Exhibit 10.1

 

LOAN AND SECURITY AGREEMENT

 

This LOAN AND SECURITY AGREEMENT is entered into as of August 31, 2020 between
PINNACLE BANK, a California corporation (Lender), with an office located at
18181 Butterfield Blvd, Ste. 135, Morgan Hill, CA 95037 and POLAR POWER, INC., a
Delaware corporation (Borrower), with its chief executive office located at 249
E. Gardena Blvd., Gardena, CA 90248.

 

The parties agree as follows:

 

1. DEFINITIONS AND CONSTRUCTION

 

1.1 Terms. As used in this Agreement, the following terms shall have the
following meanings:

 

Accounts means, in addition to the definition of accounts in the Code, all
presently existing and hereafter arising accounts receivable, contract rights,
health-care-insurance receivables, and all other forms of obligations owing to
Borrower arising out of the sale, lease, license or assignment of goods or other
property, or the rendition of services by Borrower, whether or not earned by
performance, all credit insurance, guaranties, and other security therefor, as
well as all merchandise returned to or reclaimed by Borrower and Borrower’s
Books relating to any of the foregoing.

 

Advances means all loans and advances by Lender to or on account of the
Borrower, including those under this Agreement.

 

Agreement means collectively this Loan and Security Agreement, any concurrent or
subsequent rider to this Loan and Security Agreement, and any extensions,
supplements, amendments, addenda or modifications to or in connection with this
Loan and Security Agreement or any such rider.

 

Authorized Officer means any officer or other representative of Borrower
authorized in a writing delivered to Lender to transact business with Lender.

 

Borrower’s Books means all of Borrower’s books and records including all of the
following: ledgers; records indicating, summarizing, or evidencing Borrower’s
assets or liabilities, or the Collateral; all information relating to Borrower’s
business operations or financial condition; and all computer programs, disk or
tape files, printouts, runs, or other computer prepared information, and the
equipment containing such information.

 

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

 

Chattel Paper shall have the same meaning ascribed to such term in the Code.

 

Code means the California Uniform Commercial Code, as amended or revised from
time to time.

 

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Collateral means all assets of the Borrower, whether now owned or existing, or
hereafter acquired or arising, and wherever located, including, without
limitation, all of the following assets, properties and interests in property of
Borrower: all Accounts; all Equipment; all General Intangibles; all Chattel
Paper; all Inventory; all Negotiable Collateral; all Investment Property; all
Financial Assets; all Letter of Credit Rights; all Supporting Obligations; all
Commercial Tort Claims; all Deposit Accounts; all money or any assets of
Borrower which hereafter come into the possession, custody, or control of
Lender; all proceeds and products, whether tangible or intangible, of any of the
foregoing, including proceeds of insurance covering any or all of the foregoing,
and any and all tangible or intangible property resulting from the sale, lease,
license or other disposition of the foregoing, or any portion thereof or
interest therein, and all proceeds thereof, and any other assets of Borrower or
any Guarantor which may be subject to a security interest or lien in favor of
Lender. Notwithstanding anything to the contrary in this Agreement, Collateral
shall not include any assets of Borrower: (a) in which a third party has an
interest pursuant to any contract, lease or license covering any such assets of
Borrower, if, pursuant to the terms of such contract, lease or license, the
granting of a security interest or lien in such assets to Lender is prohibited
and such prohibition is not waived or the consent of such third party is not
obtained; provided, that the foregoing exclusion shall in no way be construed:
(i) to apply if any such prohibition (1) is not previously disclosed to Lender,
or (2) is unenforceable under Section 9-406, 9-407, or 9-408 of the Code or
other applicable law, (ii) to limit, impair or otherwise affect Lender’s
continuing security interests or liens upon any rights or interests of Borrower
in and to monies due or to become due under any such contract, lease or license
(including any Accounts), or (iii) to limit, impair or otherwise affect Lender’s
continuing security interests and liens upon any rights or interests of Borrower
in and to any proceeds from the sale, license, lease or other dispositions of
any such contract, lease or license or the assets covered thereby; (b) for which
the granting of a security interest or lien thereon is prohibited by applicable
law, provided that upon the cessation of any such prohibition, such property
shall automatically become part of the Collateral; (c) that constitute the
capital stock of a controlled foreign corporation (as defined in the IRC) in
excess of 65% of the voting power of all classes of capital stock of such
controlled foreign corporation entitled to vote, if the granting of a security
interest in such capital stock pursuant to this Agreement would result in
material adverse “deemed dividend” tax consequences to Borrower due to the
application of IRC § 956.

 

Commercial Tort Claim shall have the meaning ascribed to such term in the Code.

 

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

 

Deposit Account shall have the meaning ascribed to such term in the Code.

 

Documents shall have the meaning ascribed to such term in the Code.

 

Effective Tangible Equity (aka Effective Tangible Net Worth) means, as
determined by Lender as of a fiscal quarter ending period of Borrower,
Borrower’s Tangible Equity plus loans to Borrower from officers, stockholders or
employees that have been formally subordinated to the Obligations of Borrower to
Lender pursuant to a subordination agreement in form and content acceptable to
Lender. Tangible Equity means as of a fiscal quarter ending period of Borrower,
Borrower’s and its subsidiaries’ total assets (that have been consolidated on
Borrower’s financial statements including refundable income taxes and prepaid
expenses) excluding all intangible assets (i.e. goodwill, trademarks,
organizational expenses) less Borrower’s and its subsidiaries’ total liabilities
(that have been consolidated on Borrower’s financial statements).

 

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Eligible Accounts means those Accounts created by Borrower in the ordinary
course of business, which are and at all times shall continue to be acceptable
to Lender in all respects; provided, however, that standards of eligibility may
be fixed and revised from time to time by Lender in Lender’s Sole Discretion. In
determining such acceptability and standards of eligibility, Lender may, but
need not, rely on agings, reports and schedules of Accounts furnished by
Borrower, but reliance by Lender thereon from time to time shall not be deemed
to limit Lender’s right to revise standards of eligibility at any time as to
both Borrower’s present and future Accounts. In general, an Account shall not be
deemed eligible unless: (1) the Account debtor on such Account is and at all
times continues to be acceptable to Lender in its Sole Discretion, and (2) such
Account complies in all respects with the representations, covenants and
warranties hereinafter set forth. Except in Lender’s sole discretion, Eligible
Accounts shall not include any of the following: (a) Accounts which the Account
debtor has failed to pay within ninety (90) days of invoice date, except that
such time period, with respect to the Accounts of an Account Debtor, on a
case-by-case basis, may be extended to one hundred twenty (120) days in Lender’s
sole discretion; (b) all Accounts owed by any Account debtor that has failed to
pay twenty-five percent (25%) or more of its Accounts owed to Borrower within
ninety (90) days of invoice date, except that such time period, with respect to
the Accounts of an Account Debtor, on a case-by-case basis, may be extended to
one hundred twenty (120) days in Lender’s sole discretion; (c) Accounts with
respect to which goods are sold on a bill and hold basis or placed on
consignment or for a guaranteed sale, or which contain other terms by reason of
which payment by the Account debtor may be conditional; (d) Accounts with
respect to which the Account debtor is not a resident of the United States
unless the Account: (1) is supported by foreign credit insurance or a letter of
credit, in both instances satisfactory to and assigned to Lender, or (2) is
owing from an Account debtor that is a household known company as determined by
Lender; (e) Accounts with respect to which the Account debtor is the United
States or any department, agency or instrumentality of the United States, any
State of the United States or any city, town, municipality or division thereof
unless all filings have been made under the Federal Assignment of Claims Act or
comparable state or other statute; (f) Accounts with respect to which the
Account debtor is an officer, employee or agent of, or subsidiary of, related
to, affiliated with or has common shareholders, officers or directors with
Borrower; (g) Accounts with respect to which Borrower is or may become liable to
the Account debtor for goods sold or services rendered by the Account debtor to
Borrower; (h) Accounts with respect to an Account debtor whose total obligations
to Borrower exceed twenty-five percent (25%) of all Accounts (except that such
percentage shall be 50%, respectively, with respect to account debtors AT&T,
Verizon Wireless and T-Mobile and their affiliates, and such percentage may be
increased with respect to other account debtors, on a case-by-case basis, in
Lender’s sole discretion (such applicable percentage, the “Concentration
Percentage”)), to the extent such obligations of an Account Debtor exceed its
applicable Concentration Percentage; (i) Accounts with respect to which the
Account debtor disputes liability or makes any claim with respect thereto, or is
subject to any insolvency proceeding, or becomes insolvent, fails or goes out of
business; (j) the Account arises out of a contract or purchase order for which a
surety bond was issued on behalf of Borrower; (k) Accounts in which Lender does
not have a first priority and exclusive perfected security interest (excepting
from such exclusivity Permitted Liens holding a junior security interest or lien
in Accounts); (l) Accounts where the Account Debtor is in a jurisdiction for
which Borrower is required to file a notice of business activities or similar
report and Borrower has not filed such report within the time period required by
applicable law; (m) any Account as to which an invoice has not been issued to
the Account debtor; (n) any Account which represents a progress payment on a
contract which has not been fully completed by Borrower unless: (1) milestones
are verified as approved directly from the applicable Account debtor, (2) such
Account is otherwise approved by Lender in its sole discretion, and (3) Lender
has received all contracts, statements of work, change orders and similar
documentation giving rise to such Account; (o) Accounts with respect to which
Borrower has not performed all things required of Borrower by the terms of all
agreements or purchase orders giving rise to such Accounts, including pre-billed
Accounts; (p) Accounts arising from jobs or contracts with respect to which
Borrower’s entitlement to payment on such Account is subject to any retention,
holdback or other withholding, whether related to any mechanics’ or
materialmen’s liens or otherwise; (q) Accounts deemed ineligible for Advances by
Lender in its Sole Discretion including, without limitation, Accounts for which
a proof of delivery has not been provided to or made available to Lender or
Accounts that are not verified as valid by the applicable Account debtors
following Lender’s request for verification; (r) Accounts arising from sales or
services rendered to an individual consumer for personal, family or household
purposes; or (s) Accounts requiring an approval from the Account debtor prior to
payment and where such approval has not been provided.

 

Eligible Inventory means Inventory consisting of first quality finished goods
held for sale in the ordinary course of Borrower’s business and raw material
engines for such finished goods which are located at Borrower’s premises and
acceptable to Lender in all respects; provided, however, that general criteria
for Eligible Inventory may be established and revised from time to time by
Lender in Lender’s Sole Discretion. In determining such acceptability and
standards of eligibility, Lender may, but need not, rely on reports and
schedules of Inventory furnished to Lender by Borrower, but reliance thereon by
Lender from time to time shall not be deemed to limit Lender’s right to revise
standards of eligibility at any time. In general, except in Lender’s sole
discretion, Eligible Inventory shall not include: non-engine raw materials (but,
for purposes of clarification, shall include raw material engines), work in
process, components which are not part of finished goods, spare parts, packaging
and shipping materials, materials used or consumed in Borrower’s business, goods
returned to, repossessed by, or stopped in transit by Borrower, Inventory which
is obsolete or slow moving (with Inventory not to be deemed slow moving until
eighteen (18) months from Borrower’s acquisition of same, with such 18 months’
time period to decrease to twelve (12) months’ on the one (1) year anniversary
of the commencement of the Initial Term unless such 1 year period is extended by
Lender in its sole discretion), Inventory subject to a security interest or lien
in favor of any third party, bill and hold goods, Inventory which is not subject
to a perfected security interest in favor of Lender, returned and/or defective
goods, “seconds” and Inventory purchased on consignment, Inventory which
contains any labels, trademarks, trade names or other identifying
characteristics which are the properties of third parties unless the use of same
by Borrower is under a valid license, royalty or similar agreement with the
owner thereof, in form and substance satisfactory to Lender, and which remains
in full force and effect, and has not been terminated, and such owner thereof
has issued in favor of Lender an agreement, in form and substance satisfactory
to Lender, allowing Lender to dispose of said items of Inventory upon the
occurrence of an Event of Default, and Inventory located at a leased premises,
public or private warehouse or with a bailee or other third party unless Lender
has received a waiver agreement, in form and substance acceptable to Lender,
from such landlord, mortgagee, warehouseman, bailee or other third party.
Eligible Inventory shall for the purposes of this Agreement be valued at the
lower of cost or wholesale market value (the Eligible Inventory Value).

 

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Eligible Inventory Value shall have the meaning ascribed to such term in the
definition of Eligible Inventory.

 

Equipment means in addition to the definition of equipment in the Code, all of
Borrower’s present and hereafter acquired equipment, machinery, machine tools,
motors, furniture, furnishings, fixtures, motor vehicles, rolling stock,
processors, tools, pans, dies, jigs, goods (other than consumer goods or farm
products) and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located.

 

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

 

ERISA Affiliate means each trade or business (whether or not incorporated and
whether or not foreign) which is or may hereafter become a member of a group of
which Borrower is a member and which is treated as a single employer under ERISA
Section 4001(b)(1), or IRC Section 414.

 

Event of Default means the events specified in Section 8, below.

 

Financial Assets shall have the meaning ascribed to such term in the Code.

 

General Intangibles means all of Borrower’s present and future general
intangibles and other personal property (including choses or things in action,
goodwill, patents, trade names; trademarks, service marks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, infringement claims, computer programs,
computer discs, computer tapes, Borrower’s Books, literature, reports, catalogs,
deposit accounts, insurance premium rebates, tax refunds, and tax refund claims)
other than goods and Accounts.

 

Guarantor means each person or entity which guarantees the Obligations or issues
a validity guaranty relating to the Collateral or pledges any assets to Lender
as additional security for the Obligations. As of the date of this Agreement,
this Agreement does not include a Guarantor.

 

Insolvency Proceeding means any proceeding commenced by or against any person or
entity under any provision of the federal Bankruptcy Code, as amended, or under
any other state or federal insolvency law, including assignments for the benefit
of creditors, formal or informal moratoria, compositions, or extensions
generally with its creditors.

 

Instruments shall have the meaning ascribed to such term in the Code.

 

Inventory means, in addition to the definition of inventory in the Code, all
present and future inventory in which Borrower has any interest, including goods
held for sale or lease or to be furnished under a contract of service,
Borrower’s present and future raw materials, work in process, finished goods,
tangible property, stock in trade, wares, and materials used in or consumed in
Borrower’s business, goods which have been returned to, repossessed by, or
stopped in transit by Borrower, packing and shipping materials, wherever
located, any documents of title representing any of the above, and Borrower’s
Books relating to any of the foregoing.

 

Investment Property shall have the meaning ascribed to such term in the Code.

 

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

 

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Lender Expenses means all of the following without limitation: (a) costs and
expenses paid or incurred by Lender in connection with the Loan Documents or the
Obligations; (b) costs and expenses (whether taxes, assessments, insurance
premiums or otherwise) required to be paid by Borrower under any of the Loan
Documents which are paid or advanced by Lender; (c) filing, recording,
publication, appraisal and search fees paid or incurred by Lender in connection
with the Loan Documents or the Obligations; (d) costs and expenses incurred by
Lender in administering Borrower’s loan account and lending relationship with
Borrower or in connection with the disbursement or collection of funds
(including without limitation (1) twenty-five dollars ($25.00) for each
cashier’s check or wire transfer made by Lender to parties other than Borrower,
(2) twenty-five dollars ($25.00) for each overnight delivery made by Lender to,
Borrower, anyone designated by Borrower, or any third party, (3) Seventy-Five
Dollars ($75.00) per hour (with a 2 hour minimum) for photocopy charges, for
reports and items previously prepared and delivered by Lender and/or for reports
and items not regularly prepared and provided by Lender to Borrower, (4) One
Hundred Dollars ($100.00) for each returned or dishonored check received by
Lender from Borrower, any Account debtor or any third party, provided, however,
that Lender reserves the right to change the amount of the foregoing specified
charges in subsections (1)-(4) with prior written notice to Borrower, and (5)
Lender’s standard charges imposed in connection with Borrower’s acceptance of
merchant credit cards in payment of amounts owed by Account debtors); (e) a
lockbox fee of N/A dollars ($N/A) per month or any portion thereof; (f) a web
access fee of N/A dollars ($N/A) per month or any portion thereof; (g) a mail
forwarding fee, if mail forwarding is required, of five hundred dollars
($500.00) per month for a three (3) month period following the termination of
this Agreement and the repayment of the Obligations; (h) costs and expenses
incurred by Lender to correct any default or enforce any provision of the Loan
Documents, or in gaining possession of, maintaining, handling, preserving,
storing, shipping, selling, preparing for sale, or advertising to sell the
Collateral, or any portion thereof, irrespective of whether a sale is
consummated; (i) costs and expenses incurred by Lender in enforcing or defending
the Loan Documents, including, but not limited to, costs and expenses incurred
in connection with any proceeding, suit, enforcement of judgment, or appeal; (j)
Lender’s reasonable attorneys’ fees and expenses, including allocated fees of
in-house counsel, incurred in advising, structuring, drafting, reviewing,
administering, amending, terminating, enforcing, defending, or otherwise
representing Lender (including, without limitation, in connection with
responding as a third party to deposition, subpoena and like requests) in
connection with the Loan Documents or the Obligations; and (k) a loan
documentation fee of Five Hundred Dollars ($500.00) in connection with Lender’s
in-house documentation of the original Loan Documents prior to the initial
Advance hereunder, together with all fees and costs of Lender’s outside counsel
relating to, documenting and negotiating such original Loan Documents, and the
taking of other actions for Lender’s benefit prior to or contemporaneously with
the initial Advance hereunder.

 

Letter of Credit Rights shall have the meaning ascribed to such term in the
Code.

 

Loan Documents means, collectively, this Agreement, any Note(s), any security
agreements, pledge agreements, mortgages, deeds of trust or other encumbrances
or agreements which secure the Obligations, and any other agreement entered into
between Borrower and Lender or by Borrower or a Guarantor in favor of Lender
relating to or in connection with this Agreement or the Obligations, as each of
same may be amended, modified, renewed, extended or substituted from time to
time.

 

Material Adverse Change means a material adverse change in (any one or more of
the following): (a) the assets, operations, business or financial condition, of
Borrower and its subsidiaries taken as a whole; (b) Guarantor’s assets,
operations, business or financial condition; (c) Borrower’s ability to pay and
perform the Obligations when due; (d) the Collateral in which Lender holds a
security interest; (e) the perfection or priority of any such security interest
in the Collateral; or (f) Lender’s rights and remedies under this Agreement or
the Loan Documents.

 

Multiemployer Plan means a multiemployer plan as defined in ERISA Sections 3(37)
or 4001(a)(3) or IRC Section 414(f).

 

Negotiable Collateral means all of Borrower’s present and future letters of
credit, notes, drafts, Instruments, Documents, leases, and Chattel Paper.

 

Net Face Amount means with respect to an Account, the gross face amount of such
Account less (at Lender’s option) all trade discounts, sales, excise and similar
taxes, or other deductions to which the associated Account debtor is entitled.

 

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Note means any promissory note made by Borrower to the order of Lender
concurrently herewith or at any time hereafter.

 

Obligations means all loans, Advances, debts, liabilities (including all
interest and amounts charged to the Obligations pursuant to any agreement
authorizing Lender to charge the Obligations), obligations, lease payments,
guaranties, covenants, and duties owing by Borrower to Lender of any kind and
description (whether pursuant to or evidenced by the Loan Documents or by any
other agreement between Lender and Borrower, and irrespective of whether for the
payment of money), whether made or incurred prior to, on, or after the
Termination Date, direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising, including any debt, liability or
obligation owing from Borrower to others which Lender may obtain by assignment
or otherwise, and all interest thereon and all Lender Expenses.

 

Permitted Indebtedness means (a) Borrower’s indebtedness evidenced by this
Agreement or the Loan Documents; (b) amounts owing by Borrower under licenses in
the ordinary course of Borrower’s business; (c) subordinated indebtedness owing
by Borrower that is subject to a Subordination Agreement in favor of, and in
form and content satisfactory to, Lender; (c) indebtedness incurred by Borrower
in connection with capital expenditures permitted by Section 7.10; (d)
indebtedness owing by Borrower to trade creditors in the ordinary course of
Borrower’s business; (e) indebtedness secured by Permitted Liens; (f) Borrower’s
indebtedness set forth in the latest financials of Borrower submitted to Lender
on or prior to the date of this Agreement; (g) any SBA Payroll Protection Plan
loan under the CARES Act obtained by Borrower so long as (1) such loan is
unsecured, (2) does not result in an Event of Default, (3) Borrower uses the
proceeds thereof for purposes that qualify the loan for forgiveness, (4)
Borrower promptly applies for loan forgiveness and provides weekly status
updates for same on Friday of each week, (5) Borrower uses its best efforts to
cause the lender to enter into a Subordination Agreement in favor of, and in
form and content acceptable to, Lender in the event that all of the indebtedness
thereunder is not forgiven prior to the commencement of payments becoming due
thereunder, and (6) in the event that all of such loan is not forgiven, Borrower
hereby irrevocably authorizes Lender to institute a reserve against the Accounts
Borrowing Base and Inventory Borrowing Base in anticipation of payments coming
due under such loan, and with Borrower irrevocably authorizing Lender to make
any such payments having come due, regardless of whether an Overadvance will
result, but with Lender having no obligation to make any such payments; (h) any
loan provided to Borrower under any other federal or state disaster or economic
relief program so long as (1) such loan is unsecured, (2) does not result in an
Event of Default, (3) Borrower uses the proceeds thereof for purposes that
qualify the loan for forgiveness, (4) Borrower promptly applies for loan
forgiveness and provides weekly status updates for same on Friday of each week,
(5) Borrower uses its best efforts to cause the lender to enter into a
Subordination Agreement in favor of, and in form and content acceptable to,
Lender in the event that all of the indebtedness thereunder is not forgiven
prior to the commencement of payments becoming due thereunder, and (6) in the
event that all of such loan is not forgiven, Borrower hereby irrevocably
authorizes Lender to institute a reserve against the Accounts Borrowing Base and
Inventory Borrowing Base in anticipation of payments coming due under such loan,
and with Borrower irrevocably authorizing Lender to make any such payments
having come due, regardless of whether an Overadvance will result, but with
Lender having no obligation to make any such payments; and (i) indebtedness
incurred by Borrower in connection with borrowed money permitted by Section 7.1.

 

Permitted Investments means (a) investments existing as of the date of this
Agreement; (b) loans, advances, extensions of credit to, or investments in,
Borrower’s subsidiaries as permitted by Section 7.9; (c) extensions of credit
consisting of accounts receivable arising from the sale or lease of goods or
services in the ordinary course of business to non-affiliated parties; (d)
investments in cash equivalents; (e) extensions of trade credit in the ordinary
course of business consistent with past practices; (f) loans, advances and
extensions of credit to any officer, director, executive employee or shareholder
of Borrower as permitted by Section 7.9; and (g) investments approved by Lender
in advance in writing.

 

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Permitted Liens means: (a) liens for taxes, assessments, or other governmental
charges not yet delinquent, or being diligently contested in good faith by
appropriate proceedings (and with respect to which, if required by Lender,
Lender has established a reserve under the Accounts Borrowing Base and/or the
Inventory Borrowing Base), or for which a bond has been posted in the amount of
such contested taxes, assessments or charges; (b) liens in connection with
judgments that do not constitute an Event of Default under Section 8 of this
Agreement; (c) easements, zoning, restrictive covenants and other real estate
related interests that to not materially impair the use, value or operations of
the property subject thereto; (d) customary bankers’ liens (burdening only
deposit accounts or funds on deposit with a depository institution), and liens
imposed by law such as mechanics’, materialmens’, warehousemans’ landlords’ and
other like liens securing obligations which are not yet due; (e) purchase money
security interests with respect to assets being acquired by Borrower so long as
such security interests do not cover any assets of Borrower other than those
being acquired, and so long as such acquisitions are permitted by this
Agreement; and (f) precautionary Uniform Commercial Code financing statement
filings with respect to leases so long as such filings do not cover any assets
of Borrower other than those being leased, and so long as such leases are
permitted by this Agreement.

 

Plan means any plan described in ERISA Section 3(2) maintained for employees of
Borrower or any ERISA Affiliate, other than a Multiemployer Plan.

 

Prime Rate means the variable rate of interest, per annum, from time to time
published in the Wall Street Journal (the Journal) as the “prime rate.” In the
event the Journal publishes a range of rates as the “prime rate”, Lender’s
“Prime Rate” shall be determined by reference to the highest number in the
range. In the event that the Prime Rate announced by Lender is, from time to
time hereafter, changed, adjustment in the rate of interest chargeable on
Borrower’s Obligations under this Agreement shall be made on the effective date
of the change in the Prime Rate. The rate of interest, as adjusted, shall apply
until the Prime Rate is adjusted again.

 

Revolving Credit Facility means the revolving credit facility provided for in
Section 2.1 hereof.

 

Sole Discretion means the exercise by Lender of its good faith business
discretion (from the perspective of a secured asset-based lender) in light of
all the facts and circumstances existing with respect to the issue then under
consideration by Lender.

 

Subordinating Creditor means any person or entity to whom Borrower is indebted
on a secured or unsecured basis, and which person or entity is required to sign
a Subordination Agreement in favor of Lender.

 

Subordination Agreement means a subordination or intercreditor agreement in form
and substance acceptable to Lender whereby Subordinating Creditor (if any)
subordinates in favor of Lender: (a) obligations owed to it by Borrower in favor
of the Obligations owing by Borrower to Lender; and/or (b) security interests
and liens granted to it by Borrower in favor of security interests and liens
granted by Borrower to Lender, as more fully set forth in such subordination or
intercreditor agreement.

 

Supporting Obligation shall have the same meaning ascribed to such term in the
Code.

 

Term means the period from the date of the initial Advance hereunder through and
including the later of (a) the Termination Date and (b) the payment and
performance in full of the Obligations.

 

Termination Date means (a) August 30, 2022 (the period through such date the
Initial Term), unless such date is extended pursuant to Section 3.1 hereof, and
if so extended on one or more occasions the last date of the last such
extension, or (b) if earlier terminated by Lender pursuant to Sections 3.1 or
9.1 hereof, the date of such termination.

 

1.2 Construction. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular and to the singular
include the plural. The words hereof, herein, hereby, hereunder, and similar
terms in this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement. Section, subsection, clause and exhibit
references are to this Agreement unless otherwise specified. Words importing a
particular gender mean and include every other gender. Paragraphs and paragraph
numbers have been set forth herein for convenience only; unless the contrary is
compelled by the context, everything contained in each paragraph applies equally
to all paragraphs herein. “Includes” and “including” are not limiting. “Or” is
not exclusive. “All” includes “any” and “any” includes “all”. The term “security
interest” has the inclusive meaning of a “lien”.

 

 7 

 

 

1.3 Accounting Terms. All accounting terms not specifically defined herein shall
be construed in accordance with generally accepted accounting principles (GAAP)
as in effect from time to time. When used herein, the term financial statements
shall include the notes and schedules thereto.

 

1.4 Exhibits. All of the exhibits, addenda or riders attached to this Agreement
shall be deemed incorporated herein by reference.

 

1.5 Code. Any terms used in this Agreement which are defined in the Code shall
be construed and defined as set forth in the Code, unless otherwise defined
herein.

 

2. ADVANCES AND TERMS OF PAYMENT

 

2.1 Revolving Advances; Advance Limit. Upon the request of Borrower, made at any
time from and after the date hereof until the Termination Date, and so long as
no Event of Default has occurred and is continuing, Lender may, in its Sole
Discretion, make Advances in an amount up to (a) eighty-five percent (85%) of
the aggregate Net Face Amount of Eligible Accounts (the foregoing, the Accounts
Borrowing Base), plus (b) the least of (1) thirty-five percent (35%) (the
Inventory Advance Rate)1 of the aggregate Eligible Inventory Value of Eligible
Inventory or (2) Two Million Five Hundred Thousand Dollars ($2,500,000.00) (the
Inventory Advances Limit)2 (the foregoing, as applicable, Inventory Borrowing
Base); provided, however, that in no event shall the aggregate amount of the
outstanding Advances under the Revolving Credit Facility be greater than, at any
time, the amount of Four Million Dollars ($4,000,000.00) (said dollar limit the
Advance Limit). Borrower shall draw all available Advances under the Accounts
Borrowing Base prior to drawing any available Advances under the Inventory
Borrowing Base. Termination of the revolving line under the Accounts Borrowing
Base shall result in a concurrent termination of the revolving line under the
Inventory Borrowing Base. Lender may create reserves against amounts that would
be available for borrowing pursuant to the foregoing or reduce its advance rates
based upon Eligible Accounts and Eligible Inventory without declaring an Event
of Default if it determines, in its good faith credit judgment that such
reserves are necessary, including, without limitation: (i) to protect Lender’s
interest in Collateral; (ii) to protect Lender against possible non-payment of
Accounts for any reason by one or more Account debtors; (iii) in the event the
dilution with respect to the Accounts for any period (based on the ratio of (1)
the aggregate amount of reductions in Accounts other than as a result of
payments in cash to (2) the aggregate amount of total sales) has increased in
any material respect or may be reasonably anticipated to increase in any
material respect above historical levels; (iv) in the event the general
creditworthiness of one or more Account debtors has declined; (v) to protect
Lender against possible diminution of the value of any Collateral; (vi) to
protect Lender against possible non-payment of any of the Obligations; (vii) for
any taxes; (viii) in respect of any state of facts that could constitute an
Event of Default; (ix) in the event the number of days of turnover of Inventory
for any period has increased in any material respect; (x) in the event the
liquidation value of Eligible Inventory, or any category thereof, has decreased;
(xi) in the event cost or count variances exist or are anticipated to exist with
respect to Inventory; or (xii) in the event the nature or quality of Inventory
has deteriorated. Borrower acknowledges it may request that Lender enter into an
indemnification agreement in favor of Citibank, N.A. and agrees that any sums
paid by Lender to Citibank, N.A. thereunder shall be deemed to be Advances under
this Section 2.1.

 

 

1. At such time that the aggregate amount of Eligible Accounts exceeds: (a) One
Million and 00/100 Dollars ($1,000,000.00), the Inventory Advance Rate shall
increase to forty percent (40%); and (b) One Million Five Hundred Thousand and
00/100 Dollars ($1,500,000.00), the Inventory Advance Rate shall increase to
forty-five percent (45%).

 

2. In the event that Borrower’s Effective Tangible Net Worth diminishes to: (a)
Ten Million and 00/100 Dollars ($10,000,000.00), the Inventory Advances Limit
shall decrease to Two Million and 00/100 Dollars ($2,000,000.00); (b) Nine
Million and 00/100 Dollars ($9,000,000.00), the Inventory Advances Limit shall
decrease to One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00); (c) Eight Million and 00/100 Dollars ($8,000,000.00), the
Inventory Advances Limit shall decrease to One Million and 00/100 Dollars
($1,000,000.00); (d) Seven Million and 00/100 Dollars ($7,000,000.00), the
Inventory Advances Limit shall decrease to Five Hundred Thousand and 00/100
Dollars ($500,000.00); and (e) Six Million and 00/100 Dollars ($6,000,000.00),
the Inventory Advances Limit Sublimit shall reduce to Zero and 00/100 Dollars
($0). Any such decrease in the Inventory Advances Limit shall take effect on the
first day of the month following Borrower’s delivery of its quarterly financial
statements as required by Section 6.4.

 

 8 

 

 

2.2 Overadvances; Special Credit Accommodations.

 

A. All Advances shall be added to and be deemed part of the Obligations when
made. If, at any time and for any reason, without Lender’s prior written
consent, the aggregate amount of the outstanding Advances under the Revolving
Credit Facility exceed the dollar or percentage limitations contained in Section
2.1 (an Overadvance), then an Event of Default shall occur as a result thereof
and Borrower shall, without demand by Lender, immediately pay to Lender, in
cash, the amount of such Overadvance. Without waiving the Event of Default
resulting from any such Overadvance and without affecting Borrower’s obligation
to immediately repay to Lender the amount of any such Overadvance, Borrower
shall pay Lender a fee (the Overadvance Fee) in an amount equal to five percent
(5.0%) of the amount of any such Overadvance, but not less than $500 per
occurrence of any such Overadvance, plus interest on the Overadvance amount
applicable to any such Overadvance at the Default Rate set forth below so long
as any such Overadvance is outstanding.

 

B. In the event Lender, in its sole and absolute discretion, from time to time:
(a) consents to an Overadvance; (b) provides an Advance to Borrower that
involves a variance from the terms or conditions of the Loan Agreement
(including, without limitation, the making of an Advance: (1) against Accounts
that are ineligible as a result of the cross-aging or concentration limitations
set forth in subsections (b) or (h), respectively, of the definition of Eligible
Accounts, or (2) after the then effective Termination Date); or (c) provides an
Advance to Borrower that involves a variance from Lender’s standard customs,
practices or procedures (the foregoing, each, a Special Credit Accommodation),
then Borrower, upon demand by Lender, shall immediately pay to Lender, in cash,
the amount of such Special Credit Accommodation. Each Special Credit
Accommodation shall be evidenced by a writing, in form and substance
satisfactory to Lender, delivered to Borrower prior to such Special Credit
Accommodation, which writing may take the form of an e-mail correspondence.
Without affecting Borrower’s obligation to repay to Lender upon demand the
amount of any Special Credit Accommodation, Borrower shall pay Lender a fee (the
Special Credit Accommodation Fee) in an amount equal to five percent (5.0%) of
the amount of any such Special Credit Accommodation, but not less than $500 per
occurrence of any such Special Credit Accommodation, plus interest on the
Special Credit Accommodation amount applicable to any such Special Credit
Accommodation at the Default Rate set forth below so long as any such Special
Credit Accommodation is outstanding.

 

2.3 Authorization to Make Advances. Lender is hereby authorized to make the
Advances based upon telephonic or other instructions received from anyone
purporting to be an Authorized Officer, or, at the discretion of Lender, if such
Advances are necessary to satisfy any Obligations then due. All requests for
Advances shall specify the date on which such Advance is to be made (which day
shall be a Business Day) and the amount of such Advance. Requests received after
10:30 a.m. Pacific time on any day shall be deemed to have been made as of the
opening of business on the immediately following Business Day. All Advances made
under this Agreement shall be conclusively presumed to have been made to, at the
request of, and for the benefit of Borrower when deposited to the credit of
Borrower or otherwise disbursed in accordance with the instructions of Borrower
or in accordance with the terms and conditions of this Agreement. Unless
otherwise requested by Borrower, all Advances shall be made by a wire transfer
to the deposit account of Borrower designated on Schedule 2.3 annexed hereto, or
such other account as Borrower shall notify Lender in writing. Borrower shall
pay to Lender a funds transfer fee of $25.00 for each Advance. Said fees shall
be payable on the first day of each month of the Term for all Advances made
during the preceding month.

 

 9 

 

 

2.4 Interest.

 

A. Except where specified to the contrary in the Loan Documents, interest shall
accrue on the Daily Balance at the per annum rate of one and one-quarter
percentage points (1.25%) above the Prime Rate (such sum, the Standard Interest
Rate), but in no event shall the Standard Interest Rate be less than three and
three-quarters percentage points (3.75%) per annum, except that interest on that
portion of the Daily Balance consisting of Advances against Inventory shall
accrue at the per annum rate of two and one-quarter percentage points (2.25%)
above the Prime Rate (such sum, the Inventory Interest Rate), but in no event
shall the Inventory Interest Rate be less than four and three-quarters
percentage points (4.75%) per annum (respectively, as applicable, hereinafter,
the Interest Rate). Without prejudicing or waiving Lender’s right to assess and
impose interest at the Default Rate (as defined below) as a result of the
occurrence of any of the following events, and without waiving Lender’s ability
to declare an Event of Default at any time as a result thereof, if Borrower
fails to perform any covenant, term or provision of this Agreement or any of the
Loan Documents (including, without limitation, the timely delivery of any
financial statements, reports, documents, or certificates required by this
Agreement), then (at Lender’s discretion and with respect to any such event)
interest shall accrue on the Daily Balance at the per annum rate of six
percentage points (6.0%) above the Interest Rate or above such other interest
rate applicable to such portion of the Daily Balance (the Alternative Interest
Rate), with Borrower to be granted a ten (10) business day cure period, from the
date of Lender’s notice of its intent to invoke the Alternative Interest Rate,
in which to perform such failed covenant, term or provision prior to the
Alternative Interest Rate taking effect, and if not cured, the Alternative
Interest Rate shall take effect upon the expiration of such cure period and
shall remain in effect until such failed covenant, term or provision is
performed. The Daily Balance shall, at the option of Lender, from and after the
occurrence of an Event of Default, and without constituting a waiver of any such
Event of Default, and if the Obligations are not paid in full by the Termination
Date, and without waiving the maturity of the Obligations on the Termination
Date, bear maximum interest at the per annum rate of ten percentage points
(10.0%) above the Interest Rate or above such other interest rate applicable to
such portion of the Daily Balance (the Default Rate). All interest payable under
the Loan Documents shall be computed on the basis of a three hundred sixty (360)
day year for the actual number of days elapsed on the Daily Balance. Interest as
provided for herein shall continue to accrue until the Obligations are paid in
full.

 

B. The interest rate payable by Borrower under the terms of this Agreement shall
be adjusted in accordance with any change in the Prime Rate from time to time on
the date of any such change. All interest payable by Borrower shall be due and
payable on the first day of each calendar month during the Term. Lender may, at
its option, add such interest and all Lender Expenses to the Obligations, and
such amount shall thereafter accrue interest at the rate then applicable under
this Agreement. Notwithstanding anything to the contrary contained in the Loan
Documents, the minimum interest payable by Borrower on the Advances shall be Two
Thousand Five Hundred Dollars ($2,500.00) per month.

 

C. In no event shall interest on the Obligations exceed the highest lawful rate
in effect from time to time. It is not the intention of the parties hereto to
make an agreement which violates any applicable state or federal usury laws. In
no event shall Borrower pay or Lender accept or charge any interest which,
together with any other charges upon the principal or any portion thereof,
exceeds the maximum lawful rate of interest allowable under any applicable state
or federal usury laws. Should any provision of this Agreement or any existing or
future Notes or Loan Documents between the parties be construed to require the
payment of interest or any other fees or charges which could be construed as
interest which, together with any other charges upon the principal or any
portion thereof and any other fees or charges which could be construed as
interest, exceeds the maximum lawful rate of interest, then any such excess
shall be applied to the remaining principal balance of the Obligations, if any,
and the remainder refunded to Borrower.

 

D. Notwithstanding the foregoing, for purposes of this Agreement, it is the
intention of Borrower and Lender that “interest” shall mean, and be limited to,
any payment to Lender which compensates it for extending credit to Borrower, for
making available to Borrower a revolving credit facility during the term of this
Agreement and for any default or breach by Borrower of a condition upon which
credit was extended. Borrower and Lender agree that, for the sole purpose of
calculating the “interest” paid by Borrower to Lender, it is the intention of
Borrower and Lender that interest shall mean and include, and be expressly
limited to, any interest accrued on the aggregate outstanding balance of the
Obligations during the term hereof pursuant to Sections 2.4(A) and 2.4(B); and
any Overadvance Fee, Special Credit Accommodation Fee, Facility Fee, and late
payment fees charged to Borrower during the term hereof. Borrower and Lender
further agree that it is their intention that the following fees shall not
constitute “interest”: any Administration Fees, Unused Line Fees, Early
Termination Fees, any Field Examination Fees, Late Reporting Fees, Misdirected
Payment Fees, any attorney fees incurred by Lender, any premiums or commissions
attributable to insurance guaranteeing repayment, finders’ fees, credit report
fees, appraisal fees, fees included in the Lender Expenses or fees for document
preparation or notarization. To the extent, however, that California law
excludes from the calculation of “interest” any fees defined herein as interest,
or includes as interest any fees or other sums which are intended not to
constitute interest California law shall supersede and prevail and all such
interest shall be subject to paragraph 2.4(C) above.

 

 10 

 

 

2.5 Collection of Accounts; Misdirected Payment Fee. Lender or a Lender designee
may, at any time, with or without notice to Borrower, notify customers or
Account debtors or other obligors that the Accounts or other Collateral have
been assigned to Lender, and that Lender has a security interest in them and
collect the Accounts and other Collateral directly, and add the collection costs
and expenses to the Obligations, but, unless and until Lender does so or gives
Borrower other written instructions, Borrower shall notify all Account debtors
and other obligors to remit payments on Accounts and other Collateral to a
lockbox and/or blocked deposit account to be designated by Lender. All such
payments remitted to the lockbox and/or blocked deposit account shall be
credited to a deposit account of Lender and into which account remittances from
account debtors or obligors of other clients of Lender may be credited. If
notwithstanding said notice Borrower obtains payment on any Account or other
Collateral, Borrower shall receive all payments on Accounts and other Collateral
and other proceeds, including cash, of Collateral in trust for Lender and
immediately deliver said payments to Lender’s designated bank account, in their
original form as received from the Account debtor or other obligor, together
with any necessary endorsements. In the event that: (a) any payment on any
Account is inadvertently collected or received by Borrower through no fault or
interference by Borrower and not delivered in kind to Lender within three (3)
business days of receipt thereof, (b) Borrower interferes with, hinders, or
delays any payment with respect to any Account, or (c) any payment on any
Account is collected or received directly by Borrower from an Account debtor
(unless permitted by this Agreement) as a result of Borrower’s intentional
interference with direct payment thereof to the Lender (each of the foregoing, a
Misdirected Payment); then Borrower shall pay to Lender a misdirected payment
fee for each Misdirected Payment in an amount equal to the greater of (1) ten
percent (10%) of the amount of such Misdirected Payment, or (2) Five Hundred
Dollars ($500.00) (the Misdirected Payment Fee). Lender’s receipt of such
Misdirected Payment Fee in connection with a Misdirected Payment shall not
constitute a waiver of any Event of Default occasioned by such Misdirected
Payment.

 

2.6 Crediting Payments. The receipt of any item of payment by Lender shall, for
the sole purpose of determining availability under the revolving credit facility
provided for herein, subject to final clearance of such item, be provisionally
applied to reduce Obligations on the date of receipt of such item by Lender
(and, in the event that the Obligations are reduced to Zero and 00/100 Dollars
($0) after receipt of any payment, any credit balance in Borrower’s loan account
consisting of cleared funds, in the absence of an Event of Default, is to be
made available to Borrower upon request), but the receipt of such an item of
payment shall for all other purposes in determining the Daily Balance, including
without limitation for the purpose of calculation of interest on the Obligations
and the calculation of the Administration Fee and Unused Line Fee, not be deemed
to have been paid to Lender until three (3) Business Days after the date of
Lender’s actual receipt of such item of payment. Notwithstanding anything to the
contrary contained herein, payments received by Lender after 11:00 a.m. Pacific
time shall be deemed to have been received by Lender as of the opening of
business on the immediately following Business Day, provided, that Lender in its
sole discretion may, from time to time, make exceptions and apply payments
received after such deadline on the same Business Day but with such exceptions
not to establish a course of conduct or course of dealing.

 

2.7 Facility Fee. In consideration of Lender’s entering into this Agreement,
Borrower shall pay Lender a yearly facility fee (the Facility Fee) in an amount
equal to one and one-eighth percent (1.125%) of the sum of the Advance Limit
plus the original principal balance of any term loans and Advances other than
under the Revolving Credit Facility, for each yearly period commencing from the
execution hereof through the initial Termination Date of August 30, 2022, with
all such amounts being fully earned upon the execution hereof and payable in
advance of each year, unless earlier payable pursuant to the terms hereof. In
the event the Termination Date is thereafter extended, on one or more occasions,
beyond such initial Termination Date, Borrower shall pay Lender a Facility Fee
for each yearly period of any extension in an amount equal to one and one-eighth
percent (1.125%) of the sum of Advance Limit (in effect at the time of the
extension) plus the then outstanding principal balance of any term loans and
Advances other than under the Revolving Credit Facility, with all such amounts
being fully earned upon the execution of any extension agreement, and payable in
advance of each year, unless earlier payable pursuant to the terms hereof.

 

 11 

 

 

2.8 Unused Line Fee. Borrower shall pay Lender a fee (the Unused Line Fee) in an
amount equal to N/A percent (N/A%) of the daily average difference between the
Advance Limit and the Daily Balance during each month payable on or before the
first (1st) day of each calendar month for the preceding calendar month, during
the Term, including the Renewal Term, or so long as the Obligations are
outstanding. As of the date of this Agreement, there is no Unused Line Fee in
this Agreement.

 

2.9 Administration Fee. Borrower shall pay Lender a fee (the Administration
Fee), also referred to as the Collateral Monitoring Fee, in an amount equal to
one-quarter of one percent (0.25%) of the daily average outstanding balance of
the Advances during each month payable on or before the first (1st) day of each
calendar month in respect of Lender’s services for the preceding calendar month,
during the Term, including each Renewal Term, or so long as the Obligations are
outstanding.

 

2.10 Field Examination Fee; Appraisal Fees. Borrower shall pay Lender a fee (the
Field Examination Fee) in an amount equal to One Thousand Dollars ($1,000.00)
per day per examiner, plus out-of-pocket expenses for each examination of
Borrower’s Books or the other Collateral performed by Lender or its designee.
There shall be no more than two (2) of such examinations per twelve (12) month
period unless an Event of Default has occurred. While any: (a) funds are
available to Borrower for borrowing against the value of Eligible Inventory
under Section 2.1; or (b) Advances against the value of Eligible Inventory under
Section 2.1 are outstanding to Lender, Borrower shall pay on demand any fees
incurred in connection with periodic Inventory appraisal and monitoring fees
required by Lender in sole discretion. There shall be no more than one (1)
inventory appraisal per twelve (12) month period unless an Event of Default has
occurred. There shall be no limitation on any scheduled recurring inventory
monitoring required by Lender, if any.

 

2.11 Late Reporting Fee. Borrower shall pay to Lender a fee in an amount equal
to Fifty Dollars ($50.00) per document per day for each Business Day any report,
financial statement or schedule required by this Agreement to be delivered to
Lender is past due. In the event of an uncontrollable and unforeseeable event
such as an Act of God, natural disaster or government mandate to shut down which
inhibits Borrower’s ability to provide any such report, financial statement or
schedule required by this Agreement, then Borrower will have a five calendar (5)
day extension to the due date applicable to same without incurring a late
reporting fee during such five (5) calendar day extension period.

 

2.12 Good Faith Deposit. The Ten Thousand and 00/100 Dollar ($10,000.00) good
faith deposit made by Borrower prior to the signing of this Agreement shall be
applied to Lender’s due diligence and audit costs. Any unused portion of such
good faith deposit will be applied towards the Facility Fee or refunded.

 

2.13 Monthly Statements. Lender may render monthly or other periodic statements
to Borrower or provide other information to Borrower from time to time, whether
in writing or through Lender’s website, including statements or other
information concerning all Obligations, all principal, interest and Lender
Expenses, and Borrower shall have fully and irrevocably waived all objections to
such statements (and the contents thereof) and other information unless, within
thirty (30) days after receipt or the posting of same on Lender’s website, as
applicable, Borrower shall deliver to Lender, by registered, certified or
overnight mail as set forth in Section 12 hereof, written objection to such
statement or other information specifying the error or errors, if any, contained
therein.

 

3. TERM

 

3.1 Term and Renewal Date. This Agreement shall become effective upon the making
of the initial Advance hereunder and continue in full force through the Initial
Term and from year to year thereafter (a Renewal Term) for a one (1) year term
from the then Termination Date, provided that neither Borrower nor Lender has
exercised its termination right in accordance with this Section 3.1. Borrower
and Lender may terminate the Term on the then Termination Date by giving the
other at least sixty (60) days prior written notice pursuant to the notice
provisions of Section 12 hereof. In addition, Lender shall have the right to
terminate this Agreement: (a) at any time in its sole discretion (including in
the absence of an Event of Default) upon sixty (60) days’ prior written notice;
and (b) immediately at any time upon the occurrence of an Event of Default. No
such termination shall relieve or discharge Borrower of its duties, Obligations
and covenants hereunder until all Obligations have been paid and performed in
full, and Lender’s continuing security interest in the Collateral shall remain
in effect until the Obligations have been fully and irrevocably paid and
satisfied in cash or cash equivalent. On the Termination Date of this Agreement,
the Obligations shall be immediately due and payable in full. Expressly in
addition to all rights and remedies available to Lender, if the term of this
Agreement is not renewed and the Obligations are not paid in full by the
Termination Date, then Borrower shall pay to Lender interest on the Obligations
at the Default Rate until paid in full.

 

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3.2 Early Termination Fee. If the Term is terminated by Lender upon the
occurrence of an Event of Default, or is terminated by Borrower except as
provided in Section 3.1, in view of the impracticability and extreme difficulty
of ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Lender’s lost profits as a result thereof, Borrower
shall pay Lender upon the effective date of such termination a fee in an amount
equal to: (a) Twelve Thousand and 00/100 Dollars ($12,000.00), if such
termination occurs on or prior to the first (1st) anniversary of the
commencement date of the Initial Term; (b) Eight Thousand and 00/100 Dollars
($8,000.00), if such termination occurs on or prior to the (2nd) anniversary of
the commencement date of the Initial Term; or (c) Four Thousand and 00/100
Dollars ($4,000.00), if such termination occurs at any time after the second
(2nd) anniversary of the commencement date of the Initial Term or during a
Renewal Term, provided, that any such termination fee shall be waived if
Borrower qualifies for and obtains conventional bank financing with Pinnacle
Bank to replace the facility hereunder within the last six (6) months of the
Initial Term or thereafter. Such fee shall be presumed to be the amount of
damages sustained by Lender as the result of an early termination and Borrower
acknowledges that it is reasonable under the circumstances currently existing.
The fee provided for in this Section 3.2 shall be deemed included in the
Obligations.

 

4. CREATION OF CONTINUING SECURITY INTEREST

 

4.1 Grant of Continuing Security Interest. Borrower hereby grants to Lender a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of the Obligations and in
order to secure prompt performance by Borrower of each and all of its covenants
and Obligations under the Loan Documents and otherwise. Lender’s continuing
security interest in the Collateral shall attach to all Collateral without
further act on the part of Lender or Borrower.

 

4.2 Negotiable Collateral. In the event that any Collateral, including proceeds,
is evidenced by or consists of Negotiable Collateral, Borrower shall notify
Lender and upon the request of Lender, immediately endorse and assign such
Negotiable Collateral to Lender and deliver physical possession of such
Negotiable Collateral to Lender.

 

4.3 Delivery of Additional Documentation Required. Borrower shall execute and
deliver to Lender concurrently with Borrower’s execution and delivery of this
Agreement and at any time thereafter at the request of Lender, all financing
statements, continuation financing statements, fixture filings, security
agreements, chattel mortgages, pledges, assignments, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and all other documents that Lender
may request, in form satisfactory to Lender, to perfect and maintain perfected
Lender’s continuing security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents and
Borrower hereby authorizes Lender to file and/or record such financing
statements and other documents as Lender deems necessary to perfect and maintain
Lender’s continuing security interest in the Collateral, and agrees any such
financing statement may contain an “all asset” or “all property” description of
the Collateral, and Borrower hereby ratifies any such financing statement or
other document heretofore filed by Lender.

 

 13 

 

 

4.4 Power of Attorney. Borrower hereby irrevocably makes, constitutes and
appoints Lender (and any person designated by Lender) as Borrower’s true and
lawful attorney-in-fact with power to sign the name of Borrower on any of the
above described documents or on any other similar documents to be executed,
recorded or filed for the sole purpose to perfect or continue perfected Lender’s
continuing security interest in the Collateral. In addition, Borrower hereby
appoints Lender (and any person designated by Lender) as Borrower’s
attorney-in-fact with power to: (a) sign Borrower’s name on verifications of
Accounts and other Collateral, and on notices to Account debtors; (b) send
requests for verification of Accounts and other Collateral; (c) endorse
Borrower’s name on any checks, notes, acceptances, money orders, drafts or other
forms of payment or security that may come into Lender’s possession, which
Lender will apply as payment to Borrower’s Obligations, and any excess amounts
to be made available to Borrower pursuant to the terms of Section 2.6; (d)
following the occurrence of an Event of Default (that is not: (a) waived by
Lender, or (b) cured pursuant to the terms of any cure right granted by Lender),
notify the post office authorities to change the address for delivery of
Borrower’s mail to an address designated by Lender, to receive and open all mail
addressed to Borrower, and to retain all mail relating to the Collateral and
forward all other mail to Borrower within ten (10) business days of receipt; and
(e) following the occurrence of an Event of Default (that is not: (a) waived by
Lender, or (b) cured pursuant to the terms of any cure right granted by Lender),
make, settle and adjust all claims under Borrower’s policies of insurance,
endorse the name of Borrower on any check, draft, instrument or other item of
payment for the proceeds of such policies of insurance and make all
determinations and decisions with respect to such policies of insurance. The
appointment of Lender as Borrower’s attorney-in-fact and each and every one of
Lender’s rights and powers, being coupled with an interest, is irrevocable so
long as any Accounts in which Lender has a continuing security interest remain
unpaid and until all of the Obligations have been fully repaid and performed.

 

4.5 Right To Inspect. Lender shall have the right at any time or times hereafter
during Borrower’s usual business hours, or during the usual business hours of
any third party having control over Borrower’s Books, to inspect Borrower’s
Books in order to verify the amount or condition of, or any other matter
relating to, the Collateral or Borrower’s financial condition. Lender also shall
have the right at any time or times hereafter during Borrower’s usual business
hours to inspect, examine and appraise the Inventory, the Equipment and other
Collateral and to check and test the same as to quality, quantity, value and
condition.

 

5. REPRESENTATIONS AND WARRANTIES

 

Borrower represents, warrants and covenants to Lender the following (and
acknowledges and agrees that such representations, warranties and covenants
shall be automatically deemed repeated and reaffirmed with each Advance and
shall be conclusively presumed to have been relied on by Lender regardless of
any investigation made, or information possessed by Lender):

 

5.1 No Prior Encumbrances; Security Interests. Borrower has good and marketable
title to the Collateral, free and clear of liens, claims, security interests or
encumbrances, except for the security interests to be satisfied from the
proceeds of the first Advances hereunder, the continuing security interests
granted to Lender by Borrower, and those disclosed on Schedule 5.1 annexed
hereto. Other than those expressly permitted by this Agreement, Borrower will
not create or permit to be created any security interest, lien, pledge, mortgage
or encumbrance on any Collateral or any of its other assets.

 

5.2 Bona Fide Accounts; Eligible Accounts. All Eligible Accounts represent bona
fide sales or leases of goods and/or services for which Borrower has an
unconditional right to payment and as to which the goods have been delivered to
the customer and/or the services rendered, as applicable. None of the Eligible
Accounts are subject to any rights of offset, counterclaim, cancellation or
contractual rights of return. All Accounts reported to Lender as Eligible
Accounts shall conform to the requirements of Eligible Accounts.

 

5.3 Merchantable Inventory; Eligible Inventory. All Eligible Inventory is now
and at all times hereafter shall be of good and merchantable quality, free from
defects. All Inventory reported to Lender as Eligible Inventory shall conform to
the requirements of Eligible Inventory.

 

5.4 Location of Inventory, Equipment and Collateral. The Inventory and Equipment
is not now and shall not at any time or times hereafter be stored with a bailee,
warehouseman, processor, or similar party unless otherwise conditionally allowed
pursuant to the terms of the Loan Documents. Borrower shall keep the Inventory
and Equipment only at its address set forth on the first page hereof and at the
following locations: 249 E. Gardena Blvd., Gardena, CA 90248, 400 W. Gardena
Blvd., Gardena, CA 90248, and 334 E. Gardena Blvd., Gardena, CA 90248 and other
locations as conditionally allowed pursuant to the terms of the Loan Documents.
If Inventory, Equipment or other Collateral is located at a leased premises,
public or private warehouse, with a bailee or other third party, Borrower shall
cause the applicable landlord, mortgagee, warehouseman, bailee or third party to
provide Lender with a waiver agreement, in form and substance acceptable to
Lender.

 

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5.5 Inventory Records. Borrower now keeps and hereafter at all times shall keep
correct and accurate records itemizing and describing the kind, type, quality
and quantity of the Inventory and Borrower’s cost of said items and none of
Borrower’s Inventory contains any labels, trademarks, trade-names or other
identifying characteristics which are the properties of third parties unless the
use of same by Borrower is under a valid license, royalty or similar agreement
with the owner thereof, in form and substance satisfactory to Lender, and which
remains in full force and effect, and has not been terminated, and such owner
thereof has issued in favor of Lender an agreement, in form and substance
satisfactory to Lender, allowing Lender to dispose of said items of Inventory
upon the occurrence of an Event of Default.

 

5.6 Retail Accounts. No Accounts arise from the sale of goods or rendition of
services to an individual consumer for personal, family or household purposes
except as disclosed to Lender in writing, with such Accounts in no event to
constitute Eligible Accounts.

 

5.7 Relocation of Chief Executive Office and Other Locations. The chief
executive office of Borrower and the location of all books and records of
Borrower relating to the Collateral is at the address indicated on the first
page of this Agreement, and Borrower’s other locations are as set forth in
Section 5.4, and Borrower will not, without thirty (30) days’ prior written
notice to Lender and compliance with Section 4.3 hereof, relocate such office or
other locations.

 

5.8 Due Incorporation and Qualification. Borrower is, and shall at all times
hereafter, be a corporation duly organized and existing under the laws of the
state of its formation as set forth on the first page hereof, and is qualified
and licensed to do business and is in good standing in any state in which the
conduct of its business or its ownership of assets requires that it be so
qualified.

 

5.9 Actual and Fictitious Name. Borrower’s exact name is set forth on the first
page hereof, and Borrower has not changed its name within the last five (5)
years. Borrower is conducting its business under the following trade or
fictitious name(s) and no others: none. Borrower has complied with the
fictitious name laws of all jurisdictions in which compliance is required in
connection with its use of such name(s).

 

5.10 Permits and Licenses. Borrower holds all licenses, permits, franchises,
approvals and consents required for the conduct of its business and the
ownership and operation of its assets.

 

5.11 Due Authorization; Enforceability. Borrower has the right and power and is
duly authorized to enter into the Loan Documents to which it is a party; all
necessary action to authorize the execution and delivery of the Loan Documents
has been properly taken; and Borrower is and will continue to be duly authorized
to borrow under this Agreement and to perform all of the other terms and
provisions of the Loan Documents throughout the Term. The Loan Documents, when
executed and delivered by Borrower, will constitute the legal, valid and binding
obligations of Borrower enforceable in accordance with their terms.

 

5.12 Compliance with Articles; Organizational Documents. The execution by
Borrower of the Loan Documents to which it is a party and the performance of the
terms thereof do not constitute a breach of any provision contained in
Borrower’s Certificate or Articles of Incorporation, Formation or Organization
(or similar incorporation document), as applicable or its Bylaws, Operating
Agreement, Partnership Agreement (or similar organizational document), as
applicable, nor does it constitute an event of default under any material
agreement to which Borrower is now or may hereafter become a party.

 

5.13 Litigation. Except as set forth in Section 5.13, there are no actions,
proceedings or claims pending by or against Borrower, whether or not before any
court or administrative agency and Borrower has no knowledge or notice of any
pending, threatened or imminent litigation, governmental investigations, or
claims, complaints, actions, or prosecutions involving Borrower, except for
ongoing collection matters in which Borrower is the plaintiff. If any such
actions, proceedings or claims presently exist or arise during the Term,
Borrower shall promptly notify Lender in writing and shall, from time to time,
notify Lender of all materials events relating thereto with the exception of any
of same seeking only a monetary remedy in an amount not greater than One Hundred
Thousand and 00/100 Dollars ($100,000.00).

 

 15 

 

 

5.14 Accuracy of Information and No Material Adverse Change in Financial
Statements. All information furnished by Borrower to Lender and all statements
made by Borrower to Lender, including, without limitation, information set forth
in a loan application, is true, accurate and complete in all respects and does
not contain any misstatement of fact or omit to state any facts necessary to
make the statements or information contained therein not misleading. All
financial statements relating to Borrower which have been or may hereafter be
delivered to Lender (i) have been prepared in accordance with GAAP; (ii) fairly
present Borrower’s financial condition as of the date thereof and Borrower’s
results of operations for the period then ended; and (iii) disclose all
contingent obligations of Borrower. In addition, no Material Adverse Change in
the financial condition of Borrower has occurred since the date of the most
recent of such financial statements, except for Borrower entering into a
Securities Purchase Agreement for a private placement of its equity securities
on July 2, 2020 pursuant to Section 4(a)(2) of the Securities Act of 1933, as
amended (the Securities Act), and Rule 506 promulgated thereunder, and
Borrower’s entering into a loan agreement with Citibank, N.A. pursuant to the
Paycheck Protection Program (the PPP) under the Coronavirus Aid, Relief, and
Economic Security Act (the CARES Act).

 

5.15 Solvency. Borrower is now, and shall be at all times through the Term,
solvent and able to pay its debts (including trade debts) as they mature.

 

5.16 ERISA. Neither Borrower or any ERISA Affiliate, nor any Plan is or has been
in violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a), or any of the published interpretations
thereof. No lien upon the assets of Borrower has arisen with respect to any
Plan. No prohibited transaction within the meaning of ERISA Section 406 or IRC
Section 4975(c) has occurred with respect to any Plan. Neither Borrower nor any
ERISA Affiliate has incurred any withdrawal liability with respect to any
Multiemployer Plan. Borrower and each ERISA Affiliate have made all
contributions required to be made by them to any Plan or Multiemployer Plan when
due. There is no accumulated funding deficiency in any Plan, whether or not
waived.

 

5.17 Environmental Laws and Hazardous Materials. Borrower has complied, and at
all times through the Term will comply, with all Environmental Laws. Borrower
has not and will not, in violation of Environmental Law or other applicable law,
cause or permit any Hazardous Materials to be located, incorporated, generated,
stored, manufactured, transported to or from, released, disposed of, or used at,
upon, under, or within any premises at which Borrower conducts its business, or
in connection with Borrower’s business. To the best of Borrower’s knowledge, no
prior owner or operator of any premises at which Borrower conducts its business
has caused or permitted any of the above to occur at, upon, under, or within any
of the premises. Borrower will not permit any lien to be filed against the
Collateral or any part thereof under any Environmental Law, and will promptly
notify Lender of any proceeding, inquiry or claim relating to any alleged
violation of any Environmental Law, or any alleged loss, damage or injury
resulting from any Hazardous Material, with the exception of any of same seeking
only a monetary remedy in an amount not greater than Fifty Thousand and 00/100
Dollars ($50,000.00). Lender shall have the right to join and participate in, as
a party if it so elects, any legal or administrative proceeding initiated with
respect to any Hazardous Material or in connection with any Environmental Law.
Hazardous Material includes without limitation any substance, material,
emission, or waste which is or hereafter becomes regulated or classified as a
hazardous substance, hazardous material, toxic substance or solid waste under
any Environmental Law, asbestos, petroleum products, urea formaldehyde,
polychlorinated biphenyls (PCBs), radon, and any other hazardous or toxic
substance, material, emission or waste. Environmental Law means the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, the Resource Conservation and Recovery Act of 1976, the Hazardous
Materials Transportation Act, the Toxic Substances Control Act, the regulations
pertaining to such statutes, and any other safety, health or environmental
statutes, laws, regulations or ordinances of the United States or of any state,
county or municipality in which Borrower conducts its business or the Collateral
is located.

 

5.18 Tax Compliance. Borrower has filed all tax returns required to be filed by
it and has paid all taxes due and payable on said returns and on any assessment
made against it or its assets except to the extent any such taxes or assessments
are being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted, and, if required by Lender (with respect to any unpaid
taxes in excess of $5,000.00) a bond has been posted in the amount of any such
disputed taxes or assessments that have not been paid.

 

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5.19 Reliance by Lender; Cumulative. Each warranty, representation and agreement
contained in this Agreement shall be automatically deemed repeated by Borrower
with each request for an Advance and shall be conclusively presumed to have been
relied on by Lender regardless of any investigation made or information
possessed by Lender. The warranties, representations and agreements set forth
herein shall be cumulative and in addition to any and all other warranties,
representations and agreements which Borrower shall now or hereafter give, or
cause to be given, to Lender.

 

5.20 Use of Proceeds. The proceeds of the initial Advance will be used by
Borrower for the purposes set forth on Schedule 5.20 annexed hereto.

 

5.21 Motor Vehicles and Intellectual Property. Borrower has informed Lender of
all motor vehicles, patents, patent applications, copyrights, trademarks,
tradenames and other intellectual property, registered or unregistered, owned by
Borrower. Borrower will promptly notify Lender of all motor vehicles or
intellectual property hereafter owned by Borrower, and the status of all patent
and trademark applications and the issuance of patents and trademarks, and all
copyrights registrations, and in accordance with Section 4.3, will cooperate
with Lender in taking all actions required by Lender to have a perfected
security interest or lien on such motor vehicles and intellectual property.

 

5.22 Commercial Tort Claims. Borrower does not, as of the date hereof, have any
Commercial Tort Claims against any third parties. If Borrower does hereafter
have any such Commercial Tort Claims, Borrower shall furnish Lender with prompt
written notice thereof, and in accordance with Article 4 hereof, shall execute
and deliver such supplemental documents and cooperate with Lender in taking all
action as required by Lender to have a perfected security interest or lien on
such Commercial Tort Claims.

 

6. AFFIRMATIVE COVENANTS

 

Borrower covenants and acknowledges that during the Term Borrower shall comply
with all of the following:

 

6.1 Collateral and Other Reports. Borrower shall no less frequently than weekly
report to Lender all sales and Accounts arising since its most recent report to
Lender and shall provide copies of all invoices, together with supporting
shipping documentation acceptable to Lender. Borrower shall execute and deliver
to Lender, no later than the tenth (10th) day of each month during the Term, a
detailed aging of the Accounts, a reconciliation statement and a summary aging,
by vendor, of all accounts payable of Borrower and any book overdraft. Borrower
shall deliver to Lender, as Lender may from time to time require, collection
reports, sales journals, invoices, original delivery receipts, customers’
purchase orders, shipping instructions, bills of lading and other documentation
respecting shipment arrangements. Absent such a request by Lender, copies of all
such documentation shall be held by Borrower as custodian for Lender. Borrower
shall provide Lender with prompt notice of any pending or threatened litigation,
governmental investigations, claims, complaints or prosecutions involving
Borrower or any Guarantor, with the exception of any of same seeking only a
monetary remedy in an amount not greater than One Hundred Thousand and 00/100
Dollars ($100,000.00).

 

6.2 Returns. Returns and allowances, if any, as between Borrower and any Account
debtors, shall be permitted on the same basis and in accordance with the usual
customary practices of Borrower as they exist at the date of the execution and
delivery of this Agreement. If at any time prior to the occurrence of an Event
of Default any Account debtor returns any Inventory to Borrower, Borrower shall
promptly determine the reason for such return and, if Borrower accepts such
return, issue a credit memorandum (with a copy to be sent to Lender) in the
appropriate amount to such Account debtor. Borrower shall promptly notify Lender
of all returns and recoveries and of all disputes and claims, any of which are
in excess of Ten Thousand and 00/100 Dollars ($10,000.00).

 

6.3 Designation of Inventory. Borrower shall contemporaneously with the
execution hereof and from time to time hereafter, but not less frequently than
monthly by the 10th day of each month, execute and deliver to Lender a
designation of Inventory specifying the cost and the wholesale market value of
Borrower’s raw materials, work in process and finished goods, and further
specifying such other information as Lender may reasonably request. Borrower
shall promptly, in writing, notify Lender if any of Borrower’s Inventory
contains any labels, trademarks, tradenames or other identifying characteristics
which are the properties of third parties.

 

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6.4 Financial Statements, Reports, Certificates. Borrower shall deliver to
Lender: (a) as soon as available, but in any event within forty-five (45) days
after the end of each of Borrower’s fiscal quarters during the Term, a balance
sheet and profit and loss statement prepared by Borrower covering Borrower’s
operations during such period; and (b) as soon as available, but in any event
within ninety (90) days after the end of each of Borrower’s fiscal years,
financial statements of Borrower for each such fiscal period, audited by
independent certified public accountants acceptable to Lender (with Borrower’s
accounting firm as of the date of this Agreement to be acceptable to Lender
provided that such firm has been disclosed to Lender). Such financial statements
shall include a balance sheet and profit and loss statement, and the
accountants’ management letter, if any, and shall be prepared in accordance with
GAAP. Together with the above, Borrower shall also deliver Borrower’s Form
10-Qs, 10-Ks or 8-Ks, if any, as soon as the same become available but in any
event within thirty (30) days of filing, and any other report reasonably
requested by Lender relating to the Collateral and the financial condition of
Borrower and a certificate signed by its chief financial officer to the effect
that all reports, statements or computer prepared information of any kind or
nature delivered or caused to be delivered to Lender under this Section 6.4
fairly present its financial condition and that there exists on the date of
delivery of such certificate to Lender no condition or event which constitutes
an Event of Default.

 

6.5 Tax Returns, Receipts. Borrower shall deliver to Lender copies of each of
its future federal income tax returns, and any amendments thereto, within thirty
(30) days of the filing thereof. Borrower further shall promptly deliver to
Lender, upon request, satisfactory evidence of Borrower’s payment of all
withholding and other taxes required to be paid by it.

 

6.6 Guarantor Reports. Borrower agrees to cause each Guarantor (if any) to
deliver: (a) its annual financial statements upon the earlier to occur of (i)
delivery of copies of its federal income tax returns as required below, or (ii)
one year from the date of delivery of its prior financial statements to Lender;
and (b) and copies of all federal income tax returns as soon as the same are
available and in any event no later than thirty (30) days after the same are
required to be filed by law.

 

6.7 Title to Equipment. Upon Lender’s request, Borrower shall immediately
deliver to Lender, properly endorsed, any and all evidences of ownership of,
certificates of title, or applications for title to any items of Equipment.

 

6.8 Maintenance of Equipment. Borrower shall keep and maintain the Equipment in
good operating condition and repair, and shall make all necessary replacements
thereto so that its value and operating efficiency shall at all times be
maintained and preserved unless Borrower determines consistent with its past
practices that such Equipment is: (a) obsolete and of insignificant value, (b)
no longer economically practicable to maintain, or (c) not useful in the
ordinary course of Borrower’s business. Borrower shall not permit any item of
Equipment to become a fixture to real estate or an accession to other property,
and the Equipment is now and shall at all times remain Borrower’s personal
property.

 

6.9 Taxes. All Federal, state and local assessments and taxes, whether real,
personal or otherwise, due or payable by, or imposed, levied or assessed against
Borrower or any of its assets or in connection with Borrower’s business shall
hereafter be paid in full, before they become delinquent or before the
expiration of any extension period. Borrower shall make due and timely payment
or deposit of all federal, state and local taxes, assessments or contributions
required of it by law, and will execute and deliver to Lender, on demand,
appropriate certificates attesting to the payment or deposit thereof.

 

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6.10 Insurance. Borrower, at its expense, shall keep and maintain insurance to
protect the Collateral against all risk of loss covered under a Special property
form (If any of the tangible Collateral is located in a flood zone, Borrower
must also have flood insurance.) The coverage shall be written on a replacement
cost basis. The property limit(s) shall be no less than those necessary to
satisfy the coinsurance requirement contained in the insurance policy. The
Borrower, at its expense, shall keep and maintain Business Income Coverage. The
Business Income Coverage shall insure against loss covered under a Special
policy form. The limit must contemplate a benefit period of no less than twelve
months and meet the minimum limit needed to satisfy the coinsurance requirement
contained in the policy. The Business Income coverage can be written on an
agreed amount basis, or with a coinsurance percentage from 80% to 100%. All
policies insurance business personal property and business income shall contain
a Lender’s Loss Payable endorsement in a form satisfactory to Lender. All
policies insuring real property on which Lender has a mortgage or other lien
shall contain a Mortgagee endorsement in form satisfactory to Lender. Either, or
both, form(s) shall contain a waiver of warranties. All proceeds payable under
such policies shall be payable to Lender and applied to the Obligations.
Borrower shall cause to be delivered to Lender a properly executed Evidence of
Property Insurance form along with a copy of the Lender’s Loss Payable and/or
Mortgagee endorsement(s) as applicable, in advance of the loan closing date and
thereafter at least thirty (30) days prior to the expiration date(s) of the
policy(ies). All Mortgagee and Lender’s Loss Payable endorsements shall contain
the following address for notification purposes, or such other address as Lender
may, from time to time, notify Borrower:

 

Pinnacle Bank

18181 Butterfield Blvd, Ste. 135

Morgan Hill, CA 95037

Attn: Kevin O’Hare

 

Borrower, at its expense, shall keep and maintain Commercial General Liability
Coverage insuring against all risks relating to or arising from Borrower’s
ownership and use of the Collateral and its other assets, its products, and its
operations. Lender, its directors, officers and employees shall be named as
additional insureds for Commercial General Liability on Borrower’s policy.
Borrower shall cause to be delivered to Lender a properly executed Certificate
of Insurance, containing the required additional insured wording, before the
loan closing and thereafter at least thirty (30) days prior the expiration date
of the policy. Along with the Certificate of Insurance, Borrower shall also
deliver a copy of the General Liability endorsement whereby Lender, et. al., are
added to the policy as additional insureds.

 

All required policies shall be in such form, with such companies and in such
amounts as may be satisfactory to Lender. All policies shall contain a 30 day
notice for cancellation or non-renewal. Lender reserves the right to change
insurance specifications at any time.

 

6.11 Lender Expenses. Borrower shall promptly and without demand reimburse
Lender for all Lender Expenses and Borrower hereby authorizes the payment of
such Lender Expenses.

 

6.12 Compliance With Law. Borrower shall comply, in all material respects, with
the requirements of all applicable laws, rules, regulations and orders of
governmental authorities relating to Borrower and the conduct of its business.

 

6.13 Accounting System. Borrower at all times hereafter shall maintain a
standard and modern system of accounting in accordance with GAAP with ledger and
account cards or computer tapes, disks, printouts and records pertaining to the
Collateral containing such information as may from time to time be requested by
Lender.

 

6.14 Effective Tangible Net Worth. As determined by Lender as of the end of each
fiscal quarter of Borrower, Borrower shall attain an Effective Tangible Net
Worth greater than Six Million and 00/100 Dollars ($6,000,000.00).

 

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7. NEGATIVE COVENANTS

 

Borrower covenants and acknowledges that during the Term Borrower shall not
undertake any of the following:

 

7.1 Extraordinary Transactions and Disposal of Assets. Enter into any
transaction not in the ordinary and usual course of its business as conducted on
the date hereof, including but not limited to the sale, lease, disposal,
movement, relocation or transfer, whether by sale or otherwise, of any of its
assets other than sales of Inventory in the ordinary and usual course of its
business as presently conducted; incur any indebtedness for borrowed money (in
excess of Twenty-Five Thousand Dollars ($25,000.00) for any individual
transaction or where the aggregate amount of such transactions in any fiscal
year exceeds One Hundred Thousand Dollars ($100,000.00)), or other indebtedness
outside the ordinary and usual course of its business as conducted on the date
hereof, except for Permitted Indebtedness and renewals or extensions of existing
debts permitted by Lender; make any advance or loan to any third party; make any
investments except for Permitted Investments; or grant a lien on any of its
assets except (a) in favor of Lender, (b) the continuing security interests, if
any, set forth on Schedule 5.1, and (c) Permitted Liens.

 

7.2 Change Name, etc. Change its name, business structure, jurisdiction of
incorporation or formation as applicable, or identity, or add any new fictitious
name (a “Corporate Change”), without giving Lender at least thirty (30) Business
Days’ advanced written notice of such Corporate Change, and with Borrower
agreeing prior to commencing any such Corporate Change, to undertake and
complete such actions required by Lender in connection with such Corporate
Change.

 

7.3 Merge, Acquire. Merge, acquire, or consolidate with or into any other
business organization unless approved in advance by Lender.

 

7.4 Guaranty. Guaranty or otherwise become in any way liable with respect to the
obligations of any third party, except by endorsement of instruments or items of
payment for deposit to the account of Borrower for negotiation and delivery to
Lender.

 

7.5 Restructure. Make any change (excepting insignificant changes) in its
financial structure or business operations.

 

7.6 Prepayments. Prepay any existing indebtedness owing to any third party other
than trade payables or as permitted by the Loan Documents.

 

7.7 Change of Ownership. Cause, permit or suffer any change, direct or indirect,
in the ownership of the capital stock of Borrower (which results in the members
of the board of directors (or equivalent governing body), existing as of the
date of this Agreement, no longer constituting a majority of members of the
board of directors) or enter into any agreement with any person or entity that
provides for a payment to such person or entity based upon the income of
Borrower.

 

7.8 Intentionally Omitted.

 

7.9 Loans, Investments and Advances. Make any loans, advances or extensions of
credit to any officer, director, executive employee or shareholder of Borrower,
or to any entity which is a subsidiary of, related to, affiliated with or has
common shareholders, officers or directors with Borrower, or make any
investments in any such entity, where the aggregate amount of all of such
actions undertaken during any fiscal year of Borrower is in excess of Fifty
Thousand Dollars ($50,000.00).

 

7.10 Capital Expenditures. Make any plant or fixed capital expenditure, or any
commitment therefor, or purchase or lease any real or personal assets or
replacement Equipment where the aggregate amount of such transactions in any
fiscal year exceeds the lesser of (a) Four Hundred Thousand Dollars
($400,000.00), or (b) Borrower’s historical average aggregate amount of such
transactions during a fiscal year.

 

7.11 Consignments of Inventory. Consign any Inventory to any third party or
obtain any Inventory on a consignment basis from any third party, with the
exception of Inventory consigned at any one time to channel partners (providing
field tech support to Borrower’s customers) having an aggregate cost value of
less than One Hundred Thousand Dollars ($100,000.000), and provided that such
consigned inventory shall not constitute, and shall be excluded from, Eligible
Inventory.

 

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7.12 Distributions. Make any distribution or declare or pay any dividends (in
cash) on, or purchase, acquire, redeem or retire (with cash), any of its capital
stock, of any class, whether now or hereafter outstanding unless at the time of
any of such action involving the use of cash: (a) no Event of Default exists or
will result from any such action; (b) Borrower’s accounts payable are currently
paid according to their respective terms; (c) Borrower has Advances borrowing
availability under Section 2.1 after giving effect to any such action; and (d)
Borrower shall have attained positive net income for the fiscal quarter ending
period immediately preceding such action, and the aggregate amount of cash
expended for all such actions during a fiscal quarter period of Borrower shall
not exceed the amount of Borrower’s positive net income for the immediately
preceding fiscal quarter ending period of Borrower.

 

7.13 Accounting Methods. Modify or change its method of accounting or enter
into, modify or terminate any agreement presently existing or at any time
hereafter entered into with any third party for the preparation or storage of
Borrower’s records of Accounts and financial condition without said party
agreeing to provide Lender with information regarding the Collateral or
Borrower’s financial condition. Borrower agrees that Lender may contact any such
party directly in order to obtain such information.

 

7.14 Business Suspension. Suspend or go out of business.

 

8. EVENTS OF DEFAULT

 

The occurrence of any one or more of the following events shall constitute an
Event of Default by Borrower hereunder:

 

8.1 Failure to Pay. Borrower’s failure to pay when due and payable, or when
declared due and payable, any portion of the Obligations (whether principal,
interest, taxes, Lender Expenses, or otherwise), provided, that with respect
only to Obligations not consisting of principal or interest, Borrower shall have
a three (3) Business Day cure period to make a failed payment with respect to
same prior to the occurrence of an Event of Default;

 

8.2 Failure to Perform. Borrower’s or a Guarantor’s failure to perform, keep or
observe any term, provision, condition, representation, warranty, covenant or
agreement contained in this Agreement, in any of the Loan Documents or in any
other present or future agreement between Borrower, and/or a Guarantor and
Lender, provided, Borrower shall have (with respect any term, provision,
condition, representation, warranty, covenant or agreement not contained in
Sections 2.5, 6, 7 or 8 of this Agreement that Borrower has failed to perform,
keep or observe, and which is curable) a ten (10) day period to cure same
following the occurrence of a failure to perform, keep or observe same,
provided, further, however, that such cure period shall not apply to, among
other things, financial covenants or any other covenants that are required to be
satisfied, completed or tested by a date certain;

 

8.3 Misrepresentation. Any misstatement or misrepresentation (excluding any
insignificant misstatement or misrepresentation) now or hereafter exists in any
warranty, representation, statement, aging or report made to Lender by, Borrower
and/or a Guarantor or any officer, employee, agent or director thereof, or if
any such warranty, representation, statement, aging or report is withdrawn by
such person;

 

8.4 Material Adverse Change. There is a Material Adverse Change in Borrower’s,
or a Guarantor’s, business or financial condition;

 

8.5 Material Impairment. There is a material impairment of the prospect of
repayment of the Obligations or a material impairment of Lender’s continuing
security interests in the Collateral;

 

8.6 Levy or Attachment. Subject to the terms of the last paragraph of this
Section 8, any material portion of Borrower’s assets is attached, seized,
subjected to a writ or distress warrant or is levied upon, or comes into the
possession of any judicial officer or assignee;

 

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8.7 Insolvency by Borrower or Guarantor. An Insolvency Proceeding is commenced
by Borrower or by any Guarantor;

 

8.8 Insolvency Against Borrower or Guarantor. Subject to the terms of the last
paragraph of this Section 8, an Insolvency Proceeding is commenced against
Borrower or any Guarantor;

 

8.9 Injunction Against Borrower. Borrower is enjoined, restrained or in any way
prevented by court order from continuing to conduct all or any material part of
its business;

 

8.10 Government Lien. Subject to the terms of the last paragraph of this Section
8, a notice of lien, levy or assessment is filed of record with respect to any
of Borrower’s or a Guarantor’s assets by the United States Government, or any
department, agency or instrumentality thereof, or by any state, county,
municipal or other governmental agency, or any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether choate or
otherwise, upon any of Borrower’s or a Guarantor’s assets and the same is not
paid on the payment date thereof;

 

8.11 Judgment. Subject to the terms of the last paragraph of this Section 8, a
judgment is entered against Borrower or a Guarantor, excepting any judgment that
involves only a monetary judgment: (a) in an amount less than One Hundred
Thousand Dollars ($100,000.00), or (b) as to which insurance coverage has been
accepted in writing by an independent third-party insurance company for the
total amount of such monetary claim;

 

8.12 Default to Third Party. There is a default in any material agreement to
which Borrower or a Guarantor is a party or by which binds Borrower or a
Guarantor or any of their assets, and as a result the other party or parties to
such agreement have the right, irrespective of whether exercised, to cancel or
terminate such agreement, or to accelerate the maturity of Borrower’s or such
Guarantor’s obligations thereunder;

 

8.13 Subordinated Debt. (a) Borrower or any Subordinating Creditor (i) fails to
perform or observe any of such Subordinating Creditor’s obligations under any
Subordination Agreement; or (ii) notifies Lender of Subordinating Creditor’s
intention to rescind, modify, terminate or revoke any Subordination Agreement;
(b) the occurrence of a default or event of default under any subordinated
indebtedness; (c) any Subordination Agreement ceases to be in full force and
effect for any reason whatsoever; or (d) Borrower makes any payment on account
of indebtedness which has now or hereafter been subordinated to the Obligations,
except to the extent such payment is allowed under any subordination agreement
entered into with Lender;

 

8.14 Termination of Guarantor. A Guarantor dies or terminates its guaranty, with
there being no Guarantor as of the date of this Agreement;

 

8.15 Change in Management. If Arthur D. Sams (or his successor that is
acceptable to Lender, as provided below) (as applicable, the Manager) ceases to
be actively engaged in the management of Borrower (a Management Change) unless:
(a) within five (5) Business Days of a Management Change, Borrower notifies
Lender of same, and (b) within thirty (30) Business Days of such a Management
Change, a Manager reasonably acceptable to Lender replaces the outgoing Manager;

 

8.16 ERISA Violation. A prohibited transaction within the meaning of ERISA
Section 406 or IRC Section 1975(c) shall occur with respect to a Plan which
could have a material adverse effect on the financial condition of Borrower; any
lien upon the assets of Borrower in connection with any Plan shall arise;
Borrower or any ERISA Affiliate shall completely or partially withdraw from a
Multiemployer Plan and such withdrawal could, in the opinion of Lender, have a
material adverse effect on the financial condition of Borrower. Borrower or any
of its ERISA Affiliates shall fail to make full payment when due of all amounts
which Borrower or any of its ERISA Affiliates may be required to pay to any Plan
or any Multiemployer Plan as one or more contributions thereto; Borrower or any
of its ERISA Affiliates creates or permits the creation of any accumulated
funding deficiency, whether or not waived; the voluntary or involuntary
termination of any Plan which termination could, in the opinion of Lender, have
a material adverse effect on the financial condition of Borrower or Borrower
shall fail to notify Lender promptly and in any event within ten (l0) days of
the occurrence of an event which constitutes an Event of Default under this
clause or would constitute an Event of Default upon the exercise of Lender’s
judgment; or

 

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8.17 Loss of License, etc. If any license, permit, distributor, franchise or
similar agreement, necessary for the continued operation of Borrower’s ordinary
course of business is revoked, suspended or terminated and not reinstated or
brought to good standing within a thirty (30) day calendar period, excepting
from such cure period any revocation, suspension, or termination of any of same
that mandates the immediate ceasing of continued operations of Borrower’s
business in the ordinary course.

 

Notwithstanding anything contained in this Section 8 to the contrary, Lender
shall refrain from exercising its rights and remedies and an Event of Default
shall not be deemed to have occurred by reason of the occurrence of any of the
events set forth in Sections 8.6, 8.8, 8.10 or 8.11 hereof if, within twenty
(20) days from the date thereof, the same is released, discharged, dismissed,
bonded against or satisfied; provided, however, Lender shall not be obligated to
make Advances to Borrower during such period.

 

9. LENDER’S RIGHTS AND REMEDIES

 

9.1 Rights and Remedies. Upon the occurrence of an Event of Default (that is
not: (a) waived by Lender, or (b) cured pursuant to the terms of any cure right
granted by Lender), Lender may, at its election, without notice of such election
and without demand, do any one or more of the following:

 

(a) Declare all Obligations, whether evidenced by the Loan Documents or
otherwise, immediately due and payable in full:

 

(b) Cease advancing money or extending credit to or for the benefit of Borrower
under the Loan Documents or under any other agreement between Borrower and
Lender;

 

(c) Terminate this Agreement as to any future liability or obligation of Lender,
but without affecting Lender’s rights and security interest in the Collateral
and without affecting the Obligations;

 

(d) Settle or adjust disputes and claims directly with Account debtors for
amounts and upon terms which Lender considers advisable and, in such cases,
Lender will credit the Obligations with the net amounts received by Lender in
payment of such disputed Accounts, after deducting all Lender Expenses;

 

(e) Cause Borrower to hold all returned Inventory in trust for Lender, segregate
all returned Inventory from all other property of Borrower or in Borrower’s
possession and conspicuously label said returned Inventory as the property of
Lender;

 

(f) Without notice to or demand upon Borrower or a Guarantor, make such payments
and do such acts as Lender considers necessary or reasonable to protect its
security interest in the Collateral. Borrower shall assemble the Collateral if
Lender so requires and make it available as Lender designates. Borrower
authorizes Lender to enter any premises where the Collateral is located, to take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest or compromise any encumbrance, charge or lien which in
Lender’s determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith;

 

(g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
lease, license or other disposition, advertise for sale, lease, license or other
disposition, and sell, lease, license or otherwise dispose (in the manner
provided for herein or in the Code) the Collateral. Lender is hereby granted an
irrevocable license or other right to use, without charge, Borrower’s labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any asset of a similar
nature, pertaining to the Collateral, in completing the production of,
advertising for sale, lease, license or other disposition, and sale, lease,
license or other disposition of the Collateral. Borrower’s rights under all
licenses and all franchise agreements shall inure to Lender’s benefit. With
respect to any of Borrower’s owned or leased premises, Borrower hereby grants
Lender an irrevocable license to enter into possession of such premises and to
occupy the same, without charge, for a period to be determined by Lender in its
sole discretion in order to exercise any of Lender’s rights or remedies provided
herein or in any of the other Loan Documents, at law, in equity, or otherwise;

 

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(h) Sell, lease, license or otherwise dispose of the Collateral at either a
public or private proceeding, or both, by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places (including
Borrower’s premises) as Lender determines is commercially reasonable. It is not
necessary that the Collateral be present at any such sale;

 

(i) Lender shall give notice of the disposition of the Collateral as follows:

 

(1) To Borrower and each holder of a security interest in the Collateral who has
filed with Lender a written request for notice, a notice in writing of the time
and place of public sale or other disposition or, if the sale or other
disposition is a private sale or some other disposition other than a public sale
is to be made, then the time on or after which the private sale or other
disposition is to be made;

 

(2) The notice hereunder shall be personally delivered or mailed, postage
prepaid, to Borrower as provided in Section 12 hereof, at least ten (10)
calendar days before the date fixed for the sale or other disposition, or at
least ten (10) calendar days before the date on or after which the private sale
or other disposition is to be made, unless the Collateral is perishable or
threatens to decline speedily in value. Notice to persons other than Borrower
claiming an interest in the Collateral shall be sent to such addresses as they
have furnished to Lender;

 

(j) Lender may credit bid and purchase at any public sale:

 

(k) Any deficiency that exists after disposition of the Collateral, as provided
herein, shall be immediately paid by Borrower. Any excess will be remitted
without interest by Lender to the party or parties legally entitled to such
excess; and

 

(l) In addition to the foregoing, Lender shall have all rights and remedies
provided by law (including those set forth in the Code) and any rights and
remedies contained in any Loan Documents and all such rights and remedies shall
be cumulative.

 

9.2 No Waiver. No delay on the part of Lender in exercising any right, power or
privilege under any Loan Document shall operate as a waiver, nor shall any
single or partial exercise of any right, power or privilege under such Loan
Documents or otherwise, preclude other or further exercise of any such right,
power or privilege.

 

10. TAXES AND EXPENSES REGARDING THE COLLATERAL

 

If Borrower fails to pay any monies (whether taxes, assessments, insurance
premiums or otherwise) due to third persons or entities, or fails to make any
deposits or furnish any required proof of payment or deposit, or fails to
perform any of Borrower’s other covenants under any of the Loan Documents, then
in its discretion and without prior notice to Borrower (provided Lender shall
endeavor to provide notice to Borrower but without liability for failure to do
so), Lender may do any or all of the following: (a) make any payment which
Borrower has failed to pay or any part thereof; (b) set up such reserves in
Borrower’s loan account as Lender deems necessary to protect Lender from the
exposure created by such failure; (c) obtain and maintain insurance policies of
the type described in Section 6.10 hereof and take any action with respect to
such policies as Lender deems prudent; or (d) take any other action deemed
necessary to preserve and protect its interests and rights under the Loan
Documents. Any payments made by Lender shall not constitute: (a) an agreement by
Lender to make similar payments in the future or (b) a waiver by Lender of any
Event of Default. Lender need not inquire as to, or contest the validity of, any
such expense, tax, security interest, encumbrance or lien and the receipt of
notice for the payment thereof shall be conclusive evidence that the same was
validly due and owing.

 

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11. WAIVERS

 

11.1 Demand, Protest. Borrower waives demand, protest, notice of protest, notice
of default or dishonor, notice of payment and nonpayment, notice of any default,
and notice of nonpayment at maturity and acknowledges that Lender may
compromise, settle or release, without notice to Borrower, any Collateral and/or
guaranties at any time held by Lender. Borrower hereby consents to any
extensions of time of payment or partial payment at, before or after the
Termination Date.

 

11.2 No Marshaling. Borrower, on its own behalf and on behalf of its successors
and assigns hereby expressly waives all rights, if any, to require a marshaling
of assets by Lender or to require that Lender first resort to some portion(s) of
the Collateral before foreclosing upon, selling or otherwise realizing on any
other portion thereof.

 

11.3 Lender’s Non-Liability for Inventory or Equipment or for Protection of
Rights. So long as Lender complies with its obligations, if any, under Section
9-207 of the Code, Lender shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Inventory or Equipment; (b) any loss
or damage thereto occurring or arising in any manner or fashion from any cause;
(c) any diminution in the value thereof; or (d) any act or default of any
carrier, warehouseman, bailee, forwarding agency or other person whomsoever. All
risk of loss, damage or destruction of the Inventory or Equipment shall be borne
by Borrower. Lender shall have no obligation to protect any rights of Borrower
against any person obligated on any Collateral.

 

11.4 Limitation of Damages. In any action or other proceeding against Lender
under this Agreement or relating to the transactions between Lender and
Borrower, Borrower waives the right to seek any: (a) lost profits or other
special or consequential damages; or (b) punitive damages.

 

11.5 Statute of Limitations. To the maximum extent permitted by law, Borrower
waives the pleading of any statute of limitations with respect to any and all
actions in connection herewith. To the extent that Borrower may now or in the
future have any claim against Lender, arising out of this agreement or the
transaction contemplated herein whether in contract or tort or otherwise,
Borrower must assert such claim within one year of it accruing. Failure to
assert such claim by Borrower within one year shall constitute of waiver
thereof. Borrower agrees that such period is reasonable and sufficient for it to
investigate and act upon the claim. This Section shall survive any termination
of this agreement.

 

12. NOTICES

 

Unless otherwise provided herein, all consents, waivers, notices or demands by
any party relating to the Loan Documents shall be in writing and (except for
financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be telecopied or emailed (followed up
by a mailing), personally delivered or sent by registered or certified mail,
postage prepaid, return receipt requested, or by receipted overnight delivery
service to Borrower or to Lender, as the case may be, at their addresses set
forth below

 

  If to Borrower: Polar Power, Inc.     249 E. Gardena Blvd.     Gardena, CA
90248     Attn: Luis Zavala     Email: lzavala@polarpowerinc.com         If to
Lender: Pinnacle Bank     1818 Butterfield Blvd, Ste. 135     Morgan Hill, CA
95037     Attn: Kevin O’Hare     Fax # (408) 904-7425     Email:
kevin.ohare@pinnacle.bank

 

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Any party may change the address at which it is to receive notices hereunder by
notice in writing in the foregoing manner given to the other. All notices or
demands sent in accordance with this Section 12 shall be deemed received on the
earlier of the date of actual receipt or five (5) calendar days after the
deposit thereof in the mail or on the date telecommunicated if telecopied.

 

13. DESTRUCTION OF BORROWER’S DOCUMENTS

 

13.1 Destruction. All documents, schedules, invoices, agings or other papers
delivered to Lender may be destroyed or otherwise disposed of by Lender four (4)
months after they are delivered to or received by Lender, unless Borrower
requests, in writing, the return of the said documents, schedules, invoices or
other papers (but with Lender entitled to retain a copy for record retention
purposes or as otherwise required by law) and makes arrangements, at Borrower’s
expense, for their return.

 

13.2 Copies. Lender will provide electronic copies of checks and payments
prepared by Borrower’s customers and received directly by Lender, within a three
(3) Business Day period of receiving same.

 

14. GENERAL PROVISIONS

 

14.1 Effectiveness. This Agreement shall be binding and deemed effective upon
the making of initial Advance hererunder.

 

14.2 Successors and Assigns. This Agreement shall bind and inure to the benefit
of the respective successors and assigns of each of the parties; provided,
however, that Borrower may not assign this Agreement or any rights hereunder and
any prohibited assignment shall be absolutely void. No consent to an assignment
by Lender shall release Borrower from its Obligations. Without notice to or the
consent of Borrower, Lender may assign this Agreement and its rights and duties
hereunder (provided, that in the absence of an Event of Default, Lender agrees
not to assign this Agreement or its rights and duties hereunder to a competitor
of Borrower that has been disclosed to Lender in writing), and Lender reserves
the right to sell, assign, transfer, negotiate or grant participations in all or
any part of, or any interest in Lender’s rights and benefits hereunder. In
connection therewith, Lender may disclose all documents and information which
Lender now or hereafter may have relating to Borrower or Borrower’s business.
Borrower and Lender do not intend any of the benefits of the Loan Documents to
inure to any third party, and no third party shall be a third party beneficiary
hereof or thereof.

 

14.3 Section Headings. Headings and numbers have been set forth herein for
convenience only.

 

14.4 Integration; Interpretation. This Agreement supersedes all other agreements
and understandings between the parties hereto, verbal or written, express or
implied, relating to the subject matter hereof. No promises of any kind have
been made by Lender or any third party to induce Borrower to execute this
Agreement. No course of dealing, course of performance or trade usage, and no
parole evidence of any nature, shall be used to supplement or modify any terms
of this Agreement. Neither this Agreement nor any uncertainty or ambiguity
herein shall be construed or resolved against Lender or Borrower, whether under
any rule of construction or otherwise. On the contrary, this Agreement has been
reviewed by each party and shall be construed and interpreted according to the
ordinary meaning of the words used so as to fairly accomplish the purposes and
intentions of the parties hereto. The parties waive the provisions of California
Civil Code §1654 or similar provision.

 

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

 

14.6 Amendments in Writing. This Agreement cannot be changed or terminated
orally. This Agreement is the entire agreement between the parties with respect
to the matters contained herein. This Agreement supersedes all prior agreements,
understandings and negotiations, if any, all of which are merged into this
Agreement.

 

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14.7 Counterparts. This Agreement may be executed in any number of counterparts
each of which, when executed and delivered, shall be deemed to be an original
and all of which, when taken together, shall constitute but one and the same
Agreement.

 

14.8 Indemnification. Borrower hereby indemnifies, protects, defends and saves
harmless Lender and any member, officer, director, official, agent, employee and
attorney of Lender, and their respective heirs, successors and assigns
(collectively, the Indemnified Parties), from and against any and all losses,
damages, expenses or liabilities of any kind or nature and from any suits,
claims or demands, including reasonable counsel fees incurred in investigating
or defending such claim, suffered by any of them and caused by, relating to,
arising out of, resulting from, or in any way connected with the Loan Documents
and the transactions contemplated therein or the Collateral (unless caused by
the gross negligence or willful misconduct of the Indemnified Parties)
including, without limitation: (a) losses, damages, expenses or liabilities
sustained by Lender in connection with any environmental cleanup or other remedy
required or mandated by any Environmental Law; (b) any untrue statement of a
material fact contained in information submitted to Lender by Borrower or a
Guarantor or the omission of any material fact necessary to be stated therein in
order to make such statement not misleading or incomplete; (c) the failure of
Borrower or a Guarantor to perform any obligations required to be performed by
Borrower or a Guarantor under the Loan Documents; and (d) the ownership,
construction, occupancy, operations, use and maintenance of any of Borrower’s or
a Guarantor’s assets. The provisions of this paragraph 14.8 shall survive
termination of this Agreement and the other Loan Documents.

 

14.9 Joint and Several Obligations; Dealings with Multiple Borrowers. If more
than one person or entity is named as Borrower hereunder, all Obligations,
representations, warranties, covenants and indemnities set forth in the Loan
Documents to which such person or entity is a party shall be joint and several.
Lender shall have the right to deal with any individual of any Borrower with
regard to all matters concerning the rights and obligations of Lender and
Borrower hereunder and pursuant to applicable law with regard to the
transactions contemplated under the Loan Documents. All actions or inactions of
the officers, managers, members and/or agents of any Borrower with regard to the
transactions contemplated under the Loan Documents shall be deemed with full
authority and binding upon all Borrowers hereunder. Each Borrower hereby
appoints each other Borrower as its true and lawful attorney-in-fact, with full
right and power, for purposes of exercising all rights of such person hereunder
and under applicable law with regard to the transactions contemplated under the
Loan Documents. The foregoing is a material inducement to the agreement of
Lender to enter into this Agreement and to consummate the transactions
contemplated hereby. The Borrowers represent they are operated as part of one
consolidated business entity and are directly dependent upon each other for and
in connection with their respective business activities financial resources.
Each Borrower will receive a direct economic and financial benefit from the
Obligations incurred under this Agreement and the incurrence of such Obligations
is in the best interests of each Borrower.

 

14.10 Revival of Obligations. If the incurrence or payment of the Obligations by
Borrower or any Guarantor or the transfer by either or both of such parties to
Lender of any property of either or both such parties should for any reason
subsequently be declared to be void or voidable under any state or federal law
relating to creditor’s rights, including provisions of the United States
Bankruptcy Code (11 U.S.C. §101 et seq.), as amended, and any successor statute
relating to fraudulent conveyances, preferences, and other voidable or
recoverable payments or money or transfers or property (collectively, a Voidable
Transfer), and if Lender is required to repay or restore, in whole or in part,
any such Voidable Transfer, or elects to do so upon the reasonable advice of its
counsel, then, as to any such Voidable Transfer or the amount thereof that
Lender is required or elects to repay or restore, and as to all reasonable
costs, expenses, and attorneys’ fees of Lender related thereto, the liability of
Borrower or such Guarantor automatically shall be revived, reinstated, and
restored and shall exist as though such Voidable Transfer had never been made.

 

14.11 Setoff. Borrower hereby grants to Lender a lien, security interest and
right of setoff as security for all Obligations to Lender upon and against all
deposits, credits, collateral and property, now or hereafter in the possession,
custody, safekeeping or control of Lender, or any entity under the control of
Lender, or its parent entity(ies), or in transit to any of them. At any time,
without demand or notice, Lender may set off the same or any part thereof and
apply the same to the Obligations of Borrower, even though unmatured and
regardless of the adequacy of any other collateral securing the Obligations. ANY
AND ALL RIGHTS TO REQUIRE LENDER TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT
TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS
RIGHTS OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE
BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

 

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14.12 Releases. In recognition of Lender’s right to have all its attorneys’ fees
and other expenses incurred in connection with this Agreement secured by the
Collateral, notwithstanding payment in full of all Obligations by Borrower,
Lender shall not be required to record any terminations or satisfactions of any
of its liens on the Collateral or to turnover any excess proceeds of Collateral
held by Lender, unless and until Lender has received an original counterpart of
a general release in a form prepared by and reasonably acceptable to Lender
(each a Release), fully executed and (if requested) acknowledged by each of the
following (the Releasing Parties): (i) Borrower (and each of them, if there is
more than one); (ii) if Borrower is a corporation, partnership, limited
liability company, or other legal entity, then by such officers, directors,
shareholders, partners, members, or other owners of Borrower as Lender may
designate or require; (iii) any Subordinating Creditors; (iv) any Guarantors;
and (v) such other persons or entities that Lender may designate, wherein (among
other things) the Releasing Parties (and each of them) release the Lender
Parties of and from any and all Claims, and wherein such Releasing Parties waive
their rights under California Civil Code Section 1542. Borrower understands that
this provision constitutes a waiver of its rights under the UCC (including,
without limitation, the provisions of UCC Section 9-513).

 

15. CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND REFERENCE PROCEEDING.

 

THE VALIDITY OF THE LOAN DOCUMENTS, THEIR CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. THE PARTIES AGREE
THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THE LOAN DOCUMENTS
SHALL BE TRIED AND LITIGATED ONLY IN THE STATE COURTS LOCATED IN THE COUNTY OF
SANTA CLARA, STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE VENUE INCLUDES THE
STATE OF CALIFORNIA, OR AT THE SOLE OPTION OF LENDER, IN ANY OTHER COURT IN
WHICH LENDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER AND LENDER EACH
WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, THE RIGHT TO A TRIAL BY
JURY IN ANY PROCEEDING UNDER THE LOAN DOCUMENTS OR RELATING TO THE DEALINGS OF
BORROWER AND LENDER AND ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF “FORUM
NON CONVENIENS” OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 15.

 

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR
RESPECTIVE RIGHTS 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 §638 as such section may be amended and/or re-numbered from time to
time (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 proceeding shall be conducted pursuant
to and in accordance with the provisions of California Code of Civil Procedure
§§638 through 645.1 inclusive, as such sections may be amended and/or
re-numbered from time to time. No provision of this Section shall limit the
right of any party (a) to exercise self-help remedies (including setoff), (b) to
foreclose against or sell any collateral, by power of sale or otherwise, or (c)
to obtain or oppose provisional or ancillary remedies from a court of competent
jurisdiction before, after or during the pendency of a reference. The exercise
of, or opposition to, any such remedy does not waive the right of any party to
reference pursuant to this Section. Subject to the referee’s power to award
costs to the prevailing party, the parties will equally share the cost of the
referee and the court reporter at trial. In the event of any challenge to the
legality or enforceability of this Section, the prevailing party shall be
entitled to recover the costs and expenses, including reasonable attorneys’
fees, incurred by it in connection therewith.

 

[Remainder of Page Intentionally Left Blank; Signatures on Next Page]

 

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Borrower and Lender have executed and delivered this Agreement at Lender’s place
of business in Morgan Hill, California as of the date first above written.

 

  BORROWER:         POLAR POWER, INC.,   a California corporation         Signed
by: /s/ Arthur D. Sams   Print Name: Arthur D. Sams   Title/Capacity: CEO &
Corporate Secretary         PINNACLE BANK,   a California corporation        
Signed by: /s/ Kevin O’Hare   Print Name: Kevin O’Hare   Title/Capacity:
President, Pinnacle Capital Finance

 

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Schedule 2.3

 

Deposit Account of Borrower for Advances

 

Account # 202010989

 

Bank Name and Wire Transfer Instructions:

 

Pinnacle Bank

 

ABA # 121144340

 

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Schedule 5.1

 

EXISTING LIENS WHICH ARE TO CONTINUE

 

[NONE]

 

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Schedule 5.13

 

LITIGATION

 

1) Rolando Ahumada vs Polar Power Inc (we declined mediation settlement last
week. Still negotiating settlement. Settlement claim was for $180K. Targeting
under $50K). 2) Augustin Mejia Mendez vs Polar Power Inc. New claim. 3) Fredrick
Clark vs Polar Power Inc. New claim. 4) Abraham Trejo vs Polar Power Inc. New
claim. Currently being handled by workers comp policy.

 

These employees stopped working at Polar between 10/2018 and 12/2019. Most of
these employees were terminated for continuous policy violations. These cases
involve disgruntled employees suing Borrower under employment law. Borrower’s
estimates that these cases may settle in mediation for a dollar amount between
$50,000.00 to $100,000.00.

 

Borrower has insurance that provides for legal representation for these matters,
with the policy having a deductible of $100,000.00.

 

Upon Lender’s request, Borrower agrees to provide Lender with periodic updates
and information regarding the status of the above litigation.

 

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Schedule 5.20

 

USE OF PROCEEDS OF INITIAL ADVANCE

 

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