LOAN AND SECURITY AGREEMENT

 

by and between

 

RENEWABLE POWER RESOURCES, LLC

 

as Lender

 

and

 

XZERES CORP. and

 

XZERES ENERGY SERVICES CORP, jointly and severally,

 

as Borrowers

 

 

 

 

Dated: March __, 2013

 

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LOAN AND SECURITY AGREEMENT

 

LOAN AND SECURITY AGREEMENT, dated as of March __, 2013, by and among XZERES
CORP. a Nevada corporation (“Xzeres”), and its wholly-owned subsidiary, XZERES
ENERGY SERVICES CORP, a Nevada corporation (“Energy” and, collectively with
Xzeres, jointly and severally, “Borrower”), each with offices at 9025 SW Hillman
Court, Suite 3126, Wilsonville, Oregon 97070 and RENEWABLE POWER RESOURCES, LLC,
a Delaware limited liability company with offices at 430 East 56th Street, 4G,
New York, New York 10022 (together with its successors and assigns, the
“Lender”).

R E C I T A L S:

WHEREAS, Borrower desires to enter into a line of credit loan facility with
Lender; and

WHEREAS, Lender is willing to provide such line of credit on the terms and
conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements herein contained and other good and valuable consideration, Lender
and Borrower mutually covenant, warrant and agree as follows:

Section 1.                DEFINITIONS AND RULES OF INTERPRETATION AND
CONSTRUCTION

Specific Terms Defined. Capitalized terms used herein and not otherwise defined
have the following meanings:

1.1              “Account Debtor” or “account debtor” has the meaning ascribed
to such term in the UCC.

1.2              “Accounts” or “accounts” means “accounts” as defined in the
UCC, and, in addition, any and all obligations of any kind at any time due
and/or owing to Borrower, whether now existing or hereafter arising, and all
rights of Borrower to receive payment or any other consideration including,
without limitation, invoices, contract rights, accounts receivable, general
intangibles, choses in action, notes, drafts, acceptances, instruments and all
other debts, obligations and liabilities in whatever form owing to Borrower from
any Person, Governmental Authority or any other entity, all security therefor,
and all of Borrower’s rights to receive payments for goods sold (whether
delivered, undelivered, in transit or returned) or services rendered, which may
be represented thereby, or with respect thereto, including, but not limited to,
all rights as an unpaid vendor (including stoppage in transit, replevin or
reclamation), and all additional amounts due from any Account Debtor, whether or
not invoiced, together with all Proceeds and products of any and all of the
foregoing.

1.3              “Advance” has the meaning as set forth in Section 2.1(a)
hereof.

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1.4              “Affiliate” means, with respect to any Person, (a) any other
Person that, directly or indirectly, controls, is controlled by, or is under
common control with such Person, including any Subsidiary, or (b) any other
Person who is a director, manager or officer (i) of such Person, (ii) of any
Subsidiary of such Person or (iii) of any Person described in clause (a) above.
For the purposes of this definition, control of a Person shall mean the power
(direct or indirect) to direct or cause the direction of the management or the
policies of such Person, whether through the ownership of any voting securities,
by contract or otherwise.

1.5              “Agreement” means this Loan and Security Agreement (including
all Exhibits and Schedules annexed hereto) as originally executed or, if
amended, modified, supplemented, renewed or extended from time to time, as so
amended, modified, supplemented, renewed or extended.

1.6              “Balance Sheet” means the balance sheet of Borrower dated as of
the Balance Sheet Date.

1.7              “Balance Sheet Date” means November 30, 2012.

1.8              “Borrower” has the meaning set forth in the introductory
paragraph hereof.

1.9              “Borrower’s Premises” means the property leased by the Borrower
located at 9025 SW Hillman Court, Suite 3126, Wilsonville, Oregon 97070.

1.10          “Budget” means the budget delivered to Lender in accordance with
Section 9.18 hereof, setting forth the Projected Information for the periods
covered thereby, a copy of which is annexed hereto as Exhibit 1.10 hereto,
together with any subsequent or amended budget(s) thereto delivered to Lender,
in form and substance satisfactory to Lender, in accordance with the terms and
conditions hereof.

1.11          “Business” means the business of designing, developing and
marketing small wind turbine systems and related equipment for electrical power
generation.

1.12          “Business Day” means any day other than a Saturday, Sunday or any
other day on which banks located in the State of New York are authorized or
required to close under applicable banking laws.

1.13          “Capital Assets” means, in accordance with GAAP, fixed assets,
both tangible (such as land, buildings, fixtures, machinery and equipment) and
intangible (such as patents, copyrights, trademarks, franchises and goodwill).

1.14          “Change of Control” has the meaning as set forth in Section 10.1
hereof. “Chattel Paper” means all “chattel paper,” as such term is defined in
the UCC, including electronic chattel paper, now owned or hereafter acquired by
any Person. “Closing Date” means the Business Day on which the conditions
precedent set forth in Section 6 have been satisfied or specifically waived in
writing by Lender, and the initial Advance has been made.

1.15          “Collateral” has the meaning as set forth in Section 5.1 hereof.

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1.16          “Collateral Access Agreement” means a landlord waiver, bailee
letter, or acknowledgement agreement of any lessor, warehouseman, processor,
consignee, or other Person in possession of, having a Lien upon, or having
rights or interests in any Borrower’s or its Subsidiaries’ books and records,
Equipment, or Inventory, in each case, in form and substance reasonably
satisfactory to Lender.

1.17          “Collection Account” means that certain account of Lender, Account
Number _______ in the name of Lender at ______Bank in New York, New York, ABA
No. _____or such other account as may be specified in writing by Lender as the
“Collection Account”.

1.18          “Commercial Tort Claims” has the meaning ascribed to such term in
the UCC.

1.19          “Common Stock” means the common stock, par value $0.001 per share,
of Xzeres.

1.20          “Control Agreement” means a control agreement, in form and
substance satisfactory to Lender, executed and delivered by a Borrower or any
other Credit Party, Lender, and the applicable securities intermediary (with
respect to a securities account) or bank (with respect to a Deposit Account).

1.21          “Credit Party” means Borrower, and any other Person (other than
Lender) that is or may become a party to this Agreement or any other Loan
Document.

1.22          “Default Interest Rate” has the meaning set forth in Section
3.1(b).

1.23          “Deposit Accounts” has the meaning ascribed to such term in the
UCC.

1.24          “Document” or “document” has the meaning ascribed to such term in
the UCC.

1.25          “Environment” means all air, surface water, groundwater or land,
including, without limitation, land surface or subsurface, including, without
limitation, all fish, wildlife, biota and all other natural resources.

1.26          “Environmental Law” or “Environmental Laws” means all federal,
state and local laws, statutes, ordinances and regulations now or hereafter in
effect, and in each case as amended or supplemented from time to time, and any
judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment relating to the regulation and
protection of human health, safety, the environment and natural resources
(including ambient air, surface water, groundwater, wetlands, land surface or
subsurface strata, wildlife, aquatic species and vegetation).

1.27          “Environmental Liabilities and Costs” means, as to any Person, all
liabilities, obligations, responsibilities, remedial actions, losses, damages,
punitive damages, consequential damages, treble damages, costs and expenses
(including all fees, disbursements and expenses of counsel, experts and
consultants and costs of investigation and feasibility

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studies), fines, penalties, sanctions and interest incurred as a result of any
claim or demand by any other Person, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute, including any
Environmental Law, permit, order or agreement with any Governmental Authority or
other Person, and which arise from any environmental, health or safety
conditions, or a Release or conditions that are reasonably likely to result in a
Release, and result from the past, present or future operations of such Person
or any of its Affiliates.

1.28          “Environmental Lien” means any Lien in favor of any Governmental
Authority for Environmental Liabilities and Costs.

1.29          “ERISA” means the Employee Retirement Income Security Act of 1974,
as the same now exists or may from time to time hereafter be amended, modified,
recodified or supplemented, together with all rules, regulations and
interpretations thereunder or related thereto.

1.30          “Equipment” means “equipment”, as such term is defined in the UCC,
now owned or hereafter acquired by Borrower, wherever located, and shall
include, without limitation, the machinery and equipment set forth on Schedule
5.4(j) hereto, and all other equipment, machinery, furniture, Fixtures, computer
equipment, telephone equipment, molds (including blade molds), tools, dies,
partitions, tooling, transportation equipment, all other tangible assets used in
connection with the manufacture, sale or lease of goods or rendition of
services, and Borrower’s interests in any leased equipment, and all repairs,
modifications, alterations, additions, controls and operating accessories
thereof or thereto, and all substitutions and replacements therefor.

1.31          “Equity Interests” means, with respect to any Person, any and all
shares, rights to purchase, options, warrants, general, limited or limited
liability partnership interests, membership interests, units, participations or
other equivalents of or interest in (regardless of how designated) equity of
such Person, whether voting or nonvoting, including common stock, preferred
stock, convertible securities or any other “equity security” (as such term is
defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the
SEC (or any successor thereto) under the 1934 Act).

1.32          “Event of Default” means the occurrence or existence of any event
or condition described in Section 11 of this Agreement.

1.33          “Fees” has the meaning set forth in Section 3.3 herein.

1.34          “Financial Statements” has the meaning as set forth in Section 8.9
hereof.

1.35          “Financing Statements” means the Uniform Commercial Code UCC 1
Financing Statements or applicable foreign filings, to be filed with applicable
Governmental Authorities of each State or Commonwealth or political subdivisions
thereof or application authorities of any foreign jurisdiction, pursuant to
which Lender shall perfect its security interest in the Collateral.

1.36          “Fiscal Year” means that twelve (12) month period commencing on
March 1 and ending on February 28/29.

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1.37          “Fixtures” has the meaning ascribed to such term in the UCC.

1.38          “GAAP” means generally accepted accounting principles in effect in
the United States of America at the time of any determination, and which are
applied on a consistent basis. All accounting terms used in this Agreement which
are not expressly defined in this Agreement shall have the meanings given to
those terms by GAAP, unless the context of this Agreement otherwise requires.

1.39          “General Intangibles” means all “general intangibles,” as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
including all right, title and interest that such Person may now or hereafter
have in or under any Contract, all Payment Intangibles, customer lists,
Licenses, Intellectual Property, interests in partnerships, joint ventures and
other business associations, permits, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, software, data bases, data, skill,
expertise, experience, processes, models, drawings, materials, Books and
Records, Goodwill (including the Goodwill associated with any Intellectual
Property), all rights and claims in or under insurance policies (including
insurance for fire, damage, loss, and casualty, whether covering personal
property, real property, tangible rights or intangible rights, all liability,
life, key-person, and business interruption insurance, and all unearned
premiums), uncertificated securities, choses in action, deposit accounts, rights
to receive tax refunds and other payments, rights to receive dividends,
distributions, cash, Instruments and other property in respect of or in exchange
for pledged Stock and Investment Property, and rights of indemnification.

1.40          “Goods” means all “goods,” as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including embedded
software to the extent included in “goods” as defined in the Code, manufactured
homes, standing timber that is cut and removed for sale and unborn young of
animals.

1.41          “Goodwill” means all goodwill, trade secrets, proprietary or
confidential information, technical information, procedures, formulae, quality
control standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.

1.42          “Governmental Authority” or “Governmental Authorities” means any
federal, state, county or municipal governmental agency, department,
instrumentality, board, commission, officer, official or entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.

1.43          “Guarantee” means any agreement to perform all or any portion of
the Obligations on behalf of Borrower or any other Credit Party, in favor of,
and in form and substance satisfactory to, Lender, together with all amendments,
modifications and supplements thereto, and shall refer to such Guarantee as the
same may be in effect at the time such reference becomes operative.

1.44          “Guarantor” means Xzeres Wind Europe Ltd.

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1.45          “Indebtedness” means, with respect to any Person, (a) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services (including reimbursement and all other obligations
with respect to surety bonds, letters of credit and bankers’ acceptances,
whether or not matured, but not including obligations to trade creditors
incurred in the ordinary course of business and not more than forty-five (45
days) past due; (b) all obligations evidenced by notes, bonds, debentures or
similar instruments; (c) all indebtedness created or arising under any
conditional sale or other title retention agreements with respect to property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such property); (d) all Capital Lease Obligations; (e) all Guaranteed
Indebtedness; (f) all Indebtedness referred to in clauses (a), (b), (c), (d) or
(e) above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon or in
property (including accounts and contract rights) owned by such Person, even
though such Person has not assumed or become liable for the payment of such
Indebtedness; (g) the Obligations; and h. all liabilities under Title IV of
ERISA.

1.46          “Initial Warrant” means the warrants to purchase Common Stock
being issued to the Lenders and their affiliates on the date hereof, initially
for an aggregate of 7,500,000 shares Common Stock at a per share purchase price
of $0.35, which warrants are in the form attached hereto.

1.47          “Intellectual Property” means all of the following intellectual
property used in the conduct of the business of Borrower: (a) inventions,
processes, techniques, discoveries, developments and related improvements,
whether or not patentable; (b) United States patents, patent applications,
divisionals, continuations, reissues, renewals, registrations, confirmations,
re-examinations, extensions and any provisional applications, of any such
patents or patent applications, and any foreign or international equivalent of
any of the foregoing; (c) unregistered , United States registered or pending
trademark, trade dress, service mark, service name, trade name, brand name,
logo, domain name, or business symbol and any foreign or international
equivalent of any of the foregoing and all goodwill associated therewith; (d)
work specifications, software (including object and source code listing) and
artwork; (e) technical, scientific and other know-how and information, trade
secrets, methods, processes, practices, formulas, designs, assembly procedures,
specifications owned or used by Borrower, including with respect to any power
efficiency products and related software; (f) copyrights; (g) work for hire; (h)
customer and mailing lists; and (i) any and all rights of the Borrower to the
names “Xzeres” or any derivations thereof, and Borrower’s entire customer list
and database and all assets used or useful by Borrower in the conduct of its
business over the internet or in any electronic medium, including any websites,
URLs or domain names owned by Borrower.

1.48          “Interest Rate” has the meaning set forth in Section 3.1 herein.

1.49          “Instruments” has the meaning ascribed to such term in the UCC.

1.50          “Intercreditor Agreement” means that certain Intercreditor
Agreement, dated of even date herewith between Lender and Hanover Holdings LLC,
as the same may be amended, modified, supplemented, renewed or extended from
time to time.

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1.51          “Inventory” means “inventory,” as such term is defined in the UCC,
now owned or hereafter acquired by Borrower, wherever located, and, in any
event, shall include, without limitation, all raw materials, work in process,
finished and semi-finished Inventory including, without limitation, all
materials, parts, components and supplies relating to the manufacture or
assembly thereof, packaging and shipping supplies relating thereto, and all
other inventory, merchandise, goods and other personal property now or hereafter
owned by Borrower, which are held for sale, exchange or lease or are furnished
or are to be furnished under a contract of service or an exchange arrangement or
which constitute raw materials, work in process or materials used or consumed or
to be used or consumed in Borrower’s business, or the processing, packaging,
delivery or shipping of the same, and all finished goods and the products of the
foregoing, whatever form and wherever located; and all names or marks affixed to
or to be affixed thereto for purposes of selling same by the seller,
manufacturer, lessor or licensor thereof and all right, title and interest of
Borrower therein and thereto.

1.52          “Investment Property” means all “investment property,” as such
term is defined in the UCC, now owned or hereafter acquired by any Person,
wherever located.

1.53          “Lender” has the meaning set forth in the introductory paragraph
hereof.

1.54          “Letter-of-Credit Rights” means “letter-of-credit rights” as such
term is defined in the UCC, including rights to payment or performance under a
letter of credit, whether or not the beneficiary thereof has demanded or is
entitled to demand payment or performance.

1.55          “Lien” or “lien” means any mortgage, deed of trust, pledge,
security interest, hypothecation, assignment, lien (statutory or other,
including, without limitation, liens imposed by any Governmental Authority),
claim, charge or other encumbrance of any kind or nature whatsoever (including,
without limitation, pursuant to any conditional sale or other title retention
agreement, any financing lease having substantially the same economic effect as
any of the foregoing, and the filing of any financing statement under the UCC or
comparable law of any jurisdiction to evidence any of the foregoing) on personal
or real property or fixtures.

1.56          “Loans” means the principal amounts advanced to, made available
to, or paid for the benefit of, Borrower as set forth in this Agreement and the
other Loan Documents.

1.57          “Loan Documents” means this Agreement, the Note, the Guarantee,
the Patent and Trademark Security Agreement, the Collateral Access Agreements,
the Intercreditor Agreement, the Subordination Agreements, the Warrant Issuance
Agreement, any Control Agreements, and any and all other agreements, notes,
documents, mortgages, financing statements, guaranties, intercreditor
agreements, subordination agreements, certificates and instruments executed
and/or delivered at any time by Borrower or any other Person to Lender pursuant
to and in connection with the Loans and this Agreement, as the same may be
amended, modified, supplemented, renewed or extended from time to time.

1.58          “Management Consultant” shall have the meaning set forth in
Section 9.19.

1.59          "Material Budget Deviation" shall have the meaning set forth in
Section 9.18(c) hereof.

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1.60          “Material Adverse Effect” means a material adverse effect on (a)
the Business, assets, liabilities, financial condition, results of operations or
business prospects of Borrower, (b) the ability of Borrower or any Guarantor to
perform its obligations under any Loan Document to which it is a party, (c) the
value of the Collateral or the rights of Lender therein, (d) the validity or
enforceability of any of the Loan Documents, (e) the rights and remedies of
Lender under any of such Loan Documents, or (f) the timely payment of the
principal of or interest on the Loans or other amounts payable in connection
therewith. All determinations of materiality shall be made by the Lender in its
reasonable judgment.

1.61          “Material Contract” means any contract or other arrangement (other
than Loan Documents), whether written or oral, to which Borrower is a party as
to which the breach, nonperformance, cancellation or failure to renew by any
party thereto could have a Material Adverse Effect.

1.62          “Maturity Date” means the earlier of (i) the Stated Maturity Date
and (ii) the date Lender exercises the right to terminate this Agreement in
accordance with Section 4.2.

1.63          “Maximum Credit” shall mean $5,000,000 (subject to adjustment as
provided in Section 2.4 hereof).

1.64          “1934 Act” means the Securities Exchange Act of 1934, as amended.

1.65          “Note” has the meaning as set forth in Section 2.1(b) hereof , as
the same may be amended, modified, supplemented, renewed or extended from time
to time.

1.66          “Noteholders” shall mean the Noteholders set forth on Schedule
1.65 hereto.

1.67          “Obligations” means all loans, advances, debts, expense
reimbursement, fees, liabilities, and obligations for the performance of
covenants, tasks or duties or for payment of monetary amounts (whether or not
such performance is then required or contingent, or amounts are liquidated or
determinable) owing by Borrower and any other Credit Party to Lender, of any
kind or nature, present or future, whether or not evidenced by any note,
agreement or other instrument, whether arising under any of the Loan Documents
or under any other agreement between Borrower, such Credit Party and Lender, and
all covenants and duties regarding such amounts. This term includes all
principal, interest (including interest accruing at the then applicable rate
provided in this Agreement after the maturity of the Loans and interest accruing
at the then applicable rate provided in this Agreement after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, whether or not a claim for post-filing or post-petition
interest is allowed in such proceeding), Fees, charges, expenses, attorneys’
fees and any other sum chargeable to Borrower under any of the Loan Documents,
and all principal and interest due in respect of the Loans and all obligations
and liabilities of any Guarantor under any Guarantee.

1.68          “Organizational Documents” means, in the case of a corporation,
its Articles of Incorporation, Certificate of Incorporation and By-Laws; in the
case of a general partnership, its Articles of Partnership and any partnership
agreement; in the case of a limited partnership, its Articles of Limited
Partnership and any partnership agreement; in the case of a

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limited liability company, its Articles of Organization and Operating Agreement
or Regulations, if any; in the case of a limited liability partnership, its
Articles of Limited Liability Partnership; or alternatively, in each case, the
legal equivalent thereof in the jurisdiction of its organization, together with
all other formation or governing documents, schedules, exhibits, amendments,
addendums, modifications, replacements, additions, or restatements of the
foregoing, which are in effect.

1.69          “Patent & Trademark Security Agreement” means a Patent & Trademark
Security Agreement, in form and substance acceptable to Lender, executed and
delivered by Borrower or any other Credit Party to Lender for recording at the
United States Patent and Trademark Office, as the same may be amended, modified,
supplemented, renewed or extended from time to time.

1.70          “Payment Intangibles” means all “payment intangibles” as such term
is defined in the UCC, now owned or hereafter acquired by any Person.

1.71          “Permitted Encumbrances” means the following: (a) Liens granted to
Lender or its Affiliates; (b) purchase money security interests in favor of
equipment vendors upon any Capital Assets hereafter acquired (including, without
limitation, capitalized or finance leases); provided, that, (i) no such purchase
money security interest or other Lien (or capitalized or finance lease, as the
case may be) with respect to specific future Capital Assets shall extend to or
cover any other property, other than the specific Capital Assets so acquired,
and the proceeds thereof, (ii) such mortgage, Lien or security interest secures
only the cost or obligation to pay the purchase price of such specific Capital
Assets only (or the obligations under the capitalized or finance lease), (iii)
the principal amount secured thereby shall not exceed one hundred (100%) percent
of the lesser of the cost or the fair market value (at the time of the
acquisition of the Capital Assets) of the Capital Assets so acquired, and (iv)
such purchase money security interest is preapproved in writing by Lender; (c)
Liens of carriers, warehousemen, artisans, bailees, mechanics and materialmen
incurred in the ordinary course of business securing sums not overdue; (d) Liens
incurred in the ordinary course of business in connection with worker’s
compensation, unemployment insurance or other forms of governmental insurance or
benefits, relating to employees, securing sums (i) not overdue or (ii) being
diligently contested in good faith provided that adequate reserves with respect
thereto are maintained on the books of Borrower in conformity with GAAP; (e)
Liens for taxes (i) not yet due or (ii) being diligently contested in good faith
by appropriate proceedings, provided that adequate reserves with respect thereto
are maintained on the books of Borrower in conformity with GAAP, and which have
no effect on the priority of Liens in favor of Lender or the value of the assets
in which Lender has a Lien; and (f) [such other Liens as are set forth on
Schedule 5.4(a) annexed hereto and made a part hereof].

1.72          “Permitted Indebtedness” means the Indebtedness set forth on
Schedule 1.72 annexed hereto and made part hereof.

1.73          “Person” or “person” means, as applicable, any individual, sole
proprietorship, partnership, corporation, limited liability company, limited
liability partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.

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1.74          “Proceeds” has the meaning ascribed to such term in the UCC and
shall also include, but not be limited to, (a) any and all proceeds of any and
all insurance policies (including, without limitation, life insurance, casualty
insurance, business interruption insurance and credit insurance), indemnity,
warranty or guaranty payable to Borrower from time to time with respect to any
of the Collateral or otherwise, (b) any and all payments (in any form
whatsoever) made or due and payable to Borrower from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of all
or any part of the Collateral by any governmental body, authority, bureau or
agency or any other Person (whether or not acting under color of Governmental
Authority) and (c) any and all other amounts from time to time paid or payable
under or in connection with any of the Collateral.

1.75          “Promissory Note” has the meaning ascribed to such term in the
UCC.

1.76          “Release” means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, or disposing of a
Hazardous Substance into the Environment.

1.77          “Reserves” means, as of any date of determination, such amounts as
Lender may from time to time establish and revise in good faith reducing the
amount available to be borrowed hereunder (a) to reflect events, conditions,
contingencies or risks which, as determined by Lender in good faith, do or may
adversely affect either (i) the Collateral or any other property which is
security for the Obligations or its value, including the possible non-payment of
Accounts for any reason by Account Debtors, (ii) the assets, Business or
prospects of Borrower, (iii) the security interests and other rights of Lender
in the Collateral (including the enforceability, perfection and priority
thereof), (iv) the possible diminution of the value of any of the Collateral
(including due to the nonpayment of Taxes, assessments, insurance premiums,
rents or license payments), or (v) Borrower’s ability to perform its Obligations
under the Loan Documents; or (b) in respect of any state of facts which Lender
determines in good faith constitutes an Event of Default or may, with notice or
passage of time or both, constitute an Event of Default.

1.78          “Responsible Officer” means the President, Chief Executive Officer
or Chief Financial Officer of Borrower.

1.79          “SEC” means the United States Securities and Exchange Commission.

1.80          “SEC Reports” has the meaning set forth in Section 9.18 hereof.

1.81          “Securities” has the meaning ascribed to such term in the UCC.

1.82          “Series A Warrants” means the warrants to purchase Common Stock
which may be issued after the date hereof to the Lenders and their respective
affiliates upon payment of the purchase price therefor as set forth in this
Agreement being delivered on the date of this Agreement, which warrants when
issued will be substantially in the form attached hereto.

1.83          “Software” means all “software” as such term is defined in the
UCC, now owned or hereafter acquired by any Person, including all computer
programs and all supporting information provided in connection with a
transaction related to any program.

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1.84          “Stated Maturity Date” means September __, 2014.

1.85          “Subordination Agreement” means the Subordination Agreement, which
shall be in form and substance acceptable to Lender, by and among Lender and
each of the Noteholders, as the same may be amended, modified, supplemented,
renewed or extended from time to time.

1.86          “Subsidiary” means, as to any Person, a corporation, limited
liability company or other entity with respect to which more than fifty (50%)
percent of the outstanding Equity Interests of each class having voting power is
at the time owned by such Person or by one or more Subsidiaries of such Person
or by such Person.

1.87          “Tangible Chattel Paper” has the meaning ascribed to such term in
the UCC.

1.88          “Tax” has the meaning set forth in Section 8.12(c).

1.89          “Tax Deduction” has the meaning set forth in Section 8.12(c).

1.90          “Term” has the meaning set forth in Section 4.1.

1.91          “UCC” means the Uniform Commercial Code as presently enacted in
New York (or any successor legislation thereto), and as the same may be amended
from time to time, and the state counterparts thereof as may be enacted in such
states or jurisdictions where any of the Collateral is located or held.

1.92          “United States Bankruptcy Code” means Title 11 of the United
States Code, as amended or modified, and any successor statute.

1.93          “Warrants” means the Initial Warrants and the Series A Warrants,
collectively.

1.94          Rules of Interpretation and Construction. In this Agreement unless
the context otherwise requires:

(a)                All terms used herein which are defined in the UCC shall have
the meanings given therein unless otherwise defined in this Agreement;

(b)               Sections mentioned by number only are the respective Sections
of this Agreement as so numbered;

(c)                Words importing a particular gender shall mean and include
the other gender and words importing the singular number mean and include the
plural number and vice versa;

(d)               Words importing persons shall mean and include firms,
associations, partnerships (including limited partnerships), societies, trusts,
corporations, limited

12

 

liability companies or other legal entities, including public or governmental
bodies, as well as natural persons;

(e)                Each reference in this Agreement to a particular person shall
be deemed to include a reference to such person's successors and permitted
assigns;

(f)                Any headings preceding the texts of any Section of this
Agreement, and any table of contents or marginal notes appended to copies hereof
are intended, solely for convenience of reference and shall not constitute a
part of this Agreement, nor shall they affect its meaning, construction or
effect;

(g)               If any clause, provision or section of this Agreement shall be
ruled invalid or unenforceable by any court of competent jurisdiction, such
holding shall not invalidate or render unenforceable any of the remaining
provisions thereof;

(h)               The terms “herein”, “hereunder”, “hereby”, “hereto”, and any
similar terms as used in this Agreement refer to this Agreement; the term
“heretofore” means before the date of execution of this Agreement; and the term
“hereafter” shall mean after the date of execution of this Agreement;

(i)                 If any clause, provision or section of this Agreement shall
be determined to be apparently contrary to or conflicting with any other clause,
provision or section of this Agreement, then the clause, provision or section
containing the more specific provisions shall control and govern with respect to
such apparent conflict;

(j)                 Unless otherwise specified, (i) all accounting terms used
herein or in any Loan Document shall be interpreted in accordance with GAAP,
(ii) all accounting determinations and computations hereunder or thereunder
shall be made in accordance with GAAP and (iii) all financial statements
required to be delivered hereunder or thereunder shall be prepared in accordance
with GAAP;

(k)               An Event of Default that occurs shall exist or continue or be
continuing unless such Event of Default is waived by Lender in accordance with
the terms of this Agreement; and

(l)                 The word “and” when used from time to time herein shall mean
“or” or “and/or” if such meaning is expansive of the rights or interests of
Lender in the given context.

(m)             All references herein and in the other Loan Documents to times
of day shall refer to New York City time, unless otherwise specified to the
contrary; and

(n)               No provision of this Agreement shall be construed against or
interpreted to the disadvantage of any party hereto by reason of such party or
his or its counsel having, or being deemed to have, structured or drafted such
provision.

Section 2.               

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LOANS

2.1              Loans.

(a)                Lender may, subject to the terms and conditions contained
herein and the satisfaction of the closing and funding conditions set forth
herein, make one or more loans under the line of credit (“Advances”) in the
amounts set forth on the Budget for each Budget Period (as defined in Section
9.18) provided that (i) in no event shall the aggregate amount of all
outstanding Advances exceed the Maximum Credit, (ii) in no event shall the
aggregate amount of all outstanding Advances exceed the projected Loan Balance
(as set forth in the Budget) for each projected Budget Period, and (iii) the
proceeds of the Advances shall only be used to fund expenses in amounts not to
exceed the amounts set forth on the Budget subject to the review and approval of
each disbursement by the Management Consultant. Borrower may at its request from
time to time borrow, repay and reborrow, under this Section 2.1.

(b)               In addition to the Advances, which have been made by Lender to
Borrower pursuant to Section 2.1(a), and so long as no Event of Default exists
and is continuing, Borrower may request, with the review and approval of the
Management Consultant, and Lender, in its sole discretion, may advance to
Borrower, additional Advances in amounts in excess of the amounts otherwise
available under Section 2.1(a)), provided that in no event shall the aggregate
amount of such Advances together with all outstanding Advances exceed the
Maximum Credit.

(c)                Borrower shall request each Advance by written notice to
Lender substantially in the form of Exhibit A hereto (each a “Notice of
Advance”) given no later than 3:00 p.m. on the Business Day preceding the date
of the proposed advance, which shall be executed by both a Responsible Officer
and the Management Consultant. Lender shall be fully protected under this
Agreement in relying upon, and shall be entitled to rely upon, (i) any Notice of
advance believed by Lender to be genuine, and (ii) the assumption that the
Persons making electronic requests or executing and delivering a Notice of
Advance were duly authorized, unless the responsible individual acting thereon
for Lender shall have actual knowledge to the contrary. As an accommodation to
Borrower, Lender may permit telephonic, electronic, or facsimile requests for an
Advance and electronic or facsimile transmittal of instructions, authorizations,
agreements or reports to Lender by Borrower. Unless Borrower specifically
directs Lender in writing not to accept or act upon telephonic, facsimile or
electronic communications from Borrower, Lender shall have no liability to
Borrower for any loss or damage suffered by Borrower as a result of Lender’s
honoring of any requests, execution of any instructions, authorizations or
agreements or reliance on any reports communicated to it telephonically, by
facsimile or electronically and purporting to have been sent to Lender by
Borrower and Lender shall have no duty to verify the origin of any such
communication or the identity or authority of the Person sending it.

(d)               The obligation of Borrower to repay the Loans shall be
evidenced by a note (the “Note”) in the form of Exhibit 2.1(d) hereto and dated
the date hereof.

(e)                Borrower shall use the proceeds of the Advances for ongoing
business operations and working capital, and to pay certain one-time
expenditures set forth in the

14

 

Budget. All disbursements shall be reviewed and approved by the Management
Consultant in accordance with the Budget.

(f)                The principal amount of the Loans shall be payable on the
Maturity Date.

2.2              Maximum Credit. Subject to the provisions of Section 2.4 below,
the aggregate principal amount of the Loans shall not exceed the amount of the
Maximum Credit subject to the limitations for Advances set forth in the Budget.

2.3              Term and Repayment.

(a)                Upon the Maturity Date, the obligations of Lender to make
Advances and extend other credit hereunder shall immediately terminate and
Borrower shall pay to Lender in full, in cash (i) all outstanding Advances and
all accrued and unpaid interest thereon, (ii) all accrued and outstanding fees,
(iii) all outstanding other fees, expenses and other Obligations payable to
Lender in accordance with the terms of this Agreement, and (iv) an amount
sufficient to enable Lender to hold cash collateral for all indemnification and
other Obligations in accordance with the Note and this Agreement.

(b)               Subject to the provisions set forth in Section 4.2 herein,
Borrower may voluntarily prepay the entire unpaid principal sum of the Loans
without premium or penalty.

2.4              Increase in Maximum Credit.

(a)                As a one-time accommodation to Borrower, Borrower may, at any
time, deliver a written request to Lender to increase the Maximum Credit from
$5,000,000 to $6,500,000.

(b)               Upon the receipt by Lender of any such written request, Lender
shall notify each participant of such request and each participant shall have
the option (but not the obligation) to increase the amount of its participation
by an amount up to its pro rata share of the amount of the increase in the
Maximum Credit requested by Borrower as set forth in the notice from Lender to
such Lender. Each participant shall notify Lender within ten (10) days after the
receipt of such notice from Lender whether it is willing to so increase its
participation, and if so, the amount of such increase; provided, that, no
participant shall be obligated to provide such increase in its participation and
the determination to increase the participation of a participant shall be within
the sole and absolute discretion of such participant. If the aggregate amount of
the increases in the participations received from the participants does not
equal or exceed the amount of the increase in the Maximum Credit requested by
Borrower, Lender or Borrower may seek additional participations from such other
Persons as it may determine, after, in the case of the Borrower, consultation
with Lender. In the event participants have committed in writing to provide
increases in their participations or new participations in an aggregate amount
in excess of the increase in the Maximum Credit requested by Borrower or
permitted hereunder, Lender shall then have the right to allocate such
participations in such amounts and manner as Lender may determine.

15

 

(c)                The Maximum Credit shall be increased by the amount of the
increase in participations from participants or new participations from other
Persons, in each case selected in accordance with Section 2.4(b) above, for
which Lender has received participations on the date requested by Borrower for
the increase or such other date as Lender and Borrower may agree (but subject to
the satisfaction of the conditions set forth below), effective on the date that
Lender notifies Borrower that each of the following conditions have been
satisfied (such date being the “Maximum Credit Increase Effective Date”):

(i)                 Lender shall have received from each participant that is
providing an additional participation as part of the increase in the Maximum
Credit, a participation agreement executed by Lender and such participant;

(ii)               the conditions precedent to the making of Loans set forth in
Section 7 shall be satisfied as of the date of the increase in the Maximum
Credit, both before and after giving effect to such increase;

(iii)             such increase in the Maximum Credit on the date of the
effectiveness thereof shall not violate any term or provisions of any applicable
law, regulation or order or decree of any court or other Governmental Authority
and shall not be enjoined, temporarily, preliminarily or permanently;

(iv)             there shall have been paid to Lender and each participant, in
each case, providing an additional participation in connection with such
increase in the Maximum Credit all fees and expenses due and payable to such
Person on or before the effectiveness of such increase; and

(v)               there shall have been paid to Lender, for the account of the
Lender and participants (in accordance with any agreement among them) all fees
and expenses (including reasonable fees and expenses of counsel) due and payable
pursuant to any of the Financing Agreements on or before the effectiveness of
such increase to the extent relating to such increase.

(d)               As of a Maximum Credit Increase Effective Date, each reference
to the term Maximum Credit herein shall be deemed amended to mean the amount of
the Maximum Credit specified in the written notice from Lender to Borrower of
the increase in the Maximum Credit.

Section 3.                INTEREST, FEES AND CHARGES

3.1              Interest.

(a)                Interest on Loan. Borrower shall pay interest to Lender on
the unpaid principal balance of the Loans at a rate equal to the rate of ten
percent (10%) per annum (the “Interest Rate”) and shall be payable in accordance
with the Note. All computations of interest shall be made by Lender on the basis
of a three hundred sixty (360) day year, in each case for the actual number of
days occurring in the period for which such interest or fee is payable. Each
determination by Lender of an interest rate hereunder shall be conclusive and
binding for all purposes, absent manifest error. In no event will Lender charge
interest at a rate

16

 

that exceeds the highest rate of interest permissible under any law that a court
of competent jurisdiction shall, in a final determination, deem applicable.

(b)               Interest shall be payable on the outstanding Loans (i) in
arrears for the preceding calendar month on the first (1st) day of each calendar
month, (ii) on the Maturity Date, and (iii) if any interest accrues or remains
payable after the Maturity Date, upon demand by Lender.

(c)                Effective upon the occurrence of any Event of Default and for
so long as any Event of Default shall be continuing, the Interest Rate shall
automatically be increased by two (2%) percentage points per annum (such
increased rate, the “Default Rate”), and all outstanding Obligations, including
unpaid interest, shall continue to accrue interest from the date of such Event
of Default at the Default Rate applicable to such Obligations.

(d)               If any interest or any other payment (including Unused Line
Fees and Administrative Fees) to Lender under this Agreement becomes due and
payable on a day other than a Business Day, such payment date shall be extended
to the next succeeding Business Day and interest thereon shall be payable at the
then applicable rate during such extension.

3.2              Cash Management System. On or prior to the Closing Date and
until the Maturity Date, Borrower will establish and maintain the cash
management system described in Exhibit B hereto. All payments in respect of the
Collateral shall be made to or deposited in the blocked or lockbox accounts
described in Exhibit B hereto in accordance with the terms thereof.

3.3              Fees. Borrower shall pay Lender the fees set forth in Exhibit C
hereto. To the extent such fees and expenses are due and payable on the Closing
Date, such fees and expenses shall be deemed fully earned and payable on the
date hereof, and shall be paid from Loan proceeds.

3.4              Receipt of Payments. Borrower shall make each payment under
this Agreement (not otherwise made pursuant to Section 3.5) without set-off,
counterclaim or deduction and free and clear of all Taxes not later than 3:00PM
in New York City on the day when due in lawful money of the United States of
America in immediately available funds to the Collection Account. If Borrower
shall be required by law to deduct any Taxes from any payment to Lender under
any Loan Document, then the amount payable to Lender shall be increased so that,
after making all required deductions, Lender receives an amount equal to that
which it would have received had no such deductions been made. For purposes of
computing interest and Fees, all payments shall be deemed received by Lender one
(1) Business Day following receipt of immediately available funds in the
Collection Account. For purposes of determining the Loans, payments shall be
deemed received by Lender upon receipt of immediately available funds in the
Collection Account.

3.5              Application and Allocation of Payments. Borrower irrevocably
agrees that Lender shall have the continuing and exclusive right to apply any
and all payments against the then due and payable Obligations in such order as
Lender may deem advisable. Lender is authorized to, and at its option may
(without prior notice or precondition and at any time or times), but shall not
be obligated to, make or cause to be made, Advances on behalf of Borrower

17

 

for: (a) payment of all Fees, expenses, indemnities, charges, costs, principal,
interest, or other Obligations owing by Borrower under this Agreement or any of
the other Loan Documents, (b) the payment, performance or satisfaction of any of
Borrower’s obligations with respect to preservation of the Collateral, or (c)
any premium in whole or in part required in respect of any of the policies of
insurance required by this Agreement, even if the making of any Advance causes
the outstanding balance of the Loan to exceed the amount of Advances available
under the Budget, and Borrower agrees to repay immediately, in cash, any amount
by which the Loans exceeds the amount of Advances available.

3.6              Accounting. Lender is authorized to record on its books and
records the date and amount of each Loan and each payment of principal thereof
and such recordation shall constitute prima facie evidence of the accuracy of
the information so recorded. Lender shall provide Borrower on a monthly basis a
statement and accounting of such recordations but any failure on the part of the
Lender to keep any such recordation (or any errors therein) or to send a
statement thereof to Borrower shall not in any manner affect the obligation of
Borrower to repay any of the Obligations. Except to the extent that Borrower
shall, within thirty (30) days after such statement and accounting is sent,
notify Lender in writing of any objection Borrower may have thereto (stating
with particularity the basis for such objection), such statement and accounting
shall be deemed final, binding and conclusive upon Borrower, absent manifest
error.

3.7              Reserves. The amount of Advances available to be borrowed shall
be subject to Lender’s continuing right to withhold reserves, and to increase
and decrease such reserves from time to time, if and to the extent that in
Lender’s good faith credit judgment such reserves are necessary. Lender may, at
its option, implement reserves by reducing the amount of an Advance by the
amount of the intended reserves.

3.8              Costs and Expenses. Borrower shall pay, on Lender's demand, all
costs, expenses, filing fees and taxes payable in connection with the
preparation, execution, delivery, recording, administration, collection,
liquidation, defense and enforcement of the Loan Documents, Lender's rights in
the Collateral, and all other existing and future agreements or documents
contemplated herein or related hereto, including any amendments, waivers,
supplements or consents which may now or hereafter be made or entered into in
respect hereof, or in any way involving claims or defenses asserted by Lender or
claims or defenses against Lender asserted by Borrower or any third party
directly or indirectly arising out of or related to the relationship between
Borrower and Lender, including, but not limited to the following, whether
incurred before, during or after the Term or after the commencement of any case
with respect to Borrower under the United States Bankruptcy Code or any similar
or successor statute: (a) all costs and expenses of filing or recording
(including UCC Financing Statement and, if applicable, mortgage filing fees);
(b) all title insurance and other insurance premiums, appraisal fees, fees
incurred in connection with any environmental report and audit, survey and
search fees and charges; (c) all fees relating to the wire transfer of loan
proceeds and other funds and fees for returned checks; and (d) all costs, fees
and disbursements of counsel to Lender. If any fees, costs or charges payable to
Lender hereunder are not paid when due, such amounts shall be added to the
principal amount of the Loans and accrued interest until paid.

3.9              Savings Clause. It is intended that the Interest Rate shall
never exceed the maximum rate, if any, which may be legally charged in the State
of New York for loans made to

18

 

corporations (the “Maximum Rate”). If the provisions for interest contained in
the Note would result in a rate higher than the Maximum Rate, the interest shall
nevertheless be limited to the Maximum Rate and any amounts which may be paid
toward interest in excess of the Maximum Rate shall be applied to the reduction
of principal, or, at the option of Lender, returned to the Borrower.

Section 4.                SECTION 4. TERM.

4.1              Term. This Agreement shall continue from the date hereof up to
the Stated Maturity Date.

4.2              Early Termination

(a)                Lender shall have the right to terminate this Agreement at
any time upon or after the occurrence of an Event of Default.

(b)               In the event the outstanding balance of the Loans are repaid,
in cash, on or prior to the Stated Maturity Date, Lender retains the right
either to (x) convert into Series A Warrants a portion of the outstanding
balance of the Loans in an amount not to exceed $1,625,000, or (z) purchase
Series A Warrants in an amount up to $1,625,000 in accordance with the terms set
forth in Exhibit C hereto.

Section 5.                SECTION 5. COLLATERAL.

5.1              Security Interests in Borrower’s Assets. As collateral security
for the prompt and complete payment and performance of the Obligations, Borrower
hereby grants and conveys to Lender a first priority continuing security
interest in and Lien upon all now owned and hereafter acquired property and
assets of Borrower, whether real or personal, tangible or intangible, and the
Proceeds and products thereof (which property, assets and Proceeds, together
with all other collateral security for the Obligations now or hereafter granted
to or otherwise acquired by Lender, are referred to herein collectively as the
“Collateral”), including, without limitation, all property of Borrower now or
hereafter held or possessed by Lender, and including the following:

(a)                Accounts;

(b)               Chattel Paper;

(c)                Commercial Tort Claims;

(d)               Deposit Accounts;

(e)                Documents;

(f)                Equipment;

(g)               Fixtures;

19

 

(h)               General Intangibles ((including, without limitation the
website domain names set forth on Schedule 8.22 hereto, all Intellectual
Property, contract rights, choses in action, Payment Intangibles and Software);

(i)                 Goods;

(j)                 Instruments;

(k)               Inventory;

(l)                 Investment Property;

(m)             Letter-of-Credit Rights;

(n)               Promissory Notes;

(o)               cash monies;

(p)               tax and duty refunds;

(q)               all Supporting Obligations

(r)                 All present and future books and records relating to any of
the above including, without limitation, all present and future books of account
of every kind or nature, purchase and sale agreements, invoices, ledger cards,
bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data relating to the Collateral or any Account
Debtor, together with the tapes, disks, diskettes and other data and software
storage media and devices, file cabinets or containers in or on which the
foregoing are stored (including any rights of Borrower with respect to any of
the foregoing maintained with or by any other Person);

(s)                All of Borrower’s real property as well as any and all
fixtures and improvements thereto, and any and all interests therein, wherever
located; and

(t)                 Any and all products and Proceeds of the foregoing in any
form including, without limitation, all insurance claims, warranty claims and
proceeds and claims against third parties for loss or destruction of or damage
to any or the foregoing.

5.2              Financing Statements. Borrower hereby authorizes Lender to file
Financing Statements with respect to the Collateral in form acceptable to Lender
and its counsel, and hereby ratifies any actions taken by Lender prior to the
date hereof to file such Financing Statements. Borrower shall, at all times, do,
make, execute, deliver and record, register or file all Financing Statements and
other instruments, acts, pledges, leasehold or other mortgages, amendments,
modifications, assignments and transfers (or cause the same to be done), and
will deliver to Lender such instruments and/or documentation evidencing items of
Collateral, as may be requested by Lender to better secure or perfect Lender's
security interest in the Collateral or any Lien with respect thereto. Borrower
acknowledges that it is not authorized to file any Financing Statement or
amendment or termination statement with respect to any Financing

20

 

Statement without the prior written consent of Lender and agrees that it will
not do so without the prior written consent of Lender. In addition, Borrower
hereby authorizes Lender to record the Liens in favor of the Lender in the U.S.
Patent and Trademark Office and the U.S. Copyright Office, as applicable, and
the taking of any actions required under the laws of jurisdictions outside the
United States with respect to Intellectual Property included in the Collateral.

5.3              License Grant. On the date hereof, Borrower shall grant to
Lender, as collateral security for the prompt and complete payment and
performance when due of the Obligations, all of the Borrower’s right, title and
interest in and to the Intellectual Property. Subject to the terms of the Patent
and Trademark Security Agreement, upon the occurrence and during the continuance
of an Event of Default, Lender shall have the right to use or otherwise exploit
in any manner as to which authorization of the holder of such Intellectual
Property would be required, and to license or sublicense such rights in to and
under, any Intellectual Property now or hereafter owned by or licensed to
Borrower, and wherever the same may be located, including in such license access
to all media in which any of such Intellectual Property may be recorded or
stored and to all software and hardware used for the compilation or printout
thereof, and represents, promises and agrees that any such license or sublicense
is not and will not be in conflict with the contractual or commercial rights of
any third Person and subject, in the case of trademarks and service marks, to
sufficient rights to quality control and inspection in favor of Borrower to
avoid the risk of invalidation of said trademarks and service marks.

5.4              Representations, Warranties and Covenants Concerning the
Collateral. Borrower covenants, represents and warrants (each of which such
representations and warranties shall survive execution and delivery of this
Agreement and shall be deemed repeated upon the making of each request for a
Loan and made as of the time of each and every Loan hereunder) and covenants as
follows:

(a)                (i) All of the Collateral is owned by Borrower free and clear
of all Liens (including any claim of infringement) except those in Lender’s
favor and Permitted Encumbrances and (ii) none of the Collateral is subject to
any agreement prohibiting the granting of a Lien or requiring notice of or
consent to the granting of a Lien, except as set forth in Schedule 5.4(a)
hereto.

(b)               Borrower shall not encumber, mortgage, pledge, assign or grant
any Lien upon any Collateral or any other assets to anyone other than the Lender
and except for Permitted Encumbrances.

(c)                The Liens granted pursuant to this Agreement, upon the filing
of Financing Statements in respect of Borrower in favor of the Lender in the
applicable filing office of the state of organization of Borrower, the recording
of the Liens in favor of the Lender in the U.S. Patent and Trademark Office and
the U.S. Copyright Office, as applicable, and the taking of any actions required
under the laws of jurisdictions outside the United States with respect to
Intellectual Property included in the Collateral which is created under such
laws, constitute valid perfected first priority security interests in all of the
Collateral in favor of the Lender, as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with the
terms hereof.

21

 

(d)               No security agreement, mortgage, deed of trust, financing
statement, equivalent security or Lien instrument or continuation statement
covering all or any part of the Collateral is or will be on file or of record in
any public office, except those relating to Permitted Encumbrances.

(e)                Borrower shall not dispose of any of the Collateral whether
by sale, lease or otherwise except for (i) the sale of Inventory in the ordinary
course of business and (ii) the disposition or transfer in the ordinary course
of business of Equipment if consented to in advance in writing by Lender, in
Lender’s sole discretion, and then only to the extent that the proceeds of any
such disposition are used to acquire replacement Equipment which is subject to
the Lender’s security interest or are used to repay the Obligations, as
determined by Lender.

(f)                It shall defend the right, title and interest of the Lender
in and to the Collateral against the claims and demands of all Persons
whomsoever, and take such actions, including (i) all actions necessary to grant
the Lender “control” of any Investment Property, Deposit Accounts,
Letter-of-Credit Rights or Electronic Chattel Paper owned by it, with any
agreements establishing control to be in form and substance satisfactory to the
Lender, (ii) the prompt (but in no event later than three (3) Business Days
following the Lender’s request therefor) delivery to the Lender of all original
Instruments, Chattel Paper, negotiable Documents and certificated Securities
owned by it (in each case, accompanied by stock powers, allonges or other
instruments of transfer executed in blank), (iii) notification to third parties
of the Lender’s interest in Collateral at the Lender’s request, and (iv) the
institution of litigation against third parties as shall be prudent in order to
protect and preserve its and/or the Lender’s interests in the Collateral.

(g)               It shall promptly, and in any event within three (3) Business
Days after the same is acquired by it, notify the Lender of any Commercial Tort
Claim acquired by it and, unless otherwise consented to by the Lender, it shall
enter into a supplement to this Agreement granting to the Lender a Lien in such
Commercial Tort Claim for the benefit of Lender.

(h)               Borrower shall perform in a reasonable time all other steps
requested by the Lender to create and maintain in the Lender’s favor a valid
perfected first Lien in all Collateral.

(i)                 Borrower shall notify the Lender promptly, and in any event
within three (3) Business Days after obtaining knowledge thereof (i) of any
material delay in its performance of any of its obligations to any Account
Debtor; (ii) of any assertion by any Account Debtor of any material claims,
offsets or counterclaims; (iii) of any allowances, credits and/or monies granted
by it to any Account Debtor; (iv) of all material adverse information relating
to the financial condition of an Account Debtor; (v) of any material return of
Goods; and (vi) of any loss, damage or destruction of any of the Collateral.

(j)                 Schedule 5.4(j) hereto contains a true and complete list of
all Equipment owned by Borrower. Borrower owns no Equipment other than as set
forth in such Schedule 5.4(j). Borrower shall keep and maintain its Equipment in
good operating condition, except for ordinary wear and tear, and shall make all
necessary repairs and replacements thereof

22

 

so that the value and operating efficiency shall at all times be maintained and
preserved. It shall not permit any such items to become a fixture to real estate
or accessions to other personal property.

(k)               Schedule 5.4(k) hereto lists all banks and other financial
institutions at which it maintains deposits and/or other accounts, and such
Schedule correctly identifies the name, address and telephone number of each
such depository, the name in which the account is held, a description of the
purpose of the account, and the complete account number. Borrower shall not
establish any depository or other bank account with any financial institution
(other than the accounts set forth on Schedule 5.4(k)) without providing Lender
with written notification thereof and providing similar information related
thereto.

(l)                 On the date hereof, its exact legal name (as indicated in
the public record of its jurisdiction of organization), jurisdiction of
organization, organizational identification number, if any, from the
jurisdiction of organization, and the location of its chief executive office and
all other offices or locations out of which it conducts business or operations,
are specified on Schedule 5.4(l) hereto. It has furnished to the Lender its
Organizational Documents and long-form good standing certificate as of a date
which is within thirty (30) days of the date hereof. It is organized solely
under the law of the jurisdiction so specified and has not filed any
certificates of domestication, transfer or continuance in any other
jurisdiction. Except as otherwise indicated on Schedule 5.4(l) hereto, the
jurisdiction of its organization of formation is required to maintain a public
record showing it to have been organized or formed. Except as specified on
Schedule 5.4(l) hereto, it has not changed its name, jurisdiction of
organization, chief executive office or sole place of business or its corporate
or company structure in any way (e.g., by merger, consolidation, change in form
or otherwise) within the last five years and has not within the last five years
become bound (whether as a result of merger or otherwise) as a grantor under a
security agreement entered into by another Person, which has not heretofore been
terminated.

(m)             Borrower shall maintain and keep all of its books and records
concerning the Collateral at its executive offices listed in Schedule 5.4(l)
hereto.

(n)               Borrower will not, except with Lender’s prior written consent
and upon delivery to the Lender of all additional financing statements and other
documents and legal opinions requested by the Lender to maintain the validity,
perfection and priority of the security interests provided for herein: (i)
change its jurisdiction of organization or the location of its chief executive
office from that referred to in Schedule 5.4(l) hereto; or (ii) change its name,
identity or organizational structure.

(o)               None of the Collateral is subject to any prohibition against
encumbering, pledging, hypothecating or assigning the same or requires notice or
consent to Borrower’s doing of the same.

(p)               (i) All Accounts represent complete bona fide transactions
which require no further act under any circumstances on its part to make such
Accounts payable by the Account Debtors, (ii) no Account is subject to any
present, future contingent offsets or counterclaims, and (iii) no Account
represents bill and hold sales, consignment sales, guaranteed

23

 

sales, sale or return or other similar understandings or obligations of any
Affiliate or Subsidiary of the applicable Borrower. Borrower has not made, nor
will it make, any agreement with any Account Debtor for any extension of time
for the payment of any Account, any compromise or settlement for less than the
full amount thereof, any release of any Account Debtor from liability therefor,
or any deduction therefrom except a discount or allowance for prompt or early
payment allowed by it in the ordinary course of its business consistent with
historical practice and as previously disclosed to the Lender in writing.

(q)               On the Closing Date, Borrower shall execute and deliver a
Power of Attorney in the form attached as Exhibit 5.4(q) hereto. The power of
attorney granted pursuant to the Power of Attorney and all powers granted under
any Loan Document are powers coupled with an interest and shall be irrevocable.
The powers conferred on Lender under the Power of Attorney are solely to protect
Lender’s interests in the Collateral and shall not impose any duty upon it to
exercise any such powers. Lender agrees not to exercise any power or authority
granted under the Power of Attorney unless an Event of Default has occurred and
is continuing. Borrower also hereby (i) authorizes Lender to file any financing
statements, continuation statements or amendments thereto that (A) indicate the
Collateral (1) as all assets of Borrower (or any portion of Borrower’s assets)
or words of similar effect, regardless of whether any particular asset comprised
in the Collateral falls within the scope of Article 9 of the Code of such
jurisdiction, or (2) as being of an equal or lesser scope or with greater
detail, and (B) contain any other information required by Part 5 of Article 9 of
the Code for the sufficiency or filing office acceptance of any financing
statement, continuation statement or amendment and (ii) ratifies its
authorization for Lender to have filed any initial financial statements, or
amendments thereto if filed prior to the date hereof. Borrower acknowledges that
it is not authorized to file any financing statement or amendment or termination
statement with respect to any financing statement without the prior written
consent of Lender and agrees that it will not do so without the prior written
consent of Lender, subject to Borrower’s rights under Section 9-509(d)(2) of the
Code.

Section 6.                CONDITIONS TO INITIAL ADVANCE.

The obligation of Lender to make the initial Advance shall be subject to the
satisfaction or waiver by Lender, prior thereto or concurrently therewith, of
each of the following conditions precedent:

6.1              Loan Documents. Each of the Loan Documents shall have been duly
and properly authorized, executed and delivered by Borrower and the other
parties thereto and shall be in full force and effect as of the date hereof.

6.2              Representations and Warranties. Each of the representations and
warranties made by or on behalf of Borrower to Lender in this Agreement and in
other Loan Documents shall be true and correct in all material respects as of
the date hereof, provided that any such representation or warranty that is
qualified by materiality shall be true and correct in all respects as of the
date hereof.

6.3              The Budget. Borrower shall have delivered to Lender a Budget,
which is in form and substance acceptable to Lender.

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6.4              Certified Copies of Formation Documents. Lender shall have
received from Borrower, certified by a duly authorized officer to be true and
complete on and as of a date which is not more than ten (10) Business Days prior
to the date hereof, a copy of each of the Organizational Documents of Borrower
in effect on such date of certification.

6.5              Proof of Action. Lender shall have received from Borrower a
copy, certified by a duly authorized officer to be true and complete on and as
of the date which is not more than ten (10) Business Days prior to the date
hereof, of the records of all corporate action taken by Borrower to authorize
(a) its execution and delivery of each of the Loan Documents to which it is or
is to become a party as contemplated or required by this Agreement, (b) its
performance of all of its agreements and obligations under each of such
documents, and (c) the incurring of the Obligations contemplated by this
Agreement.

6.6              Legal Opinion. Lender shall have received a written legal
opinion, addressed to Lender, dated the date hereof, from counsel for Borrower.
Such legal opinion shall be acceptable to Lender and its counsel.

6.7              Collateral. Lender shall have obtained a first priority,
perfected security interest in the Collateral of Borrower.

6.8              Insurance. Lender shall have received evidence of insurance,
additional insured and loss payee endorsements required hereunder and under the
other Loan Documents, in form and substance satisfactory to Lender, and
certificates of insurance policies and/or endorsements naming Lender as
additional insured and loss payee.

6.9              Validity of Collateral Representation. Lender shall have
received a statement by the appropriate officers of Borrower which shall
represent and certify the validity of the Collateral.

6.10          IRS Form 4506. Lender shall have received from Borrower an
executed Form 4506 to be submitted to the Internal Revenue Service which shall
grant Lender access to Borrower’s tax returns.

6.11          IRS Form W-9. Lender shall have received from Borrower an executed
Form W-9 to be submitted to the Internal Revenue Service which shall allow
Lender to verify Borrower’s tax identification number(s).

6.12          Pay Proceeds Letter. Borrower shall have delivered to Lender a pay
proceeds letter with respect to the disbursement of the proceeds of the initial
Loans in form and substance satisfactory to Lender, which letter shall provide
for, among other things, the payment or reimbursement of all costs and expenses
incurred by Lender in connection with this Agreement and the other Loan
Documents.

6.13          No Event of Default. No event shall have occurred on or prior to
the date of the initial Loan by Lender hereunder and be continuing on the date
of each such initial Loan by Lender hereunder, and no condition shall exist on
the date of each Loan by Lender hereunder, which constitutes an Event of Default
or which would, with notice or the lapse of time, or both, constitute an Event
of Default under this Agreement or any other Loan Document; and, Lender

25

 

shall have received a certification from a Responsible Officer with respect to
the foregoing in form and substance satisfactory to Lender.

6.14          Intercreditor Agreement. Lender shall have received an
Intercreditor Agreement executed and delivered by Hanover Holdings, LLC, which
is in form and substance acceptable to Lender.

6.15          Subordination Agreements. Lender shall have received Subordination
Agreements executed and delivered by each Noteholder, which Subordination
Agreements are in form and substance acceptable to Lender.

6.16          Warrants. Lender and its affiliates shall have received the
Initial Warrants issued in favor of Lender and its affiliates, which shall be
exercisable initially for an aggregate of 7,500,000 shares of Common Stock at an
exercise price of $0.35 per share, in each case subject to adjustment as
provided in the Initial Warrant.

6.17          Guarantee. Lender shall have received the Guarantee executed and
delivered by Guarantor in form and substance acceptable to Lender, together with
any collateral security documents requested by Lender to secure certain assets
of Guarantor located in Europe.

6.18          Management Consultant and Financial Advisor. Lender shall have
received executed copies of each of the Management Consulting Retention
Agreement with Hofflich and Associates and the Financial Advisor Engagement
Letter with Max Value Advisors, LLC.

6.19          Participation. Lender shall have (a) entered into participation
agreements with participants in an aggregate amount of not less than the Maximum
Credit, which participation agreements shall be in form and substance
satisfactory to Lender, and (b) received from each such participant, in
immediately available funds, the amount of such participant’s participation in
the Loans, which may be advanced from time to time by Lender in accordance with
the terms hereof.

6.20          Additional Deliveries. Borrower shall have delivered to Lender
such other instruments, documents and certificates reasonably requested by
Lender.

Section 7.                CONDITIONS TO MAKING ALL LOANS.

The obligations of Lender to make all Loans hereunder shall be subject to the
satisfaction or waiver by Lender, prior thereto or concurrently therewith, of
each of the conditions set forth in Section 6 and, in addition, the following
conditions precedent:

7.1              Applications and Compliance. The application for such Loans
shall have been made by Borrower to Lender in accordance with the applicable
provisions of this Agreement and in compliance with all provisions of this
Agreement.

7.2              Representations and Warranties. Each of the representations and
warranties made by or on behalf of Borrower to Lender in this Agreement or in
other Loan Documents shall have been true and correct in all material respects
when made (provided that

26

 

any such representation or warranty that is qualified as to materiality shall be
true and correct in all respects), shall, for all purposes of this Agreement, be
deemed to be repeated on and as of the date of each Loan by Lender hereunder and
shall be true and correct in all respects on and as of each such date, except to
the extent that any of such representations and warranties relate, by the
express terms thereof, solely to a date prior to the date of each Loan by Lender
hereunder, and Lender shall have received a certification from a Responsible
Officer of Borrower with respect to the foregoing in form and substance
satisfactory to Lender.

7.3              Performance, etc. Borrower shall have duly and properly
performed, complied with and observed each of its covenants, agreements and
obligations contained in this Agreement and in any other Loan Documents on the
date of each Loan by Lender hereunder, and Lender shall have received a
certification from a Responsible Officer with respect to the foregoing in form
and substance satisfactory to Lender. No event shall have occurred on or prior
to the date of each Loan by Lender hereunder and be continuing on the date of
each Loan by Lender hereunder, and no condition shall exist on the date of each
Loan by Lender hereunder, which constitutes an Event of Default or which would,
with notice or the lapse of time, or both, constitute an Event of Default under
this Agreement or any other Loan Document, and Lender shall have received a
certification from a Responsible Officer with respect to the foregoing in form
and substance satisfactory to Lender.

7.4              Material Adverse Effect. No event or circumstance shall have
occurred and be continuing that has had or reasonably could be expected to have
a Material Adverse Effect

Section 8.                REPRESENTATIONS AND WARRANTIES.

Borrower hereby represents and warrants to Lender, knowing and intending that
Lender shall rely thereon in making the Loans contemplated hereby (each of which
representations and warranties shall be continuing unless expressly made in
relation only to a specific date), that:

8.1              Existence:

(a)                Borrower (i) is a corporation or limited liability company
duly organized or formed, validly existing and in good standing under the laws
of the jurisdiction of its organization or formation, (ii) is in good standing
in all other jurisdictions in which it is required to be qualified to do
business as a foreign corporation or limited liability company, (iii) has all
requisite corporate or limited liability company power and authority and full
legal right to own or to hold under lease its properties and to carry on the
business as presently engaged and (iv) Borrower has been issued all required
federal, state and local licenses, certificates or permits necessary, required
or appropriate to the operation of its business.

(b)               Borrower has corporate or limited liability company power and
authority and has full legal rights to enter into each of the Loan Documents to
which it is a party, and to perform, observe and comply with all of its
agreements and obligations under each of such documents.

8.2              No Violation, etc. The execution and delivery by Borrower of
the Loan Documents to which Borrower is a party, the performance by Borrower of
all of its agreements

27

 

and obligations under each of such documents, and the incurring by Borrower of
all of the Obligations contemplated by this Agreement, have been duly authorized
by all necessary corporate or limited liability company actions on the part of
Borrower and, if required, its shareholders, and do not and will not (a)
contravene any provision of Borrower’s Organizational Documents or this
Agreement (each as from time to time in effect), (b) conflict with, or result in
a breach of the terms, conditions, or provisions of, or constitute a default
under, or result in the creation of any Lien upon any of the property of
Borrower under, any agreement, mortgage or other instrument to which Borrower is
or may become a party, (c) violate or contravene any provision of any law,
regulation, order, ruling or interpretation thereunder or any decree, order or
judgment or any court or governmental or regulatory authority, bureau, agency or
official (all as from time to time in effect and applicable to such entity), (d)
other than waivers required from Borrower’s landlords require any waivers,
consents or approvals by any third party, including any creditors or trustees
for creditors of Borrower, or (e) require any approval, consent, order,
authorization, or license by, or giving notice to, or taking any other action
with respect to, any Governmental Authority.

8.3              Binding Effect of Documents, etc. Borrower has duly executed
and delivered each of the Loan Documents to which Borrower is a party, and each
of the Loan Documents is valid, binding and in full force and effect. The
agreements and obligations of Borrower as contained in each of the Loan
Documents constitute, or upon execution and delivery thereof will constitute,
legal, valid and binding obligations of Borrower, enforceable against Borrower
in accordance with their respective terms, subject, as to the enforcement of
remedies only, to limitations imposed by federal and state laws regarding
bankruptcy, insolvency, reorganization, moratorium and other laws affecting
creditors' rights and remedies generally, and by general principles of law and
equity.

8.4              No Events of Default.

(a)                No Event of Default has occurred and is continuing and no
event has occurred and is continuing and no condition exists that would, with
notice or the lapse of time, or both, constitute an Event of Default.

(b)               Borrower is not in default under any Material Contract to
which Borrower is a party or by which Borrower or any property of Borrower is
bound.

(c)                Borrower’s execution, delivery and performance of and
compliance with this Agreement and the other Loan Documents will not, with or
without the passage of time or giving of notice, result in any material
violation of law, or be in conflict with or constitute a default under any term
or provision, or result in the creation of any Lien upon any of Borrower’s
properties or assets or the suspension, revocation, impairment, forfeiture or
nonrenewal, of any permit, license, authorization or approval applicable to
Borrower, or any of its businesses or operations or any of its assets or
properties.

8.5              No Governmental Consent Necessary. No consent or approval of,
giving of notice to, registration with or taking of any other action in respect
of, any Governmental Authority is required with respect to the execution,
delivery and performance by Borrower of this Agreement and the other Loan
Documents to which it is a party.

28

 

8.6              No Proceedings. Except as set forth on Schedule 8.6 hereto,
there are no judgments, actions, suits, or proceedings pending or, to the best
of Borrower’s knowledge, threatened against or affecting Borrower in any court
or before any Governmental Authority which, if adversely determined, would have
an adverse effect on the ability of Borrower to perform its obligations under
this Agreement or the other Loan Documents to which it is a party

8.7              No Violations of Laws; Licenses and Permits. Borrower has
conducted, and is conducting, its Business, so as to comply in all material
respects with all applicable federal, state, county and municipal statutes and
regulations. Neither Borrower nor any officer, director, manager, member or
shareholder of Borrower is or has been charged with, or so far as is known by
Borrower, is under investigation with respect to, any violation of any such
statutes, regulations or orders, which could have a Material Adverse Effect.
Borrower has been issued all required federal, state and local licenses,
certificates or permits required for the operation of its business.

8.8              Use of Proceeds of the Loans. Proceeds from the Loans shall be
used only for those purposes set forth in this Agreement. No part of the
proceeds of the Loans shall be used, directly or indirectly, for the purpose of
purchasing or carrying any margin stock or for the purpose of purchasing or
carrying or trading in any stock under such circumstances as to involve Borrower
in a violation of any statute or regulation. In particular, without limitation
of the foregoing, no part of the proceeds from the Loans is intended to be used
to acquire any publicly-held stock of any kind.

8.9              Financial Statements; Indebtedness.

(a)                The balance sheet of Borrower as of November 30, 2012, and
the related statement of operations, stockholders’ equity and cash flows
(together with the related notes) for the year ended February 28, 2012, and the
balance sheet of Borrower and the related statement of operations, stockholders’
or members’ equity and cash flows (together with the related notes) for the nine
(9)-month period ended November 30, 2013 (collectively, the “Financial
Statements”) fairly present, as of the date thereof, the financial position of
Borrower, and the results of its operations, cash flows and stockholders’ equity
in all material aspects.

(b)               Except as shown on the most recent Financial Statements, (i)
Borrower has no other Indebtedness as of the date hereof, and (ii) Borrower has
no liabilities, contingent or otherwise, except those which, individually or in
the aggregate, are not material to the financial condition or operating results
of Borrower.

 

8.10          Changes in Financial Condition. Since the Balance Sheet Date,
there has been no material adverse change and no material adverse development in
the business, properties, operations, condition (financial or otherwise),
results of operations or prospects of Borrower. Since the Balance Sheet Date,
Borrower has not (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, outside of the ordinary course of business,
(iii) had capital expenditures outside of the ordinary course of business, (iv)
except as set forth on Schedule 8.10 hereto, engaged in any transaction with any
Affiliate or (v) engaged in any other transaction outside of the ordinary course
of business.

29

 

8.11          Equipment. Borrower shall keep its Equipment in good order and
repair, and in running and marketable condition, ordinary wear and tear
excepted.

8.12          Taxes and Assessments.

(a)                Except as set forth on Schedule 8.12 hereto, (i) Borrower has
paid and discharged when due all taxes, assessments and other governmental
charges which may lawfully be levied or assessed upon its income and profits, or
upon all or any portion of any property belonging to it, whether real, personal
or mixed, to the extent that such taxes, assessment and other charges have
become due, and (ii) Borrower has filed all tax returns, federal, state and
local, and all related information, required to be filed by it.

(b)               Borrower shall make all payments to be made by it hereunder
without any Tax Deduction (as defined below), unless a Tax Deduction is required
by law. If Borrower is aware that it must make a Tax Deduction (or that there is
a change in the rate or the basis of a Tax Deduction), it shall promptly notify
Lender. If a Tax Deduction is required by law to be made by Borrower, the amount
of the payment due from Borrower shall be increased to an amount which (after
making the Tax Deduction) leaves an amount equal to the payment which would have
been due if no Tax Deduction had been required. If Borrower is required to make
a Tax Deduction, Borrower shall make the minimum Tax Deduction allowed by law
and shall make any payment required in connection with that Tax Deduction within
the time allowed by law. Within thirty (30) days of making either a Tax
Deduction or a payment required in connection with a Tax Deduction, Borrower
shall deliver to Lender evidence satisfactory to Lender that the Tax Deduction
has been made or (as applicable) the appropriate payment has been paid to the
relevant taxing authority.

(c)                “Tax Deduction” means a deduction or withholding for or on
account of Tax from a payment under a Loan Document. “Tax” means any tax, levy,
impost, duty or other charge or withholding of a similar nature, including any
income, franchise, stamp, documentary, excise or property tax, charge or levy
(in each case, including any related penalty or interest).

8.13          ERISA. Borrower is in compliance in all material respects with the
applicable provisions of ERISA and all regulations issued thereunder by the
United States Treasury Department, the Department of Labor and the Pension
Benefit Guaranty Corporation.

8.14          Environmental Matters.

(a)                Borrower has duly complied with, and its facilities, business
assets, property, leaseholds and equipment are in compliance in all respects
with, the provisions of all Environmental Laws.

(b)               Borrower has been issued all required federal, state and local
licenses, certificates or permits required under Environmental Laws for the
operation of its business.

8.15          United States Anti-Terrorism Laws; Holding Company Status.

30

 

(a)                In this Section 8.15:

“Anti-Terrorism Law” means each of: (i) Executive Order No. 13224 of September
23, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit,
Threaten To Commit, or Support Terrorism (the “Executive Order”); (ii) the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (commonly known
as the USA Patriot Act); (iii) the Money Laundering Control Act of 1986, Public
Law 99-570; and (iv) any similar law enacted in the United States of America
subsequent to December 31, 2004.

“holding company” has the meaning given to it in the United States Public
Utility Holding Company Act of 1935, and any successor legislation and rules and
regulations promulgated thereunder.

“investment company” has the meaning given to it in the United States Investment
Company Act of 1940.

“public utility” has the meaning given to it in the United States Federal Power
Act of 1920.

“Restricted Party” means any person listed: (i) in the Annex to the Executive
Order; (ii) on the Specially Designated Nationals and Blocked Persons list
maintained by the Office of Foreign Assets Control of the United States
Department of the Treasury; or (iii) in any successor list to either of the
foregoing.

(b)               Borrower is not (i) a holding company or subject to regulation
under the United States Public Utility Holding Company Act of 1935; (ii) a
public utility or subject to regulation under the United States Federal Power
Act of 1920; (iii) required to be registered as an investment company or subject
to regulation under the United States Investment Company Act of 1940; or (iv)
subject to regulation under any United States Federal or State law or regulation
that limits its ability to incur or guarantee indebtedness.

(c)                To the best of Borrower’s knowledge, Borrower (i) is not, and
is not controlled by, a Restricted Party; (ii) has not received funds or other
property from a Restricted Party; and (iii) is not in breach of and is not the
subject of any action or investigation under any Anti-Terrorism Law.

(d)               Borrower has taken reasonable measures to ensure compliance
with the Anti-Terrorism Laws.

8.16          Representations, Warranties and Covenants Concerning the
Collateral. The representations and warranties of Borrower set forth in Section
5.4 hereof are incorporated in this Section 8.16 by reference.

8.17          Books and Records. Borrower maintains its chief executive office
and its books and records related to its Accounts, Inventory and all other
Collateral at its address set forth in Schedule 5.4(l) hereto.

31

 

8.18          Ownership and Control. All of the issued and outstanding capital
Equity Interests of Borrower are owned beneficially and of record according to
the percentages set forth in Schedule 8.18 hereto.

8.19          Insurance. As of the Closing Date, Schedule 8.19 hereto lists all
insurance of any nature maintained for current occurrences by Borrower and each
other Corporate Credit Party, as well as a summary of the terms of such
insurance. Each Corporate Credit Party shall deliver to Lender certified copies
and endorsements to all of its and those of its Subsidiaries (i) “All Risk” and
business interruption insurance policies naming Lender loss payee, and (ii)
general liability and other liability policies naming Lender as an additional
insured. All policies of insurance on real and personal property will contain an
endorsement, in form and substance acceptable to Lender, showing loss payable to
Lender (Form 438 BFU or equivalent) and extra expense and business interruption
endorsements. Such endorsement, or an independent instrument furnished to
Lender, will provide that the insurance companies will give Lender at least
thirty (30) days’ prior written notice before any such policy or policies of
insurance shall be altered or canceled and that no act or default of Borrower or
any other Person shall affect the right of Lender to recover under such policy
or policies of insurance in case of loss or damage. Each Corporate Credit Party
shall direct all present and future insurers under its “All Risk” policies of
insurance to pay all proceeds payable thereunder directly to Lender. If any
insurance proceeds are paid by check, draft or other instrument payable to any
Credit Party and Lender jointly, Lender may endorse such Credit Party’s name
thereon and do such other things as Lender may deem advisable to reduce the same
to cash. Lender reserves the right at any time, upon review of each Credit
Party’s risk profile, to require additional forms and limits of insurance. Each
Corporate Credit Party shall, on each anniversary of the Closing Date and from
time to time at Lender’s request, deliver to Lender a report by a reputable
insurance broker, satisfactory to Lender, with respect to such Person’s
insurance policies.

8.20          Deposit and Disbursement Accounts. Schedule 5.4(k) hereto lists
all banks and other financial institutions at which Borrower, or any other
Corporate Credit Party, maintains deposits and/or other accounts, including the
Disbursement Account, and such Attachment correctly identifies the name, address
and telephone number of each such depository, the name in which the account is
held, a description of the purpose of the account, and the complete account
number.

8.21          Changes. Since the Balance Sheet Date, except as disclosed in
Schedule 8.21 hereto, with respect to Borrower, there has not been:

(a)                any change in its business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects, which,
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;

(b)               any resignation or termination of any of its officers, key
employees or groups of employees;

(c)                any material change, except in the ordinary course of
business, in its contingent obligations by way of guaranty, endorsement,
indemnity, warranty or otherwise;

32

 

(d)               any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect;

(e)                any waiver by it of a valuable right or of a material debt
owed to it;

(f)                any direct or indirect loans made by it to any of its
stockholders, managers, members, employees, managers, officers or directors,
other than advances made in the ordinary course of business;

(g)               any material change in any compensation arrangement or
agreement with any employee, officer, manager, director or equity holder;

(h)               any declaration or payment of any dividend or other
distribution of its assets;

(i)                 any labor organization activity related to it;

(j)                 any debt, obligation or liability incurred, assumed or
guaranteed by it, except those for immaterial amounts and for current
liabilities incurred in the ordinary course of business;

(k)               any sale, assignment, transfer, abandonment or other
disposition of any Collateral other than Inventory in the ordinary course of
business;

(l)                 any change in any Material Contract to which it is a party
or by which it is bound which, either individually or in the aggregate, has had,
or could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;

(m)             any other event or condition of any character that, either
individually or in the aggregate, has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect; or

(n)               any arrangement or commitment by it to do any of the acts
described in subsection (a) through (m) of this Section 8.21.

8.22          Intellectual Property.

(a)                Except for Permitted Encumbrances, (i) Borrower holds all
Intellectual Property that it owns free and clear of all Liens and restrictions
on use or transfer, whether or not recorded, and has sole title to and ownership
of or has the full, exclusive (subject to the rights of its licensees) right to
use in its field of business such Intellectual Property; and Borrower holds all
Intellectual Property that it uses but does not own under valid licenses or
sub-licenses from others; (ii) the use of the Intellectual Property by Borrower
does not, to the knowledge of Borrower, violate or infringe on the rights of any
other Person; (iii) Borrower has not received any notice of any conflict between
the asserted rights of others and Borrower with respect to any Intellectual
Property; (iv) Borrower has used its commercially reasonable best efforts to
protect its rights in and to all Intellectual Property; (v) Borrower is in
compliance with

33

 

all material terms and conditions of its agreements relating to the Intellectual
Property; (vi) Borrower is not, and since the Balance Sheet Date has not been, a
defendant in any action, suit, investigation or proceeding relating to
infringement or misappropriation by Borrower of any Intellectual Property nor
has Borrower been notified of any alleged claim of infringement or
misappropriation by Borrower of any Intellectual Property; (vii) to the
knowledge of Borrower, none of the products or services Borrower is researching,
developing, proposes to research and develop, make, have made, use, or sell,
infringes or misappropriates any Intellectual Property right of any third party;
(viii) none of the trademarks and service marks used by Borrower, to the
knowledge of Borrower, infringes the trademark or service mark rights of any
third party; and (ix) to Borrower’s knowledge, none of the material processes
and formulae, research and development results and other know-how relating to
Borrower's business, the value of which to Borrower is contingent upon
maintenance of the confidentiality thereof, has been disclosed to any Person
other than Persons bound by written confidentiality agreements.

(b)               Schedule 8.22 hereto sets forth a true and complete list of
(i) all Intellectual Property owned or claimed by Borrower, together with any
and all registration or application numbers for any Intellectual Property filed
or issued by any Intellectual Property registry (and, in the case of any and all
domain names registered by or on behalf of Borrower, the names of the
registrar(s) thereof) and (ii) all Intellectual Property licenses which are
either material to the business of Borrower or relate to any material portion of
Borrower’s Inventory, including licenses for standard software having a
replacement value of more than $10,000. None of such Intellectual Property
licenses are reasonably likely to be construed as an assignment of the licensed
Intellectual Property to Borrower. Borrower shall update such Schedule 8.22 upon
each new claim, use, registration or application of or for Intellectual Property
by Borrower, and upon Borrower becoming the licensee under any license described
in the foregoing clause (b)(ii).

8.23          Employees. Borrower has no collective bargaining agreements with
any of its employees. There is no labor union organizing activity pending or, to
Borrower’s knowledge, threatened with respect to Borrower. Except as set forth
in Schedule 8.23 hereto, Borrower is not a party to or bound by any currently
effective deferred compensation arrangement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee compensation plan or
agreement. To Borrower’s knowledge, no employee of Borrower, nor any consultant
with whom Borrower has contracted, is in violation of any material term of any
employment contract or any other contract relating to the right of any such
individual to be employed by, or to contract with, Borrower or to receive any
benefits; and, to Borrower’s knowledge, the continued employment by Borrower of
its present employees, and the performance of Borrower’s contracts with its
independent contractors, will not result in any such violation. Except for
employees who have a current effective employment agreement with Borrower, as
set forth in Schedule 8.23 hereto, no employee of Borrower has been granted the
right to continued employment by Borrower or to any material compensation
following termination of employment with Borrower. Borrower is not aware that
any officer, director, manager, partner, key employee or group of employees
intends to terminate his, her or their employment with Borrower, nor does
Borrower have a present intention to terminate any of the same.

8.24          Tax Status. Borrower (i) has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is

34

 

subject, (ii) has paid all taxes and other governmental assessments and charges
that are shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and for which it has
set aside on its books a provision in the amount of such taxes being contested
in good faith and (iii) has set aside on its books provisions reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes
payable by Borrower claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Borrower know of no basis for any such
claim.

8.25          Capitalization.

(a)                Except as disclosed in the SEC Reports, there are no
outstanding options, warrants, rights (including conversion or preemptive rights
and rights of first refusal), proxy or stockholder agreements, or other
arrangements or agreements of any kind for the purchase or acquisition from
either Borrower of any of their securities.

(b)               All of Borrower’s issued and outstanding securities: (i) have
been duly authorized and validly issued and are fully paid and non-assessable
and (ii) were issued in compliance with all applicable state and federal laws.

(c)                The issuance of the Warrants has been duly authorized by all
requisite action and the Warrants when issued as provided in this Agreement
shall be validly issued and fully paid and will be free of any Liens.

(d)               The shares of Common Stock issuable pursuant to the Warrants
have been duly and validly reserved for issuance. When issued in accordance with
the provisions of the Warrants, such shares will be validly issued, fully paid
and non-assessable, and will be free of any Liens.

8.26          Representations and Warranties: True, Accurate and Complete. None
of the representations, certificates, reports, warranties or statements now or
hereafter made or delivered to Lender pursuant hereto or in connection with this
Agreement or any other Loan Document or the transactions contemplated hereby
contains or will contain any untrue statement of a material fact, or omits or
will omit to state a material fact necessary in order to make the statements
contained herein and therein, in light of the circumstances in which they are
made, not misleading.

8.27          SEC Reports. The SEC Reports do not contain any untrue statement
of a material fact nor omit to state a material fact necessary in order to make
the statements contained herein or therein, in light of the circumstances in
which they are made, not misleading.

8.28          Fees; Brokers; Finders. There are no fees, commissions or other
compensation due to any third party acting on behalf of or at the direction of
Borrower in connection with the Loan Documents except as set forth on Schedule
8.28 hereto. All negotiations relative to the Loan Documents, and the
transactions contemplated thereby, have been carried on by the Borrower with the
Lender without the intervention of any other person or entity acting on behalf
of the Borrower, and in such manner as not to give rise to any claim against the
Borrower or the Lender for any finder's fee, brokerage commission or like
payment

35

 

due to any third party acting on behalf of or at the direction of Borrower, and
if any such fee, commission or payment is payable, it shall be the sole
responsibility of the Borrower and the Borrower shall pay, and indemnify the
Lender for, the same.

Section 9.                AFFIRMATIVE COVENANTS.

Until the indefeasible payment and satisfaction in full of all Obligations and
the termination of this Agreement, Borrower hereby covenants and agrees as
follows:

9.1              Notify Lender. Borrower shall promptly, and in any event within
three (3) Business Days of determining of any of the following, inform Lender
(a) if any one or more of the representations and warranties made by Borrower in
this Agreement or in any document related hereto shall no longer be entirely
true, accurate and complete in any respect, (b) of all material adverse
information relating to the financial condition of Borrower; (c) of any material
return of goods; (f) of any loss, damage or destruction of any of the
Collateral, and (d) the occurrence of an Event of Default or a Material Adverse
Effect.

9.2              Change in Directors or Officers. Borrower shall promptly notify
Lender of any changes in Borrower’s directors and/or executive officers of
Borrower.

9.3              Pay Taxes and Liabilities; Comply with Agreement. Borrower
shall promptly pay, when due, or otherwise discharge, all Indebtedness, sums and
liabilities of any kind now or hereafter owing by Borrower to its employees as
wages or salaries or to Lender and Governmental Authorities however created,
incurred, evidenced, acquired, arising or payable, including, without
limitation, the Obligations, income taxes, excise taxes, sales and use taxes,
license fees, and all other taxes with respect to any of the Collateral, or any
wages or salaries paid by Borrower or otherwise, unless the validity of which
are being contested in good faith by Borrower by appropriate proceedings,
provided that Borrower shall have maintained reasonably adequate reserves and
accrued the estimated liability on Borrower’s balance sheet for the payment of
same.

9.4              Observe Covenants, etc. Borrower shall observe, perform and
timely comply with the covenants, terms and conditions of this Agreement and the
other Loan Documents, including without limitation the Warrants.

9.5              Registration of the shares of Common Stock issuable upon
exercise of the Warrants. Among other covenants in the Warrants is a covenant to
promptly register the shares of Common Stock issuable upon exercise of the
Warrants. The Borrower shall commence appropriate action to do so and file a
Registration Statement with respect to such shares within three months of the
date of this Agreement and thereafter shall take all appropriate actions to
cause such Registration Statement to become effective as soon thereafter as may
be practicable.

9.6              Maintain Corporate Existence and Qualifications. Borrower shall
maintain and preserve in full force and effect, its corporate existence and
rights, franchises, licenses and qualifications necessary to continue its
business, and comply with all applicable statutes, rules and regulations
pertaining to the operation, conduct and maintenance of its existence and
business including, without limitation, all federal, state and local laws
relating to

36

 

benefit plans, environmental safety, or health matters, and hazardous or liquid
waste or chemicals or other liquids (including use, sale, transport and disposal
thereof).

9.7              Financial Reports and other Information and Documents to be
Furnished to Lender. Borrower shall deliver or cause to be delivered to Lender:

(a)                Annual Financial Statements. Annual financial statements of
Borrower, certified by the Chief Financial Officer of each and reviewed by an
outside accounting firm acceptable to Lender, as soon as available, but in any
event within ninety (90) days after the end of Borrower’s Fiscal Year during the
Term. Such financial statements shall (x) fairly present the financial position
of Borrower as of the dates thereof and the results of its operations, cash
flows and stockholders’ equity for each of the periods then ended in all
material aspects; and (y) be prepared in accordance with GAAP.

(b)               Quarterly Financial Statements. Quarterly financial statements
of the Borrower, as soon as available but in any event no later than forty-five
(45) days after the close of each calendar quarter, the unaudited balance sheet
and the related statement of income of the Borrower, prepared in accordance with
GAAP, subject to year-end audit adjustments, together with such other
information with respect to the business of Borrower as Lender may request.

(c)                Monthly Financial Statements. Not later than twenty (20) days
after the end of each calendar month, the unaudited balance sheets and the
related statements of income of Borrower, certified by the Chief Financial
Officer of Borrower, subject to year-end audit adjustments, with an aging
schedule for all accounts receivable and accounts payable, together with such
other information with respect to the business of Borrower as Lender may
request.

(d)               Other Weekly Reports. Weekly aging schedule for all accounts
receivable and accounts payable, and inventory schedules and financial
projections, in such form and at such intervals as Lender may request.

(e)                Notice of Litigation, Judgments, Environmental, Health or
Safety Complaints.

(i)                 Immediately after commencement thereof, notice in writing of
all litigation and of all proceedings before any Governmental Authority
affecting the Borrower or any of its assets;

(ii)               Within three (3) Business Days thereafter, written notice to
Lender of the entry of any judgment or the institution of any lawsuit or of
other legal or equitable proceedings or the assertion of any cross claim or
counterclaim seeking monetary damages from Borrower in an amount exceeding
$10,000; and

(iii)             Within three (3) Business Days thereafter, notice or copies if
written of all claims, complaints, orders, citations or notices, whether formal
or informal, written or oral, from a governmental body or private person or
entity, relating to air emissions, water discharge, noise emission, solid or
liquid waste disposal, hazardous waste or materials, or

37

 

any other environmental, health or safety matter, which adversely affect
Borrower. Such notices shall include, among other information, the name of the
party who filed the claim, the potential amount of the claim, and the nature of
the claim.

(f)                Other Information. Upon demand,

(i)                 Certificates of insurance for all policies of insurance to
be maintained by Borrower pursuant hereto;

(ii)               All information received by Borrower affecting the financial
status or condition of any Account Debtor or the payment of any Account,
including but not limited to, invoices, original orders, shipping and delivery
receipts; and

(iii)             An estoppel certificate executed by an authorized officer of
Borrower indicating that there then exists no Event of Default and no event
which, with the giving of notice or lapse of time, or both, would constitute an
Event of Default.

(g)               SEC Filings. Within one (1) Business Day of filing with the
SEC, all SEC Reports

(h)               Additional Information. From time to time, such other
information as Lender may reasonably request, including financial projections
and cash flow analysis.

9.8              Comply with Laws. Borrower shall comply with the requirements
of all applicable laws, rules, regulations and orders of any Governmental
Authority, compliance with which is necessary to maintain its corporate
existence or the conduct of its business or non-compliance with which would
adversely affect in any respect its ability to perform its obligations or any
security given to secure its obligations.

9.9              Insurance Required.

(a)                Borrower shall cause to be maintained, in full force and
effect on all property of Borrower including, without limitation, all Inventory
and Equipment, insurance in such amounts against such risks as is reasonably
satisfactory to Lender, including, but without limitation, business
interruption, liability, casualty, fire, boiler, theft, burglary, pilferage,
vandalism, malicious mischief, loss in transit, and hazard insurance and, if as
of the date hereof, any of the leased real property of Borrower is in an area
that has been identified by the Secretary of Housing and Urban Development as
having special flood or mudslide hazards, and on which the sale of flood
insurance has been made available under the National Flood Insurance Act of
1968, then Borrower shall maintain flood insurance. Said policy or policies
shall:

(i)                 Be in a form and with insurers which are satisfactory to
Lender;

(ii)               Be for such risks, and for such insured values as Lender or
its assigns may reasonably require in order to replace the property in the event
of actual or constructive total loss;

38

 

(iii)             Designate Lender as additional insured and loss payee as
Lender’s interest may from time to time appear;

(iv)             Contain a “breach of warranty clause” whereby the insurer
agrees that a breach of the insuring conditions or any negligence by Borrower or
any other person shall not invalidate the insurance as to Lender and its
assignee;

(v)               Provide that they may not be canceled or altered without
thirty (30) days prior written notice to Lender; and

(vi)             Upon demand, be delivered to Lender.

(b)               Borrower shall obtain such additional insurance as Lender may
reasonably require.

(c)                Borrower shall, in the event of loss or damage, forthwith
notify Lender and file proofs of loss with the appropriate insurer. Borrower
hereby authorizes Lender to endorse any checks or drafts constituting insurance
proceeds.

(d)               Borrower shall forthwith upon receipt of insurance proceeds
endorse and deliver the same to Lender.

(e)                In no event shall Lender be required either to (i) ascertain
the existence of or examine any insurance policy or (ii) advise Borrower in the
event such insurance coverage shall not comply with the requirements of this
Agreement.

9.10          Condition of Collateral; No Liens. Borrower shall maintain all
Collateral in good condition and repair at all times, and preserve it against
any loss, damage, or destruction of any nature whatsoever relating to said
Collateral or its use, and keep said Collateral free and clear of any Liens,
except for the Permitted Encumbrances, and shall not permit Collateral to become
a fixture to real estate or accessions to other personal property.

9.11          Payment of Proceeds. Borrower shall forthwith upon receipt of all
proceeds of Collateral, pay such proceeds (insurance or otherwise) over to
Lender for application against the Obligations in such order and manner as
Lender may elect.

9.12          Records. Borrower shall at all times keep accurate and complete
records of its operations, of the Collateral and the status of each Account,
which records shall be maintained at its executive offices as set forth on
Schedule 5.4(l) hereto.

9.13          Delivery of Documents. If any proceeds of Accounts shall include,
or any of the Accounts shall be evidenced by, notes, trade acceptances or
instruments or documents, or if any Inventory is covered by documents of title
or chattel paper, whether or not negotiable, then Borrower waives protest
regardless of the form of the endorsement. If Borrower fails to endorse any
instrument or document, Lender is authorized to endorse it on Borrower’s behalf.

9.14          United States Contracts. If any of the Accounts arise out of
contracts with the United States or any of its departments, agencies or
instrumentalities, Borrower will notify

39

 

Lender and, if requested by Lender, execute any necessary instruments in order
that all monies due or to become due under such contract shall be assigned to
Lender and proper notice of the assignment given under the Federal Assignment of
Claims Act.

9.15          Further Assurances. Borrower shall at any time or from time to
time upon request of Lender take such steps and execute and deliver such
Financing Statements and other documents (including, without limitation, the
Lender’s receipt of original title certificates of motor vehicles included in
the Collateral and subject to certificate of title statutes in the United
States) all in the form of substance satisfactory to Lender relating to the
creation, validity or perfection of the security interests provided for herein,
under the UCC or which are reasonably necessary to effectuate the purposes and
provisions of this Agreement. Borrower shall defend the right, title and
interest of Lender in and to the Collateral against the claims and demands of
all Persons whomsoever, and take such actions, including (i) all actions
necessary to grant Lender “control” of any Investment Property, Deposit
Accounts, Letter-of-Credit Rights or Electronic Chattel Paper owned by it, with
any agreements establishing control to be in form and substance satisfactory to
Lender, (ii) the prompt (but in no event later than three (3) Business Days
following Lender’s request therefor) delivery to Lender of all original
Instruments, Chattel Paper, negotiable Documents and certificated Securities
owned by it (in each case, accompanied by stock powers, allonges or other
instruments of transfer executed in blank), (iii) notification of Lender’s
interest in Collateral at Lender’s request, and (iv) the institution of
litigation against third parties as shall be prudent in order to protect and
preserve Borrower’s and/or Lender’s respective and several interests in the
Collateral.

9.16          Indemnification. Borrower shall indemnify, protect, defend and
save harmless Lender, as well as Lender's directors, officers, trustees,
employees, agents, attorneys, members and shareholders (hereinafter referred to
collectively as the “Indemnified Parties” and individually as an “Indemnified
Party”) from and against (a) any and all losses, damages, expenses or
liabilities of any kind or nature and from any suits, claims or demands, by
third parties (including, without limitation, claims of brokers and finders),
including reasonable counsel fees incurred in investigating or defending such
claim, suffered by any of them and caused by, relating to, arising out of,
resulting from, or in any way connected with the Loans, the transactions
contemplated herein and the Loan Documents, and (b) any and all losses, damages,
expenses or liabilities sustained by Lender in connection with any Environmental
Liabilities and Costs. In case any action shall be brought against an
Indemnified Party based upon any of the above and in respect to which indemnity
may be sought against Borrower, the Indemnified Party against whom such action
was brought shall promptly notify Borrower in writing, and Borrower shall assume
the defense thereof, including the employment of counsel selected by Borrower
and reasonably satisfactory to the Indemnified Party, the payment of all costs
and expenses and the right to negotiate and consent to settlement. Upon
reasonable determination made by the Indemnified Party, the Indemnified Party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof; provided, however, that the Indemnified
Party shall pay the costs and expenses incurred in connection with the
employment of separate counsel. Borrower shall not be liable for any settlement
of any such action effected without its consent, but if settled with Borrower’s
consent, or if there be a final judgment for the claimant in any such action,
Borrower agrees to indemnify and save harmless said Indemnified Party against
whom such action was brought from and against any loss or liability by reason of
such settlement

40

 

or judgment, except as otherwise provided above. The provisions of this Section
shall survive the termination of this Agreement and the final repayment of the
Obligations.

9.17          Publicly Traded Common Stock.

(a)                Listing. Borrower shall (a) do all things necessary for the
continuation of its listing or quotation, as applicable, on the trading market
upon which shares of its Common Stock are listed or quoted, as applicable, which
on the date hereof is the OTCQB; and (b) comply in all material respects with
its reporting, filing and other obligations under the by-laws or rules of the
Financial Industry Regulatory Authority and other regulatory authorities, as
applicable.

(b)               Disclosure Controls. Borrower shall maintain disclosure
controls and procedures (as such term is defined in Rule 13a-15 under the 1934
Act) designed to ensure that information required to be disclosed by Borrower in
the reports that it files or submits under the 1934 Act is recorded, processed,
summarized, and reported, within the time periods specified in the rules and
forms of the SEC and there shall not be any weakness in any such disclosure
controls or Financial Reporting Controls, except as so disclosed in any 1934 Act
Filings or to Lender and, to the extent so disclosed, shall use its reasonable
efforts to promptly remedy any such weakness.

(c)                Compliance with Laws. Neither Borrower nor any of its
Subsidiaries shall be in violation of the Sarbanes-Oxley Act of 2002 or any SEC
related regulation or rule or any rule of the trading market promulgated
thereunder in respect of the conduct of its business or the ownership of its
properties which will have, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.

9.18          Reports and Financial Statements. (a) Borrower shall prepare and
timely file and distribute as appropriate all proxy statements, financial
reports and other documents required to be filed by it under the 1934 Act
(collectively, the “SEC Reports”); (b) each SEC Report shall be, at the time of
its filing, in compliance in all material respects with the requirements of its
respective form and none of the SEC Reports, nor the financial statements (and
the notes thereto) included in such SEC Reports, as of their respective filing
dates, shall contain any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; and (c) such financial statements shall be prepared in
accordance with GAAP and applied on a consistent basis during the periods
involved (except (1) as may be otherwise indicated in such financial statements
or the notes thereto or (2) in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed) and shall fairly
present in all material respects the financial condition, the results of
operations and cash flows of Borrower and its Subsidiaries, on a consolidated
basis, as of, and for, the periods presented in each such SEC Report.

9.19          Budget.

(a)                Borrower has prepared and delivered to Lender the Budget. The
Budget has been reviewed by Borrower and sets forth for each of the semi-monthly
periods

41

 

covered thereby (the “Budget Period”): (i) projected receipts (Sources of Funds)
for each Budget Period, (ii) projected cash disbursements (Uses of Funds) for
each Budget Period, (iii) projected aggregate principal amount of outstanding
Advances (Loan Balance) for each Budget Period, and (iv) projected Advances
(Loan Advances) available to Borrower under the terms and conditions of the Loan
Agreement for each Budget Period (collectively, the "Projected Information"). In
addition to the Budget, by no later than 5:00 p.m. (Eastern time) on the Tuesday
of each week commencing on March 31, 2013, Borrower shall furnish to Lender, in
form and substance satisfactory to Lender, a report in the form attached hereto
as Exhibit 9.18(a) that sets forth for the immediately preceding Budget Period
and on a cumulative basis a comparison of the actual Total Sources of Funds,
actual Total Use of Funds, actual Advances and actual Loan Balances to the
corresponding items in the Projected Information for such Budget Periods set
forth in the Budget on a cumulative, roll-forward basis, together with a
certification from the chief financial officer of the Borrower that no
disbursements, other than as set forth on the Budget, have been made and no
Material Budget Deviation has occurred.

(b)               Borrower acknowledges, confirms and agrees that commencing
with the trailing bi-monthly period ending on March 31, 2013 and for the
trailing semi-monthly period ending on the 15th and the end of each month
thereafter: (i) the actual aggregate Total Sources of Funds received during such
period shall not be less than ninety (90%) percent of the projected aggregate
Total Sources of Funds during such period in the Budget, (ii) the actual
aggregate Total Use of Funds during such period shall not be more than one
hundred and ten (110%) of the projected aggregate Total Use of Funds during such
period in the Budget, (iii) the actual aggregate amount of Advances available to
Borrowers as of the end of such period shall not be less than the projected
amount of Advances available to Borrowers as of the end of such period, or (vi)
the actual aggregate principal amount of outstanding Loans as of the end of such
period shall not be more than the projected aggregate principal amount of
outstanding Loans as of the end of such period.

(c)                Each Borrower and Guarantor hereby confirms, acknowledges and
agrees that (i) a failure to maintain the minimum deviations in the Budget as
set forth in Section 9.18(b) hereof shall constitute a material deviation from
the Budget and an additional Event of Default (each, a "Material Budget
Deviation") and (ii) the failure to deliver reports with respect to any Budget,
in form and substance satisfactory to Lender, as provided in Section 9.18(a)
hereof, shall constitute an Event of Default; provided, that, Lender shall not
exercise any rights or remedies as a result of the occurrence of a Material
Budget Deviation unless (x) such Material Budget Deviation occurs during two (2)
consecutive Budget Periods, (y) the Material Budget Deviation for such two (2)
consecutive Budget Periods is not cured during the fifteen (15) consecutive day
period immediately following the second consecutive Budget Period in which such
Material Budget Deviation occurs, and (z) no other Default or Event of Default
is in existence; except, that, Lender may, in all cases, exercise such rights or
remedies in the event of the occurrence of a Material Budget Deviation in more
than five (5) Budget Periods during the Term of this Agreement. Lender is
relying upon the Borrowers' delivery of, and compliance with, the Budget in
accordance with this Section 9.18 in determining to enter into the financing
arrangements provided for herein.

(d)               In the event that actual receipts of Sources of Funds exceeds
projected Sources of Fund by twenty (20%) percent or more in any two (2)
consecutive Budget

42

 

Periods or in the aggregate for the cumulative prior Budget Periods, Borrower
shall prepare, with the assistance, review and approval of the Management
Consultant, a revised Budget, which, once approved by Lender, shall replace the
existing Budget and be deemed the Budget for purposes of this Agreement from
that point forward.

9.20          Retention of Management Consultant

(a)                Borrower shall retain Hofflich & Associates or such other
consulting firm acceptable to Lender ("Management Consultant"), on terms and
conditions acceptable to Lender, as its management consultant to, among other
things, assist Borrowers in managing its operations and financial affairs in
connection with conducting Borrower’s operations. Management Consultant shall
assist Borrower in the preparation and compliance with the Budget, including the
preparation of all reports submitted to Lender and shall be authorized to review
and approve the expenditure of all cash disbursements by Borrower prior to
payment and to review and approve all Advance requests.

(b)               The Agreement providing for the retention of the Management
Consultant shall not be amended, modified, supplemented or terminated without
the prior written consent of Lender. The Management Consultant and the scope and
nature of the engagement of the Management Consultant shall at all times be
acceptable to Lender, in its discretion, including, without limitation, the
Management Consultant’s authority to review and approve all cash disbursements
and requests for Advances in connection with conducting the Borrowers’
operations. Borrower agrees to provide the Management Consultant with complete
and full access to all of its books and records and premises and agrees to
cooperate fully with the Management Consultant. Borrower hereby authorizes and
directs (which authorization and direction shall be irrevocable during the term
of the Management Consultant’s retention agreement) the Management Consultant to
share with Lender all budgets, records, projections, financial information,
reports and other information relating to the Collateral and the financial
condition or operations of the business of Borrower.

(c)                The parties hereto acknowledge and agree that it shall
constitute an Event of Default if the Management Consultant resigns or is
terminated by Borrower and is not promptly (but in any case within fourteen (14)
calendar days of such resignation or termination) replaced with another firm
acceptable to Lender, on term and conditions acceptable to Lender.

Section 10.            NEGATIVE COVENANTS.

Until payment and satisfaction in full of all Obligations and the termination of
this Agreement, Borrower hereby covenants and agrees as follows:

10.1          Change of Control; No Creation of Subsidiaries. Borrower will not
consolidate with, merge with, or acquire the stock or a material portion of the
assets of any person, firm, joint venture, partnership, corporation, or other
entity, whether by merger, consolidation, purchase of stock or otherwise if any
such action results in a Change of Control (as defined below). Borrower will not
create or permit to exist any Subsidiary unless such new Subsidiary is a
wholly-owned Subsidiary and is designated by Lender as either a co-borrower or
guarantor hereunder and such Subsidiary shall have entered into all such
documentation required

43

 

by Lender, including, without limitation, to grant to Lender a first priority
perfected security interest in substantially all of such Subsidiary’s assets to
secure the Obligations. In addition, Borrower will not acquire a material
portion of the assets of any entity in a manner that is not addressed by the
foregoing provisions of this Section 10.1 if such action would impair Lender’s
rights hereunder or in the Collateral.

A “Change of Control” shall be deemed to have occurred if:

(i)                 any “Person,” which shall mean a “person” as such term is
used in Sections 13(d) and 14(d) of the 1934 Act, or group of Persons, other
than Persons that are holders of voting securities of the Borrower as of the
date of the execution of this Agreement, is or becomes the “beneficial owner”
(as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of
securities of Borrower representing 50% or more of the combined voting power of
Borrower’s then outstanding voting securities;

(ii)               individuals, who at the Closing Date constitute the Board of
Directors or the managers of Borrower, and any new director whose election by
the Board of Directors of Borrower, or whose nomination for election by
Borrower’s equity holders, was approved by a vote of at least one-half (1/2) of
the directors or managers then in office (other than in connection with a
contested election), cease for any reason to constitute at least a majority of
the Board of Directors or managers of Borrower;

(iii)             the stockholders or members of Borrower approve (I) a plan of
complete liquidation of Borrower or (II) the sale or other disposition by
Borrower of all or substantially all of Borrower’s assets; or

(iv)             a merger or consolidation of Borrower with any other entity is
consummated, other than:

(A)             a merger or consolidation which results in the voting securities
of Borrower outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than 50% of the combined voting power of the
surviving entity's outstanding voting securities immediately after such merger
or consolidation; or

(B)              a merger or consolidation which would result in the directors
or managers of Borrower (who were directors or managers immediately prior
thereto) continuing to constitute more than 50% of all directors or managers of
the surviving entity immediately after such merger or consolidation.

In this paragraph (iv), “surviving entity” shall mean only an entity in which
all of Borrower’s equity holders immediately before such merger or consolidation
(determined without taking into account any equity holders properly exercising
appraisal or similar rights) become stockholders by the terms of such merger or
consolidation, and the phrase “directors or managers of Borrower (who were
directors or managers immediately prior thereto)” shall include only individuals
who were directors or managers of Borrower at the Closing Date.

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10.2          Disposition of Assets or Collateral. Borrower will not sell,
lease, transfer, convey, or otherwise dispose of any or all of its assets or
Collateral, other than the sale of Inventory in the ordinary course of business
or the sale of Equipment in accordance with Lender’s prior written consent under
Section 5.4(e) hereof.

10.3          Other Liens. Borrower will not incur, create or permit to exist
any Lien on any of its property or assets, whether now owned or hereafter
acquired, except for (a) those Liens in favor of Lender created by this
Agreement and the other Loan Documents; and (b) the Permitted Encumbrances.

10.4          Other Liabilities. Borrower will not incur, create, assume, or
permit to exist, any Indebtedness or liability on account of either borrowed
money or the deferred purchase price of property, except (i) Obligations to
Lender, (ii) debt expressly subordinated to Borrower’s Obligations to Lender
pursuant to a subordination agreement in form and substance satisfactory to
Lender, (iii) Permitted Indebtedness, or (iv) Indebtedness incurred in
connection with any of the Permitted Encumbrances.

10.5          Loans. Borrower will not make any loans to any Person, other than
advances to employees of Borrower in the ordinary course of business, with
outstanding advances to any employee not to exceed $1,000 at any time without
the prior written consent of Lender.

10.6          Guaranties. Borrower will not assume, guaranty, endorse,
contingently agree to purchase or otherwise become liable upon the obligation of
any Person, except by the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business.

10.7          Transfers of Notes or Accounts. Borrower will not sell, assign,
transfer, discount or otherwise dispose of any Accounts or any promissory note
payable to Borrower, with or without recourse.

10.8          Dividends. Borrower will not declare or pay any cash dividend,
make any distribution on, redeem, retire or otherwise acquire directly or
indirectly, any shares of its stock or other Equity Interests without the prior
written consent of Lender.

10.9          Payments to Affiliates. Except as set forth in Schedule 10.9
hereto, or as otherwise approved by Lender in writing in advance, Borrower shall
not make any payments of cash or other property to any Affiliate.

10.10      Modification of Documents. Borrower will not change, alter or modify,
or permit any change, alteration or modification of its Organizational Documents
in any manner that might adversely affect Lender’s rights hereunder as a secured
lender or its Collateral without Lender's prior written consent.

10.11      Change Business or Name. Borrower will not engage in any business
other than the Business, or change its names as it appears in the official
filings of its state of organization.

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10.12      Settlements. Other than in the ordinary course of its business,
Borrower will not compromise, settle or adjust any claims in any amount relating
to any of the Collateral, without the prior written consent of Lender.

Section 11.            EVENTS OF DEFAULT.

The occurrence of any of the following shall constitute an event of default
(hereinafter referred to as an “Event of Default”):

11.1          Failure to Pay. The failure by Borrower to pay, when due, (a) any
payment of principal, interest or other charges due and owing to Lender pursuant
to any obligations of Borrower to Lender including, without limitation, those
Obligations arising pursuant to this Agreement or any Loan Document, or under
any other agreement for the payment of monies then due and payable to Lender, or
(b) any taxes due to any Governmental Authority.

11.2          Failure of Insurance. Failure of one or more of the insurance
policies required hereunder to remain in full force and effect; failure on the
part of Borrower to pay or cause to be paid all premiums when due on the
insurance policies pursuant to this Agreement; failure on the part of Borrower
to take such other action as may be requested by Lender in order to keep said
policies of insurance in full force and effect until all Obligations have been
indefeasibly paid in full; and failure on the part of Borrower to execute any
and all documentation required by the insurance companies issuing said policies
to effectuate said assignments.

11.3          Failure to Perform. Borrower’s failure to perform or observe any
covenant, term or condition of this Agreement or in any other Loan Document.

11.4          Cross Default. On or after the Closing Date, Borrower’s default
under any agreement or contract with a third party which default would result in
a liability to Borrower in excess of $10,000.

11.5          False Representation or Warranty. Borrower shall have made any
statement, representation or warranty in this Agreement or in any other Loan
Document to which Borrower is a party or in a certificate executed by Borrower
incident to this Agreement, which is at any time found to have been false in any
material respect at the time such representation or warranty was made.

11.6          Liquidation, Voluntary Bankruptcy, Dissolution, Assignment to
Creditors. Any resolution shall be passed or any action (including a meeting of
creditors) shall be taken by Borrower for the termination, winding up,
liquidation or dissolution of Borrower, or Borrower shall make an assignment for
the benefit of creditors, or Borrower shall file a petition in voluntary
liquidation or bankruptcy, or Borrower shall file a petition or answer or
consent seeking, or consenting to, the reorganization of Borrower or the
readjustment of any of the indebtedness of Borrower under any applicable
insolvency or bankruptcy laws now or hereafter existing (including the United
States Bankruptcy Code), or Borrower shall consent to the appointment of any
receiver, administrator, liquidator, custodian or trustee of all or any part of

46

 

the property or assets of Borrower or any corporate action shall be taken by
Borrower for the purposes of effecting any of the foregoing.

11.7          Involuntary Petition Against Borrower. Any petition or application
for any relief is filed against Borrower under applicable insolvency or
bankruptcy laws now or hereafter existing (including the United States
Bankruptcy Code) or under any insolvency, reorganization, receivership,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction now or hereafter in effect (whether at law or in equity), and is
not dismissed or stayed within thirty (30) days of the filing thereof, provided
that during such thirty (30) day period the Lender shall not be obligated to
make any Advances hereunder..

11.8          Judgments; Levies. Judgments or attachments aggregating in excess
of $10,000 at any given time are obtained against Borrower which remain unstayed
for a period of ten (10) days or are enforced.

11.9          Change in Condition. There occurs any event or a change in the
condition or affairs, financial or otherwise, of Borrower which, in the
reasonable opinion of Lender, impairs Lender's security or ability of Borrower
to discharge its obligations hereunder or any other Loan Document or which
impairs the rights of Lender in Borrower’s Collateral.

11.10      Environmental Claims. Lender determines that any Environmental
Liabilities and Costs or Environmental Lien with respect to Borrower will have a
potentially adverse effect on the financial condition of Borrower or on the
Collateral.

11.11      Failure to Notify. If at any time Borrower fails to provide Lender
immediately with notice or copies, if written, of all complaints, orders,
citations or notices with respect to environmental, health or safety complaints.

11.12      Failure to Deliver Documentation. Borrower shall fail to obtain and
deliver to Lender any other documentation required to be signed or obtained as
part of this Agreement, or shall have failed to take any reasonable action
requested by Lender to perfect, protect, preserve and maintain the security
interests and Lien on the Collateral provided for herein.

11.13      Change of Control. Borrower undergoes a Change of Control.

11.14      Dissolution; Maintenance of Existence. Borrower is dissolved, or
Borrower fails to maintain its corporate existence in good standing, or the
usual business of Borrower ceases or is suspended in any respect.

11.15      Indictment. The indictment of Borrower or any director or Responsible
Officer of Borrower under any criminal statute, or commencement of criminal or
civil proceedings against Borrower, pursuant to which statute or proceedings the
penalties or remedies sought or available include forfeiture of any portion of
the property of Borrower.

11.16      Tax Liens. The filing of a Lien for any unpaid taxes filed by any
Governmental Authority against Borrower or any of its assets.

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11.17      Challenge to Validity of Loan Documents. Borrower attempts to
terminate, or challenges the validity of, or its liability under, this Agreement
or any other Loan Document, or any proceeding shall be brought to challenge the
validity, binding effect of Loan Document, or any Loan Document ceases to be a
valid, binding and enforceable obligation of Borrower.

11.18      Claims Against Lender. The filing of a motion by the Borrower seeking
to challenge the Lender’s Liens under the Loan Documents or otherwise commencing
any cause of action against the Lender.

11.19      Current Officers. Each of the current Chief Executive Officer and
Chief Financial Officer as the Closing Date shall cease to be the Chief
Executive Officer and the Chief Financial Officer of Xzeres, unless an
individual reasonably acceptable to Lender for each position shall become the
successor Chief Executive Officer and Chief Financial Officer within sixty (60)
days of the effective date of each of the current Chief Executive Officer and
Chief Financial Officer ceasing to hold such position; provided, that, no
Default shall be deemed to exist under this clause during such sixty (60) day
period.

11.20      Cure Period. Notwithstanding anything to the contrary contained
herein, other than with respect to an Event of Default arising under Sections
11.1, 11.5, 11.6, 11.7, 11.13, 11.14, 11.15, 11.17, 11.18 or 11.19 hereto,
Borrower shall have a period of fifteen (15) calendar days from the occurrence
of an Event of Default to cure such Event of Default in a manner satisfactory to
Lender in its sole discretion, to the extent that such Event of Default is
capable of being cured as determined by Lender; provided, that, Borrower may
cure only three (3) Events of Default in any consecutive twelve (12) month
period.

Section 12.            REMEDIES.

12.1          Acceleration; Other Remedies. Upon the occurrence and during the
continuation of an Event of Default:

(a)                Lender shall have all rights and remedies provided in this
Agreement, any of the other Loan Documents, the UCC or other applicable law, all
of which rights and remedies may be exercised without notice to Borrower, all
such notices being hereby waived, except such notice as is expressly provided
for hereunder or is not waivable under applicable law. All rights and remedies
of Lender are cumulative and not exclusive and are enforceable, in Lender's
discretion, alternatively, successively, or concurrently on any one or more
occasions and in any order Lender may determine. Without limiting the foregoing,
Lender may (i) accelerate the payment of all Obligations and demand immediate
payment thereof to Lender, (ii) with or without judicial process or the aid or
assistance of others, enter upon any premises on or in which any of the
Collateral may be located and take possession of the Collateral or complete
processing, manufacturing and repair of all or any portion of the Collateral,
(iii) require Borrower, at Borrower’s expense, to assemble and make available to
Lender any part or all of the Collateral at any place and time designated by
Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon
any and all Collateral, (v) notify Account Debtors or other obligors to make
payment directly to Lender, or notify bailees as to the disposition of
Collateral, (vi) extend the time of payment of, compromise or settle for cash,

48

 

credit, return of merchandise, and upon any terms or conditions, any and all
Accounts or other Collateral which includes a monetary obligation and discharge
or release the Account Debtor or other obligor, without affecting any of the
Obligations, and (vii) sell, lease, transfer, assign, deliver or otherwise
dispose of any and all Collateral (including, without limitation, entering into
contracts with respect thereto, by public or private sales at any exchange,
broker's board, any office of Lender or elsewhere) at such prices or terms as
Lender may deem reasonable, for cash, upon credit or for future delivery, with
Lender having the right to purchase the whole or any part of the Collateral at
any such public sale, all of the foregoing being free from any right or equity
of redemption of Borrower, which right or equity of redemption is hereby
expressly waived and released by Borrower. If any of the Collateral or other
security for the Obligations is sold or leased by Lender upon credit terms or
for future delivery, the Obligations shall not be reduced as a result thereof
until payment therefor is finally collected by Lender. If notice of disposition
of Collateral is required by law, ten (10) days prior notice by Lender to
Borrower designating the time and place of any public sale or the time after
which any private sale or other intended disposition of Collateral is to be
made, shall be deemed to be reasonable notice thereof and Borrower waives any
other notice. In the event Lender institutes an action to recover any Collateral
or seeks recovery of any Collateral by way of prejudgment remedy, Borrower
waives the posting of any bond which might otherwise be required.

(b)               Lender may apply the proceeds of Collateral actually received
by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of any of the Obligations, in whole or in part (including
attorneys' fees and legal expenses incurred by Lender with respect thereto or
otherwise chargeable to Borrower) and in such order as Lender may elect, whether
or not then due. Borrower shall remain liable to Lender for the payment on
demand of any deficiency together with interest at the Default Interest Rate and
all costs and expenses of collection or enforcement, including reasonable
attorneys' fees and legal expenses.

(c)                Lender may, at its option, cure any default by Borrower under
any agreement with a third party or pay or bond on appeal any judgment entered
against Borrower, discharge taxes and Liens at any time levied on or existing
with respect to the Collateral, and pay any amount, incur any expense or perform
any act which, in Lender's sole judgment, is necessary or appropriate to
preserve, protect, insure, maintain, or realize upon the Collateral. Such
amounts paid by Lender shall be repayable by Borrower on demand and added to the
Obligations, with interest payable thereon at the Default Interest Rate. Lender
shall be under no obligation to effect such cure, payment, bonding or discharge,
and shall not, by doing so, be deemed to have assumed any obligation or
liability of Borrower.

(d)               Lender and Lender’s agents shall have the right to utilize any
of Borrower’s customer lists, registered names, trade names or trademarks to
publicly advertise the sell, lease, transfer, assign, deliver or otherwise
dispose of any and all Collateral and Borrower will be deemed to have waived and
voided any confidentiality agreements by and between Borrower and Lender.

12.2          Set-off. Lender shall have the right, immediately and without
notice of other action, to set-off against any of Borrower’s liabilities to
Lender any money or other liability owed by Lender or any Affiliate of Lender
(and such Affiliate of Lender is hereby authorized to effect such set-off) in
any capacity to Borrower, whether or not due, and Lender or

49

 

such Affiliate shall be deemed to have exercised such right of set-off and to
have made a charge against any such money or other liability immediately upon
the occurrence of such Event of Default even though the actual book entries may
be made at a time subsequent thereto. The right of set-off granted hereunder
shall be effective irrespective of whether Lender shall have made demand under
or in connection with the Loans. None of the rights of Lender described in this
Section are intended to diminish or limit in any way Lender's or Affiliates of
Lender's common-law set-off rights.

12.3          Costs and Expenses. Borrower shall be liable for all costs,
charges and expenses, including attorney's fees and disbursements, incurred by
Lender by reason of the occurrence of any Event of Default or the exercise of
Lender's remedies with respect thereto, each of which shall be repayable by
Borrower on demand with interest, and added to the Obligations.

12.4          No Marshaling. Lender shall be under no obligation whatsoever to
proceed first against any of the Collateral or other property which is security
for the Obligations before proceeding against any other of the Collateral. It is
expressly understood and agreed that all of the Collateral or other property
which is security for the Obligations stands as equal security for all
Obligations, and that Lender shall have the right to proceed against any or all
of the Collateral or other property which is security for the Obligations in any
order, or simultaneously, as in its sole and absolute discretion it shall
determine. It is further understood and agreed that Lender shall have the right
to sell any or all of the Collateral or other property which is security for the
Obligations in any order or simultaneously, as Lender shall determine in its
sole and absolute discretion.

12.5          No Implied Waivers; Rights Cumulative. No delay on the part of
Lender in exercising any right, remedy, power or privilege hereunder or under
any other Loan Document or provided by statute or at law or in equity or
otherwise shall impair, prejudice or constitute a waiver of any such right,
remedy, power or privilege or be construed as a waiver of any Event of Default
or as an acquiescence therein. No right, remedy, power or privilege conferred on
or reserved to Lender hereunder or under any other Loan Document or otherwise is
intended to be exclusive of any other right, remedy, power or privilege. Each
and every right, remedy, power or privilege conferred on or reserved to Lender
under this Agreement or under any of the other Loan Documents or otherwise shall
be cumulative and in addition to each and every other right, remedy, power or
privilege so conferred on or reserved to Lender and may be exercised by Lender
at such time or times and in such order and manner as Lender shall (in its sole
and complete discretion) deem expedient.

Section 13.            OTHER RIGHTS OF LENDER.

13.1          Repayment of Obligations. All Obligations shall be payable at
Lender's office set forth below or at a bank or such other place as Lender may
expressly designate from time to time for purposes of this Section. Lender shall
apply all proceeds of Accounts, or other Collateral received by Lender and all
other payments in respect of the Obligations to the Loans whether or not then
due or to any other Obligations then due, in whatever order or manner Lender
shall determine.

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13.2          Lender Appointed Attorney-in-Fact.

(a)                Borrower hereby irrevocably constitutes and appoints Lender,
with full power of substitution, as its true and lawful attorney-in-fact, with
full irrevocable power and authority in its place and stead and in its name or
otherwise, from time to time in Lender's discretion, at Borrower’s sole cost and
expense, to take any and all appropriate action and to execute and deliver any
and all documents and instruments which Lender may deem reasonably necessary or
advisable to accomplish the purposes of this Agreement, including, without
limiting the generality of the foregoing, (i) at any time any of the Obligations
are outstanding, (A) to transmit to Account Debtors, other obligors or any
bailees notice of the interest of Lender in the Collateral or request from
Account Debtors or such other obligors or bailees at any time, in the name of
Borrower or Lender or any designee of Lender, information concerning the
Collateral and any amounts owing with respect thereto; (B) to execute in the
name of Borrower and file against Borrower in favor of Lender Financing
Statements or amendments with respect to the Collateral, or record a copy or an
excerpt hereof in the United States Copyright Office or the United States Patent
and Trademark Office and to take all other steps as are necessary in the
reasonable opinion of Lender under applicable law to perfect the security
interests granted herein; and (C) to pay or discharge taxes, Liens, security
interests or other encumbrances levied or placed on or threatened against the
Collateral; and (ii) after and during the continuation of an Event of Default,
(A) to receive, take, endorse, assign, deliver, accept and deposit, in the name
of Lender or Borrower, any and all cash, checks, commercial paper, drafts,
remittances and other instruments and documents relating to the Collateral or
the proceeds thereof, (B) to notify Account Debtors or other obligors to make
payment directly to Lender, or notify bailees as to the disposition of
Collateral, (C) to change the address for delivery of mail to Borrower and to
receive and open mail addressed to Borrower, (D) take or bring, in the name of
Lender or Borrower, all steps, actions, suits or proceedings deemed by Lender
necessary or desirable to effect collection of or other realization upon the
Collateral; (E) to obtain and adjust insurance required pursuant to this
Agreement and to pay all or any part of the premiums therefor and the costs
thereof, and (F) to extend the time of payment of, compromise or settle for
cash, credit, return of merchandise, and upon any terms or conditions, any and
all Accounts or other Collateral which includes a monetary obligation and
discharge or release the Account Debtor or other obligor, without affecting any
of the Obligations.

(b)               Borrower hereby ratifies, to the extent permitted by law, all
that Lender shall lawfully and in good faith do or cause to be done by virtue of
and in compliance with this Agreement. The powers of attorney granted pursuant
to this Agreement are each a power coupled with an interest and shall be
irrevocable until the Obligations are paid indefeasibly in full.

13.3          Release of Lender. Borrower hereby releases and exculpates Lender,
its officers, partners, members, directors, employees, agents, representatives
and designees, from any liability arising from any acts or occurrences under
this Agreement or in furtherance thereof, whether as attorney-in-fact or
otherwise, whether of omission or commission, and whether based upon any error
of judgment or mistake of law or fact, except for gross negligence or willful
misconduct as determined by a final and non-appealable order from a court of
competent jurisdiction. In no event will Lender have any liability to Borrower
for lost profits or other special or consequential damages.

51

 

13.4          Uniform Commercial Code. At all times prior and subsequent to an
Event of Default hereinafter, Lender shall be entitled to all the rights and
remedies of a secured party under the UCC with respect to all Collateral.

13.5          Preservation of Collateral. At all times prior and subsequent to
an Event of Default hereinafter, Lender may (but without any obligation to do
so) take any and all action which in its sole and absolute discretion is
necessary and proper to preserve its interest in the Collateral consisting of
Accounts, including without limitation the payment of debts of Borrower which
might, in Lender's sole and absolute discretion, impair the Collateral or
Lender's security interest therein, and the sums so expended by Lender shall be
secured by the Collateral, shall be added to the amount of the Obligations due
Lender and shall be payable on demand with interest at the rate applicable to
the Loan set forth in Section 3.1 hereof from the date expended by Lender until
repaid by Borrower. After written notice by Lender to Borrower and
automatically, without notice, after an Event of Default, Borrower shall not,
without the prior written consent of Lender in each instance, (a) grant any
extension of time of payment of any Accounts, (b) compromise or settle any
Accounts for less than the full amount thereof, (c) release in whole or in part
any Account Debtor or other person liable for the payment of any of the Accounts
or any such other Collateral, or (d) grant any credits, discounts, allowances,
deductions, return authorizations or the like with respect to any of the
Accounts.

13.6          Lender's Right to Cure. In the event Borrower shall fail to
perform any of its Obligations hereunder or under any other Loan Document, then
Lender, in addition to all of its rights and remedies hereunder, may perform the
same, but shall not be obligated to do so, at the cost and expense of Borrower.
Such costs and expenses shall be added to the amount of the Obligations due
Lender, and Borrower shall promptly reimburse Lender for such amounts together
with interest at the Default Interest Rate from the date such sums are expended
until repaid by Borrower.

13.7          Inspection of Collateral. From time to time as requested by
Lender, Lender or its designee shall have access, (a) prior to an Event of
Default, at the sole expense of Borrower, during reasonable business hours to
all of the premises where Collateral is located for the purpose of inspecting
the Collateral and to all of Borrower’s Collateral, inclusive of books and
records, and Borrower shall permit Lender or Lender’s designees to make copies
of such books and records or extracts therefrom as Lender may request, and (b)
on or after an Event of Default, at the sole expense of Borrower, at any time,
to all of the premises where Collateral is located for the purposes of
inspecting, disposing and realizing upon the Collateral, and all Borrower’s
books and records, and Borrower shall permit Lender or its designee to make such
copies of such books and records or extracts therefrom as Lender may request.
Without expense to Lender, Lender may use such of Borrower’s personnel,
equipment, including computer equipment, programs, printed output and computer
readable media, supplies and premises for the collection of Accounts and
realization on other Collateral as Lender, in its sole discretion, deems
appropriate. Borrower hereby irrevocably authorizes all accountants and third
parties to disclose and deliver to Lender at Borrower’s expense all financial
information, books and records, work papers, management reports and other
information in its possession regarding Borrower.

Section 14.            PROVISIONS OF GENERAL APPLICATION.

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14.1          Waivers. Borrower waives demand, presentment, notice of dishonor
or protest and notice of protest of any instrument of Borrower or others which
may be included in the Collateral.

14.2          Survival. All covenants, agreements, representations and
warranties made by Borrower herein or in any other Loan Document or in any
certificate, report or instrument contemplated hereby shall survive any
independent investigation made by Lender and the execution and delivery of this
Agreement, and such certificates, reports or instruments and shall continue so
long as any Obligations are outstanding and unsatisfied, applicable statutes of
limitations to the contrary notwithstanding.

14.3          Notices. All notices, requests and demands to or upon the
respective parties hereto shall be in writing and either (a) delivered by
registered or certified mail, (b) delivered by hand, or (c) delivered by
national overnight courier service with next Business Day delivery, and shall be
deemed to have been duly given or made (i) upon the earlier of actual receipt
and three (3) Business Days after deposit in the United States Mail, registered
or certified mail, return receipt requested, with proper postage prepaid, (ii)
one (1) Business Day after deposit with a national overnight courier with all
charges prepaid, or (iii) when hand-delivered. All notices, requests and demands
are to be given or made to the respective parties at the following addresses (or
to such other addresses as either party may designate by notice in accordance
with the provisions of this paragraph):

 

If to Borrower: Xzeres Corp

9025 SW Hillman Court, Suite 3126

Wilsonville, Oregon 97070

Attention: Mr. Steve Shum

 

With a copy to: Cane Clark, LLP

3273 Warm Springs Rd.

Las Vegas, NV 89120

Attention: Bryan R. Clark, Esq.

 

If to Lender: Renewable Power Resources, LLC

430 East 56th Street, 4G

New York, New York 10022

Attention: Mr. Reid Krakower

 

With a copy to: Otterbourg, Steindler, Houston & Rosen, P.C.

230 Park Avenue

New York, New York 10169

Attention: Andrew M. Kramer, Esq.

 

Notwithstanding the foregoing, that parties expressly acknowledge and agree that
foregoing provisions of notice by Lender to Borrower’s counsel is an
accommodation only, and that Lender shall have fulfilled its notice obligation
hereunder if notice shall have been received by Borrower at the address set
forth above, irrespective of whether such notice is received by Borrower’s
counsel.

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14.4          Amendments; Waiver of Defaults. The terms of this Agreement shall
not be amended, waived, altered, modified, supplemented or terminated in any
manner whatsoever except by a written instrument signed by Lender and Borrower.
Any default or Event of Default by Borrower may only be waived by a written
instrument specifically describing such default or Event of Default and signed
by the Lender.

14.5          Confidentiality.

(a)                Lender shall use all reasonable efforts to keep confidential,
in accordance with its customary procedures for handling confidential
information and safe and sound lending practices, any non-public information
supplied to it by Borrower pursuant to this Agreement which is clearly and
conspicuously marked as confidential at the time such information is furnished
by such Borrower to Lender, provided, that, nothing contained herein shall limit
the disclosure of any such information: (i) to the extent required by statute,
rule, regulation, subpoena or court order, (ii) to bank examiners and other
regulators, auditors and/or accountants, (iii) in connection with any litigation
to which Lender is a party, (iv) to any Lender or participant (or prospective
Lender or participant) or to any Affiliate of any Lender so long as such Lender,
participant (or prospective Lender or participant), or Affiliate shall have been
instructed to treat such information as confidential in accordance with this
Section 14.5, or (v) to counsel for Lender or any participant (or prospective
Lender or participant).

(b)               In the event that Lender receives a request or demand to
disclose any confidential information pursuant to any subpoena or court order,
Lender agrees (i) to the extent permitted by applicable law or if permitted by
applicable law, to the extent Lender determines in good faith that it will not
create any risk of liability to Lender, Lender will promptly notify Borrower of
such request so that Borrower may seek a protective order or other appropriate
relief or remedy and (ii) if disclosure of such information is required,
disclose such information and, subject to reimbursement by Borrower of Lender’s
expenses, cooperate with Borrower in the reasonable efforts to obtain an order
or other reliable assurance that confidential treatment will be accorded to such
portion of the disclosed information which Borrower so designates, to the extent
permitted by applicable law or if permitted by applicable law, to the extent
Lender determines in good faith that it will not create any risk of liability to
Lender.

(c)                In no event shall this Section 14.5 or any other provision of
this Agreement, any of the other Loan Documents or applicable law be deemed: (i)
to apply to or restrict disclosure of information that has been or is made
public by Borrower, Guarantor or any third party or otherwise becomes generally
available to the public other than as a result of a disclosure in violation
hereof, (ii) to apply to or restrict disclosure of information that was or
becomes available to Lender (or any Affiliate of Lender) on a non-confidential
basis from a person other than Borrower or Guarantor, (iii) to require Lender to
return any materials furnished by Borrower or Guarantor to Lender or prevent
Lender from responding to routine informational requests in accordance with any
code of ethics or other applicable industry standards relating to the exchange
of credit information. The obligations of Lender under this Section 14.5 shall
supersede and replace the obligations of Lender under any confidentiality letter
signed prior to the date hereof or any other arrangements concerning the
confidentiality of information provided by Borrower or Guarantor to Lender.

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14.6          Binding on Successors.

(a)                This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns, provided,
however, that Borrower may not assign any of its rights or obligations under
this Agreement or the other Loan Documents to any Person without the prior
written consent of Lender.

(b)               Lender may assign any or all of the Obligations together with
any or all of the security therefor to any Person and any such assignee shall
succeed to all of Lender’s rights with respect thereto. Lender shall notify
Borrower of any such assignment. Upon such assignment, Lender shall have no
further obligations under the Loan Documents. Lender may from time to time sell
or otherwise grant participations in any of the Obligations and the holder of
any such participation shall, subject to the terms of any agreement between
Lender and such holder, be entitled to the same benefits as Lender with respect
to any security for the Obligations in which such holder is a participant.

14.7          Invalidity. Any provision of this Agreement which may be
determined by competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

14.8          Publicity. Borrower hereby authorizes Lender to make appropriate
announcements of the financial arrangement entered into by and between Borrower
and Lender, including, without limitation, announcements which are commonly
known as tombstones, in such publications and to such selected parties as Lender
shall in its sole and absolute discretion deem appropriate, or as required by
applicable law.

14.9          Section or Paragraph Headings. Section and paragraph headings are
for convenience only and shall not be construed as part of this Agreement.

14.10      APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, THE LAWS OF
WHICH BORROWER HEREBY EXPRESSLY ELECTS TO APPLY TO THIS AGREEMENT, WITHOUT
GIVING EFFECT TO PROVISIONS FOR CHOICE OF LAW THEREUNDER. BORROWER AGREES THAT
ANY ACTION OR PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS AGREEMENT
SHALL BE COMMENCED IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT.

14.11      WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ANY AND ALL RIGHTS THAT
IT MAY NOW OR HEREAFTER HAVE UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR
ANY STATE TO A TRIAL BY JURY OF ANY AND ALL ISSUES ARISING EITHER DIRECTLY OR
INDIRECTLY IN ANY ACTION OR PROCEEDING BETWEEN BORROWER, LENDER OR ITS
SUCCESSORS AND ASSIGNS, OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, THE OBLIGATIONS AND/OR THE COLLATERAL. IT IS INTENDED

55

 

THAT SAID WAIVER SHALL APPLY TO ANY AND ALL DEFENSES, RIGHTS, AND/OR
COUNTERCLAIMS IN ANY ACTION OR PROCEEDINGS BETWEEN BORROWER AND LENDER. BORROWER
WAIVES ALL RIGHTS TO INTERPOSE ANY CLAIMS, DEDUCTIONS, SETOFFS OR COUNTERCLAIMS
OF ANY KIND, NATURE OR DESCRIPTION IN ANY ACTION OR PROCEEDING INSTITUTED BY
LENDER WITH RESPECT TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE
OBLIGATIONS, THE COLLATERAL OR ANY MATTER ARISING THEREFROM OR RELATING THERETO,
EXCEPT COMPULSORY COUNTERCLAIMS.

14.12      CONSENT TO JURISDICTION. BORROWER HEREBY (a) IRREVOCABLY SUBMITS AND
CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED
IN THE STATE OF NEW YORK, NEW YORK COUNTY WITH RESPECT TO ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, THE
OBLIGATIONS AND/OR THE COLLATERAL OR ANY MATTER ARISING THEREFROM OR RELATING
THERETO, AND (b) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE BASED ON
VENUE OR FORUM NON CONVENIENS WITH RESPECT THERETO. IN ANY SUCH ACTION OR
PROCEEDING, BORROWER WAIVES PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT OR
OTHER PROCESS AND PAPERS THEREIN AND AGREES THAT THE SERVICE THEREOF MAY BE MADE
BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO BORROWER AT ITS OFFICES
SET FORTH HEREIN OR OTHER ADDRESS THEREOF OF WHICH LENDER HAS RECEIVED NOTICE AS
PROVIDED IN THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, BORROWER CONSENTS TO
THE COMMENCEMENT BY LENDER OF ANY SUIT, ACTION OR PROCEEDING IN ANY OTHER
JURISDICTION TO ENFORCE LENDER’S RIGHTS AND BORROWER WAIVES ANY OBJECTIONS WHICH
IT MAY NOW OR HEREAFTER HAVE BASED ON VENUE AND/OR FORUM NON CONVENIENS OF ANY
SUCH SUIT, ACTION OR PROCEEDING.

14.13      Entire Agreement. This Agreement, the other Loan Documents, any
supplements or amendments hereto or thereto, and any instruments or documents
delivered or to be delivered in connection herewith or therewith contains the
entire agreement and understanding concerning the subject matter hereof and
thereof between the parties hereto, and supersede all other prior agreements,
understandings, negotiations and discussions, representations, warranties,
commitments, proposals, offers and contracts concerning the subject matter
hereof, whether oral or written. In the event of any inconsistency between the
terms of this Agreement and any schedule or exhibit hereto, the terms of this
Agreement shall govern.

14.14      Counterparts. This Agreement may be executed in counterparts and by
facsimile or other electronic signatures, each of which when so executed, shall
be deemed an original, but all of which shall constitute but one and the same
instrument.

14.15      Joint and Several Obligations. If more than one Person is a Borrower
hereunder, the following shall apply:

(a)                All Obligations, covenants and liabilities of Borrower
hereunder shall be the joint and several Obligations, covenants and liabilities
of each Borrower. All

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representations and warranties of Borrower hereunder shall be deemed made by
each Borrower with respect to such Borrower. The Borrower shall make payment
upon the maturity of the Obligations by acceleration or otherwise, and such
obligation and liability on the part of the Borrower shall in no way be affected
by the failure of Lender to pursue or preserve its rights against any Borrower
or the release by Lender of any Collateral now or thereafter acquired from any
Borrower.

(b)               Each Borrower expressly waives any and all rights of
subrogation, reimbursement, indemnity, exoneration, contribution or any other
claim which such Borrower may now or hereafter have against any other Borrower
or against any other Person directly or contingently liable for the Obligations
until all Obligations have been indefeasibly paid in full as determined by
Lender.

(c)                Each Borrower represents and warrants to Lender that (i) the
Borrowers have one or more common or affiliated shareholders, directors and
officers, (ii) the businesses and corporate activities of each Borrower are
closely related to, and substantially benefit, the business and corporate
activities of the other, (iii) each Borrower will receive a substantial economic
benefit from entering into this Agreement and will receive a substantial
economic benefit from the application of the Loan hereunder, in each case,
whether or not such amount is used directly by such Borrower and (iv) the Loans
made hereunder are for the exclusive and indivisible benefit of the Borrower as
though, for purposes of this Agreement, the Borrowers constituted a single
entity.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, this Loan and Security Agreement has been duly executed as
of the day and year first above written.

 

BORROWERS:

 

 

XZERES CORP.

 

 

By: /s/ Frank Greco

Name: Frank Greco

Title: Chief Executive Officer

 

XZERES ENERGY SERVICES CORP

 

 

By: /s/ Frank Greco

Name: Frank Greco

Title: Chief Executive Officer

 

 

LENDER:

 

 

RENEWABLE POWER RESOURCES, LLC

 

 

By:

Name: ____________________________________

Title:

 

 

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