Document:

Exhibit
10.1

 

ETELOS,
INCORPORATED

 

BRIDGE
BANK, NATIONAL ASSOCIATION

 

LOAN
AND SECURITY AGREEMENT

 

 

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

 

RECITALS

 

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

 

AGREEMENT

 

The parties agree as follows:

 

1.                                      DEFINITIONS
AND CONSTRUCTION.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Closing Date” means the date of this Agreement.

 

“Code” means the California Uniform Commercial Code.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Permitted Indebtedness” means:

 

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

 

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

 

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

 

(d)                                  Subordinated
Debt.

 

“Permitted Investment” means:

 

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

 

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

 

“Permitted Liens” means the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“Revolving Maturity Date” means October         ,
2008.

 

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

 

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

 

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

 

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

 

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

 

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

 

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2.                                      LOAN
AND TERMS OF PAYMENT.

 

2.1                               Credit
Extensions.

 

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

 

(a)                                  Revolving
Advances.

 

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

 

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

 

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

 

2.3                               Interest
Rates, Payments, and Calculations.

 

(a)                                  Interest
Rates.

 

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

 

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

 

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

 

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

 

5

 

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

 

2.5                               Fees.  Borrower shall pay to Bank the following:

 

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

 

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

 

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

 

3.                                      CONDITIONS
OF LOANS.

 

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

 

(a)                                  this
Agreement;

 

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

 

(c)                                  UCC
National Form Financing Statement;

 

(d)                                  an
intellectual property security agreement;

 

(e)                                  a
warrant to purchase stock;

 

(f)                                    agreement
to provide insurance;

 

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

 

(h)                                 current
financial statements of Borrower;

 

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

 

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

 

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

 

6

 

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

 

4.                                      CREATION
OF SECURITY INTEREST.

 

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

 

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

 

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

 

5.                                      REPRESENTATIONS
AND WARRANTIES.

 

Borrower represents and warrants as follows:

 

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

 

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

 

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

 

5.4                               Intentionally
Deleted.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8

 

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

 

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

 

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

 

6.                                      AFFIRMATIVE
COVENANTS.

 

Borrower shall do all of the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

9

 

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

 

6.6          Insurance.

 

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

 

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

 

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

 

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

 

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

 

6.10        Intellectual
Property Rights.

 

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

 

10

 

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

 

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

 

7.             NEGATIVE
COVENANTS.

 

Borrower will not do any of the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

11

 

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

 

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

 

8.             EVENTS
OF DEFAULT.

 

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

 

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

 

8.2          Covenant
Default.

 

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

 

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

 

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

 

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

 

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

 

12

 

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

 

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

 

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

 

9.             BANK’S
RIGHTS AND REMEDIES.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

13

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

14

 

10.          NOTICES.

 

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

 

If to Borrower:                                                                                                               ETELOS,
INCORPORATED

200 Mill Avenue South, Suite 400

Renton, Washington  98055

Attn:  Jeff Garon

FAX: 
(        )                         

 

If to Bank:                                                                                                                                     Bridge
Bank, National Association

55 Almaden Boulevard

San Jose, California  95123

Attn:  Technology Division

FAX:  (408) 282-1681

 

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

 

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

 

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

 

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

 

12.          GENERAL
PROVISIONS.

 

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

 

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

 

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

 

15

 

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

 

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

 

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

 

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

 

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

 

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

 

16

 

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

 

 

	
   

  	
  ETELOS, INCORORATED

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jeffrey L. Garon

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  President / CEO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  BRIDGE BANK, NATIONAL
  ASSOCIATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dan Pistoni

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  Senior Vice President

  

 

17

 

EXHIBIT A

 

	
  DEBTOR:

  	
  ETELOS, INCORPORATED

  
	
   

  	
   

  
	
  SECURED PARTY:

  	
  BRIDGE BANK, NATIONAL
  ASSOCIATION

  

 

COLLATERAL DESCRIPTION ATTACHMENT 

TO LOAN AND SECURITY AGREEMENT

 

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

 

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

 

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

 

18

 

EXHIBIT B

 

REVOLVING
ADVANCE REQUEST

 

 

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

 

	
  To:

  	
  Bridge Bank, National
  Association

  	
   

  
	
   

  	
   

  	
   

  
	
  Fax:

  	
  (408) 282-1681

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  From:

  	
   

  	
   

  
	
   

  	
  Borrower’s Name

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Authorized Signature

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Authorized Signer’s
  Name (please print)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Phone Number

  	
   

  
	
   

  	
   

  	
   

  
	
  To Account #

  	
   

  	
   

  
				

 

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

 

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

 

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

 

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

 

19

 

EXHIBIT C

COMPLIANCE CERTIFICATE

 

TO:                                                                            BRIDGE
BANK, NATIONAL ASSOCIATION

 

FROM:                                                         ETELOS,
INCORPORATED

 

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

 

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

 

	
  Reporting Covenant

  	
   

  	
  Required

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Annual financial
  statements (CPA Audited)

  	
   

  	
  FYE beginning 12/31/07,
  within 180 days

  	
   

  	
  Yes

  	
   

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Monthly financial
  statements and Compliance Certificate

  	
   

  	
  Prior to each Credit
  Extension, and monthly within 30 days

  	
   

  	
  Yes

  	
   

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  10K and 10Q

  	
   

  	
  (as applicable)

  	
   

  	
  Yes

  	
   

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

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

  	
   

  	
  Yes

  	
   

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  A/R & A/P
  Agings

  	
   

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

  	
   

  	
  Yes

  	
   

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Deposit balances with
  Bank

  	
   

  	
  $                           

  	
   

  	
   

  	
   

  	
   

  
	
  Deposit balance outside
  Bank

  	
   

  	
  $                           

  	
   

  	
   

  	
   

  	
   

  

 

	
  Financial Covenant

  	
   

  	
  Required

  	
   

  	
   

  	
   

  	
  Actual

  	
   

  	
  Complies

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Minimum Adjusted Quick
  Ratio

  	
   

  	
  1.50:1.00

  	
   

  	
                :1.00

  	
   

  	
  Yes

  	
   

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Minimum quarterly
  revenue

  	
   

  	
  Within 80% of plan

  	
   

  	
                %

  	
   

  	
  Yes

  	
   

  	
  No

  

 

	
  Comments Regarding Exceptions:
  See Attached.

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  BANK USE ONLY

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Received by:

  	
   

  
	
  Sincerely,

  	
   

  	
   

  	
  AUTHORIZED
  SIGNER

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Verified:

  	
   

  
	
  SIGNATURE

  	
   

  	
   

  	
  AUTHORIZED
  SIGNER

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Date:

  	
   

  
	
  TITLE

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Compliance Status

  	
  Yes

  	
  No

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  DATE

  	
   

  	
   

  	
   

  	
   

  
									

 

20

 

SCHEDULE
OF EXCEPTIONS

 

 

Permitted
Indebtedness  (Section 1.1)

 

 

Permitted
Investments  (Section 1.1)

 

 

Permitted
Liens  (Section 1.1)

 

 

Inbound
Licenses  (Section 5.6)

 

 

Prior Names  (Section 5.7)

 

 

Litigation  (Section 5.8)

 

 

21Exhibit 10.2

 

 

	
  To: Don Morissette

  	
   

  	
  March 6, 2008

  

 

From:
Jeff Garon and Danny Kolke

 

Subject:
Modification of the Agreement of Ownership Equity and Anti-Dilution date
9-19-2007 (copy attached)

 

Dear
Don,

 

With
regard to the discussion we have recently concluded regarding the terms of
anti-dilution as laid out in the above referenced agreement, we respectfully
request that you agree through your acknowledgement below to change the
following items while leaving all other terms in effect as stated in the 9-19
Agreement:

 

1)              Replace “$2,150,000” with “$3,024,000”
in the 2nd sentence of the Recitals;

 

2)              Replace the words “25.5%
following” with “23.5% following” in the next to last sentence and in the last
sentence of the Recitals;

 

3)              Replace “25.5%” with “23.5%”
in the second sentence of paragraph 3.

 

As
we have discussed, this Agreement will terminate in all respects upon the
closing of the Reverse Merger.

 

Thank
you, please acknowledge and agree by signing in the space below and returning
the signed document to us via email or Fax (408-516-8425).

 

We
continue to appreciate your support,

 

 

	
  Jeffrey L. Garon

  	
   

  	
  Danny Kolke

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Jeffrey L. Garon

  	
   

  	
  /s/ Danny Kolke

  
	
  President & CEO

  	
   

  	
  Founder, Chairman & CTO

  
	
  Etelos Incorporated

  	
   

  	
  Etelos Incorporated

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Acknowledged and Agreed:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Don Morissette

  	
   

  	
   

  
	
  Don Morissette

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
  March 6, 2008

  	
   

  	
   

  
				

 

Etelos | 1900 O’Farrell Street | Suite 320
| San Mateo | CA | 94403| www.etelos.com | 800.874.4914

 

 

ADDITIONAL AGREEMENT OF OWNERSHIP EQUITY AND
ANTI-DILUTION

 

This Agreement is by and
between Don Morissette (“Morissette”) and Danny Kolke, Jeff Garon (President
and CEO of Etelos) and Etelos, Inc. (collectively “Etelos”) regarding
Morissette’s investment in Etelos, Inc. This Agreement sets forth the
terms and conditions of Morissette’s additional investment in Etelos.

 

Recitals

 

Morissette has made
previous investments in Etelos including the $500,000 investment set forth in
the “Agreement of Ownership Equity and Anti-dilution” dated July 2007. At
the time of that agreement, Etelos planned to raise up to $1,000,000. Instead,
Etelos raised $2,150,000 including Morissette’s $500,000. Etelos plans to raise
an additional $500,000 prior to the $5.5 million dollar round expected circa December 2007,
which is expected to occur in conjunction with a reverse merger into Tripath
Technology Inc. While Morissette’s ownership equity is 31%, Morissette has
agreed to invest an additional $195,000 in Etelos to keep his ownership
interests from being diluted following the $500,000 contribution from another
party. Etelos has has assured Morissette that his contribution of an additional
$195,000 will result in effective ownership equity in Etelos of not less than
31% prior to the reverse merger, and not less than 25.5% following the reverse
merger. Etelos has additionally assured that Morissette’s effective ownership
equity in Etelos will not be diluted below 31% prior to the merger and 25.5%
following the merger without Morissette’s express written permission.

 

Agreement

 

1.               In consideration of Morissette’s
contribution of this additional $195,000, Morissette’s effective ownership
equity in Etelos is maintained at no less than 31%.

 

2.               Morissette’s effective ownership equity
of 31% takes into account all potential dilution from debt conversions, options
and any and all other potentially dilutive securities, interests or events.

 

3.               Etelos plans to raise approximately
$5,500,000 circa December 2007 in conjunction with a reverse merger into a
public “shell” that is emerging from bankruptcy. Following that merger,
Morissette’s ownership equity will not be diluted below 25.5% taking into
account all potential dilution from debt conversions, options and any and all
other potentially dilutive securities, interests or events.

 

4.               Morissette’s effective ownership equity
will not be diluted except by written agreement of the parties. For such
written agreement to be effective, it shall address only dilution, not be a
part of any other agreement, and be titled “Agreement of Dilution.”

 

5.               Danny Kolke and Jeff Garon, in his role
as CEO,  represent and warrant that each
has obtained any and all approvals by the Board of Directors and other
interested parties to enter into this Agreement and a copy of the Unanimous
Written Consent approving this Agreement will be provided to Morissette.

 

6.               Etelos will provide Morissette copies of
the merger documents as soon as they become available.

 

7.               Any and all notes, securities purchase
agreements and other documents relating to the financing of Etelos and the
contemplated merger will be drafted to reflect the terms and conditions set
forth in this Agreement.

 

Agreed
to this          day of September,
2007, by:

 

 

	
   

  	
  /s/ Danny Kolke

  	
   

  
	
   

  	
  Danny Kolke

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Danny
  Kolke

  	
   

  
	
   

  	
  Danny Kolke,
  Etelos, Inc.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Jeffrey
  L. Garon

  	
   

  
	
   

  	
  Jeff Garon, CEO,
  Etelos, Inc.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Don
  Morissette

  	
   

  
	
   

  	
  Don Morissette

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