Exhibit 10.1
 

 
LOAN AND SECURITY AGREEMENT

Dated as of June 29, 2011

between

OCULUS INNOVATIVE SCIENCES, INC.,
a Delaware corporation,

as “Borrower”,

and

VENTURE LENDING & LEASING VI, INC.,
a Maryland corporation,

as “Lender”
 
 
 

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LOAN AND SECURITY AGREEMENT

The Borrower and Lender identified on the cover page of this document have
entered or anticipate entering into one or more transactions pursuant to which
Lender agrees to make available to Borrower a loan facility governed by the
terms and conditions set forth in this document and one or more Supplements
executed by Borrower and Lender which incorporate this document by
reference.  Each Supplement constitutes a supplement to and forms part of this
document, and will be read and construed as one with this document, so that this
document and the Supplement constitute a single agreement between the parties
(collectively referred to as this “Agreement”).

Accordingly, the parties agree as follows:

ARTICLE 1 - INTERPRETATION

1.1      Definitions.  The terms defined in Article 10 and in the Supplement
will have the meanings therein specified for purposes of this Agreement.

1.2      Inconsistency.  In the event of any inconsistency between the
provisions of any Supplement and this document, the provisions of the Supplement
will be controlling for the purpose of all relevant transactions.

ARTICLE 2 - THE COMMITMENT AND LOANS

2.1      The Commitment.  Subject to the terms and conditions of this Agreement,
Lender agrees to make term loans to Borrower from time to time from the Closing
Date and to, but not including, the Termination Date in an aggregate principal
amount not exceeding the Commitment.  The Commitment is not a revolving credit
commitment, and Borrower does not have the right to repay and reborrow
hereunder.  Each Loan requested by Borrower to be made on a single Business Day
shall be for a minimum principal amount set forth in the Supplement, except to
the extent the remaining Commitment is a lesser amount.

2.2      Notes Evidencing Loans; Repayment.  Each Loan shall be evidenced by a
separate Note payable to the order of Lender, in the total principal amount of
the Loan.  Principal and interest of each Loan shall be payable at the times and
in the manner set forth in the Note and regularly scheduled payments thereof and
each Final Payment shall be effected by automatic debit of the appropriate funds
from Borrower’s Primary Operating Account as specified in the Supplement hereto.

2.3      Procedures for Borrowing.

(a)      Borrower shall give Lender, at least five (5) Business Days’ prior to a
proposed Borrowing Date, written notice of any request for borrowing hereunder
(a “Borrowing Request”).  Each Borrowing Request shall be in substantially the
form of Exhibit “B” to the Supplement, shall be executed by a responsible
executive or financial officer of Borrower, and shall state how much is
requested, and shall be accompanied by such other information and documentation
as Lender may reasonably request, including the original executed Note(s) for
the Loan(s) covered by the Borrowing Request.

(b)      No later than 1:00 p.m. Pacific Standard Time on the Borrowing Date, if
Borrower has satisfied the conditions precedent in Article 4, Lender shall make
the Loan available to Borrower in immediately available funds.

2.4      Interest.  Except as otherwise specified in the applicable Note, Basic
Interest on the outstanding principal balance of each Loan shall accrue daily at
the Designated Rate from the Borrowing Date until the Maturity Date.  If the
outstanding principal balance of such Loan is not paid on the Maturity Date,
interest shall accrue at the Default Rate until paid in full, as further set
forth herein.

2.5      Final Payment.  Except as otherwise provided in the Supplement,
Borrower shall pay the Final Payment with respect to each Loan on the Maturity
Date of such Loan.

2.6      Interest Rate Calculation.  Basic Interest, along with charges and fees
under this Agreement and any Loan Document, shall be calculated for actual days
elapsed on the basis of a 360-day year, which results in higher interest, charge
or fee payments than if a 365-day year were used.  In no event shall Borrower be
obligated to pay Lender interest, charges or fees at a rate in excess of the
highest rate permitted by applicable law from time to time in effect.

 
 

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2.7      Default Interest.  Any unpaid payments of principal or interest or the
Final Payment with respect to any Loan shall bear interest from their respective
maturities, whether scheduled or accelerated, Default Rate.  Borrower shall pay
such interest on demand.

2.8      Late Charges. If Borrower is late in making any payment of principal or
interest or Final Payment under this Agreement by more than five (5) Business
Days, Borrower agrees to pay a late charge of five percent (5%) of the
installment due, but not less than fifty dollars ($50.00) for any one such
delinquent payment. This late charge may be charged by Lender for the purpose of
defraying the expenses incidental to the handling of such delinquent
amounts.  Borrower acknowledges that such late charge represents a reasonable
sum considering all of the circumstances existing on the date of this Agreement
and represents a fair and reasonable estimate of the costs that will be
sustained by Lender due to the failure of Borrower to make timely
payments.  Borrower further agrees that proof of actual damages would be costly
and inconvenient.  Such late charge shall be paid without prejudice to the right
of Lender to collect any other amounts provided to be paid or to declare a
default under this Agreement or any of the other Loan Documents or from
exercising any other rights and remedies of Lender.

2.9      Lender’s Records.  Principal, Basic Interest, Final Payments and all
other sums owed under any Loan Document shall be evidenced by entries in records
maintained by Lender for such purpose.  Each payment on and any other credits
with respect to principal, Basic Interest, Final Payments and all other sums
outstanding under any Loan Document shall be evidenced by entries in such
records.  Absent manifest error, Lender’s records shall be conclusive evidence
thereof.

2.10       Grant of Security Interests; Filing of Financing Statements.

(a)  To secure the timely payment and performance of all of Borrower’s
Obligations to Lender, Borrower hereby grants to Lender continuing security
interests in all of the Collateral.  In connection with the foregoing, Borrower
authorizes Lender to prepare and file any financing statements describing the
Collateral without otherwise obtaining the Borrower’s signature or consent with
respect to the filing of such financing statements.

(b)  In furtherance of the Borrower’s grant of the security interests in the
Collateral pursuant to Section 2.10(a) above, Borrower hereby pledges and grants
to the Lender 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.  On the Closing Date or at
any time thereafter following Lender’s request, the certificate or certificates
for the Shares will be delivered to Lender, accompanied by an instrument of
assignment duly executed in blank by Borrower, unless such Shares have not been
certificated.  To the extent required by the terms and conditions governing the
Shares, Borrower 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.  Upon
the occurrence and during the continuance of an Event of Default hereunder,
Lender may effect the transfer of any securities included in the Collateral
(including but not limited to the Shares) into the name of Lender and cause new
certificates representing such securities to be issued in the name of Lender or
its transferee(s).  Borrower will execute and deliver such documents, and take
or cause to be taken such actions, as Lender may reasonably request to perfect
or continue the perfection of Lender’s security interest in the Shares.  Unless
an Event of Default shall have occurred and be continuing, Borrower 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.

(c)  Borrower is and shall remain absolutely and unconditionally liable for the
performance of its obligations under the Loan Documents, including, without
limitation, any deficiency by reason of the failure of the Collateral to satisfy
all amounts due Lender under any of the Loan Documents.

 
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(d)  All Collateral pledged by Borrower under this Agreement and any Supplement
shall secure the timely payment and performance of all Obligations under this
Agreement, the Notes and the other Loan Documents.  Except as expressly provided
in this Agreement, no Collateral pledged under this Agreement or any Supplement
shall be released until such time as all Obligations under this Agreement and
the other Loan Documents have been satisfied and paid in full.

ARTICLE 3 - REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants that, except as set forth in the Supplement or
the Schedule of Exceptions hereto, if any, as of the Closing Date and each
Borrowing Date:

3.1      Due Organization.  Borrower is a corporation duly organized and validly
existing in good standing under the laws of the jurisdiction of its
incorporation, and is duly qualified to conduct business and is in good standing
in each other jurisdiction in which its business is conducted or its properties
are located, except where the failure to be so qualified would not reasonably be
expected to have a Material Adverse Effect.

3.2      Authorization, Validity and Enforceability. The execution, delivery and
performance of all Loan Documents executed by Borrower are within Borrower’s
powers, have been duly authorized, and are not in conflict with Borrower’s
articles or certificate of incorporation or by-laws, or the terms of any charter
or other organizational document of Borrower, as amended from time to time; and
all such Loan Documents constitute valid and binding obligations of Borrower,
enforceable in accordance with their terms (except as may be limited by
bankruptcy, insolvency and similar laws affecting the enforcement of creditors’
rights in general, and subject to general principles of equity).

3.3      Compliance with Applicable Laws.  Borrower has complied with all
licensing, permit and fictitious name requirements necessary to lawfully conduct
the business in which it is engaged, and to any sales, leases or the furnishing
of services by Borrower, including without limitation those requiring consumer
or other disclosures, the noncompliance with which would have a Material Adverse
Effect.

3.4      No Conflict.  The execution, delivery, and performance by Borrower of
all Loan Documents are not in conflict with any law, rule, regulation, order or
directive, or any indenture, agreement, or undertaking to which Borrower is a
party or by which Borrower may be bound or affected.  Without limiting the
generality of the foregoing, the issuance of the Warrant to Lender (or its
designee) does not violate any agreement or instrument by which Borrower is
bound or require the consent of any holders of Borrower’s securities other than
consents which have been obtained prior to the Closing Date.

3.5      No Litigation, Claims or Proceedings.  There is no litigation, tax
claim, proceeding or dispute pending, or, to the knowledge of Borrower,
threatened against or affecting Borrower, its property or the conduct of its
business.

3.6      Correctness of Financial Statements.  Borrower’s financial statements
which have been delivered to Lender fairly and accurately reflect Borrower’s
financial condition in accordance with GAAP as of the latest date of such
financial statements; and, since that date there has been no Material Adverse
Change.

3.7      No Subsidiaries.  Borrower is not a majority owner of or in a control
relationship with any other business entity.

3.8      Environmental Matters.  To its knowledge after reasonable inquiry,
Borrower has concluded that Borrower is in compliance with Environmental Laws,
except to the extent a failure to be in such compliance could not reasonably be
expected to have a Material Adverse Effect.

3.9      No Event of Default.  No Default or Event of Default has occurred and
is continuing.

3.10    Full Disclosure.  None of the representations or warranties made by
Borrower in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of Borrower
in connection with the Loan Documents (including disclosure materials delivered
by or on behalf of Borrower to Lender prior to the Closing Date or pursuant to
Section 5.2 hereof), contains any untrue statement of a material fact or omits
any material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they are
made, not misleading as of the time when made or delivered.

 
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3.11   Specific Representations Regarding Collateral.

(a)      Title.  Except for the security interests created by this Agreement and
Permitted Liens, (i) Borrower is and will be the unconditional legal and
beneficial owner of the Collateral, and (ii) the Collateral is genuine and
subject to no Liens, rights or defenses of others.  Except for the security
interests created by this Agreement and Permitted Liens, there exists no prior
assignments or encumbrances of record with the U.S. Patent and Trademark Office
or U.S. Copyright Office affecting any Collateral in favor of any third party
other than Lender.

(b)      Rights to Payment.  The names of the obligors, amount owing to
Borrower, due dates and all other information with respect to the Rights to
Payment are and will be correctly stated in all material respects in all Records
relating to the Rights to Payment.  Borrower further represents and warrants, to
its knowledge, that each Person appearing to be obligated on a Right to Payment
has authority and capacity to contract and is bound as it appears to be.

(c)      Location of Collateral.  Borrower’s chief executive office, Inventory,
Records, Equipment, and any other offices or places of business are located at
the address(es) shown on the Supplement.

(d)      Business Names.  Other than its full corporate name, Borrower has not
conducted business using any trade names or fictitious business names except as
shown on the Supplement.

3.12  Copyrights, Patents, Trademarks and Licenses.

(a)      Borrower owns or is licensed or otherwise has the right to use all of
the patents, trademarks, service marks, trade names, copyrights, contractual
franchises, authorizations and other similar rights that are reasonably
necessary for the operation of its business, without, to the best of Borrower’s
knowledge, conflict with the rights of any other Person.

(b)      To Borrower’s knowledge, no slogan or other advertising device,
product, process, method, substance, part or other material now employed, or now
contemplated to be employed, by Borrower infringes upon any rights held by any
other Person.

(c)      No claim or litigation regarding any of the foregoing is pending or, to
Borrower’s knowledge, threatened, and no patent, invention, device, application,
principle or any statute, law, rule, regulation, standard or code is pending or
proposed which, in either case, could reasonably be expected to have a Material
Adverse Effect.

3.13   Regulatory Compliance. Borrower has met the minimum funding requirements
of ERISA with respect to any employee benefit plans subject to ERISA.  No event
has occurred resulting from Borrower’s failure to comply with ERISA that is
reasonably likely to result in Borrower’s incurring any liability that could
have a Material Adverse Effect.  Borrower is not an “investment company” or a
company “controlled” by an “investment company” within the meaning of the
Investment Company Act of 1940.  Borrower is not engaged principally, or as one
of its important activities, in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of Regulations T and
U of the Board of Governors of the Federal Reserve System).  Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.

3.14   Shares.  Subject to the Lien granted to VLL5, Borrower has full power and
authority to create a first priority Lien on the Shares and no disability or
contractual obligation exists that would prohibit Borrower from pledging the
Shares pursuant to this Agreement.  To Borrower’s knowledge, there are no
subscriptions, warrants, rights of first refusal or other restrictions on
transfer relative to, or options exercisable with respect to the Shares.  The
Shares have been and will be duly authorized and validly issued, and are fully
paid and non-assessable.  To Borrower’s knowledge, the Shares are not the
subject of any present or threatened suit, action, arbitration, administrative
or other proceeding, and Borrower knows of no reasonable grounds for the
institution of any such proceedings.

3.15   Survival. The representations and warranties of Borrower as set forth in
this Agreement survive the execution and delivery of this Agreement.

 
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ARTICLE 4 - CONDITIONS PRECEDENT

4.1      Conditions to First Loan.  The obligation of Lender to make its first
Loan hereunder is, in addition to the conditions precedent specified in Section
4.2 and in any Supplement, subject to the fulfillment of the following
conditions and to the receipt by Lender of the documents described below, duly
executed and in form and substance satisfactory to Lender and its counsel:

(a)      Resolutions.  A certified copy of the resolutions of the Board of
Directors of Borrower authorizing the execution, delivery and performance by
Borrower of the Loan Documents.

(b)      Incumbency and Signatures.  A certificate of the secretary of Borrower
certifying the names of the officer or officers of Borrower authorized to sign
the Loan Documents, together with a sample of the true signature of each such
officer.

(c)      Legal Opinion.  The opinion of legal counsel for Borrower in the form
of Exhibit “E” attached to the Supplement.

(d)      Articles and By-Laws.  Certified copies of the Articles or Certificate
of Incorporation and By-Laws of Borrower, as amended through the Closing Date.

(e)      This Agreement.  Original counterparts of this Agreement and an initial
Supplement, with all schedules completed and attached thereto, and disclosing
such information as is acceptable to Lender.

(f)       Financing Statements.  Filing copies (or other evidence of filing
satisfactory to Lender and its counsel) of such UCC financing statements,
collateral assignments, account control agreements, and termination statements,
with respect to the Collateral as Lender shall request.

(g)     Consent and Waiver. A written consent and waiver executed by Innovacyn,
Inc., permitting Lender to perfect and maintain a Lien on Borrower’s
Intellectual Property in accordance with the terms of this Agreement, and
waiving its rights under Section 5.3 of the Revenue Sharing Distribution
Agreement dated September 15, 2009, as amended on June 1, 2010 and September 1,
2010.

(h)      Lien Searches. UCC lien, judgment, bankruptcy and tax lien searches of
Borrower from such jurisdictions or offices as Lender may reasonably request,
all as of a date reasonably satisfactory to Lender and its counsel.

(i)      Good Standing Certificate.  A Certificate of status or good standing of
Borrower as of a date acceptable to Lender from the jurisdiction of Borrower’s
organization and any foreign jurisdictions where Borrower is qualified to do
business.

(j)      Warrant(s). An original warrant issued by Borrower to Lender (or its
designee) exercisable for such number, type and class of shares of Borrower’s
capital stock, and for an initial exercise price as is specified in the
Supplement.

(k)      Insurance Certificates. Insurance certificates showing Lender as loss
payee or additional insured.

(l)      Other Documents. Such other documents and instruments as Lender may
reasonably request to effectuate the intents and purposes of this Agreement.

(m)     Intellectual Property Security Agreement.  An Intellectual Property
Security Agreement executed by Borrower substantially in the form attached as
Exhibit “G” to the Supplement

4.2      Conditions to All Loans.  The obligation of Lender to make its initial
Loan and each subsequent Loan is subject to the following further conditions
precedent that:

(a)      No Default.  No Default or Event of Default has occurred and is
continuing or will result from the making of any such Loan, and the
representations and warranties of Borrower contained in Article 3 of this
Agreement and Part 3 of the Supplement are true and correct as of the Borrowing
Date of such Loan.

(b)      No Material Adverse Effect.  No event has occurred that has had or
could reasonably be expected to have a Material Adverse Effect.

(c)      Borrowing Request.  Borrower shall have delivered to Lender a Borrowing
Request for such Loan.

 
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(d)      Note.  Borrower shall have delivered an original executed Note
evidencing such Loan, substantially in the form of Exhibit “A” attached to the
Supplement.

(e)      Supplemental Lien Filings.  Borrower shall have executed and delivered
such amendments or supplements to this Agreement and additional Security
Documents,  financing statements and third party waivers as Lender may
reasonably request in connection with the proposed Loan, in order to create,
protect or perfect or to maintain the perfection of Lender’s Liens on the
Collateral.

(f)       Intentionally omitted.

(g)      Financial Projections.  Borrower shall have delivered to Lender
Borrower’s business plan and/or financial projections or forecasts as most
recently approved by Borrower’s Board of Directors.

ARTICLE 5 - AFFIRMATIVE COVENANTS

During the term of this Agreement and until its performance of all Obligations,
Borrower will:

5.1      Notice to Lender.  Promptly give written notice to Lender of:

(a)      Any litigation or administrative or regulatory proceeding affecting
Borrower where the amount claimed against Borrower is at the Threshold Amount or
more, or where the granting of the relief requested could have a Material
Adverse Effect; or of the acquisition by Borrower of any commercial tort claim,
including brief details of such claim and such other information as Lender may
reasonably request to enable Lender to better perfect its Lien in such
commercial tort claim as Collateral.

(b)      Any substantial dispute which may exist between Borrower and any
governmental or regulatory authority.

(c)      The occurrence of any Default or any Event of Default.

(d)      Any change in the location of any of Borrower’s places of business or
Collateral at least thirty (30) days in advance of such change, or of the
establishment of any new, or the discontinuance of any existing, place of
business.

(e)      Any dispute or default by Borrower or any other party under any joint
venture, partnering, distribution, cross-licensing, strategic alliance,
collaborative research or manufacturing, license or similar agreement which
could reasonably be expected to have a Material Adverse Effect.

(f)      Any other matter which has resulted or might reasonably result in a
Material Adverse Change.

5.2      Financial Statements.  Make available to Lender via EDGAR at
www.sec.gov, in form and detail satisfactory to Lender the following financial
and other information, which Borrower warrants shall be accurate and complete in
all material respects:

(a)      Quarterly Financial Statements.  As soon as available but no later than
forty-five (45) days after the end of each month, unless a valid extension is
filed with the Securities and Exchange Commission (“SEC”) in which case the date
of the last day of the deadline, Borrower’s balance sheet as of the end of such
period, and Borrower’s income statement for such period and for that portion of
Borrower’s financial reporting year ending with such period, prepared in
accordance with GAAP and attested by a responsible financial officer of Borrower
as being complete and correct and fairly presenting Borrower’s financial
condition and the results of Borrower’s operations.

(b)      Year-End Financial Statements.  As soon as available but no later than
the date of delivery to the SEC as of the end of each financial reporting year,
a complete copy of Borrower’s audit report, which shall include balance sheet,
income statement, statement of changes in equity and statement of cash flows for
such year, prepared in accordance with GAAP and certified by an independent
certified public accountant selected by Borrower (the “Accountant”).

(c)      Compliance Certificates.  Within three (3) business days following the
filing of each set of financial statements referred to in paragraphs (a) and (b)
above, a certificate of the chief financial officer of Borrower (or other
executive officer) substantially in the form of Exhibit “C” to the Supplement
(i) setting forth in reasonable detail any calculations required to establish
whether Borrower is in compliance with any financial covenants or tests set
forth in the Supplement, and (ii) stating whether any Default or Event of
Default exists on the date of such certificate, and if so, setting forth the
details thereof and the action which Borrower is taking or proposes to take with
respect thereto.

 
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(d)      Other Information.  Such other statements, lists of property and
accounts, budgets (as updated), capitalization tables (as updated) or other
information as Lender may from time to time reasonably request.

5.3      Intentionally Omitted.

5.4      Existence.  Maintain and preserve Borrower’s existence, present form of
business, and all rights and privileges necessary or desirable in the normal
course of its business; and keep all Borrower’s property in good working order
and condition, ordinary wear and tear excepted.

5.5      Insurance.  Obtain and keep in force insurance in such amounts and
types as is usual in the type of business conducted by Borrower.  Such insurance
policies must be in form and substance satisfactory to Lender, and shall list
Lender as an additional insured or loss payee, as applicable, on endorsement(s)
in form reasonably acceptable to Lender.  Borrower shall furnish to Lender such
endorsements, and upon Lender’s request, copies of any or all such policies.

5.6      Accounting Records.  Maintain adequate books, accounts and records, and
prepare all financial statements in accordance with GAAP, and in compliance with
the regulations of any governmental or regulatory authority having jurisdiction
over Borrower or Borrower’s business; and permit employees or agents of Lender
at such reasonable times as Lender may request, at Borrower’s expense, to
inspect Borrower’s properties, and to examine, and make copies and memoranda of
Borrower’s books, accounts and records.

5.7      Compliance With Laws.  Comply with all laws (including Environmental
Laws), rules, regulations applicable to, and all orders and directives of any
governmental or regulatory authority having jurisdiction over, Borrower or
Borrower’s business, and with all material agreements to which Borrower is a
party, except where the failure to so comply would not have a Material Adverse
Effect.

5.8      Taxes and Other Liabilities.  Pay all Borrower’s Indebtedness when due;
pay all taxes and other governmental or regulatory assessments before
delinquency or before any penalty attaches thereto, except as may be contested
in good faith by the appropriate procedures and for which Borrower shall
maintain appropriate reserves; and timely file all required tax returns.

5.9      Special Collateral Covenants.

(a)   Maintenance of Collateral; Inspection.  Do all things reasonably necessary
to maintain, preserve, protect and keep all Collateral in good working order and
salable condition, ordinary wear and tear excepted, deal with the Collateral in
all ways as are considered good practice by owners of like property, and use the
Collateral lawfully and, to the extent applicable, only as permitted by
Borrower’s insurance policies.  Maintain, or cause to be maintained, complete
and accurate Records relating to the Collateral.  Upon reasonable prior notice
at reasonable times during normal business hours, Borrower hereby authorizes
Lender’s officers, employees, representatives and agents to inspect the
Collateral and to discuss the Collateral and the Records relating thereto with
Borrower’s officers and employees, and, in the case of any Right to Payment,
with any Person which is or may be obligated thereon.

(b)   Financing Statements and Other Actions.  Execute and deliver to Lender all
financing statements, notices and other documents (including, without
limitation, any filings with the United States Patent and Trademark Office and
the United States Copyright Office and equivalents in other jurisdictions) from
time to time reasonably requested by Lender to maintain a first perfected
security interest in the Collateral in favor of Lender; perform such other acts,
and execute and deliver to Lender such additional conveyances, assignments,
agreements and instruments, as Lender may at any time request in connection with
the administration and enforcement of this Agreement or Lender’s rights, powers
and remedies hereunder.

(c)   Liens.  Not create, incur, assume or permit to exist any Lien or grant any
other Person a negative pledge on any Collateral, except Permitted Liens.

 
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(d)   Documents of Title.  Not sign or authorize the signing of any financing
statement or other document naming Borrower as debtor or obligor, or acquiesce
or cooperate in the issuance of any bill of lading, warehouse receipt or other
document or instrument of title with respect to any Collateral, except those
negotiated to Lender, or those naming Lender as secured party, or if solely to
create, perfect or maintain a Permitted Lien.

(e)  Change in Location or Name.  Without at least 30 days’ prior written notice
to Lender:  (a) not relocate any Collateral or Records, its chief executive
office, or establish a place of business at a location other than as specified
in the Supplement; and (b) not change its name, mailing address, location of
Collateral, jurisdiction of incorporation or its legal
structure.  Notwithstanding the foregoing, Borrower shall not relocate any
Collateral in excess of $200,000 to a jurisdiction outside the United States
without obtaining the prior written consent of Lender which may be withheld in
its sole discretion.  Schedule 5.9(e) sets forth a list of Collateral in excess
of $200,000, and the location(s) at which such Collateral is maintained, as of
the Closing Date.  Borrower shall provide Lender with an updated list of
Collateral in excess of $200,000 and the location(s) at which such Collateral is
maintained on a quarterly basis.

(f)   Decals, Markings.  At the request of Lender, firmly affix a decal, stencil
or other marking to designated items of Equipment, indicating thereon the
security interest of Lender.

(g)  Agreement With Persons in Possession of Collateral.  Obtain and maintain
such acknowledgments, consents, waivers and agreements (each a “Waiver”) from
the owner, operator, lienholder, mortgagee, landlord or any Person in possession
of tangible Collateral in excess of $150,000 per location as Lender may require,
all in form and substance satisfactory to Lender.  Notwithstanding the
foregoing, Lender hereby waives the requirements of this Section 5.9(g) for each
location at which Collateral is maintained as of the Closing Date.

(h)  Certain Agreements on Rights to Payment.  Other than in the ordinary course
of business, not make any material discount, credit, rebate or other reduction
in the original amount owing on a Right to Payment or accept in satisfaction of
a Right to Payment less than the original amount thereof.

5.10   Authorization for Automated Clearinghouse Funds Transfer.  (i) Authorize
Lender to initiate debit entries to Borrower’s Primary Operating Account,
specified in the Supplement hereto, through Automated Clearinghouse (“ACH”)
transfers, in order to satisfy the regularly scheduled payments of principal,
interest and Final Payments (if any); (ii) provide Lender at least thirty (30)
days notice of any change in Borrower’s Primary Operating Account; and (iii)
grant Lender any additional authorizations necessary to begin ACH debits from a
new account which becomes the Primary Operating Account.

ARTICLE 6 - NEGATIVE COVENANTS

During the term of this Agreement and until the performance of all Obligations,
Borrower will not, (without Lender’s prior written consent):

6.1      Indebtedness.  Be indebted for borrowed money, the deferred purchase
price of property, or leases which would be capitalized in accordance with GAAP;
or become liable as a surety, guarantor, accommodation party or otherwise for or
upon the obligation of any other Person, except for:

(a)      Indebtedness incurred for the acquisition of supplies or inventory on
normal trade credit;

(b)      Indebtedness of Borrower under this Agreement;

(c)      Subordinated Debt not in excess of $150,000;

(d)      Indebtedness outstanding under the VLL5 Loan Agreement; and

(e)      Any Indebtedness approved by Lender prior to the Closing Date as shown
on Schedule 6.1.

6.2      Liens.  Create, incur, assume or permit to exist any Lien, or grant any
other Person a negative pledge, on any of Borrower’s property, except Permitted
Liens.  Borrower and Lender agree that this covenant is not intended to
constitute a lien, deed of trust, equitable mortgage, or security interest of
any kind on any of Borrower’s real property, and this Agreement shall not be
recorded or recordable.  Notwithstanding the foregoing, however, violation of
this covenant by Borrower shall constitute an Event of Default.  Without
limiting the generality of the foregoing, and as a material inducement to the
Lender’s making of the Commitment and entering into the Loan Documents, Borrower
agrees that (i) it shall not assign, mortgage, pledge, grant a security interest
in, or encumber any of Borrower’s Intellectual Property, and (ii) it shall not
permit the inclusion into any agreement, document, instrument or other
arrangement with any Person (except with or in favor of Lender) which directly
or indirectly prohibits or has the effect of prohibiting Borrower from
assigning, mortgaging, pledging, granting a security interest in or upon, or
encumbering any of Borrower’s Intellectual Property, except as is otherwise
permitted in Section 6.5(i) of this Agreement, or would otherwise be a
“Permitted Lien” hereunder.

 
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6.3      Dividends.  Pay any dividends or purchase, redeem or otherwise acquire
or make any other distribution with respect to any of Borrower’s capital stock,
except (a) dividends or other distributions solely of capital stock of Borrower,
and (b) so long as no Event of Default has occurred and is continuing, (i)
repurchases of stock from employees upon termination of employment under reverse
vesting or similar repurchase plans not to exceed $100,000 in any calendar year.

6.4      Liquidation/Dissolution. Liquidate or dissolve.

6.5      Sales of Assets. Sell, transfer, lease, license or otherwise dispose of
(a “Transfer”) any of Borrower’s assets except (i) non-exclusive licenses of
Intellectual Property in the ordinary course of business consistent with
industry practice, provided that such licenses of Intellectual Property neither
result in a legal transfer of title of the licensed Intellectual Property nor
have the same effect as a sale of such Intellectual Property and have been
approved by Borrower’s Board of Directors; (ii) Transfers of worn-out, obsolete
or surplus property (each as determined by the Borrower in its reasonable
judgment); (iii) Transfers of Inventory in the ordinary course of business; (iv)
Transfers constituting Permitted Liens; (v) Transfers permitted in Section 6.6
hereunder; and (vi) Transfers of Collateral (other than Intellectual Property)
for fair consideration and in the ordinary course of its business.

6.6      Loans/Investments.  Make or suffer to exist any loans, guaranties,
advances, or investments, except:

(a)      Accounts receivable in the ordinary course of Borrower’s business;

(b)      Investments in domestic certificates of deposit issued by, and other
domestic investments with, financial institutions organized under the laws of
the United States or a state thereof, having at least One Hundred Million
Dollars ($100,000,000) in capital and a rating of at least “investment grade” or
“A” by Moody’s, Standard & Poor’s or any successor rating agency;

(c)      Investments in marketable obligations of the United States of America
and in open market commercial paper given the highest credit rating by a
national credit agency and maturing not more than one year from the creation
thereof;

(d)      Temporary advances to cover incidental expenses to be incurred in the
ordinary course of business;

(e)      Investments in joint ventures, strategic alliances, licensing and
similar arrangements customary in Borrower’s industry and which do not require
Borrower to assume or otherwise become liable for the obligations of any third
party not directly related to or arising out of such arrangement or, without the
prior written consent of Lender, require Borrower to transfer ownership of
non-cash assets to such joint venture or other entity; and

(f)      Investments in wholly-owned subsidiaries of the Borrower.

6.7      Transactions With Related Persons.  Directly or indirectly enter into
any transaction with or for the benefit of a Related Person on terms more
favorable to the Related Person than would have been obtainable in an “arms’
length” dealing.

6.8      Other Business.  Engage in any material line of business other than the
business Borrower conducts as of the Closing Date.

6.9      Intentionally omitted.

 
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6.10    Compliance.  Become an “investment company” or 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 Loan 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 the priority of Lender’s Lien on the Collateral, or permit any
of its subsidiaries to do any of the foregoing.

6.11   Other Deposit and Securities Accounts.  Maintain any deposit accounts or
accounts holding securities owned by Borrower except (i) Deposit Accounts and
investment/securities accounts as set forth in the Supplement, and (ii) other
Deposit Accounts and securities/investment accounts, in each case, with respect
to which Borrower and Lender shall have taken such action as Lender reasonably
deems necessary to obtain a perfected first priority security interest
therein.  The provisions of the previous sentence shall not apply to Deposit
Accounts exclusively used for payroll, payroll taxes and other employee wage and
benefit payments to or for the benefit of Borrower’s employees.

6.12    Prepayment of Indebtedness. Prepay, redeem or otherwise satisfy in any
manner prior to the scheduled repayment thereof any Indebtedness (other than the
Loans).  Notwithstanding the foregoing, Lender agrees that the conversion or
exchange into Borrower’s equity securities of any Indebtedness (other than the
Loans) shall not be prohibited by this Section 6.12.

6.13    Repayment of Subordinated Debt. Repay, prepay, redeem or otherwise
satisfy in any manner any Subordinated Debt, except in accordance with the terms
of any subordination agreement among Borrower, Lender and the holder(s) of such
Subordinated Debt.  Notwithstanding the foregoing, Lender agrees that the
conversion or exchange into Borrower’s equity securities of any Subordinated
Debt and the payment of cash in lieu of fractional shares shall not be
prohibited by this Section 6.13.

6.14    Subsidiaries.

(a)      Sell, transfer, encumber or otherwise dispose of Borrower’s ownership
interest in any Subsidiary other than Permitted Liens.

(b)      Cause or permit a Subsidiary to do any of the following:  (a) grant
Liens on such Subsidiary’s assets, except for Liens that would constitute
Permitted Liens if incurred by Borrower and Liens on any property held or
acquired by such Subsidiary in the ordinary course of its business securing
Indebtedness incurred or assumed for the purpose of financing all or any part of
the cost of acquiring such property; provided, that such Lien attaches solely to
the property acquired with such Indebtedness and that the principal amount of
such Indebtedness does not exceed one hundred percent (100%) of the cost of such
property; and (b) issue any additional Shares.

ARTICLE 7 - EVENTS OF DEFAULT

7.1      Events of Default; Acceleration.  Upon the occurrence and during the
continuation of any Default, the obligation of Lender to make any additional
Loan shall be suspended.  The occurrence of any of the following (each, an
“Event of Default”) shall terminate any obligation of Lender to make any
additional Loan; and shall, at the option of Lender (1) make all sums of Basic
Interest and principal, all Final Payments, and any Obligations and other
amounts owing under any Loan Documents immediately due and payable without
notice of default, presentment or demand for payment, protest or notice of
nonpayment or dishonor or any other notices or demands, and (2) give Lender the
right to exercise any other right or remedy provided by contract or applicable
law:

(a)      Borrower shall fail to pay any principal, interest or Final Payment
under this Agreement or any Note, or fail to pay any fees or other charges when
due under any Loan Document, and such failure continues for five (5) Business
Days or more after the same first becomes due; or an Event of Default as defined
in any other Loan Document shall have occurred.

(b)      Any representation or warranty made, or financial statement,
certificate or other document provided, by Borrower under any Loan Document
shall prove to have been false or misleading in any respect, such that a
Material Adverse Effect occurs or is reasonably likely to occur when made or
deemed made herein.

 
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(c)      (i) Borrower shall fail to pay its debts generally as they become due
and such failure continues for five (5) Business Days or (ii) Borrower shall
commence any Insolvency Proceeding with respect to itself; an involuntary
Insolvency Proceeding shall be filed against Borrower, or a custodian, receiver,
trustee, assignee for the benefit of creditors, or other similar official, shall
be appointed to take possession, custody or control of the properties of
Borrower, and such involuntary Insolvency Proceeding, petition or appointment is
acquiesced to by Borrower or is not dismissed within sixty (60) days; or the
dissolution, winding up, or termination of the business or cessation of
operations of Borrower; or Borrower shall take any corporate action for the
purpose of effecting, approving, or consenting to any of the foregoing.

(d)      Borrower shall be in default beyond any applicable period of grace or
cure under any other agreement involving the borrowing of money, the purchase of
property, the advance of credit or any other monetary liability of any kind to
Lender or to any Person which results in the acceleration of payment of such
obligation in an amount in excess of the Threshold Amount.

(e)      Any governmental or regulatory authority shall take any judicial or
administrative action, or any defined benefit pension plan maintained by
Borrower shall have any unfunded liabilities, any of which, in the reasonable
judgment of Lender, might have a Material Adverse Effect.

(f)      Subject to Section 6.5 hereof, any sale, transfer or other disposition
of all or a substantial or material part of the assets of Borrower, including
without limitation to any trust or similar entity, shall occur.

(g)      Any judgment(s) singly or in the aggregate in excess of the Threshold
Amount shall be entered against Borrower which remain unsatisfied, unvacated or
unstayed pending appeal for ten (10) or more days after entry thereof.

(h)      Borrower shall fail to perform or observe any covenant contained in
Article 6 of this Agreement.

(i)       Borrower shall fail to perform or observe any covenant contained in
Section 5.9 of this Agreement, and such failure continues for five (5) Business
Days.

(j)      Borrower shall fail to perform or observe any covenant contained in
Article 5 or elsewhere in this Agreement or any other Loan Document (other than
a covenant which is dealt with specifically elsewhere in this Article 7) and, if
capable of being cured, the breach of such covenant is not cured within 30 days
after the sooner to occur of Borrower’s receipt of notice of such breach from
Lender or the date on which such breach first becomes known to any officer of
Borrower; provided, however that if such breach is not capable of being cured
within such 30-day period and Borrower timely notifies Lender of such fact and
Borrower diligently pursues such cure, then the cure period shall be extended to
the date requested in Borrower’s notice but in no event more than 90 days from
the initial breach; provided, further, that such additional 60-day opportunity
to cure shall not apply in the case of any failure to perform or observe any
covenant which has been the subject of a prior failure within the preceding 180
days or which is a willful and knowing breach by Borrower.

7.2      Remedies Upon Default.  Upon the occurrence and during the continuance
of an Event of Default, Lender shall be entitled to, at its option, exercise any
or all of the rights and remedies available to a secured party under the UCC or
any other applicable law, and exercise any or all of its rights and remedies
provided for in this Agreement and in any other Loan Document.  The obligations
of Borrower under this Agreement shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any Obligations is
rescinded or must otherwise be returned by Lender upon, on account of, or in
connection with, the insolvency, bankruptcy or reorganization of Borrower or
otherwise, all as though such payment had not been made.

7.3      Sale of Collateral.  Upon the occurrence and during the continuance of
an Event of Default, Lender may, subject to the provisions contained in the
Supplement, the UCC and other applicable law, rules or regulations, sell all or
any part of the Collateral, at public or private sales, to itself, a wholesaler,
retailer or investor, for cash, upon credit or for future delivery, and at such
price or prices as Lender may deem commercially reasonable.  To the extent
permitted by law, Borrower hereby specifically waives all rights of redemption
and any rights of stay or appraisal which it has or may have under any
applicable law in effect from time to time.  Any such public or private sales
shall be held at such times and at such place(s) as Lender may determine.  In
case of the sale of all or any part of the Collateral on credit or for future
delivery, the Collateral so sold may be retained by Lender until the selling
price is paid by the purchaser, but Lender shall not incur any liability in case
of the failure of such purchaser to pay for the Collateral and, in case of any
such failure, such Collateral may be resold.  Lender may, instead of exercising
its power of sale, proceed to enforce its security interest in the Collateral by
seeking a judgment or decree of a court of competent jurisdiction.  Without
limiting the generality of the foregoing, if an Event of Default is in effect,

 
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(1)      Subject to the rights of any third parties, Lender may license, or
sublicense, whether general, special or otherwise, and whether on an exclusive
or non-exclusive basis, any Copyrights, Patents or Trademarks included in the
Collateral throughout the world for such term or terms, on such conditions and
in such manner as Lender shall in its sole discretion determine;

(2)      Lender may (without assuming any obligations or liability thereunder),
at any time and from time to time, enforce (and shall have the exclusive right
to enforce) against any licensee or sublicensee all rights and remedies of
Borrower in, to and under any Copyright Licenses, Patent Licenses or Trademark
Licenses and take or refrain from taking any action under any thereof, and
Borrower hereby releases Lender from, and agrees to hold Lender free and
harmless from and against any claims arising out of, any lawful action so taken
or omitted to be taken with respect thereto other than claims arising out of
Lender’s gross negligence or willful misconduct; and

(3)      Upon request by Lender, Borrower will execute and deliver to Lender a
power of attorney, in form and substance reasonably satisfactory to Lender for
the implementation of any lease, assignment, license, sublicense, grant of
option, sale or other disposition of a Copyright, Patent or Trademark.  In the
event of any such disposition pursuant to this clause 3, Borrower shall supply
its know-how and expertise relating to the products or services made or rendered
in connection with Patents, the manufacture and sale of the products bearing
Trademarks, and its customer lists and other records relating to such
Copyrights, Patents or Trademarks and to the distribution of said products, to
Lender.

(4)      If, at any time when Lender shall determine to exercise its right to
sell the whole or any part of the Shares hereunder, such Shares or the part
thereof to be sold shall not be effectively registered under the Securities Act
(or any similar statute), then Lender may, in its discretion (subject only to
applicable requirements of law), sell such Shares or part thereof by private
sale in such manner and under such circumstances as Lender may deem necessary or
advisable, but subject to the other requirements of this Article 7, and shall
not be required to effect such registration or to cause the same to be
effected.  Without limiting the generality of the foregoing, in any such event,
Lender in its discretion may (i) in accordance with applicable securities laws
proceed to make such private sale notwithstanding that a registration statement
for the purpose of registering such Shares or part thereof could be or shall
have been filed under the Securities Act (or similar statute), (ii) approach and
negotiate with a single possible purchaser to effect such sale, and (iii)
restrict such sale to a purchaser who is an accredited investor under the
Securities Act and who will represent and agree that such purchaser is
purchasing for its own account, for investment and not with a view to the
distribution or sale of such Shares or any part thereof.  In addition to a
private sale as provided above in this Article 7, if any of the Shares shall not
be freely distributable to the public without registration under the Securities
Act (or similar statute) at the time of any proposed sale pursuant to this
Article 7, then Lender shall not be required to effect such registration or
cause the same to be effected but, in its discretion (subject only to applicable
requirements of law), may require that any sale hereunder (including a sale at
auction) be conducted subject to restrictions:

(A)          as to the financial sophistication and ability of any Person
permitted to bid or purchase at any such sale;

(B)          as to the content of legends acceptable to Borrower’s counsel to be
placed upon any certificates representing the Shares sold in such sale,
including restrictions on future transfer thereof;

(C)          as to the representations required to be made by each Person
bidding or purchasing at such sale relating to such Person’s access to financial
information about Borrower or any of its Subsidiaries and such Person’s
intentions as to the holding of the Shares so sold for investment for its own
account and not with a view to the distribution thereof; and

 
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(D)          as to such other matters as Lender may, in its discretion, deem
necessary or appropriate in order that such sale (notwithstanding any failure so
to register) may be effected in compliance with the Bankruptcy Code and other
laws affecting the enforcement of creditors’ rights and the Securities Act and
all applicable state securities laws.

(5)      Borrower recognizes that Lender may be unable to effect a public sale
of any or all the Shares and may be compelled to resort to one or more private
sales thereof in accordance with clause (4) above.  Borrower also acknowledges
that any such private sale may result in prices and other terms less favorable
to the seller than if such sale were a public sale and, notwithstanding such
circumstances, agrees that any such private sale shall not be deemed to have
been made in a commercially unreasonable manner solely by virtue of such sale
being private.  Lender shall be under no obligation to delay a sale of any of
the Shares for the period of time necessary to permit the applicable Subsidiary
to register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if Borrower and/or the Subsidiary would
agree to do so.

7.4      Borrower’s Obligations Upon Default.  Upon the request of Lender after
the occurrence and during the continuance of an Event of Default, Borrower will:

(a)      Assemble and make available to Lender the Collateral at such place(s)
as Lender shall reasonably designate, segregating all Collateral so that each
item is capable of identification; and

(b)      Subject to the rights of any lessor, permit Lender, by Lender’s
officers, employees, agents and representatives, to enter any premises where any
Collateral is located, to take possession of the Collateral, to complete the
processing, manufacture or repair of any Collateral, and to remove the
Collateral, or to conduct any public or private sale of the Collateral, all
without any liability of Lender for rent or other compensation for the use of
Borrower’s premises.

ARTICLE 8 - SPECIAL COLLATERAL PROVISIONS

8.1      Compromise and Collection.  Borrower and Lender recognize that setoffs,
counterclaims, defenses and other claims may be asserted by obligors with
respect to certain of the Rights to Payment; that certain of the Rights to
Payment may be or become uncollectible in whole or in part; and that the expense
and probability of success of litigating a disputed Right to Payment may exceed
the amount that reasonably may be expected to be recovered with respect to such
Right to Payment.  Borrower hereby authorizes Lender, after and during the
continuance of an Event of Default, to compromise with the obligor, accept in
full payment of any Right to Payment such amount as Lender shall negotiate with
the obligor, or abandon any Right to Payment.  Any such action by Lender shall
be considered commercially reasonable so long as Lender acts in good faith based
on information known to it at the time it takes any such action.

8.2      Performance of Borrower’s Obligations.  Without having any obligation
to do so, upon reasonable prior notice to Borrower, Lender may perform or pay
any obligation which Borrower has agreed to perform or pay under this Agreement,
including, without limitation, the payment or discharge of taxes or Liens levied
or placed on or threatened against the Collateral.  In so performing or paying,
Lender shall determine the action to be taken and the amount necessary to
discharge such obligations.  Borrower shall reimburse Lender on demand for any
amounts paid by Lender pursuant to this Section, which amounts shall constitute
Obligations secured by the Collateral and shall bear interest from the date of
demand at the Default Rate.

8.3      Power of Attorney.  For the purpose of protecting and preserving the
Collateral and Lender’s rights under this Agreement, Borrower hereby irrevocably
appoints Lender, with full power of substitution, as its attorney-in-fact with
full power and authority, after the occurrence and during the continuance of an
Event of Default, to do any act which Borrower is obligated to do hereunder; to
exercise such rights with respect to the Collateral as Borrower might exercise;
to use such Inventory, Equipment, Fixtures or other property as Borrower might
use; to enter Borrower’s premises; to give notice of Lender’s security interest
in, and to collect the Collateral; and before or after Default, to execute and
file in Borrower’s name any financing statements, amendments and continuation
statements, account control agreements or other Security Documents necessary or
desirable to create, maintain, perfect or continue the perfection of Lender’s
security interests in the Collateral.  Borrower hereby ratifies all that Lender
shall lawfully do or cause to be done by virtue of this appointment.

 
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8.4      Authorization for Lender to Take Certain Action.  The power of attorney
created in Section 8.3 is a power coupled with an interest and shall be
irrevocable.  The powers conferred on Lender hereunder are solely to protect its
interests in the Collateral and shall not impose any duty upon Lender to
exercise such powers.  Lender shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers and in no event
shall Lender or any of its directors, officers, employees, agents or
representatives be responsible to Borrower for any act or failure to act, except
for gross negligence or willful misconduct.  After the occurrence and during the
continuance of an Event of Default, Lender may exercise this power of attorney
without notice to or assent of Borrower, in the name of Borrower, or in Lender’s
own name, from time to time in Lender’s sole discretion and at Borrower’s
expense.  To further carry out the terms of this Agreement, after the occurrence
and during the continuance of an Event of Default, Lender may:

(a)      Execute any statements or documents or take possession of, and endorse
and collect and receive delivery or payment of, any checks, drafts, notes,
acceptances or other instruments and documents constituting Collateral, or
constituting the payment of amounts due and to become due or any performance to
be rendered with respect to the Collateral.

(b)      Sign and endorse any invoices, freight or express bills, bills of
lading, storage or warehouse receipts; drafts, certificates and statements under
any commercial or standby letter of credit relating to Collateral; assignments,
verifications and notices in connection with Accounts; or any other documents
relating to the Collateral, including without limitation the Records.

(c)      Use or operate Collateral or any other property of Borrower for the
purpose of preserving or liquidating Collateral.

(d)      File any claim or take any other action or proceeding in any court of
law or equity or as otherwise deemed appropriate by Lender for the purpose of
collecting any and all monies due or securing any performance to be rendered
with respect to the Collateral.

(e)      Commence, prosecute or defend any suits, actions or proceedings or as
otherwise deemed appropriate by Lender for the purpose of protecting or
collecting the Collateral.  In furtherance of this right, upon the occurrence
and during the continuance of an Event of Default, Lender may apply for the
appointment of a receiver or similar official to operate Borrower’s business.

(f)      Prepare, adjust, execute, deliver and receive payment under insurance
claims, and collect and receive payment of and endorse any instrument in payment
of loss or returned premiums or any other insurance refund or return, and apply
such amounts at Lender’s sole discretion, toward repayment of the Obligations or
replacement of the Collateral.

8.5      Application of Proceeds.  Any Proceeds and other monies or property
received by Lender pursuant to the terms of this Agreement or any Loan Document
may be applied by Lender first to the payment of expenses of collection,
including without limitation reasonable attorneys’ fees, and then to the payment
of the Obligations in such order of application as Lender may elect.

8.6      Deficiency.  If the Proceeds of any disposition of the Collateral are
insufficient to cover all costs and expenses of such sale and the payment in
full of all the Obligations, plus all other sums required to be expended or
distributed by Lender, then Borrower shall be liable for any such deficiency.

8.7      Lender Transfer.  Upon the transfer of all or any part of the
Obligations, Lender may transfer all or part of the Collateral and shall be
fully discharged thereafter from all liability and responsibility with respect
to such Collateral so transferred, and the transferee shall be vested with all
the rights and powers of Lender hereunder with respect to such Collateral so
transferred, but with respect to any Collateral not so transferred, Lender shall
retain all rights and powers hereby given.

 
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8.8      Lender’s Duties.

(a)      Lender shall use reasonable care in the custody and preservation of any
Collateral in its possession.  Without limitation on other conduct which may be
considered the exercise of reasonable care, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of such Collateral if
such Collateral is accorded treatment substantially equal to that which Lender
accords its own property, it being understood that Lender shall not have any
responsibility for ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, declining value, tenders or other matters
relative to any Collateral, regardless of whether Lender has or is deemed to
have knowledge of such matters; or taking any necessary steps to preserve any
rights against any Person with respect to any Collateral.  Under no
circumstances shall Lender be responsible for any injury or loss to the
Collateral, or any part thereof, arising from any cause beyond the reasonable
control of Lender.

(b)      Lender may at any time deliver the Collateral or any part thereof to
Borrower and the receipt of Borrower shall be a complete and full acquittance
for the Collateral so delivered, and Lender shall thereafter be discharged from
any liability or responsibility therefor.

(c)      Neither Lender, nor any of its directors, officers, employees, agents,
attorneys or any other person affiliated with or representing Lender shall be
liable for any claims, demands, losses or damages, of any kind whatsoever, made,
claimed, incurred or suffered by Borrower or any other party through the
ordinary negligence of Lender, or any of its directors, officers, employees,
agents, attorneys or any other person affiliated with or representing Lender.

8.9      Termination of Security Interests.   Upon the payment in full of the
Obligations and satisfaction of all Borrower’s obligations under this Agreement
and the other Loan Documents, and if Lender has no further obligations under its
Commitment, the security interest granted hereby shall terminate and all rights
to the Collateral shall revert to Borrower.  Upon any such termination, the
Lender shall, at Borrower’s expense, execute and deliver to Borrower such
documents as Borrower shall reasonably request to evidence such termination.

ARTICLE 9 - GENERAL PROVISIONS

9.1      Notices.  Any notice given by any party under any Loan Document shall
be in writing and personally delivered, sent by overnight courier, or United
States mail, postage prepaid, or sent by facsimile, or other authenticated
messenger, charges prepaid, to the other party’s or parties’ addresses shown on
the Supplement. Each party may change the address or facsimile number to which
notices, requests and other communications are to be sent by giving written
notice of such change to each other party.  Notice given by hand delivery shall
be deemed received on the date delivered; if sent by overnight courier, on the
next Business Day after delivery to the courier service; if by first class mail,
on the third Business Day after deposit in the U.S. Mail; and if by facsimile,
on the date of transmission.

9.2      Binding Effect.  The Loan Documents shall be binding upon and inure to
the benefit of Borrower and Lender and their respective successors and assigns;
provided, however, that Borrower may not assign or transfer Borrower’s rights or
obligations under any Loan Document.  Lender reserves the right to sell, assign,
transfer, negotiate or grant participations in all or any part of, or any
interest in, Lender’s rights and obligations under the Loan Documents.  In
connection with any of the foregoing, Lender may disclose all documents and
information which Lender now or hereafter may have relating to the Loans,
Borrower, or its business; provided that any person who receives such
information shall have agreed in writing in advance to maintain the
confidentiality of such information on terms reasonably acceptable to Borrower.

9.3      No Waiver.  Any waiver, consent or approval by Lender of any Event of
Default or breach of any provision, condition, or covenant of any Loan Document
must be in writing and shall be effective only to the extent set forth in
writing.  No waiver of any breach or default shall be deemed a waiver of any
later breach or default of the same or any other provision of any Loan
Document.  No failure or delay on the part of Lender in exercising any power,
right, or privilege under any Loan Document shall operate as a waiver thereof,
and no single or partial exercise of any such power, right, or privilege shall
preclude any further exercise thereof or the exercise of any other power, right
or privilege.  Lender has the right at its sole option to continue to accept
interest and/or principal payments due under the Loan Documents after default,
and such acceptance shall not constitute a waiver of said default or an
extension of the Maturity Date unless Lender agrees otherwise in writing.

 
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9.4      Rights Cumulative.  All rights and remedies existing under the Loan
Documents are cumulative to, and not exclusive of, any other rights or remedies
available under contract or applicable law.

9.5      Unenforceable Provisions.  Any provision of any Loan Document executed
by Borrower which is prohibited or unenforceable in any jurisdiction, shall be
so only as to such jurisdiction and only to the extent of such prohibition or
unenforceability, but all the remaining provisions of any such Loan Document
shall remain valid and enforceable.

9.6      Accounting Terms.  Except as otherwise provided in this Agreement,
accounting terms and financial covenants and information shall be determined and
prepared in accordance with GAAP.

9.7      Indemnification; Exculpation.  Borrower shall pay and protect, defend
and indemnify Lender and Lender’s employees, officers, directors, shareholders,
affiliates, correspondents, agents and representatives (other than Lender,
collectively “Agents”) against, and hold Lender and each such Agent harmless
from, all claims, actions, proceedings, liabilities, damages, losses, expenses
(including, without limitation, attorneys’ fees and costs) and other amounts
incurred by Lender and each such Agent, arising from (i) the matters
contemplated by this Agreement or any other Loan Documents, (ii) any dispute
between Borrower and a third party,  or (iii) any contention that Borrower has
failed to comply with any law, rule, regulation, order or directive applicable
to Borrower’s business; provided, however, that this indemnification shall not
apply to any of the foregoing incurred solely as the result of Lender’s or any
Agent’s gross negligence or willful misconduct.  This indemnification shall
survive the payment and satisfaction of all of Borrower’s Obligations to Lender.

9.8      Reimbursement.  Borrower shall reimburse Lender for all actual costs
and expenses, including without limitation reasonable attorneys’ fees and
disbursements expended or incurred by Lender in any arbitration, mediation,
judicial reference, legal action or otherwise in connection with (a) the
preparation and negotiation of the Loan Documents, subject to the cap
established in the Supplement, (b) the amendment and enforcement of the Loan
Documents, including without limitation during any workout, attempted workout,
and/or in connection with the rendering of legal advice as to Lender’s rights,
remedies and obligations under the Loan Documents, (c) collecting any sum which
becomes due Lender under any Loan Document, (d) any proceeding for declaratory
relief, any counterclaim to any proceeding, or any appeal, or (e) the
protection, preservation or enforcement of any rights of Lender.  For the
purposes of this section, attorneys’ fees shall include, without limitation,
fees incurred in connection with the following:  (1) contempt proceedings; (2)
discovery; (3) any motion, proceeding or other activity of any kind in
connection with an Insolvency Proceeding; (4) garnishment, levy, and debtor and
third party examinations; and (5)  postjudgment motions and proceedings of any
kind, including without limitation any activity taken to collect or enforce any
judgment.  All of the foregoing costs and expenses shall be payable upon demand
by Lender, and if not paid within forty-five (45) days of presentation of
invoices shall bear interest at the Default Rate.

9.9      Execution in Counterparts.  This Agreement may be executed in any
number of counterparts which, when taken together, shall constitute but one
agreement.

9.10    Entire Agreement.  The Loan Documents are intended by the parties as the
final expression of their agreement and therefore contain the entire agreement
between the parties and supersede all prior understandings or agreements
concerning the subject matter hereof.  This Agreement may be amended only in a
writing signed by Borrower and Lender.

9.11    Governing Law and Jurisdiction.

(a)      THIS AGREEMENT AND THE LOAN DOCUMENTS SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.

 
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(b)      ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR
OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, EACH OF BORROWER AND LENDER CONSENTS, FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE
COURTS. EACH OF BORROWER AND LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING
ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR
PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT
RELATED HERETO.  BORROWER AND LENDER EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS,
COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY
CALIFORNIA LAW.

9.12     Waiver of Jury Trial.  TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW,
BORROWER AND LENDER EACH WAIVES ITS RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS
AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY
ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY PARTICIPANT OR ASSIGNEE,
WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.  BORROWER
AND LENDER EACH AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY
A COURT TRIAL WITHOUT A JURY.  WITHOUT LIMITING THE FOREGOING, THE PARTIES
FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY
OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEMS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR
THEREOF.  THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

ARTICLE 10 - DEFINITIONS

The definitions appearing in this Agreement or any Supplement shall be
applicable to both the singular and plural forms of the defined terms:

“Account” means any “account,” as such term is defined in the UCC, now owned or
hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest and, in any event, shall include, without limitation, all
accounts receivable, book debts and other forms of obligations (other than forms
of obligations evidenced by Chattel Paper, Documents or Instruments) now owned
or hereafter received or acquired by or belonging or owing to Borrower
(including, without limitation, under any trade name, style or division thereof)
whether arising out of goods sold or services rendered by Borrower or from any
other transaction, whether or not the same involves the sale of goods or
services by Borrower (including, without limitation, any such obligation that
may be characterized as an account or contract right under the UCC) and all of
Borrower’s rights in, to and under all purchase orders or receipts now owned or
hereafter acquired by it for goods or services, and all of Borrower’s rights to
any goods represented by any of the foregoing (including, without limitation,
unpaid seller’s rights of rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods), and all monies
due or to become due to Borrower under all purchase orders and contracts for the
sale of goods or the performance of services or both by Borrower or in
connection with any other transaction (whether or not yet earned by performance
on the part of Borrower), now in existence or hereafter occurring, including,
without limitation, the right to receive the proceeds of said purchase orders
and contracts, and all collateral security and guarantees of any kind given by
any Person with respect to any of the foregoing.

“Affiliate” means any Person which directly or indirectly controls, is
controlled by, or is under common control with Borrower.  “Control,” “controlled
by” and “under common control with” mean direct or indirect possession of the
power to direct or cause the direction of management or policies (whether
through ownership of voting securities, by contract or otherwise); provided,
that control shall be conclusively presumed when any Person or affiliated group
directly or indirectly owns five percent (5%) or more of the securities having
ordinary voting power for the election of directors of a corporation.

 
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“Agreement” means this Loan and Security Agreement and each Supplement thereto,
as each may be amended or supplemented from time to time.

“Bankruptcy Code” means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C.
§101, et seq.), as amended.

“Basic Interest” means the fixed rate of interest payable on the outstanding
balance of each Loan at the applicable Designated Rate.

“Borrowing Date” means the Business Day on which the proceeds of a Loan are
disbursed by Lender.

“Borrowing Request” means a written request from Borrower in substantially the
form of Exhibit “B” to the Supplement, requesting the funding of one or more
Loans on a particular Borrowing Date.

“Business Day” means any day other than a Saturday, Sunday or other day on which
commercial banks in New York City or San Francisco are authorized or required by
law to close.

“Chattel Paper” means any “chattel paper,” as such term is defined in the UCC,
now owned or hereafter acquired by Borrower or in which Borrower now holds or
hereafter acquires any interest.

“Closing Date” means the date of this Agreement.

“Collateral” means all of Borrower’s right, title and interest in and to the
following property, whether now owned or hereafter acquired and wherever
located: (a) all Receivables; (b) all Equipment; (c) all Fixtures; (d) all
General Intangibles; (e) all Inventory; (f) all Investment Property; (g) all
Deposit Accounts; (h) all Shares; (i) all other Goods and personal property of
Borrower, whether tangible or intangible and whether now or hereafter owned or
existing, leased, consigned by or to, or acquired by, Borrower and wherever
located; (j) all Records; and (k) all Proceeds of each of the foregoing and all
accessions to, substitutions and replacements for, and rents, profits and
products of each of the foregoing.  Notwithstanding the foregoing the term
“Collateral” shall not include any of the following items: (i)  exclusive
distribution rights to liquid solutions based on Borrower’s Microcyn Technology,
specifically including Vetericyn Wound Care Spray, within the animal health
markets solely for use in the treatment of all types of animals (non-humans)
within the United States of America, Canada, Puerto Rico, the People’s Republic
of China, Hong Kong, Taiwan, Japan, Korea, Singapore and Mexico, pursuant to the
Revenue Sharing, Partnership, and Distribution Agreement between Borrower and
Vetericyn, Inc. (formerly VetCure, Inc.), dated January 26, 2009, as amended and
restated by Amendment No. 1 dated February 24, 2009, amended by Amendment No. 2
dated July 24, 2009, and amended by Amendment No. 3 dated June 1, 2010 and as
such may be subsequently amended; (ii) non-exclusive right to market Borrower’s
Microcyn over-the-counter liquid and hydrogel products, pursuant to the Revenue
Sharing Distribution Agreement between Borrower and Innovacyn, Inc. (formerly
V&M Industries), dated September 2009, as amended by Amendment No. 1 to Exhibit
A dated June 1, 2010 and as such may be subsequently amended; (iii) exclusive
distribution rights to liquid solutions based on Borrower’s Microcyn Technology
within advanced human wound care for humans in hospital, pharmacy and clinic
markets within the People’s Republic of China pursuant to the Distribution
Agreement between Borrower and Tianjian Ascent Import and Export Company, Ltd,
dated January 28, 2011 and as such may be subsequently amended; (iv) exclusive
sales, marketing, and distribution agent for certain of Borrower’s liquid and
gel products in the prescription dermatology market in the United States, its
territories and possessions, and Canada, pursuant to the Exclusive Sales and
Distribution Agreement between Borrower and Quinnova Pharmaceuticals, Inc.,
dated February 14, 2011 and as such may be subsequently amended; (v) exclusive
right to promote certain of Borrower’s liquid and gel prescription products
designed for chronic wound care under Borrower’s trademark in the field of
podiatry in the continental United States, its territories, and Canada pursuant
to the Exclusive Co-Promotion Agreement between Borrower and Quinnova
Pharmaceuticals, Inc., dated February 14, 2011 and as such may be subsequently
amended; and (vi) exclusive sales, distribution, and marketing rights for
Borrower’s Microcyn-based acne drug candidate pursuant to the Product Option
Agreement between the Borrower and AmDerma Pharmaceuticals, LLC, dated February
14, 2011 and as such may be subsequently amended.

 
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“Commitment” means the obligation of Lender to make Loans to Borrower up to the
aggregate principal amount set forth in the Supplement.

“Copyright License” means any written agreement granting any right to use any
Copyright or Copyright registration now owned or hereafter acquired by Borrower
or in which Borrower now holds or hereafter acquires any interest.

“Copyrights” means all of the following now owned or hereafter acquired by
Borrower or in which Borrower now holds or hereafter acquires any interest:  (i)
all copyrights, whether registered or unregistered, held pursuant to the laws of
the United States, any State thereof or of any other country; (ii) all
registrations, applications and recordings in the United States Copyright Office
or in any similar office or agency of the United States, any State thereof or
any other country; (iii) all continuations, renewals or extensions thereof; and
(iv) any registrations to be issued under any pending applications.

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

“Default Rate” means eighteen percent (18%) per annum.

“Deposit Accounts” means any “deposit accounts,” as such term is defined in the
UCC, now owned or hereafter acquired by Borrower or in which Borrower now holds
or hereafter acquires any interest.

“Designated Rate” means the rate of interest per annum described in the
Supplement as being applicable to an outstanding Loan from time to time.

“Documents” means any “documents,” as such term is defined in the UCC, now owned
or hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest.

“Environmental Laws” means all federal, state or local laws, statutes, common
law duties, rules, regulations, ordinances and codes, together with all
administrative orders, directed duties, requests, licenses, authorizations and
permits of, and agreements with, any governmental authorities, in each case
relating to environmental, health, or safety matters.

“Equipment” means any “equipment,” as such term is defined in the UCC, now owned
or hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest and any and all additions, substitutions and replacements
of any of the foregoing, wherever located, together with all attachments,
components, parts, equipment and accessories installed thereon or affixed
thereto.

“Event of Default” means any event described in Section 7.1.

“Final Payment” means, with respect to a Loan, an amount payable on the Maturity
Date of such Loan in an amount equal to that percentage of the original
principal amount of such Loan specified in the Supplement.

“Fixtures” means any “fixtures,” as such term is defined in the UCC, now owned
or hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest.

“GAAP” means generally accepted accounting principles and practices consistent
with those principles and practices promulgated or adopted by the Financial
Accounting Standards Board and the Board of the American Institute of Certified
Public Accountants, their respective predecessors and successors.  Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP.  Each accounting term used but not otherwise
expressly defined herein shall have the meaning given it by GAAP.

 
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“General Intangibles” means any “general intangibles,” as such term is defined
in the UCC, now owned or hereafter acquired by Borrower or in which Borrower now
holds or hereafter acquires any interest and, in any event, shall include,
without limitation, all right, title and interest that Borrower may now or
hereafter have in or under any contract, all customer lists, Copyrights,
Trademarks, Patents, websites, domain names, and all applications therefor and
reissues, extensions, or renewals thereof, other rights to Intellectual
Property, interests in partnerships, joint ventures and other business
associations, Licenses, permits, trade secrets, proprietary or confidential
information, inventions (whether or not patented or patentable), technical
information, procedures, designs, knowledge, know-how, software, data bases,
data, skill, expertise, recipes, experience, processes, models, drawings,
materials and records, goodwill (including, without limitation, the goodwill
associated with any Trademark, Trademark registration or Trademark licensed
under any Trademark License), claims in or under insurance policies, including
unearned premiums, uncertificated securities, money, cash or cash equivalents,
deposit, checking and other bank accounts, rights to sue for past, present and
future infringement of Copyrights, Trademarks and Patents, rights to receive tax
refunds and other payments and rights of indemnification.

“Goods” means any “goods,” as such term is defined in the UCC, now owned or
hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest.

“Indebtedness” of any Person means at any date, without duplication and without
regard to whether matured or unmatured, absolute or contingent:  (i) all
obligations of such Person for borrowed money; (ii) all obligations of such
Person evidenced by bonds, debentures, notes, or other similar instruments;
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business; (iv) all obligations of such Person as lessee under capital
leases; (v) all obligations of such Person to reimburse or prepay any bank or
other Person in respect of amounts paid under a letter of credit, banker’s
acceptance, or similar instrument, whether drawn or undrawn; (vi) all
obligations of such Person to purchase securities which arise out of or in
connection with the sale of the same or substantially similar securities; (vii)
all obligations of such Person to purchase, redeem, exchange, convert or
otherwise acquire for value any capital stock of such Person or any warrants,
rights or options to acquire such capital stock, now or hereafter outstanding,
except to the extent that such obligations remain performable solely at the
option of such Person; (viii) all obligations to repurchase assets previously
sold (including any obligation to repurchase any accounts or chattel paper under
any factoring, receivables purchase, or similar arrangement); (ix) obligations
of such Person under interest rate swap, cap, collar or similar hedging
arrangements; and (x) all obligations of others of any type described in clause
(i) through clause (ix) above guaranteed by such Person.

“Insolvency Proceeding” means (a) any case, action or proceeding before any
court or other governmental authority relating to bankruptcy, reorganization,
insolvency, liquidation, receivership, dissolution, winding-up or relief of
debtors, or (b) any general assignment for the benefit of creditors,
composition, marshalling of assets for creditors, or other, similar arrangement
in respect of its creditors generally or any substantial portion of its
creditors, undertaken under U.S. Federal, state or foreign law, including the
Bankruptcy Code.

“Instruments” means any “instrument,” as such term is defined in the UCC, now
owned or hereafter acquired by Borrower or in which Borrower now holds or
hereafter acquires any interest.

“Intellectual Property” means all Copyrights, Trademarks, Patents, Licenses,
trade secrets, source codes, customer lists, proprietary or confidential
information, inventions (whether or not patented or patentable), technical
information, procedures, designs, knowledge, know-how, software, data bases,
skill, expertise, experience, processes, models, drawings, materials, records
and goodwill associated with the foregoing.

“Intellectual Property Security Agreement” means any Intellectual Property
Security Agreement executed and delivered by Borrower in favor of Lender, as the
same may be amended, supplemented, or restated from time to time.

“Inventory” means any “inventory,” as such term is defined in the UCC, wherever
located, now owned or hereafter acquired by Borrower or in which Borrower now
holds or hereafter acquires any interest, and, in any event, shall include,
without limitation, all inventory, goods and other personal property that are
held by or on behalf of Borrower for sale or lease or are furnished or are to be
furnished under a contract of service or that constitute raw materials, work in
process or materials used or consumed or to be used or consumed in Borrower’s
business, or the processing, packaging, promotion, delivery or shipping of the
same, and all finished goods, whether or not the same is in transit or in the
constructive, actual or exclusive possession of Borrower or is held by others
for Borrower’s account, including, without limitation, all goods covered by
purchase orders and contracts with suppliers and all goods billed and held by
suppliers and all such property that may be in the possession or custody of any
carriers, forwarding agents, truckers, warehousemen, vendors, selling agents or
other Persons.

 
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“Investment Property” means any “investment property,” as such term is defined
in the UCC, now owned or hereafter acquired by Borrower or in which Borrower now
holds or hereafter acquires any interest.

“Letter of Credit Rights” means any “letter of credit rights,” as such term is
defined in the UCC, now owned or hereafter acquired by Borrower or in which
Borrower now holds or hereafter acquires any interest, including any right to
payment under any letter of credit.

“License” means any Copyright License, Patent License, Trademark License or
other license of rights or interests now held or hereafter acquired by Borrower
or in which Borrower now holds or hereafter acquires any interest and any
renewals or extensions thereof.

“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment for
security, security interest, encumbrance, levy, lien or charge of any kind,
whether voluntarily incurred or arising by operation of law or otherwise,
against any property, any conditional sale or other title retention agreement,
any lease in the nature of a security interest, and the filing of any financing
statement (other than a precautionary financing statement with respect to a
lease that is not in the nature of a security interest) under the UCC or
comparable law of any jurisdiction.

“Loan” means an extension of credit by Lender under this Agreement.

“Loan Documents” means, individually and collectively, this Loan and Security
Agreement, each Supplement, each Note, the Intellectual Property Security
Agreement, and any other security or pledge agreement(s), any Warrants issued by
Borrower to Lender (or its designee) in connection with this Agreement, and all
other contracts, instruments, addenda and documents executed in connection with
this Agreement or the extensions of credit which are the subject of this
Agreement.

“Material Adverse Effect” or “Material Adverse Change” means (a) a material
adverse change in, or a material adverse effect upon, the operations, business,
properties, or condition (financial or otherwise) of Borrower; (b) a material
impairment of the ability of Borrower to perform under any Loan Document; or (c)
a material adverse effect upon the legality, validity, binding effect or
enforceability against Borrower of any Loan Document.

“Maturity Date” means, with regard to a Loan, the earlier of (i) its maturity by
reason of acceleration, or (ii) its stated maturity date; and is the date on
which payment of all outstanding principal, accrued interest, and the Final
Payment with respect to such Loan is due.
 
“Note” means a promissory note substantially in the form attached to the
Supplement as Exhibit “A”, executed by Borrower evidencing each Loan.

“Obligations” means all debts, obligations and liabilities of Borrower to Lender
currently existing or now or hereafter made, incurred or created under, pursuant
to or in connection with this Agreement or any other Loan Document, whether
voluntary or involuntary and however arising or evidenced, whether direct or
acquired by Lender by assignment or succession, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, and
whether Borrower may be liable individually or jointly, or whether recovery upon
such debt may be or become barred by any statute of limitations or otherwise
unenforceable; and all renewals, extensions and modifications thereof; and all
attorneys’ fees and costs incurred by Lender in connection with the collection
and enforcement thereof as provided for in any Loan Document.

“Patent License” means any written agreement granting any right with respect to
any invention on which a Patent is in existence now owned or hereafter acquired
by Borrower or in which Borrower now holds or hereafter acquires any interest.

 
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“Patents” means all of the following property now owned or hereafter acquired by
Borrower or in which Borrower now holds or hereafter acquires any interest: (a)
all letters patent of, or rights corresponding thereto in, the United States or
any other country, all registrations and recordings thereof, and all
applications for letters patent of, or rights corresponding thereto in, the
United States or any other country, including, without limitation,
registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country; (b) all reissues, continuations,
continuations-in-part or extensions thereof; (c) all petty patents, divisionals,
and patents of addition; and (d) all patents to be issued under any such
applications.

“Permitted Lien” means

(a)      Involuntary Liens which, in the aggregate, would not have a Material
Adverse Effect and which in any event would not exceed, in the aggregate, the
Threshold Amount;

(b)      Liens for current taxes or other governmental or regulatory assessments
which are not delinquent, or which are contested in good faith by the
appropriate procedures and for which appropriate reserves are maintained;

(c)      security interests on any property held or acquired by Borrower in the
ordinary course of business securing Indebtedness incurred or assumed for the
purpose of financing all or any part of the cost of acquiring such property;
provided, that such Lien attaches solely to the property acquired with such
Indebtedness and that the principal amount of such Indebtedness does not exceed
one hundred percent (100%) of the cost of such property;

(d)      Liens in favor of Lender;

(e)      bankers’ liens, rights of setoff and similar Liens incurred on deposits
made in the ordinary course of business;

(f)       materialmen’s, mechanics’, repairmen’s, employees’ or other like Liens
arising in the ordinary course of business and which are not delinquent for more
than 45 days or are being contested in good faith by appropriate proceedings;

(g)     any judgment, attachment or similar Lien, unless the judgment it secures
has not been discharged or execution thereof effectively stayed and bonded
against pending appeal within 30 days of the entry thereof;

(h)     licenses or sublicenses of Intellectual Property  in accordance with the
terms of Section 6.5 hereof;

(i)      Liens securing Subordinated Debt;

(j)      Liens which have been approved by Lender in writing prior to the
Closing Date, as shown on the Schedule of Exceptions hereto; and

(k)     Liens securing Indebtedness outstanding under the VLL5 Loan Agreement.

“Person” means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, limited liability
company, institution, public benefit corporation, other entity or government
(whether federal, state, county, city, municipal, local, foreign, or otherwise,
including any instrumentality, division, agency, body or department thereof).

“Proceeds” means “proceeds,” as such term is defined in the UCC and, in any
event, shall include, without limitation, (a) any and all Accounts, Chattel
Paper, Instruments, cash or other forms of money or currency or other proceeds
payable to Borrower from time to time in respect of the Collateral, (b) any and
all proceeds of any insurance, indemnity, warranty or guaranty payable to
Borrower from time to time with respect to any of the Collateral, (c) any and
all payments (in any form whatsoever) made or due and payable to Borrower from
time to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral by any governmental
authority (or any Person acting under color of governmental authority), (d) any
claim of Borrower against third parties (i) for past, present or future
infringement of any Copyright, Patent or Patent License or (ii) for past,
present or future infringement or dilution of any Trademark or Trademark License
or for injury to the goodwill associated with any Trademark, Trademark
registration or Trademark licensed under any Trademark License and (e) any and
all other amounts from time to time paid or payable under or in connection with
any of the Collateral.

 
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“Receivables” means all of Borrower’s Accounts, Instruments, Documents, Chattel
Paper, Supporting Obligations, and letters of credit and Letter of Credit
Rights.

“Records” means all Borrower’s computer programs, software, hardware, source
codes and data processing information, all written documents, books, invoices,
ledger sheets, financial information and statements, and all other writings
concerning Borrower’s business.

“Related Person” means any Affiliate of Borrower, or any officer, employee,
director or equity security holder of Borrower or any Affiliate.

“Rights to Payment” means all Borrower’s accounts, instruments, contract rights,
documents, chattel paper and all other rights to payment, including, without
limitation, the Accounts, all negotiable certificates of deposit and all rights
to payment under any Patent License, any Trademark License, or any commercial or
standby letter of credit.

“Security Documents” means this Loan and Security Agreement, the Supplement
hereto, the Intellectual Property Security Agreement, and any and all account
control agreements, collateral assignments, chattel mortgages, financing
statements, amendments to any of the foregoing and other documents from time to
time executed or filed to create, perfect or maintain the perfection of Lender’s
Liens on the Collateral.

“Shares” means: (a) one hundred percent (100%) of the issued and outstanding
capital stock, membership units or other securities owned or held of record by
Borrower in any domestic Subsidiary, and (b) 65% of the issued and outstanding
capital stock, membership units or other securities entitled to vote owned or
held of record by Borrower in any Subsidiary that is a controlled foreign
corporation (as defined in the Internal Revenue Code).

“Subordinated Debt” means Indebtedness (i) approved by Lender; and (ii) where
the holder’s right to payment of such Indebtedness, the priority of any Lien
securing the same, and the rights of the holder thereof to enforce remedies
against Borrower following default have been made subordinate to the Liens of
Lender and to the prior payment to Lender of the Obligations, pursuant to a
written subordination agreement approved by Lender in its sole but reasonable
discretion.

“Subsidiary” means any Person a majority of the equity ownership or voting stock
of which is at the time owned by Borrower.

“Supplement” means that certain supplement to the Loan and Security Agreement,
as the same may be amended or restated from time to time, and any other
supplements entered into between Borrower and Lender, as the same may be amended
or restated from time to time.

“Supporting Obligations” means any “supporting obligations,” as such term is
defined in the UCC, now owned or hereafter acquired by Borrower or in which
Borrower now holds or hereafter acquires any interest.

“Termination Date” has the meaning specified in the Supplement.

“Threshold Amount” has the meaning specified in the Supplement.

“Trademark License” means any written agreement granting any right to use any
Trademark or Trademark registration now owned or hereafter acquired by Borrower
or in which Borrower now holds or hereafter acquires any interest.

“Trademarks” means all of the following property now owned or hereafter acquired
by Borrower or in which Borrower now holds or hereafter acquires any interest:
(a) all trademarks, tradenames, corporate names, business names, trade styles,
service marks, logos, other source or business identifiers, prints and labels on
which any of the foregoing have appeared or appear, designs and general
intangibles of like nature, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and any applications in connection
therewith, including, without limitation, registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof or any other country or
any political subdivision thereof and (b) reissues, extensions or renewals
thereof.

 
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“UCC” means the Uniform Commercial Code as the same may, from time to time, be
in effect in the State of California; provided, that in the event that, by
reason of mandatory provisions of law, any or all of the attachment, perfection
or priority of, or remedies with respect to, Lender’s Lien on any Collateral is
governed by the Uniform Commercial Code as enacted and in effect in a
jurisdiction other than the State of California, the term “UCC” shall mean the
Uniform Commercial Code as enacted and in effect in such other jurisdiction
solely for purposes of the provisions thereof relating to such attachment,
perfection, priority or remedies and for purposes of definitions related to such
provisions.  Unless otherwise defined herein, terms that are defined in the UCC
and used herein shall have the meanings given to them in the UCC.

“VLL5” means Venture Lending & Leasing V, Inc., a Maryland corporation, together
with its successors and assigns.

“VLL5 Loan Agreement” means that certain Loan and Security Agreement and
Supplement thereto, both dated as of May 1, 2010, between Borrower and VLL5,
together with all of the “Loan Documents” (as such term is defined therein), as
the same have been and may be amended, supplemented, restated or modified from
time to time and any refinancings thereof.

[Signature page follows]

 
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[Signature page to Loan and Security Agreement]

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

BORROWER:

OCULUS INNOVATIVE SCIENCES, INC.

By:
/s/ Robert E. Miller
 
Name: 
Robert E. Miller
 
Title:
CFO
 

LENDER:

VENTURE LENDING & LEASING VI, INC.

By:
/s/ David Wanek
 
Name: 
David Wanek
 
Title:
Vice President
 

[Schedules to Loan and Security Agreement follow]

 
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Schedules to Loan and Security Agreement
dated as of June 29, 2011
between
Oculus Innovative Sciences, Inc.
and
Venture Lending & Leasing VI, Inc.
 

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Schedule 3.5 Litigation, Claims or Proceedings

Borrower may, on occasion, be involved in legal matters arising in the ordinary
course of its business.  Borrower further believes that such matters will not
result in a Material Adverse Event.

Schedule 3.7 Subsidiaries

Borrower is in a control relationship with the following subsidiaries:
Aquamed Technologies, Petaluma, CA
MicroMed Laboratories, Inc., Petaluma, CA
L3 Pharmaceuticals, Inc., Petaluma, CA
Oculus Technologies of Mexico, S.A. de C.V.
Oculus Innovative Sciences Netherlands, B.V.

Schedule 3.11(d) Business Names

Borrower has a commercial agreement with Innovacyn, Inc., a corporation
wholly-owned by Borrower’s former director.  Innovacyn, Inc. bottles, packages,
and sells Borrower’s product under the brand name Vetericyn.  Borrower also
conducts business under the name, Micromed Laboratories.

Schedule 5.9(e) Equipment

The following equipment valued at over $75,000 is all located in Petaluma,
California.

Vendor
 
Description
 
Acq. date
 
Acq. Cost ($)
 
Filamatic
     
9/08 - 12/08
    176,234  
Filling line II
 
Pont Filling
 
Jul-09
    147,134  
Financed
 
Company Automobile
 
Aug-09
    100,147  
Various
 
Portable Cleanroom
 
Jun-07
    81,270                 504,785  

Schedule 6.1. Permitted Indebtedness

* none *

Schedule 6.2. Permitted Liens

* none *

 
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