Loan and Security Agreement



 Exhibit 10.1 
  
 IRVINE SENSORS CORPORATION 
  
 LOAN AND SECURITY AGREEMENT 







  
 This LOAN AND SECURITY AGREEMENT is entered
into as of December 30, 2005, by and between Square 1 Bank (“Bank”) and IRVINE SENSORS CORPORATION (“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, all capitalized terms shall have the definitions set
forth on Exhibit A. Any term used in the Code and not defined herein shall have the meaning given to the term in the Code. 
  
 1.2 Accounting Terms. Any accounting term not specifically defined on Exhibit A shall be construed in accordance with GAAP and all
calculations shall be made in accordance with GAAP. The term “financial statements” shall include the accompanying notes and schedules. 
  
 2. LOAN AND TERMS OF PAYMENT. 
  
 2.1 Credit Extensions. 
  
 (a) Promise to Pay. Borrower promises to pay to Bank, in lawful money of the United States of America, the aggregate unpaid
principal amount of all Credit Extensions made by Bank to Borrower, together with interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof. 
  
 (b) Advances Under Revolving Line. 
  
 (i) Amount. Subject to and upon the terms and
conditions of this Agreement (1) Borrower may request Advances in an aggregate outstanding amount not to exceed the lesser of (A) the Revolving Line or (B) the Borrowing Base, and (2) amounts borrowed pursuant to this
Section 2.1(b) may be repaid and reborrowed at any time prior to the Revolving Maturity Date, at which time all Advances under this Section 2.1(b) shall be immediately due and payable. Borrower may prepay any Advances without penalty or
premium. 
  
 (ii) Form of Request.
Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Eastern time (1:00 p.m. Eastern time for wire transfers), 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 C. 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(b) to Borrower’s deposit account. 
  

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 (c) Term Loan. 
  
 (i) Subject to and upon the terms and conditions of this Agreement, on the Closing Date or as soon
thereafter as is practical, Bank shall make one term loan to Borrower in an aggregate amount not to exceed Six Million Dollars ($6,000,000) (the “Term Loan”), which amount shall be used to finance not more than thirty-five percent
(35%) of the cash portion of the purchase price of the Acquisition. Borrower shall complete and deliver to Bank the Payment/Advance Form in substantially the form of Exhibit C no later than 3:00 p.m. Eastern time (1:00 p.m. Eastern time for
wire transfers), on the Business Day that the Term Loan is to be made, which shall reflect, among other things, the actual cash portion of the purchase price of the Acquisition to be paid at the closing (not including any earn-outs or hold-backs).

  
 (ii) Interest shall accrue from the
date the Term Loan is made at the rate specified in Section 2.3(a). The Term Loan shall be repaid in forty-eight (48) equal monthly installments of principal plus accrued but unpaid interest, commencing on January 30, 2006 and
continuing on the same day of each month thereafter through the Term Loan Maturity Date, at which time all amounts owing under this Section 2.1(c) shall be immediately due and payable. The Term Loan, once repaid, may not be reborrowed. Borrower
may prepay the Term Loan without penalty or premium. 
  
 (iii) Borrower shall reduce the principal balance of the Term Loan with fifty percent (50%) of the net proceeds (the “Excess Proceeds”) of (a) any public offering of Borrower’s equity securities (provided
that the Borrower’s $10,000,000 convertible debt financing on the Closing Date shall not trigger this clause), and/or (b) any capital asset sale other than a Permitted Transfer. The Excess Proceeds will be allocated to the Term Loan in the
inverse order of payments due beginning backwards from the Term Loan Maturity Date. 
  
 (iv) On the earlier of the Term Loan Maturity Date or full payoff of the Term Loan, in addition to any other amounts then due
hereunder, Borrower shall remit to Bank a Success Fee, defined as the greater of: (a) 50 basis points of the Term Loan amount funded, or (b) the positive result of deducting (i) the average closing market price of 84,860 shares of
Borrower’s stock during the 90 trading days prior to the date of funding of the Term Loan, from (ii) the average closing market price of 84,860 shares of Borrower’s stock during the 90 trading days prior to the date of payoff of the
Term Loan. At Borrower’s option the success fee could be replaced by a four-year warrant to purchase 84,860 shares of Borrower’s common stock, priced at $3.10 per share. 
  
 2.2 Overadvances. If the aggregate amount of the outstanding Advances exceeds the lesser of the
Revolving Line or the Borrowing Base at any time, 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 variable rate equal to 1.00% above the Prime Rate. 
  
 (ii) Term Loan. Except as set forth in Section 2.3(b), the Term Loan shall bear interest, on the outstanding daily balance
thereof, at a rate equal to 2.50% above the Prime Rate; provided that, if Borrower’s Debt Service Coverage Ratio (“DSCR;” as defined in accordance with Section 6.7(b) hereof; determined at the end of each calendar quarter) is
greater than or equal to the amount set forth below, the margin above the Prime Rate shall be as set forth opposite the respective Debt Service Coverage Ratio: 
  

				
	 DSCR

	  	Margin above
Prime Rate

	 
	>1.25:1.00 <1.35:1.00	  	2.25	%
		
	31.35:1.00 <1.40:1.00	  	2.00	%
		
	31.40:1.00 <1.45:1.00	  	1.75	%
		
	31.45:1.00	  	1.50	%

  

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 (b) Late Fee; Default Rate. If any payment is not made within 10 days after the
date such payment is due, Borrower shall pay Bank a late fee equal to the lesser of (i) 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 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 30th calendar (or next Business) 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. 
  
 (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 360 day year for the actual number of days elapsed. 
  
 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, except that to the extent Borrower uses the Advances to purchase Collateral, Borrower’s repayment of the Advances shall apply on a
“first-in-first-out” basis so that the portion of the Advances used to purchase a particular item of Collateral shall be paid in the chronological order the Borrower purchased the Collateral. After the occurrence of an Event of Default,
Bank shall have the right, in its sole discretion, to immediately apply any wire transfer of funds, check, or other item of payment Bank may receive to conditionally reduce Obligations, but such applications of funds 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 Eastern 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 fee equal to (i) one percent (1.00%) of the actual amount of the Term Loan funded; and (ii) $10,000, on account of the Revolving Line; each of which shall be nonrefundable; 
  
 (b) Bank Expenses. On the Closing Date, all Bank
Expenses incurred through the Closing Date, and, after the Closing Date, all Bank Expenses, as and when they become due. 
  
 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 

  

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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. 
  
 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) an officer’s certificate of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of this Agreement; 
  
 (c) a Guaranty and Third Party Security Agreement executed by Guarantor; 
  
 (d) an officer’s certificate of Guarantor with
respect to incumbency and resolutions authorizing the execution and delivery of the Guaranty and Third Party Security Agreement; 
  
 (e) a financing statement (Form UCC-1) for each of Borrower and Guarantor; 
  
 (f) an intellectual property security agreement from
each of Borrower and Guarantor; 
  
 (g)
the certificate(s) for the Shares, together with Assignment(s) Separate from Certificate, duly executed in blank; 
  
 (h) a subordination agreement from all holders of Subordinated Debt; 
  
 (i) agreement to provide insurance; 
  
 (j) payment of the fees and Bank Expenses then due specified in Section 2.5; 
  
 (k) current SOS Reports indicating that except for
Permitted Liens, there are no other security interests or Liens of record in the Collateral; 
  
 (l) current financial statements, including audited statements for Borrower’s most recently ended fiscal year, together with
an unqualified opinion, company prepared consolidated and consolidating balance sheets and income statements for the most recently ended month in accordance with Section 6.2, and such other updated financial information as Bank may reasonably
request; 
  
 (m) current Compliance
Certificate in accordance with Section 6.2; 
  
 (n) a Collateral Information Certificate; and 
  
 (o) such other documents or certificates, 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 (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date). 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 the Collateral to secure prompt repayment of any and all Obligations and to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except for Permitted
Liens, 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 later-acquired Collateral. Notwithstanding any termination,
Bank’s Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 
  
 4.2 Perfection of Security Interest. Borrower authorizes Bank to file at any time financing statements, continuation statements,
and amendments thereto that (i) either specifically describe the Collateral or describe the Collateral as all assets of Borrower of the kind pledged hereunder, and (ii) contain any other information required by the Code for the sufficiency
of filing office acceptance of any financing statement, continuation statement, or amendment, including whether Borrower is an organization, the type of organization and any organizational identification number issued to Borrower, if applicable. Any
such financing statements may be signed by Bank on behalf of Borrower, as provided in the Code, and may be filed at any time in any jurisdiction whether or not Revised Article 9 of the Code is then in effect in that jurisdiction. Borrower shall from
time to time endorse and deliver to Bank, at the request of Bank, all Negotiable Collateral and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank’s security interests in the
Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. Borrower shall have possession of the Collateral, except where expressly otherwise provided in this Agreement or where Bank chooses to perfect
its security interest by possession in addition to the filing of a financing statement. Where Collateral is in possession of a third party bailee, Borrower shall take such steps as Bank reasonably requests for Bank to (i) obtain an
acknowledgment, in form and substance satisfactory to Bank, of the bailee that the bailee holds such Collateral for the benefit of Bank, (ii) obtain “control” of any Collateral consisting of investment property, deposit accounts,
letter-of-credit rights or electronic chattel paper (as such items and the term “control” are defined in Revised Article 9 of the Code) by causing the securities intermediary or depositary institution or issuing bank to execute a control
agreement in form and substance satisfactory to Bank. Borrower will not create any chattel paper without placing a legend on the chattel paper acceptable to Bank indicating that Bank has a security interest in the chattel paper. Borrower from time
to time may deposit with Bank specific cash collateral to secure specific Obligations; Borrower authorizes Bank to hold such specific 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 specific 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 and without interrupting the Borrower’s business, 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. 
  
 4.4 Pledge of Collateral. Borrower hereby pledges,
assigns and grants to Bank a security interest in all the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and 

  

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property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the
foregoing, as security for the performance of the Obligations. On the Closing Date, the certificate or certificates for the Shares will be delivered to Bank, accompanied by an instrument of assignment duly executed in blank by Borrower. To the
extent required by the terms and conditions governing the Shares, Borrower shall cause the books of each entity whose Shares are part of the Collateral and any transfer agent to reflect the pledge of the Shares. Upon the occurrence of an Event of
Default hereunder, Bank may effect the transfer of any securities included in the Collateral (including but not limited to the Shares) into the name of Bank and cause new certificates representing such securities to be issued in the name of Bank or
its transferee. Borrower will execute and deliver such documents, and take or cause to be taken such actions, as Bank may reasonably request to perfect or continue the perfection of Bank’s security interest in the Shares. Unless an Event of
Default shall have occurred and be continuing, Borrower shall be entitled to exercise any voting rights with respect to the Shares and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent,
waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms. All such rights to vote and give consents, waivers and
ratifications shall terminate upon the occurrence and continuance of an Event of Default. 
  
 4.5 Termination of Financing Statement. Upon indefeasible payment in full and satisfaction by Borrower of all of the Obligations,
Bank shall, upon written request from Borrower, promptly file a termination statement with respect to the Collateral, and provide written evidence of the same to Borrower. 
  
 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 the state in which it is incorporated 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, except where the failure to do so
would not reasonably be expected to cause a Material Adverse Effect. 
  
 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 Certificate of Incorporation or Bylaws, nor will they constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement by
which it is bound, except to the extent such default would not reasonably be expected to cause a Material Adverse Effect. 
  
 5.3 Collateral. Borrower has rights in or the power to transfer the Collateral, and its title to the Collateral is free and clear
of Liens, adverse claims, and restrictions on transfer or pledge except for Permitted Liens. All Collateral is located solely in the Collateral States. The Eligible Accounts are bona fide existing obligations. The property or services giving rise to
such Eligible Accounts has been delivered or rendered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. Borrower has not received notice of actual or imminent Insolvency
Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. All Inventory is in all material respects of good and merchantable quality, free from all material defects, except for Inventory
for which adequate reserves have been made. Except as set forth in the Schedule, none of the Collateral is maintained or invested with a Person other than Bank or Bank’s Affiliates. 
  
 5.4 Intellectual Property Collateral. Borrower is the sole owner of the Intellectual Property
Collateral, except for licenses granted by Borrower to its customers in the ordinary course of business. To the best of Borrower’s knowledge, each of the Copyrights, Trademarks and 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 to Borrower that any part of the Intellectual Property Collateral violates the rights of any third party except to the extent
such claim would not reasonably be expected to cause a Material Adverse Effect. 

  

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Borrower’s rights as a licensee of intellectual property do not give rise to more than 10% 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. 
  
 5.5 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, and its exact legal name is as set forth in the first paragraph of this Agreement. The chief executive office of Borrower is located in the Chief Executive Office State at the address indicated
in Section 10 hereof. 
  
 5.6
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 a likely adverse decision would reasonably be expected to
have a Material Adverse Effect. 
  
 5.7 No
Material Adverse Change in Financial Statements. All consolidated and consolidating financial statements related to Borrower and any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrower’s
consolidated and consolidating 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 in the
consolidating financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank. 
  
 5.8 Solvency, Payment of Debts. Borrower is able to pay its debts (including trade debts) as they mature; the fair saleable value
of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; and Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement. 
  
 5.9 Compliance with Laws and Regulations. Borrower
and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrower’s failure to comply with ERISA that is reasonably likely to result
in Borrower’s incurring any liability that could have a Material Adverse Effect. Borrower is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment
Company Act of 1940. Borrower is not engaged principally, or as one of 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 in all material respects with all the provisions of the Federal Fair Labor Standards Act. Borrower is in compliance with all environmental laws, regulations and ordinances except where
the failure to comply is not reasonably likely to have a Material Adverse Effect. Borrower has not violated any statutes, laws, ordinances or rules applicable to it, the violation of which would reasonably be expected to have a Material Adverse
Effect. 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 except those being contested in good faith
with adequate reserves under GAAP or where the failure to file such returns or pay such taxes would not reasonably be expected to have a Material Adverse Effect. 
  
 5.10 Subsidiaries. Borrower does not own any stock, partnership interest or other equity securities
of any Person, except for Permitted Investments. 
  
 5.11 Government Consents. Borrower and each Subsidiary have obtained all 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, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect. 
  
 5.12 Inbound Licenses. Except as disclosed on the Schedule, Borrower is not a party to, nor is bound
by, any license or other agreement that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property. 
  

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 5.13 Shares. Borrower has full power and authority to create a first lien on the
Shares and no disability or contractual obligation exists that would prohibit Borrower from pledging the Shares pursuant to this Agreement. Except as disclosed in Borrower’s 10-K as of the Closing Date, and except with respect to restrictions
or transfers affected by the dissolution of subsidiaries into Borrower, to Borrower’s knowledge, there are no subscriptions, warrants, rights of first refusal or other restrictions on transfer relative to, or options exercisable with respect to
the Shares. The Shares have been and will be duly authorized and validly issued, and are fully paid and non-assessable. To Borrower’s knowledge, the Shares are not the subject of any present or threatened suit, action, arbitration,
administrative or other proceeding, and Borrower knows of no reasonable grounds for the institution of any such proceedings. 
  
 5.14 Full Disclosure. No representation, warranty or other statement made by Borrower in any certificate or written statement
furnished to Bank taken together with all such certificates and written statements 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, it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts and that actual results during the
period or periods covered by any such projections and forecasts may differ from the projected or forecasted results. 
  
 6. AFFIRMATIVE COVENANTS. 
  
 Borrower covenants that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension
hereunder, Borrower shall do all of the following: 
  
 6.1 Good Standing and Government Compliance. Borrower shall maintain its and each of its Subsidiaries’ corporate existence and good standing in such entity’s jurisdiction of organization, shall maintain qualification and
good standing in each other jurisdiction in which the failure to so qualify would reasonably be expected to have a Material Adverse Effect, and shall furnish to Bank the organizational identification number issued to Borrower by the authorities of
the state in which Borrower is organized, if applicable. 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 in
all material respects with all applicable Environmental Laws, and maintain all material permits, licenses and approvals required thereunder where the failure to do so would reasonably be expected to have a Material Adverse Effect. 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, and shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses,
approvals and agreements, the loss of which or failure to comply with which would reasonably be expected to have a Material Adverse Effect. 
  
 6.2 Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (i) as soon as available, but in any event
within 30 days after the end of each calendar month, a company prepared consolidated and consolidating balance sheet and income statement covering Borrower’s operations during such period, in a form reasonably acceptable to Bank and certified
by a Responsible Officer; (ii) as soon as available, but in any event within 150 days after the end of Borrower’s fiscal year, audited consolidated and consolidating financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an opinion which is unqualified or otherwise consented to in writing by Bank on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (iii) if applicable,
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 all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission;
(iv) 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 $250,000 or more; (v) promptly upon
receipt, each management letter prepared by Borrower’s independent certified public accounting firm regarding Borrower’s management control systems; (vi) such budgets, sales projections, operating plans or other financial information
generally prepared by Borrower in the ordinary course of business as Bank may reasonably request from time to time; and (vii) within 30 days of the last day of each fiscal quarter in which an application is filed or the status of any
outstanding applications or registrations change, a report signed by Borrower, in form reasonably acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of 

  

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any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrower’s
Intellectual Property Collateral, including but not limited to any subsequent ownership right of Borrower in or to any Trademark, Patent or Copyright not specified in Exhibits A, B, and C of any Intellectual Property Security Agreement delivered to
Bank by Borrower in connection with this Agreement. 
  
 (a) Within 10 days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto, together with aged listings by invoice
date of accounts receivable and accounts payable; provided that Borrower shall have 25 days after the last month of Borrower’s fiscal year to deliver the same with respect to such month. 
  
 (b) Within 30 days after the last day of each month,
Borrower shall deliver to Bank with the monthly financial statements a Compliance Certificate certified as of the last day of the applicable month and signed by a Responsible Officer in substantially the form of Exhibit E hereto. 
  
 (c) As soon as possible and in any event within 3
Business Days after becoming aware of the occurrence or existence of an Event of Default hereunder, a written statement of a Responsible Officer setting forth details of the Event of Default, and the action which Borrower has taken or proposes to
take with respect thereto. 
  
 (d) 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 6 months unless an Event of Default has
occurred and is continuing. 
  
 Borrower may deliver to Bank on an
electronic basis any certificates, reports or information required pursuant to this Section 6.2, and Bank shall be entitled to rely on the information contained in the electronic files, provided that Bank in good faith believes that the files
were delivered by a Responsible Officer. If Borrower delivers this information electronically, it shall also deliver to Bank by U.S. Mail, reputable overnight courier service, hand delivery, facsimile or .pdf file within 5 Business Days of
submission of the unsigned electronic copy the certification of monthly financial statements, the intellectual property report, the Borrowing Base Certificate and the Compliance Certificate, each bearing the physical signature of the Responsible
Officer. 
  
 6.3 Inventory; Returns.
Borrower shall keep all Inventory in good and merchantable 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 on the Closing Date. Borrower shall promptly notify Bank of all returns, recoveries, disputes or claims involving more than $100,000. 
  
 6.4 Taxes. Borrower shall make, and 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, including, but not limited to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and
state disability, and will execute and deliver to Bank, on demand, proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits and any appropriate certificates attesting to the payment or deposit thereof;
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. 
  
 6.5 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 liability and other insurance in amounts and of a type that are customary to businesses similar to Borrower’s. 
  

 10 








 (b) All such policies of insurance shall be in such form and with such companies
and in such amounts as reasonably satisfactory to Bank. All 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, and all liability insurance
policies shall show Bank as an additional insured and specify that the insurer must give at least 20 days notice to Bank before canceling its policy for any reason. Upon Bank’s request, Borrower shall deliver to Bank certified copies of the
policies of insurance and evidence of all premium payments. If no Event of Default has occurred and is continuing, proceeds payable under any casualty policy will, at Borrower’s option, be payable to Borrower to replace the property subject to
the claim, provided that any such replacement property shall be deemed Collateral in which Bank has been granted a first priority security interest. If an Event of Default has occurred and is continuing, all proceeds payable under any such policy
shall, at Bank’s option, be payable to Bank to be applied on account of the Obligations. 
  
 6.6 Primary Depository. Borrower shall, within 45 days of the Closing Date, maintain all its depository and operating
accounts with Bank and its primary investment accounts with Bank or Bank’s Affiliates. Notwithstanding the foregoing, Borrower may maintain accounts with less than $50,000 on deposit (each) at other institutions (each as set forth on the
Schedule), subject to control agreements in form and content reasonably acceptable to Bank. Notwithstanding the foregoing, Borrower may maintain payroll accounts with each of U.S. Bank and Texas Capital Bank, not subject to control agreements.

  
 6.7 Financial Covenants.
Borrower shall at all times maintain the following financial ratios and covenants: 
  
 (a) Profitability. As of the last day of each calendar month commencing March 31, 2006, Profitability of not less than
$1.00 for such month, on a rolling 3-month basis. 
  
 (b) Debt Service Coverage Ratio. A ratio of EBITDA plus non-cash employee retirement plan contributions, less cash taxes and cash unfinanced Capitalized Expenditures, to the principal and interest payments due on the Credit
Extensions during the period, plus any cash principal and interest payments due on account of Subordinated Debt during the period; all as of the last day of any fiscal quarter for the trailing three (3) months ending on that date, of not less
than (i) 1.20 to 1.00 from the Closing Date through the first anniversary of the Closing Date; and (ii) 1.25 to 1.00 thereafter. 
  
 (c) Tangible Net Worth Plus Subordinated Debt. A Tangible Net Worth plus Subordinated Debt at all times of not less than
$6,000,000, increasing quarterly by 50% of net profit (but not decreasing for losses). 
  
 6.8 Registration of Intellectual Property Rights. 
  
 (a) Borrower shall register or cause to be registered on an expedited basis (to the extent not
already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as the case may be, those registrable intellectual property rights now owned or hereafter developed or acquired by Borrower, to the extent
that Borrower, in its reasonable business judgment, deems it appropriate to so protect such intellectual property rights. 
  
 (b) 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. 
  
 (c) 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;
(ii) prior to the filing of any such applications or registrations, execute such documents as Bank may reasonably request for Bank to maintain its perfection in such intellectual property rights to be registered by Borrower; (iii) upon the
request of Bank, either deliver to Bank or file such 

  

 11 








 
documents simultaneously with the filing of any such applications or registrations; (iv) upon filing any such applications or registrations, promptly
provide Bank with a copy of such applications or registrations together with any exhibits, 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 the date of such filing. 
  
 (d) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect and maintain the perfection and priority of Bank’s security
interest in the Intellectual Property Collateral. 
  
 (e) Borrower shall (i) protect, defend and maintain the validity and enforceability of the trade secrets, Trademarks, Patents and Copyrights, (ii) use commercially reasonable efforts to detect infringements of the
Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights to be abandoned, forfeited or dedicated to the public without the
written consent of Bank, which shall not be unreasonably withheld. 
  
 (f) Bank may audit Borrower’s Intellectual Property Collateral to confirm compliance with this Section 6.8, 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 6.8 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 6.8. 
  
 6.9 Consent of Inbound Licensors. Prior to
entering into or becoming bound by any material license or agreement, Borrower shall: (i) provide written notice to Bank of the material terms of such license or agreement with a description of its likely impact on Borrower’s business or
financial condition; and (ii) in good faith use commercially reasonable efforts to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for Borrower’s interest in such licenses or contract rights to be
deemed Collateral and for Bank to have a security interest in it that might otherwise be restricted by the terms of the applicable license or agreement, whether now existing or entered into in the future, provided, however, that the failure to
obtain any such consent or waiver shall not constitute a default under this Agreement. 
  
 6.10 Creation/Acquisition of Subsidiaries. In the event Borrower or any Subsidiary creates or acquires any material,
domestic Subsidiary (each, a “Material Subsidiary”), Borrower and such Subsidiary shall promptly notify Bank of the creation or acquisition of such Material Subsidiary and take all such action as may be reasonably required by Bank to cause
such Material Subsidiary to guarantee the Obligations of Borrower under the Loan Documents and grant a continuing pledge and security interest in and to the collateral of such Material Subsidiary (substantially as described on Exhibit A hereto), and
Borrower shall grant and pledge to Bank a perfected security interest in the stock, units or other evidence of ownership of such Material Subsidiary. 
  
 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 covenants and agrees that, so long as any credit hereunder shall be available and until the outstanding Obligations are paid in full or for so
long as Bank may have any commitment to make any Credit Extensions, Borrower will not do any of the following without Bank’s prior written consent, which shall not be unreasonably withheld: 
  
 7.1 Dispositions. Convey, sell, lease,
license, transfer or otherwise dispose of (collectively, to “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, or move cash balances on deposit with Bank to accounts opened at another
financial institution, other than Permitted Transfers. 
  

 12 








 7.2 Change in Name, Location, Executive Office, or Executive Management; Change
in Business; Change in Fiscal Year; Change in Control. Change its name or the Borrower State or relocate its chief executive office without 30 days prior written notification to Bank; replace its chief executive officer or chief financial
officer without prompt written notification to Bank; engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by Borrower; change its
fiscal year end; have a Change in Control. 
  
 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 (other than mergers or consolidations of a Subsidiary into another
Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person except (a) where (i) such transactions do not in the aggregate exceed
(x) cash consideration of $1,000,000, or (y) consideration consisting of cash (subject to (x) above) and/or stock of a value of $2,000,000; in any case, during any fiscal year, (ii) no Event of Default has occurred, is continuing
or would exist after giving effect to such transactions, (iii) such transactions do not result in a Change in Control, and (iv) Borrower is the surviving entity; or (b) the Acquisition. 
  
 7.4 Indebtedness. Create, incur, assume,
guarantee or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness, or prepay any Indebtedness or take any actions which impose on Borrower an obligation to prepay any
Indebtedness, except Indebtedness to Bank. 
  
 7.5 Encumbrances. Create, incur, assume or allow 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 covenant to any other Person that Borrower in the future will refrain from creating, incurring, assuming or allowing any Lien with respect to any of Borrower’s property (other than as set forth in a
security agreement with respect to a Person holding a Permitted Lien so long as any Liens of the Bank are permitted thereunder). 
  
 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, except that Borrower may (i) 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, and (ii) repurchase the stock of former employees pursuant to stock repurchase agreements by the cancellation of indebtedness owed by such former employees to Borrower regardless of whether an Event of Default exists.

  
 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 Bank’s Affiliates or
permit any Subsidiary to do so unless such Person has entered into a 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. Except as set forth in the Schedule, 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 payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision affecting Bank’s rights contained in any documentation relating to the Subordinated Debt without Bank’s prior written consent. 
  
 7.10 Inventory and Equipment. Store the Inventory or the Equipment with a bailee, warehouseman, or similar third party
unless the third party has been notified of Bank’s security interest and Bank (a)

  

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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
possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower shall keep the
Inventory and Equipment only at the location set forth in Section 10 and such other locations of which Borrower gives Bank prior written notice and as to which Bank files a financing statement where needed to perfect its security interest.

  
 7.11 No Investment Company; Margin
Regulation. Become 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. 
  
 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
any of the Obligations when due; 
  
 8.2
Covenant Default. 
  
 (a) If Borrower
fails to perform any obligation under Sections 6.2, 6.5 – 6.7 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 10
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 10 day period or cannot after diligent attempts by Borrower be cured within
such 10 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 Change. If there occurs a material adverse change in Borrower’s prospects, business or financial
condition, or if there is a material impairment in the prospect of repayment of any portion of the Obligations or a material impairment in the perfection, value or priority of Bank’s security interests in the Collateral; 
  
 8.4 Attachment. If any material 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 30 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 thirty 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 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 

  

 14 








 
stayed within 45 days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding); 
  
 8.6 Other Agreements. If there is a default or
other failure to perform in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess
of $250,000; 
  
 8.7 Subordinated
Debt. If Borrower makes any payment on account of Subordinated Debt, except to the extent the payment is allowed under any subordination agreement entered into with Bank; 
  
 8.8 Judgments. If a judgment or judgments for the payment of money in an amount, individually
or in the aggregate, of at least $250,000 shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of 30 days (provided that no Credit Extensions will be made prior to the satisfaction or stay of the judgment); or

  
 8.9 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. 
  
 8.10 Guaranty. If any guaranty of all or a portion of the Obligations (a “Guaranty) ceases for any reason to be in full force and effect, or any guarantor fails to perform any obligation under any Guaranty or a security
agreement securing any Guaranty (collectively, the “Guaranty Documents”), or any event of default occurs under any Guaranty Document or any guarantor revokes or purports to revoke a Guaranty, or any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth in any Guaranty Document or in any certificate delivered to Bank in connection with any Guaranty Document, or if any of the circumstances described in Sections 8.3
through 8.9 occur with respect to any guarantor. 
  
 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 (insolvency), all
Obligations shall become immediately due and payable without any action by Bank); 
  
 (b) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining
undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit, and
Borrower shall promptly deposit and pay such amounts; 
  
 (c) 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; 
  
 (d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in
whatever order that Bank reasonably considers advisable; 
  
 (e) 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 

  

 15 








 
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; 
  
 (f) Set off and apply to the Obligations any and all
(i) balances and deposits of Borrower held by Bank, and (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank; 
  
 (g) 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; 
  
 (h) Sell the Collateral at either a public or private
sale, or both, 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. Bank may sell the Collateral without giving any warranties as to the Collateral. Bank may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to
affect the commercial reasonableness of any sale of the Collateral. If Bank sells any of the Collateral upon credit, Borrower will be credited only with payments actually made by the purchaser, received by Bank, and applied to the indebtedness of
the purchaser. If the purchaser fails to pay for the Collateral, Bank may resell the Collateral and Borrower shall be credited with the proceeds of the sale; 
  

(i) Bank may credit bid and purchase at any public sale; 
  
 (j) Apply for the appointment of a receiver, trustee, liquidator or conservator of the Collateral,
without notice and without regard to the adequacy of the security for the Obligations and without regard to the solvency of Borrower, any guarantor or any other Person liable for any of the Obligations; and 
  
 (k) Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by Borrower. 
  
 Bank
may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. 
  
 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; (g) enter into a short-form intellectual property security agreement consistent with the terms of this Agreement for recording purposes only or modify, in its sole discretion, any intellectual property
security agreement entered into between Borrower and Bank without first obtaining Borrower’s approval of or signature to such 

  

 16 








 
modification by amending Exhibits A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or
Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest; and
(h) file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; provided Bank may exercise such power of
attorney to sign the name of Borrower on any of the documents described in clauses (g) and (h) above, regardless of whether an Event of Default has occurred. 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 advances hereunder is terminated. 
  
 9.3 Accounts Collection. At any time after the
occurrence and during the continuation 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 the Revolving Line 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 6.5 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. Bank has no obligation to clean up or otherwise prepare the Collateral for sale. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower, until such time as the Bank has taken possession of
the Collateral (exclusive to the rights of Borrower therein). 
  
 9.6 No Obligation to Pursue Others. Bank has no obligation to attempt to satisfy the Obligations by collecting them from any other person liable for them and Bank may release, modify or waive any
collateral provided by any other Person to secure any of the Obligations, all without affecting Bank’s rights against Borrower. Borrower waives any right it may have to require Bank to pursue any other Person for any of the Obligations.

  
 9.7 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. Borrower expressly agrees that this
Section 9.7 may not be waived or modified by Bank by course of performance, conduct, estoppel or otherwise. 
  
 9.8 Demand; Protest. Except as otherwise provided in this Agreement, Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment and any other notices relating to the Obligations. 
  

 17 








 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:	  	IRVINE SENSORS CORPORATION
	 	  	3001 Red Hill Ave., Bldg. 4-108
	 	  	Costa Mesa, CA 92626
	 	  	Attn: Chief Financial Officer
	 	  	FAX: (714) 444-8773
		
	If to Bank:	  	Square 1 Bank
	 	  	406 Blackwell Street, Suite 240
	 	  	Crowe Building
	 	  	Durham, NC 27701
	 	  	Attn: Manager
	 	  	FAX: (919) 314-3080
		
	with a copy to:	  	Square 1 Bank
	 	  	12481 High Bluff Dr., Ste. 350
	 	  	San Diego, CA 92130
	 	  	Attn: Michael Berrier, Senior Vice President
	 	  	 FAX: (858) 436-3501


  
 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.
BANK AND BORROWER WAIVE ANY RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREIN, INCLUDING CLAIMS BASED ON CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER COMMON LAW
OR STATUTORY BASES. Borrower submits to the exclusive jurisdiction of the state and federal courts located in the County of San Diego, State of California. If the jury waiver set forth in this Section is not enforceable, then any dispute,
controversy or claim arising out of or relating to this Agreement or any of the transactions contemplated herein will be finally settled by binding arbitration in San Diego, California in accordance with the then-current Commercial Arbitration Rules
of the American Arbitration Association by one arbitrator appointed in accordance with said rules. The arbitrator shall apply California law to the resolution of any dispute, without reference to rules of conflicts of law or rules of statutory
arbitration. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, the parties may apply to any court of competent jurisdiction for preliminary or interim equitable
relief, or to compel arbitration in accordance with this paragraph. The expenses of the arbitration, including the arbitrator’s fees and expert witness fees, incurred by the parties to the arbitration, may be awarded to the prevailing party, in
the discretion of the arbitrator, or may be apportioned between the parties in any manner deemed appropriate by the arbitrator. Unless and until the arbitrator decides that one party is to pay for all (or a share) of such expenses, both parties
shall share equally in the payment of the arbitrator’s fees as and when billed by the arbitrator. 
  
 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 and shall bind all persons who become bound as a debtor to this Agreement; provided, however, that neither this Agreement nor any rights hereunder may be assigned 

  

 18 








 
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, its officers, employees and agents 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. 
  
 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. All
amendments to or terminations of this Agreement or the other Loan Documents must be in writing. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this
Agreement and the other 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 Confidentiality. In handling any confidential information, Bank and all employees and
agents of Bank shall exercise the same degree of care that Bank 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. 
  
 12.8 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 any Credit Extension 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. 
  

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

  

			
	IRVINE SENSORS CORPORATION
		
	By:	 	 /s/ JOHN J. STUART, JR.

	 Title: 
	 	 Senior Vice President and
 Chief Financial
Officer

	
	 SQUARE 1 BANK

		
	By:	 	 /s/ MICHAEL BERRIER

	 Title: 
	 	 Senior Vice President and Regional Manager



  
 [Signature
Page to Loan and Security Agreement] 









  
 EXHIBIT A 

 
 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 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. 
  
 “Acquisition” means the acquisition by Borrower of one hundred percent
(100%) of the issued and outstanding capital stock of Optex, pursuant to the Acquisition Documents. 
  
 “Acquisition Documents” means the Stock Purchase Agreement dated as of December 30, 2005, by and between Borrower, Optex and Seller, and the schedules and exhibits thereto, and any and all agreement and
instruments executed in connection therewith; each as amended from time in form and substance reasonably satisfactory to Bank. 
  
 “Advance” or “Advances” means a cash advance or cash advances under the Revolving Line. 
  
 “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, whether generated in-house or by outside counsel) 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 (whether generated in-house or by outside counsel) 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 State” means
Delaware, the state under whose laws Borrower is organized. 
  
 “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. 
  
 “Borrowing Base” means an amount equal to 80% of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower. 
  
 “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. 
  
 “Capitalized Expenditures” means current period cash expenditures that would, in accordance with GAAP, be properly recordable as capital expenditures and that are amortized over a period of time in accordance with GAAP.

  
 “Cash” means unrestricted cash and cash equivalents. 
  
 “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. 
  
 “Chief
Executive Office State” means California, where Borrower’s chief executive office is located. 
  

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 “Closing Date” means the date of this Agreement. 
  
 “Code” means the California Uniform Commercial Code as amended or supplemented from time to time. 
  
 “Collateral” means the property described on Exhibit B attached hereto and all
Negotiable Collateral and Intellectual Property Collateral to the extent not described on Exhibit B, except to the extent any such property (i) is nonassignable by its terms without the consent of the licensor thereof or another party (but only
to the extent such prohibition on transfer is enforceable under applicable law, including, without limitation, Sections 9406 and 9408 of the Code), (ii) the granting of a security interest therein is contrary to applicable law, provided that
upon the cessation of any such restriction or prohibition, such property shall automatically become part of the Collateral, or (iii) constitutes the capital stock of a controlled foreign corporation (as defined in the IRC), in excess of 65% of
the voting power of all classes of capital stock of such controlled foreign corporations entitled to vote. 
  
 “Collateral State” means the state or states where the Collateral is located, which are California and Texas. 
  
 “Contingent Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any
indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect
of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued for the account of that Person; and (iii) all obligations
arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. 
  
 “Copyrights” means any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.

  
 “Credit Extension” means each Advance, Term Loan, or any other
extension of credit by Bank to or for the benefit of Borrower hereunder. 
  
 “Eligible Accounts” means those Accounts that arise in the ordinary course of Borrower’s business that comply with all of Borrower’s representations and warranties to Bank set forth in Section 5.3; provided, that
Bank may change the standards of eligibility by giving Borrower 30 days prior written notice. Unless otherwise agreed to by Bank, Eligible Accounts shall not include the following: 
  
 (a) Accounts that the account debtor has failed to pay in full within 90 days of invoice date; 
  
 (b) Credit balances over 90 days; 
  
 (c) Accounts with respect to an account debtor, 25% of whose Accounts the account
debtor has failed to pay within 90 days of invoice date; 
  
 (d) Accounts
with respect to an account debtor, including Subsidiaries and Affiliates, whose total obligations to Borrower exceed 25% of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank;

  
 (e) Accounts with respect to which the account debtor does not have its
principal place of business in the United States, except for Eligible Foreign Accounts; 
  

 2 








 (f) Accounts with respect to which the account debtor is the United States or any department, agency, or
instrumentality of the United States, except for Accounts of the United States if the payee has assigned its payment rights to Bank and the assignment has been acknowledged under the Assignment of Claims Act of 1940 (31 U.S.C. 3727) (provided that
such acknowledgement is received by Bank within 30 days of the Closing Date, with respect to Accounts under this Subsection to be included in any Advances requested on the Closing Date); 
  
 (g) Accounts with respect to which Borrower is liable to the account debtor for goods sold or services rendered by the account debtor
to Borrower, but only to the extent of any amounts owing to the account debtor against amounts owed to Borrower; 
  
 (h) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, demo or promotional, or other
terms by reason of which the payment by the account debtor may be conditional; 
  
 (i) Accounts with respect to which the account debtor is an officer, employee, agent or Affiliate of Borrower; 
  
 (j) Accounts that have not yet been billed to the account debtor or that relate to deposits (such as good faith deposits) or other property of the account debtor
held by Borrower for the performance of services or delivery of goods which Borrower has not yet performed or delivered; 
  
 (k) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion,
that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; 
  
 (l) Accounts the collection of which Bank reasonably determines after inquiry and
consultation with Borrower to be doubtful; and 
  
 (m) Retentions and
hold-backs. 
  
 “Eligible Foreign Accounts” means Accounts with respect
to which the account debtor does not have its principal place of business in the United States and that are (i) supported by one or more letters of credit in an amount and of a tenor, and issued by a financial institution, acceptable to Bank,
(ii) insured by the Export Import Bank of the United States, (iii) generated by an account debtor with its principal place of business in Canada, provided that the Bank has perfected its security interest in the appropriate Canadian
province, or (iv) approved by Bank on a case-by-case basis. All Eligible Foreign Accounts must be calculated in U.S. Dollars. 
  
 “Environmental Laws” means all laws, rules, regulations, orders and the like issued by any federal state, local foreign or other governmental or
quasi-governmental authority or any agency pertaining to the environment or to any hazardous materials or wastes, toxic substances, flammable, explosive or radioactive materials, asbestos or other similar materials. 
  
 “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, consistently applied, as in effect from time to time. 
  
 “Guarantor” means Optex. 
  

 3 








 “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: 
  
 (a) Copyrights, Trademarks and Patents; 
  
 (b) Any and all trade secrets, and any and all intellectual property rights in
computer software and computer software products now or hereafter existing, created, acquired or held; 
  
 (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; 
  
 (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to
sue for and collect such damages for said use or infringement of the intellectual property rights identified above; 
  
 (e) 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; 
  
 (f) All amendments, renewals and
extensions of any of the Copyrights, Trademarks or Patents; and 
  
 (g) 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 present and future inventory in which Borrower has any interest. 
  
 “Investment” means any beneficial ownership of (including stock, partnership or
limited liability company 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 document, instrument or 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, (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents, (iii) Borrower’s interest in, or the value, perfection or priority of Bank’s
security interest in the Collateral, or (iv) Borrower’s ability to attract additional equity financing from its existing investors or other investors acceptable to Bank. 
  
 “Negotiable Collateral” means all of Borrower’s present and future letters of credit of which it is a beneficiary, drafts,
instruments (including promissory notes), securities, documents of title, and chattel paper, and Borrower’s Books relating to any of the foregoing. 
  

 4 








 “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. 
  
 “Optex” means Optex Systems, Inc., a Texas corporation 
  
 “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 not to exceed $1,000,000 in
the aggregate in any fiscal year of Borrower secured by a lien described in clause (c) of the defined term “Permitted Liens,” provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment
financed with such Indebtedness; 
  
 (d) Subordinated Debt; 
  
 (e) Indebtedness to trade creditors incurred in the ordinary course of business; and

  
 (f) Extensions, refinancings and renewals of any items of Permitted
Indebtedness, provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be. 
  
 “Permitted Investment” means: 
  
 (a) Investments existing on the Closing Date disclosed in the Schedule; 
  
 (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
year from the date of acquisition thereof, (ii) commercial paper maturing no more than one 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) Bank’s certificates of deposit maturing no more than one year from the date of investment therein, and (iv) Bank’s money market accounts; 
  
 (c) Repurchases of stock from former employees or directors of Borrower under the
terms of applicable repurchase agreements (i) in an aggregate amount not to exceed $250,000 in any fiscal year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases, or (ii) in
any amount where the consideration for the repurchase is the cancellation of indebtedness owed by such former employees to Borrower regardless of whether an Event of Default exists; 
  
 (d) Investments accepted in connection with Permitted Transfers; 
  
 (e) Investments of Subsidiaries in or to other Subsidiaries or Borrower and Investments by Borrower in Subsidiaries not to exceed
$250,000 in the aggregate in any fiscal year; 
  

 5 








 (f) Investments not to exceed $250,000 in the aggregate in any fiscal year consisting of (i) travel advances
and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to
employee stock purchase plan agreements approved by Borrower’s Board of Directors; 
  
 (g) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers
arising in the ordinary course of Borrower’s business; 
  
 (h)
Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided that this subparagraph (h) shall not apply to
Investments of Borrower in any Subsidiary; and 
  
 (i) Joint ventures or
strategic alliances in the ordinary course of Borrower’s business consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash Investments by Borrower do
not exceed $250,000 in the aggregate in any fiscal year. 
  
 “Permitted
Liens” means the following: 
  
 (a) Any Liens existing on the Closing
Date and disclosed in the Schedule (excluding Liens to be satisfied with the proceeds of the Advances) or arising under this Agreement or the other Loan Documents; 
  
 (b) Liens securing Subordinated Debt; 
  
 (c) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings
and for which Borrower maintains adequate reserves, provided the same have no priority over any of Bank’s security interests; 
  
 (d) Liens not to exceed $1,000,000 in the aggregate (i) upon or in any Equipment (other than Equipment financed by an Equipment Advance) 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 or lease 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; 
  
 (e) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through
(d) 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;

  
 (f) Deposits or pledges to secure payment of workers’
compensation, unemployment insurance, old age pensions or other social security obligations, in the ordinary course of business of a Borrower or a Subsidiary; 
  

(g) Liens of carriers, warehousemen, mechanics and materialmen, and other like Liens arising in the ordinary course of business, for sums not due or to the
extent that payment therefor shall not at the time be required to be made; 
  
 (h) Liens arising solely by virtue of any statutory or common law provision relating to banker’s liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository
institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restriction against access by a Borrower or a Subsidiary in excess of those set forth by regulations promulgated by the Board
of Governors of the Federal Reserve System, and (ii) such deposit account is not intended by any Borrower or any Subsidiary to provide collateral to the depository institution; and 
  

 6 








 (i) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default
under Sections 8.4 (attachment) or 8.8 (judgments). 
  
 “Permitted
Transfer” means the conveyance, sale, lease, transfer or disposition by Borrower or any Subsidiary of: 
  
 (a) Inventory in the ordinary course of business; 
  
 (b) licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; 
  
 (c) worn-out or obsolete Equipment; 
  
 (d) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of
such sale are applied with reasonable promptness to the purchase price of such replacement equipment; or 
  
 (e) other assets of Borrower or its Subsidiaries that do not in the aggregate exceed $250,000 during any fiscal year. 
  
 “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 variable rate of interest, per annum, most recently announced by Bank, as its “prime rate,” whether or not such announced rate
is the lowest rate available from Bank. 
  
 “Profitability” means net
income after tax. 
  
 “Responsible Officer” means any one (1) of
the following: the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer or the Controller of Borrower. 
  
 “Revolving Line” means a Credit Extension of up to $2,000,000 (provided that the aggregate amount of the Revolving Line and the Term Loan outstanding at any
time may not exceed $7,000,000). 
  
 “Revolving Maturity Date” means 364
days from the Closing Date. 
  
 “Schedule” means the schedule of
exceptions attached hereto and approved by Bank, if any. 
  
 “Seller”
means Timothy Looney. 
  
 “Shares” means (subject to Section 5.13
hereof) (i) sixty-six and two-thirds percent (66-2/3%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by Borrower in any Subsidiary of Borrower which is not an entity organized under
the laws of the United States or any territory thereof, and (ii) one hundred percent (100%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by Borrower in any Subsidiary of Borrower
which is an entity organized under the laws of the United States or any territory thereof. 
  
 “SOS Reports” means the official reports from the Secretaries of State of each Collateral State, Chief Executive Office State and the Borrower State and other applicable federal, state or local government
offices identifying all current security interests filed in the Collateral and Liens of record as of the date of such report. 
  
 “Subordinated Debt” means any debt incurred by Borrower that is subordinated in writing to the debt owing by Borrower to Bank on terms reasonably acceptable to
Bank (and identified as being such by Borrower and Bank). 
  

 7 








 “Subsidiary” means any corporation, partnership or limited liability company or joint venture in which
(i) any general partnership interest or (ii) more than 50% of the stock, limited liability company interest or joint venture of which by the terms thereof 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. 
  
 “Tangible Net Worth” means at any date as of which the amount thereof shall be determined, the sum of the sum of the common stock, preferred stock, additional
paid-in capital and retained earnings (deducting treasury stock) of Borrower and its Subsidiaries minus intangible assets, determined in accordance with GAAP. 
  

“Term Loan” has the meaning set forth in Section 2.1(c) (provided that the aggregate amount of the Term Loan and the Revolving Line outstanding at any
time may not exceed $7,000,000). 
  
 “Term Loan Maturity Date” means
December 30, 2009. 
  
 “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. 
  

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