LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of December 9, 2008 (the “ Effective Date ”) among BLUECREST CAPITAL FINANCE, L.P ., a Delaware limited partnership (“ BlueCrest ”), the other Lenders listed on Schedule 1.1 hereof and otherwise party hereto, and BlueCrest in its capacity as agent for the Lenders (the “ Agent ”), BlueCrest in its capacity as lead arranger (in such capacity, the “ Arranger ”), and PEREGRINE PHARMACEUTICALS, INC. , a Delaware corporation (“ Peregrine ”), and AVID BIOSERVICES, INC ., a Delaware corporation (“ Avid ,” and together with Peregrine, jointly and severally, individually and collectively, referred to as “ Borrower ”), provides the terms on which Lenders shall lend to Borrower and Borrower shall repay Lenders.  The parties agree as follows:

Accounting terms not defined in this Agreement shall be construed following GAAP.  Calculations and determinations must be made following GAAP.  Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13.  All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

2.1           Promise to Pay .  Borrower hereby unconditionally promises to pay Lenders the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement.

2.1.1        Growth Capital Advances .

(a)            Availability .  Subject to the terms and conditions of this Agreement, during the Growth Capital Draw Period, Lenders agree, severally and not jointly, to make advances to Borrower (each a “ Growth Capital Advance ” and, collectively, the “ Growth Capital Advances ”) not exceeding the Growth Capital Line according to each Lender's pro-rata share of the Growth Capital Line (based upon the respective Commitment Percentage of each Lender).  After repayment, no Growth Capital Advance may be reborrowed.  The Growth Capital Advances shall be available in two tranches.  The first tranche (“ Tranche One ”) shall be in an amount equal to Five Million Dollars ($5,000,000) and shall be advanced within ten (10) calendar days after the Effective Date.  The second tranche (“ Tranche Two ”) shall be in an amount equal to Five Million Dollars ($5,000,000) and shall be available to be advanced only within the fifteen (15) Business Day period following the satisfaction of the following conditions, but shall not be advanced after the Growth Capital Commitment Termination Date:

(i)           Peregrine receives (in cash) at least (x) $7,500,000 in gross proceeds from the issuance of new equity after the Effective Date or (y) ********** in net proceeds from the sale of Avid ;

(ii)           the interim results from either (x) the Phase II bavituximab and carboplatin breast cancer study or (y) the Phase II bavituximab and carboplatin lung cancer study meet the predetermined response rate sufficient to continue Stage B enrollment as specified in the respective clinical protocol for such study, and proven to the reasonable satisfaction of Agent; and

(iii)           no Default or Event of Default has occurred or is continuing.

(c)            Repayment .  Commencing on the seventh (7 ^th ) Interest Payment Date for each Growth Capital Advance, and on each Interest Payment Date thereafter, Borrower shall pay to Lenders as a principal payment under such Growth Capital Advance outstanding an amount equal to the “Amortization Payment” (defined below) as an amortization payment in respect of such Growth Capital Advance.  The term “ Amortization Payment ” means the principal payment based upon a straight-line amortization of equal monthly principal payments through the Growth Capital Line Maturity Date.  The final payment of all unpaid principal and accrued interest is due and payable in full on the Growth Capital Line Maturity Date.

(d)            Mandatory Prepayment Upon an Acceleration .  If the Growth Capital Advances are accelerated following the occurrence of an Event of Default, Borrower shall immediately pay to Lenders an amount equal to the sum of (i) all outstanding principal plus accrued and unpaid interest, (ii) the Final Payment, (iii) the Prepayment Fee, and (iv) all other sums, if any, that shall have become due and payable, including interest at the Default Rate with respect to any past due amounts.

(e)            Permitted Prepayment of Growth Capital Advances .   So long as no Event of Default has occurred and is continuing, Borrower shall have the option to prepay all, but not less than all, of the Growth Capital Advances advanced by Lenders under this Agreement, provided Borrower (i) delivers written notice to Agent of its election to prepay the Growth Capital Advances at least thirty (30) days prior to such prepayment, and (ii) pays to Lenders, on the date of such prepayment (A) all outstanding principal plus accrued and unpaid interest, (B) the Final Payment,  (C) the Prepayment Fee, and (D) all other sums, if any, that shall have become due and payable, including interest at the Default Rate with respect to any past due amounts.  Notwithstanding the foregoing, Lenders shall waive fifty percent (50%) of the Prepayment Fee in the event Borrower refinances all of the Obligations within thirty (30) days after Lenders’ demand for Borrower to pay increased costs or additional costs pursuant to Section 2.4 hereof.

2.2             Payment of Interest on the Credit Extensions .

(a)            Computation of Interest .  Interest on the Credit Extensions and all fees payable hereunder shall be computed on the basis of a 360-day year and the actual number of days elapsed in the period during which such interest accrues.  In computing interest on any Credit Extension, the date of the making of such Credit Extension shall be included and the date of payment shall be excluded; provided, however, that if any Credit Extension is repaid on the same day on which it is made, such day shall be included in computing interest on such Credit Extension.

(b)            Interest Payments .  Subject to the provisions of Sections 2.2(c) and 3.5 below, each Growth Capital Advance shall bear interest on the outstanding principal amount thereof from the date when made until paid in full at a rate per annum equal to (i) the greater of (A) the LIBOR Rate in effect for the applicable Interest Period or (B) three percent (3%), plus (ii) the LIBOR Rate Margin, adjusted on the first day of each Interest Period and fixed for the duration of each such Interest Period.  Pursuant to the terms hereof, interest on each Growth Capital Advance shall be paid in arrears on each Interest Payment Date.  Interest shall also be paid on the date of any prepayment of any Growth Capital Advance pursuant to this Agreement for the portion of any Growth Capital Advance so prepaid and upon payment (including prepayment) in full thereof.  All accrued but unpaid interest on the Growth Capital Advances shall be due and payable on the Growth Capital Line Maturity Date.

(c)            Default Interest .  After and during the continuation of an Event of Default, Obligations shall bear interest of five percent (5.00%) above the rate that is otherwise applicable thereto (the “ Default Rate ”).  Payment or acceptance of the increased interest rate provided in this Section 2.2(c) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Agent or Lenders.

(d)            Debit of Accounts .  Lenders may debit any of Borrower’s deposit accounts, including the Designated Deposit Account, for principal and interest payments when due, or any other amounts Borrower owes Lenders under the Loan Documents, when due.  These debits shall not constitute a set-off.

(e)            Payments .  Unless otherwise provided, interest is payable monthly on each Interest Payment Date.  Payments of principal and/or interest received after 12:00 noon Eastern time are considered received at the opening of business on the next Business Day.  When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest, as applicable, shall continue to accrue.  All payments to be made by Borrower hereunder or under any other Loan Document, including payments of principal and interest made hereunder and pursuant to any other Loan Document, and all fees, expenses, indemnities and reimbursements, shall be made without set-off, recoupment or counterclaim, in lawful money of the United States and in immediately available funds.  All payments required under this Agreement are to be made directly to Lenders.

(f)            Maximum Lawful Rate .  In no event shall the interest charged hereunder, with respect to the notes (if any) or any other obligations of Borrower under any Loan Documents exceed the maximum amount permitted under the Laws of the State of Maryland or of any other applicable jurisdiction.  Notwithstanding anything to the contrary herein or elsewhere, if at any time the rate of interest payable hereunder or under any note or other Loan Document (the “ Stated Rate ”) would exceed the highest rate of interest permitted under any applicable Law to be charged (the “ Maximum Lawful Rate ”), then for so long as the Maximum Lawful Rate would be so exceeded, the rate of interest payable shall be equal to the Maximum Lawful Rate; provided, however , that if at any time thereafter the Stated Rate is less than the Maximum Lawful Rate, Borrower shall, to the extent permitted by Law, continue to pay interest at the Maximum Lawful Rate until such time as the total interest received is equal to the total interest which would have been received had the Stated Rate been (but for the operation of this provision) the interest rate payable.  Thereafter, the interest rate payable shall be the Stated Rate unless and until the Stated Rate again would exceed the Maximum Lawful Rate, in which event this provision shall again apply.  In no event shall the total interest received by any Lender exceed the amount which it could lawfully have received, had the interest been calculated for the full term hereof at the Maximum Lawful Rate.  If, notwithstanding the prior sentence, any Lender has received interest hereunder in excess of the Maximum Lawful Rate, such excess amount shall be applied to the reduction of the principal balance of the Growth Capital Advances or to other amounts (other than interest) payable hereunder, and if no such principal or other amounts are then outstanding, such excess or part thereof remaining shall be paid to Borrower.  In computing interest payable with reference to the Maximum Lawful Rate applicable to any Lender, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in the year in which such calculation is made.

2.3             Fees .  Borrower shall pay to Lenders:

(a)            Commitment Fee.   A fully earned, non-refundable commitment fee of (i) $50,000 in regard to Tranche One, due and payable on the Effective Date, and (ii) $50,000 in regard to Tranche Two (the “Tranche Two Commitment Fee”) due and payable on the earliest to occur of (A) the funding of Tranche Two or (B) June 30, 2009 (if the condition in Section 2.1.1(a)(ii) has been met prior to such date); provided, however, that the Tranche Two Commitment Fee shall be waived if the condition in Section 2.1.1(a)(ii) has not been met prior to June 30, 2009;

(b)            Prepayment Fee .  The Prepayment Fee, when due hereunder;

(c)            Final Payment .  The Final Payment, when due hereunder; and

(d)            Lenders' Expenses .  All Lenders' Expenses (including reasonable attorneys’ fees and expenses, plus expenses, for documentation and negotiation of this Agreement) incurred through and after the Effective Date, within ten (10) Business Days following written demand therefor, net of the $50,000 deposit previously paid by Borrower.

2.4             Additional Costs .  If any new Law or regulation increases Lender’s costs or reduces its income for any loan, Borrower shall pay the increase in cost or reduction in income or additional expense; provided, however, that Borrower shall not be liable for any amount attributable to any period before 180 days prior to the date Agent notifies Borrower of such increased costs.  Each Lender agrees that it shall allocate any increased costs among its customers similarly affected in good faith and in a manner consistent with such Lender's customary practice.

2.5             Payments and Taxes .  Any and all payments made by Borrower under this Agreement or any Loan Documents shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any governmental authority (including any interest, additions to tax or penalties applicable thereto) other than any taxes imposed on or measured by any Lender’s overall net income and franchise taxes imposed on it (in lieu of net income taxes), by a jurisdiction (or any political subdivision thereof) as a result of any Lender being organized or resident, conducting business (other than a business deemed to arise from such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, or otherwise with respect to, this Agreement or any Loan Documents) or having its principal office in such jurisdiction (“ Indemnified Taxes ”).  If any Indemnified Taxes shall be required by Law to be withheld or deducted from or in respect of any sum payable under this Agreement or any Loan Documents to any Lender (w) an additional amount shall be payable as may be necessary so that, after making all required withholdings or deductions (including withholdings or deductions applicable to additional sums payable under this Section) such Lender receives an amount equal to the sum it would have received had no such withholdings or deductions been made, (x) Borrower shall make such withholdings or deductions, (y) Borrower shall pay the full amount withheld or deducted to the relevant taxing authority or other authority in accordance with applicable Law and (z) Borrower shall deliver to such Lender evidence of such payment.  Borrower’s obligation hereunder shall survive the termination of this Agreement.

3.1            Conditions Precedent to Initial Credit Extension .  Each Lender’s obligation to make the initial Credit Extension is subject to the condition precedent that Borrower shall consent to or shall have delivered, in form and substance satisfactory to Lenders, such documents, and completion of such other matters, as Lenders may reasonably deem necessary or appropriate, including, without limitation:

(a)           Agent shall have received duly executed original signatures to the Loan Documents to which Borrower is a party;

(b)           Agent shall have received duly executed original signatures to the Control Agreement[s];

(c)           Agent shall have received Operating Documents and a good standing certificate of Borrower certified by the Secretary of State of the State of Delaware as of a date no earlier than thirty (30) days prior to the Effective Date;

(d)           Agent shall have received duly executed original signatures to the completed Borrowing Resolutions for Borrower;

(e)           Agent shall have received certified copies, dated as of a recent date, of financing statement searches, as Agent shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;

(f)           Agent shall have received the Perfection Certificate executed by Borrower;

(g)           Agent shall have received a legal opinion of Borrower’s counsel dated as of the Effective Date together with the duly executed original signatures thereto;

(h)           BlueCrest shall have (i) assigned to another Lender (the “ Assignee Lender ”) a seventy percent (70%) Commitment Percentage under the Growth Capital Line and all rights, remedies and obligations in connection therewith, and resigned as Agent and agreed to permit such Assignee Lender to become the Agent and Arranger;

(i)           Agent shall have received payment of the fees and Lenders' Expenses then due as specified in Section 2.3 hereof; and

(j)           Agent shall have received evidence, satisfactory to Agent, that all Liens set forth in clause (l) of the definition of “Permitted Liens” have been terminated.

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

(a)           (i) Agent’s receipt of a promissory note or promissory notes, as the case may be, in substantially the form agreed upon by the parties hereto as of the Effective Date, executed by Borrower in favor of each Lender (one promissory note per Lender) with a face amount equal to the portion of the applicable Credit Extension to be funded by the applicable Lender, and (ii) except as otherwise provided in Section 3.4, timely receipt of an executed Advance Request Form;

(b)           the representations and warranties in Section 5 shall be true, correct and complete in all material respects on the date of the Advance Request Form and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Default or Event of Default shall have occurred and be continuing or result from the Credit Extension.  Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in Section 5 remain true in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and

(c)           in such Lender’s sole discretion, there has not been any material impairment in the general affairs, management, results of operation, financial condition or the prospect of repayment of the Obligations, nor has there been any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Agent.

3.3             Covenant to Deliver .  Borrower agrees to deliver to Agent each item required to be delivered to Agent under this Agreement as a condition to any Credit Extension.  Borrower expressly agrees that the extension of a Credit Extension prior to the receipt by Agent of any such item shall not constitute a waiver by Lenders of Borrower’s obligation to deliver such item, and any such extension in the absence of a required item shall be in Agent’s sole discretion.

3.4             Procedures for Borrowing .  Subject to the prior satisfaction of all other applicable conditions to the making of a Growth Capital Advance set forth in this Agreement, to obtain a Growth Capital Advance, Borrower shall notify Agent (which notice shall be irrevocable) by electronic mail, facsimile, or telephone by 12:00 noon Eastern time five (5) Business Days prior to the date the Growth Capital Advance is to be made.  Together with any such electronic or facsimile notification, Borrower shall deliver to Agent by electronic mail or facsimile a completed Advance Request Form executed by a Responsible Officer or his or her designee.  Upon receipt of an Advance Request Form, Agent shall promptly provide a copy of the same to each Lender.  Agent may rely on any telephone notice given by a person whom such Agent believes is a Responsible Officer or designee.  On the Funding Date, each Lender shall credit and/or transfer (as applicable) to Borrower's Designated Deposit Account, an amount equal to its Commitment Percentage multiplied by the amount of the Growth Capital Advance.  Each Lender may make Growth Capital Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Growth Capital Advances are necessary to meet Obligations which have become due.

3.5             Special Provisions Governing Growth Capital Advances.

Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to the matters covered:

(a)            Determination of Applicable Interest Rate .  As soon as practicable on each Interest Rate Determination Date, Agent shall determine (which determination shall, absent manifest error in calculation, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Growth Capital Advances for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Borrower.

(b)            No Breakage Fees .  Borrower shall not incur any breakage fees associated with the prepayment of Growth Capital Advances on a day that is not the last day of the relevant Interest Period.

(c)            Inability to Determine Applicable Interest Rate .  In the event that Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Growth Capital Advance, that adequate and fair means do not exist for ascertaining the interest rate applicable to such Growth Capital Advance on the basis provided for in the definition of LIBOR Rate, then Agent may select a comparable replacement index and corresponding margin.

4.1             Grant of Security Interest .  Borrower hereby grants Agent, for the ratable benefit of the Lenders, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Agent, for the ratable benefit of the Lenders, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof.  Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority security interest in the Collateral (subject only to Permitted Liens that may have superior priority under this Agreement).  If Borrower shall acquire a commercial tort claim (as defined in the Code), Borrower shall promptly notify Agent in a writing signed by Borrower of the general details thereof (and further details as may be required by Agent) and grant to Agent, for the ratable benefit of the Lenders, in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Agent.  If this Agreement is terminated, Agent’s Lien in the Collateral shall continue until the Obligations are repaid in full in cash.  Upon payment in full in cash of the Obligations and at such time as the Lenders' obligation to make Credit Extensions has terminated, the Agent, at Borrower’s sole cost and expense, shall release its Liens in the Collateral and all rights therein shall revert to Borrower.

4.2             Authorization to File Financing Statements .  Borrower hereby authorizes Agent to file financing statements, without notice to Borrower, with all appropriate jurisdictions to perfect or protect Agent’s  and each Lender's interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of the Agent and the Lenders under the Code.

Borrower represents and warrants as follows:

5.1             Due Organization and Authorization .  Borrower and each of its Subsidiaries, if any, are duly existing and in good standing, as Registered Organizations in their respective jurisdictions of formation and are qualified and licensed to do business and are in good standing in any jurisdiction in which the conduct of their business or their ownership of property requires that they be qualified except where the failure to do so could not reasonably be expected to have a material adverse effect on Borrower’s business.  In connection with this Agreement, Borrower has delivered to Agent a completed perfection certificate   signed by Borrower (the “Perfection Certificate”).  Borrower represents and warrants that (a) Borrower’s exact legal name is that indicated on the Perfection Certificate and on the signature page hereof; (b) Borrower is an organization of the type and is organized in the jurisdiction set forth in the Perfection Certificate; (c) the Perfection Certificate accurately sets forth Borrower’s organizational identification number or accurately states that Borrower has none; (d) the Perfection Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address (if different than its chief executive office); (e) Borrower (and each of its predecessors) has not, in the past five (5) years, changed its jurisdiction of formation, organizational structure or type (except for changes to its authorized capital and the establishment of a stockholders’ rights plan), or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificate pertaining to Borrower and each of its Subsidiaries is accurate and complete (it being understood and agreed that Borrower may from time to time update certain information in the Perfection Certificate after the Effective Date to the extent permitted by one or more specific provisions in this Agreement).  If Borrower is not now a Registered Organization but later becomes one, Borrower shall promptly notify Agent of such occurrence and provide Agent with Borrower’s organizational identification number.

The execution, delivery and performance by Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of Borrower’s organizational documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which Borrower or any of its Subsidiaries or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect) or are being obtained pursuant to Section 6.1(b), or (v) nor constitute an event of default under any material agreement by which Borrower is bound.  Borrower is not in default under any agreement to which it is a party or by which it is bound in which the default could reasonably be expected to   have a material adverse effect on Borrower’s business.

5.2             Collateral .

(a)           Borrower has good title to, has rights in, and the power to transfer each item of the Collateral upon which it purports to grant a Lien hereunder, free and clear of any and all Liens except Permitted Liens.  Borrower has no Collateral Accounts other than the Collateral Accounts with Agent, the Collateral Accounts, if any, described in the Perfection Certificate, or of which Borrower has given Agent notice and taken such actions as are necessary to give Agent for the ratable benefit of all Lenders a perfected security interest therein.

(b)           The Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided in the Perfection Certificate.  None of the components of the Collateral shall be maintained at locations other than as provided in the Perfection Certificate or as Borrower has given Agent notice pursuant to Section 7.2.  In the event that Borrower, after the date hereof, intends to store or otherwise deliver any portion of the Collateral to a bailee, then Borrower will first receive the written consent of Agent and such bailee must execute and deliver a bailee agreement in form and substance satisfactory to Agent in its sole discretion.

(c)           All Inventory is in all material respects of good and marketable quality, free from material defects.

(d)           All of Borrower’s Material Intellectual Property, including all licenses under which Borrower is the licensee of any such Material Intellectual Property owned by another Person, are set forth on Schedule 5.2.  Such Schedule 5.2 indicates in each case the expiration date of such Material Intellectual Property and whether such Material Intellectual Property (or application therefor) is owned or licensed by Borrower, and in the case of any such licensed Material Intellectual Property, lists the name and address of the licensor and the name and date of the agreement pursuant to which such item of Material Intellectual Property is licensed, the expiration date of such license and the expiration date of the underlying Material Intellectual Property, whether or not such license is an exclusive license and whether there are any purported restrictions in such license on the ability to Borrower to grant a security interest in and/or to transfer any of its rights as a licensee under such license.

5.3             Litigation .  Except as set forth in Schedule 5.3 and except for actions or proceedings in regard to which Agent has received notice under Section 6.2(a)(iv), there are no actions or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against Borrower or any of its Subsidiaries involving more than One Hundred Thousand Dollars ($100,000.00).

5.4             No Material Deviation in Financial Statements .  All consolidated financial statements for Borrower and any of its Subsidiaries delivered to Agent fairly present, in conformity with GAAP, in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations.  There has not been any material deterioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Agent.

5.5             Solvency .  The fair salable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature.

5.6             Regulatory Compliance .  Borrower is not an “investment company” or a company “controlled” by an “investment company” or a “subsidiary” of an “investment company” under the Investment Company Act of 1940.  Borrower is not engaged in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors).  Borrower has complied in all material respects with the Federal Fair Labor Standards Act.  Neither Borrower nor any of its Subsidiaries is a “holding company” or an “affiliate” or a “holding company” or a “subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding Company Act of 2005.  Borrower has not violated any Laws, ordinances or rules, the violation of which could reasonably be expected to have a material adverse effect on its business.  None of Borrower’s or any of its Subsidiaries’ properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally.  Borrower has obtained all Required Permits, or has contracted with third parties holding Required Permits, necessary for compliance with all Laws and all such Required Permits are current.  Borrower and each of its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Governmental Authorities that are necessary to continue their respective businesses as currently conducted.

None of the Borrower, its Affiliates or any of their respective agents acting or benefiting in any capacity in connection with the transactions contemplated by this Agreement is (i) in violation of any Anti-Terrorism Law, (ii) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law, or (iii) is a Blocked Person.  Neither Borrower nor, to the knowledge of Borrower, any of its Affiliates or agents acting or benefiting in any capacity in connection with the transactions contemplated by this Agreement, (x) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, or (y) deals in, or otherwise engages in any transaction relating to, any property or interest in property blocked pursuant to Executive Order No. 13224, any similar executive order or other Anti-Terrorism Law.

5.7             Subsidiaries; Investments .  Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments.

5.8             Tax Returns and Payments; Pension Contributions .  Borrower has timely filed all required tax returns and reports (including those relating to employee tax withholding, social security and unemployment taxes), and Borrower and its Subsidiaries have timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower.  Borrower may defer payment of any contested taxes, provided that Borrower (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Agent in writing of the commencement of, and any material development in, the proceedings, (c) posts bonds or takes any other steps required to prevent the governmental authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien”.  Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could result in additional taxes becoming due and payable by Borrower.  Borrower has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

5.9             Use of Proceeds .  Borrower shall use the proceeds of the Credit Extensions solely as working capital

5.10           Full Disclosure .  No written representation, warranty or other statement of Borrower in any certificate or written statement given to Agent or any Lender, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Agent or any Lender, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

5.11           Regulatory Developments .

(a)           All Products and all Required Permits are listed on Schedule 5.11 (as updated from time to time pursuant to Section 6.2(d)), and Borrower has delivered to Agent a copy of all Required Permits to the extent requested by Agent pursuant to Section 6.2(d);

(b)           Without limiting the generality of Section 5.6 above, with respect to any Product being tested or manufactured by Borrower, Borrower has received, and such Product is the subject of, all Required Permits needed in connection with the testing or manufacture of such Product as such testing is currently being conducted by or on behalf of Borrower, and Borrower has not received any notice from any applicable Governmental Authority, specifically including the FDA, that such Governmental Authority is conducting an investigation or review of (A) Borrower’s manufacturing facilities and processes for such Product which have disclosed any material deficiencies or violations of Laws and/or the Required Permits related to the manufacture of such Product, or (B) any such Required Permit or that any such Required Permit has been revoked or withdrawn, nor has any such Governmental Authority issued any order or recommendation stating that the development, testing and/or manufacturing of such Product by Borrower should cease;

(c)           Without limiting the generality of Section 5.6 above, with respect to any Product marketed or sold by Borrower, Borrower shall have received, and such Product is the subject of, all Required Permits needed in connection with the marketing and sales of such Product as currently being marketed or sold by Borrower, and Borrower has not received any notice from any applicable Governmental Authority, specifically including the FDA, that such Governmental Authority is conducting an investigation or review of any such Required Permit or approval or that any such Required Permit has been revoked or withdrawn, nor has any such Governmental Authority issued any order or recommendation stating that such marketing or sales of such Product cease or that such Product be withdrawn from the marketplace;

(d)           Without limiting the generality of Section 5.6 above, (i) there have been no adverse clinical test results which could cause a Material Adverse Change, and (ii) there have been no Product recalls or voluntary Product withdrawals from any market; and

(e)           Borrower has not (since the Effective Date) experienced any significant failures in their manufacturing of any Product such that the amount of such Product successfully manufactured by Borrower in accordance with all specifications thereof and the required payments related thereto in any month shall decrease significantly with respect to the quantities of such Product produced in the prior month.

Until all Obligations have been satisfied in full and Lenders are under no further obligation to make Credit Extensions hereunder, Borrower shall do all of the following:

6.1             Government Compliance .

(a)           Maintain its and all its Subsidiaries’ legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower’s business or operations.  Borrower shall comply, and have each Subsidiary comply, with all Laws, ordinances and regulations to which it is subject, the noncompliance with which could have a material adverse effect on Borrower’s business.

(b)           Use commercially reasonable efforts to obtain all of the Governmental Approvals necessary for the performance by Borrower of its obligations under the Loan Documents to which it is a party and the grant of a security interest to Agent for the ratable benefit of the Lenders, in all of its property.  Borrower shall promptly provide copies of any such obtained Governmental Approvals to Agent.

(c)           In connection with the development, testing, manufacture, marketing or sale of each and any Product by Borrower, Borrower shall comply fully and completely in all respects with all Required Permits at all times issued by any Governmental Authority the noncompliance with which could have a material adverse effect on Borrower’s business, specifically including the FDA, with respect to such development, testing, manufacture, marketing or sales of such Product by Borrower as such activities are at any such time being conducted by Borrower.

6.2             Financial Statements, Reports, Certificates .

(a)           Deliver to Agent:  (i) as soon as available, but no later than five (5) days after filing with the Securities Exchange Commission, Peregrine’s 10K, 10Q, and 8K reports; (ii) a Compliance Certificate together with delivery of the 10K and 10Q reports; (iii) within 60 days after the end of each fiscal year, annual financial projections for the following fiscal year (on a quarterly basis) as approved by Peregrine’s board of directors, together with any related business forecasts used in the preparation of such annual financial projections; (iv) a prompt report of any litigation or governmental proceedings pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $100,000 or more or could result in a Material Adverse Change; (v) prompt notice of an event that materially and adversely affects the value of the Borrower’s Intellectual Property; and (vi) budgets, sales projections, operating plans or other financial information Agent reasonably requests.  Peregrine’s 10K, 10Q, and 8K reports required to be delivered pursuant to Section 6.2(a)(i) shall be deemed to have been delivered on the date on which Peregrine posts such report or provides a link thereto on Borrower’s or another website on the Internet; provided , that Borrower shall provide paper copies to Agent of the Compliance Certificates required by Section 6.2(a)(ii).

(b)           Borrower will keep proper books of record and account in accordance with GAAP in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities.  Borrower shall allow, at the sole cost of Borrower, Agent, and Lenders to visit and inspect any of its properties, to examine and make abstracts or copies from any of their respective books and records, to conduct a collateral audit and analysis of its operations and the Collateral, to verify the amount and age of the accounts, the identity and credit of the respective account debtors, to review the billing practices of Borrower and to discuss its respective affairs, finances and accounts with their respective officers, employees and independent public accountants as often as may reasonably be desired.  Notwithstanding the foregoing, such audits shall be conducted at Borrower's expense no more often than once every twelve (12) months unless an Event of Default has occurred and is continuing.

(c)           Borrower shall deliver to Agent an updated Schedule 5.2 promptly upon Borrower’s acquisition or development of any Material Intellectual Property not already listed on Schedule 5.2 and upon any other material change in Borrower’s Material Intellectual Property from that listed on Schedule 5.2.

(d)           If after the Effective Date, Borrower wishes to manufacture, sell, develop, test or market any new Product, Borrower shall give prior written notice to Agent of such intention (which shall include a brief description of such Product, plus a list of all Required Permits relating to such new Product (and a copy of such Required Permits if requested by Agent) and/or Borrower’s manufacture, sale, development, testing or marketing thereof issued or outstanding as of the date of such notice) along with a copy of an amended and restated Schedule 5.11; and further, provided, that , if Borrower shall at any time obtain any new or additional Required Permits from the FDA, DEA, or parallel state or local authorities, or foreign counterparts of the FDA, DEA, or parallel state or local authorities, with respect to any Product which has previously been disclosed to Agent, Borrower shall promptly give written notice to Agent of such new or additional Required Permits (along with a copy thereof if requested by Agent).

6.3             Inventory; Returns .  Keep all Inventory in good and marketable condition, free from material defects.  Returns and allowances between Borrower and its Account Debtors shall follow Borrower’s customary practices as they exist at the Effective Date.  Borrower must promptly notify Agent of all returns, recoveries, disputes and claims that involve more than One Hundred Thousand Dollars ($100,000).

6.4             Taxes; Pensions .  Make, and cause each of its Subsidiaries to make, timely payment of all foreign, federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting pursuant to the terms of Section 5.8 hereof) and shall deliver to Agent, within a reasonable period of time (not to exceed five (5) Business Days) following demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.

6.5             Insurance .  Keep its business and the Collateral insured for risks and in amounts standard for companies in Borrower’s industry and location and as Agent may reasonably request.  Insurance policies shall be in a form, with companies, and in amounts that are satisfactory to Agent.  All property policies shall have a lender’s loss payable endorsement showing Agent as lender loss payee and waive subrogation against Agent, and all liability policies shall show, or have endorsements showing, the Agent, as an additional insured.  All policies (or the loss payable and additional insured endorsements) shall provide that the insurer must give Agent at least twenty (20) days notice before canceling, amending, or declining to renew its policy.  At Agent’s request, Borrower shall deliver certified copies of policies and evidence of all premium payments.  Proceeds payable under any policy with respect to any casualty event involving the Collateral shall, at Lenders’ option, be payable to Lenders on account of the Obligations.  Notwithstanding the foregoing, (a) so long as no Event of Default has occurred and is continuing, Borrower shall have the option of applying the proceeds of any casualty policy up to $50,000 with respect to any loss, but not exceeding $100,000, in the aggregate, for all losses under all casualty policies in any one year, toward the replacement or repair of destroyed or damaged Collateral; provided that any such replaced or repaired Collateral (i) shall be of equal or like value as the replaced or repaired Collateral and (ii) shall be deemed Collateral in which Agent and Lenders have been granted a first priority security interest, and (b) after the occurrence and during the continuance of an Event of Default, all proceeds payable under such casualty policy with respect to any casualty event involving the Collateral shall, at the option of Lenders, be payable to Lenders on account of the Obligations.  If Borrower fails to obtain insurance as required under this Section 6.5 or to pay any amount or furnish any required proof of payment to third persons and Agent, Agent may make all or part of such payment or obtain such insurance policies required in this Section 6.5, and take any action under the policies Agent deems prudent.

6.6             Operating Accounts .  For each Collateral Account that Borrower at any time maintains with institutions other than Agent, provided the Borrower received prior consent from the Agent, Borrower shall cause the applicable bank or financial institution (other than Agent) at or with which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Agent's Lien in such Collateral Account in accordance with the terms hereunder.  The provisions of the previous sentence shall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrower’s employees and identified to Agent by Borrower as such.

6.7             Intellectual Property Rights .  Borrower shall own, or be licensed to use or otherwise have the right to use, all Material Intellectual Property.  Except as indicated on Schedule 5.2, Borrower is and all times shall be the sole and exclusive owner or licensee of the entire and unencumbered right, title and interest in and to each such Material Intellectual Property, free and clear of any Liens and/or licenses in favor of third parties or agreements or covenants not to sue such third parties for infringement.  All Material Intellectual Property is and shall be fully protected and/or duly and properly registered, filed or issued in the appropriate office and jurisdictions for such registrations, filings or issuances, except where the failure to do so would not reasonably be expected to result in a Material Adverse Change.  Borrower shall not become a party to, nor become bound by, any material license or other agreement with respect to which Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or other property.  Borrower shall, to the extent it determines, in the exercise of its reasonable business judgment, that it is prudent to do the following: (a) protect, defend and maintain the validity and enforceability of its Intellectual Property; (b) promptly advise Agent in writing of material infringements of its Intellectual Property; and (c) not allow any Material Intellectual Property to be abandoned, forfeited or dedicated to the public without Agent’s prior written consent.  Within ten (10) days after the end of each calendar quarter, Borrower shall provide written notice to Agent of (i) any patent, registered trademark or servicemark, registered mask work, or any pending application for any of the foregoing, obtained by Borrower, whether as owner, licensee or otherwise, and (ii) any patent or the registration of any trademark or servicemark applied for by Borrower, and Borrower shall execute such intellectual property security agreements and other documents and take such other actions as Agent shall request in its good faith business judgment to perfect and maintain a first priority security interest in favor of Agent, for the ratable benefit of Lenders, in such property.  If Borrower obtains any registered copyright or any pending application for any copyright, then Borrower shall immediately provide written notice thereof to Agent and shall execute such intellectual property security agreements and other documents and take such other actions as Agent shall request in its good faith business judgment to perfect and maintain a first priority security interest in favor of Agent, for the ratable benefit of Lenders, in such property.   If Borrower decides to register any copyrights or mask works in the United States Copyright Office, Borrower shall: (x) provide Agent with at least fifteen (15) days prior written notice of Borrower’s intent to register such copyrights or mask works together with a copy of the application it intends to file with the United States Copyright Office (excluding exhibits thereto); (y) execute an intellectual property security agreement and such other documents and take such other actions as Agent may request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Agent, for the ratable benefit of the Lenders, in the copyrights or mask works intended to be registered with the United States Copyright Office; and (z) record such intellectual property security agreement with the Untied States Copyright Office contemporaneously with filing the copyright or mask work application(s) with the United States Copyright Office.  Concurrently with the delivery of the notices required under this Section 6.7 for the applications described above, Borrower shall provide Agent with evidence of the recording of the intellectual property security agreement necessary for Agent, for the ratable benefit of the Lenders, to perfect and maintain a first priority perfected security interest in such property.

6.8             Litigation Cooperation .  From the date hereof and continuing through the termination of this Agreement, make available to Agent, without expense to Agent, Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Agent may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Agent with respect to any Collateral or relating to Borrower.

6.9             Further Assurances .  Execute any further instruments and take further action as Agent reasonably requests to perfect or continue Agent’s Lien in the Collateral or to effect the purposes of this Agreement.  Deliver to Agent, within five (5) days after the same are sent or received, copies of all correspondence, reports, documents and other filings with any Governmental Authority regarding compliance with or maintenance of Governmental Approvals or Requirements of Law or that could reasonably be expected to have a material effect on any of the Governmental Approvals or otherwise on the operations of Borrower or any of its Subsidiaries.  For the avoidance of doubt, the foregoing requirement to deliver copies of correspondence shall not apply to filings and communications with the FDA respecting protocols for clinical trials that have yet to commence.

6.10           Notices of Defaults and Events of Default.   Without limiting or contradicting any other more specific provision of this Agreement, promptly (and in any event within three (3) Business Days) upon Borrower becoming aware of the existence of any Default or Event of Default, Borrower shall give written notice to Agent of such occurrence, which such notice shall include a reasonably detailed description of such Default or Event of Default.

6.11           Cash and Cash Equivalents .  In the event of the termination of or other material adverse change to Borrower’s current contract with the U.S. Department of Defense for the study of bavituximab in treating viral hemorrhagic fever, Borrower shall be required at all times thereafter to maintain cash and Cash Equivalents of at least eighty percent (80%) of the then outstanding principal balance under the Growth Capital Advances in a restricted account over which Borrower shall not be permitted to make withdrawals or otherwise exercise control, and with respect to which Borrower has complied with the requirements of Section 6.6.

6.12           Evidence of Insurance .  Within ten (10) days after the Effective Date, Borrower shall deliver to Agent evidence that the insurance policies required by Section 6.5 hereof are in full force and effect, together with appropriate evidence showing lender loss payable and/or additional insured clauses or endorsements in favor of Agent, for the ratable benefit of the Lenders.

6.13           Landlord Waiver .  Within forty-five (45) days after the Effective Date, Peregrine shall deliver to Agent a landlord’s consent acceptable to Agent and executed in favor of Agent, for the ratable benefit of the Lenders, for Peregrine’s leased premises at 14282 Franklin Avenue, Tustin, California 92780 and 5353 W. Alabama, Suite 306, Houston, Texas 77056.

Until all Obligations have been satisfied in full and Agent and Lenders are under no further obligation to make Credit Extensions hereunder, Borrower shall not do any of the following without Agent’s prior written consent:

7.1             Dispositions .  Convey, sell, lease, transfer, assign, or otherwise dispose of (collectively, “ Transfer ”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (a) of Inventory in the ordinary course of business; (b) of worn-out or obsolete Equipment; (c) in connection with Permitted Liens and Permitted Investments; and (d) comprised of the sale of the capital stock of Avid by Peregrine or the sale of all or substantially all of Avid’s assets so long as in either case Peregrine receives at least *********** in upfront net cash proceeds from such sale (the “ Permitted Avid Transaction ”).  Agent and Lenders hereby agree to release the Avid Liens, at Borrower’s expense, upon the closing of the Permitted Avid Transaction.

7.2             Changes in Business, Management, Ownership, or Business Locations .  (a) Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower and such Subsidiary, as applicable, or reasonably related thereto; (b) liquidate or dissolve; or (c) permit or suffer any Change in Control (except a change in ownership of Avid in connection with the Permitted Avid Transaction).  Borrower shall not, without at least thirty (30) days prior written notice to Agent: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than Twenty Five Thousand Dollars ($25,000) in Borrower’s assets or property), (2) change its jurisdiction of organization, (3) change its organizational type, (4) change its legal name, or (5) change any organizational number (if any) assigned by its jurisdiction of organization.  Borrower shall deliver a landlord's waiver, bailee agreement or similar agreement, in form and substance acceptable to Agent in its reasonable discretion, for any location that contains greater than Twenty Five Thousand Dollars ($25,000) in assets (other than in regard to 8858 Rochester Avenue, Rancho Cucamonga, California).

7.3             Mergers or Acquisitions .  Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except for the Permitted Avid Transaction.  A Subsidiary may merge or consolidate into another Subsidiary or into Borrower.

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

7.5             Encumbrance .  Create, incur, allow, or suffer any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted herein, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Agent) with any Person which directly or indirectly prohibits or has the effect of prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of Borrower’s or any Subsidiary’s Intellectual Property, except as is otherwise permitted in Section 7.1 hereof and the definition of “Permitted Liens” herein.  For the avoidance of doubt, the foregoing provision shall not prohibit the Borrower from in-licensing Intellectual Property.

7.6             Maintenance of Collateral Accounts .  Maintain any Collateral Account except pursuant to the terms of Section 6.6 hereof.

7.7             Distributions; Investments .  (a) Pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock provided that (i) Borrower may pay dividends solely in common stock or preferred stock to the extent permitted under clause (g) of the definition of “Permitted Indebtedness” in Section 13.1 below, and (ii) Borrower may repurchase the stock of former employees or consultants pursuant to stock repurchase agreements so long as no Default or Event of Default exists at the time of such repurchase and would exist after giving effect to such repurchase, provided such repurchases do not exceed in the aggregate Fifty Thousand Dollars ($50,0000) in any twelve-month period, or (b) directly or indirectly make any Investment other than Permitted Investments, or permit any of its Subsidiaries to do so.

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 .  (a) Make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof or adversely affect the subordination thereof to Obligations owed to the Lenders.

7.10           Compliance .  Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that 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 other Law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower’s business, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

7.11           Compliance with Anti-Terrorism Laws.   Agent hereby notifies Borrower that pursuant to the requirements of Anti-Terrorism Laws, and Agent's policies and practices, Agent is required to obtain, verify and record certain information and documentation that identifies Borrower and its principals, which information includes the name and address of Borrower and its principals and such other information that will allow Agent to identify such party in accordance with Anti-Terrorism Laws.  Borrower will not, nor will Borrower permit any Subsidiary or Affiliate to, directly or indirectly, knowingly enter into any documents, instruments, agreements or contracts with any Person listed on the OFAC Lists.  Borrower shall immediately notify Agent if Borrower has knowledge that Borrower or any Subsidiary or Affiliate is listed on the OFAC Lists or (a) is convicted on, (b) pleads nolo contendere to, (c) is indicted on, or (d) is arraigned and held over on charges involving money laundering or predicate crimes to money laundering.  Borrower will not, nor will Borrower permit any Subsidiary or Affiliate to, directly or indirectly, (i) conduct any business or engage in any transaction or dealing with any Blocked Person, including, without limitation, the making or receiving of any contribution of funds, goods or services to or for the benefit of any Blocked Person, (ii) deal in, or otherwise engage in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224, any similar executive order or other Anti-Terrorism Law, or (iii) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in Executive Order No. 13224 or other Anti-Terrorism Law.

7.12           Third Party Possession of Assets .  Maintain assets with a value in excess of $750,000 at 8858 Rochester Avenue, Rancho Cucamonga, California.

Any one of the following shall constitute an event of default (an “ Event of Default ”) under this Agreement:

8.1             Payment Default .  Borrower fails to (a) make any payment of principal or interest on any Credit Extension on its due date (provided, however, that if such failure results from a failure of an auto-debit to occur through no fault of Borrower, then no “Event of Default” shall be deemed to have occurred unless Borrower fails to make the applicable payment within two (2) Business Days after Borrower’s receipt of notice from Agent of the failure of such auto-debit), or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable (which three (3) Business Day grace peri