Exhibit 10.1

 

ETELOS, INCORPORATED

 

BRIDGE BANK, NATIONAL ASSOCIATION

 

LOAN AND SECURITY AGREEMENT

 

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This LOAN AND SECURITY AGREEMENT is entered into as of October 5, 2007, by and
between BRIDGE BANK, NATIONAL ASSOCIATION (“Bank”) and ETELOS, INCORPORATED
(“Borrower”).

 

RECITALS

 

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

 

AGREEMENT

 

The parties agree as follows:

 

1.                                      DEFINITIONS AND CONSTRUCTION.

 

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

 

“Accounts” means all presently existing and hereafter arising accounts, contract
rights, payment intangibles, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower’s Books relating
to any of the foregoing.

 

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

 

“Affiliate” means, with respect to any Person, any Person that owns or controls
directly or indirectly such Person, any Person that controls or is controlled by
or is under common control with such Person, and each of such Person’s senior
executive officers, directors, and partners.

 

“Bank Expenses” means all:  reasonable costs or expenses (including reasonable
attorneys’ fees and expenses) incurred in connection with the preparation,
negotiation, administration, and enforcement of the Loan Documents; reasonable
Collateral audit fees; and Bank’s reasonable attorneys’ fees and expenses
incurred in amending, enforcing or defending the Loan Documents (including fees
and expenses of appeal), incurred before, during and after an Insolvency
Proceeding, whether or not suit is brought.

 

“Borrower’s Books” means all of Borrower’s books and records including: 
ledgers; records concerning Borrower’s assets or liabilities, the Collateral,
business operations or financial condition; and all computer programs, or tape
files, and the equipment, containing such information.

 

 “Business Day” means any day that is not a Saturday, Sunday, or other day on
which banks in the State of California are authorized or required to close.

 

“Change in Control” shall mean a transaction in which any “person” or “group”
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of a sufficient number
of shares of all classes of stock then outstanding of Borrower ordinarily
entitled to vote in the election of directors, empowering such “person” or
“group” to elect a majority of the Board of Directors of Borrower, who did not
have such power before such transaction.

 

“Closing Date” means the date of this Agreement.

 

“Code” means the California Uniform Commercial Code.

 

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

 

“Contingent Obligation” means, as applied to any Person, any direct or indirect
liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another;
(ii) any obligations with respect to undrawn letters of credit, corporate credit
cards, or merchant services

 

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issued or provided for the account of that Person; and (iii) all obligations
arising under any agreement or arrangement designed to protect such Person
against fluctuation in interest rates, currency exchange rates or commodity
prices; provided, however, that the term “Contingent Obligation” shall not
include endorsements for collection or deposit in the ordinary course of
business.  The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by Bank in good faith; provided, however, that such amount shall not
in any event exceed the maximum amount of the obligations under the guarantee or
other support arrangement.

 

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

 

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

 

“Current Assets” means, as of any applicable date, all amounts that should, in
accordance with GAAP, be included as current assets on the consolidated balance
sheet of Borrower and its Subsidiaries as at such date.

 

“Current Liabilities” means, as of any applicable date, all amounts that should,
in accordance with GAAP, be included as current liabilities on the consolidated
balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the
extent not already included therein, all outstanding Credit Extensions made
under this Agreement.

 

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

 

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

 

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

 

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

 

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

 

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred
purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.

 

“Insolvency Proceeding” means any proceeding commenced by or against any person
or entity under any provision of the United States Bankruptcy Code, as amended,
or under any other bankruptcy or insolvency law, including assignments for the
benefit of creditors, formal or informal moratoria, compositions, extension
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

 

“Intellectual Property Collateral” means all of Borrower’s right, title, and
interest in and to the following: Copyrights, Trademarks and Patents; all trade
secrets, all design rights, claims for damages by way of past, present and
future infringement of any of the rights included above, all licenses or other
rights to use any of the Copyrights, Patents or Trademarks, and all license fees
and royalties arising from such use to the extent permitted by such license or
rights; all amendments, renewals and extensions of any of the Copyrights,
Trademarks or Patents; and all proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.

 

“Inventory” means all inventory in which Borrower has or acquires any interest,
including work in process and finished products intended for sale or lease or to
be furnished under a contract of service, of every kind and description now or
at any time hereafter owned by or in the custody or possession, actual or
constructive, of Borrower, including such inventory as is temporarily out of its
custody or possession or in transit and including any returns upon any accounts
or other proceeds, including insurance proceeds, resulting from the sale or
disposition of any of the foregoing and any documents of title representing any
of the above, and Borrower’s Books relating to any of the foregoing.

 

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

 

“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.

 

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

 

“Loan Documents” means, collectively, this Agreement, any note or notes executed
by Borrower, and any other agreement entered into in connection with this
Agreement, all as amended or extended from time to time.

 

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

 

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

 

“Obligations” means all debt, principal, interest, Bank Expenses and other
amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.

 

“Patents” means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.

 

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

 

“Permitted Indebtedness” means:

 

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

 

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

 

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

 

(d)                                  Subordinated Debt.

 

“Permitted Investment” means:

 

(a)                                  Investments existing on the Closing Date
disclosed in the Schedule; and

 

(b)                                  (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having rating of at least A-2 or P-2 from either
Standard & Poor’s Corporation or Moody’s Investors Service, (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank and (iv) Bank’s money market accounts.

 

“Permitted Liens” means the following:

 

(a)                                  Any Liens existing on the Closing Date and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;

 

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(b)                                  Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank’s security interests;

 

(c)                                  Liens (i) upon or in any equipment which
was not financed by Bank acquired or held by Borrower or any of its Subsidiaries
to secure the purchase price of such equipment or indebtedness incurred solely
for the purpose of financing the acquisition of such equipment, or (ii) existing
on such equipment at the time of its acquisition, provided that the Lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such equipment;

 

(d)                                  Liens incurred in connection with the
extension, renewal or refinancing of the indebtedness secured by Liens of the
type described in clauses (a) through (c) above, provided that any extension,
renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.

 

“Person” means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.

 

“Prime Rate” means the the Prime Rate published in the Money Rates section of
the Western Edition of The Wall Street Journal, or such other rate of interest
publicly announced from time to time by Lender as its Prime Rate.  Lender may p
rice loans to its customers at, above or below the Prime Rate.   Any change in
the Prime Rate shall take effect at the opening of business on the day specified
in the public announcement of a change in Prime Rate.

 

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

 

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

 

“Revolving Line” means a credit extension of up to Two Hundred and Fifty
Thousand Dollars ($250,000).

 

“Revolving Maturity Date” means October         , 2008.

 

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

 

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

 

“Subsidiary” means any corporation, company or partnership in which (i) any
general partnership interest or (ii) more than 50% of the stock or other units
of ownership which by the terms thereof has the ordinary voting power to elect
the Board of Directors, managers or trustees of the entity, at the time as of
which any determination is being made, is owned by Borrower, either directly or
through an Affiliate.

 

 “Total Liabilities” means at any date as of which the amount thereof shall be
determined, all obligations that should, in accordance with GAAP be classified
as liabilities on the consolidated balance sheet of Borrower, including in any
event all Indebtedness.

 

“Trademarks” means any trademark and servicemark rights, whether registered or
not, applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Borrower connected with
and symbolized by such trademarks.

 

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

 

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2.                                      LOAN AND TERMS OF PAYMENT.

 

2.1                               Credit Extensions.

 

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

 

(a)                                  Revolving Advances.

 

(i)                                    Subject to and upon the terms and
conditions of this Agreement, Borrower may request Advances in an aggregate
outstanding amount not to exceed the lesser of the Revolving Line.  Subject to
the terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1(a) may be repaid and reborrowed at any time prior to the Revolving
Maturity Date, at which time all Advances under this Section 2.1(a) shall be
immediately due and payable.  Borrower may prepay any Advances without penalty
or premium.

 

(ii)                                Whenever Borrower desires an Advance,
Borrower will notify Bank by facsimile transmission or telephone no later than
3:00 p.m. Pacific time, on the Business Day that the Advance is to be made. 
Each such notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of Exhibit B hereto.  Bank is authorized to make Advances
under this Agreement, based upon instructions received from a Responsible
Officer or a designee of a Responsible Officer, or without instructions if in
Bank’s discretion such Advances are necessary to meet Obligations which have
become due and remain unpaid.  Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer or a designee thereof, and Borrower shall indemnify and hold Bank
harmless for any damages or loss suffered by Bank as a result of such reliance. 
Bank will credit the amount of Advances made under this Section 2.1(a) to
Borrower’s deposit account.

 

2.2                               Overadvances.  If the aggregate amount of the
outstanding Advances exceeds the Revolving Line, Borrower shall immediately pay
to Bank, in cash, the amount of such excess.

 

2.3                               Interest Rates, Payments, and Calculations.

 

(a)                                  Interest Rates.

 

(i)                                    Advances.  Except as set forth in
Section 2.3(b), the Advances shall bear interest, on the outstanding Daily
Balance thereof, at a rate equal to two and one half percent (2.50%) above the
Prime Rate.

 

(b)                                  Late Fee; Default Rate.  If any payment is
not made within ten (10) days after the date such payment is due, Borrower shall
pay Bank a late fee equal to the lesser of (i) five percent (5%) of the amount
of such unpaid amount or (ii) the maximum amount permitted to be charged under
applicable law.  All Obligations shall bear interest, from and after the
occurrence and during the continuance of an Event of Default, at a rate equal to
five (5) percentage points above the interest rate applicable immediately prior
to the occurrence of the Event of Default.

 

(c)                                  Payments.  Interest hereunder shall be due
and payable on the tenth calendar day of each month during the term hereof. 
Bank shall, at its option, charge such interest, all Bank Expenses, and all
Periodic Payments against any of Borrower’s deposit accounts or against the
Revolving Line, in which case those amounts shall thereafter accrue interest at
the rate then applicable hereunder.  Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.  All payments
shall be free and clear of any taxes, withholdings, duties, impositions or other
charges, to the end that Bank will receive the entire amount of any Obligations
payable hereunder, regardless of source of payment.

 

(d)                                  Computation.  In the event the Prime Rate
is changed from time to time hereafter, the applicable rate of interest
hereunder shall be increased or decreased, effective as of the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate.  All
interest chargeable under the Loan Documents shall be computed on the basis of a
three hundred sixty (360) day year for the actual number of days elapsed.

 

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2.4                               Crediting Payments.  Prior to the occurrence
of an Event of Default, Bank shall credit a wire transfer of funds, check or
other item of payment to such deposit account or Obligation as Borrower
specifies.  After the occurrence of an Event of Default, the receipt by Bank of
any wire transfer of funds, check, or other item of payment shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment on account unless such payment is of immediately available federal funds
or unless and until such check or other item of payment is honored when
presented for payment.  Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been received by Bank as of the opening of business
on the immediately following Business Day.  Whenever any payment to Bank under
the Loan Documents would otherwise be due (except by reason of acceleration) on
a date that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.

 

2.5                               Fees.  Borrower shall pay to Bank the
following:

 

(a)                                  Facility Fee.  On the Closing Date, a
Facility Fee equal to $2,500, which shall be nonrefundable; and

 

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

 

2.6                               Term.  This Agreement shall become effective
on the Closing Date and, subject to Section 12.7, shall continue in full force
and effect for so long as any Obligations remain outstanding or Bank has any
obligation to make Credit Extensions under this Agreement.  Notwithstanding the
foregoing, Bank shall have the right to terminate its obligation to make Credit
Extensions under this Agreement immediately and without notice upon the
occurrence and during the continuance of an Event of Default.  Notwithstanding
termination, Bank’s Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.

 

3.                                      CONDITIONS OF LOANS.

 

3.1                               Conditions Precedent to Initial Credit
Extension.  The obligation of Bank to make the initial Credit Extension is
subject to the condition precedent that Bank shall have received, in form and
substance satisfactory to Bank, the following:

 

(a)                                  this Agreement;

 

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

 

(c)                                  UCC National Form Financing Statement;

 

(d)                                  an intellectual property security
agreement;

 

(e)                                  a warrant to purchase stock;

 

(f)                                    agreement to provide insurance;

 

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

 

(h)                                 current financial statements of Borrower;

 

(i)                                    such other documents, and completion of
such other matters, as Bank may reasonably deem necessary or appropriate.

 

3.2                               Conditions Precedent to all Credit
Extensions.  The obligation of Bank to make each Credit Extension, including the
initial Credit Extension, is further subject to the following conditions:

 

(a)                                  timely receipt by Bank of the
Payment/Advance Form as provided in Section 2.1; and

 

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(b)                                  the representations and warranties
contained in Section 5 shall be true and correct in all material respects on and
as of the date of such Payment/Advance Form and on the effective date of each
Credit Extension as though made at and as of each such date, and no Event of
Default shall have occurred and be continuing, or would exist after giving
effect to such Credit Extension.  The making of each Credit Extension shall be
deemed to be a representation and warranty by Borrower on the date of such
Credit Extension as to the accuracy of the facts referred to in this
Section 3.2.

 

4.                                      CREATION OF SECURITY INTEREST.

 

4.1                               Grant of Security Interest.  Borrower grants
and pledges to Bank a continuing security interest in all presently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents.  Except as set forth
in the Schedule, such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in Collateral acquired after the date
hereof.

 

4.2                               Delivery of Additional Documentation
Required.  Borrower shall from time to time execute and deliver to Bank, at the
request of Bank, all Negotiable Collateral, all financing statements and other
documents that Bank may reasonably request, in form satisfactory to Bank, to
perfect and continue the perfection of Bank’s security interests in the
Collateral and in order to fully consummate all of the transactions contemplated
under the Loan Documents.  Borrower from time to time may deposit with Bank
specific time deposit accounts to secure specific Obligations. Borrower
authorizes Bank to hold such balances in pledge and to decline to honor any
drafts thereon or any request by Borrower or any other Person to pay or
otherwise transfer any part of such balances for so long as the Obligations are
outstanding.

 

4.3                               Right to Inspect.  Bank (through any of its
officers, employees, or agents) shall have the right, upon reasonable prior
notice, from time to time during Borrower’s usual business hours but no more
than twice a year (unless an Event of Default has occurred and is continuing),
to inspect Borrower’s Books and to make copies thereof and to check, test, and
appraise the Collateral in order to verify Borrower’s financial condition or the
amount, condition of, or any other matter relating to, the Collateral.

 

5.                                      REPRESENTATIONS AND WARRANTIES.

 

Borrower represents and warrants as follows:

 

5.1                               Due Organization and Qualification.  Borrower
and each Subsidiary is a corporation duly existing under the laws of its state
of incorporation and qualified and licensed to do business in any state in which
the conduct of its business or its ownership of property requires that it be so
qualified.

 

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

 

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

 

5.4                               Intentionally Deleted.

 

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

 

5.6                               Intellectual Property Collateral.  Borrower is
the sole owner of the Intellectual Property Collateral, except for non-exclusive
licenses granted by Borrower to its customers in the ordinary course of
business.  Each of the Patents is valid and enforceable, and no part of the
Intellectual Property Collateral has been judged invalid or unenforceable, in
whole or in part, and no claim has been made that any part of the

 

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Intellectual Property Collateral violates the rights of any third party.  Except
as set forth in the Schedule, Borrower’s rights as a licensee of intellectual
property do not give rise to more than five percent (5%) of its gross revenue in
any given month, including without limitation revenue derived from the sale,
licensing, rendering or disposition of any product or service.  Except as set
forth in the Schedule, Borrower is not a party to, or bound by, any agreement
that restricts the grant by Borrower of a security interest in Borrower’s rights
under such agreement.

 

5.7                               Name; Location of Chief Executive Office. 
Except as disclosed in the Schedule, Borrower has not done business under any
name other than that specified on the signature page hereof.  The chief
executive office of Borrower is located at the address indicated in Section 10
hereof.  All Borrower’s Inventory and Equipment is located only at the location
set forth in Section 10 hereof.

 

5.8                               Litigation.  Except as set forth in the
Schedule, there are no actions or proceedings pending by or against Borrower or
any Subsidiary before any court or administrative agency in which an adverse
decision could have a Material Adverse Effect, or a material adverse effect on
Borrower’s interest or Bank’s security interest in the Collateral.

 

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

 

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

 

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

 

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

 

5.13                        Taxes.  Borrower and each Subsidiary have filed or
caused to be filed all tax returns required to be filed, and have paid, or have
made adequate provision for the payment of, all taxes reflected therein.

 

5.14                        Subsidiaries.  Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.

 

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5.15                        Government Consents.  Borrower and each Subsidiary
have obtained all material consents, approvals and authorizations of, made all
declarations or filings with, and given all notices to, all governmental
authorities that are necessary for the continued operation of Borrower’s
business as currently conducted.

 

5.16                        Accounts.  None of Borrower’s nor any Subsidiary’s
property is maintained or invested with a Person other than Bank.

 

5.17                        Full Disclosure.  No representation, warranty or
other statement made by Borrower in any certificate or written statement
furnished to Bank contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained in
such certificates or statements not misleading.

 

6.                                      AFFIRMATIVE COVENANTS.

 

Borrower shall do all of the following:

 

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

 

6.2                               Government Compliance.  Borrower shall meet,
and shall cause each Subsidiary to meet, the minimum funding requirements of
ERISA with respect to any employee benefit plans subject to ERISA.  Borrower
shall comply, and shall cause each Subsidiary to comply, with all statutes,
laws, ordinances and government rules and regulations to which it is subject,
noncompliance with which could have a Material Adverse Effect.

 

6.3                               Financial Statements, Reports, Certificates. 
Borrower shall deliver the following to Bank:  (a) as soon as available, but in
any event within thirty (30) days after the end of each calendar month, a
company prepared consolidated balance sheet, income, and cash flow statement
covering Borrower’s consolidated operations during such period, prepared in
accordance with GAAP, consistently applied, in a form acceptable to Bank and
certified by a Responsible Officer; (b) as soon as available, but in any event
within one hundred and eighty (180) days after the end of Borrower’s fiscal year
beginning with the fiscal year ended December 31, 2007, audited consolidated
financial statements of Borrower prepared in accordance with GAAP, consistently
applied, together with an unqualified opinion on such financial statements of an
independent certified public accounting firm reasonably acceptable to Bank;
(c) copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and, if applicable, all reports on Forms 10-K and 10-Q filed with the
Securities and Exchange Commission; (d) as soon as available, but in any event
within thirty (30) days prior to Borrower’s fiscal year end, a company prepared
operating budget (e) promptly upon receipt of notice thereof, a report of any
legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of Fifty Thousand
Dollars ($50,000) or more; and (f) such budgets, sales projections, operating
plans or other financial information as Bank may reasonably request from time to
time.

 

Within twenty (30) days after the last day of each month, Borrower shall deliver
to Bank aged listings of accounts receivable and accounts payable.

 

Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit C hereto.

 

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

 

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

 

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6.5          Taxes.  Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.

 

6.6          Insurance.

 

(a)           Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower’s
business is conducted on the date hereof.  Borrower shall also maintain
insurance relating to Borrower’s business, ownership and use of the Collateral
in amounts and of a type that are customary to businesses similar to Borrower’s.

 

(b)           All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank.  All such
policies of property insurance shall contain a lender’s loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof, and all liability insurance policies shall show the Bank as an
additional insured and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason.  Upon
Bank’s request, Borrower shall deliver to Bank certified copies of such policies
of insurance and evidence of the payments of all premiums therefor.  All
proceeds payable under any such policy shall, at the option of Bank, be payable
to Bank to be applied on account of the Obligations.

 

6.7          Accounts.  Borrower shall maintain and shall cause each of its
Subsidiaries to maintain its primary depository, operating, and investment
accounts with Bank, and in any case of deposit accounts not maintained with
Bank, Borrower shall grant to Bank a first priority perfected security interest
in and “control” (within the meaning of Section 9104 of the California Uniform
Commercial Code) of such deposit account pursuant to documentation acceptable to
Bank.

 

                        6.8          Adjusted Quick Ratio.  Borrower shall
maintain at all times a ratio of of at least 1.50 to 1.00, defined as all
unrestricted cash and cash equivalents maintained with Bank, plus accounts
receivable aged less than 90 days from the invoice date, divided by Current
Liabilities.

 

6.9          Quarterly Planned Revenue.  Borrower shall not incur a negative
variance of more than 20% from the planned quarterly revenue, provided to Bank
in a plan approved by Borrower’s board of directors, and in a form and substance
acceptable to Bank.

 

6.10        Intellectual Property Rights.

 

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

 

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

 

6.11        Further Assurances.  At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.

 

7.             NEGATIVE COVENANTS.

 

Borrower will not do any of the following:

 

7.1          Dispositions.  Convey, sell, lease, transfer or otherwise dispose
of (collectively, a “Transfer”), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than:  (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries in the ordinary course of business; or (iii) Transfers of worn-out
or obsolete Equipment which was not financed by Bank.

 

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

 

7.3          Mergers or Acquisitions.  Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.

 

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

 

7.5          Encumbrances.  Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens, or agree with any Person
other than Bank not to grant a security interest in, or otherwise encumber, any
of its property, or permit any Subsidiary to do so.

 

7.6          Distributions.  Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock, or permit any of its Subsidiaries to do so, except that Borrower may
repurchase the stock of former employees pursuant to stock repurchase agreements
as long as an Event of Default does not exist prior to such repurchase or would
not exist after giving effect to such repurchase.

 

7.7          Investments.  Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments; or maintain or invest any of its property with
a Person other than Bank or permit any of its Subsidiaries to do so unless such
Person has entered into an account control agreement with Bank in form and
substance satisfactory to Bank; or suffer or permit any Subsidiary to be a party
to, or be bound by, an agreement that restricts such Subsidiary from paying
dividends or otherwise distributing property to Borrower.

 

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

 

7.9          Subordinated Debt.  Make any regularly scheduled payment in respect
of any Subordinated Debt, or permit any of its Subsidiaries to make any
regularly scheduled such payment, except in compliance with the terms of such
Subordinated Debt, or amend any provision contained in any documentation
relating to the Subordinated Debt without Bank’s prior written consent.

 

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7.10        Inventory and Equipment. Store the Inventory or the Equipment with a
bailee, warehouseman, or other third party unless the third party has been
notified of Bank’s security interest and Bank (a) has received an acknowledgment
from the third party that it is holding or will hold the Inventory or Equipment
for Bank’s benefit or (b) is in pledge possession of the warehouse receipt,
where negotiable, covering such Inventory or Equipment. Store or maintain any
Equipment or Inventory at a location other than the location set forth in
Section 10 of this Agreement.

 

7.11        Compliance.  Become an “investment company” or be controlled by an
“investment company,” within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Credit Extension for such
purpose.  Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect, or a material
adverse effect on the Collateral or the priority of Bank’s Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.

 

8.             EVENTS OF DEFAULT.

 

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

 

8.1          Payment Default.  If Borrower fails to pay, when due, any of the
Obligations;

 

8.2          Covenant Default.

 

(a)           If Borrower fails to perform any obligation under Article 6 or
violates any of the covenants contained in Article 7 of this Agreement; or

 

(b)           If Borrower fails or neglects to perform or observe any other
material term, provision, condition, covenant contained in this Agreement, in
any of the Loan Documents, or in any other present or future agreement between
Borrower and Bank and as to any default under such other term, provision,
condition or covenant that can be cured, has failed to cure such default within
ten days after Borrower receives notice thereof or any officer of Borrower
becomes aware thereof; provided, however, that if the default cannot by its
nature be cured within the ten day period or cannot after diligent attempts by
Borrower be cured within such ten day period, and such default is likely to be
cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed 30 days) to attempt to
cure such default, and within such reasonable time period the failure to have
cured such default shall not be deemed an Event of Default but no Credit
Extensions will be made.

 

8.3          Material Adverse Effect.  If there occurs any circumstance or
circumstances that could have a Material Adverse Effect;

 

8.4          Attachment.  If any portion of Borrower’s assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower’s assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower’s assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);

 

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

 

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8.6          Other Agreements.  If there is a default or other failure to
perform in any agreement to which Borrower is a party or by which it is bound
resulting in a right by a third party or parties, whether or not exercised, to
accelerate the maturity of any Indebtedness in an amount in excess of Fifty
Thousand Dollars ($50,000) or which could have a Material Adverse Effect;

 

8.7          Judgments.  If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of at least Fifty Thousand Dollars
($50,000) shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of ten (10) days (provided that no Credit Extensions will
be made prior to the satisfaction or stay of such judgment); or

 

8.8          Misrepresentations.  If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.

 

9.             BANK’S RIGHTS AND REMEDIES.

 

9.1          Rights and Remedies.  Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:

 

(a)           Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in
Section 8.5, all Obligations shall become immediately due and payable without
any action by Bank);

 

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

 

(c)           Settle or adjust disputes and claims directly with account debtors
for amounts, upon terms and in whatever order that Bank reasonably considers
advisable;

 

(d)           Make such payments and do such acts as Bank considers necessary or
reasonable to protect its security interest in the Collateral.  Borrower agrees
to assemble the Collateral if Bank so requires, and to make the Collateral
available to Bank as Bank may designate.  Borrower authorizes Bank to enter the
premises where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or lien which in Bank’s determination appears to be prior
or superior to its security interest and to pay all expenses incurred in
connection therewith.  With respect to any of Borrower’s owned premises,
Borrower hereby grants Bank a license to enter into possession of such premises
and to occupy the same, without charge, in order to exercise any of Bank’s
rights or remedies provided herein, at law, in equity, or otherwise;

 

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

 

(f)            Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral.  Bank is hereby granted a license or other right, solely pursuant to
the provisions of this Section 9.1, to use, without charge, Borrower’s labels,
patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks, service marks, and advertising matter, or any property of a similar
nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank’s
exercise of its rights under this Section 9.1, Borrower’s rights under all
licenses and all franchise agreements shall inure to Bank’s benefit;

 

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

 

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

 

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

 

9.2          Power of Attorney.  Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank’s designated officers, or employees) as Borrower’s true
and lawful attorney to:  (a) send requests for verification of Accounts or
notify account debtors of Bank’s security interest in the Accounts; (b) endorse
Borrower’s name on any checks or other forms of payment or security that may
come into Bank’s possession; (c) sign Borrower’s name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims
under and decisions with respect to Borrower’s policies of insurance; (f) settle
and adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable; and
(g) to file, in its sole discretion, one or more financing or continuation
statements and amendments thereto, relative to any of the Collateral.  The
appointment of Bank as Borrower’s attorney in fact, and each and every one of
Bank’s rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank’s
obligation to provide Credit Extensions hereunder is terminated.

 

9.3          Accounts Collection.  At any time after the occurrence of an Event
of Default, Bank may notify any Person owing funds to Borrower of Bank’s
security interest in such funds and verify the amount of such Account.  Borrower
shall collect all amounts owing to Borrower for Bank, receive in trust all
payments as Bank’s trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.

 

9.4          Bank Expenses.  If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following after
reasonable notice to Borrower:  (a) make payment of the same or any part
thereof; (b) set up such reserves under a loan facility in Section 2.1 as Bank
deems necessary to protect Bank from the exposure created by such failure; or
(c) obtain and maintain insurance policies of the type discussed in Section 6.6
of this Agreement, and take any action with respect to such policies as Bank
deems prudent.  Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral.  Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.

 

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

 

9.6          Remedies Cumulative.  Bank’s rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative. 
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity.  No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower’s part shall be deemed a continuing waiver.  No delay by
Bank shall constitute a waiver, election, or acquiescence by it.  No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.

 

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

 

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10.          NOTICES.

 

Unless otherwise provided in this Agreement, all notices or demands by any party
relating to this Agreement or any other agreement entered into in connection
herewith shall be in writing and (except for financial statements and other
informational documents which may be sent by first-class mail, postage prepaid)
shall be personally delivered or sent by a recognized overnight delivery
service, certified mail, postage prepaid, return receipt requested, or by
telefacsimile to Borrower or to Bank, as the case may be, at its addresses set
forth below:

 

If to
Borrower:                                                                                                              
ETELOS, INCORPORATED

200 Mill Avenue South, Suite 400

Renton, Washington  98055

Attn:  Jeff Garon

FAX:  (        )                         

 

If to
Bank:                                                                                                                                    
Bridge Bank, National Association

55 Almaden Boulevard

San Jose, California  95123

Attn:  Technology Division

FAX:  (408) 282-1681

 

The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.

 

11.          CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

 

This Agreement shall be governed by, and construed in accordance with, the
internal laws of the State of California, without regard to principles of
conflicts of law.  Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California.  BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS.  EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT.  EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

 

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

 

12.          GENERAL PROVISIONS.

 

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

 

12.2        Indemnification.  Borrower shall defend, indemnify and hold harmless
Bank and its officers, employees, and agents against:  (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement; and (b) all
losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a
result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys’ fees and
expenses), except for losses caused by Bank’s gross negligence or willful
misconduct.

 

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

 

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12.4        Severability of Provisions.  Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.

 

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

 

12.6        Counterparts.  This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.

 

12.7        Survival.  All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding or Bank has any obligation to make Credit
Extensions to Borrower.  The obligations of Borrower to indemnify Bank with
respect to the expenses, damages, losses, costs and liabilities described in
Section 12.2 shall survive until all applicable statute of limitations periods
with respect to actions that may be brought against Bank have run.

 

12.8        Confidentiality.  In handling any confidential information Bank and
all employees and agents of Bank, including but not limited to accountants,
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank and (v) as Bank may
determine in connection with the enforcement of any remedies hereunder. 
Confidential information hereunder shall not include information that either: 
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.

 

12.9        Patriot Act.  To help the government fight the funding of terrorism
and money laundering activities, Federal law requires all financial institutions
to obtain, verify, and record information that identifies each person who opens
an account.  WHAT THIS MEANS FOR YOU:  when you open an account, we will ask
your name, address, date of birth, and other information that will allow us to
identify you.  We may also ask to see your driver’s license or other identifying
documents.

 

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

 

 

 

ETELOS, INCORORATED

 

 

 

By:

/s/ Jeffrey L. Garon

 

 

 

 

Title:

President / CEO

 

 

 

 

 

 

 

BRIDGE BANK, NATIONAL ASSOCIATION

 

 

 

 

By:

/s/ Dan Pistoni

 

 

 

 

Title:

Senior Vice President

 

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EXHIBIT A

 

DEBTOR:

ETELOS, INCORPORATED

 

 

SECURED PARTY:

BRIDGE BANK, NATIONAL ASSOCIATION

 

COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT

 

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

 

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

 

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

 

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EXHIBIT B

 

REVOLVING ADVANCE REQUEST

 

 

(To be submitted no later than 2:00 PM to be considered for same day processing)

 

To:

Bridge Bank, National Association

 

 

 

 

Fax:

(408) 282-1681

 

 

 

 

Date:

 

 

 

 

 

From:

 

 

 

Borrower’s Name

 

 

 

 

 

 

 

 

Authorized Signature

 

 

 

 

 

 

 

 

Authorized Signer’s Name (please print)

 

 

 

 

 

 

 

 

Phone Number

 

 

 

 

To Account #

 

 

 

Borrower hereby requests funding in the amount of $                in accordance
with the Revolving Advance as defined in the Loan and Security Agreement dated
September         , 2007.

 

Borrower hereby authorizes Lender to rely on facsimile stamp signatures and
treat them as authorized by Borrower for the purpose of requesting the above
advance.

 

All representations and warranties of Borrower stated in the Loan and Security
Agreement are true, correct and complete in all material respects as of the date
of this Revolving Advance Request; provided that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.

 

Capitalized terms used herein and not otherwise defined have the meanings set
forth in the Loan and Security Agreement.

 

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EXHIBIT C

COMPLIANCE CERTIFICATE

 

TO:                                                                           
BRIDGE BANK, NATIONAL ASSOCIATION

 

FROM:                                                         ETELOS,
INCORPORATED

 

The undersigned authorized officer of Etelos, Incorporated hereby certifies that
in accordance with the terms and conditions of the Loan and Security Agreement
between Borrower and Bank (the “Agreement”), (i) Borrower is in complete
compliance for the period ending                                with all
required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.

 

Please indicate compliance status by circling Yes/No under “Complies” column.

 

Reporting Covenant

 

Required

 

Complies

 

 

 

 

 

 

 

Annual financial statements (CPA Audited)

 

FYE beginning 12/31/07, within 180 days

 

Yes

 

No

 

 

 

 

 

 

 

Monthly financial statements and Compliance Certificate

 

Prior to each Credit Extension, and monthly within 30 days

 

Yes

 

No

 

 

 

 

 

 

 

10K and 10Q

 

(as applicable)

 

Yes

 

No

 

 

 

 

 

 

 

Annual operating budget, sales projections and operating plans approved by board
of directors

 

Annually no later than 30 days prior to the beginning of each fiscal year

 

Yes

 

No

 

 

 

 

 

 

 

A/R & A/P Agings

 

Prior to each Credit Extension, and monthly within 30 days when there are any
unpaid Credit Extensions

 

Yes

 

No

 

 

 

 

 

 

 

Deposit balances with Bank

 

$                           

 

 

 

 

Deposit balance outside Bank

 

$                           

 

 

 

 

 

Financial Covenant

 

Required

 

 

 

Actual

 

Complies

 

 

 

 

 

 

 

 

 

Minimum Adjusted Quick Ratio

 

1.50:1.00

 

              :1.00

 

Yes

 

No

 

 

 

 

 

 

 

 

 

Minimum quarterly revenue

 

Within 80% of plan

 

              %

 

Yes

 

No

 

Comments Regarding Exceptions: See Attached.

 

 

 

 

 

 

BANK USE ONLY

 

 

 

 

 

 

 

 

 

Received by:

 

Sincerely,

 

 

AUTHORIZED SIGNER

 

 

 

 

 

 

 

Date:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Verified:

 

SIGNATURE

 

 

AUTHORIZED SIGNER

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

 

TITLE

 

 

 

 

 

 

Compliance Status

Yes

No

 

 

 

 

 

DATE

 

 

 

 

 

20

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SCHEDULE OF EXCEPTIONS

 

 

Permitted Indebtedness  (Section 1.1)

 

 

Permitted Investments  (Section 1.1)

 

 

Permitted Liens  (Section 1.1)

 

 

Inbound Licenses  (Section 5.6)

 

 

Prior Names  (Section 5.7)

 

 

Litigation  (Section 5.8)

 

 

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