LOAN AND SECURITY AGREEMENT
 
THIS LOAN AND SECURITY AGREEMENT is made and dated as of March 31, 2010 and is
entered into by and among POLYMEDIX, INC., a Delaware corporation (“PolyMedix”),
and POLYMEDIX PHARMACEUTICALS, INC., a Delaware corporation (“PolyMedix
Pharmaceuticals”) (PolyMedix and PolyMedix Pharmaceuticals are hereinafter,
individually and collectively, jointly and severally, referred to as
“Borrower”), and HERCULES TECHNOLOGY II, L.P., a Delaware limited partnership
(“Lender”).
 
RECITALS
 
A.           Borrower has requested Lender to make available to Borrower term
loans in an aggregate principal amount of up to FOURTEEN MILLION DOLLARS
($14,000,000) (collectively, the “Term Loan”);
 
B.           Lender is willing to make the Term Loan on the terms and conditions
set forth in this Agreement.
 
AGREEMENT
 
NOW, THEREFORE, Borrower and Lender agree as follows:
 
SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION
 
1.1 Unless otherwise defined herein, the following capitalized terms shall have
the following meanings:
 
“Account Control Agreement(s)” means any agreement entered into by and among the
Lender, Borrower and a third party Bank or other institution (including a
Securities Intermediary) in which Borrower maintains a Deposit Account or an
account holding Investment Property and which grants Lender a perfected first
priority security interest in the subject account or accounts.
 
“ACH Authorization” means the ACH Debit Authorization Agreement in substantially
the form of Exhibit H.
 
“Advance(s)” means a Term Loan Advance.
 
“Advance Date” means the funding date of any Advance.
 
“Advance Request” means a request for an Advance submitted by Borrower to Lender
in substantially the form of Exhibit A.
 
“Agreement” means this Loan and Security Agreement, as amended from time to
time.
 
 
 
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“Amortization Date” means January 1, 2011; provided, however, that the
Amortization Date will be extended to April 1, 2011 in the event that the
closing of the Subsequent Financing occurs on or prior to December 31, 2010.
 
 “Assignee” has the meaning given to it in Section 11.13.
 
“Borrower Products” means all products, software, service offerings, technical
data or technology currently being designed, manufactured or sold by Borrower or
which Borrower intends to sell, license, or distribute in the future including
any products or service offerings under development, collectively, together with
all products, software, service offerings, technical data or technology that
have been sold, licensed or distributed by Borrower since its incorporation.
 
 “Cash” means all cash and liquid funds.
 
“Change in Control” means any reorganization, recapitalization, consolidation or
merger (or similar transaction or series of related transactions) of Borrower or
any Subsidiary, sale or exchange of outstanding shares (or similar transaction
or series of related transactions) of Borrower or any Subsidiary in which the
holders of Borrower or Subsidiary’s outstanding shares immediately before
consummation of such transaction or series of related transactions do not,
immediately after consummation of such transaction or series of related
transactions, retain shares representing more than fifty percent (50%) of the
voting power of the surviving entity of such transaction or series of related
transactions (or the parent of such surviving entity if such surviving entity is
wholly owned by such parent), in each case without regard to whether Borrower or
Subsidiary is the surviving entity; provided, however, a Public Offering shall
not constitute a Change in Control.
 
“Claims” has the meaning given to it in Section 11.10.
 
“Closing Date” means the date of this Agreement.
 
“Collateral” means the property described in Section 3.
 
“Confidential Information” has the meaning given to it in Section 11.12.
 
“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including any such obligation directly or indirectly guaranteed, endorsed,
co-made or discounted or sold with recourse by that Person, or in respect of
which that Person is otherwise directly or indirectly liable; (ii) any
obligations with respect to undrawn letters of credit, corporate credit cards or
merchant services issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term “Contingent Obligation” shall not include endorsements for
collection or deposit in the ordinary course of business.  The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
 
 
 
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“Copyright License” means any written agreement granting any right to use any
Copyright or Copyright registration, now owned or hereafter acquired by Borrower
or in which Borrower now holds or hereafter acquires any interest.
 
“Copyrights” means all copyrights, whether registered or unregistered, held
pursuant to the laws of the United States, any State thereof, or of any other
country.
 
“Deposit Accounts” means any “deposit accounts,” as such term is defined in the
UCC, and includes any checking account, savings account, or certificate of
deposit.
 
“ERISA” is the Employee Retirement Income Security Act of 1974, and its
regulations.
 
“Event of Default” has the meaning given to it in Section 9.
 
“Facility Charge” means one-half of one percent (0.50%) of the Maximum Term Loan
Amount.
 
“Financial Statements” has the meaning given to it in Section 7.1.
 
 “GAAP” means generally accepted accounting principles in the United States of
America, as in effect from time to time.
 
 “Indebtedness” means indebtedness of any kind appearing (or required to be
recorded) as indebtedness on a balance sheet of the Borrower in accordance with
GAAP, including (a) all indebtedness for borrowed money or the deferred purchase
price of property or services (excluding trade credit entered into in the
ordinary course of business due within sixty (60) days), including reimbursement
and other obligations with respect to surety bonds and letters of credit, (b)
all obligations evidenced by notes, bonds, debentures or similar instruments,
(c) all capital lease obligations, and (d) all Contingent Obligations.
 
 “Insolvency Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
 
“Intellectual Property” means all of Borrower’s Copyrights; Trademarks; Patents;
Licenses; trade secrets and inventions; mask works; Borrower’s applications
therefor and reissues, extensions, or renewals thereof; and Borrower’s goodwill
associated with any of the foregoing, together with Borrower’s rights to sue for
past, present and future infringement of Intellectual Property and the goodwill
associated therewith.
 
 
 
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“Investment” means any beneficial ownership (including stock, partnership or
limited liability company interests) of or in any Person, or any loan, advance
or capital contribution to any Person or the acquisition of all, or
substantially all, of the assets of another Person.
 
“Joinder Agreements” means for each Subsidiary, a completed and executed Joinder
Agreement in substantially the form attached hereto as Exhibit G.
 
“Lender” has the meaning given to it in the preamble to this Agreement.
 
"Lender Expenses” are all audit fees and expenses, costs, and expenses
(including reasonable attorneys’ fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency Proceedings)
or otherwise incurred with respect to Borrower.
 
“License” means any Copyright License, Patent License, Trademark License or
other license of rights or interests.
 
“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment for
security, security interest, encumbrance, levy, lien or charge of any kind,
whether voluntarily incurred or arising by operation of law or otherwise,
against any property, any conditional sale or other title retention agreement,
and any lease in the nature of a security interest.
 
“Loan” means the Advances made under this Agreement.
 
“Loan Documents” means this Agreement, the Notes, the ACH Authorization, the
Account Control Agreements, the Joinder Agreements, all UCC Financing
Statements, the Warrant, any Subordination Agreement, and any other documents
executed in connection with the Secured Obligations or the transactions
contemplated hereby, as the same may from time to time be amended, modified,
supplemented or restated.
 
“Material Adverse Effect” means a material adverse effect upon: (i) the
business, operations, properties, assets, or condition (financial or otherwise)
of Borrower and its subsidiaries taken as a whole other than an effect in and of
itself reasonably attributable to (a) the failure of any nonclinical or clinical
trial to demonstrate the desired safety or efficacy of any biologic or drug or
(b) the denial, delay or limitation of approval of, or taking of any other
regulatory action by, the United States Food and Drug Administration or any
other governmental entity with respect to any biologic or drug; or (ii) the
ability of Borrower to perform the Secured Obligations in accordance with the
terms of the Loan Documents, or the ability of Lender to enforce any of its
rights or remedies with respect to the Secured Obligations; or (iii) the
Collateral or Lender’s Liens on the Collateral or the priority of such Liens, in
each case, in the aggregate.
 

 
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“Maximum Term Loan Amount” means Fourteen Million and No/100 Dollars
($14,000,000).
 
“Maximum Rate” shall have the meaning assigned to such term in Section 2.3.
 
“Note(s)” means a Term Note.
 
“Patent License” means any written agreement granting any right with respect to
any invention on which a Patent is in existence or a Patent application is
pending, in which agreement Borrower now holds or hereafter acquires any
interest.
 
“Patents” means all letters patent of, or rights corresponding thereto, in the
United States or in any other country, all registrations and recordings thereof,
and all applications for letters patent of, or rights corresponding thereto, in
the United States or any other country.
 
"Permitted Indebtedness” means: (i) Indebtedness of Borrower in favor of Lender
arising under this Agreement or any other Loan Document; (ii) Indebtedness
existing on the Closing Date which is disclosed in Schedule 1A; (iii)
Indebtedness of up to $1,000,000 outstanding at any time secured by a lien
described in clause (vii) of the defined term “Permitted Liens,” provided such
Indebtedness does not exceed the lesser of the cost or fair market value of the
Equipment financed with such Indebtedness; (iv) Indebtedness to trade creditors
incurred in the ordinary course of business, including Indebtedness incurred in
the ordinary course of business with corporate credit cards; (v) Indebtedness
that also constitutes a Permitted Investment; (vi) Subordinated Indebtedness;
(vii) reimbursement obligations in connection with letters of credit that are
secured by cash or cash equivalents and issued on behalf of the Borrower or a
Subsidiary thereof in an amount not to exceed $1,400,000 at any time
outstanding, (viii) other Indebtedness in an amount not to exceed $100,000 at
any time outstanding, and (ix) extensions, refinancings and renewals of any
items of Permitted Indebtedness, provided that the principal amount is not
increased or the terms modified to impose materially more burdensome terms upon
Borrower or its Subsidiary, as the case may be.
 
“Permitted Investment” means: (i) Investments existing on the Closing Date which
are disclosed in Schedule 1B; (ii) (a) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within two years from the date of acquisition thereof,
(b) repurchase agreements collateralized by obligations issued or guaranteed by
the US Government , its agencies or instrumentalities, (c) commercial paper
maturing no more than one year from the date of creation thereof and currently
having a rating of at least A-2 or P-2 from either Standard & Poor’s Corporation
or Moody’s Investors Service, (d) certificates of deposit issued by any bank
with assets of at least $500,000,000 maturing no more than one year from the
date of investment therein, and (e) money market accounts; (iii) repurchases of
stock (or rights to acquire stock) from former employees, directors, or
consultants of Borrower in an aggregate amount not to exceed $250,000 in any
fiscal year, provided that no Event of Default has occurred, is continuing or
would exist after giving effect to the repurchases; (iv) Investments accepted in
connection with Permitted Transfers; (v) Investments (including debt
obligations) received in connection with the bankruptcy or reorganization of
customers or suppliers and in settlement of delinquent obligations of, and other
disputes with, customers or suppliers arising in the ordinary course of
Borrower’s business; (vi) Investments consisting of notes receivable of, or
prepaid royalties and other credit extensions, to customers and suppliers who
are not affiliates, in the ordinary course of business, provided that this
subparagraph
 
 
 
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(vi) shall not apply to Investments of Borrower in any Subsidiary; (vii)
Investments consisting of loans not involving the net transfer on a
substantially contemporaneous basis of cash proceeds to employees, officers or
directors relating to the purchase of capital stock of Borrower pursuant to
employee stock purchase plans or other similar agreements approved by Borrower’s
Board of Directors; (viii) Investments consisting of cash advances to employees
for business-related expenses in the ordinary course of business in an aggregate
amount not to exceed $50,000 in any fiscal year; (ix) Investments in
Subsidiaries organized in the United States, provided that any newly-formed
Subsidiaries enter into a Joinder Agreement promptly after their formation
by  Borrower and execute such other documents as shall be reasonably requested
by Lender; (x) Investments in subsidiaries organized outside of the United
States approved in advance in writing by Lender; (xi) joint ventures or
strategic alliances in the ordinary course of Borrower’s business consisting of
the licensing of technology, the development of technology or the providing of
technical support or licenses that could not result in a legal transfer of title
of the licensed property, provided that any cash Investments by Borrower in
respect of such joint ventures or strategic alliances do not exceed $1,000,000
in the aggregate in any fiscal year; and (xii) additional Investments that do
not exceed $500,000 in the aggregate.
 
“Permitted Liens” means any and all of the following: (i) Liens in favor of
Lender; (ii) Liens existing on the Closing Date which are disclosed in Schedule
1C; (iii) Liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings; provided, that Borrower maintains adequate reserves therefor in
accordance with GAAP; (iv) Liens securing claims or demands of materialmen,
artisans, mechanics, carriers, warehousemen, landlords and other like Persons
arising in the ordinary course of Borrower’s business and imposed without action
of such parties; provided, that the payment thereof is not yet required;
(v) Liens arising from judgments, decrees or attachments in circumstances which
do not constitute an Event of Default hereunder; (vi) the following deposits, to
the extent made in the ordinary course of business:  deposits under worker’s
compensation, unemployment insurance, social security and other similar laws, or
to secure the performance of bids, tenders or contracts (other than for the
repayment of borrowed money) or to secure indemnity, performance or other
similar bonds for the performance of bids, tenders or contracts (other than for
the repayment of borrowed money) or to secure statutory obligations (other than
liens arising under ERISA or environmental liens) or surety or appeal bonds, or
to secure indemnity, performance or other similar bonds; (vii) Liens on
Equipment or software or other intellectual property constituting purchase money
liens and liens in connection with capital leases securing Indebtedness
permitted in clause (iii) of “Permitted Indebtedness”;  (viii) Liens incurred in
connection with Subordinated Indebtedness; (ix) leasehold interests in leases or
subleases and licenses granted in the ordinary course of business and not
interfering in any material respect with the business of the licensor; (x) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payment of custom duties that are promptly paid on or before the date they
become due; (xi) Liens on insurance proceeds securing the payment of financed
insurance premiums that are promptly paid on or before the date they become due
(provided that such Liens extend only to such insurance proceeds and not to any
other property or assets); (xii) statutory and common law rights of set-off and
other similar rights as to deposits of cash and securities in favor of banks,
other depository institutions and brokerage firms; (xiii) easements, zoning
restrictions, rights-of-way and similar encumbrances on real property imposed by
law or arising in the ordinary course of business so long as they do not
materially impair the value or marketability of the related property; (xiv)
Liens on cash or cash equivalents securing obligations permitted under clause
(vii) of the definition of Permitted Indebtedness; and (xv) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clauses (i) through (xi) above;
provided, that any extension, renewal or replacement Lien shall be limited to
the property encumbered by the existing Lien and the principal amount of the
indebtedness being extended, renewed or refinanced (as may have been reduced by
any payment thereon) does not increase.
 
 
 
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“Permitted Transfers” means (i) sales of Inventory in the normal course of
business, (ii) licenses and similar arrangements for the use of Intellectual
Property in the ordinary course of business that could not result in a legal
transfer of title of the licensed property, or (iii) dispositions of worn-out,
obsolete or surplus Equipment at fair market value in the ordinary course of
business, (iv) other Transfers of assets having a fair market value of not more
than $500,000 in the aggregate in any fiscal year, (v) transfers to any
Borrower, (vi) transfers of cash constituting payments not otherwise prohibited
hereunder, (v) purchases and sales of, and other transactions constituting,
Permitted Investments and (vi) Permitted Liens.
 
 “Person” means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, limited liability
company, institution, other entity or government.
 
“Preferred Stock” means at any given time any equity security issued by Borrower
that has any rights, preferences or privileges senior to Borrower’s common
stock.
 
“Prepayment Charge” shall have the meaning assigned to such term in Section 2.4.
 
“Public Offering” means the public offering of Borrower’s common stock pursuant
to a registration statement under the Securities Act of 1933 filed with and
declared effective by the Securities and Exchange Commission.
 
 “SBA” shall have the meaning assigned to such term in Section 7.14.
 
“SBIC” shall have the meaning assigned to such term in Section 7.14.
 
“SBIC Act” shall have the meaning assigned to such term in Section 7.14.
 
“Receivables” means (i) all of Borrower’s Accounts, Instruments, Documents,
Chattel Paper, Supporting Obligations, letters of credit, proceeds of any letter
of credit, and Letter of Credit Rights, and (ii) all customer lists, software,
and business records related thereto.
 
 “Second Draw Period” means the period commencing on the date of the closing of
the Subsequent Financing and ending on the earlier to occur of (i) December 31,
2010 and (ii) the occurrence of an Event of Default.
 
“Secured Obligations” means Borrower’s obligations under this Agreement and any
Loan Document, including any obligation to pay any amount now owing or later
arising.
 
 
 
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“Subordinated Indebtedness” means Indebtedness subordinated to the Secured
Obligations in amounts and on terms and conditions satisfactory to Lender in its
sole discretion.
 
“Subordination Agreement” means any subordination agreement entered into in
connection with Subordinated Indebtedness in form and substance acceptable to
Lender .
 
“Subsequent Financing” means the closing of one or more financing(s) and/or
strategic partnering(s) which becomes effective after the Closing Date and in
combination results in aggregate proceeds to Borrower of at least $14,000,000.
 
 “Subsidiary” means an entity, whether corporate, partnership, limited liability
company, joint venture or otherwise, in which Borrower owns or controls 50% or
more of the outstanding voting securities, including each entity listed on
Schedule 1 hereto.
 
“Term Loan Advance” means any Term Loan funds advanced under this Agreement.
 
 “Term Loan Interest Rate” means for any day with respect to a Term Loan a
floating rate per annum equal to the greater of (i) 12.35% or (ii) lesser of (A)
the sum of (1) the prime rate as reported in the Wall Street Journal, and if not
reported, then the prime rate next reported in the Wall Street Journal, and (2)
7.10%, or (B) 14.00%. The Term Loan Interest Rate will float and change on the
day the Prime Rate changes from time to time.
 
“Term Loan Maturity Date” means (i) September 30, 2013 (in the event the
Amoritization Date is January 1, 2011) or (ii) December 31, 2013 (in the event
the Amoritization Date is April 1, 2011).
 
“Term Note” means a Promissory Note in substantially the form of Exhibit B.
 
“Trademark License” means any written agreement granting any right to use any
Trademark or Trademark registration, now owned or hereafter acquired by Borrower
or in which Borrower now holds or hereafter acquires any interest.
 
“Trademarks” means all trademarks (registered, common law or otherwise) and any
applications in connection therewith, including registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof or any other country or
any political subdivision thereof.
 
“UCC” means the Uniform Commercial Code as the same is, from time to time, in
effect in the State of California; provided, that in the event that, by reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to, Lender’s Lien on any Collateral is
governed by the Uniform Commercial Code as the same is, from time to time, in
effect in a jurisdiction other than the State of California, then the term “UCC”
shall mean the Uniform Commercial Code as in effect, from time to time, in such
other jurisdiction solely for purposes of the provisions thereof relating to
such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions.
 
 “Warrant” means the warrant entered into in connection with the Loan.
 
 
 
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Unless otherwise specified, all references in this Agreement or any Annex or
Schedule hereto to a “Section,” “subsection,” “Exhibit,” “Annex,” or “Schedule”
shall refer to the corresponding Section, subsection, Exhibit, Annex, or
Schedule in or to this Agreement.  Unless otherwise specifically provided
herein, any accounting term used in this Agreement or the other Loan Documents
shall have the meaning customarily given such term in accordance with GAAP, and
all financial computations hereunder shall be computed in accordance with GAAP,
consistently applied. Unless otherwise defined herein or in the other Loan
Documents, terms that are used herein or in the other Loan Documents and defined
in the UCC shall have the meanings given to them in the UCC.
 
SECTION 2. THE LOAN
 
2.1 Term Loan.
 
(a) Advances.  Subject to the terms and conditions of this Agreement, Lender
will make, and Borrower agrees to draw, a Term Loan Advance of $10,000,000 on
the Closing Date. During the Second Draw Period, Borrower may request an
additional Term Loan Advance of up to $4,000,000.  The aggregate outstanding
Term Loan Advances shall not exceed the Maximum Term Loan Amount.
 
(b)  Advance Request.  To obtain a Term Loan Advance, Borrower shall complete,
sign and deliver an Advance Request and Term Note to Lender.  Lender shall fund
the Term Loan Advance in the manner requested by the Advance Request provided
that each of the conditions precedent to such Term Loan Advance is satisfied as
of the requested Advance Date.
 
(c) Interest.  The principal balance of each Term Loan Advance shall bear
interest thereon from such Advance Date at the Term Loan Interest Rate based on
a year consisting of 360 days, with interest computed daily based on the actual
number of days elapsed.  The Term Loan Interest Rate will float and change on
the day the Prime Rate changes from time to time.
 
(d) Payment.  Borrower will pay interest on each outstanding Term Loan Advance
on the first day of each month, commencing on May 1, 2010.  Borrower shall repay
the aggregate Term Loan principal balance that is outstanding on the
Amortization Date in 33 equal monthly installments of principal and interest
beginning on the Amortization Date and continuing on the first business day of
each month thereafter.  The entire Term Loan principal balance and all accrued
but unpaid interest hereunder, shall be due and payable on Term Loan Maturity
Date.  Borrower shall make all payments under this Agreement without setoff,
recoupment or deduction and regardless of any counterclaim or defense. Lender
will initiate debit entries to the Borrower’s account as authorized on the ACH
Authorization on each payment date of all periodic obligations payable to Lender
under each Term Note or Term Advance.
 
 
 
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2.2 Maximum Interest.  Notwithstanding any provision in this Agreement, the
Notes, or any other Loan Document, it is the parties’ intent not to contract
for, charge or receive interest at a rate that is greater than the maximum rate
permissible by law that a court of competent jurisdiction shall deem applicable
hereto (which under the laws of the State of California shall be deemed to be
the laws relating to permissible rates of interest on commercial loans) (the
“Maximum Rate”).  If a court of competent jurisdiction shall finally determine
that Borrower has actually paid to Lender an amount of interest in excess of the
amount that would have been payable if all of the Secured Obligations had at all
times borne interest at the Maximum Rate, then such excess interest actually
paid by Borrower shall be applied as follows:  first, to the payment of
principal outstanding on the Notes; second, after all principal is repaid, to
the payment of Lender’s accrued interest, costs, Lender Expenses, professional
fees and any other Secured Obligations; and third, after all Secured Obligations
are repaid, the excess (if any) shall be refunded to Borrower.
 
2.3 Default Interest.  In the event any payment is not paid on the scheduled
payment date, an amount equal to two percent (2%) of the past due amount shall
be payable on demand. In addition, upon the occurrence and during the
continuation of an Event of Default hereunder, all Secured Obligations,
including principal, interest, compounded interest, and professional fees, shall
bear interest at a rate per annum equal to the rate set forth in Section 2.1(c),
plus two percent (2%) per annum.  In the event any interest is not paid when due
hereunder, delinquent interest shall be added to principal and shall bear
interest on interest, compounded at the rate set forth in Section 2.1(c) or
Section 2.3, as applicable.
 
2.4 Prepayment.  At its option upon at least 5 business days prior notice to
Lender, Borrower may prepay all or any part of the outstanding Advances by
paying the applicable principal balance, all accrued and unpaid interest
thereon, all fees and Lender Expenses accrued to the date of the prepayment,
together with a prepayment charge equal to the following percentage of the
principal amount of the Advance being prepaid: if the principal amount of the
Advance being prepaid is prepaid in any of the first twelve (12) months
following the Closing Date, 3%; if prepaid after twelve (12) months but prior to
twenty four (24) months, 2%; and if prepaid thereafter, 1% (each, a “Prepayment
Charge”).  Borrower agrees that the Prepayment Charge is a reasonable
calculation of Lender’s lost profits in view of the difficulties and
impracticality of determining actual damages resulting from an early repayment
of the Advances.  Borrower shall prepay the outstanding amount of all principal
and accrued interest and unpaid interest upon the occurrence of a Change in
Control.
 
SECTION 3. SECURITY INTEREST
 
3.1 As security for the prompt, complete and indefeasible payment when due
(whether on the payment dates or otherwise) of all the Secured Obligations,
Borrower grants to Lender a security interest in all of Borrower’s personal
property now owned or hereafter acquired, including the following (collectively,
the “Collateral”):  (a) Receivables; (b) Equipment; (c) Fixtures; (d) General
Intangibles (other than Intellectual Property); (e) Inventory; (f) Investment
Property (but excluding thirty-five percent (35%) of the capital stock of any
foreign Subsidiary that constitutes a Permitted Investment); (g) Deposit
Accounts; (h) Cash; (i) Goods; and other tangible and intangible personal
property of Borrower whether now or hereafter owned or existing, leased,
consigned by or to, or acquired by, Borrower and wherever located; and, to the
extent not otherwise included, all Proceeds of each of the foregoing and all
accessions to, substitutions and replacements for, and rents, profits and
products of each of the foregoing; provided, that the Collateral shall not
include (x) Intellectual Property, provided further, however, that
notwithstanding the foregoing the Collateral shall include all Accounts and
General Intangibles that consist of rights to payment and proceeds from the
sale, licensing or disposition of all or any part, or rights in, the
Intellectual Property (the “Rights to Payment”) or (y) any property that is
subject to a Permitted Lien described in clause (vii) of the definition of
“Permitted Lien”, to the extent that the inclusion of such property in the
Collateral hereunder would violate or require any consent under the agreements
governing such Permitted Liens or associated Indebtedness.
 
 
 
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SECTION 4. CONDITIONS PRECEDENT TO LOAN
 
The obligations of Lender to make the Loan hereunder are subject to the
satisfaction by Borrower of the following conditions:
 
4.1 Initial Advance.  On or prior to the Closing Date, Borrower shall have
delivered to Lender the following:
 
(a) executed originals of the Loan Documents, Account Control Agreements, a
legal opinion of Borrower’s counsel, and all other documents and instruments
reasonably required by Lender to effectuate the transactions contemplated hereby
or to create and perfect the Liens of Lender with respect to all Collateral, in
all cases in form and substance reasonably acceptable to Lender;
 
(b) certified copy of resolutions of Borrower’s board of directors evidencing
approval of (i) the Loan and other transactions evidenced by the Loan Documents;
and (ii) the Warrant and transactions evidenced thereby;
 
(c) certified copies of the Certificate of Incorporation and the Bylaws, as
amended through the Closing Date, of Borrower;
 
(d) a certificate of good standing for Borrower from its state of incorporation
and similar certificates from all other jurisdictions in which it does business
and where the failure to be qualified would have a Material Adverse Effect;
 
(e) payment of the Facility Charge and reimbursement of Lender’s current Lender
Expenses reimbursable pursuant to this Agreement, which amounts may be deducted
from the initial Advance; and
 
(f) such other documents as Lender may reasonably request.
 
4.2 All Advances.  On each Advance Date:
 
(a) Lender shall have received (i) an Advance Request and a Note for the
relevant Advance as required by Section 2.1(b), each duly executed by Borrower’s
Chief Executive Officer or Chief Financial Officer, and (ii) any other documents
Lender may reasonably request.
 
 
 
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(b) The representations and warranties set forth in this Agreement and in
Section 5 and in the Warrant shall be true and correct in all material respects
on and as of the Advance Date with the same effect as though made on and as of
such date, except to the extent such representations and warranties expressly
relate to an earlier date.
 
(c) Borrower shall be in compliance with all the terms and provisions set forth
herein and in each other Loan Document on its part to be observed or performed,
and at the time of and immediately after such Advance no Event of Default shall
have occurred and be continuing.
 
(d) Each Advance Request shall be deemed to constitute a representation and
warranty by Borrower on the relevant Advance Date as to the matters specified in
paragraphs (b) and (c) of this Section 4.2 and as to the matters set forth in
the Advance Request.
 
4.3 No Default.  As of the Closing Date and each Advance Date, (i) no fact or
condition exists that would (or would, with the passage of time, the giving of
notice, or both) constitute an Event of Default and (ii) no event that has had
or could reasonably be expected to have a Material Adverse Effect has occurred
and is continuing.
 
SECTION 5. REPRESENTATIONS AND WARRANTIES OF BORROWER
 
Borrower represents and warrants that:
 
5.1 Corporate Status.  Borrower is a corporation duly organized, legally
existing and in good standing under the laws of its jurisdiction of formation,
and is duly qualified as a foreign corporation in all jurisdictions in which the
nature of its business or location of its properties require such qualifications
and where the failure to be qualified could reasonably be expected to have a
Material Adverse Effect.  Each Borrower’s present name, former names (if any),
locations, place of formation, tax identification number, organizational
identification number and other information are correctly set forth in Exhibit
C, as may be updated by Borrower in a written notice (including any Compliance
Certificate) provided to Lender after the Closing Date.
 
5.2 Collateral.  Borrower owns the Collateral and the Intellectual Property,
free of all Liens, except for Permitted Liens.  Borrower has the power and
authority to grant to Lender a Lien in the Collateral as security for the
Secured Obligations .
 
5.3 Consents.  Borrower’s execution, delivery and performance of the Notes, this
Agreement and all other Loan Documents, and Borrower’s execution of the Warrant,
(i) have been duly authorized by all necessary corporate action of Borrower,
(ii) will not result in the creation or imposition of any Lien upon the
Collateral, other than Permitted Liens and the Liens created by this Agreement
and the other Loan Documents, (iii) do not violate any provisions of Borrower’s
Certificate or Articles of Incorporation (as applicable), bylaws, or any, law,
regulation, order, injunction, judgment, decree or writ to which Borrower is
subject and (iv) except as described on Schedule 5.3, do not violate any
contract or agreement or require the consent or approval of any other
Person.  The individual or individuals executing the Loan Documents and the
Warrant are duly authorized to do so.
 
 
 
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5.4 Material Adverse Effect.  No event that has had or could reasonably be
expected to have a Material Adverse Effect has occurred and is continuing.
Borrower is not aware of any event likely to occur that is reasonably expected
to result in a Material Adverse Effect.
 
5.5 Actions Before Governmental Authorities.  Except as described on Schedule
5.5, there are no actions, suits or proceedings at law or in equity or by or
before any governmental authority now pending or, to the knowledge of Borrower,
threatened against or affecting Borrower or its property which could reasonably
be expected to have a Material Adverse Effect.
 
5.6 Laws.  Borrower is not in violation of any law, rule or regulation, or in
default with respect to any judgment, writ, injunction or decree of any
governmental authority, where such violation or default is reasonably expected
to result in a Material Adverse Effect.  Borrower is not in default in any
manner under any provision of any agreement or instrument evidencing
indebtedness, or any other material agreement to which it is a party or by which
it is bound.
 
5.7 Information Correct and Current.  No information, report, Advance Request,
financial statement, exhibit or schedule furnished, by or on behalf of Borrower
to Lender in connection with any Loan Document or included therein or delivered
pursuant thereto (other than forecasts, budgets or projections) contained,
contains or will contain any material misstatement of fact or omitted, omits or
will omit to state any material fact necessary to make the statements therein
taken as a whole, in the light of the circumstances under which they were, are
or will be made, not misleading at the time such statement was made or deemed
made. Additionally, any and all financial or business projections provided by
Borrower to Lender shall be provided in good faith and based on the most current
data and information available to Borrower.
 
5.8 Tax Matters.  Except as described on Schedule 5.8, (a) Borrower has filed
all federal, state and local tax returns that it is required to file, (b)
Borrower has duly paid or fully reserved for all taxes or installments thereof
(including any interest or penalties) as and when due, which have or may become
due pursuant to such returns, and (c) Borrower has paid or fully reserved for
any tax assessment received by Borrower for the three (3) years preceding the
Closing Date, if any (including any taxes being contested in good faith and by
appropriate proceedings).
 
5.9 Intellectual Property Claims.  Borrower is the sole owner of, or otherwise
has the right to use, the Intellectual Property.  Except as described on
Schedule 5.9,(i) each of the material Copyrights, Trademarks and Patents is
valid and enforceable, (ii) no material part of the Intellectual Property has
been judged invalid or unenforceable, in whole or in part, and (iii) no claim
has been made to Borrower that any material part of the Intellectual Property
violates the rights of any third party. Exhibit D is a true, correct and
complete list of each of Borrower’s Patents, registered Trademarks, registered
Copyrights, and material agreements under which Borrower licenses Intellectual
Property from third parties (other than shrink-wrap software licenses), together
with application or registration numbers, as applicable, owned by Borrower or
any Subsidiary, in each case as of the Closing Date. Borrower is not in material
breach of, nor has Borrower failed to perform any material obligations under,
any of the foregoing contracts, licenses or agreements and, to Borrower’s
knowledge, no third party to any such contract, license or agreement is in
material breach thereof or has failed to perform any material obligations
thereunder.
 
 
 
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5.10 Intellectual Property.  Except as described on Schedule 5.10, Borrower has,
or in the case of any proposed business, will have, all material rights with
respect to Intellectual Property necessary in the operation or conduct of
Borrower’s business as currently conducted and proposed to be conducted by
Borrower.  Without limiting the generality of the foregoing, and in the case of
Licenses, except for restrictions that are unenforceable under Division 9 of the
UCC, Borrower has the right, to the extent required to operate Borrower’s
business, to freely transfer, license or assign all material Intellectual
Property without condition, restriction or payment of any kind (other than
license payments in the ordinary course of business) to any third party, and
Borrower owns or has the right to use, pursuant to valid licenses, all software
development tools, library functions, compilers and all other third-party
software and other items that are used in the design, development, promotion,
sale, license, manufacture, import, export, use or distribution of Borrower
Products.
 
5.11 Borrower Products.  Except as described on Schedule 5.11, no Intellectual
Property owned by Borrower or Borrower Product has been or is subject to any
actual or, to the knowledge of Borrower, threatened litigation, proceeding
(including any proceeding in the United States Patent and Trademark Office or
any corresponding foreign office or agency) or outstanding decree, order,
judgment, settlement agreement or stipulation that restricts in any manner
Borrower’s use, transfer or licensing thereof or that may affect the validity,
use or enforceability thereof. There is no decree, order, judgment, agreement,
stipulation, arbitral award or other provision entered into in connection with
any litigation or proceeding that obligates Borrower to grant licenses or
ownership interest in any future Intellectual Property related to the operation
or conduct of the business of Borrower or Borrower Products.  Borrower has not
received any written notice or claim, or, to the knowledge of Borrower, oral
notice or claim, challenging or questioning Borrower’s ownership in any
Intellectual Property (or written notice of any claim challenging or questioning
the ownership in any licensed Intellectual Property of the owner thereof) or
suggesting that any third party has any claim of legal or beneficial ownership
with respect thereto nor, to Borrower’s knowledge, is there a reasonable basis
for any such claim.  Neither Borrower’s use of its Intellectual Property nor the
production and sale of Borrower Products infringes the Intellectual Property or
other rights of others.
 
5.12 Financial Accounts.  Exhibit E, as may be updated by the Borrower in a
written notice provided to Lender after the Closing Date, is a true, correct and
complete list of (a) all banks and other financial institutions at which
Borrower or any Subsidiary maintains Deposit Accounts and (b) all institutions
at which Borrower or any Subsidiary maintains an account holding Investment
Property, and such exhibit correctly identifies the name, address and telephone
number of each bank or other institution, the name in which the account is held,
a description of the purpose of the account, and the complete account number
therefor.
 
 
 
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5.13 Employee Loans.  Borrower has no outstanding loans to any employee, officer
or director of the Borrower nor has Borrower guaranteed the payment of any loan
made to an employee, officer or director of the Borrower by a third party.
 
5.14 Capitalization and Subsidiaries.  Borrower does not own any stock,
partnership interest or other securities of any Person, except for Permitted
Investments.  Attached as Schedule 5.14, as may be updated by Borrower in a
written notice provided after the Closing Date, is a true, correct and complete
list of each Subsidiary.
 
SECTION 6. INSURANCE; INDEMNIFICATION
 
6.1 Coverage.  Borrower shall cause to be carried and maintained commercial
general liability insurance, on an occurrence form, against risks customarily
insured against in Borrower’s line of business.  Such risks shall include the
risks of bodily injury, including death, property damage, personal injury,
advertising injury, and contractual liability per the terms of the
indemnification agreement found in Section 6.3.  Borrower must maintain a
minimum of $2,000,000 of commercial general liability insurance for each
occurrence.  Borrower has and agrees to maintain a minimum of $2,000,000 of
directors and officers’ insurance for each occurrence and $5,000,000 in the
aggregate.  So long as there are any Secured Obligations outstanding, Borrower
shall also cause to be carried and maintained insurance upon the Collateral,
insuring against all risks of physical loss or damage howsoever caused, in an
amount not less than the full replacement cost of the Collateral, provided that
such insurance may be subject to standard exceptions and deductibles.  Borrower
shall also carry and maintain a fidelity insurance policy in an amount not less
than $100,000.
 
6.2 Certificates.  Borrower shall deliver to Lender certificates of insurance
that evidence Borrower’s compliance with its insurance obligations in
Section 6.1 and the obligations contained in this Section 6.2.  Borrower’s
insurance certificate shall state Lender is an additional insured for commercial
general liability, an additional insured and a loss payee for all risk property
damage insurance, subject to the insurer’s approval, a loss payee for fidelity
insurance, and a loss payee for property insurance and additional insured for
liability insurance for any future insurance that Borrower may acquire from such
insurer.  Attached to the certificates of insurance will be additional insured
endorsements for liability and lender’s loss payable endorsements for all risk
property damage insurance and fidelity.  All certificates of insurance will
provide for a minimum of thirty (30) days advance written notice to Lender of
cancellation or any other change adverse to Lender’s interests.  Any failure of
Lender to scrutinize such insurance certificates for compliance is not a waiver
of any of Lender’s rights, all of which are reserved.
 
 
 
 
 
 
 
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6.3 Indemnity.  Borrower agrees to indemnify and hold Lender and its officers,
directors, employees, agents, in-house attorneys, representatives and
shareholders harmless from and against any and all claims, costs, Lender
Expenses, damages and liabilities (including such claims, costs, Lender
Expenses, damages and liabilities based on liability in tort, including strict
liability in tort), including reasonable attorneys’ fees and disbursements and
other costs of investigation or defense (including those incurred upon any
appeal), that may be instituted or asserted against or incurred by Lender or any
such Person as the result of credit having been extended, suspended or
terminated under this Agreement and the other Loan Documents or the
administration of such credit, or in connection with or arising out of the
transactions contemplated hereunder and thereunder, or any actions or failures
to act in connection therewith, or arising out of the disposition or utilization
of the Collateral, excluding in all cases claims resulting solely from Lender’s
gross negligence or willful misconduct. Borrower agrees to pay, and to save
Lender harmless from, any and all liabilities with respect to, or resulting from
any delay in paying, any and all excise, sales or other similar taxes (excluding
taxes imposed on or measured by the net income of Lender) that may be payable or
determined to be payable with respect to any of the Collateral or this
Agreement.
 
SECTION 7. COVENANTS OF BORROWER
 
Borrower agrees as follows:
 
7.1 Financial Reports.  Borrower shall furnish to Lender the Compliance
Certificate in the form of Exhibit F monthly within 30 days after the end of
each month and the financial statements listed hereinafter (the “Financial
Statements”):
 
(a) as soon as practicable (and in any event within 30 days) after the end of
each month, unaudited interim and year-to-date financial statements as of the
end of such month (prepared on a consolidated basis, if applicable), including
balance sheet and related statements of income, certified by Borrower’s Chief
Executive Officer or Chief Financial Officer to the effect that they have been
prepared in accordance with GAAP in all material respects, except (i) for the
absence of footnotes, (ii) that they are subject to normal year-end adjustments,
and (iii) they do not contain certain non-cash items that are customarily
included in quarterly and annual financial statements;
 
(b) as soon as practicable (and in any event within 45 days) after the end of
each calendar  quarter, unaudited interim and year-to-date financial statements
as of the end of such calendar quarter (prepared on a consolidated basis, if
applicable), including balance sheet and related statements of income and cash
flows,  certified by Borrower’s Chief Executive Officer or Chief Financial
Officer to the effect that they have been prepared in accordance with GAAP in
all material respects, except (i) for the absence of footnotes, and (ii) that
they are subject to normal year-end adjustments (it being agreed that the
Borrower’s timely filing of its Quarterly Report on Form 10-Q with the
Securities and Exchange Commission, together with a notice thereof to Lender
with an internet link to such Quarterly Report shall be deemed to satisfy
Borrower’s obligations under this Section 7.1(b));
 
 
 
 
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(c) as soon as practicable (and in any event within one hundred fifty (150)
days) after the end of each fiscal year, unqualified audited financial
statements as of the end of such year (prepared on a consolidated basis, if
applicable), including balance sheet and related statements of income and cash
flows, and setting forth in comparative form the corresponding figures for the
preceding fiscal year, certified by a firm of independent certified public
accountants selected by Borrower and reasonably acceptable to Lender,
accompanied by any management report from such accountants; (it being agreed
that the Borrower’s timely filing of its Annual Report on Form 10-K with the
Securities and Exchange Commission, together with a notice thereof to Lender
with an internet link to such Annual Report, shall be deemed to satisfy
Borrower’s obligations under this Section 7.1(c));
 
(d) promptly after the sending or filing thereof, as the case may be, copies of
any proxy statements, financial statements or reports that Borrower has made
available to holders of its Preferred Stock and copies of any regular, periodic
and special reports or registration statements that Borrower files with the
Securities and Exchange Commission or any governmental authority that may be
substituted therefor, or any national securities exchange (it being agreed that
the Borrower’s timely filing of the applicable document  with the Securities and
Exchange Commission, together with a notice thereof to Lender with an internet
link to such document, shall be deemed to satisfy Borrower’s obligations under
this Section 7.1(d)); and
 
(e) financial and business projections promptly following their approval by
Borrower’s Board of Directors, as well as budgets, operating plans and other
financial information reasonably requested by Lender.
 

The executed Compliance Certificate may be sent via facsimile to Lender at (650)
473-9194 or via e-mail to bjadot@herculestech.com.  All Financial Statements
required to be delivered pursuant to clauses (a), (b) and (c) shall be sent via
e-mail to financialstatements@herculestech.com with a copy to
bjadot@herculestech.com provided, that if e-mail is not available or sending
such Financial Statements via e-mail is not possible, they shall be sent via
facsimile to Lender at: (866) 468-8916, attention Chief Credit Officer.
 
7.2 Management Rights.  Borrower shall permit any representative that Lender
authorizes, including its attorneys and accountants, to inspect the Collateral
and examine and make copies and abstracts of the books of account and records of
Borrower at reasonable times and intervals and upon reasonable notice during
normal business hours.  In addition, any such representative shall have the
right to meet with management and officers of Borrower to discuss such books of
account and records.  In addition, Lender shall be entitled at reasonable times
and intervals to consult with and advise the management and officers of Borrower
concerning significant business issues affecting Borrower.  Such consultations
shall not unreasonably interfere with Borrower’s business operations.  The
parties intend that the rights granted Lender shall constitute “management
rights” within the meaning of 29 C.F.R Section 2510.3-101(d)(3)(ii), but that
any advice, recommendations or participation by Lender with respect to any
business issues shall not be deemed to give Lender, nor be deemed an exercise by
Lender of, control over Borrower’s management or policies.
 
 
 
 
 
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7.3 Further Assurances.  Borrower shall from time to time execute, deliver and
file, alone or with Lender, any financing statements, security agreements,
collateral assignments, notices, control agreements, or other documents to
perfect or give the highest priority to Lender’s Lien on the
Collateral.  Borrower shall from time to time procure any instruments or
documents as may be requested by Lender, and take all further action that may be
necessary or desirable, or that Lender may reasonably request, to perfect and
protect the Liens granted hereby and thereby.  In addition, in the event that
Borrower shall have failed to comply with its obligations hereunder after five
(5) Business Days prior written notice from Lender, and for such purposes only,
Borrower hereby authorizes Lender to execute and deliver on behalf of Borrower
and to file such financing statements, collateral assignments, notices, control
agreements, security agreements and other documents without the signature of
Borrower either in Lender’s name or in the name of Lender as agent and
attorney-in-fact for Borrower.  Borrower shall protect and defend Borrower’s
title to the Collateral and Lender’s Lien thereon against all Persons claiming
any interest adverse to Borrower or Lender other than Permitted Liens.
 
7.4 Indebtedness.  Borrower shall not create, incur, assume, guarantee or be or
remain liable with respect to any Indebtedness, or permit any Subsidiary so to
do, other than Permitted Indebtedness, or prepay any Indebtedness or take any
actions which impose on Borrower an obligation to prepay any Indebtedness,
except for the conversion of Indebtedness into equity securities and the payment
of cash in lieu of fractional shares in connection with such conversion.
 
7.5 Collateral.  Borrower shall at all times keep the Collateral, the
Intellectual Property and all other property and assets used in Borrower’s
business or in which Borrower now or hereafter holds any interest free and clear
from any Liens whatsoever (except for Permitted Liens), and shall give Lender
prompt written notice of any legal process affecting the Collateral, the
Intellectual Property, such other property and assets, or any Liens
thereon.  Borrower shall cause its Subsidiaries to protect and defend such
Subsidiary’s title to its assets from and against all Persons claiming any
interest adverse to such Subsidiary, and Borrower shall cause its Subsidiaries
at all times to keep such Subsidiary’s property and assets free and clear from
any Liens whatsoever (except for Permitted Liens), and shall give Lender prompt
written notice of any legal process affecting such Subsidiary’s assets. Borrower
shall not agree with any Person other than Lender not to encumber its property
except for restrictions in connection with a  Permitted Lien described in clause
(vii) of the definition of “Permitted Lien.”.
 
7.6 Investments.  Borrower shall not directly or indirectly acquire or own, or
make any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.
 
7.7 Distributions.  Borrower shall not, and shall not allow any Subsidiary to,
(a) repurchase or redeem any class of stock or other equity interest other than
pursuant to employee, director or consultant repurchase plans or other similar
agreements, in an aggregate amount not to exceed $250,000 per year, or (b)
declare or pay any cash dividend or make a cash distribution on any class of
stock or other equity interest, except that a Subsidiary may pay dividends or
make distributions to Borrower, or (c) other than in connection with corporate
credit cards in the ordinary course of business, lend money to any employees,
officers or directors or guarantee the payment of any such loans granted by a
third party in excess of $100,000 in the aggregate or (d) waive, release or
forgive any indebtedness owed by any employees, officers or directors in excess
of $100,000 in the aggregate.
 
 
 
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7.8 Transfers.  Except for Permitted Transfers, Borrower shall not voluntarily
or involuntarily transfer, sell, lease, license, lend or in any other manner
convey any equitable, beneficial or legal interest in any material portion of
their assets.
 
7.9 Mergers or Acquisitions.  Borrower shall not merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other business
organization (other than mergers or consolidations of a Subsidiary into another
Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person.
 
7.10 Taxes.  Borrower and its Subsidiaries shall pay when due all taxes, fees or
other charges of any nature whatsoever (together with any related interest or
penalties) now or hereafter imposed or assessed against Borrower, Lender or the
Collateral or upon Borrower’s ownership, possession, use, operation or
disposition thereof or upon Borrower’s rents, receipts or earnings arising
therefrom.  Borrower shall file on or before the due date therefor all personal
property tax returns in respect of the Collateral.  Notwithstanding the
foregoing, Borrower may contest, in good faith and by appropriate proceedings,
taxes for which Borrower maintains adequate reserves therefor in accordance with
GAAP.
 
7.11 Corporate Changes.  Neither Borrower nor any Subsidiary shall change its
corporate name, legal form or jurisdiction of formation without twenty (20)
days’ prior written notice to Lender.  Neither Borrower nor any Subsidiary shall
suffer a Change in Control. Neither Borrower nor any Subsidiary shall relocate
its chief executive office or its principal place of business unless: (i) it has
provided prior written notice to Lender; and (ii) such relocation shall be
within the continental United States.  Neither Borrower nor any Subsidiary shall
relocate any item of Collateral (other than (x) sales of Inventory in the
ordinary course of business, (y) relocations of Equipment having an aggregate
value of up to $150,000 in any fiscal year, and (z) relocations of Collateral
from a location described on Exhibit C to another location described on Exhibit
C) unless (i) it has provided prompt written notice to Lender, (ii) such
relocation is within the continental United States and, (iii) if such relocation
is to a third party bailee, it has delivered a bailee agreement in form and
substance reasonably acceptable to Lender.
 
7.12 Deposit Accounts.  Neither Borrower nor any Subsidiary shall maintain any
Deposit Accounts, or accounts holding Investment Property, other than any
account holding cash collateral for letters of credit as permitted pursuant to
the definition of Permitted Indebtedness and Permitted Liens, except with
respect to which Lender has an Account Control Agreement.
 
7.13 Borrower shall notify Lender of each Subsidiary formed subsequent to the
Closing Date and, within 15 days of formation, shall cause any such Subsidiary
organized under the laws of any State within the United States to execute and
deliver to Lender a Joinder Agreement.
 
 
 
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7.14 Lender has received a license from the U.S. Small Business Administration
(“SBA”) to extend loans as a small business investment company (“SBIC”) pursuant
to the Small Business Investment Act of 1958, as amended, and the associated
regulations (collectively, the “SBIC Act”).  Portions of the loan to Borrower
will be made under the SBA license and the SBIC Act.  Addendum 1 to this
Agreement outlines various responsibilities of Lender and Borrower associated
with an SBA loan, and such Addendum 1 is hereby incorporated in this Agreement.
 
SECTION 8. [RESERVED]
 
SECTION 9. EVENTS OF DEFAULT
 
The occurrence of any one or more of the following events shall be an Event of
Default:
 
9.1 Payments.  Borrower fails to pay any amount due under this Agreement, the
Notes or any of the other Loan Documents on the due date; or
 
9.2 Covenants.  Borrower breaches or defaults in the performance of any covenant
or Secured Obligation under this Agreement, the Notes, or any of the other Loan
Documents, and (a) with respect to a default under any covenant under this
Agreement (other than under Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9 or 7.14) such
default continues for more than ten (10) Business Days after the earlier of the
date on which (i) Lender has given notice of such default to Borrower and (ii)
Borrower has actual knowledge of such default or (b) with respect to a default
under any of Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9 or 7.14, the occurrence of such
default; or
 
9.3 Material Adverse Effect.  A circumstance has occurred that has or could
reasonably be expected to have a Material Adverse Effect; or
 
9.4 Other Loan Documents.  The occurrence of any default under any Loan Document
or any other agreement between Borrower and Lender and such default continues
for more than ten (10) Business Days after the earlier of (a) Lender has given
notice of such default to Borrower, or (b) Borrower has actual knowledge of such
default; or
 
9.5 Representations.  Any representation or warranty made by Borrower in any
Loan Document or in the Warrant shall have been false or misleading in any
material respect; or
 
9.6 Insolvency.  Borrower (A) (i) shall make an assignment for the benefit of
creditors; or (ii) shall be unable to pay its debts as they become due, or be
unable to pay or perform under the Loan Documents, or shall become insolvent; or
(iii) shall file a voluntary petition in bankruptcy; or (iv) shall file any
petition, answer, or document seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation pertinent to such
circumstances; or (v) shall seek or consent to or acquiesce in the appointment
of any trustee, receiver, or liquidator of Borrower or of all or any substantial
part (i.e., 33-1/3% or more) of the assets or property of Borrower; or
(vi) shall cease operations of its business as its business has normally been
conducted, or terminate substantially all of its employees; or (vii) Borrower or
its directors or majority shareholders shall take any action initiating any of
the foregoing actions described in clauses (i) through (vi); or (B) either
(i) thirty (30) days shall have expired after the commencement of an involuntary
action against Borrower seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, without such action being dismissed or all
orders or proceedings thereunder affecting the operations or the business of
Borrower being stayed; or (ii) a stay of any such order or proceedings shall
thereafter be set aside and the action setting it aside shall not be timely
appealed; or (iii) Borrower shall file any answer admitting or not contesting
the material allegations of a petition filed against Borrower in any such
proceedings; or (iv) the court in which such proceedings are pending shall enter
a decree or order granting the relief sought in any such proceedings; or (v)
thirty (30) days shall have expired after the appointment, without the consent
or acquiescence of Borrower, of any trustee, receiver or liquidator of Borrower
or of all or any substantial part of the properties of Borrower without such
appointment being vacated; or
 
 
 
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9.7 Attachments; Judgments.  Any portion of Borrower’s assets is attached or
seized, or a levy is filed against any such assets, or a judgment or judgments
is/are entered for the payment of money, individually or in the aggregate, of at
least $100,000, or Borrower is enjoined or in any way prevented by court order
from conducting any part of its business; or
 
9.8 Other Obligations.  The occurrence of any default under any agreement or
obligation of Borrower involving any Indebtedness in excess of $100,000, or the
occurrence of any default under any agreement  or obligation of Borrower that
could reasonably be expected to have a Material Adverse Effect.
 
SECTION 10. REMEDIES
 
10.1 General.  Upon and during the continuance of any one or more Events of
Default, (i) Lender may, at its option, accelerate and demand payment of all or
any part of the Secured Obligations together with a Prepayment Charge and
declare them to be immediately due and payable (provided, that upon the
occurrence of an Event of Default of the type described in Section 9.6, the
Notes and all of the Secured Obligations shall automatically be accelerated and
made due and payable, in each case without any further notice or act), (ii)
Lender may terminate any commitment of Lender to make any further Advances
hereunder, and (iii) Lender may notify any of Borrower’s account debtors to make
payment directly to Lender, compromise the amount of any such account on
Borrower’s behalf and endorse Lender’s name without recourse on any such payment
for deposit directly to Lender’s account.  Lender may exercise all rights and
remedies with respect to the Collateral under the Loan Documents or otherwise
available to it under the UCC and other applicable law, including the right to
release, hold, sell, lease, liquidate, collect, realize upon, or otherwise
dispose of all or any part of the Collateral and the right to occupy, utilize,
process and commingle the Collateral.  All Lender’s rights and remedies shall be
cumulative and not exclusive.
 
 
 
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10.2 Collection; Foreclosure.  Upon the occurrence and during the continuance of
any Event of Default, Lender may, at any time or from time to time, apply,
collect, liquidate, sell in one or more sales, lease or otherwise dispose of,
any or all of the Collateral, in its then condition or following any
commercially reasonable preparation or processing, in such order as Lender may
elect.  Any such sale may be made either at public or private sale at its place
of business or elsewhere.  Borrower agrees that any such public or private sale
may occur upon ten (10) calendar days’ prior written notice to Borrower.  Lender
may require Borrower to assemble the Collateral and make it available to Lender
at a place designated by Lender that is reasonably convenient to Lender and
Borrower.  The proceeds of any sale, disposition or other realization upon all
or any part of the Collateral shall be applied by Lender in the following order
of priorities:
 
 
First, to Lender in an amount sufficient to pay in full Lender’s costs and
professionals’ and advisors’ fees and expenses as described in Section 11.11;

 
 
Second, to Lender in an amount equal to the then unpaid amount of the Secured
Obligations (including principal, interest, and the Default Rate interest), in
such order and priority as Lender may choose in its sole discretion; and

 
 
Finally, after the full, final, and indefeasible payment in Cash of all of the
Secured Obligations, to any creditor holding a junior Lien on the Collateral, or
to Borrower or its representatives or as a court of competent jurisdiction may
direct.

 
Lender shall be deemed to have acted reasonably in the custody, preservation and
disposition of any of the Collateral if it complies with the obligations of a
secured party under the UCC.
 
10.3 No Waiver.  Lender shall be under no obligation to marshal any of the
Collateral for the benefit of Borrower or any other Person, and Borrower
expressly waives all rights, if any, to require Lender to marshal any
Collateral.
 
10.4 Cumulative Remedies.  The rights, powers and remedies of Lender hereunder
shall be in addition to all rights, powers and remedies given by statute or rule
of law and are cumulative.  The exercise of any one or more of the rights,
powers and remedies provided herein shall not be construed as a waiver of or
election of remedies with respect to any other rights, powers and remedies of
Lender.
 
SECTION 11. MISCELLANEOUS
 
11.1 Severability.  Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
such law, such provision shall be ineffective only to the extent and duration of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
 
11.2 Notice.  Except as otherwise provided herein, any notice, demand, request,
consent, approval, declaration, service of process or other communication
(including the delivery of Financial Statements) that is required, contemplated,
or permitted under the Loan Documents or with respect to the subject matter
hereof shall be in writing, and shall be deemed to have been validly served,
given, delivered, and received upon the earlier of: (i) the day of transmission
by facsimile or hand delivery or delivery by an overnight express service or
overnight mail delivery service; or (ii) the third calendar day after deposit in
the United States mails, with proper first class postage prepaid, in each case
addressed to the party to be notified as follows:
 
 
 
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If to Lender:
 
HERCULES TECHNOLOGY II, L.P.
Legal Department
Attention:  Chief Legal Officer
400 Hamilton Avenue, Suite 310
Palo Alto, CA  94301
Facsimile:  650-473-9194
Telephone:  650-289-3068
 

 
If to Borrower:
 
c/o POLYMEDIX, INC.
Attention:  Edward Smith, Chief Financial Officer
179 N. Radnor Chester Road
Suite 300
Radnor, PA 19087
Facsimile:  484-598-2333
Telephone:  484-598-2332

 
or to such other address as each party may designate for itself by like notice.
 
11.3 Entire Agreement; Amendments.  This Agreement, the Notes, and the other
Loan Documents constitute the entire agreement and understanding of the parties
hereto in respect of the subject matter hereof and thereof, and supersede and
replace in their entirety any prior proposals, term sheets, letters,
negotiations or other documents or agreements, whether written or oral, with
respect to the subject matter hereof or thereof (including Lender’s revised
proposal letter dated February 26, 2010).  None of the terms of this Agreement,
the Notes or any of the other Loan Documents may be amended except by an
instrument executed by each of the parties hereto.
 
11.4 No Strict Construction.  The parties hereto have participated jointly in
the negotiation and drafting of this Agreement.  In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement.
 
 
 
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11.5 No Waiver.  The powers conferred upon Lender by this Agreement are solely
to protect its rights hereunder and under the other Loan Documents and its
interest in the Collateral and shall not impose any duty upon Lender to exercise
any such powers.  No omission or delay by Lender at any time to enforce any
right or remedy reserved to it, or to require performance of any of the terms,
covenants or provisions hereof by Borrower at any time designated, shall be a
waiver of any such right or remedy to which Lender is entitled, nor shall it in
any way affect the right of Lender to enforce such provisions thereafter.
 
11.6 Survival.  All agreements, representations and warranties contained in this
Agreement, the Notes and the other Loan Documents or in any document delivered
pursuant hereto or thereto shall be for the benefit of Lender and shall survive
the execution and delivery of this Agreement and the expiration or other
termination of this Agreement.
 
11.7 Successors and Assigns.  The provisions of this Agreement and the other
Loan Documents shall inure to the benefit of and be binding on Borrower and its
permitted assigns (if any).  Borrower shall not assign its obligations under
this Agreement, the Notes or any of the other Loan Documents without Lender’s
express prior written consent, and any such attempted assignment shall be void
and of no effect.  Lender may assign, transfer, or endorse its rights hereunder
and under the other Loan Documents without prior notice to Borrower, and all of
such rights shall inure to the benefit of Lender’s successors and assigns.
 
11.8 Governing Law.  This Agreement, the Notes and the other Loan Documents have
been negotiated and delivered to Lender in the State of California, and shall
have been accepted by Lender in the State of California.  Payment to Lender by
Borrower of the Secured Obligations is due in the State of California.  This
Agreement, the Notes and the other Loan Documents shall be governed by, and
construed and enforced in accordance with, the laws of the State of California,
excluding conflict of laws principles that would cause the application of laws
of any other jurisdiction.
 
11.9 Consent to Jurisdiction and Venue.  All judicial proceedings (to the extent
that the reference requirement of Section 11.10 is not applicable) arising in or
under or related to this Agreement, the Notes or any of the other Loan Documents
may be brought in any state or federal court located in the State of
California.  By execution and delivery of this Agreement, each party hereto
generally and unconditionally: (a) consents to nonexclusive personal
jurisdiction in Santa Clara County, State of California; (b) waives any
objection as to jurisdiction or venue in Santa Clara County, State of
California; (c) agrees not to assert any defense based on lack of jurisdiction
or venue in the aforesaid courts; and (d) irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Agreement, the Notes or the
other Loan Documents.  Service of process on any party hereto in any action
arising out of or relating to this Agreement shall be effective if given in
accordance with the requirements for notice set forth in Section 11.2, and shall
be deemed effective and received as set forth in Section 11.2.  Nothing herein
shall affect the right to serve process in any other manner permitted by law or
shall limit the right of either party to bring proceedings in the courts of any
other jurisdiction.
 
 
 
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11.10 Mutual Waiver of Jury Trial / Judicial Reference.
 
(a) Because disputes arising in connection with complex financial transactions
are most quickly and economically resolved by an experienced and expert person
and the parties wish applicable state and federal laws to apply (rather than
arbitration rules), the parties desire that their disputes be resolved by a
judge applying such applicable laws.  EACH OF BORROWER AND LENDER SPECIFICALLY
WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM,
CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR ANY OTHER CLAIM (COLLECTIVELY,
“CLAIMS”) ASSERTED BY BORROWER AGAINST LENDER OR ITS ASSIGNEE OR BY LENDER OR
ITS ASSIGNEE AGAINST BORROWER.  This waiver extends to all such Claims,
including Claims that involve Persons other than Borrower and Lender; Claims
that arise out of or are in any way connected to the relationship between
Borrower and Lender; and any Claims for damages, breach of contract, tort,
specific performance, or any equitable or legal relief of any kind, arising out
of this Agreement, any other Loan Document.
 
(b) If the waiver of jury trial set forth in Section 11.10(a) is ineffective or
unenforceable, the parties agree that all Claims shall be resolved by reference
to a private judge sitting without a jury, pursuant to Code of Civil Procedure
Section 638, before a mutually acceptable referee or, if the parties cannot
agree, a referee selected by the Presiding Judge of the Santa Clara County,
California.  Such proceeding shall be conducted in Santa Clara County,
California, with California rules of evidence and discovery applicable to such
proceeding.
 
(c) In the event Claims are to be resolved by judicial reference, either party
may seek from a court identified in Section 11.9, any prejudgment order, writ or
other relief and have such prejudgment order, writ or other relief enforced to
the fullest extent permitted by law notwithstanding that all Claims are
otherwise subject to resolution by judicial reference.
 
11.11 Professional Fees.  Borrower promises to pay Lender’s fees and Lender
Expenses necessary to finalize the loan documentation, including but not limited
to reasonable attorneys fees, UCC searches, filing costs, and other
miscellaneous expenses. In addition, Borrower promises to pay any and all
reasonable attorneys’ and other professionals’ fees and expenses (including fees
and expenses of in-house counsel) incurred by Lender after the Closing Date in
connection with or related to:  (a) the Loan; (b) the administration,
collection, or enforcement of the Loan; (c) the amendment or modification of the
Loan Documents; (d) any waiver, consent, release, or termination under the Loan
Documents; (e) the protection, preservation, sale, lease, liquidation, or
disposition of Collateral or the exercise of remedies with respect to the
Collateral; (f) any legal, litigation, administrative, arbitration, or out of
court proceeding in connection with or related to Borrower or the Collateral,
and any appeal or review thereof; and (g) any bankruptcy, restructuring,
reorganization, assignment for the benefit of creditors, workout, foreclosure,
or other action related to Borrower, the Collateral, the Loan Documents,
including representing Lender in any adversary proceeding or contested matter
commenced or continued by or on behalf of Borrower’s estate, and any appeal or
review thereof.
 
 
 
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11.12 Confidentiality.  Lender acknowledges that certain items of Collateral and
information provided to Lender by Borrower are confidential and proprietary
information of Borrower, if and to the extent such information either (x) is
marked as confidential by Borrower at the time of disclosure, or (y) should
reasonably be understood to be confidential (the “Confidential
Information”).  Accordingly, Lender agrees that any Confidential Information it
may obtain in the course of acquiring, administering, or perfecting  Lender’s
security interest in the Collateral shall not be disclosed to any other person
or entity in any manner whatsoever, in whole or in part, without the prior
written consent of Borrower, except that Lender may disclose any such
information:  (a) to its own directors, officers, employees, accountants,
counsel and other professional advisors and to its affiliates if Lender in its
sole discretion determines that any such party should have access to such
information in connection with such party’s responsibilities in connection with
the Loan or this Agreement and, provided that such recipient of such
Confidential Information either (i) agrees to be bound by the confidentiality
provisions of this paragraph or (ii) is otherwise subject to confidentiality
restrictions that reasonably protect against the disclosure of Confidential
Information; (b) if such information is generally available to the public;
(c) if required or appropriate in any report, statement or testimony submitted
to any governmental authority having or claiming to have jurisdiction over
Lender; (d) if required or appropriate in response to any summons or subpoena or
in connection with any litigation, to the extent permitted or deemed advisable
by Lender’s counsel; (e) to comply with any legal requirement or law applicable
to Lender; (f) to the extent reasonably necessary in connection with the
exercise of any right or remedy under any Loan Document, including Lender’s
sale, lease, or other disposition of Collateral after default; (g) to any
participant or assignee of Lender or any prospective participant or assignee;
provided, that such participant or assignee or prospective participant or
assignee agrees in writing to be bound by this Section prior to disclosure; or
(h) otherwise with the prior consent of Borrower; provided, that any disclosure
made in violation of this Agreement shall not affect the obligations of Borrower
or any of its affiliates or any guarantor under this Agreement or the other Loan
Documents.
 
11.13  Assignment of Rights.  Borrower acknowledges and understands that Lender
may sell and assign all or part of its interest hereunder and under the Note(s)
and Loan Documents to any person or entity (an “Assignee”); provided, that if no
Event of Default has occurred and is continuing,  Lender shall not make any such
assignment to a direct competitor of Borrower or any “vulture fund” or similar
investor (as reasonably determined by Lender) without the prior consent of
Borrower.  After such assignment the term “Lender” as used in the Loan Documents
shall mean and include such Assignee, and such Assignee shall be vested with all
rights, powers and remedies of Lender hereunder with respect to the interest so
assigned; but with respect to any such interest not so transferred, Lender shall
retain all rights, powers and remedies hereby given.  No such assignment by
Lender shall relieve Borrower of any of its obligations hereunder.  Lender
agrees that in the event of any transfer by it of the Note(s), it will endorse
thereon a notation as to the portion of the principal of the Note(s), which
shall have been paid at the time of such transfer and as to the date to which
interest shall have been last paid thereon.
 
 
 
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11.14 Revival of Secured Obligations.  This Agreement and the Loan Documents
shall remain in full force and effect and continue to be effective if any
petition is filed by or against Borrower for liquidation or reorganization, if
Borrower becomes insolvent or makes an assignment for the benefit of creditors,
if a receiver or trustee is appointed for all or any significant part of
Borrower’s assets, or if any payment or transfer of Collateral is recovered from
Lender.  The Loan Documents and the Secured Obligations and Collateral security
shall continue to be effective, or shall be revived or reinstated, as the case
may be, if at any time payment and performance of the Secured Obligations or any
transfer of Collateral to Lender, or any part thereof is rescinded, avoided or
avoidable, reduced in amount, or must otherwise be restored or returned by, or
is recovered from, Lender or by any obligee of the Secured Obligations, whether
as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though
such payment, performance, or transfer of Collateral had not been made.  In the
event that any payment, or any part thereof, is rescinded, reduced, avoided,
avoidable, restored, returned, or recovered, the Loan Documents and the Secured
Obligations shall be deemed, without any further action or documentation, to
have been revived and reinstated except to the extent of the full, final, and
indefeasible payment to Lender in Cash.
 
11.15 Counterparts.  This Agreement and any amendments, waivers, consents or
supplements hereto may be executed in any number of counterparts, and by
different parties hereto in separate counterparts, each of which when so
delivered shall be deemed an original, but all of which counterparts shall
constitute but one and the same instrument.
 
11.16 No Third Party Beneficiaries.  No provisions of the Loan Documents are
intended, nor will be interpreted, to provide or create any third-party
beneficiary rights or any other rights of any kind in any person other than
Lender and Borrower unless specifically provided otherwise herein, and, except
as otherwise so provided, all provisions of the Loan Documents will be personal
and solely between the Lender and the Borrower.
 
11.17 Publicity.  Lender may use Borrower’s name and logo, and include a brief
description of the relationship between Borrower and Lender, in Lender’s
marketing materials.
 
(SIGNATURES TO FOLLOW)
 
 
 
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IN WITNESS WHEREOF, Borrower and Lender have duly executed and delivered this
Loan and Security Agreement as of the day and year first above written.
 
BORROWER:
 
POLYMEDIX, INC.
 
Signature:         /s/ Edward Smith
 
Print Name:      Edward Smith
 
Title:                 Chief Financial Officer
 
 
POLYMEDIX PHARMACEUTICALS, INC.
 
Signature:         /s/ Edward Smith
 
Print Name:      Edward Smith 
 
Title:                 Chief Financial Officer
 
 
Accepted in Palo Alto, California:
 
LENDER:
 
HERCULES TECHNOLOGY II, L.P.,
a Delaware limited partnership
 
By:  Hercules Technology SBIC
        Management, LLC, its General Partner
 
        By:  Hercules Technology Growth
                Capital, Inc., its Manager
 
                By:        /s/ K. Nicholas Martitsch        
                Name:   K. Nicholas Martitsch
                Its:        Associate General Counsel
 
 
 
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Table of Addenda, Exhibits and Schedules
 
 
 
Addendum1:
SBA Provisions
       
Exhibit A:
Advance Request
   
Attachment to Advance Request
 
     
Exhibit B:
Term Note
       
Exhibit C:
Name, Locations, and Other Information for Borrower
       
Exhibit D:
Borrower’s Patents, Trademarks, Copyrights and Licenses
       
Exhibit E:
Borrower’s Deposit Accounts and Investment Accounts
       
Exhibit F:
Compliance Certificate
       
Exhibit G:
Joinder Agreement
       
Exhibit H:
ACH Debit Authorization Agreement
       

 
 

 
 
 
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ADDENDUM 1 to LOAN AND SECURITY AGREEMENT
 

 
(a) Borrower’s Business.  For purposes of this Addendum 1, Borrower shall be
deemed to include its “affiliates” as defined in Title 13 Code of Federal
Regulations Section 121.103.  Borrower represents and warrants to Lender (as of
the Closing Date and for a period of one year thereafter) and covenants to
Lender as follows:
 
1.  
Size Status.  Borrower does not have tangible net worth in excess of $18 million
or average net income after Federal income taxes (excluding any carry-over
losses) for the preceding two completed fiscal years in excess of $6 million;

 
2.  
No Relender.  Borrower’s primary business activity does not involve, directly or
indirectly, providing funds to others, purchasing debt obligations, factoring,
or long-term leasing of equipment with no provision for maintenance or repair;

 
3.  
No Passive Business.  Borrower is engaged in a regular and continuous business
operation (excluding the mere receipt of payments such as dividends, rents,
lease payments, or royalties).  Borrower’s employees are carrying on the
majority of day to day operations.  Borrower will not pass through substantially
all of the proceeds of the Loan to another entity;

 
4.  
No Real Estate Business.  Borrower is not classified under Major Group 65 (Real
Estate) or Industry No. 1531 (Operative Builders) of the SIC Manual.  The
proceeds of the Loan will not be used to acquire or refinance real property
unless Borrower (x) is acquiring an existing property and will use at least 51
percent of the usable square footage for its business purposes; (y) is building
or renovating a building and will use at least 67 percent of the usable square
footage for its business purposes; or (z) occupies the subject property and uses
at least 67 percent of the usable square footage for its business purposes.

 
5.  
No Project Finance.  Borrower’s assets are not intended to be reduced or
consumed, generally without replacement, as the life of its business progresses,
and the nature of Borrower’s business does not require that a stream of cash
payments be made to the business's financing sources, on a basis associated with
the continuing sale of assets (e.g., real estate development projects and oil
and gas wells).  The primary purpose of the Loan is not to fund production of a
single item or defined limited number of items, generally over a defined
production period, where such production will constitute the majority of the
activities of Borrower (e.g., motion pictures and electric generating plants).

 
 
 
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6.  
No Farm Land Purchases.  Borrower will not use the proceeds of the Loan to
acquire farm land which is or is intended to be used for agricultural or
forestry purposes, such as the production of food, fiber, or wood, or is so
taxed or zoned.

 
7.  
No Foreign Investment.  The proceeds of the Loan will not be used substantially
for a foreign operation.  At the time of the Loan, Borrower will not have more
than 49 percent of its employees or tangible assets located outside the United
States.  The representation in this subsection (7) is made only as of the date
hereof and shall not continue for one year as contemplated in the first sentence
of this Section 1.

 
(b) Small Business Administration Documentation.  Lender acknowledges that
Borrower completed, executed and delivered to Lender SBA Forms 480, 652 and 1031
(Parts A and B) together with a business plan showing Borrower’s financial
projections (including balance sheets and income and cash flows statements) for
the period described therein and a written statement (whether included in the
purchase agreement or pursuant to a separate statement) from Lender regarding
its intended use of proceeds from the sale of securities to Lender (the “Use of
Proceeds Statement”).  Borrower represents and warrants to Lender that the
information regarding Borrower and its affiliates set forth in the SBA Form 480,
Form 652 and Form 1031 and the Use of Proceeds Statement delivered as of the
Closing Date is accurate and complete.
 
(c) Inspection.  The following covenants contained in this Section (c) are
intended to supplement and not to restrict the related provisions of the Loan
Documents.  Subject to the preceding sentence, Borrower will permit, for so long
as Lender holds any debt or equity securities of Borrower, Lender or its
representative, at Lender’ expense, and examiners of the SBA to visit and
inspect the properties and assets of Borrower, to examine its books of account
and records, and to discuss Borrower’s affairs, finances and accounts with
Borrower’s officers, senior management and accountants, all at such reasonable
times as may be requested by Lender or the SBA.
 
(d) Annual Assessment.  Promptly after the end of each calendar year (but in any
event prior to February 28 of each year) and at such other times as may be
reasonably requested by Lender, Borrower will deliver to Lender a written
assessment of the economic impact of Lender’ investment in Borrower, specifying
the full-time equivalent jobs created or retained in connection with the
investment, the impact of the investment on the businesses of Borrower in terms
of expanded revenue and taxes, other economic benefits resulting from the
investment (such as technology development or commercialization, minority
business development, or expansion of exports) and such other information as may
be required regarding Borrower in connection with the filing of Lender’s SBA
Form 468.   Lender will assist Borrower with preparing such assessment.  In
addition to any other rights granted hereunder, Borrower will grant Lender and
the SBA access to Borrower’s books and records for the purpose of verifying the
use of such proceeds.  Borrower also will furnish or cause to be furnished to
Lender such other information regarding the business, affairs and condition of
Borrower as Lender may from time to time reasonably request.
 
 
 
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(e) Use of Proceeds.  Borrower will use the proceeds from the Loan only for
general working capital purposes.  Borrower will deliver to Lender from time to
time promptly following Lender’s request, a written report, certified as correct
by Borrower's Chief Financial Officer, verifying the purposes and amounts for
which proceeds from the Loan have been disbursed.  Borrower will supply to
Lender such additional information and documents as Lender reasonably requests
with respect to its use of proceeds and will permit Lender and the SBA to have
access to any and all Borrower records and information and personnel as Lender
deems necessary to verify how such proceeds have been or are being used, and to
assure that the proceeds have been used for the purposes specified in this
Section 7.16.
 
(f) Activities and Proceeds.  Neither Borrower nor any of its affiliates (if
any) will engage in any activities or use directly or indirectly the proceeds
from the Loan for any purpose for which a small business investment company is
prohibited from providing funds by the SBIC Act, including 13 C.F.R. §107.720. 
Without obtaining the prior written approval of Lender, Borrower will not change
within 1 year of the date hereof, Borrower’s current business activity to a
business activity which a licensee under the SBIC Act is prohibited from
providing funds by the SBIC Act.
 
(g) Redemption Provisions.  Notwithstanding any provision to the contrary
contained in the Certificate of Incorporation of Borrower, as amended from time
to time (the “Charter”), if, pursuant to the redemption provisions contained in
the Charter, Lender is entitled to a redemption of its Warrant, such redemption
(in the case of Lender) will be at a price equal to the redemption price set
forth in the Charter (the “Existing Redemption Price”).  If, however, Lender
delivers written notice to Borrower that the then current regulations
promulgated under the SBIC Act prohibit payment of the Existing Redemption Price
in the case of an SBIC (or, if applied, the Existing Redemption Price would
cause the Series C Preferred Stock to lose its classification as an “equity
security” and Lender has determined that such classification is unadvisable),
the amount Lender will be entitled to receive shall be the greater of (i) fair
market value of the securities being redeemed taking into account the rights and
preferences of such securities plus any costs and expenses of the Lender
incurred in making or maintaining the Warrant, and (ii) the Existing Redemption
Price where the amount of accrued but unpaid dividends payable to the Lender is
limited to Borrower's earnings plus any costs and expenses of the Lender
incurred in making or maintaining the Warrant; provided, however, the amount
calculated in subsections (i) or (ii) above shall not exceed the Existing
Redemption Price.
 
 
 
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(h) Cost of Money.  Notwithstanding any provision to the contrary contained in
the Loan Documents, all interest and fees charged pursuant to the Loan Documents
shall comply with the provisions of 13 C.F.R. § 107.855, including, without
limitation, that such amounts shall not exceed the Cost of Money ceiling (as
defined hereafter).  The current Cost of Money ceiling for this Loan is fourteen
percent.
 
(i) Compliance and Resolution.   Borrower agrees that a failure to comply with
Borrower’s obligations under this Addendum, or any other set of facts or
circumstances where it has been asserted by any governmental regulatory agency
(or Lender believes that there is a substantial risk of such assertion) that
Lender and its affiliates are not entitled to hold, or exercise any significant
right with respect to, any securities issued to Lender by Borrower, will
constitute a breach of the obligations of Borrower under the financing
agreements between Borrower and Lender.  In the event of (i) a failure to comply
with Borrower’s obligations under this Addendum; or (ii) an assertion by any
governmental regulatory agency (or Lender believes that there is a substantial
risk of such assertion) of a failure to comply with Borrower’s obligations under
this Addendum, then (i) Lender and Borrower will meet and resolve any such issue
in good faith to the satisfaction of Borrower, Lender, and any governmental
regulatory agency, and (ii) upon request of Lender, Borrower will cooperate and
assist with any assignment of the financing agreements from Hercules Technology
II, L.P. to Hercules Technology Growth Capital, Inc.
 
 
 
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EXHIBIT A
 
ADVANCE REQUEST
 
To:
Lender:
Date:
__________, 2010
         
Hercules Technology II, L.P.
400 Hamilton Avenue, Suite 310
Palo Alto, CA 94301
Facsimile:  650-473-9194
              Attn:     

 

POLYMEDIX, INC.  and POLYMEDIX PHARMACEUTICALS, INC.   (Collectively,
“Borrower”) hereby requests from Hercules Technology II, L.P. (“Lender”) an
Advance in the amount of _____________________ Dollars ($________________) on
______________, 2010 (the “Advance Date”) pursuant to the Loan and Security
Agreement between Borrower and Lender (the “Agreement”). Capitalized words and
other terms used but not otherwise defined herein are used with the same
meanings as defined in the Agreement.
 
Please:
 
(a)
Issue a check payable to Borrower _____________      
 
or
     
(b)
Wire Funds to Borrower’s account _____________        
Bank:
_____________________________
 
Address:
_____________________________
 
 
_____________________________
 
ABA Number:
_____________________________
 
Account Number:
_____________________________
 
Account Name:
_____________________________

 
 
Borrower represents that the conditions precedent to the Advance set forth in
the Agreement are satisfied and shall be satisfied upon the making of such
Advance, including but not limited to:  (i) that no event that has had or could
reasonably be expected to have a Material Adverse Effect has occurred and is
continuing; (ii) that the representations and warranties set forth in the
Agreement and in the Warrant are and shall be true and correct in all material
respects on and as of the Advance Date with the same effect as though made on
and as of such date, except to the extent such representations and warranties
expressly relate to an earlier date; (iii) that Borrower is in compliance with
all the terms and provisions set forth in each Loan Document on its part to be
observed or performed; and (iv) that as of the Advance Date, no fact or
condition exists that would (or would, with the passage of time, the giving of
notice, or both) constitute an Event of Default under the Loan
Documents.  Borrower understands and acknowledges that Lender has the right to
review the financial information supporting this representation and, based upon
such review in its sole discretion, Lender may decline to fund the requested
Advance.
 
 
 
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Borrower hereby represents that Borrower’s corporate status and locations have
not changed since the date of the Agreement or, if the Attachment to this
Advance Request is completed, are as set forth in the Attachment to this Advance
Request.
 
Borrower agrees to notify Lender promptly before the funding of the Loan if any
of the matters which have been represented above shall not be true and correct
on the Borrowing Date and if Lender has received no such notice before the
Advance Date then the statements set forth above shall be deemed to have been
made and shall be deemed to be true and correct as of the Advance Date.
 
Executed as of [              ], 2010.
 
BORROWER:
 
 POLYMEDIX, INC.
 
SIGNATURE:________________________
TITLE:_____________________________
PRINT NAME:_______________________
 
 
POLYMEDIX PHARMACEUTICALS, INC.
 
SIGNATURE:________________________
TITLE:_____________________________
PRINT NAME:_______________________
 
 
 
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ATTACHMENT TO ADVANCE REQUEST
 
Dated: _______________________
 
Borrower hereby represents and warrants to Lender that Borrower’s current name
and organizational status is as follows:
 
 
Name:
POLYMEDIX, INC.

 
 
Type of organization:
Corporation

 
 
State of organization:
[                                      ]

 
 
Organization file number:

 
 
Name:
POLYMEDIX PHARMACEUTICALS, INC.

 
 
Type of organization:
Corporation

 
 
State of organization:
[                                      ]

 
 
Organization file number:

 
Borrower hereby represents and warrants to Lender that the street addresses,
cities, states and postal codes of its current locations are as follows:
 
 
 
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EXHIBIT B
 
SECURED TERM PROMISSORY NOTE
 
$[  ],000,000
Advance Date:  ___ __, 2010
 
Maturity Date:  September 30, 2013 (in the event the Amortization Date is
January 1, 2011) or December 31, 2013 (in the event the Amortization Date is
April 1, 2011)

 
FOR VALUE RECEIVED, PolyMedix, Inc., a Delaware  corporation,  and  PolyMedix,
Pharmaceuticals, Inc., a Delaware  corporation (individually and collectively,
jointly and severally, the “Borrower”) hereby promises to pay to the order of
Hercules Technology II, L.P., a Delaware limited partnership or the holder of
this Note (the “Lender”) at 400 Hamilton Avenue, Suite 310, Palo Alto, CA 94301
or such other place of payment as the holder of this Secured Term Promissory
Note (this “Promissory Note”) may specify from time to time in writing, in
lawful money of the United States of America, the principal amount of [  ]
Million Dollars ($[  ],000,000) or such other principal amount as Lender has
advanced to Borrower, together with interest at a floating rate per annum equal
to the greater of (i) 12.35% or (ii) lesser of (A) the sum of (1) the prime rate
as reported in the Wall Street Journal, and if not reported, then the prime rate
next reported in the Wall Street Journal, and (2) 7.10%, or (B) 14.00%, based
upon a year consisting of 360 days, with interest computed daily based on the
actual number of days in each month. The Term Loan Interest Rate will float and
change on the day the Prime Rate changes from time to time.
 
This Promissory Note is the Note referred to in, and is executed and delivered
in connection with, that certain Loan and Security Agreement dated March __,
2010, by and between Borrower and Lender (as the same may from time to time be
amended, modified or supplemented in accordance with its terms, the “Loan
Agreement”), and is entitled to the benefit and security of the Loan Agreement
and the other Loan Documents (as defined in the Loan Agreement), to which
reference is made for a statement of all of the terms and conditions
thereof.  All payments shall be made in accordance with the Loan Agreement.  All
terms defined in the Loan Agreement shall have the same definitions when used
herein, unless otherwise defined herein.  An Event of Default under the Loan
Agreement shall constitute a default under this Promissory Note.
 
Borrower waives presentment and demand for payment, notice of dishonor, protest
and notice of protest under the UCC or any applicable law.   Borrower agrees to
make all payments under this Promissory Note without setoff, recoupment or
deduction and regardless of any counterclaim or defense.  This Promissory Note
has been negotiated and delivered to Lender and is payable in the State of
California.  This Promissory Note shall be governed by and construed and
enforced in accordance with, the laws of the State of California, excluding any
conflicts of law rules or principles that would cause the application of the
laws of any other jurisdiction.
 
BORROWER:
 
POLYMEDIX, INC.
 
By:
Title:
 
POLYMEDIX PHARMACEUTICALS, INC.
 
By:
Title:
 
 
 
 

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EXHIBIT C
 
NAME, LOCATIONS, AND OTHER INFORMATION FOR BORROWER
 
1.  Borrower represents and warrants to Lender that Borrower’s current name and
organizational status as of the Closing Date is as follows:
 
Name:
POLYMEDIX, INC.

 
 
Type of organization:
Corporation

 
 
State of organization:
[                                               ]

 
 
 
Organization file number:

 
Name:
POLYMEDIX PHARMACEUTICALS, INC.

 
 
Type of organization:
Corporation

 
 
State of organization:
[                                               ]

 
 
Organization file number:
 

 
 

 
2.  Borrower represents and warrants to Lender that for five (5) years prior to
the Closing Date, Borrower did not do business under any other name or
organization or form except the following:
 
Name:
Used during dates of:
Type of Organization:
State of organization:
Organization file Number:
Borrower’s fiscal year ends on _____
Borrower’s federal employer tax identification number is: _______________
 
       3.  Borrower represents and warrants to Lender that its chief executive
office is located at _______________.
 
 
 
 

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EXHIBIT D
 
BORROWER’S PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES
 
 
 
 
 

--------------------------------------------------------------------------------

 
 
EXHIBIT E
 
BORROWER’S DEPOSIT ACCOUNTS AND INVESTMENT ACCOUNTS
 
 
 
 
 

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EXHIBIT F
 
COMPLIANCE CERTIFICATE
 
Hercules Technology II, L.P.
400 Hamilton Avenue, Suite 310
Palo Alto, CA 94301
 
Reference is made to that certain Loan and Security Agreement dated March __,
2010 and all ancillary documents entered into in connection with such Loan and
Security Agreement all as may be amended from time to time, (hereinafter
referred to collectively as the “Loan Agreement”) among Hercules Technology II,
L.P. (“Hercules”) as Lender and PolyMedix, Inc. and PolyMedix Pharmaceuticals,
Inc. (individually and collectively, jointly and severally, the “Company”) as
Borrower. All capitalized terms not defined herein shall have the same meaning
as defined in the Loan Agreement.
 
The undersigned is an Officer of the Company, knowledgeable of all Company
financial matters, and is authorized to provide certification of information
regarding the Company; hereby certifies that in accordance with the terms and
conditions of the Loan Agreement, the Company is in compliance for the period
ending ___________ of all covenants, conditions and terms and hereby reaffirms
that all representations and warranties contained therein are true and correct
on and as of the date of this Compliance Certificate with the same effect as
though made on and as of such date, except to the extent such representations
and warranties expressly relate to an earlier date, after giving effect in all
cases to any standard(s) of materiality contained in the Loan Agreement as to
such representations and warranties.  Attached are the required documents
supporting the above certification.  The undersigned further certifies that
these are prepared in accordance with GAAP in (except for the absence of
footnotes with respect to unaudited financial statement and subject to normal
year-end adjustments) and are consistent from one period to the next except as
explained below.
 
REPORTING REQUIREMENT
REQUIRED
CHECK IF ATTACHED
Interim Financial Statements
Monthly within 30 days
 
Interim Financial Statements
Quarterly within 30 days
 
Audited Financial Statements
FYE within 150 days
 

 

 

 

 
 

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   Very Truly Yours,
 
 POLYMEDIX, INC.
 
 
By:
____________________________

 
 
Name:   _____________________________

 
 
Its:
____________________________

 
POLYMEDIX PHARMACEUTICALS, INC.
 
 
By:
____________________________

 
 
Name:   _____________________________

 
 
Its:
____________________________

 
 
 
 
 
 
 
 
 
 

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EXHIBIT G
 
FORM OF JOINDER AGREEMENT
 
This Joinder Agreement (the “Joinder Agreement”) is made and dated as of
[          ], 20[  ], and is entered into by and between__________________., a
___________ corporation (“Subsidiary”), and Hercules Technology II, L.P., a
Delaware limited partnership, as a Lender.
 
RECITALS
 
A.  Subsidiary’s Affiliates, PolyMedix, Inc. and PolyMedix Pharmaceuticals, Inc.
(individually and collectively, jointly and severally, “Company”) have entered
into that certain Loan and Security Agreement dated March __, 2010, with Lender,
as such agreement may be amended (the “Loan Agreement”), together with the other
agreements executed and delivered in connection therewith;
 
B.  Subsidiary acknowledges and agrees that it will benefit both directly and
indirectly from Company’s execution of the Loan Agreement and the other
agreements executed and delivered in connection therewith;
 
AGREEMENT
 
NOW THEREFORE, Subsidiary and Lender agree as follows:
 
1.  
The recitals set forth above are incorporated into and made part of this Joinder
Agreement.  Capitalized terms not defined herein shall have the meaning provided
in the Loan Agreement.

 
2.  
By signing this Joinder Agreement, Subsidiary shall be bound by the terms and
conditions of the Loan Agreement the same as if it were the Borrower (as defined
in the Loan Agreement) under the Loan Agreement, mutatis mutandis, provided
however, that Lender shall have no duties, responsibilities or obligations to
Subsidiary arising under or related to the Loan Agreement or the other
agreements executed and delivered in connection therewith.  Rather, to the
extent that Lender has any duties, responsibilities or obligations arising under
or related to the Loan Agreement or the other agreements executed and delivered
in connection therewith, those duties, responsibilities or obligations shall
flow only to Company and not to Subsidiary or any other person or entity.  By
way of example (and not an exclusive list): (a) Lender’s providing notice to
Company in accordance with the Loan Agreement or as otherwise agreed between
Company and Lender shall be deemed provided to Subsidiary; (b) a Lender’s
providing an Advance to Company shall be deemed an Advance to Subsidiary; and
(c) Subsidiary shall have no right to request an Advance or make any other
demand on Lender.

 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
 
 
 
 
 
 
 
 
 
 
 
 

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[SIGNATURE PAGE TO JOINDER AGREEMENT]
 
 
SUBSIDIARY:

 
 
_________________________________.

 

 
By:

 
Name:

 
Title:

 
 
Address:

 
Telephone: ___________

 
Facsimile: ____________

 
  LENDER:
HERCULES TECHNOLOGY II, L.P.,

 
a Delaware limited partnership

 
By:  Hercules Technology SBIC
        Management, LLC, its General Partner
 
        By:  Hercules Technology Growth
                Capital, Inc., its Manager
 
                By:_________________________
                Name:
                Its:
 

 

 
 

--------------------------------------------------------------------------------

 
 
EXHIBIT H
 
ACH DEBIT AUTHORIZATION AGREEMENT
 
Hercules Technology II, L.P.
400 Hamilton Avenue, Suite 310
Palo Alto, CA  94301
 
Re:  Loan and Security Agreement dated March __, 2010 among PolyMedix, Inc. and
PolyMedix Pharmaceuticals, Inc. (individually and collectively, jointly and
severally, the “Borrower”) and Hercules Technology II, L.P. (“Company”) (the
“Agreement”)
 
In connection with the above referenced Agreement, the Borrower hereby
authorizes the Company to initiate debit entries for the periodic payments due
under the Agreement to the Borrower’s account indicated below.  The Borrower
authorizes the depository institution named below to debit to such account.
 

DEPOSITORY NAME
BRANCH
CITY
STATE AND ZIP CODE
TRANSIT/ABA NUMBER
ACCOUNT NUMBER

 
This authority will remain in full force and effect so long as any amounts are
due under the Agreement.
 
 
 
____________________________________________
(Borrower)(Please Print)
 
By: _________________________________________
 
Date: ________________________________________
 
 
 
 
 
 
 
 

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