Exhibit 10.18

 

Partners for Growth 

 

Loan and Security Agreement

  

Borrower:

Giga-tronics Incorporated, a California corporation

Address:

4650 Norris Canyon Road, San Ramon CA, 94583

 

 

Borrower: Microsource, Inc., a California corporation Address: 4650 Norris
Canyon Road, San Ramon CA, 94583     Date:  April 27, 2017

 

THIS LOAN AND SECURITY AGREEMENT (“Agreement”) is entered into on the above date
(the “Effective Date”) between PARTNERS FOR GROWTH V, L.P. (“PFG”), whose
address is 1660 Tiburon Blvd., Suite D, Tiburon, CA 94920 and Borrower(s) named
above (jointly and severally, “Borrower”), whose chief executive offices are
located at the above addresses (“Borrower’s Address”). The Schedule to this
Agreement (the “Schedule”) being signed by the parties concurrently, is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 7 below.)

 

1.     LOANS.

 

1.1 Loans. PFG will make loans to Borrower (the “Loan” or “Loans”) in the amount
(s) shown on the Schedule subject at all times to, and notwithstanding any other
provision of this Agreement, no Default or Event of Default having occurred and
being continuing at any time a Loan is requested or made.

 

1.2 Interest. All Loans and all other monetary Obligations shall bear interest
at the rates shown in the Schedule, except where otherwise expressly set forth
in this Agreement. Interest shall be payable monthly on the first day of each
month for interest accrued during the prior month (or such other Billing
Period). Interest payable from time to time on Loan principal will be determined
by multiplying outstanding Loan principal by the per annum interest rate set
forth in Section 2 of the Schedule and dividing such product by 360 to render a
daily interest amount, which daily interest amount will be multiplied by the
actual number of days elapsed in each month (or other Billing Period) to derive
the amount of interest due in such month (or other Billing Period). In computing
interest, (i) all payments received after 12:00 p.m. U.S. Pacific time on any
day shall be deemed received at the opening of business on the next Business
Day, and (ii) the date of the making of any Loan shall be included and the date
of payment shall be excluded; provided, however, that if any Loan is repaid on
the same day on which it is made, such day shall be included in computing
interest on such Loan.

 

1.3 Fees. Borrower shall pay PFG the fees shown on the Schedule, which are in
addition to all interest, Lender Expenses and other sums payable to PFG, all of
which are not refundable.

 

1.4 Loan Requests. To obtain a Loan, Borrower shall make a Qualifying Request to
PFG compliant with Section 8.5. Loan Requests are not deemed made until PFG
acknowledges receipt of the same by electronic mail or otherwise in writing.
Without limiting the effect of Section 8.22, each Borrower appoints the
Responsible Officer(s) as its authorized agent to make Loan Requests and any
Loan Request made by such Responsible Officer(s) shall be binding on each
Borrower as if made by its own respective officers who are duly authorized to
bind Borrower in respect of this Agreement. PFG’s obligation to fund a Loan
Request shall be subject to its receipt of such reports, certificates and other
information as may be set forth in the Schedule. Loan Requests received after
12:00 Noon U.S. Pacific time on any Business Day will not be deemed to have been
received by PFG until the next Business Day. PFG may rely on any Loan Request
given by a person whom PFG believes in good faith is a Responsible Officer, and
Borrower will indemnify PFG for any loss PFG suffers as a result of that
reliance.

 

1.5 Late Fee. If any payment of principal or interest Obligation is not received
by PFG by the end of the third Business Day after the later of (i) the date for
such payment to be received by PFG as reflected in any PFG invoice that may be
sent from time to time to Borrower and (ii) such Obligation’s Due Date, then
upon each such failure to timely pay Borrower shall pay PFG a late payment fee
equal to 5% of the amount of the payment due and not timely paid.
Notwithstanding the foregoing, Borrower shall not incur the afore-specified late
payment fee in respect of an Obligation contemplated within clause (ii) of the
definition of Due Date that is capable of being reasonably estimated (such as
the interest portion of a monthly payment where an intervening principal payment
has also been made) so long as Borrower pays the greater of the amount
reasonably estimated and the last such monthly payment made. If Borrower has
overpaid the amount due based on its reasonable estimation, PFG will credit any
such overpayment to the next payment due. If Borrower has underpaid based on its
reasonable estimation, then so long as Borrower pays the amount of such
underpayment within three Business Days of PFG’s notice of such underpayment, no
late payment fee shall apply to such underpayment. Notwithstanding anything to
the contrary set forth in this Agreement, the imposition of any late payment fee
and Borrower’s payment thereof shall not be construed as PFG’s consent to
Borrower’s failure to pay any amounts when due, and PFG’s acceptance of any late
payment shall not restrict PFG’s exercise of any remedies arising out of any
such failure, such as under Section 6 of this Agreement. Unless expressly waived
in writing by PFG in its sole discretion, interest at the Default Rate shall
commence to apply to all monetary Obligations not timely paid as from the date
the relevant grace period (for payment prior to a late payment fee applying, as
set forth above), expires.

 

 

 
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Partners for Growth

Loan and Security Agreement

 

1.6 Invoicing. PFG will endeavor to send invoices to Borrower (i) prior to the
end of each month reflecting amounts due from time to time under or in
connection with this Agreement, including for interest that will fall due
through the end of each such month and (as applicable) recurring or scheduled
principal payments, and (ii) from time to time not less than three Business Days
before the Due Date for other non-recurring monetary Obligations and monetary
Obligations not having a specified date for payment; provided, however, the
failure of PFG to send or Borrower to receive an invoice for payment Obligations
falling due shall in no event excuse Borrower from its obligation to timely make
such payments. The responsibility to make payments so that they are received by
PFG on or prior to the Due Date rests solely with Borrower.

 

2. SECURITY INTEREST.

 

2.1 Grant of Security Interest. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to PFG a continuing security
interest in, and pledges to PFG, all of the following (collectively, the
“Collateral”): all right, title and interest of Borrower in and to all of the
following, whether now owned or hereafter arising or acquired and wherever
located: all Accounts; all Inventory (except for MSI Bonded Inventory); all
Equipment; all Collateral Accounts (including Deposit Accounts); all General
Intangibles (including without limitation all Intellectual Property); all
Investment Property; all Other Property; and any and all claims, rights and
interests in any of the above, and all guaranties and security for any of the
above, and all substitutions and replacements for, additions, accessions,
attachments, accessories, and improvements to, and proceeds (including proceeds
of any insurance policies, proceeds of proceeds and claims against third
parties) of, any and all of the above and all Borrower’s books relating to any
and all of the above.

 

Notwithstanding anything herein to the contrary, that the Collateral will not
include (a) any application for a Trademark that would otherwise be deemed
invalidated, cancelled or abandoned due to the grant of a Lien thereon unless
and until such time as the grant of such Lien will not affect the validity of
such trademark, (b) any lease, license, contract, or agreement, if the grant of
a security interest in such lease, license, contract, or agreement under the
terms thereof or under applicable law with respect thereto, is prohibited and
such prohibition has not been or is not waived or the consent of the other party
to such lease, license, contract, or agreement has not been or is not otherwise
obtained or under applicable law such prohibition cannot be waived, (c) more
than 65% of the voting equity interests of any Subsidiary of Borrower organized
in a jurisdiction outside of the United States, provided, however, such
percentage shall be 100% unless Borrower demonstrates to PFG’s reasonable
satisfaction that pledging more than 65% of the voting equity interests of such
Subsidiary would result in a material adverse tax consequence; (d) vehicles and
other goods subject to a certificate of title, and (e) any deposit accounts used
exclusively for payroll or employee benefit payment purposes; provided that (x)
any such limitation described in the foregoing clause (b) on the security
interests granted hereunder shall only apply to the extent that any such
prohibition could not be rendered ineffective pursuant to the UCC or any other
applicable law or principles of equity and (y) in the event of the termination
or elimination of any such prohibition or the requirement for any consent
contained in any applicable law, lease, license, contract or other agreement, to
the extent sufficient to permit any such item to become Collateral hereunder, or
upon the granting of any such consent, or waiving or terminating any requirement
for such consent, a security interest in such lease, license, contract or other
agreement shall be automatically and simultaneously granted hereunder and shall
be included as Collateral hereunder.

 

3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.

 

In order to induce PFG to enter into this Agreement and to make Loans, Borrower
represents and warrants to PFG as follows, and Borrower covenants that the
following representations will continue to be true, except for representations
expressly specified to be made as of a particular date, and that Borrower will
at all times comply with all of the following covenants, throughout the term of
this Agreement and thereafter until all Obligations (other than inchoate
indemnity obligations) have been paid and performed in full:

 

 

 
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Partners for Growth

Loan and Security Agreement

 

3.1 Corporate Existence, Authority and Consents. Borrower is and will continue
to be, duly organized, validly existing and in good standing under the laws of
the jurisdiction of its formation and has in full force and effect all
Governmental Authorizations required for Borrower to lawfully conduct its
business as conducted on the Effective Date. Borrower shall give PFG 30 days’
prior written notice before changing its jurisdiction or form of organization.
Borrower is and will continue to be qualified and licensed to do business in all
jurisdictions in which any failure to do so could result in a Material Adverse
Change. The execution, delivery and performance by Borrower of this Agreement,
and all other documents contemplated hereby (i) have been duly and validly
authorized, (ii) are enforceable against Borrower in accordance with their terms
(except as enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar Legal Requirements relating to
creditors' rights generally), and (iii) do not violate Borrower’s Constitutional
Documents, or any material Legal Requirement or any material agreement or
instrument of Borrower or relating to its property, (iv) does not require any
action by, filing, registration or qualification with, or Governmental
Authorization from, any Governmental Body (except such Governmental
Authorizations which have already been obtained and are in full force and
effect), and (v) do not constitute grounds for acceleration of any material
Indebtedness or obligation under any agreement or instrument of Borrower or
relating to its property. Without limiting the foregoing: (A) the Board has the
authority under Borrower’s Constitutional Documents to enter into and cause
Borrower to perform, or to delegate such authority to a Responsible Officer to
enter into and cause Borrower to perform, its Obligations, and (B) no consent is
required of any Person other than such consents as have already been obtained or
could reasonably result in a cost to or liability of Borrower in excess of
$100,000.

 

3.2 Name; Trade Names and Styles. As of the Effective Date, the name of Borrower
set forth in the heading to this Agreement is its correct name, as set forth in
its Constitutional Documents. Listed in the Representations are all prior names
of Borrower and all of Borrower’s present and prior trade names as of the
Effective Date. Borrower has complied, and will in the future comply, in all
material respects, with all laws relating to the conduct of business under a
fictitious business name, if applicable to Borrower.

 

3.3 Place of Business; Location of Collateral. As of the Effective Date, the
address set forth in the heading to this Agreement is Borrower’s chief executive
office. In addition, as of the Effective Date, Borrower has places of business
and Collateral is located only at the locations set forth in the
Representations. Borrower will give PFG at least 30 days prior written notice
before opening any additional place of business, changing its chief executive
office (other than to the new address as from April 1, 2017 advised in the
Representations), or moving any of the Collateral valued at greater than $10,000
to a location other than Borrower’s Address or one of the locations set forth in
the Representations, except that Borrower may (x) maintain sales offices in the
ordinary course of business at which not more than a total of $10,000 fair
market value of Equipment is located, and (y) provide Inventory up to $240,000
in any instance to customers on a temporary basis without having sold such
Inventory, solely for the purposes of demonstration, consistent in form and
substance with Borrower’s past practice.

 

3.4 Title to Collateral; Perfection; Permitted Liens. 

 

(a)     Borrower is as of the Effective Date, and will at all times in the
future be, the sole owner of all the Collateral, except for Collateral which is
leased or licensed to Borrower. The Collateral is as of the Effective Date and
will remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. As of the Effective
Date, PFG will have, and will continue to have, a First-Priority perfected and
enforceable security interest in all of the Collateral, subject only to
Permitted Liens, and Borrower will at all times defend the Liens granted to PFG
hereunder and use commercially-reasonable efforts to defend the Collateral
against all claims of others.

 

(b)     Borrower has set forth in the Representations all of Borrower’s
Collateral Accounts as of the Effective Date, and Borrower shall (i) give PFG
five Business Days advance written notice before establishing any new Collateral
Accounts or (ii) depositing any Cash or Cash Equivalents or Investment Property
into any new Collateral Account and (iii) subject to the rights of the Senior
Lender, shall cause the institution where any such new Collateral Account is
maintained to execute and deliver to PFG a Control Agreement in form legally and
commercially sufficient to perfect PFG’s security interest in the Collateral
Account and otherwise reasonably satisfactory to PFG in its good faith business
judgment.

 

(c)     In the event that Borrower shall at any time after the Effective Date
have any commercial tort claims against others, which it is asserting, and in
which the potential recovery exceeds $100,000, Borrower shall promptly notify
PFG thereof in writing and provide PFG with such information regarding the same
as PFG shall request (unless providing such information would waive Borrower’s
attorney-client privilege). Such notification to PFG shall constitute a grant of
a security interest in the commercial tort claim and all proceeds thereof to
PFG, and Borrower shall execute and deliver all such documents and take all such
actions as PFG shall request in connection therewith.

 

 

 
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Partners for Growth

Loan and Security Agreement

 

(d)      As of the Effective Date, no Collateral with a value in excess of
$100,000 is affixed to any real property in such a manner or with such intent as
to become a fixture, except as disclosed in detail in Exhibit A. From and after
the Effective Date, without PFG’s consent in each instance, no material part of
the Collateral will be affixed to any real property in such a manner, or with
such intent, as to become a fixture. Borrower is not, except as set forth in
Exhibit A, and will not become a lessee under any real property lease pursuant
to which the lessor may obtain any rights in any of the Collateral and no such
lease now prohibits, restrains, impairs or will prohibit, restrain or impair
Borrower’s right to remove any Collateral from the leased premises. Whenever any
Collateral is located upon premises in which any third party has an interest,
Borrower shall, whenever requested by PFG, use commercially reasonable efforts
to cause such third party to execute and deliver to PFG, in form acceptable to
PFG, such waivers and subordinations as PFG shall specify in its good faith
business judgment; provided that, with respect to any property of Borrower which
is considered work-in-process but not yet inventory and is temporarily located
for finishing with a third party as part of Borrower’s historic manufacturing
process, no such third party waiver or subordination will be required with
respect to such property so long as (x) temporarily locating such property with
a third party is consistent with Borrower’s past manufacturing processes and (y)
such property is not located with any such third party for a period longer than
the time required by such third party to complete the work on such property.
Borrower will keep in full force and effect, and will comply with all material
terms of, any lease of real property where any of the Collateral now or in the
future may be located.

 

(e)     Except as specified in the Representations, Borrower is not party to,
nor is it bound by, any Restricted License.

 

3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good
working condition (ordinary wear and tear excepted), and Borrower will not use
the Collateral for any unlawful purpose. Borrower will promptly advise PFG in
writing of any material loss or damage to the Collateral.

 

3.6 Books and Records. Borrower has maintained and will maintain at Borrower’s
Address complete and accurate books and records, comprising an accounting system
in accordance with GAAP.

 

3.7 Financial Condition, Statements and Reports. All Financial Statements now or
in the future delivered to PFG have been, and will be, prepared in conformity
with GAAP and now and in the future will fairly present the results of
operations and financial condition of Borrower in all material respects, in
accordance with GAAP, at the times and for the periods therein stated. Between
the last date covered by any such statement provided to PFG and the Effective
Date, there has been no Material Adverse Change.

 

3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely filed,
and will timely file, all material required Tax Returns, and Borrower has timely
paid, and will timely pay, all Taxes now or in the future owed by Borrower.
Borrower may, however, defer payment of any of the foregoing which are contested
by Borrower in good faith, provided that Borrower (i) contests the same by
appropriate proceedings promptly and diligently instituted and conducted, (ii)
notifies PFG in writing of the commencement of, and any material development in,
the proceedings, and (iii) posts bonds or takes any other steps required to keep
the same from becoming a lien upon any of the Collateral. Borrower is unaware of
any claims or adjustments proposed for any of Borrower’s prior tax years which
could result in additional Taxes becoming due and payable by Borrower. Borrower
has paid, and shall continue to pay all amounts necessary to fund all present
and future pension, profit sharing and deferred compensation plans in accordance
with their terms, and Borrower has not and will not withdraw from participation
in, permit partial or complete termination of, or permit the occurrence of any
other event with respect to, any such plan which could reasonably be expected to
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other Governmental Body.

 

3.9 Compliance with Law. Borrower has, to the best of its knowledge, complied,
and will comply, in all material respects, with all provisions of all Legal
Requirements applicable to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower’s business, and all environmental matters.

 

3.10 Litigation. Except as disclosed in Exhibit A hereto as of the Effective
Date or disclosed in an update to the Representations as to future periods,
there is no claim, suit, litigation, proceeding or investigation pending or (to
Borrower’s Knowledge) threatened against or affecting Borrower in any court or
before any Governmental Body (or any basis therefor known to Borrower) (i)
involving any single claim of $50,000 or more, or involving $100,000 or more in
the aggregate, or (ii) which could reasonably be expected to result, either
separately or in the aggregate, in any Material Adverse Change. Borrower will
promptly inform PFG in writing of any claim, proceeding, litigation or
investigation in the future threatened or instituted against Borrower involving
any single claim of $50,000 or more, or involving $100,000 or more in the
aggregate.

 

3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for lawful
business purposes, including any purposes detailed in the Schedule. Borrower is
not purchasing or carrying any “margin stock” (as defined in Regulation U of the
Board of Governors of the Federal Reserve System) and no part of the proceeds of
any Loan will be used to purchase or carry any “margin stock” or to extend
credit to others for the purpose of purchasing or carrying any “margin stock.”

 

3.12 No Default. At the Effective Date, no Default or Event of Default has
occurred, and no Default or Event of Default will have occurred after giving
effect to any Loans being made concurrently herewith.

 

 

 
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Partners for Growth

Loan and Security Agreement

 

3.13 Protection and Registration of Intellectual Property Rights. Borrower owns
or otherwise holds the right to use all Intellectual Property rights material to
Borrower’s business or necessary for the conduct of its business as currently
conducted and reflected in any Borrower’s Plans. Borrower shall: (a) protect,
defend and maintain the validity and enforceability of its Intellectual
Property, other than Intellectual Property that is not material to Borrower’s
business, has a fair value of less than $25,000 and that Borrower has
affirmatively determined not to maintain or to abandon; (b) promptly advise PFG
in writing of infringements of its Intellectual Property material to its
business; (c) except as permitted in clause (a), not allow any Intellectual
Property material to Borrower’s business to be abandoned, forfeited or dedicated
to the public without PFG’s written consent, (d) provide (i) written notice to
PFG at least ten (10) days prior to entering into or becoming bound by any
Restricted License (other than over-the-counter software that is commercially
available to the public and licenses or agreements of Borrower with customers in
which Borrower is an original equipment manufacturer), and (ii) the consent or
waiver of any Person whose consent or waiver is necessary for (A) any Restricted
License to be deemed “Collateral” and for PFG to have a Lien in it that might
otherwise be restricted or prohibited by law or by the terms of any such
Restricted License, whether now existing or entered into in the future, and (B)
PFG to have the ability in the event of a liquidation of any Collateral to
dispose of such Collateral in accordance with PFG’s rights and remedies under
this Agreement and the other Loan Documents, and (e) while any Obligations are
Outstanding, shall not Transfer any Intellectual Property without PFG’s consent,
which consent shall not be unreasonably withheld if no Default or Event of
Default has occurred and is then continuing, the Transfer of such Intellectual
Property would not give rise to such a Default or Event of Default, and if such
Intellectual Property meets the three criteria set forth as the exceptions to
Borrower’s duties to protect, defend and maintain under clause (a), above. If,
before the Obligations have been paid and/or performed in full, Borrower shall
(i) adopt, use, acquire or apply for registration of any trademark, service mark
or trade name, (ii) apply for registration of any patent or obtain any patent or
patent application; (iii) create or acquire any published or material
unpublished works of authorship material to the business that is or is to be
registered with the U.S. Copyright Office or any non-U.S. equivalent; or (iv)
register or acquire any domain name or domain name rights, then the provisions
of Section 2.1 shall automatically apply thereto, and Borrower shall use all
commercially reasonable efforts to give PFG advance written notice thereof and
in any event shall thereafter give PFG prompt written notice thereof (which for
purposes hereof shall be deemed to be not more than five (5) Business Days from
the occurrence of each and any of the foregoing). Borrower shall further provide
PFG with all information and details relating to the foregoing and take such
further actions as PFG may reasonably request from time to time to enable PFG to
perfect or continue the perfection of PFG’s interest in such Collateral.

 

3.14 Domain Rights and Related Matters. Borrower (a) is the sole record, legal
and beneficial owner of all domain names and domain name rights used in
connection with its business and that of its Subsidiaries, free and clear of any
rights or claims of any third party; (b) has set forth in the Representations
with respect to domain names and ownership thereof, domain registry, domain
servers, location and administrative contact information, web hosting and
related services and facilities (collectively, “Domain Rights”) is true,
accurate and complete in all material respects and Borrower shall promptly
notify PFG of any material changes to such information; (c) shall maintain all
Domain Rights that Borrower has not affirmatively determined to abandon in full
force and effect so long as any Obligations remain outstanding; (d) shall, upon
request of PFG, notify such third parties (including domain registrars, hosting
companies and internet service providers) of PFG’s security interest in
Borrower’s Domain Rights; and (e) shall promptly advise PFG in writing of any
material disputes or infringements of its Domain Rights. The obligations of
Borrower under this Section shall not be limited by any Borrower obligations
under the IP Security Agreement and related Collateral Agreements and Notices
executed in connection with this Agreement.

 

3.15 Internal Controls. Parent maintains a system of internal controls,
including, but not limited to, disclosure controls and procedures, internal
controls over accounting matters and financial reporting and legal and
regulatory compliance controls (collectively, "Internal Controls") that are
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. The Internal Controls are overseen by
the audit committee (the "Audit Committee") of Parent's board of directors (the
"Board") in accordance with the Exchange Act rules. Except as specified in
Exhibit A, Parent does not reasonably expect to publicly disclose or report to
the Audit Committee or the Board, a significant deficiency, material weakness,
change in Internal Controls or fraud involving management or other employees who
have a significant role in Internal Controls, any violation of, or failure to
comply with, the Securities Laws, or any matter that, if determined adversely,
would have or reasonably be expected to result, individually or in the
aggregate, in a Material Adverse Change.

 

3.16 SEC Reporting. Parent is and will remain subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act and (i) has filed and
will file all required reports under Section 13 or 15(d) of the Exchange Act, as
applicable, other than Form 8-K reports; and (ii) has submitted and will submit
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T, during the 12 months preceding such sale.

 

 

 
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Partners for Growth

Loan and Security Agreement

 

3.17 SEC Filings; FINRA and the Sarbanes-Oxley Act. Parent has timely filed with
or furnished to the Securities and Exchange Commission (the “SEC”) each report,
statement, schedule, form or other document or filing required to be filed or
furnished (or otherwise filed or furnished) by Parent with the SEC from the date
of its initial filing with the SEC to the Effective Date (all such documents
collectively being the “SEC Documents”). Each SEC Document complied, and each
SEC Document filed or furnished to the SEC subsequent to the Effective Date will
comply, in all material respects with the applicable requirements of the
Securities Act and the Exchange Act, and did not or will not contain any untrue
statement of material fact or omit to state any material fact necessary in order
to make the statements made therein, in light of the circumstances under which
they were made, not misleading. Parent has and at all times will comply in all
material respects with its obligations under FINRA and the Sarbanes-Oxley Act of
2002. Parent has provided PFG with a copy of any and all notices of material
noncompliance and subsequent resulting written communications received from the
SEC, FINRA and the NASDAQ, along with Parent’s responses thereto.

 

3.18 No Injunctions. Neither Borrower nor any of its predecessors or affiliates
has been subject to any order, judgment or decree of any court of competent
jurisdiction temporarily, preliminarily or permanently enjoining such person for
a failure to comply with Regulation D under the Securities Act and Borrower
shall comply in all respects with Regulation D in connection with any future
securities offerings made in reliance on Regulation D.

 

3.19 PFG Parent Stock

 

(a) The shares of Parent’s common stock issuable on the Effective Date and on a
monthly basis under this Agreement as set forth in Section 8(d) of the Schedule
(the “PFG Parent Stock”) have been duly and validly authorized for issuance on
the Effective Date and each other date on which the PFG Parent Stock is required
to be issued. The issuance of the PFG Parent Stock is not subject to preemptive
or any similar rights of the stockholders of Parent (which have not been duly
waived as at the Effective Date) or any liens or encumbrances except for
restrictions on transfer provided for herein or under applicable federal and
state securities laws and restrictions created by PFG. The PFG Parent Stock will
be issued without any legends other than a customary Securities Act legend,
until such time as it is removed pursuant to the provisions hereof.

 

(b) The capitalization table of Parent provided to PFG as part of the
Representations is true, correct, accurate and complete as of the date hereof.

 

(c) No consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any governmental
authority or other person or entity is required on the part of Parent in
connection with the execution, delivery and performance of this Agreement or the
issuance, sale and delivery of the PFG Parent Stock, except (i) such filings as
shall have been made prior to and shall be effective on and as of the date
hereof, (ii) notice filings required pursuant to applicable state securities
laws on or after the date hereof, and (iii) filings necessary to perfect
security interests of PFG. All stockholder consents required in connection with
the issuance of the PFG Parent Stock have either been obtained by Parent or no
such consents are required.

 

(d) Assuming the accuracy of the representations and warranties of PFG contained
in Exhibit C hereof, the offer, sale and issuance of the PFG Parent Stock is
exempt from the registration requirements of the Securities Act pursuant to 506
of Regulation D under the Securities Act and from the registration and
qualification requirements of applicable state securities laws. Neither the
Company nor any agent on its behalf has solicited or will solicit any offers to
sell or has offered to sell or will offer to sell all or any part of such
securities to any person or persons so as to bring the sale and issuance of the
PFG Parent Stock within the registration provisions of the Securities Act.

 

(e) Subject only to the proviso set forth in Section 4.13, Parent is and will
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act and (i) has filed and will file all required reports under Section
13 or 15(d) of the Exchange Act, as applicable, during the 12 months preceding
the initial issuance of PFG Parent Stock, other than Form 8-K reports; and (ii)
has submitted and will submit electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T, during the 12 months preceding such sale
(a “Reporting Issuer”).

 

(f) The PFG Parent Stock has been authorized for quotation on the NASDAQ Capital
Select Market. Any filings required by such market, including, without
limitation, the Financial Industry Regulatory Authority (“FINRA”) shall be
timely made and any required authorizations or approvals for the entry into this
Agreement and the consummation of the transactions contemplated herein,
including, without limitation, the issuance of the PFG Parent Stock, have been
obtained.

 

(g) Unless required to do so by Special Request under Section 6 of the Schedule,
Parent shall not at any time provide PFG with any material nonpublic information
and will publicly disclose the terms of this Agreement on Form 8-K under the
Exchange Act (including it as an exhibit thereto only if Parent deems it
required under applicable law) promptly following the date hereof; provided, if
applicable, that Parent makes no representation or warranty with respect to any
information provided to Parent in writing pursuant to a Special Request.

 

 

 
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(h) Parent has not and shall not pay any commission or other remuneration either
directly or indirectly in connection with the PFG Parent Stock.

 

(j) Parent has not and shall not engage any placement agent, finder or broker
dealer in connection with the offer and sale of the PFG Parent Stock.

 

(k) neither Parent nor any of its predecessors or affiliates has been subject to
any order, judgment or decree of any court of competent jurisdiction
temporarily, preliminarily or permanently enjoining such person for a failure to
comply with Regulation D under the Securities Act and Parent shall comply in all
respects with Regulation D in connection with any future securities offerings
made in reliance on Regulation D.

 

(l) neither Parent nor any person acting on its behalf has used or will use any
form of general solicitation or general advertising in connection with the offer
or sale of the PFG Parent Stock.

 

(m) if all of the foregoing (a) through (l) and PFG’s representations set forth
in Exhibit C, are (and remain) true and correct, PFG will be entitled to sell
the PFG Parent Stock in the ordinary course under Rule 144.

 

(n) The authorized capital of Borrower consists of 40,000,000 common shares, of
which 9,594,203 are issued and outstanding, 1,000,000 Preferred Shares, no par
value per share, of which 18,533.51 are issued and outstanding, of which (i)
250,000 are designated as Series A Preferred Shares and none are issued and
outstanding, (ii) 10,000 are designated as Series B Preferred Shares and 9,997
are issued and outstanding, (iii) 3,500 are designated as Series C Preferred
Shares and 3,424.65 are issued and outstanding (iv) 6,000 are designated as
Series D Preferred Shares and 5,111.86 are issued and outstanding. Each share of
preferred stock can convert into 100 shares of common. Common stock warrants
totaling 1,093,071 have been granted in association with the Preferred Share
purchases; an additional 2,643,631 of common stock warrants have been granted in
association with other debt and equity financing. As of the date hereof,
Borrower has reserved a total of 2,850,000 shares of its Common Stock for
issuance under its 2005 Plan, of which 1,004,500 shares are reserved for
issuance upon exercise of outstanding options. Borrower has also issued 100,000
common stock options outside of the 2005 that is outstanding. A capitalization
table for Parent, true, correct, accurate and complete in all material respects
is appended hereto as Exhibit D.

 

4. ADDITIONAL DUTIES OF BORROWER.

 

Borrower will at all times comply with all of the following covenants throughout
the term of this Agreement:

 

4.1 Financial and Other Covenants. Borrower shall at all times comply with the
financial and other covenants set forth in the Schedule.

 

4.2. Remittance of Proceeds. Subject to the rights of the Senior Lender, all
proceeds arising from the disposition of any Collateral shall be delivered, in
kind, by Borrower to PFG in the original form in which received by Borrower not
later than the following Business Day after receipt by Borrower, to be applied
to the Obligations in such order as PFG shall determine; provided that, if no
Default or Event of Default has occurred and is continuing, Borrower shall not
be obligated to remit to PFG (i) the proceeds of Accounts arising in the
ordinary course of business, or (ii) the proceeds of the sale of surplus, worn
out or obsolete Equipment disposed of by Borrower in good faith in an arm’s
length transaction for an aggregate purchase price of $25,000 or less (for all
such transactions in any fiscal year). Borrower agrees that it will not
commingle proceeds of Collateral (other than those described in subclauses (i)
and (ii) above) with any of Borrower’s other funds or property, but will hold
such proceeds separate and apart from such other funds and property and in an
express trust for PFG, except as set forth above, and subject to the rights of
the Senior Lender. Subject to the rights of the Senior Lender, PFG may, in its
good faith business judgment, require that all proceeds of Collateral be
deposited by Borrower into a Lock-Box account, or such other “blocked account”
as PFG may specify, pursuant to a blocked account agreement in such form as PFG
may specify in its good faith business judgment. Nothing in this Section limits
the restrictions on disposition of Collateral set forth elsewhere in this
Agreement. Notwithstanding anything contained herein to the contrary, so long as
no Default or Event of Default shall have occurred and be continuing (unless by
reason of a conditional waiver or forbearance then being in effect between PFG
and Borrower), Borrower shall not be required to deliver such proceeds to PFG in
connection with any disposition so long as (x) Borrower reinvests all or any
portion of such proceeds in assets used or useful in the business of Borrower,
and (y) Borrower has notified PFG in advance of the intended reinvestment of
such proceeds.

 

 

 
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4.3 Insurance. Borrower shall at all times insure all of the tangible personal
property Collateral and carry such other business insurance, with insurers
reasonably acceptable to PFG, in such form and amounts as PFG may reasonably
require and as are customary and in accordance with standard practices for
Borrower’s industry and locations, and Borrower shall provide evidence of such
insurance to PFG. All such insurance policies shall have a lender’s loss payable
endorsement showing PFG as a lender loss payee, each in form and substance
reasonably acceptable to PFG. Upon receipt of the proceeds of any such
insurance, subject to the rights of the Senior Lender, PFG shall apply such
proceeds in reduction of the Obligations as PFG shall determine in its good
faith business judgment, except that, provided no Default or Event of Default
has occurred and is continuing, PFG shall release to Borrower insurance proceeds
with respect to Collateral totaling less than $100,000, which shall be utilized
by Borrower for the replacement of the Collateral with respect to which the
insurance proceeds were paid. PFG may require reasonable assurance that the
insurance proceeds so released will be so used. If Borrower fails to provide or
pay for any insurance, PFG may, but is not obligated to, obtain the same at
Borrower’s expense. Borrower shall promptly deliver to PFG copies of all
material reports made to insurance companies. Notwithstanding anything contained
herein to the contrary, so long as no Default or Event of Default shall have
occurred and be continuing (unless by reason of a conditional waiver or
forbearance then being in effect between PFG and Borrower), Borrower shall not
be required to deliver such proceeds of such insurance to PFG so long as (x)
Borrower reinvests all or any portion of such proceeds in assets used or useful
in the business of Borrower, and (y) Borrower has notified PFG in advance of the
intended reinvestment of such proceeds.

 

4.4 Reports. Borrower, at its expense, shall provide PFG with the written
reports set forth in the Schedule, and such other written reports with respect
to Borrower (including budgets, projections, operating plans and other financial
documentation), as PFG shall from time to time specify in its good faith
business judgment.

 

4.5 Access to Collateral, Books and Records; Additional Reporting and Notices.
At reasonable times, and on three (3) Business Days” notice, PFG, or its agents,
shall have the right to inspect the Collateral, and the right to audit and copy
Borrower's books and records. The foregoing inspections and audits shall be at
Borrower’s expense and the charge therefor shall be $850 per person per day (or
such higher amount as shall represent PFG’s then current standard charge for the
same), plus Lender Expenses, provided that so long as no Default or Event of
Default has occurred and is then continuing and no inspection or audit within
the one-year period prior to such inspection or audit has revealed material
deficiencies or inaccuracies in Borrower’s books and records, only one such
inspection and audit shall be at Borrower’s expense during any calendar year.
Notwithstanding the foregoing, Borrower shall not be required to disclose to PFG
any document or information (i) where disclosure is prohibited by applicable
law, or (ii) is subject to attorney-client or similar privilege or constitutes
attorney work product. If Borrower is withholding any information under the
preceding sentence, it shall so advise PFG in writing, giving PFG a general
description of the nature of the information withheld. Without limiting the
scope of reporting under Section 6 of the Schedule, Borrower shall promptly
disclose to PFG any efforts to sell Borrower, its business or assets or any
material part thereof or to refinance the Loan and shall disclose the salient
details of any offers received from time to time in respect of the foregoing. At
any time when a Default or Event of Default has occurred and is continuing
(whether or not PFG has agreed to forbear), PFG shall be entitled (i) to be
briefed by the as to such matters as PFG may require in its business discretion,
(ii) to receive advance notice of any and all Board meetings or written
consents, together with the agendas for the foregoing, and (iii) to observe any
such Board meetings, whether or not formally constituted as such; provided that,
but subject to the next succeeding proviso, with respect to the rights contained
in clauses (i) through (iii), Borrower may exclude confidential compensation
information and any other information relating to this Agreement, any other Loan
Document, or Borrower’s relationship with the Senior Lender, PFG or any other
lender, or any information Borrower reasonably believes may create a conflict of
interest for PFG or affect the attorney/client or a similar privilege of any of
Borrower and their legal advisors; provided further however, that Borrower’s
right to exclude information shall be subject to it providing PFG with a general
description of the information excluded and the claimed basis for exclusion.

 

4.6 Negative Covenants. Except as may be permitted in the Schedule, Borrower
shall not, without PFG's prior written consent (which shall be a matter of its
good faith business judgment and shall be conditioned on Borrower then being in
compliance with the terms of this Agreement), do any of the following:

 

(i) acquire any assets, except in the ordinary course of business, or make any
Investments other than Permitted Investments;

 

(ii) enter into any transaction outside the ordinary course of business with a
value in excess of $50,000 (which non-ordinary course transactions shall include
mergers, amalgamations, consolidations in respect of any Borrower or other Group
Member, provided that with not less than thirty (30) days’ notice to PFG, one
Borrower may merge with another Borrower and a Non-Borrower Subsidiary may merge
with a Borrower or another Non-Borrower Subsidiary;

 

(iii) Transfer any Collateral (including without limitation the Transfer of
Collateral which is then leased back by Borrower), except for (A) the sale of
finished Inventory in the ordinary course of Borrower’s business, (B) the sale
or other disposal of worn-out, obsolete or unneeded Equipment in the ordinary
course of business and otherwise in compliance with the terms of this Agreement,
(C) the making of Permitted Investments, and (D) the granting of Permitted
Liens; and, for the avoidance of any doubt, a Transfer of business or property,
as contemplated above, would include (1) Borrower or any Subsidiary making or
causing any payment to be made on Subordinated Debt unless expressly permitted
under the terms of the subordination, intercreditor or other agreement to which
the Subordinated Debt is subject (and, if permitted in this Agreement, only to
the extent permitted), and (2) other than with the express consent of PFG in its
sole business discretion, the amendment or modification of any such
subordination, intercreditor or other agreement to provide for earlier or
greater principal, interest or other payments thereon or adversely affect the
subordination thereof to Obligations owed to PFG;

 

 

 
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(iv) store any Inventory or other Collateral with any warehouseman or other
third party with an aggregate value (per location) of $10,000 or greater, unless
there is in place a bailee agreement in such form as PFG shall specify in its
good faith business judgment between PFG and such warehouseman or other third
party;

 

(v) sell any Inventory on a sale-or-return, guaranteed sale, consignment, or
other contingent basis;

 

(vi) make any loans of any money or other assets, other than Permitted
Investments;

 

(vii) incur or permit to exist any Indebtedness, other than Permitted
Indebtedness;

 

(viii) guarantee or otherwise become liable with respect to the obligations of
another party or entity;

 

(ix) pay or declare any Dividends (except for dividends payable solely in stock
of Borrower);

 

(x) redeem, retire, purchase or otherwise acquire, directly or indirectly, any
of Borrower's equity, except as required in the ordinary course of business and
consistent with past practice in connection with redeeming or purchasing equity
of departing employees, up to a maximum aggregate of $25,000 in any fiscal year;
provided, however, that payment of a “put” purchase price to PFG in connection
with any warrants held from time to time with Borrower shall not be limited by
this clause;

 

(xi) engage, directly or indirectly, in any business other than the businesses
currently engaged in by Borrower or reasonably related thereto;

 

(xii) with respect to Non-Borrower Subsidiaries, after the date hereof (A) cause
or permit any Non-Borrower Subsidiary to hold Cash or Cash Equivalents with
depositary institutions or otherwise of more than $10,000, or (B) cause or
permit Borrower (in the aggregate) to make Permitted Investments in Non-Borrower
Subsidiaries or incur Permitted Indebtedness to Non-Borrower Subsidiaries (in
the aggregate) of more than $25,000 at any time;

 

(xiii) make or permit any payment on any Subordinated Debt, except under the
terms of the subordination, intercreditor, or other similar agreement to which
such Subordinated Debt is subject, or (b) amend any provision in any document
relating to the Subordinated Debt which would increase the amount thereof,
provide for earlier or greater principal, interest, or other payments thereon,
or adversely affect the subordination thereof to Obligations owed to PFG;

 

(xiv) (A) without at least thirty (30) days prior written notice to PFG: (1) add
any new offices or business locations, including warehouses (unless such new
offices or business locations contain less than $10,000 in Borrower’s assets or
property), (2) change its jurisdiction of organization, (3) change its
organizational structure or type, (4) change its legal name, (5) change any
organizational number (if any) assigned by its jurisdiction of organization; or
(6) form any new Subsidiaries, and in each case, subject to (x) Borrower’s and
such Subsidiary(ies) compliance with Section 4.9 hereof, (y) such
Subsidiary(ies) compliance with Section 3.4(b), and (z) such Subsidiary(ies)
compliance with Section 8(b) of the Schedule; or (B) fail to provide notice to
PFG of any Key Person departing from or ceasing to be actively in the employ of
Borrower within the earlier to occur of promptly after Knowledge thereof and (2)
two days after such Key Person’s departure from Borrower;

 

(xv) liquidate or dissolve, or elect or resolve to liquidate or dissolve; or

 

(xvi) the Board shall permit or shall resolve to or approve (unless such
resolution or approval is expressly conditioned upon the prior consent of PFG),
or Borrower shall otherwise take any affirmative steps to effect, any of the
foregoing actions in clauses (i) through (xv), inclusive, which are not
otherwise expressly permitted herein unless the result of such actions would
result in a repayment of all Obligations in accordance with this Agreement.

 

Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default would occur as a result of such
transaction.

 

4.7 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or instituted or threatened in writing against PFG with respect to
any Collateral or relating to Borrower, Borrower shall, without expense to PFG,
make available Borrower and its officers, employees and agents and Borrower’s
books and records, to the extent that PFG may deem them reasonably necessary in
order to prosecute or defend any such suit or proceeding.

 

4.8 Changes. When required under Section 6 of the Schedule, Borrower agrees to
promptly notify PFG in writing of any changes in the information set forth in
the Representations, provided that Borrower shall only be required to notify PFG
of material changes to the Collateral value information set forth in Part A,
Sections 3(d)(e) and (g), and to the information solicited in Sections 3(i),
4(b), 4(d), Part B, Sections 8-10, 11(d) and 14.

 

 

 
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4.9 Further Assurances. Borrower agrees, at its expense, on reasonable request
by PFG, to execute all documents and take all actions, as PFG, may, in its good
faith business judgment, reasonably deem necessary in order to perfect and
maintain PFG’s perfected First-Priority security interest in the Collateral
(subject to Permitted Liens), and in order to fully consummate the transactions
contemplated by this Agreement, including without limitation, the joinder of any
New Subsidiaries to this Agreement and execution of such other agreements and
instruments as PFG reasonably request, including execution of a cross-corporate
continuing guaranty among Borrowers and any Non-Borrower Subsidiaries. In
addition, Borrower shall Deliver to PFG, within five (5) days after the same are
sent or received, copies of all material correspondence, reports, documents and
other filings with any Governmental Body regarding compliance with or
maintenance of Governmental Authorizations or Legal Requirements or that could
reasonably be expected to have a material adverse effect on any of the
Governmental Authorizations or otherwise on the operations of Borrower or any of
its Subsidiaries.

 

4.10 Collateral Accounts. Subject to Section 8(b) of the Schedule: (a) At all
times thereafter, maintain all of its Collateral Accounts depositary
institutions in respect of which a Control Agreement in favor of PFG is at all
times in effect; and (b) provide PFG five (5) days prior written notice before
establishing any Collateral Account at or with any bank or financial institution
other than the Senior Lender.

 

4.11 Authorization to File Security Instruments. By executing and delivering a
term sheet in respect of the Loans, Borrower shall be deemed to have authorized
PFG to file Security Instruments on or prior to the Effective Date, without
notice to Borrower, with all appropriate jurisdictions to perfect or protect
PFG’s interest or rights hereunder, including a notice that any disposition of
the Collateral, by either Borrower or any other Person, shall be deemed to
violate the rights of PFG under the Code. Such Security Instruments may indicate
the Collateral as “all assets of the Debtor” or words of similar effect, or as
being of an equal or lesser scope, or with greater detail, all in PFG’s
discretion.

 

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

 

4.13 Current Public Information. At all times during the term of this Agreement
and so long as PFG beneficially owns any PFG Parent Stock, Parent shall be and
remain a Reporting Issuer; provided, however, upon Parent’s prior request, PFG
will not unreasonably withhold its consent to a transaction that would otherwise
(without PFG consent) violate Borrower’s Obligations under Section 3.19(e),
Section 4.14 and this Section 4.13, but that PFG determines in its good faith
business judgment (a) is in the best interests of Borrower and (b) does not
reflect adversely on (i) Borrower’s business or its prospects, or (ii) the
Collateral, the value thereof or PFG’s Liens or the priority thereof.

 

4.14 Listing. Subject to the proviso set forth in Section 4.13, at all times
during the term of this Agreement and so long as PFG beneficially owns any PFG
Parent Stock, Parent shall cause the common stock to be authorized for quotation
on the NASDAQ Capital Select Market or OTC on NASDAQ.

 

4.15 Legends. Parent shall remove any restrictive securities legends on the PFG
Parent Stock six (6) months following each issuance of PFG Parent Stock. The
foregoing six (6) month period shall commence on the date PFG is required to be
issued under the terms of this Agreement, regardless of when in fact issued by
Parent.

 

5. TERM.

 

5.1 Maturity Date. This Agreement shall continue in effect until the Maturity
Date, subject to Sections 5.2, 5.3 and 5.4, below.

 

5.2 Early Termination. This Agreement may be terminated prior to the Maturity
Date as follows: (i) if expressly permitted in the Schedule, by Borrower,
effective three Business Days after written notice of termination is given to
PFG and payment in full in cash of all Obligations (other than inchoate
indemnity obligations); or (ii) by PFG at any time after the occurrence and
during the continuance of an Event of Default, without notice, effective
immediately. If a Borrower right to prepay Obligations is provided in the
Schedule and the exercise of such right is subject to payment of any
consideration to PFG as a condition to such exercise, a Borrower Default or
Event of Default that results in an acceleration of Obligations and/or
termination of this Agreement shall not relieve Borrower of the obligation to
pay such consideration, which shall be included in the Obligations required to
be paid or performed by Borrower.

 

 

 
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5.3 Payment of Obligations. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Notwithstanding
any termination of this Agreement, (i) all of PFG’s security interests in all of
the Collateral and all of the terms and provisions of this Agreement shall
continue in full force and effect until all Obligations have been paid and
performed in full, and (ii) no further Loans will be made to Borrower unless PFG
otherwise agrees in its sole and absolute discretion. No termination shall in
any way affect or impair any right or remedy of PFG, nor shall any such
termination relieve Borrower of any Obligation to PFG, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, PFG shall
promptly terminate its financing statements with respect to Borrower and deliver
to Borrower such other documents as may be required to fully terminate PFG’s
security interests.

 

5.4 Survival of Certain Obligations. Without limiting the survival of
obligations addressed otherwise in this Agreement and notwithstanding any other
provision of this Agreement, all covenants, representations and warranties made
in this Agreement continue in full force until this Agreement has terminated
pursuant to its terms and all Obligations (other than inchoate indemnity
obligations and any other obligations which, by their terms, are to survive the
termination of this Agreement) have been paid in full and satisfied. The
obligation of Borrower in Section 8.9 to indemnify PFG shall survive until the
statute of limitations with respect to such claim or cause of action shall have
run.

 

6. EVENTS OF DEFAULT AND REMEDIES.

 

6.1 Events of Default. The occurrence of any of the following events shall
constitute an “Event of Default” under this Agreement regardless of whether
notice thereof is given by PFG, and Borrower shall give PFG immediate written
notice thereof:

 

(a) Borrower or any Guarantor or any Person acting for Borrower or any Guarantor
makes any representation, warranty, or other statement now or later in this
Agreement, any Loan Document or in any writing delivered to PFG or to induce PFG
to enter this Agreement or any Loan Document, and such representation, warranty,
or other statement is incorrect in any material respect when made; or

 

(b) Borrower shall fail to pay any Loan or any interest thereon or any other
monetary Obligation when due; or

 

(c) Borrower (i) shall fail to comply with any of the financial covenants set
forth in the Schedule, or (ii) shall breach any of the provisions of Section 4.6
hereof, or (iii) shall fail to perform any other non-monetary Obligation which
by its nature cannot be cured, or (iv) shall fail to permit PFG to conduct an
inspection or audit as provided in Section 4.5 hereof or shall fail to provide
the notices, information, briefing and other rights set forth in Section 4.5, or
(v) shall fail to provide PFG with a Report under Section 6 of the Schedule
within three (3) Business Days after the date due; or

 

(d) Borrower shall fail to perform any non-monetary Obligation not otherwise
addressed in this Section 6.1, or a default or breach shall occur under any
other Loan Document (whether or not Borrower is a party), which failure, default
or breach is not cured within ten (10) Business Days after the earlier of date
performance is due and the date of such failure, default or breach, as the case
may be (which cure period, for the avoidance of doubt, shall not apply to events
set forth in this Agreement for which a cure period is otherwise specified); or

 

(e) any levy, assessment, attachment or seizure is made on all or any part of
the Collateral which is not cured within five (5) Business Days after the
occurrence of the same, or any lien or encumbrance (other than a Permitted Lien)
is made on all or any part of the Collateral which is not cured within ten (10)
Business Days after the occurrence of the same; or

 

(f) any default or event of default occurs under any obligation secured by a
Permitted Lien, which is not cured within any applicable cure period or
unconditionally waived in writing by the holder of the Permitted Lien (and for
purposes of the foregoing, a waiver does not include a forbearance); or

 

(g) there is, under any agreement to which Borrower or any Guarantor is a party
with a third party or parties, (i) any default resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount individually or in the aggregate in excess of
$100,000; or (ii) any breach or default by Borrower or any Guarantor, the result
of which could result in a Material Adverse Change; provided, however, for
purposes of this Section 6.1(g) (only), any default or breach which would be
reasonably likely to result in an overall adverse financial consequence of
$600,000 or more shall be presumed to constitute a Material Adverse Change
unless Borrower is able to demonstrate to PFG’s reasonable satisfaction that
such adverse financial consequence is not a Material Adverse Change; or

 

 

 
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(h) (i) dissolution, termination of existence, insolvency or business failure of
Borrower or any Guarantor; or (ii) appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any Insolvency Proceeding by, against or in
respect of Borrower or any Guarantor under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, in each above case
that is not dismissed or stayed within 45 days (and for the avoidance of doubt,
PFG shall have no obligation to advance any Loan while any of the foregoing
conditions or those set forth in clauses (iii) and (iv), below, exist); or (iii)
Borrower or any Guarantor shall generally not pay its debts as they become due;
or (iv) Borrower or any Guarantor shall conceal, remove or Transfer any part of
its property, with intent to hinder, delay or defraud its creditors, or make or
suffer any Transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or

 

(i) revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or

 

(j) revocation or termination of, or limitation or denial of liability upon, any
pledge of any certificate of deposit, securities or other property or asset of
any kind pledged by any third party to secure any or all of the Obligations, or
any attempt to do any of the foregoing, or commencement of proceedings by or
against any such third party under any bankruptcy or insolvency law; or

 

(k) Borrower makes any payment on account of any indebtedness or obligation
which has been subordinated to the Obligations (other than as permitted in the
applicable subordination agreement), or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or

 

(l) Borrower shall (i) enter into any agreement, binding or non-binding, that
would result in a Change in Control, or (ii) effect or suffer a Change in
Control; or

 

(m) a default or breach shall occur under any other Loan Document, which default
or breach shall be continuing after the later of cure period expressly specified
in such Loan Document or five (5) Business Days; or

 

(n) Parent shall fail to timely issue PFG Parent Stock when due or to comply
with Sections 4.13, 4.14, or 4.15 (without any grace or cure period); or

 

(o) a Material Adverse Change shall occur.

 

PFG may cease making any Loans hereunder during any of the cure periods provided
above, and thereafter if an Event of Default has occurred and is continuing.

 

6.2 Remedies. Upon the occurrence and during the continuance of any Event of
Default, and at any time thereafter, PFG, at its option, and without notice or
demand of any kind (all of which are hereby expressly waived by Borrower), may,
subject to the rights of the Senior Lender, do any one or more of the following:
(a) Cease making Loans or otherwise extending credit to Borrower under this
Agreement or any other Loan Document; (b) Accelerate and declare all or any part
of the Obligations to be immediately due, payable, and performable,
notwithstanding any deferred or installment payments allowed by any instrument
evidencing or relating to any Obligation; (c) Take possession of any or all of
the Collateral wherever it may be found, and for that purpose Borrower hereby
authorizes PFG without judicial process to enter onto any of Borrower's premises
without interference to search for, take possession of, keep, store, or remove
any of the Collateral, and remain on the premises or cause a custodian to remain
on the premises in exclusive control thereof, without charge for so long as PFG
deems it necessary, in its good faith business judgment, in order to complete
the enforcement of its rights under this Agreement or any other agreement;
provided, however, that should PFG seek to take possession of any of the
Collateral by court process, Borrower hereby irrevocably waives: (i) any bond
and any surety or security relating thereto required by any statute, court rule
or otherwise as an incident to such possession; (ii) any demand for possession
prior to the commencement of any suit or action to recover possession thereof;
and (iii) any requirement that PFG retain possession of, and not dispose of, any
such Collateral until after trial or final judgment; (d) Require Borrower to
assemble any or all of the Collateral and make it available to PFG at places
designated by PFG which are reasonably convenient to PFG and Borrower, and to
remove the Collateral to such locations as PFG may deem advisable; (e) Complete
the processing, manufacturing or repair of any Collateral prior to a disposition
thereof and, for such purpose and for the purpose of removal, PFG shall have the
right to use Borrower's premises, vehicles, hoists, lifts, cranes, and other
Equipment and all other property without charge; (f) Sell, lease or otherwise
dispose of any of the Collateral, in its condition at the time PFG obtains
possession of it or after further manufacturing, processing or repair, at one or
more public and/or private sales, in lots or in bulk, for cash, exchange or
other property, or on credit, and to adjourn any such sale from time to time
without notice other than oral announcement at the time scheduled for sale. PFG
shall have the right to conduct such disposition on Borrower's premises without
charge, for such time or times as PFG deems reasonable, or on PFG's premises, or
elsewhere and the Collateral need not be located at the place of disposition.
PFG may directly or through any affiliated company purchase or lease any
Collateral at any such public disposition, and if permissible under applicable
law, at any private disposition. Any sale or other disposition of Collateral
shall not relieve Borrower of any liability Borrower may have if any Collateral
is defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Accounts and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes PFG to endorse or sign Borrower's name on all collections, receipts,
instruments and other documents, to take possession of and open mail addressed
to Borrower and remove therefrom payments made with respect to any item of the
Collateral or proceeds thereof, and, in PFG's good faith business judgment, to
grant extensions of time to pay, compromise claims and settle Accounts and the
like for less than face value; (h) Exercise any and all rights under any present
or future Control Agreements relating to Deposit Accounts or Investment
Property; and (i) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto. All Lender Expenses, liabilities and obligations
incurred by PFG with respect to the foregoing shall be added to and become part
of the Obligations, shall be due on demand, and shall bear interest at a rate
equal to the highest interest rate applicable to any of the Obligations. Without
limiting any of PFG's rights and remedies, from and after the occurrence and
during the continuance of any Event of Default, the interest rate applicable to
the Obligations shall be the Default Rate.

 

 

 
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6.3 Standards for Determining Commercial Reasonableness. Borrower and PFG agree
that a sale or other disposition (collectively, “sale”) of any Collateral which
complies with the following standards will conclusively be deemed to be
commercially reasonable: (i) Notice of the sale is given to Borrower at least
ten days prior to the sale, and, in the case of a public sale, notice of the
sale is published at least five days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted; (ii) Notice of the
sale describes the collateral in general, non-specific terms; (iii) The sale is
conducted at a place designated by PFG, with or without the Collateral being
present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.;
(v) Payment of the purchase price in cash or by cashier’s check or wire transfer
is required; (vi) With respect to any sale of any of the Collateral, PFG may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same. PFG shall be free to
employ other methods of noticing and selling the Collateral, in its discretion,
if they are commercially reasonable. Without limiting the foregoing, if Exigent
Circumstances exist, Borrower and PFG agree that notice periods may be shorter
than as set forth above and such shorter notice periods are commercially
reasonable in Exigent Circumstances. Borrower further acknowledges and agrees
that if PFG’s or third parties’ access to Collateral is inhibited, restricted or
denied, it shall be commercially reasonable for PFG to conduct a sale of
Collateral under such circumstances even though the lack of access to Collateral
would likely give rise to a sale price less than if parties had unfettered
access to Collateral for purposes of conducting a sale.

 

6.4 Power of Attorney. Upon the occurrence and during the continuance of any
Event of Default, without limiting PFG’s other rights and remedies, Borrower
grants to PFG an irrevocable power of attorney coupled with an interest,
authorizing and permitting PFG (acting through any of its employees, attorneys
or agents) at any time, at its option, but without obligation, with or without
notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but PFG agrees that if it exercises
any right hereunder, it will do so in good faith and in a commercially
reasonable manner: (a) Execute on behalf of Borrower any documents that PFG may,
in its good faith business judgment, deem advisable in order to perfect and
maintain PFG's security interest in the Collateral, or in order to exercise a
right of Borrower or PFG, or in order to fully consummate all the transactions
contemplated under this Agreement, and all other Loan Documents; (b) Execute on
behalf of Borrower, any invoices relating to any Account, any draft against any
Account Debtor and any notice to any Account Debtor, any proof of claim in
bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other
lien, or assignment or satisfaction of mechanic's, materialman's or other lien;
(c) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into PFG's
possession; (d) Endorse all checks and other forms of remittances received by
PFG; (e) Pay, contest or settle any lien, charge, encumbrance, security interest
and adverse claim in or to any of the Collateral, or any judgment based thereon,
or otherwise take any action to terminate or discharge the same; (f) Grant
extensions of time to pay, compromise claims and settle Accounts and General
Intangibles for less than face value and execute all releases and other
documents in connection therewith; (g) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (h)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (i) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give PFG the same rights of access and other rights with respect
thereto as PFG has under this Agreement; (j) Execute on behalf of Borrower and
file in Borrower’s name such documents and instruments as may be necessary or
appropriate to effect the Transfer of Domain Rights, domain names, domain
registry administrative contacts and domain and website hosting services into
the name of PFG or its designees, and (k) Take any action or pay any sum
required of Borrower pursuant to this Agreement and any other Loan Documents.
Any and all Lender Expenses incurred by PFG with respect to the foregoing shall
be added to and become part of the Obligations, shall be payable on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations. In no event shall PFG's rights under the foregoing power
of attorney or any of PFG's other rights under this Agreement be deemed to
indicate that PFG is in control of the business, management or properties of
Borrower.

 

 

 
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6.5 Application of Proceeds. All proceeds realized as the result of any sale of
the Collateral shall be applied by PFG first to Lender Expenses incurred by PFG
in the exercise of its rights under this Agreement, second to the interest due
upon any of the Obligations, and third to the principal of the Obligations, in
such order as PFG shall determine in its sole discretion. Any surplus shall be
paid to Borrower or other persons legally entitled thereto; Borrower shall
remain liable to PFG for any deficiency. If, PFG, in its good faith business
judgment, directly or indirectly enters into a deferred payment or other credit
transaction with any purchaser at any sale of Collateral, PFG shall have the
option, exercisable at any time, in its good faith business judgment, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by PFG of the cash
therefor.

 

6.6 Remedies Cumulative. In addition to the rights and remedies set forth in
this Agreement, PFG shall have all the other rights and remedies accorded a
secured party under the Code and under all other applicable laws, and under any
other instrument or agreement now or in the future entered into between PFG and
Borrower, and all of such rights and remedies are cumulative and none is
exclusive. Exercise or partial exercise by PFG of one or more of its rights or
remedies shall not be deemed an election, nor bar PFG from subsequent exercise
or partial exercise of any other rights or remedies. The failure or delay of PFG
to exercise any rights or remedies shall not operate as a waiver thereof, but
all rights and remedies shall continue in full force and effect until all of the
Obligations have been fully paid and performed.

 

7.     Definitions. As used in this Agreement, the following terms have the
following meanings:

 

“Account Debtor” means the obligor on an Account.

 

“Accounts” means all present and future “accounts” as defined in the Code in
effect on the Effective Date with such additions to such term as may hereafter
be made, and includes without limitation all accounts receivable, healthcare
receivables and other sums owing to Borrower.

 

“Affiliate” means, with respect to any Person, a relative, partner, shareholder,
director, officer, or employee of such Person, or any parent or Subsidiary of
such Person, or any Person directly or indirectly through any other Person
controlling, controlled by or under common control with such Person.

 

“Billing Period” means monthly, unless another period or date for payment is
specified under this Agreement (such as the Maturity Date), or (ii) such other
period as PFG as may result from monetary Obligations not being outstanding
during the entire period for which interest is being calculated (such as partial
months if the Effective Date is not the first day of a calendar month), or (iii)
such other period as PFG may notify in writing to Borrower. For the avoidance of
doubt, under this Agreement, a “month” consists of 31 days in each January,
March, May, July, August, October and December, 30 days in each other month
except February, which consists of 28 days or, in a leap year, 29 days.

 

“Board” means the Board of Directors or other governing authority of Borrower as
authorized in its Constitutional Documents.

 

“Business Day” or “business day” means a day on which PFG is open for business.

 

“Cash” means unrestricted and unencumbered (except for the Liens of PFG and the
Senior Lender) cash or cash equivalents in Deposit Accounts or other Collateral
Accounts for which there is in effect a Control Agreement among Borrower, PFG
and the depositary institution in respect of such accounts, unless the
requirement for a Control Agreement has been waived by PFG.

 

“Cash Equivalents” means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency or any State
thereof having maturities of not more than one (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having a rating of at least A-1 or the equivalent thereof by
Standard & Poor's Ratings Group or a rating of P-1 or the equivalent thereof by
Moody's Investors Service, Inc.; (c) certificates of deposit held with the
Senior Lender maturing no more than one (1) year after the date of acquisition,
and overnight bank deposits, in each case which are issued by a commercial bank
organized under the laws of the United States or any state thereof, having
capital and surplus in excess of $500,000,000; and (d) money market funds at
least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this definition
and (e) Investments pursuant to Borrower's Investment Policy, provided that such
investment policy (and any such amendment thereto) has been provided by Borrower
to PFG and approved in writing by PFG.

 

 

 
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“Change in Control” means any event, transaction, or occurrence as a result of
which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3)
of the Securities Exchange Act of 1934, as an amended (the “Exchange Act”)),
other than a trustee or other fiduciary holding securities under an employee
benefit plan of Borrower, is or becomes a beneficial owner (within the meaning
Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of
securities of Borrower, representing thirty-five percent (35%) or more of the
combined voting power of Borrower’s then outstanding securities in a single
transaction or a series of related transactions (other than by the sale of
Borrower’s equity securities in a public offering or to venture capital or
private equity investors so long as Borrower identifies to PFG the venture
capital or private equity investors at least seven (7) Business Days prior to
the initial closing of the transaction and provides to PFG a description of the
material terms of the transaction and such other information as PFG may
reasonably request); or (b) during any period of twelve consecutive calendar
months, individuals who at the beginning of such period constituted the Board of
Borrower (together with any new directors whose election by the Board of
Borrower was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease for
any reason other than death or disability to constitute a majority of the
directors then in office (other than as a result of the above-referenced venture
capital / private equity exception, subject to the same notice and information
requirements as specified above).

 

“Code” means the Uniform Commercial Code as adopted and in effect in the State
of California from time to time.

 

“Collateral” has the meaning set forth in Section 2 above.

 

“Collateral Account” is any Deposit Account.

 

“Compliance Certificate” means Borrower’s certification of its compliance with
the terms and conditions of this Agreement and such other matters as PFG may
require to be addressed in such certificate, in the form as initially set forth
as Exhibit B hereto, as such form may be amended from time to time upon advance
notice from PFG.

 

“Constitutional Document” means for any Person, such Person’s formation
documents, as last certified by the Secretary of State (or equivalent
Governmental Body) of such Person’s jurisdiction of organization, together with,
(a) if such Person is a corporation, its bylaws in current form, (b) if such
Person is a limited liability company, its limited liability company agreement
(or operating or similar agreement), (c) if such Person is a partnership, its
partnership agreement (or similar agreement), and (d) if such Person is a
statutory joint venture company or similar entity, its joint venture (or
similar) agreement, each of the foregoing with all current amendments or
modifications thereto.

 

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

 

“continuing” and “during the continuance of” when used with reference to a
Default or Event of Default means that the Default or Event of Default has
occurred and has not been either waived in writing by PFG or cured within any
applicable cure period.

 

“Control Agreement” means a written agreement among PFG, Borrower and a
depositary bank or other custodian in respect of Borrower’s Collateral Accounts
by which the depositary bank or other custodian, as appropriate, agrees to
comply with instructions given from time to time by PFG directing the
disposition of the funds, investments and securities in Borrower’s Collateral
Accounts without further consent of Borrower, which instructions may include not
complying with instructions (which term may include the honoring of checks
written by Borrower against funds in said accounts) given by Borrower, and
containing other terms acceptable to PFG.

 

“Current Depositary(ies)” means the banking and / or other financial
institutions at which Borrower maintains Collateral Accounts on the Effective
Date.

 

“Default” means any event which with notice or passage of time or both, would
constitute an Event of Default.

 

 

 
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“Default Rate” means the lesser of (i) the applicable rate(s) set forth in the
Schedule, plus six percent (6%) per annum, and (ii) the maximum rate of interest
that may lawfully be charged to a commercial borrower under applicable usury
laws.

 

“Deposit Accounts” means all present and future “deposit accounts” as defined in
the Code in effect on the Effective Date with such additions to such term as may
hereafter be made, and includes without limitation all general and special bank
accounts, demand accounts, checking accounts, savings accounts and certificates
of deposit, and as used in this Agreement, the term “Deposit Accounts” shall be
construed to also include securities, commodities and other Investment Property
accounts.

 

“Dividend” means a payment or other distribution in respect to equity to an
owner thereof, (A) whether or not (i) in respect of net profits or otherwise,
(ii) declared by Borrower’s (or other relevant party’s) (iii) Board, previously
paid, or (iv) authorized in its Constitutional Documents or otherwise, and (B)
for the avoidance of doubt, includes distributions to members of a limited
liability company.

 

“Due Date” in relation to monetary Obligations payable from time to time by
Borrower means (i) the date for payment specified in this Agreement (such as, on
the first day of each calendar month for interest accrued during the prior
month, as contemplated in Section 1.2) or in any other writing executed and
delivered by PFG and Borrower from time to time, whether such payment is
recurring, one-time or otherwise, or (ii) in the case of Obligations for which
no date for payment is specified in this Agreement and which cannot be
reasonably ascertained without an invoice from PFG, such as reimbursement of
Lender Expenses, the date for payment specified in an invoice sent by or on
behalf of PFG to Borrower.

 

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

 

“Event of Default” means any of the events set forth in Section 6.1 of this
Agreement.

 

“Exigent Circumstances” means circumstances that substantially inhibit an
orderly sale process or that imply urgency due to rapid erosion of value or
opportunity, including Borrower closing its business or “going dark”, inability
or refusal (express or implied by non-response) to provide for the security of
Collateral.

 

“Financial Statements” means consolidated financial statements of Borrower,
including a balance sheet, income statement and cash flow and, in the case of
monthly-required financial statements, showing data for the month being reported
and a history showing each month from the beginning of the relevant fiscal year.

 

“First-Priority” means, in relation to PFG’s Lien in Collateral, a security
interest that is prior to any other security interest, with the exception of the
Liens of the Senior Lender and other Permitted Liens, which other Permitted
Liens may only have superior priority to PFG’s Lien as expressly specified
herein or pursuant to the terms of a subordination agreement between PFG and the
holder of such other Permitted Lien.

 

“GAAP” means generally accepted accounting principles consistently applied.

 

“General Intangibles” means all present and future “general intangibles” as
defined in the Code in effect on the Effective Date with such additions to such
term as may hereafter be made, and includes without limitation all Intellectual
Property, payment intangibles, royalties, contract rights, goodwill, franchise
agreements, purchase orders, customer lists, route lists, telephone numbers,
domain names, claims, income tax refunds, security and other deposits, options
to purchase or sell real or personal property, rights in all litigation
presently or hereafter pending (whether in contract, tort or otherwise),
insurance policies (including without limitation key man, property damage, and
business interruption insurance), payments of insurance and rights to payment of
any kind.

 

“good faith business judgment” means honesty in fact and good faith (as defined
in Section 1201 of the Code) in the exercise of PFG’s business judgment.

 

“Governmental Authorization” means any: (a) permit, license, certificate,
franchise, concession, approval, consent, ratification, permission, clearance,
confirmation, endorsement, waiver, certification, designation, rating,
registration, qualification or authorization that is, has been issued, granted,
given or otherwise made available by or under the authority of any Governmental
Body or pursuant to any Legal Requirement; or (b) right under any Contract with
any Governmental Body.

 

“Governmental Body” means any: (a) nation, principality, commonwealth, province,
territory, county, municipality, district or other jurisdiction of any nature;
(b) local, municipal, foreign or other government; (c) governmental or
quasi-governmental authority of any nature (including any governmental division,
subdivision, department, agency, bureau, branch, office, commission, council,
board, instrumentality, officer, official, representative, organization, unit,
body or entity and any court or other tribunal); (d) multi-national organization
or body; or (e) individual, entity or body exercising, or entitled to exercise,
any executive, legislative, judicial, administrative, regulatory, police,
military or taxing authority or power of any nature.

 

 

 
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“Group” means Borrower and all direct and indirect Subsidiaries and affiliated
Persons under the direct or indirect control of Borrower, and “Group Member”
means any of such foregoing Persons.

 

“including” means including (but not limited to).

 

“Indebtedness” means (a) indebtedness for borrowed money or the deferred
purchase price of property or services (other than trade payables arising in the
ordinary course of business), (b) obligations evidenced by bonds, notes,
debentures or other similar instruments, (c) reimbursement obligations in
connection with letters of credit, (d) capital lease obligations and (e)
Contingent Obligations.

 

“Insolvency Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law in any
jurisdiction, including assignments for the benefit of creditors, compositions,
receiverships, administrations, extensions generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.

 

“Intellectual Property” means all present and future: (a) copyrights, copyright
rights, copyright applications, copyright registrations and like protections in
each work of authorship and derivative work thereof, whether published or
unpublished, (b) trade secret rights, including all rights to unpatented
inventions and know-how, and confidential information; (c) mask work or similar
rights available for the protection of semiconductor chips; (d) patents, patent
applications and like protections including without limitation improvements,
divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same; (e) trademarks, servicemarks, trade styles,
and trade names, whether or not any of the foregoing are registered, and all
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Borrower connected with and symbolized by
any such trademarks; (f) Domain Rights as described in Section 3.14 hereof, (g)
computer software and computer software products; (h) designs and design rights;
(i) technology; (j) all claims for damages by way of past, present and future
infringement of any of the rights included above; and (k) all licenses or other
rights to use any property or rights of a type described above.

 

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

 

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

 

“Investment Property” means all present and future investment property,
securities, stocks, bonds, debentures, debt securities, partnership interests,
limited liability company interests, options, security entitlements, securities
accounts, commodity contracts, commodity accounts, and all financial assets held
in any securities account or otherwise, and all options and warrants to purchase
any of the foregoing, wherever located, and all other securities of every kind,
whether certificated or uncertificated.

 

“Knowledge” or “best of knowledge” and words of similar import mean either (i)
the actual knowledge of any of Borrower’s officers, including its Directors, any
Chief Executive Officer, President, designated legal representative under the
Legal Requirements of any non-U.S. jurisdiction, Chief Information Officer (if
any), Chief Technology Officer (or equivalent), Chief Financial Officer and
Corporate Controller, or Borrower's Vice Presidents or General Managers
supervising a business unit or division, or any persons succeeding or performing
the responsibilities of such identified positions including Directors with
executive authority, or (ii) such knowledge as the persons in such identified
positions would have assuming (A) Borrower policies in accordance with
generally-accepted norms of corporate governance and (B) the actual exercise of
reasonable diligence and prudence by such persons in accordance with such
policies.

 

“Legal Requirement” means any written local, municipal, foreign or other law,
statute, legislation, constitution, principle of common law, resolution,
ordinance, code, edict, decree, proclamation, treaty, convention, rule,
regulation, ruling, directive, pronouncement, requirement, specification,
determination, decision, opinion or interpretation that is, has been issued,
enacted, adopted, passed, approved, promulgated, made, implemented or otherwise
put into effect by or under the authority of any Governmental Body.

 

 

 
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“Lender Expenses” means, in each case without limitation as to type and kind:
reasonable Professional Costs, and all filing, recording, search, title
insurance, appraisal, audit, and other reasonable costs incurred by PFG,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is filed), including, but not limited to, Professional Costs PFG
pays or incurs in order to do the following: (i) prepare and negotiate this
Agreement and all present and future documents relating to this Agreement; (ii)
obtain legal advice in connection with this Agreement or Borrower; enforce, or
seek to enforce, any of its rights or retain the services of consultants to do
so; (iii) prosecute actions against, or defend actions by, Account Debtors; (iv)
commence, intervene in, or defend any action or proceeding; (v) initiate any
complaint to be relieved of the automatic stay in bankruptcy; (vi) file or
prosecute any probate claim, bankruptcy claim, third-party claim, or other
claim; (vii) examine, audit, copy, and inspect any of the Collateral or any of
Borrower’s books and records, subject to Section 4.5; (viii) protect, obtain
possession of, lease, dispose of, or otherwise enforce PFG’s security interest
in, the Collateral; and (ix) otherwise represent PFG in any litigation relating
to Borrower.

 

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

 

“Loan Documents” means, collectively, this Agreement, the Representations, and
all other present and future documents, instruments and agreements between PFG
and Borrower, including, but not limited to those relating to this Agreement,
and all amendments and modifications thereto and replacements therefor.

 

“Loan Request” means any request that may be made by a Borrower in connection
with this Agreement, including a borrowing request, consent request, a waiver
request and any other accommodation that may be given by PFG under or relating
to the Loan Agreement.

 

“Material Adverse Change” means any of the following: (i) a material adverse
change in the business, operations, or condition (financial or otherwise) of
Borrower or any Guarantor, or (ii) a material impairment of the prospect of
repayment of any portion of the Obligations; or (iii) a material impairment of
the perfection or priority of PFG’s Liens in the Collateral.

 

“MSI Bonded Inventory” means inventory held in bonded storage that is not
reflected in the Financial Statements of Borrower and that is made available to
Borrower’s customers as spare and repair parts.

 

“Maturity Date” means the Maturity Date specified in Section 4 of the Schedule,
or such earlier date at which Obligations become due by acceleration, prepayment
or otherwise.

 

“Net Income” means, as calculated on a consolidated basis for Borrower and its
Subsidiaries for any period as at any date of determination, the net profit (or
loss), after provision for taxes, of Borrower and its Subsidiaries for such
period taken as a single accounting period; provided, however, for purposes of
Section 3 of the Schedule, the amount of non-cash charges related to incentive
compensation arrangement approved by the Board and reflected in Net Income may
be added back for purposes of such Section 3 of the Schedule.

 

“New Subsidiary(ies)” means any person that becomes a Subsidiary of Borrower
after the date hereof.

 

“New Subsidiary(ies)” means any person that becomes a Subsidiary of Borrower
after the date hereof.

 

“Non-Borrower Subsidiary(ies)” means any direct or indirect Subsidiary of
Borrower not joined as a co-Borrower hereunder and otherwise joined to the Loan
Documents.

 

“Non-Overdue Senior Monetary Obligations” means, at any time, the amount of
monetary Obligations other than principal Indebtedness owed by Borrower to the
Senior Lender but not then due, such as accrued and unpaid interest not yet due.

 

“Obligations” means all present and future Loans, advances, debts, liabilities,
obligations, guaranties, covenants, duties and indebtedness at any time owing by
Borrower to PFG, including obligations and covenants intended to survive the
termination of this Agreement, whether evidenced by this Agreement or any note
or other instrument or document, or otherwise, including indebtedness under any
obligation to purchase equity derivatives (including stock warrants) purchased
or otherwise issued to PFG from time to time, whether arising from an extension
of credit, opening of a letter of credit, banker’s acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by PFG in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest (including deferred interest due
upon Maturity), charges, expenses, fees, attorney's fees, expert witness fees,
audit fees, collateral monitoring fees, closing fees, facility fees, termination
fees, minimum interest charges and any other sums chargeable to Borrower under
this Agreement or under any other Loan Documents.

 

“Ordinary (or “ordinary”) course of business” and derivatives shall apply to an
action taken or an action required to be taken and not taken by or on behalf of
a Borrower. An action will not be deemed to have been taken in the “ordinary
course of business” unless: (a) such action is consistent with its past
practices (if such type of action has been taken in the past and, if not, such
action shall be deemed not in the ordinary course of business) and is similar in
nature and magnitude to actions customarily taken by it; (b) such action is
taken in accordance with sound and prudent business practices in its
jurisdiction of organization; and (c) such action is not required to be
authorized by its shareholders and does not require any other separate or
special authorization of any nature.

 

 

 
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“Other Property” means the following as defined in the Code in effect on the
Effective Date with such additions to such terms as may hereafter be made, and
all rights relating thereto: all present and future “commercial tort claims”
(including without limitation any commercial tort claims identified in the
Representations), “documents”, “instruments”, “promissory notes”, “chattel
paper”, “letters of credit”, “letter-of-credit rights”, “fixtures”, “farm
products” and “money”; and all other goods and personal property of every kind,
tangible and intangible, whether or not governed by the Code.

 

“Parent” means Borrower, Giga-tronics Incorporated, a California corporation.

 

“Payment” means all checks, wire transfers and other items of payment received
by PFG for credit to Borrower’s outstanding Obligations.

 

“Permitted Indebtedness” means:

 

(i) the Loans and other Obligations;

 

(ii) Indebtedness existing on the Effective Date and shown on Exhibit A hereto;

 

(iii) Subordinated Debt;

 

(iv) Indebtedness owing to Senior Lender not to exceed the Senior Debt Limit
specified in the Schedule;

 

(v) other Indebtedness secured by Permitted Liens described in clauses (i),
(ii), (iii), (v), (vi), (vii), (viii) and (ix) of that definition;

 

(vi) unsecured Indebtedness to trade creditors incurred in the ordinary course
of business (for purposes of clarification, the permission under this clause
(vi) shall include trade payables for the deferred purchase price of property or
services incurred in the ordinary course of business);

 

(vii) extensions, refinancings, modifications, amendments and restatements of
any items of Permitted Indebtedness (i) through (vi) above, provided that the
principal amount thereof is not increased or the terms thereof are not modified
to impose materially more burdensome terms upon Borrower;

 

(viii) Indebtedness of up to $100,000 outstanding at any time secured by a Lien
described in clause (i) of Permitted Liens; provided such Indebtedness does not
exceed the lesser of the cost or fair market value of the property financed with
such Indebtedness; and

 

(ix) reimbursement obligations in respect of letters of credit in an aggregate
face amount outstanding not to exceed $300,000 at any time outstanding, which
have been reported to PFG in writing, and, in the case of reimbursement
obligations to the Senior Lender in respect of letters of credit which do not
exceed the Senior Debt Limit (taking into account all other Indebtedness to
Senior Lender).

 

“Permitted Investments” are:

 

(i) Investments (if any) shown on Exhibit A and existing on the Effective Date;

 

(ii) Investments consisting of Cash Equivalents;

 

 

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

 

(iv) Investments in Subsidiaries existing on the Effective Date.

 

“Permitted Liens” means the following:

 

(i) purchase money Liens (including Liens arising under any retention of title,
hire purchase or conditional sales arrangement or arrangements having similar
effect) (i) on Equipment acquired or held by Borrower incurred for financing the
acquisition of the Equipment securing no more than $100,000 in the aggregate
amount outstanding, or (ii) existing on Equipment when acquired, if the Lien is
confined to the property and improvements and the proceeds of the Equipment;

 

(ii) Liens for Taxes not yet payable;

 

(iii) additional Liens consented to in writing by PFG, which consent may be
withheld in its good faith business judgment. PFG shall have the right to
require, as a condition to its consent under this subparagraph (iii), that the
holder of the additional security interest or lien sign a subordination
agreement in PFG’s then standard form, acknowledge that the security interest is
subordinate to the security interest in favor of PFG, and agree not to take any
action to enforce its subordinate security interest so long as any Obligations
remain outstanding, and that Borrower agrees that any uncured default in any
obligation secured by the subordinate security interest shall also constitute an
Event of Default under this Agreement;

 

(iv) Liens being terminated substantially concurrently with this Agreement;

 

(v) Liens of materialmen, mechanics, warehousemen, carriers, or other similar
liens arising in the ordinary course of business and securing obligations which
are not delinquent;

 

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

 

(vii) Liens incurred in connection with the extension, renewal or refinancing of
the indebtedness secured by liens of the type described above in clauses (i),
(ii), (iii) and (ix), provided that any extension, renewal or replacement lien
is limited to the property encumbered by the existing lien and the principal
amount of the indebtedness being extended, renewed or refinanced does not
increase and other terms are not less favorable to Borrower;

 

(viii) Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods;

 

(ix) non-exclusive licenses of Intellectual Property granted to third parties in
the ordinary course of business; and

 

(x) Liens in favor of Senior Lender securing an amount not in excess of the
Senior Debt Limit.

 

“Person” means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, government, or any
agency or political division thereof, or any other entity.

 

“PFG Parent Stock” means the Parent common stock to be issued to PFG at the
Effective Date and during the term of the Loan as specified in Section 8(d) of
the Schedule.

 

“Plan” means Borrower’s Board-approved financial plan as presented to PFG on
March 22, 2017 in Excel format in the file entitled “PFG_20170324 Operating Plan
Presented.xlsx” for the Borrower’s fiscal year ending March 30, 2018.

 

“Professional Costs” means all reasonable fees and expenses of auditors,
accountants, valuation experts, Collateral disposition service providers,
restructuring and other advisory services in connection with restructurings,
workouts and Insolvency Proceedings, and fees and costs of attorneys.

 

“Qualifying Request” means a request made by a Responsible Officer of Borrower
under Section 1.4 for (i) a Loan (A) that is within Borrower’s borrowing
availability under this Agreement, (B) that satisfies the relevant conditions
set forth in this Agreement (including the Schedule), (C) that is accompanied by
such certificates, documents and instruments as may be required under this
Agreement or otherwise reasonably required by PFG to confirm Borrower’s
compliance with the Loan Documents at the time of such request, and (D) that is
made within 30 days of the date the Reporting package is required to be
delivered (as specified in Section 6 of the Schedule) showing satisfaction of
the relevant borrowing conditions, or (ii) any other matter for which PFG’s
consent is required under the Loan Documents.

 

“Representations” means the written Representations and Warranties provided by
Borrower to PFG referred to in the Schedule.

 

“Responsible Officer(s)” means William J. Thompson and John Regazzi, and any
other person authorized to bind Borrower and notified to PFG in writing by a
Responsible Officer as a new Responsible Officer.

 

“Restricted License” means any material license or other agreement with respect
to which Borrower is the licensee (a) that prohibits or otherwise restricts
Borrower from granting a security interest in Borrower’s interest in such
license or agreement or any other property, or (b) for which a default under or
termination of could interfere with PFG’s right to sell any Collateral.

 

“Security Instruments” means financing statements and similar notices filed
under the Code or other relevant local law (U.S. or non-U.S.) in any
jurisdiction in which such financing statements may be filed, fixed and floating
charges, share charges, mortgage debentures, and any other notices, instruments
and filings that reflect the “all assets” security granted to PFG by Borrower in
this Agreement and the other Loan Documents.

 

“Senior Debt” has the meaning set forth in Section 8 of the Schedule.

 

 

 
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“Senior Lender” has the meaning set forth in Section 8 of the Schedule.

 

“Subordinated Debt” means debt incurred by Borrower subordinated to Borrower’s
debt to PFG pursuant to a subordination agreement entered into between PFG,
Borrower and the subordinated creditor(s) upon terms acceptable to PFG in its
sole business discretion, but which may at PFG’s option include: (i)
subordination of subordinated creditor Lens, (ii) restrictions or prohibition of
payments on subordinated debt until all Obligations to PFG are fully repaid and
performed, and (iii) a prohibition on the exercise of remedies by a subordinated
creditor until all Obligations to PFG are fully repaid and performed.

 

“Subordination Agreement” means that certain Subordination Agreement, dated as
of the date hereof, by and between PFG and Senior Lender.

 

“Subsidiary” means, with respect to any Person, (i) any Person of which more
than 50% of the voting stock or other equity interests is owned or (ii) a Person
controlled, directly or indirectly, by such Person or one or more Affiliates of
such Person and which, for the avoidance of doubt, shall include a “sister”
company to a Person under common direct or indirect ownership meeting the above
specified percentage for being considered a “Subsidiary”.

 

“Tax” means any tax (including any income tax, franchise tax, capital gains tax,
estimated tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, occupation tax, inventory tax, occupancy tax, withholding tax or payroll
tax), levy, assessment, tariff, impost, imposition, toll, duty (including any
customs duty), deficiency or fee, and any related charge or amount (including
any fine, penalty or interest), that is, has been or may in the future be (a)
imposed, assessed or collected by or under the authority of any Governmental
Body, or (b) payable pursuant to any tax-sharing agreement or similar contract.

 

“Tax Return” means any return (including any information return), report,
statement, declaration, estimate, schedule, notice, notification, form,
election, certificate or other document or information that is, has been or may
in the future be filed with or submitted to, or required to be filed with or
submitted to, any Governmental Body in connection with the determination,
assessment, collection or payment of any Tax or in connection with the
administration, implementation or enforcement of or compliance with any Legal
Requirement relating to any Tax.

 

“Transfer” or “transfer” shall include any sale, assignment with or without
consideration, encumbrance, hypothecation, pledge, or other transfer or
disposition of any kind, including, but not limited to, transfers to receivers,
levying creditors, trustees or receivers in bankruptcy proceedings or general
assignees for the benefit of creditors, whether voluntary or by operation of
law, directly or indirectly.

 

Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with GAAP,
consistently applied. All other terms contained in this Agreement, unless
otherwise indicated, shall have the meanings provided by the Code, to the extent
such terms are defined therein.

 

8.     GENERAL PROVISIONS.

 

8.1 Confidentiality. PFG agrees to use the same degree of care that it exercises
with respect to its own proprietary information, to maintain the confidentiality
of any and all proprietary, trade secret or confidential information provided to
or received by PFG from Borrower prior to and after the Effective Date, which
(i) indicates that it is confidential, including business plans and forecasts,
non-public financial information, confidential or secret processes, formulae,
devices and contractual information, customer lists, and employee relation
matters, or (ii) by its very nature should reasonably be understood as
confidential; provided, however, in each case of (i) and (ii) above, such
information shall actually be treated by Borrower and by policy and conduct of
Borrower within its business as confidential and provided, further, that PFG may
disclose such information (A) to its officers, directors, employees, attorneys,
accountants, affiliates, advisory boards, participants, prospective
participants, assignees and prospective assignees, and such other Persons to
whom PFG shall at any time be required to make such disclosure in accordance
with applicable law or legal process, provided that with respect to voluntary
disclosees, such persons shall be subject to confidentiality obligations that
reasonably protect against the disclosure of such information, and (B) in its
good faith business judgment in connection with the enforcement of its rights or
remedies after an Event of Default, or in connection with any dispute with
Borrower or any other Person relating to Borrower. The confidentiality agreement
in this Section supersedes any prior confidentiality agreement of PFG relating
to Borrower.

 

8.2 Interest Computation. In computing interest on the Obligations, all Payments
received after 12:00 Noon, Pacific Time, on any day shall be deemed received on
the next Business Day.

 

8.3 Payments. All Payments may be applied, and in PFG's good faith business
judgment reversed and re-applied, to the Obligations, in such order and manner
as PFG shall determine in its good faith business judgment.

 

 

 
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8.4 Monthly Accountings. PFG may provide Borrower monthly with an account of
advances, charges, expenses and payments made pursuant to this Agreement. Such
account shall be deemed correct, accurate and binding on Borrower and an account
stated (except for reverses and reapplications of payments made and corrections
of errors discovered by PFG), unless Borrower notifies PFG in writing to the
contrary within 60 days after such account is rendered, describing the nature of
any alleged errors or omissions.

 

8.5 Notices. All notices to be given under this Agreement shall be in writing
and shall be given either personally, or by reputable private delivery service,
or by regular first-class mail, or certified mail return receipt requested, or
by fax to the most recent fax number a party has for the other party (and if by
fax, sent concurrently by one of the other methods provided herein), or by
electronic mail to the most recent electronic mail address for Borrower provided
for the chief financial officer or financial controller executing the
Representations (and if by electronic mail, with an electronic delivery and/or
read receipt), addressed to PFG or Borrower at the addresses shown in the
heading to this Agreement, in the Representations or at any other address
designated in writing by one party to the other party. All notices shall be
deemed to have been given upon delivery in the case of notices personally
delivered, or at the expiration of one Business Day following delivery to the
private delivery service, or two Business Days following the deposit thereof in
the United States mail, with postage prepaid, or on the first business day of
receipt during business hours in the case of notices sent by fax or electronic
mail, as provided herein.

 

8.6 Authorization to Use Borrower Name, Etc. Borrower irrevocably authorizes PFG
to: (i) use Borrower’s logo on PFG’s website and in its marketing materials to
denote the lending relationship between PFG and Borrower; (ii) use a “tombstone”
to highlight the transaction(s) from time to time between PFG and Borrower; and
(iii) to issue press releases in a form reasonable acceptable to Borrower and
PFG highlighting and summarizing the credit facilities extended by PFG to
Borrower from time to time under this Agreement, as amended from time to time,
all of the above (i) through (iii), for marketing purposes.

 

8.7 Severability. Should any provision of this Agreement be held by any court of
competent jurisdiction to be void or unenforceable, such defect shall not affect
the remainder of this Agreement, which shall continue in full force and effect.

 

8.8 Integration. This Agreement and such other written agreements, documents and
instruments as may be executed in connection herewith are the final, entire and
complete agreement between Borrower and PFG and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.

 

8.9 Waivers; Indemnity. The failure of PFG at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other Loan Document shall not waive or diminish any right of PFG later to demand
and receive strict compliance therewith. Any waiver of any default shall not
waive or affect any other default, whether prior or subsequent, and whether or
not similar. None of the provisions of this Agreement or any other Loan Document
shall be deemed to have been waived by any act or knowledge of PFG or its agents
or employees, but only by a specific written waiver signed by an authorized
officer of PFG and delivered to Borrower. Borrower waives the benefit of all
statutes of limitations relating to any of the Obligations or this Agreement or
any other Loan Document, and Borrower waives demand, protest, notice of protest
and notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by PFG on which Borrower is or may in any way be liable, and notice of any
action taken by PFG, unless expressly required by this Agreement. Borrower
hereby agrees to indemnify PFG and its affiliates, subsidiaries, parent,
directors, officers, employees, agents, and attorneys, and to hold them harmless
from and against any and all claims, debts, liabilities, demands, obligations,
actions, causes of action, penalties and Lender Expenses of every kind, which
they may sustain or incur based upon or arising out of any of the Obligations,
or any relationship or agreement between PFG and Borrower, or any other matter,
relating to Borrower or the Obligations; provided that this indemnity shall not
extend to any indemnified costs, expenses or damages determined by a court of
competent jurisdiction in a final judgment to have been proximately caused by
the indemnitee’s own gross negligence or willful misconduct. Notwithstanding any
provision in this Agreement to the contrary, the indemnity agreement set forth
in this Section shall survive any termination of this Agreement and shall for
all purposes continue in full force and effect.

 

8.10 No Liability for Ordinary Negligence. Borrower agrees that any and all
claims it may have under this Agreement shall be limited to claims against PFG
and not its directors, officers, employees, agents, attorneys or any other
Person affiliated with or representing PFG. Neither PFG, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing PFG shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the negligence of PFG, or any of its directors,
officers, employees, agents, attorneys or any other Person affiliated with or
representing PFG, but nothing herein shall relieve PFG from liability for its
own willful misconduct.

 

 

 
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8.11 Amendment. The terms and provisions of this Agreement may not be waived or
amended, except in a writing executed by Borrower and a duly authorized officer
of PFG. No purported amendment or modification of any Loan Document, or waiver,
discharge or termination of any obligation under any Loan Document, shall be
enforceable or admissible unless, and only to the extent, expressly set forth in
a writing signed by the party against which enforcement or admission is sought.
Without limiting the generality of the foregoing, no oral promise or statement,
nor any action, inaction, delay, failure to require performance or course of
conduct shall operate as, or evidence, an amendment, supplement or waiver or
have any other effect on any Loan Document. Any waiver granted shall be limited
to the specific circumstance expressly described in it, and shall not apply to
any subsequent or other circumstance, whether similar or dissimilar, or give
rise to, or evidence, any obligation or commitment to grant any further waiver.

 

8.12 Time of Essence. Time is of the essence in the performance by Borrower of
each and every obligation under this Agreement.

 

8.13 Lender Expenses. Borrower shall reimburse PFG for all Lender Expenses. All
Lender Expenses to which PFG may be entitled pursuant to this Paragraph shall
immediately become part of Borrower’s Obligations, shall be due on demand, and
if not paid within two (2) Business Days after demand, shall bear interest at a
rate equal to the highest interest rate applicable to any of the Obligations.

 

8.14 Benefit of Agreement. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and PFG; provided, however, that
Borrower may not assign or Transfer any of its rights under this Agreement
without the prior written consent of PFG, and any prohibited assignment shall be
void. No consent by PFG to any assignment shall release Borrower from its
liability for the Obligations.

 

8.15 Joint and Several Liability. If Borrower consists of more than one Person,
their liability shall be joint and several, and the compromise of any claim
with, or the release of, any Borrower shall not constitute a compromise with, or
a release of, any other Borrower.

 

8.16 Limitation of Actions. Any claim or cause of action by Borrower against
PFG, its directors, officers, employees, agents, accountants or attorneys, based
upon, arising from, or relating to this Loan Agreement, or any other Loan
Document, or any other transaction contemplated hereby or thereby or relating
hereto or thereto, or any other matter, cause or thing whatsoever, incurred,
done, omitted or suffered to be done by PFG, its directors, officers, employees,
agents, accountants or attorneys, shall be barred unless asserted by Borrower by
the commencement of an action or proceeding in a court of competent jurisdiction
by (a) the filing of a complaint within one year after the earlier to occur of
(i) the first act, occurrence or omission upon which such claim or cause of
action, or any part thereof, is based, or (ii) the date this Agreement is
terminated, and (b) the service of a summons and complaint on an officer of PFG,
or on any other person authorized to accept service on behalf of PFG, within
thirty (30) days thereafter. Borrower agrees that such one-year period is a
reasonable and sufficient time for Borrower to investigate and act upon any such
claim or cause of action. The one-year period provided herein shall not be
waived, tolled, or extended except by the written consent of PFG in its sole
discretion. This provision shall survive any termination of this Loan Agreement
or any other Loan Document.

 

8.17 Loan Monitoring. At reasonable times and upon reasonable advance notice to
Borrower, PFG shall have the right to visit personally with Borrower up to two
times per calendar year at its principal place of business or such other
location as the parties may mutually agree, for the purpose of meeting with
Borrower’s management in order to remain as up-to-date with Borrower’s business
as is practicable and to maintain best practices in terms of lender loan
monitoring and diligence.

 

8.18 Paragraph Headings; Construction; Counterparts. Paragraph headings are only
used in this Agreement for convenience. Borrower and PFG acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. This Agreement has
been fully reviewed and negotiated between the parties with the benefit of
independent counsel and no uncertainty or ambiguity in any term or provision of
this Agreement shall be construed strictly against PFG or Borrower under any
rule of construction or otherwise. References to “Borrower” are construed to
mean “each Borrower”, unless otherwise expressly specified. Amounts set off in
brackets or parentheses are negative. The word “shall” is mandatory, the word
“may” is permissive, and the word “or” is not exclusive. The term “Agreement”
includes the Schedule. and (if not otherwise specified) any amendment,
modification, restatement or other writing amending the terms of this Agreement.
Obligations of a similar nature addressed in different sections of this
Agreement shall be deemed supplemental to one another and not exclusive unless
expressly set forth as such. Words and phrases expressing examples, including
“for example” and “such as” are non-exclusive. This Agreement may be executed in
any number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, is an original, and all taken
together, constitute one Agreement.

 

 

 
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Loan and Security Agreement

 

8.19 Correction of Loan Documents. PFG may correct patent errors and fill in any
blanks in the Loan Documents consistent with the agreement of the parties so
long as PFG provides Borrowers with written notice of such correction and allows
Borrower at least ten (10) days to object to such correction. In the event of
such objection, such correction shall not be made except by an amendment signed
by both PFG and Borrower.

 

8.20 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of PFG and Borrower shall
be governed by the laws of the State of California. As a material part of the
consideration to PFG to enter into this Agreement, Borrower (i) agrees that all
actions and proceedings relating directly or indirectly to this Agreement shall
be litigated in courts located within California and that the exclusive venue
therefor shall, at PFG’s option, be Santa Clara County; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process in
any such action or proceeding by personal delivery or by
internationally-recognized commercial courier or overnight delivery service or
by certified mail, return receipt requested, to the last known address for
Borrower; and (iii) waives any and all rights Borrower may have to object to the
jurisdiction of any such court, or to transfer or change the venue of any such
action or proceeding. Notwithstanding the foregoing, PFG, in pursuit of
collection and Collateral or rights therein, may pursue remedies in any
jurisdiction in which Borrower or any Collateral resides or is deemed to reside.

 

8.21 Withholding. Payments received by PFG from Borrower under this Agreement
will be made free and clear of and without deduction for any and all present or
future taxes, levies, imposts, duties, deductions, withholdings, assessments,
fees or other charges imposed by any Governmental Body (including any interest,
additions to tax or penalties applicable thereto). Specifically, however, if at
any time any Governmental Body, applicable law, regulation or international
agreement requires Borrower to make any withholding or deduction from any such
payment or other sum payable hereunder to PFG, Borrower hereby covenants and
agrees that the amount due from Borrower with respect to such payment or other
sum payable hereunder will be increased to the extent necessary to ensure that,
after the making of such required withholding or deduction, PFG receives a net
sum equal to the sum which it would have received had no withholding or
deduction been required, and Borrower shall pay the full amount withheld or
deducted to the relevant Governmental Body. Borrower will, upon request, furnish
PFG with proof reasonably satisfactory to PFG indicating that Borrower has made
such withholding payment; provided, however, that Borrower need not make any
withholding payment if the amount or validity of such withholding payment is
contested in good faith by appropriate and timely proceedings and as to which
payment in full is bonded or reserved against by Borrower. The agreements and
obligations of Borrower contained in this Section 8.21 shall survive the
termination of this Agreement.

 

8.22 Multiple Borrowers; Suretyship Waivers.

 

(a) Borrowers' Agent. Each Borrower hereby irrevocably appoints each other
Borrower, as the agent, attorney-in-fact and legal representative of all
Borrowers for all purposes, including requesting disbursement of the Loan and
receiving account statements and other notices and communications to Borrowers
(or any of them) from PFG. PFG may rely, and shall be fully protected in
relying, on any request for a Loan, disbursement instruction, report,
information or any other notice or communication made or given by any Borrower,
whether in its own name, as Borrowers' agent, or on behalf of one or more
Borrowers, and PFG shall not have any obligation to make any inquiry or request
any confirmation from or on behalf of any other Borrower as to the binding
effect on it of any such request, instruction, report, information, other notice
or communication, nor shall the joint and several character of Borrowers'
obligations hereunder be affected thereby.

 

 

 
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Loan and Security Agreement

 

(b)     Waivers. Each Borrower hereby waives: (i) any right to require PFG to
institute suit against, or to exhaust its rights and remedies against, any other
Borrower or any other Person, or to proceed against any property of any kind
which secures all or any part of the Obligations, or to exercise any right of
offset or other right with respect to any reserves, credits or deposit accounts
held by or maintained with PFG or any indebtedness of PFG to any other Borrower,
or to exercise any other right or power, or pursue any other remedy PFG may
have; (ii) any defense arising by reason of any disability or other defense of
any other Borrower or any guarantor or any endorser, co-maker or other Person,
or by reason of the cessation from any cause whatsoever of any liability of any
other Borrower or any guarantor or any endorser, co-maker or other Person, with
respect to all or any part of the Obligations, or by reason of any act or
omission of PFG or others which directly or indirectly results in the discharge
or release of any other Borrower or any guarantor or any other Person or any
Obligations or any security therefor, whether by operation of law or otherwise;
(iii) any defense arising by reason of any failure of PFG to obtain, perfect,
maintain or keep in force any Lien on, any property of any Borrower or any other
Person; (iv) any defense based upon or arising out of any Insolvency Proceeding,
liquidation or dissolution proceeding commenced by or against or in respect of
any Borrower or any guarantor or any endorser, co-maker or other Person,
including without limitation any discharge of, or bar against collecting, any of
the Obligations (including without limitation any interest thereon), in or as a
result of any such proceeding. Until all of the Obligations have been paid,
performed, and discharged in full, nothing shall discharge or satisfy the
liability of Borrower hereunder except the full performance and payment of all
of the Obligations. If any claim is ever made upon PFG for repayment or recovery
of any amount or amounts received by PFG in payment of or on account of any of
the Obligations, because of any claim that any such payment constituted a
preferential Transfer or fraudulent conveyance, or for any other reason
whatsoever, and PFG repays all or part of said amount by reason of any judgment,
decree or order of any court or administrative body having jurisdiction over PFG
or any of its property, or by reason of any settlement or compromise of any such
claim effected by PFG with any such claimant (including without limitation the
any other Borrower), then and in any such event, Borrower agrees that any such
judgment, decree, order, settlement and compromise shall be binding upon
Borrower, notwithstanding any revocation or release of this Agreement or the
cancellation of any note or other instrument evidencing any of the Obligations,
or any release of any of the Obligations, and Borrower shall be and remain
liable to PFG under this Agreement for the amount so repaid or recovered, to the
same extent as if such amount had never originally been received by PFG, and the
provisions of this sentence shall survive, and continue in effect,
notwithstanding any revocation or release of this Agreement. Each Borrower
hereby expressly and unconditionally waives all rights of subrogation,
reimbursement and indemnity of every kind against any other Borrower, and all
rights of recourse to any assets or property of any other Borrower, and all
rights to any collateral or security held for the payment and performance of any
Obligations, including (but not limited to) any of the foregoing rights which
Borrower may have under any present or future document or agreement with any
other Borrower or other Person, and including (but not limited to) any of the
foregoing rights which Borrower may have under any equitable doctrine of
subrogation, implied contract, or unjust enrichment, or any other equitable or
legal doctrine. Each Borrower further hereby waives any other rights and
defenses that are or may become available to Borrower by reason of California
Civil Code Sections 2787 to 2855 (inclusive), 2899, and 3433, as now in effect
or hereafter amended, and under all other similar statutes and rules now or
hereafter in effect.

 

(c)     Consents. Each Borrower hereby consents and agrees that, without notice
to or by Borrower and without affecting or impairing in any way the obligations
or liability of Borrower hereunder, PFG may, from time to time before or after
revocation of this Agreement, do any one or more of the following in PFG's sole
and absolute discretion: (i) accept partial payments of, compromise or settle,
renew, extend the time for the payment, discharge, or performance of, refuse to
enforce, and release all or any parties to, any or all of the Obligations;
(ii) grant any other indulgence to any Borrower or any other Person in respect
of any or all of the Obligations or any other matter; (iii) accept, release,
waive, surrender, enforce, exchange, modify, impair, or extend the time for the
performance, discharge, or payment of, any and all property of any kind securing
any or all of the Obligations or any guaranty of any or all of the Obligations,
or on which PFG at any time may have a Lien, or refuse to enforce its rights or
make any compromise or settlement or agreement therefor in respect of any or all
of such property; (iv) substitute or add, or take any action or omit to take any
action which results in the release of, any one or more other Borrowers or any
endorsers or guarantors of all or any part of the Obligations, including,
without limitation one or more parties to this Agreement, regardless of any
destruction or impairment of any right of contribution or other right of
Borrower; (v) apply any sums received from any other Borrower, any guarantor,
endorser, or co-signer, or from the disposition of any Collateral or security,
to any indebtedness whatsoever owing from such Person or secured by such
Collateral or security, in such manner and order as PFG determines in its sole
discretion, and regardless of whether such indebtedness is part of the
Obligations, is secured, or is due and payable. Borrower consents and agrees
that PFG shall be under no obligation to marshal any assets in favor of
Borrower, or against or in payment of any or all of the Obligations. Borrower
further consents and agrees that PFG shall have no duties or responsibilities
whatsoever with respect to any property securing any or all of the Obligations.
Without limiting the generality of the foregoing, PFG shall have no obligation
to monitor, verify, audit, examine, or obtain or maintain any insurance with
respect to, any property securing any or all of the Obligations.

 

(d)     Independent Liability. Each Borrower hereby agrees that one or more
successive or concurrent actions may be brought hereon against Borrower, in the
same action in which any other Borrower may be sued or in separate actions, as
often as deemed advisable by PFG. Each Borrower is fully aware of the financial
condition of each other Borrower and is executing and delivering this Agreement
based solely upon its own independent investigation of all matters pertinent
hereto, and Borrower is not relying in any manner upon any representation or
statement of PFG with respect thereto. Each Borrower represents and warrants
that it is in a position to obtain, and each Borrower hereby assumes full
responsibility for obtaining, any additional information concerning any other
Borrower's financial condition and any other matter pertinent hereto as Borrower
may desire, and Borrower is not relying upon or expecting PFG to furnish to it
any information now or hereafter in PFG's possession concerning the same or any
other matter.

 

(e) Subordination. All indebtedness of a Borrower now or hereafter arising held
by another Borrower is subordinated to the Obligations and Borrower holding the
indebtedness shall take all actions reasonably requested by PFG to effect, to
enforce and to give notice of such subordination.

 

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

 

 

 
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Loan and Security Agreement

 

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

 

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

 

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

 

 

 

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Borrower: PFG:     GIGA-TRONICS INCORPORATED PARTNERS FOR GROWTH V, L.P.        
By_______________________________ By_______________________________ Acting Chief
Executive Officer     Name: ___________________________
By_______________________________   Chief Financial Officer or Secretary Title:
Manager, Partners for Growth V, LLC   Its General Partner     MICROSOURCE, INC.
          By_______________________________   Acting Chief Executive Officer    
  By_______________________________   Chief Financial Officer or Secretary  

 

 

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