Exhibit 10.1

 

 

 

 

 

 

 

 

CATASYS, INC.

ANXIOLITIX, INC.

CATASYS HEALTH, INC.

 

HERITAGE BANK OF COMMERCE

LOAN AND SECURITY AGREEMENT

 

 

 

 

 

 

 

 

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This Loan And Security Agreement is entered into as of June 14, 2018, by and
between HERITAGE BANK OF COMMERCE (“Bank”) and CATASYS, INC. (“Parent”),
ANXIOLITIX, INC. (“Anxiolitix”), and CATASYS HEALTH, INC. (“Catasys Health”).

 

 

 

Recitals

 

Borrowers wish to obtain credit from time to time from Bank, and Bank desires to
extend credit to Borrowers. This Agreement sets forth the terms on which Bank
will advance credit to Borrowers, and Borrowers will repay the amounts owing to
Bank.

 

Agreement

 

The parties agree as follows:

 

1.     Definitions and Construction.

 

1.1     Definitions. As used in this Agreement, the following terms shall have
the following definitions:

 

“Accounts” means all presently existing and hereafter arising accounts, contract
rights, payment intangibles, and all other forms of obligations owing to a
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 a Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by a Borrower and such Borrower’s Books
relating to any of the foregoing.

 

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

 

“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) incurred in connection with the preparation,
negotiation, administration, and enforcement of the Loan Documents; reasonable
Collateral audit fees; and Bank’s reasonable attorneys’ fees and expenses
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” means each of Parent, Anxiolitix, and Catasys Health.

 

“Borrower’s Books” means all of a 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 (i) eighty-five percent (85%) of
Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrowers, minus (ii) the amount of tax
obligations that are/were secured by the Tax Liens, until such time as Borrowers
provide evidence satisfactory to Bank that such Tax Liens have been released.

 

“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.

 

1.

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“Change in Control” shall mean a transaction in which (i) 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
sufficient number of shares of all classes of stock then outstanding of a
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 such
Borrower, who did not have such power before such transaction, or (ii) Parent
ceases to directly or indirectly own all of the outstanding capital stock of any
other Borrower.

 

“Closing Date” means the date of this Agreement.

 

“Code” means the California Uniform Commercial Code.

 

“Collateral” means the property described on Exhibit A attached hereto.

 

“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;
(ii) any obligations with respect to undrawn letters of credit, corporate credit
cards, or merchant services issued or provided for the account of that Person;
and (iii) all obligations arising under any agreement or arrangement designed to
protect such 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 Bank 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.

 

“Copyrights” means any and all copyright rights, copyright applications,
copyright registrations and like protections in each work of authorship and
derivative work thereof.

 

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

 

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

 

“EBITDA” means Parent’s consolidated earnings before interest, taxes,
depreciation and amortization expenses, plus stock-based compensation expense
and other non-cash expenses (as may be approved by Bank on a case by case
basis), including change in the estimated fair value of warrant liabilities,
each determined in accordance with GAAP.

 

“Eligible Accounts” means those Accounts that arise in the ordinary course of a
Borrower’s business that comply with all of Borrowers’ representations and
warranties to Bank set forth in Section 5.4 and net after all offsets and
contras; provided, that standards of eligibility may be fixed and revised from
time to time by Bank in Bank’s reasonable judgment and upon notification thereof
to Borrowers in accordance with the provisions hereof. Unless otherwise agreed
to by Bank, Eligible Accounts shall not include the following:

 

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

 

(b)     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;

 

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

 

(d)     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;

 

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(e)     Accounts with respect to which the account debtor is an Affiliate of any
Borrower;

 

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

 

(g)     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 that Bank approves on a case-by-case basis, which
approval may be conditioned upon the requirement that the payee has assigned its
payment rights to Bank, the assignment has been acknowledged under the
Assignment of Claims Act of 1940 (31 U.S.C. Section 3727), and such assignment
otherwise complies with the Assignment of Claims Act to Bank's reasonable
satisfaction;

 

(h)     Accounts with respect to which a Borrower is liable to the account
debtor for goods sold or services rendered by the account debtor to a Borrower
or for deposits or other property of the account debtor held by a Borrower, but
only to the extent of any amounts owing to the account debtor against amounts
owed to such Borrower;

 

(i)     Accounts with respect to an account debtor, including Subsidiaries and
Affiliates, whose total obligations to Borrower exceed thirty percent (30%) of
all Accounts, to the extent such obligations exceed the aforementioned
percentage, except as approved in writing by Bank;

 

(j)     Accounts that have not yet been billed to the account debtor;

 

(k)     Accounts that relate to deposits (such as good faith deposits) or other
property of the account debtor held by a Borrower for the performance of
services or delivery of goods which Borrowers have not yet performed or
delivered (i.e., prebillings);

 

(l)     retention billings, progress billings or bonded receivables;

 

(m)     Accounts consisting of deferred revenue ;

 

(n)     Accounts with respect to which the account debtor in good faith disputes
liability or makes any good faith 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 good faith dispute or claim),
or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and

 

(o)     Accounts which Bank reasonably determines to be unsatisfactory for
inclusion as an Eligible Account.

 

“Eligible Foreign Accounts” means Accounts with respect to which the account
debtor does not have its principal place of business in the United States or
Canada and that Bank approves on a case-by-case basis, which approval may be
conditioned upon such Accounts being (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 or (ii) covered in full by credit insurance satisfactory to
Bank, less any deductible.

 

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

 

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

 

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

 

“Existing CB&T Account” means Parent’s deposit account existing as of the
Closing Date that is maintained at California Bank & Trust.

 

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“Existing Foreign Subsidiaries” means Parent’s wholly owned Subsidiaries Catasys
International (Cayman) Ltd. and Catasys Switzerland Sarl.

 

“Financial Plan” has the meaning set forth in Section 6.3(d) hereof

 

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

 

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services (excluding unsecured trade payables
incurred in the ordinary course of business and aged less than one hundred
eighty (180) days), 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; (d) all Contingent Obligations, and (e) any
other obligations or liabilities which are required by GAAP to be shown as debt
on the balance sheet of such person.

 

“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 a Borrower’s right, title, and interest in
and to the following: Copyrights, Trademarks and Patents; all trade secrets, all
design rights, claims for damages by way of past, present and future
infringement of any of the rights included above, 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; all amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and 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 inventory in which a Borrower has or acquires any
interest, including work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of a Borrower, including such inventory as
is temporarily out of its custody or possession or in transit and including any
returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above, and such Borrower’s Books relating to
any of the foregoing.

 

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

 

“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,
certificates, documents or instruments executed by a Borrower, any guarantees by
third parties, and any other document, instrument or agreement entered into in
connection with this Agreement, all as amended or extended from time to time.

 

“Management Services Agreement” means any license, management or other agreement
by and between any Borrower on the one hand and another Person organized under
the laws of a given jurisdiction, on the other hand, and involving, among other
things, the license of Intellectual Property or other personal property of any
Borrower to such other Person so as to facilitate the provision of certain
Borrowers’ services to end users or patients of such Person in a manner that
complies with the given jurisdiction’s laws generally concerning the authorized
practice of medicine. For the avoidance of any doubt, (i) the Management
Services Agreement by and between the Parent, as Manager thereunder, and Texas
Integrated Health, Inc., a Texas nonprofit health organization (“TIH”), dated as
of April 2, 2018, (ii) the License Agreement, dated as of April 2, 2018 by and
between the Parent, as Licensor thereunder, and TIH, and (iii) the license,
management and other agreements (each that are of the type described in the
previous sentence) that the Borrowers shall enter into after the date hereof
with California Integrated Health, Inc. (“CIH”), shall each constitute a
“Management Services Agreement” hereunder.

 

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“Material Adverse Effect” means a material adverse effect on (i) the business
operations, condition (financial or otherwise) of Parent and its Subsidiaries
taken as a whole or (ii) the ability of Borrowers to repay the Obligations or
otherwise perform their obligations under the Loan Documents or (iii) the value
or priority of Bank’s security interests in the Collateral.

 

“Measurement Date” has the meaning set forth in Section 6.9(c).

 

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

 

“Obligations” means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrowers 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 Borrowers to others that Bank may have obtained by assignment or otherwise.

 

“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.

 

“Periodic Payments” means all installments or similar recurring payments that
Borrowers may now or hereafter become obligated to pay to Bank pursuant to the
terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrowers and Bank.

 

“Permitted Indebtedness” means:

 

(a)     Indebtedness of Borrowers in favor of Bank arising under this Agreement
or any other Loan Document;

 

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

 

(c)     Indebtedness secured by a lien described in clause (c) of the defined
term “Permitted Liens,” provided (i) such Indebtedness does not exceed the
lesser of the cost or fair market value of the equipment financed with such
Indebtedness and (ii) such Indebtedness does not exceed $100,000 in the
aggregate at any given time;

 

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

 

(e)     Indebtedness in an aggregate amount not to exceed $7,500,000 owing to
Horizon Technology Finance Corporation, subject to an intercreditor agreement in
form and substance reasonably satisfactory to Bank;

 

(f)     Subordinated Debt;

 

(g)     intercompany Indebtedness owed by any Subsidiary to any Borrower or any
wholly-owned Subsidiary, as applicable; provided that, such Indebtedness is also
permitted as a Permitted Investment and, in the case of such Indebtedness owed
to a Borrower, such Indebtedness shall be incurred in the ordinary course of
business and consistent with past practices and evidenced by one or more
promissory notes that are provided to Bank;

 

(h)     Indebtedness for deferred compensation to each Borrower’s employees, not
to exceed $150,000 in the aggregate in addition to that which is existing on the
Closing Date;

 

(i)     reimbursement obligations of any Borrower to its employees for travel
and other expenses incurred in the ordinary course of business;

 

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(j)      liabilities of any Borrower associated with accrued but unused vacation
time of employees of the Borrowers incurred in the ordinary course of business
and pursuant to applicable laws governing Borrowers; and

 

(k)     Lien in favor of Los Angeles County Tax Collector for unpaid taxes in
the amount of $6,414.13, and a Lien in favor of North Carolina Department of
Revenue for unpaid taxes in the amount of $1,952.34, both of which have been
paid in full by the Parent prior to the Closing Date (collectively, the “Tax
Liens”); and

 

(l)     extensions, refinancings, modifications, amendments and restatements of
any items of Permitted Indebtedness under subsection (e) above; provided that
the principal amount thereof is not increased or the terms thereof are not
modified to impose materially more burdensome terms upon any Borrower or all
Borrowers collectively.

 

“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) certificates of deposit maturing
no more than one (1) year from the date of investment therein issued by Bank and
(iv) Bank’s money market accounts;

 

(c)     Investments pursuant to or arising under currency agreements or interest
rate agreements entered into in the ordinary course of business;

 

(d)     Investments by Borrowers and Subsidiaries in their Subsidiaries in the
ordinary course, in an aggregate amount not to exceed $250,000 after the Closing
Date;

 

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

 

(f)     Investments or other participation in joint ventures or strategic
alliances in the ordinary course of each Borrower’s business consisting of the
licensing of technology, intellectual property and/or product, the development
of such technology, intellectual property and/or product or the providing of
technical support, provided that any cash Investments by Borrowers do not exceed
$100,000 in the aggregate in any fiscal year and there are no Investments or
transfers of any other property of Borrowers to such joint venture;

 

(g)     Investments by Borrower in TIH, CIH or any other Person pursuant to or
in connection with a Management Services Agreement in an aggregate amount not to
exceed One Hundred Thousand Dollars ($100,000) during any fiscal year; and

 

(h)     other Investments aggregating not in excess of One Hundred Thousand
Dollars ($100,000) at any time.

 

“Permitted Licenses” means and includes (i) non-exclusive licenses of
Intellectual Property entered into in the ordinary course of business,
including, without limitation pursuant to any Management Services Agreement,
(ii) exclusive licenses of Intellectual Property entered into in the ordinary
course of business and applicable solely outside the United States, provided
that such exclusive licenses could not result in a legal transfer of title of
the licensed Intellectual Property and (iii) exclusive licenses of Intellectual
Property entered into in the ordinary course of business that are exclusive as
to the United States, to the extent consented to by Bank, which consent shall
not be unreasonably withheld, conditioned or delayed.

 

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“Permitted Liens” means the following:

 

(a)     Any Liens existing on the Closing Date and disclosed in the Schedule 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 (provided that such appropriate proceedings do not involve any
substantial danger of the sale, forfeiture or loss of any material item of
Collateral which in the aggregate is material to any Borrower, or all Borrowers
collectively, and that Parent has adequately bonded such Lien or reserves
sufficient to discharge such Lien have been provided on the books of Parent),
provided the same have no priority over any of Bank’s security interests;

 

(c)     Liens (i) upon or in any equipment which was not financed by Bank
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 leasing 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 or leased and improvements thereon, and the
proceeds of such equipment;

 

(d)     Liens in favor of Horizon Technology Finance Corporation securing the
Indebtedness described in clause (e) of the definition of Permitted
Indebtedness, subject to an intercreditor agreement in form and substance
reasonably satisfactory to Bank;

 

(e)     carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or
other similar Liens arising in the ordinary course of business and which are not
delinquent or remain payable without penalty or which are being contested in
good faith and by appropriate proceedings (provided that such appropriate
proceedings do not involve any substantial danger of the sale, forfeiture or
loss of any material item of Collateral or Collateral which in the aggregate is
material to any Borrower, or all Borrowers collectively, and that Parent has
adequately bonded such Lien or reserves sufficient to discharge such Lien have
been provided on the books of Parent);

 

(f)     leases or subleases of real property granted in the ordinary course of
any Borrower’s business, and leases, subleases, non-exclusive licenses or
sublicenses of personal property (other than Intellectual Property) granted in
the ordinary course of any Borrower’s business, if the leases, subleases,
licenses and sublicenses do not prohibit granting Lender a security interest
therein;

 

(g)     Liens in favor of financial institutions arising solely in connection
with any Borrower’s deposit or securities accounts held at such institutions
that are maintained in compliance with Section 6.8;

 

(h)     Liens consisting of Permitted Licenses; and

 

(i)     Liens incurred in connection with the extension, renewal or refinancing
of the indebtedness secured by Liens of the type described in clauses (a)
through (d) 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.

 

“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, that appears in The
Wall Street Journal from time to time.

 

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“Remaining Months Liquidity” means the amount of Borrowers’ unrestricted cash
maintained in their accounts with Bank plus the amount available for borrowing
under the Revolving Facility.

 

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

 

“Revolving Facility” means the facility under which Borrowers may request Bank
to issue Advances, as specified in Section 2.1(a) hereof.

 

“Revolving Line” means a credit extension of up to Two Million Five Hundred
Thousand Dollars ($2,500,000).

 

“Revolving Maturity Date” means the second anniversary of the Closing Date.

 

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

 

“SEC Documents” means the reports, schedules, forms, statements and other
documents required to be filed by a Person under the Securities Exchange Act of
1934, as amended, or the Securities Act of 1933, as amended, and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein.

 

“Shares” means (i) one hundred percent (100%) of the issued and outstanding
capital stock, membership units or other securities owned or held of record by a
Borrower or any Subsidiary of a Borrower, in any direct or indirect Subsidiary;
and (ii) sixty five percent (65%) of the issued and outstanding capital stock,
membership units or other securities owned or held of record by a Borrower or
any Subsidiary of Borrower, in any direct or indirect Subsidiary which is not an
entity organized under the laws of the United States or any territory thereof,
including the Existing Foreign Subsidiaries.

 

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

 

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

 

“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.

 

 1.2     Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with GAAP and all calculations made hereunder
shall be made in accordance with GAAP. When used herein, the terms “financial
statements” shall include the notes and schedules thereto.

 

2.     Loan and Terms Of Payment.

 

 2.1     Credit Extensions.

 

Each Borrower promises to pay to the order of Bank, in lawful money of the
United States of America, the aggregate unpaid principal amount of all Credit
Extensions made by Bank to Borrowers hereunder. Each Borrower shall also pay
interest on the unpaid principal amount of such Credit Extensions at rates in
accordance with the terms hereof.

 

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(a)     Revolving Advances.

 

(i)     Subject to and upon the terms and conditions of this Agreement,
Borrowers may request Advances in an aggregate outstanding amount not to exceed
the lesser of (i) the Revolving Line or (ii) the Borrowing Base. Subject to the
terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving
Maturity Date, at which time all Advances under this Section 2.1(a) shall be
immediately due and payable. Notwithstanding the foregoing, Bank may, in its
sole discretion and upon a Borrower’s request, make Advances to such Borrower
after the Revolving Maturity Date, and all other terms and conditions under this
Agreement shall apply to such Advances. Borrowers may prepay any Advances
without penalty or premium. Borrowers shall use the proceeds of the Advances for
short-term working capital and corporate purposes.

 

(ii)     Whenever a Borrower desires an Advance, such Borrower will notify Bank
by email, facsimile transmission or telephone no later than 2:00 p.m. Pacific
Time, on the Business Day that is one day before the Business Day the Advance is
to be made. Each such notification shall be promptly confirmed by an Advance
Request Form in substantially the form of Exhibit B hereto, along with (i) aged
listings of accounts receivable and accounts payable, (ii) a sales journal,
(iii) a collections journal, (iv) a deferred revenue schedule and (v) a
Borrowing Base Certificate signed by a Responsible Officer in substantially the
form of Exhibit C hereto. Bank is authorized to make Advances under this
Agreement, based upon instructions received from a Responsible Officer or a
designee of a 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 email or telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer or a designee thereof, and Borrowers 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 to the
appropriate Borrower’s deposit account at Bank.

 

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,
Borrowers shall immediately pay to Bank, in cash, the amount of such excess.

 

2.3     Interest Rates, Payments, and Calculations.

 

(a)     Interest Rates.

 

(i)     Except as set forth in Section 2.3(b), the Advances shall bear interest,
on the outstanding Daily Balance thereof, at a per annum rate equal to three
percent (3.00%) above the Prime Rate.

 

(b)     Late Fee; Default Rate. If any payment is not made within ten (10) days
after the date such payment is due, Borrowers 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. Interest hereunder shall be due and payable on the last
business 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 Borrowers’ deposit accounts (and each Borrower hereby authorizes Bank to
deduct such amounts from its deposit accounts maintained at Bank) or against the
Revolving Facility, 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. All payments
shall be free and clear of any taxes, withholdings, duties, impositions or other
charges, to the end that Bank will receive the entire amount of any Obligations
payable hereunder, regardless of source of payment.

 

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(d)     Lockbox.    Borrowers shall cause all account debtors to wire or direct
all ACH or other electronic payments of any amounts owing to a Borrower to a
restricted account at Bank (the “Bancontrol Account”) as Bank shall specify, and
to mail all payments made by check to a lockbox or post office box under Bank’s
control (and Borrowers shall cease the use of any remote deposit check systems).
All invoices shall specify such post office box as the payment address. Bank
shall have sole authority to collect such payments and deposit them to the
Bancontrol Account. If a Borrower receives any amount despite such instructions,
such Borrower shall immediately deliver such payment to Bank in the form
received, except for an endorsement to the order of Bank and, pending such
delivery, shall hold such payment in trust for Bank. Bank shall credit all
amounts paid into the Bancontrol Account first against any Obligations owing to
Bank, and then any remaining balance of such amount shall be credited to such
Borrower’s operating account maintained at Bank. Borrowers shall enter into such
lockbox agreement as Bank shall reasonably request from time to time. Bank may,
at its option, conduct a credit check of the account debtor for each Eligible
Account requested by a Borrower for inclusion in the Borrowing Base and notify
any account debtor of Bank’s security interest in the Borrowers’ Accounts. Bank
may also verify directly with the respective account debtors the validity,
amount and other matters relating to the Eligible Accounts, by means of matching
purchase orders or contracts to invoices, analyzing customer payment history and
direct telephonic or written confirmation with the account debtor or otherwise.

 

(e)     Computation. In the event the Prime Rate is changed from time to time
hereafter, the applicable rate of interest hereunder shall be increased or
decreased, effective as of the day the Prime Rate is changed, by an amount equal
to such change in the Prime Rate. 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 a Borrower specifies. After the occurrence of
an Event of Default, the receipt by Bank of any wire transfer of funds, check,
or other item of payment shall be immediately applied to conditionally reduce
Obligations, but 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 and Expenses.

 

(a)     Facility Fees. Borrowers shall pay to Bank on the Closing Date and on
the first anniversary of the Closing Date, a facility fee with respect to the
Revolving Facility equal to one percent (1.00%) of the Revolving Line, which is
fully earned and nonrefundable on such due date.

 

(b)     Bank Expenses. Borrowers shall pay to Bank, on the Closing Date, all
Bank Expenses incurred through the Closing Date, including reasonable attorneys’
fees and expenses and, after the Closing Date, all Bank Expenses, including
reasonable attorneys’ fees and expenses, as and when they are incurred by Bank.

 

2.6     Term. This Agreement shall become effective on the Closing Date and,
subject to Section 12.7, 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. Notwithstanding termination, Bank’s Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.

 

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 reasonably satisfactory to Bank,
the following:

 

(a)     this Agreement;

 

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(b)     a certificate of the Secretary of each Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;

 

(c)     UCC National Form Financing Statements;

 

(d)     a warrant to purchase stock;

 

(e)     intercreditor agreement with Horizon Technology Finance Corporation;

 

(f)     evidence of Borrower’s receipt of at least $5,000,000 in cash proceeds
from its debt financing transaction with Horizon Technology Finance Corporation;

 

(g)     account control agreement with respect to the Existing CB&T Account;

 

(h)     certificate(s) of insurance naming Bank as loss payee and additional
insured;

 

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

 

(j)     to the extent not provided in Parent’s SEC Documents, current financial
statements of each Borrower;

 

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

 

(l)     establishment of the Bancontrol Account and lockbox arrangements; and

 

(m)     such other documents, 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 Loan Advance/Payment Request Form, along
with (i) aged listings of accounts receivable and accounts payable, (ii) a sales
journal, (iii) a collections journal, (iv) a deferred revenue schedule and (v) a
Borrowing Base Certificate, as provided in Section 2.1;

 

(b)     the representations and warranties contained in Section 5 shall be true
and correct in all material respects on and as of the date of Borrowers’ request
for such Credit Extension 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. The making of each Credit Extension shall be deemed to be a
representation and warranty by Borrowers on the date of such Credit Extension as
to the accuracy of the facts referred to in this Section 3.2; and

 

(c)     in Bank’s sole discretion, there has not been any material impairment in
the Accounts, general affairs, management, results of operation, financial
condition or the prospect of repayment of the Obligations, or there has not been
any material adverse deviation (more than 25%) by Borrowers from the most recent
business plan of Borrowers presented to and accepted by Bank.

 

4.     Creation of Security Interest.

 

4.1     Grant of Security Interest. Each Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrowers of each of
its covenants and duties under the Loan Documents. Such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral (subject to (i) Permitted Liens described in clause (c) which are
permitted to be senior to Bank’s Lien and (ii) Permitted Liens described in
clauses (b) and (e) of such defined term, to the extent such Liens are senior to
Bank’s Lien by operation of law), and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof (subject to (i)
Permitted Liens described in clause (c) which are permitted to be senior to
Bank’s Lien and (ii) Permitted Liens described in clauses (b) and (e) of such
defined term, to the extent such Liens are senior to Bank’s Lien by operation of
law).

 

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4.2     Delivery of Additional Documentation Required. Each Borrower shall from
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue the
perfection of Bank’s security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents. Each
Borrower from time to time may deposit with Bank specific time deposit accounts
to secure specific Obligations. Each Borrower authorizes Bank to hold such
balances in pledge and to decline to honor any drafts thereon or any request by
a Borrower or any other Person to pay or otherwise transfer any part of such
balances for so long as the 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 Borrowers’ usual business hours but no more than twice a year (unless an
Event of Default has occurred and is continuing), to inspect each Borrower’s
Books and to make copies thereof and to check, test, and appraise the Collateral
in order to verify each Borrower’s financial condition or the amount, condition
of, or any other matter relating to, the Collateral.

 

4.4     Pledge of Shares. Each Borrower hereby pledges, assigns and grants to
Bank, a security interest in all the Shares, together with all proceeds and
substitutions thereof, all cash, stock and other moneys and property paid
thereon, all rights to subscribe for securities declared or granted in
connection therewith, and all other cash and noncash proceeds of the foregoing,
as security for the performance of the Obligations. Within ten (10) days
following Bank’s request (which request shall not be made until after the
earlier of the occurrence of an Event of Default or August 31, 2018), the
certificate or certificates for the Shares will be delivered to Bank,
accompanied by an instrument of assignment duly executed in blank by Borrowers,
and Borrowers shall cause the books of each entity whose Shares are part of the
Collateral and any transfer agent to reflect the pledge of the Shares, and
Borrowers will execute and deliver such documents, and take or cause to be taken
such actions, as Bank may reasonably request to perfect or continue the
perfection of Bank’s security interest in the Shares. Upon the occurrence of an
Event of Default hereunder, Bank may effect the transfer of any securities
included in the Collateral (including but not limited to the Shares) into the
name of Bank and cause new (as applicable) certificates representing such
securities to be issued in the name of Bank or its transferee. Unless an Event
of Default shall have occurred and be continuing, Borrowers shall be entitled to
exercise any voting rights with respect to the Shares and to give consents,
waivers and ratifications in respect thereof, provided that no vote shall be
cast or consent, waiver or ratification given or action taken which would be
inconsistent with any of the terms of this Agreement or which would constitute
or create any violation of any of such terms. All such rights to vote and give
consents, waivers and ratifications shall terminate upon the occurrence and
continuance of an Event of Default.

 

5.     Representations and Warranties.

 

Each Borrower represents and warrants as follows:

 

5.1     Due Organization and Qualification. Each Borrower and each Subsidiary is
a corporation duly existing under the laws of its state of incorporation 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
for such states as to which any failure to so qualify could not reasonably be
expected to have a Material Adverse Effect.

 

5.2     Due Authorization; No Conflict. The execution, delivery, and performance
of the Loan Documents are within each Borrower’s powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in a Borrower’s Articles of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which a
Borrower is a party or by which a Borrower is bound, in each case, to the extent
such conflict, breach or default could not reasonably be likely to have a
Material Adverse Effect No Borrower is in default under any material agreement
to which it is a party or by which it is bound to the extent such default could
not reasonably be likely to have a Material Adverse Effect.

 

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5.3     No Prior Encumbrances. Each Borrower has good and marketable title to
its property, free and clear of Liens, except for Permitted Liens.

 

5.4     Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The property and services giving rise to such Eligible
Accounts has been delivered or rendered to the account debtor or to the account
debtor’s agent for immediate and unconditional acceptance by the account debtor.
No Borrower has received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.

 

5.5     Merchantable Inventory. All Inventory is in all material respects of
good and marketable quality, free from all material defects, except for
Inventory for which adequate reserves have been made.

 

5.6     Intellectual Property. Each Borrower is the sole owner of the
Intellectual Property, except for Permitted Licenses. Each of the 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 that
any part of the Intellectual Property violates the rights of any third party.
Except as set forth in the Schedule, each Borrower’s rights as a licensee of
intellectual property do not give rise to more than five percent (5%) of its
gross revenue in any given month, including without limitation revenue derived
from the sale, licensing, rendering or disposition of any product or service. No
Borrower is a party to, or bound by, any agreement that restricts the grant by
such Borrower of a security interest in such Borrower’s rights under such
agreement.

 

5.7     Name; Location of Chief Executive Office. Except as disclosed in the
Schedule, no Borrower has done business under any name other than that specified
on the signature page hereof; or, in the past five (5) years, changed its
jurisdiction of formation, corporate structure, organizational type, or any
organizational number assigned by its jurisdiction. The chief executive office
of each Borrower is located at the address indicated in Section 10 hereof. All
Borrowers’ Inventory and Equipment is located only at the location set forth in
Section 10 hereof.

 

5.8     Litigation. Except as set forth in the Schedule, there are no actions or
proceedings pending by or against a Borrower or any Subsidiary before any court
or administrative agency which could result in liabilities in excess of $250,000
or in which an adverse decision could have a Material Adverse Effect.

 

5.9     No Material Adverse Change in Financial Statements. All consolidated and
consolidating financial statements related to Borrowers and any Subsidiary that
Bank has received from Borrowers fairly present in all material respects
Borrowers’ financial condition as of the date thereof and Borrowers’
consolidated and consolidating results of operations for the period then ended.
There has not been a material adverse change in the consolidated or the
consolidating financial condition of Borrowers since the date of the most recent
of such financial statements submitted to Bank.

 

5.10     Solvency, Payment of Debts. Each Borrower is solvent and able to pay
its debts (including trade debts) as they mature.

 

5.11     Regulatory Compliance. Each Borrower and each Subsidiary have met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA, and no event has occurred resulting from a Borrower’s failure
to comply with ERISA that could result in such Borrower’s incurring any material
liability. No Borrower is an “investment company” or a company “controlled” by
an “investment company” within the meaning of the Investment Company Act of
1940. No Borrower is 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). Each Borrower and each Subsidiary have
materially complied with all the provisions of the Federal Fair Labor Standards
Act. Each Borrower and each Subsidiary have not materially violated any material
statutes, laws, ordinances or rules applicable to it.

 

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5.12     Environmental Condition. None of Borrowers’ or any Subsidiary’s
properties or assets has ever been used by a Borrower or any Subsidiary or, to
the best of Borrowers’ knowledge, by previous owners or operators, in the
disposal of, or to produce, store, handle, treat, release, or transport, any
hazardous waste or hazardous substance other than in accordance with applicable
law; to the best of Borrowers’ knowledge, none of Borrowers’ properties or
assets has ever been designated or identified in any manner pursuant to any
environmental protection statute as a hazardous waste or hazardous substance
disposal site, or a candidate for closure pursuant to any environmental
protection statute; no lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by a
Borrower or any Subsidiary; and neither a Borrower nor any Subsidiary has
received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal, state or other governmental agency
concerning any action or omission by a Borrower or any Subsidiary resulting in
the releasing, or otherwise disposing of hazardous waste or hazardous substances
into the environment.

 

5.13     Taxes. Each Borrower and each Subsidiary have filed or caused to be
filed all tax returns required to be filed (or extensions have been obtained and
such extensions have not expired), and have paid, or have made adequate
provision for the payment of, all taxes reflected therein, except for the
payment of any such taxes, assessments, fees and other governmental charges
which are being diligently contested by such Borrower in good faith by
appropriate proceedings and for which adequate reserves have been made under
GAAP.

 

5.14     Investments; Subsidiaries. Except as set forth in the Schedule, no
Borrower or any Subsidiary owns any stock, partnership interest or other equity
securities of any Person, except for Permitted Investments.

 

5.15     Government Consents. Each Borrower and each Subsidiary have obtained
all material 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 such Borrower’s business as currently
conducted, except for such consents, approval or authorization the failure to
obtain could not reasonably be expected to result in a Material Adverse Effect.

 

5.16     Operating, Depository and Investment Accounts. None of a Borrower’s nor
any Subsidiary’s operating, depository or investments accounts is maintained or
invested with a Person other than Bank, except in compliance with Section 6.8.

 

5.17     Shares. Each Borrower has full power and authority to create a first
lien on the Shares and no disability or contractual obligation exists that would
prohibit such Borrower from pledging the Shares pursuant to this Agreement.
There are no subscriptions, warrants, rights of first refusal or other
restrictions on transfer relative to, or options exercisable with respect to the
Shares, other than that restrictions on transfer that arise by operation of
applicable law. The Shares have been and will be duly authorized and validly
issued, and are fully paid and non-assessable. The Shares are not the subject of
any present or threatened suit, action, arbitration, administrative or other
proceeding, and each Borrower knows of no reasonable grounds for the institution
of any such proceedings.

 

5.18     Full Disclosure. No representation, warranty or other statement made by
a Borrower in any certificate or written statement furnished to Bank (other than
projections, forward-looking statements and other information of a general
economic or industry nature, which projections, forward-looking statements and
other information of a general economic or industry nature have been prepared by
the applicable Borrower in good faith based upon assumptions believed by such
Borrower to be reasonable at the time) 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.

 

6.     Affirmative Covenants.

 

Each Borrower shall do all of the following:

 

6.1     Good Standing. Each Borrower shall maintain its and each of its
Subsidiaries’ corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which it is
required under applicable law. Each Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain, in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.

 

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6.2     Government Compliance. Each 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. Each 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, noncompliance with
which could have a Material Adverse Effect.

 

6.3     Financial Statements, Reports, Certificates. Borrowers shall deliver the
following to Bank:

 

(a)     within fifteen (15) days after the last day of each month, (i) aged
listings of accounts receivable and accounts payable, (ii) a sales journal,
(iii) a collections journal, (iv) a deferred revenue schedule and (v) a
Borrowing Base Certificate signed by a Responsible Officer in substantially the
form of Exhibit C hereto;

 

(b)     as soon as available, but in any event within thirty (30) days after the
end of each month, a Borrower prepared consolidated and consolidating balance
sheet, income statement, and cash flow statement covering each Borrower’s
consolidated and consolidating operations during such month, prepared in
accordance with GAAP, consistently applied, in a form acceptable to Bank along
with a Compliance Certificate signed by a Responsible Officer in substantially
the form separately provided by Bank to Borrower;

 

(c)     as soon as available, but in any event within ninety (90) days after the
end of each Borrower’s fiscal year, audited consolidated financial statements of
each Borrower prepared in accordance with GAAP, consistently applied, together
with an unqualified opinion on such financial statements of an independent
certified public accounting firm reasonably acceptable to Bank;

 

(d)     as soon as available, but in any event no later than thirty (30) days
following the beginning of each Borrower’s next fiscal year, annual operating
projections (including income statements, balance sheets and cash flow
statements presented in a monthly format) for such fiscal year, approved by
Borrowers’ board of directors, in form and substance reasonably satisfactory to
Bank (each, a “Financial Plan”);

 

(e)     a detailed cash receipts journal on the Friday of each week until such
time as Bank determines such reporting item is not required;

 

(f)     copies of all statements, reports and notices sent or made available
generally by each Borrower to its security holders or to any holders of
Subordinated Debt and all reports on Forms 10-K and 10-Q filed with the
Securities and Exchange Commission;

 

(g)     promptly upon receipt of notice thereof, a report of any legal actions
pending or threatened against either a Borrower or any Subsidiary that could
result in damages or costs to such Borrower or any Subsidiary of Fifty Thousand
Dollars ($50,000) or more, or any commercial tort claim (as defined in the Code)
acquired by any Borrower;

 

(h)     such budgets, sales projections, operating plans, other financial
information including information related to the verification of Borrowers’
Accounts as Bank may reasonably request from time to time; and

 

(i)     promptly (and in any event within three (3) Business Days) upon a
Borrower becoming aware of the existence of any Event of Default or event
described in Section 8 (including Section 8.6) which, with the giving of notice
or passage of time, or both, would constitute an Event of Default, such Borrower
shall give written notice to Bank of such occurrence, which such notice shall
include a reasonably detailed description of such Event of Default or event
which, with the giving of notice or passage of time, or both, would constitute
an Event of Default.

 

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

 

6.5     Inventory; Returns. Borrowers shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between Borrowers and their account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrowers, as they exist at the
time of the execution and delivery of this Agreement. Borrowers shall promptly
notify Bank of all returns and recoveries and of all disputes and claims, where
the return, recovery, dispute or claim involves more than Fifty Thousand Dollars
($50,000).

 

6.6     Taxes. Each Borrower shall make, and shall 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, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and each Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that such Borrower or a Subsidiary has made such
payments or deposits; provided that such 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 Borrowers.

 

6.7     Insurance.

 

(a)     Each 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 each Borrower’s business is
conducted on the date hereof. Each Borrower shall also maintain insurance
relating to such Borrower’s business, ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to such
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, and Bank
hereby acknowledges and agrees that the insurance coverage of the Borrowers as
of the date hereof is reasonably satisfactory to the Bank and if so maintained
during the term hereof the Borrowers shall be in compliance with the
requirements set forth in this Section 6.7, All such 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 thereof, and all
liability insurance policies shall show the Bank as an additional insured and
shall 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, Borrowers
shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All proceeds payable under
any such policy shall, at the option of Bank, be payable to Bank to be applied
on account of the Obligations.

 

6.8     Operating, Depository and Investment Accounts. Each Borrower shall
maintain and shall cause each of its Subsidiaries to maintain all of its
depository, operating, and investment accounts with Bank; provided however that
Parent may maintain its Existing CB&T Account during the 90 day period following
the Closing Date. For each account that a Borrower maintains outside of Bank,
such Borrower shall cause the applicable bank or financial institution at or
with which any such account is maintained to execute and deliver an account
control agreement or other appropriate instrument in form and substance
satisfactory to Bank.

 

6.9     Financial Covenants.

 

(a)     Asset Coverage Ratio. Measured on the last day of each month, Borrowers
shall maintain a minimum ratio of (i) unrestricted cash maintained at Bank plus
all Eligible Accounts to (ii) all Obligations owing to Bank (“Asset Coverage
Ratio”) of at least 2.00 to 1.00. Notwithstanding the foregoing, upon the
completion of two consecutive quarters in which Borrowers’ EBITDA is at least $1
and provided that no Event of Default has occurred during such two quarter
period, the minimum Asset Coverage Ratio shall automatically be reduced to 1.25
: 1.00, beginning with the first month following such two quarter period and
ending on the first day following any trailing three month period in which
Borrowers’ EBITDA is negative.

 

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(b)     Performance to Plan - EBITDA. Measured on the last day of each calendar
quarter, Parent’s trailing three months’ EBITDA shall not negatively deviate by
more than 30% from its projected EBITDA for such period as set forth in
Borrowers’ Financial Plan. For purposes of determining Borrower’s compliance
with this Section 6.9(b) for the calendar quarters ending June 30, 2018 through
December 31, 2019, the minimum EBITDA requirements are set forth on the
Compliance Certificate separately provided by Bank to Borrower on the Closing
Date.

 

(c)     Remaining Months Liquidity. Borrowers’ Remaining Months Liquidity,
measured as of the last day of each month (the “Measurement Date”), shall be at
least three (3) times the absolute value of the monthly average of Parent’s
EBITDA loss for the trailing three (3) month period ending on the Measurement
Date.

 

6.10     Intellectual Property Rights.

 

(a)     Each Borrower shall (i) protect, defend and maintain the validity and
enforceability of its Intellectual Property; (ii) promptly advise Bank in
writing of material infringements of its Intellectual Property; and (iii) not
allow any Intellectual Property material to a Borrower’s business to be
abandoned, forfeited or dedicated to the public.

 

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

 

(c)      Borrowers shall (i) give Bank not less than 30 days prior 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, and (ii) execute such
documents as Bank may reasonably request for Bank to perfect or maintain its
perfection in the proceeds of such intellectual property rights to be registered
by any Borrower, and upon the request of Bank and shall file such documents
simultaneously with the filing of any such applications or registrations. Upon
filing any such applications or registrations with the United States Copyright
Office, Borrowers shall promptly provide Bank with (i) a copy of such
applications or registrations, without the exhibits, if any, thereto, (ii)
evidence of the filing of any documents requested by Bank to be filed for Bank
to maintain the perfection and priority of its security interest in the proceeds
of such intellectual property rights, and (iii) the date of such filing.

 

(d)     Bank may audit any Borrower's Intellectual Property to confirm
compliance with this Section, provided such audit may not occur more often than
twice per year, unless an Event of Default has occurred and is continuing. Bank
shall have the right, but not the obligation, to take, at Borrowers’ sole
expense, any actions that a Borrower is required under this Section to take but
which such Borrower fails to take, after 15 days’ notice to Borrowers. Borrowers
shall reimburse and indemnify Bank for all reasonable costs and reasonable
expenses incurred in the reasonable exercise of its rights under this Section.

 

6.11     Post-Closing Covenant. On or before August 31, 2018, Borrowers shall
provide evidence satisfactory to Bank of the commencement of dissolution
proceedings regarding the Existing Foreign Subsidiaries, and use commercially
reasonable efforts to consummate the dissolution of the Existing Foreign
Subsidiaries in a timely manner.

 

6.12     Further Assurances. At any time and from time to time Borrowers 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.

 

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7.      Negative Covenants.

 

No Borrower will do any of the following:

 

7.1     Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a “Transfer”), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than: (i) Transfers of Inventory
in the ordinary course of business; (ii) Transfers of non-exclusive licenses and
similar arrangements for the use of the property of a Borrower or its
Subsidiaries in the ordinary course of business; or (iii) Transfers of worn-out
or obsolete Equipment which was not financed by Bank; (iv) Transfers consisting
of Permitted Licenses; (v) sales of assets with Bank’s prior written consent;
(vi) Transfers by a Subsidiary of any or all of its business, property or assets
to a Borrower (with prompt notice to Bank); (vii) Transfers consisting of
transactions permitted by Sections 7.6, 7.3, 7.7 and 7.8; (viii) Transfers of
cash or cash equivalents for uses not prohibited by the terms of this Agreement
in the ordinary course of business and consistent with Borrower’s Financial
Plan; and (ix) Transfers consisting of Permitted Liens.

 

7.2     Change in Business or Executive Office. Engage in any business, or
permit any of its Subsidiaries to engage in any business, other than the
businesses currently engaged in by Borrowers and any business substantially
similar or related thereto (or incidental thereto); cease to conduct business in
substantially the manner conducted by Borrowers as of the Closing Date; or
without thirty (30) days prior written notification to Bank, relocate its chief
executive office or state of incorporation or change its legal name; or without
Bank’s prior written consent, change the date on which its fiscal year ends.

 

7.3     Mergers or Acquisitions; Change in Control. Suffer or permit a Change in
Control; merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with or into any other business organization, or acquire, or permit
any of its Subsidiaries to acquire, all or a material portion of the capital
stock or property of another Person provided that (i) any Subsidiary may merge
into another Subsidiary and (ii) any Subsidiary may merge into a Borrower so
long as such Borrower is the surviving entity, as long as Borrowers provide
prompt notice to Bank of any such merger.

 

7.4     Indebtedness. Create, incur, guarantee, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.

 

7.5     Encumbrances. Create, incur, assume or suffer to exist 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 enter into any agreement
with any Person (other than Bank or Horizon Technology Finance Corporation) not
to grant a security interest in, or otherwise encumber, any of its property, or
permit any Subsidiary to do so.

 

7.6     Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock, or permit any of its Subsidiaries to do so, except that (i) Parent may
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 the aggregate amount of
such repurchase does not exceed $100,000 in any fiscal year and (ii) any
subsidiary of Parent may pay dividends or make distributions on account of any
capital stock without restriction.

 

7.7     Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments; or maintain or invest any of its property with
a Person other than Bank or permit any of its Subsidiaries to do so unless such
Person has entered into an account 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 a Borrower.

 

7.8     Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrowers except
for transactions that are in the ordinary course of such Borrower’s business,
upon fair and reasonable terms that are no less favorable to such Borrower than
would be obtained in an arm’s length transaction with a non-affiliated Person,
provided that any Borrower or Subsidiary may enter into any transaction with
another Borrower or Subsidiary in the ordinary course of business and consistent
with past practices.

 

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7.9     Subordinated Debt. Make any payment on account of Subordinated Debt,
except to the extent the payment is allowed under any subordination agreement
entered into with Bank, or amend any provision 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 other 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 pledge possession of the warehouse receipt,
where negotiable, covering such Inventory or Equipment. Store or maintain any
Equipment or Inventory at a location other than the location set forth in
Section 10 of this Agreement.

 

7.11     Compliance. Become an “investment company” 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. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral, or permit any of its Subsidiaries to do any of
the foregoing.

 

8.       Events of Default.

 

Any one or more of the following events shall constitute an Event of Default by
Borrowers under this Agreement:

 

8.1     Payment Default. If Borrowers fail to pay, when due, any of the
Obligations.

 

8.2     Covenant Default.

 

(a)     If a Borrower fails to perform any obligation under Article 6 (other
than Section 6.2, 6.4, 6.5, 6.10(a) or 6.10(b)) or violates any of the covenants
contained in Article 7 of this Agreement; or

 

(b)     If a Borrower fails or neglects to perform or observe any obligation
under Section 6.2, 6.4, 6.5, 6.10(a) or 6.10(b) or any other material term,
provision, condition, or covenant contained in this Agreement, in any of the
Loan Documents, or in any other present or future agreement between such
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
twenty days after such Borrower receives notice thereof or any officer of such
Borrower becomes aware thereof; provided, however, that if the default cannot by
its nature be cured within the twenty day period or cannot after diligent
attempts by such Borrower be cured within such twenty day period, and such
default is likely to be cured within a reasonable time, then such Borrower shall
have an additional reasonable period (which shall not in any case exceed an
aggregate of 40 days) to 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 Effect. If there occurs any circumstance or
circumstances that could have a Material Adverse Effect.

 

8.4     Attachment. If any portion of a 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 a Borrower is enjoined,
restrained, or in any way prevented by court order from continuing to conduct
all or any part of its business affairs, or if a judgment or other claim becomes
a lien or encumbrance upon any portion of a Borrower’s assets, or if a notice of
lien, levy, or assessment is filed of record with respect to any of a 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 any 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 required to be made during such cure period).

 

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8.5     Insolvency. If a Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by a Borrower, or if an Insolvency Proceeding is
commenced against any Borrower and is not dismissed or stayed within thirty (30)
days (provided that no Credit Extensions will be made prior to the dismissal of
such Insolvency Proceeding).

 

8.6     Other Agreements. If there is a default or other failure to perform in
any agreement to which a Borrower is a party or by which it is bound resulting
in a right by a third party or parties, whether or not exercised, to accelerate
the maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or which could have a Material Adverse Effect.

 

8.7     Subordinated Debt. If any 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.

 

8.8     Judgments; Settlements; Fines; Penalties.  If a judgment or judgments
for the payment of money in an amount, individually or in the aggregate, of at
least One Hundred Thousand Dollars ($100,000) shall be rendered against a
Borrower, or if a Borrower enters into any settlement agreement with respect to
any litigation matters that results in payment obligations or liabilities
incurred by such Borrower in excess of One Hundred Thousand Dollars ($100,000);
or if one or more fines, penalties or orders or decrees for the payment of money
in excess of One Hundred Thousand Dollars ($100,000) shall be rendered against
Borrower by any governmental authority; and the foregoing shall remain
unsatisfied and unstayed for a period of ten (10) days except for those that are
fully covered by a reputable and financially sound insurer (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment, settlement, fine, penalty or orders or decree); or

 

8.9     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.

 

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 Borrowers:

 

(a)     Declare all or any portion of 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 8.5, all Obligations shall become immediately due and payable without
any action by Bank);

 

(b)     Cease advancing money or extending credit to or for the benefit of
Borrowers under this Agreement or under any other agreement between Borrowers
and Bank;

 

(c)     Make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral. Each Borrower
agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Each 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 a Borrower’s owned
premises, each 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;

 

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

 

(e)     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, each 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, Borrowers’ rights under all
licenses and all franchise agreements shall inure to Bank’s benefit;

 

(f)     Dispose of the Collateral by way of one or more contracts or
transactions, for cash or on terms, in such manner and at such places (including
each Borrower’s premises) as Bank determines is commercially reasonable, and
apply any proceeds to the Obligations in whatever manner or order Bank deems
appropriate;

 

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

 

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

 

9.2     Power of Attorney. Effective only upon the occurrence and during the
continuance of an Event of Default, each Borrower hereby irrevocably appoints
Bank (and any of Bank’s designated officers, or employees) as such 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) notify
all account debtors with respect to the Accounts to pay Bank directly; (c) sign
a 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) make, settle, and
adjust all claims under and decisions with respect to a Borrower’s policies of
insurance; (e) demand, collect, receive, sue, and give releases to any account
debtor for the monies due or which may become due upon or with respect to the
Accounts and to compromise, prosecute, or defend any action, claim, case or
proceeding relating to the Accounts; (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; (g) sell, assign, transfer,
pledge, compromise, discharge or otherwise dispose of any Collateral; (h)
receive and open all mail addressed to a Borrower for the purpose of collecting
the Accounts; (i) endorse a Borrower’s name on any checks or other forms of
payment or security that may come into Bank’s possession; (j) execute on behalf
of a Borrower any and all instruments, documents, financing statements and the
like to perfect Bank's interests in the Accounts and file, in its sole
discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral; and (k) to the extent permitted by
applicable law, do all acts and things necessary or expedient, in furtherance of
any such purposes; provided however Bank may exercise such power of attorney
with respect to any actions described in clause (j) above, regardless of whether
an Event of Default has occurred. The appointment of Bank as each 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 Credit Extensions
hereunder is terminated.

 

9.3     Accounts Collection. In addition to the foregoing, at any time after the
occurrence of an Event of Default, Bank may notify any Person owing funds to
Borrowers of Bank’s security interest in such funds and verify the amount of
such Account. Each Borrower shall collect all amounts owing to Borrowers 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 Borrowers fail 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:
(a) make payment of the same or any part thereof; (b) set up such reserves under
a loan facility in Section 2.1 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 6.7 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.

 

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9.5     Application of Collateral Proceeds. The proceeds of the Collateral, or
any part thereof resulting from Bank’s exercise of its rights and remedies
hereunder shall be paid to and applied as follows.

 

(a)     First, to the payment of out-of-pocket costs and expenses, including all
amounts expended to preserve the value of the Collateral, of foreclosure or
suit, if any, and of such sale and the exercise of any other rights or remedies,
and of all proper fees, expenses, liability and advances, including reasonable
legal expenses and attorneys’ fees, incurred or made hereunder by Bank,
including Bank Expenses;

 

(b)      Second, to the payment of Obligations owing to Bank, to be applied in
such manner as Bank determines in its sole discretion; and

 

(c)     Third, to the payment of the surplus, if any, to Borrowers, their
successors and assigns or to the persons lawfully entitled to receive the same.

 

9.6     Bank’s Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrowers.

 

9.7     Shares. Borrowers recognize that Bank may be unable to effect a public
sale of any or all the Shares, by reason of certain prohibitions contained in
federal securities laws and applicable state and provincial securities laws or
otherwise, and may be compelled to resort to one or more private sales thereof
to a restricted group of purchasers which will be obliged to agree, among other
things, to acquire such securities for their own account for investment and not
with a view to the distribution or resale thereof. Borrowers acknowledge and
agree that any such private sale may result in prices and other terms less
favorable than if such sale were a public sale and, notwithstanding such
circumstances, agrees that any such private sale shall be deemed to have been
made in a commercially reasonable manner. Bank shall be under no obligation to
delay a sale of any of the Shares for the period of time necessary to permit the
issuer thereof to register such securities for public sale under federal
securities laws or under applicable state and provincial securities laws, even
if such issuer would agree to do so. Upon the occurrence of an Event of Default
which continues, Bank shall have the right to exercise all such rights as a
secured party under the Code as it, in its sole judgment, shall deem necessary
or appropriate, including without limitation the right to liquidate the Shares
and apply the proceeds thereof to reduce the Obligations. Effective only upon
the occurrence and during the continuance of an Event of Default, Borrowers
hereby irrevocably appoint Bank (and any of Bank’s designated officers, or
employees) as such Borrowers’ true and lawful attorney to enforce such
Borrower’s rights against any Subsidiary, including the right to compel any
Subsidiary to make payments or distributions owing to such Borrower.

 

9.8     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 or remedy shall
be deemed an election, and no waiver by Bank of any Event of Default on
Borrowers’ 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.

 

9.9     Demand; Protest. Each Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrowers may in any way be liable.

 

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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 email
or telefacsimile to Borrowers or to Bank, as the case may be, at its addresses
set forth below:

 

If to any Borrower: CATASYS, INC.  

11601 Wilshire Blvd., Suite 1100

Los Angeles, CA 90025

Attn: _______________

FAX: (____) _______________
Email: ________________________

    If to Bank: HERITAGE BANK OF COMMERCE  

150 South Almaden Blvd.

San Jose, California 95113

Attn: Karla Schrader

FAX: (408) 947-6910

Email:  Karla.Schrader@herbank.com

 

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.

 

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 jurisdiction
of the state and Federal courts located in the County of Santa Clara, State of
California. BORROWERS AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF
THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

 

If the jury waiver set forth in this Section is not enforceable, then any
dispute, controversy or claim arising out of or relating to this Agreement, the
Loan Documents or any of the transactions contemplated therein shall be settled
by judicial reference pursuant to Code of Civil Procedure Section 638 et seq.
before a referee sitting without a jury, such referee to be mutually acceptable
to the parties or, if no agreement is reached, by a referee appointed by the
Presiding Judge of the California Superior Court for Santa Clara County. This
Section shall not restrict a party from exercising remedies under the Code or
from exercising pre-judgment remedies under applicable law.

 

12.      General Provisions.

 

12.1     Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by any Borrower without Bank’s prior written consent, which
consent may be granted or withheld in Bank’s sole discretion. Bank shall have
the right without the consent of or notice to Borrowers to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank’s obligations, rights and benefits hereunder.

 

23.

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12.2     Indemnification. Each 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
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to the
transactions between Bank and Borrowers whether under this Agreement, or
otherwise (including without limitation reasonable attorneys’ fees and
expenses), except for losses caused by Bank’s gross negligence or willful
misconduct.

 

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

 

12.4     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.

 

12.5     Amendments in Writing, Integration. Neither this Agreement nor the Loan
Documents can be amended or terminated orally. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Agreement and the Loan
Documents, if any, are merged into this Agreement and the Loan Documents.

 

12.6     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. In
the event that any signature to this Agreement or any other Loan Document is
delivered by facsimile transmission or by e-mail delivery of a “.pdf” format
data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or “.pdf” signature page were an original
thereof. Notwithstanding the foregoing, Borrowers shall deliver all original
signed documents requested by Bank no later than ten (10) Business Days
following the Closing Date.

 

12.7     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 Credit Extensions to
Borrowers. The obligations of Borrowers to indemnify Bank with respect to the
expenses, damages, losses, costs and liabilities described in Section 12.2 shall
survive until all applicable statute of limitations periods with respect to
actions that may be brought against Bank have run.

 

12.8     Confidentiality. In handling any confidential information Bank and all
employees and agents of Bank, including but not limited to accountants, shall
exercise the same degree of care that it 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 Borrowers, (ii) to prospective transferees or purchasers of any
interest in the loans, provided that they are similarly bound by confidentiality
obligations, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, and (iv) as may be required in connection with
the examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder, and
shall use such information only for purposes in connection with this Agreement,
including but not limited to the evaluation of the creditworthiness of any
Borrower, the administration, management and review of the Credit Extensions
provided hereunder, and the exercise or potential exercise of Bank’s rights and
the enforcement of its remedies under this Agreement and the other Loan
Documents. 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.

 

12.9     Publicity. Each Borrower authorizes Bank to disclose its relationship
with such Borrower for marketing and/or advertising purposes with prior notice
to such Borrower, including the use of such Borrower’s logo, name and contact
information, photographs of such Borrower or its buildings, and quotes about
Bank from Borrowers’ officers and employees in Bank’s promotional materials.

 

24.

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12.10     Patriot Act Notice. Bank hereby notifies Borrowers that, pursuant to
the requirements of the USA Patriot Act, Title III of Pub. L. 107-56 (signed
into law on October 26, 2001) (the “Patriot Act”), it is required to obtain,
verify and record information that identifies the Borrowers, which information
includes names and addresses and other information that will allow Bank, as
applicable, to identify the Borrowers in accordance with the Patriot Act.

 

13.     CO-BORROWERS.

 

13.1     Co-Borrowers. Borrowers are jointly and severally liable for the
Obligations and Bank may proceed against one Borrower to enforce the Obligations
without waiving its right to proceed against the other Borrower. This Agreement
and the Loan Documents are a primary and original obligation of each Borrower
and shall remain in effect notwithstanding future changes in conditions,
including any change of law or any invalidity or irregularity in the creation or
acquisition of any Obligations or in the execution or delivery of any agreement
between Bank and any Borrower. Each Borrower shall be liable for existing and
future Obligations as fully as if all of the Credit Extensions were advanced to
such Borrower. Bank may rely on any certificate or representation made by any
Borrower as made on behalf of, and binding on, all Borrowers, including without
limitation any Advance request form or borrowing base certificate or compliance
certificates. Each Borrower appoints each other Borrower as its agent with all
necessary power and authority to give and receive notices, certificates or
demands for and on behalf of both Borrowers, to act as disbursing agent for
receipt of any Advances on behalf of each Borrower and to apply to Bank on
behalf of each Borrower for Advances, any waivers and any consents. This
authorization cannot be revoked, and Bank need not inquire as to one Borrower’s
authority to act for or on behalf of another Borrower.

 

13.2     Subrogation and Similar Rights. Notwithstanding any other provision of
this Agreement or any other Loan Document, each Borrower irrevocably waives,
until all Obligations are paid in full and Bank has no further obligation to
make Credit Extensions to Borrower, all rights that it may have at law or in
equity (including, without limitation, any law subrogating the Borrower to the
rights of Bank under the Loan Documents) to seek contribution, indemnification,
or any other form of reimbursement from any other Borrower, or any other Person
now or hereafter primarily or secondarily liable for any of the Obligations, for
any payment made by a Borrower with respect to the Obligations in connection
with the Loan Documents or otherwise and all rights that it might have to
benefit from, or to participate in, any security for the Obligations as a result
of any payment made by a Borrower with respect to the Obligations in connection
with the Loan Documents or otherwise. Any agreement providing for
indemnification, reimbursement or any other arrangement prohibited under this
Section shall be null and void. If any payment is made to a Borrower in
contravention of this Section, such Borrower shall hold such payment in trust
for Bank and such payment shall be promptly delivered to Bank for application to
the Obligations, whether matured or unmatured.

 

13.3     Waivers of Notice. Each Borrower waives, to the extent permitted by
law, notice of acceptance hereof; notice of the existence, creation or
acquisition of any of the Obligations; notice of an Event of Default except as
set forth herein; notice of the amount of the Obligations outstanding at any
time; notice of any adverse change in the financial condition of any other
Borrower or of any other fact that might increase the Borrower’s risk;
presentment for payment; demand; protest and notice thereof as to any
instrument; and all other notices and demands to which the Borrower would
otherwise be entitled by virtue of being a co-borrower or a surety. Each
Borrower waives any defense arising from any defense of any other Borrower, or
by reason of the cessation from any cause whatsoever of the liability of any
other Borrower. Bank’s failure at any time to require strict performance by any
Borrower of any provision of the Loan Documents shall not waive, alter or
diminish any right of Bank thereafter to demand strict compliance and
performance therewith. Each Borrower also waives any defense arising from any
act or omission of Bank that changes the scope of the Borrower’s risks
hereunder. Each Borrower hereby waives any right to assert against Bank any
defense (legal or equitable), setoff, counterclaim, or claims that such Borrower
individually may now or hereafter have against another Borrower or any other
Person liable to Bank with respect to the Obligations in any manner or
whatsoever.

 

13.4     Subrogation Defenses. Until all Obligations are paid in full and Bank
has no further obligation to make Credit Extensions to Borrowers, each Borrower
hereby waives any defense based on impairment or destruction of its subrogation
or other rights against any other Borrower and waives all benefits which might
otherwise be available to it under California Civil Code Sections 2809, 2810,
2819, 2839, 2845, 2848, 2849, 2850, 2899, and 3433 and California Code of Civil
Procedure Sections 580a, 580b, 580d and 726, as those statutory provisions are
now in effect and hereafter amended, and under any other similar statutes now
and hereafter in effect.

 

25.

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13.5     Right to Settle, Release.

 

(a)     The liability of Borrowers hereunder shall not be diminished by (i) any
agreement, understanding or representation that any of the Obligations is or was
to be guaranteed by another Person or secured by other property, or (ii) any
release or unenforceability, whether partial or total, of rights, if any, which
Bank may now or hereafter have against any other Person, including another
Borrower, or property with respect to any of the Obligations.

 

(b)     Without notice to any given Borrower and without affecting the liability
of any given Borrower hereunder, Bank may (i) compromise, settle, renew, extend
the time for payment, change the manner or terms of payment, discharge the
performance of, decline to enforce, or release all or any of the Obligations
with respect to any other Borrower by written agreement with such other
Borrower, (ii) grant other indulgences to another Borrower in respect of the
Obligations, (iii) modify in any manner any documents relating to the
Obligations with respect to any other Borrower by written agreement with such
other Borrower, (iv) release, surrender or exchange any deposits or other
property securing the Obligations, whether pledged by a Borrower or any other
Person, or (v) compromise, settle, renew, or extend the time for payment,
discharge the performance of, decline to enforce, or release all or any
obligations of any guarantor, endorser or other Person who is now or may
hereafter be liable with respect to any of the Obligations.

 

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

 

[signature page follows]

 

26.

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

 

 

 

BORROWERS:

 

CATASYS, INC.

 

 

 

 

 

 

By:

/s/ Terren Peizer

 

 

 

 

 

 

Name:

Terren Peizer

 

          Title: Chairman & CEO             ANXIOLITIX, INC.             By:
/s/ Terren Peizer             Name: Terren Peizer             Title: Chairman &
CEO             CATASYS HEALTH, INC.             By: /s/ Terren Peizer          
  Name: Terren Peizer             Title: Chairman & CEO                        
    BANK:

HERITAGE BANK OF COMMERCE             By: /s/ Karla Schrader             Name:
Karla Schrader             Title: VP  

 

27.

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DEBTOR:

CATASYS, INC., ANXIOLITIX, INC. and CATASYS HEALTH, INC.

 

SECURED

PARTY: HERITAGE BANK OF COMMERCE

 

Exhibit A

COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT

 

All personal property of each Borrower (herein referred to as “Borrower” or
“Debtor”) whether presently existing or hereafter created or acquired, and
wherever located, including, but not limited to:

 

(a)      all accounts (including health-care-insurance receivables), chattel
paper (including tangible and electronic chattel paper), commercial tort claims,
deposit accounts, securities accounts, documents (including negotiable
documents), equipment (including all accessions and additions thereto), general
intangibles (including payment intangibles and software), goods (including
fixtures), instruments (including promissory notes), inventory (including all
goods held for sale or lease or to be furnished under a contract of service, and
including returns and repossessions), investment property (including securities
and securities entitlements), letter of credit rights, money, and all of
Debtor’s books and records with respect to any of the foregoing, and the
computers and equipment containing said books and records; and

 

(b)      any and all cash proceeds and/or noncash proceeds of any of the
foregoing, including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to payment. All terms
above have the meanings given to them in the California Uniform Commercial Code,
as amended or supplemented from time to time.

 

Notwithstanding the foregoing, the Collateral shall not include any copyrights,
patents, trademarks, servicemarks and applications therefor, now owned or
hereafter acquired, or any claims for damages by way of any past, present and
future infringement of any of the foregoing (collectively, the “Intellectual
Property”); provided, however, that the Collateral shall include all accounts
and general intangibles that consist of rights to payment and proceeds from the
sale, licensing or disposition of all or any part, or rights in, the foregoing
(the “Rights to Payment”). Notwithstanding the foregoing, if a judicial
authority (including a U.S. Bankruptcy Court) holds that a security interest in
the underlying Intellectual Property is necessary to have a security interest in
the Rights to Payment, then the Collateral shall automatically, and effective as
of the Closing Date, include the Intellectual Property to the extent necessary
to permit perfection of Bank’s security interest in the Rights to Payment.

 

 

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[b1.jpg]

Exhibit B
[ex_116461img001.jpg]

 

 

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[b1.jpg]

 Exhibit C

 

BORROWING BASE CERTIFICATE

 

Borrower: Catasys, Inc. et. al.

 

Lender:

HERITAGE BANK OF COMMERCE 

 

Commitment Amount:

$2,500,000

 

 

 

Loan #:

 

                             

ACCOUNTS RECEIVABLE

   

Period:

               

1

Accounts Receivable Book Value as of:

X/X/XX

 

Catasys, Inc.

 

$0.00

   

2

         

Anxiolitix, Inc.

$0.00

   

3

         

Catasys Health, Inc.

$0.00

   

4

           

$0.00

   

5

Total Accounts Receivable:

         

$0.00

                             

ACCOUNTS RECEIVABLE DEDUCTIONS

                     

6

Accounts Receivable Aged over 90 Days from invoice date

       

$0.00

       

7

Cross aging over

   

25%

     

$0.00

       

8

Concentration

 

30%

     

$0.00

       

9

Contra Accounts (including Customer's Related Deposits)

       

$0.00

       

10

Foreign Accounts other than Canada (w/out Insurance or LC)

       

$0.00

       

11

Affiliate/Related Party/Employee Accounts

       

$0.00

       

12

Prebillings, progress billings, retention billings, bonded receivables

           

$0.00

       

13

Bill & Hold Accounts

           

$0.00

        14 U.S. Government Accounts (w/o assignment of claims)             $0.00
       

15

Other Deductions as Defined by Lender: ____________________

         

$0.00

       

16

Total Ineligible Accounts:

           

$0.00

       

17

Total Eligible Accounts (#2 − #16)

         

$0.00

   

18

Advance Rate

                 

85%

   

19

Borrowing Base (#17 multiplied by #18)

         

$0.00

                         

 

 

BALANCES

                     

20

Maximum Loan Amount

     

$2,500,000.00

       

21

Total Borrowing Base [Lesser of #19 or #20]

       

$0.00

   

22

Less: Present Balance owing on Line of Credit

       

$0.00

   

23

Less: Other (tax obligations secured by Tax Liens)

             

$0.00

   

24

Less: Funding Request Today

             

$0.00

   

25

Remaining Availability [#21 − (#22 + #23 + #24)]

       

$0.00

                             

If line #25 is a negative number, this amount must be remitted to the Bank
immediately to bring loan balance into compliance. By signing this form you
authorize Bank to deduct any advance amounts directly from the company’s
checking account at HERITAGE BANK OF COMMERCE in the event there is an
overadvance.

     

The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and HERITAGE BANK OF COMMERCE.

   

 

 

Each Borrower hereby requests funding in the amount of $___________ in
accordance with this Borrowing Base Certificate. All representations and
warranties of Borrowers stated in the Loan and Security Agreement are true,
correct, and complete in all material respects as of the date of this Borrowing
Base Certificate; provided that those representations and warranties expressly
referring to another date shall be true, correct, and complete in all material
respects as of such date.

     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By (Authorized Signer):

 

Title:

       

Date:

                     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reviewed by Bank:

 

Title:

       

Date: