EXHIBIT 10.1
 
LOAN AND SECURITY AGREEMENT
 
This Loan and Security Agreement, is entered into as of September 30, 2013, by
and among Alpha Capital Anstalt (“Lender”), Andalay Solar, Inc. (“Borrower”), a
Delaware corporation, and Collateral Services, LLC (the “Collateral Agent”).
 
RECITALS
 
A.           Borrower has requested that Lender make loans to Borrower for
business purposes.
 
B.           Lender is willing to make such loans to Borrower, on the terms and
conditions set forth in this Agreement, and Borrower agrees to make the payments
required by this Agreement and to comply with the other terms and conditions of
this Agreement.
 
AGREEMENT
 
For good and valuable consideration, receipt of which is hereby acknowledged,
the parties agree as set forth below.
 
1. Definitions and Construction.
 
1.1. Definitions.  As used in this Agreement, the following terms shall have the
following
 
definitions:
 
“Account Debtor” means a person obligated on an Account, Chattel Paper, or
General Intangible.
 
“Accounts” means all currently existing and hereafter arising accounts as
defined in the Code, as such definition may be changed from time to time, and
shall include, but not be limited to a right to payment of a monetary obligation
for property sold or services rendered, and any and all credit insurance,
guaranties, or security therefor.
 
“Affiliate” means, when used with respect to any Person, any other Person which,
directly or indirectly, controls or is controlled by or is under common control
with such Person. For purposes of this definition, “control” (including the
correlative meanings of the terms “controlled by” and “under common control
with”), with respect to any Person, shall mean possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities or
by contract or otherwise.
 
“Agreement” means this Loan and Security Agreement together with all addenda,
exhibits and schedules hereto, as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated, or replaced.
 
“Allowable Amount” means the lesser of the Borrowing Base and the Maximum
Amount.
 
“A/R Borrowing Base” has the meaning set forth in the definition of Borrowing
Base.
 
 
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“A/R Line of Credit” means the aggregate amount at any given time of Advances
calculated with respect to the face amount of the Accounts pursuant to the A/R
Borrowing Base, as the amount thereof shall change from time to time. (The A/R
Line of Credit is and shall be secured by all the Collateral.)
 
“Authenticate” has the meaning given in the Code, as such definition may be
amended from time to time, which means to sign, execute, or otherwise adopt a
symbol, or encrypt or similarly process a record in whole or in part, with the
present intention of the authenticating person to identify the person and adopt
or accept a record.
 
“Authorized Officer” means any officer or employee of Borrower as set forth in
that certain Signature Authorization of even date herewith, as it may be amended
from time to time.
 
“Bankruptcy Code” means Title 11 of the United States Code, as amended and any
successor statute.
 
“Borrower” has the meaning set forth in the preamble to this Agreement,
individually and collectively.
 
“Borrower’s Books” means all of Borrower’s books and records, including, without
limitation, ledgers, records indicating, summarizing, or evidencing Borrower’s
properties or assets (including, without limitation, the Collateral) or
liabilities, all information relating to Borrower’s business operations or
financial condition, and all computer programs, disc or tape files, printouts,
runs, or other computer prepared information, and the equipment containing such
information.
 
“Borrowing Base” means the sum of the following:
 
(a.) eighty percent (80 %) of the Net Face Amount of Prime Accounts, but in any
event not in an aggregate amount in excess of the Maximum Account Advance (the
“A/R Borrowing Base”); plus (b.) fifty percent (50%) of the Current Market Cost
of raw materials that constitute Eligible Inventory; plus (c.) sixty five
percent (65%) of the Current Market Cost of finished goods that constitute
Eligible Inventory; plus (d) ninety five percent (95%) of the cash in the
Blocked Account, but in any event not in an aggregate amount in excess of the
Maximum Inventory Advance (the “Inventory Borrowing Base”).
 
“Business Day(s)” means any day that is not a Saturday, Sunday, or other day on
which New York State or national banks are authorized or required to be closed.
 
“CERCLA” has the meaning given in the definition of Environmental Laws.
 
“Chattel Paper” has the meaning given in the Code, as such definition may be
amended from time to time, which defines Chattel Paper as a record or records
that evidence both (a.) a monetary obligation; and (b.) a Security Interest in
(i.) specific goods; (ii.) a Security Interest in specific goods and Software
used in the goods; (iii.) a Security Interest in specific goods and license of
Software used in the goods; or (iv.) a lease of specific goods and license of
Software used in the goods.
 
“Chief Executive Office” means Borrower’s sole place of business (if it has only
one), chief executive office (if it has more than one place of business) or
residence (if an individual) which is located at 1475 S. Bascom Avenue, Suite
101, Campbell, California 95008.
 
“Closing Date” means the date of the initial advance hereunder.
 
 
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“Code” or “UCC” means the New York Uniform Commercial Code, or any successor
statute in effect in the state of California, as amended and/or re-numbered from
time to time, which is also known as the UCC.
 
“Collateral” means all of the personal property and Trade Fixtures now owned or
hereafter acquired by Borrower whether now existing or hereafter arising and
wherever located, including without limitation: (a.) all Accounts; (b.) all
Chattel Paper including without limitation Electronic Chattel Paper; (c.) all
Inventory; (d.) all Equipment; (e.) all Trade Fixtures; (f.) all Fixtures; (g.)
all Instruments; (h.) all Financial Assets, including without limitation,
Investment Property; (i.) all Documents; (j.) all Deposit Accounts; (k.) all
Letter of Credit Rights; (l.) all General Intangibles including without
limitation copyrights, trademarks, and patents, Payment Intangibles, Software,
and all rights in and to domain names in whatever form, and all derivative URLs;
(m.) all Supporting Obligations; (n.) any Commercial Tort Claim listed on any
schedule provided herewith or hereafter; (o.) all returned or repossessed goods
arising from or relating to any Accounts or Chattel Paper; (p.) all certificates
of title and certificates of origin or manufacturers statements of origin
relating to any of the foregoing, now owned or hereafter acquired; (q.) all
property similar to any of the foregoing hereafter acquired by Borrower; (r.)
all ledger sheets, files, records, documents, instruments, and other books and
records (including without limitation related electronic data processing
Software) evidencing an interest in or relating to the above; (s.) all money,
cash or cash equivalents; and (t.) to the extent not otherwise included in the
foregoing, all proceeds, products, insurance claims, and other rights to payment
and all accessions to, replacements for, attachments to, substitutions for, and
rents and profits of, and noncash proceeds of, each of the foregoing.
Notwithstanding any contrary term of this Agreement, Collateral shall not
include any waste or other materials that have been or may be designated as
toxic or hazardous.
 
“Commercial Tort Claim” has the meaning given in the Code, as such definition
may be amended from time to time, which means a claim arising in tort with
respect to which the claimant is an organization or if the claimant is an
individual, the claim arose in (a.) the course of the claimant’s business or
profession; and (b.) does not include damages arising out of personal injury to
or death of an individual.
 
“Concentration Limit” means the maximum permitted percentage in the aggregate,
that one Account Debtor may constitute of Borrower’s total Accounts, as further
described in subsection (u) of the definition of Prime Accounts.
 
“Current Market Cost” means, as determined by Lender in good faith, the lower of
(a.) cost of Inventory, computed on a first-in-first-out basis in accordance
with GAAP; or (b.) market value of Inventory.
 
“Daily Balance” means the principal amount of any Obligations owed at the end of
a given day, which shall be calculated for purposes of calculating interest that
no payment made by check or other means, including without limitation wire
transfer, ACH transfer, credit card payment or any other means shall be deemed
to be made until three (3) Business Days after receipt by Lender of such
payments to allow for clearance thereof, as provided in Section 3.4 hereof;
provided however, that all payments when received shall be given provisional
credit for purposes of determining availability of Advances under the Agreement.
 
“Delinquent Accounts” means Accounts that remain uncollected for more than one
hundred twenty (120) days from the invoice date.
 
“Deposits” means the Good Faith Deposit and the Documentation Fee/Legal Deposit
as further described in Section 2.2.11 hereof and any other deposit that Lender
may require on a case by case basis.
 
“Deposit Account(s)” has the meaning given in the Code, as such definition may
be amended from time to time, including without limitation, a demand, time,
savings, passbook, or similar account maintained with a bank or other depository
institution.
 
“Dilution Rate” means the percentage rate at which Borrower’s Prime Accounts are
subject to reduction due to credits, returns, and allowances.
 
“Documents” has the meaning given in the Code, as such definition may be amended
from time to time.
 
“Electronic Chattel Paper” has the meaning given in the Code, as such definition
may be amended from time to time, which defines Electronic Chattel Paper as
Chattel Paper evidenced by a record or records consisting of information stored
in an electronic medium.
 
“Eligible Inventory” means Inventory that meets all of the following criteria:
 
(a.) Inventory acceptable to Lender, in its Sole Discretion, for lending
purposes;
 
(b.) Inventory held for sale or lease in the ordinary course of Borrower’s
business;
 
 
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(c.) Inventory located at Borrower’s Chief Executive Office or Other Locations;
provided, however, that if any such location is owned by a party other than
Borrower, Lender shall have obtained from the owner thereof an agreement
relative to Lender’s rights with respect to such Inventory, in form and content
satisfactory to Lender;
 
(d.) Inventory in which Lender has a first priority, perfected Security Interest
under the laws of the United States of America or any state of the United States
of America;
 
(e.) Inventory not subject to a Security Interest, lien, or other encumbrance in
favor of any other Person, except for Permitted Liens;
 
(f.) Inventory of good and merchantable quality that is free from defect and
that is not slow moving, obsolete, returned, perishable, or manufactured under a
license agreement unless the licensor (if other than Borrower) has entered into
an agreement in form and content reasonably acceptable to Lender;
 
(g.) Inventory owned and in the lawful possession of Borrower;
 
(h.) Inventory which does not consist of packaging and shipping materials; and
 
(i.) Inventory that does not consist of supplies used or consumed in Borrower’s
business or work-in process.
 
General criteria for Eligible Inventory may be established and revised from time
to time by Lender in good faith. Any Inventory that is not Eligible Inventory
shall nevertheless be part of the Collateral.
 
“Environmental Laws” means all federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders, decrees, permits,
concessions, grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges or releases
of pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes into the environment,
including ambient air, surface water, ground water, or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, petroleum or
petroleum products, chemicals, or industrial, toxic or hazardous substances or
wastes or the clean-up or other remediation thereof, including without
limitation 42 U.S.C. §9601 (14), of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (“CERCLA”), as amended by the Superfund
Amendments and Reauthorization Act of 1986 set forth at 42 U.S.C. §9601 et seq.
(“SARA”), or the Resource Conservation and Recovery Act of 1976 set forth at 42
U.S.C. §9601 et seq. (“RCRA”) and all successor statutes and amendments thereto.
 
“EPA” means the United States Environmental Protection Agency.
 
“Equipment” means all of Borrower’s now owned and hereafter acquired equipment
as defined in the Code, as such definition may be amended from time to time, and
wherever located, and shall include, but not be limited to, all goods (other
than inventory, farm products, or consumer goods) including without limitation
machinery, computers and computer hardware and Software (whether owned or
licensed), vehicles, tools, furniture, Trade Fixtures, all attachments,
accessions and property now or hereafter affixed thereto or used in connection
therewith, and substitutions and replacements thereof, wherever located.
 
“Exhibit” means that certain Exhibit A hereto.
 
“Financial Assets” has the meaning given in the Code, as such definitions may be
amended from time to time, which defines Financial Assets as any of the
following: (a.) a security; (b.) an obligation of a person or a share,
participation, or other interest in a person or in property or an enterprise of
a person, that is, or is of a type, dealt in or traded on financial markets or
that is recognized in any area in which it is issued or dealt in as a medium for
investment; and (c.) any property that is held by a securities intermediary for
another person in a securities account that has expressly agreed with the other
person that the property is to be treated as a financial asset.
 
 
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“Fixtures” has the meaning given in the Code, as such definition may be amended
from time to time, which defines Fixtures as goods that have become so related
to particular real property that an interest in them arises under property law,
but shall not include Trade Fixtures.
 
“GAAP” means generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and pronouncements of the Financial Accounting
Standards Board (or any successor authority) that are applicable as of the date
of determination.
 
“General Intangibles” means general intangibles as defined in the Code, as such
definition may be amended from time to time, (and shall include, but not be
limited to, registered and unregistered patents, trademarks, service marks,
copyrights, trade names, domain names and all derivative URL’s, applications for
the foregoing, trade secrets, goodwill, processes, drawings, blueprints,
customer lists, licenses, whether as licensor or licensee, choses in action and
other claims and existing and future leasehold interests in Equipment, Payment
Intangibles and Software), all whether arising under the laws of the United
States of America or any other country.
 
“Hazardous Substances” and “Hazardous Wastes” means all or any of the following:
 
(a.) substances that are defined or listed in, or otherwise classified pursuant
to, any applicable laws or regulations as “hazardous substances,” “hazardous
materials,” “hazardous wastes,” “toxic substances,” or any other formulation
intended to define, list, or classify substances by reason of deleterious
properties such as ignitability, corrosivity, reactivity, carcinogenicity,
reproductive toxicity, or “EP toxicity”;
 
(b.) oil, petroleum, or petroleum derived substances, natural gas, natural gas
liquids, synthetic gas drilling fluids, produced waters, and other wastes
associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources;
 
(c.) any flammable substances or explosives or any radioactive materials; and
 
(d.) asbestos in any form or electrical equipment which contains any oil or
dielectric fluid containing levels of polychlorinated biphenyls in excess of
fifty (50) parts per million.
 
“Indebtedness” means all of the following:
 
(a.) all indebtedness for borrowed money (whether by loan or the issuance and
sale of debt securities);
 
(b.) that portion of obligations with respect to capital leases that is properly
classified as a liability on a balance sheet in conformity with GAAP;
 
(c.) acceptances, bonds, indentures, notes payable, and drafts accepted
representing extensions of credit whether or not representing obligations for
borrowed money;
 
(d.) any obligation owed for all or any part of the deferred purchase price of
property or services if the purchase price is due more than six (6) months from
the date the obligation is incurred or is evidenced by a note or similar written
instrument;
 
(e.) all indebtedness secured by any lien on any property or asset owned or held
by Borrower regardless of whether the indebtedness secured thereby shall have
been assumed by Borrower or is nonrecourse to the credit of Borrower;
 
(f.) contingent obligations to the extent such obligations are no longer
contingent but become absolute and remain unpaid;
 
(g.) all obligations, contingent or otherwise, relative to the face amount of
any letter of credit, letter of credit guaranties, bankers acceptances, interest
rate swaps, controlled disbursement accounts, or other financial products;
 
 
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(h.) any unfunded obligation of Borrower or any of its subsidiaries to a
multiemployer plan required to be accrued by GAAP; and
 
(i.) obligations of Borrower guaranteeing or intended to guarantee (whether
guaranteed, endorsed, comade discounted, or sold with recourse to Borrower), any
indebtedness, lease, dividend, letter of credit, or other obligation of any
other Person.
 
“Insolvency Proceeding” means any case, proceeding, or matter commenced by or
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, including, without limitation, assignments for the
benefit of creditors, formal or informal moratoria, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other similar relief.
 
“Instrument” has the meaning given in the Code, as such definition may be
amended from time to time, which defines an Instrument as a negotiable
instrument or any other writing that evidences a right to payment of a monetary
obligation, is not itself a security agreement or lease, and is of a type that
in the ordinary course of business is transferred by delivery with any necessary
endorsement or assignment. Instrument shall include but not be limited to
promissory notes.
 
“Inventory” means all present and future inventory, as defined in the Code, as
such definition may be amended from time to time, in which Borrower has any
interest and wherever located, and shall include but not be limited to, goods
held for sale or lease or to be furnished under a contract of service and all of
Borrower’s present and future raw materials, work in process, finished goods,
and packing and shipping materials, wherever located, and any documents of title
representing any of the above.
 
“Inventory Line of Credit” means the aggregate amount at any given time of
Advances calculated with respect to the value of Eligible Inventory pursuant to
the Inventory Borrowing Base, as the amount thereof may change from time to
time. (The Inventory Line of Credit is and shall be secured by all the
Collateral.)
 
“Investment Property” has the meaning given in the Code, as such definition may
be amended from time to time, which defines Investment Property as securities,
security accounts, commodity contracts, or commodity accounts.
 
“IRC” means the Internal Revenue Code of 1986, Title 26 of the United States
Code, as amended and/or re-numbered, including any successor statute, and the
regulations thereunder.
 
“Lender Expenses” includes, without limitation, all of the following:
 
(a.) reasonable costs or expenses (including without limitation taxes,
photocopying, notarization, telecommunication, insurance premiums, and postage)
paid by Lender in connection with Lender’s transactions with Borrower;
 
(b.) reasonable costs and expenses required to be paid by Borrower under any of
the Loan Documents that are paid or advanced by Lender in connection with
Lender’s transactions with Borrower;
 
(c.) reasonable documentation, filing, recording, publication, appraisal
(including periodic Collateral appraisals) and search fees assessed, paid, or
incurred by Lender in connection with Lender’s transactions with Borrower;
 
(d.) reasonable costs and expenses incurred by Lender in the disbursement of
funds to Borrower (by wire transfer or otherwise);
 
(e.) reasonable charges paid or incurred by Lender in connection with Lender’s
transactions with Borrower, resulting from the dishonor of checks in connection
with Lender’s transactions with Borrower; costs and expenses paid or incurred by
Lender to correct any default or enforce any provision of the Loan Documents, or
in gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, preparing for sale, or advertising to sell the Collateral or any
portion thereof, irrespective of whether a sale is consummated;
 
 
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(f.) reasonable costs and expenses paid or incurred by Lender in examining
Borrower’s Books.
 
(g.) a $6,500 Dollars fee payable to Lender’s counsel Grushko & Mittman, P.C.;
and
 
(h.) reasonable costs and expenses of third party claims or any other suit paid
or incurred by Lender in enforcing or defending the Loan Documents and adjusting
or settling disputes and claims with Account Debtors with respect to Borrower’s
Accounts; and Lender’s reasonable Attorneys’ Fees and expenses (whether for
legal services incurred by and expenses from outside counsel and/or from
in-house counsel and staff) incurred in advising, structuring, drafting,
reviewing, administering, amending, terminating, or enforcing this Agreement or
the other Loan Documents (including reasonable Attorneys’ Fees and expenses
incurred in such adjusted or settled disputes and claims, and in connection with
a “workout,” a “restructuring,” or an Insolvency Proceeding concerning Borrower
of the Obligations, irrespective of whether suit is brought). The Attorneys’
Fees incurred by Lender in any Insolvency Proceeding shall include, without
limitation, those incurred in connection with debtor-in-possession financing,
motions for relief from automatic stay, and actions to determine
dischargeability, and defending, or concerning the Loan Documents.
 
“Letter of Credit Rights” has the meaning given in the Code, as such definition
may be amended from time to time, which defines Letter of Credit Rights as a
right to payment or performance under a letter of credit, whether or not
beneficiary has demanded or is at the time entitled to demand payment or
performance.
 
“Line of Credit” means the aggregate amount at any given time of Advances made
under the A/R Line of Credit, the Inventory Line of Credit or otherwise under
this Agreement as the amount thereof may change from time to time. (The Line of
Credit is and shall be secured by all of the Collateral.)
 
“Loan Documents” means collectively, this Agreement, and all notes, other
guarantees, security agreements, subordination agreements, and other agreements,
documents and instruments now or at any time hereafter executed and/or delivered
by Borrower in connection with this Agreement or otherwise, as the same now
exist or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced.
 
“Material Adverse Change” means a material adverse change in any one or more of
the following:
 
(a.) Borrower’s, any subsidiary’s assets, operations, business, or financial
condition, or business;
 
(b.) Borrower’s ability to pay and perform the Obligations when due; (c.) any
material property in which Lender holds a Security Interest; (d.) the perfection
or priority of any such Security Interest; or (e.) Lender’s rights and remedies
under any Loan Documents.
 
“Maximum Account Advance” means $200,000.
 
“Maximum Amount” means $500,000.
 
“Maximum Inventory Advance” means $300,000.
 
“Note” has the meaning given in Section 8.1.23 hereof.
 
“Net Face Amount” means, with respect to an Account, the gross face amount of
such Account less all trade discounts or other deductions to which the Account
Debtor is entitled.
 
 
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“Obligations” means (a.) the due and punctual payment of all amounts due or to
become due under this Agreement; (b.) the performance of all obligations of
Borrower under the Loan Documents; and (c.) all present and future obligations
owing by Borrower to Lender whether or not for the payment of money, whether or
not evidenced by any note or other instrument, whether direct or indirect,
absolute or contingent, due or to become due, joint or several, primary or
secondary, liquidated or unliquidated, secured or unsecured, original or renewed
or extended, whether arising before, during or after the commencement of any
bankruptcy case in which Borrower is a debtor, (each, an “Insolvency
Proceeding”), including but not limited to Lender Expenses and any obligations
arising pursuant to letters of credit or acceptance transactions or any other
financial accommodations; and all principal, interest, fees, charges, Lender
Expenses, reasonable Attorneys’ Fees, Audit Fees, and accountants’ fees
chargeable to Borrower or incurred by Lender in connection with the Loan
Documents. Except to the extent otherwise provided, this Agreement does not
secure any obligation described above which is secured by a consensual lien on
real property.
 
 “Other Locations” means that or those physical locations, other than Borrower’s
Chief Executive Office, including but not limited to additional business
offices, warehouses, other storage facilities, both public and non-public, or
the like, where Borrower operates its business and/or stores collateral, more
specifically set forth below, but excluding sales offices and locations where no
collateral is maintained.
 
“Overadvance” means the amount by which the principal balance of any sums
advanced plus any applicable reserves exceed the Allowable Amount.
 
“Payment Intangibles” means a General Intangible under which the Account
Debtor’s principal obligation is a monetary obligation.
 
“Permitted Indebtedness” means all of the following:
 
(a.) Indebtedness evidenced by this Agreement or the Loan Documents or any other
debt owed to Lender;
 
(b.) amounts owing under license in the ordinary course of Borrower’s business,
so long as the licensor has entered into an agreement in favor of Lender in form
and content satisfactory to Lender.
 
(c.) subordinated debt that is subject to a subordination agreement in favor of
Lender in form and content reasonably satisfactory to Lender;
 
(d.) Permitted Purchase Money Indebtedness for Acquisition of Fixed Assets;
 
(e.) the Indebtedness set forth in the latest financial statements of Borrower
submitted to Lender on or prior to the Closing Date;
 
(f.) Indebtedness secured by Permitted Liens;
 
(g.) refinancings, renewals, or extensions of the foregoing, provided: (i.) the
terms and conditions of such refinancings, renewals, or extensions do not
materially impair the prospects of repayment of the Obligations by Borrower;
(ii.) the net cash proceeds of such refinancings, renewals, or extensions do not
result in an increase in the aggregate principal amount of the Indebtedness so
refinanced, renewed, or extended; (iii.) such refinancings, renewals, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended; and (iv.) that to the extent
that the Indebtedness that is refinanced was subordinated in right of payment to
the Obligations, then the subordination terms and conditions of the refinancing
of the Indebtedness must be at least as favorable to Lender as those applicable
to the refinanced Indebtedness; and
 
(h.) unsecured debt arising from the regular course of business not in excess of
an aggregate $75,000.
 
 
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“Permitted Liens” means all of the following:
 
(a.) liens for unpaid taxes of Borrower that are either (i.) not yet due and
payable; or (ii.) (1.) do not constitute an Event of Default hereunder; and (2.)
are the subject of a Permitted Protest;
 
(b.) liens and Security Interests granted against Equipment disclosed in writing
by Borrower to Lender and consented to by Lender in writing;
 
(c.) liens described in Addendum thereto, provided they are subject to such
subordination agreements as Lender may require;
 
(d.) purchase money liens or the interests of lessor under capital leases to the
extent that such liens or interests secure Permitted Purchase Money Indebtedness
for Acquisition of Fixed Assets and so long as such lien attaches only to the
asset purchased or acquired and the proceeds thereof;
 
(e.) with respect to real property, easements, rights of way, reservations,
covenants, conditions, restrictions, zoning variances, and other similar
encumbrances that do not materially interfere with the use or value of the
property subject thereto;
 
(f.) obligations and duties as lessee under any operating lease existing on the
date of this Agreement; and obligations and duties as lessee under any lease
existing on the date of this Agreement;
 
(g.) any liens incurred in connection with the refinancing, renewal, or
modification of indebtedness secured by Permitted Liens, provided: (i.) the
terms and conditions of such refinancings, renewals, or extensions do not
materially impair the prospects of repayment of the Obligations by Borrower;
(ii.) the net cash proceeds of such refinancings, renewals, or extensions do not
result in an increase in the aggregate principal amount of the Indebtedness so
refinanced, renewed, or extended; (iii.) such refinancings, renewals, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended; and (iv.) that to the extent
that the Indebtedness that is refinanced was subordinated in right of payment to
the Obligations, then the subordination terms and conditions of the refinancing
of the Indebtedness must be at least as favorable to Lender as those applicable
to the refinanced Indebtedness;
 
(h.) liens for unpaid taxes, assessments, or other governmental charges or
levies (i.) that are not yet delinquent; or (ii.) do not constitute an Event of
Default hereunder and are the subject of Permitted Protests;
 
(i.) judgment liens that do not constitute an Event of Default under this
Agreement;
 
(j.) liens on amounts deposited in connection with obtaining Workers’
Compensation Insurance or other unemployment insurance; and
 
(k.) liens on amounts deposited as security for surety or appeal bonds in
connection with obtaining such bonds in the ordinary course of business,
provided that such deposits have been made with Lender’s prior written consent.
 
“Permitted Protest” shall mean a protest taken by Borrower in good faith with
respect to disputed taxes for which a bond has been posted by Borrower in the
amount of disputed taxes that have not been paid.
 
“Permitted Purchase Money Indebtedness for Acquisition of Fixed Assets” means,
as of any date of determination, Purchase Money Indebtedness for Acquisition of
Fixed Assets incurred after the date hereof in an aggregate principal amount
outstanding at any one time which shall not exceed Twenty-five thousand Dollars
($25,000.00) without Lender’s prior written consent, which consent shall not be
unreasonably withheld.
 
“Person” means and includes natural persons, corporations, limited partnerships,
general partnerships, joint ventures, limited liability companies, limited
liability partnerships, trusts, land trusts, business trusts, or other
organizations, irrespective of whether they are legal entities, and governments
and agencies and political subdivisions thereof.
 
“Premises” means all of the locations of Borrower consisting of its Chief
Executive Office, any and all other offices or locations and any and all Other
Locations.
 
 
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“Prime Accounts” means those Accounts of Borrower that meet all of the following
criteria:
 
(a.) are acceptable to Lender in the exercise of its Sole Discretion;
 
(b.) are creditworthy as determined by Lender in its Sole Discretion based on
the facts and circumstances presented, including payment history, turn, PAYDEX
rating and other data;
 
(c.) have been validly assigned as Collateral to Lender, giving Lender a first
priority Security Interest therein and in all proceeds thereof;
 
(d.) as of the date of determining whether an Account is a “Prime Account” or
not, (i.) no invoice is more than sixty (60) days past due if such invoice
provides for payment terms of thirty (30) days or less; or (ii.) in any event,
no invoice remains uncollected for more than one hundred twenty (120) days from
the date of such invoice (the “120 Day Eligibility Period”), except, that with
respect to an invoice that has payment terms of 90 days (a “90 Day Term
Invoice”), such 90 Day Eligibility Period shall be extended to one hundred
twenty (120) days (the “120 Day Eligibility Period”), provided, however, that
the aggregate amount of all invoices with a 120 Day Eligibility Period shall not
exceed 33% of all Prime Accounts (but the portion not in excess of 33% may be
deemed Prime Accounts);
 
(e.) strictly comply with all Borrower’s warranties and representations to
Lender;
 
(f.) have been created by absolute sales of Borrower’s merchandise or services;
 
(g.) are genuine, bona fide and collectible;
 
(h.) Borrower shall have good, unencumbered and absolute title to Collateral
free of all third party claims other than Permitted Liens;
 
(i.) are not subject to any dispute, right of offset, counterclaim, or right of
cancellation or return;
 
(j.) all property giving rise to such Accounts shall have been delivered from
Borrower’s Premises to, and unconditionally accepted by, each Account Debtor;
 
(k.) Borrower has performed all things required of Borrower by the terms of all
agreements or purchase orders giving rise to such Accounts;
 
(l.) are due and unconditionally payable on terms of thirty (30) days or less,
or on such other terms not exceeding sixty (60) days (if acceptable to Lender in
its Sole Discretion) which are expressly set forth on the face of all invoices,
copies of which shall be delivered to Lender;
 
(m.) are not Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by which the payment by the Account Debtor may
be conditional;
 
(n.) are not Accounts with respect to which the Account Debtor is an officer,
employee, partner, joint venturer or agent of Borrower;
 
(o.) are not Accounts with respect to which the Account Debtor is a resident of
a country other than the United States of America, except if a letter of credit
is issued for such an Account;
 
 
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(p.) are not Accounts with respect to which the Account Debtor disputes
liability or makes any claim, or has any defense, crossclaim, counterclaim or
offset (each a “Contra” and collectively, “Contras”);
 
(q.) are not Accounts with respect to which any Insolvency Proceeding is filed
by or against the Account Debtor, or if an Account Debtor becomes insolvent,
fails or goes out of business;
 
(r.) are not Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account Debtor to
Borrower;
 
(s.) are not Accounts which in the aggregate from one Account Debtor constitutes
twenty-five percent (25%) of total Accounts, but the portion not in excess of
the Concentration Limit may be deemed Prime Accounts; and
 
(t.) are not Accounts from an Account Debtor, whose Accounts that have aged 120
days or more from invoice date comprise more than twenty-five percent (25%) of
such Account Debtor’s total Accounts (the “Cross-Aging Limit”).
 
“Purchase Money Indebtedness for Acquisition of Fixed Assets” means debt (other
than the Indebtedness, but including capitalized lease obligations), incurred at
the time of, or within twenty (20) days after, the acquisition of any fixed
asset for the purpose of financing all or any part of the acquisition cost
thereof.
 
“RCRA” has the meaning given in the definition of Environmental Laws.
 
“Report of Assigned Accounts” means the form with which invoices are transmitted
to Lender.
 
“Security Interest(s)” means any present or future lien, charge, mortgage,
pledge, assignment, or other encumbrance, or security interest in any asset,
whether created or arising voluntarily, involuntarily or by operation of law.
 
“Share Purchase Agreement” has the meaning given in Section 8.1.23 hereof.
 
“Software” has the meaning given in the Code, which defines Software as a
computer program and any supporting information provided in connection with a
transaction relating to the program.
 
“Sole Discretion” means the exercise by Lender of its reasonable (from the
perspective of a secured asset based Lender) business judgment in light of all
of the facts and circumstances existing with respect to the issue then under
consideration by Lender.
 
“Solvent” means that (a.) a Person is able to pay its debts and other
liabilities, contingent obligations and other commitments as they mature in the
normal course of business; and (b.) such Person does not intend to, and does not
believe that it will, incur debts beyond such Person’s ability to pay as such
debts mature. In computing the amount of contingent liabilities at any time, it
is intended that such liabilities will be computed at the amount that, in light
of all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
 
“Supporting Obligations” has the meaning given in the Code, as such definition
may be amended from time to time, which defines a Supporting Obligation as a
letter-of-credit right or secondary obligation that supports the payment or
performance of an Account, Chattel Paper, a Document, a General Intangible, an
Instrument, or a Financial Asset, including without limitation, Investment
Property.
 
“Trade Fixtures” means equipment and furnishings that are used in Borrower’s
business or operations which become affixed to the Premises, but which can be
removed from the Premises without causing undue damage to such Premises.
 
“UCC” has the meaning given in the definition of Code.
 
 
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1.2. Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with GAAP. When used herein, the term
“financial statements” shall include the notes and schedules thereto. Whenever
the term “Borrower” is used in respect of a financial covenant or a related
definition, it shall be understood to mean Borrower on a consolidated basis
unless the context clearly requires otherwise.
 
1.3. Terms Not Defined. All other terms contained in this Agreement, to the
extent not specifically defined herein, shall have the meanings provided in the
Code.
 
1.4. Construction. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term “including” is not limiting, and the term
“or” has, except where otherwise indicated, the inclusive meaning represented by
the phrase “and/or”. The words “hereof”, “herein”, “hereby”, “hereunder”, and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Any section, subsection, clause,
schedule, and exhibit references are to this Agreement unless otherwise
specified. Any reference in this Agreement or in the Loan Documents to this
Agreement or any of the Loan Documents shall include all alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions, and supplements, thereto and thereof, as applicable.
 
1.5. Authenticated Documents. Any reference herein to a “writing”, a “written
document”, or an executed document shall also mean an “Authenticated” writing or
document or “Authentication” unless Lender shall otherwise require an original
writing.
 
1.6. Addenda; Schedules and Exhibits. All of the addenda, schedules, and
exhibits attached to this Agreement shall be deemed to be incorporated herein by
reference as though set forth in full herein.
 
2. Loan and Terms of Payment.
 
2.1. Revolving Advances Against Accounts and Inventory.
 
2.1.1. Advances Not to Exceed Borrowing Base. Subject to the terms and
conditions of this Agreement, from the Closing Date until the termination of
this Agreement, Lender shall, from time to time, at the request of Borrower,
make advances (each, an “Advance” and collectively, the “Advances”) to Borrower
so long as no Overadvance exists before the requested Advance or would be
created by such Advance.
 
2.1.2. Advances to be Drawn First Against A/R Borrowing Base; Inventory Advances
Due Upon Payment in Full of A/R Advances if no Intent to Have Further Advances
to be Made Against Accounts.  Borrower shall draw all available funds under the
A/R Borrowing Base under the A/R Line of Credit prior to drawing any available
funds under the Inventory Borrowing Base under the Inventory Line of Credit. At
such time as amounts advanced against Accounts under the A/R Line of Credit
under this Agreement have been paid in full, with (a.) no further intention on
the part of Lender to make further Advances against Accounts  under the A/R Line
of Credit; and/or (b.) no further intention on the part of Borrower to obtain
any further Advances against Accounts under the A/R Line of Credit, amounts
advanced against Inventory under the Inventory Line of Credit under this
Agreement shall also be due, owing, and payable in full. Amounts borrowed
pursuant to this Section 2.1.2 may be repaid and, subject to the terms and
conditions of this Agreement, reborrowed at any time during the term of this
Agreement.
 
2.1.3. Reduction of Advance Rates; Reserves. Lender may, in its Sole Discretion,
from time to time, reduce the Borrowing Base and/or institute reserves against
the Borrowing Base to the extent that Lender determines in good faith (among
other things) that: (a.) the Dilution Rate with respect to the Accounts for any
period (based on the ratio of (i.) the aggregate amount of reductions in
Accounts other than as a result of payments in cash to (ii.) the aggregate
amount of total sales) has increased in any material respect or may be
reasonably anticipated to increase in any material respect above historical
levels; (b.) the general creditworthiness of (an) Account Debtor(s) has(have)
declined; (c.) the number of days of the turnover of the Inventory for any
period has increased in any material respect; (d.) the liquidation value of the
Eligible Inventory, or any category thereof, has decreased; (e.) cost or count
variances exist or are anticipated to exist with respect to Inventory; or (f.)
the nature and quality of the Inventory has deteriorated. In determining whether
to reduce the Borrowing Base and/or institute reserves against the Borrowing
Base, Lender may consider events, conditions, contingencies, or risks that are
also considered in determining Prime Accounts or Eligible Inventory.
 
2.1.4. Authorization for Advances. Subject to the terms and conditions of this
Agreement, Lender is authorized to make Advances (a.) upon telephonic, facsimile
or other instructions received from anyone purporting to be an Authorized
Officer of Borrower; or (b.) at the Sole Discretion of Lender, and
notwithstanding any other provision in this Agreement, if necessary to meet any
Obligations, including but not limited to any interest not paid when due.
Notwithstanding anything to the contrary contained herein, Lender shall not be
obligated to make an Advance if, before the Advance is made, an Overadvance
exists or as a result of making an Advance, an Overadvance would be
created.  Borrower may make one weekly request for an Advance (except for
emergencies). Weekly requests for Advances shall be accompanied by  Request for
Advance in the form shown in Exhibit A which states Borrower’s  Borrowing Base
at the time of the request.
 
 
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2.1.5. Establish Deposit Account; Provide Pledge Agreement and Control
Agreement. Borrower agrees to establish and maintain a single designated Deposit
Account for the purpose of receiving the proceeds of the Advances requested by
Borrower and made by Lender hereunder. Unless otherwise agreed by Lender and
Borrower, any Advance requested by Borrower and made by Lender hereunder shall
be made to such designated Deposit Account. Borrower agrees to provide Lender
with (a.) a pledge agreement; and (b.) a control agreement in form and substance
reasonably acceptable to Lender, signed by the bank or financial institution at
which the Deposit Account is located. If Borrower’s bank or financial
institution refuses to or does not cooperate in executing such control
agreement, Borrower shall move its account to a financial institution willing to
execute a control agreement in form and substance reasonably satisfactory to
Lender.
 
2.2. Interest: Rates, Payments, Fees, and Calculations.
 
2.2.1. Interest Rates.
 
2.2.1.1. On Advances Against Accounts. All Advances against Accounts under the
A/R Line of Credit hereunder shall bear interest, on the Daily Balance, at a per
annum rate of 12% percent.
 
2.2.1.2. On Advances Against Inventory. All Advances against Inventory under the
Inventory Line of Credit hereunder shall bear interest, on the Daily Balance, at
a per annum rate of 12% percent.
 
2.2.2. Intentionally left blank
 
2.2.3. Monthly Interest Payment; Minimum Payment. Borrower shall pay Interest on
the Line of Credit, together with the Administrative Fee payable under this
Agreement, on a monthly basis. Interest on the Line of Credit shall not be less
than $500.00 Dollars (the “Minimum Monthly Interest Payment”) provided that in
no event shall the payment be in excess of the maximum amount of interest
allowed by law. Within seven (7) days of the end of each month, Borrower shall
submit a report to Lender stating interest, calculated on a weekly basis,
incurred throughout the previous month, along with a payment for such Interest
or the Minimum Monthly Interest Payment, whichever is greater.
 
2.2.4. Default Rate.  All Obligations shall bear interest, from and after the
occurrence and during the continuance of an Event of Default, at a rate equal to
6% percent per annum in excess of the applicable interest rate as set forth in
Section 2.2.1 (the “Default Rate”). Lender’s failure to assess interest at the
Default Rate as provided hereunder shall not be deemed a waiver by Lender of its
right to charge such Default Rate at any time after default. Lender reserve the
right to, and Borrower hereby acknowledges that Lender may, recalculate interest
at the Default Rate.
 
2.2.5. Interest Payments. Subject to Section 2.2.4, interest on the Obligations
shall be payable monthly, in arrears, shall be computed at the applicable
interest rate as set forth in Section 2.2.1, and shall be due on the seventh day
of each month following the accrual thereof. Interest shall be payable
commencing on the seventh (7th) calendar day of the month following the Closing
Date. 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.
 
2.2.6. Calculation of Interest. All interest and fees charged hereunder shall be
computed on the basis of a three hundred sixty (360) day year for the actual
number of days elapsed. Notwithstanding anything to the contrary contained
herein, any interest rate calculated hereunder shall be rounded up to the
closest one-quarter of one percent (1/4 of 1.00%), with no adjustments made for
rate changes of less than one-quarter of one percent (1/4 of 1.00%). Lender
shall, for the purpose of the computation of interest due hereunder, add the
Clearance Days to any payments by check or other means, including without
limitation wire transfer, ACH transfer, credit card payment or any other means,
which is acknowledged by the parties to constitute an integral aspect of the
pricing of Lender’s facility to Borrower, and shall apply irrespective of the
characterization of whether receipts are owned by Borrower or Lender. Should any
check not be honored when presented for payment, then Borrower shall be deemed
not to have made such payment, and interest shall be recalculated accordingly.
 
2.2.7. Principal Payments.  Upon the Termination of this agreement, as scheduled
or accelerated, the entire principal shall be due.
 
2.2.8. Loan Fee.  At the time of initial funding hereunder Borrower agrees to
pay Lender a loan fee of 50 Series D Preferred Shares (the “Loan Fee”).
 
2.2.9. Left intentionally blank.
 
 
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2.2.10. Collateral Agent Fee.  The Collateral Agent shall be paid an initial fee
of $5,000 Dollars upon the execution of this Agreement plus, while any
Obligations remain outstanding to Lender, on or before the first (1st) day of
each month, Borrower agrees to pay the Collateral Agent an administrative fee
equal to half a percentage point (0.5%) per month of the Daily Balance during
the preceding month or the sum of $500.00 Dollars, whichever is less (the
“Collateral Agent Fee”).
 
2.2.11. Deposits for Lender Expenses. Borrower shall pay to Lender the Lender
Expenses incurred by Lender in connection with the negotiation and preparation
of this Agreement and the Loan Documents. In connection therewith, the following
applies with respect to Deposits for such Lender Expenses:
 
2.2.12. Audit Fees. Borrower shall pay to Lender on demand periodic audit fees
of One thousand Dollars ($1,000.00) per day, plus actual out of pocket costs
related to each audit (the “Audit Fee”).
 
2.2.13. Inventory Appraisal and Monitoring Fees. While any (a.) funds are
available to Borrower under the Inventory Borrowing Base; or (b.) funds that
have been advanced under the Maximum Inventory Amount are owing and payable to
Lender, Borrower shall pay to Lender on demand any fees incurred in connection
with periodic inventory appraisal and monitoring fees (collectively, the
“Inventory Appraisal Fee”).
 
3. Payment of Advances.
 
3.1. Delivery to Lender of All Payments. Borrower shall remit to Lender all
payments received by Borrower on all Accounts, including, without limitation,
all payments on Accounts, Deposits, and proceeds of cash sales, irrespective of
whether Borrower has obtained or seeks to obtain an Advance against any Account
or any Inventory.
 
3.2. Required Payments on Past Due Accounts or Overadvance. On demand, Borrower
shall pay to Lender (a.) the Net Face Amount of all Delinquent Accounts; or (b.)
the Net Face Amount of Accounts more than sixty (60) days past due.
Notwithstanding the foregoing, in the alternative, rather than complying with
(a.) or (b.) above, if Borrower provides additional Prime Accounts reasonably
acceptable to Lender, in lieu of payment of such past due Accounts to Lender,
Borrower may, in the alternative, submit additional invoices that constitute
Prime Accounts to eliminate any Overadvance.  Except as set forth in the prior
sentence of this Section 3.2, Borrower shall pay the entire unpaid balance of
the Obligations immediately upon (1.) the occurrence of an Event of Default and
acceleration of the Obligations by Lender pursuant to Section 12.1.1; or (2.) in
the case of termination, as set forth in Section 6.1, whether by notice, lapse
of time or otherwise, whichever occurs first.
 
3.3. Application of Payments. Payments received shall be applied as follows:
(a.) first against any Loan Fees and Lender Expenses, if any; (b.) against
interest; and (c.) then against principal. To the extent Borrower uses Advances
under this Agreement to purchase any Collateral, Borrower’s repayment of the
Advances shall apply on a “first-in-first-out” basis so that the portion of the
Advances used to purchase a particular item of Collateral shall be paid in the
chronological order in which Borrower purchased the Collateral.
 
3.4. Clearance Days. Payments made by check or any other means, including, ACH
transfer, or credit card receipts, shall be deemed to be made three (3) Business
Days after receipt by Lender and shall be subject to clearance of funds (the
“Clearance Days”). Wire transfers are deemed to be made on the date of
confirmation of receipt of the wire.
 
3.5. Overadvances. Subject to the provisions of Section 3.2, in the event of an
Overadvance, if Lender continues in its Sole Discretion to provide Advances
hereunder, such event shall not limit, waive or otherwise affect any rights of
Lender in that circumstance or on any future occasions and Borrower shall, upon
demand by Lender, which may be made at any time or from time to time,
immediately repay to Lender the entire amount of the Overadvance.  Should the
Line of Credit at any time exceed the  Borrowing Base, Borrower shall have seven
(7) days pay any such excess amount.
 
3.6. Payment of Obligations. Notwithstanding anything to the contrary contained
in this Agreement, no payment received by Lender shall constitute payment
thereof unless and until final payment thereof has been received.
 
3.7. Statements of Obligations. Upon request from the Borrower, Lender will
provide Borrower with a statement regarding its Obligations, including
principal, interest, fees and an itemization of all charges and expenses
constituting Lender Expenses owing, and such information shall be conclusively
presumed to be correct and accurate and constitute an account stated between
Borrower and Lender unless, within thirty (30) days following any such
information first becoming available to Borrower, Borrower shall have delivered
to Lender by registered or certified mail at its address specified herein,
written objection thereto describing the error or errors contained in such
applicable information.
 
 
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3.8. Notification of Accounts. Lender and Borrower have agreed to the terms set
forth below with respect to notification of Accounts.
 
3.8.1. Right of Lender to Notify Account Debtors. Lender may, at any time, (a.)
after the occurrence and during the continuance of an Event of Default; or (b.)
as necessary in Lender’s Sole Discretion in light of the facts and
circumstances, to prevent prejudice to Lender irrespective of whether an Event
of Default has occurred or is continuing, without notice to or the assent of
Borrower: (i.) notify any Account Debtor that the underlying Account has been
assigned for collateral purposes to Lender by Borrower and that payment thereof
is to be made to the order of and directly and solely to Lender; and (ii.) send,
or cause to be sent by its designee, written or telephonic requests (which may
identify the sender by a pseudonym) for verification of any Account directly to
the appropriate Account Debtor or any bailee with respect thereto. At Lender’s
request, all invoices and statements sent to any Account Debtor or any bailee
shall state that the relevant Account has been for collateral purposes assigned
to Lender and that any payments in respect thereof are payable directly and
solely to Lender.
 
3.8.2. Collateral Control. At Lender’s option:
 
3.8.2.1. Collateral Control Account(s). Borrower shall direct, at Borrower
expense and in the manner requested by Lender from time to time, that
remittances and other collections and proceeds of Accounts and other Collateral
be sent directly by Account Debtor to the bank account (the “Blocked Account”)
designated in the Blocked Account Control Agreement attached hereto as Exhibit B
(the “Blocked Account Control Agreement”); (ii) sent directly by Account
Debtor(s) and other third parties to a the Control Account (the “Blocked
Account”); or (iii) if Debtor receives a check the check will be immediately
deposited in the Blocked Account. (Hereinafter, the Blocked Account is referred
to as the “Collateral Control Account(s)”.) Borrower hereby grants to Lender a
Security Interest in the Collateral Control Account(s), over which Borrower
shall have no control and into remittances and other collections and proceeds of
Accounts and other Collateral shall be deposited immediately upon their receipt.
 
3.8.2.2. Remittance Reporting. With respect to any Blocked Account, Borrower (at
its expense) shall cause the provider of such account to deliver duplicate
copies to Lender on each Business Day (or Lender shall be provided with on-line
access and a password so that it can directly obtain copies) of (i) checks
received in such account, (ii) envelopes, remittance papers, and other detail
which might be included in the envelope with remittances, and (iii) an account
batch listing (or similar reporting) which details the sequence number, dollar
amount of checks, deposit total and account number credited for each deposit
(all of the foregoing, the “Remittance Reporting”). In the event that the
provider of such account will not deliver duplicate copies to Lender (or provide
on-line access to Lender), Borrower agrees to deliver to Lender copies of the
Remittance Reporting on each Business Day. Borrower acknowledges and agrees that
notwithstanding anything to the contrary contained in this Agreement,
remittances and other collections and proceeds of Accounts and other Collateral
made to such account shall not be deemed received by Lender (and the Obligations
shall not be credited nor shall Clearance Days commence) until Lender has
received the Remittance Reporting.
 
3.8.2.3. Collection Privilege. Borrower may be provided with the revocable
privilege to collect (at Borrower’s expense) directly from Account Debtors and
other third parties, remittances and other collection and proceeds of Account
and other Collateral, subject to the express conditions set forth in Section
3.8.6, with all such remittances and other collections and proceeds being
received by Borrower in trust for Lender and to be immediately delivered to
Lender (in their original form as received) in the following manner as Lender
shall so direct: (a) by overnight mail, (b) by deposit to the Blocked Account,
or (c) in the case of electronic payment, by remittance to Lender’s Account (the
foregoing, the “Collection Privilege”). Such Collection Privilege is subject to
revocation by Lender at any time without cause and shall be automatically
revoked upon the occurrence of an Event of Default. Lender may undertake any and
all of those actions delineated in Section 3.8.10 to process such remittances
and other collections and proceeds delivered by Borrower to Lender. All such
remittances and other collections and proceeds received by Lender shall be
applied against the Obligations pursuant to the terms of this Agreement.
 
3.8.3. Lender’s Account. All payments remitted to Lender in kind (pursuant to
Section 3.8.2.3 or through a Collateral Control Account(s), shall be credited to
a deposit account owned of Lender, into which remittances from Account Debtor(s)
or other obligors of other borrowers of Lender may be credited (the “Lender’s
Account”).
 
3.8.4. Further Credit Reports. Borrower acknowledges and agrees that Lender may
from time to time at its Sole Discretion run such further credit reports and
other reports as it may deem necessary to continue to keep itself apprised
regarding the continued financial condition of Borrower during the term of this
Agreement and hereby authorizes Lender to run such credit and other reports from
time to time as Lender deems appropriate.
 
3.8.5. Electronic Transfers. Borrower shall direct all Account Debtors on
Accounts that make payments by electronic transfer of funds to remit such funds
directly to the Blocked Account, or as Lender shall so direct.
 
 
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3.8.6. Monies Held in Trust. In furtherance of the Collection Privilege,
Borrower and all of its affiliates, subsidiaries, shareholders, directors,
employees, or agents, acting as trustee for Lender, shall (i) hold in trust for
Lender, as property of Lender, any remittances and other collections and
proceeds of Account and other Collateral which come into Borrower’s possession
or control, and (ii) immediately upon receipt thereof, and in their original
form as received, remit same, in kind, to Lender in the manner set forth in
Section 3.8.2.3, as Lender shall so direct. In the event the Collection
Privilege is inapplicable, but Borrower or related parties nonetheless receive
such remittances despite a contrary agreement with Lender, all of the foregoing
terms and conditions shall apply and Borrower shall remit same, in kind, to
Lender, as Lender shall so direct, either by overnight delivery, deposit to the
Blocked Account or in the case of electronic payment, by remittance to Lender’
Account. In no event shall such remittances be commingled with Borrower’s own
funds. Borrower shall continue to remit such remittances to Lender until such
time as Borrower’s Obligations (other than contingent obligations) have been
paid in full.
 
3.8.7. Authorization. Notwithstanding any other provision of this Agreement,
Borrower hereby irrevocably authorizes Lender to transfer into the Lender’s
Account any funds in payment of or relating to the Accounts that have been
deposited into other deposit accounts with Lender or that Lender has otherwise
received.
 
3.8.8. Lender’s Right to Items in Lender’s Account. Lender shall have a
continuing security interest in all of the items contained from time to time in
the Lender’s Account and the proceeds thereof. 3.8.9. Lender Has Sole Control
Over Lender’s Account. Neither Borrower, nor any Person or entity claiming
through Borrower shall have any right in or control over the use of, or any
right to withdraw any amount from the Lender’s Account that shall be under
Lender’s sole control. Unless (a.) the instruments so deposited in the Lender’s
Account are dishonored; or (b.) Lender shall in Lender’s Sole Discretion have
remitted the amount thereof to Borrower, Lender shall credit the amount thereof
against Borrower’s Obligations (other than contingent obligations) to Lender.
 
3.8.10. Lender Authorization.
 
3.8.10.1. Borrower hereby irrevocably authorizes Lender and any designee of
Lender, at Borrower’s sole expense, to exercise at any time in Lender’s or such
designee’s Sole Discretion all or any of the following powers as attorney in
fact of Borrower until all of the Obligations (other than contingent
obligations) have been paid in full:
 
3.8.10.1.1. in the ordinary course of business as a Lender, receive, take,
endorse, assign, deliver, accept and deposit, in the name of Lender or Borrower,
any and all cash, checks, commercial paper, drafts, remittances and other
instruments and documents relating to the Collateral or the proceeds thereof
(whether checks or other forms of payment are (a.) in the name of Borrower; (b.)
any other name under which it now does business or does business in the future;
or (c.) in the names of its products now or in the future, and Borrower
additionally agrees not to make any protest of any kind against Lender for
negotiating such checks or other items described herein);
 
3.8.10.1.2. after the occurrence and during the continuance of an Event of
Default, take or bring, in the name of Lender or Borrower, all steps, actions,
suits or proceedings deemed by Lender necessary or desirable to effect
collection of or other realization upon the Accounts and other Collateral;
 
3.8.10.1.3. after the occurrence and during the continuance of an Event of
Default, extend the time of payment of, compromise or settle for cash, credit,
return of merchandise, and upon any terms or conditions, any and all Accounts or
other Collateral which includes a monetary obligation and discharge or release
any Account Debtor or other obligor (including filing of any public record
releasing any lien granted to Borrower by such Account Debtor), without
affecting any of the Obligations;
 
3.8.10.1.4. execute in the name of Borrower and file against Borrower in favor
of Lender financing statements or amendments with respect to the Collateral;
 
3.8.10.1.5. pay any sums necessary to discharge any lien or encumbrance that is
senior to Lender’s Security Interest in the Collateral other than Permitted
Liens, which sums shall be included as Obligations hereunder;
 
3.8.10.1.6. at any time, irrespective of whether an Event of Default has
occurred, without notice to or the assent of Borrower, notify any Account Debtor
obligated with respect to any Account, that the underlying Account has been
assigned for collateral purposes to Lender by Borrower and that payment thereof
is to be made to the order of and directly and solely to Lender;
 
3.8.10.1.7. after the occurrence and during the continuance of an Event of
Default, change the address for delivery of mail to Borrower and to receive and
open mail addressed to Borrower;
 
 
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3.8.10.1.8. send requests for verification of Accounts;
 
3.8.10.1.9. after the occurrence and during the continuance of an Event of
Default, to make, settle, and adjust all claims under Borrower’s policies of
insurance and make all determinations and decisions with respect to such
policies of insurance;
 
3.8.10.1.10. after the occurrence and during the continuance of an Event of
Default, to settle and adjust disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms which Lender
determines to be reasonable;
 
3.8.10.1.11. after the occurrence and during the continuance of an Event of
Default and as Lender may reasonably determine to be necessary without the
occurrence of an Event of Default if Lender has requested and Borrower has
refused, Lender may cause to be executed and delivered any documents and
releases which Lender reasonably determines to be necessary in order to protect
its interest as Lender; and
 
3.8.10.1.12. after the occurrence and during the continuance of an Event of
Default, qualify Borrower to do business in any state if Borrower shall fail to
do so following request by Lender.
 
3.8.10.2. After the occurrence and during the continuance of an Event of
Default, Borrower authorizes Lender to accept, indorse and deposit on behalf of
Borrower any checks tendered by an Account Debtor “in full payment” of its
obligation to Borrower. Borrower shall not assert against Lender any claim
arising therefrom, irrespective of whether such action by Lender affects an
accord and satisfaction of Borrower’s claims, under §3-311 of the Code, as such
section may be amended and/or re-numbered from time to time or otherwise.
 
3.8.10.3. RELEASE. BORROWER HEREBY RELEASES AND EXCULPATES LENDERS, COLLATERAL
AGENT AND ALL OF LENDER’S AND COLLATERAL AGENT’S OFFICERS, EMPLOYEES, AGENTS,
DESIGNEES, ATTORNEYS, ACCOUNTANTS, AND OTHER REPRESENTATIVES FROM AND AGAINST
ANY AND ALL LIABILITY ARISING FROM ANY ACTS UNDER THIS AGREEMENT OR RELATED TO
THIS AGREEMENT IN ANY MANNER OR IN FURTHERANCE THEREOF, WHETHER OF OMISSION OR
COMMISSION, AND WHETHER BASED UPONANY ERROR OF JUDGMENT OR MISTAKE OF LAW OR
FACT AND WHETHER BASED UPON ANY LEGAL THEORY, INCLUDING WITHOUT LIMITATION,
BREACH OF CONTRACT, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW
OR STATUTORY CLAIMS, EXCEPT FOR LIABILITY DIRECTLY CAUSED BY LENDERS’ GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT. IN NO EVENT SHALL LENDERS HAVE ANY LIABILITY
TO BORROWER FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
 
4. Audits. Lender shall have the right to conduct audits of Borrower’s Accounts,
Inventory, and Borrower’s Books on a periodic basis during the term of this
Agreement, which audit shall be conducted during reasonable business hours
absent the occurrence and continuance of an Event of Default. Lender agrees to
give Borrower reasonable advance notice of such audit provided that no Event of
Default shall have occurred or reasonably be suspected by Lender to have
occurred and is continuing. In the event of an actual or potential Event of
Default, no advance notice of any audit shall be required. The cost of each
audit shall be paid by Borrower, which cost per audit shall not exceed the Audit
Fee or the Inventory Appraisal Fee set forth in Sections 2.2.12 and 2.2.13,
respectively. Borrower shall pay the cost of such Audit Fee or Inventory
Appraisal Fee within five (5) Business Days of receipt of an invoice therefor
and if such Audit Fee or Inventory Appraisal Fee is not paid by such date,
Lender may charge such Audit Fee and Inventory Appraisal Fee against the
Obligations at such time or if not charged at such time, upon termination. In
addition, upon the occurrence and during the continuance of an Event of Default,
Lender may conduct such additional audits as it deems appropriate, also at
Borrower’s cost, but not subject to any limitation contained in Sections 2.2.12
and 2.2.13.
 
4.1. Delivery of Collateral. At such times as Lender may request and in the
manner specified by Lender, Borrower shall deliver to Lender or Lender’s
representative original invoices, agreements, proofs of rendition of services
and delivery of goods and other documents evidencing or relating to the
transactions which gave rise to any of the Collateral, together with customer
statements, schedules describing the proceeds or statements of account and
confirmatory collateral assignments to Lender of the proceeds in form and
substance satisfactory to Lender and duly executed by Borrower. Without limiting
the provisions of any other section of this Agreement, Borrower will promptly
notify Lender, in writing, of Borrower’s granting of credits, discounts,
allowances, deductions, return authorizations or the like with respect to any
proceeds. In no event shall any such schedule or confirmatory collateral
assignment (or the absence thereof or omission of any proceeds therefrom) limit
or in any way be construed as a waiver, limitation, or modification of the liens
or rights of Lender or the warranties, representations, and covenants of
Borrower under this Agreement. In addition, in the event that any Collateral,
including without limitation proceeds, is evidenced by or consists of Chattel
Paper, Documents, Instruments, or Financial Assets, including without
limitation, Investment Property, Borrower shall, immediately upon written
request therefor from Lender, endorse and assign such Chattel Paper, Documents,
Instruments, or Financial Assets, including without limitation, Investment
Property over to Lender and deliver actual physical possession of such Chattel
Paper, Documents, Instruments, or Financial Assets, including without
limitation, Investment Property to Lender with, if applicable, stock powers in
blank executed by Borrower.
 
5. Conditions Precedent to Advances.
 
5.1. Conditions Precedent to Initial Advance. Any agreement of Lender to make
the initial Advance is subject to the fulfillment on or before the Closing Date,
to the satisfaction of Lender and its counsel (unless waived by Lender in
writing in its Sole Discretion), of each of the conditions set forth below.
 
 
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5.1.1. Lien in First Position. Lender shall be satisfied that its lien against
the Collateral is a first priority perfected Security Interest, subject only to
Permitted Liens.
 
5.1.2. UCC Search. Lender shall have received searches with results reflecting
the filing of its financing statements and fixture filings.
 
5.1.3. Loan Documents Contemplated Hereby. Lender shall have received all of the
Loan Documents, duly executed, and each such document shall be in full force and
effect.
 
5.1.4. Authorization. Lender shall have received such certificates of
authorization, corporate resolution, unanimous written consent, or other writing
as Lender deems appropriate under the circumstances, duly executed by the
secretary, general partner, managing member, or other appropriate representative
of Borrower, authorizing the execution and delivery of this Agreement and the
other Loan Documents to which Borrower is a party and authorizing one or more
specific officers, general partners, managing members, or other persons to
execute and deliver same to Lender.
 
5.1.5. Bylaws, etc. Lender shall have received copies of Borrower’s By-laws and
Articles, Certificate of Incorporation, Articles of Organization, Partnership
Agreement, Trust Agreement, or Operating Agreement, all duly certified as
appropriate, as amended, modified, or supplemented to the Closing Date, all of
which shall accurately reflect the current status of Borrower and Borrower’s
officers, directors, and any other requested information.
 
5.1.6. Certificate from State of Delaware. Lender shall have received a
certificate of status, corporate or otherwise, with respect to Borrower dated as
of a date acceptable to Lender, by the Secretary of State of Delaware, which
certificate shall indicate that Borrower is in good standing in such state.
 
5.1.7. Certificates from States Other than Delaware. Lender shall have received
certificates of status, corporate or otherwise, with respect to Borrower dated
as of a date acceptable to Lender, issued by the Secretary of State of the
states in which its failure to be duly qualified or licensed would have a
Material Adverse Change in the financial condition or properties and assets of
Borrower, and shall indicate that Borrower is in good standing.
 
5.1.8. Insurance Policies and Endorsements. Lender shall have received certified
copies of the policies of insurance, together with the endorsements thereto, as
further described in Section 9.12 hereof, as are required hereby, the form and
substance of which shall be satisfactory to Lender and its counsel.
 
5.1.9. Certificates of Title. Lender shall have received duly executed
certificates of title with respect to that portion of the Collateral that is
subject to certificates of title, if any.
 
5.1.10. Evidence of Payment of Taxes. Lender shall have received satisfactory
evidence that all tax returns required to be filed by Borrower have been timely
filed and all taxes upon Borrower or its properties, assets, income, and
franchises (including real property taxes and payroll taxes) have been paid
prior to delinquency, except such taxes that are the subject of a Permitted
Protest.
 
5.1.11. Subordination Agreements. Lender shall have received subordination
agreements in form and content reasonably satisfactory to Lender from all
parties that Lender shall require.
 
5.1.12. Payment of All Fees and Lender Expenses. All fees and Lender Expenses
required to be paid in connection with this Agreement shall have been paid.
 
5.1.13. Bailment Agreements; Waiver and Consents by Real Property Owner(s);
Sales of Premises; Changes in Premises/Other Locations. Borrower shall execute
and deliver, or cause to be executed and delivered to Lender such commercially
reasonable agreements, documents, and instruments in form and substance
reasonably acceptable to Lender, as Lender may deem reasonably necessary or
desirable to protect its interests in the Collateral at the Premises/Other
Locations, including without limitation, UCC-1 Financing Statements, Waivers and
Consents by Real Property Owner(s), and/or bailment agreements. In the event
that Borrower becomes aware of the pending or potential sale of the Premises,
Borrower shall give Lender not less than thirty (30) days’ notice of the sale or
potential sale of the Premises by the owner thereof unless Borrower is not
notified at least 30 days prior to such sale and then Borrower’s obligation
shall be to give prompt notice whether the Premises are owned or leased by
Borrower, so that Lender may obtain an executed Waiver and Consent from the new
owner prior to title to the Premises having been transferred to the new owner of
the Premises. The Inventory and Equipment shall not, at any time now or
hereafter, be stored with a bailee, warehouseman, or similar party without
Lender’s prior written consent. Additionally, Borrower shall not open any new
locations, whether a new Chief Executive Office or other operating facility or
any new Other Locations, unless Borrower (a.) gives Lender thirty (30) days’
prior written notice of the intended opening of any such new Chief Executive
Office or Other Locations; and (b.) executes and delivers, or causes to be
executed and delivered, to Lender such agreements, documents, and instruments in
form and substance acceptable to Lender, as Lender may deem reasonably necessary
or desirable to protect its interests in the Collateral at such Chief Executive
Office or Other Locations, including without limitation, UCC-1 Financing
Statements, Waiver and Consents by Real Property Owner(s), and/or bailment
agreements.
 
 
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5.1.14. Control Agreements. Borrower shall execute, or cause to be executed, and
Lender shall have received such control agreements, in form and substance
satisfactory to Lender and its counsel, regarding Deposit Accounts, Investment
Property, or such other Collateral as Lender may reasonably require.
 
5.1.15. Other Documents and Legal Matters. All other documents in connection
with the transactions contemplated by this Agreement shall have been delivered
or executed or recorded and shall be in form and substance satisfactory to
Lender and its counsel, including without limitation a Report of Assigned
Accounts of Invoices and all procedural requirements, whether pursuant to a
procedure manual or otherwise, shall have been met.
 
5.1.19. Payment of Deposits. All required Deposits shall have been paid to
Lender, including the Good Faith Deposit and the Documentation Fee/Legal
Deposit.
 
5.2. Conditions Precedent to All Advances. The items set forth below shall be
conditions precedent to all Advances hereunder and under the Loan Documents.
 
5.2.1. Representations and Warranties. The representations and warranties
contained in this Agreement and the other Loan Documents shall be true and
correct in all respects on and as of the date of any Advance under this
Agreement, as though made on and as of such date (except to the extent that such
representations and warranties relate solely to an earlier date).
 
5.2.2. No Event of Default. No Event of Default or event that with the giving of
notice or passage of time would constitute an Event of Default shall have
occurred and be continuing on the date of any Advance under this Agreement, nor
shall either result from the making of such Advance.
 
5.2.3. No Injunction, etc. No injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the making of such
Advance shall have been issued and remain in force by any governmental authority
against Borrower, Lender, or any Affiliate.
 
5.2.4. Procedural Requirements. Borrower shall have submitted a Report of
Assigned Accounts and followed such other procedures as Lender may require
pursuant to a procedure manual or otherwise.
 
6. Basic Term; Termination; Prepayment Fee.
 
6.1. Basic Term. This Agreement will be effective upon the Closing Date, will
continue in full force and effect for twelve (12) months thereafter (the “Basic
Term”).
 
6.2. Termination; Payments Due upon Termination. Upon the termination of this
Agreement whether pursuant to the provisions of Section 6.1, or due to the
occurrence of an Event of Default pursuant to the provisions of Section 11,
Borrower shall pay the Obligations to Lender. Upon payment in full in cash of
the Obligations (other than contingent obligations), with no further Advances to
be made under the Agreement, Lender shall at Borrower’s sole cost and expense,
release its lien in the Collateral and all rights therein shall revert to
Borrower.
 
6.3. Prepayment Fee. If the Obligations are prepaid in full on a final basis
prior to the end of the Basic Term or any Renewal Term, a “Prepayment” shall be
deemed to have occurred. In the event that such Prepayment shall have occurred,
Borrower shall pay to Lender a prepayment fee in an amount equal to one percent
(0.5%) of the Maximum Amount, if such prepayment occurs at any time including
during the Basic Term or a Renewal Term (as applicable, the “Prepayment Fee”).
In addition, Borrower shall also pay any prepayment fees provided for in any
other agreements with Lender. The Prepayment Fee provided for in this Section
6.3 and in any other agreements with Lender shall be deemed included in the
Obligations. A Prepayment may be deemed to have occurred regardless of whether
such payment or other reduction (a.) is voluntary or involuntary; (b.) is
occasioned by Lender’s acceleration of the Obligations or demand hereunder; (c.)
is made by Borrower or other third party; (d.) results from Lender’s receipt or
collection of proceeds of its Collateral, including insurance proceeds or
condemnation awards; (e.) results from Lender’s exercise of its right of setoff;
and/or (f.) is made during an Insolvency Proceeding, or is made pursuant to any
plan or reorganization or liquidation.
 
 
 
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6.4. Acceleration of Other Obligations Upon Termination of this Agreement. Upon
termination of this Agreement whether pursuant to Section 6 or due to the
occurrence of a Event of default pursuant to Section 11 or any other Loan
Documents shall be accelerated and shall be due, owing and payable in full at
such time, including without limitation, all Lender Expenses.
 
6.5. Obligations and Rights Upon Termination. No termination of this Agreement
shall relieve or discharge Borrower of any of Borrower's duties, Obligations, or
covenants hereunder, including without limitation the obligation to continue to
turn over sales information and invoices, and Lender's continuing Security
Interests in the Collateral shall remain in effect until all Obligations (other
than contingent obligations) have been fully and finally discharged and Lender's
agreement to provide Advances hereunder is terminated.
 
7. Creation of Security Interest.
 
7.1. Grant of Security Interest. In order to secure the payment and performance
in full of all of the Obligations, Borrower hereby grants to Collateral Agent on
behalf of the Lender a continuing Security Interest in the Collateral.
 
7.2. Express Authority of Lender to Execute and File UCC Financing Statement(s).
Notwithstanding any provision hereof, Lender is hereby expressly authorized to
execute, if necessary, and file on behalf of Borrower, UCC Financing
Statement(s), including but not limited to corrections, amendments, and
modifications thereof, including, without limitation, the use of an abbreviated
description of Collateral such as “All Assets of the Borrower” on any and all of
the foregoing.
 
7.3. Delivery of Additional Loan Documents. At any time upon the reasonable
request of Lender, Borrower shall hereby authorize the preparation and filing by
Lender and/or shall execute and deliver to Lender all financing statements,
continuation financing statements, control agreements, fixture filings, security
agreements, chattel mortgages, pledges, assignments, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of Accounts, letters of authority, and all other documents that Lender
may reasonably request, in form satisfactory to Lender, to perfect and continue
the perfection of Lender’s Security Interests in the Collateral, and in order to
fully consummate all of the transactions contemplated hereby and under the Loan
Documents.
 
8. Representations and Warranties, and Covenants.
 
8.1. Borrower’s Representations, Warranties, and Covenants.  Borrower warrants,
represents, and agrees that except as disclosed in the Disclosure Schedule
attached as Addendum and consented thereto by Lender, the statements set forth
herein are true and correct on the Closing Date and shall remain true and
correct after the Closing Date until such time as Borrower notifies Lender to
the contrary. Borrower shall immediately advise Lender if it learns that any
such representation or warranty is untrue in any material respect.
 
8.1.1. Borrower Sole Owner of Collateral; Personal Property; First Priority
Security Interest. All Collateral is (a.) solely owned by Borrower; (b.) shall
remain personal property at all times; and (c.) all Security Interests against
any Collateral given or caused to be given by Borrower to Lender are and will be
first priority Security Interests thereon except for Permitted Liens.
 
8.1.2. No Other Liens. Borrower has good and indefeasible title to the
Collateral and the Collateral is free and clear of all liens, encumbrances,
Security Interests, and adverse claims or restrictions on transfer or pledge
except: (a.) Permitted Liens; (b.) as disclosed in Addendum; and (c.) all such
liens, encumbrances, Security Interests, and adverse claims that have either
previously or concurrently herewith, been consented to in writing by Lender.
 
8.1.3. Condition of Collateral; No Transfer of Collateral. The Collateral (a.)
is kept in good condition and repair subject to normal wear and tear; (b.) is
not subject to waste; and (c.) will not (except for (i.) sales of Inventory in
the ordinary course of business; (ii.) the sale of obsolete equipment from time
to time in the ordinary course of Borrower’s business in an amount not to exceed
the aggregate sum of Twenty-five thousand Dollars ($25,000.00) provided that all
proceeds of such sale of obsolete equipment shall be remitted to Lender; and
(iii.) licenses of Borrower’s intellectual property in the ordinary course of
Borrower’s business) be sold, transferred, assigned or removed from the
Premises/Other Locations without first obtaining Lender’s prior written consent,
which consent shall not be unreasonably withheld.
 
 
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8.1.4. Facts, Figures and Representations True and Correct. All facts, figures,
and representations given, or caused to be given, by Borrower to Lender in
connection with the value of the Collateral or regarding each Advance or Account
or pertaining to anything done under this Agreement shall to the best of
Borrower’s knowledge after reasonable inquiry, be true and correct as of the
date given and if Borrower subsequently learns that any such facts, figures, or
representations are materially or intentionally false, Borrower shall promptly
so advise Lender.
 
8.1.5. Books and Records. Borrower’s Books and records (a.) fully and accurately
reflect all of Borrower’s assets and liabilities (absolute and contingent); (b.)
are kept in the ordinary course of business; and (c.) are in accordance with
GAAP (subject, in the case of internally prepared interim financial statements,
to the absence of footnotes and normal recurring year-end adjustments, the
effect of which will not, individually or in the aggregate, be materially
adverse).
 
8.1.6. Fair Market Value of Collateral. The fair market value of the Collateral
is, and shall at all times be, not less than (a.) the value carried on
Borrower’s financial statements (less normal depreciation caused by ordinary
wear and tear); and (b.) as represented to Lender by Borrower.
 
8.1.7. Taxes. All taxes of any governmental or taxing authority due or payable
by, or imposed or assessed against Borrower, have been paid and shall be paid in
full before delinquency, subject only to Permitted Protests.
 
8.1.8. No Actions, Litigation, etc. Except as disclosed in writing by Borrower
to Lender as reflected on the Disclosure Schedule attached hereto as Addendum:
(a.) there are no actions or proceedings pending by or against Borrower before
any court or administrative agency; and (b.) Borrower does not have knowledge or
belief of any pending, threatened, or imminent litigation, governmental
investigations, or claims, complaints, actions, or prosecutions involving
Borrower or any guarantor of the Obligations, except for (i.) ongoing collection
matters in which Borrower is the plaintiff; and (ii.) matters arising after the
date hereof that, if decided adversely to Borrower, would not (1.) materially
impair the prospect of repayment of the Obligations; or (2.) materially impair
the value or priority of Lender’s Security Interests in the Collateral.
 
8.1.9. Legal Power and Authority. Borrower has the legal power and authority to
enter into this Agreement and the Loan Documents and to perform and discharge
Borrower’s Obligations hereunder and under the Loan Documents. The Persons
signing this Agreement and the Loan Documents on behalf of Borrower are
authorized to do so.
 
8.1.10. Payments on Accounts. At such time as Borrower submits any invoice that
is being represented to constitute a Prime Account, to the best of Borrower’s
knowledge after due inquiry at such time and subject to Borrower’s obligation to
advise Lender at such time as it learns to the contrary, every payment falling
due on Accounts assigned to Lender will be duly paid and received by Lender on
or before the earlier of (a.) sixty (60) days from the due date of each invoice
if the payment terms call for payments of thirty (30) days or less; and (b.) in
any event, one hundred twenty (120) days from the date of each invoice.
 
8.1.11. Prime Accounts. All Accounts against which Borrower seeks Advances from
Lender are now Prime Accounts and Borrower shall only seek Advances against
Accounts if such Accounts are believed by Borrower to be Prime Accounts as
defined above.
 
8.1.12. Eligible Inventory. All Inventory against which Borrower seeks Advances
from Lender is and shall be Eligible Inventory as defined above, and Borrower
shall only seek Advances against such Inventory if such Inventory is believed by
Borrower to be Eligible Inventory as defined above.
 
8.1.13. Location of Inventory. Except as permitted herein, the Inventory is not
and shall not be stored with a bailee, warehouseman, or similar party (without
Lender’s prior written consent and the execution by the bailee of a bailment
agreement in form and content satisfactory to Lender) and is located and shall
be located only at the Premises/Other Locations.
 
8.1.14. Inventory Records. Borrower now keeps, and hereafter at all times shall
keep, correct and accurate records itemizing and describing the kind, type,
quality, and quantity of the Inventory, and Borrower’s cost therefor.
 
8.1.15. Location of Chief Executive Office; FEIN; Organizational Number. The
Chief Executive Office of Borrower is located at the address set forth in the
definition of Chief Executive Office. Borrower’s Federal Employer Identification
Number (the “FEIN”) is 90-0181035 and the number assigned by Delaware, the state
of Borrower’s organization, for Borrower’s organizational identification number
(the “Org ID”) is 90-0181035
 
 
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8.1.16. Due Organization and Qualification. Borrower is a duly formed,
organized, and existing corporation, limited liability company, limited
partnership, general partnership, or other legal entity in good standing,
qualified, and licensed to do business in the state of its incorporation or
formation and in any other state where the failure to be so licensed or
qualified could reasonably be expected to have a Material Adverse Change to the
business, operations, conditions (financial or otherwise), or finances of
Borrower, or on the value of the Collateral to Lender.
 
8.1.17. 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 By-laws and Articles, Certificate of Incorporation, Articles of
Organization, Partnership Agreement, Trust Agreement, or Operating Agreement,
nor will they constitute an event of default under any material agreement to
which Borrower is a party or by which its properties or assets may be bound.
 
8.1.18. Financial Statements Fairly Represent Borrower’s Financial Condition; No
Material Adverse Change in Financial Condition. All financial statements
relating to Borrower that have been delivered by Borrower to Lender have been
prepared in accordance with GAAP (subject, in the case of internally prepared
interim financial statements, to the absence of footnotes and normal recurring
yearend adjustments, the effect of which will not, individually or in the
aggregate, be materially adverse) and fairly present Borrower’s  financial
condition as of the date thereof and Borrower’s results of operations for the
period then ended. There has not been a Material Adverse Change in the financial
condition of Borrower since the date of the latest financial statements
submitted to Lender on or before the Closing Date.
 
8.1.19. Solvency. No transfer of property is being made by Borrower and no
Obligation is being incurred by Borrower in connection with the transactions
contemplated by this Agreement or the other Loan Documents with the intent to
hinder, delay, or defraud either the present or future creditors of Borrower.
 
8.1.20. Environmental Condition. Except as disclosed in writing by Borrower to
Lender, none of Borrower’s properties or assets has ever been used by Borrower
or, to the best of Borrower’s knowledge, by previous owners or operators in the
disposal of, or to produce, store, handle, treat, release, or transport, any
Hazardous Substances or Hazardous Wastes. None of the Premises of Borrower’s
properties or assets has ever been designated or identified in any manner
pursuant to any Environmental Laws as a disposal site for Hazardous Substances
or Hazardous Wastes, or a candidate for closure pursuant to any Environmental
Laws. No lien arising under any Environmental Laws has attached to any revenues
or to any real or personal property owned or operated by Borrower. Borrower has
not received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal or state governmental agency concerning
any action or omission by Borrower resulting in the releasing or disposing of
Hazardous Substances or Hazardous Wastes into the environment. Borrower is not
using and neither Borrower nor to the best of Borrower’s knowledge, any prior
owner, occupant, or operator of the Premises has used Hazardous Substances or
Hazardous Wastes at or upon, or in any way affecting, the Premises in any manner
which violates or violated any Environmental Laws if such violation could,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Change with respect to any of the Premises or property of Borrower or to
result in a Material Adverse Change.
 
8.1.21. Filings and other Actions. Borrower shall timely make all filings and
take other actions required under applicable law, including, but not limited to,
applicable securities law.
 
8.1.22. Stockholder Consent. Borrower represents and warrants to Lender that no
Borrower preferred stock of any kind or class is issued or outstanding and, as a
result, no preferred shareholder consent is required for Borrower to enter into,
and continue to perform, the transactions evidenced by this Agreement and the
Loan Documents, with Borrower agreeing that it will not issue any preferred
stock without prior notice to Lender, and will not issue any preferred stock
that would require its consent to Borrower’s continued performance under this
Agreement and the Loan Documents. Borrower further represents and warrants to
Lender that no consent of common stockholders or any other stockholders is
required for Borrower to enter into, and continue to perform, the transactions
evidenced by this Agreement and the Loan Documents.
 
8.1.23. Prior Investments. Lender owns preferred stock, common stock, and
convertible notes issued by Borrower pursuant to investment agreements entered
into by Lender and Borrower, specifically including a convertible note, issued
Aug 30, 2013 (the “Note”) pursuant to a Securities Purchase Agreement, dated Aug
30, 2013 (the “Share Purchase Agreement”). All representations and warranties
contained in the Share Purchase Agreement and the Note are incorporated herein
by reference.
 
8.1.24. Intellectual Property Ownership. Borrower represents and warrants to
Lender that it owns all intellectual property utilized in the conduct of its
business.
 
8.2. Reliance by Lender; Cumulative Representations and Warranties. Each
warranty and representation contained in this Agreement automatically shall be
deemed repeated with each Advance made hereunder or any of the other Loan
Documents and shall be conclusively presumed to have been relied on by Lender
regardless of any investigation made or information possessed by Lender. The
warranties and representations set forth herein shall be cumulative and in
addition to any and all other warranties and representations that Borrower now
or hereafter shall give, or cause to be given, to Lender.
 
 
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9. Affirmative Covenants. Borrower covenants and agrees that, so long as any
ability to obtain Advances hereunder shall be available to Borrower and until
full and final payment of the Obligations (other than contingent obligations),
and unless Lender shall otherwise consent in writing, the following statements
shall be true and Borrower shall do all of the actions set forth below.
 
9.1. Preserve Good Standing. Borrower shall do all things necessary to preserve
its good standing as a corporation under the laws of the states where Borrower
is authorized to do business, specifically the state(s) of California, and under
the laws of Delaware, the state of its organization. Further, Borrower shall
maintain the state of Delaware as the state in which Borrower is organized or
incorporated.
 
9.2. Preliminary Annual Financial Statements. Borrower shall provide to Lender,
as soon as possible after the end of each fiscal year of Borrower, and in any
event within sixty (60) days thereafter, preliminary yearend financial
statements, including but not limited to, the balance sheet and income statement
for such year.
 
9.3. Reviewed Annual Financial Statements. Borrower shall deliver to Lender, as
soon as available, but in any event within one hundred fifty (150) days after
the end of each fiscal year, a balance sheet and profit and loss statement
together with a statement of cash flows and applicable notes to the financial
statements of Borrower for each such fiscal period, reviewed by independent
certified public accountants acceptable to Lender. Such financial statements
shall include the accountants' management letter, if any, and shall be prepared
in accordance with GAAP. To the extent the financial statements of Borrower are
prepared on a consolidated or combined basis, they shall include
consolidating/combining schedules as applicable. Together with the above,
Borrower shall also deliver Borrower's Form 10-Qs, 10-Ks or 8-Ks, if any, as
soon as the same become available, and any other report reasonably requested by
Lender relating to the Collateral and the financial condition of Borrower and,
at Lender’s request, a certificate signed by its chief financial officer to the
effect that all reports, statements or computer prepared information of any kind
or nature delivered or caused to be delivered to Lender fairly present its
financial condition and that there exists on the date of delivery of such
certificate to Lender no condition or event which constitutes an Event of
Default.
 
9.4. Other Financial Statements. No later than forty-five (45) days after the
close of each month (each, an “Accounting Period”), Borrower shall provide to
Lender Borrower’s balance sheet as of the close of such Accounting Period and
its income statement for that portion of the then current fiscal year through
the end of such Accounting Period, which upon Lender’s request, shall be
certified by Borrower’s chief financial officer as being complete, correct, and
fairly representing its financial condition and results of operations. Borrower
shall provide such additional financial information as Lender may from time to
time reasonably request, either orally or in writing, each in form acceptable to
Lender.
 
9.5. Tax Returns. Upon Lender request, Borrower shall provide to Lender copies
of each of Borrower’s federal income tax returns, and any amendments thereto and
extensions thereof, within one hundred eighty (180) days after the end of
Borrower's fiscal year or on such other dates as permitted by law.
 
9.6. Inventory Product Activity. If applicable, at Lender’s request, Borrower
shall provide to Lender a full, complete, and accurate summary of all Borrower’s
Inventory activity on a monthly basis from Borrower within five (5) Business
Days of the end of the prior period and on a monthly basis from any and all
public warehouses within fifteen (15) Business Days of the end of the prior
month.
 
9.7. Monthly Accounts Payable and Accounts Receivable Aging Reports. Borrower
shall provide to Lender on a monthly basis a full, complete, and accurate i)
accounts payable aging reports within fifteen (15) Business Days of the end of
the prior month; and ii) accounts receivable aging reports within ten (10)
Business Days of the end of the prior month.
 
9.8. Securities Disclosure Undertaking. Borrower shall file a Current Report on
Form 8-K including the Loan Documents as exhibits thereto within four Business
Days of the date hereof.
 
9.9. Accounting System. Borrower shall maintain a standard and modern system of
accounting in accordance with GAAP with ledger and account cards or computer
tapes, discs, printouts, and records pertaining to the Collateral that contain
information as from time to time may be reasonably requested by Lender. Borrower
also shall keep proper books of account showing all sales, claims, and
allowances on its Inventory.
 
 
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9.10. Designation of Inventory. Upon Lender’s request, Borrower shall now and
from time to time hereafter, but not less frequently than monthly, execute and
deliver to Lender a summary designation of Inventory from Borrower and from all
public warehouses, specifying the cost and, if applicable, the market value of
Borrower's raw materials, work in process and finished goods, and further
specifying such other information as Lender may reasonably request, with all
monthly information due within fifteen (15) days of month end. Borrower shall
promptly, in writing, notify Lender if any of Borrower's Inventory contains any
labels, trademarks, tradenames or other identifying characteristics which are
the properties of third parties.
 
9.11. Taxes. All assessments and taxes, whether real, personal, or otherwise,
due or payable by, or imposed, levied, or assessed against Borrower or any of
its property have been paid subject to Permitted Protests, and shall hereafter
be paid in full, before delinquency or before the expiration of any extension
period subject to Permitted Protests. Subject to Permitted Protests, Borrower
shall make due and timely payment or deposit of all federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute and
deliver to Lender, on demand, appropriate certificates and/or payroll and other
tax receipts attesting to the payment thereof or deposit with respect thereto.
Borrower shall make timely payment or deposit of all payroll and other
employment related tax payments and withholding taxes required of it by
applicable laws, including 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 Lender with proof satisfactory to Lender indicating that Borrower has
made such payments or deposits.
 
9.12. Insurance. 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 are ordinarily insured against by
other owners in similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and property damage insurance
relating to Borrower’s ownership and use of the Collateral, as well as insurance
against larceny, embezzlement, and criminal misappropriation. Additionally,
Borrower shall maintain Workers’ Compensation Insurance coverage for all
employees as required by law.
 
9.13. Lender as Loss Payee. All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be reasonably satisfactory
to Lender. All such policies of insurance (except those of public liability and
property damage) shall contain a 438BFU Lender’s loss payable endorsement or
comparable endorsement, or an equivalent endorsement in a form satisfactory to
Lender, showing Lender as additional loss payee thereof, and shall contain a
waiver of warranties, and shall specify that the insurer must give at least
thirty (30) days’ prior written notice to Lender before canceling its policy for
any reason. Borrower shall deliver to Lender certified copies of such policies
of insurance and evidence of the payment of all premiums therefor. All proceeds
payable under any such policy shall be payable to Lender to be applied on
account of the Obligations.
 
9.14. No Setoffs or Counterclaims. All payments hereunder and under the other
Loan Documents made by or on behalf of Borrower shall be made without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
 
9.15. Location of Collateral, Inventory, and Equipment. Borrower shall keep the
Collateral, including, but not limited to Inventory and Equipment, only at the
Premises and any Other Locations at which any Collateral is stored (assuming
bailment agreement(s) in form and content satisfactory to Lender have been
signed in favor of Lender) in the following states: California, Delaware and New
York (in the singular or the plural, the “Collateral State”); provided, however,
that with the prior written consent of Lender, Borrower may change the locations
of the Collateral, including Inventory and Equipment after sending written
notice to Lender not less than thirty (30) days prior to the date on which the
Collateral, including but not limited to Inventory and Equipment is to be moved
to such new location, provided (a.) such new location is within the continental
United States; and (b.) at the time of giving such written notification,
Borrower authorizes (i.) the filing of or provides any financing statements or
fixture filings necessary to perfect and continue perfected Lender’s Security
Interest in such assets; and (ii.) executes and delivers, or causes to be
executed and delivered, to Lender such agreements, documents, and instruments as
Lender may deem reasonably necessary or desirable to protect its Security
Interest in the Collateral, including but not limited to Inventory and
Equipment, at such location, with such agreements, documents, and instruments to
be in form and substance satisfactory to Lender.
 
9.16. Control of Collateral. At the request of Lender, Borrower shall cooperate
with Lender in obtaining possession of any Collateral, in those instances in
which Lender chooses to perfect its Security Interest in such Collateral by
possession in addition to the filing of a financing statement. At the request of
Lender, Borrower shall cooperate with Lender in obtaining control with respect
to Collateral consisting of Deposit Accounts, Financial Assets, including
without limitation, Investment Property, Letter of Credit Rights, and Electronic
Chattel Paper.
 
 
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9.17. Commercial Tort Claim. If Borrower has or should in the future acquire a
commercial tort claim, Borrower shall promptly notify Lender in a writing signed
by Borrower of the general details thereof and grant to Lender in such writing a
Security Interest therein and in the proceeds thereof, all upon the terms of
this Agreement, with such writing to be in form and substance satisfactory to
Lender.
 
9.18. Leases. Borrower shall pay when due all rents and other amounts payable
under any leases to which Borrower is a party or by which Borrower’s properties
and assets are bound, unless such payments are the subject of a permitted
protest. To the extent that Borrower fails timely to make payment of such rents
and other amounts payable when due under its leases, Lender shall be entitled,
in its Sole Discretion, and without the necessity of declaring an Event of
Default, to reserve an amount equal to such unpaid amounts from the loan
available to Borrower.
 
9.19. Change in Name. Borrower shall give Lender written notice immediately upon
forming an intention to change its name, form, jurisdiction of business
organization, FEIN, or Org ID, but in any event not less than thirty (30) days
prior to effecting such change, and Borrower shall not make such change without
first inquiring of Lender what actions Lender may require as a result of the
contemplated change. Borrower shall take such actions, including, but not
limited to, executing such documents as Lender may reasonably require as a
result of such change. 9.20. Inspection. Upon reasonable advance notice by
Lender to Borrower, Borrower shall permit Lender or any representatives thereof,
during usual business hours, to periodically: (a.) have access to all
Premises/Other Locations where any Collateral is located for the purposes of
inspecting (and removing, if after the occurrence and during the continuance of
an Event of Default) any of the Collateral, including Borrower’s Books; and (b.)
permit Lender or its designees to inspect, audit, make copies of, and make
extracts from Borrower’s Books as Lender may request. No such advance notice
shall be required after the occurrence and during the continuance of an Event of
Default or if Lender reasonably suspects that an Event of Default may have
occurred. Borrower hereby irrevocably authorizes all accountants and third
parties to disclose and deliver to Lender at Borrower’s expense all financial
information, books and records, work papers, management reports and other
information in its possession relating to Borrower whether verbally, in writing
(by record or authenticated record) or otherwise.
 
9.21. Employee Retirement Income Security Act. To the extent applicable,
Borrower shall comply with all provisions of the Employee Retirement Income
Security Act of 1974, and any successor statute, all as amended from time to
time (“ERISA”), including regulations promulgated thereunder and interpretations
published regarding same.
 
9.22. Environmental Issues. Borrower shall comply with the affirmative covenants
set forth below with respect to environmental issues.
 
9.22.1. Borrower shall furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof, a copy of any notice, summons, citation,
directive, letter or other communications from the EPA or any other governmental
agency or instrumentality concerning any intentional or unintentional action or
omission on Borrower’s part in connection with the handling, transporting,
transferring, disposal or in the releasing, spilling, leaking, pumping, pouring,
emitting, emptying or dumping of Hazardous Substances or Hazardous Wastes into
the environment resulting in damage to the environment, fish, shellfish,
wildlife, biota and any other natural resource;
 
9.22.2. Borrower shall furnish to Lender promptly and in any event within thirty
(30) days after the receipt thereof, a copy of any notice of or other
communication concerning the filing of a lien upon, against or in connection
with Borrower, the Collateral or Borrower’s real property by the EPA or any
other governmental agency or instrumentality authorized to file such a lien
pursuant to an environmental protection statute in connection with a fund to pay
for damages and/or cleanup and/or removal costs arising from the intentional or
unintentional action or omission of Borrower resulting from the disposal or in
the releasing, spilling, leaking, pumping, pouring, emitting, emptying or
dumping of Hazardous Substances or Hazardous Wastes into the environment;
 
9.22.3. Borrower shall furnish to Lender promptly and in any event within thirty
(30) days after the receipt thereof, a copy of any notice, directive, letter or
other communication from the EPA or any other governmental agency or
instrumentality acting under the authority of an Environmental Law indicating
that all or any portion of the Borrower’s property or assets have been listed
and/or that Borrower has been deemed by such agency to be the owner and operator
of the facility that has failed to furnish to the EPA or other authorized
governmental agency or instrumentality, all the information required by the
RCRA, CERCLA, SARA, or other applicable Environmental Laws; and
 
9.22.4. Borrower shall furnish to Lender promptly and in no event more than
thirty (30) days after the filing thereof with the EPA or other governmental
agency or instrumentality authorized as such pursuant to an environmental
protection statute, copies of any and all information reports filed with such
agency or instrumentality in connection with Borrower’s compliance with RCRA,
CERCLA, SARA, or other applicable Environmental Laws.
 
 
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9.22.5. Compliance with Environmental Laws. Borrower shall require and use all
commercially reasonable efforts to ensure compliance by all operators and
occupants of the Premises with all applicable Environmental Laws.
 
9.22.6. Indemnification Regarding Environmental Laws. Borrower hereby agrees to
defend, indemnify, save, and hold Lender and its officers, employees, and agents
harmless against all obligations, demands, claims, and liabilities claimed or
asserted by any other Person arising out of or relating to any breach of the
Environmental Laws and any discharges or releases by Borrower or its agents of
Hazardous Substances or Hazardous Wastes into the environment from or about the
Premises, including ambient air, surface water, ground water, or land, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous substances or Hazardous
Wastes or the clean-up or other remediation thereof, and all losses (including
without limitation reasonable Attorneys’ Fees and legal and other costs and the
reasonable estimate of the allocated costs and expenses of in-house legal
counsel and staff) in any way suffered, incurred, or paid by Lender as a result
of or in any way arising out of, following, or consequential thereto; provided,
however, that no such indemnification shall apply with respect to any liability
directly arising out of the gross negligence or willful misconduct on the part
of Lender or any of its officers, employees and agents in connection with
Hazardous Wastes or Hazardous Substances.
 
9.23. Reaffirmation and Continuing Nature of Representations, Warranties, and
Covenants. The foregoing representations, warranties, and covenants shall be of
a continuing nature. To the extent that they constitute obligations to indemnify
or similar continuing obligations, they shall survive the termination of this
Agreement and full payment and performance of the Obligations. Such
representations, warranties, and covenants shall also be deemed to have been
repeated whenever Borrower makes a request for an Advance.
 
10. Negative Covenants. Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final payment and
performance of the Obligations (other than contingent obligations), Borrower
will not act or take any of the actions set forth herein, without Lender’s prior
written consent.
 
10.1. Returns; Allowances and Credits. Borrower shall not accept any returns or
grant any allowances or credits to Account Debtors without notifying Lender at
the time any credit is issued. Such notification may be made by way of the
submission by Borrower of its usual reports to Lender in the event of returns,
allowances, or credits provided they are (a.) in the ordinary course of
Borrower’s business; and (b.) not in material amounts. Lender in its discretion
shall have the right to impose a reserve against the A/R Borrowing Base for
actual or anticipated returns, allowance, and credits.
 
10.2. Credit Limit. Borrower shall not borrow any funds from any third party in
an amount in excess of Twenty-five thousand Dollars ($25,000.00) without
Lender’s prior written consent, which consent shall not be unreasonably denied.
The foregoing credit limit shall not include (a.) accounts payable owed by
Borrower to its trade debt in the ordinary course of Borrower’s business; (b.)
Permitted Indebtedness; or (c.) debt secured by Permitted Liens.
 
10.3. Indebtedness. Except as permitted by Section 10.2, Borrower shall not
create, incur, assume, permit, guarantee, or otherwise become or remain,
directly or indirectly, liable with respect to any Indebtedness except Permitted
Indebtedness.
 
10.4. Liens. Borrower shall not create, incur, assume, or permit to exist,
directly or indirectly, any lien on or with respect to any of the Collateral or
its property or assets, of any kind, whether now owned or hereafter acquired, or
any income or profits therefrom except for Permitted Liens (including liens that
are replacements of Permitted Liens to the extent that the original Indebtedness
is refinanced and provided that the replacement liens secure only those assets
or property that secured the original Indebtedness).
 
10.5. Restrictions on Fundamental Changes. Borrower shall not enter into any
change of ownership, acquisition, merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or liquidate, wind up, or
dissolve itself (or suffer any liquidation or dissolution), or convey, sell,
assign, lease, license, transfer, or otherwise dispose of, in one transaction or
a series of transactions, all or any substantial part of its business, property,
or assets, whether now owned or hereafter acquired, or acquire by purchase or
otherwise all or substantially all of the properties, assets, stock, or other
evidence of beneficial ownership of any Person.
 
10.6. Extraordinary Transactions and Disposal of Assets. Borrower shall not
enter into any transaction not in the ordinary and usual course of Borrower’s
business, including the sale, lease, license, or other disposition of, moving,
relocation, or transfer, whether by sale or otherwise, of any of Borrower’s
properties or assets (other than sales of Inventory to buyers in the ordinary
course of Borrower’s business as currently conducted) except as permitted by
this Agreement or the Loan Documents. Nothing herein shall prohibit Borrower
from disposing of worthless or obsolete assets from time to time in the ordinary
course of Borrower’s business provided that (a.) Borrower shall notify Lender
prior to doing so if Borrower is disposing of assets valued at or having a cost
greater than Twenty-five thousand Dollars ($25,000.00); (b.) Lender shall
receive all of the proceeds from any sale of such worthless or obsolete assets
(which proceeds Lender shall apply toward the repayment of the Obligations); and
(c.) such assets shall not include Borrower’s customer list or any portion
thereof.
 
 
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10.7. Change Name. Borrower shall not change Borrower’s name, FEIN, business
structure, or identity, or add any new fictitious name. .  To that effect,
Borrower shall not do business under any name other than Westinghouse Solar,
Inc. or Andalay Solar, Inc., whichever shall be Borrower’s correct legal name,
unless Borrower has provided to Lender evidence that it has taken such legal
steps required with respect to fictitious or assumed names under the applicable
laws of the jurisdictions in which Borrower is located and/or does
business.  Lender has received acceptable documentation indicating that Borrower
will be doing business under the following additional name(s): Andalay, Inc.
 
10.8. Guarantee. Borrower shall not guarantee or otherwise become in any way
liable with respect to the obligations of any third Person except by endorsement
of instruments or items of payment for deposit to the account of Borrower or
which are transmitted or turned over to Lender.
 
10.9. Restructure. Borrower shall not make any change in Borrower’s financial
structure, the principal nature of Borrower’s business operations, or the date
of the ending of its fiscal year without Lender’s prior written consent, which
consent shall not be unreasonably withheld.
 
10.10. Consignments. Borrower shall not consign any Inventory or sell any
Inventory on bill and hold, sale or return, sale on approval, or other
conditional terms of sale.
 
10.11. Distributions. Borrower shall not make any distribution or declare or pay
any dividends (whether in cash or stock) on, or purchase, acquire, redeem, or
retire any of Borrower’s capital stock, of any class, whether now or hereafter
outstanding, except as consented to in writing by Lender, which consent shall
not be unreasonably withheld. Notwithstanding the foregoing, if Borrower is a
Subchapter S corporation or other pass through entity for income tax purposes,
Borrower may make distributions to its shareholders or members (as applicable)
for their use to pay taxes owed by them as a consequence of the income of
Borrower attributed to such shareholders or members (as applicable) as long as
no Event of Default has occurred and is continuing.
 
10.12. Accounting Methods. Borrower shall not modify or change its method of
accounting or enter into, modify, or terminate any agreement currently existing,
or at any time hereafter entered into with any third party accounting firm or
service bureau for the preparation or storage of Borrower’s accounting records
without said accounting firm or service bureau agreeing to provide Lender
information regarding the Collateral or Borrower’s financial condition. Borrower
waives the right to assert a confidential relationship, if any, it may have with
any accounting firm or service bureau in connection with any information
requested by Lender pursuant to or in accordance with this Agreement, and agrees
that Lender may contact directly any such accounting firm or service bureau in
order to obtain such information.
 
10.13. Investments. Borrower shall not directly or indirectly make or acquire
any beneficial interest in (including stock, partnership interest, or other
securities of), or make any loan, or capital contribution to, any Person without
Lender’s prior written consent, which consent shall not be unreasonably
withheld.
 
10.14. Transactions With Affiliates. Except as disclosed in Addendum, Borrower
shall not directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of Borrower except for transactions that are in
the ordinary course of Borrower’s business, upon fair and reasonable terms, that
are fully disclosed to Lender, and that are no less favorable to Borrower than
would be obtained in arm’s length transaction with a non-Affiliate.
 
10.15. Suspension. Borrower shall not suspend or go out of a substantial portion
of its business.
 
10.16. Change in Location of Chief Executive Office / Other Locations;
Collateral and Third Party Control. Borrower covenants and agrees that it will
not, without giving thirty (30) days’ prior written notification to Lender,
relocate its Chief Executive Office to a new location or add or change any Other
Locations. Further, Borrower agrees that at the time of such written
notification, Borrower shall provide Lender any financing statements or fixture
filings necessary to perfect and continue Lender’s perfected Security Interests
in the Collateral and authorize Lender to file same. In addition, Borrower
agrees that it will not at any time store the Collateral with any bailee or
warehouseman or in a third party owned facility without providing the Lender
with a bailment agreement between Lender and bailee or a waiver and consent by
landlord, each in form and substance satisfactory to Lender. Lender acknowledges
that this Agreement shall serve as written notice of Borrower’s proposed
relocation of its corporate headquarters to its warehouse location in San Jose,
California that is anticipated to occur prior to year end.
 
 
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10.17. Hazardous Substances or Hazardous Waste. Borrower shall not permit the
Premises to be used to generate, manufacture, refine, transport, treat, store,
handle, dispose, produce, or process Hazardous Substances or Hazardous Wastes,
except in compliance with all applicable Environmental Laws.
 
10.18. Management If Borrower’s CEO or CFO should no longer be employed or
should die or become disabled such that such officer would not be able to
continue to act in its capacity as an officer, (a “Material Management Change”),
Borrower shall (a.) so notify Lender within five (5) Business Days of such
Material Management Change; and (b.) to(i.) replace such CEO or CFO with a CEO
or, CFO  satisfactory to Lender within six (6) weeks of the Material Management
Change; and(ii.) so advise Lender, provided, that in the event of conflict
between the terms of this Section 10.19 and the terms of any validity agreement,
support agreement or any other agreement provided by any such officer, the terms
of any such validity, support or other agreement shall govern.
 
11. Events Of Default. Any one or more of the events set forth below shall
constitute a “Event of Default” under this Agreement and the Loan Documents.
 
11.1. Failure to Pay. Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations whether of principal,
interest, (including any interest which, but for the provisions of the
Bankruptcy Code, would have accrued on such amounts), fees and charges due
Lender, reimbursement of Lender Expenses, or other amounts constituting the
Obligations.
 
11.2. Failure to Perform. Borrower fails or neglects to perform, keep, or
observe any material term, provision, condition, covenant, or agreement
contained in this Agreement, any of the Loan Documents, or in any other present
or future agreement between Borrower and Lender.
 
11.3. Material Adverse Change. A Material Adverse Change has occurred without
being cured.
 
11.4. Writ. Any of Borrower’s properties or assets is attached, seized,
subjected to a writ or distress warrant, or is levied upon, or comes into the
possession of any third Person.
 
11.5. Insolvency Proceeding. An Insolvency Proceeding is commenced by or against
Borrower without being dismissed in sixty (60) days; provided, however, that
upon the filing of an Insolvency Proceeding by or against Borrower, Lender shall
have no obligation to advance funds to Borrower and may seek relief from stay or
to prohibit use of cash collateral or such other protection as Lender deems
reasonably necessary under the circumstances without being dismissed in sixty
(60) days; provided, however, that Lender may take such immediate actions
permitted under the Loan Documents or applicable law that Lender believes are
required under the circumstances to prevent or avoid prejudice to Lender,
including but not limited to seeking court orders granting relief from the
automatic stay or prohibiting the use of cash collateral, and Lender shall not
be required to continue to made advances under the Agreement absent a
stipulation on terms and conditions satisfactory to Lender and approved by the
bankruptcy court.
 
11.6. Injunction Against Doing Business. Borrower is enjoined, restrained, or in
any way prevented by court order from continuing to conduct all or any material
part of its business affairs. 11.7. Notice of Lien or Levy. (a.) A notice of
lien, levy, or assessment is filed of record with respect to any of Borrower’s
properties or assets by the government of the United States, or any department,
agency, or instrumentality thereof, or by any state, county, municipal, or
governmental agency; or (b.) any taxes or debts owing at any time hereafter to
any one or more of such entities becomes a lien, whether choate or otherwise,
upon any of Borrower’s properties or assets and the same is not paid on the
payment date thereof.
 
11.8. Judgment Lien. A judgment or other claim becomes a lien or encumbrance
upon any of Borrower properties or assets.
 
11.9. Material Third Party Agreements. Borrower defaults on any material
agreement to which Borrower is a party with one or more third Persons resulting
in a right by such third Persons, irrespective of whether exercised, to
accelerate the maturity of Borrower’s obligations thereunder, or any material
agreement to which Borrower is a party is cancelled, matures or terminates, and
which default, cancellation, maturity or termination would have a material
negative effect on Borrower’s business in Lender’s reasonable business judgment.
 
 
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11.10. Prohibited Payment on Subordination Agreement. Borrower makes any payment
on account of Indebtedness that has been subordinated in right of payment to the
payment of the Obligations, except to the extent such payment is permitted by
the terms of the subordination provisions applicable to such Indebtedness.
 
11.11. Misstatement or Misrepresentation. Any material or intentional
misstatement or misrepresentation exists now or hereafter in any warranty,
representation, statement, or report made to Lender by Borrower or any officer,
employee, agent, or director of Borrower or any such warranty or representation
is withdrawn.
 
11.12. Other Default. The occurrence of an “Event of Default”, as defined in the
Note, shall be deemed an Event of Default hereunder.
 
11.13. Prospect of Payment Materially Impaired. Lender shall reasonably believe
in good faith and in light of all the facts and circumstances that the prospect
of (a.) payment of the Loans; or (b.) the performance of any of Borrower’s
material Obligations is materially impaired.
 
11.14. Termination, Lapse, or Ineffectiveness of UCC Filing. The termination,
lapse of, or ineffectiveness of any UCC Financing Statement filed in connection
with or related to any Collateral granted pursuant to this Agreement or any of
the other Loan Documents unless due to the failure of Lender to file a
continuation statement; provided, however that it shall be an Event of Default
if Borrower does not take such steps as Lender may reasonably request to assist
Lender in correcting such terminated, lapsed or ineffective UCC filing.
 
11.15. Violation of any Environmental Law. (a.) The failure by Borrower to
comply with each, every and all of the requirements of RCRA, CERCLA, SARA, or
any other applicable Environmental Law on Borrower’s property; (b.) the receipt
by Borrower of a notice from the EPA or any other governmental agency or
instrumentality acting under the authority of any Environmental Law, indicating
that a lien has been filed against any of the Collateral, or any of Borrower’s
other property by the EPA or any other governmental agency or instrumentality in
connection with a fund as a result of damage arising from an intentional or
unintentional action or omission by Borrower resulting from the disposal,
releasing, spilling, leaking, pumping, pouring, emitting, emptying or dumping of
Hazardous Substances or Hazardous Wastes into the environment; and (c.) any
other event or condition exists which might reasonably be expected, in the good
faith opinion of Lender, under applicable environmental protection statutes, to
have a material adverse effect on the financial or operational condition of
Borrower or the value of all or any material part of the Collateral or other
property of Borrower.
 
11.16. Failure to Obtain a Waiver and Consent from Owner or Bailment Agreement
After Change in Chief Executive Office / Other Locations. If Lender shall not be
not provided with a waiver and consent from the owner of the Chief Executive
Office or a bailment agreement from the owner or operator of any new Other
Location following a change in (a.) the location of Borrower’s Chief Executive
Office or Other Locations; or (b.) the ownership of the Chief Executive Office
or Other Locations.
 
11.17. Fraud, Defalcation or Conversion. If Borrower shall have engaged in any
fraud, defalcation or conversion.
 
11.18. Failure to Cure a Breach or Default After Notice.  Any breach or default
under this Agreement (other than the specific Material Events of Default above),
the Loan Documents or any other present or future agreement between Borrower and
Lender shall become an Event of default if Borrower has not cured said breach or
default within the time period specified by Lender in its Sole Discretion in any
notice of default, which time period shall depend upon the facts and
circumstances then in effect.
 
11.19. Name Change Notification.  Any failure of the Borrower to provide notice
as required under Section 8.3, above.
 
 
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12. Lender’s Rights and Remedies Upon Default. Borrower and Lender have agreed
to the terms set forth below with respect to the rights and remedies of Lender
upon the occurrence of a breach or default hereunder or under the Loan
Documents.
 
12.1. Rights and Remedies. Upon the occurrence, and during the continuation, of
an Event of default, Lender may, at its election, without notice of its election
and without demand, take any one or more of the actions set forth below, all of
which are authorized by Borrower.
 
12.1.1. Accelerate Obligations. Lender may declare all Obligations, whether
evidenced by this Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable, without presentment, demand, protest, or notice of
any kind, all of which are hereby expressly waived by Borrower.
 
12.1.2. Cease Making Advances. Lender may cease making Advances or extending
credit to or for the benefit of Borrower under this Agreement, the Loan
Documents, or any other agreement between Borrower and Lender.
 
12.1.3. Terminate This Agreement. Lender may terminate this Agreement and any of
the other Loan Documents as to any future liability or obligation of Lender, but
without affecting Lender’s rights and Security Interests in the Collateral and
without affecting the Obligations.
 
12.1.4. Settle or Adjust Disputes. Lender may settle or adjust disputes and
claims directly with Account Debtors to the Accounts for amounts and upon terms
which Lender considers advisable, and in such cases, Lender will credit
Borrower’s loan account with only the net amounts received by Lender in payment
of such disputed Accounts, after deducting all Lender Expenses incurred or
expended in connection therewith.
 
12.1.5. Returned Inventory. Lender may cause Borrower to hold (a.) all returned
Inventory in trust for Lender; (b.) segregate all returned Inventory from all
other property of Borrower or in Borrower’s possession; and (c.) conspicuously
label said returned Inventory as being the Collateral of Lender.
 
12.1.6. Make Payment; Take Action. Lender may, without notice to or demand upon
Borrower, or other guarantor, make such payments and take such actions as Lender
considers necessary or reasonable to protect its Security Interests in the
Collateral. Borrower agrees to assemble the Collateral if Lender so requires,
and to make the Collateral available to Lender as Lender may designate. Borrower
authorizes Lender to enter the Premises/Other Locations 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
that in Lender’s determination appears to conflict with its Security Interests
and to pay all expenses incurred in connection therewith. With respect to any of
Borrower’s owned Premises, Borrower hereby grants Lender a license to enter into
possession of such Premises and to occupy the same, without charge, for up to
one hundred twenty (120) days in order to exercise any of Lender’s rights or
remedies provided herein or in any of the other Loan Documents, at law, in
equity, or otherwise.
 
12.1.7. Setoff. Lender may, without notice to Borrower (such notice being
expressly waived), and without constituting a retention of any Collateral in
satisfaction of an Obligation (within the meaning of §§ 9620 and 9621 of the
Code, as such sections may be amended and/or re-numbered from time to time), set
off and apply to the Obligations any and all (a.) balances and deposits of
Borrower held by Lender (including any amounts received in the Lender’s
Account); or (b.) the Obligations at any time owing to or for the credit or the
account of Borrower held by Lender.
 
12.1.8. Hold Monies. Lender may hold, as cash collateral, any and all balances
and deposits of Borrower held by Lender, and any amounts received in the
Lender’s Account and Collateral Control Account(s), to secure the full and final
repayment of all of the Obligations.
 
12.1.9. Deal with Collateral. Lender may collect, ship, reclaim, recover, store,
finish, maintain, repair, dispose of, prepare for sale, advertise for sale, and
sell (in the manner provided for herein) the Collateral. Lender is hereby
granted a license or other right 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 Borrower’s rights under all
licenses and all franchise agreements shall inure to Lender’s benefit.
 
 
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12.1.10. Sell Collateral. Lender may sell the Collateral at either a public or
private sale, or both, 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 Lender determines is commercially reasonable. It is not necessary that the
Collateral be present at any such sale.
 
12.1.11. Notice of Disposition of Collateral. Lender shall give notice of the
disposition of the Collateral as follows:
 
12.1.11.1. Lender shall give Borrower and each holder of a Security Interest in
the Collateral which has filed with Lender a written request for notice, a
notice in writing of the time and place of public sale, or, if the sale is a
private sale or some other disposition other than a public sale is to be made of
the Collateral, then the time on or after which the private sale or other
disposition is to be made;
 
12.1.11.2. the notice shall be personally delivered or mailed, postage prepaid,
to Borrower at the address set forth herein, giving such notice as may be
reasonable under the circumstance of (a.) the date fixed for the sale; or (b.)
before the date on or after which the private sale or other disposition is to be
made; except that no notice needs to be given prior to the disposition of any
portion of the Collateral that is perishable or threatens to decline speedily in
value or that is of a type customarily sold on a recognized market. Notice to
Persons other than Borrower, or secured creditors reflected in a UCC search
claiming an interest in the Collateral shall be sent to such addresses as they
have furnished to Lender or as is reflected in such UCC search as the case may
be; and
 
12.1.11.3. if the sale is to be a public sale, Lender shall also give notice of
the time and place by publishing a notice one (1) time giving such notice as may
be reasonable under the circumstances before the date of the sale in a newspaper
of general circulation in the county in which the sale is to be held.
 
12.1.12. Credit Bid. Lender may credit bid and purchase any and all of the
Collateral at any public sale.
 
12.1.13. Deficiency; Excess. Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately to Lender by Borrower. Any
excess will be returned, without interest and subject to the rights of third
Persons, by Lender to Borrower.
 
12.2. Remedies Cumulative. Lender shall have all rights, powers and remedies
available under each of the Loan Documents, or accorded by law, including
without limitation the right to resort to any or all Collateral for any credit
accommodation from Lender under this Agreement or any other Loan Document and to
exercise any or all of the rights of a beneficiary or secured party pursuant to
applicable law. All rights, powers and remedies of Lender in connection with
each of the Loan Documents or as accorded by Lender, may be reasonably exercised
at any time by Lender and from time to time after the occurrence and during the
continuance of a Event of default, are cumulative and not exclusive, and shall
be in addition to any other rights, powers or remedies provided by law or
equity.
 
13. Taxes and Lender Expenses.
 
13.1. Actions to Protect Lender. If Borrower fails to pay any monies (whether
taxes, rents, assessments, insurance premiums, or otherwise) due to third
Persons, or fails to make any deposits or furnish any required proof of payment
or deposit, all as required under the terms of this Agreement (in each case,
except for payments subject to Permitted Protests), then, to the extent that
Lender determines in its good faith reasonable business judgment that such
failure by Borrower could have a Material Adverse Change with respect to
Lender’s interests in the Collateral, in its Sole Discretion and without prior
notice except as provided in the Loan Documents (except that Lender shall use
its best efforts to give two (2) days’ notice to Borrower without incurring any
liability for failure to do so), Lender may do any or all of the following: (a.)
set up such reserves in Borrower’s loan account and comply with any condition as
Lender reasonably deems necessary to protect Lender from the exposure created by
such failure; (b.) qualify Borrower in any state to collect Accounts; (c.)
obtain and maintain insurance policies of the type described herein; and (d.)
take any action with respect to such policies as Lender reasonably deems
prudent.  Any such amounts paid by Lender shall be at Borrower’s expense and
shall constitute Lender Expenses. Any such payments made by Lender shall not
constitute an agreement by Lender to make similar payments in the future or a
waiver by Lender of any Event of Default under this Agreement. Lender need not
inquire as to, or contest the validity of, any such expense, tax, Security
Interest, encumbrance, or lien and the receipt of the usual official notice for
the payment thereof shall be conclusive evidence that the same was validly due
and owing. Such Lender’s Expenses may be charged to Borrower’s account and if
not charged or paid prior to such time, shall be charged upon termination.
 
 
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13.2. Lender May Obtain Insurance to Protect its Interest Upon Borrower’s
Failure to Provide Insurance. Unless Borrower provides Lender with evidence of
the insurance coverage as required by this Agreement, Lender may purchase such
insurance at Borrower’s expense to protect Lender's interest. This insurance
may, but need not, also protect Borrower’s interest. If any Collateral becomes
damaged, the insurance coverage that Lender purchases may not pay any claim
Borrower makes or any claim made against Borrower. Borrower may later cancel
this coverage after providing evidence that Borrower has obtained property
coverage elsewhere.
 
13.3. Costs of Insurance. Borrower is responsible for the cost of any insurance
purchased by Lender, which shall constitute a Lender Expense. The cost of
obtaining this insurance may be added to Borrower’s loan balance. If the cost is
added to Borrower’s loan balance, interest at the Rate set forth in Section
2.2.1 will apply to this added amount. The effective date of coverage may be the
date on which Borrower’s prior coverage lapsed or the date Borrower failed to
provide proof of coverage.
 
13.4. Disclosure Regarding Lender Obtained Insurance. The insurance coverage
that Lender purchases may be considerably more expensive than the insurance
coverage that Borrower could obtain and may not satisfy any need for property
damage coverage or any mandatory liability insurance requirements imposed by
applicable law.
 
14. Waivers; Indemnification.
 
14.1. Waivers of Demand, Protest, etc. Except as expressly provided in the
Agreement or the other Loan Documents, Borrower hereby waives 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 Lender on which Borrower may in any
way be liable.
 
14.2. No Liability of Lender Re: Collateral. Lender and Collateral Agent 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; or (c.) any diminution in the value thereof;
or any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other Person. All risk of loss, damage, or destruction of the Collateral
shall be borne by Borrower.
 
14.3. Indemnification. Borrower hereby agrees to indemnify Lender and Collateral
Agent, any Affiliate thereof, and its directors, officers, employees, agents,
counsel, and other advisors (each an “Indemnified Person”) against, and hold
each of them harmless from, any and all liabilities, obligations, losses,
claims, damages, penalties, actions judgments, suits, costs, expenses, or
disbursements of any kind or nature whatsoever, including Attorneys’ Fees,
Lender Expenses, the reasonable fees and disbursements of counsel to an
Indemnified Person (including allocated costs of internal counsel), which may be
imposed on, incurred by, or asserted against any Indemnified Person, in any way
relating to or arising out of this Agreement or the transactions contemplated
hereby or any action taken or omitted to be taken by it hereunder (the
“Indemnified Liabilities”); provided that Borrower shall not be liable to any
Indemnified Person for any portion of such Indemnified Liabilities to the extent
they are found by a final decision of a court of competent jurisdiction to have
resulted from such Indemnified Person’s gross negligence or willful misconduct.
If and to the extent that the foregoing indemnification is for any reason held
unenforceable, Borrower agrees to make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities, which is permissible
under applicable law.
 
14.4. No Liability for Failure to Make Advances. Borrower hereby agrees Lender
shall not be liable or responsible for any failure to make Advances (a.) if in
Lender’s Sole Discretion Lender reasonably believes in light of all of the facts
and circumstances that Borrower is not entitled to receive such Advances; (b.)
due to any accounting or administrative errors made by Lender provided that such
errors are not in bad faith; or (c.) due to any other failure by Lender unless
the same arises directly from Lender’s gross negligence or willful misconduct.
 
14.5. Best Efforts by Lender to Give Notice of Default. Lender agrees to use its
best efforts to give Borrower prompt written notice of any default or Event of
Default or alleged default by Borrower promptly after Lender has made the
determination that it intends to exercise its rights and remedies as Lender;
provided, however, that there shall be no obligation on the part of Lender to
give any notice in the event of any fraud, defalcation, or conversion on the
part of Borrower.
 
 
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15. Notices. Unless otherwise provided in this Agreement or hereinbelow, all
notices or demands by any party relating to this Agreement or any of the other
Loan Documents shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) may be made, and deemed to be given, as follows: a) if delivered in
person or by courier (overnight or otherwise), on the date when it is delivered;
b) if by facsimile, when received at the correct number (proof of which shall be
an original facsimile transmission confirmation slip or equivalent); or c) if
sent by certified or registered mail or the equivalent, on the earlier of the
date such mail is actually delivered or three (3) days after deposit thereof in
the mail, unless the date of actual delivery or such date 3 days after deposit
thereof in the mail (as applicable) is not a Business Day in which case such
communication shall be deemed given and effective on the first following
Business Day. Any such notice or communication given pursuant to this Agreement
or any of the Loan Documents shall be addressed to the intended recipient at its
address or number specified as follows:
 

If to Borrower: Andalay Solar, Inc.

1475 S. Bascom Avenue, Suite 101,
Campbell, California 95008
Attn: Margaret Randazzo, CEO and CFO
Fax: (408) 371-5105

If to Lender:

Alpha Capital Anstalt
Pradafant 7
9490 Furstentums
Vaduz, Lichtenstein
Fax: 011-42-32323196

If to the Collateral Agent:

Collateral Services, LLC
515 Rockaway Avenue
Valley Stream, New York 11581
Attn: Ari Kluger
AKluger@lhfin.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.
Notwithstanding anything to the contrary in the foregoing, Borrower acknowledges
and agrees that notices sent by Lender in connection with §§ 9610, 9611, 9612,
9613, 9614, 9615, 9617, 9618, 9620, 9621, or 9624 of the Code and any other
references to the disposition of collateral under the Code, all as such sections
may be amended and/or re-numbered from time to time, shall be deemed sent when:
(a) delivered in person or by courier (overnight or otherwise), (b) deposited in
the mail, or (c) transmitted by facsimile.
 
16. Choice of Law. This Agreement and all transactions contemplated hereunder
and/or evidenced hereby shall be governed by, construed under, and enforced in
accordance with the internal laws of the State of New York without giving effect
to conflicts of law principles.
 
 
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17. Venue. The parties hereby agree that (a.) this Agreement is entered into and
that Borrower’s performance to Lender occurs at Campbell, California ; and (b.)
all actions or proceedings arising in connection with this Agreement and/or the
Loan Documents shall be tried and litigated only in the State and Federal courts
located in the State and County of New York or, at the sole option of Lender, in
any other court in which Lender shall initiate legal or equitable proceedings
and which has subject matter jurisdiction over the matter in controversy. Each
of Borrower and Lender waives, to the extent permitted under applicable law, any
right each may have to assert the doctrine of forum non conveniens or to object
to venue to the extent any proceeding is brought in accordance with this
section.
 
18. JURY TRIAL WAIVER. BORROWER AND LENDERS 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, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND LENDERS
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY
WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE
EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.
 
19. Destruction of Borrower’s Documents. All documents, schedules, invoices,
agings, or other papers delivered to Lender, other than Borrower’s Books or
Collateral, may be destroyed or otherwise disposed of by Lender four (4) months
after they are delivered to or received by Lender, unless Borrower requests, in
writing, the return of said documents, schedules, or other papers and makes
arrangements, at Borrower’s expense, for their return.
 
20. Revocation of Borrower’s Right to Sell Inventory Free and Clear of Lender’s
Security Interest. Lender may, upon the occurrence and during the continuance of
an Event of Default, revoke Borrower’s right to sell Inventory free and clear of
Lender’s Security Interest therein.
 
21. Third Party Debt. If Borrower owes money to any third party (the “Third
Party Debt”) which is also a borrower or other obligor of Lender (the “Third
Party Debtor”), Lender may at its option to protect the interests of Lender,
advance sums in the amount of the Third Party Debt under the Agreement and pay
directly to the Third Party Debtor the amount of the Third Party Debt.
 
22. Disclaimer for Negligence. Lender shall not be liable for any claims,
demands, losses, or damages made, claimed, or suffered by Borrower, except to
the extent such claims, demands, losses, or damages are caused directly by
Lender’s gross negligence or willful misconduct.
 
23. Limitation of Damages. Lender and Collateral Agent shall not be responsible
for any lost profits or indirect, special, or consequential damages from
Borrower arising from any breach of contract, tort (excluding Lender’s gross
negligence or willful misconduct), or any other wrong arising from the
establishment, administration, or collection of the Obligations. In no event
shall Lender be liable for losses or delays resulting from computer malfunction,
interruption of communication facilities, labor difficulties or other causes
beyond Lender’s reasonable control or for indirect, special or consequential
damages.
 
24. left intentionally blank.
 
25. Borrower Authorization. Borrower consents to Lender’s use of Borrower’s
company names and logos in Lender’s written and oral presentations, including in
Lender’s advertising, promotional and marketing materials, client lists, news
releases and Web site. In connection with any client references in such written
or oral presentations, Borrower consents to the use of individual names and
quotations.
 
26. General Provisions.
 
26.1. Effectiveness. This Agreement shall be binding and deemed effective when
executed by Borrower and Lender.
 
26.2. Successors and Assigns. This Agreement shall be binding on and inure to
the benefit of the heirs, executors, administrators, legal representatives,
successors and assigns of the parties; provided, however, that Borrower may not
assign or transfer its interest hereunder without the prior written consent of
Lender, and any prohibited assignment shall be void ab initio. Lender reserves
the right to sell, assign, transfer, negotiate, or grant participations in all
or any part of, or any interest in, Lender’s rights and benefits under each of
the Loan Documents executed herewith or hereafter. In connection therewith,
Lender may, subject to the requirements of Section 30, disclose all documents
and information that Lender now has or may hereafter acquire relating to any
credit extended by Lender to Borrower, Borrower or its business, or any
Collateral.
 
 
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26.3. Section Headings. Headings and numbers have been set forth herein for
convenience only. Unless the contrary is compelled by the context, everything
contained in each section applies equally to this entire Agreement.
 
26.4. Interpretation. This Agreement, all the Loan Documents, and all agreements
relating to the subject matter hereof are the product of negotiation and
preparation by and among each party and its respective attorneys, and shall be
construed accordingly.
 
26.5. Severability of Provisions. In the event that any one or more of the
provisions contained in this Agreement shall be for any reason held to be
invalid, illegal or unenforceable in any respect, then such provision shall be
ineffective only to the extent of such prohibition or invalidity, and the
validity, legality, and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby. The parties agree
to replace any invalid provision with a valid provision, which most closely
approximates the intent and economic effect of the invalid provision.
 
26.6. Amendments in Writing. Neither this Agreement nor any provisions hereof
may be changed, waived, discharged, or terminated, nor may any consent to the
departure from the terms hereof be given, orally (even if supported by new
consideration), but may only be by an instrument in writing signed by all
parties to this Agreement. Any waiver or consent so given shall be effective
only in the specific instance and for the specific purpose for which given.
 
26.7. Waiver or Delay by Lender to Exercise Rights. No failure by Lender to
exercise and no delay by Lender in exercising any right, power, or remedy
hereunder or under any of the other Loan Documents shall impair any right,
power, or remedy which Lender may have, nor shall any such delay be construed to
be a waiver of any of such rights, powers, or remedies, or any acquiescence in
any breach or default hereunder; nor shall any waiver by Lender of any breach or
default by Borrower hereunder be deemed a waiver of any default or breach
subsequently occurring. All rights and remedies granted to Lender hereunder
shall remain in full force and effect notwithstanding any single or partial
exercise of, or any discontinuance of action begun to enforce, any such right or
remedy. The rights and remedies specified herein are cumulative and not
exclusive of each other or of any rights or remedies which Lender would
otherwise have. Any waiver, permit, consent, or approval by Lender of any breach
or default hereunder must be in writing and shall be effective only to the
extent set forth in such writing and only as to that specific instance.
 
26.8. Survival. All representations, warranties, and agreements herein contained
shall be effective so long as any portion of this Agreement remains executory.
 
26.9. Continuing Obligations. No termination of this Agreement or any other Loan
Document shall relieve or discharge Borrower of its respective duties,
obligations and covenants until all of Borrower’s Obligations (other than
contingent obligations) under this Agreement and the other Loan Documents, other
than contingent obligations, have been fully and finally discharged and paid,
and Lender’s continuing Security Interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Loan Documents and applicable law
and procedures established by Lender in connection with its lending operations
from time to time, whether pursuant to a procedure manual or otherwise, shall
remain in effect until all such Obligations (other than contingent obligations),
other than contingent obligations, have been fully and finally discharged and
paid.
 
26.10. Further Assurances. Borrower shall execute such other and further
documents and instruments and take such other actions as Lender may reasonably
request to implement the provisions of this Agreement and to perfect and protect
the Security Interests and other rights and remedies of Lender contemplated by
the Loan Documents or granted hereafter.
 
26.11. Counterparts; Facsimile Execution. This Agreement and all of the Loan
Documents may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if all signatures were upon the same
instrument. This Agreement and all of the Loan Documents, or a signature page
thereto intended to be attached to a copy of this Agreement or any of the Loan
Documents, signed and transmitted by facsimile machine, telecopier or other
electronic means (including via transmittal of a “pdf” file) shall be deemed and
treated as an original document. The signature of any person thereon, for
purposes hereof, is to be considered as an original signature, and the document
transmitted is to be considered to have the same binding effect as an original
signature on an original document. At the request of any party hereto, any
facsimile, telecopy or other electronic document is to be re-executed in
original form by the persons who executed the facsimile, telecopy of other
electronic document. No party hereto may raise the use of a facsimile machine,
telecopier or other electronic means or the fact that any signature was
transmitted through the use of a facsimile machine, telecopier or other
electronic means as a defense to the enforcement of this Agreement and any of
the Loan Documents.
 
 
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26.12.           Revival and Reinstatement of Obligations. If the incurrence or
payment of the Obligations by Borrower to Lender of any property of either or
both of such parties should for any reason subsequently be declared to be void
or voidable under any state or federal law relating to creditors’ rights,
including provisions of the Bankruptcy Code relating to fraudulent conveyances,
preferences, and other voidable or recoverable payments of money or transfers of
property (individually or collectively, a “Voidable Transfer”), and if Lender is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Lender is required or elects
to repay or restore, and as to all reasonable costs, expenses, and Attorneys’
Fees of Lender related thereto, the liability of Borrower automatically shall be
revived, reinstated, and restored and shall exist as though such Voidable
Transfer had never been made.
 
26.13.           Supplementary Terms. The terms and conditions of the Loan
Documents shall supplement the terms hereof, except to the extent otherwise
specifically provided herein.
 
26.14.           Integration. This Agreement, together with the Loan Documents,
embodies the entire agreement and understanding among and between the parties
hereto, and supersedes all prior or contemporaneous agreements and
understandings between said parties, verbal or written, express or implied,
relating to the subject matter hereof. No promises of any kind have been made by
Lender or any third party to induce Borrower to execute this Agreement or the
Loan Documents. No course of dealing, course of performance or trade usage, and
no parole evidence of any nature, shall be used to supplement or modify any
terms of this Agreement or the Loan Documents.
 
26.15.           Conflicts With Other Agreements. Unless otherwise expressly
stated in the Loan Documents or any other agreement between Lender and Borrower,
if a conflict exists between the provisions of this Agreement and the provisions
of or the Loan Documents or such other agreement, the provisions of this
Agreement shall control.
 
27.           Cross Collateral. Any Collateral pledged to Lender to secure any
obligation of Borrower shall also secure any other obligation of Borrower to
Lender.
 
28.           Cross-Payment; Right to Reserve. Lender may, in its Sole
Discretion, make Advances under one loan to make any payments due from Borrower
to Lender under any other loan. Lender may also, in its Sole Discretion reserve
under one loan from Borrower for amounts due under any other loan from Borrower.
 
29.           Cross-Defaults. An Event of Default under this Agreement shall be
an Event of Default under each of the Loan Documents, and vice versa.
 
30.           Confidentiality. In handling any non-public information of
Borrower, Lender and all employees and agents of Lender shall exercise the same
degree of care to maintain the confidentiality of such proprietary information
that Lender exercises with respect to its own proprietary information of the
same type, except that disclosure of such proprietary information may be made:
(a.) to the subsidiaries or Affiliates of Lender in connection with their
present or prospective business relations with Borrower; (b.) to prospective
transferees or purchasers of any interest in the Advances; (c.) as required by
law, regulations, rule or order, subpoena, judicial order, or similar order;
(d.) as may be required in connection with the examination, audit or similar
investigation of Lender; and (e.) as Lender may determine in connection with the
enforcement of any remedies hereunder. Confidential information hereunder shall
not include information that either: (i.) is in the public domain or in the
knowledge or possession of Lender when disclosed to Lender, or becomes part of
the public domain after disclosure to Lender through no fault of Lender; or
(ii.) is disclosed to Lender by a third party, provided Lender does not have
actual knowledge that such third party is prohibited from disclosing such
information. The terms hereof supersede any and all terms of any other
pre-existing confidentiality agreement between Borrower and Lender, with such
other confidentiality agreement deemed to have had no force and effect.
 
31.           Dealership Sales.  Lender has been informed by Borrower that it
intends to sell its vehicles and other products (collectively, “Vehicles”) to
industrial sales (or other) dealerships (“Dealerships”) who in turn will sell
such vehicles to the general public. To the extent such sales to Dealerships
constitute Prime Accounts and subject to the terms of this Agreement, Lender
will be providing Advances against Accounts owing to Borrower from
Dealerships.  However, notwithstanding anything else to the contrary in this
Agreement, Lender in its absolute discretion reserves the right to establish
credit limits for each respective Dealership limiting the amount of total
Advances to be made against the Accounts of a respective Dealership(s). Lender
from time to time will inform Borrower in writing of such respective Dealership
credit limits.  In connection with Borrower’s sales of Vehicles to Dealerships,
Borrower will provide Lender with a “sell-through” report in form acceptable to
Lender which describes, among other things, the amount and types of Vehicles:
(a) sold to respective Dealerships; (b) held in stock by respective Dealerships,
and (c) sold by respective Dealerships to the general public.
 
33.           Non-Public Information.  Without the prior written consent of the
Lender, the Borrower shall not deliver to the Lender any material non-public
information regarding the Borrower.  The Borrower acknowledges that the Lender
may engage in transactions with the Borrower’s securities in reliance on this
Section 33.
 
 
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33.           The Collateral Agent.
 
33.1           Appointment. The Lender (all capitalized terms used herein and
not otherwise defined shall have the respective meanings provided in the
Security Agreement to which this Annex B is attached (the "Agreement"), by their
acceptance of the benefits of the Agreement, hereby designate Collateral
Services, LLC (“Collateral Agent”) as the Collateral Agent to act as specified
herein and in the Agreement. Lender shall be deemed irrevocably to authorize the
Collateral Agent to take such action on its behalf under the provisions of the
Agreement and any other Transaction Document (as such term is defined in the
Debentures) and to exercise such powers and to perform such duties hereunder and
thereunder as are specifically delegated to or required of the Collateral Agent
by the terms hereof and thereof and such other powers as are reasonably
incidental thereto.  The Collateral Agent may perform any of its duties
hereunder by or through its agents or employees.
 
33.2           Duties of the Collateral Agent.  All reports and statements
required to be delivered under this Agreement shall be delivered to the
Collateral Agent.  All rights of the Lender hereunder shall be exercised by the
Collateral Agent.  Additionally all requests for Advance will be sent to the
Collateral Agent for its review and provided such request is in accordance with
the terms of this Agreement it shall be forwarded to the Lender to fund such
Advance.  It is specifically intended to structure the transactions herein so
that the Collateral Agent will act in the place of the Lender so that no
material non-public information is delivered to the Lender.
 
33.3           Other Activities.   Collateral Agent may generally engage in any
kind of business with Lender or Debtor any subsidiary or affiliate thereof as if
it had not entered into this Agreement. Collateral Agent and its affiliates and
their officers, directors, employees, and agents (including legal counsel) may
now or hereafter be engaged in one or more transactions with either Lender or
Debtor or may act as trustee, agent or representative of either Lender or
Debtor, or otherwise be engaged in other transactions with such parties
(collectively, the “Other Activities”).  Without limiting the forgoing,
Collateral Agent and its affiliates and their officers, directors, employees,
and agents (including legal counsel) shall not be responsible to account to
Lender or Debtor for such other activities.
 
33.4           Collateral Agent.
 
33.4.1 Limitations on Duties of Collateral Agent. The Collateral Agent shall
have no duties or responsibilities except those expressly set forth in the
Agreement. Neither the Collateral Agent nor any of its partners, members,
shareholders, officers, directors, employees or agents shall be liable for any
action taken or omitted by it as such under the Agreement or hereunder or in
connection herewith or therewith, be responsible for the consequence of any
oversight or error of judgment or answerable for any loss, unless caused solely
by its or their gross negligence or willful misconduct as determined by a final
judgment (not subject to further appeal) of a court of competent jurisdiction.
The duties of the Collateral Agent shall be mechanical and administrative in
nature; the Collateral Agent shall not have by reason of the Agreement or any
other Transaction Document a fiduciary relationship in respect of any Borrower
or Lender; and nothing in the Agreement or any other Transaction Document,
expressed or implied, is intended to or shall be so construed as to impose upon
the Collateral Agent any obligations in respect of the Agreement or any other
Transaction Document except as expressly set forth herein and therein.
 
33.4.2  Lack of Reliance on the Collateral Agent. Independently and without
reliance upon the Collateral Agent, Lender, to the extent it deems appropriate,
has made and shall continue to make (i) its own independent investigation of the
financial condition and affairs of the Company and its subsidiaries in
connection with such Lender’s investment in the Borrower, the creation and
continuance of the Obligations, the transactions contemplated by the Transaction
Documents, and the taking or not taking of any action in connection therewith,
and (ii) its own appraisal of the creditworthiness of the Company and its
subsidiaries, and of the value of the Collateral from time to time, and the
Collateral Agent shall have no duty or responsibility, either initially or on a
continuing basis, to provide Lender with any credit, market or other information
with respect thereto, whether coming into its possession before any Obligations
are incurred or at any time or times thereafter. The Collateral Agent shall not
be responsible to the Borrower or Lender for any recitals, statements,
information, representations or warranties herein or in any document,
certificate or other writing delivered in connection herewith, or for the
execution, effectiveness, genuineness, validity, enforceability, perfection,
collectibility, priority or sufficiency of the Agreement or any other
Transaction Document, or for the financial condition of the Borrower or the
value of any of the Collateral, or be required to make any inquiry concerning
either the performance or observance of any of the terms, provisions or
conditions of the Agreement or any other Transaction Document, or the financial
condition of the Borrower, or the value of any of the Collateral, or the
existence or possible existence of any default or Event of Default under the
Agreement, the Debentures or any of the other Transaction Documents.
 
 
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33.4.3  Certain Rights of the Collateral Agent. The Collateral Agent shall have
the right to take any action with respect to the Collateral, on behalf of the
Lender. To the extent practical, the Collateral Agent shall request instructions
from the Lender with respect to any material act or action (including failure to
act) in connection with the Agreement or any other Transaction Document, and
shall be entitled to act or refrain from acting in accordance with the
instructions of Lender; if such instructions are not provided despite the
Collateral Agent’s request therefor, the Collateral Agent shall be entitled to
refrain from such act or taking such action, and if such action is taken, shall
be entitled to appropriate indemnification from Lender in respect of actions to
be taken by the Collateral Agent; and the Collateral Agent shall not incur
liability to any person or entity by reason of so refraining. Without limiting
the foregoing, (a) Lender shall have no right of action whatsoever against the
Collateral Agent as a result of the Collateral Agent acting or refraining from
acting hereunder in accordance with the terms of the Agreement or any other
Transaction Document, and the Borrower shall have no right to question or
challenge the authority of, or the instructions given to, the Collateral Agent
pursuant to the foregoing and (b) the Collateral Agent shall not be required to
take any action which the Collateral Agent believes (i) could reasonably be
expected to expose it to personal liability or (ii) is contrary to this
Agreement, the Transaction Documents or applicable law.
 
33.4.4  Reliance. The Collateral Agent shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, radiogram, order
or other document or telephone message signed, sent or made by the proper person
or entity, and, with respect to all legal matters pertaining to the Agreement
and the other Transaction Documents and its duties thereunder, upon advice of
counsel selected by it and upon all other matters pertaining to this Agreement
and the other Transaction Documents and its duties thereunder, upon advice of
other experts selected by it. Anything to the contrary notwithstanding, the
Collateral Agent shall have no obligation whatsoever to Lender to assure that
the Collateral exists or is owned by the Borrower or is cared for, protected or
insured or that the liens granted pursuant to the Agreement have been properly
or sufficiently or lawfully created, perfected, or enforced or are entitled to
any particular priority.
 
33.4.5  Indemnification. To the extent that the Collateral Agent is not
reimbursed and indemnified by the Borrower, the Lender will jointly and
severally reimburse and indemnify the Collateral Agent, in proportion to their
initially purchased respective principal amounts of Debentures, from and against
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever which may be imposed on, incurred by or asserted against the
Collateral Agent in performing its duties hereunder or under the Agreement or
any other Transaction Document, or in any way relating to or arising out of the
Agreement or any other Transaction Document except for those determined by a
final judgment (not subject to further appeal) of a court of competent
jurisdiction to have resulted solely from the Collateral Agent's own gross
negligence or willful misconduct. Prior to taking any action hereunder as
Collateral Agent, the Collateral Agent may require Lender to deposit with it
sufficient sums as it determines in good faith is necessary to protect the
Collateral Agent for costs and expenses associated with taking such action.
 
33.4.6  Resignation by the Collateral Agent. (a) The Collateral Agent may resign
from the performance of all its functions and duties under the Agreement and the
other Transaction Documents at any time by giving 10 calendar days' prior
written notice (as provided in the Agreement) to the Borrower and the Lender.
Such resignation shall take effect upon the appointment of a successor
Collateral Agent pursuant to clauses (b) and (c) below.(b) Upon any such notice
of resignation, the Lender, acting by a Majority in Interest, shall appoint a
successor Collateral Agent hereunder.(c) If a successor Collateral Agent shall
not have been so appointed within said 30-day period, the Collateral Agent shall
then appoint a successor Collateral Agent who shall serve as Collateral Agent
until such time, if any, as the Lender appoint a successor Collateral Agent as
provided above. If a successor Collateral Agent has not been appointed within
such 30-day period, the Collateral Agent may petition any court of competent
jurisdiction or may interplead the Borrower and the Lender in a proceeding for
the appointment of a successor Collateral Agent, and all fees, including, but
not limited to, extraordinary fees associated with the filing of interpleader
and expenses associated therewith, shall be payable by the Borrower on demand.
 
33.4.7  Rights with respect to Collateral. Lender agrees with the  Collateral
Agent (i) that it shall not, and shall not attempt to, exercise any rights with
respect to its security interest in the Collateral, whether pursuant to any
other agreement or otherwise (other than pursuant to this Agreement), or take or
institute any action against the Collateral Agent in respect of the Collateral
or its rights hereunder (other than any such action arising from the breach of
this Agreement) and (ii) that Lender has no other rights with respect to the
Collateral other than as set forth in this Agreement and the other Transaction
Documents. Upon the acceptance of any appointment as Collateral Agent hereunder
by a successor Collateral Agent, such successor Collateral Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Collateral Agent and the retiring Collateral Agent shall be
discharged from its duties and obligations under the Agreement.  After any
retiring Collateral Agent’s resignation or removal hereunder as Collateral
Agent, the provisions of the Agreement including this Annex B shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Collateral Agent.
 
 
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34.           Responsibility for Collateral.  The Borrower assume all
liabilities and responsibility in connection with all Collateral, and the
Obligations shall in no way be affected or diminished by reason of the loss,
destruction, damage or theft of any of the Collateral or its unavailability for
any reason. Without limiting the generality of the foregoing, (a) neither the
Collateral Agent nor Lender (i) has any duty (either before or after an Event of
Default) to collect any amounts in respect of the Collateral or to preserve any
rights relating to the Collateral, or (ii) has any obligation to clean-up or
otherwise prepare the Collateral for sale, and (b) each Borrower shall remain
obligated and liable under each contract or agreement included in the Collateral
to be observed or performed by such Borrower thereunder. Neither the Collateral
Agent nor Lender shall have any obligation or liability under any such contract
or agreement by reason of or arising out of this Agreement or the receipt by the
Collateral Agent or Lender of any payment relating to any of the Collateral, nor
shall the Collateral Agent or Lender be obligated in any manner to perform any
of the obligations of any Borrower under or pursuant to any such contract or
agreement, to make inquiry as to the nature or sufficiency of any payment
received by the Collateral Agent or Lender in respect of the Collateral or as to
the sufficiency of any performance by any party under any such contract or
agreement, to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to the Collateral Agent or to which the Collateral Agent or Lender may
be entitled at any time or times.
 
37.  Power of Attorney; Further Assurances.
 
(a) Borrower authorizes the Collateral Agent, and does hereby make, constitute
and appoint the Collateral Agent and its officers, agents, successors or assigns
with full power of substitution, as Borrower’s true and lawful attorney-in-fact,
with power, in the name of the Collateral Agent or Borrower, to, after the
occurrence and during the continuance of an Event of Default, (i) endorse any
note, checks, drafts, money orders or other instruments of payment (including
payments payable under or in respect of any policy of insurance) in respect of
the Collateral that may come into possession of the Collateral Agent; (ii) to
sign and endorse any financing statement pursuant to the UCC or any invoice,
freight or express bill, bill of lading, storage or warehouse receipts, drafts
against Borrower, assignments, verifications and notices in connection with
accounts, and other documents relating to the Collateral; (iii) to pay or
discharge taxes, liens, security interests or other encumbrances at any time
levied or placed on or threatened against the Collateral; (iv) to demand,
collect, receipt for, compromise, settle and sue for monies due in respect of
the Collateral; (v) to transfer any Intellectual Property or provide licenses
respecting any Intellectual Property; and (vi) generally, at the option of the
Collateral Agent, and at the expense of the Borrower, at any time, or from time
to time, to execute and deliver any and all documents and instruments and to do
all acts and things which the Collateral Agent deems necessary to protect,
preserve and realize upon the Collateral and the Security Interests granted
therein in order to effect the intent of this Agreement and the Debentures all
as fully and effectually as the Borrower might or could do; and each Borrower
hereby ratifies all that said attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest and shall be
irrevocable for the term of this Agreement and thereafter as long as any of the
Obligations shall be outstanding.  The designation set forth herein shall be
deemed to amend and supersede any inconsistent provision in the Organizational
Documents or other documents or agreements to which any Borrower is subject or
to which any Borrower is a party. Without limiting the generality of the
foregoing, after the occurrence and during the continuance of an Event of
Default, Lender is specifically authorized to execute and file any applications
for or instruments of transfer and assignment of any patents, trademarks,
copyrights or other Intellectual Property with the United States Patent and
Trademark Office and the United States Copyright Office.
 
(b)           On a continuing basis, each Borrower will make, execute,
acknowledge, deliver, file and record, as the case may be, with the proper
filing and recording agencies in any jurisdiction, including, without
limitation, the jurisdictions indicated on Schedule C  attached hereto, all such
instruments, and take all such action as may reasonably be deemed necessary or
advisable, or as reasonably requested by the Collateral Agent, to perfect the
Security Interests granted hereunder and otherwise to carry out the intent and
purposes of this Agreement, or for assuring and confirming to the Collateral
Agent the grant or perfection of a perfected security interest in all the
Collateral under the UCC.
 
(c)           Each Borrower hereby irrevocably appoints the Collateral Agent as
such Borrower’s attorney-in-fact, with full authority in the place and instead
of such Borrower and in the name of such Borrower, from time to time in the
Collateral Agent’s discretion, to take any action and to execute any instrument
which the Collateral Agent may deem necessary or advisable to accomplish the
purposes of this Agreement, including the filing, in its sole discretion, of one
or more financing or continuation statements and amendments thereto, relative to
any of the Collateral without the signature of such Borrower where permitted by
law, which financing statements may (but need not) describe the Collateral as
“all assets” or “all personal property” or words of like import, and ratifies
all such actions taken by the Collateral Agent. This power of attorney is
coupled with an interest and shall be irrevocable for the term of this Agreement
and thereafter as long as any of the Obligations shall be outstanding.
 
38.  Limitations on Liability. Nothing in this Agreement shall be construed to
subject Collateral Agent or Lender to liability as a control person of Borrower
or any if its direct or indirect subsidiaries, nor shall Collateral Agent or
Lender be deemed to have assumed any obligations as an officer, director or
control person of Borrower or any if its direct or indirect subsidiaries or
otherwise.
 

 
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IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security
Agreement to be executed as of the date first set forth above.
 

 
BORROWER

Andalay Solar, Inc.

____________________
By:
Title:

LENDER

Alpha Capital Anstalt

____________________
By:
Its:

COLLATERAL AGENT

Collateral Services, LLC

____________________
By:
Title:
 

 

 
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