Exhibit 10.1
LOAN AND SECURITY AGREEMENT

$100,000
San Antonio, TX
 
Date: November 10, 2009

FOR VALUE RECEIVED, the undersigned ATSI COMMUNICATIONS, INC., a Nevada
corporation (“Company), hereby promises to pay to ATV Texas Ventures III, LP., a
Delaware limited partnership (“Lender”), at such place as Lender may specify, in
lawful money of the United States of America, the principal amount of $100,000
(the “Principal Amount”) on the earlier of: (i) a Mandatory Payment Event (as
hereinafter defined), or (ii) According to the attached Payback Schedule (the
“Maturity Date”), plus interest on the Principal Amount outstanding from time to
time hereunder at a rate equal to the lesser of (i) the maximum lawful rate or
(ii) Twelve percent (12%) per annum.  Interest shall be calculated in arrears
through the last day of each month and shall be due and payable on the first day
of the each month, as more fully set forth below in Section 1.

1.           Advances; Payments.  On the date of this Loan and Security
Agreement (the “Agreement”) and subject to the accuracy of Company’s
representations and the conditions set forth in Section 3 herein, Lender will
deliver to Company in immediately available funds the Principal Amount specified
above (the “Loan”).  All payments under this Agreement shall be applied first to
fees and expenses, then to interest and then to reduction of the Principal
Amount.  Any Principal Amount outstanding after the occurrence and during the
continuance of an Event of Default under this Agreement shall bear interest at a
rate equal to the lesser of (i) the lawful legal rate or (ii) seven percent (7%)
above the interest rate otherwise applicable under this Agreement.

2.           Secured Agreement.

2.1         General.  To secure repayment and performance of all Obligations
hereunder, Company grants Lender a security interest in the Company’s accounts
receivable (other than accounts factored with Wells Fargo),  ATSI’s ownership in
ATSICOM, whether now owned or hereafter acquired, or any value received in
exchange for any of the foregoing including, without limitation, all proceeds of
insurance covering the same and all tort claims in connection therewith
(collectively, the “Collateral”).  For purposes of this Agreement and the other
Loan Documents, “Obligations” means and includes all loans, debts, liabilities,
obligations, covenants and duties owing by the Company to the Lender of any kind
or nature, present or future, whether or not evidenced by any note, guaranty or
other instrument, which may arise under, out of, or in connection with, this
Agreement, the other Loan Documents or any other agreement executed in
connection herewith or therewith, whether or not for the payment of money,
whether arising by reason of a loan, guaranty, indemnification or in any other
manner, whether direct or indirect (including those acquired by assignment,
purchase, discount or otherwise), whether absolute or contingent, due or to
become due, and however acquired.  The term includes, without limitation, all
interest, charges, expenses, reasonable attorneys’ fees, and any other sum
properly chargeable to the Company under this Agreement, the Note, the other
Loan Documents or any other agreement executed in connection herewith or
therewith.

As further security for the Obligations, and to provide other assurances to the
Lender, the Lender shall receive, among other things:

(a)          This Agreement shall constitute a security agreement for purposes
of the UCC.

2.3         Recourse to Security.  Recourse to security shall not be required
for any Obligation hereunder and the Company hereby waives any requirement that
the Lender exhausts any right or take any action against any of the Collateral
before proceeding to enforce the Obligations against the Company.

2.4         Special Provisions Relating to Receivables.

(a)           Records, Collections, Etc.  The Company shall report all customer
credits, disputes and discrepancies in calls and minutes in each case with a
value in excess of $100,000 to the Lender.  Such report shall include a general
description of each such dispute and resolution.  The Company shall not settle
or adjust any dispute or claim, or grant any discount (except ordinary trade
discounts), credit or allowance or accept any disputes, except in the ordinary
course of its business, without the Lender’s consent.  Upon the occurrence and
during the continuance of an Event of Default, the Lender may (i) settle or
adjust disputes or claims directly with account debtors for amounts and upon
terms which it considers advisable and (ii) notify account debtors on the
Company’s receivables that such receivables have been assigned to the Lender,
and that payments in respect thereof shall be made directly to the
Lender.  Where Company receives collateral of any kind or nature by reason of
transactions between itself and its customers or account debtors, the Company
will hold the same on the Lender’s behalf, subject to the Lender’s instructions,
and as property forming part of the Company’s Receivables.  If the Company sells
goods or services to a customer which also sells goods or services to it or
which may have other claims against it, the Company will so advise the Lender
immediately to permit the Lender to establish a reserve therefore.
 
 
 

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(b)           Receivables Covenants.  During the term of this Agreement, the
Company shall always maintain current unfactored receivables greater than or
equal to the Principal Amount.  The Company shall notify the Lender promptly
of:  any material delay in the Company’s performance of any of its obligations
to any account debtor or the assertion of any claims, offsets, defenses or
counterclaims by any account debtor or any disputes with account debtors or any
settlement, adjustment or compromise thereof, all material adverse information
relating to the financial condition of any account debtor and any event or
circumstance which, to the Company’s knowledge, could be reasonably expected to
cause an Event of Default.  The Lender shall have the right at any time or
times, in the Lender’s name or in the name of a nominee of Lender, to verify the
validity, amount or any other matter relating to any account or other
Collateral, by mail, telephone, facsimile transmission or otherwise.

2.5                     Continuation of Liens, Etc.  The Company shall defend
the Collateral against all claims and demands of all persons at any time
claiming any interest therein, other than claims relating to liens permitted by
this Agreement and the other Loan Documents.  The Company agrees to comply with
the requirements of all state and federal laws to grant to the Lender valid and
perfected security interests in the Collateral and shall obtain a Deposit
Account Control Agreement or Control Agreement from any securities intermediary
or depository bank in possession of any of the Company’s investment property or
deposit accounts.  The Lender is hereby authorized by the Company to sign the
Company’s name on any document or instrument as may be necessary or desirable to
establish and maintain the liens covering the Collateral and the priority and
continued perfection thereof or file any financing or continuation statements or
similar documents or instruments covering the Collateral whether or not the
Company’s signature appears thereon.  The Company agrees, from time to time, at
the Lender’s request, to file notices of liens, financing statements, similar
documents or instruments, and amendments, renewals and continuations thereof,
and cooperate with the Lender’s representatives, in connection with the
continued perfection (and the priority status thereof) and protection of the
Collateral and the Lender’s liens thereon.  The Company agrees that the Lender
may file a carbon, photographic or other reproduction of this Agreement (or any
financing statement related hereto) as a financing statement.

2.7         Power of Attorney.  In addition to all of the powers granted to the
Lender hereunder, the Company hereby irrevocably designates and appoints the
Lender (and all persons designated by the Lender) as the Company’s true and
lawful attorney-in-fact, and authorizes the Lender (and its designees), in the
Company’s or the Lender’s name, to, at any time an Event of Default exists or
has occurred and is continuing (i) demand payment on receivables or other
Collateral, (ii) enforce payment of receivables by legal proceedings or
otherwise, (iii) exercise all of the Company’s rights and remedies to collect
any receivable or other Collateral, (iv) sell or assign any receivable or other
Collateral upon such terms, for such amount and at such time or times as the
Lender deems advisable, (v) settle, adjust, compromise, extend or renew any
receivable, (vi) discharge and release any receivable, (vii) prepare, file and
sign the Company’s name on any proof of claim in bankruptcy or other similar
document against an account debtor or other obligor in respect of any
receivables or other Collateral, (viii) notify the post office authorities to
change the address for delivery of remittances from account debtors or other
obligors in respect of receivables or other proceeds of Collateral to an address
designated by the Lender, and open and dispose of all mail addressed to the
Company and handle and store all mail relating to the Collateral; (ix) make any
payment or take any action necessary or desirable to protect or preserve any
Collateral; and (x) do all acts and things which are necessary, in the Lender’s
determination, to fulfill the Company’s Obligations under this Agreement and the
other Loan Documents.  The Company hereby releases the Lender and each Lender
and their respective officers, employees and designees from any liabilities
arising from any act or acts under this power of attorney and in furtherance
thereof, whether of omission or commission, except as a result of the Lender’s
or any of its officer’s, employee’s or designee’s own gross negligence or
willful misconduct as determined pursuant to a final non-appealable order of a
court of competent jurisdiction.  The Lender’s authority hereunder shall
include, without limitation, the authority to execute and give receipt for any
certificate of ownership or any document, to transfer title to any item of
Collateral and to take any other actions arising from or incident to the powers
granted to the Lender under this Agreement.  This power of attorney is coupled
with an interest and is irrevocable until the Obligations are repaid in full.

 
 

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2.8         Perfection of Security Interests.

(a)           The Company irrevocably and unconditionally authorizes the Lender
to file at any time and from time to time such financing statements and similar
instruments with respect to the Collateral naming the Lender or its designee as
the secured party and the Company as debtor, as the Lender may require, and
including any other information with respect to the Company or otherwise
required by the Uniform Commercial Code of such jurisdiction as the Lender may
determine, together with any amendment and continuations with respect thereto,
which authorization shall apply to all financing statements and similar
instruments filed on, prior to or after the date hereof.  The Company hereby
ratifies and approves all financing statements naming the Lender or its designee
as secured party and the Company as debtor with respect to the Collateral (and
any amendments with respect to such financing statements and similar
instruments) filed by or on behalf of the Lender prior to the date hereof and
ratifies and confirms the authorization of the Lender to file such financing
statements and similar instruments (and amendments, if any).  The Company hereby
authorizes the Lender to adopt on behalf of the Company any symbol required for
authenticating any electronic filing.  In no event shall the Company at any time
file, or permit or cause to be filed, any correction statement or termination
statement with respect to any financing statement or similar instrument (or
amendment or continuation with respect thereto) naming the Lender or its
designee as secured party and the Company as debtor, without the prior written
consent of the Lender.

(b)           The Company does not have any chattel paper (whether tangible or
electronic) or instruments as of the date hereof.  In the event that any Company
shall be entitled to or shall receive any chattel paper or instrument after the
date hereof, the Company shall promptly notify the Lender thereof in
writing.  Promptly upon the receipt thereof, the Company shall deliver, or cause
to be delivered to the Lender, all tangible chattel paper and instruments that
the Company has or may at any time acquire, accompanied by such instruments of
transfer or assignment duly executed in blank as the Lender may from time to
time specify, in each case except as the Lender may otherwise agree.  At the
Lender’s option, the Company shall, or the Lender may at any time on behalf of
the Company, cause the original of any such instrument or chattel paper to be
conspicuously marked in a form and manner acceptable to the Lender with the
following legend referring to chattel paper or instruments as applicable: “This
[chattel paper][instrument] is subject to the security interest of, ATV Texas
Ventures III, LP as Lender, and any sale, transfer, assignment or encumbrance of
this [chattel paper][instrument] violates the rights of such secured party.”

 (c)           The Company does not have any deposit accounts, except for Wells
Fargo, as of the date hereof., The Company shall not, directly or indirectly,
after the date hereof open, establish or maintain any deposit account unless
each of the following conditions is satisfied: (i) the Lender shall have
received not less than one (1) Business Days prior written notice of the
intention of the Company to open or establish such account which notice shall
specify in reasonable detail and specificity reasonably acceptable to the Lender
the name of the account, the owner of the account, the name and address of the
bank or other financial institution at which such account is to be opened or
established, the individual at such bank or other financial institution with
whom the Company is dealing and the purpose of the account and (ii) on or before
the opening of such deposit account, the Company shall as the Lender may specify
either (A) deliver to the Lender a Deposit Account Control Agreement with
respect to such deposit account of the Company duly authorized, executed and
delivered by the Company and the bank at which such deposit account is opened
and maintained or (B) arrange for the Lender to become the customer of the bank
with respect to such deposit account of the Company on terms and conditions
acceptable to the Lender.  The terms of this subsection (C) shall not apply to
deposit accounts specifically and exclusively used for payroll, payroll taxes
and other employee wage and benefit payments to or for the benefit of any
Company’s salaried employees.

 
 

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(d)           The Company shall take any other actions reasonably requested by
the Lender from time to time to cause the attachment and perfection of, and the
ability of the Lender to enforce, the security interest of the Lender in any and
all of the Collateral, including, without limitation, (i) executing, delivering
and, where appropriate, filing financing statements and similar instruments and
amendments relating thereto under the UCC or other applicable law, to the
extent, if any, that the Company’s signature thereon is required therefore, (ii)
causing the Lender’s name to be noted as secured party on any certificate of
title for a titled good if such notation is a condition to attachment,
perfection or priority of, or ability of the Lender to enforce, the security
interest of the Lender in such Collateral, (iii) complying with any provision of
any statute, regulation or treaty of the United States as to any Collateral if
compliance with such provision is a condition to attachment, perfection or
priority of, or ability of the Lender to enforce, the security interest of the
Lender in such Collateral, (iv) obtaining the consents and approvals of any
Governmental Person or third party, including, without limitation, any consent
of any licensor, lessor or other person obligated on Collateral, and taking all
actions required by any earlier versions of the UCC or by other law, as
applicable in any relevant jurisdiction.

2.9         Right to Cure.  The Lender may, at its option, (a) upon notice to
the Company, cure any default by the Company under any material agreement with a
third party that affects the Collateral, its value or the ability of the Lender
to collect, sell or otherwise dispose of the Collateral or the rights and
remedies of the Lender therein or the ability of the Company to perform its
Obligations hereunder or under the other Loan Documents, (b) pay or bond on
appeal any judgment entered against the Company, (c) discharge taxes, liens,
security interests or other encumbrances at any time levied on or existing with
respect to the Collateral and (d) pay any amount, incur any expense or perform
any act which, in the Lender’s good faith judgment, is necessary or appropriate
to preserve, protect, insure or maintain the Collateral and the rights of the
Lender with respect thereto.  The Lender may add any amounts so expended to the
Obligations, such amounts to be repayable by the Company on demand.  The Lender
shall be under no obligation to effect such cure, payment or bonding and shall
not, by doing so, be deemed to have assumed any obligation or liability of the
Company.  Any payment made or other action taken by the Lender under this
Section shall be without prejudice to any right to assert an Event of Default
hereunder and to proceed accordingly.

3.           Representations, Warranties and Covenants of Company.

3.1         Corporate Existence and Authority.  Company is and will continue to
be duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.  Company is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Company.  Company has
all requisite power to transact the business it transacts and proposes to
transact, to execute and deliver this Agreement, and all other documents and
agreements contemplated by this Agreement, and to perform the provisions of this
Agreement and to consummate the transactions contemplated by this Agreement. The
execution, delivery and performance of this Agreement, and all other documents
and agreements contemplated by this Agreement, and the consummation of the
transactions contemplated by this Agreement, have been duly authorized and
approved by Company.  This Agreement, and all other documents and agreements
contemplated by this Agreement have each been duly authorized, executed and
delivered by, and each is the valid and binding obligation of, Company
enforceable against Company in accordance with its terms, except as may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other similar laws or by legal or equitable principles relating to or limiting
creditors’ rights generally.

3.2         No Conflicts. The consummation of the transactions contemplated by
this Agreement and the performance of the terms and provisions of this
Agreement, and any other documents or agreements contemplated by this Agreement
will not (i) contravene, result in any breach of, or constitute a default under
any indenture, mortgage, deed of trust, bank loan or credit agreement, corporate
charter, by-laws or other material agreement or instrument to which Company is a
party or by which Company or any of its properties or the Collateral is
bound,  (ii) conflict with or result in a breach of any of the terms, conditions
or provisions of any order of any court, arbitrator or Federal, State, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign (collectively, “Governmental Person”)
applicable to Company or (iii) violate any material provision of any statute or
other rule or regulation of any Governmental Person applicable to Company, which
could have a material adverse effect on Company.

3.3         Place of Business; Location of Collateral.  The address set forth in
Section 9.3 of this Agreement is Company’s chief executive office and the
Collateral is located only at such location and at such other location or
locations listed herein.  Company will give Lender prior written notice before
opening any additional place of business, changing its chief executive office,
or moving any of the Collateral to a location other than Company’s chief
executive office.

 
 

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3.4         Title to Collateral; Permitted Liens.  Company is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of equipment which are leased by Company.  The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, other than Permitted Liens.  Lender now has,
and will continue to have, a perfected and enforceable security interest in all
of the Collateral subject only to Permitted Liens, and Company will at all times
defend Lender and the Collateral against all claims of others (subject to the
rights of holders of the Permitted Liens).  So long as the Loan is outstanding,
none of the Collateral now is or will be affixed to any real property in such a
manner, or with such intent, as to become a fixture.  Company is not and will
not become a lessee under any real property lease pursuant to which the lessor
may obtain any rights in any of the Collateral and no such lease now prohibits,
restrains, impairs or will prohibit, restrain or impair Company’s right to
remove any Collateral from the leased premises (subject to statutory rights of
landlords).  Whenever any Collateral is located upon premises in which any third
party has an interest (whether as owner, mortgagee, beneficiary under a deed of
trust, lien or otherwise), Company shall, whenever requested by Lender, use its
best efforts to cause such third party to execute and deliver to Lender, in form
acceptable to Lender, such waivers and subordinations as Lender shall specify,
so as to ensure that Lender’s rights in the Collateral are, and will continue to
be, superior to the rights of any such third party.  Company will keep in full
force and effect, and will comply with all the terms of, any lease of real
property where any of the Collateral now or in the future may be located.

As used in this Agreement, “Permitted Liens” shall mean (a) the lien, charges,
security interests in favor of the Lender (b) liens, charges, security
interests, licenses, leases, and other encumbrances 4 attached hereto and made a
part hereof, (c) liens, charges, security interests, and other encumbrances
arising under or relating to the sale of accounts receivable under that certain
Account Transfer Agreement with Wells Fargo Business Credit and any renewal,
extension or replacement thereof; (d) liens for taxes or assessments or other
charges by a Governmental Person that are not yet due and payable or, if due and
payable, are being contested in good faith by appropriate proceedings and for
which appropriate reserves are maintained; (e) mechanics’ materialmen’s,
landlords’, warehousemen’s, carrier’s and other similar liens imposed by law and
securing obligations incurred in the ordinary course of business which are not
past due for more than thirty (30) days or which are being diligently contested
in good faith by appropriate proceedings and for which appropriate reserves have
been established; (f) liens under workers’ compensation, unemployment insurance,
Social Security and other similar legislation’ (g) liens, deposits, or pledges
securing the performance of contracts, leases, public or statutory obligations,
surety, stay, appeal and performance bonds and other similar obligations
incurred in the ordinary course of business; (h) liens securing capital lease
obligations or the payment of the purchase price of any asset; and (i) with
respect to real property, easements, restrictive covenants, rights-of-way and
other similar liens and encumbrances that do not impair the continued use of
such real property.

3.5         Maintenance of Collateral.  Company will maintain the Collateral in
good working condition, ordinary wear and tear accepted, and Company will not
use the Collateral for any unlawful purposes.  Company will immediately advise
Lender in writing of any material loss or damage to the Collateral as more fully
set forth in Section 3.29(c).  The Company will not directly or indirectly, in
any fiscal year, sell, transfer or otherwise dispose of any of the Collateral
(other than sales of inventory in the ordinary course of business), or grant any
option.

3.6         Books and Records.  Company has maintained and will maintain at
Company’s chief executive or chairman’s office at the address set forth in
Section 9.3 complete and accurate books and records, comprising an accounting
system in accordance with generally accepted accounting principals.  The Company
shall, (i) maintain books and records (including computer records and programs)
of account pertaining to the assets, liabilities and financial transactions of
the Company in such detail, form and scope as is consistent with good business
practice and (ii) provide the Lender access to the premises of the Company at
any time and from time to time, during normal business hours and upon reasonable
notice under the circumstances, but in all events at least one (1) Business Day
notice, and at any time after the occurrence and during the continuance of an
Event of Default, for the purposes of (A) inspecting and verifying the
Collateral, (B) inspecting and copying (at the Company’ expense) any and all
records pertaining thereto, and (C) discussing the affairs, finances and
business of the Company with any officer or director thereof, all of whom are
hereby authorized to disclose to the Lender all financial statements, work
papers, and other information relating to such affairs, finances or business.

3.7         Financial Condition, Statements and Reports.  All financial
statements now or in the future delivered to Lender have been, and will be,
prepared in conformity with generally accepted accounting principles (“GAAP”)
and now and in the future will completely and fairly reflect the financial
condition of Company, at the times and for the periods therein stated.  Between
the last date covered by any such statement provided to Lender and the date
hereof, the Company represents that there has been no material adverse change in
the financial condition or business of Company.  The Company will not at any
time make or permit any material change in accounting policies or reporting
practices, except as required by GAAP.

 
 

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3.8         Compliance with Law.  Company has complied, and will comply, in all
material respects, with all provisions of all applicable laws and regulations,
including, but not limited to, those relating to Company’s ownership of real or
personal property, the conduct and licensing of Company’s business, and all
environmental matters.

3.9         Litigation.  Except as disclosed, there is no claim, suit,
litigation, proceeding or investigation pending or (to the best of Company’s
knowledge) threatened by or against or affecting Company in any court or before
any Governmental Person (or any basis therefore known to Company) which could
normally or reasonably be expected to result, either separately or in the
aggregate, in any material adverse change in the financial condition or business
of Company, or in any material impairment in the ability of Company to carry on
its business in substantially the same manner as it is now being
conducted.  Company will promptly inform Lender in writing of any claim,
proceeding, litigation or investigation in the future threatened or instituted
by or against Company.

3.10       Use of Proceeds.  All proceeds of the Loan shall be used solely in
accordance with this Agreement.  In no event shall the Company (i) use any
portion of the proceeds of the Loan for the purpose of purchasing or carrying
any “margin stock” (as defined in Regulation U of the Federal Reserve Board) in
any manner which violates the provisions of Regulation T, U or X of the Federal
Reserve Board or for any other purpose in violation of any applicable statute or
regulation, or of the terms and conditions of this Agreement, or (ii) take, or
permit any person acting on its behalf to take, any action which could
reasonably be expected to cause this Agreement or any document or instrument
delivered pursuant hereto to violate any regulation of the Federal Reserve
Board.

3.11       Intellectual Property.  Company possesses all material licenses,
permits, franchises, authorizations, patents, copyrights, trademarks and trade
names and any other tangible or intangible or intellectual property rights, or
rights thereto, required to conduct its business substantially as now conducted
and as currently proposed to be conducted, and such rights do not infringe any
material intellectual property rights of others in any material respect and no
claim or litigation is pending, or, to the best of the Company’s knowledge,
threatened against the Company that contests its right to sell or use any such
product, process, method, substance, part or other material.  The Company shall
do and cause to be done all things necessary to preserve and keep in full force
and affect all of its material registrations of intellectual property, including
without limitation all trademarks, service marks and other marks, trade names
and other trade rights.

3.12       Indebtedness.  Except as set forth on the Debt Schedule and as
reported in the Company’s SEC filings, Company has no outstanding indebtedness
of any kind.

3.13       Disclosure.  No representation or other statement made by Company to
Lender contains any untrue statement of a material fact or omits to state a
material fact necessary to make any statements made to Lender not misleading.

3.14                No Actual or Pending Material Modification of
Business.  There exists no actual or, to the best of the Company’s knowledge
after due inquiry, threatened termination, cancellation or limitation of, or any
modification or change in, the business relationship of the Company with any
customer or group of customers which individually or in the aggregate could
reasonably be expected to have a material adverse effect.

3.15       No Broker’s or Finder’s Fees.  No broker or finder brought about the
obtaining, making or closing of the Loan or financial accommodations afforded
hereunder or in connection herewith by the Lender or any of its affiliates.

3.16       Investment Company.  Company is not an “investment company,” or an
“affiliated person” of, or “promoter” or “principal underwriter” for, an
“investment company,” as such terms are defined in the Investment Company Act of
1940, as amended.  Neither the making of the Loan or the application of the
proceeds or repayment thereof by the Company, nor the consummation of the other
transactions contemplated by this Agreement or the other Loan Documents, will
violate any provision of such Act or any rule, regulation or order of the
Securities and Exchange Commission there under.

 
 

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3.17       Solvency.  Company is Solvent and will be Solvent upon the completion
of all transactions contemplated to occur on or before the making of the Loan by
the Lender.  For purposes of this Agreement “Solvent” means, that as of the date
as to which the Company’s solvency is to be measured:

(a)           it has sufficient capital to conduct its business; and

(b)           it is able to meet its debts as they mature.

3.18       Affiliate Transactions.  Except as specified in herein, the Company
is not a party to or bound by any agreement or arrangement (whether oral or
written) to which any affiliate of the Company is a party except (i) in the
ordinary course of and pursuant to the reasonable requirements of the business
of the Company and (ii) upon fair and reasonable terms no less favorable to the
Company than it could obtain in a comparable arm’s-length transaction with an
unaffiliated person.

3.19       Performance.  Company shall pay the Principal Amount of, and interest
on, the Loan evidenced by this Agreement in the manner provided in this
Agreement.  The obligation of Company described in the preceding sentence is
absolute and unconditional, irrespective of any tax or accounting treatment of
such obligation including without limitation any documentary stamp, transfer, ad
valorem or other taxes assessed by any jurisdiction in connection with this
transaction.

3.20       Stay, Extension and Usury Laws.  Company agrees (to the extent it may
lawfully do so) that it will not at any time insist upon, plead or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension law
or any usury law or other law that would prohibit or forgive Company from paying
all or a portion of the Principal Amount of, finance fee, or interest on the
Loan contemplated by this Agreement, wherever enacted, now or at any time
hereinafter in force, or that may materially affect the covenants or the
performance of this Agreement in any manner inconsistent with the provisions of
this Agreement.  Company expressly waives all benefit or advantage of any such
law.  If a court of competent jurisdiction prescribes that Company may not waive
its rights to take the benefit or advantage of any stay or extension law or any
usury law or other law in accordance with the prior sentence, then the
obligation to pay interest on the Principal Amount shall be reduced to the
maximum legal limit under applicable law governing the interest payable in
connection with this Agreement, and any amount of interest paid by Company that
is deemed illegal shall be deemed to have been a prepayment of the Principal
Amount on the Loan.

3.21       Taxes.  The Company has properly completed and timely filed all
income tax returns it is required to file. The information filed within such tax
returns is complete and accurate in all material respects.  All deductions taken
in such income tax returns are appropriate and in accordance with applicable
laws and regulations, except deductions that may have been disallowed but are
being challenged in good faith and for which adequate reserves have been
established in accordance with GAAP.  All taxes, assessments, fees and other
governmental charges for periods beginning prior to the date hereof have been
timely paid (or, if not yet due, adequate reserves therefore have been
established) by it and the Company has no liability for taxes in excess of the
amounts so paid or reserves so established.  No deficiencies for taxes have been
claimed, proposed or assessed by any taxing or other Governmental Person against
the Company and no tax liens have been filed with respect thereto.  There are no
pending or threatened audits, investigations or claims for or relating to any
liability of the Company for taxes and there are no matters under discussion
with any Governmental Person which could result in an additional liability for
taxes.  No extension of a statute of limitations relating to taxes, assessments,
fees or other governmental charges is in effect with respect to the
Company.  Company is not a party to, and has no obligations under, any written
tax sharing agreement or agreement regarding payments in lieu of taxes.  Until
payment and satisfaction of all Obligations in full the Company shall pay, when
due, (i) all tax assessments, and other governmental charges and levies imposed
against it or any of its property and (ii) all lawful claims that, if unpaid,
might by law become a lien upon its property; provided, however, that, unless
such tax assessment, charge, levy or claim has become a lien on any of the
property of the Company it need not be paid if it is being contested in good
faith, by appropriate proceedings diligently conducted and an adequate reserve
or other appropriate provision shall have been established therefore as required
in accordance with GAAP.

 
 

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3.22       Limitations on Indebtedness.  Without Lender’s prior written consent,
Company shall not, directly or indirectly, create, incur, assume, suffer to
exist or otherwise in any manner become liable or commit to become liable for
any indebtedness other than (a) indebtedness incurred under and in accordance
with this Agreement; (b) indebtedness listed on Debt Schedule, including any
extension and renewals thereof; (c) indebtedness incurred in connection with the
purchase (or the capitalized or capitalizable lease) of assets used in the
business, which shall not exceed the purchase price (or aggregate lease
obligations relating to) such assets; (d) indebtedness relating to or arising
from the sale of accounts receivable under that certain Account Transfer
Agreement with Wells Fargo Business Credit and any renewal, extension or
replacement thereof; and (e) indebtedness incurred in the ordinary course of
business not in excess of US $2.5 million in the aggregate.

3.23       Qualified Business.  Company acknowledges and agrees that Lender is
providing the Loan to the Company pursuant to the Texas CAPCO Law as a qualified
business.  The Company understands that in order for the Loan to be made by the
Lender the following representations must be true and correct as of the date of
this Agreement and as of the date that any Loan is outstanding by the Lender.

(a) The Company is headquartered in Texas, its principal business operations and
books and records are in Texas and the Company at all times intends to remain in
Texas.  As of the date hereof, the Company does not and has not had more than
100 employees at any given time.  At least 80% of the Company’s employees reside
in Texas or the Company pays at least 80% of its payroll to Texas residents.

(b)  The Company’s primary business is and will continue to remain in: (i)
manufacturing, processing, or assembling products; (ii) conducting research and
development; or (iii) providing services.

(c)  The Company does not and will not incur more than 20% of its expenses and
does not receive more than 20% of its income from:

(i) retail sales;

(ii) real estate development;

(iii) the business of financial services including insurance, banking, or
lending; or

(iv) the provision of professional services provided by accountants, attorneys,
or physicians.

3.24       Corporate Changes.  Company will not merge or consolidate with any
person or entity, or make any investments, or dispose of any substantial portion
of its assets, or amend, alter or modify its Articles of Incorporation or
by-laws, its legal name, mailing address, chief executive office or principal
places of business, structure, status or existence, or liquidate or dissolve
itself (or suffer any liquidation or dissolution) or issue any capital stock or
other equity interests without Lender’s prior written consent or Loan repayment.

3.25       Insurance.  The Company shall at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated.  Such policies
of insurance shall be reasonably satisfactory to the Lender as to form, amount
and insurer.  The Company shall furnish certificates, policies or endorsements
to the Lender as the Lender shall request as proof of such insurance, and, if
the Company fails to do so, the Lender is authorized, but not required, to
obtain such insurance at the expense of the Company.  All policies shall provide
for at least thirty (30) days prior written notice to the Lender of any
cancellation or reduction of coverage and that the Lender may act as attorney
for the Company in obtaining, and at any time an Event of Default exists or has
occurred and is continuing, adjusting, settling, amending and canceling such
insurance.  The Company shall cause the Lender to be named as a loss payee and
an additional insured (but without any liability for any premiums) under such
insurance policies and the Company shall obtain non-contributory lender’s loss
payable endorsements to all insurance policies in form and substance
satisfactory to the Lender.  Such Lender’s loss payable endorsements shall
specify that the proceeds of such insurance shall be payable to the Lender as
its interests may appear and further specify that the Lender shall be paid
regardless of any act or omission by a Company or any of its affiliates.  In the
event of a loss that results in a material adverse effect, at its option, the
Lender may apply any insurance proceeds received by the Lender at any time to
the cost of repairs or replacement of Collateral and/or to payment of the
Obligations, whether or not then due, in any order and in such manner as the
Lender may determine or hold such proceeds as cash collateral for the
Obligations.  In all other circumstances, the Company shall determine whether
the insurance proceeds shall be applied to the cost of repairs or replacement of
Collateral or to payment of the Obligations.

 
 

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3.26                      Investments.  Until payment and satisfaction of all
Obligations in full, the Company will not directly or indirectly, at any time
make or hold any investment in any person (whether in cash, securities or other
property of any kind) except the Company may make investments in cash and cash
equivalents so long as the Lender has a perfected, lien on such cash and cash
equivalents pursuant to a Control Agreement or a Deposit Account Control
Agreement;

3.27       Financial Covenants.  Until payment and satisfaction of all
Obligations in full, the Company shall:

 
(a)
omitted;

 
(b)
omitted;

 
(c)
permit Lender to conduct on site due diligence and asset review with reasonable
notice;

 
(d)
properly identify all assets on Company’s books and records; and

(e)           deliver to Lender unaudited financial statements within 45 days of
month end, audited statements within 115 days of the fiscal year end.

For purposes of this Agreement

“Tangible Net Worth” shall mean at any date of determination, an amount equal to
(i) the total assets determined in accordance with GAAP, on a basis consistent
with the latest audited financial statements of the Company but excluding such
assets as are properly classified as intangible assets under GAAP, minus (ii)
the total liabilities determined in accordance with GAAP, on a basis consistent
with the latest audited financial statements of the Company, in each case as
reported on the most recent quarterly or annual financial statements prepared by
the Company.

“Debt Service Ratio” shall mean at any date of determination, the ratio of (a)
the EBITDA reported by the Company for the most recently completed fiscal
quarter, to (b) all payments by the Company pursuant to Loan for the most
recently completed four fiscal quarters (or lesser number if this Agreement has
been in force for less than four fiscal quarters) divided by four (or such
lesser number of fiscal quarters for which this Agreement has been in force..

“EBITDA” shall mean, in any period, all earnings of the Company before all (i)
interest and tax obligations, (ii) depreciation and (iii) amortization for said
period, all determined in accordance with GAAP on a consistent basis with the
latest audited financial statements of the Company, but excluding the effect of
extraordinary and/or non-reoccurring gains or losses for such period and
excluding all non-cash expenses deducted from earnings during such period.

3.29       Notification Requirements.  The Company shall timely give the Lender
the following notices and other documents:

(a)          Notice of Defaults.  Promptly, and in any event within five (5)
Business Days after becoming aware of the occurrence of an Event of Default, a
certificate of a senior officer of the Company specifying the nature thereof and
the Company’s proposed response thereto, each in reasonable detail.

(b)         Proceedings or Changes.  Promptly, and in any event within five (5)
Business Days after the Company becomes aware of (i) any proceeding being
instituted or threatened to be instituted by or against Company in any federal,
state, local or foreign court or before any commission or other regulatory body
(federal, state, local or foreign) involving a sum, together with the sum
involved in all other similar proceedings, in excess of $100,000 in the
aggregate, (ii) any order, judgment or decree involving a sum, together with the
sum of all other orders, judgments or decrees, in excess of $100,000 in the
aggregate being entered against the Company or any of its property or assets,
(iii) any material notice or correspondence issued to the Company thereof by a
Governmental Person warning, threatening or advising of the commencement of any
investigation involving the Company or its property or assets, (iv) any actual
or prospective change, development or event which has had or could reasonably be
expected to have a material adverse effect, (v) the cessation of the business
relationship with any customer of a Company whose purchases have accounted for
more than 10% of the sales of the Company in any year, (vi) a change in the
location of any Collateral from the locations specified herein except for
changes as otherwise permitted herein or (vii) a proposed or actual change of
the name, identity, corporate structure or jurisdiction of organization or
formation of the Company.

 
 

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(c)          Casualty Loss.  The Company shall (i) provide written notice to the
Lender, within ten (10) Business Days, of any material damage to, the
destruction of or any other material loss to any asset or property owned or used
by the Company other than any such asset or property with a net book value
(individually or in the aggregate) less than $100,000, or any condemnation,
confiscation or other taking, in whole or in part, or any event that otherwise
diminishes so as to render impracticable or unreasonable the use of such asset
or property owned or used by the Company together with a statement of the amount
of the damage, destruction, loss or diminution in value (a “Casualty Loss”) and
(ii) diligently file and prosecute its claim for any award or payment in
connection with a Casualty Loss.

(d)          Financial Reporting.  The Company shall deliver to the Lender the
following:

(i)           Annual financial statements.  As soon as available, but not later
than one hundred fifteen (115) days after the end of each fiscal year, beginning
with the fiscal year ended July 31, 2009, audited financial statements for such
fiscal year together with an Unqualified opinion of the Company’s auditors with
respect thereto.

(ii)          Monthly financial statements.  As soon as available, but not later
than forty-five (45) days after the end of each month, commencing with the month
in which this Agreement is executed, (A) interim financial statements as at the
end of such month, for the most recently ended fiscal quarter and for the fiscal
year to date and (B) a certification by the Chief Financial Officer that such
financial statements have been prepared in accordance with GAAP and are fairly
stated in all material respects (subject to normal year-end audit adjustments).

(iii)         Other Financial Information.  Within ten (10) Business Days after
the request by the Lender therefore, such additional financial statements,
budgets, forecasts, projections and other related data and information as to the
Collateral and the business, prospects, operations, results of operations,
assets, liabilities or condition (financial or otherwise) of Company as the
Lender may from time to time reasonably request, and the Company can produce
without unreasonable effort or expense, including, without limitation, reports
on sales and use tax collections, and sales and use tax accruals.

For purposes of this Agreement, “Unqualified” shall mean without any material
qualification (i) resulting from a limitation on the scope of examination of
such financial statements or the underlying data, (ii) as to the capability of a
Company to continue operations as a going concern or (iii) which could be
eliminated by changes in financial statements or notes thereto covered by such
report (such as by the creation of or increase in a reserve or a decrease in the
carrying value of assets) and which if so eliminated by the making of any such
change and after giving effect thereto would result in an Event of Default.

4.           Conditions to Funding   The obligation of the Lender to make the
Loan is subject to the satisfaction of the following conditions prior to or
concurrent with the funding of such Loan.

4.1         Closing Documents.  The Lender shall have received the following;
each dated the date hereof or as of an earlier date acceptable to the Lender, in
form and substance satisfactory to the Lender and its counsel:

 
(a)
The Note, duly executed by the Company;

(b)          Acknowledgment copies of Uniform Commercial Code financing
statements (naming the Lender as secured party and the Company as debtor) and
duly authorized release or termination statements, in form and substance
satisfactory to the Lender, duly filed in all jurisdictions that the Lender
deems necessary or desirable to perfect and protect the liens created hereunder
and under the Loan Documents;

(c)          Such other agreements, instruments, documents and evidence as the
Lender in good faith deems necessary in its sole and absolute discretion in
connection with the transactions contemplated hereby.

 
 

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4.2         Perfection of Liens.  The liens in favor of the Lender shall have
been duly perfected, and the Collateral shall be free and clear of all liens
other than Permitted Liens.

4.3         Representations and Warranties.  All representations and warranties
contained in this Agreement and the other Loan Documents shall be true and
correct in all material respects on and as of the date of such Loan as if then
made, other than representations and warranties that expressly relate solely to
an earlier date, in which case they shall have been true and correct as of such
earlier date.

5.           Prepayments.

5.1         Optional.  Company may, from time to time, prepay the Loan evidenced
hereby, in whole or in part, so long as each partial prepayment of the Principal
Amount is equal to or greater than $50,000 and Company has given Lender two (2)
or more Business Days’ notice of such optional prepayment.  Any such optional
prepayment of the Principal Amount shall be without premium or penalty.  Any
Principal Amount prepaid pursuant to this Section shall be in addition to, and
not in lieu of, all payments otherwise required to be paid under this Agreement
at the time of such prepayment.

5.2         Mandatory.  Unless otherwise agreed to by Lender, Company shall
prepay the Loan to the extent of the net proceeds actually received by Company
from the following events (each, a “Mandatory Prepayment Event”):
(a)  a public offering or private placement of equity or debt securities having
an aggregate market value in excess of $2,000,000; provided, however, that the
proceeds from the public offering or private placement of Excluded Securities
shall not be subject to this provision and shall not be considered a Mandatory
Prepayment Event; or

(b)  the sale of all or a substantial amount of the Company’s assets in a single
or group of related transactions.

As used in this Agreement, “Excluded Securities” means (a) issuance and sale of
equity securities pursuant to options, warrants, convertible securities or other
rights to acquire such securities outstanding as of the date hereof; (b)
issuance of equity securities pursuant to options, warrants, convertible
securities or other rights to acquire such securities issued after the date
hereof to employees or consultants of the Company pursuant to an equity
compensation plan adopted by the Company; and (c) equity or debt securities
issued in connection with the acquisition of any other company, whether in the
form of a merger, consolidation, acquisition of assets, exchange of securities
or otherwise.

6.           Intentionally Omitted.

7.           Events of Default.

(a)  Events of Default Defined; Acceleration of Maturity.  If any of the
following events (“Events of Default”) shall occur and be continuing (for any
reason whatsoever and whether it shall be voluntary or involuntary or by
operation of law or otherwise):

(i)  default shall be made in the payment of the Principal Amount of, or
interest on, the Loan or any other Obligation when and as the same shall become
due and payable, whether at stated maturity, by acceleration, upon a Mandatory
Prepayment Event or otherwise; or

(ii)  default shall be made in the performance or observance of any covenant,
agreement or condition contained in this Agreement or in any of the other Loan
Documents, including but not limited to the failure of any financial covenant
contained herein, and such default shall have continued for a period of ten (10)
Business Days; provided, that, such ten (10) Business Day period shall not apply
in the case of: (A) any failure to observe any covenant which is not capable of
being cured at all or within such ten (10) Business Day period or which has been
the subject of a prior failure within a six (6) month period or (B) an
intentional breach by the Company of any covenant; or

 
 

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(iii)  Company shall (1) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property and assets, (2) be generally
unable to pay its debts as such debts become due, (3) make a general assignment
for the benefit of its creditors, (4) commence a voluntary case under the United
States Bankruptcy Code or similar law or regulation (as now or hereafter in
effect), (5) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (6) fail to controvert in a timely or
appropriate manner, or acquiesce in writing to, any petition filed against it in
an involuntary case under the United States Bankruptcy Code or other law or
regulation, (7) dissolve, (8) take any corporate action under any applicable law
analogous to any of the foregoing, or (9) take any corporate action for the
purpose of effecting any of the foregoing; or

(iv)  a proceeding or case shall be commenced, without the application or
consent of Company in any court of competent jurisdiction, seeking (1) the
liquidation, reorganization, dissolution, winding up or composition or
readjustment of its debts, (2) the appointment of a trustee, receiver,
custodian, liquidator or the like of it or for all or any substantial part of
its assets, or (3) similar relief in respect of Company, under any law providing
for the relief of debtors, and such proceeding or case shall continue
undismissed, or unstayed and in effect, for a period of sixty (60) days; or an
order for relief shall be entered in an involuntary case under the United States
Bankruptcy Code or other similar law or regulation, against Company; or action
under the laws of any jurisdiction affecting Company analogous to any of the
foregoing shall be taken with respect to Company and shall continue unstayed and
in effect for any period of sixty (60) days; or

(v)  final judgment for the payment of money shall be rendered by a court of
competent jurisdiction against Company and Company shall not discharge the same
or provide for its discharge in accordance with its terms, or procure a stay of
execution thereof within sixty (60) days from the date of entry thereof and
within said period of sixty (60) days, or such longer period during which
execution of such judgment shall have been stayed, appeal therefrom and cause
the execution thereof to be stayed during such appeal, and such judgment
together with all other such judgments shall exceed in the aggregate US$100,000;
or

(vi)  any representation or warranty made by Company in this Agreement, Loan
Document, or any other documents or agreements contemplated hereby and thereby
or in any certificate or other instrument delivered hereunder or pursuant hereto
or in connection with any provision hereof shall be false or incorrect in any
material respect on the date as of which made; or

(vii)           the indictment by any Governmental Person under any criminal
statute, or commencement or threatened commencement of criminal or civil
proceedings against the Company, pursuant to which statute or proceedings the
penalties or remedies sought or available include forfeiture of (i) any of the
Collateral having a value in excess of $100,000 or (ii) any other property of
the Company which is necessary or material to the conduct of its business; or

(viii)         (A) the acquisition by any person (or group of persons as defined
by the Securities Exchange Act of 1934 and the regulations thereunder) of more
than 20% of the outstanding voting securities of the Company, (B) the public
offer by any person (or group of persons as defined by the Securities Exchange
Act of 1934 and the regulations thereunder) to acquire more than 20% of the
outstanding voting securities of the Company; (C) the election in a contested
proxy solicitation of candidates nominated by a person other than the Company
that represent more than a majority of the full board of directors; or (D) any
other event or circumstance in which any person acquires the right or ability to
direct the management or control of the Company who does not presently have the
right or ability to direct the management or control of the Company without the
prior approval of the Company’s board of directors.

 
(ix)
the occurrence of any event or condition that has a material adverse effect.

then (x) upon the occurrence of any Event of Default described in Section
7(a)(iii) or (iv), the unpaid Principal Amount of the Loan, together with the
interest accrued thereon and all other amounts payable by Company under this
Agreement, shall automatically become immediately due and payable, without
presentment, demand, protest or other requirements of any kind, all of which are
hereby expressly waived by Company or (y) upon the occurrence of any other Event
of Default, Lender may, by notice to Company, declare the unpaid Principal
Amount of the Loan to be, and the same shall forthwith become, due and payable,
together with the interest accrued thereon and all other amounts payable by
Company hereunder.
 
 
 

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8.           Other Remedies.

8.1         General.

(a)           Upon the occurrence and during the continuance of an Event of
Default, the Lender shall have all rights and remedies with respect to the
Obligations and the Collateral under applicable law and the Loan Documents, an,
subject to the rights of the holder of any Permitted Lien, the Lender may do any
or all of the following:

(i)           remove for copying all documents, instruments, files and records
(including the copying of any computer records) relating to the Company’s
receivables or use (at the expense of the Company) such supplies or space of the
Company at the Company’s places of business necessary to administer, enforce and
collect such receivables and any supporting obligations;

(ii)         accelerate or extend the time of payment, compromise, issue
credits, or bring suit on a the Company’s receivables (in the name of the
Company or the Lender) and otherwise administer and collect such receivables;

(iii)         sell, assign and deliver a Company’s receivables with or without
advertisement, at public or private sale, for cash, on credit or otherwise,
subject to applicable law;

(iv)        foreclose the security interests created pursuant to the Loan
Documents by any available procedure, or take possession of any or all of the
Collateral, without judicial process and enter any premises where any Collateral
may be located for the purpose of taking possession of or removing the same;

(v)         require the Company, at the Company’s expense, to assemble and make
available to the Lender any part or all of the Collateral at any place and time
designated by the Lender; or

(vi)        collect, foreclose, receive, appropriate, setoff and realize upon
any and all Collateral; or

(vii)       remove any or all of the Collateral from any premises on or in which
the same may be located for the purpose of effecting the sale, foreclosure or
other disposition thereof or for any other purpose; or

(viii)      sell, lease, transfer, assign, deliver or otherwise dispose of any
and all Collateral (including entering into contracts with respect thereto,
public or private sales at any exchange, broker’s board, at any office of the
Lender or elsewhere) at such prices or terms as the Lender may deem reasonable,
for cash, upon credit or for future delivery, with the Lender having the right
to purchase the whole or any part of the Collateral at any such public sale; or

(ix)         terminate this Agreement.

If any of the Collateral is sold or leased by the Lender upon credit terms or
for future delivery, the Obligations shall not be reduced as a result thereof
until payment therefore is finally collected by the Lender.  In the event the
Lender institutes an action to recover any Collateral or seeks recovery of any
Collateral by way of prejudgment remedy, the Company waives the posting of any
bond which might otherwise be required.

(b)           The Lender may bid or become a purchaser at any sale, free from
any right of redemption, which right is expressly waived by the Company.  If
notice of intended disposition of any Collateral is required by law, it is
agreed that ten (10) Business Days’ notice shall constitute reasonable
notification.  The Company will assemble the Collateral in its possession and
make it available at such locations as the Lender may specify, whether at the
premises of the Company or elsewhere, and will make available to the Lender the
premises and facilities of the Company for the purpose of the Lender’s taking
possession of or removing the Collateral or putting the Collateral in saleable
form.  The Lender may sell the Collateral or any part thereof in one or more
parcels at public or private sale, at any exchange, broker’s board or at any of
the Lender’s offices or elsewhere, for cash, on credit or for future delivery,
and upon such other terms as the Lender may deem commercially reasonable.  The
Lender shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given.  The Lender may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it
was so adjourned.  The Company hereby grants the Lender a license to enter and
occupy any of the Company’s leased or owned premises and facilities, without
charge, to exercise any of the Lender’s rights or remedies.

 
 

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(c)           The Lender may, at any time or times that an Event of Default has
occurred and is continuing, enforce any Company’s rights against any account
debtor or secondary obligor or other obligor in respect of any of the Company’s
accounts or other receivables.  Without limiting the generality of the
foregoing, the Lender may at such time or times (i) notify any or all account
debtors, secondary obligors or other obligors in respect thereof that the
receivables have been assigned to the Lender and that the Lender has a security
interest therein and the Lender may direct any or all accounts debtors,
secondary obligors and other obligors to make payment of receivables directly to
the Lender, extend the time of payment of, compromise, settle or adjust for
cash, credit, return of merchandise or otherwise, and upon any terms or
conditions, any and all receivables or other obligations included in the
Collateral and thereby discharge or release the account debtor or any secondary
obligors or other obligors in respect thereof without affecting any of the
Obligations, demand, collect or enforce payment of any receivables or such other
obligations, but without any duty to do so, and the Lender shall not be liable
for its failure to collect or enforce the payment thereof nor for the negligence
of the Lender or its attorneys with respect thereto and take whatever other
action the Lender may deem necessary or desirable for the protection of its
interests.

8.2         License for Use of Software and Other Intellectual Property.  Upon
the occurrence or during the continuance of an Event of Default, the Company
hereby grants to the Lender an irrevocable, non-exclusive license or other right
to use or sublicense, without charge or royalty, all computer software programs,
data bases, processes, trademarks, trade names, copyrights, labels, trade
secrets, service marks, copyrights, copyrightable material, advertising
materials and other rights, assets and materials of Company, whether now owned
or hereafter acquired, including in such license reasonable access to all media
in which any of the foregoing may be stored or recorded and to all computer
programs used for the compilation or printout thereof.

8.3         No Marshaling; Deficiencies; Remedies Cumulative.  The Lender shall
have no obligation to marshal any Collateral or to seek recourse against or
satisfaction of any of the Obligations from one source before seeking recourse
against or satisfaction from another source.  The net cash proceeds resulting
from the Lender’s exercise of any of the foregoing rights to liquidate
Collateral shall be applied by the Lender to such of the Obligations and in such
order as the Lender shall elect in its sole and absolute discretion, whether due
or to become due.  The Company shall remain liable to the Lender and the Lenders
for any deficiency with interest at the highest rate applicable to Loan
hereunder and the Lender agrees to remit to the Company or its successor or
assign, any surplus resulting therefrom.  All of the Lender’s remedies under the
Loan Documents shall be cumulative, may be exercised simultaneously against any
Collateral and the Company or in such order and with respect to such Collateral
or the Company as the Lender may deem desirable, and are not intended to be
exhaustive.

8.4         Waivers.  Except as may be otherwise specifically provided herein or
in any other Loan Document, the Company hereby waives any right to a judicial or
other hearing with respect to any action or prejudgment remedy or proceeding by
the Lender to take possession, exercise control over, or dispose of any item of
Collateral in any instance (regardless of where the same may be located) where
such action is permitted under the terms of this Agreement or any other Loan
Document or by applicable law or of the time, place or terms of sale in
connection with the exercise of the Lender’s rights hereunder and also waives
any bonds, security or sureties required by any statute, rule or other law as an
incident to any taking of possession by the Lender of any Collateral.  The
Company also waives any damages (direct, consequential or otherwise) occasioned
by the enforcement of the Lender’s rights under this Agreement or any other Loan
Document including the taking of possession of any Collateral or the giving of
notice to any account debtor or the collection of any receivable of the
Company.  The Company also consents that upon the occurrence and during the
continuance of an Event of Default, the Lender may enter upon any premises owned
by or leased to it without obligations to pay rent or for use and occupancy,
through self-help, without judicial process and without having first obtained an
order of any court.  These waivers and all other waivers provided for in this
Agreement and the other Loan Documents have been negotiated by the parties, and
the Company acknowledges that it has been represented by counsel of its own
choice, has consulted such counsel with respect to its rights hereunder and has
freely and voluntarily entered into this Agreement and the other Loan Documents
as the result of arm’s-length negotiations.

 
 

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8.5         Indemnification; Reimbursement of Expenses of Collection.   Company
hereby agrees that, whether or not any of the transactions contemplated by this
Agreement or the other Loan Documents are consummated, the Company will
indemnify, defend and hold harmless (on an after-tax basis) the Lender and its
successors and assigns and its directors, officers, agents, employees, advisors,
shareholders, attorneys and affiliates (each, an “Indemnified Party”) from and
against any and all losses, claims, damages, liabilities, deficiencies,
obligations, fines, penalties, actions (whether threatened or existing),
judgments, suits (whether threatened or existing) or expenses (including,
without limitation, reasonable fees and disbursements of counsel, experts,
consultants and other professionals) imposed on, asserted against or incurred by
any of them (collectively, “Claims”) (except, in the case of each Indemnified
Party, to the extent that any Claim is determined in a final and non-appealable
judgment by a court of competent jurisdiction to have directly resulted from
such Indemnified Party’s gross negligence or willful misconduct) arising out of
or by reason of (i) any litigation, investigation, claim or proceeding related
to (A) this Agreement, any other Loan Document or the transactions contemplated
hereby or thereby, (B) any actual or proposed use by the Company of the proceeds
of the Loan, or (C) the Lender’s entering into this Agreement, the other Loan
Documents or any other agreements and documents relating hereto (other than
consequential damages and loss of anticipated profits or earnings), including,
without limitation, amounts paid in settlement, court costs and the fees and
disbursements of counsel incurred in connection with any such litigation,
investigation, claim or proceeding, and (ii) any pending, threatened or actual
action, claim, proceeding or suit by any shareholder or director of the Company
or any actual or purported violation of a the Company’s governing documents or
any other agreement or instrument to which the Company is a party or by which
any of its properties is bound.  In addition, the Company shall, upon demand,
pay to the Lender all costs and expenses incurred by the Lender (including the
reasonable fees and disbursements of counsel and other professionals) in
connection with the preparation, execution, delivery, administration,
modification and amendment of the Loan Documents, and pay to the Lender all
costs and expenses (including the reasonable fees and disbursements of counsel
and other professionals) paid or incurred by the Lender in (A) enforcing or
defending its rights under or in respect of this Agreement, the other Loan
Documents or any other document or instrument now or hereafter executed and
delivered in connection herewith, (B) collecting the Obligations or otherwise
administering this Agreement and (C) foreclosing or otherwise realizing upon the
Collateral or any part thereof.  If and to the extent that the obligations of
the Company hereunder are unenforceable for any reason, the Company hereby
agrees to make the maximum contribution to the payment and satisfaction of such
obligations that is permissible under applicable law.  The Company’s obligations
hereunder shall survive any termination of this Agreement and the other Loan
Documents and the payment in full of the Obligations, and are in addition to,
and not in substitution of, any of the other Obligations.

8.6         Remedies Cumulative.  No remedy herein conferred upon Lender is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.

9.           Miscellaneous.

9.1         Reliance on and Survival of Representations.   All representations,
warranties, covenants and agreements of Company herein shall be deemed to be
material and to have been relied upon by Lender and shall survive the execution
and delivery of this Agreement, for so long as the Loan remains outstanding.

9.2         Successors and Assigns.  This Agreement shall bind and inure to the
benefit of and be enforceable by Company, Lender and each of their respective
successors and assigns, and, in addition, shall inure to the benefit of and be
enforceable by each person who shall from time to time be a holder of the Loan.

9.3         Notices.  All notices and other communications provided for in this
Agreement shall be in writing and delivered by registered or certified mail,
postage prepaid, or delivered by overnight courier (for next Business Day
delivery) or telecopied, addressed as follows, or at such other address as any
of the parties hereto may hereafter designate by notice to the other parties
given in accordance with this Section:

1) 
if to the Company:

ATSI Communications, Inc.
Attn: Arthur L Smith, President & CEO
Antonio Estrada, Sr. VP of Finance
3201 Cherry Ridge Road
San Antonio, TX 78230
Telephone: (210) 614-7240
Facsimile: (210) 614-7264
 
 
 

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2)
if to Lender:

ATV TEXAS VENTURES III, LP
5090 Richmond Ave., Suite 319
Telephone: (713) 599-1300 x105
Telecopy:  (713) 599-1304

Any such notice or communication shall be deemed to have been duly given on the
fifth day after being so mailed, the next Business Day after delivery by
overnight courier, when received when sent by telecopy or email, or upon receipt
when delivered personally.

9.4         Counterparts.  This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.  Signatures may be
exchanged by telecopy, with original signatures to follow.  Each of the parties
hereto agrees that it will be bound by its own telecopied signature and that it
accepts the telecopied signatures of the other parties to this Agreement.  The
original signature pages shall be forwarded to Lender or its counsel and Lender
or its counsel will provide all of the parties hereto with a copy of the entire
Agreement.

9.5         Amendments.  This Agreement may only be amended by a writing duly
executed by the parties hereto.

9.6         Severability. If any term or provision of this Agreement or any
other document executed in connection herewith shall be determined to be illegal
or unenforceable, all other terms and provisions hereof and thereof shall
nevertheless remain effective and shall be enforced to the fullest extent
permitted by applicable law.

9.7         Governing Law; Submission to Process. THIS AGREEMENT AND ALL
AMENDMENTS, SUPPLEMENTS, WAIVERS AND CONSENTS RELATING HERETO OR THERETO SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.  THE COMPANY HEREBY
IRREVOCABLY SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND
FEDERAL COURTS SITTING IN THE STATE OF TEXAS AND AGREES AND CONSENTS THAT
SERVICE OF PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDINGS RELATING HERETO
BY ANY MEANS ALLOWED UNDER TEXAS OR FEDERAL LAW.  THE COMPANY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT
MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT
IN SUCH COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.  THE COMPANY SHALL APPOINT AN AGENT FOR
SERVICE OF PROCESS IN TEXAS AND SHALL NOTIFY HOLDER OF ANY FUTURE CHANGE
THEREIN.

9.8         Entire Agreement.  This Agreement contains the entire Agreement of
the parties hereto with respect to the transactions contemplated hereby and
supersedes all previous oral and written, and all previous contemporaneous oral
negotiations, commitments and understandings.

9.9         Further Assurances.  Company agrees promptly to execute and deliver
such documents and to take such other acts as are reasonably necessary to
effectuate the purposes of this Agreement.

9.10       Headings.  The headings contained herein are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.

9.11       Assignments and Participations.  Company may not assign its rights or
obligations hereunder or under the Loan without the prior written consent of
Lender.  Lender may assign all or any portion of the Loan without the prior
consent of Company.  Lender may sell or agree to sell to one or more other
persons a participation in all or any part of any of the Loan or Warrants
without the prior consent of Company.  Upon surrender of the Loan or Warrants,
Company shall execute and deliver one or more substitute notes, warrants or
other securities in such denominations and of a like aggregate unpaid Principal
Amount or other amount issued to Lender and/or to Lender’s designated transferee
or transferees.  Lender may furnish any information in the possession of Lender
concerning Company, or any of its respective subsidiaries, from time to time to
assignees and participants (including prospective assignees and participants).

 
 

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9.12       JURY WAIVER.  HOLDER AND COMPANY EACH WAIVES ANY RIGHT TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THE LOAN DOCUMENTS OR ANY
OF THE TRANSACTIONS CONTEMPLATED HEREIN.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day and year set forth above.
 

 
COMPANY:
     
ATSI COMMUNICATIONS, INC.,
 
a Nevada corporation
       
By:
/S/ Arthur L Smith
   
Name: Arthur L Smith
   
Title: President & CEO
       
HOLDER:
     
ATV TEXAS VENTURES III, LP
       
By:
/S/ Scott Crist
   
Name: Scott Crist
   
Title: Officer

 
 

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EXHIBIT A

The Collateral shall consist of all right, title and interest of Company in and
to the following:

(a)          Account Receivables other than accounts that have been sold to
Wells Fargo under the Account Transfer Agreement dated December 6, 2007.

(b)          ownership interest in ATSICOM.

 
 

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

 

PAYBACK SCHEDULE
 
December 10, 2009
    4,707.35  
January 10, 2010
    4,707.35  
February 10, 2010
    4,707.35  
March 10, 2010
    4,707.35  
April 10, 2010
    4,707.35  
May 10, 2010
    4,707.35  
June 10, 2010
    4,707.35  
July 10, 2010
    4,707.35  
August 10, 2010
    4,707.35  
September 10, 2010
    4,707.35  
October 10, 2010
    4,707.35  
November 10, 2010
    4,707.35  
December 10, 2010
    4,707.35  
January 10, 2011
    4,707.35  
February 10, 2011
    4,707.35  
March 10, 2011
    4,707.35  
April 10, 2011
    4,707.35  
May 10, 2011
    4,707.35  
June 10, 2011
    4,707.35  
July 10, 2011
    4,707.35  
August 10, 2011
    4,707.35  
September 10, 2011
    4,707.35  
October 10, 2011
    4,707.35  
November 10, 2011
    4,707.35  

 
 

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