Document:

exv10w13

 

Exhibit 10.13

LOAN AND SECURITY AGREEMENT

Dated as of June14, 2006

among

OCULUS INNOVATIVE SCIENCES, INC.

a California corporation,

and

OCULUS TECHNOLOGIES OF MEXICO, S.A. de C.V.

a corporation organized under the laws of Mexico,

and

OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.

a corporation organized under the laws of The Netherlands

each individually as a “Borrower” and collectively, as the “Borrowers"

and

VENTURE LENDING & LEASING IV, INC.,

a Maryland corporation,

as “Lender"

 

 

LOAN AND SECURITY AGREEMENT

     The Borrowers and Lender identified on the cover page of this document have entered or
anticipate entering into one or more transactions pursuant to which Lender agrees to make available
to Borrowers a loan facility governed by the terms and conditions set forth in this document and
one or more Supplements executed by Borrowers and Lender which incorporate this document by
reference. Each Supplement constitutes a supplement to and forms part of this document, and will
be read and construed as one with this document, so that this document and the Supplement
constitute a single agreement between the parties (collectively referred to as this “Agreement”).

     Accordingly, the parties agree as follows:

ARTICLE 1 — INTERPRETATION

     1.1 Definitions. The terms defined in Article 11 and in the Supplement will have the meanings
therein specified for purposes of this Agreement.

     1.2 Inconsistency. In the event of any inconsistency between the provisions of any Supplement
and this document, the provisions of the Supplement will be controlling for the purpose of all
relevant transactions.

ARTICLE 2 — THE COMMITMENT AND LOANS

     2.1 The Commitment. Subject to the terms and conditions of this Agreement, Lender agrees to
make term loans to Borrowers from time to time from the Closing Date and to, but not including, the
Termination Date in an aggregate principal amount not exceeding the Commitment. The Commitment is
not a revolving credit commitment, and no Borrower has the right to repay and reborrow hereunder.
Each Loan requested by a Borrower to be made on a single Business Day shall be for a minimum
principal amount set forth in the Supplement, except to the extent the remaining Commitment is a
lesser amount.

     2.2 Notes Evidencing Loans; Repayment. Each Loan shall be evidenced by a separate Note
executed by Borrowers payable to the order of Lender, in the total principal amount of the Loan.
Principal and interest of each Loan shall be payable at the times set forth in the Note and
regularly scheduled payments thereof and each Final Payment shall be effected by automatic debit of
the appropriate funds from Borrowers’ Primary Operating Account as specified in the Supplement
hereto.

     2.3 Procedures for Borrowing.

     (a) At least five (5) Business Days’ prior to a proposed Borrowing Date, Lender shall have
received a written notice of any request for borrowing hereunder (a “Borrowing Request”). Each
Borrowing Request shall be in substantially the form of Exhibit “B” to the Supplement,
shall be executed by a responsible executive or financial officer of the Parent on behalf of the
Borrowers, and shall state how much is requested, and shall be accompanied by such other
information and documentation as Lender may reasonably request, including the original executed
Note(s) for the Loan(s) covered by the Borrowing Request.

     (b) No later than 1:00 p.m. Pacific Standard Time on the Borrowing Date, if Borrowers have
satisfied the conditions precedent in Article 4, Lender shall make the Loan available to each such
applicable Borrower in immediately available funds.

     2.4 Interest. Except as otherwise specified in the applicable Note and/or the Supplement,
Basic Interest on the outstanding principal balance of each Loan shall accrue daily at the
Designated Rate from the Borrowing Date. If the outstanding principal balance of such Loan is not
paid at maturity, interest shall accrue at the Default Rate until paid in full, as further set
forth herein.

     2.5 Final Payment. Borrowers shall pay the Final Payment with respect to each Loan on the
date set forth in the Note evidencing such Loan.

     2.6 Interest Rate Calculation. Basic Interest, along with charges and fees under this
Agreement and any Loan Document, shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall a Borrower be obligated to pay Lender interest, charges or fees at a rate
in excess of the highest rate permitted by applicable law from time to time in effect.

     2.7 Default Interest. Any unpaid payments of principal or interest or the Final Payment with
respect to any Loan shall bear interest from their respective

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maturities, whether scheduled or accelerated, at the Designated Rate for such Loan plus
five percent (5.00%) per annum, until paid in full, whether before or after judgment (the “Default
Rate”). Each Borrower shall pay such interest on demand.

     2.8 Late Charges. If Borrowers are late in making any payment of principal or interest or
Final Payment under this Agreement by more than five (5) days, Borrowers agree to pay a late charge
of five percent (5%) of the installment due, but not less than fifty dollars ($50.00) for any one
such delinquent payment. This late charge may be charged by Lender for the purpose of defraying the
expenses incidental to the handling of such delinquent amounts. Borrowers acknowledge that such
late charge represents a reasonable sum considering all of the circumstances existing on the date
of this Agreement and represents a fair and reasonable estimate of the costs that will be sustained
by Lender due to the failure of Borrowers to make timely payments. Borrowers further agree that
proof of actual damages would be costly and inconvenient. Such late charge shall be paid without
prejudice to the right of Lender to collect any other amounts provided to be paid or to declare a
default under this Agreement or any of the other Loan Documents or from exercising any other rights
and remedies of Lender.

     2.9 Lender’s Records. Principal, Basic Interest, Final Payments and all other sums owed under
any Loan Document shall be evidenced by entries in records maintained by Lender for such purpose.
Each payment on and any other credits with respect to principal, Basic Interest, Final Payments and
all other sums outstanding under any Loan Document shall be evidenced by entries in such records.
Absent manifest error, Lender’s records shall be conclusive evidence thereof.

     2.10 Grant of Security Interests; Filing of Financing Statements.

          (a) To secure the timely payment and performance of all of the Obligations, subject to the
terms of the Supplement, each Borrower hereby grants to Lender a continuing security interest in, ,
all of the Collateral of such Borrower. In connection with the foregoing, each Borrower (i)
authorizes Lender to prepare and file any financing statements in the United States of America
describing the Collateral without otherwise obtaining such Borrower’s signature or consent with
respect to the filing of such financing statements; and (ii) agrees to assist in the filing or
recordation of such other documents or instruments as may be customary or reasonably required by
Lender in accordance with the laws of the jurisdiction where the Borrower or its Collateral is
located in order to create, maintain and/or perfect Lender’s Lien on such Collateral.

          (b) In furtherance of the Parent’s grant of the security interests in the Collateral pursuant
to Section 2.10(a) above, Parent hereby pledges, assigns and grants to Lender a security interest
in all the Shares, together with all proceeds and substitutions thereof, all cash, stock and other
moneys and 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 Lender, accompanied by an instrument of assignment duly executed in
blank by Parent, if and to the extent such Shares have been certificated. To the extent required
by the terms and conditions governing the Shares, Parent 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 and during the continuance of an Event of Default, Lender may effect the transfer of
any securities included in the Collateral (including but not limited to the Shares) into the name
of Lender and cause new certificates representing such securities to be issued in the name of
Lender or its transferee(s). Parent will execute and deliver such documents, and take or cause to
be taken such actions, as Lender may reasonably request to perfect or continue the perfection of
Lender’s security interest in the Shares, including delivering to Lender the certificate or
certificates for any Shares of any Subsidiary that were not certificated as of the Closing Date or
previously delivered to Lender. Unless and until an Event of Default shall have occurred and be
continuing, Parent 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.

          (c) Each Borrower is and shall remain absolutely and unconditionally liable, on a joint and
several basis, for the payment and performance of the Obligations under the Loan Documents,
including,

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without limitation, any deficiency by reason of the failure of the Collateral to satisfy all
amounts due Lender under any of the Loan Documents.

          (d) All Collateral pledged by each Borrower under this Agreement and any Supplement shall
secure the timely payment and performance of all Obligations under this Agreement, the Notes and
the other Loan Documents. Except as expressly provided in this Agreement, no Collateral pledged
under this Agreement or any Supplement shall be released until such time as all Obligations under
this Agreement and the other Loan Documents have been satisfied and paid in full.

     2.11 Withholding Adjustment. In the event any Borrower is required to deduct or withhold any
Taxes (hereinafter defined) from any Loan payment or other amount payable to Lender hereunder,
Borrowers agree to pay timely such additional amount as may be necessary to ensure that Lender
receives a net amount, free and clear of all Taxes, equal to the full amount which Lender would
have received had no such withholding been made. “Taxes” includes any present or future
tax, levy import, duty, charge, fee, deduction or withholding of any nature and whatever called, by
a government or other fiscal authority of any country, including any province thereof or
subdivision thereof, on whomever and whatever imposed, levied, collected, withheld or assessed, in
any event from or with respect of any amount payable to Lender. Borrowers shall, from time to time
and promptly after paying, depositing and/or filing such Tax, deliver to Lender receipts,
certificates or other proof evidencing the amounts (if any) paid or payable to the relevant
government or other fiscal authority in respect of such Taxes.

ARTICLE 3 — REPRESENTATIONS AND WARRANTIES

     Each Borrower represents and warrants that, except as set forth in the Supplement or any
schedule of exceptions executed by the parties, as of the Closing Date and each Borrowing Date:

     3.1 Due Organization. Each Borrower is a company or corporation duly organized and validly
existing in good standing under the laws of the jurisdiction (where such standing is legally
recognized) of its organization or incorporation, and is duly qualified to conduct business and is
in good standing in each other jurisdiction (where such standing is legally recognized) in which
its business is conducted or its properties are located, except where the failure to be in good
standing or so qualified would not reasonably be expected to have a Material Adverse Effect..

     3.2 Authorization, Validity and Enforceability. The execution, delivery and performance of
all Loan Documents executed by each Borrower are within each such Borrower’s corporate or company
powers, have been duly authorized, and are not in conflict with any Borrower’s certificate of
incorporation or by-laws, articles of association, or the terms of any charter or other
organizational document of any Borrower (each to the extent applicable), as amended from time to
time; and all such Loan Documents constitute valid and binding obligations of each Borrower,
enforceable in accordance with their terms (except as may be limited by bankruptcy, insolvency and
similar laws affecting the enforcement of creditors’ rights in general, and subject to general
principles of equity and subject to the satisfaction of the post-closing requirements set forth in
that certain side letter of Lender to Parent regarding the pledge of shares in Oculus Technologies
of Mexico, S.A. de C.V. and Oculus Innovative Sciences Netherlands B.V.)

     3.3 Compliance with Applicable Laws. Each Borrower has complied with all licensing, permit
and fictitious name requirements necessary to lawfully conduct the business in which it is engaged,
and to any sales, leases or the furnishing of services by each Borrower, including without
limitation those requiring consumer or other disclosures, the noncompliance with which would have a
Material Adverse Effect.

     3.4 No Conflict. The execution, delivery, and performance by each Borrower of all Loan
Documents are not in conflict with any law, rule, regulation, order or directive, or any indenture,
agreement, or undertaking to which each Borrower is a party or by which each Borrower may be bound
or affected. Without limiting the generality of the foregoing: the issuance of the Warrant to
Lender (or its designee) by Parent and the grant of registration rights in connection therewith do
not violate any agreement or instrument by which Parent is bound or require the consent of any
holders of Parent’s securities other than consents which have been obtained prior to the Closing
Date; and the grant by each Borrower of Liens in favor of Lender pursuant to Section 2.10 of this
Agreement does not violate any laws applicable to such Borrower or require the consent or approval
or any governmental authority having jurisdiction over such Borrower.

     3.5 No Litigation, Claims or Proceedings. There is no litigation, tax claim, proceeding or
dispute pending, or, to the knowledge of any Borrower,

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threatened against or affecting any Borrower, its property or the conduct of its business.

     3.6 Correctness of Financial Statements. The consolidated and consolidating financial
statements of Parent and its Subsidiaries which have been delivered to Lender fairly and accurately
reflect the financial condition of Parent and its Subsidiaries in accordance with GAAP as of the
latest date of such financial statements; and, since that date there has been no Material Adverse
Change.

     3.7 No Subsidiaries. Except as set forth on Schedule 3.7 hereto, no Borrower is a
majority owner of or in a control relationship with any other business entity.

     3.8 Environmental Matters. To its knowledge each Borrower has concluded that such Borrower is
in compliance with Environmental Laws, except to the extent a failure to be in such compliance
could not reasonably be expected to have a Material Adverse Effect.

     3.9 No Event of Default. No Default or Event of Default has occurred and is continuing.

     3.10 Full Disclosure. None of the representations or warranties made by any Borrower in the
Loan Documents as of the date such representations and warranties are made or deemed made, and none
of the statements contained in any exhibit, report, statement or certificate furnished by or on
behalf of any Borrower in connection with the Loan Documents (including disclosure materials
delivered by or on behalf of any Borrower to Lender prior to the Closing Date or pursuant to
Section 5.2 hereof), contains any untrue statement of a material fact or omits any material fact
required to be stated therein or necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading as of the time when made or delivered.

     3.11 Specific Representations Regarding Collateral.

     (a) Title. Except for the security interests created by this Agreement and Permitted Liens,
(i) each Borrower is and will be the unconditional legal and beneficial owner of the Collateral,
and (ii) the Collateral is genuine and subject to no Liens, rights or defenses of others. There
exist no prior assignments or encumbrances of record with the U.S. Patent and Trademark Office or
U.S. Copyright Office, or such other applicable offices where such assignments or encumbrances of
record are filed within the respective jurisdictions of the Borrowers affecting any Collateral in
favor of any third party other than Lender.

     (b) Rights to Payment. The names of the obligors, amount owing to each Borrower, due dates
and all other information with respect to the Rights to Payment are and will be correctly stated in
all material respects in all Records relating to the Rights to Payment. Each Borrower further
represents and warrants, to its knowledge, that each Person appearing to be obligated on a Right to
Payment has authority and capacity to contract and is bound as it appears to be.

     (c) Location of Collateral. Each Borrower’s chief executive office, Inventory, Records,
Equipment, and any other offices or places of business are located at the address(es) shown on the
Supplement.

     (d) Business Names. Other than its full corporate name, no Borrower has conducted business
using any trade names or fictitious business names except as shown on the Supplement.

     3.12 Copyrights, Patents, Trademarks and Licenses.

     (a) Each Borrower owns or is licensed or otherwise has the right to use all of the patents,
trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and
other similar rights that are reasonably necessary for the operation of its respective business,
without conflict with the rights of any other Person.

     (b) To each Borrower’s knowledge, no slogan or other advertising device, product, process,
method, substance, part or other material now employed, or now contemplated to be employed, by any
Borrower infringes upon any rights held by any other Person.

     (c) No claim or litigation regarding any of the foregoing is pending or, to each Borrower’s
knowledge, threatened, and no patent, invention, device, application, principle or any statute,
law, rule, regulation, standard or code is pending or proposed which, in either case, could
reasonably be expected to have a Material Adverse Effect.

     3.13 Regulatory Compliance. To the extent applicable to such Borrower, Borrower has met the
minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA.
No event has occurred resulting from such Borrower’s failure to comply with ERISA that is

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reasonably likely to result in such Borrower’s incurring any liability that could have a Material
Adverse Effect. No Borrower is an “investment company” or a company “controlled” by an “investment
company” within the meaning of the Investment Company Act of 1940. No Borrower is engaged
principally, or as one of its 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). Each Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act.

     3.14 Shares. Parent has full power and authority to create a first priority Lien on the
Shares, and no disability or contractual obligation exists that would prohibit Parent from pledging
the Shares pursuant to this Agreement. To Parent’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 Parent’s knowledge, the Shares are not
the subject of any present or threatened suit, action, arbitration, administrative or other
proceeding, and Parent knows of no reasonable grounds for the institution of any such proceedings.

     3.15 Survival. The representations and warranties of the Borrowers as set forth in this
Agreement survive the execution and delivery of this Agreement.

ARTICLE 4 — CONDITIONS PRECEDENT

     4.1 Conditions to First Loan. The obligation of Lender to make its first Loan hereunder is,
in addition to the conditions precedent specified in Section 4.2 and in any Supplement, subject to
the fulfillment of the following conditions and to the receipt by Lender of the documents described
below, duly executed and in form and substance satisfactory to Lender and its counsel:

     (a) Resolutions. A certified copy of the resolutions of the Board of Directors and
shareholders of each Borrower, as applicable, of each Borrower authorizing the execution, delivery
and performance by each such Borrower of the Loan Documents.

     (b) Incumbency and Signatures. A certificate of the secretary of each Borrower certifying the
names of the officer or officers of each Borrower authorized to sign the Loan Documents, together
with a sample of the true signature of each such officer.

     (c) Legal Opinion. The opinion of legal counsel for Parent in the form of Exhibit H attached
to the Supplement.

     (d) Organizational Documents. Copies of the charter and organizational documents (e.g.,
certificate or articles of incorporation or association and bylaws) of each Borrower, as amended
through the Closing Date, certified by each Borrower as being true, correct and complete.

     (e) This Agreement. Original counterparts of this Agreement and an initial Supplement, with
all schedules completed and attached thereto, and disclosing such information as is acceptable to
Lender.

     (f) Lien Perfection Documents. Filing copies (or other evidence of filing satisfactory to
Lender and its counsel) of such UCC financing statements, foreign lien/charge registrations,
collateral assignments, account control agreements, and termination statements, with respect to the
Collateral as Lender shall request.

     (g) Intentionally Omitted.

     (h) Lien Searches. UCC lien, judgment, bankruptcy and tax lien searches of each Borrower from
such jurisdictions or offices as Lender may reasonably request, all as of a date reasonably
satisfactory to Lender and its counsel.

     (i) Good Standing Certificate. A certificate of status or good standing of each Borrower as
of a date acceptable to Lender from the jurisdiction of each Borrower’s organization and any
foreign jurisdictions where each such Borrower is qualified to do business.

     (j) Warrant. A warrant issued by Parent to Lender (or its designee) exercisable for such
number, type and class of shares of such issuer’s capital stock, and for an initial exercise price
as is specified in the Supplement.

     (k) Pledge by Aquamed. The pledge agreement by Aquamed Technologies, Inc., a California
corporation of its shares of stock in Oculus Technologies of Mexico S.A. de C.V.

     (l) Other Documents. Such other documents and instruments as Lender may reasonably request to
effectuate the intents and purposes of this Agreement,

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including the certificate or certificates for the Shares, accompanied by an instrument of
assignment or stock power duly executed in blank.

     4.2 Conditions to All Loans. The obligation of Lender to make its initial Loan and each
subsequent Loan is subject to any additional conditions precedent specified in the Supplement and
the following further conditions precedent that:

     (a) No Default. No Default or Event of Default has occurred and is continuing or will result
from the making of any such Loan, and the representations and warranties of Borrowers contained in
Article 3 of this Agreement and Part 3 of the Supplement are true and correct as of the Borrowing
Date of such Loan.

     (b) No Material Adverse Change. No event has occurred that has had or could reasonably be
expected to have a Material Adverse Change.

     (c) Borrowing Request. Borrowers shall have delivered to Lender a Borrowing Request for such
Loan.

     (d) Note. Each Borrower shall have delivered an original executed Note evidencing such Loan,
substantially in the form attached to the Supplement.

     (e) Supplemental Lien Filings. Each Borrower shall have executed and delivered such
amendments or supplements to this Agreement and additional Security Documents, any required filings
or registrations for lien perfection under foreign law, financing statements and third party
waivers as Lender may reasonably request in connection with the proposed Loan, in order to create,
protect or perfect or to maintain the perfection of Lender’s Liens on the Collateral.

     (f) VCOC Limitation. Lender shall not be obligated to make any Loan under its Commitment if
at the time of or after giving effect to the proposed Loan Lender would no longer qualify as: (A)
a “venture capital operating company” under U.S. Department of Labor Regulations Section
2510.3-101(d), Title 29 of the Code of Federal Regulations, as amended; and (B) a “business
development company” under the provisions of federal Investment Company Act of 1940, as amended;
and (C) a “regulated investment company” under the provisions of the Internal Revenue Code of 1986,
as amended.

     (g) Financial Projections. Parent shall have delivered to Lender each such Borrower’s
business plan and/or financial projections or forecasts as most recently approved by Parent’s Board
of Directors.

ARTICLE 5 — AFFIRMATIVE COVENANTS

     During the term of this Agreement and until its performance of all Obligations, each Borrower
will:

     5.1 Notice to Lender. Promptly give written notice to Lender of:

     (a) Any litigation or administrative or regulatory proceeding affecting any Borrower where the
amount claimed against any Borrower is at the Threshold Amount or more, or where the granting of
the relief requested could have a Material Adverse Effect; or of the acquisition by any Borrower of
any commercial tort claim, including brief details of such claim and such other information as
Lender may reasonably request to enable Lender to better perfect its Lien in such commercial tort
claim as Collateral.

     (b) Any substantial dispute which may exist between any Borrower or any governmental or
regulatory authority.

     (c) The occurrence of any Default or any Event of Default.

     (d) Any change in the location of any of Borrowers’ places of business or Collateral at least
thirty (30) days in advance of such change, or of the establishment of any new, or the
discontinuance of any existing, place of business.

     (e) Any dispute or default by any Borrower or any other party under any joint venture,
partnering, distribution, cross-licensing, strategic alliance, collaborative research or
manufacturing, license or similar agreement which could reasonably be expected to have a Material
Adverse Effect.

     (f) Any other matter which has resulted or might reasonably result in a Material Adverse
Change.

     5.2 Financial Statements. Deliver to Lender or cause to be delivered to Lender, in form and
detail satisfactory to Lender the following financial and other information, which each Borrower
warrants shall be accurate and complete in all material respects:

     (a) Monthly Financial Statements. As soon as available but no later than thirty (30) days
after the end of each month, Parent’s and its Subsidiaries’ unaudited

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balance sheet as of the end of such period, and Parent’s and its Subsidiaries’ unaudited income
statement and unaudited cash flow statement for such period and for that portion of Parent’s and
its Subsidiaries’ financial reporting year ending with such period, on a consolidated and
consolidating basis, prepared in accordance with GAAP, and attested by a responsible financial
officer of Parent as being complete and correct and fairly presenting the consolidated financial
condition and the results of operations of Parent and its Subsidiaries.

     (b) Year-End Financial Statements. As soon as available but no later than one hundred twenty
(120) days after and as of the end of each financial reporting year, starting on the financial
reporting year ending March 31, 2006 or any prior year that Parent’s Board of Director’s directs
audited statements to be produced a complete copy of Parent’s and its Subsidiaries’ audit report,
which shall include balance sheet, income statement, statement of changes in equity and statement
of cash flows for such year, on a consolidated and consolidating basis, prepared in accordance with
GAAP and certified by an independent certified public accountant selected by Parent and
satisfactory to Lender (the “Accountant”). The Accountant’s certification shall not be qualified
or limited due to a restricted or limited examination by the Accountant of any material portion of
Parent’s records or otherwise. For its financial reporting year ended March 31, 2005, if
applicable, Parent shall furnish company prepared annual financial statements to Lender as
otherwise required above.

     (c) Compliance Certificates. Simultaneously with the delivery of each set of financial
statements referred to in paragraphs (a) and (b) above, a certificate of the chief financial
officer of each Borrower substantially in the form of Exhibit “C” to the Supplement, (i)
setting forth in reasonable detail any calculations required to establish whether Borrowers are in
compliance with any financial covenants or tests set forth in the Supplement, and (ii) stating
whether any Default or Event of Default exists on the date of such certificate, and if so, setting
forth the details thereof and the action which each such Borrower is taking or proposes to take
with respect thereto.

     (d) Government Required Reports; Press Releases. Promptly after sending, issuing, making
available, or filing, copies of all statements released to any news media for publication, all
reports, proxy statements, and financial statements that any Borrower sends or makes available to
its stockholders, and, not later than five (5) days after actual filing or the date such filing was
first due, all registration statements and reports that Borrower files or is required to file with
the Securities and Exchange Commission, or any other governmental or regulatory authority.

     (e) Other Information. Such other statements, lists of property and accounts, budgets,
forecasts, sales projections, operating plans, reports, or other financial information as Lender
may from time to time reasonably request.

     5.3 Managerial Assistance from Lender. Permit Lender to substantially participate in, and
substantially influence the conduct of management of Parent through the exercise of “management
rights,” as that term is defined in 29 C.F.R. § 2510.3-101(d), including without limitation the
following rights:

     (a) Each Borrower agrees that (i) it will make its officers, directors, employees and
affiliates available at such times as Lender may reasonably request for Lender to consult with and
advise as to the conduct of Borrower’s business, its equipment and financing plans, and its
financial condition and prospects, (ii) Lender shall have the right to inspect Borrowers’ books,
records, facilities and properties at reasonable times during normal business hours on reasonable
advance notice, and (iii) Lender shall be entitled to recommend prospective candidates for election
or nomination for election to Parent’s Board of Directors and Parent shall give due consideration
to (but shall not be bound by) such recommendations, it being the intention of the parties that
Lender shall be entitled through such rights, inter alia, to furnish “significant managerial
assistance”, as defined in Section 2(a)(47) of the Investment Company Act of 1940, to each
Borrower.

     (b) Without limiting the generality of (a) above, if Lender reasonably believes that financial
or other developments affecting any Borrower have impaired or are likely to impair such Borrower’s
ability to perform its obligations under this Agreement, permit Lender reasonable access to such
Borrower’s management and/or Board of Directors and opportunity to present Lender’s views with
respect to such developments.

Lender shall cooperate with each Borrower to ensure that the exercise of Lender’s rights shall not
disrupt the business of such Borrower. The rights enumerated above shall not be construed as
giving Lender control over any Borrower’s management or policies.

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     5.4 Existence. Maintain and preserve each Borrower’s existence, present form of business, and
all rights and privileges necessary or desirable in the normal course of its business; and keep all
Borrowers’ property in good working order and condition, ordinary wear and tear excepted.

     5.5 Insurance. Obtain and keep in force insurance in such amounts and types as is usual in
the type of business conducted by each Borrower, with insurance carriers having a policyholder
rating of not less than “A” and financial category rating of Class VII in “Best’s Insurance Guide,”
unless otherwise approved by Lender. Such insurance policies must be in form and substance
satisfactory to Lender, and shall list Lender as an additional insured or loss payee, as
applicable, on endorsement(s) in form reasonably acceptable to Lender. Each Borrower shall furnish
to Lender such endorsements, and upon Lender’s request, copies of any or all such policies.

     5.6 Accounting Records. Maintain adequate books, accounts and records, and prepare all
financial statements in accordance with GAAP (or similar standards under foreign law or practice
applicable to Borrower), and in compliance with the regulations of any governmental or regulatory
authority having jurisdiction over any Borrower or any such Borrower’s business; and permit
employees or agents of Lender at such reasonable times as Lender may request, During such
Borrower’s normal business hours, to inspect each Borrower’s properties, and to examine, and make
copies and memoranda of each Borrower’s books, accounts and records if Lender reasonably believes
the Collateral has been impaired.

     5.7 Compliance With Laws. Comply with all laws (including Environmental Laws), rules,
regulations applicable to, and all orders and directives of any governmental or regulatory
authority having jurisdiction over, any Borrower or any such Borrower’s business, and with all
material agreements to which any Borrower is a party, except where the failure to so comply would
not have a Material Adverse Effect.

     5.8 Taxes and Other Liabilities. Pay all of each Borrower’s Indebtedness when due; pay all
taxes and other governmental or regulatory assessments before delinquency or before any penalty
attaches thereto, except as may be contested in good faith by the appropriate procedures and for
which such Borrower shall maintain appropriate reserves; and timely file all required tax returns.

     5.9 Special Collateral Covenants.

     (a) Maintenance of Collateral; Inspection. Do all things reasonably necessary to maintain,
preserve, protect and keep all Collateral in good working order and salable condition, ordinary
wear and tear excepted, deal with the Collateral in all ways as are considered good practice by
owners of like property, and use the Collateral lawfully and, to the extent applicable, only as
permitted by each Borrower’s insurance policies. Maintain, or cause to be maintained, complete and
accurate Records relating to the Collateral. Upon reasonable prior notice at reasonable times
during normal business hours, each Borrower hereby authorizes Lender’s officers, employees,
representatives and agents to inspect the Collateral and to discuss the Collateral and the Records
relating thereto with each such Borrower’s officers and employees, and, in the case of any Right to
Payment, with any Person which is or may be obligated thereon.

     (b) Ownership of Subsidiaries. Not sell, transfer, encumber or otherwise dispose of all or
any portion of Parent’s ownership interest in any Subsidiary.

     (c) Liens. Not create, incur, assume or permit to exist any Lien or grant any other Person a
negative pledge on any Collateral, except Permitted Liens.

     (d) Documents of Title. Not sign or authorize the signing of any financing statement or
other document naming any Borrower as debtor or obligor, or acquiesce or cooperate in the issuance
of any bill of lading, warehouse receipt or other document or instrument of title with respect to
any Collateral, except those negotiated to Lender, or those naming Lender as secured party, or if
solely to create, perfect or maintain a Permitted Lien.

     (e) Change in Location or Name. Without at least 30 days’ prior written notice to Lender:
(a) not relocate any Collateral or Records, its chief executive office, or establish a place of
business at a location other than as specified in the Supplement; and (b) not change its name,
mailing address, location of Collateral, jurisdiction of incorporation or its legal structure.

     (f) Decals, Markings. At the request of Lender, firmly affix a decal, stencil or other
marking to designated items of Equipment, indicating thereon the security interest of Lender.

     (g) Agreement With Real Property Owner/Landlord. Obtain and maintain such

8

 

acknowledgments, consents, waivers and agreements (each, a “Waiver”) from the owner, lienholder,
mortgagee and landlord (each, a “Landlord”) with respect to any real property on which Collateral
is located as Lender may require, all in form and substance satisfactory to Lender, if Lender
advises Borrower that such real property is located in a jurisdiction that provides for statutory
landlord’s liens or where the lease for such real property grants to the Landlord a Lien on such
Borrower’s personal property. In all other cases, each Borrower agrees it will use commercially
reasonable efforts to obtain a Waiver from the Landlord if requested by Lender.

     (h) Certain Agreements on Rights to Payment. Other than in the ordinary course of business,
not make any material discount, credit, rebate or other reduction in the original amount owing on a
Right to Payment or accept in satisfaction of a Right to Payment less than the original amount
thereof.

     5.10 Authorization for Automated Clearinghouse Funds Transfer. (i) Authorize Lender to
initiate debit entries to the Primary Operating Account, specified in the Supplement hereto,
through Automated Clearinghouse (“ACH”) transfers, in order to satisfy the Obligations; (ii)
provide Lender at least thirty (30) days notice of any change in the Primary Operating Account; and
(iii) grant Lender any additional authorizations necessary to begin ACH debits from a new account
which becomes the Primary Operating Account.

ARTICLE 6 — NEGATIVE COVENANTS

     During the term of this Agreement and until the performance of all Obligations, each Borrower
will not, and will not permit any Subsidiary to:

     6.1 Indebtedness. Be indebted for borrowed money, the deferred purchase price of property, or
leases which would be capitalized in accordance with GAAP; or become liable as a surety, guarantor,
accommodation party or otherwise for or upon the obligation of any other Person, except:

     (a) Indebtedness incurred for the acquisition of supplies or inventory on normal trade credit;

     (b) Indebtedness incurred pursuant to one or more transactions permitted under Section
6.4;

     (c) Indebtedness of any Borrower under this Agreement;

     (d) Indebtedness in the form of bridge loans, provided such Indebtedness shall be subordinated
to the Obligations on terms and conditions acceptable to Lender, including without limiting the
generality of the foregoing, subordination of such Indebtedness in right of payment to the prior
payment in full of the Obligations, and the subordination of the priority of any Lien at any time
securing such Indebtedness to the Liens of Lender in the collateral covered thereby;

     (e) Subordinated Debt;

     (f) Intercompany Indebtedness among Borrowers;

     (g) any Indebtedness existing on the Closing Date as shown on Schedule 6.1, and

     (h) Indebtedness permitted under the terms of the Supplement.

     6.2 Liens. Create, incur, assume or permit to exist any Lien, or grant any other Person a
negative pledge, on any of Borrowers’ or such Subsidiary’s property, except Permitted Liens. Each
Borrower and Lender agree that this covenant is not intended to constitute a lien, deed of trust,
equitable mortgage, or security interest of any kind on any of each Borrower’s real property, and
this Agreement shall not be recorded or recordable. Notwithstanding the foregoing, however,
violation of this covenant by any Borrower shall constitute an Event of Default. Without limiting
the generality of the foregoing, and as a material inducement to the Lender’s making of the
Commitment and entering into the Loan Documents, each Borrower agrees that (i) it shall not assign,
mortgage, pledge, grant a security interest in, or encumber any of such Borrower’s Intellectual
Property, and (ii) it shall not permit the inclusion in any agreement, document, instrument or
other arrangement with any Person (except with or in favor of Lender) which directly or indirectly
prohibits or has the effect of prohibiting such Borrower from assigning, mortgaging, pledging,
granting a security interest in or upon, or encumbering any of such Borrower’s Intellectual
Property, except as is otherwise permitted in Section 6.5(i) or (ii) of this Agreement, or would
otherwise be a “Permitted Lien” hereunder.

     6.3 Dividends. Except after a Qualified Public Offering, pay any dividends or purchase,
redeem or

9

 

otherwise acquire or make any other distribution with respect to any of each Borrower’s capital
stock, except: (a) dividends or other distributions solely of capital stock of each such Borrower;
(b) so long as no Event of Default has occurred and is continuing, (i) repurchases of Parent’s
stock from its employees upon termination of employment under reverse vesting or similar repurchase
plans not to exceed $100,000 in any calendar year; (ii) dividends required to be paid to the
Parent’s Series A Preferred Stockholders pursuant to the Amended and Restated Articles of
Incorporation in force at the time of the execution of this Agreement and (c) any Subsidiary of
Parent may pay dividends to Parent from time to time so long as such funds are not further
distributed to any equity holders of Parent.

     6.4 Changes/Mergers. Liquidate or dissolve; or enter into any consolidation, merger or other
combination in which the stockholders of any Borrower immediately prior to the first such
transaction own less than 50% of the voting stock of any such Borrower immediately after giving
effect to such transaction or related series of such transactions, except that any such Borrower
may consolidate or merge so long as: (A) the entity that results from such merger or consolidation
(the “Surviving Entity”) shall have executed and delivered to Lender an agreement in form and
substance reasonably satisfactory to Lender, containing an assumption by the Surviving Entity of
the due and punctual payment and performance of all Obligations and performance and observance of
each covenant and condition of such Borrower in the Loan Documents; (B) all such obligations of the
Surviving Entity to Lender shall be guaranteed by any entity that directly or indirectly owns or
controls more than 50% of the voting stock of the Surviving Entity; (C) immediately after giving
effect to such merger or consolidation, no Event of Default or, event which with the lapse of time
or giving of notice or both, would result in an Event of Default shall have occurred and be
continuing; and (D) the credit risk to Lender, in its reasonable discretion, of the Surviving
Entity shall not be increased. In determining whether the proposed merger or consolidation would
result in an increased credit risk, Lender may consider, among other things, changes in such
Borrower’s management team, employee base, access to equity markets, venture capital support,
financial position and/or disposition of intellectual property rights which may reasonably be
anticipated as a result of the transaction.

     Notwithstanding anything to the contrary in this Section 6.4, (i) changes in ownership
resulting from additional bona fide private equity financings by financial investors shall be
permitted (subject to the covenants of Section 6.13 hereof), and (ii) Parent shall be permitted (A)
to liquidate or dissolve any Subsidiary in a transaction pursuant to which all of the assets of
such Subsidiary are transferred to Parent, and (B) merge with or into a Subsidiary in a transaction
in which Parent is the surviving entity

     6.5 Sales of Assets. Sell, transfer, lease, license or otherwise dispose of (a “Transfer”) any
Borrower’s or Subsidiary’s assets (including, without limitation, shares of stock and indebtedness
of any Subsidiary) except: (i) non-exclusive licenses of Intellectual Property in the ordinary
course of business consistent with industry practice or as permitted elsewhere in this Agreement or
the other Loan Documents; (ii) exclusive licenses of Intellectual Property granted by Borrower in
the ordinary course of business to a distributor or licensee with respect to one or more fields of
use which when taken alone or together do not constitute a major portion of the existing uses of
Grantor’s Intellectual Property and approved by the Board of Directors; (iii) Transfers of
worn-out, obsolete or surplus property (each as determined by each Borrower in its reasonable
judgment); (iv) Transfers of Inventory; (v) Transfers constituting Permitted Liens; (vi) Transfers
permitted in Section 6.6 hereunder; and (vii) Transfers of Collateral (other than Intellectual
Property) for fair consideration and in the ordinary course of its business.

     6.6 Loans/Investments. Make or suffer to exist any loans, guaranties, advances, or
investments, except:

     (a) accounts receivable in the ordinary course of business;

     (b) investments in domestic certificates of deposit issued by, and other domestic investments
with, financial institutions organized under the laws of the United States or a state thereof,
having at least One Hundred Million Dollars ($100,000,000) in capital and a rating of at least
“investment grade” or “A” by Moody’s or any successor rating agency;

     (c) investments in marketable obligations of the United States of America and in open market
commercial paper rated A1 or P1 and floating rate preferred rated AAA by a national credit agency
and maturing not more than one year from the creation thereof;

     (d) temporary advances to cover incidental expenses to be incurred in the ordinary course of
business;

10

 

     (e) investments in joint ventures, strategic alliances, licensing and similar arrangements
customary in each Borrower’s industry and which do not require such Borrower to assume or otherwise
become liable for the obligations of any third party not directly related to or arising out of such
arrangement or, without the prior written consent of Lender, require such Borrower to transfer
ownership of non-cash assets to such joint venture or other entity; and

     (f) Investments in and loans to Subsidiaries of Parent.

     6.7 Transactions With Related Persons. Directly or indirectly enter into any transaction with
or for the benefit of a Related Person on terms more favorable to the Related Person than would
have been obtainable in an “arms’ length” dealing.

     6.8 Other Business. Engage in any material line of business other than the business any
Borrower conducts or contemplates conducting as of the Closing Date.

     6.9 Compliance. Become an “investment company” or 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 Loan for such purpose. Fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur, fail to comply with the Federal Fair Labor Standards
Act or violate any law or regulation, which violation could have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Lender’s Lien on the Collateral, or
permit any of its subsidiaries to do any of the foregoing.

     6.10 Other Deposit and Securities Accounts. Maintain any Deposit Accounts or accounts holding
securities except (i) Deposit Accounts and investment/securities accounts as set forth in the
Supplement, and (ii) other Deposit Accounts and securities/investment accounts, in each case, with
respect to which each Borrower and Lender shall have taken such action as Lender reasonably deems
necessary to obtain a perfected first security interest therein.

     6.11 Subsidiaries. Cause or permit a Subsidiary to issue any additional Shares, unless the
same have been pledged to Lender as part of the Collateral. In addition, Parent will not allow its
wholly owned subsidiary Aquamed Technologies, Inc., a California corporation, to engage in any
business or incur any Indebtedness after the Closing Date.

     6.12 Financing Statements and Other Actions. Fail to execute and deliver to Lender all
financing statements, account control agreements, notices and other documents (including, without
limitation, any filings with the United States Patent and Trademark Office,) from time to time
reasonably requested by Lender or as necessary in order to maintain either (i) a first priority
fixed or floating security interest in the Collateral, or (ii) a first perfected security interest
in the Collateral, in favor of Lender, except in each case to the extent a Permitted Lien is
permitted to be senior to Lender’s security interests; perform such other acts, and execute and
deliver to Lender such additional conveyances, assignments, agreements and instruments, as Lender
may at any time reasonably request.

     6.13 Stock Ownership Allow any Person or two or more Persons acting in concert to acquire
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission)
of fifty percent (50%) or more of the outstanding shares of voting stock of Borrower.

ARTICLE 7 — EVENTS OF DEFAULT

     7.1 Events of Default; Acceleration. Upon the occurrence and during the continuation of any
Default, the obligation of Lender to make any additional Loan shall be suspended. The occurrence
of any of the following (each, an “Event of Default”) shall terminate any obligation of Lender to
make any additional Loan; and shall, at the option of Lender (1) make all sums of Basic Interest
and principal, all Final Payments and any Obligations and other amounts owing under any Loan
Documents immediately due and payable without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor or any other notices or demands, and (2) give Lender
the right to exercise any other right or remedy provided by contract or applicable law:

     (a) Borrowers shall fail to pay any principal, interest or Final Payment under this Agreement
or any Note, or fail to pay any fees or other charges when due under any Loan Document, and such
failure continues for five (5) Business Days or more after the same first

11

 

becomes due; or an Event of Default as defined in any other Loan Document shall have occurred.

     (b) Any representation or warranty made, or financial statement, certificate or other document
provided, by any Borrower under any Loan Document shall prove to have been false or misleading in
any material respect when made or deemed made herein.

     (c) Any Borrower shall fail to pay its debts generally as they become due or shall commence
any Insolvency Proceeding with respect to itself; an involuntary Insolvency Proceeding shall be
filed against any Borrower, or a custodian, receiver, trustee, assignee for the benefit of
creditors, or other similar official, shall be appointed to take possession, custody or control of
the properties of any Borrower, and such involuntary Insolvency Proceeding, petition or appointment
is acquiesced to by any Borrower or is not dismissed within sixty (60) days; or the dissolution or
termination of the business of any Borrower.

     (d) Any Borrower shall be in default beyond any applicable period of grace or cure under any
other agreement involving the borrowing of money, the purchase of property, the advance of credit
or any other monetary liability of any kind to Lender or to any Person which results in the
acceleration of payment of such obligation in an amount in excess of the Threshold Amount.

     (e) Any governmental or regulatory authority shall take any judicial or administrative action,
or any defined benefit pension plan maintained by any Borrower shall have any unfunded liabilities,
any of which, in the reasonable judgment of Lender, might have a Material Adverse Effect.

     (f) Any sale, transfer or other disposition of all or a substantial or material part of the
assets of any Borrower, including without limitation to any trust or similar entity, shall occur,
except as permitted by Section 6.5.

     (g) Any judgment(s) singly or in the aggregate in excess of the Threshold Amount shall be
entered against any Borrower which remain unsatisfied, unvacated or unstayed pending appeal for ten
(10) or more days after entry thereof.

     (i) Any Borrower shall fail to perform or observe any covenant contained in Article 6 of this
Agreement.

     (h) (Intentionally Omitted.)

     (j) Any Borrower shall fail to perform or observe any material covenant contained in Article 5
or elsewhere in this Agreement or any other Loan Document (other than a covenant which is dealt
with specifically elsewhere in this Article 7) and, if capable of being cured, the breach of such
covenant is not cured within 30 days after the sooner to occur of such Borrower’s receipt of notice
of such breach from Lender or the date on which such breach first becomes known to any officer of
such Borrower; provided, however that if such breach is not capable of being cured
within such 30-day period and such Borrower timely notifies Lender of such fact and such Borrower
diligently pursues such cure, then the cure period shall be extended to the date requested in such
Borrower’s notice but in no event more than 90 days from the initial breach; provided,
further, that such additional 60-day opportunity to cure shall not apply in the case of any
failure to perform or observe any covenant which has been the subject of a prior failure within the
preceding 180 days or which is a willful and knowing breach by Borrower.

     7.2 Remedies Upon Default. Upon the occurrence and during the continuance of an Event of
Default, Lender shall be entitled to, at its option, exercise any or all of the rights and remedies
available to a secured party under the UCC or any other applicable law, and exercise any or all of
its rights and remedies provided for in this Agreement and in any other Loan Document. The
obligations of Borrowers under this Agreement shall continue to be effective or be reinstated, as
the case may be, if at any time any payment of any Obligations is rescinded or must otherwise be
returned by Lender upon, on account of, or in connection with, the insolvency, bankruptcy or
reorganization of any Borrower or otherwise, all as though such payment had not been made.

     7.3 Sale of Collateral. Upon the occurrence and during the continuance of an Event of
Default, Lender may, subject to the provisions contained in the UCC and other applicable law, rules
or regulations, sell all or any part of the Collateral, at public or private sales, to itself, a
wholesaler, retailer or investor, for cash, upon credit or for future delivery, and at such price
or prices as are commercially reasonable. Any such public or private sales shall be held at such
times and at such place(s) as Lender may determine. In case of the sale of all or any part of the
Collateral on credit or for future delivery, the Collateral so sold may be retained by Lender until
the selling price is paid by the purchaser, but Lender shall not incur any liability in case of the
failure of such purchaser to pay for the Collateral and,

12

 

in case of any such failure, such Collateral may be resold. Lender may, instead of exercising its
power of sale, proceed to enforce its security interest in the Collateral by seeking a judgment or
decree of a court of competent jurisdiction. Without limiting the generality of the foregoing, if
an Event of Default is in effect,

     (1) Subject to the rights of any third parties, Lender may license, or sublicense, whether
general, special or otherwise, and whether on an exclusive or non-exclusive basis, any Copyrights,
Patents or Trademarks included in the Collateral throughout the world for such term or terms, on
such conditions and in such manner as Lender shall in its sole discretion determine;

     (2) Lender may (without assuming any obligations or liability thereunder), at any time and
from time to time, enforce (and shall have the exclusive right to enforce) against any licensee or
sublicensee all rights and remedies of any Borrower in, to and under any Copyright Licenses, Patent
Licenses or Trademark Licenses and take or refrain from taking any action under any thereof, and
each Borrower hereby releases Lender from, and agrees to hold Lender free and harmless from and
against any claims arising out of, any lawful action so taken or omitted to be taken with respect
thereto other than claims arising out of Lender’s gross negligence or willful misconduct; and

     (3) Upon request by Lender, each Borrower will execute and deliver to Lender a power of
attorney, in form and substance reasonably satisfactory to Lender for the implementation of any
lease, assignment, license, sublicense, grant of option, sale or other disposition of a Copyright,
Patent or Trademark. In the event of any such disposition pursuant to this clause 3,
Borrowers shall supply their know-how and expertise relating to the products or services made or
rendered in connection with Patents, the manufacture and sale of the products bearing Trademarks,
and its customer lists and other records relating to such Copyrights, Patents or Trademarks and to
the distribution of said products, to Lender.

     (4) If, at any time when Lender shall determine to exercise its right to sell the whole or any
part of the Shares hereunder, such Shares or the part thereof to be sold shall not, for any reason
whatsoever, be effectively registered under the Securities Act (or any similar statute), then
Lender may, in its discretion (subject only to applicable requirements of law), sell such Shares or
part thereof by private sale in such manner and under such circumstances as Lender may deem
necessary or advisable, but subject to the other requirements of this Article 7, and shall
not be required to effect such registration or to cause the same to be effected. Without limiting
the generality of the foregoing, in any such event, Lender in its discretion may (i) in accordance
with applicable securities laws proceed to make such private sale notwithstanding that a
registration statement for the purpose of registering such Shares or part thereof could be or shall
have been filed under the Securities Act (or similar statute), (ii) approach and negotiate with a
single possible purchaser to effect such sale, and (iii) restrict such sale to a purchaser who is
an accredited investor under the Securities Act and who will represent and agree that such
purchaser is purchasing for its own account, for investment and not with a view to the distribution
or sale of such Shares or any part thereof. In addition to a private sale as provided above in
this Article 7, if any of the Shares shall not be freely distributable to the public
without registration under the Securities Act (or similar statute) at the time of any proposed sale
pursuant to this Article 7, then Lender shall not be required to effect such registration
or cause the same to be effected but, in its discretion (subject only to applicable requirements of
law), may require that any sale hereunder (including a sale at auction) be conducted subject to
restrictions:

	 	 	(A) as to the financial sophistication and ability of any Person permitted to bid or
purchase at any such sale;
	 
	 	 	(B) as to the content of legends to be placed upon any certificates representing the Shares
sold in such sale, including restrictions on future transfer thereof;
	 
	 	 	(C) as to the representations required to be made by each Person bidding or purchasing at
such sale relating to such Person’s access to financial information about Parent or any of
its Subsidiaries and such Person’s intentions as to the holding of the Shares so sold for
investment for its own account and not with a view to the distribution thereof; and
	 
	 	 	(D) as to such other matters as Lender may, in its discretion, deem necessary or appropriate
in order that such sale (notwithstanding any failure so to register) may be effected in
compliance with the Bankruptcy Code and other laws affecting the enforcement of creditors’
rights and the Securities Act and all applicable state

13

 

	    	 	securities laws.

     (5) Borrowers recognize that Lender may be unable to effect a public sale of any or all the
Shares and may be compelled to resort to one or more private sales thereof in accordance with
clause (4) above. Borrowers also acknowledge that any such private sale may result in
prices and other terms less favorable to the seller than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall not be deemed to have
been made in a commercially unreasonable manner solely by virtue of such sale being private.
Lender shall be under no obligation to delay a sale of any of the Shares for the period of time
necessary to permit the applicable Subsidiary to register such securities for public sale under the
Securities Act, or under applicable state securities laws, even if such Borrower and/or the
Subsidiary would agree to do so

     7.4 Borrowers’ Obligations Upon Default. Upon the request of Lender after the occurrence and
during the continuance of an Event of Default, each Borrower will:

     (a) Assemble and make available to Lender the Collateral at such place(s) as Lender shall
reasonably designate, segregating all Collateral so that each item is capable of identification;
and

     (b) Subject to the rights of any lessor, permit Lender, by Lender’s officers, employees,
agents and representatives, to enter any premises where any Collateral is located, to take
possession of the Collateral, to complete the processing, manufacture or repair of any Collateral,
and to remove the Collateral, or to conduct any public or private sale of the Collateral, all
without any liability of Lender for rent or other compensation for the use of Borrowers’ premises.

ARTICLE 8 — SPECIAL COLLATERAL PROVISIONS

     8.1 Intentionally Omitted.

     8.2 Performance of Borrowers’ Obligations. Without having any obligation to do so, upon
reasonable prior notice to any Borrower, Lender may perform or pay any obligation which any
Borrower has agreed to perform or pay under this Agreement, including, without limitation, the
payment or discharge of taxes or Liens levied or placed on or threatened against the Collateral.
In so performing or paying, Lender shall determine the action to be taken and the amount necessary
to discharge such obligations. Borrowers shall reimburse Lender on demand for any amounts paid by
Lender pursuant to this Section, which amounts shall constitute Obligations secured by the
Collateral and shall bear interest from the date of demand at the Default Rate.

     8.3 Power of Attorney. For the purpose of protecting and preserving the Collateral and
Lender’s rights under this Agreement, each Borrower hereby irrevocably appoints Lender, with full
power of substitution, as its attorney-in-fact with full power and authority, after the occurrence
and during the continuance of an Event of Default, to do any act which each such Borrower is
obligated to do hereunder; to exercise such rights with respect to the Collateral as each such
Borrower might exercise; to use such Inventory, Equipment, Fixtures or other property as each such
Borrower might use; to enter each Borrower’s premises; to give notice of Lender’s security interest
in, and to collect the Collateral; and before or after Default, to execute and file in each such
Borrower’s name any financing statements, amendments and continuation statements necessary or
desirable to perfect or continue the perfection of Lender’s security interests in the Collateral.
Each Borrower hereby ratifies all that Lender shall lawfully do or cause to be done by virtue of
this appointment.

     8.4 Authorization for Lender to Take Certain Action. The power of attorney created in Section
8.3 is a power coupled with an interest and shall be irrevocable. The powers conferred on Lender
hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon
Lender to exercise such powers. Lender shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and in no event shall Lender or any of its
directors, officers, employees, agents or representatives be responsible to any Borrower for any
act or failure to act, except for gross negligence or willful misconduct. After the occurrence and
during the continuance of an Event of Default, Lender may exercise this power of attorney without
notice to or assent of any Borrower, in the name of each Borrower, or in Lender’s own name, from
time to time in Lender’s sole discretion and at Borrowers’ expense. To further carry out the terms
of this Agreement, after the occurrence and during the continuance of an Event of Default, Lender
may:

     (a) Execute any statements or documents or take possession of, and endorse and collect and
receive delivery or payment of, any checks, drafts, notes, acceptances or other instruments and
documents constituting Collateral, or constituting the payment of

14

 

amounts due and to become due or any performance to be rendered with respect to the Collateral.

     (b) Sign and endorse any invoices, freight or express bills, bills of lading, storage or
warehouse receipts; drafts, certificates and statements under any commercial or standby letter of
credit relating to Collateral; assignments, verifications and notices in connection with Accounts;
or any other documents relating to the Collateral, including without limitation the Records.

     (c) Use or operate Collateral or any other property of any Borrower for the purpose of
preserving or liquidating Collateral.

     (d) File any claim or take any other action or proceeding in any court of law or equity or as
otherwise deemed appropriate by Lender for the purpose of collecting any and all monies due or
securing any performance to be rendered with respect to the Collateral.

     (e) Commence, prosecute or defend any suits, actions or proceedings or as otherwise deemed
appropriate by Lender for the purpose of protecting or collecting the Collateral.

     (f) Prepare, adjust, execute, deliver and receive payment under insurance claims, and collect
and receive payment of and endorse any instrument in payment of loss or returned premiums or any
other insurance refund or return, and apply such amounts at Lender’s sole discretion, toward
repayment of the Obligations or replacement of the Collateral.

     8.5 Application of Proceeds. Any Proceeds and other monies or property received by Lender
pursuant to the terms of this Agreement or any Loan Document may be applied by Lender first to the
payment of expenses of collection, including without limitation reasonable attorneys’ fees, and
then to the payment of the Obligations in such order of application as Lender may elect.

     8.6 Deficiency. If the Proceeds of any disposition of the Collateral are insufficient to
cover all costs and expenses of such sale and the payment in full of all the Obligations, plus all
other sums required to be expended or distributed by Lender, then each Borrower shall be liable for
any such deficiency.

     8.7 Lender Transfer. Upon the transfer of all or any part of the Obligations, Lender may
transfer all or part of the Collateral and shall be fully discharged thereafter from all liability
and responsibility with respect to such Collateral so transferred, and the transferee shall be
vested with all the rights and powers of Lender hereunder with respect to such Collateral so
transferred, but with respect to any Collateral not so transferred, Lender shall retain all rights
and powers hereby given.

     8.8 Lender’s Duties.

     (a) Lender shall use reasonable care in the custody and preservation of any Collateral in its
possession. Without limitation on other conduct which may be considered the exercise of reasonable
care, Lender shall be deemed to have exercised reasonable care in the custody and preservation of
such Collateral if such Collateral is accorded treatment substantially equal to that which Lender
accords its own property, it being understood that Lender shall not have any responsibility for
ascertaining or taking action with respect to calls, conversions, exchanges, maturities, declining
value, tenders or other matters relative to any Collateral, regardless of whether Lender has or is
deemed to have knowledge of such matters; or taking any necessary steps to preserve any rights
against any Person with respect to any Collateral. Under no circumstances shall Lender be
responsible for any injury or loss to the Collateral, or any part thereof, arising from any cause
beyond the reasonable control of Lender.

     (b) Lender may at any time deliver the Collateral or any part thereof to any Borrower and the
receipt of such Borrower shall be a complete and full acquittance for the Collateral so delivered,
and Lender shall thereafter be discharged from any liability or responsibility therefor.

     (c) Neither Lender, nor any of its directors, officers, employees, agents, attorneys or any
other person affiliated with or representing Lender shall be liable for any claims, demands, losses
or damages, of any kind whatsoever, made, claimed, incurred or suffered by any Borrower or any
other party through the ordinary negligence of Lender, or any of its directors, officers,
employees, agents, attorneys or any other person affiliated with or representing Lender.

     8.9 Termination of Security Interests. Upon the payment in full of the Obligations and
satisfaction of all Borrowers’ obligations under this Agreement and the other Loan Documents, and
if Lender has no further obligations under its Commitment, the security interest granted hereby
shall terminate and all rights to the Collateral shall revert to Borrowers. Upon any such

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termination, the Lender shall, at Borrowers’ expense, execute and deliver to Borrowers such
documents as Borrowers shall reasonably request to evidence such termination.

ARTICLE 9 — GENERAL PROVISIONS

     9.1 Notices. Any notice given by any party under any Loan Document shall be in writing and
personally delivered, sent by overnight courier, or United States mail, postage prepaid, or sent by
facsimile, or other authenticated message, charges prepaid, to the other party’s or parties’
addresses shown on the Supplement. Each party may change the address or facsimile number to which
notices, requests and other communications are to be sent by giving written notice of such change
to each other party. Notice given by hand delivery shall be deemed received on the date delivered;
if sent by overnight courier, on the next Business Day after delivery to the courier service; if by
first class mail, on the third Business Day after deposit in the U.S. Mail; and if by facsimile, on
the date of transmission.

     9.2 Binding Effect. The Loan Documents shall be binding upon and inure to the benefit of each
Borrower and Lender and their respective successors and permitted assigns; provided, however, that
no Borrower nor Lender may assign or transfer such Borrower’s rights or obligations under any Loan
Document without the other party’s prior written consent, provided that Lender may (i) transfer
its rights under any of the Loan Documents to an affiliate of Lender and, (ii) may grant a security
interest in its rights and obligations under the Loan Documents. Lender shall at all times
maintain the confidentiality of all documents and information which Lender now or hereafter may
have relating to the Loans, any Borrower, or its business. It is the intention of the parties that,
as a “venture capital operating company,” Venture Lending & Leasing IV, LLC (“LLC”), the parent and
sole owner of Venture Lending & Leasing IV, Inc., shall have the benefit of, and the power to
independently exercise, those “management rights” provided in Section 5.3. To that end, the
references to Lender in Sections 4.2(f), 5.1, 5.2, 5.3 and 5.9(a) hereof shall include LLC, and LLC
shall have the right to exercise the advisory, inspection, information and other rights given to
lender under those Sections independently of Lender. No amendment or modification of this
Agreement shall alter or diminish LLC’s rights under the preceding sentence without the consent of
LLC.

     9.3 No Waiver. Any waiver, consent or approval by Lender of any Event of Default or breach of
any provision, condition, or covenant of any Loan Document must be in writing and shall be
effective only to the extent set forth in writing. No waiver of any breach or default shall be
deemed a waiver of any later breach or default of the same or any other provision of any Loan
Document. No failure or delay on the part of Lender in exercising any power, right, or privilege
under any Loan Document shall operate as a waiver thereof, and no single or partial exercise of any
such power, right, or privilege shall preclude any further exercise thereof or the exercise of any
other power, right or privilege. Lender has the right at its sole option to continue to accept
interest and/or principal payments due under the Loan Documents after default, and such acceptance
shall not constitute a waiver of said default or an extension of the maturity of any Loan unless
Lender agrees otherwise in writing.

     9.4 Rights Cumulative. All rights and remedies existing under the Loan Documents are
cumulative to, and not exclusive of, any other rights or remedies available under contract or
applicable law.

     9.5 Unenforceable Provisions. Any provision of any Loan Document executed by any Borrower
which is prohibited or unenforceable in any jurisdiction, shall be so only as to such jurisdiction
and only to the extent of such prohibition or unenforceability, but all the remaining provisions of
any such Loan Document shall remain valid and enforceable.

     9.6 Accounting Terms. Except as otherwise provided in this Agreement, accounting terms and
financial covenants and information shall be determined and prepared in accordance with GAAP.

     9.7 Indemnification; Exculpation. Each Borrower shall pay and protect, defend and indemnify
Lender and Lender’s employees, officers, directors, shareholders, affiliates, correspondents,
agents and representatives (other than Lender, collectively “Agents”) against, and hold Lender and
each such Agent harmless from, all claims, actions, proceedings, liabilities, damages, losses,
expenses (including, without limitation, attorneys’ fees and costs) and other amounts incurred by
Lender and each such Agent, arising from (i) the matters contemplated by this Agreement or any
other Loan Documents, (ii) any dispute between any Borrower and a third party, or (iii) any
contention that any Borrower has failed to comply with any law, rule, regulation, order or
directive applicable to such Borrower’s business; provided, however, that this
indemnification shall not

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apply to any of the foregoing incurred solely as the result of Lender’s or any Agent’s gross
negligence or willful misconduct. This indemnification shall survive the payment and satisfaction
of all of Borrowers’ Obligations to Lender.

     9.8 Reimbursement. Borrowers shall reimburse Lender for all costs and expenses, including
without limitation reasonable attorneys’ fees and disbursements expended or incurred by Lender in
any arbitration, mediation, judicial reference, legal action or otherwise in connection with (a)
the preparation and negotiation of the Loan Documents, (b) the amendment and enforcement of the
Loan Documents, including without limitation during any workout, attempted workout, and/or in
connection with the rendering of legal advice as to Lender’s rights, remedies and obligations under
the Loan Documents, (c) collecting any sum which becomes due Lender under any Loan Document, (d)
any proceeding for declaratory relief, any counterclaim to any proceeding, or any appeal, or (e)
the protection, preservation or enforcement of any rights of Lender. For the purposes of this
section, attorneys’ fees shall include, without limitation, fees incurred in connection with the
following: (1) contempt proceedings; (2) discovery; (3) any motion, proceeding or other activity
of any kind in connection with an Insolvency Proceeding; (4) garnishment, levy, and debtor and
third party examinations; and (5) postjudgment motions and proceedings of any kind, including
without limitation any activity taken to collect or enforce any judgment. All of the foregoing
costs and expenses shall be payable upon demand by Lender, and if not paid within forty-five (45)
days of presentation of invoices shall bear interest at the highest applicable Default Rate.

     9.9 Execution in Counterparts. This Agreement may be executed in any number of counterparts
which, when taken together, shall constitute but one agreement.

     9.10 Entire Agreement. The Loan Documents are intended by the parties as the final expression
of their agreement and therefore contain the entire agreement between the parties and supersede all
prior understandings or agreements concerning the subject matter hereof. This Agreement may be
amended only in a writing signed by each Borrower and Lender.

     9.11 Governing Law and Jurisdiction.

     (a) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, THIS AGREEMENT AND THE LOAN
DOCUMENTS SHALL BE GOVERNED EXCLUSIVELY BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF CALIFORNIA WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS.

     (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT
MAY BE BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE
NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE
BORROWERS AND LENDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE EXCLUSIVE
JURISDICTION OF THOSE COURTS. EACH OF THE BORROWERS AND LENDER IRREVOCABLY WAIVES ANY OBJECTION,
INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS,
WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION
IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. EACH OF THE BORROWERS AND LENDER EACH
WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER
MEANS PERMITTED BY CALIFORNIA LAW.

     9.12 Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW, BORROWERS AND
LENDER EACH WAIVES ITS RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT
BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT
TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. BORROWERS AND LENDER EACH AGREES THAT ANY SUCH
CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE
FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL

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BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEMS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR
THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.

ARTICLE 10 — CROSS-CORPORATE GUARANTEES

     10.1 Guaranty. In consideration of the execution and delivery by Lender of this Agreement
and the making of Loans to Borrowers hereunder, each Borrower hereby jointly and severally
guarantees absolutely and unconditionally to Lender the due and punctual payment, when and as due
(whether upon demand, at maturity, by reason of acceleration or otherwise), of all liabilities and
obligations of each other Borrower under this Agreement and the other Loan Documents, and agrees to
pay any and all expenses (including reasonable legal fees and disbursements) which may be incurred
by Lender in enforcing its rights under this guaranty. The liability of Borrowers under this
guaranty shall be joint and several, unlimited and unconditional, and this guaranty shall be a
continuing guaranty of any and all Notes given as evidence of or in extension or renewal of any of
the Obligations.

     10.2 Waivers. Each Borrower, to the fullest extent permitted by applicable law, hereby
waives (i) diligence, presentment, demand and protest with respect to any instrument at any time
evidencing any of the Obligations, (ii) any requirement that Lender exhaust any right or take any
action against any other Person or any of the Collateral or other property at any time securing any
of the Obligations, (iii) the benefit of all principles or provisions of applicable law which are
or might be in conflict with the terms of this guaranty, (iv) notice of acceptance hereof, (v)
notice of the occurrence of a Default or Event of Default,(vi) notice of any and all favorable and
unfavorable information, financial or other, about any other Borrower, heretofore, now or hereafter
learned or acquired by a Borrower, (vii) notice of the existence or creation of any of the
Obligations, (viii) notice of any alterations, amendments, increase, extension or exchange of any
of the Obligations; (ix) notice of any amendments, modifications or supplements of or to this
Agreement or any of the other Loan Documents, and (x) the right to require Lender to proceed
against the Borrowers or any Borrower on any of the Obligations. Each Borrower hereby further
agrees that the time of payment of any of the Obligations may be extended and the Borrowers will
remain bound under this guaranty notwithstanding such extensions, whether or not referred to above,
which might otherwise constitute a legal or equitable discharge of a guaranty.

     10.3 Subrogation; Subordination. No Borrower shall have any right of subrogation,
contribution, reimbursement or indemnity whatsoever, nor any right of recourse to security for any
of the Obligations, and nothing shall discharge or satisfy the liability of any Borrower hereunder,
until the termination of this Agreement and the irrevocable satisfaction in full of, or provision
for, the Obligations; and any and all present and future debts and obligations of each Borrower to
the others are hereby postponed in favor of and subordinated to the full payment and performance of
all present and future Obligations.

     10.4 Release of Collateral. The joint and several liability of Borrowers shall continue
notwithstanding and shall not be impaired and affected by any release of any Collateral or by the
release of any one or more Persons liable for any of the Obligations, whether as principal, surety,
guarantor, indemnitor or otherwise.

     10.5 Other Waivers. To the extent permitted by law, each Borrower hereby waives any right of
set-off and any and all other rights, benefits, protections and other defenses available to a
surety or guarantor now or at any time hereafter, including, without limitation, under California
Civil Code 2787 to 2855, inclusive.

     10.6 Statutory Waiver of Rights and Defenses Regarding Election of Remedies. Each Borrower
hereby waives all rights and defenses arising out of the election of remedies by Lender, even
though that election of remedies, such as a nonjudicial foreclosure with respect to security for a
guaranteed obligation, has destroyed such Borrower’s rights of subrogation and reimbursement
against the other Borrower by the operation of Section 580d of the California Code of Civil
Procedure or otherwise.

     10.7 Financial Condition of Borrowers. Each Borrower represents and warrants that it is
fully aware of the financial condition of the other Borrower, and each Borrower delivers its
guarantee based solely upon its own independent investigation of such other

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Borrower’s financial condition and in no part upon any representation or statement of Lender with
respect thereto. Each Borrower further represents and warrants that it is in a position to and
hereby does assume full responsibility for obtaining such additional information concerning the
other Borrower’s financial condition as such Borrower may deem material to its obligations
hereunder, and such Borrower is not relying upon, nor expecting Lender to furnish it any
information in Lender’s possession concerning the other Borrower’s financial condition or
concerning any circumstances bearing on the existence or creation, or the risk of nonpayment or
nonperformance of the Obligations.

     10.8 Advice of Counsel. Each Borrower acknowledges that it has either obtained the advice of
counsel or has had the opportunity to obtain such advice in connection with the terms and
provisions of this Section 10.

     10.9 Limitation of Guarantee Obligations. In any action or proceeding involving any state
corporate law, or any state or federal bankruptcy, insolvency, reorganization or other law
affecting the rights of creditors generally, if the obligations of a Borrower under its guarantee
in this Section 10 would otherwise be held or determined to be void, invalid or unenforceable, or
subordinated to the claims of any other creditors, on account of the amount of its liability under
its guarantee, then, notwithstanding, any other provision of this Section 10 to the contrary, the
amount of such liability shall, without further action of such Borrower, Lender or any other
person, be automatically limited and reduced to the highest amount which is valid and enforceable
and not subordinated to the claims of other creditors as determined in such action or proceeding.

ARTICLE 11 — DEFINITIONS

     The definitions appearing in this Agreement or any Supplement shall be applicable to both the
singular and plural forms of the defined terms:

“Account” means any “account,” as such term is defined in the UCC now owned or hereafter acquired
by any Borrower or in which any Borrower now holds or hereafter acquires any interest and, in any
event, shall include, without limitation, all accounts receivable, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper, Documents or Instruments)
now owned or hereafter received or acquired by or belonging or owing to any Borrower (including,
without limitation, under any trade name, style or division thereof) whether arising out of goods
sold or services rendered by any Borrower or from any other transaction, whether or not the same
involves the sale of goods or services by any Borrower (including, without limitation, any such
obligation that may be characterized as an account or contract right under the UCC) and all of any
Borrower’s rights in, to and under all purchase orders or receipts now owned or hereafter acquired
by it for goods or services, and all of any Borrower’s rights to any goods represented by any of
the foregoing (including, without limitation, unpaid seller’s rights of rescission, replevin,
reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), and
all monies due or to become due to any Borrower under all purchase orders and contracts for the
sale of goods or the performance of services or both by any Borrower or in connection with any
other transaction (whether or not yet earned by performance on the part of any Borrower), now in
existence or hereafter occurring, including, without limitation, the right to receive the proceeds
of said purchase orders and contracts, and all collateral security and guarantees of any kind given
by any Person with respect to any of the foregoing.

“Affiliate” means any Person which directly or indirectly controls, is controlled by, or is under
common control with any Borrower. “Control,” “controlled by” and “under common control with” mean
direct or indirect possession of the power to direct or cause the direction of management or
policies (whether through ownership of voting securities, by contract or otherwise); provided, that
control shall be conclusively presumed when any Person or affiliated group directly or indirectly
owns five percent (5%) or more of the securities having ordinary voting power for the election of
directors of a corporation.

“Agreement” means this Loan and Security Agreement and each Supplement thereto, as each may be
amended or supplemented from time to time.

“Bankruptcy Code” means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. §101, et
seq.), as amended.

“Basic Interest” means the fixed rate of interest payable on the outstanding balance of each Loan
at the applicable Designated Rate.

“Borrowing Date” means the Business Day on which the proceeds of a Loan are disbursed by Lender.

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“Borrowing Request” means a written request from Borrowers in substantially the form of Exhibit
“B” to the Supplement, requesting the funding of one or more Loans on a particular Borrowing
Date.

“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks
in New York City or San Francisco are authorized or required by law to close.

"Chattel Paper” means any “chattel paper,” as such term is defined in the UCC now owned or
hereafter acquired by any Borrower or in which any Borrower now holds or hereafter acquires any
interest.

“Closing Date” means the date of this Agreement.

“Collateral” means all of Borrowers’ right, title and interest in and to the following property,
whether now owned or hereafter acquired and wherever located: (a) all Receivables; (b) all
Equipment; (c) all Fixtures; (d) all General Intangibles; (e) all Inventory; (f) all Investment
Property; (g) all Deposit Accounts; (h) all Shares, (i) all other Goods and personal property of
any Borrower, whether tangible or intangible and whether now or hereafter owned or existing,
leased, consigned by or to, or acquired by, any Borrower and wherever located; (j) all Records; and
(k) all Proceeds of each of the foregoing and all accessions to, substitutions and replacements
for, and rents, profits and products of each of the foregoing.

“Commitment” means the obligation of Lender to make Loans to Borrowers up to the aggregate
principal amount set forth in the Supplement.

“Copyright License” means any written agreement granting any right to use any Copyright or
Copyright registration now owned or hereafter acquired by any Borrower or in which any Borrower now
holds or hereafter acquires any interest.

“Copyrights” means all of the following now owned or hereafter acquired by any Borrower or in which
any Borrower now holds or hereafter acquires any interest: (i) all copyrights, whether registered
or unregistered, held pursuant to the laws of the United States, any State thereof or of any other
country; (ii) all registrations, applications and recordings in the United States Copyright Office
or in any similar office or agency of the United States, any State thereof or any other country;
(iii) all continuations, renewals or extensions thereof; and (iv) any registrations to be issued
under any pending applications.

“Default” means an event which with the giving of notice, passage of time, or both would constitute
an Event of Default.

“Default Rate” is defined in Section 2.7.

“Deposit Accounts” means any “deposit accounts,” as such term is defined in the UCC, now owned or
hereafter acquired by any Borrower or in which any Borrower now holds or hereafter acquires any
interest.

“Designated Rate” means the rate of interest per annum described in the Supplement as being
applicable to an outstanding Loan from time to time.

“Documents” means any “documents,” as such term is defined in the UCC, now owned or hereafter
acquired by any Borrower or in which any Borrower now holds or hereafter acquires any interest.

“Environmental Laws” means all federal, state or local laws, statutes, common law duties, rules,
regulations, ordinances and codes, together with all administrative orders, directed duties,
requests, licenses, authorizations and permits of, and agreements with, any governmental
authorities, in each case relating to environmental, health, or safety matters.

“Equipment” means any “equipment,” as such term is defined in the UCC now owned or hereafter
acquired by any Borrower or in which any Borrower now holds or hereafter acquires any interest and
any and all additions, substitutions and replacements of any of the foregoing, wherever located,
together with all attachments, components, parts, equipment and accessories installed thereon or
affixed thereto.

“Event of Default” means any event described in Section 7.1.

“Final Payment” means, with respect to a Loan, an amount equal to that percentage of the original
principal amount of such Loan and payable at the time specified in the Supplement or the Note
evidencing such Loan.

“Fixtures” means any “fixtures,” as such term is defined in the UCC, now owned or hereafter
acquired by any Borrower or in which any Borrower now holds or hereafter acquires any interest.

“GAAP” means generally accepted accounting principles and practices consistent with those
principles and practices promulgated or adopted by the Financial

20

 

Accounting Standards Board and the Board of the American Institute of Certified Public Accountants,
their respective predecessors and successors. Each accounting term used but not otherwise
expressly defined herein shall have the meaning given it by GAAP.

“General Intangibles” means any “general intangibles,” as such term is defined in the UCC now owned
or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter acquires any
interest and, in any event, shall include, without limitation, all right, title and interest that
any Borrower may now or hereafter have in or under any contract, all customer lists, Copyrights,
Trademarks, Patents, websites, domain names, and all applications therefor and reissues,
extensions, or renewals thereof, other rights to Intellectual Property, interests in partnerships,
joint ventures and other business associations, Licenses, permits, trade secrets, proprietary or
confidential information, inventions (whether or not patented or patentable), technical
information, procedures, designs, knowledge, know-how, software, data bases, data, skill,
expertise, recipes, experience, processes, models, drawings, materials and records, goodwill
(including, without limitation, the goodwill associated with any Trademark, Trademark registration
or Trademark licensed under any Trademark License), claims in or under insurance policies,
including unearned premiums, uncertificated securities, money, cash or cash equivalents, deposit,
checking and other bank accounts, rights to sue for past, present and future infringement of
Copyrights, Trademarks and Patents, rights to receive tax refunds and other payments and rights of
indemnification.

“Goods” means any “goods,” as such term is defined in the UCC now owned or hereafter acquired by
any Borrower or in which any Borrower now holds or hereafter acquires any interest.

“Indebtedness” of any Person means at any date, without duplication and without regard to whether
matured or unmatured, absolute or contingent: (i) all obligations of such Person for borrowed
money; (ii) all obligations of such Person evidenced by bonds, debentures, notes, or other similar
instruments; (iii) all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of business; (iv) all
obligations of such Person as lessee under capital leases; (v) all obligations of such Person to
reimburse or prepay any bank or other Person in respect of amounts paid under a letter of credit,
banker’s acceptance, or similar instrument, whether drawn or undrawn; (vi) all obligations of such
Person to purchase securities which arise out of or in connection with the sale of the same or
substantially similar securities; (vii) all obligations of such Person to purchase, redeem,
exchange, convert or otherwise acquire for value any capital stock of such Person or any warrants,
rights or options to acquire such capital stock, now or hereafter outstanding, except to the extent
that such obligations remain performable solely at the option of such Person; (viii) all
obligations to repurchase assets previously sold (including any obligation to repurchase any
accounts or chattel paper under any factoring, receivables purchase, or similar arrangement); (ix)
obligations of such Person under interest rate swap, cap, collar or similar hedging arrangements
(other than foreign exchange hedging arrangements); and (x) all obligations of others of any type
described in clause (i) through clause (ix) above guaranteed by such Person.

“Insolvency Proceeding” means with respect to a Person (a) any case, action or proceeding before
any court or other governmental authority relating to bankruptcy, reorganization, insolvency,
liquidation, receivership, dissolution, winding-up or relief of debtors with respect to such
Person, or (b) any general assignment for the benefit of creditors, composition, marshalling of
assets for creditors, or other, similar arrangement in respect of such Person’s creditors generally
or any substantial portion of its creditors, undertaken under U.S. Federal, state or foreign law,
including the Bankruptcy Code, but in each case, excluding any avoidance or similar action against
such Person commenced by an assignee for the benefit of creditors, bankruptcy trustee, debtor in
possession, or other representative of another Person or such other Person’s estate.

“Instruments” means any “instrument,” as such term is defined in the UCC now owned or hereafter
acquired by any Borrower or in which any Borrower now holds or hereafter acquires any interest.

“Intellectual Property” means all Copyrights, Trademarks, Patents, Licenses, trade secrets, source
codes, customer lists, proprietary or confidential information, inventions (whether or not patented
or patentable), technical information, procedures, designs, knowledge, know-how, software, data
bases, skill, expertise, experience, processes, models, drawings, materials, records and goodwill
associated with the foregoing.

“Intellectual Property Security Agreement” means any Intellectual Property Security Agreement

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executed and delivered by a Borrower in favor of Lender, as the same may be amended, supplemented,
or restated from time to time.

“Inventory” means any “inventory,” as such term is defined in the UCC wherever located, now owned
or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter acquires any
interest, and, in any event, shall include, without limitation, all inventory, goods and other
personal property that are held by or on behalf of any Borrower for sale or lease or are furnished
or are to be furnished under a contract of service or that constitute raw materials, work in
process or materials used or consumed or to be used or consumed in any Borrower’s business, or the
processing, packaging, promotion, delivery or shipping of the same, and all finished goods, whether
or not the same is in transit or in the constructive, actual or exclusive possession of any
Borrower or is held by others for any Borrower’s account, including, without limitation, all goods
covered by purchase orders and contracts with suppliers and all goods billed and held by suppliers
and all such property first may be in the possession or custody of any carriers, forwarding agents,
truckers, warehousemen, vendors, selling agents or other Persons.

“Investment Property” means any “investment property,” as such term is defined in the UCC, now
owned or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter
acquires any interest.

“Letter of Credit Rights” means any “letter of credit rights,” as such term is defined in the UCC,
now owned or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter
acquires any interest, including any right to payment under any letter of credit.

“License” means any Copyright License, Patent License, Trademark License or other license of rights
or interests now held or hereafter acquired by Borrower or in which Borrower now holds or hereafter
acquires any interest and any renewals or extensions thereof.

“Lien” means any mortgage, deed of trust, pledge, hypothecation, assignment for security, security
interest, encumbrance, levy, lien or charge of any kind, whether voluntarily incurred or arising by
operation of law or otherwise, against any property, any conditional sale or other title retention
agreement, any lease in the nature of a security interest, and the filing of any financing
statement (other than a precautionary financing statement with respect to a lease that is not in
the nature of a security interest) under the UCC or comparable law of any jurisdiction.

“Loan” means an extension of credit by Lender under this Agreement.

“Loan Documents” means, individually and collectively, this Loan and Security Agreement, each
Supplement, each Note, the Intellectual Property Security Agreement and any other security or
pledge agreement(s), any Warrants issued by Borrower to Lender (or its designee) in connection with
this Agreement, and all other contracts, instruments, addenda and documents executed in connection
with this Agreement or the extensions of credit which are the subject of this Agreement.

“Material Adverse Effect” or “Material Adverse Change” means, with respect to all Borrowers and
their respective Subsidiaries, if any, on a consolidated basis (a) a material adverse change in, or
a material adverse effect upon, the operations, business, properties, condition (financial or
otherwise) or prospects of the Borrowers, (b) a material impairment of the ability of the Borrowers
to perform under any Loan Document; (c) a material adverse effect upon the legality, validity,
binding effect or enforceability against the Borrowers of any Loan Document; or (d) a material
adverse effect on, or a material adverse change in, the Borrowers’ interest in, or the value,
perfection or priority of Lender’s security interest in the Collateral.

“Note” means a promissory note substantially in the form attached to the Supplement as Exhibit
“A-1”, “A-2” and “A-3”, executed by Borrowers evidencing each Loan.

“Obligations” means all debts, obligations and liabilities of Borrowers to Lender currently
existing or now or hereafter made, incurred or created under, pursuant to or in connection with
this Agreement or any other Loan Document, whether voluntary or involuntary and however arising or
evidenced, whether direct or acquired by Lender by assignment or succession, whether due or not
due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether a
Borrower may be liable individually or jointly, or whether recovery upon such debt may be or become
barred by any statute of limitations or otherwise unenforceable; and all renewals, extensions and
modifications thereof; and all attorneys’ fees and costs incurred by Lender in

22

 

connection with the collection and enforcement thereof as provided for in any Loan Document.

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

“Patents” means all of the following property now owned or hereafter acquired by any Borrower or in
which any Borrower now holds or hereafter acquires any interest: (a) all letters patent of, or
rights corresponding thereto in, the United States or any other country, all registrations and
recordings thereof, and all applications for letters patent of, or rights corresponding thereto in,
the United States or any other country, including, without limitation, registrations, recordings
and applications in the United States Patent and Trademark Office or in any similar office or
agency of the United States, any State thereof or any other country; (b) all reissues,
continuations, continuations-in-part or extensions thereof; (c) all petty patents, divisionals, and
patents of addition; and (d) all patents to be issued under any such applications.

“Parent” means Oculus Innovative Sciences, Inc., a California corporation.

“Permitted Lien” means:

     (a) involuntary Liens which, in the aggregate, would not have a Material Adverse Effect and
which in any event would not exceed, in the aggregate, the Threshold Amount;

     (b) Liens for current taxes or other governmental or regulatory assessments which are not
delinquent, or which are contested in good faith by the appropriate procedures and for which
appropriate reserves are maintained;

     (c) security interests on any property held or acquired by any Borrower in the ordinary course
of business securing Indebtedness incurred or assumed for the purpose of financing all or any part
of the cost of acquiring such property; provided, that such Lien attaches solely to the
property acquired with such Indebtedness and that the principal amount of such Indebtedness does
not exceed one hundred percent (100%) of the cost of such property;

     (d) Liens in favor of Lender;

     (e) bankers’ liens, rights of setoff and similar Liens incurred on deposits made in the
ordinary course of business;

     (f) materialmen’s, mechanics’, repairmen’s, employees’ or other like Liens arising in the
ordinary course of business and which are not delinquent for more than 45 days or are being
contested in good faith by appropriate proceedings;

     (g) any judgment, attachment or similar Lien, unless the judgment it secures has not been
discharged or execution thereof effectively stayed and bonded against pending appeal within 30 days
of the entry thereof;

     (h) licenses or sublicenses of Intellectual Property granted in accordance with Sections
6.5(i) and 6.5(ii) hereof;

     (i) Liens in favor of Venture Lending & Leasing III, LLC, and

     (j) Liens which have been approved by Lender in writing prior to the Closing Date, including
the following: CIT Commercial (Avaya phone system); Exchange Bank (office furniture); Cupertino
National Bank (forklift); Bank of Petaluma (network cabling).

“Person” means any individual, sole proprietorship, partnership, joint venture, trust,
unincorporated organization, association, corporation, limited liability company, institution,
public benefit corporation, other entity or government (whether federal, state, county, city,
municipal, local, foreign, or otherwise, including any instrumentality, division, agency, body or
department thereof).

“Primary Operating Account” is set forth in Section 8 of Part 2 of the Supplement.

“Proceeds” means “proceeds,” as such term is defined in the UCC and, in any event, shall include,
without limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other forms of
money or currency or other proceeds payable to any Borrower from time to time in respect of the
Collateral, (b) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to
any Borrower from time to time with respect to any of the Collateral, (c) any and all payments (in
any form whatsoever) made or due and payable to any Borrower from time to time in connection with
any requisition, confiscation, condemnation, seizure or forfeiture of all or any part

23

 

of the Collateral by any governmental authority (or any Person acting under color of governmental
authority), (d) any claim of any Borrower against third parties (i) for past, present or future
infringement of any Copyright, Patent or Patent License or (ii) for past, present or future
infringement or dilution of any Trademark or Trademark License or for injury to the goodwill
associated with any Trademark, Trademark registration or Trademark licensed under any Trademark
License and (e) any and all other amounts from time to time paid or payable under or in connection
with any of the Collateral.

“Qualified Public Offering” means the closing of a firmly underwritten public offering of any
Borrower’s common stock with aggregate proceeds of not less than $20,000,000 (prior to underwriting
expenses and commissions).

“Receivables” means all of Borrowers’ Accounts, Instruments, Documents, Chattel Paper, Supporting
Obligations, and letters of credit and Letter of Credit Rights.

“Records” means all Borrowers’ computer programs, software, hardware, source codes and data
processing information, all written documents, books, invoices, ledger sheets, financial
information and statements, and all other writings concerning Borrower’s business.

“Related Person” means any Affiliate of any Borrower, or any officer, employee, director or equity
security holder of any Borrower or any Affiliate.

“Rights to Payment” means all Borrower’s accounts, instruments, contract rights, documents, chattel
paper and all other rights to payment, including, without limitation, the Accounts, all negotiable
certificates of deposit and all rights to payment under any Patent License, any Trademark License,
or any commercial or standby letter of credit.

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

“Security Documents” means this Loan and Security Agreement, the Supplement hereto, the
Intellectual Property Security Agreement, and any and all account control agreements, collateral
assignments, chattel mortgages, financing statements, amendments to any of the foregoing and other
documents from time to time executed or filed to create, perfect or maintain the perfection of
Lender’s Liens on the Collateral.

“Shares” means one hundred percent (100%) of the issued and outstanding capital stock, membership
units or other securities owned or held of record by Parent in any Subsidiary of Parent, including
the other Borrowers.

“Subordinated Debt” means Indebtedness (i) approved by Lender and (ii) subordinated to the
Obligations on terms and conditions acceptable to Lender, including without limiting the generality
of the foregoing, subordination of such Indebtedness in right of payment to the prior payment in
full of the Obligations, the subordination of the priority of any Lien at any time securing such
Indebtedness to the Liens of Lender in the collateral covered thereby, and the subordination of the
rights of the holder of such Indebtedness to enforce its junior Lien following an Event of Default
hereunder pursuant to a written subordination agreement approved by Lender in its sole and good
faith discretion.

“Subsidiary” means any Person a majority of the equity ownership or voting stock of which is at the
time owned, directly or indirectly, by a Borrower or by one or more other Subsidiaries or by a
Borrower and one or more other Subsidiaries.

“Supplement” means that certain supplement to the Loan and Security Agreement, as the same may be
amended or restated from time to time, and any other supplements entered into among Borrowers and
Lender, as the same may be amended or restated from time to time.

“Supporting Obligations” means any “supporting obligations,” as such term is defined in the UCC,
now owned or hereafter acquired by any Borrower or in which any Borrower now holds or hereafter
acquires any interest.

“Termination Date” has the meaning specified in the Supplement.

“Threshold Amount” has the meaning specified in the Supplement.

“Trademark License” means any written agreement granting any right to use any Trademark or
Trademark registration now owned or hereafter acquired by any Borrower or in which any Borrower now
holds or hereafter acquires any interest.

“Trademarks” means all of the following property now owned or hereafter acquired by any Borrower or
in which any Borrower now holds or hereafter acquires

24

 

any interest: (a) all trademarks, tradenames, corporate names, business names, trade styles,
service marks, logos, other source or business identifiers, prints and labels on which any of the
foregoing have appeared or appear, designs and general intangibles of like nature, now existing or
hereafter adopted or acquired, all registrations and recordings thereof, and any applications in
connection therewith, including, without limitation, registrations, recordings and applications in
the United States Patent and Trademark Office or in any similar office or agency of the United
States, any State thereof or any other country or any political subdivision thereof and (b)
reissues, extensions or renewals thereof.

“UCC” means the Uniform Commercial Code as the same may, from time to time, be in effect in the
State of California; provided, that in the event that, by reason of mandatory provisions of
law, any or all of the attachment, perfection or priority of, or remedies with respect to, Lender’s
Lien on any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a
jurisdiction other than the State of California, the term “UCC” shall mean the Uniform Commercial
Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions
thereof relating to such attachment, perfection, priority or remedies and for purposes of
definitions related to such provisions. Unless otherwise defined herein, terms that are defined in
the UCC and used herein shall have the meanings given to them in the UCC.

     11.2 Construction of Collateral Definitions. In the definition of Collateral and in all terms
defined directly or indirectly within the definition of Collateral, all references to “Borrower” or
“Borrower’s” shall be interpreted as referring to “any Borrower” or to “each Borrower,” as the
context may require for purposes of any Loan Document, including any security agreement, charge
registration or financing statement executed by any Borrower from time to time pursuant to this
Agreement.

25

 

[Signature page to Loan and Security Agreement]

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

BORROWERS:

	 	 	 	 	 
	OCULUS INNOVATIVE SCIENCES, INC.

 	 
	By:  	/s/ Hojabr Alimi 
 	 
	 	 	Name:  	Hojabr Alimi 	 
	 	 	Title:  	President/CEO 	 
	 

	 	 	 	 	 
	OCULUS TECHNOLOGIES OF MEXICO, S.A. de C.V.

 	 
	By:  	/s/ Bruce Thornton 
 	 
	 	 	Name:  	Bruce Thornton 	 
	 	 	Title:  	VP Global Ops and Sales 	 
	 

	 	 	 	 	 
	OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.

 	 
	By:  	/s/ Bruce Thornton 
 	 
	 	 	Name:  	Bruce Thornton 	 
	 	 	Title:  	VP Global Ops and Sales 	 
	 

LENDER:

	 	 	 	 	 
	VENTURE LENDING & LEASING IV, INC.

 	 
	By:  	/s/ Ronald W. Swenson 
 	 
	 	 	Name:  	Ronald W. Swenson 	 
	 	 	Title:  	CEO 	 
	 

 

 

Schedules to Loan and Security Agreement

dated as of June 14, 2006

among

Oculus Innovative Sciences, Inc.

Oculus Technologies of Mexico, S.A. De C.V.

Oculus Innovative Sciences Netherlands B.V.

Co-Borrowers

and

Venture Lending & Leasing IV, Inc.

Lender

 

LSA 3.5 — Litigation, Claims, Proceedings

(1) A            former director and chief operating officer filed an action against Oculus in the
Superior Court of the State of California, Sonoma County, alleging breach of employment contract.
In the complaint, the plaintiff claims $300,000 and the right to purchase approximately 600,000
shares of the Company’s common stock at $0.75 per share. The Company has tendered the claims to
the Company’s Employment Practice Liability insurance carrier, but it expects the insurance carrier
to deny coverage to all or a portion of the claim.

(2) On March 14, 2006, the Company filed suit in the Northern District of California Federal Court
against Nofil Corporation and Naoshi Kono, CEO of Nofil, for breach of contract, misappropriation
of trade secrets and trademark infringement. The Company believes that Nofil Corporation violated
key terms of both an exclusive purchase agreement and non-disclosure agreement by contacting and
working with a potential competitor in Mexico.

(3) A company in Mexico filed a complaint against the Company and Oculus Mexico alleging
infringement by the Company’s trademark Microcyn in Mexico. The Company has filed a registration
for “Oculus Microcyn” with the Mexican authorities.

LSA 3.7 Subsidiaries

Parent owns 100% of the shares of Oculus Innovative Sciences Netherlands, B.V.

Parent owns 1% of the shares of Oculus Technologies of Mexico, C.A. de C.V.

Aquamed Technologies, Inc., a California corporation wholly-owned by Parent, owns 99% of the shares
of Oculus Technologies of Mexico, C.A. de C.V.

LSA 3.11 — Title

(1) The Company licenses certain technology under six issued Japanese patents relating to Microcyn
products and the Company’s proprietary super-oxidized water.

LSA 3.12(b)

(1) see disclosure in 3.5(3).

2

 

LSA 5.1(b) — Dispute with governmental agency.

As a cautionary measure, the Company discloses that in its communications with the FDA, contrary to
information previously received from the FDA, the FDA has suggested that an additional pivotal
study could be required. If the additional study is required in connection with the pre-operative
skin treatment trials. IF such additional trials are required, such trials could cost as much as
$500,000. The matter is not a controversy or dispute but merely part of the regulatory clearance
process.

LSA 5.1(d) — Change in locations

Notice is hereby given that the Company closed its Morelia, Mexico operations in September, 2005.

LSA 5.19(h) — Certain agreements on rights to payment

Notice is hereby given that the Company intends to take a non-cash accounting charge to write down
any assets related to the termination of the Company’s relationship with Quimica Pasteur. The
charge will be approximately $2.4 million.

Notice is hereby given that the Company, form time to time, exchanges product for inventory if the
shelf-life of product held by customers/distributors drops below limits specified in the Company’s
arrangement with the customer/distributor.

LSA 6.1(g) Indebtedness

Equipment line and notes payable

     In March of 2004, the Company obtained an equipment line of credit. The Company could borrow
an amount not to exceed $1,000,000, available in minimum monthly installments of $50,000 until
March 31, 2005, upon which the line expired. The Company was required to pledge fixed assets equal
to the amount of each draw as collateral. In 2005, the Company made four draws on this line of
credit for $494,000, $203,000, $181,000, $116,000 with effective interest rates of 13.5% and
maturities of December 1, 2006, January 1, 2007, April 1, 2007, and May 1, 2007, respectively. All
these loans are payable in 36 monthly installments with a 5% terminal payment due on maturity date.
Associated with this line was short-term notes payable at March 31, 2005 and 2006 of $337,439 and
$331,922. Additionally, associated with this line was long-term notes payable at March 31, 2005
and 2006 of $350,759 and $18,563, respectively. Also in connection with this line the Company
issued 66,667 warrants to purchase preferred series A shares (Note 6).

     The Company had a note payable in the amount of $100,000 and which incurred interest at 8%
with a final payment due on April 1, 2004. Associated with this note was short-term notes payable
at March 31, 2005 and 2006 of $0 and $0 respectively. Additionally, associated with this note was
long-term notes payable at March 31, 2005 and 2006 of $0 and $0 respectively. This note was
associated with the financing of general operations. This note was paid in full in April, 2004.

     The Company had a note payable in the amount of $15,000 and which incurred interest at 8% with
a final payment due on November 30, 2004. Associated with this note was short-term notes payable
at March 31, 2005 and 2006 of $0 and $0 respectively. Additionally, associated with this note was
long-term notes payable at March 31, 2005 and 2006 of $0 and $0 respectively. This note was
associated with the financing of general operations. This note was paid in full in November, 2004.

     The Company had a note payable in the amount of $200,000 and which incurred interest at 8%
with a final payment due on November 1, 2004. Associated with this note was short-term notes
payable at March 31, 2005 and

3

 

2006 of $0 and $0 respectively. Additionally, associated with this note was long-term notes
payable at March 31, 2005 and 2006 of $0 and $0 respectively. This note was associated with the
financing of general operations. This note was paid in full in November, 2004.

     The Company has a note payable in the amount of $64,086 and which incurred interest at 8% with
a final payment due on December 31, 2009. The note payable was amended in February 2005 to $95,000
with a final payment date of December 31, 2005, contingent upon the Company receiving institutional
funding of $15,000,000 by December 31, 2005. In the event institutional funding was not received
the maturity date reverts back to December 31, 2009. The funding was not received and the maturity
date reverted back to December 31, 2009. Associated with this note was short-term notes payable at
March 31, 2005 and 2006 of $95,000 and $0 respectively. Additionally, associated with the note was
long-term notes payable at March 31, 2005 and 2006 of $0 and $68,334 respectively. This note was
established for services rendered by a consultant.

     The Company had a note payable in the amount of $91,073 and which incurred interest at 8% with
a final payment due on January 1, 2010. Associated with this note was short-term notes payable at
March 31, 2005 and 2006 of $16,171 and $17,316, respectively. Additionally, associated with this
note was long-term notes payable at March 31, 2005 and 2006 of $72,673 and $56,811, respectively.
This note was associated with the purchase of software, and was secured by the related software.

     The Company had a note payable in the amount of $44,102 and which incurred interest at 6% with
a final payment due on March 2, 2010. Associated with this note was short-term notes payable at
March 31, 2005 and 2006 of $7,754 and $8,319, respectively. Additionally, associated with this
note was long-term notes payable at March 31, 2005 and 2006 of $36,348 and $27,444, respectively.
This note was associated with the purchase of a company automobile, and was secured by the related
automobile.

     The Company had a note payable in the amount of $158,063 and which incurred interest at 8.2%
with a final payment due on January 1, 2007. Associated with this note was short-term notes
payable at March 31, 2005 and 2006 of $0 and $130,513, respectively. Additionally, associated with
this note was long-term notes payable at March 31, 2005 and 2006, of $0 and $0, respectively. This
note was associated with the financing of company insurance premiums.

     The Company had a note payable in the amount of $26,928 and which incurred interest at 4.9%
with a final payment due on February 14, 2011. Associated with this note was short-term notes
payable at March 31, 2005 and 2006 of $0 and $4,890, respectively. Additionally, associated with
this note was long-term notes payable at March 31, 2005 and 2006, of $0 and $21,756, respectively.
This note was associated with the purchase of a company automobile, and was secured by the related
automobile.

     The Company had a note payable in the amount of $19,661 and which incurred interest at 14.440%
with a final payment due on March 14, 2011. Associated with this note was short-term notes payable
at March 31, 2005 and 2006 of $0 and $2,664, respectively. Additionally, associated with this note
was long-term notes payable at March 31, 2005 and 2006, of $0 and $16,997, respectively. This note
was associated with the purchase of a company automobile, and was secured by the related
automobile.

     The Company has outstanding obligations in the amount of $68,651.95 to Hansel-Prestige, Inc.
in connection with the lease of a car. The Company makes installment pagyments that are scheduled
to continue through May 2012.

     The Company has entered into various note agreements that expire over the next five years from
March 31, 2006. Minimum payments for notes are as follows (in thousands):

	 	 	 	 	 
	For years ending March 31,	 	 	 	 
	2007
	 	$	546	 
	2008
	 	 	63	 
	2009
	 	 	44	 

4

 

	 	 	 	 	 
	For years ending March 31,	 	 	 	 
	2010
	 	 	109	 
	2011
	 	 	11	 
	 
	 	 	 
	Total minimum maturity payments
	 	 	773	 
	Less: amounts representing interest
	 	 	(58	)
	 
	 	 	 
	Present value of minimum maturity payments
	 	 	714	 
	Less: current portion
	 	 	(504	)
	 
	 	 	 
	Long-term portion
	 	$	210	 
	 
	 	 	 

5

 

SUPPLEMENT

to the

Loan and Security Agreement

Dated as of June 14, 2006

among

Oculus Innovative Sciences, Inc.,

Oculus Technologies of Mexico S.A. de C.V., and

Oculus Innovative Sciences Netherlands B.V.

(each individually a “Borrower” and collectively “Borrowers”)

and

Venture Lending & Leasing IV, Inc. (“Lender”)

 

     This is a Supplement identified in the document entitled Loan and Security Agreement dated as
of June 14, 2006, among Borrowers and Lender. All capitalized terms used in this Supplement and
not otherwise defined in this Supplement have the meanings ascribed to them in Article 11 of the
Loan and Security Agreement, which is incorporated in its entirety into this Supplement. In the
event of any inconsistency between the provisions of that document and this Supplement, this
Supplement is controlling. Execution of this Supplement by the Lender and Borrowers shall
constitute execution of the Loan and Security Agreement.

     In addition to the provisions of the Loan and Security Agreement, the parties agree as
follows:

Part 1. — Additional Definitions:

     “Average Expenses” means, as of any date of determination, an amount equal to the quotient of
(i) the aggregate dollar amount of operating and other expenses paid (excluding non-cash expenses,
amortization, depreciation, and deferred rent) by Borrowers during each of the four (4) full
calendar months most recently ended prior to such date of determination, divided by (ii) four (4).
For the avoidance of doubt, “Average Expenses” shall exclude extraordinary expenses related to the
closure (prior to the date hereof) of the business in Mexico (including accounting and legal
expenses) and extraordinary expenses related to Parent’s initial public offering process.

     “Borrowing Base” means, as of any date of determination, a dollar amount equal to the sum of
(A) eighty percent (80%) of the sum of Eligible Accounts Receivable with respect to which the
principal place of business and chief executive office of the account debtor obligated thereon is
located within the United States of America, plus (B) sixty percent (60%) of the sum of Eligible
Accounts Receivable with respect to which the principal place of business and chief executive
office of the account debtor obligated thereon is located outside the United States of America,
including where the account debtor is the Mexican Ministry of Health, and amounts available for
drawing by any Borrower as beneficiary under letters of credit issued by foreign banks.

     “Borrowing Base Certificate” is defined in Section 2(c) of Part 2 of this Supplement.

     “Cash Equivalents” means, as of any date of determination, the following assets or rights of
Borrowers: (i) marketable direct obligations issued or unconditionally guaranteed by the United
States government having maturities of not more than 12 months from the date of acquisition; (ii)
domestic certificates of deposit and time deposits having maturities of not more than 12 months
from the date of acquisition, and overnight bank deposits, in each case issued by a commercial bank
organized under the laws of the United States or any state thereof which at the time of acquisition
are rated A-1 or better by Standard & Poor’s Corporation (or equivalent), and not subject to any
offset rights in favor of such bank arising from any banking relationship with such bank; and (iii)
commercial paper which at the time of acquisition is rated A-1 or better by Standard & Poor’s
Corporation (or equivalent), and Floating Rate Preferred issues which at the time of acquisition is
rated AAA or better.

     “Combined Working Capital Loans” means, as of any date of determination, the aggregate
outstanding principal balance of all Working Capital Loans advanced by Lender hereunder.

 

 

     “Commitment": Subject to the terms and conditions set forth in the Loan and Security Agreement
and this Supplement, Lender commits to make:

	 	(i)	 	Growth Capital Loans to Borrowers up to the aggregate original principal
amount of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000) for general
corporate purposes (the “Growth Capital Loan Commitment"),
	 
	 	(ii)	 	Equipment Loans to Borrowers up to the aggregate original principal amount of
One Million Dollars ($1,000,000.00) to finance the acquisition of Eligible Equipment
and Soft Costs (the “Equipment Loan Commitment"). As a sub-facility of the
Equipment Loan Commitment, Lender commits to make Soft Cost Loans to Borrowers in an
aggregate original principal amount not to exceed One Million Dollars
($1,000,000.00), i.e., the entire amount of the Equipment Loan Commitment without
duplication (the “Soft Cost Loan Sublimit"); and
	 
	 	(iii)	 	Working Capital Loans to Borrowers up to the aggregate original principal
amount of One Million Two Hundred Fifty Thousand Dollars ($1,250,000) for working
capital financing (the “Working Capital Loan Commitment").

     As used herein, the term “Commitment” shall mean the Equipment Loan Commitment, the Growth
Capital Loan Commitment, the Working Capital Loan Commitment, or any combination or all of them, as
the context requires; and Equipment Loans, Soft Cost Loans, Growth Capital Loans, and Working
Capital Loans are sometimes referred to herein individually as a “Loan” or collectively as “Loans”.

     “Designated Rate": The Designated Rate for each Loan shall be a fixed rate of interest per
annum equal to the Prime Rate as published on the Business Day on which Lender prepares the Note
for such Loan following Borrowers’ submission of the Borrowing Request for such Equipment Loan,
plus one-half of one percent (0.50%); provided, however, that in no event shall the
Designated Rate for a Loan be less than eight percent (8.00%).

     “Eligible Accounts Receivable” means an Account which meets each of the following
requirements: (i) arises in the ordinary course of Borrowers’ business (which shall be deemed to
include government contracts); (ii) upon which Borrowers’ right to payment is absolute, subject to
Borrowers’ standard terms and conditions, and not contingent on the fulfillment of any conditions
(other than customary conditions such as acceptance by the obligor and final payment due upon
acceptance; provided that aggregate contingent payments shall equal no more than twenty percent
(20%) of the value of the Accounts); (iii) against which there has not been asserted any defense,
offset or discount; (iv) is owned by Borrower free and clear of Liens except for Permitted Liens;
(v) is not more than 90 days past due; and (vi) the principal place of business and chief executive
office of the account debtor obligated thereon is located within the United States or in a foreign
jurisdiction approved by Lender, or the account debtor is the Mexican Ministry of Health or a
foreign bank as issuer of a letter of credit issued for the benefit of Borrower.

     “Eligible Equipment” means manufacturing equipment, computer equipment, lab and shop
equipment, test equipment, office equipment and other standard hardware approved by Lender in
writing and that is not the subject of a license agreement(s) between Borrower and any Person.

     “Equipment Loan” means any Loan requested by Borrowers and funded by Lender to finance
Borrowers’ acquisition or carrying of specific items of Eligible Equipment.

     “Final Payment": Each Equipment Loan and Soft Cost Loan shall have a Final Payment equal to
six and 581/1000 percent (6.581%) of the original principal amount of such Loan. Each Growth
Capital Loan and each Working Capital Loan shall have a Final Payment equal to six and 59/1000
percent (6.059%) of the original principal amount of such Loan.

     “Growth Capital Loan” means any Loan requested by Borrowers and funded by Lender under the
Growth Capital Loan Commitment for general working capital purposes of Borrowers.

2

 

     “Prime Rate” means the “prime rate” of interest, as published from time to time by The
Wall Street Journal in the “Money Rates” section of its Western Edition newspaper.

     “Soft Costs” “ means, with respect to amounts to be financed hereunder with proceeds of a Soft
Cost Loan, Borrowers’ costs of acquiring or licensing non-standard equipment (not otherwise
approved by Lender as Eligible Equipment). Equipment located outside of the United States,
perpetual software license fees, tenant improvements and other items of personal property approved
in writing by Lender.

     “Soft Cost Loan” means any Loan requested by Borrowers and funded by Lender to finance Soft
Costs.

     “Termination Date": The Termination Date of a Commitment means the earlier of:

	 	(i)	 	the date Lender may terminate making Loans or extending other
credit pursuant to the rights of Lender under Article 7 of the Loan and
Security Agreement, or
	 
	 	(ii)	 	(A) with respect to the Growth Capital Loan Commitment, June 16, 2006,
	 
	 	 	 	(B) with respect to the Equipment Loan Commitment, December 31, 2006, or
	 
	 	 	 	(C) with respect to the Working Capital Loan Commitment, December
31, 2006, provided however, that to the extent that there remains an
unfunded portion of Working Capital Loan Commitment on December 31, 2006,
Borrowers may continue to draw upon up to $500,000 of the unfunded portion of
the Working Capital Loan Commitment through March 31, 2007.

     “Unrestricted Cash” means, as of any date of determination, Borrowers’ cash on hand and Cash
Equivalents which are not subject to a Lien of any Person other than Lender.

     “Working Capital Loan” means any Loan requested by Borrowers and funded by Lender for general
working capital purposes of Borrowers.

     “Working Capital Loan Coverage Ratio” means, as of any date of determination, the ratio of the
(a) Borrowing Base to (b) the Combined Working Capital Loans.

     “Threshold Amount": Seventy-Five Thousand Dollars ($75,000.00).

Part 2. — Additional Covenants and Conditions:

     1.     Limitation on Loans; Use of Proceeds.

          (a)     Equipment Loan Facility and Soft Cost Loan Sub-facility. Subject to the terms and
conditions of the Loan and Security Agreement:

               (i)     Equipment Loans. Lender agrees to make Equipment Loans to Borrowers from time to time
from the Closing Date and to and including the Termination Date in an aggregate original principal
amount up to but not exceeding the lesser of (A) the then unfunded portion of the Equipment Loan
Commitment, and (B) an amount equal to 100% of the amount paid or payable by Borrowers to a
manufacturer, vendor or dealer who is not an Affiliate of Borrowers for each item of Eligible
Equipment being financed with the proceeds of such Loan as shown on an invoice therefor (excluding
any commissions and any portion of the amount invoiced which relates to servicing of the Eligible
Equipment, delivery, freight and installation charges or sales taxes payable upon acquisition)
(“Original Cost”). Notwithstanding the foregoing, no item of Eligible Equipment shall be eligible
to be financed with the proceeds of an Equipment Loan if such item was acquired or first placed in
service by Borrowers earlier than 90 days prior to the Borrowing Date of such Equipment Loan;
provided, however, that so long as the Borrowing Date of the initial Equipment Loan occurs
prior to June 30, 2006, Borrowers may finance Eligible Equipment acquired or first placed in
service after July 1, 2005, at Original Cost.

3

 

               (ii)     Soft Cost Loans. Lender agrees to make Soft Cost Loans to Borrowers from time to time
from the Closing Date and to and including the Termination Date in an aggregate original principal
amount up to but not exceeding the lowest of (A) the then unfunded portion of the Equipment Loan
Commitment; (B) the then unfunded portion of the Soft Cost Loan Sublimit; and (C) an amount equal
to 100% of the Soft Costs proposed to be financed under the related Borrowing Request.
Notwithstanding the foregoing, no item of Soft Costs shall be eligible to be financed with the
proceeds of a Soft Cost Loan if such Soft Cost was first expended or incurred by Borrowers earlier
than 90 days prior to the Borrowing Date of such Soft Cost Loan; provided, however, that so
long as the Borrowing Date of the initial Soft Cost Loan occurs prior to June 30, 2006, Borrowers
may finance Soft Costs incurred, acquired or first placed in service after July 1, 2005, at
Original Cost subject to Lender’s approval of such Soft Costs.

               (iii)     Location of Equipment. All Eligible Equipment financed hereunder shall be located at
all times at Parent’s principal place of business in Petaluma, California, or such other place of
business located within the United States as may be consented to by Lender in writing.

          (b)     Growth Capital Loans.

               (i)     Growth Capital Loan Facility. Subject to the
terms and conditions of the Loan and Security Agreement and the Supplement, Lender agrees to make Growth Capital Loans to
Borrowers at any time from and after the Closing Date up to and including the Termination Date in
an aggregate original principal amount up to but not exceeding the Growth Capital Loan Commitment.

               (ii)     Use of Proceeds. The proceeds of the Growth Capital Loan shall not be restricted and may
be used by Borrowers for general corporate and operating purposes.

          (c)     Working Capital Loans; Mandatory Prepayment to Comply with Coverage Ratio. Subject to the
terms and conditions of the Loan and Security Agreement and this Supplement, Lender agrees to make
Working Capital Loans to Borrowers from time to time from the Closing Date and to and including the
Termination Date in an aggregate original principal amount up to but not exceeding the lesser of
(i) the Borrowing Base, and (ii) then unfunded portion of Lender’s Working Capital Loan Commitment.

               (i)     Borrowing Base Limitation; Mandatory Prepayment. At all times after the initial Working
Capital Loan is advanced, Borrowers shall maintain a Working Capital Loan Coverage Ratio of not
less than 1.0 to 1.0 (provided that failure to maintain such ratio shall not, by itself, constitute
an Event of Default). No later than five (5) days after the end of each month, Borrowers shall
deliver to Lender a certificate of the chief financial officer or other authorized representative
of Parent substantially in the form of Exhibit “D” to this Supplement (“Borrowing Base
Certificate"), setting forth a calculation of the Working Capital Loan Coverage Ratio. Subject to
Section 1(c)(ii) below, if as of such date of determination the Working Capital Loan Coverage Ratio
is less than 1.0 to 1.0, then Borrowers shall immediately prepay outstanding principal of Working
Capital Loans in an amount necessary to restore compliance with such Ratio, without premium or
penalty. Such mandatory principal prepayments shall be applied to the most remote installments of
such Loans so that the dollar amounts of previously scheduled monthly payments remains unchanged
and the outstanding Loans are repaid sooner.

               (ii)     Catch-Up Provision. Notwithstanding anything to the contrary in Section 1(c)(i) above,
if as of the end of any month that the Working Capital Loan Coverage Ratio is less than 1.0 to 1.0,
and if as of such date of determination no Event of Default has occurred and is continuing,
then Borrowers may, without penalty, delay prepaying the Loans as required by Section 1(c)(i) above
for up to 30 days after the date on which the related Borrowing Base Certificate was or should have
been delivered. If as of the end of such 30-day period the Borrowing Base has not increased in a
sufficient amount to restore compliance with the Working Capital Loan Coverage Ratio, then pursuant
to Section 1(c)(i) above Borrowers shall immediately prepay, in cash, outstanding principal of
Working Capital Loans in an amount necessary to restore compliance with the Working Capital Loan
Coverage Ratio as of the end of the most recent month-end. Such mandatory principal prepayments
shall be applied to the most remote installments of such Loans so that the dollar amounts of
previously scheduled monthly payments remains unchanged and the outstanding Loans are repaid
sooner.

4

 

          (d)     Minimum Funding Amount. Except to the extent the remaining Commitment is a lesser amount
each Loan or Loans requested by Borrowers to be made on a single Business Day shall be for a
minimum aggregate principal amount of One Hundred Thousand Dollars ($100,000). Borrowers shall not
submit a Borrowing Request more frequently than once each month, provided that a Borrowing Request
may request more than one type of Loan.

          (e)     Repayment of Loans.

               (i)     Repayment of Equipment and Soft Cost Loans. Principal of and interest on each Equipment
Loan and each Soft Cost Loan shall be payable as set forth in the Note (substantially in the form
of Exhibit “A-1”) evidencing such Loan, which Note shall provide substantially as follows.
Principal and interest at the Designated Rate shall be fully amortized over a period of 32 months
in equal, monthly installments. In particular, on the Borrowing Date applicable to the Loan
evidenced by such Note, Borrowers shall pay to Lender (i) if the Borrowing Date is not the first
day of the month, interest only at 1.00% per month, in advance, on the principal balance of the
Loan evidenced by such Note, for the period from such Borrowing Date through the last day of the
calendar month in which such Borrowing Date occurs, and (ii) the first amortization installment of
principal and interest. Commencing on the first day of the second full month after the Borrowing
Date, and continuing on the first day of each consecutive calendar month thereafter, principal and
interest at the Designated Rate shall be payable, in advance, in thirty-one (31) equal consecutive
monthly installments. Borrowers shall pay the Final Payment one month later. The rates for each
Equipment Loan and each Soft Cost Loan will be determined prior to funding and shall be fixed for
the term of each such Loan. The payment factors for the amortizing payments are based on a Prime
Rate of 7.50% (the “Base Rate") and will be indexed so that the all in yield (inclusive of any
interest-only and Final Payments) of the Loan shall be increased or decreased by any change in the
Prime Rate from the Base Rate, subject to a minimum Prime Rate of 7.50%.

               (ii)     Repayment of Growth Capital Loans. Principal of and interest on each Growth Capital Loan
shall be payable as set forth in the Note, substantially in the form attached hereto as Exhibit
“A-2”, evidencing such Loan, which Note shall provide substantially as follows. Principal and
interest at the Designated Rate shall be fully amortized over a period of 30 months in equal,
monthly installments, commencing after an initial 2 and one-half months period of interest-only
monthly payments which shall commence on June 15, 2006. In particular, if the Borrowing Date
is on June 15, 2006, then on that date Borrowers shall pay to Lender a first
(1st) interest-only installment at a rate of 1.00% per month on the outstanding
principal balance of the Note for the period from June 15, 2006 through June 30, 2006. If the
Borrowing Date is prior to  June 15, 2006, then on the first day of the first full calendar
month after such Borrowing Date, Borrowers shall pay to Lender interest only at a rate of 1.00% per
month on the outstanding principal balance of the Loan for the period from such Borrowing Date
through June 30, 2006. Commencing on July 1, 2006 after the Borrowing Date, and continuing on
August 1, 2006, Borrowers shall pay interest only, in advance, at a rate of 1.00% per month on the
outstanding principal balance of the Note for the ensuing month. Commencing on September 1, 2006,
and continuing on the first day of each consecutive calendar month thereafter, principal and
interest shall be payable, in advance, in thirty (30) equal consecutive installments in an amount
sufficient to fully amortize the Loan evidenced by such Note. Borrowers shall pay the Final
Payment on each Loan within 30 days of the last amortization payment. The payment factors for the
amortizing payments are based on a Prime Rate of 7.50% (the “Base Rate") and will be indexed so
that the all in yield (inclusive of any interest-only and Final Payments) of the Loan shall be
increased or decreased by any change in the Prime Rate from the Base Rate, subject to a minimum
Prime Rate of 7.50%.

               (iii)     Repayment of Working Capital Loans. Principal of and interest on each Working Capital
Loan shall be payable as set forth in the Note, substantially in the form attached hereto as
Exhibit “A-3”, evidencing such Loan, which Note shall provide substantially as follows.
Principal and interest at the Designated Rate shall be fully amortized over a period of 30 months
in equal, monthly installments, commencing after an initial 3-month period of interest-only monthly
payments. In particular, if the Borrowing Date is the first day of the month, then on that
date Borrowers shall pay to Lender a first (1st) interest-only installment at a rate of
1.00% per month on the outstanding principal balance of the Note for the ensuing month; and if the
Borrowing Date is not the first day of the month, then on the first day of first full
calendar month after such Borrowing Date, Borrowers shall pay to Lender interest only at a rate of
1.00% per month on the outstanding principal balance of the Loan for the period from such Borrowing
Date through the last day of the calendar month in which such Borrowing Date

5

 

occurs. Commencing on the first day of the second full month after the Borrowing Date, and
continuing on the first day of each of the next two succeeding months, Borrowers shall pay interest
only, in advance, at a rate of 1.00% per month on the outstanding principal balance of the Note for
the ensuing month. Commencing on the first day of the fourth (4th) full calendar month
after the Borrowing Date, and continuing on the first day of each consecutive calendar month
thereafter, principal and interest shall be payable, in advance, in thirty (30) equal consecutive
installments in an amount sufficient to fully amortize the Loan evidenced by such Note. Borrowers
shall pay the Final Payment on each Loan within 30 days of the last amortization payment. The
payment factors for the amortizing payments are based on a Prime Rate of 7.50% (the “Base Rate")
and will be indexed so that the all in yield (inclusive of any interest-only and Final Payments) of
the Loan shall be increased or decreased by any change in the Prime Rate from the Base Rate,
subject to a minimum Prime Rate of 7.50%.

          (f) Additional Condition Precedent to Loans in Excess of $4,000,000. In addition to the
satisfaction of all the other conditions precedent specified in Sections 4.1 and 4.2 of the Loan
and Security Agreement, Lender’s obligation to fund any Equipment, Soft Cost or Working Capital
Loan once Lender has advanced $4,000,000 in aggregate original principal amount of Loans (of any
type) is subject to the completion by Parent’s auditors, Marcum & Kliegman LLP, of its audit of
Borrowers’ 2006 financial reporting year without a “going concern” qualification.

     2.     Voluntary Prepayment. No Loan may be prepaid voluntarily except as provided in this
Section. Borrowers may voluntarily prepay all Loans in whole but not in part at any time by
tendering to Lender cash payment in respect of such Loans in an amount equal to the sum of: (i) all
accrued and unpaid Basic Interest on each such Loan as of the date of prepayment; (ii) the
undiscounted Final Payment on each such Loan; and (iii) an amount equal to the undiscounted, total
amount of all installment payments of principal and Basic Interest that would have accrued and been
payable from the date of prepayment through the stated Maturity Date of each Loan had it remained
outstanding and been paid in accordance with the terms of the related Note.

     3.     Special Provisions Relating to Lien on Intellectual Property; Scope of Collateral Security
for Loans; Negative Pledge on Intellectual Property.

          (a)     Initial Exclusion of IP from “Collateral.” In reliance on Borrowers’ covenant in Section
6.2 of the Loan and Security Agreement to keep all of their Intellectual Property assets free and
clear of Liens other than as set forth in Section 6.2, Lender has agreed, subject to the provisions
of this Supplement, to exclude Intellectual Property from the Collateral over which each Borrower
has granted to Lender a Lien to secure the Obligations; provided that Collateral shall include
Accounts and General Intangibles that consist of rights to payment and proceeds from the sale,
licensing or disposition of all or any part, or rights in, the Intellectual Property (the “IP
Rights to Payment"); and further provided, that if at any time while the Obligations are
outstanding a judicial authority (including a U.S. Bankruptcy Court) determines that a security
interest in intellectual property is necessary to the creation or perfection of Lender’s Lien in
the IP Rights to Payment, then the Collateral shall automatically, retroactive to the Closing Date,
include the Intellectual Property solely to the extent necessary to permit perfection of Lender’s
security interest in the IP Rights to Payment. Consistent with the foregoing, notwithstanding
anything to the contrary in Section 2.10 of the Loan and Security Agreement, or in the definition
of “Collateral” or elsewhere in Article 11 of the Loan and Security Agreement, Borrower’s initial
grant and the perfection of security interests in its assets as security for the Obligations and
the definition of “Collateral” shall be limited to the following:

“Collateral” means all of Borrowers’ right, title and interest in and to
the following property, whether now owned or hereafter acquired and
wherever located: (a) all Receivables; (b) all Equipment; (c) all Fixtures;
(d) all General Intangibles (subject to the exclusion described below with
respect to Intellectual Property); (e) all Inventory; (f) all Investment
Property; (g) all Deposit Accounts; (h) all other Goods and personal
property of Borrowers (subject to the exclusion described below with
respect to Intellectual Property), whether tangible or intangible and
whether now or hereafter owned or existing, leased, consigned by or to, or
acquired by, Borrowers and wherever located; (i) all Records; and (j) all
Proceeds of each of the foregoing and all accessions to, substitutions and
replacements for, and rents, profits and products of each of the

6

 

foregoing. Notwithstanding the foregoing, the Collateral shall not include
Intellectual Property; provided, however, that the Collateral shall
include all Accounts and General Intangibles that consist of rights to
payment and proceeds from the sale, licensing or disposition of all or any
part, or rights in, the Intellectual Property (the “IP Rights to Payment");
provided, further, that if at any time while the Obligations are
outstanding a judicial authority (including a U.S. Bankruptcy Court)
determines that a security interest in the intellectual property is
necessary to the creation or perfection of Lender’s Lien in the IP Rights
to Payment, then the Collateral shall automatically, retroactive to the
Closing Date, include the Intellectual Property solely to the extent
necessary to permit perfection of Lender’s security interest in the IP
Rights to Payment.

          (b)     IP Lien Upon Reduced Liquidity; Release of IP Lien Upon Equity Funding. Borrowers agree
that if at any time its Unrestricted Cash is less than 600% of Average Expenses, then the
definition of Collateral in Article 11 of the Loan and Security Agreement shall be amended
automatically and immediately, without any further action or writing required by the parties, to
read as stated in Article 11 of the Loan and Security Agreement without reference to Section 4(a)
above, such that all of Borrowers’ Intellectual Property then owned and thereafter arising or
acquired becomes part of the Collateral for all purposes of the Loan and Security Agreement. In
connection therewith: (A) Lender may file an amendment to its UCC-1 financing statement to reflect
the broader scope of the Collateral to cover Intellectual Property; (B) Borrowers shall execute and
deliver, at Borrowers’ sole cost and expense, all documents and instruments reasonably necessary to
perfect such Lien, including an Intellectual Property Security Agreement, substantially the form
attached hereto as Exhibit “E”; and (C) Lender shall have verified by customary lien
searches that upon filing such amendment to its financing statement and other perfection documents
Lender will have a perfected Lien of first priority against all Intellectual Property Collateral
subject only to Permitted Liens. If after the Lien upon the Borrowers’ Intellectual
Property in favor of the Lender has been put in place, Parent completes one or more rounds of
equity financing (including convertible, subordinated debt) from which Parent receives aggregate
proceeds of at least $10 million, then so long no Event of Default has occurred and is then
continuing, Lender agrees upon written request of Parent to partially release its Lien with respect
to that portion of the Collateral consisting of Intellectual Property, and upon such partial
release of Lien the provisions of Section 3(a) above shall become applicable.

     4.     Subordination of Funded Debt. During the term of the Loan and Security Agreement and until
performance of all Obligations to Lender, Borrowers shall not incur or permit to exist any
Indebtedness for borrowed money (excluding Indebtedness permitted under Section 6.1 of the Loan and
Security Agreement), unless (a) approved by Lender and (b) where the holder’s right to repayment of
such Indebtedness, the priority of any Lien on the Collateral securing the same, and the rights of
the holder thereof to enforce remedies against Borrowers following default have been made
subordinate to the Liens of Lender and the prior payment of the Obligations to Lender under the
Loan Documents pursuant to a written subordination agreement approved by Lender in its sole
discretion, which agreement may provide that regularly scheduled payments of accrued interest on
such subordinated Indebtedness may be paid by Borrowers and retained by the holder so long as no
Event of Default has occurred and is continuing. Notwithstanding the foregoing, if Parent (a) has
successfully concluded an initial public offering of its common stock, and (b) Borrowers’ have
Unrestricted Cash greater than two times the aggregate principal amount of outstanding Loans from
Lender, Borrowers may enter into additional credit facilities with third parties upon the prior
written consent of Lender, which shall not be unreasonably withheld.

     5.     Factoring of Mexican Ministry of Health Accounts Receivables. The portion of the
Collateral consisting of Mexican Ministry of Health accounts receivable owed to Oculus Technologies
of Mexico S.A. de C.V. shall be included in the Borrowing Base (to the extent that such accounts
receivable otherwise satisfy each of the elements of the definition of Eligible Accounts
Receivable) until such time as Oculus Technologies of Mexico S.A. de C.V. enters into an agreement
with NAFINSA for the factoring of a portion of such accounts receivable. Subsequent to the
effective date of such agreement, such portion of the accounts receivable factored to NAFINSA shall
not be deemed to be Eligible Accounts Receivable for purposes of calculation of Borrowing Base.

     6.     Issuance of Warrant to Lender. As additional consideration for the making of the
Commitment, Lender has earned and is entitled to receive immediately upon the execution of the Loan
and Security Agreement and this Supplement, a warrant instrument issued by Parent substantially the
form attached hereto as Exhibit “E” (the

7

 

“Warrant"), exercisable for 215,000 of fully paid and nonassessable shares of Parent’s Series B
convertible preferred stock (“Preferred Stock”) at an initial exercise price per share of $4.50 per
share, provided, however, if Parent does not complete an initial public offering of its
common stock (“IPO”) prior to March 31, 2007, then the initial exercise price per share shall be
adjusted to 75% of either the Next Round Price, as defined in the Warrant, or a subsequent IPO
completed after March 31, 2007 (the “Stock Purchase Price”). The Warrant shall be immediately
vested and exercisable with respect to such shares.

          In addition thereto, Lender shall be entitled to purchase under the Warrant at the Stock
Purchase Price up to 85,000 additional fully paid and nonassessable shares of the Parent’s
Preferred Stock pro rata with the aggregate original principal amount of all Loans advanced by
Lender (the “Additional Shares”). (For example, if Borrowers draw $1,000,000 of the $5,000,000
Commitment, Lender will be entitled to purchase an additional 17,000 Additional Shares, calculated
as follows: 1,000,000/5,000,000=.20*85,000 shares=17,000 shares). The Additional Shares shall vest
pro rata upon each advance by the Lender of a Loan to Borrowers.

The Warrant shall include piggyback and S-3 registration rights, anti-dilution protections and
other rights and protections equivalent to those rights and protections granted to the holders of
the series of preferred stock for which the Warrant is exercisable, and shall remain exercisable
beyond any public offering of Parent’s securities or merger transaction, and shall not be subject
to any “pay to play” provisions in Parent’s charter documents. The Warrant shall be exercisable at
any time and from time to time through March 31, 2017. Parent acknowledges that Lender has
assigned its rights to receive the Warrant to its parent, Venture Lending & Leasing IV, LLC; in
connection therewith, Parent shall issue the Warrant directly to Venture Lending & Leasing IV, LLC.
Lender shall furnish to Parent a copy of the agreement in which Lender assigned the Warrant to
Venture Lending & Leasing IV, LLC.

     7.     Completion of Due Diligence; Payment and Disposition of Commitment Fee. As an additional
condition precedent under Section 4.1 of the Loan and Security Agreement, Lender shall have
completed to its satisfaction its due diligence review of Borrowers’ business and financial
condition and prospects, and Lender’s credit committee shall have approved the Commitment. If this
condition is not satisfied, Lender shall refund to Borrowers the Twenty-Five Thousand Dollar
($25,000.00) commitment fee previously paid to Lender on account of the Commitment. Lender agrees
that with respect to each Loan advanced, on the Borrowing Date applicable to such Loan, Lender
shall credit against the payments due from Borrowers on such date in respect of such Loan an amount
equal to the product of Twenty-Five Thousand Dollars ($25,000.00) and a fraction the numerator of
which is the principal amount of such Loan and the denominator of which is Five Million Dollars
($5,000,000.00), until the aggregate amount of such credits equals but does not exceed Twenty-Five
Thousand Dollars ($25,000.00).

     8.     Debits to Account for ACH Transfers. For purposes of Section 2.2 and 5.10 of the Loan and
Security Agreement, Borrower’s Primary Operating Account is:

Cupertino National Bank

3 Palo Alto Square, Suite 150

Palo Alto, CA 94306

Account No.: 3115895

Routing No.: 121141534  — for credit to Greater Bay Bank, Account # 3115895

Contact: Tod Racine Tel: 650-813-3800

Loans will be advanced to the account specified above and payments will be automatically debited
from the same account.

Part 3. — Additional Representations:

     Borrowers represent and warrant that as of the Closing Date and each Borrowing Date:

	 	 	 	 	 
	a)	 	Its chief executive office is located at:
	 
	 	 	 	 
	 

	 	(i)
	 	Parent: 1129 North McDowell Blvd., Petaluma, CA 94954

8

 

	 	 	 	 	 
	 

	 	(ii)
	 	Oculus Technologies of Mexico S.A. de C.V.: Industria Vidriera 81
	 
	 	 	 	 
	 	 	Fracc Industrial Zapopan Norte, Zapopan, Jalisco, México, 45130
	 
	 	 	 	 
	 

	 	(iii)
	 	Oculus Innovative Sciences Netherlands B.V.:
	 

	 	 	 	Nusterweg 123, 6136 KT Sittard, P.O. Box 5056, 6130 PB Sittard, The Netherlands
	 
	 	 	 	 
	b)	 	Its Equipment is located at:
	 
	 	 	 	 
	 

	 	(i)
	 	Parent: 1129 North McDowell Blvd., Petaluma, CA 94954
	 
	 	 	 	 
	 

	 	(ii)
	 	Oculus Technologies of Mexico S.A. de C.V.: Industria Vidriera 81
	 
	 	 	 	 
	 	 	Fracc Industrial Zapopan Norte, Zapopan, Jalisco, México, 45130
	 
	 	 	 	 
	 	 	Oculus Innovative Sciences Netherlands B.V.: Nusterweg 123, 6136 KT
	 

	 	 	 	Sittard, P.O. Box 5056, 6130 PB Sittard, The Netherlands
	 
	 	 	 	 
	c)	 	Its Records are located at:
	 
	 	 	 	 
	 

	 	(i)
	 	Parent: 1129 North McDowell Blvd., Petaluma, CA 94954
	 
	 	 	 	 
	 

	 	(ii)
	 	Oculus Technologies of Mexico S.A. de C.V.: Industria Vidriera 81
	 
	 	 	 	 
	 	 	Fracc Industrial Zapopan Norte, Zapopan, Jalisco, México, 45130
	 
	 	 	 	 
	 

	 	(ii)
	 	Oculus Innovative Sciences Netherlands B.V.:
	 

	 	 	 	Nusterweg 123, 6136 KT Sittard, P.O. Box 5056, 6130 PB Sittard, The Netherlands
	 
	 	 	 	 
	d)	 	Its Inventory is located at various distributor warehouse sites and at the Borrowers’ premises, as referenced below:
	 
	 	 	 	 
	 

	 	(i)
	 	Parent: 1129 North McDowell Blvd., Petaluma, CA 94954

	 
	 	 	 	 
	 

	 	(ii)
	 	Oculus Technologies of Mexico S.A. de C.V.: Pedro Martinez Rivas 861
	 
	 	 	 	 
	 	 	Parque Industrial Belenes Norte, Zapopan, Jalisco, México, 45150
	 
	 	 	 	 
	 

	 	(iii)
	 	Oculus Innovative Sciences Netherlands B.V.: Nusterweg 123, 6136 KT
Sittard, P.O. Box 5056, 6130 PB Sittard, The Netherlands
	 
	 	 	 	 
	e)	 	In addition to its chief executive office, Borrowers maintain offices or operates its business at the following locations:

Aquamed Technologies

1129 N. McDowell Blvd.

Petaluma, CA 94954

USA

MicroMed Laboratories, Inc.

1129 N. McDowell Blvd.

Petaluma, CA 94954

USA

L3 Pharmaceuticals, Inc.

1129 N. McDowell Blvd.

Petaluma, CA 94954

USA

Oculus Technologies of Mexico S.A. de C.V.

Industria Vidriera 81

Fracc Industrial Zapopan Norte

Zapopan, Jalisco

México

45130 (manufacturing and adminsitration)

9

 

Pedro Martinez Rivas 861

Parque Industrial Belenes Norte

Zapopan, Jalisco

México

45150 (warehouse)

Oculus Innovative Sciences Netherlands B.V.

Nusterweg 123

6136 KT Sittard

P.O. Box 5056

6130 PB Sittard

The Netherlands

	 	f)	 	Other than its full corporate name, Parent has conducted business using the
following trade names or fictitious business names: Micromed Laboratories
	 
	 	g)	 	Parent’s Federal Tax I.D. number is: 680423298
	 
	 	h)	 	Parent’s California state corporation I.D. number is: C2160639
	 
	 	i)	 	Parent is a majority owner of or in a control relationship with the following
business entities:

Aquamed Technologies

1129 N. McDowell Blvd.

Petaluma, CA 94954

USA

MicroMed Laboratories, Inc.

1129 N. McDowell Blvd.

Petaluma, CA 94954

USA

(corporation formed but shares not yet issued)

L3 Pharmaceuticals, Inc.

1129 N. McDowell Blvd.

Petaluma, CA 94954

USA

(corporation formed but shares not yet issued)

Oculus Technologies of Mexico S.A. de C.V.

Industria Vidriera 81

Fracc Industrial Zapopan Norte

Zapopan, Jalisco

México

45130 [to be clarified]

Oculus Innovative Sciences Netherlands B.V.

Nusterweg 123

6136 KT Sittard

P.O. Box 5056

6130 PB Sittard

The Netherlands

10

 

	 	 	i) Borrower’s Other Deposit and Investment Accounts: Including Borrower’s
Primary Operating Account identified in Section 8 of Part 2 above, Borrowers
maintain the following other deposit and investment accounts located within the
United States:

______________________________________________________

Merrill Lynch

600 California Street, 8th Floor San Francisco, CA 94108

Mellon Bank N.A. One Mellon Bank Center, Pittsburgh, PA 15258

ABA# 043000261

For Credit to Merrill Lynch, Account 1011730

For further credit to Oculus Innovative Sciences Acct 6CA-07225

David Bell

415-955-3700

Financial Advisor

6CA-07225

Part 4. — Additional Loan Documents:

	 	 	 
	Form of Note for Equipment and Soft Cost Loans

	 	Exhibit “A-1”
	Form of Note for Growth Capital Loans

	 	Exhibit “A-2”
	Form of Note for Working Capital Loans

	 	Exhibit “A-3”
	Form of Borrowing Request

	 	Exhibit “B”
	Form of Compliance Certificate

	 	Exhibit “C”
	Form of Borrowing Base Certificate

	 	Exhibit “D”
	Form of Intellectual Property Security Agreement

	 	Exhibit “E”
	Form of Warrant

	 	Exhibit “F”
	Form of Landlord Waiver

	 	Exhibit “G”
	Form of Legal Opinion

	 	Exhibit “H”

[Signature Page Follows]

11

 

     IN WITNESS WHEREOF, the parties have executed this Supplement as of the date first above
written.

	 	 	 	 	 
	 	BORROWERS:

 	 
	 	OCULUS INNOVATIVE SCIENCES, INC.

 	 
	 	By:  	/s/ Hojabr Alimi 
 	 
	 	 	Name:  	Hojabr Alimi 	 
	 	 	Title:  	President/CEO 	 
	 

	 	 	 
	Address for Notices:

	 	Attn: General Counsel
	 

	 	1129 North McDowell Blvd., Petaluma, CA 94954
	 

	 	Fax #: (707) 283-0551

	 	 	 	 	 
	 	OCULUS TECHNOLOGIES OF MEXICO S.A. DE C.V.

 	 
	 	By:  	/s/ Bruce Thornton 
 	 
	 	 	Name:  	Bruce Thornton 	 
	 	 	Title:  	VP Global Ops and Sales 	 
	 

	 	 	 
	Address for Notices:

	 	Attn: General Counsel, Oculus Innovative Sciences, Inc.
	 

	 	1129 North McDowell Blvd., Petaluma, CA 94954
	 

	 	Fax #: (707) 283-0551

	 	 	 	 	 
	 	OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.

 	 
	 	By:  	/s/ Bruce Thornton 
 	 
	 	 	Name:  	Bruce Thornton 	 
	 	 	Title:  	VP Global Ops and Sales 	 
	 

	 	 	 
	Address for Notices:

	 	Attn: General Counsel, Oculus Innovative Sciences, Inc.
	 

	 	1129 North McDowell Blvd., Petaluma, CA 94954
	 

	 	Fax #: (707) 283-0551
	 
	 	 
	Copy of any Notice to Borrowers:

	 	Attn: Sylvia K. Burks
	 

	 	Pillsbury Winthrop Shaw Pittman LLP
	 

	 	2475 Hanover Street, Palo Alto, CA 94304-1114
	 

	 	Fax: (650) 233 4545
	 
	 	 
	 

	 	LENDER:

	 	 	 	 	 
	 	VENTURE LENDING & LEASING IV, INC.

 	 
	 	By:  	/s/ Ronald W. Swenson 	 
	 	 	Name:  	Ronald W. Swenson 	 
	 	 	Title:  	CEO 	 
	 

	 	 	 
	Address for Notices:

	 	Attn: Chief Financial Officer
	 

	 	2010 North First Street, Suite 310
	 

	 	San Jose, California 95131
	 

	 	Fax #: (408) 436-8625

12

 

EXHIBIT “A-1"

FORM OF PROMISSORY NOTE

[Equipment and Soft Cost Loans]

[Note
No. X-XXX]

			
	$_____________	 	_______________, 200___
San Jose, California

      

     Each of the undersigned (“Borrowers”) jointly and severally promises to pay to the order of
VENTURE LENDING & LEASING IV, INC., a Maryland corporation (“Lender”), at its office at 2010 North
First Street, Suite 310, San Jose, California 95131, or at such other place as Lender may designate
in writing, in lawful money of the United States of America, the principal sum of
_________________________ Dollars ($____________), with Basic Interest thereon (except as otherwise
provided herein) from the date hereof until maturity, whether scheduled or accelerated, at a fixed
rate per annum equal to [the Prime Rate on the Business Day Lender prepares the Note plus 0.50%,
but in no event less than 8.00%; (the “Designated Rate”), and a Final Payment in the sum of 
[6.581% of face amount]  Dollars ($____________) payable on the Maturity Date.]

          This Note is one of the Notes referred to in, and is entitled to all the benefits of, a Loan
and Security Agreement dated as of June 14, 2006, between Borrowers and Lender (the “Loan
Agreement”). Each capitalized term not otherwise defined herein shall have the meaning set forth
in the Loan Agreement. The Loan Agreement contains provisions for the acceleration of the maturity
of this Note upon the happening of certain stated events.

     Principal of and interest on this Note shall be payable as follows:

     On the Borrowing Date, Borrowers shall pay [if the Borrowing Date is not the first day of the
month: (i) interest at the rate of 1.00% per month on the outstanding principal balance of this
Note for the period from the Borrowing Date through  [the last day of the same month]____________,
in the amount of $___; and (ii)] a first (1st) amortization installment of
principal and interest at the Designated Rate in the amount of ____________, in advance for
the month of [first full month after Borrowing Date].

     Commencing on the first day of the second full month after the Borrowing Date, and continuing
on the first day of each consecutive month thereafter, principal and interest at the Designated
Rate shall be payable, in advance, in thirty (30) equal consecutive installments of
____________ Dollars ($____________) each, with a thirty-first (31st)
installment on ____________, 200__ equal to the entire unpaid principal balance and accrued
interest at the Designated Rate and any unpaid expenses and fees. The Final Payment in the amount
of $____________ shall be due and payable on  [one month later] , 200_.]

     This Note may be voluntarily prepaid only as permitted under Section 2 of Part 2 of the
Supplement to the Loan Agreement.

     Any unpaid payments of principal or interest on this Note shall bear interest from their
respective maturities, whether scheduled or accelerated, at a rate per annum equal to the Default
Rate. Borrowers shall pay such interest on demand.

     Interest, charges and fees shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall Borrowers be

 

 

obligated to pay interest, charges or fees at a rate in
excess of the highest rate permitted by applicable law from time to time in effect.

     If Borrowers are late in making any payment under this Note by more than five (5) days,
Borrowers agree to pay a “late charge” of five percent (5%) of the installment due, but not less
than fifty dollars ($50.00) for any one such delinquent payment. This late charge may be charged
by Lender for the purpose of defraying the expenses incidental to the handling of such delinquent
amounts. Borrowers acknowledge that such late charge represents a reasonable sum considering all
of the circumstances existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by Lender due to the failure of Borrowers to make
timely payments. Borrowers further agree that proof of actual damages would be costly and
inconvenient. Such late charge shall be paid without prejudice to the right of Lender to collect
any other amounts provided to be paid or to declare a default under this Note or any of the other
Loan Documents or from exercising any other rights and remedies of Lender.

     This Note shall be governed by, and construed in accordance with, the laws of the State of
California.

	 	 	 	 	 	 	 
	 	 	OCULUS INNOVATIVE SCIENCES, INC.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	OCULUS TECHNOLOGIES OF MEXICO S.A. DE C.V.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:
	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 

 

 

EXHIBIT “A-2"

FORM OF PROMISSORY NOTE

[Growth Capital Loans]

[Note
No. X-XXX]

					
	$________________	 	 	 	____________,
200___

San Jose, California

     

     Each of the undersigned (“Borrowers”) jointly and severally promises to pay to the order of
VENTURE LENDING & LEASING IV, INC., a Maryland corporation (“Lender”), at its office at 2010 North
First Street, Suite 310, San Jose, California 95131, or at such other place as Lender may designate
in writing, in lawful money of the United States of America, the principal sum of
___Dollars ($_____________), with Basic Interest thereon (except as otherwise
provided herein) from the date hereof until maturity, whether scheduled or accelerated, at a fixed
rate per annum equal to [the Prime Rate on the Business Day Lender prepares the Note plus 0.50%,
but in no event less than 8.00%; (the “Designated Rate”), and a Final Payment in the sum of 
[6.059% of face amount]  Dollars ($_____________) payable on the Maturity Date.]

     This Note is one of the Notes referred to in, and is entitled to all the benefits of, a Loan
and Security Agreement dated as of June 14, 2006, between Borrowers and Lender (the “Loan
Agreement”). Each capitalized term not otherwise defined herein shall have the meaning set forth
in the Loan Agreement. The Loan Agreement contains provisions for the acceleration of the maturity
of this Note upon the happening of certain stated events.

     Principal of and interest on this Note shall be payable as follows:

     On the Borrowing Date, Borrowers shall pay interest only at the rate of 1.00% per month on the
outstanding principal balance of this Note for the period from the Borrowing Date through June 30,
2006, in the amount of $_____________.

     Commencing on July 1, 2006, and continuing on August 1, 2006, Borrowers shall make payments in
advance of interest only at the rate of 1.00% per month on the principal balance outstanding
hereunder, in the amount of $_____________ each.

     Commencing on September 1,2006, and continuing on the first day of each consecutive month
thereafter, principal and interest at the Designated Rate shall be payable, in advance, in
twenty-nine (29) equal consecutive installments of _____________ Dollars ($_____________)
each, with a thirtieth
(30th)
installment on _____________, 200__, equal to the entire
unpaid principal balance and accrued interest at the Designated Rate and any unpaid expenses and
fees. The Final Payment in the amount of $_____________ shall be due and payable on 
[one month later] , 200_.]

     This Note may be voluntarily prepaid only as permitted under Section 2 of Part 2 of the
Supplement to the Loan Agreement.

     Any unpaid payments of principal or interest on this Note shall bear interest from their
respective maturities, whether scheduled or accelerated, at a rate per annum equal to the Default
Rate. Borrowers shall pay such interest on demand.

     Interest, charges and fees shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall Borrowers be

 

 

obligated to pay interest, charges or fees at a rate in excess of the highest rate permitted by
applicable law from time to time in effect.

     If Borrowers are late in making any payment under this Note by more than five (5) days,
Borrowers agree to pay a “late charge” of five percent (5%) of the installment due, but not less
than fifty dollars ($50.00) for any one such delinquent payment. This late charge may be charged
by Lender for the purpose of defraying the expenses incidental to the handling of such delinquent
amounts. Borrowers acknowledge that such late charge represents a reasonable sum considering all
of the circumstances existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by Lender due to the failure of Borrowers to make
timely payments. Borrowers further agree that proof of actual damages would be costly and
inconvenient. Such late charge shall be paid without prejudice to the right of Lender to collect
any other amounts provided to be paid or to declare a default under this Note or any of the other
Loan Documents or from exercising any other rights and remedies of Lender.

     This Note shall be governed by, and construed in accordance with, the laws of the State of
California.

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	OCULUS INNOVATIVE SCIENCES, INC.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	OCULUS TECHNOLOGIES OF MEXICO S.A. DE C.V.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 

 

 

EXHIBIT “A-3"

FORM OF PROMISSORY NOTE

[Working Capital Loans]

[Note
No. X-XXX]

			
	$_____________
	 	_____________, 200__

San Jose, California

      

     Each of the undersigned (“Borrowers”) jointly and severally promises to pay to the order of
VENTURE LENDING & LEASING IV, INC., a Maryland corporation (“Lender”), at its office at 2010 North
First Street, Suite 310, San Jose, California 95131, or at such other place as Lender may designate
in writing, in lawful money of the United States of America, the principal sum of
_____________ Dollars ($_____________), with Basic Interest thereon (except as otherwise
provided herein) from the date hereof until maturity, whether scheduled or accelerated, at a fixed
rate per annum equal to [the Prime Rate on the Business Day Lender prepares the Note plus 0.50%,
but in no event less than 8.00%; (the “Designated Rate”), and a Final Payment in the sum of 
[6.059% of face amount]  Dollars ($_____________) payable on the Maturity Date.]

     This Note is one of the Notes referred to in, and is entitled to all the benefits of, a Loan
and Security Agreement dated as of June 14, 2006, between Borrowers and Lender (the “Loan
Agreement”). Each capitalized term not otherwise defined herein shall have the meaning set forth
in the Loan Agreement. The Loan Agreement contains provisions for the acceleration of the maturity
of this Note upon the happening of certain stated events.

     Principal of and interest on this Note shall be payable as follows:

     On the Borrowing Date, Borrowers shall pay [if the Borrowing Date is not the first day of the
month: (i) interest only at the rate of 1.00% per month on the outstanding principal balance of
this Note for the period from the Borrowing Date through  [the last day of the same
month]_____________, in the amount of $_____________; and (ii)] interest only at the rate of 1.00% per
month, in the amount of $_____________, for the month of [date of first regular interest-only
installment].

     Commencing on the first day of the second full month after the Borrowing Date, and continuing
on the first day of the third full month after the Borrowing Date, Borrowers shall make payments in
advance of interest only at the rate of 1.00% per month on the principal balance outstanding
hereunder, in the amount of $_____________ each.

     Commencing on the first day of the fourth full month after the Borrowing Date, and continuing
on the first day of each consecutive month thereafter, principal and interest at the Designated
Rate shall be payable, in advance, in twenty-nine (29) equal consecutive installments of
_____________ Dollars ($_____________) each, with a thirtieth (30th) installment
on _____________, 200__,equal to the entire unpaid principal balance and accrued interest at the
Designated Rate and any unpaid expenses and fees. The Final Payment in the amount of
$___shall be due and payable on  [one month later] , 200_.]

     This Note may be voluntarily prepaid only as permitted under Section 2 of Part 2 of the
Supplement to the Loan Agreement.

     Any unpaid payments of principal or interest on this Note shall bear interest from their
respective maturities, whether scheduled or accelerated, at a rate per annum equal to the Default
Rate. Borrowers shall pay such interest on demand.

 

 

     Interest, charges and fees shall be calculated for actual days elapsed on the basis of a
360-day year, which results in higher interest, charge or fee payments than if a 365-day year were
used. In no event shall Borrowers be obligated to pay interest, charges or fees at a rate in
excess of the highest rate permitted by applicable law from time to time in effect.

     If Borrowers are late in making any payment under this Note by more than five (5) days,
Borrowers agree to pay a “late charge” of five percent (5%) of the installment due, but not less
than fifty dollars ($50.00) for any one such delinquent payment. This late charge may be charged
by Lender for the purpose of defraying the expenses incidental to the handling of such delinquent
amounts. Borrowers acknowledge that such late charge represents a reasonable sum considering all
of the circumstances existing on the date of this Note and represents a fair and reasonable
estimate of the costs that will be sustained by Lender due to the failure of Borrowers to make
timely payments. Borrowers further agree that proof of actual damages would be costly and
inconvenient. Such late charge shall be paid without prejudice to the right of Lender to collect
any other amounts provided to be paid or to declare a default under this Note or any of the other
Loan Documents or from exercising any other rights and remedies of Lender.

     This Note shall be governed by, and construed in accordance with, the laws of the State of
California.

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	OCULUS INNOVATIVE SCIENCES, INC.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	OCULUS TECHNOLOGIES OF MEXICO S.A. DE C.V.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	OCULUS INNOVATIVE SCIENCES NETHERLANDS B.V.
	 
	 	 	 	 	 	 
	 

	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Its:	 	 	 	 
	 

	 	 	 	 	 	 

 

 

EXHIBIT “B”

FORM OF BORROWING REQUEST

[Date]

Venture Lending & Leasing IV, Inc.

2010 North First Street, Suite 310

San Jose, CA 95131

Re:     Oculus Innovative Sciences, Inc.

Gentlemen:

          Reference is made to the Loan and Security Agreement dated as of June 14, 2006 (as amended
from time to time, the “Loan Agreement”, the capitalized terms used herein as defined therein),
between Venture Lending & Leasing IV, Inc. and Oculus Innovative Sciences, Inc.. (the “Company”),
Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative Sciences Netherlands B.V., as
borrowers (together with the Company, “Borrowers”).

          The undersigned is the ___of the Company, and hereby requests on behalf of
Borrowers a Loan under the Loan Agreement, and in that connection certifies as follows:

          1. The type(s) of the proposed Loan is/are [an Equipment Loan][a Soft Cost Loan][Growth
Capital Loan][Working Capital Loan]. The amount of the proposed Loan is
_______ and ______/100 Dollars ($___). The Borrowing Date of the
proposed Loan is __________ ___, 200___.

          2. [If an Equipment Loan and/or Soft Cost Loan] The Eligible Equipment and/or Soft Costs to be
financed with the proceeds of the Loan(s) is or will be located at the address(es) shown on the
attached Schedule 1 or amendment or supplement to Schedule 1, which is hereby
incorporated by reference in and made a part of the Loan Agreement. The requested amount of the
Equipment Loan does not exceed the aggregate of one hundred percent (100%) of the amount paid or
payable by a Borrower to a non-affiliated manufacturer, vendor or dealer for such items of
Equipment as shown on an invoice therefor (excluding any commissions and any portion of the payment
which relates to the servicing of the equipment and sales taxes payable by a Borrower upon
acquisition, and delivery charges). No item of Equipment or Soft Costs was expended, first placed
in service or acquired by a Borrower earlier than ninety (90) days before the proposed Borrowing
Date [or, in the case of Eligible Equipment to be financed with an Equipment Loan, on or after July
1, 2005 for the initial Equipment Loan, if such Loan is funded prior to March 31, 2006] [or, in the
case of Soft Costs to be financed with a Soft Cost Loan, on or after July 1, 2005 for the initial
Soft Cost Loan, if such Loan is funded prior to March 31, 2006].

          3. [If a Working Capital Loan]. The proposed Working Capital Loan is not in excess of the
Borrowing Base, and after giving effect to the proposed Working Capital Loan, the outstanding
balance of all Working Capital Loans will not exceed the Borrowing Base. The Borrowing Base as of
_____________, is calculated as follows:

     Borrowing Base:

	 	 	 	 	 	 	 
	 

	 	(a) Eligible Accounts Receivable — U.S. account debtors
	 	 	 	$_____________
	 

	 	(b) 80% of (a)
	 	 	 	$_____________
	 

	 	(c) Eligible Accounts Receivable — foreign account debtors	 	 	 	 
	 

	 	(including foreign bank LCs and accounts from Mexican Ministry of Health
	 	 	 	$_____________

 

 

	 	 	 	 	 	 	 
	 

	(d)	60% of (c) 	 	 	$______________	 
	 
	 

	(e) 	does total of lines (b) and (d) equal or exceed the amount
of proposed Working Capital Loan?
	 	YES / NO	 	 
	 
	 

	(d) 	does total of lines (b) and (d) equal or exceed the
amount of all Working Capital Loans
outstanding plus the amount of the proposed Loan?
	 	YES/NO	 	 

          4. As of this date, no Default or Event of Default has occurred and is continuing, or will
result from the making of the proposed Loan, the representations and warranties of Borrowers
contained in Article 3 of the Loan Agreement are true and correct, and the conditions precedent
described in Article 4 of the Loan Agreement have been met.

          5. No event that has had, or could reasonably be expected to have, a Material Adverse Change
has occurred.

          6. The Company’s most recent [financial projections or business plan] dated ___, are
enclosed herewith.

     The Company shall notify you promptly before the funding of the Loan if any of the matters to
which I have certified above shall not be true and correct on the Borrowing Date

	 	 	 	 	 	 	 
	 	 	Very truly yours,
	 
	 	 	 	 	 	 
	 	 	OCULUS INNOVATIVE
SCIENCES, INC.
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

 

 

Schedule 1 to the Loan and Security Agreement

Description of Equipment/Soft Costs

	 	 	 	 	 	 	 	 	 	 	 	 	 
	Quantity	 	Article	 	Make	 	Year Mfg.	 	Model/ Serial #	 	Location	 	* if Soft Cost
	 

	 	 
	 	 
	 	 
	 	 
	 	 
	 	 

          See attached continuation to Schedule 1
 

           

           

           

           

together with all improvements, replacements, accessions and additions thereto, wherever located,
and all Proceeds thereof arising from the sale, lease, rental or other use or disposition of any
such property, including all rights to payment with respect to insurance or condemnation, returned
premiums, or any cause of action relating to any of the foregoing.

(E) OCULUS
INNOVATIVE SCIENCES, INC.

 

	 	 	 
	By:
	 	 

	Name:
	 	 

	Its:
	 	 

	 
	 	 
	VENTURE LENDING
& LEASING IV, INC.

	By:
	 	 

	Name:
	 	 

	Its:
	 	 

	 
	 	 

 

 

EXHIBIT “C”

2 COMPLIANCE CERTIFICATE

Venture Lending & Leasing IV, Inc.

2010 North First Street, Suite 310

San Jose, CA 95131

     Re:    Oculus Innovative Sciences, Inc.

Gentlemen:

     Reference is made to the Loan and Security Agreement dated as of June 14, 2006 (as the same
have been and may be amended from time to time, the “Loan Agreement”, the capitalized terms used
herein as defined therein), between Venture Lending & Leasing IV, Inc. and Oculus Innovative
Sciences, Inc. (the “Company”), Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative
Sciences Netherlands B.V., as borrowers (together with the Company, “Borrowers”).

     The undersigned authorized representative of the Company hereby certifies that in accordance
with the terms and conditions of the Loan Agreement, Borrowers are in complete compliance for the
financial reporting period ending ___with all required financial reporting under the Loan
Agreement, except as noted below. Attached herewith are the required documents supporting the
foregoing certification. The undersigned further certifies that the accompanying financial
statements have been prepared in accordance with Generally Accepted Accounting Principles, and are
consistent from one period to the next, except as explained below. These financial statements have
been prepared on a consolidated and consolidating basis for both the Company and its Subsidiaries

Indicate compliance status by circling Yes/No under “Complies"

	 	 	 	 	 
	REPORTING REQUIREMENT	 	REQUIRED	 	COMPLIES
	Interim Financial Statements

	 	Monthly within 30 days
	 	YES/NO
	Annual Financial Statements

	 	FYE within 150 days
	 	YES/NO

	 	 	 	 	 	 	 
	Ratio of Unrestricted Cash to Average Expenses:

	 	 	 	 	 	 
	      (i) Unrestricted Cash as of ___:

	 	 	_____________________	 	 	 
	 

	 	(ii) Average Expenses for the month ended ___:
	______
	 
	 	 	 	 	 	 
	 	 	(iii) Ratio of (i) to (ii): __________ [if less than 6:1, then Lien against IP springs]

	 	 	 
	Business Plan or Projections dated ___

	    With each Borrowing Request	YES/NO
	 
	 	 
	Any change in budget since prior Borrowing Request

	 	YES/NO
	 
	 	 
	[If Lender’s Lien on Borrowers’ Intellectual Property is then in effect:]
	 
	 
	 	 
	PATENTS, TRADEMARKS AND COPYRIGHTS
	 	 
	 
	 	 
	Patents, Trademarks and Copyrights applied
and/or filed with the U.S. Patent &
Trademark Office or U.S. Copyright Office
during the quarter ending _____________
	    Quarterly within 30 days	YES*/NO

 

 

* if “YES” then please list by application/registration number and title

Pursuant to Section 6.11 of the Loan Agreement, Parent represents and warrants that: (i) as of the
date hereof, Borrowers maintains in the United States only those Deposit Accounts and
investment/securities accounts set forth below; and (ii) a control agreement has been executed and
delivered to Lender with respect to each such account [Note: If a Borrower has established any new
account(s) since the date of the last compliance certificate, please so indicate].

(A) Deposit Accounts

(B)

	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Control Agt.	 	 	 	New
	 	 	Name of Institution	 	Account Number	 	In place?	 	Complies	 	Account
	 
	 	 	 	 	 	 	 	 	 	 
	1.)

	 	 

	 	 

	 	YES/NO
	 	YES/NO
	 	YES/NO
	 
	 	 	 	 	 	 	 	 	 	 
	2.)

	 	 

	 	 

	 	YES/NO
	 	YES/NO
	 	YES/NO
	 
	 	 	 	 	 	 	 	 	 	 
	3.)

	 	 

	 	 

	 	YES/NO
	 	YES/NO
	 	YES/NO
	 
	 	 	 	 	 	 	 	 	 	 
	4.)

	 	 

	 	 

	 	YES/NO
	 	YES/NO
	 	YES/NO

(C) Investment Accounts

	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Control Agt.	 	 	 	New
	 	 	Name of Institution	 	Account Number	 	In place?	 	Complies	 	Account
	 
	 	 	 	 	 	 	 	 	 	 
	1.)

	 	 

	 	 

	 	YES/NO
	 	YES/NO
	 	YES/NO
	 
	 	 	 	 	 	 	 	 	 	 
	2.)

	 	 

	 	 

	 	YES/NO
	 	YES/NO
	 	YES/NO
	 
	 	 	 	 	 	 	 	 	 	 
	3.)

	 	 

	 	 

	 	YES/NO
	 	YES/NO
	 	YES/NO
	 
	 	 	 	 	 	 	 	 	 	 
	4.)

	 	 

	 	 

	 	YES/NO
	 	YES/NO
	 	YES/NO

(D)

(E)

EXPLANATIONS
 

 

     

 

     

 

     

 

 

 

	 	 	 	 
	 

	Very truly yours,

	 
	 

	OCULUS INNOVATIVE SCIENCES,
INC

	 
	Name:	 
	 

	 	 	 
	 

	Title:*	 
	 

	 	 	 

 

			
	 	 	* Must be executed by Borrower’s Chief
Financial Officer or other executive officer.

 

 

EXHIBIT “D”

3 FORM OF BORROWING BASE CERTIFICATE

[to be delivered if Working Capital Loans are outstanding]

Venture Lending & Leasing IV, Inc.

2010 North First Street, Suite 310

San Jose, CA 95131

     Re: Oculus Innovative Sciences, Inc.

     Reference is made to the Loan and Security Agreement dated as of June 14, 2006 (as the same
have been and may be amended from time to time, the “Loan Agreement”, the capitalized terms used
herein as defined therein), between Venture Lending & Leasing IV, Inc. and Oculus Innovative
Sciences, Inc. (the “Company”), Oculus Technologies of Mexico S.A. de C.V. and Oculus Innovative
Sciences Netherlands B.V., as borrowers (together with the Company, “Borrowers”).

     The undersigned authorized representative of Company hereby certifies that in accordance with
the terms and conditions of the Loan Agreement, Borrowers are in complete compliance for the
financial reporting period ending ___with the borrowing base requirements with respect to
Working Capital Loans set forth in the Supplement to the Loan Agreement, except as noted below.
Attached herewith are the required documents supporting the foregoing certification.

BORROWING BASE REQUIREMENT

	 	 	 	 	 
	Working Capital Loan Coverage Ratio
as of _________, 200

	 	Line12 must equal or exceed Line 2
	 	YES/NO

	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Borrowing Base:	 	 
	 

	 	 	1.	 	 	(a) Eligible Accounts Receivable — U.S. account debtors
	 	$__________________
	 

	 	 	 	 	 	(b) 80% of (a)
	 	$__________________
	 

	 	 	 	 	 	(c) Eligible Accounts Receivable — foreign account debtors
(including foreign bank LCs and accounts from Mexican Ministry of Health)
	 	$__________________
	 

	 	 	 	 	 	(d) 60% of (c) 	 	$__________________
	 

	 	 	 	 	 	(e) Total of lines (b) and (d)
	 	$__________________
	 
	 	 	 	 	 	 	 	 
	 

	 	 	2.	 	 	Aggregate outstanding balance
of Combined Working Capital Loans     $___	 	 

If Line 2 exceeds Line 1, then Borrowers shall promptly restore compliance by prepaying principal
of Working Capital Loans in an amount necessary to restore compliance.

 

EXPLANATIONS

 

 

 

 

 

 

 

 

 

 

	 	 	 	 
	 

	Very truly yours,

	 
	 

	OCULUS INNOVATIVE SCIENCES,
INC.

	 
	By:	 
	 

	 	 	 
	 
	Name:	 
	 

	 	 	 
	 

	Title:*	 
	 

	 	 	 

 

			
	 	 	* Must be executed by Company’s Chief
Financial Officer or other executive officer.

 

 

EXHIBIT “E”

FORM OF INTELLECTUAL PROPERTY SECURITY AGREEMENT

 

 

INTELLECTUAL PROPERTY SECURITY AGREEMENT

     This Intellectual Property Security Agreement (this “Agreement”) is made as of ___,
200_, by and between OCULUS INNOVATIVE SCIENCES, INC., a California corporation (“Grantor”), and
VENTURE LENDING & LEASING IV, INC., a Maryland corporation (“Secured Party”).

RECITALS

     A.     Pursuant to a Loan and Security Agreement of dated as of June ___, 2006 (the “Loan
Agreement”) between Grantor, as borrower, and Secured Party, as lender, Secured Party has agreed to
make certain advances of money and to extend certain financial accommodations to Grantor (the
“Loans”) in the amounts and manner set forth in the Loan Agreement. All capitalized terms used
herein without definition shall have the meanings ascribed to them in the Loan Agreement.

     B.     Secured Party is willing to make the Loans to Grantor, but only upon the condition, among
others, that Grantor shall grant to Secured Party a security interest in substantially all of
Grantor’s personal property whether presently existing or hereafter acquired. To that end, Grantor
has executed in favor of Secured Party the Loan Agreement granting a security interest in all
Collateral, and is executing this Agreement with respect to certain items of Intellectual Property,
in particular.

     NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:

     1. Grant of Security Interest. As collateral security for the prompt and complete
payment and performance of all of Grantor’s present or future Obligations, Grantor hereby grants a
security interest and mortgage to Secured Party, as security, in and to Grantor’s entire right,
title and interest in, to and under the following Intellectual Property, now owned or hereafter
acquired by Grantor or in which Grantor now holds or hereafter acquires any interest (all of which
shall collectively be called the “Collateral” for purposes of this Agreement):

          (a) Any and all copyrights, whether registered or unregistered, held pursuant to the laws of
the United States, any State thereof or of any other country; all registrations, applications and
recordings in the United States Copyright Office or in any similar office or agency of the United
States, and State thereof or any other country; all continuations, renewals, or extensions
thereof; and any registrations to be issued under any pending applications, including without
limitation those set forth on Exhibit A attached hereto (collectively, the “Copyrights”);

          (b) All letters patent of, or rights corresponding thereto in, the United States or any other
country, all registrations and recordings thereof, and all applications for letters patent of, or
rights corresponding thereto in, the United States or any other country, including, without
limitation, registrations, recordings and applications in the United States Patent and Trademark
Office or in any similar office or agency of the United States, any State thereof or any other
country; all reissues, continuations, continuations-in-part or extensions thereof; all petty
patents, divisionals, and patents of addition; and all patents to be issued under any such
applications, including without limitation the patents and patent applications set forth on
Exhibit B attached hereto (collectively, the “Patents”);

          (c) All trademarks, trade names, corporate names, business names, trade styles, service marks,
logos, other source or business identifiers, prints and labels on which any of the foregoing have
appeared or appear, designs and general intangibles of like nature, now existing or hereafter
adopted or acquired, all registrations and recordings thereof, and any applications in connection
therewith, including, without limitation, registrations, recordings and applications in the United
States Patent and Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country or any political subdivision thereof, and reissues, extensions
or renewals thereof, and the entire goodwill of the business of Grantor connected with and
symbolized by such trademarks, including without limitation those set forth on Exhibit C
attached hereto (collectively, the “Trademarks”);

          (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;

1

 

          (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.

Notwithstanding the foregoing the term “Collateral” shall not include: (a) “intent-to-use”
trademarks at all times prior to the first use thereof, whether by the actual use thereof in
commerce, the recording of a statement of use with the United States Patent and Trademark Office or
otherwise, but only to the extent the granting of a security interest in such “intent to use”
trademarks would be contrary to applicable law or (b) any contract, instrument or chattel paper in
which Grantor has any right, title or interest if and to the extent such contract, instrument or
chattel paper includes a provision containing a restriction on assignment such that the creation of
a security interest in the right, title or interest of Grantor therein would be prohibited and
would, in and of itself, cause or result in a default thereunder enabling another person party to
such contract, instrument or chattel paper to enforce any remedy with respect thereto;
provided, however, that the foregoing exclusion shall not apply if (i) such
prohibition has been waived or such other person has otherwise consented to the creation hereunder
of a security interest in such contract, instrument or chattel paper, or (ii) such prohibition
would be rendered ineffective pursuant to Sections 9-407(a) or 9-408(a) of the UCC, as applicable
and as then in effect in any relevant jurisdiction, or any other applicable law (including the
Bankruptcy Code) or principles of equity); provided further that immediately upon
the ineffectiveness, lapse or termination of any such provision, the term “Collateral” shall
include, and Grantor shall be deemed to have granted a security interest in, all its rights, title
and interests in and to such contract, instrument or chattel paper as if such provision had never
been in effect; and provided further that the foregoing exclusion shall in no way be construed so
as to limit, impair or otherwise affect Secured Party’s unconditional continuing security interest
in and to all rights, title and interests of Grantor in or to any payment obligations or other
rights to receive monies due or to become due under any such contract, instrument or chattel paper
and in any such monies and other proceeds of such contract, instrument or chattel paper.

     2. Covenants and Warranties. Grantor represents, warrants, covenants and agrees as
follows:

          (a) Grantor is now the sole owner of the Collateral, except for licenses granted by Grantor to
its customers in the ordinary course of business;

          (b) During the term of this Agreement, Grantor will not transfer or otherwise encumber any
interest in the Collateral, except for (i) exclusive licenses granted by Grantor in the ordinary
course of business to a distributor or licensee with respect to one or more fields of use which
when taken alone or together do not constitute a major portion of the existing uses of Grantor’s
intellectual property rights, and (ii) non-exclusive licenses granted by Grantor in the ordinary
course of business; or as permitted elsewhere in this Agreement or the Loan Agreement;

          (c) To its knowledge, each of the Patents is valid and enforceable, and no part of the
Collateral has been judged invalid or unenforceable, in whole or in part, and no claim has been
made that any part of the Collateral violates the rights of any third party;

          (d) Grantor shall deliver to Secured Party within thirty (30) days of the last day of each
fiscal quarter, a report signed by Grantor, in form reasonably acceptable to Secured Party, listing
any applications or registrations that Grantor has made or filed in respect of any patents,
copyrights or trademarks and the status of any outstanding applications or registrations. Grantor
shall promptly advise Secured Party of any material change in the composition of the Collateral,
including but not limited to any
subsequent ownership right of the Grantor in or to any Trademark, Patent or Copyright not
specified in this Agreement;

          (e) Grantor shall use reasonable commercial efforts to (i) protect, defend and maintain the
validity and enforceability of the Trademarks, Patents and Copyrights (ii) detect infringements of
the Trademarks, Patents and Copyrights and promptly advise Secured Party in writing of material
infringements detected and (iii) not allow

2

 

any material Trademarks, Patents or Copyrights to be
abandoned, forfeited or dedicated to the public without the written consent of Secured Party, which
consent shall not be unreasonably withheld;

          (f) Grantor shall apply for registration (to the extent not already registered) with the United
States Patent and Trademark Office or the United States Copyright Office, as applicable: (i) those
intellectual property rights listed on Exhibits A, B and C hereto within
thirty (30) days of the date of this Agreement; and (ii) those additional intellectual property
rights developed or acquired by Grantor from time to time in connection with any product or
service, prior to the sale or licensing of such product or the rendering of such service to any
third party (including without limitation revisions or additions to the intellectual property
rights listed on such Exhibits A, B and C), except with respect to such
rights that Grantor determines in its sole but reasonable commercial judgment need not be filed in
order to avoid a material adverse impact on the business and prospects of Grantor. Grantor shall,
from time to time, execute and file such other instruments, and take such further actions as
Secured Party may reasonably request from time to time to perfect or continue the perfection of
Secured Party’s interest in the Collateral. Grantor shall give Secured Party notice of all such
applications or registrations; and

          (g) Grantor shall not enter into any agreement that would materially impair or conflict with
Grantor’s obligations hereunder without Secured Party’s prior written consent, which consent shall
not be unreasonably withheld. Grantor shall not permit the inclusion in any material contract to
which it becomes a party of any provisions that could or might in any way prevent the creation of a
security interest in Grantor’s rights and interests in any property included within the definition
of the Collateral acquired under such contracts.

     3. Further Assurances; Attorney in Fact.

          (a) On a continuing basis, Grantor will make, execute, acknowledge and deliver, and file and
record in the proper filing and recording places in the United States, all such instruments,
including appropriate financing and continuation statements and collateral agreements and filings
with the United States Patent and Trademark Office and the Register of Copyrights, and take all
such action as may reasonably be deemed necessary or advisable, or as reasonably requested by
Secured Party, to perfect Secured Party’s security interest in all Copyrights, Patents and
Trademarks and otherwise to carry out the intent and purposes of this Agreement, or for assuring
and confirming to Secured Party the grant or perfection of a security interest in all Collateral.

          (b) Grantor hereby irrevocably appoints Secured Party as Grantor’s attorney-in-fact, with full
authority in the place and stead of Grantor and in the name of Grantor, from time to time in
Secured Party’s discretion, to take any action and to execute any instrument which Secured Party
may deem necessary or advisable to accomplish the purposes of this Agreement, including (i) to
modify, in its sole discretion, this Agreement without first obtaining Grantor’s approval of or
signature to such modification by amending Exhibits A, B and C, hereof, as
appropriate, to include reference to any right, title or interest in any Copyrights, Patents or
Trademarks acquired by Grantor after the execution hereof or to delete any reference to any right,
title or interest in any Copyrights, Patents or Trademarks in which Grantor no longer has or claims
any right, title or interest, (ii) to 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 Grantor where permitted by law, and (iii) after the occurrence of an Event of Default,
to transfer the Collateral into the name of Secured Party or a third party to the extent permitted
under the California Uniform Commercial Code.

     4. Events of Default. The occurrence of any of the following shall constitute an Event
of Default under this Agreement:

          (a) An Event of Default under the Loan Agreement; or

          (b) Grantor breaches any warranty or agreement made by Grantor in this Agreement and, as to any
breach that is capable of cure, Grantor fails to cure such breach within thirty (30) days of the
sooner to occur of Grantor’s receipt of notice of such breach from Secured Party or the date on
which such breach first becomes known to Grantor.

3

 

     5. Amendments. This Agreement may be amended only by a written instrument signed by
both parties hereto, except for amendments permitted under Section 3 hereof to be made by Secured
Party alone.

     6. Counterparts. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute the same instrument.

[Signature Pages Follow]

4

 

[Signature page to Intellectual Property Security Agreement]

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first
above written.

	 	 	 	 	 
	 	 	GRANTOR:
	 
	 	 	 	 
	Address of Grantor:	 	OCULUS INNOVATIVE SCIENCES, INC.,
	 
	 	 	 	 
	 
	 	 	 	 
	1129 N. McDowell Blvd.

	 	By:	 	 
	 

	 	 	 	 
	Petaluma, CA 94954

Attn:                     

	 	Name:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Its:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	 	 	SECURED PARTY:
	 
	 	 	 	 
	Address of Secured Party:	 	VENTURE LENDING & LEASING IV, INC.
	 
	 	 	 	 
	 
	 	 	 	 
	2010 North First Street, Suite 310

	 	By:	 	 
	 

	 	 	 	 
	San Jose, CA 95131

Attn: President

	 	Name:	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	Its:	 	 
	 

	 	 	 	 

5

 

[EXHIBITS A, B AND C TO BE COMPLETED BY GRANTOR]

EXHIBIT A

Copyrights

	 	 	 	 	 
	Description	 	Registration Number	 	Registration Date
	 

	 	 
	 	 

 

 

EXHIBIT B

Patents

	 	 	 	 	 
	Description	 	Registration/Serial Number	 	Registration/Application Date
	 

	 	 
	 	 

 

 

EXHIBIT C

Trademarks

	 	 	 	 	 
	Description	 	U.S. Registration/Application Number	 	Registration/Application Date
	 

	 	 
	 	 

 

 

EXHIBIT “F”

FORM OF WARRANT

 

 

EXHIBIT “G”

FORM OF LANDLORD WAIVER

 

 

EXHIBIT “H”

FORM OF LEGAL OPINIONexv10w14

 

Exhibit 10.14

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”) is entered into by and between Hojabr
Alimi (the “Executive”), and Oculus Innovative Sciences, Inc., a California corporation
(the “Corporation”), as of January 1, 2004 (the “Effective Date”).

     THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts, understandings and
intentions:

     A. The Corporation desires that the Executive be employed by the Corporation to carry out the
duties and responsibilities described below, all on the terms and conditions hereinafter set forth.

     B. The Executive is willing to accept such employment on such terms and conditions.

     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises of the parties, the
parties hereto agree as follows:

1. Retention and Duties.

     1.1 Retention. The Corporation does hereby hire, engage and employ the Executive for
the Period of Employment (as defined in Section 2) on the terms and conditions expressly set forth
in this Agreement. The Executive does hereby accept and agree to such hiring, engagement and
employment, on the terms and conditions expressly set forth in this Agreement.

     1.2 Duties. During the Period of Employment, the Executive shall serve the
Corporation as its President and Chief Executive Officer. The Executive shall, without limitation
and without limiting the Executive’s other duties to the Corporation, and without limiting the
authority of the Corporation’s Board of Directors (the “Board”), be responsible for the
general supervision, direction and control of the business and affairs of the Corporation and have
such other duties and responsibilities as the Board shall designate that are consistent with the
Executive’s position as Chief Executive Officer and President of the Corporation. The Executive
shall perform all of such duties and responsibilities in accordance with the legal directives of
the Board and in accordance with the practices and policies of the Corporation as in effect from
time to time throughout the Period of Employment (including, without limitation, the Corporation’s
insider trading and ethics policies, as they may change from time to time). While employed as
Chief Executive Officer and President of the Corporation, the Executive shall report exclusively to
the Board. Throughout the Period of Employment, the Executive shall not serve on the boards of
directors or advisory boards of any other entity unless such service is expressly approved by the
Board.

     1.3 No Other Employment; Minimum Time Commitment. Throughout the Period of Employment, the Executive shall both (i) devote substantially all
of the Executive’s business time, energy and skill to the performance of the Executive’s duties for
the Corporation, and (ii) hold no other job. The Executive agrees that any investment or direct
involvement in, or any appointment to or continuing service on the board of directors or similar
body of, any corporation or other entity must be first approved in writing by the Corporation. The
foregoing

Page 1 of 19

 

 

provisions of this Section 1.3 shall not prevent the Executive from investing in
non-competitive publicly-traded securities to the extent permitted by Section 7(b). The Executive
agrees that, as of the Effective Date, Exhibit A to this Agreement sets forth a complete
and accurate description of (i) any investment or direct involvement of the Executive in any other
corporation or business that reasonably could be construed as falling outside of the scope of the
foregoing permitted investments and involvement, and (b) any board of directors or similar body of
any corporation or other entity on which the Executive is a member. The Corporation may require
the Executive to resign from membership on any board or similar body of any entity, on which he may
now or in the future serve, if the Corporation determines that the Executive’s membership on such
board or similar body interferes (interference shall include, without limitation, giving rise to
conflicts or competitive activity) with the performance of the Executive’s duties hereunder.

     1.4 No Breach of Contract. The Executive hereby represents to the Corporation that:
(i) the execution and delivery of this Agreement by the Executive and the Corporation and the
performance by the Executive of the Executive’s duties hereunder shall not constitute a breach of,
or otherwise contravene, the terms of any other agreement or policy to which the Executive is a
party or otherwise bound; (ii) that the Executive has no information (including, without
limitation, confidential information and trade secrets) of any other person or entity which the
Executive is not legally and contractually free to disclose to the Corporation; (iii) that the
Executive is not bound by any confidentiality, trade secret or similar agreement (other than this
Agreement) with any other person or entity.

     1.5 Location. The Executive acknowledges that the Corporation’s principal executive
offices are currently located in Petaluma, California. The Executive’s principal place of
employment shall be the Corporation’s principal executive offices, as they may be moved from time
to time at the discretion of the Corporation. The Executive agrees that the Executive will be
regularly present at the Corporation’s principal executive offices and that the Executive may be
required to travel from time to time in the course of performing the Executive’s duties for the
Corporation.

2. Period of Employment. The “Period of Employment” shall commence on January 1,
2004, and shall continue until the date of Executive’s termination pursuant to Section 5.1.

3. Compensation.

     3.1 Base Salary. Effective January 1, 2004 and during the Period of Employment, the Corporation shall pay to
the Executive a base salary at the rate of $225,000 per year, subject to increase (but not
decrease) by the Board (the “Base Salary”). The Executive’s Base Salary shall be paid in
accordance with the Corporation’s regular payroll practices in effect from time to time, but not
less frequently than in monthly installments.

     3.2 Stock Awards. The Executive shall continue to vest in those options to purchase
the Corporation’s common stock previously granted to the Executive in accordance with the terms of
such option grants. The Corporation may, in its sole discretion, grant additional stock options
and/or make other stock-based awards to the Executive.

Page 2 of 19

 

 

4. Benefits.

     4.1 Health and Welfare. During the Period of Employment, the Executive shall be
entitled to participate in all employee pension and welfare benefit plans and programs made
available by the Corporation to the Corporation’s senior-level employees generally, as such plans
or programs may be in effect from time to time.

     4.2 Reimbursement of Business Expenses. The Executive is authorized to incur
reasonable expenses in carrying out the Executive’s duties for the Corporation under this Agreement
and entitled to reimbursement for all such expenses the Executive incurs during the Period of
Employment in connection with carrying out the Executive’s duties for the Corporation, subject to
the Corporation’s reasonable expense reimbursement policies in effect from time to time. The
Corporation shall reimburse the Executive to the extent required by the preceding sentence.

     4.3 Vacation and Other Leave. During the Period of Employment, the Executive shall
accrue and be entitled to take paid vacation in accordance with the Corporation’s standard vacation
policies in effect from time to time, including the Corporation’s policies regarding vacation
accruals. The Executive shall also be entitled to all other holiday and leave pay generally
available to other employees of the Corporation.

5. Termination.

     5.1 Termination by the Corporation. The Executive’s employment by the Corporation,
and the Period of Employment, may be terminated at any time by the Corporation: (i) with Cause (as
defined in Section 5.5), or (ii) without Cause, or (iii) in the event of the Executive’s death, or
(iv) in the event that the Board determines in good faith that the Executive has a Disability (as
defined in Section 5.5).

     5.2 Termination by the Executive. The Executive’s employment by the Corporation, and
the Period of Employment, may be terminated at any time by the Executive, on no less than sixty
(60) days prior written notice to the Corporation.

     5.3 Benefits Upon Termination. If the Executive’s employment by the Corporation is
terminated during the Period of Employment for any reason by the Corporation or by the Executive,
the Corporation shall have no further obligation to make or provide to the Executive, and the
Executive shall have no further right to receive or obtain from the Corporation, any payments or
benefits except:

          (a) the Corporation shall pay the Executive (or, in the event of his death, the Executive’s
estate) any Accrued Obligations (as defined in Section 5.5); and

          (b) if, during the Period of Employment, the Executive’s employment is terminated by the
Corporation without Cause or by the Executive for Good Reason (as defined in Section 5.5) (and, in
each case, other than due to either the Executive’s death, or a good faith determination by the
Board that the Executive has a Disability):

Page 3 of 19

 

 

     (i) the Corporation shall, subject to the conditions set forth in Section
5.3(c), also pay the Executive a lump sum severance benefit equal to twenty-four
(24) times the average monthly Base Salary paid to the Executive over the twelve
(12) whole months preceding the month in which the termination of the Executive’s
employment occurs (or, if the Period of Employment has not been in effect for twelve
(12) whole months preceding the month in which the termination of the Executive’s
employment occurs, the average monthly Base Salary for this purpose shall be
determined based on the average monthly Base Salary paid to the Executive over the
whole months in the Period of Employment occurring prior to the month in which the
termination of the Executive’s employment occurs). Subject to the conditions set
forth in Section 5.3(c), such lump sum amount shall be paid to the Executive
(without interest) no later than seven (7) days following the date on which the
Executive’s employment by the Corporation terminates;

     (ii) the Corporation shall, subject to the conditions set forth in Section
5.3(c), pay as a severance benefit one hundred percent (100%) of the Executive’s
premiums under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”)
for the same or reasonably equivalent medical coverage as in effect on the date the
Executive’s employment terminated for a period not to exceed the lesser of one year
following the date of such termination or until the Executive becomes eligible for
medical insurance coverage provided by another employer; and

     (iii) as of the date the Executive’s employment terminates, any and all stock
options, stock appreciation rights, restricted stock awards, and similar equity and
equity-based awards granted by the Corporation to the Executive outstanding
immediately prior to such termination of employment shall thereupon
be deemed fully vested and shall be exercisable for a period of no less than
twelve (12) months thereafter or until the stated expiration date for such option or
award at the end of its maximum term, whichever is earlier; provided, however, that
this Section 5.3(b)(iii) shall not affect any right of the Corporation to terminate
such option or award in connection with a change in control of the Corporation or
similar event to the extent such right exists under the provisions of any agreement
evidencing such option or award.

          (c) Any obligation of the Corporation pursuant to Section 5.3(b) to pay a severance benefit in
the circumstances described therein is further subject to the following two conditions precedent:
(i) such severance obligation shall be paid only if the Executive has remained in compliance with
all of the provisions of Section 5.6 and Sections 7 through 12, and such obligation shall terminate
immediately if the Executive is for any reason not in compliance with one or more of the provisions
of Section 5.6, and Sections 7 through 12; and (ii) the Executive’s satisfaction of the release
obligations set forth in Section 5.4. For purposes of the preceding sentence, if the Executive is
not in compliance with one or more provisions of Section 5.6, and Sections 7 though 12, and a cure
is reasonably possible in the circumstances, the Executive will not be deemed to have breached such
provision(s) unless the Executive is given notice and a reasonable opportunity (in no case shall
more than a 10-day cure period be required) to cure such breach and such breach is not cured within
such time period. The parties agree that

Page 4 of 19

 

 

a cure will not be reasonably possible in all
circumstances including, without limitation, a material breach of confidentiality or similar
occurrence.

          (d) Except as expressly provided herein, the foregoing provisions of this Section 5.3 shall
not affect: (i) the Executive’s receipt of benefits otherwise due terminated employees under group
insurance coverage consistent with the terms of each applicable Corporation welfare benefit plan;
(ii) the Executive’s rights under COBRA to continue participation in medical, dental,
hospitalization and life insurance coverage; (iii) the Executive’s receipt of benefits otherwise
due in accordance with the terms of the Corporation’s 401(k) plan (if any); or (iv) any rights that
the Executive may have under and with respect to a stock option, stock appreciation right,
restricted stock award, or similar equity or equity-based award, to the extent that such award was
granted before the date that the Executive’s employment by the Corporation terminates and to the
extent expressly provided in the written agreement evidencing such award.

     5.4 Release; Exclusive Remedy.

          (a) Thus Section 5.4 shall apply notwithstanding anything else contained in this Agreement to
the contrary As a condition precedent to any Corporation obligation to the Executive pursuant to
Section 5.3(b), the Executive shall, upon or promptly following his last day of employment with the
Corporation, provide the Corporation with a valid, executed, written Release (as defined in Section
5.5) (in a form provided by the Corporation) and such release shall have not been revoked by the
Executive pursuant to any revocation rights afforded by applicable law. The Corporation shall have
no obligation to make any payment to the Executive pursuant to Section 5.3(b) unless and until the
Release contemplated by this Section 5.4 becomes irrevocable by the Executive in accordance with
all applicable laws, rules and regulations.

          (b) The Executive agrees that the payments contemplated by Section 5.3 shall constitute the
exclusive and sole remedy for any termination of his employment and the Executive covenants not to
assert or pursue any other remedies, at law or in equity, with respect to any termination of
employment. The Corporation and Executive acknowledge and agree that there is no duty of the
Executive to mitigate damages under this Agreement. All amounts paid to the Executive pursuant to
Section 5.3 shall be paid without regard to whether the Executive has taken or takes actions to
mitigate damages.

     5.5 Certain Defined Terms.

          (a) As used herein, “Accrued Obligations” means:

     (i) any Base Salary that had accrued but had not been paid (including accrued
and unpaid vacation time) prior to the date of termination; and

     (ii) any reimbursement due to the Executive pursuant to Section 4.2 for
expenses incurred by the Executive prior to the date the Period of Employment
terminates.

Page 5 of 19

 

 

          (b) As used herein, “Cause” shall mean the reasonable and good faith determination by
a majority of the Board based on its reasonable belief at the time, that, during the Period of
Employment, any of the following events or contingencies exists or has occurred:

     (i) the Executive is convicted of, or has pled guilty to, a felony (under the
laws of the United States or any state thereof); or

     (ii) the Executive has engaged in acts of fraud, material dishonesty or other
acts of willful misconduct in the course of his duties hereunder, unless the
Executive believed in good faith that such acts were in the interests of the
Corporation; or

     (iii) the Executive willfully and repeatedly fails to perform or uphold his
duties under this Agreement; or

     (iv) the Executive willfully fails to comply with reasonable directives of the
Board which are communicated to him in writing.

          (c) As used herein, “Disability” shall mean a physical or mental impairment which
substantially limits a major life activity of the Executive and which renders the Executive unable
to perform the essential functions of the Executive’s position, even with reasonable accommodation
which does not impose an undue hardship on the Corporation, for ninety (90) days in any consecutive
twelve (12) month period. The Board reserves the right, in good faith, to make the determination
of whether or not a Disability exists for purposes of this Agreement based upon information
supplied by the Executive and/or his medical personnel, as well as information from medical
personnel (or others) selected by the Corporation or its insurers.

          (d) As used herein, “Good Reason” shall mean the occurrence of one or more of the
following without the Executive’s written consent:

     (i) the assignment of the Executive to duties materially inconsistent with the
Executive’s authorities, duties, responsibilities and status (including titles and
reporting requirements) as Chief Executive Officer of the Corporation, or a material
reduction or alteration in the nature or status of the Executive’s authorities,
duties or responsibilities, other than an insubstantial and inadvertent act that is
remedied by the Corporation promptly after receipt of notice thereof given by the
Executive; or

     (ii) a reduction by the Corporation in the Executive’s Base Salary as in effect
on the Effective Date or as the same shall be increased from time to time, or the
Corporation otherwise fails to satisfy its compensation obligations to the Executive
under this Agreement, after notice by the Executive and a reasonable opportunity to
cure; or

     (iii) the failure of the Corporation to obtain a satisfactory agreement from
any successor to the Corporation to assume and agree to perform this Agreement.

Page 6 of 19

 

 

     provided, however, that none of the events specified in clause (i), (ii), or
(iii) above shall constitute Good Reason unless the Executive shall have notified the Corporation
in writing describing the events which constitute Good Reason and the Corporation shall have failed
to cure such event within a reasonable period, not to exceed ten (10) days, after the Corporation’s
actual receipt of such written notice.

          (e) As used herein, “Release” shall mean a written release, discharge and covenant not
to sue entered into by the Executive on behalf of himself, his descendants, dependents, heirs,
executors, administrators, assigns, and successors, and each of them, of and in favor of the
Corporation, its parent (if any), the Corporation’s subsidiaries and affiliates, past and present,
and each of them, as well as its and their trustees, directors, officers, agents, attorneys,
insurers, employees, shareholders, members, representatives, assigns, and successors, past and
present, and each of them (the “releasees”), with respect to and from any and all claims, wages,
demands, rights, liens, agreements, contracts, covenants, actions, suits, causes of action,
obligations, debts, costs, expenses, attorneys’ fees, damages, judgments, orders and liabilities of
whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or
unsuspected, and whether or not concealed or hidden, which he may then own or hold or he at any
time theretofore owned or held or may in the future hold as against any or all of said releasees,
arising out of or in any way connected with the Executive’s employment relationship with each and
every member of the Company Group (as defined in Section 7) with which the Executive has had such a
relationship, or the termination of his employment or any other transactions, occurrences, acts or
omissions or any loss, damage or injury whatever, known or unknown, suspected or unsuspected,
resulting from any act or omission by or on the part of said releasees, or any of them, committed
or omitted prior to the date of such release including, without limiting the generality of the
foregoing, any claim under Section 1981 of the Civil Rights Act of 1866, Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment
Act, the Americans with Disabilities Act, the Family and Medical Leave Act of 1993, the
California Fair Employment and Housing Act, the California Family Rights Act, any other claim under
any other federal, state or local law or regulation, and any other claim for severance pay, bonus
or incentive pay, sick leave, holiday pay, vacation pay, life insurance, health or medical
insurance or any other fringe benefit, medical expenses, or disability (except that such release
shall not constitute a release of any Corporation obligation to the Executive that may be due to
the Executive pursuant to Section 5.3(b) upon the Corporation’s receipt of such release). The
Release shall also contain the Executive’s warrant that he has not theretofore assigned or
transferred to any person or entity, other than the Corporation, any released matter or any part or
portion thereof and that he will defend, indemnify and hold harmless the Corporation and the
aforementioned releases from and against any claim (including the payment of attorneys’ fees and
costs actually incurred whether or not litigation is commenced) that is directly or indirectly
based on or in connection with or arising out of any such assignment or transfer made, purported or
claimed.

     5.6 Resignation From Boards. Upon or promptly following any termination of
Executive’s employment with the Corporation, the Executive agrees to resign from (i) each and every
board of directors (or similar body, as the case may be) of the Corporation and each of its
affiliates on which the Executive may then serve (if any), and (ii) each and every office of the
Corporation and each of its affiliates that the Executive may then hold, and all positions that he
may have previously held with the Corporation and any of its affiliates.

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     5.7 Excise Tax Gross-Up. During and after the period of Executive’s employment with
the Corporation, Executive shall be entitled to the excise tax protections set forth in Exhibit B
hereto. The preceding sentence takes precedence over any contrary provision (such as, without
limitation, an excise tax cut-back provision) of any other applicable incentive plan or award
agreement.

6. Means and Effect of Termination. Any termination of the Executive’s employment
under this Agreement shall be communicated by written notice of termination from the terminating
party to the other party. The notice of termination shall indicate the specific provision(s) of
this Agreement relied upon in effecting the termination.

7. Non-Competition. The Executive acknowledges and recognizes the highly competitive
nature of the businesses of the Corporation, the amount of sensitive and confidential information
involved in the discharge of the Executive’s position with the Corporation, and the harm to the
Corporation that would result if such knowledge or expertise was disclosed or made available to a
competitor. Based on that understanding, the Executive hereby expressly agrees as follows:

          (a) As a result of the particular nature of the Executive’s relationship with the Corporation,
in the capacities identified earlier in this Agreement, for the Period of Employment
the Executive hereby agrees that he will not, directly or indirectly, (i) engage in any
business for the Executive’s own account or otherwise derive any personal benefit from any business
that competes with the business of the Corporation or any of its affiliates (the Corporation and
its affiliates are referred to, collectively, as the “Company Group”), (ii) enter the
employ of, or render any services to, any person engaged in any business that competes with the
business of any entity within the Company Group, (iii) acquire a financial interest in any person
engaged in any business that competes with the business of any entity with the Company Group,
directly or indirectly, as an individual, partner, member, shareholder, officer, director,
principal, agent, trustee or consultant, or (iv) interfere with business relationships (whether
formed before or after the Effective Date) between the Corporation, any of its respective
affiliates or subsidiaries, and any customers, suppliers, officers, employees, partners, members or
investors of any entity within the Company Group. For purposes of this Agreement, businesses in
competition with the Company Group shall include, without limitation, businesses which any entity
within the Company Group may conduct operations, and any businesses which any entity within the
Company Group has specific plans to conduct operations in the future and as to which the Executive
is aware of such planning, whether or not such businesses have or have not as of that date
commenced operations.

          (b) Notwithstanding anything to the contrary in this Agreement, the Executive may, directly or
indirectly, own, solely as an investment, securities of any person which are publicly traded on a
national or regional stock exchange or on an over-the-counter market if the Executive (i) is not a
controlling person of, or a member of a group which controls, such person, and (ii) does not,
directly or indirectly, beneficially own one percent (1%) or more of any class of securities of
such person.

8. Confidentiality. As a material part of the consideration for the Corporation’s
commitment to the terms of this Agreement, the Executive hereby agrees that the Executive will not
at any time (whether during or after the Executive’s employment with the Corporation), other

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in the
course of the Executive’s duties hereunder, or unless compelled by lawful process after written
notice to the Corporation of such notice along with sufficient time for the Corporations to try and
overturn such lawful process, disclose or use for the Executive’s own benefit or purposes or the
benefit or purposes of any other person, firm, partnership, joint venture, association, corporation
or other business organization, entity or enterprise, any trade secrets, or other confidential data
or information relating to customers, development programs, costs, marketing, trading, investment,
sales activities, promotion, credit and financial data, financing methods, or plans of any entity
within the Company Group; provided, however, that the foregoing shall not apply to
information which is generally known to the industry or the public, other than as a result of the
Executive’s breach of this covenant. The Executive further agrees that the Executive will not
retain or use for his account, at any time, any trade names, trademark or other proprietary
business designation used or owned in connection with the business of any entity within the Company
Group.

9. Inventions and Developments.

(a) All inventions, policies, systems, developments or improvements conceived, designed,
implemented and/or made by the Executive, either alone or in conjunction
with others, at any time or at any place during the Period of Employment, whether or not
reduced to writing or practice during such Period of Employment, which directly or indirectly
relate to the business of any entity within the Company Group, or which were developed or made in
whole or in part using the facilities and/or capital of any entity within the Company Group, shall
be the sole and exclusive property of the Company Group. The Executive shall promptly give notice
to the Corporation of any such invention, development, patent or improvement, and shall at the same
time, without the need for any request by any person or entity within the Company Group, assign all
of the Executive’s rights to such invention, development, patent and/or improvement to the Company
Group. The Executive shall sign all instruments necessary for the filing and prosecution of any
applications for, or extension or renewals of, letters patent of the United States or any foreign
country that any entity in the Company Group desires to file.

(b) All copyrightable work by the Executive during the Period of Employment that relates to
the business of any entity in the Company Group is intended to be “work made for hire” as defined
in Section 101 of the Copyright Act of 1976, and shall be the property of the Company Group. If
the copyright to any such copyrightable work is not the property of the Company Group by operation
of law, the Executive will, without further consideration, assign to the Company Group all right,
title and interest in such copyrightable work and will assist the entities in the Company Group and
their nominees in every way, at the Company Group’s expense, to secure, maintain and defend for the
Company Group’s benefit copyrights and any extensions and renewals thereof on any and all such work
including translations thereof in any and all countries, such work to be and to remain the property
of the Company Group whether copyrighted or not.

10. Anti-Solicitation. In light of the amount of sensitive and confidential information
involved in the discharge of the Executive’s duties, and the harm to the Corporation that would
result if such knowledge or expertise were disclosed or made available to a competitor, and as a
reasonable step to help protect the confidentiality of such information, the Executive promises and
agrees that during the Period of Employment and for a period of two (2) years thereafter, the

Page 9 of 19

 

 

Executive will not, directly or indirectly, individually or as a consultant to, or as an employee,
officer, shareholder, director or other owner or participant in any business, influence or attempt
to influence customers, vendors, suppliers, joint venturers, associates, consultants, agents, or
partners of any entity within the Company Group, either directly or indirectly, to divert their
business away from the Company Group, to any individual, partnership, firm corporation or other
entity then in competition with the business of any entity within the Company Group, and he will
not otherwise materially interfere with any business relationship of any entity within the Company
Group.

11. Soliciting Employees. In light of the amount of sensitive and confidential information
involved in the discharge of the Executive’s duties, and the harm to the Corporation that would
result if such knowledge or expertise were disclosed or made available to a competitor, and as a
reasonable step to help protect the confidentiality of such information, the Executive promises and
agrees that during the Period of Employment and for a period of two (2) years thereafter, the
Executive will not,
directly or indirectly, individually or as a consultant to, or as an employee, officer,
shareholder, director or other owner of or participant in any business, solicit (or assist in
soliciting) any person who is then, or at any time within six (6) months prior thereto was, an
employee of an entity within the Company Group, who earned annually $25,000 or more as an employee
of such entity during the last six (6) months of his or her own employment to work for (as an
employee, consultant or otherwise) any business, individual, partnership, firm, corporation, or
other entity whether or not engaged in competitive business with any entity in the Company Group.

12. Return of Property. The Executive agrees to truthfully and faithfully account for and
deliver to the Corporation all property belonging to the Corporation, any other entity in the
Company Group, or any of their respective affiliates, which the Executive may receive from or on
account of the Corporation, any other entity in the Company Group, or any of their respective
affiliates, and upon the termination of the Period of Employment, or the Corporation’s demand, the
Executive shall immediately deliver to the Corporation all such property belonging to the
Corporation, any other entity in the Company Group, or any of their respective affiliates.

13. Withholding Taxes. Notwithstanding anything else herein to the contrary, the
Corporation may withhold (or cause there to be withheld, as the case may be) from any amounts
otherwise due or payable under or pursuant to this Agreement such federal, state and local income,
employment, or other taxes as may be required to be withheld pursuant to any applicable law or
regulation.

14. Cooperation in Litigation. The Executive agrees that he will reasonably cooperate with
the Corporation, subject to his reasonable personal and business schedules, in any litigation which
arises out of events occurring prior to the termination of his employment, including but not
limited to, serving as a witness or consultant and producing documents and information relevant to
the case or helpful to the Corporation. The Corporation agrees to reimburse the Executive for all
reasonable costs and expenses he incurs in connection with his obligations under this Section 14
and, in addition, to reasonably compensate the Executive for time actually spent in connection
therewith following the termination of his employment with the Corporation.

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15. Assignment. This Agreement is personal in its nature and neither of the parties hereto
shall, without the consent of the other, assign or transfer this Agreement or any rights or
obligations hereunder; provided, however, that in the event of a merger,
consolidation, or transfer or sale of all or substantially all of the assets of the Corporation
with or to any other individual(s) or entity, this Agreement shall, subject to the provisions
hereof, be binding upon and inure to the benefit of such successor and such successor shall
discharge and perform all the promises, covenants, duties, and obligations of the Corporation
hereunder.

16. Number and Gender. Where the context requires, the singular shall include the plural, the plural shall include the
singular, and any gender shall include all other genders.

17. Section Headings. The section headings of, and titles of paragraphs and subparagraphs
contained in, this Agreement are for the purpose of convenience only, and they neither form a part
of this Agreement nor are they to be used in the construction or interpretation thereof.

18. Governing Law. This Agreement, and all questions relating to its validity,
interpretation, performance and enforcement, as well as the legal relations hereby created between
the parties hereto, shall be governed by and construed under, and interpreted and enforced in
accordance with, the laws of the State of California, notwithstanding any California or other
conflict of law provision to the contrary.

19. Severability. If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of this Agreement which
can be given effect without the invalid provisions or applications and to this end the provisions
of this Agreement are declared to be severable.

20. Entire Agreement. This Agreement embodies the entire agreement of the parties hereto
respecting the matters within its scope. This Agreement supersedes all prior and contemporaneous
agreements of the parties hereto that directly or indirectly bears upon the subject matter hereof.
Any prior negotiations, correspondence, agreements, proposals or understandings relating to the
subject matter hereof shall be deemed to have been merged into this Agreement, and to the extent
inconsistent herewith, such negotiations, correspondence, agreements, proposals, or understandings
shall be deemed to be of no force or effect. There are no representations, warranties, or
agreements, whether expressed or implied, or oral or written, with respect to the subject matter
hereof, except as expressly set forth herein.

21. Modifications. This Agreement may not be amended, modified or changed (in whole or in
part), except by a formal, definitive written agreement expressly referring to this Agreement,
which agreement is executed by both of the parties hereto.

22. Waiver. Neither the failure nor any delay on the part of a party to exercise any
right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any right, remedy, power or privilege, nor shall any waiver of
any right, remedy,
power or privilege with respect to any occurrence be construed as a waiver of such right, remedy,
power or privilege with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.

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23. Resolution of Disputes.

          (a) Any controversy arising out of or relating to the Executive’s employment (whether or not
before or after the expiration of the Period of Employment), any termination of the Executive’s
employment, this Agreement or the enforcement or interpretation of this Agreement, or because of an
alleged breach, default, or misrepresentation in connection with any of the provisions of this
Agreement, including (without limitation) any state or federal statutory claims, shall be submitted
to arbitration in Santa Rosa, California, before a sole arbitrator (the “Arbitrator”)
selected from judicial arbitration mediation services (“JAMS”), or if JAMS is no longer
able to supply the arbitrator, such arbitrator shall be selected from the American Arbitration
Association (“AAA”), and shall be conducted in accordance with the provisions of California
Code of Civil Procedure §§ 1280 et seq. as the exclusive remedy of such dispute;
provided, however, that provisional injunctive relief may, but need not, be sought
in a court of law while arbitration proceedings are pending, and any provisional injunctive relief
granted by such court shall remain effective until the matter is finally determined by the
Arbitrator. Final resolution of any dispute through arbitration may include any remedy or relief
that the Arbitrator deems just and equitable, including any and all remedies provided by applicable
state or federal statutes. At the conclusion of the arbitration, the Arbitrator shall issue a
written decision that sets forth the essential findings and conclusions upon which the Arbitrator’s
award or decision is based. Any award or relief granted by the Arbitrator hereunder shall be final
and binding on the parties hereto and may be enforced by any court of competent jurisdiction.

          (b) The parties acknowledge and agree that they are hereby waiving any rights to trial by jury
in any action, proceeding or counterclaim brought by either of the parties against the other in
connection with any matter whatsoever arising out of or in any way connected with any of the
matters referenced in the first sentence of the first paragraph of this Section 23.

          (c) The parties agree that Corporation shall be responsible for payment of the forum costs of
any arbitration hereunder, including the Arbitrator’s fee. The parties further agree that in any
proceeding with respect to such matters, the prevailing party will be entitled to recover its
reasonable attorney’s fees and costs from the non-prevailing party (other than forum costs
associated with the arbitration which in any event shall be paid by the Corporation).

          (d) Without limiting the remedies available to the parties and notwithstanding the foregoing
provisions of this Section 23, the Executive and the Corporation acknowledge that any breach of any
of the covenants or provisions contained in Sections 5.6, and 7 through 12 could result in
irreparable injury to either of the parties hereto for which there might be no adequate remedy at
law, and that, in the event of such a breach or threat thereof, the non-breaching party shall be
entitled to obtain a temporary restraining order and/or a preliminary injunction and a permanent
injunction restraining the other party hereto from engaging in any activities prohibited by any
covenant or provision in Sections 5.6, and 7 through 12 or such other equitable relief as may be
required to enforce specifically any of the covenants or provisions of Sections 5.6, and 7 through
12.

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24. Notices.

          (a) All notices, requests, demands and other communications required or permitted under this
Agreement shall be in writing and shall be deemed to have been duly given and made if (i) delivered
by hand, (ii) otherwise delivered against receipt therefore, or (iii) sent by registered or
certified mail, postage prepaid, return receipt requested. Any notice shall be duly addressed to
the parties as follows:

               (i) if to the Corporation:

Oculus Innovative Services, Inc.

1129 North McDowell Boulevard

Petaluma, California 94954

Attn: Jim Schutz

Fax: +1 (707) 782-0705

               (ii) if to the Executive:

Hojabr Alimi

30 Bicentennial Way, #428

Santa Rosa, CA 95403

+1 (707) 571-1623

          (b) Any party may alter the address to which communications or copies are to be sent by giving
notice of such change of address in conformity with the provisions of this Section 24 for the
giving of notice. Any communication shall be effective when delivered by hand, when otherwise
delivered against receipt therefore, or five (5) business days after being mailed in accordance
with the foregoing.

25. Legal Counsel; Mutual Drafting. Each party recognizes that this is a legally binding
contract and acknowledges and agrees that they have had the opportunity to consult with legal
counsel of their choice. Each party has cooperated in the drafting, negotiation and preparation of
this Agreement. Hence, in any construction to be made of this Agreement, the same shall not be
construed against either party on the basis of that party being the drafter of such language.

26. Provisions that Survive Termination. The provisions of 5.3, 5.4, 5.5, 5.6, 5.7, 7
through 25, 27, and this Section 26 shall survive any termination of the Period of Employment.

27. Counterparts. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original as against any party whose signature appears thereon, and all of
which together shall constitute one and the same instrument. This Agreement shall become binding
when one or more counterparts hereof, individually or taken together, shall bear the signatures of
all of the parties reflected hereon as the signatories. Photographic copies of such signed
counterparts may be used in lieu of the originals for any purpose.

[Signature Page Follows]

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     IN WITNESS WHEREOF, the Corporation and the Executive have executed this Agreement as of the
Effective Date.

	 	 	 	 	 	 	 
	 	 	CORPORATION	 	 
	 
	 	 	 	 	 	 
	 	 	Oculus Innovative Services, Inc.,	 	 
	 	 	a California corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ Richard Conley	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Richard Conley, Secretary of the Board of	 	 
	 

	 	 	 	   Directors,	 	 
	 

	 	 	 	Oculus Innovative Sciences, Inc.	 	 
	 
	 	 	 	 	 	 
	 	 	EXECUTIVE	 	 
	 
	 	 	 	 	 	 
	 	 	/s/ Hojabr Alimi	 	 
	 	 	 	 	 

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EXHIBIT
A — SECTION 1.3 DISCLOSURE SCHEDULE

 

 

EXHIBIT
B — SECTION 5.7 EXCISE TAX GROSS-UP

B.1. Equalization Payment. If any payment, distribution, transfer, or benefit (including,
without limitation, any amounts received or deemed received by the Executive within the meaning of
any provision of the Internal Revenue Code of 1986, as amended (the “Code”), or by the Executive as
a result of (and not by way of limitation) any automatic vesting, lapse of resteictions and/or
accelerated target or performance achievement provisions, or otherwise, applicable to outstanding
grants or awards to the Executive under any of the Corporation’s incentive plans) by the
Corporation or a successor, or by a direct or indirect subsidiary or affiliate of the Corporation
(or any successor or affiliate of any of them, and including any benefit plan of any of them),
whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or
otherwise (collectively, the “Total Payments”), is or will be subject to the excise tax imposed
under Section 4999 of the Code or any similar or successor tax (the “Excise Tax”), the Corporation
shall pay in cash to Executive or for Executive’s benefit as provided below an additional amount or
amounts (the “Gross-Up Payment(s)”) such that the net amount retained by the Executive after the
deduction of any Excise Tax on such Total Payments and any Federal, state and local income tax and
Excise Tax upon the Gross-Up Payment(s) provided for by this Section B.l shall be equal to such
Total Payments had they not been subject to the Excise Tax. Such Gross-Up Payment(s) shall be made
by the Corporation to the Executive or to any applicable taxing authority on behalf of the
Executive as soon as practicable following the receipt or deemed receipt of any such Total Payments
by the Executive, and may be satisfied by the corporation making a payment or payments on the
Executive’s account in lieu of withholding for tax purposes but in all events shall be made within
thirty (30) days of the receipt or deemed receipt by the Executive of any such Total Payment

B.2. Calculation of Gross-Up Payment. The determination of whether a Gross-Up Payment is
required pursuant to this Exhibit B and the amount of any such Gross-Up Payment shall be determined
in writing (the “Determination”) by a nationally-recognized certified public accounting firm
selected by the Corporation (the “Accounting Firm”). The Accounting Firm shall provide its
Determination in writing, together with detailed supporting calculations and documentation and any
assumptions used in making such computation, to the Corporation and the Executive. In the event of
a termination of the Executive’s employment which reasonably may require the payment of a Gross-Up
Payment or in the event of a Change in Control such documentation shall be provided no later than
twenty (20) days following such event. Within twenty (20) days following delivery of the
Accounting Firm’s Determination, the Executive shall have the right, at the Corporation’s expense,
to obtain the opinion of an “outside counsel,” which opinion need not be unqualified, which sets
forth: (i) the amount of the Executive’s “annualized includible compensation for the base period”
(as defined in Code Section 280G(d) (1)); (ii) the present value of the Total Payments made to the
Executive; (iii) the amount and present value of any “excess parachute payment;” and (iv) detailed
supporting calculations and documentation and any assumptions used in making such computations.
The opinion of such outside counsel shall be supported by the opinion of a nationally-recognized
certified public accounting firm and, if necessary or required by the Corporation, a firm of
nationally-recognized executive compensation consultants. The Executive shall also have the right
to obtain such an opinion of outside counsel in the event that the Corporation has not timely
submitted the initial determination to the Accounting Firm as provided above (including, without
limitation, in the event that the Corporation does not submit such a determination to the
Accounting Firm

 

 

following an event in connection with which the Executive reasonably believes that he may be
entitled to a Gross-Up Payment). The outside counsel’s opinion shall be binding upon the
Corporation and the Executive and shall constitute the “Determination” for purposes of this Exhibit
B instead of the initial determination by the Accounting Firm. The Corporation shall pay (or, to
the extent paid by the Executive, reimburse the Executive for) the certified public accounting
firm’s and, if applicable, the executive compensation consultant’s reasonable and customary fees
for rendering such opinion. For purposes of this Section B.2, “outside counsel” means a licensed
attorney selected by the Executive who is recognized in the field of executive compensation and has
experience with respect to the calculation of the Excise Tax; provided that the Corporation must
approve the Executive’s selection, which approval shall not be unreasonably withheld.

B.3. Computation Assumptions. For purposes of determining whether any Total Payments will
be subject to Excise Tax, and the amount of any such Excise Tax:

	 	(a)	 	Any other payments, benefits and/or amounts received or to be received by the
Executive in connection with or contingent upon any change in the ownership or
effective control of the Corporation or any change in the ownership of a substantial
portion of the Corporation’s assets or termination of the Executive’s employment
(whether pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Corporation, or with any Person whose actions result in such a
change or any Person affiliated with the Corporation or such Persons) shall be combined
to determine whether the Executive has received any “parachute payment” within the
meaning of Section 280G(b)(2) of the Code, and if so, the amount of any “excess
parachute payments” within the meaning of Section 280G(b)(l) that shall be treated as
subject to the Excise Tax, unless in the opinion of the person or firm rendering the
Determination, such other payments, benefits and/or amounts (in whole or in part) do
not constitute parachute payments, or such excess parachute payments represent
reasonable compensation for services actually rendered within the meaning of Section
280G(b)(4) of the Code in excess of the base amount within the meaning of Section
280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax (for purposes of
this Section B.3(a), “Person” shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a
“group” as defined in Section 13(d) thereof);
	 
	 	(b)	 	The value of any non-cash benefits or any deferred payment or benefit shall be
determined by the person or firm rendering the Determination in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code;
	 
	 	(c)	 	The compensation and benefits provided for in Section 5 of this Agreement, and
any other compensation earned prior to the termination of the Executive’s employment
pursuant to the Corporation’s compensation program (if such payments would have been
made in the future in any event, even though the timing of such payment is triggered by
a change in the ownership or effective control of the Corporation or any change in the
ownership of a substantial portion of the Corporation’s assets or a termination of the
Executive’s employment), shall

 

 

	 	 	 	for purposes of the calculation pursuant to this Section B.3 be deemed to be
reasonable; and

	 	(d)	 	The Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the Gross-Up
Payment is to be made. Furthermore, the computation of the Gross-Up Payment shall
assume (and adjust for the fact) that (i) there is a loss of miscellaneous itemized
deductions under Section 67 of the Code (or analogous federal or state provisions) on
account of the Gross-Up Payment and (3) a loss of itemized deductions under Section 68
of the Code (or analogous federal or state provisions) on account of the Gross-Up
Payment. The computation of the Gross-Up Payment shall take into account any reduction
in the Gross-Up Payment due to the Executive’s share of the hospital insurance portion
of FICA and any state withholding taxes (other than any state withholding tax for
income tax liability). The computation of the state and local income taxes applicable
to the Gross-Up Payment shall be based on the highest marginal rate of taxation in the
state and locality of the Executive’s residence on the date the Executive’s employment
terminates, and shall take into account the maximum reduction in federal income taxes
that could be obtained from the deduction of such state and local taxes.

B.4 Executive’s Obligation to Notify Corporation. The Executive shall promptly notify the
Corporation in writing of any claim by the Internal Revenue Service (or any successor thereof or
any state or local taxing authority (individually or collectively, the “Taxing Authority”) that, if
successful, would require the payment by the Corporation of a Gross-Up Payment in excess of any
Gross-Up Payment as originally set forth in the Determination. If the Corporation notifies the
Executive in writing that it desires to contest such claim, the Executive shall: (a) give the
Corporation any information reasonably requested by the Corporation relating to such claim; (b)
take such action in connection with contesting such claim as the Corporation shall reasonably
request in writing from time to time, including, without limitation, accepting legal representation
with respect to such claim by an attorney selected by the Corporation that is reasonably acceptable
to the Executive; (c) cooperate with the Corporation in good faith in order to effectively contest
such claim; and (d) permit the Corporation to participate in any proceedings relating to such
claim; provided that the Corporation shall bear and pay directly all attorneys fees, costs and
expenses (including additional interest penalties and additions to tax) incurred in connection with
such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for all
taxes (including, without limitation, income and excise taxes), interest, penalties and additions
to tax imposed in relation to such claim and in relation to the payment of such costs and expenses
or indemnification. Without limitation on the foregoing provisions of this Section B.4, and to the
extent its actions do not unreasonably interfere with or prejudice the Executive’s disputes wid1
the Taxing Authority as to other issues, the Corporation shall control all proceedings taken in
connection with such contest and, in its reasonable discretion, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences wid1 tile Taxing Authority in respect
of such claim and may, at its sole option, either direct Executive to pay the tax, interest or
penalties claimed and sue for a refund or contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall
determine; provided, however, that if the Corporation directs Executive

 

 

to pay such d h n and sue for a refund, the Corporation shall advance an amount equal to such
payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from all taxes (including, without limitation, income and excise
taxes), interest, penalties and additions to tax imposed wid1 respect to such advance or with
respect to any imputed income with respect to such advance, as any such amounts are incurred; and,
further, provided, that any extension of the statute of limitations relating to payment of taxes,
interest penalties or additions to tax for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested amount; and,
provided, further, that any settlement of any claim shall be reasonably acceptable to the Executive
and the Corporation’s control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or
contest, as the case may be, any other issue.

B.5. Subsequent Recalculation. In the event of a binding or uncontested determination by
the Taxing Authority that adjusts the computation set forth in the Determination so that the
Executive did not receive the greatest net benefit required pursuant to Section B.l, the
Corporation shall reimburse the Executive as provided herein for the full amount necessary to place
the Executive in the same after-tax position as he would have been in had no Excise Tax applied.
In the event of a binding or uncontested determination by the Taxing Authority that adjusts the
computation set forth in the Determination so that the Executive received a payment or benefit in
excess of the amount required pursuant to Section B.l, then the Executive shall promptly pay to the
Corporation (without interest) the amount of such excess.

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