securities for public
sale under federal securities laws or under applicable state and provincial
securities laws, even if such issuer would agree to do so. Upon the occurrence
of an Event of Default which continues, Bank shall have the right to exercise
all such rights as a secured party under the Code as it, in its sole judgment,
shall deem necessary or appropriate, including without limitation the right to
liquidate the Shares and apply the proceeds thereof to reduce the Obligations.
Effective only upon the occurrence and during the continuance of an Event of
Default, Borrower hereby irrevocably appoints Bank (and any of Bank’s designated
officers, or employees) as such Borrower’s true and lawful attorney to enforce
such Borrower’s rights against any Subsidiary, including the right to compel any
Subsidiary to make payments or distributions owing to such Borrower.

 

 

 

 

9.7           Remedies Cumulative. Bank’s rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower’s part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.

 

9.8           Demand; Protest. Borrower waives, to the extent permitted by
applicable law, demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees at any time held by Bank
on which Borrower may in any way be liable.

 

10.          Notices.

 

Unless otherwise provided in this Agreement, all notices or demands by any party
relating to this Agreement or any other agreement entered into in connection
herewith shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by a recognized overnight delivery
service, certified mail, postage prepaid, return receipt requested, or by email
or telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:

 

If to Borrower: LightPath Technologies, Inc.   2603 Challenger Tech Ct., Suite
100   Orlando, FL 32826   Attn:  Dorothy Cipolla   FAX:  (407)  382-4007  
Email: dcipolla@lightpath.com       with a copy to:   Baker & Hostetler LLP  
200 South Orange Avenue, Suite 2300   Orlando, FL 32801   Attn: Jeffrey E.
Decker, Esq.   FAX: (407) 841-0168   Email: jdecker@bakerlaw.com     If to Bank:
Avidbank Corporate Finance,   a division of Avidbank   400 Emerson Street   Palo
Alto, CA 94301   Attn:  Jon Krogstad   FAX: 650-323-6527   Email:
jkrogstad@avidbank.com       and       FAX:  (650) 289-0124   Email:
corpfinance@avidbank.com

 

The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.

 

 

 

 

11.           CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

 

This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

 

If the jury waiver set forth in this Section is not enforceable, then any
dispute, controversy or claim arising out of or relating to this Agreement, the
Loan Documents or any of the transactions contemplated therein shall be settled
by judicial reference pursuant to Code of Civil Procedure Section 638 et seq.
before a referee sitting without a jury, such referee to be mutually acceptable
to the parties or, if no agreement is reached, by a referee appointed by the
Presiding Judge of the California Superior Court for Santa Clara County. This
Section shall not restrict a party from exercising remedies under the Code or
from exercising pre-judgment remedies under applicable law.

 

12.         General Provisions.

 

12.1           Successors and Assigns. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank’s prior written consent, which consent
may be granted or withheld in Bank’s sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank’s
obligations, rights and benefits hereunder.

 

12.2           Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys’ fees and
expenses), except for losses caused by Bank’s gross negligence or willful
misconduct.

 

12.3           Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.

 

12.4           Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.

 

12.5           Correction of Loan Documents. Bank may correct patent errors and
fill in any blanks in this Agreement and the other Loan Documents consistent
with the agreement of the parties.

 

12.6           Amendments in Writing, Integration. Neither this Agreement nor
the Loan Documents can be amended or terminated orally. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Agreement and the Loan
Documents, if any, are merged into this Agreement and the Loan Documents.

 

12.7           Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement. In
the event that any signature is delivered by facsimile transmission or by e-mail
delivery of a “.pdf” format data file, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile or “.pdf”
signature page were an original thereof. Notwithstanding the foregoing, Borrower
shall deliver all original signed documents requested by Bank no later than ten
(10) Business Days following the Closing Date.

 

 

 

 

12.8           Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding or Bank has any obligation to make Credit
Extensions to Borrower. The obligations of Borrower to indemnify Bank with
respect to the expenses, damages, losses, costs and liabilities described in
Section 12.2 shall survive until all applicable statute of limitations periods
with respect to actions that may be brought against Bank have run.

 

12.9           Confidentiality. In handling any confidential information Bank
and all employees and agents of Bank, including but not limited to accountants,
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the loans, provided that they are similarly bound by confidentiality
obligations, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.

 

12.10           Patriot Act Notice. Bank hereby notifies Borrower that, pursuant
to the requirements of the USA Patriot Act, Title III of Pub. L. 107-56 (signed
into law on October 26, 2001) (the “ Patriot Act "), it is required to obtain,
verify and record information that identifies the Borrower, which information
includes names and addresses and other information that will allow Bank, as
applicable, to identify the Borrower in accordance with the Patriot Act.

 

[signature page follows]

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.

 

  LightPath Technologies, Inc.       By: /s/ J. James Gaynor         Title:
President & CEO       Avidbank Corporate Finance,   a division of Avidbank      
By: /s/ Jon Krogstad         Title: Senior Vice President