Exhibit 10.1

 

LOAN AND SECURITY AGREEMENT

 

THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of January 5, 2018
(the “Effective Date”) among SILICON VALLEY BANK, a California corporation
(“Bank”), and LIPOCINE INC., a Delaware corporation (“Parent”), and LIPOCINE
OPERATING INC., a Delaware corporation (“Lipocine Operating” and together with
Parent, individually and collectively, jointly and severally, “Borrower”),
provides the terms on which Bank shall lend to Borrower and Borrower shall repay
Bank. The parties agree as follows:

 

1ACCOUNTING AND OTHER TERMS

 

Accounting terms not defined in this Agreement shall be construed following
GAAP. Calculations and determinations must be made following GAAP; provided that
if at any time any change in GAAP would affect the computation of any financial
covenant or requirement set forth in any Loan Document, and either Borrower or
Bank shall so request, Borrower and Bank shall negotiate in good faith to amend
such financial covenant or requirement to preserve the original intent thereof
in light of such change in GAAP; provided, further, that until so amended, (a)
such financial covenant or requirement shall continue to be computed in
accordance with GAAP prior to such change therein and (b) Borrower shall provide
Bank financial statements and other documents required under this Agreement or
as reasonably requested hereunder setting forth a reconciliation between
calculations of such financial covenant or requirement made before and after
giving effect to such change in GAAP. Capitalized terms not otherwise defined in
this Agreement shall have the meanings set forth in Section 13. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code to the extent such terms are defined therein.

 

2LOAN AND TERMS OF PAYMENT

 

2.1         Promise to Pay. Borrower hereby unconditionally promises to pay Bank
the outstanding principal amount of all Credit Extensions and accrued and unpaid
interest thereon as and when due in accordance with this Agreement.

 

2.1.1      Growth Capital Loan.

 

(a)          Availability. Subject to the terms and conditions of this
Agreement, Bank agrees to make a single advance to Borrower (the “Growth Capital
Advance”) on or about the Effective Date in an amount equal to the Growth
Capital Loan Commitment.

 

 

 

 

(b)          Repayment of Growth Capital Advance.

 

(i)          Interest-Only Payments. For the Growth Capital Advance, Borrower
shall make monthly payments of interest-only commencing on the first (1st)
Business Day of the first (1st) month following the month in which the Funding
Date occurs with respect to the Growth Capital Advance and continuing thereafter
during the Interest-Only Period, on the first (1st) Business Day of each
successive month.

 

(ii)         Principal and Interest Payments. Following the last day of the
Interest-Only Period, Borrower shall make consecutive equal monthly payments of
principal, plus monthly payments of accrued and unpaid interest, commencing on
the first (1st) Business Day of the first (1st) month after the Interest-Only
Period (the “Conversion Date”), in amounts that would fully amortize the Growth
Capital Advance, as of the Conversion Date, over the Repayment Period. The Final
Payment and all unpaid principal and accrued and unpaid interest on the Growth
Capital Advance is due and payable in full on the Growth Capital Maturity Date.

 

(c)          Voluntary Prepayment. Borrower shall have the option to prepay the
Growth Capital Advance in full, provided Borrower (i) shall provide written
notice to Bank of its election to prepay the Growth Capital Advance at least ten
(10) days prior to such prepayment and (ii) pays, on the date of such
prepayment, (A) all outstanding principal and accrued but unpaid interest, plus
(B) the Prepayment Fee, plus (C) the Final Payment, plus (D) all other sums,
including Bank Expenses, if any, that shall have become due and payable.

 

(d)          Mandatory Prepayment Upon an Acceleration. If the Growth Capital
Advance is accelerated following the occurrence of an Event of Default, Borrower
shall immediately pay to Bank an amount equal to the sum of (i) all outstanding
principal and accrued but unpaid interest, plus (ii) the Prepayment Fee, plus
(iii) the Final Payment, plus (iv) all other sums, including Bank Expenses, if
any, that shall have become due and payable.

 

2.2Payment of Interest on the Credit Extensions.

 

(a)          Interest Rate. Subject to Section 2.2(b), the principal amount
outstanding for the Growth Capital Advance shall accrue interest at a floating
per annum rate equal to one percentage point (1.0%) above the Prime Rate, which
shall be payable monthly in accordance with Section 2.2(d) below.

 

(b)          Default Rate. Immediately upon the occurrence and during the
continuance of an Event of Default, Obligations shall bear interest at a rate
per annum which is five percentage points (5.00%) above the rate that is
otherwise applicable thereto (the “Default Rate”). Fees and expenses which are
required to be paid by Borrower pursuant to the Loan Documents (including,
without limitation, Bank Expenses) but are not paid when due shall bear interest
until paid at a rate equal to the highest rate applicable to the Obligations.
Payment or acceptance of the increased interest rate provided in this
Section 2.2(b) is not a permitted alternative to timely payment and shall not
constitute a waiver of any Event of Default or otherwise prejudice or limit any
rights or remedies of Bank.

 

 2 

 

  

(c)          Adjustment to Interest Rate. Changes to the interest rate of any
Credit Extension based on changes to the Prime Rate shall be effective on the
effective date of any change to the Prime Rate and to the extent of any such
change.

 

(d)          Payment; Interest Computation. Interest is payable monthly on the
first calendar day of each month and shall be computed on the basis of a 360-day
year for the actual number of days elapsed. In computing interest, (i) all
payments received after 12:00 p.m. Pacific time on any day shall be deemed
received at the opening of business on the next Business Day, and (ii) the date
of the making of any Credit Extension shall be included and the date of payment
shall be excluded; provided, however, that if any Credit Extension is repaid on
the same day on which it is made, such day shall be included in computing
interest on such Credit Extension.

 

2.3Fees. Borrower shall pay to Bank the following:

 

(a)          Final Payment. The Final Payment, when due hereunder;

 

(b)          Prepayment Fee. The Prepayment Fee, when due hereunder; and

 

(c)          Expenses. All Bank Expenses (including reasonable attorneys’ fees
and expenses, plus expenses for documentation and negotiation of this Agreement)
incurred through and after the Effective Date, when due (or, if no stated due
date, upon demand by Bank). Bank shall apply to such Bank Expenses the $25,000
good faith deposit that the Borrower deposited with the Bank prior to the
Effective Date and, following such application, shall refund to the Borrower any
remaining portion of such deposit.

 

(d)          Fees Fully Earned. Unless otherwise provided in this Agreement or
in a separate writing by Bank, Borrower shall not be entitled to any credit,
rebate, or repayment of any fees earned by Bank pursuant to this Agreement
notwithstanding any termination of this Agreement or the suspension or
termination of Bank’s obligation to make loans and advances hereunder. Bank may
deduct amounts owing by Borrower under the clauses of this Section 2.3 pursuant
to the terms of Section 2.4(c). Bank shall provide Borrower written notice of
deductions made from the Designated Deposit Account pursuant to the terms of the
clauses of this Section 2.3.

 

2.4Payments; Application of Payments; Debit of Accounts.

 

(a)          All payments to be made by Borrower under any Loan Document shall
be made in immediately available funds in Dollars, without setoff or
counterclaim, before 12:00 p.m. Pacific time on the date when due. Payments of
principal and/or interest received after 12:00 p.m. Pacific time are considered
received at the opening of business on the next Business Day. When a payment is
due on a day that is not a Business Day, the payment shall be due the next
Business Day, and additional fees or interest, as applicable, shall continue to
accrue until paid.

 

(b)          Prior to the occurrence of an Event of Default, payments shall be
applied first to any Obligations that are then due and owing and then thereafter
as determine by Bank. Upon and during the continuance of an Event of Default,
Bank has the exclusive right to determine the order and manner in which all
payments with respect to the Obligations may be applied. Except as specified
immediately above, Borrower shall have no right to specify the order or the
accounts to which Bank shall allocate or apply any payments required to be made
by Borrower to Bank or otherwise received by Bank under this Agreement when any
such allocation or application is not specified elsewhere in this Agreement.

 

 3 

 

 

(c)          Bank may debit any of Borrower’s deposit accounts, including the
Designated Deposit Account, for principal and interest payments or any other
amounts Borrower owes Bank when due. These debits shall not constitute a
set-off.

 

2.5         Withholding. Payments received by Bank from Borrower under this
Agreement will be made free and clear of and without deduction for any and all
present or future taxes, levies, imposts, duties, deductions, withholdings,
assessments, fees or other charges imposed by any Governmental Authority
(including any interest, additions to tax or penalties applicable thereto, but
excluding, for the avoidance of doubt, taxes based on the net income of Bank).
Specifically, however, if at any time any Governmental Authority, applicable
law, regulation or international agreement requires Borrower to make any
withholding or deduction from any such payment or other sum payable hereunder to
Bank, Borrower hereby covenants and agrees that the amount due from Borrower
with respect to such payment or other sum payable hereunder will be increased to
the extent necessary to ensure that, after the making of such required
withholding or deduction, Bank receives a net sum equal to the sum which it
would have received had no withholding or deduction been required, and Borrower
shall pay the full amount withheld or deducted to the relevant Governmental
Authority. Borrower will, upon request, furnish Bank with proof reasonably
satisfactory to Bank indicating that Borrower has made such withholding payment;
provided, however, that Borrower need not make any withholding payment if the
amount or validity of such withholding payment is contested in good faith by
appropriate and timely proceedings and as to which payment in full is bonded or
reserved against by Borrower. The agreements and obligations of Borrower
contained in this Section 2.5 shall survive the termination of this Agreement.

 

3CONDITIONS OF LOANS

 

3.1         Conditions Precedent to Initial Credit Extension. Bank’s obligation
to make the initial Credit Extension is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, such
documents, and completion of such other matters, as Bank may reasonably deem
necessary or appropriate, including, without limitation:

 

(a)          duly executed signatures in PDF to the Loan Documents, followed by
duly executed original signatures to the Loan Documents within five (5) Business
Days;

 

(b)          the Operating Documents and long-form good standing certificates of
Borrower and its Subsidiaries certified by the Secretary of State (or equivalent
agency) of Borrower’s and such Subsidiaries’ jurisdiction of organization or
formation and each jurisdiction in which Borrower and each Subsidiary is
qualified to conduct business, each as of a date no earlier than thirty (30)
days prior to the Effective Date;

 

(c)          duly executed original signatures to the completed Borrowing
Resolutions for Borrower;

 

 4 

 

 

(d)          certified copies, dated as of a recent date, of financing statement
searches, as Bank may request, accompanied by written evidence (including any
UCC termination statements) that the Liens indicated in any such financing
statements either constitute Permitted Liens, or have been, or in connection
with the initial Credit Extension will be, terminated or released;

 

(e)          the Perfection Certificate executed by Borrower; and

 

(f)          payment of the fees and Bank Expenses then due as specified in
Section 2.3 hereof.

 

3.2         Conditions Precedent to all Credit Extensions. Bank’s obligations to
make each Credit Extension, including the initial Credit Extension, are subject
to the following conditions precedent:

 

(a)          timely receipt of an executed Payment/Advance Form;

 

(b)          the representations and warranties in this Agreement shall be true,
accurate, and complete in all material respects on the date of the
Payment/Advance Form and on the Funding Date of each Credit Extension; provided,
however, that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or modified by
materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, and no
Event of Default shall have occurred and be continuing or result from the Credit
Extension. Each Credit Extension is Borrower’s representation and warranty on
that date that the representations and warranties in this Agreement remain true,
accurate, and complete in all material respects; provided, however, that such
materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties
expressly referring to a specific date shall be true, accurate and complete in
all material respects as of such date; and

 

(c)          Bank determines to its satisfaction that no Material Adverse Change
has occurred.

 

3.3         Covenant to Deliver.

 

(a)          Except as otherwise provided in Section 3.3(b), Borrower agrees to
deliver to Bank each item required to be delivered to Bank under this Agreement
as a condition precedent to any Credit Extension. Borrower expressly agrees that
a Credit Extension made prior to the receipt by Bank of any such item shall not
constitute a waiver by Bank of Borrower’s obligation to deliver such item, and
any such Credit Extension in the absence of a required item shall be made in
Bank’s sole discretion.

 

 5 

 

 

(b)          Unless otherwise provided in writing, within thirty (30) days after
the Effective Date:

 

(i)          Borrower shall have used commercially reasonable efforts to obtain
and deliver to Bank a landlord’s consent in favor of Bank for Borrower’s
location in the State of Utah by the landlord thereof, in form and substance
reasonably satisfactory to Bank, together with the duly executed original
signatures thereto (for the avoidance of doubt, such commercially reasonable
efforts standard shall apply so long as the aggregate value of Collateral held
in such location does not exceed $100,000);

 

(ii)         Borrower shall have delivered to Bank evidence reasonably
satisfactory to Bank that the insurance policies and endorsements required by
Section 6.5 hereof are in full force and effect, together with appropriate
evidence showing lender loss payable and/or additional insured clauses and
cancellation notice to Bank (or endorsements reflecting the same) in favor of
Bank;

 

(iii)        Borrower shall have used commercially reasonable efforts to obtain
and deliver to Bank a Control Agreement or other appropriate instrument with
respect to each of the Chase Accounts (other than deposit accounts exclusively
used for payroll, payroll taxes and other employee wage and benefit payments to
or for the benefit of Borrower’s employees and identified to Bank by Borrower as
such), in form and substance reasonably satisfactory to Bank; provided that if,
within such thirty (30) day period, Borrower shall have been unable to obtain
and deliver such a Control Agreement to Bank, then Borrower shall close such
Chase Accounts and transfer the deposits held therein to accounts held with Bank
and/or Bank’s Affiliates on or before that date which is one hundred twenty
(120) days following the Effective Date; and

 

(iv)        Borrower shall have delivered to Bank the original stock
certificates representing all the shares of Lipocine Operating, and the stock
certificates representing the shares of any other Subsidiaries of Borrower which
constitute Collateral, in each case, to the extent such shares are certificated,
together with stock powers signed in blank by the applicable owner of such
shares for each certificate so delivered, all in form and substance reasonably
satisfactory to Bank.

 

3.4         Procedures for Borrowing. Subject to the prior satisfaction of all
other applicable conditions to the making of a Credit Extension set forth in
this Agreement, to obtain a Credit Extension, Borrower shall notify Bank (which
notice shall be irrevocable) by electronic mail, facsimile, or telephone by
12:00 p.m. Pacific time on the Funding Date of the Credit Extension. Together
with any such electronic or facsimile notification, Borrower shall deliver to
Bank by electronic mail or facsimile a completed Payment/Advance Form executed
by a Responsible Officer or his or her designee. Bank may rely on any telephone
notice given by a person who Bank believes is a Responsible Officer or designee.
Bank shall credit Credit Extensions to the Designated Deposit Account. Bank may
make Credit Extensions under this Agreement based on instructions from a
Responsible Officer or his or her designee or without instructions if the Credit
Extensions are necessary to meet Obligations that have become due.

 

 6 

 

 

4CREATION OF SECURITY INTEREST

 

4.1         Grant of Security Interest. Borrower hereby grants Bank, to secure
the payment and performance in full of all of the Obligations, a continuing
security interest in, and pledges to Bank, the Collateral, wherever located,
whether now owned or hereafter acquired or arising, and all proceeds and
products thereof.

 

Borrower acknowledges that it previously has entered, and/or may in the future
enter, into Bank Services Agreements with Bank.  Regardless of the terms of any
Bank Services Agreement, Borrower agrees that any amounts Borrower owes Bank
thereunder shall be deemed to be Obligations hereunder and that it is the intent
of Borrower and Bank to have all such Obligations secured by the first priority
perfected security interest in the Collateral granted herein (subject only to
Permitted Liens that may have superior priority to Bank’s Lien in this
Agreement).

 

If this Agreement is terminated, Bank’s Lien in the Collateral shall continue
until the Obligations (other than inchoate indemnity obligations) are paid in
full in cash, and at such time, Bank shall, at Borrower’s sole cost and expense,
terminate its security interest in the Collateral and all rights therein shall
revert to Borrower. In the event (x) all Obligations (other than inchoate
indemnity obligations), except for Bank Services, are paid in full in cash, and
(y) this Agreement is terminated, Bank shall terminate the security interest
granted herein upon Borrower providing cash collateral acceptable to Bank in its
good faith business judgment for Bank Services, if any. In the event such Bank
Services consist of outstanding Letters of Credit, Borrower shall provide to
Bank cash collateral in an amount equal to (x) if such Letters of Credit are
denominated in Dollars, then at least one hundred five percent (105.0%); and
(y) if such Letters of Credit are denominated in a Foreign Currency, then at
least one hundred ten percent (110.0%), of the Dollar Equivalent of the face
amount of all such Letters of Credit plus all interest, fees, and costs due or
to become due in connection therewith (as estimated by Bank in its good faith
business judgment), to secure all of the Obligations relating to such Letters of
Credit.

 

 7 

 

 

4.2         Priority of Security Interest. Borrower represents, warrants, and
covenants that the security interest granted herein is and shall at all times
continue to be a first priority perfected (to the extent perfection may be
achieved by the filing of financing statements or by control, or in the case of
investment property, by possession) security interest in the Collateral (subject
only to Permitted Liens that are permitted pursuant to the terms of this
Agreement to have superior priority to Bank’s Lien under this Agreement). If
Borrower shall acquire a commercial tort claim with a value exceeding
Twenty-Five Thousand Dollars ($25,000) (which limitation shall not apply if an
Event of Default is continuing), Borrower shall promptly notify Bank in a
writing signed by Borrower of the general details thereof and grant to Bank in
such writing a security interest therein and in the proceeds thereof, all upon
the terms of this Agreement, with such writing to be in form and substance
reasonably satisfactory to Bank.

 

4.3         Authorization to File Financing Statements. Borrower hereby
authorizes Bank to file financing statements, without notice to Borrower, with
all appropriate jurisdictions to perfect or protect Bank’s interest or rights
hereunder. Such financing statements may indicate the Collateral as “all assets
of the Debtor” or words of similar effect, or as being of an equal or lesser
scope, or with greater detail, all in Bank’s discretion.

 

5REPRESENTATIONS AND WARRANTIES

 

Borrower represents and warrants as follows:

 

5.1         Due Organization, Authorization; Power and Authority. Borrower is
duly existing and in good standing as a Registered Organization in its
jurisdiction of formation and is qualified and licensed to do business and is in
good standing in any jurisdiction in which the conduct of its business or its
ownership of property requires that it be qualified except where the failure to
do so could not reasonably be expected to have a material adverse effect on
Borrower’s business. In connection with this Agreement, Borrower has delivered
to Bank completed certificates each signed by Borrower, entitled “Perfection
Certificate” (each, a “Perfection Certificate”). Borrower represents and
warrants to Bank that (a) Borrower’s exact legal name is that indicated on the
Perfection Certificate and on the signature page hereof; (b) Borrower is an
organization of the type, and is organized in the jurisdiction, set forth in the
Perfection Certificate; (c) the Perfection Certificate accurately sets forth
Borrower’s organizational identification number or accurately states that
Borrower has none; (d) the Perfection Certificate (as updated from time to time
pursuant to the terms hereof) accurately sets forth , as of the date thereof,
Borrower’s place of business, or, if more than one, its chief executive office
as well as Borrower’s mailing addresses (if different than their chief executive
office); (e) except as set forth in the Perfection Certificate, Borrower (and
each of their predecessors) has not, in the past five (5) years, changed its
jurisdiction of formation, organizational structure or type, or any
organizational number assigned by its jurisdiction; and (f) all other
information set forth on the Perfection Certificate (as updated from time to
time pursuant to the terms hereof) pertaining to Borrower and each of its
Subsidiaries is accurate and complete (it being understood and agreed that
Borrower may from time to time update certain information in the Perfection
Certificate after the Effective Date by delivering a new Perfection Certificate
or by disclosing such updates on a quarterly Compliance Certificate to the
extent such updates result from actions, transactions or circumstances that are
not prohibited by this Agreement and all references to “Perfection Certificate”
shall hereinafter be deemed to be a reference to the updated Perfection
Certificate)). If Borrower is not now a Registered Organization but later
becomes one, Borrower shall promptly notify Bank of such occurrence and provide
Bank with Borrower’s organizational identification number.

 

 8 

 

 

The execution, delivery and performance by Borrower of the Loan Documents to
which it is a party have been duly authorized, and do not (i) conflict with any
of Borrower’s organizational documents, (ii) contravene, conflict with,
constitute a default under or violate any material Requirement of Law,
(iii) contravene, conflict with or violate any applicable order, writ, judgment,
injunction, decree, determination or award of any Governmental Authority by
which Borrower or any of its Subsidiaries or any of their property or assets may
be bound or affected, (iv) require any action by, filing, registration, or
qualification with, or Governmental Approval from, any Governmental Authority
(except such Governmental Approvals which have already been obtained and are in
full force and effect and filings to perfect the security interests created by
the Loan Documents) or (v) conflict with, contravene, constitute a default or
breach under, or result in or permit the termination or acceleration of, any
material agreement by which Borrower is bound. Borrower is not in default under
any agreement to which it is a party or by which it is bound in which the
default could reasonably be expected to have a material adverse effect on
Borrower’s business.

 

5.2         Collateral. Borrower has good title to, rights in, and the power to
transfer each item of the Collateral upon which it purports to grant a Lien
hereunder, free and clear of any and all Liens except Permitted Liens. Borrower
has no Collateral Accounts at or with any bank or financial institution other
than Bank or Bank’s Affiliates except for the Collateral Accounts described in
the Perfection Certificate delivered to Bank in connection herewith and which
Borrower has taken such actions as are necessary to give Bank a perfected
security interest therein, pursuant to the terms of Section 6.6(b). The Accounts
are bona fide, existing obligations of the Account Debtors.

 

The Collateral is not in the possession of any third party bailee (such as a
warehouse) except as otherwise provided in the Perfection Certificate (as
updated from time to time pursuant to the terms of Section 5.1) and except as
permitted by Section 7.2. None of the components of the Collateral shall be
maintained at locations other than as provided in the Perfection Certificate(as
updated from time to time pursuant to the terms of Section 5.1) or as permitted
pursuant to Section 7.2.

 

All Inventory is in all material respects of good and marketable quality, free
from material defects.

 

Borrower is the sole owner of the Intellectual Property which it owns or
purports to own except for (a) non-exclusive licenses granted to its customers
in the ordinary course of business, (b) over-the-counter software that is
commercially available to the public, (c) material Intellectual Property
licensed to Borrower and noted on the Perfection Certificate (as updated from
time to time pursuant to Section 5.1), and (d) non-material Intellectual
Property which has been abandoned or terminated in the exercise of Borrower’s
reasonable business judgment in accordance with the terms of this Agreement.
Each Patent which it owns or purports to own and which is material to Borrower’s
business is valid and enforceable, and no part of the Intellectual Property
which Borrower owns or purports to own and which is material to Borrower’s
business has been judged by the United States Patent and Trademark Office, the
United States Copyright Office, or any court of competent jurisdiction invalid
or unenforceable, in whole or in part. To the best of Borrower’s knowledge, no
claim has been made that any part of the Intellectual Property violates the
rights of any third party except to the extent such claim would not reasonably
be expected to have a material adverse effect on Borrower’s business.

 

 9 

 

 

Except as noted on the Perfection Certificate (as updated from time pursuant to
Section 5.1) or as disclosed to Bank pursuant to Section 6.8(b) from time to
time, Borrower is not a party to, nor is it bound by, any Restricted License.

 

5.3           Litigation. Except as noted on the Perfection Certificate (as
updated from time to time pursuant to Section 5.1), there are no actions or
proceedings pending or, to the knowledge of any Responsible Officer, threatened
in writing by or against Borrower or any of its Subsidiaries involving more than
One Hundred Thousand Dollars ($100,000) individually or in the aggregate.

 

5.4           No Material Deviation in Financial Statements. All consolidated
financial statements for Borrower and any of its Subsidiaries delivered to Bank
fairly present in all material respects Borrower’s consolidated financial
condition and Borrower’s consolidated results of operations, in each case as of
the respective dates thereof, all in accordance with GAAP, subject, in the case
of interim financial statements, to the absence of footnotes and normal year-end
adjustments. There has not been any material deterioration in Borrower’s
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.

 

5.5           Solvency. The fair salable value of Borrower’s consolidated assets
(including goodwill minus disposition costs) exceeds the fair value of
Borrower’s liabilities; Borrower is not left with unreasonably small capital
after the transactions in this Agreement; and Borrower is able to pay its debts
(including trade debts) as they mature.

 

5.6           Regulatory Compliance. Borrower is not an “investment company” or
a company “controlled” by an “investment company” under the Investment Company
Act of 1940, as amended. Borrower is not engaged as one of its important
activities in extending credit for margin stock (under Regulations X, T and U of
the Federal Reserve Board of Governors). Borrower (a) has complied in all
material respects with all Requirements of Law, and (b) has not violated any
Requirements of Law the violation of which could reasonably be expected to have
a material adverse effect on its business. None of Borrower’s or any of its
Subsidiaries’ properties or assets has been used by Borrower or any Subsidiary
or, to the best of Borrower’s knowledge, by previous Persons, in disposing,
producing, storing, treating, or transporting any hazardous substance other than
legally. Borrower and each of its Subsidiaries have obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all Governmental Authorities that are necessary to
continue their respective businesses as currently conducted in all material
respects.

 

5.7           Subsidiaries; Investments. Borrower does not own any stock,
partnership, or other ownership interest or other equity securities except for
Permitted Investments.

 

 10 

 

  

5.8           Tax Returns and Payments; Pension Contributions. Borrower has
timely filed all required tax returns and reports, and Borrower has timely paid
all foreign, federal, state and local taxes, assessments, deposits and
contributions owed by Borrower except (a) to the extent such taxes are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted, so long as such reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made therefor,
or (b) if such taxes, assessments, deposits and contributions do not,
individually or in the aggregate, exceed Ten Thousand Dollars ($10,000).

 

To the extent Borrower defers payment of any contested taxes, Borrower shall (i)
notify Bank in writing of the commencement of, and any material development in,
the proceedings, and (ii) post bonds or take any other steps required to prevent
the Governmental Authority levying such contested taxes from obtaining a Lien
upon any of the Collateral that is other than a “Permitted Lien.” Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower in excess of Ten Thousand Dollars ($10,000). Borrower has paid all
amounts necessary to fund all present pension, profit sharing and deferred
compensation plans in accordance with their terms, and Borrower has not
withdrawn from participation in, and has not permitted partial or complete
termination of, or permitted the occurrence of any other event with respect to,
any such plan which could reasonably be expected to result in any liability of
Borrower, including any liability to the Pension Benefit Guaranty Corporation or
its successors or any other governmental agency.

 

5.9           Use of Proceeds. Borrower shall use the proceeds of the Credit
Extensions solely as working capital to fund its general business requirements
and not for personal, family, household or agricultural purposes.

 

5.10         Full Disclosure. No written representation, warranty or other
statement of Borrower in any certificate or written statement given to Bank, as
of the date such representation, warranty, or other statement was made, taken
together with all such written certificates and written statements given to
Bank, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period or
periods covered by such projections and forecasts may differ from the projected
or forecasted results).

 

5.11         Definition of “Knowledge.” For purposes of the Loan Documents,
whenever a representation or warranty is made to Borrower’s knowledge or
awareness, to the “best of” Borrower’s knowledge, or with a similar
qualification, knowledge or awareness means the actual knowledge, after
reasonable investigation, of any Responsible Officer.

 

 11 

 

 

6AFFIRMATIVE COVENANTS

 

Borrower shall do all of the following:

 

6.1         Government Compliance.

 

(a)          Maintain its and all its Subsidiaries’ legal existence and good
standing in their respective jurisdictions of formation and maintain
qualification in each jurisdiction in which the failure to so qualify would
reasonably be expected to have a material adverse effect on Borrower’s business
or operations. Borrower shall comply, and have each Subsidiary comply, in all
material respects, with all laws, ordinances and regulations to which it is
subject.

 

(b)          Obtain all of the Governmental Approvals necessary for the
performance by Borrower of its obligations under the Loan Documents to which it
is a party and the grant of a security interest to Bank in the Collateral.
Borrower shall promptly provide copies of any such obtained Governmental
Approvals to Bank.

 

6.2         Financial Statements, Reports, Certificates. Provide Bank with the
following:

 

(a)          Quarterly Financial Statements. As soon as available, but no later
than forty-five (45) days after the last day of each quarter (other than with
respect to the quarter ending at the end of Borrower’s fiscal year), a company
prepared consolidated balance sheet and income statement covering Parent’s and
each of its Subsidiary’s operations for such quarter certified by a Responsible
Officer and in a form acceptable to Bank (the “Quarterly Financial Statements”);

 

(b)          Annual Audited Financial Statements. As soon as available, and in
any event within ninety (90) days following the end of Parent’s fiscal year,
audited consolidated financial statements prepared under GAAP, consistently
applied, together with an unqualified opinion on the financial statements
(provided however, that Borrower's unqualified opinion on financial statements
may contain a qualification as to going concern typical for venture backed
companies similar to Borrower) from an independent certified public accounting
firm acceptable to Bank in its reasonable discretion (the “Annual Financial
Statements”);

 

(c)          Compliance Certificates. Within forty-five (45) days (or ninety
(90) days with respect to the quarter ending at the end of Borrower’s fiscal
year) after the last day of each quarter and together with the Quarterly
Financial Statements and, as appropriate, the Annual Financial Statements, a
duly completed Compliance Certificate signed by a Responsible Officer,
certifying that as of the end of such quarter, Borrower was in full compliance
with all of the terms and conditions of this Agreement (except as noted
therein), and setting forth such other information as Bank may reasonably
request;

 

(d)          Annual Operating Budget and Financial Projections. Within thirty
(30) days after the end of each fiscal year of Borrower (and more frequently as
updated), (i) annual operating budgets (including income statements, balance
sheets and cash flow statements, by month) for the following fiscal year of
Borrower, and (ii) annual financial projections for the following fiscal year
(on a quarterly basis) as approved by Borrower’s board of directors, together
with any related business forecasts used in the preparation of such annual
financial projections;

 

 12 

 

 

(e)          Other Statements. Within five (5) days of delivery, copies of all
statements, reports and notices made available to Borrower’s security holders or
to any holders of Subordinated Debt, in each case to the extent same have not
been previously furnished to the bank;

 

(f)          SEC Filings. Within five (5) days of filing, copies of all periodic
and other reports, proxy statements and other materials (in each case to the
extent material) filed by Borrower with the SEC, any Governmental Authority
succeeding to any or all of the functions of the SEC or with any national
securities exchange, or distributed to its shareholders, as the case may be.
Documents required to be delivered pursuant to the terms hereof (to the extent
any such documents are included in materials otherwise filed with the SEC) may
be delivered electronically and if so delivered, shall be deemed to have been
delivered on the date on which Borrower posts such documents, or provides a link
thereto, on Borrower’s website on the Internet at Borrower’s website address;
provided, however, Borrower shall promptly notify Bank in writing (which may be
by electronic mail) of the posting of any such documents;

 

(g)          Legal Action Notice. A prompt report of any legal actions pending
or threatened in writing against Borrower or any of its Subsidiaries that could
result in damages or costs to Borrower or any of its Subsidiaries of,
individually or in the aggregate, One Hundred Thousand Dollars ($100,000) or
more; and

 

(h)          Other Financial Information. Other financial information reasonably
requested by Bank.

 

6.3         Inventory; Returns. Keep all Inventory in good and marketable
condition, free from material defects. Returns and allowances between Borrower
and its Account Debtors shall follow Borrower’s customary practices as they
exist at the Effective Date. Borrower must promptly notify Bank of all returns,
recoveries, disputes and claims that involve more than One Hundred Thousand
Dollars ($100,000).

 

6.4         Taxes; Pensions. Timely file, and require each of its Subsidiaries
to timely file, all required tax returns and reports and timely pay, and require
each of its Subsidiaries to timely pay, all foreign, federal, state and local
taxes, assessments, deposits and contributions owed by Borrower and each of its
Subsidiaries, except for deferred payment of any taxes contested pursuant to the
terms of Section 5.8 hereof, and shall deliver to Bank, on demand, appropriate
certificates attesting to such payments, and pay all amounts necessary to fund
all present pension, profit sharing and deferred compensation plans in
accordance with their terms.

 

6.5         Insurance.

 

(a)          Keep its business and the Collateral insured for risks and in
amounts standard for companies in Borrower’s industry and location and as Bank
may reasonably request. Insurance policies shall be in a form, with financially
sound and reputable insurance companies that are not Affiliates of Borrower, and
in amounts that are reasonably satisfactory to Bank. All property policies shall
have a lender’s loss payable endorsement showing Bank as lender loss payee. All
liability policies shall show, or have endorsements showing, Bank as an
additional insured. Bank shall be named as lender loss payee and/or additional
insured with respect to any such insurance providing coverage in respect of any
Collateral.

 

 13 

 

 

(b)          Proceeds payable under any property policy are, at Bank’s option,
payable to Bank on account of the Obligations. Notwithstanding the foregoing,
(a) so long as no Event of Default has occurred and is continuing, Borrowers
shall have the option of applying the proceeds of any casualty policy up to One
Hundred Thousand Dollars ($100,000.00) in the aggregate for all losses under all
casualty policies in any one year, toward the replacement or repair of destroyed
or damaged property; provided that any such replaced or repaired property (i)
shall be of equal or like value as the replaced or repaired Collateral and (ii)
shall be deemed Collateral in which Bank has been granted a first priority
security interest, and (b) after the occurrence and during the continuance of an
Event of Default, all proceeds payable under such casualty policy shall, at the
option of Bank, be payable to Bank on account of the Obligations.

 

(c)          At Bank’s request, Borrower shall deliver certified copies of
insurance policies and evidence of all premium payments. Each provider of any
such insurance required under this Section 6.5 shall agree, by endorsement upon
the policy or policies issued by it or by independent instruments furnished to
Bank, that it will give Bank thirty (30) days (or ten (10) days for nonpayment
of premium) prior (or, if the relevant insurance company confirms in writing
that it does not customarily allow endorsement of its policies to give such
prior notice, concurrent) written notice before any such policy or policies
shall be materially altered or canceled. If Borrower fails to obtain insurance
as required under this Section 6.5 or to pay any amount or furnish any required
proof of payment to third persons and Bank, Bank may make all or part of such
payment or obtain such insurance policies required in this Section 6.5, and take
any action under the policies Bank deems prudent.

 

6.6         Operating Accounts.

 

(a)          Maintain all of its operating and other deposit accounts and
securities accounts with Bank and Bank’s Affiliates. Notwithstanding anything to
the contrary, Borrower shall be permitted to maintain its accounts with JP
Morgan Chase as disclosed on the Perfection Certificate delivered to Bank as of
the Effective Date (the “Chase Accounts”) so long as the aggregate balance in
such accounts does not exceed Five Hundred Thousand Dollars ($500,000) at any
time.

 

(b)          In addition to and without limiting the restrictions in (a),
Borrower shall provide Bank five (5) days prior written notice before
establishing any Collateral Account at or with any bank or financial institution
other than Bank or Bank’s Affiliates. For each Collateral Account that Borrower
at any time maintains, Borrower shall cause the applicable bank or financial
institution (other than Bank) at or with which any Collateral Account is
maintained to execute and deliver a Control Agreement or other appropriate
instrument with respect to such Collateral Account to perfect Bank’s Lien in
such Collateral Account in accordance with the terms hereunder, which control
agreements may not be terminated without the prior written consent of Bank. The
provisions of the previous sentence shall not apply to deposit accounts
exclusively used for payroll, payroll taxes and other employee wage and benefit
payments to or for the benefit of Borrower’s employees and identified to Bank by
Borrower as such.

 

6.7         Reserved.

  

 14 

 

  

6.8         Protection of Intellectual Property Rights.

 

(a)        (i) Undertake commercially reasonable efforts to protect, defend and
maintain the validity and enforceability of its Intellectual Property material
to the Borrower’s business; (ii) promptly advise Bank in writing of material
infringements or any other event that could reasonably be expected to materially
and adversely affect the value of its Intellectual Property; and (iii) not allow
any Intellectual Property material to Borrower’s business to be abandoned,
forfeited or dedicated to the public without Bank’s written consent.

 

(b)          Provide written notice to Bank within twenty (20) days of entering
or becoming bound by any Restricted License (other than over-the-counter
software that is commercially available to the public). Borrower shall take such
commercially reasonable steps as Bank requests to obtain the consent of, or
waiver by, any person whose consent or waiver is necessary for (i) any
Restricted License to be deemed “Collateral” and for Bank to have a security
interest in it that might otherwise be restricted or prohibited by law or by the
terms of any such Restricted License, whether now existing or entered into in
the future, and (ii) Bank to have the ability in the event of a liquidation of
any Collateral to dispose of such Collateral in accordance with Bank’s rights
and remedies under this Agreement and the other Loan Documents.

 

6.9         Litigation Cooperation. From the date hereof and continuing through
the termination of this Agreement, make available to Bank, without expense to
Bank, Borrower and its officers, employees and agents and Borrower’s books and
records, to the extent that Bank may deem them reasonably necessary to prosecute
or defend any third-party suit or proceeding instituted by or against Bank with
respect to any Collateral or relating to Borrower.

 

6.10       Access to Collateral; Books and Records. Allow Bank, or its agents,
at reasonable times, on two (2) Business Day’s notice (provided no notice is
required if an Event of Default has occurred and is continuing), to inspect the
Collateral and audit and copy Borrower’s Books. Such inspections or audits shall
be conducted no more often than once every twelve (12) months unless an Event of
Default has occurred and is continuing in which case such inspections and audits
shall occur as often as Bank shall determine is necessary. The foregoing
inspections and audits shall be at Borrower’s expense. In the event Borrower and
Bank schedule an audit more than ten (10) days in advance, and Borrower cancels
or seeks to reschedule the audit with less than ten (10) days written notice to
Bank, then (without limiting any of Bank’s rights or remedies), Borrower shall
pay Bank a fee of One Thousand Dollars ($1,000) plus any out-of-pocket expenses
incurred by Bank to compensate Bank for the anticipated costs and expenses of
the cancellation or rescheduling.

 

 15 

 

 

6.11         Formation or Acquisition of Subsidiaries. Notwithstanding and
without limiting the negative covenants contained in Section 7.3 and 7.7 hereof,
at the time that Borrower forms any direct or indirect Subsidiary or acquires
any direct or indirect Subsidiary after the Effective Date, Borrower shall (a)
cause such new Subsidiary to provide to Bank a joinder to this Agreement to
cause such Subsidiary to become a co-borrower hereunder together with such
appropriate financing statements and/or Control Agreements, all in form and
substance reasonably satisfactory to Bank (including being sufficient to grant
Bank a first priority Lien (subject to Permitted Liens) in and to the assets of
such newly formed or acquired Subsidiary), (b) provide to Bank appropriate
certificates and powers and financing statements, pledging all of the direct or
beneficial ownership interest in such new Subsidiary, in form and substance
satisfactory to Bank, and (c) provide to Bank all other documentation in form
and substance satisfactory to Bank, including one or more opinions of counsel
satisfactory to Bank, which in its opinion is appropriate with respect to the
execution and delivery of the applicable documentation referred to above. Any
document, agreement, or instrument executed or issued pursuant to this Section
6.13 shall be a Loan Document. Notwithstanding anything to the contrary, in no
event shall (a) any Foreign Subsidiary be required to become a Borrower or
Guarantor hereunder or to grant a Lien in its assets or (b) more than 65% of the
presently existing and hereafter arising issued and outstanding shares of
capital stock owned by Borrower of any Foreign Subsidiary which shares entitle
the holder thereof to vote for directors or any other matter be pledged, in each
case to the extent that same would cause any Borrower adverse tax consequences
under Internal Revenue Code Section 956 or any successor statute during the
subject fiscal year.

 

6.12         Further Assurances. Execute any further instruments and take
further action as Bank reasonably requests to perfect or continue Bank’s Lien in
the Collateral or to effect the purposes of this Agreement.

 

6.13         Financial Trigger. From and at all times after the Financial
Trigger Event but prior to the Financial Trigger Release Event, Borrower shall
deliver to and maintain with Bank, Pledged Collateral in an amount of not less
than the Minimum Cash Collateral Value.

 

 16 

 

 

7NEGATIVE COVENANTS

 

Borrower shall not do any of the following without Bank’s prior written consent:

 

7.1         Dispositions. Convey, sell, lease, transfer, assign, or otherwise
dispose of (collectively, “Transfer”), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, except for Transfers
(a) of Inventory in the ordinary course of business; (b) of worn-out or obsolete
Equipment that is, in the reasonable judgment of Borrower, no longer
economically practicable to maintain or useful in the ordinary course of
business of Borrower; (c) consisting of Permitted Liens and Permitted
Investments; (d) consisting of the sale or issuance of any stock of Borrower
permitted under Section 7.2 of this Agreement; (e) consisting of Borrower’s use
or transfer of money or Cash Equivalents in a manner that is not prohibited by
the terms of this Agreement or the other Loan Documents; (f) of non-exclusive
licenses for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business and licenses that could not result in a legal
transfer of title of the licensed property but that may be exclusive in respects
other than territory and that may be exclusive as to territory only as to
discreet geographical areas, (g) transfers of assets among Borrowers or
Subsidiaries that are secured Guarantors, (h) transfers of assets in an
aggregate amount not to exceed One Hundred Thousand Dollars ($100,000) in any
fiscal year (A) by Borrowers to their Subsidiaries that are not Borrowers or
secured Guarantors hereunder and (B) by Subsidiaries that are not Borrowers or
secured Guarantors hereunder to other Subsidiaries that are not Borrowers or
secured Guarantors hereunder or to a Borrower; and (i) so long as no Event of
Default has occurred and is continuing, other dispositions of assets (other than
Intellectual Property) not otherwise permitted by this Section 7.1 with a fair
market value not to exceed One Hundred Thousand Dollars ($100,000.00) in the
aggregate in any fiscal year.

 

7.2         Changes in Business, Management, Control or Business Locations.

 

(a)          Engage in or permit any of its Subsidiaries to engage in any
business other than the businesses currently engaged in by Borrower and such
Subsidiary, as applicable, or reasonably related thereto; (b) liquidate or
dissolve; (c) fail to provide notice to Bank of any Key Person departing from or
ceasing to be employed by Borrower within five (5) Business Days after such Key
Person’s departure from Borrower; or (d)  permit or suffer any Change in
Control.

 

Borrower shall not, without at least thirty (30) days prior written notice to
Bank: (1) add any new offices or business locations, including warehouses
(unless such new offices or business locations contain less than One Hundred
Thousand Dollars ($100,000) in Borrower’s assets or property) or deliver any
portion of the Collateral valued, individually or in the aggregate, in excess of
One Hundred Thousand Dollars ($100,000) to a bailee at a location other than to
a bailee and at a location already disclosed in the Perfection Certificate, (2)
change its jurisdiction of organization, (3) change its organizational structure
or type, (4) change its legal name, or (5) change any organizational number (if
any) assigned by its jurisdiction of organization. If Borrower intends to
deliver any portion of the Collateral valued, individually or in the aggregate,
in excess of One Hundred Thousand Dollars ($100,000) to a bailee, and Bank and
such bailee are not already parties to a bailee agreement governing both the
Collateral and the location to which Borrower intends to deliver the Collateral,
then Borrower will first receive the written consent of Bank, and such bailee
shall execute and deliver a bailee agreement in form and substance satisfactory
to Bank.

 

 17 

 

 

7.3           Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person (including, without limitation, by
the formation of any Subsidiary), except for Subsidiaries formed in accordance
with Section 6.11. Notwithstanding anything to the contrary, a Subsidiary may
merge or consolidate into another Subsidiary or into Borrower.

 

7.4           Indebtedness. Create, incur, assume, or be liable for any
Indebtedness, or permit any Subsidiary to do so, other than Permitted
Indebtedness.

 

7.5           Encumbrance. Create, incur, allow, or suffer any Lien on any of
its property, or assign or convey any right to receive income, including the
sale of any Accounts, or permit any of its Subsidiaries to do so, in each case
except for Permitted Liens; permit any Collateral not to be subject to the first
priority security interest granted herein (which Collateral may be subject to
Permitted Liens); or enter into any agreement, document, instrument or other
arrangement (except with or in favor of Bank) with any Person that directly or
indirectly prohibits, or has the effect of prohibiting, Borrower from assigning,
mortgaging, pledging, granting a security interest in or upon, or encumbering
any of Borrower’s Intellectual Property, except as is otherwise permitted in
Section 7.1 hereof and the definition of “Permitted Lien” herein.

 

7.6           Maintenance of Collateral Accounts. Maintain any Collateral
Account except pursuant to the terms of Section 6.6(b) hereof.

 

7.7           Distributions; Investments. (a) Pay any dividends or make any
distribution or payment or redeem, retire or purchase any capital stock or other
equity interests, except (i) any Borrower may pay dividends or distributions to
any other Borrower, (ii) any Borrower may pay dividends solely in common stock;
and (iii) any Borrower may repurchase the stock of former employees or
consultants pursuant to stock repurchase agreements so long as an Event of
Default does not exist at the time of such repurchase and would not exist after
giving effect to such repurchase, provided that the aggregate amount of all such
repurchases does not exceed One Hundred Thousand Dollars ($100,000) per fiscal
year; or (b) directly or indirectly make any Investment (including, without
limitation, by the formation of any Subsidiary, except for Subsidiaries formed
in accordance with Section 6.11) other than Permitted Investments, or permit any
of its Subsidiaries to do so.

 

7.8           Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower, except
for (a) transactions that are in the ordinary course of Borrower’s business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm’s length transaction with a non-affiliated Person, (b)
bona fide equity financings with Borrower’s investors; (c) transactions with
Affiliates that are borrowers or secured guarantors hereunder; (d) Investments
described in clauses (f), (g), (h) and (i) of the definition of Permitted
Investments; (e) reasonable and customary director and officer compensation
(including bonuses and stock option programs), benefits and indemnification
arrangements, in the ordinary course of business and approved by the board of
directors or other equivalent governing body of Borrower (or a committee
thereof); and (f) transactions described under the heading “Related Party
Transactions” set forth in the Parent’s Form 10-K Report filed with the
Securities and Exchange Commissions for the period ended December 31, 2016.

 

 18 

 

 

7.9           Subordinated Debt.

 

(a)          Make or permit any payment on any Subordinated Debt, except under
the terms of the subordination, intercreditor, or other similar agreement to
which such Subordinated Debt is subject, or (b) amend any provision in any
document relating to the Subordinated Debt that would increase the amount
thereof, provide for earlier or greater principal, interest, or other payments
thereon, or adversely affect the subordination thereof to Obligations owed to
Bank (except as otherwise provided for by the terms of the subordination
agreement, intercreditor agreement or similar agreement relating to such
Subordinated Debt).

 

7.10         Compliance. Become an “investment company” or a company controlled
by an “investment company”, under the Investment Company Act of 1940, as
amended, or undertake as one of its important activities extending credit to
purchase or carry margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System), or use the proceeds of any Credit
Extension for that purpose; fail to (a) meet the minimum funding requirements of
ERISA, (b) prevent a Reportable Event or Prohibited Transaction, as defined in
ERISA, from occurring, or (c) comply with the Federal Fair Labor Standards Act,
the failure of any of the conditions described in clauses (a) through (c) which
could reasonably be expected to have a material adverse effect on Borrower’s
business; or violate any other law or regulation, if the violation could
reasonably be expected to have a material adverse effect on Borrower’s business,
or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to
withdraw from participation in, permit partial or complete termination of, or
permit the occurrence of any other event with respect to, any present pension,
profit sharing and deferred compensation plan which could reasonably be expected
to result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other governmental agency.

 

7.11         Financial Trigger Event. From and at all times after the Financial
Trigger Event but prior to the Financial Trigger Release Event, allow, permit or
otherwise suffer the value of Pledged Collateral to be less than the Minimum
Cash Collateral Value at any time.

 

8EVENTS OF DEFAULT

 

Any one of the following shall constitute an event of default (an “Event of
Default”) under this Agreement:

 

8.1           Payment Default. Borrower fails to (a) make any payment of
principal or interest on any Credit Extension when due, or (b) pay any other
Obligations within three (3) Business Days after such Obligations are due and
payable (which three (3) Business Day grace period shall not apply to payments
due on the Growth Capital Maturity Date). During the cure period, the failure to
make or pay any payment specified in clause (b) hereunder is not an Event of
Default (but no Credit Extension will be made during the cure period);

 

 19 

 

 

8.2         Covenant Default.

 

(a)          Borrower fails or neglects to perform any obligation in Sections
6.2, 6.4, 6.5, 6.6, 6.7, 6.8, 6.10, 6.11, or 6.13 or violates any covenant in
Section 7; or

 

(b)          Borrower fails or neglects to perform, keep, or observe any other
term, provision, condition, covenant or agreement contained in this Agreement or
any Loan Documents, and as to any default (other than those specified in this
Section 8) under such other term, provision, condition, covenant or agreement
that can be cured, has failed to cure the default within ten (10) days after the
occurrence thereof; provided, however, that if the default cannot by its nature
be cured within the ten (10) day period or cannot after diligent attempts by
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional period
(which shall not in any case exceed thirty (30) days) to attempt to cure such
default, and within such reasonable time period the failure to cure the default
shall not be deemed an Event of Default (but no Credit Extensions shall be made
during such cure period). Cure periods provided under this section shall not
apply, among other things, to financial covenants or any other covenants set
forth in clause (a) above;

 

8.3         Material Adverse Change. A Material Adverse Change occurs;

 

8.4         Attachment; Levy; Restraint on Business.

 

(a) (i) The service of process seeking to attach, by trustee or similar process,
any funds of Borrower or of any entity under the control of Borrower (including
a Subsidiary) in excess of Fifty Thousand Dollars ($50,000), or (ii) a notice of
lien or levy is filed against any of Borrower’s assets by any Governmental
Authority, and the same under subclauses (i) and (ii) hereof are not, within ten
(10) days after the occurrence thereof, discharged or stayed (whether through
the posting of a bond or otherwise); provided, however, no Credit Extensions
shall be made during any ten (10) day cure period; or

 

(b) (i) any material portion of Borrower’s assets is attached, seized, levied
on, or comes into possession of a trustee or receiver, or (ii) any court order
enjoins, restrains, or prevents Borrower from conducting all or any material
part of its business;

 

8.5         Insolvency. (a) Borrower is unable to pay its debts (including trade
debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an
Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower
and not dismissed or stayed within forty-five (45) days (but no Credit
Extensions shall be made while any of the conditions described in clause (a)
exist and/or until any Insolvency Proceeding is dismissed);

 

8.6         Other Agreements. There is, under any agreement to which Borrower is
a party with a third party or parties, (a) any default resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount individually or in the aggregate in
excess of One Hundred Thousand Dollars ($100,000); or (b) any breach or default
by Borrower or Guarantor, the result of which could have a material adverse
effect on Borrower’s or any Guarantor’s business;

 

 20 

 

 

8.7           Judgments; Penalties. One or more fines, penalties or final
judgments, orders, or decrees for the payment of money in an amount,
individually or in the aggregate, of at least One Hundred Thousand Dollars
($100,000) (or, as to judgments relating to litigation disclosed in the
Perfection Certificate as of the Effective Date, an aggregate amount of One
Million Two Hundred Fifty Thousand Dollars ($1,250,000) for all such disclosed
litigation, subject to the condition that Borrower provides notice to Bank of
such a judgment no later than five (5) Business Days after it is entered) (not
covered by independent third-party insurance as to which liability has been
accepted by such insurance carrier) shall be rendered against Borrower by any
Governmental Authority, and the same are not, within ten (10) days after the
entry, assessment or issuance thereof, discharged, satisfied, or paid, or after
execution thereof stayed or bonded pending appeal, or such judgments are not
discharged prior to the expiration of any such stay (provided that no Credit
Extensions will be made prior to the satisfaction, payment, discharge, stay, or
bonding of such fine, penalty, judgment, order, or decree);

 

8.8           Misrepresentations. Borrower or any Person acting for Borrower
makes any representation, warranty or other statement now or later in this
Agreement, any Loan Document or in any writing delivered to Bank or to induce
Bank to enter this Agreement or any Loan Document, and such representation,
warranty, or other statement is incorrect in any material respect when made;

 

8.9           Subordinated Debt. A default or breach occurs under any agreement
between Borrower and any creditor of Borrower that signed a subordination,
intercreditor, or other similar agreement with Bank, or any creditor that has
signed such an agreement with Bank breaches any terms of such agreement; or

 

8.10         Delisting. The shares of common stock of Parent are delisted from
the NASDAQ because of failure to comply with continued listing standards thereof
or due to a voluntary delisting which results in such shares not being listed on
any other nationally recognized stock exchange in the United States having
listing standards at least as restrictive as the NASDAQ; or

 

8.11         Governmental Approvals. Any Governmental Approval required pursuant
to any Loan Document or the operation of the Borrower’s business shall have been
(a) revoked, rescinded, suspended, modified in an adverse manner or not renewed
in the ordinary course for a full term or (b) subject to any decision by a
Governmental Authority that designates a hearing with respect to any
applications for renewal of any of such Governmental Approval or that could
result in the Governmental Authority taking any of the actions described in
clause (a) above, and such decision or such revocation, rescission, suspension,
modification or non-renewal (i) causes, or could reasonably be expected to
cause, a Material Adverse Change, or (ii) adversely affects the legal
qualifications of Borrower or any of its Subsidiaries to hold such Governmental
Approval in any applicable jurisdiction and such revocation, rescission,
suspension, modification or non-renewal could reasonably be expected to affect
the status of or legal qualifications of Borrower or any of its Subsidiaries to
hold any Governmental Approval in any other jurisdiction.

 

 21 

 

 

9BANK’S RIGHTS AND REMEDIES

 

9.1         Rights and Remedies. Upon the occurrence and during the continuance
of an Event of Default, Bank may, without notice or demand, do any or all of the
following:

 

(a)          declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are immediately
due and payable without any action by Bank);

 

(b)          stop advancing money or extending credit for Borrower’s benefit
under this Agreement or under any other agreement between Borrower and Bank;

 

(c)          for any Letters of Credit, demand that Borrower (i) deposit cash
with Bank in an amount equal to at least 105% (110% for Letters of Credit
denominated in a Foreign Currency) of the Dollar Equivalent of the aggregate
face amount of all Letters of Credit remaining undrawn (plus all interest, fees,
and costs due or to become due in connection therewith (as estimated by Bank in
its good faith business judgment)), to secure all of the Obligations relating to
such Letters of Credit, as collateral security for the repayment of any future
drawings under such Letters of Credit, and Borrower shall forthwith deposit and
pay such amounts, and (ii) pay in advance all letter of credit fees scheduled to
be paid or payable over the remaining term of any Letters of Credit;

 

(d)          terminate any FX Contracts;

 

(e)          verify the amount of, demand payment of and performance under, and
collect any Accounts and General Intangibles, settle or adjust disputes and
claims directly with Account Debtors for amounts on terms and in any order that
Bank considers advisable, notify any Person owing Borrower money of Bank’s
security interest in such funds;

 

(f)          make any payments and do any acts it considers necessary or
reasonable to protect the Collateral and/or its security interest in the
Collateral. Borrower shall assemble the Collateral if Bank requests and make it
available as Bank designates. Bank may enter premises where the Collateral is
located, take and maintain possession of any part of the Collateral, and pay,
purchase, contest, or compromise any Lien that appears to be prior or superior
to its security interest and pay all expenses incurred. Borrower grants Bank a
license to enter and occupy any of its premises, without charge, to exercise any
of Bank’s rights or remedies;

 

(g)          apply to the Obligations (i) any balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;

 

(h)          ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale and sell the Collateral. Bank is hereby granted a
non-exclusive, royalty-free license or other right to, upon and during the
continuation of an Event of Default, use, without charge, Borrower’s labels,
Patents, Copyrights, mask works, rights of use of any name, trade secrets, trade
names, Trademarks, and advertising matter, or any similar property as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral and, in connection with Bank’s exercise of its rights
under this Section, Borrower’s rights under all licenses and all franchise
agreements inure to Bank’s benefit;

 

(i)          place a “hold” on any account maintained with Bank and/or deliver a
notice of exclusive control, any entitlement order, or other directions or
instructions pursuant to any Control Agreement or similar agreements providing
control of any Collateral;

 

 22 

 

 

(j)          demand and receive possession of Borrower’s Books; and

 

(k)          exercise all rights and remedies available to Bank under the Loan
Documents or at law or equity, including all remedies provided under the Code
(including disposal of the Collateral pursuant to the terms thereof).

 

9.2         Power of Attorney. Borrower hereby irrevocably appoints Bank as its
lawful attorney-in-fact, exercisable upon the occurrence and during the
continuance of an Event of Default, to: (a) endorse Borrower’s name on any
checks or other forms of payment or security; (b) sign Borrower’s name on any
invoice or bill of lading for any Account or drafts against Account Debtors; (c)
settle and adjust disputes and claims about the Accounts directly with Account
Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle,
and adjust all claims under Borrower’s insurance policies; (e) pay, contest or
settle any Lien, charge, encumbrance, security interest, and adverse claim in or
to the Collateral, or any judgment based thereon, or otherwise take any action
to terminate or discharge the same; and (f) transfer the Collateral into the
name of Bank or a third party as the Code permits. Borrower hereby appoints Bank
as its lawful attorney-in-fact to sign Borrower’s name on any documents
necessary to perfect or continue the perfection of Bank’s security interest in
the Collateral, regardless of whether an Event of Default has occurred, until
all Obligations have been satisfied in full and Bank is under no further
obligation to make Credit Extensions hereunder. Bank’s foregoing appointment as
Borrower’s attorney in fact, and all of Bank’s rights and powers, coupled with
an interest, are irrevocable until all Obligations have been fully repaid and
performed and Bank’s obligation to provide Credit Extensions terminates.

 

9.3         Protective Payments. If Borrower fails to obtain the insurance
called for by Section 6.5 or fails to pay any premium thereon or fails to pay
any other amount which Borrower is obligated to pay under this Agreement or any
other Loan Document or which may be required to preserve the Collateral, Bank
may obtain such insurance or make such payment, and all amounts so paid by Bank
are Bank Expenses and immediately due and payable, bearing interest at the then
highest rate applicable to the Obligations, and secured by the Collateral. Bank
will make reasonable efforts to provide Borrower with notice of Bank obtaining
such insurance at the time it is obtained or within a reasonable time
thereafter. No payments by Bank are deemed an agreement to make similar payments
in the future or Bank’s waiver of any Event of Default.

 

9.4         Application of Payments and Proceeds Upon Default. If an Event of
Default has occurred and is continuing, Bank shall have the right to apply in
any order any funds in its possession, whether from Borrower account balances,
payments, proceeds realized as the result of any collection of Accounts or other
disposition of the Collateral, or otherwise, to the Obligations. Bank shall pay
any surplus to Borrower by credit to the Designated Deposit Account or to other
Persons legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency. If Bank, directly or indirectly, enters into a deferred payment or
other credit transaction with any purchaser at any sale of Collateral, Bank
shall have the option, exercisable at any time, of either reducing the
Obligations by the principal amount of the purchase price or deferring the
reduction of the Obligations until the actual receipt by Bank of cash therefor.

 

 23 

 

 

9.5         Bank’s Liability for Collateral. So long as Bank complies with
reasonable banking practices regarding the safekeeping of the Collateral in the
possession or under the control of Bank, Bank shall not be liable or responsible
for: (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other Person. Borrower bears
all risk of loss, damage or destruction of the Collateral.

 

9.6         No Waiver; Remedies Cumulative. Bank’s failure, at any time or
times, to require strict performance by Borrower of any provision of this
Agreement or any other Loan Document shall not waive, affect, or diminish any
right of Bank thereafter to demand strict performance and compliance herewith or
therewith. No waiver hereunder shall be effective unless signed by the party
granting the waiver and then is only effective for the specific instance and
purpose for which it is given. Bank’s rights and remedies under this Agreement
and the other Loan Documents are cumulative. Bank has all rights and remedies
provided under the Code, by law, or in equity. Bank’s exercise of one right or
remedy is not an election and shall not preclude Bank from exercising any other
remedy under this Agreement or other remedy available at law or in equity, and
Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay
in exercising any remedy is not a waiver, election, or acquiescence.

 

9.7         Demand Waiver. Borrower waives demand, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees held by Bank on which
Borrower is liable.

 

10NOTICES

 

All notices, consents, requests, approvals, demands, or other communication by
any party to this Agreement or any other Loan Document must be in writing and
shall be deemed to have been validly served, given, or delivered: (a) upon the
earlier of actual receipt and three (3) Business Days after deposit in the U.S.
mail, first class, registered or certified mail return receipt requested, with
proper postage prepaid; (b) upon transmission, when sent by electronic mail or
facsimile transmission; (c) one (1) Business Day after deposit with a reputable
overnight courier with all charges prepaid; or (d) when delivered, if
hand-delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address, facsimile number, or email address indicated
below. Bank or Borrower may change its mailing or electronic mail address or
facsimile number by giving the other party written notice thereof in accordance
with the terms of this Section 10.

 

If to Borrower: Lipocine Inc.   675 Arapeen Drive, Suite 202   Salt Lake City,
UT 84108   Attn:  Chief Financial Officer   Fax:  (801) 994-7388  
Email:  mb@lipocine.com   Website URL: https://www.lipocine.com/     If to Bank:
Silicon Valley Bank   4370 La Jolla Village Drive, Suite 1050   San Diego, CA
92122   Attn: Igor DaCruz   Fax:  (858) 622-1424   Email:  IDacruz@svb.com

 

 24 

 

 

11CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE

 

Except as otherwise expressly provided in any of the Loan Documents, California
law governs the Loan Documents without regard to principles of conflicts of law.
Borrower and Bank each submit to the exclusive jurisdiction of the State and
Federal courts in Santa Clara County, California; provided, however, that
nothing in this Agreement shall be deemed to operate to preclude Bank from
bringing suit or taking other legal action in any other jurisdiction to realize
on the Collateral or any other security for the Obligations, or to enforce a
judgment or other court order in favor of Bank. Borrower expressly submits and
consents in advance to such jurisdiction in any action or suit commenced in any
such court, and Borrower hereby waives any objection that it may have based upon
lack of personal jurisdiction, improper venue, or forum non conveniens and
hereby consents to the granting of such legal or equitable relief as is deemed
appropriate by such court. Borrower hereby waives personal service of the
summons, complaints, and other process issued in such action or suit and agrees
that service of such summons, complaints, and other process may be made by
registered or certified mail addressed to Borrower at the address set forth in,
or subsequently provided by Borrower in accordance with, Section 10 of this
Agreement and that service so made shall be deemed completed upon the earlier to
occur of Borrower’s actual receipt thereof or three (3) days after deposit in
the U.S. mails, proper postage prepaid.

 

TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE
THEIR RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION,
INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A
MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY
HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

 

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial
by jury is not enforceable, the parties hereto agree that any and all disputes
or controversies of any nature between them arising at any time shall be decided
by a reference to a private judge, mutually selected by the parties (or, if they
cannot agree, by the Presiding Judge of the Santa Clara County, California
Superior Court) appointed in accordance with California Code of Civil Procedure
Section 638 (or pursuant to comparable provisions of federal law if the dispute
falls within the exclusive jurisdiction of the federal courts), sitting without
a jury, in Santa Clara County, California; and the parties hereby submit to the
jurisdiction of such court. The reference proceedings shall be conducted
pursuant to and in accordance with the provisions of California Code of Civil
Procedure §§ 638 through 645.1, inclusive. The private judge shall have the
power, among others, to grant provisional relief, including without limitation,
entering temporary restraining orders, issuing preliminary and permanent
injunctions and appointing receivers. All such proceedings shall be closed to
the public and confidential and all records relating thereto shall be
permanently sealed. If during the course of any dispute, a party desires to seek
provisional relief, but a judge has not been appointed at that point pursuant to
the judicial reference procedures, then such party may apply to the Santa Clara
County, California Superior Court for such relief. The proceeding before the
private judge shall be conducted in the same manner as it would be before a
court under the rules of evidence applicable to judicial proceedings. The
parties shall be entitled to discovery which shall be conducted in the same
manner as it would be before a court under the rules of discovery applicable to
judicial proceedings. The private judge shall oversee discovery and may enforce
all discovery rules and orders applicable to judicial proceedings in the same
manner as a trial court judge. The parties agree that the selected or appointed
private judge shall have the power to decide all issues in the action or
proceeding, whether of fact or of law, and shall report a statement of decision
thereon pursuant to California Code of Civil Procedure § 644(a). Nothing in this
paragraph shall limit the right of any party at any time to exercise self-help
remedies, foreclose against collateral, or obtain provisional remedies. The
private judge shall also determine all issues relating to the applicability,
interpretation, and enforceability of this paragraph.

 

 25 

 

 

This Section 11 shall survive the termination of this Agreement.

 

12GENERAL PROVISIONS

 

12.1         Termination Prior to Maturity Date; Survival. All covenants,
representations and warranties made in this Agreement continue in full force
until this Agreement has terminated pursuant to its terms and all Obligations
have been satisfied. So long as Borrower has satisfied the Obligations (other
than inchoate indemnity obligations, any other obligations which, by their
terms, are to survive the termination of this Agreement, and any Obligations
under Bank Services Agreements that are cash collateralized in accordance with
Section 4.1 of this Agreement), this Agreement may be terminated prior to the
Growth Capital Maturity Date by Borrower, in accordance with Section 2.1.1(c).
Those obligations that are expressly specified in this Agreement as surviving
this Agreement’s termination shall continue to survive notwithstanding this
Agreement’s termination.

 

12.2         Successors and Assigns. This Agreement binds and is for the benefit
of the successors and permitted assigns of each party. Borrower may not assign
this Agreement or any rights or obligations under it without Bank’s prior
written consent (which may be granted or withheld in Bank’s discretion). Bank
has the right, without the consent of or notice to Borrower, to sell, transfer,
assign, negotiate, or grant participation in all or any part of, or any interest
in, Bank’s obligations, rights, and benefits under this Agreement and the other
Loan Documents.

 

12.3         Indemnification. Borrower agrees to indemnify, defend and hold Bank
and its directors, officers, employees, agents, attorneys, or any other Person
affiliated with or representing Bank (each, an “Indemnified Person”) harmless
against: (i) all obligations, demands, claims, and liabilities (collectively,
“Claims”) claimed or asserted by any other party in connection with the
transactions contemplated by the Loan Documents; and (ii) all losses or expenses
(including Bank Expenses) in any way suffered, incurred, or paid by such
Indemnified Person as a result of, following from, consequential to, or arising
from transactions between Bank and Borrower (including reasonable attorneys’
fees and expenses), except for Claims and/or losses directly caused by such
Indemnified Person’s gross negligence or willful misconduct.

 

 26 

 

 

This Section 12.3 shall survive until all statutes of limitation with respect to
the Claims, losses, and expenses for which indemnity is given shall have run.

 

12.4         Time of Essence. Time is of the essence for the performance of all
Obligations in this Agreement.

 

12.5         Severability of Provisions. Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.

 

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

 

12.7         Amendments in Writing; Waiver; Integration. No purported amendment
or modification of any Loan Document, or waiver, discharge or termination of any
obligation under any Loan Document, shall be enforceable or admissible unless,
and only to the extent, expressly set forth in a writing signed by the party
against which enforcement or admission is sought. Without limiting the
generality of the foregoing, no oral promise or statement, nor any action,
inaction, delay, failure to require performance or course of conduct shall
operate as, or evidence, an amendment, supplement or waiver or have any other
effect on any Loan Document. Any waiver granted shall be limited to the specific
circumstance expressly described in it, and shall not apply to any subsequent or
other circumstance, whether similar or dissimilar, or give rise to, or evidence,
any obligation or commitment to grant any further waiver. The Loan Documents
represent the entire agreement about this subject matter and supersede prior
negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of the Loan Documents merge into the Loan Documents.

 

12.8         Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, is an original, and all taken together, constitute
one Agreement.

 

12.9         Borrower Liability. Each Borrower may, acting singly, request
Credit Extensions hereunder. Each Borrower hereby appoints the other as agent
for the other for all purposes hereunder, including with respect to requesting
Credit Extensions hereunder. Each Borrower hereunder shall be jointly and
severally obligated to repay all Obligations, including, without limitation, all
Credit Extensions made hereunder, regardless of which Borrower actually receives
said Credit Extension, as if each Borrower hereunder directly received all
Credit Extensions. Each Borrower waives (a) any suretyship defenses available to
it under the Code or any other applicable law, including, without limitation,
the benefit of California Civil Code Section 2815 permitting revocation as to
future transactions and the benefit of California Civil Code Sections 1432,
2809, 2810, 2819, 2839, 2845, 2847, 2848, 2849, 2850, and 2899 and 3433, and (b)
any right to require Bank to: (i) proceed against any Borrower or any other
person; (ii) proceed against or exhaust any security; or (iii) pursue any other
remedy. Bank may exercise or not exercise any right or remedy it has against any
Borrower or any security it holds (including the right to foreclose by judicial
or non-judicial sale) without affecting any Borrower’s liability.
Notwithstanding any other provision of this Agreement or other related document,
each Borrower irrevocably waives all rights that it may have at law or in equity
(including, without limitation, any law subrogating Borrower to the rights of
Bank under this Agreement) to seek contribution, indemnification or any other
form of reimbursement from any other Borrower, or any other Person now or
hereafter primarily or secondarily liable for any of the Obligations, for any
payment made by Borrower with respect to the Obligations in connection with this
Agreement or otherwise and all rights that it might have to benefit from, or to
participate in, any security for the Obligations as a result of any payment made
by Borrower with respect to the Obligations in connection with this Agreement or
otherwise. Any agreement providing for indemnification, reimbursement or any
other arrangement prohibited under this Section shall be null and void. If any
payment is made to a Borrower in contravention of this Section, such Borrower
shall hold such payment in trust for Bank and such payment shall be promptly
delivered to Bank for application to the Obligations, whether matured or
unmatured.

 

 27 

 

 

12.10         Confidentiality. In handling any confidential information, Bank
shall exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (a) to Bank’s
Subsidiaries or Affiliates (such Subsidiaries and Affiliates, together with
Bank, collectively, “Bank Entities”); (b) to prospective transferees or
purchasers of any interest in the Credit Extensions (provided, however, that any
prospective transferee or purchaser shall have entered into an agreement
containing provisions substantially the same as those in this Section); (c) as
required by law, regulation, subpoena, or other order; (d) to Bank’s regulators
or as otherwise required in connection with Bank’s examination or audit; (e) as
Bank considers appropriate in exercising remedies under the Loan Documents; and
(f) to third-party service providers of Bank so long as such service providers
have executed a confidentiality agreement with Bank with terms no less
restrictive than those contained herein. Confidential information does not
include information that is either: (i) in the public domain or in Bank’s
possession when disclosed to Bank, or becomes part of the public domain (other
than as a result of its disclosure by Bank in violation of this Agreement) after
disclosure to Bank; or (ii) disclosed to Bank by a third party if Bank does not
know that the third party, is prohibited from disclosing the information.

 

Bank Entities may use anonymous forms of confidential information for aggregate
datasets, for analyses or reporting, and for any other uses not expressly
prohibited in writing by Borrower. The provisions of the immediately preceding
sentence shall survive termination of this Agreement.

 

12.11         Attorneys’ Fees, Costs and Expenses. In any action or proceeding
between Borrower and Bank arising out of or relating to the Loan Documents, the
prevailing party shall be entitled to recover its reasonable attorneys’ fees and
other costs and expenses incurred, in addition to any other relief to which it
may be entitled.

 

12.12         Electronic Execution of Documents. The words “execution,”
“signed,” “signature” and words of like import in any Loan Document shall be
deemed to include electronic signatures or the keeping of records in electronic
form, each of which shall be of the same legal effect, validity and
enforceability as a manually executed signature or the use of a paper-based
recordkeeping systems, as the case may be, to the extent and as provided for in
any applicable law, including, without limitation, any state law based on the
Uniform Electronic Transactions Act.

 

 28 

 

 

12.13         Captions. The headings used in this Agreement are for convenience
only and shall not affect the interpretation of this Agreement.

 

12.14         Construction of Agreement. The parties mutually acknowledge that
they and their attorneys have participated in the preparation and negotiation of
this Agreement. In cases of uncertainty this Agreement shall be construed
without regard to which of the parties caused the uncertainty to exist.

 

12.15         Relationship. The relationship of the parties to this Agreement is
determined solely by the provisions of this Agreement. The parties do not intend
to create any agency, partnership, joint venture, trust, fiduciary or other
relationship with duties or incidents different from those of parties to an
arm’s-length contract.

 

12.16         Third Parties. Nothing in this Agreement, whether express or
implied, is intended to: (a) confer any benefits, rights or remedies under or by
reason of this Agreement on any persons other than the express parties to it and
their respective permitted successors and assigns; (b) relieve or discharge the
obligation or liability of any person not an express party to this Agreement; or
(c) give any person not an express party to this Agreement any right of
subrogation or action against any party to this Agreement.

 

13DEFINITIONS

 

13.1         Definitions. As used in the Loan Documents, the word “shall” is
mandatory, the word “may” is permissive, the word “or” is not exclusive, the
words “includes” and “including” are not limiting, the singular includes the
plural, and numbers denoting amounts that are set off in brackets are negative.
As used in this Agreement, the following capitalized terms have the following
meanings:

 

“Account” is any “account” as defined in the Code with such additions to such
term as may hereafter be made, and includes, without limitation, all accounts
receivable and other sums owing to Borrower.

 

“Account Debtor” is any “account debtor” as defined in the Code with such
additions to such term as may hereafter be made.

 

“Affiliate” is, with respect to any Person, each other Person that owns or
controls directly or indirectly the Person, any Person that controls or is
controlled by or is under common control with the Person, and each of that
Person’s senior executive officers, directors, partners and, for any Person that
is a limited liability company, that Person’s managers and members.

 

“Agreement” is defined in the preamble hereof.

 

“Bank” is defined in the preamble hereof.

 

 29 

 

 

“Bank Entities” is defined in Section 12.10.

 

“Bank Expenses” are all audit fees and expenses, costs, and expenses (including
reasonable attorneys’ fees and expenses) for preparing, amending, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency Proceedings
and those identified as Bank Expenses in Section 9.3 hereof) or otherwise
incurred with respect to Borrower.

 

“Bank Services”  are any products, credit services, and/or financial
accommodations previously, now, or hereafter provided to Borrower or any of its
Subsidiaries by Bank or any Bank Affiliate, including, without limitation, any
letters of credit, cash management services (including, without limitation,
merchant services, direct deposit of payroll, business credit cards, and check
cashing services), interest rate swap arrangements, and foreign exchange
services as any such products or services may be identified in Bank’s various
agreements related thereto (each, a “Bank Services Agreement”).

 

“Borrower” is defined in the preamble hereof.

 

“Borrower’s Books” are all Borrower’s books and records including ledgers,
federal and state tax returns, records regarding Borrower’s assets or
liabilities, the Collateral, business operations or financial condition, and all
computer programs or storage or any equipment containing such information.

 

“Borrowing Resolutions” are, with respect to any Person, those resolutions
substantially in the form attached hereto as Exhibit C.

 

“Business Day” is any day that is not a Saturday, Sunday or a day on which Bank
is closed.

 

“Cash Equivalents” means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency or any State
thereof having maturities of not more than one (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having the highest rating from either Standard & Poor’s Ratings
Group or Moody’s Investors Service, Inc.; (c) Bank’s certificates of deposit
issued maturing no more than one (1) year after issue; and (d) money market
funds at least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this
definition.

 

“Change in Control” means (a) at any time after the date hereof, any “person” or
“group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act)
shall become, or obtain rights (whether by means of warrants, options or
otherwise) to become, the “beneficial owner” (as defined in Rules 13(d)-3 and
13(d)-5 under the Exchange Act) that is not a holder of equity securities of
Parent on the date hereof, directly or indirectly, of twenty-five percent (25%)
or more of the ordinary voting power for the election of directors of Parent
(determined on a fully diluted basis) other than by the sale of Parent’s equity
securities in a public offering or to venture capital or private equity
investors so long as Borrower identifies to Bank the venture capital or private
equity investors at least seven (7) Business Days prior to the closing of the
transaction and provides to Bank a description of the material terms of the
transaction; (b) during any period of 12 consecutive months after the date
hereof, a majority of the members of the Board of Directors or other equivalent
governing body of Parent cease to be composed of individuals (i) who were
members of that Board or equivalent governing body on the first day of such
period, (ii) whose election or nomination to that Board or equivalent governing
body was approved or accepted by individuals referred to in clause (i) above
constituting at the time of such election or nomination at least a majority of
that Board or equivalent governing body or (iii) whose election or nomination to
that Board or other equivalent governing body was approved or accepted by
individuals referred to in clauses (i) and (ii) above constituting at the time
of such election or nomination at least a majority of that Board or equivalent
governing body; or (c) at any time, Borrower shall cease to own and control, of
record and beneficially, directly or indirectly, one hundred percent (100%) of
each class of outstanding capital stock of each Subsidiary of Borrower free and
clear of all Liens (except Liens created by this Agreement).

 

 30 

 

 

“Claims” is defined in Section 12.3.

 

“Code” is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the State of California; provided, that, to the extent
that the Code is used to define any term herein or in any Loan Document and such
term is defined differently in different Articles or Divisions of the Code, the
definition of such term contained in Article or Division 9 shall govern;
provided further, 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, Bank’s Lien on any Collateral is governed by the Uniform Commercial
Code in effect in a jurisdiction other than the State of California, the term
“Code” shall mean the Uniform Commercial Code as enacted and in effect in such
other jurisdiction solely for purposes of the provisions thereof relating to
such attachment, perfection, priority, or remedies and for purposes of
definitions relating to such provisions.

 

“Collateral” is any and all properties, rights and assets of Borrower described
on Exhibit A.

 

“Collateral Account” is any Deposit Account, Securities Account, or Commodity
Account.

 

“Commodity Account” is any “commodity account” as defined in the Code with such
additions to such term as may hereafter be made.

 

“Compliance Certificate” is that certain certificate in the form attached hereto
as Exhibit D.

 

“Contingent Obligation” is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (a) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation, in each
case, directly or indirectly guaranteed, endorsed, co-made, discounted or sold
with recourse by that Person, or for which that Person is directly or indirectly
liable; (b) any obligations for undrawn letters of credit for the account of
that Person; and (c) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but “Contingent
Obligation” does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under any guarantee or other support arrangement.

 

 31 

 

 

“Control Agreement” is any control agreement entered into among the depository
institution at which Borrower maintains a Deposit Account or the securities
intermediary or commodity intermediary at which Borrower maintains a Securities
Account or a Commodity Account, Borrower, and Bank pursuant to which Bank
obtains control (within the meaning of the Code) over such Deposit Account,
Securities Account, or Commodity Account, in each case which Control Agreement
shall (a) provide the applicable Borrower the right to have access to the
relevant account prior to the giving of a notice of exclusive control or other
similar direction by the Bank and (b) shall otherwise be in form and substance
reasonably acceptable to the Bank.

 

“Conversion Date” is defined in Section 2.1.1(b)(ii).

 

“Copyrights” are any and all copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret.

 

“Credit Extension” is the Growth Capital Advance or any other extension of
credit by Bank for Borrower’s benefit under this Agreement.

 

“Default Rate” is defined in Section 2.2(b).

 

“Deposit Account” is any “deposit account” as defined in the Code with such
additions to such term as may hereafter be made.

 

“Designated Deposit Account” is the multicurrency account denominated in
Dollars, account number *******427, maintained by Borrower with Bank.

 

“Dollars,” “dollars” or use of the sign “$” means only lawful money of the
United States and not any other currency, regardless of whether that currency
uses the “$” sign to denote its currency or may be readily converted into lawful
money of the United States.

 

“Dollar Equivalent” is, at any time, (a) with respect to any amount denominated
in Dollars, such amount, and (b) with respect to any amount denominated in a
Foreign Currency, the equivalent amount therefor in Dollars as determined by
Bank at such time on the basis of the then-prevailing rate of exchange in San
Francisco, California, for sales of the Foreign Currency for transfer to the
country issuing such Foreign Currency.

 

“Domestic Subsidiary” means a Subsidiary of Borrower organized under the laws of
the United States or any state or territory thereof or the District of Columbia.

 

“Effective Date” is defined in the preamble hereof.

 

 32 

 

 

“Equipment” is all “equipment” as defined in the Code with such additions to
such term as may hereafter be made, and includes without limitation all
machinery, fixtures, goods, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing.

 

“ERISA” is the Employee Retirement Income Security Act of 1974, and its
regulations.

 

“Event of Default” is defined in Section 8.

 

“Exchange Act” is the Securities Exchange Act of 1934, as amended.

 

“FDA” means the United States Food and Drug Administration.

 

“Final Payment” is a payment (in addition to and not a substitution for the
regular monthly payments of principal plus accrued interest) due in accordance
with Section 2.1.1 above, equal to the Growth Capital Loan Commitment multiplied
by the Final Payment Percentage.

 

“Final Payment Percentage” is six and one-half percent (6.5%).

 

“Financial Trigger Event” means that Borrower has not, by May 31, 2018, provided
to Bank evidence reasonably satisfactory to Bank that Borrower has received FDA
approval for the sale of TLANDO in the United States.

 

“Financial Trigger Release Event” means Bank’s receipt, after the occurrence of
the Financial Trigger Event, of evidence reasonably satisfactory to Bank that
Borrower has received FDA approval for the sale of TLANDO in the United States.

 

“Foreign Currency” means lawful money of a country other than the United States.

 

“Foreign Subsidiary” means any Subsidiary of the Borrower which is not a
Domestic Subsidiary.

 

“Funding Date” is any date on which a Credit Extension is made to or for the
account of Borrower, which shall be a Business Day.

 

“FX Contract” is any foreign exchange contract by and between Borrower and Bank
under which Borrower commits to purchase from or sell to Bank a specific amount
of Foreign Currency on a specified date.

 

“GAAP” is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as
may be approved by a significant segment of the accounting profession, that are
applicable to the circumstances as of the date of determination.

 

“General Intangibles” is all “general intangibles” as defined in the Code in
effect on the date hereof with such additions to such term as may hereafter be
made, and includes without limitation, all Intellectual Property, claims, income
and other tax refunds, security and other deposits, payment intangibles,
contract rights, options to purchase or sell real or personal property, rights
in all litigation presently or hereafter pending (whether in contract, tort or
otherwise), insurance policies (including without limitation key man, property
damage, and business interruption insurance), payments of insurance and rights
to payment of any kind.

 

 33 

 

 

“Governmental Approval” is any consent, authorization, approval, order, license,
franchise, permit, certificate, accreditation, registration, filing or notice,
of, issued by, from or to, or other act by or in respect of, any Governmental
Authority.

 

“Governmental Authority” is any nation or government, any state or other
political subdivision thereof, any agency, authority, instrumentality,
regulatory body, court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative functions of or
pertaining to government, any securities exchange and any self-regulatory
organization.

 

“Growth Capital Advance” is defined in Section 2.1.1(a).

 

“Growth Capital Loan Commitment” is Ten Million Dollars ($10,000,000).

 

“Growth Capital Maturity Date is December 1, 2021.

 

“Guarantor” is any Person providing a Guaranty in favor of Bank. For the
avoidance of doubt, it is acknowledged that, as of the Effective Date, there are
no Guarantors.

 

“Guaranty” is any guarantee of all or any part of the Obligations, as the same
may from time to time be amended, restated, modified or otherwise supplemented.
For the avoidance of doubt, it is acknowledged that, as of the Effective Date,
there are no Guaranties.

 

“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations, and (d)
Contingent Obligations.

 

“Indemnified Person” is defined in Section 12.3.

 

“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, with respect to any Person, all of such Person’s
right, title, and interest in and to the following:

 

(a)          its Copyrights, Trademarks and Patents;

 

(b)          any and all trade secrets and trade secret rights, including,
without limitation, any rights to unpatented inventions, know-how, operating
manuals;

 

(c)          any and all source code;

 

 34 

 

 

 

(d)          any and all design rights which may be available such Person;

 

(e)          any and all claims for damages by way of past, present and future
infringement of any of the foregoing, with the right, but not the obligation, to
sue for and collect such damages for said use or infringement of the
Intellectual Property rights identified above; and

 

(f)          all amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents.

 

“Interest-Only Extension Milestone” means Bank’s receipt, on or prior to May 31,
2018, of evidence reasonably satisfactory to Bank that Borrower has received FDA
approval for TLANDO.

 

“Interest-Only Period” means the period commencing on the Funding Date of the
Growth Capital Advance and continuing through (a) if Borrower has not satisfied
the Interest-Only Extension Milestone, December 31, 2018, or (b) if Borrower has
satisfied the Interest-Only Extension Milestone, June 30, 2019.

 

“Inventory” is all “inventory” as defined in the Code in effect on the date
hereof with such additions to such term as may hereafter be made, and includes
without limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory as is temporarily out of Borrower’s custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.

 

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

 

“Key Person” is each of Borrower’s (a) President and Chief Executive Officer,
who is Mahesh V. Patel as of the Effective Date, and (b) Executive Vice
President and Chief Financial Officer, who is Morgan Brown as of the Effective
Date.

 

“Letter of Credit” is a standby or commercial letter of credit issued by Bank
upon request of Borrower based upon an application, guarantee, indemnity, or
similar agreement.

 

“Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security
interest or other encumbrance of any kind, whether voluntarily incurred or
arising by operation of law or otherwise against any property.

 

“Loan Documents” are, collectively, this Agreement and any schedules, exhibits,
certificates, notices, and any other documents related to this Agreement, any
Bank Services Agreement, all agreements, instruments and documents relating to
any Pledged Collateral, any subordination agreement, any note, or notes or
guaranties executed by Borrower or any Guarantor, and any other present or
future agreement by Borrower and/or any Guarantor with or for the benefit of
Bank in connection with this Agreement or Bank Services, all as amended,
restated, or otherwise modified.

 

 35 

 

 

“Material Adverse Change” is (a) a material impairment in the perfection or
priority of Bank’s Lien in the Collateral or in the value of such Collateral
(including, without limitation, any Pledged Collateral); (b) a material adverse
change in the business, operations, or condition (financial or otherwise) of
Borrower; or (c) a material impairment of the prospect of repayment of any
portion of the Obligations.

 

“Minimum Cash Collateral Value” means Five Million Dollars ($5,000,000).

 

“Monthly Financial Statements” is defined in Section 6.2(a).

 

“Obligations” are Borrower’s obligation to pay when due any debts, principal,
interest, fees, Bank Expenses, and other amounts Borrower owes Bank now or
later, whether under this Agreement, the other Loan Documents, or otherwise,
including, without limitation, any interest accruing after Insolvency
Proceedings begin and debts, liabilities, or obligations of Borrower assigned to
Bank, and the performance of Borrower’s duties under the Loan Documents.

 

“Operating Documents” are, for any Person, such Person’s formation documents, as
certified by the Secretary of State (or equivalent agency) of such Person’s
jurisdiction of organization on a date that is no earlier than thirty (30) days
prior to the Effective Date, and, (a) if such Person is a corporation, its
bylaws in current form, (b) if such Person is a limited liability company, its
limited liability company agreement (or similar agreement), and (c) if such
Person is a partnership, its partnership agreement (or similar agreement), each
of the foregoing with all current amendments or modifications thereto.

 

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

 

“Payment/Advance Form” is that certain form attached hereto as Exhibit B.

 

“Perfection Certificate” is defined in Section 5.1.

 

“Permitted Indebtedness” is:

 

(a)          Borrower’s Indebtedness to Bank under this Agreement and the other
Loan Documents;

 

(b)          Indebtedness existing on the Effective Date and shown on the
Perfection Certificate;

 

(c)          Subordinated Debt;

 

(d)          unsecured Indebtedness to trade creditors incurred in the ordinary
course of business;

 

(e)          Indebtedness incurred as a result of endorsing negotiable
instruments received in the ordinary course of business;

 

 36 

 

 

(f)          Indebtedness secured by Liens permitted under clauses (a) and (c)
of the definition of “Permitted Liens” hereunder;

 

(g)          Indebtedness among Borrowers and any secured Guarantors;

 

(h)          Subject to the restriction that Indebtedness described in this
clause (h) and the Investments described in clause (g) of Permitted Investments
shall not in the aggregate exceed One Hundred Thousand Dollars ($100,000),
Indebtedness of a Borrower to any Subsidiary that is not a Borrower or secured
Guarantor hereunder and Indebtedness of any Subsidiary that is not a Borrower or
secured Guarantor hereunder to Borrowers;

 

(i)          extensions, refinancings, modifications, amendments and
restatements of any items of Permitted Indebtedness (a) through (h) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be;

 

(j)          Indebtedness in connection with commercial credit cards outside of
Bank, in an aggregate amount not exceeding One Hundred Thousand Dollars
($100,000) at any time outstanding; and

 

(k)          Other unsecured Indebtedness not otherwise permitted by Section
7.4, in an aggregate amount not exceeding Fifteen Thousand Dollars ($15,000) at
any time outstanding.

 

“Permitted Investments” are:

 

(a)          Investments shown on the Perfection Certificate and existing on the
Effective Date;

 

(b)          (i) Investments consisting of Cash Equivalents, (ii) Investments in
Collateral Accounts maintained at Bank or Bank’s Affiliates that are managed by
Bank or Bank’s Affiliates, and (iii) any Investments permitted by Borrower’s
investment policy, as amended from time to time, provided that such investment
policy (and any such amendment thereto) has been approved in writing by Bank;

 

(c)          Investments consisting of the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
Borrower;

 

(d)          Investments consisting of deposit accounts in which Bank has a
perfected security interest (except for (i) the payroll, payroll tax and other
employee wage and benefit payments accounts to or for the benefit of Borrower’s
employees, if any, permitted pursuant to Section 6.6(b) and (ii) so long as a
Control Agreement has not been obtained on the Chase Accounts as permitted in
Section 3.3(b), the Chase Accounts);

 

(e)          Investments accepted in connection with Transfers permitted by
Section 7.1;

 

 37 

 

 

(f)          Investments consisting of the creation of a Subsidiary for the
purpose of consummating a merger transaction permitted by Section 7.3 of this
Agreement, which is otherwise a Permitted Investment;

 

(g)          Subject to the restriction that Investments described in this
clause (g) and the Indebtedness described in clause (h) of Permitted
Indebtedness shall not in the aggregate exceed One Hundred Thousand Dollars
($100,000), (i) Investments of Subsidiaries that are secured Guarantors in or to
other Subsidiaries that are secured Guarantors or Borrower and Investments by
Borrower in Subsidiaries that are secured Guarantors, and (ii) Investments (A)
by Borrowers in their Subsidiaries that are not Borrowers or secured Guarantors
hereunder, and (B) by Subsidiaries that are not Borrowers or secured Guarantors
hereunder in other Subsidiaries that are not Borrowers or secured Guarantors
hereunder.

 

(h)          Investments consisting of (i) travel advances and employee
relocation loans and other employee loans and advances in the ordinary course of
business, and (ii) loans to employees, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries pursuant to
employee stock purchase plans or agreements approved by Borrower’s Board of
Directors;

 

(i)          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 business;

 

(j)          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 paragraph (j) shall not
apply to Investments of Borrower in any Subsidiary; and

 

(k)          Other Investments in an amount not exceeding One Hundred Thousand
Dollars ($100,000) in the aggregate outstanding at any time.

 

“Permitted Liens” are:

 

(a)          Liens existing on the Effective Date and shown on the Perfection
Certificate or arising under this Agreement and the other Loan Documents;

 

(b)          Liens for taxes, fees, assessments or other government charges or
levies, either not due and payable or being contested in good faith and for
which Borrower maintains adequate reserves on its Books, provided that no notice
of any such Lien has been filed or recorded under the Internal Revenue Code of
1986, as amended, and the Treasury Regulations adopted thereunder;

 

(c)          purchase money Liens (i) on Equipment acquired or held by Borrower
incurred for financing the acquisition of the Equipment securing no more than
Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate amount
outstanding, or (ii) existing on Equipment when acquired, if the Lien is
confined to the property and improvements and the proceeds of the Equipment;

 

 38 

 

 

(d)          Liens of carriers, warehousemen, suppliers, or other Persons that
are possessory in nature arising in the ordinary course of business so long as
such Liens attach only to Inventory and related property, securing liabilities
in the aggregate amount not to exceed One Hundred Thousand Dollars ($100,000)
and which are not delinquent or remain payable without penalty or which are
being contested in good faith and by appropriate proceedings which proceedings
have the effect of preventing the forfeiture or sale of the property subject
thereto;

 

(e)          Liens to secure payment of workers’ compensation, employment
insurance, old-age pensions, social security and other like obligations incurred
in the ordinary course of business (other than Liens imposed by ERISA);

 

(f)          Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c); provided that any
extension, renewal or replacement Lien must be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness may
not increase;

 

(g)          leases or subleases of real property granted in the ordinary course
of Borrower’s business (or, if referring to another Person, in the ordinary
course of such Person’s business), and leases, subleases, non-exclusive licenses
or sublicenses of personal property (other than Intellectual Property) granted
in the ordinary course of Borrower’s business (or, if referring to another
Person, in the ordinary course of such Person’s business);

 

(h)          non-exclusive licenses of Intellectual Property granted to third
parties in the ordinary course of business and leases, subleases, non-exclusive
licenses or sublicenses of personal property (other than Intellectual Property)
granted in the ordinary course of a Borrower’s business (or, if referring to
another Person, in the ordinary course of such Person’s business);

 

(i)          Liens arising from attachments or judgments, orders, or decrees in
circumstances not constituting an Event of Default under Sections 8.4 and 8.7;

 

(j)          Liens in favor of other financial institutions arising in
connection with Borrower’s deposit and/or securities accounts held at such
institutions so long as Borrower is in compliance with Section 6.6 hereof;

 

(k)          easements, zoning restrictions, rights-of-way, minor defects or
irregularities in title and similar encumbrances on real property imposed by law
or arising in the ordinary course of business which (i) do not secure
obligations for the payment of money, (ii) are not material in amount and (iii)
do not materially detract from or impair the value of the affected property or
interfere materially with the ordinary conduct of business of Borrower; and

 

(l)          Liens with respect to security deposits given by Borrower to secure
real estate leases not exceeding One Hundred Thousand Dollars ($100,000) in the
aggregate outstanding at any time.

 

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

 

 39 

 

 

“Pledged Collateral” means a cash collateral account maintained with Bank by
Borrower, which account shall be restricted such that neither Borrower nor any
other Person (other than Bank) shall be entitled to withdraw or transfer any
funds from such accounts, place any Liens on such accounts other than in favor
of Bank, or otherwise dispose of the funds in such accounts and which accounts
shall be subject to a first priority perfected security interest in favor of
Bank.

 

“Prepayment Fee” shall be an amount equal to (i) two percent (2%) of the
outstanding principal balance of the Growth Capital Advance if the principal
balance of the Growth Capital Advance is outstanding one (1) year or less, or
(ii) one percent (1%) of the outstanding principal balance of the Growth Capital
Advance if the principal balance of the Growth Capital Advance is outstanding
more than one (1) year and less than two (2) years. There shall be no Prepayment
Fee if the principal balance of the Growth Capital Advance is outstanding two
(2) years or more.

 

“Prime Rate” is the rate of interest per annum from time to time published in
the money rates section of The Wall Street Journal or any successor publication
thereto as the “prime rate” then in effect; provided that, in the event such
rate of interest is less than zero, such rate shall be deemed to be zero for
purposes of this Agreement; and provided further that if such rate of interest,
as set forth from time to time in the money rates section of The Wall Street
Journal, becomes unavailable for any reason as determined by Bank, the “Prime
Rate” shall mean the rate of interest per annum announced by Bank as its prime
rate in effect at its principal office in the State of California (such Bank
announced Prime Rate not being intended to be the lowest rate of interest
charged by Bank in connection with extensions of credit to debtors).

 

“Registered Organization” is any “registered organization” as defined in the
Code with such additions to such term as may hereafter be made.

 

“Repayment Period” is the period of time commencing on the Conversion Date and
continuing through the Growth Capital Maturity Date.

 

“Requirement of Law” is as to any Person, the organizational or governing
documents of such Person, and any law (statutory or common), treaty, rule or
regulation or determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of its
property or to which such Person or any of its property is subject.

 

“Responsible Officer” is any of the Chief Executive Officer, President, Chief
Financial Officer or Controller of Borrower.

 

“Restricted License” is any material license or other agreement with respect to
which Borrower is the licensee (a) that prohibits or otherwise restricts
Borrower from granting a security interest in Borrower’s interest in such
license or agreement or any other property, or (b) for which a default under or
termination of could interfere with Bank’s right to sell any Collateral.
Notwithstanding anything to the contrary, “Restricted License” shall not include
any license of over-the-counter software that is commercially available to the
public.

 

“SEC” shall mean the Securities and Exchange Commission, any successor thereto,
and any analogous Governmental Authority.

 

 40 

 

 

“Securities Account” is any “securities account” as defined in the Code with
such additions to such term as may hereafter be made.

 

“Subordinated Debt” is indebtedness incurred by Borrower subordinated to all of
Borrower’s now or hereafter indebtedness to Bank (pursuant to a subordination,
intercreditor, or other similar agreement in form and substance satisfactory to
Bank entered into between Bank and the other creditor), on terms acceptable to
Bank.

 

“Subsidiary” is, as to any Person, a corporation, partnership, limited liability
company or other entity of which shares of stock or other ownership interests
having ordinary voting power (other than stock or such other ownership interests
having such power only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such corporation,
partnership or other entity are at the time owned, or the management of which is
otherwise controlled, directly or indirectly through one or more intermediaries,
or both, by such Person. Unless the context otherwise requires, each reference
to a Subsidiary herein shall be a reference to a Subsidiary of Borrower or
Guarantor.

 

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

 

“Transfer” is defined in Section 7.1.

 

[Signature page follows.]

 

 41 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the Effective Date.

 

BORROWER:

 

LIPOCINE INC.

 

By:       Name:        Title:           LIPOCINE OPERATING INC.         By:    
  Name:       Title:           BANK:         SILICON VALLEY BANK         By:    
  Name:       Title:    

 

[Signature Page to Loan and Security Agreement]

 

 

 

 

EXHIBIT A

 

The Collateral consists of all of Borrower’s right, title and interest in and to
the following personal property:

 

All goods, Accounts (including health-care receivables), Equipment, Inventory,
contract rights or rights to payment of money, leases, license agreements,
franchise agreements, General Intangibles (except as provided below), commercial
tort claims, documents, instruments (including any promissory notes), chattel
paper (whether tangible or electronic), cash, deposit accounts, fixtures,
letters of credit rights (whether or not the letter of credit is evidenced by a
writing), securities, and all other investment property, supporting obligations,
and financial assets, in each of the foregoing cases, whether now owned or
hereafter acquired, wherever located; and

 

All Borrower’s Books relating to the foregoing, and any and all claims, rights
and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing.

 

Notwithstanding anything to the contrary herein, the Collateral does not include
any of the following, whether now owned or hereafter acquired: (a) more than
sixty-five percent (65%) of the presently existing and hereafter arising issued
and outstanding shares of capital stock owned by Borrower of any Foreign
Subsidiary which shares entitle the holder thereof to vote for directors or any
other matter; (b) any intent-to-use trademarks at all times prior to the first
use thereof, whether by the actual use thereof in commerce, the recording of a
statement of use with the United States Patent and Trademark Office or
otherwise; (c) rights held under a license that are not assignable by their
terms without the consent of the licensor thereof (but only to the extent such
restriction on assignment is enforceable under applicable law); (d) any interest
of Borrower as a lessee under an Equipment lease if Borrower is prohibited by
the terms of such lease from granting a security interest in such lease or under
which such an assignment or Lien would cause a default to occur under such
lease; provided, however, that upon termination of such prohibition, such
interest shall immediately become Collateral without any action by Borrower or
Bank; or (e) Intellectual Property; provided, however, the Collateral shall
include all Accounts and all proceeds of Intellectual Property. If a judicial
authority (including a U.S. Bankruptcy Court) would hold that a security
interest in the underlying Intellectual Property is necessary to have a security
interest in such Accounts and such property that are proceeds of Intellectual
Property, then the Collateral shall automatically, and effective as of the
Effective Date, include the Intellectual Property to the extent necessary to
permit perfection of Bank’s security interest in such Accounts and such other
property of Borrower that are proceeds of the Intellectual Property.

 

Pursuant to the terms of Section 7.5 and except for Permitted Liens, Borrower
has agreed not to encumber any of its Intellectual Property without Bank’s prior
written consent.

 

 A-1 

 

 

EXHIBIT B

 

Loan Payment/Advance Request Form

 

Deadline for same day processing is Noon Pacific Time.

 

Fax To:  (858) 622-1424 Date: _____________________

 

LOAN PAYMENT:

LIPOCINE INC. and LIPOCINE OPERATING INC.

 

From Account #________________________________ To Account
#____________________________________ (Deposit Account #) (Loan Account #)

Principal $____________________________________ and/or Interest
$__________________________________ Authorized
Signature:_____________________________ Phone
Number:___________________________________ Print
Name/Title:__________________________________  

 

Loan Advance:

 

Complete Outgoing Wire Request section below if all or a portion of the funds
from this loan advance are for an outgoing wire.

 

From Account #_________________________________ To Account
#____________________________________ (Loan Account #) (Deposit Account #)

Amount of Advance $___________________________

 

All Borrower’s representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
request for an advance; provided, however, that such materiality qualifier shall
not be applicable to any representations and warranties that already are
qualified or modified by materiality in the text thereof; and provided, further
that those representations and warranties expressly referring to a specific date
shall be true, accurate and complete in all material respects as of such date:

 

Authorized Signature:  ___________________________ Phone Number:
__________________________ Print Name/Title:  ________________________________  

 

Outgoing Wire Request:

Complete only if all or a portion of funds from the loan advance above is to be
wired.

Deadline for same day processing is noon, P.S.T.

 

Beneficiary Name: _____________________________   Amount of Wire:
$________________________________ Beneficiary Bank:
______________________________   Account
Number:_________________________________

City and State:

 

Beneficiary Bank Transit (ABA) #: ___________   Beneficiary Bank Code (Swift,
Sort, Chip, etc.):     (For International Wire Only)

 

Intermediary Bank: _______________________   Transit (ABA) #:
_____________________________________

For Further Credit
to:______________________________________________________________________________

 

Special
Instruction:________________________________________________________________________________

 

By signing below, I (we) acknowledge and agree that my (our) funds transfer
request shall be processed in accordance with and subject to the terms and
conditions set forth in the agreements(s) covering funds transfer service(s),
which agreements(s) were previously received and executed by me (us).

 

Authorized Signature: ___________________________ 2nd Signature (if required):
___________________________ Print Name/Title: _______________________________
Print Name/Title: __________________________________ Telephone #:
_________________________________ Telephone
#:  ____________________________________

 

 B-1 

 

 

EXHIBIT C

 

BORROWING RESOLUTIONS

 

[see attached]

 

 C-1 

 

 

EXHIBIT D

 

COMPLIANCE CERTIFICATE

 

TO: SILICON VALLEY BANK   Date: ________________________ FROM: LIPOCINE INC. and
LIPOCINE OPERATING INC.    

 

The undersigned, solely in his or her capacity as an authorized officer of
LIPOCINE INC., on behalf of LIPOCINE INC. and LIPOCINE OPERATING INC.
(individually and collectively, jointly and severally, “Borrower”), certifies
that under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the “Agreement”), (1) Borrower is in complete compliance for
the period ending _______________ with all required covenants except as noted
below, (2) there are no Events of Default, (3) all representations and
warranties in the Agreement are true and correct in all material respects on
this date except as noted below; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed
all required tax returns and reports, and Borrower has timely paid all foreign,
federal, state and local taxes, assessments, deposits and contributions owed by
Borrower except as otherwise permitted pursuant to the terms of Section 5.8 of
the Agreement, and (5) no Liens have been levied or claims made against Borrower
or any of its Subsidiaries relating to unpaid employee payroll or benefits of
which Borrower has not previously provided written notification to Bank, except
as noted below. Attached are the required documents supporting the
certification. The undersigned, solely in his or her capacity as an authorized
officer of Borrower, certifies that these are prepared in accordance with GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The undersigned, solely in his or her capacity
as an authorized officer of Borrower, acknowledges that no borrowings may be
requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered. Capitalized terms
used but not otherwise defined herein shall have the meanings given them in the
Agreement.

 

Please indicate compliance status by circling Yes/No under “Complies” column.

 

Reporting Covenant   Required   Complies           Quarterly financial
statements with Compliance Certificate   Quarterly within 45 days (Q1 – Q3)  
Yes  No Annual financial statements (CPA Audited) + CC   FYE within 90 days    
Annual Board Approved Financial Projections   FYE within 30 days (and as
updated)   Yes  No

 

The following are the exceptions with respect to the certification above: (If no
exceptions exist, state “No exceptions to note.”)

 

 

 

LIPOCINE INC., on behalf of itself and all Borrowers   BANK USE ONLY         By:
    Received by:   Name:       authorized signer Title:     Date:              
    Verified:           authorized signer       Date:                  
Compliance Status:  Yes  No

 

 D-1