LOAN AND SECURITY AGREEMENT

EXHIBIT 10.53

Confidential Treatment Request – Redacted Copy

*** C ONFIDENTIAL T REATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS E XHIBIT . T HE COPY FILED HEREWITH MOUNTS THE INFORMATION SUBJECT TO THE CONFIDENTIALITY REQUEST . O MISSIONS ARE DESIGNATED AS [****]. A COMPLETE VERSION OF THIS EXHIBIT HAS BEEN FILED SEPARATELY WITH THE S ECURITIES AND E XCHANGE C OMMISSION .

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of the Effective Date by and among S ILICON V ALLEY B ANK , a California corporation (“ Bank ”), S CI C LONE P HARMACEUTICALS I NTERNATIONAL L TD . , a Cayman Islands exempted company (“ SPIL ”) and S CI C LONE P HARMACEUTICALS I NTERNATIONAL C HINA H OLDING L TD . , a Cayman Islands exempted company (“ SPIL China ,” and together with SPIL, collectively, “ Borrowers ” and each a “ Borrower ”), provides the terms on which Bank shall lend to Borrowers and Borrowers shall repay Bank. The parties agree as follows:

1 ACCOUNTING AND OTHER TERMS

Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. As used in this Agreement, the word “shall” is mandatory, the word “may” is permissive, the word “or” is not exclusive, the words “includes” and “including” are not limiting, the singular includes the plural and 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 LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay; Parent as Guarantor Only . Borrowers hereby jointly, severally and unconditionally promise to pay Bank the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement. Bank and Borrowers intend and agree that the obligations of the Parent shall be, and are, solely those of a guarantor and that any such obligations of the Parent shall arise only if, and only to the extent, any such obligations are undertaken by the Parent pursuant to a separately executed guarantee and security agreement between Parent and Bank.

2.1.1 Revolving Advances.

(a) Availability . Subject to the terms and conditions of this Agreement and to deduction of Reserves, Bank shall make Advances not exceeding the Availability Amount. Amounts borrowed hereunder may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable terms and conditions precedent herein.

(b) Termination; Repayment . The Revolving Line terminates on the Revolving Line Maturity Date, when the principal amount of all Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line shall be immediately due and payable.

2.1.2 Letters of Credit Sublimit.

(a) As part of the Revolving Line, Bank shall issue or have issued Letters of Credit for Borrowers’ account. Such aggregate amounts utilized hereunder (in Dollars) shall at all times reduce the amount otherwise available for Advances under the Revolving Line. The face amount (as converted to Dollars) of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed $2,500,000. The aggregate amount available to be used for the issuance of Letters of Credit may not exceed (i) the lesser of (A) the Revolving Line or (B) the Borrowing Base, minus (ii) the outstanding principal amount of any Advances (including any amounts used for Cash Management Services and the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) and minus (iii) the FX Reserve. If, on the Revolving Line Maturity Date, there are any outstanding Letters of

(b) Credit, then on such date Borrowers shall provide to Bank cash collateral in an amount equal to 105% of the face amount of all such Letters of Credit plus all interest, fees, and costs due or to become due in connection therewith (as estimated by Bank in its good faith business judgment), to secure all of the Obligations relating to said Letters of Credit. All Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank’s standard Application and Letter of Credit Agreement (the “ Letter of Credit Application ”). Borrowers agree to execute any further documentation in connection with the Letters of Credit as Bank may reasonably request. Borrowers further agree to be bound by the regulations and interpretations of the issuer of any Letters of Credit guaranteed by Bank and opened for a Borrower’s account or by Bank’s interpretations of any Letter of Credit issued by Bank for a Borrower’s account, and Borrowers understand and agree that Bank shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following any Borrower’s instructions or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto.

(c) The joint and several obligation of Borrowers to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional, and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, such Letters of Credit, and the Letter of Credit Application.

(d) Borrowers may request that Bank issue a Letter of Credit payable in a Foreign Currency. If issued by Bank, such Letter of Credit shall reduce the amount otherwise available in accordance with Section 2.1.2(a). If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrowers of the equivalent of the amount thereof (plus fees and charges in connection therewith such as wire, cable, SWIFT or similar charges) in Dollars at the then-prevailing rate of exchange in San Francisco, California, for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.

(e) To guard against fluctuations in currency exchange rates, upon the issuance of any Letter of Credit payable in a Foreign Currency, Bank shall create a reserve (the “ Letter of Credit Reserve ”) under the Revolving Line in an amount equal to 10% of the face amount of such Letter of Credit. The amount of the Letter of Credit Reserve may be adjusted by Bank from time to time in its good faith credit judgment to account for fluctuations in the exchange rate. The availability of funds under the Revolving Line shall be reduced by the amount of such Letter of Credit Reserve for as long as such Letter of Credit remains outstanding.

2.1.3 Foreign Exchange Sublimit . As part of the Revolving Line, Borrowers may enter into foreign exchange contracts with Bank under which Borrowers commit to purchase from or sell to Bank a specific amount of Foreign Currency (each, a “ FX Forward Contract ”) on a specified date (the “ Settlement Date ”). FX Forward Contracts shall have a Settlement Date of at least 1 FX Business Day after the contract date and shall be subject to a reserve of 10% of each outstanding FX Forward Contract in a maximum aggregate amount equal to $250,000 (the “ FX Reserve ”). The aggregate amount of FX Forward Contracts at any one time may not exceed 10 times the amount of the FX Reserve. The amount otherwise available for Credit Extensions under the Revolving Line shall be reduced by an amount equal to ten percent (10%) of each outstanding FX Forward Contract (the “ FX Reduction Amount ”). Any amounts needed to fully reimburse Bank will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

2.1.4 Cash Management Services Sublimit . Borrowers may use up to $2,500,000 of the Revolving Line for Bank’s cash management services which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in Bank’s various cash management services agreements (collectively, the “ Cash Management Services ”). Any amounts Bank pays on behalf of Borrowers for any Cash Management Services will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

2.2 Overadvances. If, at any time, the sum of (a) the outstanding principal amount of any Advances (including any amounts used for Cash Management Services), plus (b) the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve), plus (c) the FX Reduction Amount (such sum being an “ Overadvance ”) exceeds the lesser of either the Revolving Line or the Borrowing Base, Borrowers shall immediately pay to Bank in cash such Overadvance. Without limiting Borrowers’ obligation to repay Bank any amount of the Overadvance, Borrowers agree to pay Bank interest on the outstanding amount of any Overadvance, on demand, at the Default Rate.

 

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2.3 Payment of Interest on the Credit Extensions .

(a) Interest Rate ; Advances . Subject to Section 2.3(b), the principal amount outstanding under the Revolving Line shall accrue interest at a per annum rate equal to the Prime Rate plus 1.75%, which interest shall be payable monthly.

(b) Default Rate . Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is 5% above the rate that is otherwise applicable thereto (the “ Default Rate ”). Payment or acceptance of the increased interest rate provided in this Section 2.3(b) 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 Bank.

(c) Adjustment to Interest Rate . Changes to the interest rate of any Credit Extension based on changes to the Prime Rate shall be effective on the effective date of any change to the Prime Rate and to the extent of any such change.

(d) 360-Day Year . Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed.

(e) Debit of Accounts . Bank may debit any of Borrowers’ deposit accounts, including the Designated Deposit Accounts, for principal and interest payments or any other amounts Borrowers owe Bank when due. These debits shall not constitute a set-off.

(f) Minimum Monthly Interest . Commencing on the first anniversary of the Effective Date, Borrowers shall pay Bank interest of not less than the Minimum Monthly Interest per month. Such amount shall be fully earned for the following 12 months on the first anniversary of the Effective Date and on each subsequent anniversary thereof and, except as provided in Section 12.1, shall be payable as follows: in the event the aggregate amount of interest earned by Bank in any month (exclusive of any collateral monitoring fees, unused line fees, or any other fees and charges hereunder) is less than the Minimum Monthly Interest, Borrowers shall pay Bank an amount, payable on the last day of such month, in an amount equal to the (i) Minimum Monthly Interest minus (ii) the aggregate amount of all interest earned by Bank (exclusive of any collateral monitoring fees, unused line fees, or any other fees and charges hereunder) in such month.

(g) Payment; Interest Computation; Float Charge . Interest is payable monthly on the last calendar day of each month. In computing interest on the Obligations, all Payments received after 12:00 p.m. Pacific time on any day shall be deemed received on the next Business Day. In addition, so long as any principal or interest with respect to any Credit Extension remains outstanding, Bank shall be entitled to charge Borrowers a “float” charge in an amount equal to 2 Business Days interest, at the interest rate applicable to the Credit Extensions, on all Payments Bank receives by check. Said float charge is not included in interest for purposes of computing Minimum Monthly Interest under this Agreement. The float charge for each month shall be payable on the last day of the month. Bank shall not, however, be required to credit Borrowers’ account for the amount of any item of payment which is unsatisfactory to Bank in its good faith business judgment, and Bank may charge Borrowers’ Designated Deposit Accounts for the amount of any item of payment which is returned to Bank unpaid.

2.4 Fees . Borrowers shall pay to Bank:

(a) Commitment Fee . A fully earned, non-refundable commitment fee of $50,000, due and payable on the first anniversary of the Effective Date and each subsequent anniversary thereof (unless the Agreement has been terminated prior to such anniversary of the Effective Date);

(b) Letter of Credit Fee . Bank’s customary fees and expenses for the issuance or renewal of Letters of Credit, upon the issuance, each anniversary of the issuance, and the renewal of such Letter of Credit by Bank; and

(c) Termination Fee . Subject to the terms of Section 12.1, a termination fee;

(d) Unused Revolving Line Facility Fee . Beginning on the first anniversary of the Effective Date, a fee (the “ Unused Revolving Line Facility Fee ”), payable monthly, in arrears, on a calendar year basis, in an amount equal to 0.35% per annum of the average unused portion of the Revolving Line, as determined by Bank.

 

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The unused portion of the Revolving Line, for the purposes of this calculation, shall include amounts reserved under the Cash Management Services Sublimit for products provided and under the Foreign Exchange Sublimit for FX Forward Contracts. Borrowers shall not be entitled to any credit, rebate or repayment of any Unused Revolving Line Facility Fee previously earned by Bank pursuant to this Section notwithstanding any termination of the Agreement, or suspension or termination of Bank’s obligation to make loans and advances hereunder; and

(e) Bank Expenses . All Bank Expenses (including reasonable attorneys’ fees and expenses, plus expenses, for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due. Bank acknowledges receipt of a good faith deposit in the amount of $100,000 (the “ Good Faith Deposit ”), which amount is to be applied to Bank Expenses. Any portion of such Good Faith Deposit not utilized to pay Bank Expenses through the time of the first Advance under this Agreement will be credited to the account of Borrowers.

3 CONDITIONS OF LOANS

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

(a) duly executed original signatures to the Loan Documents to which it is a party;

(b) duly executed original signatures to the Parent’s Warrant;

(c) duly executed original signatures to the Control Agreements;

(d) for each Borrower and Guarantor their Operating Documents and certified good standing certificates from each jurisdiction in which a Borrower or Guarantor transacts business as of a date no earlier than thirty (30) days prior to the Effective Date;

(e) duly executed original signatures to the completed Borrowing Resolutions for each Borrower and Guarantor;

(f) certified copies, dated as of a recent date, of financing statement searches, as Bank 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;

(g) the Perfection Certificates executed by each Borrower and Guarantor;

(h) duly executed bailee agreements in favor of Bank;

(i) a legal opinion of Borrowers’ Cayman Island counsel dated on or before the date of the initial Credit Extension together with the duly executed original signatures thereto;

(j) the duly executed original signatures to the Guaranty;

(k) evidence satisfactory to Bank that (i) the insurance policies required by Section 6.7 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 Bank and (ii) Credit Insurance Policies are in effect;

(l) the completion of the Initial Audit with results satisfactory to Bank in its sole and absolute discretion;

(m) any Credit Insurance Policies required to be in effect;

(n) certified copies of each Borrower’s register of mortgages and charges;

 

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(o) a share charge agreement in form and substance satisfactory to Bank, executed by SPIL and charging to Bank a security interest in 100% of the issued shares in the capital of SPIL China;

(p) a share charge agreement in form and substance satisfactory to Bank, executed by Parent and charging to Bank a security interest in 100% of the issued shares in the capital of SPIL;

(q) executed Officer’s Certificates from each Borrower and Guarantor in the form attached hereto as Exhibit E; and

(r) payment of the fees and Bank Expenses then due as specified in Section 2.4 hereof.

3.2 Conditions Precedent to all Credit Extensions . Bank’s obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following:

(a) except as otherwise provided in Section 3.4, timely receipt of an executed Transaction Report;

(b) the representations and warranties in Section 5 shall be true in all material respects on the date of the Transaction Report 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 Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrowers’ joint and several 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) there has not been (i) a Material Adverse Change or (ii) any material adverse deviation by Borrowers from the most recent budgets or projections of Borrowers delivered to Bank as required by Section 6.2(viii).

3.3 Covenant to Deliver .

Borrowers, jointly and severally, agree to deliver to Bank each item required to be delivered to Bank under this Agreement as a condition to any Credit Extension. Borrowers expressly agree that a Credit Extension made prior to the receipt by Bank of any such item shall not constitute a waiver by Bank of Borrowers’ obligation to deliver such item, and any such Credit Extension in the absence of a required item shall be made in Bank’s sole discretion.

3.4 Procedures for Borrowing . Subject to the prior satisfaction of all other applicable conditions to the making of an Advance set forth in this Agreement, to obtain an Advance (other than Advances under Sections 2.1.2 or 2.1.4), Borrowers shall notify Bank (which notice shall be irrevocable) by electronic mail or facsimile by 12:00 p.m. Pacific time on the Funding Date of the Advance. Together with such notification, Borrowers must promptly deliver to Bank by electronic mail or facsimile a completed Transaction Report executed by a Responsible Officer or his or her designee. Bank shall credit Advances to the Designated Deposit Account requested. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any electronic mail or facsimile notice given by a person whom Bank believes is a Responsible Officer or designee.

4 CREATION OF SECURITY INTEREST

4.1 Grant of Security Interest . Each Borrower, as legal and beneficial owner, hereby grants and charges to Bank, to secure the payment and performance in full of all of the Obligations (other than obligations under the Warrant), a continuing security interest in, and pledges to, and, by way of fixed charge, charges in favor of, Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and

 

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products thereof. Borrowers jointly and severally represent, warrant, and covenant that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that may have superior priority to Bank’s Lien under this Agreement). If a Borrower shall acquire a commercial tort claim, Borrowers shall promptly notify Bank in a writing signed by Borrowers of the general details thereof and grant to Bank 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 Bank.

If this Agreement is terminated, Bank’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations or obligations under the Warrant) outstanding at the time of such termination are repaid in full in cash. Upon payment in full in cash of the Obligations (other than inchoate indemnity obligations or obligations under the Warrant) outstanding at the time of such termination and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at Borrowers’ written request and sole cost and expense, release its Liens in the Collateral and all rights therein shall revert to Borrowers.

4.2 Authorization to File Financing Statements . Borrowers hereby authorize Bank to file financing statements, without notice to Borrowers, with all appropriate jurisdictions to perfect or protect Bank’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 Bank under the Code. Such financing statements may indicate the Collateral as “all assets of the Debtor” or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in Bank’s discretion.

5 REPRESENTATIONS AND WARRANTIES

Borrowers jointly and severally represent and warrant as follows:

5.1 Due Organization, Authorization; Power and Authority . Each Borrower is duly existing and in good standing in its jurisdiction of formation and is qualified and licensed to do business and is in good standing in any jurisdiction in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. In connection with this Agreement, Borrowers have delivered to Bank completed certificates signed by each Borrower and Guarantor, each entitled “Perfection Certificate.” Borrowers represent and warrant to Bank that, except as Borrowers may hereafter disclose to Bank pursuant to Section 7.2, (a) each Borrower’s exact legal name is indicated on the applicable Perfection Certificate and on the signature page hereof; (b) each Borrower is an organization of the type and is organized in the jurisdiction set forth in the applicable Perfection Certificate; (c) each Perfection Certificate accurately sets forth the applicable Borrower’s organizational identification number or accurately states that such Borrower has none; (d) each Perfection Certificate accurately sets forth the applicable Borrower’s place of business, or, if more than one, its chief executive office as well as such Borrower’s mailing address (if different than its chief executive office); (e) no Borrower (nor any predecessors of any Borrower) has, in the past 5 years, changed its jurisdiction of formation, organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificates pertaining to any Borrower and their Subsidiaries is accurate and complete (it being understood and agreed that Borrowers may from time to time update certain information in the Perfection Certificates after the Effective Date to the extent permitted by one or more specific provisions in this Agreement). If a Borrower is not now a Registered Organization but later becomes one, Borrowers shall promptly notify Bank of such occurrence and provide Bank with such Borrower’s organizational identification number.

The execution, delivery and performance by each Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of such 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 any Borrower or any of Borrowers’ 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 (v) constitute an event of default under any material agreement by which any Borrower is bound. Neither Borrower is 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 cause a Material Adverse Change.

 

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5.2 Collateral . Borrowers have good title to, have rights in, and the power to transfer each item of the Collateral upon which they purport to grant a Lien hereunder, free and clear of any and all Liens except Permitted Liens. Borrowers have no deposit accounts other than the deposit accounts with Bank, the deposit accounts, if any, described in the Perfection Certificate delivered to Bank in connection herewith, or of which Borrowers have given Bank written notice and taken such actions as are necessary to give Bank a perfected security interest therein, and the Excluded Collateral Accounts. The Collateral is not in the possession of any third party bailee (such as a warehouse), except as otherwise provided in the Perfection Certificate and fully insured goods in transit in the ordinary course of business. Except as hereafter disclosed to Bank in writing by Borrowers, none of the components of the Collateral shall be maintained at locations other than (a) as provided in the Perfection Certificate, (b) fully insured components of the Collateral that may be located in transit between Borrower’s locations in Belgium, Italy and Hong Kong or (c) the following locations at which no more than $100,000 in the aggregate of Collateral may be located at any time: (i) mobile equipment, including computers with employees and consultants at various locations, (ii) Collateral at locations Bank has been notified of pursuant to Section 7.2, (iii) Collateral at temporary locations for sales, testing or demonstration purposes and (iv) other locations. In the event that Borrowers, after the date hereof, intend to store or otherwise deliver any portion of the Collateral to a bailee, then Borrowers will first receive the written consent of Bank and such bailee must acknowledge in writing that the bailee is holding such Collateral for the benefit of Bank. The foregoing requirement for a written acknowledgement shall not apply with respect to any bailee that (i) does not have an established course of business with any Borrower and (ii) holds Collateral solely as part of a “start-up” testing regimen to establish such bailee as a regular part of the Borrower’s supply chain, provided that the exception to the written acknowledgement requirement contained in this sentence shall only apply until such bailee has entered into a formal agreement with one or more of the Borrowers. The Accounts are bona fide, existing obligations of the Account Debtors. Except for Inventory with an aggregate value, at any time, of not more than $200,000, all Inventory is in all material respects of good and marketable quality, free from material defects. Borrowers are the sole legal and beneficial owners of their Intellectual Property, except for (a) non-exclusive licenses of Intellectual Property granted to third parties in the ordinary course of business, (b) exclusive licenses of Intellectual Property that could not result in a legal transfer of title of the licensed property that are exclusive only in respects other than territory or exclusive as to territory only as to discreet geographical areas outside of the United States or (c) other non-exclusive licenses of Intellectual Property that could not result in a legal transfer of title of the licensed property. Each patent that is material to Borrowers’ business is valid and enforceable and no part of the Intellectual Property that is material to Borrowers’ business has been judged invalid or unenforceable, in whole or in part, and to the best of Borrowers knowledge, no claim has been made that any part of the Intellectual Property violates the rights of any third party.

5.3 Accounts Receivable.

(a) For each Account with respect to which Advances are requested, on the date each Advance is requested and made, such Account shall be an Eligible Account.

(b) All statements made and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Eligible Accounts are and shall be true and correct and all such invoices, instruments and other documents, and all of each Borrower’s Books are genuine and in all respects what they purport to be. Whether or not an Event of Default has occurred and is continuing, Bank may notify any Account Debtor owing any Borrower money of Bank’s security interest in such funds and verify the amount of such Eligible Account, provided that if no Event of Default has occurred, Bank shall coordinate its efforts to notify Account Debtors with one of the Borrowers. All sales and other transactions underlying or giving rise to each Eligible Account shall comply in all material respects with all applicable laws and governmental rules and regulations. Borrowers have no knowledge of any actual or imminent Insolvency Proceeding of any Account Debtor whose accounts are Eligible Accounts in any Transaction Report. To the best of Borrowers’ knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Eligible Accounts are genuine, and all such documents, instruments and agreements are legally enforceable in accordance with their terms.

5.4 Litigation . There are no actions or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against Parent, any Borrower or any of Borrowers’ Subsidiaries involving more than $100,000.

5.5 No Material Deviation in Financial Statements . All consolidated financial statements for Parent and Borrowers and any of their Subsidiaries delivered to Bank fairly present in all material respects the Parent’s and Borrowers’ consolidated financial condition and the Parent’s and Borrowers’ consolidated results of operations as of the dates of such financial statements. There has not been any material deterioration in the Parent’s or any Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.

 

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5.6 Solvency . The fair salable value of each Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of such Borrower’s liabilities; neither Borrower is left with unreasonably small capital after the transactions in this Agreement; and each Borrower is able to pay its debts (including trade debts) as they mature.

5.7 Regulatory Compliance . No Borrower is an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended. No Borrower is engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). Each Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Neither Borrowers, nor any of their Subsidiaries, are a “holding company” or an “affiliate” of 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. No Borrower has violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of any Borrowers’ or any of their Subsidiaries’ properties or assets have been used by Borrowers or any of their Subsidiaries or, to the best of Borrowers’ knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrowers and each of their Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Government Authorities that are necessary to continue their respective businesses as currently conducted.

5.8 Subsidiaries; Investments . Borrowers do not own any stock, partnership interest or other equity securities except for Permitted Investments.

5.9 Tax Returns and Payments; Pension Contributions . Each Borrower has timely filed all required tax returns and reports (or timely extensions therefore), and each Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by such Borrower. A Borrower may defer payment of any contested taxes, provided that such Borrower (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Bank 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”. Borrowers are unaware of any claims or adjustments proposed for any of each Borrower’s prior tax years which could reasonably be expected to result in additional taxes becoming due and payable by such Borrower. Borrowers have paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrowers have not withdrawn from participation in, and have 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 any Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

5.10 Use of Proceeds . Borrowers shall use the proceeds of the Credit Extensions solely as working capital and not for personal, family, household or agricultural purposes.

5.11 Full Disclosure . No written representation, warranty or other statement of any Borrower in any certificate or written statement given to Bank, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Bank, 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 by Bank that the projections and forecasts provided by Borrowers 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).

 

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6 AFFIRMATIVE COVENANTS

Borrowers jointly and severally shall do all of the following:

6.1 Government Compliance.

(a) Maintain each Borrower’s and all of such Borrower’s Subsidiaries’ legal existence and good standing in its respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify could reasonably be expected to cause a Material Adverse Change. Borrowers shall comply, and have each of their Subsidiaries comply, with all laws, ordinances and regulations to which they are subject, noncompliance with which could reasonably be expected to cause a Material Adverse Change.

(b) Obtain all of the Governmental Approvals necessary for the performance by Borrowers of their obligations under the Loan Documents to which any Borrower is a party and the grant of a security interest to Bank in all of each Borrower’s property. Upon request by Bank, Borrowers shall promptly provide to Bank copies of any such obtained Governmental Approvals.

6.2 Financial Statements, Reports, Certificates.

(a) Borrowers shall provide Bank with the following:

(i) weekly, whenever the Parent’s Adjusted Quick Ratio is less than 1.30 to 1:00, a Transaction Report (and any schedules related thereto);

(ii) monthly, within 30 days after the end of each month, (A) accounts receivable agings, aged by invoice date, (B) accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, and (C) reconciliations of accounts receivable agings (aged by invoice date), transaction reports and general ledger;

(iii) monthly, as soon as available, and in any event within 30 days after the end of each month, Parent prepared consolidated financial statements prepared in accordance with GAAP, consistently applied from one period to the next;

(iv) monthly, within 30 days after the end of each month, a Compliance Certificate signed by a Responsible Officer, certifying that as of the end of such month, Borrowers were in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Bank shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks;

(v) monthly, within 30 days after the end of each month, a duly executed Borrowing Base Certificate;

(vi) monthly, within 30 days after the end of each month, the Global Cash Report.

(vii) quarterly, as soon as available, and in any event within 30 days after the end of each fiscal quarter, Parent prepared consolidating financial statements prepared in accordance with GAAP, consistently applied from one period to the next;

(viii) annually, within 20 days of approval by Parent’s Board of Directors, and in any event within 60 days following the end of Parent’s fiscal year, (A) Parent’s consolidated annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the 5 quarters following such fiscal year end and (B) Parent’s annual financial projections for the 5 quarters following such fiscal year end (on a quarterly basis) as approved by Parent’s Board of Directors, together with any related business forecasts used in the preparation of such annual financial projections; and

(ix) annually, as soon as available, and in any event within 120 days following the end of Parent’s fiscal year, annual consolidated and consolidating financial statements certified by, and with an unqualified opinion of, independent certified public accountants acceptable to Bank.

(b) Within 5 days after filing, all of Parent’s reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission or a link thereto on Parent’s, a Borrower’s or another website on the Internet.

(c) Prompt written notice of Borrower’s knowledge of an event that materially adversely affects the value of the Intellectual Property.

 

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(d) Quarterly written notice of (i) any material change in the composition of the Intellectual Property and (ii) the registration of any copyright, including any subsequent ownership right of Borrowers in or to any copyright, patent or trademark not previously disclosed in writing to Bank.

6.3 Accounts Receivable.

(a) Schedules and Documents Relating to Accounts . Borrowers shall deliver to Bank transaction reports and schedules of collections, as provided in Section 6.2, on Bank’s standard forms; provided, however, that Borrowers failure to execute and deliver the same shall not affect or limit Bank’s Lien and other rights in all of Borrowers Accounts, nor shall Bank’s failure to advance or lend against a specific Account affect or limit Bank’s Lien and other rights therein. If reasonably requested by Bank, Borrowers shall furnish Bank with copies (or, at Bank’s request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts. In addition, Borrowers shall deliver to Bank, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary indorsements, and copies of all credit memos.

(b) Disputes . Borrowers shall promptly notify Bank of all disputes or claims relating to Accounts. Borrowers may forgive (completely or partially), compromise, or settle any Account for less than payment in full, or agree to do any of the foregoing so long as (i) Borrowers do so in good faith, in a commercially reasonable manner, in the ordinary course of business, in arm’s-length transactions, and report the same to Bank in the regular reports provided to Bank; (ii) no Default or Event of Default has occurred and is continuing; and (iii) after taking into account all such discounts, settlements and forgiveness, the total outstanding Advances will not exceed the lesser of the Revolving Line or the Aggregate Borrowing Base.

(c) Collection of Accounts . All proceeds of Eligible Accounts of each Borrower shall be deposited by such Borrower into such Borrower’s lockbox account, or other “blocked account,” as Bank may specify, pursuant to blocked account agreements in such form as Bank may specify in its good faith business judgment. Proceeds deposited shall be applied on a daily basis as follows: (i) if Parent’s Adjusted Quick Ratio is less than 1.30 to 1.00, all deposits will be applied to repay Borrowers’ Obligations to Bank or (ii) if Parent’s Adjusted Quick Ratio is not less than or equal to 1.30 to 1.00, all deposits will be directed to the applicable Designated Deposit Account.

(d) Returns . Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to a Borrower, Borrowers shall promptly (i) determine the reason for such return, (ii) issue a credit memorandum to the Account Debtor in the appropriate amount, and (iii) provide a copy of such credit memorandum to Bank, upon request from Bank. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, Borrowers shall hold the returned Inventory in trust for Bank, and immediately notify Bank of the return of the Inventory.

(e) Verification . Bank may, from time to time, verify directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, either in the name of a Borrower or Bank or such other name as Bank may choose.

(f) No Liability . Bank shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Bank be deemed to be responsible for any of Borrowers’ obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Bank from liability for its own gross negligence or willful misconduct.

6.4 Remittance of Proceeds . Except as otherwise provided in Section 6.3(c), deliver, in kind, all proceeds arising from the disposition of any Collateral to Bank in the original form in which received by a Borrower not later than the following Business Day after receipt by such Borrower, to be applied to the Obligations pursuant to the terms of Section 9.4 hereof; provided that, if no Default or Event of Default has occurred and is continuing, Borrowers shall not be obligated to remit to Bank the proceeds of the sale of worn out or obsolete Equipment

 

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disposed of by Borrowers in good faith in an arm’s length transaction for an aggregate purchase price of $100,000 or less (for all such transactions in any fiscal year). Borrowers agree that they will not commingle proceeds of Collateral with any of Borrowers’ other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Bank. Nothing in this Section limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.

6.5 Taxes; Pensions . Timely file, and require each of their Subsidiaries to timely file, all required tax returns and reports and timely pay, and require each of its Subsidiaries to timely file, all foreign, federal, state and local taxes, assessments, deposits and contributions owed by a Borrower or its Subsidiaries, except for deferred payment of any taxes contested pursuant to the terms of Section 5.9 hereof, and shall deliver to Bank, on 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.

6.6 Access to Collateral; Books and Records . At reasonable times, on two Business Day’s notice and during normal business hours (provided no notice is required and inspections and audits may be conducted at any time if an Event of Default has occurred and is continuing), Bank, or its agents, shall have the right to inspect the Collateral and the right to audit and copy any of Borrowers’ Books. Such audits and inspections shall be required semi-annually, or more frequently if conditions, in the sole determination of Bank, warrant more frequent audits and inspections, provided that, so long as no Event of Default has occurred and is continuing, such audit or inspections shall be limited to no more than 4 per year. The foregoing inspections and audits shall be at Borrowers’ expense, and the charge therefor shall be $750 per person per day (or such higher amount as shall represent Bank’s then-current standard charge for the same), plus reasonable out-of-pocket expenses In the event a Borrower and Bank schedule an audit more than ten (10) days in advance, and such Borrower cancels or seeks to reschedule the audit with less than ten (10) days written notice to Bank, then (without limiting any of Bank’s rights or remedies), Borrowers shall pay Bank a fee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensate Bank for the anticipated costs and expenses of the cancellation or rescheduling.

6.7 Insurance . Keep its business and the Collateral (including Collateral in transit) insured for risks and in amounts standard for companies in Borrower’s industry and location and as Bank may reasonably request. Insurance policies shall be in a form, with companies, and in amounts that are satisfactory to Bank. All property policies shall have a lender’s loss payable endorsement showing Bank as the sole lender loss payee and waive subrogation against Bank, and all liability policies shall show, or have endorsements showing, Bank as an additional insured. All policies (or the loss payable and additional insured endorsements) shall provide that the insurer shall endeavor to give Bank at least 20 days notice before canceling, amending, or declining to renew its policy. At Bank’s request, Borrowers shall deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any property policy shall, at Bank’s option, be payable to Bank on account of the Obligations. If Borrowers fail to obtain insurance as required under this Section 6.7 or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in this Section 6.7, and take any action under the policies Bank deems prudent.

6.8 Operating Accounts.

(a) Maintain all of its, all of its Parent’s and all of its Subsidiaries’, primary operating and other deposit accounts and securities accounts located in the United States with Bank and Bank’s Affiliates, which accounts shall represent not less than 80% of the dollar value of Borrowers’, its Subsidiaries’ and its Parent’s accounts at all United States financial institutions.

(b) Maintain, for each Borrower, a Collateral Account located in Hong Kong with Citibank.

(c) Provide Bank 5 days prior written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or Bank’s Affiliates. Commencing on the earlier of (i) the date 90 days from the Effective Date or (ii) the date of the first Advance under this Agreement, except for Excluded Collateral Accounts, for each Collateral Account that a Borrower at any time maintains outside of Bank or Bank’s Affiliates, Borrowers shall cause the applicable bank or financial institution 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 Bank’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 Borrowers’ employees and identified to Bank by Borrowers as such.

 

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6.9 Financial Covenants.

Borrowers shall cause Parent to maintain at all times, to be tested as of the last day of each quarter, unless otherwise noted, on a consolidated basis:

(a) Minimum Revenue . Minimum consolidated revenues shall be as set forth in Schedule 6.9(a).

(b) Minimum EBIT . Minimum EBIT shall be as set forth in Schedule 6.9(b), provided that, Borrowers shall not be in default of the covenant contained in this Section 6.9(b) so long as Parent’s consolidated EBIT on a three-quarter rolling basis is not less than Parent’s forecast over such three-quarter rolling period.

6.10 Protection and Registration of Intellectual Property Rights . Borrowers shall: (a) subject to Section 6.10(c), protect, defend and maintain the validity and enforceability of its Intellectual Property; (b) promptly after receipt of knowledge thereof, advise Bank in writing of material infringements of its Intellectual Property that is material to its business; and (c) not allow any Intellectual Property material to a Borrower’s business to be abandoned, forfeited or dedicated to the public without Bank’s written consent.

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

6.12 Further Assurances . Execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s Lien in the Collateral or to effect the purposes of this Agreement.

7 NEGATIVE COVENANTS

Borrowers, jointly and severally, shall not do any of the following without Bank’s prior written consent:

7.1 Dispositions . Convey, sell, lease, transfer 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; and (c) in connection with Permitted Liens and Permitted Investments.

7.2 Changes in Business, Ownership, or Business Locations . (a) Engage in or permit any of their Subsidiaries to engage in any business other than the businesses currently engaged in by such Borrower and its Subsidiaries, as applicable, or reasonably related thereto or (b) enter into any transactions or series of related transactions, or take any other actions, that cause, result in or permit SPIL not to be the wholly-owned Subsidiary of Parent or permit SPIL China not to be the wholly-owned Subsidiary of SPIL. Borrowers shall not, without at least 30 days prior written notice to Bank: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than $50,000 in Borrower’s assets or property), (2) change its jurisdiction of organization, or (3) change any organizational number (if any) assigned by its jurisdiction of organization.

7.3 Mergers or Acquisitions . Merge or consolidate, or permit any of their Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of their Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. A Subsidiary may merge or consolidate into another Subsidiary or into a Borrower.

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

 

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7.5 Encumbrance . Create, incur, allow, or suffer any Lien on any of the Collateral, 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, permit any Collateral not to be subject to the first priority security interest granted herein.

7.6 Maintenance of Collateral Accounts . Maintain any Collateral Account except pursuant to the terms of Section 6.8.(c) 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 a Borrower may (i) pay dividends solely in equity securities or (ii) pay dividends, make distributions and make payments to another Borrower or to Guarantor; or (b) directly or indirectly make any Investment other than Permitted Investments, or permit any of their 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 a Borrower, except transactions that are in the ordinary course of Borrowers’ business, upon fair and reasonable terms that are no less favorable to Borrowers 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 Bank.

7.10 Compliance . Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940, as amended, 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 cause a Material Adverse Change, 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 a Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.

7.11 UBS ARS Account . Notwithstanding anything else to the contrary in this Agreement, (a) allow Parent to maintain, establish or use, any account, other than the UBS ARS Account, at any UBS Entity, (b) allow Parent to locate, store or keep, any value in the UBS ARS Account in excess of the absolute minimum required by UBS to become or remain eligible for the UBS ARS Loan or (c) allow any of Borrowers’ Collateral to become subject to any lien arising out of the UBS ARS Loan.

8 EVENTS OF DEFAULT

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

8.1 Payment Default . Borrowers fail to (a) make any payment of principal or interest on any Credit Extension on its due date, or (b) pay any other Obligations within 3 Business Days after such Obligations are due and payable (which 3 Business Day grace period shall not apply to payments due on the Revolving Line Maturity Date). During the cure period, the failure to cure the payment default is not an Event of Default (but no Credit Extension will be made during the cure period);

8.2 Covenant Default.

(a) Borrowers fail or neglect to perform any obligation in Sections 6.2, 6.5, 6.7, 6.8, 6.9, 6.12 or violate any covenant in Section 7; or

 

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(b) Borrowers fail or neglect to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to any default (other than those specified in this Section 8) under such other term, provision, condition, covenant or agreement that can be cured, have failed to cure the default within 10 days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the 10 day period or cannot after diligent attempts by Borrowers be cured within such 10 day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional period (which additional period shall not in any case exceed 30 days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Grace periods provided under this section shall not apply to any covenants set forth in subsection (a) above;

8.3 Material Adverse Change . A Material Adverse Change occurs;

8.4 Attachment; Levy; Restraint on