EXHIBIT 10.2
 
LOAN AND SECURITY AGREEMENT
(Working Capital Line of Credit)
 
This LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of August 4, 2006,
among (i) SILICON VALLEY BANK, a California chartered bank, with its principal
place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a
loan production office located at One Newton Executive Park, Suite 200, 2221
Washington Street, Newton, Massachusetts 02462 (FAX 617-969-5965) (“Bank”) and
(ii) TECHNEST HOLDINGS, INC., a Nevada corporation, with offices at 1 McKinley
Sq., Fifth Floor, Boston, Massachusetts 02109 (“Technest”), E-OIR TECHNOLOGIES,
INC., a Virginia corporation, with offices at 10300 Spotsylvania Ave., Suite
220, Fredericksburg, Virginia 22408 (“EOIR”), and GENEX TECHNOLOGIES
INCORPORATED, a Maryland corporation, with offices at 10411 Motor City Drive,
Suite 650, Bethesda, Maryland 20817 (“Genex”) (hereinafter, Technest, EOIR and
Genex are jointly and severally, individually and collectively, referred to as
“Borrower”), provides the terms on which Bank shall lend to Borrower and
Borrower shall repay Bank. The parties agree as follows:
 
                1    ACCOUNTING AND OTHER TERMS
 
Accounting terms not defined in this Agreement shall be construed following
GAAP. Calculations and determinations must be made following GAAP. The term
“financial statements” includes the notes and schedules. The terms “including”
and “includes” always mean “including (or includes) without limitation,” in this
or any Loan Document. Capitalized terms in this Agreement shall have the
meanings set forth in Article 13. All other terms contained in this Agreement,
unless otherwise indicated, shall have the meaning provided by the Code, to the
extent such terms are defined therein.
 
2    LOAN AND TERMS OF PAYMENT
 
2.1         Promise to Pay. Borrower hereby unconditionally promises to pay Bank
the unpaid principal amount of all Advances hereunder with all interest, fees
and finance charges due thereon as and when due in accordance with this
Agreement.
 
2.1.1      Financing of Accounts.
 
                               (a)    Availability. Subject to the terms of this
Agreement, Borrower may request that Bank finance specific Eligible Accounts.
Bank may, in its good faith business discretion, finance such Eligible Accounts
by extending credit to Borrower in an amount equal to the result of the Advance
Rate multiplied by the face amount of the Eligible Account (the “Advance”). Bank
may, in its sole discretion, change the percentage of the Advance Rate for a
particular Eligible Account on a case by case basis. When Bank makes an Advance,
the Eligible Account becomes a “Financed Receivable.”
 
                               (b)    Maximum Advances; Aggregate Cap. The
aggregate face amount of all Financed Receivables outstanding at any time may
not exceed the Facility Amount. In addition, the aggregate amount of Obligations
under this Agreement, together with the aggregate amount of Obligations as
defined in the Term Loan Agreement, shall not exceed Ten Million Dollars
($10,000,000.00) outstanding at any time. In the event such aggregate amount of
Obligations exceed $10,000,000.00 outstanding at any time, such excess shall be
repaid immediately to Bank in good funds.
 
                                (c)    Borrowing Procedure. Borrower will
deliver an Invoice Transmittal for each Eligible Account it offers. Bank may
rely on information set forth in or provided with the Invoice Transmittal.
 
                                (d)    Credit Quality; Confirmations. Bank may,
at its option, conduct a credit check of the Account Debtor for each Account
requested by Borrower for financing hereunder in order to approve any such
Account Debtor’s credit before agreeing to finance such Account. Bank may also
verify directly with the respective Account Debtors the validity, amount and
other matters relating to the Accounts (including confirmations of Borrower’s
representations in Section 5.3) by means of mail, telephone or otherwise, either
in the name of Borrower or Bank from time to time in its sole discretion. 
 

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                               (e)    Accounts Notification/Collection. Bank may
notify any Person owing Borrower money of Bank’s security interest in the funds
and verify and/or collect the amount of the Account.
 
                               (f)    Early Termination. This Agreement may be
terminated prior to the Maturity Date as follows: (i) by Borrower, effective
three Business Days after written notice of termination is given to Bank; or
(ii) by Bank at any time after the occurrence of an Event of Default, without
notice, effective immediately. If this Agreement is terminated (A) by Bank in
accordance with clause (ii) in the foregoing sentence, or (B) by Borrower for
any reason, Borrower shall pay to Bank a termination fee in an amount equal to
Seventy Thousand Dollars ($70,000.00) (the “Early Termination Fee”). The Early
Termination Fee shall be due and payable on the effective date of such
termination and thereafter shall bear interest at a rate equal to the highest
rate applicable to any of the Obligations. Notwithstanding the foregoing, Bank
agrees to waive the Early Termination Fee if Bank agrees to refinance and
redocument this Agreement under another division of Bank (in its sole and
exclusive discretion) prior to the Maturity Date.
 
                               (g)    Maturity. This Agreement shall terminate
and all Obligations outstanding hereunder shall be immediately due and payable
on the Maturity Date.
 
                               (h)    Suspension of Advances. Borrower’s ability
to request that Bank finance Eligible Accounts hereunder will terminate if, in
Bank’s sole discretion, there has been a material adverse change in the general
affairs, management, results of operation, condition (financial or otherwise) or
the prospect of repayment of the Obligations, or there has been any material
adverse deviation by Borrower from the most recent business plan of Borrower
presented to and accepted by Bank prior to the execution of this Agreement.
 
2.2         Collections, Finance Charges, Remittances and Fees. The Obligations
shall be subject to the following fees and Finance Charges. Unpaid fees and
Finance Charges may, in Bank’s discretion, accrue interest and fees as described
in Section 9.2 hereof. 
 
2.2.1     Collections. Collections will be credited to the Financed Receivable
Balance for such Financed Receivable, but if there is an Event of Default, Bank
may apply Collections to the Obligations in any order it chooses. If Bank
receives a payment for both a Financed Receivable and a non-Financed Receivable,
the funds will first be applied to the Financed Receivable and, if there is no
Event of Default then existing, the excess will be remitted to Borrower, subject
to Section 2.2.7.
 
2.2.2     Facility Fee. A fully earned, non-refundable facility fee of
Eighty-Seven Thousand Five Hundred Dollars ($87,500.00) is due upon execution of
this Agreement.
 
2.2.3     Finance Charges. In computing Finance Charges on the Obligations under
this Agreement, all Collections received by Bank shall be deemed applied by Bank
on account of the Obligations three (3) Business Days after receipt of the
Collections. Borrower will pay a finance charge (the “Finance Charge”) on each
Financed Receivable which is equal to the Applicable Rate divided by 360
multiplied by the number of days each such Financed Receivable is outstanding
multiplied by the outstanding Financed Receivable Balance. The Finance Charge is
payable when the Advance made based on such Financed Receivable is payable in
accordance with Section 2.3 hereof. In the event that the aggregate amount of
Finance Charges earned by Bank in any fiscal quarter is less than the Minimum
Finance Charge, Borrower shall pay to Bank an additional Finance Charge equal to
(i) the Minimum Finance Charge minus (ii) the aggregate amount of all Finance
Charges earned by Bank in such fiscal quarter. Such additional Finance Charge
shall be payable on the first day of next fiscal quarter.
 
2.2.4     Collateral Handling Fee. Borrower will pay to Bank a collateral
handling fee equal to 0.10% per month of the Financed Receivable Balance for
each Financed Receivable outstanding based upon a 360 day year (the “Collateral
Handling Fee”). This fee is charged on a daily basis which is equal to the
Collateral Handling Fee divided by 30, multiplied by the number of days each
such Financed Receivable is outstanding, multiplied by the outstanding Financed
Receivable Balance. The Collateral Handling Fee is payable when the Advance made
based on such Financed Receivable is payable in accordance with Section 2.3
hereof. In computing Collateral Handling Fees under this Agreement, all
Collections received by Bank shall be deemed applied by Bank on account of
Obligations three (3) Business Days after receipt of the Collections. After an
Event of Default, the Collateral Handling Fee will increase an additional 0.50%
effective immediately upon such Event of Default.
 
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2.2.5     Accounting. After each Reconciliation Period, Bank will provide an
accounting of the transactions for that Reconciliation Period, including the
amount of all Financed Receivables, all Collections, Adjustments, Finance
Charges, Collateral Handling Fee and the Facility Fee. If Borrower does not
object to the accounting in writing within thirty (30) days it shall be
considered accurate. All Finance Charges and other interest and fees are
calculated on the basis of a 360 day year and actual days elapsed.
 
2.2.6     Deductions. Bank may deduct fees, Finance Charges, Advances which
become due pursuant to Section 2.3, and other amounts due pursuant to this
Agreement from any Advances made or Collections received by Bank.
 
2.2.7     Lockbox; Account Collection Services. Borrower shall direct each
Account Debtor (and each depository institution where proceeds of Accounts are
on deposit) to remit payments with respect to the Accounts to a lockbox account
established with Bank or to wire transfer payments to a cash collateral account
that Bank controls (collectively, the “Lockbox”). It will be considered an
immediate Event of Default if the Lockbox is not set-up and operational within
thirty (30) days of the Closing Date, provided that such failure is due to no
fault of Bank. If such Lockbox is not established, then, until such Lockbox is
established, the proceeds of the Accounts shall be paid by the Account Debtors
to an address consented to by Bank. Upon receipt by Borrower of such proceeds,
Borrower shall immediately transfer and deliver same to Bank, along with a
detailed cash receipts journal. Provided no Event of Default exists or an event
that with notice or lapse of time will be an Event of Default, within three (3)
days of receipt of such amounts by Bank, Bank will turn over to Borrower the
proceeds of the Accounts other than Collections with respect to Financed
Receivables and the amount of Collections in excess of the amounts for which
Bank has made an Advance to Borrower, less any amounts due to Bank, such as the
Finance Charge, the Facility Fee, payments due to Bank, other fees and expenses,
or otherwise; provided, however, Bank may hold such excess amount with respect
to Financed Receivables as a reserve until the end of the applicable
Reconciliation Period if Bank, in its discretion, determines that other Financed
Receivable(s) may no longer qualify as an Eligible Account at any time prior to
the end of the subject Reconciliation Period. This Section does not impose any
affirmative duty on Bank to perform any act other than as specifically set forth
herein. All Accounts and the proceeds thereof are Collateral and if an Event of
Default occurs, Bank may apply the proceeds of such Accounts to the Obligations.
 
2.2.8     Good Faith Deposit. Borrower has paid to Bank a Good Faith Deposit of
Fifty Thousand Dollars ($50,000.00) (the “Good Faith Deposit”) to initiate
Bank’s due diligence review process. Any portion of the Good Faith Deposit not
utilized to pay Bank Expenses will be applied to the Facility Fee.
 
2.3        Repayment of Obligations; Adjustments.
 
2.3.1    Repayment. Borrower will repay each Advance on the earliest of: (a) the
date on which payment is received of the Financed Receivable with respect to
which the Advance was made, (b) the date on which the Financed Receivable is no
longer an Eligible Account, (c) the date on which any Adjustment is asserted to
the Financed Receivable (but only to the extent of the Adjustment if the
Financed Receivable remains otherwise an Eligible Account), (d) the date on
which there is a breach of any warranty or representation set forth in Section
5.3, or (e) the Maturity Date (including any early termination). Each payment
will also include all accrued Finance Charges and Collateral Handling Fees with
respect to such Advance and all other amounts then due and payable hereunder.
 
2.3.2    Repayment on Event of Default. Following the occurrence of an Event of
Default and while it is continuing, Borrower will, if Bank demands (or, upon the
occurrence of an Event of Default under Section 8.5, immediately without notice
or demand from Bank) repay all of the Advances. The demand may, at Bank’s
option, include the Advance for each Financed Receivable then outstanding and
all accrued Finance Charges, the Early Termination Fee, Collateral Handling Fee,
attorneys’ and professional fees, court costs and expenses, and any other
Obligations.
 
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2.3.3     Debit of Accounts. Bank may debit any of Borrower’s deposit accounts
for payments or any amounts Borrower owes Bank hereunder. Bank shall promptly
notify Borrower when it debits Borrower’s accounts. These debits shall not
constitute a set-off.
 
2.3.4     Adjustments. If at any time during the term of this Agreement any
Account Debtor asserts an Adjustment or if Borrower issues a credit memorandum
or if any of the representations, warranties or covenants set forth in Section
5.3 are no longer true in all material respects, Borrower will promptly advise
Bank.
 
2.4        Power of Attorney. Borrower irrevocably appoints Bank and its
successors and assigns as attorney-in-fact and authorizes Bank, to: (i)
following the occurrence and during the continuance of an Event of Default,
sell, assign, transfer, pledge, compromise, or discharge all or any part of the
Financed Receivables; (ii) following the occurrence and during the continuance
of an Event of Default, demand, collect, sue, and give releases to any Account
Debtor for monies due and compromise, prosecute, or defend any action, claim,
case or proceeding about the Financed Receivables, including filing a claim or
voting a claim in any bankruptcy case in Bank’s or Borrower’s name, as Bank
chooses; (iii) following the occurrence and during the continuance of an Event
of Default, prepare, file and sign Borrower’s name on any notice, claim,
assignment, demand, draft, or notice of or satisfaction of lien or mechanics’
lien or similar document; (iv) regardless of whether there has been an Event of
Default, notify all Account Debtors to pay Bank directly (except where the
particular Financed Receivable meets the requirements set forth in subsection
(d) of the definition of “Eligible Accounts”); (v) regardless of whether there
has been an Event of Default, receive and open mail addressed to Borrower; (vi)
regardless of whether there has been an Event of Default, endorse Borrower’s
name on checks or other instruments (to the extent necessary to pay amounts owed
pursuant to this Agreement); and (vii) regardless of whether there has been an
Event of Default, execute on Borrower’s behalf any instruments, documents,
financing statements to perfect Bank’s interests in the Financed Receivables and
Collateral and do all acts and things necessary or expedient, as determined
solely and exclusively by Bank, to protect or preserve, Bank’s rights and
remedies under this Agreement, as directed by Bank.
 
3    CONDITIONS OF LOANS
 
3.1         Conditions Precedent to Initial Advance. Bank’s agreement to make
the initial Advance is subject to the condition precedent that Bank shall have
received, in form and substance satisfactory to Bank, such documents, and
completion of such other matters, as Bank may reasonably deem necessary or
appropriate, including, without limitation, subject to the condition precedent
that Bank shall have received, in form and substance satisfactory to Bank, the
following from each Borrower:
 
                              (a)    a certificate of the Secretary of Borrower
with respect to articles, bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement, the Loan Documents, and all
transactions related thereto, including the Warrant;
 
                              (b)    an Intellectual Property Security
Agreement;
 
                              (c)    subordination agreements/intercreditor
agreements by certain Persons;
 
                              (d)    Perfection Certificates by Borrower and
Guarantor;
 
                              (e)    a legal opinion of Borrower’s and
Guarantor’s counsel (authority/enforceability);
 
                               (f)    guaranty by the Guarantor;
 
                               (g)    Stock Pledge Agreement by the Guarantor;
 
                               (h)    Warrant to Purchase Stock;
 
                                (i)    Securities Account Control Agreements;
 
(j)    Certificates of insurance evidencing compliance with Section 6.4 hereof;
 
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                             (k)    payment of the fees and Bank Expenses then
due and payable;
 
                              (l)    Certificate of Foreign Qualification (if
applicable);
 
                             (m)           Certificate of Good Standing/Legal
Existence;
 
                             (n)    the Initial Audit;
 
                             (o)    payoff letter from existing lienholders;
 
                             (p)    duly executed original signatures to the
Control Agreements;
 
                             (q)    evidence of the release of all claims held
by and the termination of any litigation brought by Joseph Moulton against each
Borrower, in form and substance satisfactory to Bank; and
 
                              (r)    such other documents, and completion of
such other matters, as Bank may reasonably deem necessary or appropriate.
 
3.2        Conditions Precedent to all Advances. Bank’s agreement to make each
Advance, including the initial Advance, is subject to the following:
 
                              (a)    receipt of the Invoice Transmittal;
 
                              (b)    Bank shall have (at its option) conducted
the confirmations and verifications as described in Section 2.1.1(d); and
 
                              (c)    each of the representations and warranties
in Article 5 shall be true on the date of the Invoice Transmittal and on the
effective date of each Advance and no Event of Default shall have occurred and
be continuing, or result from the Advance. Each Advance is Borrower’s
representation and warranty on that date that the representations and warranties
in Article 5 remain true.
 
4    CREATION OF SECURITY INTEREST
 
4.1         Grant of Security Interest. Borrower hereby grants Bank, to secure
the payment and performance in full of all of the Obligations and the
performance of each of Borrower’s duties under the Loan Documents, a continuing
security interest in, and pledges and assigns to Bank, the Collateral, wherever
located, whether now owned or hereafter acquired or arising, and all proceeds
and products thereof. Borrower warrants and represents that the security
interest granted herein shall be a first priority security interest in the
Collateral.
 
Except as noted in the Disclosure Schedule hereto, Borrower is not a party to,
nor is bound by, any material license (other than over the counter software that
is commercially available to the public) or other material agreement with
respect to which Borrower is the licensee that prohibits or otherwise restricts
Borrower from granting a security interest in Borrower’s interest in such
license or agreement or any other property. Borrower shall provide written
notice to Bank within ten (10) days of entering or becoming bound by, any such
license or agreement which is reasonably likely to have a material impact on
Borrower’s business or financial condition. Borrower shall take such steps as
Bank requests to obtain the consent of, authorization by, or waiver by, any
person whose consent or waiver is necessary for all such licenses or contract
rights to be deemed “Collateral” and for Bank to have a security interest in it
that might otherwise be restricted or prohibited by law or by the terms of any
such license or agreement (such consent or authorization may include a
licensor’s agreement to a contingent assignment of the license to Bank if the
Bank determines that is necessary in its good faith judgment), whether now
existing or entered into in the future.
 
If the Agreement is terminated, Bank’s lien and security interest in the
Collateral shall continue until Borrower fully satisfies its Obligations. If
Borrower shall at any time, acquire a commercial tort claim, Borrower shall
promptly notify Bank in a writing signed by Borrower of the brief details
thereof and grant to Bank in such writing a security interest therein and in the
proceeds thereof, all upon the terms of this Agreement, with such writing to be
in form and substance satisfactory to Bank.
 
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4.2         Authorization to File Financing Statements. Borrower hereby
authorizes Bank to file financing statements, without notice to Borrower, with
all appropriate jurisdictions in order to perfect or protect Bank’s interest or
rights hereunder, which financing statements may indicate the Collateral as “all
assets of the Debtor” or words of similar effect, or as being of an equal or
lesser scope, or with greater detail, all in Bank’s discretion and may also
include a notice that any disposition of the Collateral, by either Borrower or
any other Person, shall be deemed to violate the rights of Bank under the Code.
 
5    REPRESENTATIONS AND WARRANTIES
 
Borrower represents and warrants as follows:
 
5.1         Due Organization and Authorization. Borrower and each of its
Subsidiaries is duly existing and in good standing in its state of formation and
qualified and licensed to do business in, and in good standing in, any state in
which the conduct of its business or its ownership of property requires that it
be qualified except where the failure to do so could not reasonably be expected
to cause a Material Adverse Change. Each Borrower represents and warrants to
Bank that: (a) Borrower’s exact legal name is that indicated on the Perfection
Certificate and on the signature page hereof; and (b) Borrower is an
organization of the type, and is organized in the jurisdiction, set forth in the
Perfection Certificate; and (c) the Perfection Certificate accurately sets forth
Borrower’s organizational identification number or accurately states that
Borrower has none; and (d) the Perfection Certificate accurately sets forth
Borrower’s place of business, or, if more than one, its chief executive office
as well as Borrower’s mailing address if different; and (e) all other
information set forth on the Perfection Certificate pertaining to Borrower is
accurate and complete. If Borrower does not now have an organizational
identification number, but later obtains one, Borrower shall forthwith notify
Bank of such organizational identification number.
 
The execution, delivery and performance of the Loan Documents have been duly
authorized, and do not conflict with Borrower’s organizational documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could reasonably be expected to cause a Material
Adverse Change.
 
5.2         Collateral. Borrower has good title to the Collateral, free of Liens
except Permitted Liens. All inventory is in all material respects of good and
marketable quality, free from material defects. Borrower has no deposit account,
other than the deposit accounts with Bank and deposit accounts described in the
Perfection Certificate delivered to Bank in connection herewith. The Collateral
is not in the possession of any third party bailee (such as a warehouse). Except
as hereafter disclosed to Bank in writing by Borrower, none of the components of
the Collateral shall be maintained at locations other than as provided in the
Perfection Certificate. In the event that Borrower, after the date hereof,
intends to store or otherwise deliver any portion of the Collateral to a bailee,
then Borrower will first receive the written consent of Bank and such bailee
must acknowledge in writing that the bailee is holding such Collateral for the
benefit of Bank.
 
5.3         Financed Receivables. Borrower represents and warrants for each
Financed Receivable:
 
(a)    Each Financed Receivable is an Eligible Account;
 
(b)    Borrower is the owner with legal right to sell, transfer, assign and
encumber such Financed Receivable;
 
(c)    The correct amount is on the Invoice Transmittal and is not disputed;
 
(d)    Payment is not contingent on any obligation or contract and Borrower has
fulfilled all its obligations as of the Invoice Transmittal date;
 
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(e)    Each Financed Receivable is based on an actual sale and delivery of goods
and/or services rendered, is due to Borrower, is not past due or in default, has
not been previously sold, assigned, transferred, or pledged and is free of any
liens, security interests and encumbrances other than Permitted Liens;
 
(f)    There are no defenses, offsets, counterclaims or agreements for which the
Account Debtor may claim any deduction or discount;
 
(g)    Borrower reasonably believes no Account Debtor is insolvent or subject to
any Insolvency Proceedings;
 
(h)    Borrower has not filed or had filed against it Insolvency Proceedings and
does not anticipate any filing;
 
(i)    Bank has the right to endorse and/ or require Borrower to endorse all
payments received on Financed Receivables and all proceeds of Collateral; and
 
(j)    Each Financed Receivable and all related documents are accurate and
correct in all material respects and are not misleading.
 
5.4         Litigation. Except as set forth on the Disclosure Schedule attached
hereto, there are no actions or proceedings pending or, to the knowledge of
Borrower’s Responsible Officers or legal counsel, threatened by or against
Borrower or any of its Subsidiaries in which an adverse decision could
reasonably be expected to cause a Material Adverse Change.
 
5.5         No Material Deviation in Financial Statements. All consolidated
financial statements for Borrower and any Subsidiary delivered to Bank fairly
present in all material respects Borrower’s consolidated financial condition and
Borrower’s consolidated results of operations in accordance with GAAP. There has
not been any material deterioration in Borrower’s consolidated financial
condition since the date of the most recent financial statements submitted to
Bank.
 
5.6         Solvency. Borrower is able to pay its debts (including trade debts)
as they mature.
 
5.7         Regulatory Compliance. Borrower is not an “investment company” or a
company “controlled” by an “investment company” under the Investment Company
Act. Borrower is not engaged as one of its important activities in extending
credit for margin stock (under Regulations X, T and U of the Federal Reserve
Board of Governors). Borrower has complied in all material respects with the
Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances
or rules, the violation of which could reasonably be expected to cause a
Material Adverse Change. None of Borrower’s or any Subsidiary’s properties or
assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s
knowledge, by previous Persons, in disposing, producing, storing, treating, or
transporting any hazardous substance other than legally. Borrower and each
Subsidiary has timely filed all required tax returns and paid, or made adequate
provision to pay, all material taxes, except those being contested in good faith
with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all government authorities that are necessary to
continue its business as currently conducted except where the failure to obtain
or make such consents, declarations, notices or filings would not reasonably be
expected to cause a Material Adverse Change.
 
5.8         Investment. Borrower does not own any stock, partnership interest or
other equity securities except for Permitted Investments and except for
Technest’s ownership of EOIR and Genex.
 
5.9         Inactive Subsidiary. Argus Sensors, Inc. a Delaware corporation, and
a Subsidiary of Technest, does not and will not conduct any business or own any
assets and will remain an inactive entity.
 
5.10       Litigation with Joseph Moulton. The litigation matter with Joseph
Moulton described on the Disclosure Schedule has been settled in full (with
respect to each Borrower), contingent only upon certain payments being made as
described on the Disclosure Schedule. Aside from the making of the payments
described on the Disclosure Schedule, all other conditions precedent to the
Settlement Agreement have been satisfied in full.
 
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5.11       Full Disclosure. No written representation, warranty or other
statement of Borrower in any certificate or written statement given to Bank, as
of the date such representations, warranties, or other statements were made,
taken together with all such written certificates and written statements given
to Bank, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period or
periods covered by such projections and forecasts may differ from the projected
or forecasted results).
 
6    AFFIRMATIVE COVENANTS
 
Borrower shall do all of the following:
 
6.1         Government Compliance. Borrower shall maintain its and all
Subsidiaries’ legal existence and good standing in their respective
jurisdictions of formation and maintain qualification in each jurisdiction in
which the failure to so qualify would reasonably be expected to have a material
adverse effect on Borrower’s business or operations. Borrower shall comply, and
have each Subsidiary comply, with all laws, ordinances and regulations to which
it is subject, noncompliance with which could have a material adverse effect on
Borrower’s business or operations or would reasonably be expected to cause a
Material Adverse Change.
 
6.2         Financial Statements, Reports, Certificates.
 
                               (a)    Borrower shall deliver to Bank: (i) as
soon as available, but no later than thirty (30) days after the last day of each
month, a company prepared consolidated balance sheet and income statement
covering Borrower’s consolidated operations during the period certified by a
Responsible Officer and in a form acceptable to Bank; (ii) as soon as available,
but no later than one hundred twenty (120) days after the last day of Borrower’s
fiscal year, audited consolidated financial statements prepared under GAAP,
consistently applied, together with an unqualified opinion on the financial
statements from an independent certified public accounting firm reasonably
acceptable to Bank; (iii) for Borrower’s publicly held stock, copies of all
statements, reports and notices made available to Borrower’s security holders or
to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K
filed with the Securities and Exchange Commission; (iv) a prompt report of any
legal actions pending or threatened against Borrower or any Subsidiary that is
likely to result in damages or costs to Borrower or any Subsidiary of One
Hundred Thousand Dollars ($100,000.00) or more; (v) prompt notice of any
material change in the composition of the Intellectual Property, or the
registration of any copyright, including any subsequent ownership right of
Borrower in or to any copyright, patent or trademark not shown in the IP
Agreement or knowledge of an event that materially adversely affects the value
of the Intellectual Property; and (vi) budgets, sales projections, operating
plans, cash collections reports, or other financial information reasonably
requested by Bank.
 
(b)    Within thirty (30) days after the last day of each month, Borrower shall
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit B.
 
(c)    Borrower will allow Bank to audit Borrower’s Collateral, including, but
not limited to, Borrower’s Accounts and accounts receivable, at Borrower’s
expense, upon reasonable notice to Borrower; provided, however, prior to the
occurrence of an Event of Default and while it is continuing, Borrower shall be
obligated to pay for not more than one (1) audit per year. After the occurrence
of an Event of Default, Bank may audit Borrower’s Collateral, including, but not
limited to, Borrower’s Accounts and accounts receivable at Borrower’s expense
and at Bank’s sole and exclusive discretion and without notification and
authorization from Borrower. Notwithstanding the foregoing, no Advances may be
requested prior to the Initial Audit.
 
(d)    Upon Bank’s request, provide a written report respecting any Financed
Receivable, if payment of any Financed Receivable does not occur by its due date
and include the reasons for the delay.
 
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(e)    Provide Bank with, as soon as available, but no later than thirty (30)
days following each Reconciliation Period, an aged listing of accounts
receivable and accounts payable by invoice date, in form acceptable to Bank.
 
(f)    Provide Bank with, as soon as available, but no later than thirty (30)
days following each Reconciliation Period, a Deferred Revenue report, in form
acceptable to Bank.
 
(g)    Provide Bank with, as soon as available, but no later than thirty (30)
days following each Reconciliation Period, a funded backlog schedule, in form
acceptable to Bank.
 
6.3         Taxes. Borrower shall make, and cause each Subsidiary to make,
timely payment of all material federal, state, and local taxes or assessments
(other than taxes and assessments which Borrower is contesting in good faith,
with adequate reserves maintained in accordance with GAAP) and will deliver to
Bank, on demand, appropriate certificates attesting to such payments.
 
6.4         Insurance. Borrower shall keep its business and the Collateral
insured for risks and in amounts, and as Bank may reasonably request. Insurance
policies shall be in a form, with companies, and in amounts that are
satisfactory to Bank. All property policies shall have a lender’s loss payable
endorsement showing Bank as an additional loss payee and all liability policies
shall show Bank as an additional insured and all policies shall provide that the
insurer must give Bank at least twenty (20) days notice before canceling its
policy. At Bank’s request, Borrower shall deliver certified copies of policies
and evidence of all premium payments. Proceeds payable under any policy shall,
at Bank’s option, be payable to Bank on account of the Obligations. If Borrower
fails to obtain insurance as required under this Section or to pay any amount or
furnish any required proof of payment to third persons and Bank, Bank may make
all or part of such payment or obtain such insurance policies required in this
Section and take any action under the policies Bank deems prudent.
 
6.5         Accounts.
 
(a)    In order to permit Bank to monitor Borrower’s financial performance and
condition, Borrower, and all Borrower’s Subsidiaries, shall maintain Borrower’s,
and such Subsidiaries’, primary operating accounts and securities accounts with
Bank and a majority of Borrower’s and such Subsidiaries’ cash or securities in
excess of that amount used for Borrower’s or such Subsidiaries’ operations shall
be maintained at Bank or SVB Securities.
 
(b)    Borrower shall identify to Bank, in writing, any bank or securities
account opened by Borrower with any institution other than Bank. In addition,
for each such account that Borrower or Guarantor at any time opens or maintains,
Borrower shall, at Bank’s request and option, pursuant to an agreement in form
and substance acceptable to Bank, cause the depository bank or securities
intermediary to agree that such account is the collateral of Bank, and enter
into a “control agreement” pursuant to the terms hereunder. The provisions of
the previous sentence shall not apply to deposit accounts exclusively used for
payroll, payroll taxes and other employee wage and benefit payments to or for
the benefit of Borrower’s employees.
 
6.6         Landlord’s Waivers. Borrower shall deliver to Bank, on or before the
date that is fourteen (14) calendar days from the Closing Date, a fully-executed
landlord’s waiver, in form and substance acceptable to Bank in its reasonable
discretion, with respect to Borrower’s location at 10300 Spotsylvania Avenue,
Suite 220, Fredericksburg, Virginia 22408. Borrower shall use its best efforts
to deliver to Bank, on or before the date that is fourteen (14) calendar days
from the Closing Date, a fully-executed landlord’s waiver, in form and substance
acceptable to Bank in its reasonable discretion, with respect to the following
locations: (a) Jackson Square Office Park, 4701 Carr Drive, Fredericksburg,
Virginia 22408, and (b) Jackson Square Office Park, 4324 Carr Drive,
Fredericksburg, Virginia 22408.
 
6.7         Further Assurances. Borrower shall execute any further instruments
and take further action as Bank reasonably requests to perfect or continue
Bank’s security interest in the Collateral or to effect the purposes of this
Agreement.
 
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7    NEGATIVE COVENANTS
 
Borrower shall not do any of the following without Bank’s prior written consent,
which consent shall not be unreasonably withheld:
 
7.1         Dispositions. Convey, sell, lease, transfer, assign or otherwise
dispose of (collectively a “Transfer”), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, including the
Intellectual Property, except for Transfers (i) of inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete equipment. Borrower shall not
enter into an agreement with any Person other than Bank which restricts the
subsequent granting of a security interest in the Intellectual Property.
 
7.2         Changes in Business, Ownership, Management or Business Locations.
Except as permitted by Section 7.4, (a) engage in or permit any of its
Subsidiaries to engage in any business other than the businesses currently
engaged in by Borrower and such Subsidiary, as applicable, or reasonably related
thereto; (b) liquidate or dissolve; or (c) (i) have the departure of any Key
Person or (ii) enter into any transaction or series of related transactions in
which the stockholders of Borrower immediately prior to the first such
transaction own less than 50% of the voting stock of Borrower immediately after
giving effect to such transaction or related series of such transactions (other
than by the sale of Borrower’s equity securities in a public offering or to
venture capital investors so long as Borrower identifies to Bank the venture
capital investors prior to the closing of the transaction). Borrower shall not,
without at least thirty (30) days prior written notice to Bank: (i) relocate its
chief executive office, or add any new offices or business locations, including
warehouses (unless such new offices or business locations contain less than Five
Thousand Dollars ($5,000.00) in Borrower’s assets or property), or (ii) change
its jurisdiction of organization, or (iii) change its organizational structure
or type, or (iv) change its legal name, or (v) change any organizational number
(if any) assigned by its jurisdiction of organization.
 
7.3         Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person. A Subsidiary may merge or
consolidate into another Subsidiary or into Borrower.
 
7.4         Indebtedness. Create, incur, assume, or be liable for any
Indebtedness, or permit any Subsidiary to do so, other than Permitted
Indebtedness.
 
7.5         Encumbrance. Create, incur, or allow any Lien on any of its
property, including the Intellectual Property, or assign or convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not
to be subject to the first priority security interest granted herein. The
Collateral may also be subject to Permitted Liens.
 
7.6         Distributions; Investments. (i) Directly or indirectly acquire or
own any Person, or make any Investment in any Person, other than Permitted
Investments, or permit any of its Subsidiaries to do so; or (ii) pay any
dividends or make any distribution or payment or redeem, retire or purchase any
capital stock. Borrower may repurchase the stock of former employees or
consultants pursuant to stock repurchase agreements so long as an Event of
Default does not exist at the time of such repurchase and would not exist after
giving effect to such repurchase, provided such repurchase does not exceed in
the aggregate of $100,000 per fiscal year. 
 
7.7         Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower, except
for transactions that are in the ordinary course of Borrower’s business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person.
Notwithstanding the foregoing, the Borrower may not make any direct or indirect
payment, transfer or other distribution to Markland, except for (a) loan
payments to Markland made in accordance with the Disclosure Schedule, (b)
payments to Markland pursuant to the Stockholder Agreement in effect on the
Effective Date and as set forth on the Disclosure Schedule, and (c) payments for
services rendered by Markland in the ordinary course of business, provided,
that, in the case of (a) through (b) above, Borrower provides prior written
notice to Bank within thirty (30) days of any such payment, which notice
contains the amount of such payment, the purpose of such payment, and a specific
reference to this Section 7.7, and provided further, that, in the case of (a)
through (c) above, no Event of Default exists or would result at any time after
giving effect to such transaction, either immediately or solely as a result of
the passage of time.
 
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7.8         Subordinated Debt. Make or permit any payment on any Subordinated
Debt, except under the terms of the Subordinated Debt, or amend any provision in
any document relating to the Subordinated Debt, without Bank’s prior written
consent.
 
7.9         Compliance. Become an “investment company” or a company controlled
by an “investment company”, under the Investment Company Act of 1940 or
undertake as one of its important activities extending credit to purchase or
carry margin stock, or use the proceeds of any Advance for that purpose; fail to
meet the minimum funding requirements of ERISA, or permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, if the
violation could reasonably be expected to have a material adverse effect on
Borrower’s business or operations or would reasonably be expected to cause a
Material Adverse Change, or permit any of its Subsidiaries to do so.
 
8    EVENTS OF DEFAULT
 
Any one of the following is an Event of Default:
 
8.1         Payment Default. Borrower fails to pay any of the Obligations when
due;
 
8.2         Covenant Default. Borrower fails or neglects to perform any
obligation in Article 6 or violates any covenant in Article 7 or fails or
neglects to perform, keep, or observe any other material term, provision,
condition, covenant or agreement contained in this Agreement, any Loan Documents
and as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure the default within ten (10) days
after the occurrence thereof; provided, however, grace and cure periods provided
under this section shall not apply to financial covenants or any other covenants
that are required to be satisfied, completed or tested by a date certain;
 
8.3         Material Adverse Change. A Material Adverse Change occurs;
 
8.4         Attachment. (i) Any material portion of Borrower’s assets or any of
the Financed Receivables are attached, seized, levied on, or comes into
possession of a trustee or receiver and the attachment, seizure or levy is not
removed in ten (10) days; (ii) the service of process upon Bank or Borrower
seeking to attach, by trustee or similar process, any funds of Borrower on
deposit with Bank, or any entity under the control of Bank (including a
subsidiary); (iii) Borrower is enjoined, restrained, or prevented by court order
from conducting any part of its business; (iv) a judgment or other claim in
excess of One Hundred Thousand Dollars ($100,000.00) becomes a Lien on a portion
of Borrower’s assets; or (v) a notice of lien, levy, or assessment is filed
against any of Borrower’s assets by any government agency and not paid within
ten (10) days after Borrower receives notice;
 
8.5         Insolvency. (i) Borrower is unable to pay its debts (including trade
debts) as they become due or otherwise becomes insolvent; (ii) Borrower begins
an Insolvency Proceeding; or (iii) an Insolvency Proceeding is begun against
Borrower and not dismissed or stayed within thirty (30) days (but no Advances
shall be made before any Insolvency Proceeding is dismissed);
 
8.6         Other Agreements. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000.00) or that could result in a Material Adverse Change;
 
8.7         Judgments. If a judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least One Hundred Thousand
Dollars ($100,000.00) (not covered by independent third-party insurance) shall
be rendered against Borrower and shall remain unsatisfied and unstayed for a
period of ten (10) days (provided that no Advances will be made prior to the
satisfaction or stay of such judgment);
 
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8.8         Misrepresentations. If Borrower or any Person acting for Borrower
makes any material misrepresentation or material misstatement now or later in
any warranty or representation in this Agreement or in any writing delivered to
Bank or to induce Bank to enter this Agreement or any Loan Document;
 
8.9         Subordinated Debt. A default or breach occurs under any agreement
between Borrower and any creditor of Borrower that signed a subordination
agreement with Bank, or any creditor that has signed a subordination agreement
with Bank breaches any terms of the subordination agreement.
 
8.10      Guaranty. (a) Any guaranty of any Obligations terminates or ceases for
any reason to be in full force and effect except pursuant to its terms as agreed
to by Bank in writing; (b) any Guarantor does not perform any obligation or
covenant under any guaranty of the Obligations; (c) any circumstance described
in Sections 8.4, 8.5, 8.7, or 8.8. occurs with respect to any Guarantor, (d) the
liquidation, winding up, or termination of existence of any Guarantor; or
(e) (i) a material impairment in the perfection or priority of Bank’s Lien in
the collateral provided by Guarantor or in the value of such collateral or
(ii) a material adverse change in the prospect of repayment of the Obligations
occurs with respect to any Guarantor.
 
8.11      Term Loan Agreement. An Event of Default (as such term is defined in
the Term Loan Agreement) occurs under the Term Loan Agreement (unless such Event
of Default occurs solely as a result of Borrower’s failure to comply with
Section 6.7 of the Term Loan Agreement).
 
9    BANK’S RIGHTS AND REMEDIES
 
9.1         Rights and Remedies. When an Event of Default occurs and continues
Bank may, without notice or demand, do any or all of the following:
 
(a)    Declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Bank);
 
(b)    Stop advancing money or extending credit for Borrower’s benefit under
this Agreement or under any other agreement between Borrower and Bank;
 
(c)    Settle or adjust disputes and claims directly with Account Debtors for
amounts, on terms and in any order that Bank considers advisable and notify any
Person owing Borrower money of Bank’s security interest in such funds and verify
the amount of such account. Borrower shall collect all payments in trust for
Bank and, if requested by Bank, immediately deliver the payments to Bank in the
form received from the Account Debtor, with proper endorsements for deposit;
 
(d)    Make any payments and do any acts it considers necessary or reasonable to
protect its security interest in the Collateral. Borrower shall assemble the
Collateral if Bank requests and make it available as Bank designates. Bank may
enter premises where the Collateral is located, take and maintain possession of
any part of the Collateral, and pay, purchase, contest, or compromise any Lien
which appears to be prior or superior to its security interest and pay all
expenses incurred. Borrower grants Bank a license to enter and occupy any of its
premises, without charge, to exercise any of Bank’s rights or remedies;
 
(e)    Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the account
of Borrower;
 
(f)    Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral. Bank is hereby granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower’s labels, patents, copyrights, mask works, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank’s exercise of its rights under this Section, Borrower’s
rights under all licenses and all franchise agreements inure to Bank’s benefit;
 
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(g)    Place a “hold” on any account maintained with Bank and/or deliver a
notice of exclusive control, any entitlement order, or other directions or
instructions pursuant to any control agreement or similar agreements providing
control of any Collateral; and
 
(h)    Exercise all rights and remedies and dispose of the Collateral according
to the Code.
 
9.2         Bank Expenses; Unpaid Fees. Any amounts paid by Bank as provided
herein shall constitute Bank Expenses and are immediately due and payable, and
shall bear interest at the Default Rate and be secured by the Collateral. No
payments by Bank shall be deemed an agreement to make similar payments in the
future or Bank’s waiver of any Event of Default. In addition, any amounts
advanced hereunder which are not based on Financed Receivables (including,
without limitation, unpaid fees and Finance Charges as described in Section 2.2)
shall accrue interest at the Default Rate and be secured by the Collateral.
 
9.3         Bank’s Liability for Collateral. So long as Bank complies with
reasonable banking practices regarding the safekeeping of Collateral and Section
9-207 of the Code, Bank shall not be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any
diminution in the value of the Collateral; or (d) any act or default of any
carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss,
damage or destruction of the Collateral.
 
9.4         Remedies Cumulative. Bank’s rights and remedies under this
Agreement, the Loan Documents, and all other agreements are cumulative. Bank has
all rights and remedies provided under the Code, by law, or in equity. Bank’s
exercise of one right or remedy is not an election, and Bank’s waiver of any
Event of Default is not a continuing waiver. Bank’s delay is not a waiver,
election, or acquiescence. No waiver hereunder shall be effective unless signed
by Bank and then is only effective for the specific instance and purpose for
which it was given.
 
9.5         Demand Waiver. Borrower waives demand, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees held by Bank on which
Borrower is liable.
 
9.6         Default Rate. After the occurrence of an Event of Default, all
Obligations shall accrue interest at the Applicable Rate plus five percent
(5.0%) per annum (the “Default Rate”). 
 
10          NOTICES.
 
Notices or demands by either party about this Agreement must be in writing and
personally delivered or sent by an overnight delivery service, by certified mail
postage prepaid return receipt requested, or by fax to the addresses listed at
the beginning of this Agreement. A party may change notice address by written
notice to the other party.
 
11          CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
 
Massachusetts law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Massachusetts; provided, however, that if for
any reason Bank cannot avail itself of such courts in the Commonwealth of
Massachusetts, Borrower accepts jurisdiction of the courts and venue in Santa
Clara County, California. NOTWITHSTANDING THE FOREGOING, BANK SHALL HAVE THE
RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE
COURTS OF ANY OTHER JURISDICTION WHICH BANK DEEMS NECESSARY OR APPROPRIATE IN
ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE BANK’S RIGHTS AGAINST
BORROWER OR ITS PROPERTY.
 
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY
CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER
CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
 
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12          GENERAL PROVISIONS
 
12.1       Successors and Assigns. This Agreement binds and is for the benefit
of the successors and permitted assigns of each party. Borrower may not assign
this Agreement or any rights or Obligations under it without Bank’s prior
written consent which may be granted or withheld in Bank’s discretion. Bank has
the right, without the consent of or notice to Borrower, to sell, transfer,
assign, negotiate, or grant participation in all or any part of, or any interest
in, Bank’s obligations, rights and benefits under this Agreement, the Loan
Documents or any related agreement.
 
12.2       Indemnification. Borrower hereby indemnifies, defends and holds Bank
and its directors, officers, employees and agents harmless against: (a) all
obligations, demands, claims, and liabilities asserted by any other party or
Person in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses incurred, or paid by Bank from, following,
or consequential to transactions between Bank and Borrower (including reasonable
attorneys’ fees and expenses), except for losses caused by Bank’s gross
negligence or willful misconduct.
 
12.3       Right of Set-Off. Borrower hereby grants to Bank, a lien, security
interest and right of set-off as security for all Obligations to Bank, whether
now existing or hereafter arising upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of Bank
(including a Bank subsidiary) or in transit to any of them. At any time after
the occurrence and during the continuance of an Event of Default, without demand
or notice, Bank may set off the same or any part thereof and apply the same to
any liability or obligation of Borrower even though unmatured and regardless of
the adequacy of any other collateral securing the Obligations. ANY AND ALL
RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY
OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF
SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE
HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
 
12.4       Time of Essence. Time is of the essence for the performance of all
Obligations in this Agreement.
 
12.5       Severability of Provision. Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.
 
12.6       Amendments in Writing; Integration. All amendments to this Agreement
must be in writing signed by both Bank and Borrower. This Agreement and the Loan
Documents represent the entire agreement about this subject matter, and
supersede prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement and the Loan Documents merge
into this Agreement and the Loan Documents.
 
12.7       Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, are an original, and all taken together, constitute
one Agreement.
 
12.8       Borrower Liability. Any Borrower may, acting singly, request Advances
hereunder. Each Borrower hereby appoints the other as agent for the other for
all purposes hereunder, including with respect to requesting Advances hereunder.
Each Borrower hereunder shall be obligated to repay all Advances made hereunder,
regardless of which Borrower actually receives said Advance, as if each Borrower
hereunder directly received all Advances. Each Borrower waives any suretyship
defenses available to it under the Code or any other applicable law. Each
Borrower waives any right to require Bank to: (i) proceed against any Borrower
or any other person; (ii) proceed against or exhaust any security; or (iii)
pursue any other remedy. Bank may exercise or not exercise any right or remedy
it has against any Borrower or any security it holds (including the right to
foreclose by judicial or non-judicial sale) without affecting any Borrower’s
liability. Notwithstanding any other provision of this Agreement or other
related document, each Borrower irrevocably waives all rights that it may have
at law or in equity (including, without limitation, any law subrogating Borrower
to the rights of Bank under this Agreement) to seek contribution,
indemnification or any other form of reimbursement from any other Borrower, or
any other Person now or hereafter primarily or secondarily liable for any of the
Obligations, for any payment made by Borrower with respect to the Obligations in
connection with this Agreement or otherwise and all rights that it might have to
benefit from, or to participate in, any security for the Obligations as a result
of any payment made by Borrower with respect to the Obligations in connection
with this Agreement or otherwise. Any agreement providing for indemnification,
reimbursement or any other arrangement prohibited under this Section shall be
null and void. If any payment is made to a Borrower in contravention of this
Section, such Borrower shall hold such payment in trust for Bank and such
payment shall be promptly delivered to Bank for application to the Obligations,
whether matured or unmatured.
 
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12.9       Survival. All covenants, representations and warranties made in this
Agreement continue in full force until this Agreement has terminated pursuant to
its terms, and all Obligations have been satisfied. The obligation of Borrower
in Section 12.2 to indemnify Bank shall survive until the statute of limitations
with respect to such claim or cause of action shall have run.
 
12.10     Confidentiality. In handling any confidential information, Bank shall
exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (i) to Bank’s
subsidiaries or affiliates in connection with their business with Borrower; (ii)
to prospective transferees or purchasers of any interest in the Advances
(provided, however, Bank shall use commercially reasonable efforts in obtaining
such prospective transferee’s or purchaser’s agreement to the terms of this
provision); (iii) as required by law, regulation, subpoena, or other order, (iv)
as required in connection with Bank’s examination or audit; and (v) as Bank
considers appropriate in exercising remedies under this Agreement. Confidential
information does not include information that either: (a) is in the public
domain or in Bank’s possession when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank; or (b) is disclosed to Bank by a third
party, if Bank does not know that the third party is prohibited from disclosing
the information.
 
13          DEFINITIONS
 
13.1       Definitions. In this Agreement:
 
“Accounts” are all existing and later arising accounts, contract rights, and
other obligations owed Borrower in connection with its sale or lease of goods
(including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower’s Books relating to any of the
foregoing, as such definition may be amended from time to time according to the
Code.
 
“Account Debtor” is as defined in the Code and shall include, without
limitation, any person liable on any Financed Receivable, such as, a guarantor
of the Financed Receivable and any issuer of a letter of credit or banker’s
acceptance.
 
“Adjustments” are all discounts, allowances, returns, disputes, counterclaims,
offsets, defenses, rights of recoupment, rights of return, warranty claims, or
short payments, asserted by or on behalf of any Account Debtor for any Financed
Receivable.
 
“Advance” is defined in Section 2.1.1.
 
“Advance Rate” eighty percent (80.0%), net of any offsets related to each
specific Account Debtor, including, without limitation, Deferred Revenue, or
such other percentage as Bank establishes under Section 2.1.1.
 
“Affiliate” is a Person that owns or controls directly or indirectly the Person,
any Person that controls or is controlled by or is under common control with the
Person, and each of that Person’s senior executive officers, directors, partners
and, for any Person that is a limited liability company, that Person’s managers
and members.
 
“Applicable Rate” is a per annum rate equal to the Prime Rate plus one-half of
one percent (0.50%).
 
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“Bank Expenses” are all audit fees and expenses and reasonable costs or expenses
(including reasonable attorneys’ fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including appeals or
Insolvency Proceedings).
 
“Borrower’s Books” are all Borrower’s books and records including ledgers,
records regarding Borrower’s assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or storage or any
equipment containing the information.
 
“Business Day” is any day that is not a Saturday, Sunday or a day on which Bank
is closed.
 
“Closing Date” is the date of this Agreement.
 
“Code” is the Uniform Commercial Code as adopted in Massachusetts, as amended
and as may be amended and in effect from time to time.
 
“Collateral” is any and all properties, rights and assets of Borrower granted by
Borrower to Bank or arising under the Code, now, or in the future, in which
Borrower obtains an interest, or the power to transfer rights, in the property
described on Exhibit A.
 
“Collateral Handling Fee” is defined in Section 2.2.4.
 
“Collections” are all funds received by Bank from or on behalf of an Account
Debtor for Financed Receivables.
 
“Commodity Account” is any “commodity account” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Compliance Certificate” is attached as Exhibit B.
 
“Contingent Obligation” is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (i) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation 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; (ii) any
obligations for undrawn letters of credit for the account of that Person; and
(iii) 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.
 
“Control Agreement” is any control agreement entered into among the depository
institution at which Borrower maintains a Deposit Account or the securities
intermediary or commodity intermediary at which Borrower (or Guarantor, with
respect to the assets subject to the Stock Pledge Agreement) maintains a
Securities Account or a Commodity Account, Borrower, and Bank pursuant to which
Bank obtains control (within the meaning of the Code) over such Deposit Account,
Securities Account, or Commodity Account.
 
“Default Rate” is defined in Section 9.6.
 
“Deferred Revenue” is all amounts received or invoiced, as appropriate, in
advance of performance under contracts and not yet recognized as revenue.
 
“Deposit Account” is any “deposit account” as defined in the Code with such
additions to such term as may hereafter be made.
 
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“Disclosure Schedule” is that certain schedule, in form reasonably acceptable to
Bank, attached hereto as Exhibit C.
 
“Early Termination Fee” is defined in Section 2.1.1.
 
“Eligible Accounts” are billed Accounts in the ordinary course of Borrower’s
business that meet all Borrower’s representations and warranties in Section 5.3,
have been, at the option of Bank, confirmed in accordance with Section 2.1.1(d),
and are due and owing from Account Debtors deemed creditworthy by Bank in its
sole discretion. Without limiting the fact that the determination of which
Accounts are eligible hereunder is a matter of Bank discretion in each instance,
Eligible Accounts shall not include the following Accounts (which listing may be
amended or changed in Bank’s discretion with notice to Borrower):
 
(a)    Accounts that the Account Debtor has not paid within ninety (90) days of
invoice date;
 
(b)    Accounts for an Account Debtor, fifty percent (50%) or more of whose
Accounts have not been paid within ninety (90) days of invoice date;
 
(c)    Accounts for which the Account Debtor does not have its principal place
of business in the United States, unless agreed to by Bank in writing, in its
sole discretion, on a case-by-case basis;
 
(d)    Accounts for which the Account Debtor is a federal, state or local
government entity or any department, agency, or instrumentality thereof except
for Accounts of the United States if the payee has assigned its payment rights
to Bank and the assignment has been acknowledged under the Assignment of Claims
Act of 1940 (31 U.S.C. 3727);
 
(e)    Accounts for which Borrower owes the Account Debtor, but only up to the
amount owed (sometimes called “contra” accounts, accounts payable, customer
deposits or credit accounts);
 
(f)    Accounts for demonstration or promotional equipment, or in which goods
are consigned, sales guaranteed, sale or return, sale on approval, bill and
hold, or other terms if the Account Debtor’s payment may be conditional;
 
(g)    Accounts for which the Account Debtor is Borrower’s Affiliate, officer,
employee, or agent;
 
(h)    Accounts in which the Account Debtor disputes liability or makes any
claim and Bank believes there may be a basis for dispute (but only up to the
disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business; or
 
(i)    Accounts for which Bank reasonably determines collection to be doubtful
or any Accounts which are unacceptable to Bank for any reason.
 
“ERISA” is the Employee Retirement Income Security Act of 1974, and its
regulations.
 
“Events of Default” are set forth in Article 8.
 
“Facility Amount” is Eight Million Seven Hundred Fifty Thousand Dollars
($8,750,000.00).
 
“Facility Fee” is defined in Section 2.2.2.
 
“Finance Charges” is defined in Section 2.2.3.
 
“Financed Receivables” are all those Eligible Accounts, including their
proceeds, which Bank finances by making an Advance, as set forth in Section
2.1.1. A Financed Receivable stops being a Financed Receivable (but remains
Collateral) when the Advance made for the Financed Receivable has been fully
paid.
 
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“Financed Receivable Balance” is the total outstanding gross face amount, at any
time, of any Financed Receivable.
 
“GAAP” is generally accepted accounting principles.
 
“Good Faith Deposit” is defined in Section 2.2.8.
 
“Guarantor” is any present or future guarantor of the Obligations, including
Markland.
 
“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
 
"Initial Audit" shall be the receipt by Bank of the results of a complete audit
of Borrower's Accounts, with results satisfactory to Bank in its sole and
absolute discretion.
 
“Insolvency Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
 
“Investment” is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
 
“Invoice Transmittal” shows Eligible Accounts which Bank may finance and, for
each such Account, includes the Account Debtor’s, name, address, invoice amount,
invoice date and invoice number.
 
“Intellectual Property” is the “Intellectual Property Collateral” as defined in
the IP Agreement.
 
“IP Agreement” is a certain Intellectual Property Security Agreement executed
and delivered by Borrower to Bank.
 
“Key Person” shall mean the Chief Financial Officer or the Chief Executive
Officer.
 
“Lien” is a mortgage, lien, deed of trust, charge, pledge, security interest or
other encumbrance.
 
“Loan Documents” are, collectively, this Agreement, the Term Loan Agreement, any
note, or notes or guaranties executed by Borrower or Guarantor, and any other
present or future agreement between Borrower and/or for the benefit of Bank in
connection with this Agreement, all as amended, extended or restated.
 
“Lockbox” is defined in Section 2.2.7.
 
“Markland” is Markland Technologies, Inc., a Florida corporation and the parent
company of Technest.
 
“Material Adverse Change” is: (i) A material impairment in the perfection or
priority of Bank’s security interest in the Collateral or in the value of such
Collateral; (ii) a material adverse change in the business, operations, or
condition (financial or otherwise) of Borrower; or (iii) a material impairment
of the prospect of repayment of any portion of the Obligations.
 
“Maturity Date” is 364 days from the date of this Agreement.
 
“Minimum Finance Charge” shall be the Finance Charges that would result if the
Borrower had average aggregate Advances for the subject quarter equal to at
least $1,400,000.00.
 
“Obligations” are all advances, liabilities, obligations, covenants and duties
owing, arising, due or payable by Borrower to Bank now or later under this
Agreement or any other document, instrument or agreement, account (including
those acquired by assignment) primary or secondary, such as all Advances,
Finance Charges, Facility Fee, Early Termination Fee, Collateral Handling Fee,
interest, fees, expenses, professional fees and attorneys’ fees, or other
amounts now or hereafter owing by Borrower to Bank.
 
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“Perfection Certificate” is a certain Perfection Certificate completed and
delivered by Borrower to Bank in connection with this Agreement.
 
“Permitted Indebtedness” is:
 
(a)    Borrower’s indebtedness to Bank under this Agreement or the Loan
Documents;
 
(b)    Indebtedness existing on the Effective Date and shown on the Perfection
Certificate;
 
(c)    Subordinated Debt;
 
(d)    Indebtedness to trade creditors incurred in the ordinary course of
business;
 
(e)    Indebtedness secured by Permitted Liens; and
 
(f)     extensions, refinancings, modifications, amendments and restatements of
any items of Permitted Indebtedness (a) through (d) above, provided that the
principal amount thereof is not increased or the terms thereof are not modified
to impose more burdensome terms upon Borrower or its Subsidiary, as the case may
be.
 
“Permitted Investments” are: (i) marketable direct obligations issued or
unconditionally guaranteed by the United States or its agency or any state
maturing within 1 year from its acquisition, (ii) commercial paper maturing no
more than 1 year after its creation and having the highest rating from either
Standard & Poor’s Corporation or Moody’s Investors Service, Inc., (iii) Bank’s
certificates of deposit issued maturing no more than 1 year after issue, and
(iv) any other investments administered through Bank.
 
“Permitted Liens” are:
 
(a)    Liens existing on the Effective Date and shown on the Perfection
Certificate or arising under this Agreement or other Loan Documents;
 
(b)    Liens for taxes, fees, assessments or other government charges or levies,
either not delinquent or being contested in good faith and for which Borrower
maintains adequate reserves on its Books, if they have no priority over any of
Bank’s security interests;
 
(c)    Purchase money Liens securing no more than One Hundred Thousand Dollars
($100,000.00) in the aggregate amount outstanding (i) on equipment acquired or
held by Borrower incurred for financing the acquisition of the equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
 
(d)    Leases or subleases and non-exclusive licenses or sublicenses granted in
the ordinary course of Borrower’s business, if the leases, subleases, licenses
and sublicenses permit granting Bank a security interest;
 
(e)    Pledges of or liens on manufactured products as security for any drafts
or bills of exchange drawn in connection with the importation of such
manufactured products in the ordinary course of business;
 
(f)    Liens under Article 2 of the Uniform Commercial Code that are special
property interests in goods identified as goods to which a contract refers; and
 
(g)           Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (f), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
 
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“Person” is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
 
“Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not
Bank’s lowest rate.
 
“Reconciliation Period” is each calendar month.
 
“Responsible Officer” is each of the Chief Executive Officer, President, Chief
Financial Officer and Controller of Borrower.
 
“Securities Account” is any “securities account” as defined in the Code with
such additions to such term as may hereafter be made.
 
“Settlement Agreement” is that certain Settlement Agreement and Release among
Joseph R. Moulton, Sr, EOIR and Technest, and dated as of the Effective Date.
 
“Stock Pledge Agreement” is that certain Stock Pledge Agreement of even date
herewith by and among Bank and Guarantor in which Guarantor pledges to Bank
certain stock of Technest with a market value of at least $6,000,000.00 as of
the Closing Date.
 
“Stockholder Agreement” is that certain Stockholder Agreement by and between
Technest and Markland and dated as of March 13, 2006.
 
“Subordinated Debt” is debt incurred by Borrower subordinated to Borrower’s debt
to Bank (pursuant to a subordination agreement entered into between Bank,
Borrower and the subordinated creditor), on terms acceptable to Bank.
 
“Subsidiary” is any Person, or any other business entity of which more than 50%
of the voting stock or other equity interests is owned or controlled, directly
or indirectly, by the Person or one or more Affiliates of the Person.
 
“Term Loan Agreement” is that certain Loan and Security Agreement (Term Loan) by
and between Borrower and Bank as of even date herewith, as amended from time to
time.
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as a sealed instrument under the laws of the Commonwealth of Massachusetts as of
the date first above written.
 
BORROWER:
 

TECHNEST HOLDINGS, INC.       By: /s/ Gino
Pereira                                                   Name: Gino
Pereira                                                    Title: Chief
Financial Officer                                        E-OIR TECHNOLOGIES,
INC.       By: /s/ Joseph P. Mackin                                        
Name: Joseph P. Mackin                                          Title: Chief
Executive Officer                                       GENEX TECHNOLOGIES
INCORPORATED      
By: /s/ Joseph P. Mackin                                       
  Name: Joseph P. Mackin                                           Title: Chief
Executive Officer                                                BANK:      
SILICON VALLEY BANK      
By: /s/ Michael Tramack                                         
  Name: Michael Tramack                                            
Title: Senior Vice President                                     
 

 

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EXHIBIT A

The Collateral consists of all of Borrower’s right, title and interest in and to
the following:
 
All goods, equipment, inventory, contract rights or rights to payment of money,
leases, license agreements, franchise agreements, general intangibles (including
payment intangibles), accounts (including health-care receivables), documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), commercial tort claims,
securities, and all other investment property, supporting obligations, and
financial assets, whether now owned or hereafter acquired, wherever located; and
 
Any copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work, whether published or
unpublished, now owned or later acquired; any patents, trademarks, service marks
and applications therefor; trade styles, trade names, any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing; and
 
All Borrower’s books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing. 
 
 
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EXHIBIT B
 
[siliconlogo.jpg]
 
SILICON VALLEY BANK
SPECIALTY FINANCE DIVISION
Compliance Certificate

I, as authorized officer of Technest Holdings, Inc., E-OIR Technologies, Inc.
and Genex Technologies Incorporated (jointly and severally, individually and
collectively,“Borrower”) certify under the Loan and Security Agreement (the
“Agreement”) between Borrower and Silicon Valley Bank (“Bank”) as follows (all
capitalized terms used herein shall have the meaning set forth in the
Agreement):

Borrower represents and warrants for each Financed Receivable:

Each Financed Receivable is an Eligible Account.

Borrower is the owner with legal right to sell, transfer, assign and encumber
such Financed Receivable;

The correct amount is on the Invoice Transmittal and is not disputed;

Payment is not contingent on any obligation or contract and Borrower has
fulfilled all its obligations as of the Invoice Transmittal date;

Each Financed Receivable is based on an actual sale and delivery of goods and/or
services rendered, is due to Borrower, is not past due or in default, has not
been previously sold, assigned, transferred, or pledged and is free of any
liens, security interests and encumbrances other than Permitted Liens;

There are no defenses, offsets, counterclaims or agreements for which the
Account Debtor may claim any deduction or discount;

It reasonably believes no Account Debtor is insolvent or subject to any
Insolvency Proceedings;

It has not filed or had filed against it Insolvency Proceedings and does not
anticipate any filing;

Bank has the right to endorse and/ or require Borrower to endorse all payments
received on Financed Receivables and all proceeds of Collateral.

Each Financed Receivable and all related documents are accurate and correct in
all material respects and are not misleading.

Additionally, Borrower represents and warrants as follows:

Borrower and each Subsidiary is duly existing and in good standing in its state
of formation and qualified and licensed to do business in, and in good standing
in, any state in which the conduct of its business or its ownership of property
requires that it be qualified except where the failure to do so could not
reasonably be expected to cause a Material Adverse Change. The execution,
delivery and performance of the Loan Documents have been duly authorized, and do
not conflict with Borrower’s organizational documents, nor constitute an event
of default under any material agreement by which Borrower is bound. Borrower is
not in default under any agreement to which or by which it is bound in which the
default could reasonably be expected to cause a Material Adverse Change.

Borrower has good title to the Collateral, free of Liens except Permitted Liens.
All inventory is in all material respects of good and marketable quality, free
from material defects.
 
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Borrower is not an “investment company” or a company “controlled” by an
“investment company” under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations X, T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower’s or any Subsidiary’s properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted except where the failure to obtain or make such consents,
declarations, notices or filings would not reasonably be expected to cause a
Material Adverse Change.

All representations and warranties in the Agreement are true and correct in all
material respects on this date, and Borrower represents that there is no
existing Event of Default.
 
Sincerely,
 
Signature
 
Title
 
Date

 

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