EXHIBIT 10.1

LOAN AND SECURITY AGREEMENT

This Loan and Security Agreement (this “Agreement”) is entered into as of
May 24, 2012, by and between Comerica Bank (“Bank”) and Biolase, Inc., a
Delaware corporation (“Borrower”).

RECITALS: In order to support general working capital requirements and to fund
capital expenditures, Borrower wishes to obtain credit from time to time from
Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth
the terms on which Bank will advance credit to Borrower, and Borrower will repay
the amounts owing to Bank.

AGREEMENT: The parties agree as follows:

 

ARTICLE 1. DEFINITIONS AND CONSTRUCTION.

1.1 Definitions. As used in this Agreement, all capitalized terms shall have the
definitions set forth on Exhibit A. Any term used in the Code and not defined
herein shall have the meaning given to the term in the Code.

1.2 Accounting Terms. Any accounting term not specifically defined on Exhibit A
shall be construed in accordance with GAAP and all calculations shall be made in
accordance with GAAP. The term “financial statements” shall include the
accompanying notes and schedules.

 

ARTICLE 2. LOAN AND TERMS OF PAYMENT.

 

2.1 Credit Extensions.

(a) Promise to Pay. Borrower promises to pay to Bank, in lawful money of the
United States of America, the aggregate unpaid principal amount of all Credit
Extensions made by Bank to Borrower, together with interest on the unpaid
principal amount of such Credit Extensions at rates in accordance with the terms
hereof.

 

  (b) Advances under Revolving Line.

(i) Amount. Subject to and upon the terms and conditions of this Agreement
Borrower may request Advances in an aggregate outstanding amount not to exceed
the lesser of (A) the Revolving Line or (B) the Borrowing Base. Amounts borrowed
pursuant to this Section 2.1(b) may be repaid and reborrowed at any time without
penalty or premium prior to the Revolving Maturity Date, at which time all
Advances under this Section 2.1(b) shall be immediately due and payable.

(ii) Form of Request. Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m. Pacific time
(12:00 p.m. Pacific time for wire transfers), on the Business Day that the
Advance is to be made. Each such notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of Exhibit C. Bank is authorized
to make Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of Responsible Officer, or without
instructions if in Bank’s discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any facsimile or telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer or a designee thereof, and Borrower shall
indemnify and hold Bank harmless for any damages or loss suffered by Bank as a
result of such reliance. Bank will credit the amount of Advances made under this
Section 2.1(b) to Borrower’s deposit account.

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2.2 Overadvances. If the aggregate amount of the outstanding Advances exceeds
the lesser of the Revolving Line or the Borrowing Base at any time, Borrower
shall immediately pay to Bank, in cash, the amount of such excess.

 

2.3 Interest Rates, Payments, and Calculations.

(a) Interest Rates – Advances. Except as set forth in Section 2.3(b), the
Advances shall bear interest, on the outstanding daily balance thereof, as set
forth in the Daily Adjusting LIBOR Rate Addendum attached hereto as Exhibit F
(“Rate Addendum”).

(b) Late Fee; Default Rate. If any payment is not made within 10 days after the
date such payment is due, Borrower shall pay Bank a late fee equal to the lesser
of (i) five percent (5%) of the amount of such unpaid amount or (ii) the maximum
amount permitted to be charged under applicable law. All Obligations shall bear
interest, from and after the occurrence and during the continuance of an Event
of Default, at a rate equal to five (5) percentage points above the interest
rate applicable immediately prior to the occurrence of the Event of Default.

(c) Payments. Except as set forth in the Rate Addendum, interest hereunder shall
be due and payable on the first calendar day of each month during the term
hereof. Bank shall, at its option, charge such interest, all Bank Expenses, and
all Periodic Payments against any of Borrower’s deposit accounts or against the
Revolving Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.

(d) Computation. All interest chargeable under the Loan Documents shall be
computed on the basis of a three hundred sixty (360) day year for the actual
number of days elapsed.

2.4 Crediting Payments. Prior to the occurrence of an Event of Default, Bank
shall credit a wire transfer of funds, check or other item of payment to such
deposit account or Obligation as Borrower specifies. After the occurrence of an
Event of Default, Bank shall have the right, in its sole discretion, to
immediately apply any wire transfer of funds, check, or other item of payment
Bank may receive to conditionally reduce Obligations, but such applications of
funds shall not be considered a payment on account unless such payment is of
immediately available federal funds or unless and until such check or other item
of payment is honored when presented for payment. Notwithstanding anything to
the contrary contained herein, any wire transfer or payment received by Bank
after 12:00 noon Pacific Time shall be deemed to have been received by Bank as
of the opening of business on the immediately following Business Day. Whenever
any payment to Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not a Business Day, such payment shall
instead be due on the next Business Day, and additional fees or interest, as the
case may be, shall accrue and be payable for the period of such extension.

 

2.5 Fees. Borrower shall pay to Bank the following:

(a) Facility Fee. On the Closing Date, a fee equal to $120,000.00, which shall
be nonrefundable; and

 

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(b) Bank Expenses. On the Closing Date, Bank Expenses of $            incurred
through the Closing Date, and, after the Closing Date, all Bank Expenses, as and
when they become due.

2.6 Term. This Agreement shall become effective on the Closing Date and, subject
to Section 13.8, shall continue in full force and effect for so long as any
Obligations remain outstanding or Bank has any obligation to make Credit
Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have
the right to terminate its obligation to make Credit Extensions under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default.

 

ARTICLE 3. CONDITIONS OF LOANS.

3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to
make the initial Credit Extension is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, the
following:

(a) this Agreement;

(b) an officer’s certificate of Borrower with respect to incumbency and
resolutions authorizing the execution and delivery of this Agreement,
accompanied by certified copies of Borrower’s organizational documents;

(c) financing statement (Form UCC-1);

(d) an agreement to furnish insurance;

(e) the Security Agreement;

(f) the Security Agreement- Stock Pledge for the Shares executed and delivered
by Borrower and the certificates for the Shares, together with assignment(s)
separate from certificate, duly executed in blank;

(g) payment of the fees and Bank Expenses then due specified in Section 2.5;

(h) current SOS Reports indicating that except for Permitted Liens, there are no
other security interests or Liens of record in the Collateral;

(i) an audit of the Collateral, the results of which shall be satisfactory to
Bank;

(j) current financial statements, including (i) audited statements for Biolase
Technology Inc.’s most recently ended fiscal year, together with an unqualified
opinion of its accountants regarding those statements, (ii) company prepared
consolidated and consolidating balance sheets and income statements for the most
recently ended month in accordance with Section 6.2, and (iii) such other
updated financial information as Bank may reasonably request;

(k) a current Borrowing Base Certificate as contemplated by Section 6.2(h);

(l) a current Compliance Certificate in accordance with Section 6.2(i);

(m) a Collateral Information Certificate in form satisfactory to Bank;

(n) an Automatic Debit Authorization;

 

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(o) a Warrant for 80,000 shares of Biolase Technology’s common stock with an
exercise price of 120% of the public trading closing price on the Closing Date
and a five year term; and

(p) such other documents or certificates, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.

3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to
make each Credit Extension, including the initial Credit Extension, is further
subject to the following conditions:

(a) timely receipt by Bank of the Payment/Advance Form as provided in
Section 2.1; and

(b) the representations and warranties contained in Article 5 shall be true and
correct in all material respects on and as of the date of such Payment/Advance
Form and on the effective date of each Credit Extension as though made at and as
of each such date, and no Event of Default shall have occurred and be
continuing, or would exist after giving effect to such Credit Extension
(provided, however, that those representations and warranties expressly
referring to another date shall be true, correct and complete in all material
respects as of such date). The making of each Credit Extension shall be deemed
to be a representation and warranty by Borrower on the date of such Credit
Extension as to the accuracy of the facts referred to in this Section 3.2.

 

ARTICLE 4. CREATION OF SECURITY INTEREST.

4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing
security interest in the Collateral to secure prompt repayment of any and all
Obligations and to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in later-acquired Collateral. Borrower also
hereby agrees not to sell, transfer, assign, mortgage, pledge, lease, grant a
security interest in, or encumber any of its Intellectual Property, except in
connection with Permitted Liens and Permitted Transfers. Borrower further agrees
that it shall not enter into any agreement with or for the benefit of any other
person that restricts or limits Borrower’s ability to assign or grant a security
interest to Bank in any of Borrower’s Intellectual Property. Notwithstanding any
termination of this Agreement, Bank’s Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.

4.2 Perfection of Security Interest. Borrower authorizes Bank to file at any
time financing statements, continuation statements, and amendments thereto that
(i) either specifically describe the Collateral or describe the Collateral as
all assets of Borrower of the kind pledged hereunder, and (ii) contain any other
information required by the Code for the sufficiency of filing office acceptance
of any financing statement, continuation statement, or amendment, including
whether Borrower is an organization, the type of organization and any
organizational identification number issued to Borrower, if applicable. Any such
financing statements may be filed by Bank at any time in any jurisdiction
whether or not Revised Article 9 of the Code is then in effect in that
jurisdiction. Borrower shall from time to time endorse and deliver to Bank, at
the request of Bank, all Negotiable Collateral and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfection of Bank’s security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
Borrower shall have possession of the Collateral, except where expressly
otherwise provided in this Agreement or where Bank chooses to perfect its
security interest by possession in addition to the filing of a financing
statement. Where Collateral is in possession of a third party bailee, Borrower
shall take such steps as Bank reasonably requests for Bank to (i) obtain an
acknowledgment, in form and substance satisfactory to Bank, of the bailee that
the bailee holds such Collateral for the benefit of Bank, (ii) obtain “control”
of any Collateral consisting of investment

 

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property, deposit accounts, letter-of-credit rights or electronic chattel paper
(as such items and the term “control” are defined in Revised Article 9 of the
Code) by causing the securities intermediary or depositary institution or
issuing bank to execute a control agreement in form and substance satisfactory
to Bank. Borrower will not create any chattel paper without placing a legend on
the chattel paper acceptable to Bank indicating that Bank has a security
interest in the chattel paper. Borrower from time to time may deposit with Bank
specific cash collateral to secure specific Obligations; Borrower authorizes
Bank to hold such specific balances in pledge and to decline to honor any drafts
thereon or any request by Borrower or any other Person to pay or otherwise
transfer any part of such balances for so long as the specific Obligations are
outstanding.

4.3 Right to Inspect. Bank (through any of its officers, employees, or agents)
shall have the right, upon reasonable prior notice, from time to time during
Borrower’s usual business hours but no more than twice a year (unless an Event
of Default has occurred and is continuing), to inspect Borrower’s Books and to
make copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower’s financial condition or the amount, condition of, or any other
matter relating to, the Collateral.

 

4.4 DOF Account.

(a) Borrower agrees that the Obligations shall be on a “remittance basis”.
Borrower shall at its sole expense establish and maintain (and Bank, at Bank’s
option, may establish and maintain at Borrower’s expense) a non-interest bearing
deposit account with Bank which shall be titled as designated by Bank (the
“Dominion of Funds Account”) to which Bank shall have exclusive access and
control. Borrower agrees to notify all account debtors and other parties
obligated to Borrower that all payments made to Borrower by electronic funds
transfer shall be remitted to the Dominion of Funds Account, and Borrower, at
Bank’s request, shall include a like statement on all invoices. Borrower shall
execute all documents and authorizations as required by Bank to establish and
maintain the Dominion of Funds Account.

(b) Borrower shall hold in trust for Bank all amounts that Borrower receives by
check or other form of payment or despite the directions to make electronic
funds transfer payments to the Dominion of Funds Account, and immediately
deliver such payments to Bank in their original form as received from the
account debtor, with proper endorsements for deposit into the Dominion of Funds
Account.

(c) All items or amounts which are remitted to the Dominion of Funds Account, or
otherwise delivered by or for the benefit of Borrower to Bank on account of
partial or full payment of, or with respect to, any Collateral shall, on a daily
basis, be applied to the payment of outstanding Advances, whether then due or
not, with the balance, if any, deposited to Borrower’s operating account
maintained at Bank. After the occurrence and during the continuance of an Event
of Default, all items or amounts remitted to the Dominion of Funds Account or
that Bank has otherwise received shall, in Bank’s sole discretion, be applied to
the payment of any Obligations, whether then due or not, in such order or at
such time of application as Bank may determine in its sole discretion. Borrower
agrees that Bank shall not be liable for any loss or damage which Borrower may
suffer as a result of Bank’s processing of items or its exercise of any other
rights or remedies under this Agreement, including without limitation indirect,
special or consequential damages, loss of revenues or profits, or any claim,
demand or action by any third party arising out of or in connection with the
processing of items or the exercise of any other rights or remedies under this
Agreement. Borrower agrees to indemnify and hold Bank harmless from and against
all such third party claims, demands or actions, and all related expenses or
liabilities, including, without limitation, attorney’s fees and INCLUDING
CLAIMS, DAMAGES, FINES, EXPENSES, LIABILITIES OR CAUSES OF ACTION OF WHATEVER
KIND RESULTING FROM BANK’S OWN NEGLIGENCE except to the extent (but only to the
extent) caused by Bank’s gross negligence, willful misconduct, or fraud.

 

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ARTICLE 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as
follows:

5.1 Due Organization and Qualification. Borrower and each Subsidiary is an
entity duly existing under the laws of the jurisdiction in which it is organized
and qualified and licensed to do business in any state in which the conduct of
its business or its ownership of property requires that it be so qualified,
except where the failure to do so could not reasonably be expected to cause a
Material Adverse Effect.

5.2 Due Authorization; No Conflict. The execution, delivery, and performance of
the Loan Documents are within Borrower’s powers, have been duly authorized, and
are not in conflict with nor constitute a breach of any provision contained in
Borrower’s organizational documents, nor will they constitute an event of
default under any material agreement by which Borrower is bound. Borrower is not
in default under any agreement by which it is bound, except to the extent such
default would not reasonably be expected to cause a Material Adverse Effect.

5.3 Collateral. Borrower has rights in or the power to transfer the Collateral,
and its title to the Collateral is free and clear of Liens, adverse claims, and
restrictions on transfer or pledge except for Permitted Liens. All Collateral is
located solely in the Collateral States. The Eligible Accounts are bona fide
existing obligations. The property or services giving rise to such Eligible
Accounts has been delivered or rendered to the account debtor or its agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor whose accounts are included in any Borrowing Base Certificate
as an Eligible Account. No licenses or agreements giving rise to such Eligible
Accounts are with any Prohibited Territory or with any Person organized under or
doing business in a Prohibited Territory. All Inventory is in all material
respects of good and merchantable quality, free from all material defects,
except for Inventory for which adequate reserves have been made. Except as set
forth in the Schedule, none of the Collateral is maintained or invested with a
Person other than Bank or Bank’s Affiliates.

5.4 Intellectual Property Collateral. Borrower is the sole owner of the
Intellectual Property, except for licenses granted by Borrower to its customers
in the ordinary course of business. To the best of Borrower’s knowledge, each of
the Copyrights, Trademarks and Patents is valid and enforceable, and no part of
the Intellectual Property has been judged invalid or unenforceable, in whole or
in part, and no claim has been made to Borrower that any part of the
Intellectual Property violates the rights of any third party except to the
extent such claim could not reasonably be expected to cause a Material Adverse
Effect.

5.5 Name; Location of Chief Executive Office. Except as disclosed in the
Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof, and its exact legal name is as set forth
in the first paragraph of this Agreement. The chief executive office of Borrower
is located in the Chief Executive Office State at the address indicated in
Article 10.

5.6 Actions, Suits, Litigation, or Proceedings. Except as set forth in the
Schedule, there are no actions, suits, litigation or proceedings, at law or in
equity, pending by or against Borrower or any Subsidiary before any court,
administrative agency, or arbitrator in which a likely adverse decision could
reasonably be expected to have a Material Adverse Effect.

5.7 No Material Adverse Change in Financial Statements. All consolidated and
consolidating financial statements related to Borrower and any Subsidiary that
are delivered by Borrower to Bank fairly

 

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present in all material respects Borrower’s consolidated and consolidating
financial condition as of the date thereof and Borrower’s consolidated and
consolidating results of operations for the period then ended. There has not
been a material adverse change in the consolidated or in the consolidating
financial condition of Borrower since the date of the most recent of such
financial statements submitted to Bank.

5.8 Solvency, Payment of Debts. Borrower is able to pay its debts (including
trade debts) as they become due; the fair saleable value of Borrower’s assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; and Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement.

5.9 Compliance with Laws and Regulations. Borrower and each Subsidiary have met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower’s failure
to comply with ERISA that is reasonably likely to result in Borrower’s incurring
any liability that could reasonably be expected to have a Material Adverse
Effect. Borrower is not an “investment company” or a company “controlled” by an
“investment company” within the meaning of the Investment Company Act of 1940.
Borrower is not engaged principally, or as one of the important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations T and U of the Board of
Governors of the Federal Reserve System). Borrower has complied in all material
respects with all the provisions of the Federal Fair Labor Standards Act.
Borrower is in compliance with all Environmental Laws except where the failure
to comply is not reasonably likely to have a Material Adverse Effect. Borrower
has not violated any statutes, laws, ordinances or rules applicable to it, the
violation of which could reasonably be expected to have a Material Adverse
Effect. Borrower and each Subsidiary have filed or caused to be filed all tax
returns required to be filed, and have paid, or have made adequate provision for
the payment of, all taxes reflected therein except those being contested in good
faith with adequate reserves under GAAP or where the failure to file such
returns or pay such taxes could not reasonably be expected to have a Material
Adverse Effect.

5.10 Subsidiaries. Borrower does not own any stock, partnership interest or
other equity securities of any Person, except for Permitted Investments. All
Subsidiaries of Biolase Technology and their respective shareholders are listed
on the Schedule.

5.11 Government Consents. Borrower and each Subsidiary have obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower’s business as currently conducted,
except where the failure to do so would not reasonably be expected to cause a
Material Adverse Effect.

5.12 Inbound Licenses. Except as disclosed on the Schedule, Borrower is not a
party to, nor is bound by, any inbound license or other agreement, the failure,
breach, or termination of which could reasonably be expected to cause a Material
Adverse Effect, or that prohibits or otherwise restricts Borrower from granting
a security interest in such Borrower’s interest in license or agreement or any
other property.

5.13 Full Disclosure. No representation, warranty or other statement made by
Borrower in any certificate or written statement furnished to Bank taken
together with all such certificates and written statements furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such 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 to be viewed as facts and that actual results during the
period or periods covered by any such projections and forecasts may differ from
the projected or forecasted results.

 

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ARTICLE 6. AFFIRMATIVE COVENANTS. Borrower covenants and shall cause its
Material Subsidiaries to covenant that, until payment in full of all outstanding
Obligations, and for so long as Bank may have any commitment to make a Credit
Extension hereunder, Borrower shall and shall cause each of its Material
Subsidiaries to do all of the following:

6.1 Good Standing and Government Compliance. Borrower shall maintain its and
each of its Subsidiaries’ organizational existence and good standing in the
Borrower State, shall maintain qualification and good standing in each other
jurisdiction in which the failure to so qualify could reasonably be expected to
have a Material Adverse Effect, and shall furnish to Bank the organizational
identification numbers issued to Borrower by the authorities of the jurisdiction
in which Borrower is organized, if applicable. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall comply in
all material respects with all applicable Environmental Laws, and maintain all
material permits, licenses and approvals required thereunder where the failure
to do so could reasonably be expected to have a Material Adverse Effect.
Borrower shall comply, and shall cause each Subsidiary to comply, with all
statutes, laws, ordinances and government rules and regulations to which it is
subject, and shall maintain, and shall cause each of its Subsidiaries to
maintain, in force all licenses, approvals and agreements, the loss of which or
failure to comply with which would reasonably be expected to have a Material
Adverse Effect.

 

6.2 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank:

(a) as soon as available, but in any event within 30 days after the end of each
calendar month, a company prepared consolidated and consolidating balance sheet
and income statement covering Borrower’s operations during such period, in a
form reasonably acceptable to Bank and certified by a Responsible Officer;

(b) as soon as available, but in any event within 120 days after the end of
Borrower’s fiscal year, audited consolidated and consolidating financial
statements of Borrower prepared in accordance with GAAP, consistently applied,
together with an opinion which is unqualified (including no going concern
comment or qualification) or otherwise consented to in writing by Bank on such
financial statements of an independent certified public accounting firm
reasonably acceptable to Bank;

(c) if applicable, copies of all statements, reports and notices sent or made
available generally by Borrower to its security holders or to any holders of
Subordinated Debt, if any, and all reports on Forms 10-K and 10-Q filed with the
Securities and Exchange Commission (the “SEC”) (the filing of such documents on
the SEC’s EDGAR system shall be deemed delivery by Borrower of such information
to Bank);

(d) promptly upon receipt of notice thereof, a report of any legal actions
pending or, to Borrower’s knowledge, threatened in writing against Borrower or
any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of $150,000.00 or more;

(e) promptly upon receipt, each management letter prepared by Borrower’s
independent certified public accounting firm regarding Borrower’s management
control systems;

(f) as soon as available, but in any event not later than 60 days after the
commencement of each fiscal year, Borrower’s board of directors-approved
financial and business projections and budget, sales projections, and operating
plans for that year;

 

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(g) within 30 days of the last day of each fiscal quarter, a report signed by
Borrower, in form reasonably acceptable to Bank, listing any applications or
registrations that Borrower has made or filed in respect of any Patents,
Copyrights or Trademarks and the status of any outstanding applications or
registrations, as well as any material change in Borrower’s Intellectual
Property;

(h) within 30 days after the last day of each month, a Borrowing Base
Certificate signed by a Responsible Officer in substantially the form of Exhibit
D, together with aged listings by invoice date of accounts receivable and
accounts payable; provided, however, during any Weekly Reporting Period,
Borrower shall submit Borrowing Base Certificates as of the last Business Day of
each week within 2 Business Days thereafter;

(i) within 30 days after the last day of each month, with the monthly financial
statements a Compliance Certificate certified as of the last day of the
applicable month and signed by a Responsible Officer in substantially the form
of Exhibit E.

(j) immediately upon becoming aware of the occurrence or existence of an Event
of Default hereunder, a written statement of a Responsible Officer setting forth
details of the Event of Default, and the action which Borrower has taken or
proposes to take with respect thereto.

Bank shall have a right from time to time hereafter to audit Borrower’s Accounts
and Inventory and appraise Collateral at Borrower’s expense, provided that,
unless an Event of Default has occurred and is continuing, (i) audits of
Accounts will be conducted no more often than every six (6) months and
(ii) audits of Inventory will be conducted no more often than every twelve
(12) months.

Borrower may deliver to Bank on an electronic basis any certificates, reports or
information required pursuant to this Section 6.2, and Bank shall be entitled to
rely on the information contained in the electronic files, provided that Bank in
good faith believes that the files were delivered by a Responsible Officer. If
Borrower delivers this information electronically, it shall also deliver to Bank
by U.S. Mail, reputable overnight courier service, hand delivery, facsimile or
.pdf file within five (5) days of submission of the unsigned electronic copy the
certification of monthly financial statements, the intellectual property report,
the Borrowing Base Certificate and the Compliance Certificate, each bearing the
physical signature of the Responsible Officer.

6.3 Inventory; Returns. Borrower shall keep all Inventory in good and
merchantable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist on the
Closing Date. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims involving more than $100,000.00.

6.4 Taxes. Borrower shall make, and cause each Subsidiary to make, due and
timely payment or deposit of all material federal, state, and local taxes,
assessments, or contributions required of it by law, including, but not limited
to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability,
and will execute and deliver to Bank, on demand, proof satisfactory to Bank
indicating that Borrower or a Subsidiary has made such payments or deposits and
any appropriate certificates attesting to the payment or deposit thereof;
provided that Borrower or a Subsidiary need not make any payment if the amount
or validity of such payment is contested in good faith by appropriate
proceedings and is reserved against (to the extent required by GAAP) by
Borrower.

 

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6.5 Insurance.

(a) Borrower, at its expense, shall keep the Collateral insured against loss or
damage by fire, theft, explosion, sprinklers, and all other hazards and risks,
and in such amounts, as ordinarily insured against by other owners in similar
businesses conducted in the locations where Borrower’s business is conducted on
the date hereof. Borrower shall also maintain liability and other insurance in
amounts and of a type that are customary to businesses similar to Borrower’s.

(b) All such policies of insurance shall be in such form, with such companies,
and in such amounts as are reasonably satisfactory to Bank. All policies of
property insurance shall contain a lender’s loss payable endorsement, in a form
satisfactory to Bank, showing Bank as an additional loss payee, and all
liability insurance policies shall show Bank as an additional insured and
specify that the insurer must give at least twenty (20) days notice to Bank
before canceling its policy for any reason. Upon Bank’s request, Borrower shall
deliver to Bank certified copies of the policies of insurance and evidence of
all premium payments. If no Event of Default has occurred and is continuing,
proceeds payable under any casualty policy will, at Borrower’s option, be
payable to Borrower to replace the property subject to the claim, provided that
any such replacement property shall be deemed Collateral in which Bank has been
granted a first priority security interest. If an Event of Default has occurred
and is continuing, all proceeds payable under any such policy shall, at Bank’s
option, be payable to Bank to be applied on account of the Obligations.

6.6 Accounts. Borrower shall maintain all its depository and operating accounts
with Bank and its primary investment accounts with Bank or Bank’s Affiliates
(covered by satisfactory control agreements).

 

6.7 Financial Covenants. Borrower shall maintain the following financial ratios
and covenants:

(a) Liquidity Ratio. As of the end of each month, commencing with May 31, 2012,
a ratio of (i) cash plus Eligible Accounts plus Eligible Ex-Im Accounts plus
Eligible Inventory to (ii) the outstanding principal amount of the Obligations,
at not less than 1.25:1.00.

(b) EBITDA. As of the end of each fiscal quarter, commencing with the fiscal
quarter ending March 31, 2012, an EBITDA of not less than the amount set forth
below for the applicable measurement date, measured in each case for the three
(3) months then-ending:

 

Measurement Date

   Minimum EBITDA  

March 31, 2012

     –$1,000,000.00   

June 30, 2012

     -$650,000.00   

September 30, 2012

     $- 0 -   

December 31, 2012 and thereafter

     + $300,000.00   

 

6.8 Registration of Intellectual Property Rights.

(a) Borrower shall register or cause to be registered on an expedited basis (to
the extent not already registered) with the United States Patent and Trademark
Office or the United States Copyright Office, as the case may be, those
registrable intellectual property rights now owned or hereafter developed or
acquired by Borrower, to the extent that Borrower, in its reasonable business
judgment, deems it appropriate to so protect such intellectual property rights.

(b) Borrower shall promptly give Bank written notice of any applications or
registrations of intellectual property rights filed with the United States
Patent and Trademark Office and United States Copyright Office, including the
date of such filing and the registration or application numbers, if any.

 

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(c) Borrower shall give Bank prompt written notice of the filing of any
applications or registrations with the United States Copyright Office, including
the title of such intellectual property rights to be registered, as such title
will appear on such applications or registrations, and the date such
applications or registrations will be filed.

(d) Borrower shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents, Copyrights, and trade secrets,
(ii) use commercially reasonable efforts to detect infringements of the
Trademarks, Patents and Copyrights and promptly advise Bank in writing of
material infringements detected and (iii) not allow any material Trademarks,
Patents or Copyrights to be abandoned, forfeited or dedicated to the public
without the written consent of Bank, which shall not be unreasonably withheld.

6.9 Notice of Inbound Licenses. Prior to entering into or becoming bound by any
material license or agreement, Borrower shall provide written notice to Bank of
the material terms of such material license or agreement with a description of
its likely impact on Borrower’s business or financial condition.

6.10 Further Assurances. At any time and from time to time, Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes of this Agreement.

6.11 Future Subsidiaries; Additional Collateral. Borrower shall cause, with
respect to each Person which is or becomes a Material Subsidiary of Borrower
(directly or indirectly) after the Closing Date, within 30 days of the later of
the date when the date such Person becomes a Material Subsidiary, such Material
Subsidiary to execute and deliver to Bank (x) a joinder agreement in the form of
Exhibit A to the Guaranty made by the Guarantors whereby such Material
Subsidiary becomes obligated as a Guarantor under such Guaranty, (y) a joinder
agreement in the form of Exhibit A to the Security Agreement – Stock Pledge, if
applicable, and (z) a joinder agreement in the form of Exhibit C to the Security
Agreement; and Borrower shall pledge, or cause to be pledged, to Bank 100% of
the shares of capital stock or other ownership or equity interests in such
Material Subsidiary; and in each case such documents to be in form reasonably
satisfactory to Bank together with such supporting documentation, including
without limitation corporate or other legal authority items, certificates and
opinions of counsel, as reasonably required by Bank.

ARTICLE 7. NEGATIVE COVENANTS. Borrower covenants and agrees and shall cause
each of its Subsidiaries to covenant and agree that, so long as any credit
hereunder shall be available and until the outstanding Obligations are paid in
full or for so long as Bank may have any commitment to make any Credit
Extensions, Borrower will not and will not permit any of its Subsidiaries to do
any of the following without Bank’s prior written consent:

7.1 Dispositions. Convey, sell, lease, license, transfer or otherwise dispose of
(collectively, to “Transfer”), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, or move cash balances on deposit
with Bank to accounts opened at another financial institution, other than
Permitted Transfers.

7.2 Change in Name, Location, Executive Office, or Executive Management; Change
in Business; Change in Fiscal Year; Change in Control. Change its name or the
Borrower State or relocate its chief executive office without 30 days prior
written notification to Bank; replace its chief executive officer or chief
financial officer without 30 days prior written notification to Bank, provided
that, Borrower’s board

 

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of directors acting in good faith may determine that there exist exigent
circumstances requiring prompt replacement of such officers without prior
notification to Bank, in which case notice will be given as soon as reasonably
practicable; engage in any business, or permit any of its Subsidiaries to engage
in any business, other than or reasonably related or incidental to the
businesses currently engaged in by Borrower; change its fiscal year end; have a
Change in Control.

7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization (other than mergers or consolidations of a Subsidiary into another
Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of another
Person, or enter into any agreement to do any of the same, except where (i) such
transactions do not in the aggregate exceed $100,000.00 during any fiscal year,
(ii) no Event of Default has occurred, is continuing or would exist after giving
effect to such transactions, (iii) such transactions do not result in a Change
in Control, and (iv) Borrower is the surviving entity.

7.4 Indebtedness. Create, incur, assume, guarantee or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness, or prepay any Indebtedness or take any actions which
impose on Borrower an obligation to prepay any Indebtedness, except Indebtedness
to Bank.

7.5 Encumbrances. Create, incur, assume or allow any Lien with respect to any of
its property, or assign or otherwise convey any right to receive income,
including the sale of any Accounts, or permit any of its Subsidiaries so to do,
except for Permitted Liens, or covenant to any other Person that Borrower in the
future will refrain from creating, incurring, assuming or allowing any Lien with
respect to any of Borrower’s property.

7.6 Distributions. Pay any cash dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock, except that Borrower may (i) repurchase the stock of former employees
pursuant to stock repurchase agreements as long as an Event of Default does not
exist prior to such repurchase or would not exist after giving effect to such
repurchase[, and (ii) repurchase the stock of former employees pursuant to stock
repurchase agreements by the cancellation of indebtedness owed by such former
employees to Borrower regardless of whether an Event of Default exists. For the
avoidance of doubt, Bank acknowledges that Borrower currently pays a stock
dividend and such dividend shall not be deemed a violation of this Section 7.6.

7.7 Investments. Directly or indirectly acquire or own, or make any Investment
in or to any Person, or permit any of its Subsidiaries to do so, other than
Permitted Investments, or maintain or invest any of its property with a Person
other than Bank or Bank’s Affiliates or permit any Subsidiary to do so unless
such Person has entered into a control agreement with Bank, in form and
substance satisfactory to Bank, or suffer or permit any Subsidiary to be a party
to, or be bound by, an agreement that restricts such Subsidiary from paying
dividends or otherwise distributing property to Borrower. Further, Borrower
shall not enter into any license or agreement with any Prohibited Territory or
with any Person organized under or doing business in a Prohibited Territory.

7.8 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.

7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or
permit any of its Subsidiaries to make any such payment, except in compliance
with the terms of such Subordinated Debt

 

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and the terms of the subordination agreement relating to such Subordinated Debt,
or amend any provision of any document evidencing such Subordinated Debt, except
in compliance with the terms of the subordination agreement relating to such
Subordinated Debt, or amend any provision affecting Bank’s rights contained in
any documentation relating to the Subordinated Debt without Bank’s prior written
consent.

7.10 Inventory and Equipment. Store the Inventory or the Equipment with a
bailee, warehouseman, or similar third party unless the third party has been
notified of Bank’s security interest and Bank (a) has received an acknowledgment
from the third party that it is holding or will hold the Inventory or Equipment
for Bank’s benefit or (b) is in possession of the warehouse receipt, where
negotiable, covering such Inventory or Equipment. Except for Inventory sold in
the ordinary course of business and except for such other locations as Bank may
approve in writing, Borrower shall keep the Inventory and Equipment only at the
location set forth in Article 10 and such other locations of which Borrower
gives Bank prior written notice and as to which Bank files a financing statement
where needed to perfect its security interest.

7.11 No Investment Company; Margin Regulation. Become or be controlled by an
“investment company,” within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose.

ARTICLE 8. EVENTS OF DEFAULT. Any one or more of the following events shall
constitute an Event of Default by Borrower under this Agreement:

 

8.1 Payment Default. If Borrower fails to pay any of the Obligations when due.

 

8.2 Covenant Default.

(a) If any Borrower fails to perform any obligation under Article 6 or violates
any of the covenants contained in Article 7 of this Agreement; or

(b) If Borrower fails or neglects to perform or observe any other material term,
provision, condition, covenant contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition or covenant
that can be cured, has failed to cure such default within ten (10) days after
Borrower receives notice thereof or any officer of Borrower becomes aware
thereof; provided, however, that if the default cannot by its nature be cured
within the ten (10) day period or cannot after diligent attempts by Borrower be
cured within such ten (10) day period, and such default is likely to be cured
within a reasonable time, then Borrower shall have an additional reasonable
period (which shall not in any case exceed thirty (30) days) to attempt to cure
such default, so long as Borrower continues to diligently attempt to cure such
default, and within such reasonable time period the failure to have cured such
default shall not be deemed an Event of Default but no Credit Extensions will be
made;

8.3 Material Adverse Change. If there occurs any circumstance or circumstances
that could reasonably be expected to have a Material Adverse Effect.

8.4 Defective Perfection. If Bank shall receive at any time following the
Closing Date an SOS Report indicating that except for Permitted Liens, Bank’s
security interest in the Collateral is not prior to all other security interests
or Liens of record reflected in the report;

 

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8.5 Attachment. If any material portion of Borrower’s assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower’s assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower’s assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by such Borrower
(provided that no Credit Extensions will be made during such cure period);

8.6 Insolvency. If Borrower becomes insolvent, or if an Insolvency Proceeding is
commenced by Borrower, or if an Insolvency Proceeding is commenced against
Borrower and is not dismissed or stayed within forty five (45) days (provided
that no Credit Extensions will be made prior to the dismissal of such Insolvency
Proceeding);

8.7 Other Agreements. If there is a default or other failure to perform 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
$100,000.00 or that could reasonably be expected to have a Material Adverse
Effect;

8.8 Subordinated Debt. If Borrower makes any payment on account of Subordinated
Debt, except to the extent the payment is allowed under any subordination
agreement entered into with Bank;

8.9 Judgments; Settlements. If one or more (a) judgments, orders, decrees or
arbitration awards requiring Borrower and/or any of its Subsidiaries to pay an
aggregate amount of $150,000.00 or greater shall be rendered against Borrower
and/or any of its Subsidiaries and the same shall not have been vacated or
stayed within twenty (20) days thereafter (provided that no Credit Extensions
will be made prior to such matter being vacated or stayed); or (b) settlements
are agreed upon by Borrower and/or its Subsidiaries for the payment by Borrower
and/or its Subsidiaries of an aggregate amount of $150,000.00 or greater.

8.10 Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.

 

ARTICLE 9. BANK’S RIGHTS AND REMEDIES.

9.1 Rights and Remedies. Upon the occurrence and during the continuance of an
Event of Default, Bank may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are authorized
by Borrower:

(a) Declare all Obligations, whether evidenced by this Agreement, by any of the
other Loan Documents, or otherwise, immediately due and payable (provided that
upon the occurrence of an Event of Default described in Section 8.6
(insolvency), all Obligations shall become immediately due and payable without
any action by Bank);

 

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(b) Cease advancing money or extending credit to or for the benefit of Borrower
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, upon terms and in whatever order that Bank reasonably considers
advisable;

(d) Make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Borrower agrees
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate. Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which in Bank’s determination appears to be prior
or superior to its security interest and to pay all expenses incurred in
connection therewith. With respect to any of Borrower’s owned premises, Borrower
hereby grants Bank a license to enter into possession of such premises and to
occupy the same, without charge, in order to exercise any of Bank’s rights or
remedies provided herein, at law, in equity, or otherwise;

(e) Set off and apply to the Obligations any and all (i) balances and deposits
of Borrower held by Bank, and (ii) indebtedness at any time owing to or for the
credit or the account of Borrower held by Bank;

(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
advertise for sale, and sell (in the manner provided for herein) the Collateral.
Bank is hereby granted a license or other right, solely pursuant to the
provisions of this Section 9.1, to use, without charge, Borrower’s labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a similar
nature, 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 9.1, Borrower’s rights under all
licenses and all franchise agreements shall inure to Bank’s benefit;

(g) Sell the Collateral at either a public or private sale, or both, by way of
one or more contracts or transactions, for cash or on terms, in such manner and
at such places (including Borrower’s premises) as Bank determines is
commercially reasonable, and apply any proceeds to the Obligations in whatever
manner or order Bank deems appropriate. Bank may sell the Collateral without
giving any warranties as to the Collateral. Bank may specifically disclaim any
warranties of title or the like. This procedure will not be considered adversely
to affect the commercial reasonableness of any sale of the Collateral. If Bank
sells any of the Collateral upon credit, Borrower will be credited only with
payments actually made by the purchaser, received by Bank, and applied to the
indebtedness of the purchaser. If the purchaser fails to pay for the Collateral,
Bank may resell the Collateral and Borrower shall be credited with the proceeds
of the sale;

(h) Bank may credit bid and purchase at any public sale;

(i) Apply for the appointment of a receiver, trustee, liquidator or conservator
of the Collateral, without notice and without regard to the adequacy of the
security for the Obligations and without regard to the solvency of Borrower, any
guarantor or any other Person liable for any of the Obligations; and

(j) Any deficiency that exists after disposition of the Collateral as provided
above will be paid immediately by Borrower.

 

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Bank may comply with any applicable state or federal law requirements in
connection with a disposition of the Collateral and compliance will not be
considered adversely to affect the commercial reasonableness of any sale of the
Collateral.

9.2 Power of Attorney. Effective only upon the occurrence and during the
continuance of an Event of Default, Borrower hereby irrevocably appoints Bank
(and any of Bank’s designated officers, or employees) as Borrower’s true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank’s security interest in the Accounts; (b) endorse
Borrower’s name on any checks or other forms of payment or security that may
come into Bank’s possession; (c) sign Borrower’s name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims
under and decisions with respect to Borrower’s policies of insurance; (f) settle
and adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable; and
(g) file, in its sole discretion, one or more financing or continuation
statements and amendments thereto, relative to any of the Collateral without the
signature of Borrower where permitted by law; provided Bank may exercise such
power of attorney to sign the name of Borrower on any of the documents described
in clause (g) above, regardless of whether an Event of Default has occurred. The
appointment of Bank as Borrower’s attorney in fact, and each and every one of
Bank’s rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank’s
obligation to provide advances hereunder is terminated.

9.3 Accounts Collection. At any time after the occurrence and during the
continuation of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank’s security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank’s trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.

9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required
proof of payment due to third persons or entities, as required under the terms
of this Agreement, then Bank may do any or all of the following after reasonable
notice to Borrower: (a) make payment of the same or any part thereof; (b) set up
such reserves under the Revolving Line as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.5 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.

9.5 Bank’s Liability for Collateral. Bank has no obligation to clean up or
otherwise prepare the Collateral for sale. All risk of loss, damage or
destruction of the Collateral shall be borne by Borrower.

9.6 No Obligation to Pursue Others. Bank has no obligation to attempt to satisfy
the Obligations by collecting them from any other person liable for them and
Bank may release, modify or waive any collateral provided by any other Person to
secure any of the Obligations, all without affecting Bank’s rights against
Borrower. Borrower waives any right it may have to require Bank to pursue any
other Person for any of the Obligations.

9.7 Remedies Cumulative. Bank’s rights and remedies under this Agreement, the
Loan Documents, and all other agreements shall be cumulative. Bank shall have
all other rights and remedies not inconsistent herewith as provided under the
Code, by law, or in equity. No exercise by Bank of one right

 

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or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower’s part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given. Borrower expressly agrees that this Section 9.7
may not be waived or modified by Bank by course of performance, conduct,
estoppel or otherwise.

9.8 Demand; Protest. Except as otherwise provided in this Agreement, Borrower
waives demand, protest, notice of protest, notice of default or dishonor, notice
of payment and nonpayment and any other notices relating to the Obligations.

 

ARTICLE 10. NOTICES.

Unless otherwise provided in this Agreement, all notices or demands by any party
relating to this Agreement or any other agreement entered into in connection
herewith shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by a recognized overnight delivery
service, certified mail, postage prepaid, return receipt requested, or by
telefacsimile to Borrower or to Bank, as the case may be, at its addresses set
forth below:

 

If to Borrower:  

Biolase Technology Inc.

4 Cromwell

Irvine, CA 92618

Attn: Federico Pignatelli, Chairman and CEO

FAX: (949) 273-6685

If to Bank:  

Comerica Bank

M/C 7578

39200 Six Mile Rd.

Livonia, MI 48152

Attn: National Documentation Services

with a copy to:  

Comerica Bank

Technology & Life Sciences Division

11943 El Camino Real Suite 110B

San Diego, CA 92130

Attn: Lake T. McGuire

FAX: (858) 509-2365

The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.

ARTICLE 11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
California, without regard to principles of conflicts of law. Each of Borrower
and Bank hereby submits to the exclusive jurisdiction of the State and Federal
courts located in the State of California. THE UNDERSIGNED ACKNOWLEDGE THAT THE
RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED UNDER
CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED BY LAW, EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS
OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL
PARTIES, WAIVES ANY

 

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RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE
UNDERSIGNED PARTIES.

 

ARTICLE 12. REFERENCE PROVISION.

12.1 In the event the Jury Trial Waiver set forth above is not enforceable, the
parties elect to proceed under this Judicial Reference Provision.

(a) With the exception of the items specified in Section 12.1(b), below, any
controversy, dispute or claim (each, a “Claim”) between the parties arising out
of or relating to this Agreement or any other document, instrument or agreement
between the undersigned parties (collectively in this Section, the “Loan
Documents”), will be resolved by a reference proceeding in California in
accordance with the provisions of Sections 638 et seq. of the California Code of
Civil Procedure (“CCP”), or their successor sections, which shall constitute the
exclusive remedy for the resolution of any Claim, including whether the Claim is
subject to the reference proceeding. Except as otherwise provided in the Loan
Documents, venue for the reference proceeding will be in the Superior Court in
the County where the real property involved in the action, if any, is located or
in a County where venue is otherwise appropriate under applicable law (the
“Court”).

(b) The matters that shall not be subject to a reference are the following:
(i) foreclosure of any security interests in real or personal property,
(ii) exercise of self-help remedies (including, without limitation, set-off),
(iii) appointment of a receiver and (iv) temporary, provisional or ancillary
remedies (including, without limitation, writs of attachment, writs of
possession, temporary restraining orders or preliminary injunctions). This
Agreement does not limit the right of any party to exercise or oppose any of the
rights and remedies described in clauses (i) and (ii) or to seek or oppose from
a court of competent jurisdiction any of the items described in clauses
(iii) and (iv). The exercise of, or opposition to, any of those items does not
waive the right of any party to a reference pursuant to this Agreement.

(c) The referee shall be a retired Judge or Justice selected by mutual written
agreement of the parties. If the parties do not agree within ten (10) days of a
written request to do so by any party, then, upon request of any party, the
referee shall be selected by the Presiding Judge of the Court (or his or her
representative). A request for appointment of a referee may be heard on an ex
parte or expedited basis, and the parties agree that irreparable harm would
result if ex parte relief is not granted.

(d) The parties agree that time is of the essence in conducting the reference
proceedings. Accordingly, the referee shall be requested, subject to change in
the time periods specified herein for good cause shown, to (i) set the matter
for a status and trial-setting conference within fifteen (15) days after the
date of selection of the referee, (ii) if practicable, try all issues of law or
fact within one hundred twenty (120) days after the date of the conference and
(iii) report a statement of decision within twenty (20) days after the matter
has been submitted for decision.

(e) The referee will have power to expand or limit the amount and duration of
discovery. The referee may set or extend discovery deadlines or cutoffs for good
cause, including a party’s failure to provide requested discovery for any reason
whatsoever. Unless otherwise ordered based upon good cause shown, no party shall
be entitled to “priority” in conducting discovery, depositions may be taken by
either party upon seven (7) days written notice, and all other discovery shall
be responded to within fifteen (15) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding.

 

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(f) Except as expressly set forth in this Agreement, the referee shall determine
the manner in which the reference proceeding is conducted including the time and
place of hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding. All
proceedings and hearings conducted before the referee, except for trial, shall
be conducted without a court reporter, except that when any party so requests, a
court reporter will be used at any hearing conducted before the referee, and the
referee will be provided a courtesy copy of the transcript. The party making
such a request shall have the obligation to arrange for and pay the court
reporter. Subject to the referee’s power to award costs to the prevailing party,
the parties will equally share the cost of the referee and the court reporter at
trial.

(g) The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, enter equitable orders that will be binding
on the parties and rule on any motion which would be authorized in a court
proceeding, including without limitation motions for summary judgment or summary
adjudication. The referee shall issue a decision at the close of the reference
proceeding which disposes of all claims of the parties that are the subject of
the reference. Pursuant to CCP § 644, such decision shall be entered by the
Court as a judgment or an order in the same manner as if the action had been
tried by the Court and any such decision will be final, binding and conclusive.
The parties reserve the right to appeal from the final judgment or order or from
any appealable decision or order entered by the referee. The parties reserve the
right to findings of fact, conclusions of laws, a written statement of decision,
and the right to move for a new trial or a different judgment, which new trial,
if granted, is also to be a reference proceeding under this provision.

(h) If the enabling legislation which provides for appointment of a referee is
repealed (and no successor statute is enacted), any dispute between the parties
that would otherwise be determined by reference procedure will be resolved and
determined by arbitration. The arbitration will be conducted by a retired judge
or Justice, in accordance with the California Arbitration Act §1280 through
§1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery set forth above shall apply to any such arbitration proceeding.

(i) THE PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES AND CLAIMS
RESOLVED UNDER THIS REFERENCE PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY
A JURY. AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL
OF ITS, HIS OR HER OWN CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE
MUTUAL BENEFIT OF ALL PARTIES, AGREES THAT THIS REFERENCE PROVISION WILL APPLY
TO ANY CONTROVERSY, DISPUTE OR CLAIM BETWEEN OR AMONG THEM ARISING OUT OF OR IN
ANY WAY RELATED TO, THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS.

 

ARTICLE 13. GENERAL PROVISIONS.

13.1 Successors and Assigns. This Agreement shall bind and inure to the benefit
of the respective successors and permitted assigns of each of the parties and
shall bind all persons who become bound as a debtor to this Agreement; provided,
however, that neither this Agreement nor any rights hereunder may be assigned by
Borrower without Bank’s prior written consent, which consent may be granted or
withheld

 

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in Bank’s sole discretion. Bank shall have the right without the consent of or
notice to Borrower to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank’s obligations, rights and benefits
hereunder.

13.2 Indemnification. Borrower shall defend, indemnify and hold harmless Bank
and its officers, employees, and agents against: (a) all obligations, demands,
claims, and liabilities claimed or asserted by any other party in connection
with the transactions contemplated by this Agreement and/or the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank, its officers, employees and agents as a result of or in any way arising
out of, following, or consequential to transactions between Bank and Borrower
whether under this Agreement, or otherwise (including without limitation
reasonable attorney’s fees and expenses), except for losses caused by Bank’s
gross negligence or willful misconduct.

13.3 Time of Essence. Time is of the essence for the performance of all
obligations set forth in this Agreement.

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

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

13.6 Amendments in Writing, Integration. All amendments to or terminations of
this Agreement or the other Loan Documents must be in writing signed by the
parties. All prior agreements, understandings, representations, warranties, and
negotiations between the parties hereto with respect to the subject matter of
this Agreement and the other Loan Documents, if any, are merged into this
Agreement and the Loan Documents.

13.7 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, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Agreement.

13.8 Survival. All covenants, representations and warranties made in this
Agreement shall continue in full force and effect so long as any Obligations
remain outstanding or Bank has any obligation to make any Credit Extension to
Borrower. The obligations of Borrower to indemnify Bank with respect to the
expenses, damages, losses, costs and liabilities described in Section 13.2 shall
survive until all applicable statute of limitations periods with respect to
actions that may be brought against Bank have run.

13.9 Confidentiality. In handling any confidential information, Bank and all
employees and agents of Bank shall exercise the same degree of care that Bank
exercises with respect to its own proprietary information of the same types to
maintain the confidentiality of any non-public information thereby received or
received pursuant to this Agreement except that disclosure of such information
may be made (i) to the subsidiaries or Affiliates of Bank in connection with
their present or prospective business relations with Borrower, (ii) to
prospective transferees or purchasers of any interest in the Loans, (iii) as
required by law, regulations, rule or order, subpoena, judicial order or similar
order, (iv) as may be required in connection with the examination, audit or
similar investigation of Bank, (v) to Bank’s accountants, auditors and
regulators, and (vi) as Bank may determine in connection with the enforcement of
any remedies hereunder. Confidential information hereunder shall not include
information that either: (a) is in the public domain or in the knowledge or
possession of Bank when disclosed to Bank, or becomes part of the public domain
after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank
by a third party, provided Bank does not have actual knowledge that such third
party is prohibited from disclosing such information.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security
Agreement to be executed as of the date first above written.

 

Biolase, Inc.     Comerica Bank By:  

/s/ Frederick D. Furry

    By:  

/s/ Lake T. McGuire

Name:   Frederick D. Furry     Name:   Lake T. McGuire Title:   Chief Financial
Officer     Title:   Vice President

 

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Exhibit A: Definitions

“Accounts” means all presently existing and hereafter arising accounts, contract
rights, payment intangibles and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower and
Borrower’s Books relating to any of the foregoing.

“Advance” or “Advances” means a cash advance or cash advances under the
Revolving Line.

“Affiliate” means, with respect to any Person, any Person that owns or controls
directly or indirectly such Person, any Person that controls or is controlled by
or is under common control with such Person, and each of such Person’s senior
executive officers, directors, and partners.

“Bank Expenses” means all reasonable costs or expenses (including reasonable
attorneys’ fees and expenses, whether generated in-house or by outside counsel)
incurred in connection with the preparation, negotiation, administration, and
enforcement of the Loan Documents; reasonable Collateral audit fees but no more
than $10,000 per audit; and Bank’s reasonable attorneys’ fees and expenses
(whether generated in-house or by outside counsel) incurred in amending,
enforcing or defending the Loan Documents (including fees and expenses of
appeal), incurred before, during and after an Insolvency Proceeding, whether or
not suit is brought.

“Borrower State” means Delaware, the state under whose laws each Borrower is
organized.

“Borrower’s Books” means all of Borrower’s books and records including: ledgers;
records concerning such Borrower’s assets or liabilities, the Collateral,
business operations or financial condition; and all computer programs, or tape
files, and the equipment, containing such information.

“Borrowing Base” means an amount equal to:

 

  (a) Eighty percent (80.0%) of Eligible Accounts plus

 

  (b) the least of the following:

 

  (i) Fifty percent (50.0%) of Eligible Inventory, or

 

  (ii) $1,500,000.00, or

 

  (iii) the amount determined under clause (a);

as each of the foregoing is determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrower.

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

“Cash” means unrestricted cash and cash equivalents.

“Change in Control” shall mean a transaction in which any “person” or “group”
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a

 

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sufficient number of shares of all classes of stock then outstanding of Borrower
ordinarily entitled to vote in the election of directors, empowering such
“person” or “group” to elect a majority of the Board of Directors of Borrower,
who did not have such power before such transaction.

“Chief Executive Office State” means California, where Borrower’s chief
executive office is located.

“Closing Date” means the date of this Agreement.

“Code” means the California Uniform Commercial Code as amended or supplemented
from time to time.

“Collateral” means the property described on attached Exhibit B and all
Negotiable Collateral to the extent not described on Exhibit B, except to the
extent any such property (i) is non-assignable by its terms without the consent
of the licensor thereof or another party (but only to the extent such
prohibition on transfer is enforceable under applicable law, including, without
limitation, Sections 9406 and 9408 of the Code), (ii) the granting of a security
interest therein is contrary to applicable law, provided that upon the cessation
of any such restriction or prohibition, such property shall automatically become
part of the Collateral, or (iii) constitutes the capital stock of a controlled
foreign corporation (as defined in the IRC), in excess of 65% of the voting
power of all classes of capital stock of such controlled foreign corporations
entitled to vote.

“Collateral State” means the state or states where the Collateral is located,
which is California.

“Consolidated Net Income (or Deficit)” means the consolidated net income (or
deficit) of any Person and its Subsidiaries, after deduction of all expenses,
taxes, and other proper charges, determined in accordance with GAAP, after
eliminating therefrom all extraordinary nonrecurring items of income.

“Consolidated Total Interest Expense” means with respect to any Person for any
period, the aggregate amount of interest required to be paid or accrued by a
Person and its Subsidiaries during such period on all Indebtedness of such
Person and its Subsidiaries outstanding during all or any part of such period,
whether such interest was or is required to be reflected as an item of expense
or capitalized, including payments consisting of interest in respect of any
capitalized lease or any synthetic lease, and including commitment fees, agency
fees, facility fees, balance deficiency fees and similar fees or expenses in
connection with the borrowing of money.

“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed, co-made or discounted or sold with recourse by that
Person, or in respect of which that Person is otherwise directly or indirectly
liable; (ii) any obligations with respect to undrawn letters of credit,
corporate credit cards or merchant services issued for the account of that
Person; and (iii) all obligations arising under any interest rate, currency or
commodity swap agreement, interest rate cap agreement, interest rate collar
agreement, or other agreement or arrangement designated to protect a Person
against fluctuation in interest rates, currency exchange rates or commodity
prices; provided, however, that the term “Contingent Obligation” shall not
include endorsements for collection or deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.

 

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“Copyrights” means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether or not the
same also constitutes a trade secret, now or hereafter existing, created,
acquired or held.

“Credit Extension” means each Advance or any other extension of credit by Bank
to or for the benefit of Borrower hereunder.

“EBITDA” means with respect to any fiscal period an amount equal to the sum of
(a) Consolidated Net Income of the Borrower and its Subsidiaries for such fiscal
period, plus (b) in each case to the extent deducted in the calculation of
Borrower’s Consolidated Net Income and without duplication, (i) depreciation and
amortization for such period, plus (ii) income tax expense for such period, plus
(iii) Consolidated Total Interest Expense paid or accrued during such period,
plus (iv) non-cash expense associated with granting stock options, and minus, to
the extent added in computing Consolidated Net Income, and without duplication,
all extraordinary and non-recurring revenue and gains (including income tax
benefits) for such period, all as determined in accordance with GAAP.

“Eligible Accounts” means those Accounts that arise in the ordinary course of
Borrower’s business that comply with all of Borrower’s representations and
warranties to Bank set forth in Section 5.3; provided, that Bank may change the
standards of eligibility by giving Borrower thirty (30) days prior written
notice. Unless otherwise agreed to by Bank, Eligible Accounts shall not include
the following:

(a) Accounts that the account debtor has failed to pay in full within ninety
(90) days of invoice date;

(b) Credit balances over ninety (90) days;

(c) Accounts with respect to an account debtor, twenty-five percent (25%) of
whose Accounts the account debtor has failed to pay within ninety (90) days of
invoice date;

(d) Accounts with respect to an account debtor, including Subsidiaries and
Affiliates, whose total obligations to Borrower exceed:

(i) fifty percent (50%) of all Accounts in the case of accounts owned by
National Technology Leasing and

(ii) twenty-five percent (25%) of all Accounts in the case of all other Account
Debtors, in either case, to the extent such obligations exceed the
aforementioned percentage, except as approved in writing by Bank;

(e) Accounts with respect to which the account debtor does not have its
principal place of business in the United States, except for Eligible Foreign
Accounts;

(f) Accounts with respect to which the account debtor is the United States or
any department, agency, or instrumentality of the United States, 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);

 

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(g) Accounts with respect to which Borrower is liable to the account debtor for
goods sold or services rendered by the account debtor to Borrower, but only to
the extent of any amounts owing to the account debtor against amounts owed to
Borrower;

(h) Accounts with respect to which goods are placed on consignment, guaranteed
sale, sale or return, sale on approval, bill and hold, demo or promotional, or
other terms by reason of which the payment by the account debtor may be
conditional;

(i) Accounts with respect to which the account debtor is an officer, employee,
agent or Affiliate of Borrower;

(j) Accounts that have not yet been billed to the account debtor or that relate
to deposits (such as good faith deposits) or other property of the account
debtor held by Borrower for the performance of services or delivery of goods
which Borrower has not yet performed or delivered;

(k) Accounts with respect to which the account debtor disputes liability or
makes any claim with respect thereto as to which Bank believes, in its sole
discretion, that there may be a basis for dispute (but only to the extent of the
amount subject to such dispute or claim), or is subject to any Insolvency
Proceeding, or becomes insolvent, or goes out of business;

(l) Accounts the collection of which Bank reasonably determines after inquiry
and consultation with Borrower to be doubtful; and

(m) Retentions and hold-backs.

“Eligible Ex-Im Accounts” means those Accounts that are deemed “Eligible” under
the Ex-Im Facility Documents.

“Eligible Foreign Accounts” means Accounts with respect to which the account
debtor does not have its principal place of business in the United States and is
not located in an OFAC sanctioned country and that are (i) supported by one or
more letters of credit in an amount and of a tenor, and issued by a financial
institution, acceptable to Bank, (ii) insured by the Export Import Bank of the
United States, (iii) generated by an account debtor with its principal place of
business in Canada, provided that the Bank has perfected its security interest
in the appropriate Canadian province, or (iv) approved by Bank on a case-by-case
basis. All Eligible Foreign Accounts must be calculated in U.S. Dollars.

“Eligible Inventory” is Borrower’s Inventory consisting of raw materials and of
finished goods held by Borrower for sale in the ordinary course of business
pursuant to a valid third-party purchase order received by Borrower, for
delivery in the United States, valued at the lowest of (i) Borrower’s net
purchase cost or net manufacturing cost and (ii) the average sales price,
excluding, however, any Inventory which consists of:

(a) Inventory located outside of the United States;

(b) Work-in-process, supplies, displays, packaging or promotional materials or
Inventory sold on consignment;

(c) Inventory consisting of proprietary software;

 

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(d) Any Inventory not in the actual possession of Borrower, except to the extent
provided in Subsection (l) below;

(e) Any Inventory the sale or other disposition of which has given rise to an
Account;

(f) Any Inventory which fails to meet all standards and requirements imposed by
any governmental authority over such Inventory or its production, storage, use
or sale;

(g) Any Inventory located on premises leased or rented to the Borrower or
otherwise not owned by a Borrower, unless Bank has received a waiver and consent
from the lessor, landlord or owner, in form and substance reasonably
satisfactory to Bank and from any mortgagee of such lessor, landlord or owner to
the extent required by Bank;

(h) Inventory with offsetting claims;

(i) Inventory that is damaged, defective, obsolete, returned, recalled or unfit
for further processing;

(j) Inventory that is not subject to a valid, perfected first priority Lien in
favor of Bank;

(k) Inventory that is located at an address that has not been disclosed to Bank
in writing;

(l) Inventory that is in the possession of a processor or bailee, or located on
premises leased or subleased to Borrower, or on premises subject to a mortgage
in favor of a Person other than Bank, unless such processor or bailee or
mortgagee or the lessor or sublessor of such premises, as the case may be, has
executed and delivered all documentation which Bank shall reasonably require to
evidence the subordination or other limitation or extinguishment of such
Person’s rights with respect to such Inventory and Bank’s right to gain access
thereto;

(m) any Inventory as to which Bank determines in the exercise of its sole and
absolute discretion at any time and in good faith is not in good condition or is
defective, unmerchantable, post-seasonal, slow moving or obsolete; and

(n) any Inventory which Bank in the good faith exercise of its sole and absolute
discretion has deemed to be ineligible because Bank otherwise considers the
collateral value to Bank to be impaired or its ability to realize such value to
be insecure.

In the event of any dispute under the foregoing criteria, as to whether
Inventory is, or has ceased to be, Eligible Inventory, the decision of Bank in
the good faith exercise of its sole and absolute discretion shall control.

“Environmental Laws” means all laws, rules, regulations, orders and the like
issued by any federal state, local foreign or other governmental or
quasi-governmental authority or any agency pertaining to the environment or to
any hazardous materials or wastes, toxic substances, flammable, explosive or
radioactive materials, asbestos or other similar materials.

“Equipment” means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

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

 

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“Event of Default” has the meaning assigned in Article 8.

“Ex-Im” means the Export-Import Bank of the United States.

“Ex-Im Facility Documents” means the Ex-Im Facility Letter Agreement, the
$4,000,000 Master Revolving Note, the Loan Authorization Notice, the Borrower
Agreement, and Economic Impact Certification, each dated as of May     , 2012.

“Ex-Im Facility Loans” means the loans advanced to Borrower under and pursuant
to the Ex-Im Facility Documents.

“GAAP” means generally accepted accounting principles, consistently applied, as
in effect from time to time.

“Guarantors” means BL Acquisition Corp., a Delaware corporation, and BL
Acquisition II Inc., a Delaware corporation, together with any Subsidiary that
becomes a Guarantor after the date of this Agreement pursuant to Section 6.11.

“Guaranty” means the Guaranty dated as of the Closing Date, covering all
outstanding Obligations of Borrower made by the Guarantors (whether by execution
thereof, or by execution of the joinder or assumption agreement with respect
thereto), to Bank, as amended, renewed, replaced, extended, or supplemented from
time to time.

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations, and (d) all Contingent
Obligations.

“Insolvency Proceeding” means any proceeding commenced by or against any Person
or entity under any provision of the United States Bankruptcy Code, as amended,
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

“Intellectual Property” means all of Borrower’s right, title, and interest in
and to the following:

(a) Copyrights, Trademarks and Patents;

(b) Any and all trade secrets, and any and all intellectual property rights in
computer software and computer software products now or hereafter existing,
created, acquired or held;

(c) Any and all design rights which may be available to Borrower now or
hereafter existing, created, acquired or held;

(d) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;

(e) All licenses or other rights to use any of the Copyrights, Patents or
Trademarks, and all license fees and royalties arising from such use to the
extent permitted by such license or rights;

 

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(f) All amendments, renewals and extensions of any of the Copyrights, Trademarks
or Patents; and

(g) All proceeds and products of the foregoing, including without limitation all
payments under insurance or any indemnity or warranty payable in respect of any
of the foregoing.

“Inventory” means all present and future inventory in which Borrower has any
interest.

“Investment” means any beneficial ownership of (including stock, partnership or
limited liability company interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.

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

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

“Loan Documents” means, collectively, this Agreement, any note or notes executed
by Borrower, and any other document, instrument or agreement entered into in
connection with this Agreement, all as amended or extended from time to time.

“Material Adverse Effect” means (i) a material adverse change in Borrower’s
prospects, business or financial condition (including without limitation,
evidence of a lack of investor support and/or Borrower’s inability to attract
sufficient additional equity financing from its investors), (ii) a material
impairment in the prospect of repayment of all or any portion of the Obligations
or in otherwise performing Borrower’s obligations under the Loan Documents, or
(iii) a material impairment in the perfection, value or priority of Bank’s
security interests in the Collateral.

“Material Subsidiary” means:

(a) the Guarantors;

(b) each Subsidiary that, together with its Subsidiaries (i) generates more than
five percent (5.0%) of Borrower’s consolidated gross revenue for the four
(4) fiscal quarter periods most recently ended and (ii) represents more than
five percent (5.0%) of Borrower’s consolidated assets as of the end of any
fiscal quarter; and

(c) each Subsidiary that when combined with all Subsidiaries that are not
covered by clause (b) of this definition (“Immaterial Subsidiaries”) would cause
all of the Immaterial Subsidiaries, taken as a whole, to (i) be the source of
more than fifteen percent (15.0%) of Borrower’s consolidated gross revenue for
the four (4) fiscal quarter periods most recently ended and (ii) represent more
than fifteen percent (15.0%) of Borrower’s consolidated assets as of the end of
any fiscal quarter.

“Negotiable Collateral” means all of Borrower’s present and future letters of
credit of which it is a beneficiary, drafts, instruments (including promissory
notes), securities, documents of title, and chattel paper, and Borrower’s Books
relating to any of the foregoing.

“Obligations” means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.

 

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

“Permitted Indebtedness” means:

(a) Indebtedness of Borrower in favor of Bank arising under this Agreement or
any other Loan Document or any Ex-Im Facility Document;

(b) Indebtedness existing on the Closing Date and disclosed in the Schedule;

(c) Indebtedness not to exceed $100,000.00 in the aggregate secured by a lien
described in clause (c) of the defined term “Permitted Liens,” provided such
Indebtedness does not exceed the lesser of the cost or fair market value of the
equipment financed with such Indebtedness;

(d) Subordinated Debt;

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

(f) Guarantees of Borrower in respect of Indebtedness otherwise permitted
hereunder of Borrower or any subsidiary; and

(g) Extensions, refinancings and renewals of any items of Permitted
Indebtedness, provided that the principal amount is not increased or the terms
modified to impose more burdensome terms upon Borrower or its Subsidiary, as the
case may be.

“Permitted Investment” means:

(a) Investments existing on the Closing Date disclosed in the Schedule;

(b) (i) Marketable direct obligations issued or unconditionally guaranteed by
the United States of America or any agency or any State thereof maturing within
one (1) year from the date of acquisition thereof, (ii) commercial paper
maturing no more than one (1) year from the date of creation thereof and
currently having rating of at least A-2 or P-2 from either Standard & Poor’s
Corporation or Moody’s Investors Service, (iii) Bank’s certificates of deposit
maturing no more than one (1) year from the date of investment therein, and
(iv) Bank’s money market accounts;

(c) Repurchases of stock from former employees or directors of Borrower under
the terms of applicable repurchase agreements (i) in an aggregate amount not to
exceed $100,000.00 in any fiscal year, provided that no Event of Default has
occurred, is continuing or would exist after giving effect to the repurchases,
or (ii) in any amount where the consideration for the repurchase is the
cancellation of indebtedness owed by such former employees to Borrower
regardless of whether an Event of Default exists;

(d) Investments accepted in connection with Permitted Transfers;

(e) Investments of Subsidiaries in or to other Subsidiaries or Borrower and
Investments by Borrower in Subsidiaries not to exceed the following amounts in
any fiscal year: (i) $250,000 for any Subsidiaries located in India,
(ii) $250,000 for any Subsidiaries located in Brazil, (iii) $100,000 for any
Subsidiary located in all other countries; and (iv) $750,000.00 in the
aggregate;

 

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(f) Investments not to exceed $100,000.00 in the aggregate in any fiscal year
consisting of (i) travel advances and employee relocation loans and other
employee loans and advances in the ordinary course of business, and (ii) loans
to employees, officers or directors relating to the purchase of equity
securities of Borrower or its Subsidiaries pursuant to employee stock purchase
plan agreements approved by Borrower’s Board of Directors;

(g) Investments (including debt obligations) received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of Borrower’s business;

(h) Investments consisting of notes receivable of, or prepaid royalties and
other credit extensions, to customers and suppliers who are not Affiliates, in
the ordinary course of business, provided that this subparagraph (h) shall not
apply to Investments of Borrower in any Subsidiary; and

(i) Joint ventures or strategic alliances in the ordinary course of Borrower’s
business consisting of the non-exclusive licensing of technology, the
development of technology or the providing of technical support, provided that
any cash Investments by Borrower do not exceed $150,000.00 in the aggregate in
any fiscal year.

“Permitted Liens” means the following:

(a) Any Liens existing on the Closing Date and disclosed in the Schedule
(excluding Liens to be satisfied with the proceeds of the Advances) or arising
under this Agreement or the other Loan Documents;

(b) Liens for taxes, fees, assessments or other governmental charges or levies,
either not delinquent or being contested in good faith by appropriate
proceedings and for which Borrower maintains adequate reserves, provided the
same have no priority over any of Bank’s security interests;

(c) Liens not to exceed $100,000.00 in the aggregate (i) upon or in any
Equipment (other than Equipment financed by an Equipment Advance) acquired or
held by Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition or lease of such Equipment, or (ii) existing on such Equipment at
the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
Equipment;

(d) Liens incurred in connection with the extension, renewal or refinancing of
the indebtedness secured by Liens of the type described in clauses (a) through
(e) above, provided that any extension, renewal or replacement Lien shall be
limited to the property encumbered by the existing Lien and the principal amount
of the indebtedness being extended, renewed or refinanced does not increase; and

(e) Liens arising from judgments, decrees or attachments in circumstances not
constituting an Event of Default under Sections 8.5 (attachment) or 8.9
(judgments).

 

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“Permitted Transfer” means the conveyance, sale, lease, transfer or disposition
by Borrower or any Subsidiary of:

(a) Inventory in the ordinary course of business;

(b) Non-exclusive licenses and similar arrangements for the use of the property
of Borrower or its Subsidiaries in the ordinary course of business;

(c) Worn-out or obsolete Equipment; or

(d) Other assets of Borrower or its Subsidiaries that do not in the aggregate
exceed $100,000.00 during any fiscal year.

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

“Prime Rate” means the variable rate of interest, per annum, most recently
announced by Bank, as its “prime rate,” whether or not such announced rate is
the lowest rate available from Bank.

“Prohibited Territory” means any person or country listed by the Office of
Foreign Assets Control of the United States Department of Treasury as to which
transactions between a United States Person and that territory are prohibited.

“Responsible Officer” means each of the Chief Executive Officer, the Chief
Financial Officer and the Controller of Borrower.

“Revolving Line” means a Credit Extension of up to Four Million and 00/100
Dollars ($4,000,000.00).

“Revolving Maturity Date” means May 1, 2014.

“Schedule” means the schedule of exceptions attached hereto and approved by
Bank, if any.

“Security Agreement” means the Security Agreement dated as of the Closing Date,
executed and delivered by the Guarantors, as debtor, in favor of Bank with
respect to any or all of the Collateral (as defined therein) to secure any or
all of the Obligations, as such Security Agreement may be amended, renewed,
replaced, extended, or supplemented from time to time.

“Security Agreement-Stock Pledge” means the Security Agreement dated as of the
Closing Date, executed and delivered by Borrower, as pledgor, in favor of Bank
with respect to any or all of the Collateral (as defined therein) to secure any
or all of the Obligations, as such Security Agreement may be amended, renewed,
replaced, extended, or supplemented from time to time.

“Shares” means 100% of the outstanding shares of capital stock or other equity
interests of each Guarantor.

“SOS Reports” means the official reports from the Secretaries of State of each
Collateral State, Chief Executive Office State and the Borrower State and other
applicable federal, state or local government offices identifying all current
security interests filed in the Collateral and Liens of record as of the date of
such report.

 

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“Subordinated Debt” means any debt incurred by a Borrower that is subordinated
in writing to the debt owing by Borrower to Bank on terms reasonably acceptable
to Bank (and identified as being such by Borrower and Bank).

“Subsidiary” means any corporation, partnership or limited liability company or
joint venture in which (i) any general partnership interest or (ii) more than
50% of the stock, limited liability company interest or joint venture of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity, at the time as of which any determination is
being made, is owned by Borrower, either directly or through an Affiliate.

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

“Weekly Reporting Period” means any time that EBITDA, as measured on a trailing
three month basis, is less than $0.

 

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