Exhibit 10.2

 

AMENDMENT NO. 3

TO

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

 

THIS AMENDMENT NO. 3 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this
“Amendment”) is dated as of September 30, 2016 (the “Third Amendment Date”) and
is entered into by and among ACELRX PHARMACEUTICALS, INC., a Delaware
corporation, and each of its subsidiaries (hereinafter collectively referred to
as the “Borrower”), HERCULES TECHNOLOGY II, L.P., a Delaware limited
partnership, and HERCULES CAPITAL FUNDING TRUST 2014-1, a statutory trust
created under the laws of Delaware (collectively, “Lender”). Capitalized terms
used herein without definition shall have the same meanings given them in the
Loan Agreement (as defined below).

  

 

RECITALS

 

A.            Borrower and Lender have entered into that certain Amended and
Restated Loan and Security Agreement dated as of December 16, 2013 and amended
as of September 24, 2014 and as of September 18, 2015 (as may be further
amended, restated, or otherwise modified, the “Loan Agreement”), pursuant to
which Lender has agreed to extend and make available to Borrower certain
advances of money.

 

B.            Borrower and Lender have agreed to amend the Loan Agreement upon
the terms and conditions more fully set forth herein.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing Recitals and intending to be
legally bound, the parties hereto agree as follows:

 

1.             DEFINITIONS.     

 

Unless otherwise defined herein, the following capitalized terms shall have the
following meanings:

 

“Third Amendment Facility Fee” means $204,663.25, which non-renewable fee is due
to Collateral Agent on or prior to the Third Amendment Date, and shall be deemed
fully earned on such date regardless of the early termination of the Loan
Agreement.

 

“2016 Warrant Amendments” means those certain amendments to the Warrants being
made concurrently with this Amendment.

 

2.             AMENDMENTS.

 

2.1          Section 1.1 Definitions.

 

(a)     New Definitions. The following definitions are hereby inserted
alphabetically into Section 1.1 of the Loan Agreement:

 

“ARX-04 NDA” means the new drug application filed by the Borrower with the FDA
for product ARX-04.

 

“Third Amendment” means that certain Amendment No.3 to the Amended and Restated
Loan and Security Agreement.

 

 
 

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(b)     Amended Definitions. The following definitions in Section 1.1 of the
Loan Agreement are hereby amended and restated in their entirety as follows:

 

“Amortization Date” means April 1, 2017.

 

“Warrant Amendments” means all amendments made to the Warrants, including
without limitation, those certain amendments to the Warrants being made
concurrently with the Third Amendment.

 

2.2         Section 2.2(d). Section 2.2(d) is hereby amended and restated in its
entirety as follows:

 

2.2(d)     Payment. Borrower will pay interest on each Term Loan Advance on the
first day of each month, beginning the month after the Advance Date. Borrower
shall repay the aggregate Term Loan principal balance that is outstanding on the
day immediately preceding the Amortization Date, in equal monthly installments
of principal and interest (mortgage style) over a 13-month amortization schedule
beginning on the Amortization Date and continuing on the first business day of
each month thereafter until the Secured Obligations (other than inchoate
indemnity obligations) are repaid. A balloon payment consisting of the entire
Term Loan principal balance and all accrued but unpaid interest hereunder, shall
be due and payable on the Term Loan Maturity Date. Borrower shall make all
payments under this Agreement without setoff, recoupment or deduction and
regardless of any counterclaim or defense. Except to the extent Borrower pays
any regularly scheduled installments of principal and/or optional prepayments of
principal in Common stock in accordance with, and subject to the limitations set
forth in, Section 2.2(e), Lender will initiate debit entries to the Borrower’s
account as authorized on the ACH Authorization (i) on each payment date of all
periodic obligations payable to Lender under each Note or Term Loan Advance and
(ii) for out-of-pocket legal fees and costs incurred by Collateral Agent or
Lender in connection with Section 11.11 of this Agreement.

 

2.3          Section 8. Section 8 is hereby amended and restated in its entirety
as follows:

 

SECTION 8. REFINANCING

 

Provided that the FDA accepts the ARX-04 NDA on or before April 1, 2017, upon
written request made by Borrower on or before the earlier of (a) 60 days
following the date the FDA accepts the ARX-04 NDA, and (b) the date that
Borrower prepays the outstanding Secured Obligations (other than any inchoate
indemnity obligations and any other obligations which, by their terms, are to
survive the termination of this Agreement) in full, Lender shall refinance the
Term Loan and Borrower and Lender shall evidence the refinancing by executing an
Amended and Restated Loan and Security Agreement substantially in the form
attached as Exhibit A to the Third Amendment.

 

 
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3.            BORROWER’S REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants that:

 

3.1     Immediately upon giving effect to this Amendment (i) the representations
and warranties contained in the Loan Documents are true, accurate and complete
in all material respects as of the Third Amendment Date (except to the extent
such representations and warranties relate to an earlier date, in which case
they are true and correct as of such date), and (ii) no Event of Default has
occurred and is continuing with respect to which Borrower has not been notified
in writing by Lender.

 

3.2     Borrower has the corporate power and authority to execute and deliver
this Amendment and to perform its obligations under the Loan Agreement, as
amended by this Amendment.

 

3.3     The certificate of incorporation, bylaws and other organizational
documents of Borrower delivered to Lender on the Closing Date remain true,
accurate and complete and have not been amended, supplemented or restated and
are and continue to be in full force and effect.

 

3.4     The execution and delivery by Borrower of this Amendment and the
performance by Borrower of its obligations under the Loan Agreement, as amended
by this Amendment, have been duly authorized by all necessary corporate action
on the part of Borrower.

 

3.5     This Amendment has been duly executed and delivered by Borrower and is
the binding obligation of Borrower, enforceable against it in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, liquidation, moratorium or other similar laws of
general application and equitable principles relating to or affecting creditors’
rights; and

 

3.6     As of the Third Amendment Date, it has no defenses against the
obligations to pay any amounts under the Obligations. Borrower acknowledges that
Lender has acted in good faith and has conducted in a commercially reasonable
manner its relationships with Borrower in connection with this Amendment and in
connection with the Loan Documents.

 

Borrower understands and acknowledges that Lender is entering into this
Amendment in reliance upon, and in partial consideration for, the above
representations and warranties, and agrees that such reliance is reasonable and
appropriate.

 

4.            LIMITATION. The amendments set forth in this Amendment shall be
limited precisely as written and shall not be deemed (a) to be a waiver or
modification of any other term or condition of the Loan Agreement or of any
other instrument or agreement referred to therein or to prejudice any right or
remedy which Lender may now have or may have in the future under or in
connection with the Loan Agreement (as amended hereby) or any instrument or
agreement referred to therein; or (b) to be a consent to any future amendment or
modification or waiver to any instrument or agreement the execution and delivery
of which is consented to hereby, or to any waiver of any of the provisions
thereof. Except as expressly amended hereby, the Loan Agreement shall continue
in full force and effect.

 

 
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5.             EFFECTIVENESS. This Amendment shall become effective upon the
satisfaction of all the following conditions precedent:

 

5.1     Performance Milestone. (i) No default or Event of Default shall have
occurred and be continuing, and (ii) Borrower shall have received positive data
for both ARX-04 phase 3 studies (i.e., SAP302 and SAP303) on or prior to
September 30, 2016 (it being understood and agreed by Borrower and Lender that
the condition precedent set forth in this Section 5.1(ii) has been satisfied).

 

5.2     Amendments. Borrower and Lender shall have duly executed and delivered
this Amendment to Lender, together with the 2016 Warrant Amendments and a
certified copy of resolutions of Borrower’s board of directors evidencing the
approval of this Amendment, the 2016 Warrant Amendments and the transactions
evidenced thereby.

 

5.3     Payment of Non-Renewable Facility Fee. Borrower shall have paid to
Collateral Agent on behalf of Lenders the Third Amendment Facility Fee.

 

5.4     Payment of Lender Expenses. Borrower shall have paid all Lender Expenses
(including all reasonable attorneys' fees and reasonable expenses) incurred
through the date of this Amendment.

 

6.            COUNTERPARTS. This Amendment may be signed in any number of
counterparts, and by different parties hereto in separate counterparts, with the
same effect as if the signatures to each such counterpart were upon a single
instrument. All counterparts shall be deemed an original of this Amendment. This
Amendment may be executed by facsimile, portable document format (.pdf) or
similar technology signature, and such signature shall constitute an original
for all purposes. 

 

 
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7.             INCORPORATION BY REFERENCE.  The provisions of Section 11 of the
Loan Agreement shall be deemed incorporated herein by reference, mutatis
mutandis.

 

IN WITNESS WHEREOF, the parties have duly authorized and caused this Amendment
to be executed as of the date first written above.

 

BORROWER:

     

ACELRX PHARMACEUTICALS, INC.

 

Signature:        /s/ HOWARD B. ROSEN

 

Print Name:     howard b. rosen

 

Title:                 CHIEF EXECUTIVE OFFICER

 

 

 

 

Accepted in Palo Alto, California:

 

 

 

 

LENDER:

              HERCULES CAPITAL FUNDING   HERCULES TECHNOLOGY II,   TRUST 2014-1
  L.P., a Delaware limited partnership           Signature:         /s/ Jennifer
Choe, By: Hercules Technology SBIC                              Associate
General Counsel   Management, LLC, its General Partner             By: Hercules
Technology Growth Capital,       Inc., its Manager          

          

 

 By: /s/ JENNIFER CHOE, 

                       Associate General Counsel

  

 
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EXHIBIT A

 

FORM OF amended and restated loan and security AGREEMENT 

 

 
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amended and restated

LOAN AND SECURITY AGREEMENT

 

THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the “Agreement”) is made
and dated as of _______, and is entered into by and between ACELRX
PHARMACEUTICALS, INC., a Delaware corporation (sometimes referred to herein as
the “Company”), and each of its Domestic Subsidiaries (hereinafter collectively
referred to as the “Borrower”), HERCULES TECHNOLOGY II, L.P., a Delaware limited
partnership, in its capacity as administrative agent and collateral agent for
itself and the Lender (in such capacity, “Agent”), and amends and restates in
its entirety that certain Amended and Restated Loan and Security Agreement
between Borrower, as the borrower and Hercules Technology II, L.P., a Delaware
limited partnership, and Hercules Capital, Inc. (formerly known as Hercules
Technology Growth Capital, Inc.), collectively as the lender, dated December 16,
2013 (as amended by that certain Amendment No. 1 to Amended and Restated Loan
and Security Agreement dated as of September 24, 2014, by that certain Amendment
No. 2 to Amended and Restated Loan and Security Agreement dated as of September
18, 2015, and by that certain Amendment No. 3 to Amended and Restated Loan and
Security Agreement dated as of September 30, 2016, the “2013 Agreement”).

 

RECITALS

 

A.     Borrower, Lender and Agent previously have entered into that certain 2013
Agreement, pursuant to which Lender has agreed to extend and make available to
Borrower certain advances of money, $20,466,325.15 (the “Existing Term Loan”) of
which is currently outstanding.

 

B.     Borrower has requested Lender to make available to Borrower a loan in an
aggregate principal amount of up to Thirty Million Four Hundred Sixty-Six
Thousand Three Hundred Twenty-Five and 15/100 Dollars ($30,466,325.15) (the
“Term Loan”);

 

C.     The proceeds of the Term Loan will be used to refinance the Existing Term
Loan funded under the 2013 Agreement and for general corporate purposes; and

 

D.     Lender is willing to extend the Term Loan on the terms and conditions set
forth in this Agreement.

 

 
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AGREEMENT

 

NOW, THEREFORE, Borrower, Agent and Lender agree as follows:

 

SECTION 1. DEFINITIONS AND RULES OF CONSTRUCTION

 

1.1     Unless otherwise defined herein, the following capitalized terms shall
have the following meanings:

 

“Account Control Agreement(s)” means any agreement entered into by and among the
Agent, Borrower and a third party Bank or other institution (including a
Securities Intermediary) in which Borrower maintains a Deposit Account or an
account holding Investment Property and which grants Agent a perfected first
priority security interest in the subject account or accounts.

 

“AcelRx Intellectual Property Rights” has the meaning set forth in the PSA.

 

“ACH Authorization” means the ACH Debit Authorization Agreement in substantially
the form of Exhibit H, which account numbers shall be redacted for security
purposes if and when filed publicly by the Borrower.

 

“Advance(s)” means a Term Loan Advance.

 

“Advance Date” means the funding date of any Advance.

 

“Advance Request” means a request for an Advance submitted by Borrower to Agent
in substantially the form of Exhibit A, which account numbers shall be redacted
for security purposes if and when filed publicly by the Borrower.

 

“Affiliate” means any Person that directly or indirectly controls, is controlled
by, or is under common control with the Person in question. As used in the
definition of “Affiliate,” the term “control” means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting securities, by
contract or otherwise.

 

“Agent” has the meaning given to it in the preamble to this Agreement.

 

“Agreement” has the meaning given to it in the preamble to this Agreement.

 

“Amortization Date” means October 1, 2017; provided that, if Borrower achieves
Interest Only Extension Conditions A, then the Amortization Date shall be April
1, 2018; provided further that, if Borrower achieves Interest Only Extension
Conditions B, then the Amortization Date shall be October 1, 2018.

 

“ARX-04 NDA” means the new drug application filed by the Borrower with the FDA
for product ARX-04.

 

“Assignee” has the meaning given to it in Section 11.13.

 

“Borrower Products” means all products, software, service offerings, technical
data or technology currently being designed, manufactured or sold by Borrower or
which Borrower intends to sell, license, or distribute in the future including
any products or service offerings under development, collectively, together with
all products, software, service offerings, technical data or technology that
have been sold, licensed or distributed by Borrower since its incorporation.

 

 
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“Cash” means all cash, cash equivalents and liquid funds.

 

“Change in Control” means any reorganization, recapitalization, consolidation or
merger (or similar transaction or series of related transactions) of Company,
sale or exchange of outstanding shares (or similar transaction or series of
related transactions) of Company in which the holders of Company’s outstanding
shares immediately before consummation of such transaction or series of related
transactions do not, immediately after consummation of such transaction or
series of related transactions, retain shares representing more than fifty
percent (50%) of the voting power of the surviving entity of such transaction or
series of related transactions (or the parent of such surviving entity if such
surviving entity is wholly owned by such parent), in each case without regard to
whether Company is the surviving entity.

 

“Claims” has the meaning given to it in Section 11.10.

 

“Closing Date” means the date of this Agreement.

 

“Collateral” means the property described in Section 3.

 

“Common Stock” means the Common Stock, $0.001 par value per share, of the
Company.

 

“Company Collection Account” has the meaning set forth in the PSA.

 

“Company Distribution Account” has the meaning set forth in the PSA.

 

“Confidential Information” has the meaning given to it in Section 11.12.

 

“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
Indebtedness, lease, dividend, letter of credit or other obligation of another,
including any such obligation directly or indirectly guaranteed, endorsed,
co-made or discounted or sold with recourse by that Person, or in respect of
which that Person is otherwise directly or indirectly liable; (ii) any
obligations with respect to undrawn letters of credit, corporate credit cards or
merchant services issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term “Contingent Obligation” shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.

 

 
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“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 copyrights, whether registered or unregistered, held
pursuant to the laws of the United States of America, any State thereof, or of
any other country.

 

“Deposit Accounts” means any “deposit accounts,” as such term is defined in the
UCC, and includes any checking account, savings account, or certificate of
deposit.

 

“Domestic Subsidiary” means any Subsidiary that is not a Foreign Subsidiary.

 

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

 

“Event of Default” has the meaning given to it in Section 9.

 

“Excluded Assets” means the Licensed Product, the AcelRx Intellectual Property
Rights, the Purchased Assets, the Purchased Interest, the Purchaser Portion, the
Licensor Retained Amounts, the Payment Rights, the Royalties, the Grunenthal
Agreements, the Company Collection Account and the Company Distribution Account
and all money, deposits, investment property, and other property now or at any
time hereafter therein, and any funds deposited therein, and any interest
thereon, any and all other rights, duties and obligations of Borrower under the
Transaction Documents and the Grunenthal Agreements, and in each case all
Proceeds of each of the foregoing and all additions and accessions to, all
improvements to, substitutions and replacements for, and rents, profits and
products of each of the foregoing, so long as the PSA and SPSA are in effect.

 

“Facility Charge” means one percent (1.0%) of the aggregate Term Loan Advances
funded under this Agreement, payable on the date each such Term Loan Advance is
funded.

 

“FDA” means the U.S. Food and Drug Administration or any successor entity
performing similar functions.

 

“Financial Statements” has the meaning given to it in Section 7.1.

 

“Foreign Subsidiary” means any Subsidiary other than a Subsidiary that is
organized and existing under the laws of the United States of America or any
state or commonwealth thereof or under the laws of the District of Columbia.

 

“GAAP” means generally accepted accounting principles in the United States of
America, as in effect from time to time.

 

“Grunenthal License” means collectively that certain Collaboration and License
Agreement entered into as of December 16, 2013 between Company and Grunenthal
GmbH, as amended, modified, supplemented or restated from time to time,
including by that certain First Amendment to the Collaboration and License
Agreement effective as of July 17, 2015.

 

 
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“Grunenthal Manufacture and Supply Agreement” means collectively that certain
Manufacture and Supply Agreement entered into as of December 16, 2013 between
Company and Grunenthal GmbH, as amended, modified, supplemented or restated from
time to time, including by that certain First Amendment to the Manufacture and
Supply Agreement effective as of July 17, 2015.

 

“Grunenthal Agreements” means collectively the Grunenthal License and the
Grunenthal Manufacture and Supply Agreement.

 

“Indebtedness” means indebtedness of any kind, including (a) all indebtedness
for borrowed money or the deferred purchase price of property or services
(excluding trade credit entered into in the ordinary course of business due
within ninety (90) days of invoice date), including reimbursement and other
obligations with respect to surety bonds and letters of credit, (b) all
obligations evidenced by notes, bonds, debentures or similar instruments, (c)
all capital lease obligations, and (d) all Contingent Obligations.

 

“Indemnified Person” has the meaning given to it in Section 6.3.

 

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

 

“Intellectual Property” means all of Borrower’s Copyrights; Trademarks; Patents;
Licenses; trade secrets and inventions; mask works; Borrower’s applications
therefor and reissues, extensions, or renewals thereof; and Borrower’s goodwill
associated with any of the foregoing, together with Borrower’s rights to sue for
past, present and future infringement of Intellectual Property and the goodwill
associated therewith, but specifically excluding any such property licensed to
Grunenthal GmbH pursuant to the Grunenthal Agreements or to any other Person
pursuant to a New License Agreement for so long as the PSA and the SPSA remain
in effect.

 

“Interest Only Extension Conditions A” shall mean satisfaction of each of the
following events: (a) no Event of Default shall have occurred and be continuing;
and (b) Borrower shall have achieved the Liquidity Milestone.

 

“Interest Only Extension Conditions B” shall mean satisfaction of each of the
following events: (a) no Event of Default shall have occurred and be continuing;
(b) Borrower shall have achieved the Liquidity Milestone; and (c) Borrower shall
have achieved the Tranche 2 Milestone.

 

“Investment” means any beneficial ownership (including stock, partnership or
limited liability company interests) of or in any Person, or any loan, advance
or capital contribution to any Person or the acquisition of all, or
substantially all, of the assets of another Person.

 

 
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“Joinder Agreements” means, for each Domestic Subsidiary, a completed and
executed Joinder Agreement in substantially the form attached hereto as Exhibit
G.

 

“Lender” has the meaning given to it in the preamble to this Agreement.

 

“Liabilities” has the meaning given to it in Section 6.3.

 

“License” means any Copyright License, Patent License, Trademark License or
other license of rights or interests.

 

“Licensed Product” has the meaning set forth in the PSA.

 

“Licensor Retained Amounts” has the meaning set forth in the PSA.

 

“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,
and any lease in the nature of a security interest.

 

“Liquidity Milestone” means Borrower shall have received at least $40,000,000 in
net proceeds raised as a combination of up-front cash proceeds from outlicensing
or commercial partnering relating to ARX-04 and Zalviso to the extent such
outlicensing or commercial partnering transactions constitute Permitted
Transfers, and from new equity after the Closing Date and on or before December
31, 2017.

 

“Loan” means the Advances made under this Agreement.

 

“Loan Documents” means this Agreement, the Notes (if any), the ACH
Authorization, the Account Control Agreements, the Joinder Agreements, all UCC
Financing Statements, the Warrant, and any other documents executed in
connection with the Secured Obligations or the transactions contemplated hereby,
as the same may from time to time be amended, modified, supplemented or
restated.

 

“Material Adverse Effect” means a material adverse effect upon: (i) the
business, operations, properties, assets, or condition (financial or otherwise)
of Company and its Subsidiaries taken as a whole; or (ii) the ability of
Borrower to perform or pay the Secured Obligations in accordance with the terms
of the Loan Documents, or the ability of Agent or Lender to enforce any of its
rights or remedies with respect to the Secured Obligations; or (iii) the
Collateral or Agent’s Liens on the Collateral or the priority of such Liens.

 

“Maximum Term Loan Amount” means Thirty Million Four Hundred Sixty-Six Thousand
Three Hundred Twenty-Five and 15/100 Dollars ($30,466,325.15).

 

“Maximum Rate” shall have the meaning assigned to such term in Section 2.3.

 

 
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“New License Agreement” has the meaning set forth in the PSA.

 

“Note” means a Secured Term Promissory Note in substantially the form of Exhibit
B.

 

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

 

“Patents” means all letters patent of, or rights corresponding thereto, in the
United States of America or in any other country, all registrations and
recordings thereof, and all applications for letters patent of, or rights
corresponding thereto, in the United States of America or any other country.

 

“Payment Rights” has the meaning set forth in the PSA.

 

“PDL” means PDL BioPharma, Inc.

 

“Permitted Indebtedness” means: (i) Indebtedness of Borrower in favor of Lender
arising under this Agreement or any other Loan Document; (ii) Indebtedness
existing on the Closing Date which is disclosed in Schedule 1A; (iii)
Indebtedness of up to $5,000,000 outstanding at any time secured by a Lien
described in clause (vii) of the defined term “Permitted Liens,” provided such
Indebtedness does not exceed the lesser of the cost or fair market value of the
Equipment financed with such Indebtedness (measured at the time of incurrence);
(iv) Indebtedness to trade creditors incurred in the ordinary course of
business, including Indebtedness incurred in the ordinary course of business
with corporate credit cards; (v) Indebtedness that also constitutes a Permitted
Investment; (vi) Subordinated Indebtedness; (vii) reimbursement obligations in
connection with letters of credit and cash management services (including credit
cards, debit cards and similar instruments) that are secured by cash or cash
equivalents and issued on behalf of the Borrower or a Subsidiary thereof in an
amount not to exceed $200,000 at any time outstanding; (viii) Indebtedness
secured by a Lien described in clause (xi) of the defined term “Permitted
Liens”; (ix) intercompany Indebtedness as long as either (A) each of the
Subsidiary obligor and the Subsidiary obligee under such Indebtedness has
executed a Joinder Agreement or (B) such Indebtedness constitutes a Permitted
Investment; (x) obligations of Borrower under the Transaction Documents; (xi)
other Indebtedness in an amount not to exceed $500,000 at any time outstanding;
and (xii) extensions, refinancings and renewals of any items of Permitted
Indebtedness, provided that the principal amount is not increased or the terms
modified to impose materially more burdensome terms upon Borrower or its
Subsidiary, as the case may be.

 

 
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“Permitted Investment” means: (i) Investments existing on the Closing Date which
are disclosed in Schedule 1B; (ii) (a) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one year from the date of acquisition thereof, (b)
commercial paper maturing no more than one year from the date of creation
thereof and currently having a rating of at least A-2 or P-2 from either
Standard & Poor’s Corporation or Moody’s Investors Service, (c) certificates of
deposit issued by any bank with assets of at least $500,000,000 maturing no more
than one year from the date of investment therein, and (d) money market
accounts; (iii) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business; (iv) repurchases of stock from current or former employees,
directors, or consultants of Borrower under the terms of applicable repurchase
agreements at the original issuance price of such securities in an aggregate
amount not to exceed $250,000 in any fiscal year, provided that no Event of
Default has occurred, is continuing or would exist after giving effect to the
repurchases; (v) Investments accepted in connection with Permitted Transfers;
(vi) Investments (including debt obligations) received in connection with the
bankruptcy or reorganization of customers or suppliers and in settlement of
delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of Borrower’s business; (vii) Investments
consisting of notes receivable of, or prepaid royalties and other credit
extensions, to customers and suppliers who are not Affiliates, in the ordinary
course of business, provided that this subparagraph (vii) shall not apply to
Investments of Borrower in any Subsidiary; (viii) Investments consisting of
loans not involving the net transfer on a substantially contemporaneous basis of
cash proceeds to employees, officers or directors relating to the purchase of
capital stock of Borrower pursuant to employee stock purchase plans or other
similar agreements approved by Borrower’s Board of Directors; (ix) Investments
consisting of travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business and not in excess of
$500,000 in the aggregate; (x) Investments in Domestic Subsidiaries, whether now
existing or newly formed, provided that each such Domestic Subsidiary is party
to a Joinder Agreement or enters into a Joinder Agreement promptly after its
formation and has executed or executes such other related Loan Documents as are
reasonably requested by Agent; (x) Investments in Foreign Subsidiaries approved
in advance in writing by Agent; (xi) joint ventures or strategic alliances in
the ordinary course of Borrower’s business consisting of the nonexclusive
licensing of technology, the development of technology or the providing of
technical support, provided that any cash Investments by Borrower do not exceed
$100,000 in the aggregate in any fiscal year; (xiii) Investments constituting
mergers or acquisitions permitted by Section 7.10; and (xiv) additional
Investments that do not exceed $500,000 in the aggregate.

 

“Permitted Liens” means any and all of the following: (i) Liens in favor of
Lender; (ii) Liens existing on the Closing Date which are disclosed in Schedule
1C; (iii) Liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings; provided, that Borrower maintains adequate reserves therefor in
accordance with GAAP to the extent required thereby; (iv) Liens securing claims
or demands of materialmen, artisans, mechanics, carriers, warehousemen,
landlords and other like Persons arising in the ordinary course of Borrower’s
business and imposed without action of such parties; provided, that the payment
thereof is not overdue; (v) Liens arising from judgments, decrees or attachments
in circumstances which do not constitute an Event of Default hereunder;
(vi) deposits to secure the performance of obligations (including by way of
deposits to secure letters of credit issued to secure the same) under commercial
supply and/or manufacturing agreements in the ordinary course of business and
the following deposits, to the extent made in the ordinary course of business:
deposits under worker’s compensation, unemployment insurance, social security
and other similar laws, or to secure the performance of bids, tenders or
contracts (other than for the repayment of borrowed money) or to secure
indemnity, performance or other similar bonds for the performance of bids,
tenders or contracts (other than for the repayment of borrowed money) or to
secure statutory obligations (other than liens arising under ERISA or
environmental liens) or surety or appeal bonds, or to secure indemnity,
performance or other similar bonds; (vii) Liens on Equipment or software or
other intellectual property constituting purchase money liens, liens in
connection with capital leases and liens securing Indebtedness permitted in
clause (iii) of “Permitted Indebtedness”; (viii) Liens incurred in connection
with Subordinated Indebtedness; (ix) leasehold interests in leases or subleases
and licenses and sublicenses granted in the ordinary course of business and not
interfering in any material respect with the business of the licensor; (x) Liens
in favor of customs and revenue authorities arising as a matter of law to secure
payment of custom duties that are promptly paid on or before the date they
become due; (xi) Liens on insurance proceeds securing the payment of financed
insurance premiums that are promptly paid on or before the date they become due
(provided that such Liens extend only to such insurance proceeds and not to any
other property or assets); (xii) statutory and common law rights of set-off and
other similar rights as to deposits of cash and securities in favor of banks,
other depository institutions and brokerage firms; (xiii) easements, zoning
restrictions, rights-of-way and similar encumbrances on real property imposed by
law or arising in the ordinary course of business so long as they do not
materially impair the value or marketability of the related property; (xiv)
Liens on cash or cash equivalents securing obligations permitted under clause
(vii) of the definition of Permitted Indebtedness; (xv) Liens on Excluded
Assets, for so long as the PSA and the SPSA are in effect; (xvi) Liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clauses (i) through (xi) above;
provided, that any extension, renewal or replacement Lien shall be limited to
the property encumbered by the existing Lien and the principal amount of the
indebtedness being extended, renewed or refinanced (as may have been reduced by
any payment thereon) does not increase.

 

 
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“Permitted Transfers” means (i) sales of Inventory in the normal course of
business, (ii) non-exclusive licenses and similar arrangements for the use of
Intellectual Property in the ordinary course of business and licenses that could
not result in a legal transfer of title of the licensed property but that may be
exclusive in respects other than territory and that may be exclusive as to
territory only as to discrete geographical areas outside of the United States in
the ordinary course of business, (iii) dispositions of worn-out, obsolete or
surplus Equipment at fair market value in the ordinary course of business, (iv)
dispositions expressly permitted under Section 7.7, 7.8 or 7.10 hereof, (v)
dispositions arising from the abandonment of fixtures and other similar tenant
improvements in connection with office relocations, (vi) transfers of Excluded
Assets pursuant to the Grunenthal Agreements, any New License Agreement, the
PSA, the SPSA and the Servicing Agreement, including without limitation
transfers of Royalties, Payment Rights, Purchased Assets, the Purchaser Portion
and the Purchased Interest, in each case for so long as the PSA and the SPSA are
in effect; and (vii) other Transfers of assets having a fair market value of not
more than $250,000 in the aggregate in any fiscal year.

 

“Person” means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, limited liability
company, institution, other entity or government.

 

 
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“Preferred Stock” means at any given time any equity security issued by Company
that has any rights, preferences or privileges senior to Company’s Common Stock.

 

“Prepayment Charge” shall have the meaning assigned to such term in Section
2.5. 

 

“PSA” means that certain Purchase and Sale Agreement between Company, as seller,
and ARPI LLC, as purchaser, dated as of September 18, 2015, as amended,
modified, supplemented or restated from time to time.

 

“Publicity Materials” has the meaning given to it in Section 11.17.

 

“Purchased Assets” has the meaning set forth in the PSA.

 

“Purchased Interest” has the meaning set forth in the SPSA.

 

“Purchaser Portion” has the meaning set forth in the PSA.

 

“Receivables” means (i) all of Borrower’s Accounts, Instruments, Documents,
Chattel Paper, Supporting Obligations, letters of credit, proceeds of any letter
of credit, and Letter of Credit Rights, and (ii) all customer lists, software,
and business records related thereto, but specifically excluding with respect to
clauses (i) and (ii) any such property received under the Grunenthal Agreements
or any New License Agreement, as applicable, and any Servicing Files, in each
case for so long as the PSA and the SPSA are in effect.

 

“Royalties” has the meaning set forth in the PSA.

 

“Rule 144” means Rule 144 under the Securities Act.

 

“Required Lenders” means, at any time, the holders of more than 50% of the
aggregate unpaid principal amount of the Term Loans then outstanding.

 

“SBA” shall have the meaning assigned to such term in Section 7.15.

 

“SBIC” shall have the meaning assigned to such term in Section 7.15.

 

“SBIC Act” shall have the meaning assigned to such term in Section 7.15.

 

“SEC” means the Securities and Exchange Commission.

 

“Secured Obligations” means Borrower’s obligations under this Agreement and any
Loan Document, including any obligation to pay any amount now owing or later
arising. Notwithstanding the foregoing, the Secured Obligations shall not
include any of Borrower’s obligations, liabilities or duties under the Warrant.

 

“Securities Act” means the Securities Act of 1933, as amended.

 

 
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“Servicing Agreement” means that certain Servicing Agreement by and among ARPI
LLC, PDL and AcelRx, dated as of September 18, 2015, as amended, modified,
supplemented or restated from time to time.

 

“Servicing Files” has the meaning set forth in the Servicing Agreement.

 

“SPSA” means that certain Subsequent Purchase and Sale Agreement between ARPI
LLC, as seller, and PDL, as purchaser, dated as of September 18, 2015, as
amended, modified, supplemented or restated from time to time.

 

“Subordinated Indebtedness” means Indebtedness subordinated to the Secured
Obligations in amounts and on terms and conditions satisfactory to Agent in its
sole discretion.

 

“Subsidiary” means an entity, whether corporate, partnership, limited liability
company, joint venture or otherwise, in which Borrower owns or controls 50% or
more of the outstanding voting securities, including each entity listed on
Schedule 1 hereto, but specifically excluding ARPI LLC.

 

“Term Commitment” means as to any Lender, the obligation of such Lender, if any,
to make a Term Loan Advance to the Borrower in a principal amount not to exceed
the amount set forth under the heading “Term Commitment” opposite such Lender’s
name on Schedule 1.1.

 

“Term Loan Advance” means any Term Loan funds advanced under this Agreement. 

 

“Term Loan Interest Rate” means for any day a per annum rate of interest equal
to the greater of either (i) 9.55% plus the prime rate as reported in The Wall
Street, minus 3.50%, and (ii) 9.55%.

 

“Term Loan Maturity Date” means March 1, 2020, and if Borrower achieves Interest
Only Extension Conditions A, then September 1, 2020, and if Borrower achieves
Interest Only Extension Conditions B, then March 1, 2021.

 

“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 trademarks (registered, common law or otherwise) and any
applications in connection therewith, including registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States of America, any State thereof or any other
country or any political subdivision thereof.

 

“Tranche 1 Term Loan Advance” means an Advance in the amount of $20,466,325.15
to refinance the Existing Term Loan.

 

 
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“Tranche 2 Milestone” means the FDA’s approval of the ARX-04 NDA on or before
December 31, 2017.

 

“Tranche 2 Term Loan Advance” means an Advance in an aggregate amount not to
exceed $10,000,000 subject to Borrower’s achievement of the Tranche 2 Milestone
and approval by Agent’s investment committee, such approval to be granted or
withheld in its sole discretion.

 

“UCC” means the Uniform Commercial Code as the same is, from time to time, 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, Agent’s Lien on any Collateral is
governed by the Uniform Commercial Code as the same is, from time to time, in
effect in a jurisdiction other than the State of California, then the term “UCC”
shall mean the Uniform Commercial Code as in effect, from time to time, 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.

 

“Transaction Documents” has the meaning set forth in the PSA.

 

“Warrant” means any warrant, as amended from time to time, entered into in
connection with the Loan.

 

Unless otherwise specified, all references in this Agreement or any Annex or
Schedule hereto to a “Section,” “subsection,” “Exhibit,” “Annex,” or “Schedule”
shall refer to the corresponding Section, subsection, Exhibit, Annex, or
Schedule in or to this Agreement. Unless otherwise specifically provided herein,
any accounting term used in this Agreement or the other Loan Documents shall
have the meaning customarily given such term in accordance with GAAP, and all
financial computations hereunder shall be computed in accordance with GAAP,
consistently applied. Unless otherwise defined herein or in the other Loan
Documents, terms that are used herein or in the other Loan Documents and defined
in the UCC shall have the meanings given to them in the UCC.

 

SECTION 2. THE LOAN

 

2.1     Reserved.

 

2.2     Term Loan.

 

(a)     Advances. Subject to the terms and conditions of this Agreement, on the
Closing Date Lender will severally (and not jointly) make a Tranche 1 Term Loan
Advance in an amount not to exceed its respective Term Commitment, and Borrower
agrees to draw a Tranche 1 Term Loan Advance of $20,466,325.15. Beginning April
1, 2017 and continuing through December 31, 2017, subject to Borrower’s
achievement of Tranche 2 Milestone and approval by Agent’s investment committee,
such approval to be granted or withheld in its sole discretion, Borrower may
request Tranche 2 Term Loan Advances in an aggregate amount up to $10,000,000 in
minimum increments of $2,500,000. The aggregate outstanding Term Loan Advances
in connection with the Term Loan may be up to the Maximum Term Loan Amount.

 

 
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(b)     Advance Request. To obtain a Term Loan Advance, Borrower shall complete,
sign and deliver an Advance Request (at least five business days before the
Advance Date). Lender shall fund the Term Loan Advance in the manner requested
by the Advance Request provided that each of the conditions precedent to such
Term Loan Advance is satisfied as of the requested Advance Date.

 

(c)     Interest. The principal balance of each Term Loan Advance shall bear
interest thereon from such Advance Date at the Term Loan Interest Rate based on
a year consisting of 360 days, with interest computed daily based on the actual
number of days elapsed. The Term Loan Interest Rate will float and change on the
day the Prime Rate changes from time to time.

 

(d)     Payment. Borrower will pay interest on each Term Loan Advance on the
first day of each month, beginning the month after the Closing Date. Borrower
shall repay the aggregate Term Loan principal balance that is outstanding on the
day immediately preceding the Amortization Date, in equal monthly installments
of principal and interest (mortgage style) beginning on the Amortization Date
and continuing on the first business day of each month thereafter until the
Secured Obligations (other than inchoate indemnity obligations) are repaid. The
entire Term Loan principal balance and all accrued but unpaid interest
hereunder, shall be due and payable on the Term Loan Maturity Date. Borrower
shall make all payments under this Agreement without setoff, recoupment or
deduction and regardless of any counterclaim or defense. Lender will initiate
debit entries to the Borrower’s account as authorized on the ACH Authorization
(i) on each payment date of all periodic obligations payable to Lender under
each Note or Term Loan Advance and (ii) for out-of-pocket legal fees and costs
incurred by Agent or Lender in connection with Section 11.11 of this Agreement.

 

2.3     Maximum Interest. Notwithstanding any provision in this Agreement, the
Notes or any other Loan Document, it is the parties’ intent not to contract for,
charge or receive interest at a rate that is greater than the maximum rate
permissible by law that a court of competent jurisdiction shall deem applicable
hereto (which under the laws of the State of California shall be deemed to be
the laws relating to permissible rates of interest on commercial loans) (the
“Maximum Rate”). If a court of competent jurisdiction shall finally determine
that Borrower has actually paid to Lender an amount of interest in excess of the
amount that would have been payable if all of the Secured Obligations had at all
times borne interest at the Maximum Rate, then such excess interest actually
paid by Borrower shall be deemed retroactively applied as of the date of receipt
of such payment as follows: first, to the payment of the Secured Obligations
consisting of the outstanding principal; second, after all principal is repaid,
to the payment of Lender’s accrued interest, costs, expenses, professional fees
and any other Secured Obligations; and third, after all Secured Obligations are
repaid, the excess (if any) shall be refunded to Borrower.

 

 
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2.4     Default Interest. In the event any payment is not paid on the scheduled
payment date, an amount equal to five percent (5%) of the past due amount shall
be payable on demand. In addition, upon the occurrence and during the
continuation of an Event of Default hereunder, all Secured Obligations,
including principal, interest, compounded interest, and professional fees
payable in accordance with Section 11.11, shall bear interest at a rate per
annum equal to the rate set forth in Section 2.2(c) plus five percent (5%) per
annum. In the event any interest is not paid when due hereunder, delinquent
interest shall be added to principal and shall bear interest on interest,
compounded at the rate set forth in Section 2.2(c) or this Section 2.4, as
applicable.

 

2.5     Prepayment. At its option upon at least seven (7) business days prior
notice to Agent, Borrower may prepay all, but not less than all, of the
outstanding Advances by paying the entire principal balance and all accrued and
unpaid interest thereon, together with a prepayment charge equal to the
following percentage of the Advance amount being prepaid: if such Advance
amounts are prepaid in any of the first twelve (12) months following the Closing
Date, 3.0%; after twelve (12) months but prior to twenty four (24) months, 2.0%;
and thereafter, 1.0% (each, a “Prepayment Charge”). Borrower agrees that the
Prepayment Charge is a reasonable calculation of Lender’s lost profits in view
of the difficulties and impracticality of determining actual damages resulting
from an early repayment of the Advances. Borrower shall prepay the outstanding
amount of all principal and accrued interest through the prepayment date and the
Prepayment Charge upon the occurrence of a Change in Control. Notwithstanding
the above, no Prepayment Charge shall be due in connection with term loan
advances funded under the Original Agreement.

 

2.6     End of Term Charge.

 

(a)     On the earliest to occur of (i) October 1, 2017, (ii) the date that
Borrower prepays the outstanding Secured Obligations (other than any inchoate
indemnity obligations and any other obligations which, by their terms, are to
survive the termination of this Agreement) in full (except to the extent
refinanced hereunder), or (iii) the date that the Secured Obligations become due
and payable, Borrower shall pay Lender a charge of $1,700,000 in connection with
the term loan funded under the 2013 Agreement. Notwithstanding the required
payment date of such charge, it shall be deemed earned by Lender as of December
16, 2013.

 

(b)     On the earliest to occur of (i) the Term Loan Maturity Date, (ii) the
date that Borrower prepays the outstanding Secured Obligations (other than any
inchoate indemnity obligations and any other obligations which, by their terms,
are to survive the termination of this Agreement) in full (except to the extent
refinanced hereunder), or (iii) the date that the Secured Obligations become due
and payable, Borrower shall pay Lender a charge equal to 6.5% of the aggregate
principal amount funded under the Term Loan. Notwithstanding the required
payment date of such charge, it shall be deemed earned by Lender as of the
Closing Date.

 

 
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2.7     Notes and Lender Investment Representations. If so requested by Lender
by written notice to Borrower, then Borrower shall execute and deliver to Lender
(and/or, if applicable and if so specified in such notice, to any Person who is
an assignee of Lender pursuant to Section 11.13) (promptly after the Borrower’s
receipt of such notice) a Note or Notes to evidence Lender’s Loans. This
Agreement and any Note are being issued to Lender in reliance upon the following
representations and covenants of Lender (which, for the avoidance of doubt, are
being made severally, but not jointly, by each Lender):

 

(a)     Investment Purpose. The Note has been or to the extent not yet issued
will be acquired by Lender for investment and not with a view to the sale or
distribution of any part thereof, and Lender has no present intention of selling
or engaging in any public distribution of the same except pursuant to a
registration under the Securities Act or an exemption from the registration
requirements of the Securities Act. Lender is not a registered broker-dealer
under Section 15 of the Securities and Exchange Act of 1934 or an entity engaged
in a business that would require it to be so registered as a broker-dealer.

 

(b)     Financial Risk. The Lender has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment in the Note, and has the ability to bear the economic
risks of its investment.

 

(c)     Accredited Investor. The Lender is an “accredited investor” within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act.

 

(d)     No Short Sales. The Lender has not engaged, and will not engage, in
“short sales” of the Common Stock of the Company. The term “short sale” shall
mean any sale of a security which the seller does not own or any sale which is
consummated by the delivery of a security borrowed by, or for the account of,
the seller.

 

2.8       Pro Rata Treatment. Each payment (including prepayment) on account of
any fee and any reduction of the Term Loans shall be made pro rata according to
the Term Commitments of the relevant Lender.

 

  

SECTION 3. SECURITY INTEREST

 

3.1       As security for the prompt, complete and indefeasible payment when due
(whether on the payment dates or otherwise) of all the Secured Obligations,
Borrower grants to Agent and Lender a security interest in all of Borrower’s
personal property now owned or hereafter acquired, including the following
(collectively, the “Collateral”): (a) Receivables; (b) Equipment; (c) Fixtures;
(d) General Intangibles (other than Intellectual Property); (e) Inventory; (f)
Investment Property; (g) Deposit Accounts; (h) Cash; (i) Goods; and other
tangible and intangible personal property of Borrower whether now or hereafter
owned or existing, leased, consigned by or to, or acquired by, Borrower and
wherever located; and, to the extent not otherwise included, 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; provided, however,
that the Collateral shall include all Accounts and General Intangibles that
consist of rights to payment and proceeds from the sale, licensing or
disposition of all or any part, or rights in, the Intellectual Property (the
“Rights to Payment”). Notwithstanding the foregoing, if a judicial authority
(including a U.S. Bankruptcy Court) holds that a security interest in the
underlying Intellectual Property is necessary to have a security interest in the
Rights to Payment, then the Collateral shall automatically, and effective as of
the date of this Agreement, include the Intellectual Property to the extent
necessary to permit perfection of Lender’s security interest in the Rights to
Payment. Upon payment in full in cash of the Secured Obligations (other than
inchoate indemnity obligations and any other obligations which, by their terms,
are to survive the termination of this Agreement) and at such time as this
Agreement has been terminated, the Agent and Lender shall, at Borrower’s sole
cost and expense, release their Liens in the Collateral and all rights therein
shall revert to Borrower.

 

 
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3.2     Notwithstanding anything else set forth herein, the Collateral shall
specifically exclude the Excluded Assets for so long as the PSA and SPSA remain
in effect, but upon the termination or expiration of the PSA and the SPSA, the
Excluded Assets (to the extent they do not consist of Intellectual Property)
shall automatically be subject to the security interest granted in favor of
Agent and Lender hereunder and become part of the Collateral.

 

3.3     Notwithstanding the broad grant of the security interest set forth in
Section 3.1, above, the Collateral shall not include more than 65% of the
presently existing and hereafter arising issued and outstanding shares of
capital stock owned by Borrower of any Foreign Subsidiary which shares entitle
the holder thereof to vote for directors or any other matter.

 

SECTION 4. CONDITIONS PRECEDENT TO LOAN

 

The obligations of Lender to make the Loan hereunder are subject to the
satisfaction by Borrower of the following conditions:

 

4.1     Initial Advance. On or prior to the Closing Date, Borrower shall have
delivered to Agent the following:

 

(a)     executed copies of the Loan Documents (other than the Warrant, which
shall be an original), Account Control Agreements, a legal opinion of Borrower’s
counsel and all other documents and instruments reasonably required by Agent to
effectuate the transactions contemplated hereby or to create and perfect the
Liens of Agent with respect to all Collateral, in all cases in form and
substance reasonably acceptable to Agent;

 

(b)     certified copy of resolutions of Borrower’s board of directors
evidencing approval of (i) the Loan and other transactions evidenced by the Loan
Documents; and (ii) the Warrant and transactions evidenced thereby;

 

(c)     certified copies of the Certificate of Incorporation and the Bylaws, as
amended through the Closing Date, of Borrower;

 

 
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(d)     a certificate of good standing for Borrower from its state of
incorporation and similar certificates from all other jurisdictions in which it
does business and where the failure to be qualified would have a Material
Adverse Effect;

 

(e)     payment of a Facility Charge in the amount of $204,663.25 and
reimbursement of Agent’s and Lender’s current expenses reimbursable pursuant to
this Agreement, which amounts may be deducted from the initial Advance; and

 

(f)     such other documents as Agent may reasonably request.

 

4.2      All Advances. On each Advance Date:

 

(a)     Agent shall have received (i) an Advance Request for the relevant
Advance as required by Section 2.2(b), each duly executed by Company’s Chief
Executive Officer or Chief Financial Officer, and (ii) any other documents Agent
may reasonably request.

 

(b)     The representations and warranties set forth in this Agreement shall be
true and correct in all material respects on and as of the Advance Date with the
same effect as though made on and as of such date, except to the extent such
representations and warranties expressly relate to an earlier date.

 

(c)     Borrower shall be in compliance with all the terms and provisions set
forth herein and in each other Loan Document on its part to be observed or
performed, and at the time of and immediately after such Advance no Event of
Default shall have occurred and be continuing.

 

(d)     Each Advance Request shall be deemed to constitute a representation and
warranty by Borrower on the relevant Advance Date as to the matters specified in
paragraphs (b) and (c) of this Section 4.2 and as to the matters set forth in
the Advance Request.

 

4.3       No Default. As of the Closing Date and each Advance Date, (i) no fact
or condition exists that would (or would, with the passage of time, the giving
of notice, or both) constitute an Event of Default and (ii) no event that has
had or could reasonably be expected to have a Material Adverse Effect has
occurred and is continuing.

 

SECTION 5. REPRESENTATIONS AND WARRANTIES OF BORROWER

 

Borrower represents and warrants that:

 

5.1     Corporate Status. Borrower is a corporation duly organized, legally
existing and in good standing under the laws of the State of Delaware, and is
duly qualified as a foreign corporation in all jurisdictions in which the nature
of its business or location of its properties require such qualifications and
where the failure to be qualified could reasonably be expected to have a
Material Adverse Effect. Borrower’s present name, former names (if any),
locations, place of formation, tax identification number, organizational
identification number and other information are correctly set forth in Exhibit
C, as may be updated by Borrower in a written notice (including any Compliance
Certificate) provided to Lender after the Closing Date.

 

 
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5.2     Collateral. Borrower owns the Collateral and the Intellectual Property,
free of all Liens, except for Permitted Liens. Borrower has the power and
authority to grant to Lender a Lien in the Collateral as security for the
Secured Obligations.

 

5.3     Consents. Borrower’s execution, delivery and performance of the Notes,
this Agreement and all other Loan Documents, and Borrower’s execution of the
Warrant, (i) have been duly authorized by all necessary corporate action of
Borrower, (ii) will not result in the creation or imposition of any Lien upon
the Collateral, other than Permitted Liens and the Liens created by this
Agreement and the other Loan Documents, (iii) do not violate any provisions of
Borrower’s Certificate or Articles of Incorporation (as applicable), bylaws, or
any, law, regulation, order, injunction, judgment, decree or writ to which
Borrower is subject and (iv) except as described on Schedule 5.3, do not violate
any contract or agreement or require the consent or approval of any other Person
which has not already been obtained. The individual or individuals executing the
Loan Documents and the Warrant are duly authorized to do so.

 

5.4     Material Adverse Effect. Since June 30, 2016, no event that has had or
could reasonably be expected to have a Material Adverse Effect has occurred and
is continuing. Borrower is not aware of any event likely to occur that is
reasonably expected to result in a Material Adverse Effect.

 

5.5     Actions Before Governmental Authorities. Except as described on Schedule
5.5, there are no actions, suits or proceedings at law or in equity or by or
before any governmental authority now pending or, to the knowledge of Borrower,
threatened in writing against or affecting Borrower or its property that could
reasonably be expected to result in a Material Adverse Effect.

 

5.6     Laws. Borrower is not in violation of any law, rule or regulation, or in
default with respect to any judgment, writ, injunction or decree of any
governmental authority, where such violation or default is reasonably expected
to result in a Material Adverse Effect. Borrower is not in default in any manner
under any provision of any agreement or instrument evidencing material
Indebtedness, or any other material agreement to which it is a party or by which
it is bound. Borrower, its Subsidiaries, and, to the extent of the actual
knowledge (but not implied knowledge) of the Borrower, its Affiliates and any
agent or other party acting on behalf of Borrower, its Subsidiaries or its
Affiliates are in compliance with all applicable anti-money laundering, economic
sanctions and anti-bribery laws and regulations, and none of the funds to be
provided under this Agreement will be used by Borrower or any of its
Subsidiaries, directly or indirectly, for any activities in violation of such
laws and regulations.

 

 
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5.7     Information Correct and Current. No information, report, Advance
Request, financial statement, exhibit or schedule furnished, by or on behalf of
Borrower to Agent in connection with any Loan Document or included therein or
delivered pursuant thereto contained, or, when taken as a whole, contains or
will contain any material misstatement of fact or, when taken together with all
other such information or documents, omitted, omits or will omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were, are or will be made, not materially
misleading at the time such statement was made or deemed made. Additionally, any
and all financial or business projections provided by Borrower to Agent, whether
prior to or after the Closing Date, shall be (i) provided in good faith and
based on the most current data and information available to Borrower, and (ii)
the most current of such projections provided to Borrower’s Board of Directors
(it being understood that such projections are subject to significant
uncertainties and contingencies, many of which are beyond the control of
Borrower, that no assurance is given that any particular projections will be
realized, that actual results may differ).

 

5.8     Tax Matters. Except as described on Schedule 5.8 and except those being
contested in good faith with adequate reserves under GAAP, (a) Borrower has
filed all material federal, state and local tax returns that it is required to
file, (b) Borrower has duly paid or fully reserved for all taxes (other than de
minimis amounts not exceeding Twenty Five Thousand Dollars ($25,000) in the
aggregate) or installments thereof (including any interest or penalties) as and
when due, which have or may become due pursuant to such returns, and (c)
Borrower has paid or fully reserved for any tax assessment received by Borrower
for the three (3) years preceding the Closing Date, if any (including any taxes
being contested in good faith and by appropriate proceedings).

 

5.9     Intellectual Property Claims. Borrower is the sole owner of, or
otherwise has the right to use, the Intellectual Property necessary or material
to Borrower’s business. Except as described on Schedule 5.9, (i) each of the
material Copyrights, Trademarks and Patents is valid and enforceable, (ii) no
material part of the Intellectual Property has been judged invalid or
unenforceable, in whole or in part, and (iii) no claim has been made to Borrower
that any material part of the Intellectual Property violates the rights of any
third party. Exhibit D is a true, correct and complete list of each of
Borrower’s Patents, registered Trademarks, registered Copyrights, and material
agreements under which Borrower licenses Intellectual Property from third
parties (other than shrink-wrap software licenses), together with application or
registration numbers, as applicable, owned by Borrower or any Subsidiary, in
each case as of the Closing Date. Borrower is not in material breach of, nor has
Borrower failed to perform any material obligations under, any of the foregoing
contracts, licenses or agreements and, to Borrower’s knowledge, no third party
to any such contract, license or agreement is in material breach thereof or has
failed to perform any material obligations thereunder.

 

5.10     Intellectual Property. Except as described on Schedule 5.10, Borrower
has, or in the case of any proposed business, will have, all material rights
with respect to Intellectual Property necessary or material in the operation or
conduct of Borrower’s business as currently conducted and proposed to be
conducted by Borrower. Without limiting the generality of the foregoing, and in
the case of Licenses, except for restrictions that are unenforceable under
Division 9 of the UCC, Borrower has the right, to the extent required to operate
Borrower’s business, to freely transfer, license or assign Intellectual Property
necessary or material in the operation or conduct of Borrower’s business as
currently conducted by Borrower without condition, restriction or payment of any
kind (other than license payments in the ordinary course of business) to any
third party, and Borrower owns or has the right to use, pursuant to valid
licenses, all software development tools, library functions, compilers and all
other third-party software and other items that are necessary or material to
Borrower’s business and used in the design, development, promotion, sale,
license, manufacture, import, export, use or distribution of Borrower Products,
except customary covenants in inbound license agreements and equipment leases
where Borrower is the licensee or lessee.

 

 
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5.11     Borrower Products. Except as described on Schedule 5.11, no
Intellectual Property owned by Borrower and no Borrower Product has been or is
subject to any actual or, to the knowledge of Borrower, threatened in writing
litigation, proceeding (including any proceeding in the United States Patent and
Trademark Office or any corresponding foreign office or agency) or outstanding
decree, order, judgment, settlement agreement or stipulation that restricts in
any manner Borrower’s use, transfer or licensing thereof or that may affect the
validity, use or enforceability thereof. There is no decree, order, judgment,
agreement, stipulation, arbitral award or other provision entered into in
connection with any litigation or proceeding that obligates Borrower to grant
licenses or ownership interest in any future Intellectual Property related to
the operation or conduct of the business of Borrower or Borrower Products.
Borrower has not received any written notice or claim, or, to the knowledge of
Borrower, oral notice or claim, challenging or questioning Borrower’s ownership
in any Intellectual Property (or written notice of any claim challenging or
questioning the ownership in any licensed Intellectual Property of the owner
thereof) or suggesting that any third party has any claim of legal or beneficial
ownership with respect thereto nor, to Borrower’s knowledge, is there a
reasonable basis for any such claim. Neither Borrower’s use of its Intellectual
Property nor the production and sale of Borrower Products infringes the
Intellectual Property or other rights of others except where such use or
production and sale could not reasonably be expected to cause a Material Adverse
Effect.

 

5.12     Financial Accounts. Exhibit E, as may be updated by the Borrower in a
written notice provided to Agent after the Closing Date, is a true, correct and
complete list of (a) all banks and other financial institutions at which
Borrower or any Subsidiary maintains Deposit Accounts and (b) all institutions
at which Borrower or any Subsidiary maintains an account holding Investment
Property, and such exhibit correctly identifies the name, address and telephone
number of each bank or other institution, the name in which the account is held,
a description of the purpose of the account, and the complete account number
therefor.

 

5.13     Employee Loans. Borrower has no outstanding loans to any employee,
officer or director of the Borrower nor has Borrower guaranteed the payment of
any loan made to an employee, officer or director of the Borrower by a third
party.

 

 
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5.14     Capitalization and Subsidiaries. Borrower’s capitalization as of the
Closing Date is set forth on Schedule 5.14 annexed hereto. Borrower does not own
any stock, partnership interest or other securities of any Person, except for
Permitted Investments. Attached as Schedule 5.14, as may be updated by Borrower
in a written notice provided after the Closing Date, is a true, correct and
complete list of each Subsidiary.

 

SECTION 6. INSURANCE; INDEMNIFICATION

 

6.1     Coverage. Borrower shall cause to be carried and maintained commercial
general liability insurance, on an occurrence form, against risks customarily
insured against in Borrower’s line of business. Such risks shall include the
risks of bodily injury, including death, property damage, personal injury,
advertising injury, and contractual liability per the terms of the
indemnification agreement found in Section 6.3. Borrower must maintain a minimum
of $2,000,000 of commercial general liability insurance for each occurrence.
Borrower has and agrees to maintain a minimum of $10,000,000 of directors’ and
officers’ insurance for each occurrence and $10,000,000 in the aggregate. So
long as there are any Secured Obligations (other than inchoate indemnity
obligations) outstanding, Borrower shall also cause to be carried and maintained
insurance upon the Collateral, insuring against all risks of physical loss or
damage, in an amount not less than the full replacement cost of the Collateral,
provided that such insurance may be subject to standard exceptions and
deductibles. Borrower shall also carry and maintain a fidelity insurance policy
in an amount not less than $25,000.

 

6.2     Certificates. Borrower shall deliver to Agent certificates of insurance
that evidence Borrower’s compliance with its insurance obligations in Section
6.1 and the obligations contained in this Section 6.2. Borrower’s insurance
certificate shall state Lender is an additional insured for commercial general
liability, loss payee for all risk property damage insurance, subject to the
insurer’s approval, and for any future insurance that Borrower may acquire from
such or another insurer, Borrower shall use commercially reasonable efforts to
cause such insurance certificates to state that the Lender is a loss payee for
property insurance and an additional insured for liability insurance for any
future insurance that Borrower may acquire from such insurer. Attached to the
certificates of insurance will be additional insured endorsements for liability
and lender’s loss payable endorsements for all risk property damage insurance.
Borrower shall use commercially reasonable efforts to cause its agents issuing
all certificates of insurance to provide for a minimum of thirty (30) days
advance written notice to Agent of cancellation (other than cancellation for
non-payment of premiums, for which ten (10) days’ advance written notice shall
be sufficient) or any other change adverse to Agent’s interests. Any failure of
Agent to scrutinize such insurance certificates for compliance is not a waiver
of any of Agent’s rights, all of which are reserved.

 

6.3     Indemnity. Borrower agrees to indemnify and hold Agent, Lender and their
officers, directors, employees, agents, in-house attorneys, representatives and
shareholders (each, an “Indemnified Person”) harmless from and against any and
all claims, costs, expenses, damages and liabilities (including such claims,
costs, expenses, damages and liabilities based on liability in tort, including
strict liability in tort), including reasonable attorneys’ fees and
disbursements and other costs of investigation or defense (including those
incurred upon any appeal) (collectively, “Liabilities”), that may be instituted
or asserted against or incurred by such Indemnified Person as the result of
credit having been extended, suspended or terminated under this Agreement and
the other Loan Documents or the administration of such credit, or in connection
with or arising out of the transactions contemplated hereunder and thereunder,
or any actions or failures to act in connection therewith, or arising out of the
disposition or utilization of the Collateral, excluding in all cases Liabilities
to the extent resulting solely from any Indemnified Person’s gross negligence or
willful misconduct. Borrower agrees to pay, and to save Agent and Lender
harmless from, any and all liabilities with respect to, or resulting from any
delay in paying, any and all excise, sales or other similar taxes (excluding
taxes imposed on or measured by the net income of Agent or Lender) that may be
payable or determined to be payable with respect to any of the Collateral or
this Agreement. In no event shall Borrower or any Indemnified Person be liable
on any theory of liability for any special, indirect, consequential or punitive
damages (including any loss of profits, business or anticipated savings). This
Section 6.3 shall survive the repayment of indebtedness under, and otherwise
shall survive the expiration or other termination of, the Loan Agreement.

 

 
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SECTION 7. COVENANTS OF BORROWER

 

Borrower agrees as follows:

 

7.1     Financial Reports. Borrower shall furnish to Agent the financial
statements and reports listed hereinafter (the “Financial Statements”):

 

(a)     as soon as practicable (and in any event within 30 days) after the end
of each month, unaudited interim and year-to-date financial statements as of the
end of such month (prepared on a consolidated and consolidating basis, if
applicable), including balance sheet and related statements of income and cash
flows accompanied by a report detailing any material contingencies (including
the commencement of any material litigation by or against Borrower) or any other
occurrence that would reasonably be expected to have a Material Adverse Effect,
all certified by Borrower’s Chief Executive Officer or Chief Financial Officer
to the effect that they have been prepared in accordance with GAAP, except (i)
for the absence of footnotes, (ii) that they are subject to normal year end
adjustments, (iii) they do not contain certain non-cash items that are
customarily included in quarterly and annual financial statements, and (iv) for
the first two months of each quarter only the balance sheet and income statement
will be required;

 

(b)     as soon as practicable (and in any event within 45 days) after the end
of each of the first three fiscal quarters of any fiscal year of Company,
unaudited interim and year-to-date financial statements as of the end of such
fiscal quarter (prepared on a consolidated basis), including balance sheet and
related statements of income and cash flows accompanied by a report detailing
any material contingencies (including the commencement of any material
litigation by or against Borrower) or any other occurrence that would reasonably
be expected to have a Material Adverse Effect, certified by Company’s Chief
Executive Officer or Chief Financial Officer to the effect that they have been
prepared in accordance with GAAP, except (i) for the absence of footnotes, and
(ii) that they are subject to normal year end adjustments; as well as the most
recent capitalization table for Borrower, including the weighted average
exercise price of employee stock options;

 

 
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(c)     as soon as practicable (and in any event within 90 days) after the end
of each fiscal year, unqualified audited financial statements as of the end of
such year (prepared on a consolidated basis), including balance sheet and
related statements of income and cash flows, and setting forth in comparative
form the corresponding figures for the preceding fiscal year, certified by a
firm of independent certified public accountants selected by Borrower and
reasonably acceptable to Lender (it being understood that OUM & Co. and any
accountants of recognized national or regional standing are acceptable to
Lender), accompanied by any management report from such accountants;

 

(d)     as soon as practicable (and in any event within 30 days) after the end
of each month, a Compliance Certificate in the form of Exhibit F;

 

(e)     promptly after the sending or filing thereof, as the case may be, copies
of any proxy statements, financial statements or reports that Borrower has made
available to holders of its Preferred Stock and copies of any regular, periodic
and special reports or registration statements that Borrower files with the SEC
or any governmental authority that may be substituted therefor, or any national
securities exchange;

 

(f)     [reserved]; and

 

(g)     financial and business projections promptly following their approval by
Borrower’s Board of Directors, as well as other financial information reasonably
requested by Lender.

 

Borrower shall not make any change in its (a) accounting policies or reporting
practices, except in accordance with GAAP or with the consent of Lender, or (b)
fiscal years or fiscal quarters. The fiscal year of Borrower shall end on
December 31.

 

The executed Compliance Certificate may be sent via email to Agent at
legal@herculestech.com. All Financial Statements required to be delivered
pursuant to clauses (a), (b) and (c) shall be sent via e-mail to
financialstatements@herculestech.com with a copy to legal@herculestech.com
provided that, if e-mail is not available or sending such Financial Statements
via e-mail is not possible, they shall be sent to Agent at:
legal@herculestech.com, attention Chief Credit Officer.

 

Notwithstanding the foregoing, documents required to be delivered pursuant to
the terms hereof (to the extent any such documents are included in materials
otherwise filed with the SEC) may be delivered electronically and if so
delivered, shall be deemed to have been delivered on the date on which Borrower
emails a link thereto to Agent.

 

 
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7.2     Management Rights. Borrower shall permit any representative that Agent
or Lender authorizes, including its attorneys and accountants, to inspect the
Collateral and examine and make copies and abstracts of the books of account and
records of Borrower at reasonable times and upon reasonable notice during normal
business hours. Such inspections or examinations shall be conducted no more
often than once every six months unless an Event of Default has occurred and is
continuing. In addition, any such representative shall have the right to meet
with management and officers of Borrower to discuss such books of account and
records. In addition, Agent or Lender shall be entitled at reasonable times and
intervals to consult with and advise the management and officers of Borrower
concerning significant business issues affecting Borrower. Such consultations
shall not unreasonably interfere with Borrower’s business operations. The
parties intend that the rights granted Agent and Lender shall constitute
“management rights” within the meaning of 29 C.F.R. Section
2510.3-101(d)(3)(ii), but that any advice, recommendations or participation by
Agent or Lender with respect to any business issues shall not be deemed to give
Agent or Lender, nor be deemed an exercise by Agent or Lender of, control over
Borrower’s management or policies.

 

7.3     Further Assurances. Borrower shall from time to time execute, deliver
and file, alone or with Agent, any financing statements, security agreements,
collateral assignments, notices, control agreements, or other documents to
perfect or give the highest priority to Agent’s Lien on the Collateral (subject
to Permitted Liens that are permitted pursuant to the terms of this Agreement to
have superior priority to Agent’s Lien under this Agreement). Borrower shall
from time to time procure any instruments or documents as may be reasonably
requested by Agent, and take all further action that may be necessary or
desirable, or that Agent may reasonably request, to perfect and protect the
Liens granted hereby and thereby. In addition, and for such purposes only,
Borrower hereby authorizes Agent to execute and deliver on behalf of Borrower
and to file such financing statements (including an indication that the
financing statement covers “all assets” or “all personal property” of Borrower
in accordance with Section 9-504 of the UCC), collateral assignments, notices,
control agreements, security agreements and other documents without the
signature of Borrower either in Agent’s name or in the name of Agent as agent
and attorney-in-fact for Borrower. Borrower shall protect and defend Borrower’s
title to the Collateral and Agent’s Lien thereon against all Persons claiming
any interest adverse to Borrower or Agent other than Permitted Liens.

 

7.4     [Post-Closing Items. Borrower shall use its commercially reasonable
efforts to deliver or cause to be delivered the documents listed on Schedule 7.4
on or before the corresponding dates set forth on Schedule 7.4.]

 

7.5     Indebtedness. Borrower shall not create, incur, assume, guarantee or be
or remain liable with respect to any Indebtedness, or permit any Subsidiary so
to do, other than Permitted Indebtedness, or prepay any Indebtedness or take any
actions which impose on Borrower an obligation to prepay any Indebtedness,
except (a) for the conversion of Indebtedness into equity securities and the
payment of cash in lieu of fractional shares in connection with such conversion,
(b) for purchase money Indebtedness permitted under this Agreement pursuant to
its then applicable payment schedule, (c) for prepayment by any Subsidiary of
(i) intercompany Indebtedness owed by such Subsidiary to any Borrower or (ii) if
such Subsidiary is not a Borrower, intercompany Indebtedness owed by such
Subsidiary to another Subsidiary that is not a Borrower or (d) as otherwise
permitted hereunder or approved in writing by Agent.

 

 
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7.6     Collateral. Borrower shall at all times keep the Collateral, the
Intellectual Property and all other property and assets used in Borrower’s
business or in which Borrower now or hereafter holds any interest free and clear
from any legal process or Liens whatsoever (except for Permitted Liens), and
shall give Agent prompt written notice of any legal process affecting the
Collateral, the Intellectual Property, such other property and assets, or any
Liens thereon. Borrower shall cause its Subsidiaries to protect and defend such
Subsidiary’s title to its assets from and against all Persons claiming any
interest adverse to such Subsidiary, and Borrower shall cause its Subsidiaries
at all times to keep such Subsidiary’s property and assets free and clear from
any legal process or Liens whatsoever (except for Permitted Liens), and shall
give Agent prompt written notice of any legal process affecting such
Subsidiary’s assets. Except with respect to (i) specific property encumbered to
secure payment of particular Indebtedness incurred to finance the acquisition of
such property, (ii) Liens on Excluded Assets described in subsection (xv) of the
definition of Permitted Liens, and (iii) restrictions by reason of customary
provisions restricting assignment, subletting or other transfers contained in
leases, licenses and similar agreements entered into in the ordinary course of
business (provided that such restrictions are limited to the property or assets
secured by such Liens, Excluded Assets or the property or assets subject to such
leases, licenses or similar agreements, as the case may be), Borrower shall not
agree with any Person other than Agent not to encumber its property.

 

7.7     Investments. Borrower shall not directly or indirectly acquire or own,
or make any Investment in or to any Person, or permit any of its Subsidiaries so
to do, other than Permitted Investments.

 

7.8     Distributions. Borrower shall not, and shall not allow any Subsidiary
to, (a) repurchase or redeem any class of stock or other equity interest other
than pursuant to employee, director or consultant stock purchase or repurchase
plans or other similar agreements, provided, however, in each case the
repurchase or redemption price does not exceed the original consideration paid
for such stock or equity interest, or (b) declare or pay any cash dividend or
make a cash distribution on any class of stock or other equity interest, except
that a Subsidiary may pay dividends or make distributions to Borrower, or (c)
lend money to any employees, officers or directors except as expressly permitted
by clause (ix) of the definition of Permitted Investments, or guarantee the
payment of any such loans granted by a third party in excess of $100,000 in the
aggregate or (d) waive, release or forgive any Indebtedness owed by any
employees, officers or directors in excess of $100,000 in the aggregate.

 

7.9     Transfers. Except for Permitted Transfers, neither Borrower nor its
Subsidiaries shall voluntarily or involuntarily transfer, sell, lease, license,
lend or in any other manner convey any equitable, beneficial or legal interest
in any material portion of their assets.

 

 
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7.10     Mergers or Acquisitions. Borrower shall not merge or consolidate, or
permit any of its Subsidiaries to merge or consolidate, with or into any other
business organization (other than mergers or consolidations of (a) a Subsidiary
which is not a Borrower into another Subsidiary or into a Borrower, (b) a
Borrower into another Borrower, (c) any Person into a Borrower in a transaction
in which the surviving entity is such Borrower or (d) any Person (other than a
Borrower) into a Subsidiary in a transaction in which the surviving entity is
such Subsidiary), or acquire, or permit any of its Subsidiaries to acquire, all
or substantially all of the capital stock or property of another Person, except
for acquisitions permitted by Section 7.7.

 

7.11     Taxes. Borrower and its Subsidiaries shall pay when due all taxes
(other than de minimis amounts not exceeding Twenty Five Thousand Dollars
($25,000) in the aggregate), fees or other charges of any nature whatsoever
(together with any related interest or penalties) now or hereafter imposed or
assessed against Borrower, Agent or Lender (to the extent assessed in connection
with the making of the Loan hereunder but excluding taxes on Lender’s net
income) or the Collateral or upon Borrower’s ownership, possession, use,
operation or disposition thereof or upon Borrower’s rents, receipts or earnings
arising therefrom. Borrower shall file on or before the due date therefor all
personal property tax returns in respect of the Collateral. Notwithstanding the
foregoing, Borrower may contest, in good faith and by appropriate proceedings,
taxes for which Borrower maintains adequate reserves therefor in accordance with
GAAP.

 

7.12     Corporate Changes. Neither Borrower nor any Subsidiary shall change its
corporate name, legal form or jurisdiction of formation without twenty (20)
days’ prior written notice to Agent. Neither Borrower nor any Subsidiary shall
suffer a Change in Control. Neither Borrower nor any Subsidiary shall relocate
its chief executive office or its principal place of business unless: (i) it has
provided prior written notice to Agent; and (ii) such relocation shall be within
the continental United States of America. Neither Borrower nor any Domestic
Subsidiary shall relocate any item of Collateral (other than (w) sales of
Inventory in the ordinary course of business, (x) relocations of mobile
Equipment, (y) relocations of other Equipment having an aggregate value of up to
$150,000 in any fiscal year, and (z) relocations of Collateral from a location
described on Exhibit C to another location described on Exhibit C) unless (i) it
has provided prompt written notice to Agent, (ii) such relocation is within the
continental United States or to such other jurisdiction as designated in writing
by Borrower from time to time, and, (iii) if such relocation is to a third party
bailee, it has delivered a bailee agreement in form and substance reasonably
acceptable to Agent.

 

7.13     Deposit Accounts. Neither Borrower nor any Domestic Subsidiary shall
maintain any Deposit Accounts, or accounts holding Investment Property, except
with respect to which Agent has an Account Control Agreement.

 

7.14     Borrower shall notify Agent of each Subsidiary formed subsequent to the
Closing Date and, within 30 days of formation, shall cause any such Domestic
Subsidiary to execute and deliver to Agent a Joinder Agreement.

 

 
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7.15     Notification of Event of Default. Borrower shall notify Agent promptly
upon becoming aware of the occurrence of any Event of Default, such notice to be
sent via facsimile or email to Agent.

 

7.16     Agent and Lender have received a license from the U.S. Small Business
Administration (“SBA”) to extend loans as a small business investment company
(“SBIC”) pursuant to the Small Business Investment Act of 1958, as amended, and
the associated regulations (collectively, the “SBIC Act”). Portions of the loan
to Borrower will be made under the SBA license and the SBIC Act. Addendum 1 to
this Agreement outlines various responsibilities of Agent, Lender and Borrower
associated with an SBA loan, and such Addendum 1 is hereby incorporated in this
Agreement.

 

SECTION 8. [Reserved]

 

SECTION 9. EVENTS OF DEFAULT

 

The occurrence of any one or more of the following events shall be an Event of
Default:

 

9.1     Payments. Borrower fails to pay any amount due under this Agreement, the
Notes or any of the other Loan Documents on the due date; provided, however,
that an Event of Default shall not occur on account of a failure to pay due
solely to an administrative or operational error of Lender or Borrower's bank if
Borrower had the funds to make the payment when due and makes the payment within
three (3) business days following Borrower's knowledge of such failure to pay;
or

 

9.2     Covenants. Borrower breaches or defaults in the performance of any
covenant or Secured Obligation under this Agreement, the Notes, or any of the
other Loan Documents, and (a) with respect to a default under any covenant under
this Agreement (other than under Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10, 7.15
and 7.16), such default continues for more than ten (10) days after the earlier
of the date on which (i) Agent or Lender has given notice of such default to
Borrower and (ii) Borrower has actual knowledge of such default or (b) with
respect to a default under any of Sections 6, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10,
7.15 or 7.16, the occurrence of such default; or

 

9.3     Material Adverse Effect. A circumstance has occurred that would
reasonably be expected to have a Material Adverse Effect; or

 

9.4     Other Loan Documents. The occurrence of any default under any Loan
Document or any other agreement between Borrower and Lender and such default
continues for more than ten (10) days after the earlier of the date on which
(a) Lender has given notice of such default to Borrower, or (b) Borrower has
actual knowledge of such default; or

 

9.5     Representations. Any representation or warranty made by Borrower in any
Loan Document or in the Warrant shall have been false or misleading in any
material respect; or

 

 
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9.6     Insolvency. Borrower (A) (i) shall make an assignment for the benefit of
creditors; or (ii) shall be unable to pay its debts as they become due, or be
unable to pay or perform under the Loan Documents, or shall become insolvent; or
(iii) shall file a voluntary petition in bankruptcy; or (iv) shall file any
petition, answer, or document seeking for itself any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation pertinent to such
circumstances; or (v) shall seek or consent to or acquiesce in the appointment
of any trustee, receiver, or liquidator of Borrower or of all or any substantial
part (i.e., 33-1/3% or more) of the assets or property of Borrower; or
(vi) shall cease operations of its business as its business has normally been
conducted, or terminate substantially all of its employees; or (vii) Borrower or
its directors or majority shareholders shall take any action initiating any of
the foregoing actions described in clauses (i) through (vi); or (B) either
(i) forty-five (45) days shall have expired after the commencement of an
involuntary action against Borrower seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statute, law or regulation, without such action being
dismissed or all orders or proceedings thereunder affecting the operations or
the business of Borrower being stayed; or (ii) a stay of any such order or
proceedings shall thereafter be set aside and the action setting it aside shall
not be timely appealed; or (iii) Borrower shall file any answer admitting or not
contesting the material allegations of a petition filed against Borrower in any
such proceedings; or (iv) the court in which such proceedings are pending shall
enter a decree or order granting the relief sought in any such proceedings; or
(v) forty-five (45) days shall have expired after the appointment, without the
consent or acquiescence of Borrower, of any trustee, receiver or liquidator of
Borrower or of all or any substantial part of the properties of Borrower without
such appointment being vacated; or

 

9.7     Attachments; Judgments. Any portion of Borrower’s assets is attached or
seized, or a levy is filed against any such assets, or a judgment or judgments
is/are entered for the payment of money, individually or in the aggregate, of at
least $500,000, and such judgment remains unstayed for a period of ten (10)
days, or Borrower is enjoined or in any way prevented by court order from
conducting any part of its business; or

 

9.8     Other Obligations. The occurrence of any default (after giving effect to
any grace or cure period, if any) under any agreement or obligation of Borrower
involving any Indebtedness which results in a right by a third party or parties,
whether or not exercised, to accelerate the maturity of such Indebtedness in
excess of $250,000, or the occurrence of any default by Borrower under any
agreement of Borrower involving any Indebtedness that could reasonably be
expected to have a Material Adverse Effect; or

 

9.9     Stop Trade. At any time after Lender has received shares of Common Stock
pursuant to the terms set forth in Section 2.3(e), an SEC stop trade order or
NASDAQ market trading suspension of the Common Stock shall be in effect for five
(5) consecutive days or five (5) days during a period of ten (10) consecutive
days, excluding in all cases a suspension of all trading on a public market,
provided that Borrower shall not have been able to cure such trading suspension
within thirty (30) days of the notice thereof or list the Common Stock on
another public market within sixty (60) days of such notice.

 

 
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SECTION 10. REMEDIES

 

10.1     General. Upon and during the continuance of any one or more Events of
Default, (i) Agent may, and at the direction of the Required Lenders shall,
accelerate and demand payment of all or any part of the Secured Obligations
together with a Prepayment Charge and declare them to be immediately due and
payable (provided, that upon the occurrence of an Event of Default of the type
described in Section 9.6, the Notes and all of the Secured Obligations shall
automatically be accelerated and made due and payable, in each case without any
further notice or act), (ii) Agent may, at its option, sign and file in
Borrower’s name any and all collateral assignments, notices, control agreements,
security agreements and other documents it deems necessary or appropriate to
perfect or protect the repayment of the Secured Obligations, and in furtherance
thereof, Borrower hereby grants Agent an irrevocable power of attorney coupled
with an interest, and (iii) Agent may notify any of Borrower’s account debtors
to make payment directly to Agent, compromise the amount of any such account on
Borrower’s behalf and endorse Agent’s name without recourse on any such payment
for deposit directly to Agent’s account. Agent may, and at the direction of the
Required Lenders shall, exercise all rights and remedies with respect to the
Collateral under the Loan Documents or otherwise available to it under the UCC
and other applicable law, including the right to release, hold, sell, lease,
liquidate, collect, realize upon, or otherwise dispose of all or any part of the
Collateral and the right to occupy, utilize, process and commingle the
Collateral. All Agent’s rights and remedies shall be cumulative and not
exclusive.

 

10.2     Collection; Foreclosure. Upon the occurrence and during the continuance
of any Event of Default, Agent may, and at the direction of the Required Lenders
shall, at any time or from time to time, apply, collect, liquidate, sell in one
or more sales, lease or otherwise dispose of, any or all of the Collateral, in
its then condition or following any commercially reasonable preparation or
processing, in such order as Agent may elect. Any such sale may be made either
at public or private sale at its place of business or elsewhere. Borrower agrees
that any such public or private sale may occur upon ten (10) calendar days’
prior written notice to Borrower. Agent may require Borrower to assemble the
Collateral and make it available to Agent at a place designated by Agent that is
reasonably convenient to Agent and Borrower. The proceeds of any sale,
disposition or other realization upon all or any part of the Collateral shall be
applied by Agent in the following order of priorities:

 

First, to Agent and Lender in an amount sufficient to pay in full Agent’s and
Lender’s reasonable costs and professionals’ and advisors’ fees and expenses as
described in Section 11.11;

 

Second, to Lender in an amount equal to the then unpaid amount of the Secured
Obligations (including principal, interest, and the Default Rate interest), in
such order and priority as Agent may choose in its sole discretion; and

 

Finally, after the full and final payment in Cash of all of the Secured
Obligations (other than inchoate obligations), to any creditor holding a junior
Lien on the Collateral, or to Borrower or its representatives or as a court of
competent jurisdiction may direct.

 

 
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Agent shall be deemed to have acted reasonably in the custody, preservation and
disposition of any of the Collateral if it complies with the obligations of a
secured party under the UCC.

 

10.3     No Waiver. Agent shall be under no obligation to marshal any of the
Collateral for the benefit of Borrower or any other Person, and Borrower
expressly waives all rights, if any, to require Agent to marshal any Collateral.

 

10.4     Cumulative Remedies. The rights, powers and remedies of Agent hereunder
shall be in addition to all rights, powers and remedies given by statute or rule
of law and are cumulative. The exercise of any one or more of the rights, powers
and remedies provided herein shall not be construed as a waiver of or election
of remedies with respect to any other rights, powers and remedies of Agent.

 

SECTION 11. MISCELLANEOUS

 

11.1     Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
such law, such provision shall be ineffective only to the extent and duration of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.

 

11.2     Notice. Except as otherwise provided herein, any notice, demand,
request, consent, approval, declaration, service of process or other
communication (including the delivery of Financial Statements) that is required,
contemplated, or permitted under the Loan Documents or with respect to the
subject matter hereof shall be in writing, and shall be deemed to have been
validly served, given, delivered, and received upon the earlier of: (i) the day
of transmission by electronic mail or hand delivery or delivery by an overnight
express service or overnight mail delivery service; or (ii) the third calendar
day after deposit in the United States of America mails, with proper first class
postage prepaid, in each case addressed to the party to be notified as follows:

 

If to Agent:

 

HERCULES TECHNOLOGY II, L.P. as agent
Legal Department
Attention: Chief Legal Officer and Himani Bhalla
400 Hamilton Avenue, Suite 310
Palo Alto, CA 94301
email: legal@herculestech.com
Telephone: 650-289-3060

 

 
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If to Lender:

 

HERCULES CAPITAL FUNDING TRUST 2014-1
Legal Department
Attention: Chief Legal Officer and Himani Bhalla
400 Hamilton Avenue, Suite 310
Palo Alto, CA 94301
email: legal@herculestech.com
Telephone: 650-289-3060

 

and

 

HERCULES TECHNOLOGY II, L.P.
Legal Department
Attention: Chief Legal Officer and Himani Bhalla
400 Hamilton Avenue, Suite 310
Palo Alto, CA 94301
email: legal@herculestech.com
Telephone: 650-289-3060

 

 

 

If to Borrower:

 

ACELRX PHARMACEUTICALS, INC.
Attention: Chief Financial Officer
351 Galveston Drive
Redwood City, CA 94063
email: [●]
Telephone: 650-216-3511

 

or to such other address as each party may designate for itself by like notice.

 

11.3     Entire Agreement; Amendments.

 

This Agreement and the other Loan Documents constitute the entire agreement and
understanding of the parties hereto in respect of the subject matter hereof and
thereof, and supersede and replace in their entirety any prior proposals, term
sheets, non-disclosure or confidentiality agreements, letters, negotiations or
other documents or agreements, whether written or oral, with respect to the
subject matter hereof or thereof.

 

Neither this Agreement, any other Loan Document, nor any terms hereof or thereof
may be amended, supplemented or modified except in accordance with the
provisions of this Section 11.3. The Required Lenders and Borrower party to the
relevant Loan Document may, or, with the written consent of the Required
Lenders, the Agent and the Borrower party to the relevant Loan Document may,
from time to time, (i) enter into written amendments, supplements or
modifications hereto and to the other Loan Documents for the purpose of adding
any provisions to this Agreement or the other Loan Documents or changing in any
manner the rights of the Lenders or of the Borrower hereunder or thereunder or
(ii) waive, on such terms and conditions as the Required Lenders or the Agent,
as the case may be, may specify in such instrument, any of the requirements of
this Agreement or the other Loan Documents or any default or Event of Default
and its consequences; provided, however, that no such waiver and no such
amendment, supplement or modification shall (A) forgive the principal amount or
extend the final scheduled date of maturity of any Loan, extend the scheduled
date of any amortization payment in respect of any Term Loan, reduce the stated
rate of any interest or fee payable hereunder) or extend the scheduled date of
any payment thereof, in each case without the written consent of each Lender
directly affected thereby; (B) eliminate or reduce the voting rights of any
Lender under this Section 11.3 without the written consent of such Lender; (C)
reduce any percentage specified in the definition of Required Lenders, consent
to the assignment or transfer by the Borrower of any of its rights and
obligations under this Agreement and the other Loan Documents, release all or
substantially all of the Collateral or release a Borrower from its obligations
under the Loan Documents, in each case without the written consent of all
Lenders; or (D) amend, modify or waive any provision of Section 11.17 without
the written consent of the Agent. Any such waiver and any such amendment,
supplement or modification shall apply equally to each Lender and shall be
binding upon Borrower, the Lender, the Agent and all future holders of the
Loans.

 

 
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11.4     No Strict Construction. The parties hereto have participated jointly in
the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement.

 

11.5     No Waiver. The powers conferred upon Agent and Lender by this Agreement
are solely to protect its rights hereunder and under the other Loan Documents
and its interest in the Collateral and shall not impose any duty upon Agent or
Lender to exercise any such powers. No omission or delay by Agent or Lender at
any time to enforce any right or remedy reserved to it, or to require
performance of any of the terms, covenants or provisions hereof by Borrower at
any time designated, shall be a waiver of any such right or remedy to which
Agent or Lender is entitled, nor shall it in any way affect the right of Agent
or Lender to enforce such provisions thereafter.

 

11.6     Survival. All agreements, representations and warranties contained in
this Agreement and the other Loan Documents or in any document delivered
pursuant hereto or thereto shall be for the benefit of Agent and Lender and
shall survive the execution and delivery of this Agreement. Section 6.3 shall
survive the termination of this Agreement.

 

11.7     Successors and Assigns. The provisions of this Agreement and the other
Loan Documents shall inure to the benefit of and be binding on Borrower and its
permitted assigns (if any). Borrower shall not assign its obligations under this
Agreement or any of the other Loan Documents without Agent’s express prior
written consent, and any such attempted assignment shall be void and of no
effect. Agent and Lender may assign, transfer, or endorse its rights hereunder
and under the other Loan Documents without prior notice to Borrower, and all of
such rights shall inure to the benefit of Agent’s and Lender’s successors and
assigns; provided that, as long as no Event of Default has occurred and is
continuing, neither Agent nor any Lender may assign, transfer or endorse its
rights hereunder or under the Loan Documents to any party that is a direct
competitor of Borrower (as reasonably determined by Agent), it being
acknowledged that, in all cases, any transfer to an Affiliate of any Lender or
Agent shall be allowed.

 

 
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11.8     Governing Law. This Agreement and the other Loan Documents have been
negotiated and delivered to Agent and Lender in the State of California, and
shall have been accepted by Agent and Lender in the State of California. Payment
to Agent and Lender by Borrower of the Secured Obligations is due in the State
of California. This Agreement and, except to the extent another jurisdiction is
specified therein, the other Loan Documents shall be governed by, and construed
and enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.

 

11.9     Consent to Jurisdiction and Venue. All judicial proceedings (to the
extent that the reference requirement of Section 11.10 is not applicable)
arising in or under or related to this Agreement or any of the other Loan
Documents may be brought in any state or federal court located in the State of
California. By execution and delivery of this Agreement, each party hereto
generally and unconditionally: (a) consents to nonexclusive personal
jurisdiction in Santa Clara County, State of California; (b) waives any
objection as to jurisdiction or venue in Santa Clara County, State of
California; (c) agrees not to assert any defense based on lack of jurisdiction
or venue in the aforesaid courts; and (d) irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Agreement or the other Loan
Documents. Service of process on any party hereto in any action arising out of
or relating to this Agreement shall be effective if given in accordance with the
requirements for notice set forth in Section 11.2, and shall be deemed effective
and received as set forth in Section 11.2. Nothing herein shall affect the right
to serve process in any other manner permitted by law or shall limit the right
of either party to bring proceedings in the courts of any other jurisdiction.

 

11.10     Mutual Waiver of Jury Trial / Judicial Reference.

 

Because disputes arising in connection with complex financial transactions are
most quickly and economically resolved by an experienced and expert Person and
the parties wish applicable state and federal laws to apply (rather than
arbitration rules), the parties desire that their disputes be resolved by a
judge applying such applicable laws. EACH OF BORROWER, AGENT AND LENDER
SPECIFICALLY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY OF ANY CAUSE OF
ACTION, CLAIM, CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR ANY OTHER CLAIM
(COLLECTIVELY, “CLAIMS”) ASSERTED BY BORROWER AGAINST AGENT, LENDER OR THEIR
RESPECTIVE ASSIGNEE OR BY AGENT, LENDER OR THEIR RESPECTIVE ASSIGNEE AGAINST
BORROWER. This waiver extends to all such Claims, including Claims that involve
Persons other than Agent, Borrower and Lender; Claims that arise out of or are
in any way connected to the relationship among Borrower, Agent and Lender; and
any Claims for damages, breach of contract, tort, specific performance, or any
equitable or legal relief of any kind, arising out of this Agreement, any other
Loan Document.

 

 
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If the waiver of jury trial set forth in Section 11.10(a) is ineffective or
unenforceable, the parties agree that all Claims shall be resolved by reference
to a private judge sitting without a jury, pursuant to Code of Civil Procedure
Section 638, before a mutually acceptable referee or, if the parties cannot
agree, a referee selected by the Presiding Judge of the Santa Clara County,
California. Such proceeding shall be conducted in Santa Clara County,
California, with California rules of evidence and discovery applicable to such
proceeding.

 

In the event Claims are to be resolved by judicial reference, either party may
seek from a court identified in Section 11.9, any prejudgment order, writ or
other relief and have such prejudgment order, writ or other relief enforced to
the fullest extent permitted by law notwithstanding that all Claims are
otherwise subject to resolution by judicial reference.

 

11.11     Professional Fees. Borrower promises to pay Agent’s and Lender’s fees
and expenses necessary to finalize the loan documentation, including but not
limited to reasonable attorneys fees, UCC searches, filing costs, and other
miscellaneous expenses. In addition, Borrower promises to pay any and all
reasonable attorneys’ and other professionals’ fees and expenses incurred by
Agent and Lender after the Closing Date in connection with or related to:
(a) the Loan; (b) the administration, collection, or enforcement of the Loan;
(c) the amendment or modification of the Loan Documents; (d) any waiver,
consent, release, or termination under the Loan Documents; (e) the protection,
preservation, audit, field exam, sale, lease, liquidation, or disposition of
Collateral or the exercise of remedies with respect to the Collateral; (f) any
legal, litigation, administrative, arbitration, or out of court proceeding in
connection with or related to Borrower or the Collateral, and any appeal or
review thereof; and (g) any bankruptcy, restructuring, reorganization,
assignment for the benefit of creditors, workout, foreclosure, or other action
related to Borrower, the Collateral, the Loan Documents, including representing
Agent or Lender in any adversary proceeding or contested matter commenced or
continued by or on behalf of Borrower’s estate, and any appeal or review
thereof.

 

11.12     Confidentiality. Agent and Lender acknowledge that certain items of
Collateral and information provided to Agent and Lender by Borrower are
confidential and proprietary information of Borrower, if and to the extent such
information either (x) is marked as confidential by Borrower at the time of
disclosure, or (y) should reasonably be understood to be confidential (the
“Confidential Information”). Accordingly, Agent and Lender agree that any
Confidential Information it may obtain in the course of acquiring,
administering, or perfecting Agent’s security interest in the Collateral shall
not be disclosed to any other Person or entity in any manner whatsoever, in
whole or in part, without the prior written consent of Borrower, except that
Agent and Lender may disclose any such information: (a) to its own directors,
officers, employees, accountants, counsel and other professional advisors and to
its Affiliates if Agent or Lender in their sole discretion determines that any
such party should have access to such information in connection with such
party’s responsibilities in connection with the Loan or this Agreement and,
provided that such recipient of such Confidential Information either (i) agrees
to be bound by the confidentiality provisions of this paragraph or (ii) is
otherwise subject to confidentiality restrictions that reasonably protect
against the disclosure of Confidential Information; (b) if such information is
generally available to the public through no fault of Agent or Lender; (c) if
required or appropriate in any report, statement or testimony submitted to any
governmental authority having or claiming to have jurisdiction over Agent or
Lender; (d) if required or appropriate in response to any summons or subpoena or
in connection with any litigation, to the extent permitted or deemed advisable
by Agent’s or Lender’s counsel; (e) to comply with any legal requirement or law
applicable to Agent or Lender; (f) to the extent reasonably necessary in
connection with the exercise of any right or remedy under any Loan Document,
including Agent’s sale, lease, or other disposition of Collateral after default;
(g) to any participant or assignee of Agent or Lender or any prospective
participant or assignee; provided, that such participant or assignee or
prospective participant or assignee agrees in writing to be bound by this
Section prior to disclosure; or (h) otherwise with the prior consent of
Borrower; provided, that any disclosure made in violation of this Agreement
shall not affect the obligations of Borrower or any of its Affiliates or any
guarantor under this Agreement or the other Loan Documents.

 

 
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11.13     Assignment of Rights. Borrower acknowledges and understands that Agent
or Lender may sell and assign all or part of its interest hereunder and under
the Note(s) (if any) and Loan Documents to any person or entity (an “Assignee”),
provided, however, that any transfer by Lender of the Note(s) (if any) shall be
subject to compliance with applicable federal and state securities laws. After
such assignment the term “Agent” or “Lender” as used in the Loan Documents shall
mean and include such Assignee, and such Assignee shall be vested with all
rights, powers and remedies of Agent and Lender hereunder with respect to the
interest so assigned; but with respect to any such interest not so transferred,
Agent and Lender shall retain all rights, powers and remedies hereby given. No
such assignment by Agent or Lender shall relieve Borrower of any of its
obligations hereunder. Lender agrees that in the event of any transfer by it of
the Note(s)(if any), it will endorse thereon a notation as to the portion of the
principal of the Note(s), which shall have been paid at the time of such
transfer and as to the date to which interest shall have been last paid thereon.

 

11.14     Revival of Secured Obligations. This Agreement and the Loan Documents
shall remain in full force and effect and continue to be effective if any
petition is filed by or against Borrower for liquidation or reorganization, if
Borrower becomes insolvent or makes an assignment for the benefit of creditors,
if a receiver or trustee is appointed for all or any significant part of
Borrower’s assets, or if any payment or transfer of Collateral is recovered from
Agent or Lender. The Loan Documents and the Secured Obligations and Collateral
security shall continue to be effective, or shall be revived or reinstated, as
the case may be, if at any time payment and performance of the Secured
Obligations or any transfer of Collateral to Agent, or any part thereof is
rescinded, avoided or avoidable, reduced in amount, or must otherwise be
restored or returned by, or is recovered from, Agent, Lender or by any obligee
of the Secured Obligations, whether as a “voidable preference,” “fraudulent
conveyance,” or otherwise, all as though such payment, performance, or transfer
of Collateral had not been made. In the event that any payment, or any part
thereof, is rescinded, reduced, avoided, avoidable, restored, returned, or
recovered, the Loan Documents and the Secured Obligations shall be deemed,
without any further action or documentation, to have been revived and reinstated
except to the extent of the full, final, and indefeasible payment to Agent or
Lender in Cash.

 

 
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11.15     Counterparts. This Agreement and any amendments, waivers, consents or
supplements hereto may be executed in any number of counterparts, and by
different parties hereto in separate counterparts, each of which when so
delivered shall be deemed an original, but all of which counterparts shall
constitute but one and the same instrument.

 

11.16     No Third Party Beneficiaries. No provisions of the Loan Documents are
intended, nor will be interpreted, to provide or create any third-party
beneficiary rights or any other rights of any kind in any Person other than
Agent, Lender and Borrower unless specifically provided otherwise herein, and,
except as otherwise so provided, all provisions of the Loan Documents will be
personal and solely among Agent, the Lender and the Borrower.

 

11.17     Publicity. None of the parties hereto nor any of its respective member
businesses and Affiliates shall, without the other parties’ prior written
consent (which shall not be unreasonably withheld or delayed), publicize or use
(a) the other party's name (including a brief description of the relationship
among the parties hereto), logo or hyperlink to such other parties’ web site,
separately or together, in written and oral presentations, advertising,
promotional and marketing materials, client lists, public relations materials or
on its web site (together, the “Publicity Materials”); (b) the names of officers
of such other parties in the Publicity Materials; and (c) such other parties’
name, trademarks, servicemarks in any news or press release concerning such
party; provided however, notwithstanding anything to the contrary herein, no
such consent shall be required (i) to the extent necessary to comply with the
requests of any regulators, legal requirements or laws applicable to such party,
pursuant to any listing agreement with any national securities exchange (so long
as such party provides prior notice to the other party hereto to the extent
reasonably practicable) and (ii) to comply with Section 11.12.

 

11.18     Agency.

 

(a)     Appointment. Lender hereby irrevocably appoints Hercules Technology II,
L.P. to act on its behalf as the Agent hereunder and under the other Loan
Documents and authorizes the Agent to take such actions on its behalf and to
exercise such powers as are delegated to the Agent by the terms hereof or
thereof, together with such actions and powers as are reasonably incidental
thereto.

 

(b)     Indemnification. Lender agrees to indemnify the Agent in its capacity as
such (to the extent not reimbursed by Borrower and without limiting the
obligation of Borrower to do so), according to its respective Term Commitment
percentages (based upon the total outstanding Term Loan Commitments) in effect
on the date on which indemnification is sought under this Section 11.18, from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind
whatsoever that may at any time be imposed on, incurred by or asserted against
the Agent in any way relating to or arising out of, this Agreement, any of the
other Loan Documents or any documents contemplated by or referred to herein or
therein or the transactions contemplated hereby or thereby or any action taken
or omitted by the Agent under or in connection with any of the foregoing. The
agreements in this Section shall survive the payment of the Loans and all other
amounts payable hereunder.

 

 
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(c)     Agent in Its Individual Capacity. The Person serving as the Agent
hereunder shall have the same rights and powers in its capacity as a Lender as
any other Lender and may exercise the same as though it were not the Agent and
the term “Lender” shall, unless otherwise expressly indicated or unless the
context otherwise requires, include each such Person serving as Agent hereunder
in its individual capacity.

 

(d)     Exculpatory Provisions. The Agent shall have no duties or obligations
except those expressly set forth herein and in the other Loan Documents. Without
limiting the generality of the foregoing, the Agent shall not:

 

 

(i)

be subject to any fiduciary or other implied duties, regardless of whether any
default or any Event of Default has occurred and is continuing;

 

 

(ii)

have any duty to take any discretionary action or exercise any discretionary
powers, except discretionary rights and powers expressly contemplated hereby or
by the other Loan Documents that the Agent is required to exercise as directed
in writing by the Lender, provided that the Agent shall not be required to take
any action that, in its opinion or the opinion of its counsel, may expose the
Agent to liability or that is contrary to any Loan Document or applicable law;
and

 

 

(iii)

except as expressly set forth herein and in the other Loan Documents, have any
duty to disclose, and the Agent shall not be liable for the failure to disclose,
any information relating to the Borrower or any of its Affiliates that is
communicated to or obtained by any Person serving as the Agent or any of its
Affiliates in any capacity.

 

(e)     The Agent shall not be liable for any action taken or not taken by it
(i) with the consent or at the request of the Lender or as the Agent shall
believe in good faith shall be necessary, under the circumstances or (ii) in the
absence of its own gross negligence or willful misconduct.

 

(f)     The Agent shall not be responsible for or have any duty to ascertain or
inquire into (i) any statement, warranty or representation made in or in
connection with this Agreement or any other Loan Document, (ii) the contents of
any certificate, report or other document delivered hereunder or thereunder or
in connection herewith or therewith, (iii) the performance or observance of any
of the covenants, agreements or other terms or conditions set forth herein or
therein or the occurrence of any default or Event of Default, (iv) the validity,
enforceability, effectiveness or genuineness of this Agreement, any other Loan
Document or any other agreement, instrument or document or (v) the satisfaction
of any condition set forth in Section 4 or elsewhere herein, other than to
confirm receipt of items expressly required to be delivered to the Agent.

 

 
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(g)     Reliance by Agent. Agent may rely, and shall be fully protected in
acting, or refraining to act, upon, any resolution, statement, certificate,
instrument, opinion, report, notice, request, consent, order, bond or other
paper or document that it has no reason to believe to be other than genuine and
to have been signed or presented by the proper party or parties or, in the case
of cables, telecopies and telexes, to have been sent by the proper party or
parties. In the absence of its gross negligence or willful misconduct, Agent may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon any certificates or opinions furnished to Agent
and conforming to the requirements of the Loan Agreement or any of the other
Loan Documents. Agent may consult with counsel, and any opinion or legal advice
of such counsel shall be full and complete authorization and protection in
respect of any action taken, not taken or suffered by Agent hereunder or under
any Loan Documents in accordance therewith. Agent shall have the right at any
time to seek instructions concerning the administration of the Collateral from
any court of competent jurisdiction. Agent shall not be under any obligation to
exercise any of the rights or powers granted to Agent by this Agreement, the
Loan Agreement and the other Loan Documents at the request or direction of
Lenders unless Agent shall have been provided by Lender with adequate security
and indemnity against the costs, expenses and liabilities that may be incurred
by it in compliance with such request or direction.

 

(SIGNATURES TO FOLLOW)

 

 
44

--------------------------------------------------------------------------------

 

  

IN WITNESS WHEREOF, Borrower, Agent and Lender have duly executed and delivered
this Amended and Restated Loan and Security Agreement as of the day and year
first above written.

 

BORROWER:

      ACELRX PHARMACEUTICALS, INC.       Signature:         
_______________________       Print Name:        _______________________      

Title:                   _______________________

          Accepted in Palo Alto, California:  

 

AGENT:

          HERCULES TECHNOLOGY II, L.P.,     a Delaware limited partnership      
                    By:      Hercules Technology SBIC                    
Management, LLC, its General Partner           By:          Hercules Capital,
Inc., its Manager                          By: _____________________________    

                          Jennifer Choe, Assistant General Counsel

                     

LENDER:

          HERCULES CAPITAL FUNDING TRUST HERCULES TECHNOLOGY II, L.P., 2014-1 a
Delaware limited partnership       __________________________________        
By:      Hercules Technology SBIC Jennifer Choe, Assistant General Counsel  
      Management, LLC, its General Partner         By:       Hercules Capital,
Inc., its Manager      

 

 

     By: ___________________________

                         Jennifer Choe, Assistant                         
General Counsel

  

 
 

--------------------------------------------------------------------------------

 

  

Table of Addenda, Exhibits and Schedules

 

 

Addendum 1: 

SBA Provisions

 

 

Exhibit A:   

Advance Request

 

Attachment to Advance Request

 

 

Exhibit B:  

Term Note

 

 

Exhibit C:   

Name, Locations, and Other Information for Borrower

 

 

Exhibit D:  

Borrower’s Patents, Trademarks, Copyrights and Licenses

 

 

Exhibit E: 

Borrower’s Deposit Accounts and Investment Accounts

 

 

Exhibit F:  

Compliance Certificate

 

 

Exhibit G: 

Joinder Agreement

 

 

Exhibit H: 

ACH Debit Authorization Agreement

 

 

Schedule 1

Subsidiaries

Schedule 1A  Commitments Schedule 1B Existing Permitted Indebtedness Schedule
1.1 Existing Permitted Investments Schedule 1C Existing Permitted Liens Schedule
5.3 Consents, Etc. Schedule 5.5 Actions Before Governmental Authorities Schedule
5.8 Tax Matters Schedule 5.9  Intellectual Property Claims Schedule 5.10
Intellectual Property Schedule 5.11 Borrower Products Schedule 5.14
Capitalization

  

 
 

--------------------------------------------------------------------------------

 

 

ADDENDUM 1 to

 

AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

 

 

 

(h)        Borrower’s Business.  For purposes of this Addendum 1, Borrower shall
be deemed to include its “affiliates” as defined in Title 13 Code of Federal
Regulations Section 121.103.  Borrower represents and warrants to Agent and
Lender as of the Closing Date and covenants to Agent and Lender for a period of
one year after the Closing Date with respect to subsections 2, 3, 4, 5, 6 and 7
below, as follows:

 

 

1.

Size Status.  As of the Closing Date, Borrower’s NAIC is 325412, and Borrower
has fewer than 750 employee in the aggregate;

 

 

2.

No Relender.  Borrower’s primary business activity does not involve, directly or
indirectly, providing funds to others, purchasing debt obligations, factoring,
or long-term leasing of equipment with no provision for maintenance or repair;

 

 

3.

No Passive Business.  Borrower is engaged in a regular and continuous business
operation (excluding the mere receipt of payments such as dividends, rents,
lease payments, or royalties).  Borrower’s employees are carrying on the
majority of day to day operations.  Borrower will not pass through substantially
all of the proceeds of the Loan to another entity;

 

 

4.

No Real Estate Business.  Borrower is not classified under Major Group 65 (Real
Estate) or Industry No. 1531 (Operative Builders) of the SIC Manual.  The
proceeds of the Loan will not be used to acquire or refinance real property
unless Borrower (x) is acquiring an existing property and will use at least 51
percent of the usable square footage for its business purposes; (y) is building
or renovating a building and will use at least 67 percent of the usable square
footage for its business purposes; or (z) occupies the subject property and uses
at least 67 percent of the usable square footage for its business purposes.

 

 

5.

No Project Finance.  Borrower’s assets are not intended to be reduced or
consumed, generally without replacement, as the life of its business progresses,
and the nature of Borrower’s business does not require that a stream of cash
payments be made to the business's financing sources, on a basis associated with
the continuing sale of assets (e.g., real estate development projects and oil
and gas wells).  The primary purpose of the Loan is not to fund production of a
single item or defined limited number of items, generally over a defined
production period, where such production will constitute the majority of the
activities of Borrower (e.g., motion pictures and electric generating plants).

 

 
 

--------------------------------------------------------------------------------

 

 

 

6.

No Farm Land Purchases.  Borrower will not use the proceeds of the Loan to
acquire farm land which is or is intended to be used for agricultural or
forestry purposes, such as the production of food, fiber, or wood, or is so
taxed or zoned.

 

 

7.

No Foreign Investment.  The proceeds of the Loan will not be used substantially
for a foreign operation.  At the time of the Loan, Borrower will not have more
than 49 percent of its employees or tangible assets located outside the United
States of America.  The representation in this subsection (7) is made only as of
the date hereof and shall not continue for one year as contemplated in the first
sentence of this Section 1.

 

(i)       Small Business Administration Documentation.  Agent and Lender
acknowledge that Borrower completed, executed and delivered to Agent SBA Forms
480, 652 and 1031 (Parts A and B) together with a business plan showing
Borrower’s financial projections (including balance sheets and income and cash
flows statements) for the period described therein and a written statement
(whether included in the purchase agreement or pursuant to a separate statement)
from Agent regarding its intended use of proceeds from the sale of securities to
Lender (the “Use of Proceeds Statement”).  Borrower represents and warrants to
Agent and Lender that the information regarding Borrower and its affiliates set
forth in the SBA Form 480, Form 652 and Form 1031 and the Use of Proceeds
Statement delivered as of the Closing Date is accurate and complete.

 

(j)       Inspection.  The following covenants contained in this Section (c) are
intended to supplement and not to restrict the related provisions of the Loan
Documents.  Subject to the preceding sentence, Borrower will permit, for so long
as Lender holds any debt or equity securities of Borrower, Agent, Lender or
their representative, at Agent’s or Lender’ expense, and examiners of the SBA to
visit and inspect the properties and assets of Borrower, to examine its books of
account and records, and to discuss Borrower’s affairs, finances and accounts
with Borrower’s officers, senior management and accountants, all at such
reasonable times as may be requested by Agent or Lender or the SBA.

 

(k)       Annual Assessment.  Promptly after the end of each calendar year (but
in any event prior to February 28 of each year) and at such other times as may
be reasonably requested by Agent or Lender, Borrower will deliver to Agent a
written assessment of the economic impact of Lender’s investment in Borrower,
specifying the full-time equivalent jobs created or retained in connection with
the investment, the impact of the investment on the businesses of Borrower in
terms of expanded revenue and taxes, other economic benefits resulting from the
investment (such as technology development or commercialization, minority
business development, or expansion of exports) and such other information as may
be required regarding Borrower in connection with the filing of Lender’s SBA
Form 468.   Lender will assist Borrower with preparing such assessment.  In
addition to any other rights granted hereunder, Borrower will grant Agent and
Lender and the SBA access to Borrower’s books and records for the purpose of
verifying the use of such proceeds.  Borrower also will furnish or cause to be
furnished to Agent and Lender such other information regarding the business,
affairs and condition of Borrower as Agent or Lender may from time to time
reasonably request.

 

 
 

--------------------------------------------------------------------------------

 

 

(l)     Use of Proceeds.  Borrower will use the proceeds from the Loan only for
purposes set forth in Section 7.16.  Borrower will deliver to Agent from time to
time promptly following Agent’s request, a written report, certified as correct
by Borrower's Chief Financial Officer, verifying the purposes and amounts for
which proceeds from the Loan have been disbursed.  Borrower will supply to Agent
such additional information and documents as Agent reasonably requests with
respect to its use of proceeds and will permit Agent and Lender and the SBA to
have access to any and all Borrower records and information and personnel as
Agent deems necessary to verify how such proceeds have been or are being used,
and to assure that the proceeds have been used for the purposes specified in
Section 7.16.

 

(m)     Activities and Proceeds.  Neither Borrower nor any of its affiliates (if
any) will engage in any activities or use directly or indirectly the proceeds
from the Loan for any purpose for which a small business investment company is
prohibited from providing funds by the SBIC Act, including 13 C.F.R. §107.720. 
Without obtaining the prior written approval of Agent, Borrower will not change
within 1 year of the date hereof, Borrower’s current business activity to a
business activity which a licensee under the SBIC Act is prohibited from
providing funds by the SBIC Act.

 

(n)     Redemption Provisions. Notwithstanding any provision to the contrary
contained in the Certificate of Incorporation of Borrower, as amended from time
to time (the “Charter”), if, pursuant to the redemption provisions contained in
the Charter, Lender is entitled to a redemption of its Warrant, such redemption
(in the case of Lender) will be at a price equal to the redemption price set
forth in the Charter (the “Existing Redemption Price”). If, however, Lender
delivers written notice to Borrower that the then current regulations
promulgated under the SBIC Act prohibit payment of the Existing Redemption Price
in the case of an SBIC (or, if applied, the Existing Redemption Price would
cause its common stock to lose its classification as an “equity security” and
Lender has determined that such classification is unadvisable), the amount
Lender will be entitled to receive shall be the greater of (i) fair market value
of the securities being redeemed taking into account the rights and preferences
of such securities plus any costs and expenses of the Lender incurred in making
or maintaining the Warrant, and (ii) the Existing Redemption Price where the
amount of accrued but unpaid dividends payable to the Lender is limited to
Borrower's earnings plus any costs and expenses of the Lender incurred in making
or maintaining the Warrant; provided, however, the amount calculated in
subsections (i) or (ii) above shall not exceed the Existing Redemption Price.

 

 
 

--------------------------------------------------------------------------------

 

 

(o)     Compliance and Resolution.   Borrower agrees that a failure to comply
with Borrower’s obligations under this Addendum, or any other set of facts or
circumstances where it has been asserted by any governmental regulatory agency
(or Agent or Lender believes that there is a substantial risk of such assertion)
that Agent, Lender and their affiliates are not entitled to hold, or exercise
any significant right with respect to, any securities issued to Lender by
Borrower, will constitute a breach of the obligations of Borrower under the
financing agreements among Borrower, Agent and Lender.  In the event of (i) a
failure to comply with Borrower’s obligations under this Addendum; or (ii) an
assertion by any governmental regulatory agency (or Agent or Lender believes
that there is a substantial risk of such assertion) of a failure to comply with
Borrower’s obligations under this Addendum, then (i) Agent, Lender and Borrower
will meet and resolve any such issue in good faith to the satisfaction of
Borrower, Agent, Lender, and any governmental regulatory agency, and (ii) upon
request of Lender or Agent, Borrower will cooperate and assist with any
assignment of the financing agreements among Hercules Technology II, L.P. and
Hercules Capital, Inc.

 

 
 

--------------------------------------------------------------------------------

 

 

EXHIBIT A

 

ADVANCE REQUEST

 

To:          Agent:

Date:                 ___________, 2006

     

Hercules Technology II, L.P. (the “Agent”)
            400 Hamilton Avenue, Suite 310
            Palo Alto, CA 94301
            email: legal@herculestech.com
            Attn:

 

AcelRx Pharmaceuticals, Inc. (“Borrower”) hereby requests from Hercules
Technology II, L.P. and Hercules Capital Funding Trust 2014-1 (collectively,
“Lender”) an Advance in the amount of _____________________ Dollars
($________________) on ______________, _____ (the “Advance Date”) pursuant to
the Amended and Restated Loan and Security Agreement among Borrower, Agent and
Lender (the “Agreement”). Capitalized words and other terms used but not
otherwise defined herein are used with the same meanings as defined in the
Agreement.

 

Please:

 

(a)       Issue a check payable to Borrower                        ________

 

or

 

(b)       Wire Funds to Borrower’s account                      ________ [IF
FILED PUBLICLY, ACCOUNT INFO REDACTED FOR SECURITY PURPOSES]

 

Bank:

_____________________________

Address: _____________________________   _____________________________ ABA
Number:  _____________________________ Account Number:
_____________________________ Account Name: _____________________________    
Contact Person: _____________________________ Phone Number   To Verify Wire
Info: _____________________________ Email address: _____________________________

             

Borrower represents that the conditions precedent to the Advance set forth in
the Agreement are satisfied and shall be satisfied upon the making of such
Advance, including but not limited to: (i) that no event that has had or could
reasonably be expected to have a Material Adverse Effect has occurred and is
continuing; (ii) that the representations and warranties set forth in the
Agreement and in the Warrants are and shall be true and correct in all material
respects on and as of the Advance Date with the same effect as though made on
and as of such date, except to the extent such representations and warranties
expressly relate to an earlier date; (iii) that Borrower is in compliance with
all the terms and provisions set forth in each Loan Document on its part to be
observed or performed; and (iv) that as of the Advance Date, no fact or
condition exists that would (or would, with the passage of time, the giving of
notice, or both) constitute an Event of Default under the Loan Documents.
Borrower understands and acknowledges that Agent has the right to review the
financial information supporting this representation and, based upon such review
in its sole discretion, Lender may decline to fund the requested Advance.

 

 
 

--------------------------------------------------------------------------------

 

 

Borrower hereby represents that Borrower’s corporate status and locations have
not changed since the date of the Agreement or, if the Attachment to this
Advance Request is completed, are as set forth in the Attachment to this Advance
Request.

 

Borrower agrees to notify Agent promptly before the funding of the Loan if any
of the matters which have been represented above shall not be true and correct
on the Borrowing Date and if Agent has received no such notice before the
Advance Date then the statements set forth above shall be deemed to have been
made and shall be deemed to be true and correct as of the Advance Date.

 

Executed as of [             ], 20[   ].

 

BORROWER: AcelRx Pharmaceuticals, Inc.

 

SIGNATURE:________________________
TITLE:_____________________________
PRINT NAME:______________________

 

 
 

--------------------------------------------------------------------------------

 

 

ATTACHMENT TO ADVANCE REQUEST

 

Dated: _______________________

 

Borrower hereby represents and warrants to Lender that Borrower’s current name
and organizational status is as follows:

 

 

Name:

AcelRx Pharmaceuticals, Inc.

 

 

Type of organization:

Corporation

 

 

State of organization:

Delaware

 

 

Organization file number:

3998627

 

Borrower hereby represents and warrants to Agent that the street addresses,
cities, states and postal codes of its current locations are as follows:

 

 
 

--------------------------------------------------------------------------------

 

 

EXHIBIT B

 

THIS SECURED TERM PROMISSORY NOTE HAS NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND, ACCORDINGLY, MAY NOT BE TRANSFERRED UNLESS (I) THIS NOTE HAS BEEN
REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, (II)
THIS NOTE MAY BE SOLD PURSUANT TO RULE 144, OR (III) THE BORROWER HAS RECEIVED
AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSFER MAY
LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.

 

SECURED TERM PROMISSORY NOTE

 

$[ ],000,000

Advance Date: ___ __, 20[  ]

     

Maturity Date: _____ ___, 20[ ]

 

FOR VALUE RECEIVED, AcelRx Pharmaceuticals, Inc., a Delaware corporation (the
“Borrower”), hereby promises to pay to the order of _____________ or the holder
of this Note (the “Lender”) at 400 Hamilton Avenue, Suite 310, Palo Alto, CA
94301 or such other place of payment as the holder of this Secured Term
Promissory Note (this “Promissory Note”) may specify from time to time in
writing, in lawful money of the United States of America, the principal amount
of [ ] Million Dollars ($[ ],000,000) or such other principal amount as Lender
has advanced to Borrower, together with interest at a rate as set forth in
Section 2.2(c) of the Loan Agreement based upon a year consisting of 360 days,
with interest computed daily based on the actual number of days in each month.

 

This Promissory Note is the one of the Notes referred to in, and is executed and
delivered in connection with, that certain Amended and Restated Loan and
Security Agreement dated [ ], 20[ ], by and among Borrower, Hercules Technology
II, L.P. (the “Agent”) and the several banks and other financial institutions or
entities from time to time party thereto as lender (as the same may from time to
time be amended, modified or supplemented in accordance with its terms, the
“Loan Agreement”), and is entitled to the benefit and security of the Loan
Agreement and the other Loan Documents (as defined in the Loan Agreement), to
which reference is made for a statement of all of the terms and conditions
thereof. All payments shall be made in accordance with the Loan Agreement. All
terms defined in the Loan Agreement shall have the same definitions when used
herein, unless otherwise defined herein. An Event of Default under the Loan
Agreement shall constitute a default under this Promissory Note.

 

Borrower waives presentment and demand for payment, notice of dishonor, protest
and notice of protest under the UCC or any applicable law. Borrower agrees to
make all payments under this Promissory Note without setoff, recoupment or
deduction and regardless of any counterclaim or defense. This Promissory Note
has been negotiated and delivered to Lender and is payable in the State of
California. This Promissory Note shall be governed by and construed and enforced
in accordance with, the laws of the State of California, excluding any conflicts
of law rules or principles that would cause the application of the laws of any
other jurisdiction.

 

BORROWER

 ACELRX PHARMACEUTICALS, INC.

   

 

 By:     _______________________________

 

 Title:     ______________________________

                         

 
 

--------------------------------------------------------------------------------

 

 

EXHIBIT C

 

NAME, LOCATIONS, AND OTHER INFORMATION FOR BORROWER

 

1. Borrower represents and warrants to Agent that Borrower’s current name and
organizational status as of the Closing Date is as follows:

 

Name:

AcelRx Pharmaceuticals, Inc.

 

Type of organization:

Corporation

 

State of organization:

Delaware

 

Organization file number:

3998627

 

2. Borrower represents and warrants to Agent that for five (5) years prior to
the Closing Date, Borrower did not do business under any other name or
organization or form except the following:

 

Name:     
Used during dates of:     
Type of Organization:     
State of organization:     
Organization file Number:     

 

3. Borrower’s fiscal year ends on December 31.

 

4. Borrower’s federal employer tax identification number is: 41-2193603

 

5. Borrower represents and warrants to Lender that its chief executive office is
located at 351 Galveston Drive, Redwood City, CA 94063.

 

 
 

--------------------------------------------------------------------------------

 

 

EXHIBIT D

 

BORROWER’S PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES

 

See attached chart of patents.

 

ACELRX, the ACELRX logo, ARX, NANOTAB, ACCELERATE.INNOVATE.ALLEVIATE., ZaLVISO
and associated logo are trademarks of AcelRx Pharmaceuticals, Inc.

 

 
 

--------------------------------------------------------------------------------

 

 

EXHIBIT E

 

BORROWER’S DEPOSIT ACCOUNTS AND INVESTMENT ACCOUNTS

 

 

 

DEPOSIT ACCOUNTS

 

 

 

 

 

Depository Institution
(name and address)

Account Type

Account Number

Account Holder

Wells Fargo Bank

Demand

 

AcelRx Pharmaceuticals, Inc.

 

 

 

 

INVESTMENT ACCOUNTS

 

 

 

 

 

Securities Intermediary
(name and address)

Account Type

Account Number

Account Holder

Morgan Stanley & Co.

Securities

 

AcelRx Pharmaceuticals, Inc.

 

 

 

 
 

--------------------------------------------------------------------------------

 

 

EXHIBIT F

 

COMPLIANCE CERTIFICATE

 

Hercules Technology II, L.P. (as “Agent”)
400 Hamilton Avenue, Suite 310
Palo Alto, CA 94301

 

Reference is made to that certain Amended and Restated Loan and Security
Agreement dated _______ and the Loan Documents (as defined therein) entered into
in connection with such Amended and Restated Loan and Security Agreement all as
may be amended from time to time (hereinafter referred to collectively as the
“Loan Agreement”) by and among Hercules Technology II, L.P. (the “Agent”), the
several banks and other financial institutions or entities from time to time
party thereto (collectively, the “Lender”) and AcelRx Pharmaceutical, Inc. (the
“Company”) as Borrower. All capitalized terms not defined herein shall have the
same meaning as defined in the Loan Agreement.

 

The undersigned is an Officer of the Company, knowledgeable of all Company
financial matters, and is authorized to provide certification of information
regarding the Company; hereby certifies, in such capacity, that in accordance
with the terms and conditions of the Loan Agreement, except as set forth below,
the Company is in compliance for the period ending ___________ of all covenants,
conditions and terms and hereby reaffirms that all representations and
warranties contained therein are true and correct on and as of the date of this
Compliance Certificate with the same effect as though made on and as of such
date, except to the extent such representations and warranties expressly relate
to an earlier date, after giving effect in all cases to any standard(s) of
materiality contained in the Loan Agreement as to such representations and
warranties. Attached are the required documents supporting the above
certification. The undersigned further certifies that the financial statements
delivered pursuant to Section 7.1(a) and 7.1(b), if applicable, are prepared in
accordance with GAAP (except for the absence of footnotes with respect to
unaudited financial statement and subject to normal year end adjustments) and
are consistent from one period to the next except as explained below.

 

Exception(s):

 

 

REPORTING REQUIREMENT

REQUIRED

CHECK IF

ATTACHED

    ☐

Interim Financial Statements

Monthly within 30 days

     

     

Interim Financial Statements

Within 45 days after each of the first 3 fiscal quarters of each fiscal year

☐

     

Audited Financial Statements

FYE within 90 days

☐

 

 
 

--------------------------------------------------------------------------------

 

 

The undersigned hereby also confirms the below disclosed accounts represent all
depository accounts and securities accounts presently open in the name of each
Borrower or Borrower Subsidiary/Affiliate, as applicable.

 

   

Depository

AC #

Financial

Institution

Account Type

(Depository /

Securities)

Last Month

Ending

Account

Balance

Purpose of

Account

BORROWER Name/Address:

   

1

 

 

         

2

 

 

         

3

 

 

         

4

 

 

       

 

 

BORROWER SUSIDIARY / AFFILIATE COMPANY Name/Address

   

1

 

 

         

2

 

 

         

3

 

 

         

4

 

 

         

 

 

 

  Very Truly Yours,

 

 

 

 

ACELRX PHARMACEUTICALS, INC.

 

 

 

  By: _______________________________         Name:
_______________________________         Its: _______________________________

 

 
 

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EXHIBIT G

 

FORM OF JOINDER AGREEMENT

 

This Joinder Agreement (the “Joinder Agreement”) is made and dated as of [ ],
20[ ], and is entered into by and between__________________., a ___________
corporation (“Subsidiary”), and HERCULES TECHNOLOGY II, L.P., a Delaware limited
partnership (as “Agent”).

 

RECITALS

 

A. Subsidiary’s Affiliate, [ ] (“Company”) [has entered/desires to enter] into
that certain Amended and Restated Loan and Security Agreement dated
_____________, with the several banks and other financial institutions or
entities from time to time party thereto as lender (collectively, the “Lender”)
and the Agent, as such agreement may be amended (the “Loan Agreement”), together
with the other agreements executed and delivered in connection therewith;

 

B. Subsidiary acknowledges and agrees that it will benefit both directly and
indirectly from Company’s execution of the Loan Agreement and the other
agreements executed and delivered in connection therewith;

 

AGREEMENT

 

NOW THEREFORE, Subsidiary and Agent agree as follows:

 

1.

The recitals set forth above are incorporated into and made part of this Joinder
Agreement. Capitalized terms not defined herein shall have the meaning provided
in the Loan Agreement.

 

2.

By signing this Joinder Agreement, Subsidiary shall be bound by the terms and
conditions of the Loan Agreement the same as if it were the Borrower (as defined
in the Loan Agreement) under the Loan Agreement, mutatis mutandis, provided
however, that (a) with respect to (i) Section 5.1 of the Loan Agreement,
Subsidiary represents that it is an entity duly organized, legally existing and
in good standing under the laws of [ ], (b) neither Agent nor Lender shall have
any duties, responsibilities or obligations to Subsidiary arising under or
related to the Loan Agreement or the other Loan Documents, (c) that if
Subsidiary is covered by Company’s insurance, Subsidiary shall not be required
to maintain separate insurance or comply with the provisions of Sections 6.1 and
6.2 of the Loan Agreement, and (d) that as long as Company satisfies the
requirements of Section 7.1 of the Loan Agreement, Subsidiary shall not have to
provide Agent separate Financial Statements. To the extent that Agent or Lender
has any duties, responsibilities or obligations arising under or related to the
Loan Agreement or the other Loan Documents, those duties, responsibilities or
obligations shall flow only to Company and not to Subsidiary or any other Person
or entity. By way of example (and not an exclusive list): (i) Agent’s providing
notice to Company in accordance with the Loan Agreement or as otherwise agreed
among Company, Agent and Lender shall be deemed provided to Subsidiary; (ii) a
Lender’s providing an Advance to Company shall be deemed an Advance to
Subsidiary; and (iii) Subsidiary shall have no right to request an Advance or
make any other demand on Lender.

 

 
 

--------------------------------------------------------------------------------

 

 

3.

Subsidiary agrees not to certificate its equity securities without Agent’s prior
written consent, which consent may be conditioned on the delivery of such equity
securities to Agent in order to perfect Agent’s security interest in such equity
securities.

 

4.

Subsidiary acknowledges that it benefits, both directly and indirectly, from the
Loan Agreement, and hereby waives, for itself and on behalf on any and all
successors in interest (including without limitation any assignee for the
benefit of creditors, receiver, bankruptcy trustee or itself as
debtor-in-possession under any bankruptcy proceeding) to the fullest extent
provided by law, any and all claims, rights or defenses to the enforcement of
this Joinder Agreement on the basis that (a) it failed to receive adequate
consideration for the execution and delivery of this Joinder Agreement or (b)
its obligations under this Joinder Agreement are avoidable as a fraudulent
conveyance.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 
 

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[SIGNATURE PAGE TO JOINDER AGREEMENT]

 

SUBSIDIARY:

 

_________________________________.

 

 

By:               

Name:               

Title:                

 

Address:

 

 

Telephone: ___________

email: ____________

 

AGENT:

 

HERCULES TECHNOLOGY II, L.P.

 

By:      Hercules Technology SBIC Management, LLC, its General Partner

 

By:      Hercules Capital, Inc., its Manager

 

 

           

By:____________________________________
Name:__________________________________
Title: ___________________________________

                Address:
400 Hamilton Ave., Suite 310
Palo Alto, CA 94301
email: legal@herculestech.com
Telephone: 650-289-3060

 

 
 

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EXHIBIT H

 

ACH DEBIT AUTHORIZATION AGREEMENT

 

Hercules Technology II, L.P

Hercules Capital Funding Trust 2014-1

400 Hamilton Avenue, Suite 310
Palo Alto, CA 94301

 

Re: Amended and Restated Loan and Security Agreement dated ____________ (the
“Agreement”) by and among AcelRx Pharmaceuticals, Inc. (“Borrower”) and Hercules
Technology II, L.P., as agent (“Company”) and the lenders party thereto
(collectively, the “Lender”)

 

In connection with the above referenced Agreement, the Borrower hereby
authorizes the Company to initiate debit entries for (i) the periodic payments
due under the Agreement and (ii) out-of-pocket legal fees and costs incurred by
Agent or Lender pursuant to Section 11.11 of the Agreement to the Borrower’s
account indicated below. The Borrower authorizes the depository institution
named below to debit to such account.

 

 

 

[IF FILED PUBLICLY, ACCOUNT INFO REDACTED FOR SECURITY PURPOSES]

 

Depository Name

 

Branch

City

 

State and Zip Code

Transit/ABA Number

 

Account Number

This authority will remain in full force and effect so long as any amounts are
due under the Agreement.

 

ACELRX PHARMACEUTICALS, INC.

 

By: _________________________________________

 

Date: ________________________________________

 

 
 

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SCHEDULE 1.1

 

COMMITMENTS

 

 

 

LENDER

TRANCHE 1 TERM

COMMITMENT

 

TRANCHE 1 TERM

COMMITMENT

PERCENTAGE

 

Hercules Technology II, L.P.

 

$6,822,108.39

33.33%

Hercules Capital Funding Trust 2014-1

 

$13,644,216.76

66.67%

TOTAL TRANCHE 1 COMMITMENTS

 

$20,466,325.15

100%

 

 

LENDER

TRANCHE 2 TERM

COMMITMENT

 

TRANCHE 2 TERM

COMMITMENT

PERCENTAGE

 

 

 

 

   

 

 

 

TOTAL TRANCHE 2 COMMITMENTS

 

$10,000,000.00

100%

 

 
 

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SCHEDULE 7.4

 

POST-CLOSING ITEMS

 

 

 

Borrower shall deliver or cause to be delivered to Lender:

 

 

 

[to be completed as applicable]