Security Agreement (All Assets)

A. Lender has provided and/or will provide financial accommodations to Jones Soda Co. (USA) Inc. (“Jones USA”) and JONES SODA (CANADA) INC. (“Jones Canada”)  (Jones USA and Jones Canada, each individually and collectively, together with its successors and assigns, the “Borrower”).

B. Guarantor/Pledgor has executed that certain General Continuing Guaranty (as hereafter amended, revised and/or extended, the “Guaranty”) in favor of Lender, whereby Guarantor/Pledgor agrees to guarantee the Obligations owing by Borrower to Lender, as more completely set forth in the Guaranty.

C. This Agreement is given to secure Guarantor/Pledgor’s Obligations to Lender under the  Guaranty as well as any other Obligations that may be owed now or in the future by Guarantor/Pledgor to Lender.

1. Incorporation by Reference.   The foregoing Recitals and the documents referred to in such Recitals are incorporated herein by this reference as though set forth in full herein.

2. Definitions.

(a.) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as “hazardous substances,” “hazardous materials,” “hazardous wastes,” “toxic substances,” or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or “EP toxicity”;

(b.) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources;

(c.) any flammable substances or explosives or any radioactive materials; and

(d.) asbestos in any form or electrical Equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million

(e.) asbestos in any form or electrical Equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million.

(a.) all indebtedness for borrowed money (whether by loan or the issuance and sale of debt securities);

(b.) that portion of obligations with respect to capital leases that is properly classified as a liability on a balance sheet in conformity with GAAP;

(c.) acceptances, bonds, indentures, notes payable, and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money;

(d.) any obligation owed for all or any part of the deferred purchase price of property or services if the purchase price is due more than six (6) months from the date the obligation is incurred or is evidenced by a note or similar written instrument;

(e.) all indebtedness secured by any lien on any property or asset owned or held by Guarantor/Pledgor regardless of whether the indebtedness secured thereby shall have been assumed by Guarantor/Pledgor or is nonrecourse to the credit of Guarantor/Pledgor;

(f.) contingent obligations to the extent such obligations are no longer contingent but become absolute and remain unpaid;

(g.) all obligations, contingent or otherwise, relative to the face amount of any letter of credit, letter of credit guaranties, bankers acceptances, interest rate swaps, controlled disbursement accounts, or other financial products;

(h.) any unfunded obligation of Guarantor/Pledgor or any of its subsidiaries to a multiemployer plan required to be accrued by GAAP; and

(i.) obligations of Guarantor/Pledgor guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to Guarantor/Pledgor), any indebtedness, lease, dividend, letter of credit, or other obligation of any other person or entity.

(a.) Indebtedness evidenced by the Guaranty, the Loan Agreement and / or the Loan Documents;

(a.) amounts owing under licenses in the ordinary course of Guarantor/Pledgor’s business, so long as the licensor (if a third party other than Guarantor/Pledgor) has entered into an agreement in form and content reasonably satisfactory to Lender;

(b.) subordinated debt that is subject to a subordination agreement in favor of Lender in form and content reasonably satisfactory to Lender;

(c.) Permitted Purchase Money Indebtedness for Acquisition of Fixed Assets;

(d.) the Indebtedness set forth in the latest financial statements of Guarantor/Pledgor submitted to Lender on or prior to the Closing Date;

(e.) Indebtedness secured by Permitted Liens; and

(f.) refinancings, renewals, or extensions of the foregoing, provided: 1) the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by Borrower; 2) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended; 3) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended; and 4) that to the extent that the Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing of the Indebtedness must be at least as favorable to Lender as those applicable to the refinanced Indebtedness;

(a.) liens and Security Interests held by Lender or agreed to by Lender in the any Loan Documents;

(b.) liens for unpaid taxes of Guarantor/Pledgor that are either  not yet due and payable; or    do not constitute an Event of Default hereunder; and  are the subject of a Permitted Protest;

(c.) liens and Security Interests granted against Equipment disclosed in writing by Guarantor/Pledgor to Lender and consented to by Lender in writing;

(d.) liens described in Schedule A-1 hereto, provided such liens are subject to such subordination agreements as Lender may require;

(e.) purchase money liens or the interests of lessor under capital leases to the extent that such liens or interests secure Permitted Purchase Money Indebtedness for Acquisition of Fixed Assets and so long as such lien attaches only to the asset purchased or acquired and the proceeds thereof;

(f.) with respect to real property, easements, rights of way, reservations, covenants, conditions, restrictions, zoning variances, and other similar encumbrances that do not materially interfere with the use or value of the property subject thereto;

(g.) obligations and duties as lessee under any operating lease existing on the date of this Agreement; and obligations and duties as lessee under any lease existing on the date of this Agreement;

(h.) any liens incurred in connection with the refinancing, renewal, or modification of indebtedness secured by Permitted Liens, provided:  the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by Guarantor/Pledgor;  the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended;  such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended; and  that to the extent that the Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing of the Indebtedness must be at least as favorable to Lender as those applicable to the refinanced Indebtedness;

(i.) liens for unpaid taxes, assessments, or other governmental charges or levies  that are not yet delinquent; or  do not constitute an Event of Default hereunder and are the subject of Permitted Protests;

(j.) judgment liens that do not constitute an Event of Default under this Agreement;

(k.) liens on amounts deposited in connection with obtaining Workers’ Compensation Insurance or other unemployment insurance; and

(l.) liens on amounts deposited as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of business, provided that such deposits have been made with Lender’s prior written consent.

3. Grant of Security Interest in the Collateral.   Guarantor/Pledgor hereby grants a continuing security interest in the Collateral to secure payment when due, whether by stated maturity, demand, acceleration or otherwise, of all  Obligations owing to Lender by Borrower as defined in the Agreement; and  all Obligations of Guarantor/Pledgor under the Guaranty, this Agreement and any other agreement by and between Lender and Guarantor/Pledgor.

4. Warranties, Covenants, and Agreements.  Guarantor/Pledgor warrants, covenants and agrees as set forth below.

4.1. Information; Right to Inspect.  Guarantor/Pledgor shall furnish to Lender, in form and at intervals as Lender may reasonably request, any information Lender may reasonably request and allow Lender to examine, inspect, and copy any of Guarantor/Pledgor's books and records.  Guarantor/Pledgor shall, at the written request of Lender, mark its records and the Collateral to clearly indicate the security interest of Lender under this Agreement. Lender agrees to give Guarantor/Pledgor reasonable notice of its intent to examine, inspect and copy any of Guarantor/Pledgor’s records. Notwithstanding the foregoing, after the occurrence of and during the continuation of a Material Event of Default, as defined below, no such prior notice shall be required. In that regard, (i) any fraud, defalcation or conversion on the part of Borrower or Guarantor/Pledgor or any other Guarantor shall be deemed to be a Material Event of Default; and (ii) there shall be no requirement that such fraud, defalcation or conversion be continuing in order to permit Lender to exercise any rights or remedies available to Lender under the Guaranty or applicable law.

4.2. Warranties as to Collateral.   At the time any Collateral becomes, or is represented to be, subject to a security interest in favor of Lender, Guarantor/Pledgor shall be deemed to have warranted that  Guarantor/Pledgor is the lawful owner of the Collateral and has the right and authority to subject the Collateral to a security interest granted to Lender;  none of the Collateral is subject to any security interest other than that in favor of Lender or the holder of any Permitted Lien;  there are no financing statements on file, other than in favor of Lender or the holders of Permitted Liens; and  Guarantor/Pledgor acquired its rights in the Collateral in the ordinary course of its business.

4.3. Collateral Shall be Free From Liens Other Than Permitted Liens.   Guarantor/Pledgor shall keep the Collateral free at all times from all claims, liens, security interests and encumbrances other than those in favor of Lender or the holders of Permitted Liens.  Guarantor/Pledgor will not, without the prior written consent of Lender, sell, transfer or lease, or permit to be sold, transferred or leased, any or all of the Collateral, except (where inventory is pledged as Collateral) for Inventory in the ordinary course of its business and will not return any Inventory to its supplier.  Lender or its representatives may at all reasonable times and upon reasonable advance notice inspect the

4.4. Reasonable Acts to Establish and Maintain Priority of Lender’s Lien.  Guarantor/Pledgor shall do all reasonable acts and or cause to be executed all writings reasonably requested by Lender to establish, maintain and continue a perfected and first security interest of Lender in the Collateral subject to Permitted Liens.  Guarantor/Pledgor agrees that Lender has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether real property or personal property, to secure payment of the Indebtedness, and Guarantor/Pledgor is not relying upon assets in which Lender may have a lien or security interest for payment of the Indebtedness.

4.5. Taxes and Assessments.   Guarantor/Pledgor shall pay within the time that they can be paid without interest or penalty, or on or prior to the date that the tax return for such taxes is due, all taxes, assessments and similar charges which at any time are or may become a lien, charge, or encumbrance upon any Collateral, except to the extent subject to a Permitted Protest.  If Guarantor/Pledgor fails to pay any of these taxes, assessments, or other charges in the time provided above, Lender has the option (but not the obligation) to do so and Guarantor/Pledgor agrees to repay all amounts so expended by Lender immediately upon demand, together with interest at the highest lawful default rate which could be charged by Lender to Borrower and/or Guarantor/Pledgor on any Indebtedness.

4.6. Collateral Shall be Maintained in Good Condition; Insurance.   Guarantor/Pledgor shall keep the Collateral in good condition and will protect it from loss, damage, or deterioration from any cause, subject only to normal wear and tear.  Guarantor/Pledgor has and will maintain at all times  with respect to the Collateral, insurance under an “all risk” policy against fire and other risks customarily insured against, and  public liability insurance and other insurance as may be required by law or reasonably required by Lender, all of which insurance shall be in amount, form and content, and written by companies as may be satisfactory to Lender, containing a lender's loss payable endorsement Acceptable to Lender.  Guarantor/Pledgor will deliver to Lender immediately upon demand evidence satisfactory to Lender that the required insurance has been procured.  If Guarantor/Pledgor fails to maintain satisfactory insurance, Lender has the option (but not the obligation) to do so and Guarantor/Pledgor agrees to repay all amounts so expended by Lender immediately upon demand, together with interest at the highest lawful default rate which could be charged by Lender to Guarantor/Pledgor on any Indebtedness.

4.7. Warranties as to Accounts.   With respect to the Accounts pledged as Collateral under this Agreement, then on each occasion on which Guarantor/Pledgor evidences to Lender the account balances on and the nature and extent of the Accounts, Guarantor/Pledgor shall be deemed to have warranted that except as otherwise indicated to the best of Guarantor/Pledgor’s knowledge after reasonable inquiry, the following is true:  each of those Accounts is valid and enforceable without the need for performance by Guarantor/Pledgor of any act;  each of those balances reflected as to each Account is in fact owing;  there are no setoffs, recoupments, credits, contra accounts, counterclaims or defenses against any of those Accounts;  as to any Accounts represented by a note, trade acceptance, draft or other instrument or by any chattel paper or document, the same have been endorsed and/or delivered by Guarantor/Pledgor to Lender;  Guarantor/Pledgor has not received with respect to any Account, any notice of the death of the related account debtor, nor the dissolution, liquidation, termination of existence, insolvency, business failure, appointment of a receiver for, assignment for the benefit of creditors by, or filing of a petition in bankruptcy by or against, the account debtor; and  as to each Account, the Account Debtor is not an affiliate of Guarantor/Pledgor, the United States of America or any department, agency or instrumentality of it, or a citizen or resident of any jurisdiction outside of the United States.  Guarantor/Pledgor will do all acts and will execute all writings reasonably requested by Lender to perform, enforce performance of, and collect all Accounts.  Guarantor/Pledgor shall immediately advise Lender at such time that Guarantor/Pledgor learns that any of the foregoing representations and warranties are incorrect in any material respect. Guarantor/Pledgor shall neither make nor permit any modification, compromise, or substitution for any Account other than in the ordinary course of Guarantor/Pledgor’s business without the prior written consent of Lender, which consent shall not unreasonably be withheld.  Guarantor/Pledgor shall, at Lender's reasonable prior  request, arrange for verification of Accounts directly with the accounts of Guarantor/Pledgor or by other methods Acceptable to Lender.

4.8. Compliance by Guarantor/Pledgor with Laws.   Guarantor/Pledgor at all times shall be in material compliance with all applicable laws, including, without limitation, any laws, ordinances, directives, orders, statutes, or regulations an object of which is to regulate or improve health, safety, or the environment (collectively, “Environmental Laws”).

4.9. Redelivery of Collateral.   If Lender, acting in its sole reasonable Discretion, redelivers Collateral to Guarantor/Pledgor or Guarantor/Pledgor's designee for any of the following purposes:  the ultimate sale or exchange thereof;  the presentation, collection, renewal, or registration of transfer thereof; or   the loading, unloading, storing, shipping, transshipping, manufacturing, processing or otherwise dealing with it preliminary to sale or exchange; such redelivery shall be in trust for the benefit of Lender and shall not constitute a release of Lender's security interest in it or in the proceeds or products of it unless Lender specifically so agrees in writing.  If Guarantor/Pledgor requests any such redelivery, Guarantor/Pledgor will deliver with such request a proposed form of financing statement, which financing statement will be filed by Lender if such financing statement is in form and substance satisfactory to Lender.  Any proceeds of Collateral coming into Guarantor/Pledgor's possession as a result of any such redelivery shall be held in trust for Lender and immediately delivered to Lender for application against the Indebtedness.  Lender may (in its sole reasonable Discretion) deliver any or all of the Collateral to Guarantor/Pledgor, and such delivery by Lender shall discharge Lender from all liability or responsibility for such Collateral.  Lender, at its option, may require delivery of any Collateral to Lender at any time

4.10. Additional Rights of Lender Upon Default by Guarantor/Pledgor.   Upon the occurrence and during the continuance of a Material Event of Default under the Guaranty, after giving such notice as may be reasonable under the circumstances, Lender may as to Collateral other than Equipment, Fixtures or Inventory  cause any or all of such Collateral to be transferred to its name or to the name of its nominees;  receive or collect by legal proceedings or otherwise all dividends, interest, principal payments and other sums and all other distributions at any time payable or receivable on account of such Collateral, and hold the same as Collateral, or apply the same to the Indebtedness, the manner and distribution of the application to be in the sole reasonable Discretion of Lender; and  enter into any extension, subordination, reorganization, deposit, merger or consolidation agreement or any other agreement relating to or affecting such Collateral, and deposit or surrender control of such Collateral, and accept other property in exchange for such Collateral and hold or apply the property or money so received pursuant to this Agreement.

4.11. Assignment of Indebtedness and Collateral by Lender.   Lender may assign any of the Indebtedness and deliver any or all the Collateral to its assignee, which then shall have with respect to Collateral so delivered all the rights and powers of Lender under this Agreement, and after that Lender shall be fully discharged from all liability and responsibility with respect to Collateral so delivered under the following circumstances:  Lender is assigning the Indebtedness and related obligations for collateral purposes only;  a Material Event of Default has occurred and is continuing; or  the assignee is the successor in interest to Lender following a change of control of Lender.

4.12. Independent Investigation and Decision by Guarantor/Pledgor.   Guarantor/Pledgor delivers this Agreement based solely on Guarantor/Pledgor's independent investigation of (or decision not to investigate) the financial condition of Borrower and is not relying on any information furnished by Lender.  Guarantor/Pledgor assumes full responsibility for obtaining any further information concerning Borrower's financial condition, the status of the Indebtedness or any other matter that the undersigned may deem necessary or appropriate now or later.  Guarantor/Pledgor waives any duty on the part of Lender, and agrees that Guarantor/Pledgor is not relying upon nor expecting Lender to disclose to Guarantor/Pledgor any fact now or later known by Lender, whether relating to the operations or condition of Borrower, the existence, liabilities or financial condition of any guarantor of the Indebtedness, the occurrence of any default with respect to the Indebtedness, or otherwise, notwithstanding any effect such fact may have upon Guarantor/Pledgor's risk or Guarantor/Pledgor's rights against Borrower.  Guarantor/Pledgor knowingly accepts the full range of risk encompassed in this Agreement, which risk includes, without limitation, the possibility that Borrower may incur Indebtedness to Lender after the financial condition of Borrower or Borrower's ability to pay debts as they mature, has deteriorated.

4.13. Indemnification for Violation by Guarantor/Pledgor of Law.   Guarantor/Pledgor shall defend, indemnify and hold harmless Lender, its employees, agents, shareholders, officers, and directors from and against any and all claims, damages, fines, expenses, liabilities or causes of action of whatever kind, including, without limitation, reasonable consultants’ fees, reasonable legal expenses, and reasonable attorneys' fees and estimated allocated costs of in-house legal counsel, paralegals and other legal staff, suffered by any of them as a direct or indirect result of any actual or asserted violation by Guarantor/Pledgor of any law, including, without limitation, Environmental Laws, or of any remediation relating to any property required by any law, including, without limitation, Environmental Laws, except to the extent caused directly by the gross negligence or willful misconduct of Lender.

4.14. Reasonable Costs of Lender.   Guarantor/Pledgor agrees to pay Lender all such reasonable costs and expenses incurred by Lender, immediately upon demand, and until paid all costs shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law.  Any reference in this Agreement to attorneys’ fees shall be deemed a reference to the reasonable attorneys’ fees, costs, and expenses of outside counsel and paralegals and the estimated allocated costs of in-house legal counsel, paralegals and other legal staff, whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether such actually or estimated allocated attorneys’ fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, (including, without limitation, motions for relief from stay, for determination of dischargeability or otherwise) administrative or probate proceeding or otherwise.

5. Collection of Proceeds.

5.1. Collection of Accounts.   Guarantor/Pledgor agrees to collect and enforce payment of all Collateral until such time as Lender shall direct Guarantor/Pledgor to the contrary under the following circumstances:  after a Material Event of Default has occurred and is continuing; or  if Lender reasonably believes it is necessary to do so to prevent prejudice to Lender.  Immediately upon notice to Guarantor/Pledgor by Lender and at all times after that, Guarantor/Pledgor agrees to fully and promptly cooperate and assist Lender in the collection and enforcement of all Collateral and to hold in trust for Lender all payments received in connection with Collateral and from the sale, lease or other disposition of any Collateral, all rights by way of suretyship or guaranty and all rights in the nature of a lien or security interest which Guarantor/Pledgor now or later has regarding Collateral.  Immediately upon and after such notice, Guarantor/Pledgor agrees to  endorse to Lender and immediately deliver to Lender all payments received on Collateral or from the sale, lease or other disposition of any Collateral or arising from any other rights or interests of Guarantor/Pledgor in the Collateral, in the form received by Guarantor/Pledgor without commingling with any other funds; and  immediately deliver to Lender all property in Guarantor/Pledgor's possession or later coming into Guarantor/Pledgor's possession through enforcement of Guarantor/Pledgor's rights or interests in the Collateral.  Guarantor/Pledgor irrevocably authorizes Lender or any Lender employee or agent to endorse the name of Guarantor/Pledgor upon any checks or other items that are received in payment for any Collateral, and to do any and all things necessary in order to reduce these items to

5.2. Accounts Pledged as Collateral.   With respect to any Accounts that are pledged as Collateral under this Agreement, Guarantor/Pledgor agrees that immediately upon Lender's written request (whether or not a Material Event of Default exists) the Indebtedness shall be on a “remittance basis” as follows:  Guarantor/Pledgor shall at its sole expense establish and maintain (and Lender, at Lender’s option, may establish and maintain at Guarantor/Pledgor’s expense):   an United States Post Office lock box (the “Lock Box”), to which Lender shall have exclusive access and control.  Guarantor/Pledgor expressly authorizes Lender, from time to time, to remove contents from the Lock Box, for disposition in accordance with this Agreement.  Guarantor/Pledgor agrees to notify all account debtors and other parties obligated to Guarantor/Pledgor that all payments made to Guarantor/Pledgor (other than payments by electronic funds transfer) shall be remitted, for the credit of Guarantor/Pledgor, to the Lock Box, and Guarantor/Pledgor shall include a like statement on all invoices; and  a non interest bearing deposit account with Lender which shall be titled as designated by Lender (the “Cash Collateral Account”) as security for payment of the Indebtedness to which Lender shall have exclusive access and control.  Guarantor/Pledgor agrees to notify all accounts of Guarantor/Pledgor and other parties obligated to Guarantor/Pledgor that all payments made to Guarantor/Pledgor by electronic funds transfer shall be remitted, to the Cash Collateral Account, and Guarantor/Pledgor, at Lender's request, shall include a like statement on all invoices.  Guarantor/Pledgor shall execute all documents and authorizations as may reasonably be required by Lender to establish and maintain the Lock Box and the Cash Collateral Account.

5.3. Processing by Lender; Indemnification by Guarantor/Pledgor.   To the extent that Accounts are pledged as Collateral under this Agreement, all items or amounts which are remitted to the Lock Box or otherwise delivered by or for the benefit of Guarantor/Pledgor to Lender on account of partial or full payment of, or with respect to, any Collateral shall, at Lender's option  be applied to the payment of the Indebtedness, whether then due or not, in such order or at such time of application as Lender may determine in its sole reasonable Discretion; or  be deposited to the Cash Collateral Account.

6. Default, Enforcement of Rights and Application of Proceeds.

6.1. Definition of Event of Default.   Guarantor/Pledgor shall be in default under this Agreement upon the occurrence of any of the following events (each, a “Material Event of Default”):

6.1.1. Any Event of Default by Borrower under the Loan Agreement or any of the other the Loan Documents of any material term, provision, condition, covenant or agreement occurs without being cured to the extent that cure is permitted under the Loan Agreement or the other Loan Documents;

6.1.2. Guarantor/Pledgor fails to pay the Indebtedness or any other indebtedness when due, or such portion of it as may be due, by acceleration or otherwise;

6.1.3. Any failure or neglect to comply with, or breach of, or default under, any material term, provision, condition, covenant or agreement  of this Agreement, the Guaranty or any other agreement or commitment between Borrower, Guarantor/Pledgor, or any other guarantor of any of the Indebtedness of Borrower (each, a “Guarantor”) and Lender;

6.1.4. Any warranty, representation, financial statement, or other information made, given or furnished to Lender by or on behalf of Borrower, Guarantor/Pledgor, or any Guarantor shall be, or shall prove to have been, false, materially misleading or intentionally misleading when made, given, or furnished;

6.1.5. Any loss, theft, substantial damage or destruction to or of any Collateral, or the issuance or filing of any attachment, levy, garnishment or the commencement of any proceeding in connection with any Collateral or of any other judicial process of, upon or in respect of Borrower, Guarantor/Pledgor, any Guarantor, or any Collateral without such attachment, levy, garnishment or commencement of proceeding being dismissed within ten (10) days;

6.1.6. The sale or other disposition by Borrower, Guarantor/Pledgor, or any Guarantor of any substantial portion of its assets or property or voluntary suspension of the transaction of business by Borrower, Guarantor/Pledgor, or any Guarantor, or death, dissolution, termination of existence, merger, consolidation, insolvency, business failure, or assignment for the benefit of creditors of or by Borrower, Guarantor/Pledgor, or any Guarantor; or commencement of any proceedings under any state or federal bankruptcy or insolvency law or laws for the relief of Guarantor/Pledgor by or against Borrower, Guarantor/Pledgor, or any Guarantor; or the appointment of a receiver, trustee, court appointee, sequestrator or otherwise, for all or any part of the property of Borrower, Guarantor/Pledgor, or any Guarantor, without such proceeding being dismissed in sixty (60) days; provided, however, that nothing shall require Lender to continue to advance sums to Borrower upon the filing of such a proceeding by or against Guarantor/Pledgor;

6.1.7. If applicable, Lender reasonably deems the margin of Collateral to be insufficient or itself insecure, in good faith believing that the prospect of payment of the Indebtedness or performance of this Agreement is materially impaired or shall fear material deterioration, removal, or waste of Collateral; or

6.1.8. Any breach or default under this Agreement, the Guaranty the Loan Agreement, the Loan Documents or any other present or future agreement between Borrower and Lender shall become a Material

6.2. Specified Remedies Available to Lender.

6.2.1. Upon the occurrence and during the continuance of a Material Event of Default, Lender may at its reasonable Discretion and with such prior notice to Guarantor/Pledgor as may be reasonable under the circumstances, declare any or all of the Indebtedness to be immediately due and payable, and shall have and may exercise any one or more of the following rights and remedies:

6.2.1.1. exercise all the rights and remedies upon default, in foreclosure and otherwise, available to secured parties under the provisions of the Code and other applicable law;

6.2.1.2. institute legal proceedings to foreclose upon the lien and security interest granted by this Agreement, to recover judgment for all amounts then due and owing as Indebtedness, and to collect the same out of any Collateral or the proceeds of any sale of it;

6.2.1.3. institute legal proceedings for the sale, under the judgment or decree of any court of competent jurisdiction, of any or all Collateral; and/or

6.2.1.4. personally or by its agents, attorneys, or appointment of a receiver, enter upon any premises where Collateral may then be located, and take possession of all or any of it and/or render it unusable; and without being responsible for loss or damage to such Collateral, hold, operate, sell, lease, or dispose of all or any Collateral at one or more public or private sales, leasings or other dispositions, at places and times and on terms and conditions as Lender may deem fit, without any previous demand or advertisement; and except as provided in this Agreement, all notice of sale, lease or other disposition, and advertisement, and other notice or demand, any right or equity of redemption, and any obligation of a prospective purchaser or lessee to inquire as to the power and authority of Lender to sell, lease, or otherwise dispose of the Collateral or as to the application by Lender of the proceeds of sale or otherwise, which would otherwise be required by, or available to Guarantor/Pledgor under, applicable law are hereby expressly waived by Guarantor/Pledgor to the fullest extent permitted.

6.2.2. At any sale pursuant to this Section 6.2, whether under the power of sale, by virtue of judicial proceedings or otherwise, it shall not be necessary for Lender or a public officer under order of a court to have present physical or constructive possession of Collateral to be sold.  The recitals contained in any conveyances and receipts made and given by Lender or the public officer to any purchase at any sale made pursuant to this Agreement shall, to the extent permitted by applicable law, conclusively establish the truth and accuracy of the matters stated (including, without limitation, as to the amounts of the principal of and interest on the Indebtedness, the accrual and nonpayment of it and advertisement and conduct of the sale); and all prerequisites to the sale shall be presumed to have been satisfied and performed to the extent permitted by applicable law.

6.3. Notification of Account Debtors.  Upon the occurrence and during the continuance of a Material Event of Default, Lender may  request that Guarantor/Pledgor notify the Guarantor/Pledgor’s account debtor or obligors of Lender's security interest in the Collateral, including, without limitation, the Accounts and Inventory, and direct payment of the proceeds of Accounts and the sale of Inventory to Lender; or  itself so notify and direct any account debtor or obligor to pay Lender directly; provided; however, that if any fraud, defalcation or conversion on the part of Borrower and/or Guarantor/Pledgor shall have occurred regardless of the dollar amount involved with such fraud, conversion or defalcation,  such Event of Default shall be deemed to be a Material Event of Default; and  there shall be no requirement that such Event of Default be continuing to permit Lender to send such notification to Guarantor/Pledgor’s Accounts.

6.4. Application of Proceeds of Sale.   The proceeds of any sale or other disposition of Collateral authorized by this Agreement shall be applied by Lender first, to all reasonable expenses authorized by the Code and all reasonable attorneys’ fees and reasonable legal expenses incurred by Lender and estimated allocated costs of in-house legal counsel, paralegals and other legal staff; the balance of the proceeds of the sale or other disposition shall be applied in the payment of the Indebtedness, first, to interest, then to principal, then to remaining Indebtedness and the surplus, if any, shall be paid over to Guarantor/Pledgor or to such other person(s) as may be entitled to it under applicable law.  Guarantor/Pledgor shall remain liable for any deficiency, which it shall pay to Lender immediately upon demand.

6.5. No Restriction.   Nothing in this Agreement is intended, nor shall it be construed, to preclude Lender from pursuing any other remedy provided by law for the collection of the Indebtedness or for the recovery of any other sum to which Lender may be entitled for the breach of this Agreement by Guarantor/Pledgor.  Nothing in this Agreement shall reduce or release in any way any rights or security interests of Lender contained in any existing agreement between Borrower, Guarantor/Pledgor, or any Guarantor and Lender.

6.6. No Waiver Effective Unless in Writing and Signed by Authorized Officer of Lender.   No waiver of default or consent to any act of Guarantor/Pledgor by Lender shall be effective unless in writing and signed by an authorized officer of Lender.  No waiver of any default or forbearance on the part of Lender in enforcing any of its rights under this Agreement shall operate as a waiver of any other default or of the same default on a future occasion or of any rights.

6.7. Appointment of Agent and Grant of Power of Attorney.   Guarantor/Pledgor irrevocably appoints Lender or any agent of Lender (which appointment is coupled with an interest) the true and lawful attorney of Guarantor/Pledgor (with full power of substitution) in the name, place, and stead of, and at the expense of,

6.7.1. to demand, receive, sue for, and give receipts or acquittances for any monies due or to become due on any Collateral and to endorse any item representing any payment on or proceeds of the Collateral;

6.7.2. to execute and file in the name of and on behalf of Guarantor/Pledgor all financing statements or other filings deemed necessary or desirable by Lender to evidence, perfect, or continue the security interests granted in this Agreement;

6.7.3. after the occurrence and during the continuance of an Event of Default, to qualify Borrower to do business in any state if Borrower shall fail to do so following request by Lender; and

6.7.4. to do and perform any act on behalf of Guarantor/Pledgor permitted or required under this Agreement.

7. Indemnification.

7.1. Limitation on Loss or Damage.   Guarantor/Pledgor agrees that Lender shall not be liable for any loss or damage which Guarantor/Pledgor may suffer as a result of Lender's processing of items or its exercise of any other rights or remedies under this Agreement, including, without limitation, indirect, special or consequential damages, loss of revenues or profits, or any claim, demand or action by any third party arising out of or in connection with the processing of items or the exercise of any other rights or remedies under this Agreement.  Guarantor/Pledgor agrees to indemnify and hold Lender harmless from and against all such third party claims, demands, or actions, and all related expenses or liabilities, including, without limitation, attorneys’ fees and estimated allocated costs of in-house legal counsel, paralegals and other legal staff, except to the extent of any of the foregoing was caused by Lender’s gross negligence or willful misconduct.  Lender shall not in any way or manner be liable or responsible for the safekeeping of the Collateral; any loss or damage thereto occurring or arising in any manner or fashion from any cause; any diminution in the value thereof; or any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person.  All risk of loss, damage, or destruction of the Collateral shall be borne by Guarantor/Pledgor.

7.2. Hold Harmless, etc.  Guarantor/Pledgor agrees to defend, indemnify, save, and hold Lender and Lender’s officers, employees, shareholders, directors, attorneys, and agents harmless against all obligations, demands, claims, and liabilities claimed or asserted by any other Person arising out of or relating to the transactions contemplated by this Agreement or any of the other Loan Documents; and all losses (including attorneys’ fees and legal and other costs) in any way suffered, incurred, or paid by Lender as a result of or in any way arising out of, following, or consequential to the transactions contemplated by this Agreement or any of the other Loan Documents; provided, however, that no such indemnification shall apply with respect to any liability directly arising out of the gross negligence or willful misconduct on the part of Lender or any of Lender’s officers, employees, shareholders, directors, attorneys, and agents.

8. General Terms.

8.1. Notices.   Until Lender is advised in writing by Guarantor/Pledgor to the contrary, all notices, requests and demands required under this Agreement or by law shall be given to, or made upon, Guarantor/Pledgor at the address indicated in Section 8.20 below.

8.2. Notifications of Changes.   Guarantor/Pledgor will give Lender not less than thirty  (30) days’ prior written notice of all contemplated changes in Guarantor/Pledgor's name, Chief Executive Office location, and/or location of any of the Collateral, but the giving of this notice shall not cure any Event of Default caused by this change.

8.3. No Assumption by Lender of Duties of Borrower.   Lender assumes no duty of performance or other responsibility under any contracts contained within the Collateral.

8.4. Assignments, etc, by Lender.   Lender has the right to sell, assign, transfer, negotiate, or grant any interest in, any or all of the Indebtedness and any related obligations, including, without limitation, this Agreement, in the following circumstances:  Lender is assigning the Indebtedness and related obligations for collateral purposes only;  a Material Event of Default has occurred and is continuing; or  the assignee is the successor in interest to Lender following a change of control of Lender.  Lender has the right to grant participations in any or all of the Indebtedness irrespective of whether  Lender is assigning the Indebtedness and related obligations for collateral purposes only;  an Event of Default has occurred and is continuing; or  the assignee is the successor in interest to Lender following a change of control of Lender. In connection with the above, but without limiting its ability to make other disclosures to the full extent allowable, Lender may disclose all documents and information which Lender now or later has relating to Guarantor/Pledgor, the Indebtedness or this Agreement, however obtained.  Guarantor/Pledgor further agree(s) that Lender may provide information relating to this Agreement or relating to Guarantor/Pledgor to Lender's parent, affiliates, subsidiaries, and service providers.  The

8.5. Further Credit Reports.  Borrower acknowledges and agrees that Lender may from time to time at its sole discretion run such further credit reports and other reports as it may deem necessary to continue to keep itself apprised regarding the continued financial condition of Borrower during the term of this Agreement and hereby authorizes Lender to run such credit and other reports from time to time as Lender deems appropriate.

8.6. Setoff.   In addition to Lender's other rights, any Indebtedness owing from Lender to Guarantor/Pledgor can be set off and applied by Lender on any Indebtedness at any time(s) either before or after maturity or demand without notice to any Borrower, Guarantor/Pledgor, any other guarantor, or any other person.

8.7. Waivers.   Guarantor/Pledgor waives any right to require Lender to undertake any of the following:   proceed against any person or property;  (to the extent permitted by applicable law) give notice of the terms, time and place of any public or private sale of personal property security held from Borrower or any other person, or otherwise comply with the provisions of § 9601 et seq, including without limitation, §  9611 of the California or other applicable Uniform Commercial Code; or  pursue any other remedy in Lender's power.  Guarantor/Pledgor waives notice of acceptance of this Agreement and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Indebtedness, any and all other notices to which the undersigned might otherwise be entitled, and diligence in collecting any Indebtedness, and agree(s) that Lender may (subject to specified rights Borrower may have, if any, to approve any of the following pursuant to the terms of the Agreement), once or any number or times, modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, or permit Borrower to incur additional Indebtedness, all without notice to Guarantor/Pledgor and without affecting in any manner the unconditional obligation of Guarantor/Pledgor under this Agreement.  Guarantor/Pledgor unconditionally and irrevocably waives each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of Guarantor/Pledgor under this Agreement and acknowledges that such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or other document from Guarantor/Pledgor now or later securing the Indebtedness, and acknowledges that as of the date of this Agreement no such defense or setoff exists.

8.8. Waiver of Subrogation Rights etc.   Until Lender has been paid in full, with no agreement or obligation to extend any further financial accommodations to Borrower, Guarantor/Pledgor waives any and all rights (whether by subrogation, indemnity, reimbursement, or otherwise) to recover from Borrower any amounts paid or the value of any Collateral given by Guarantor/Pledgor pursuant to this Agreement.

8.9. Agreement Regarding What Constitutes Reasonable Notice.   In the event that applicable law shall obligate Lender to give prior notice to Guarantor/Pledgor of any action to be taken under this Agreement, Guarantor/Pledgor agrees that a written notice given to Guarantor/Pledgor at least ten (10) days before the date of the action shall be reasonable notice of the intended action and, specifically, reasonable notification of the time and place of any public sale or of the time after which any private sale, lease, or other disposition is to be made, unless a shorter notice period is reasonable under the circumstances.  A notice shall be deemed to be given under this Agreement when delivered to Guarantor/Pledgor or when placed in an envelope addressed to Guarantor/Pledgor and deposited, with postage prepaid, in a post office or official depository under the exclusive care and custody of the United States Postal Service or delivered to an overnight courier.  The mailing shall be by overnight courier, certified mail or first class mail.

8.10. Reinstatement.   Notwithstanding any prior revocation, termination, surrender, or discharge of this Agreement in whole or in part, the effectiveness of this Agreement shall automatically continue or be reinstated in the event that any payment received or credit given by Lender in respect of the Indebtedness is returned, disgorged, or rescinded under any applicable law, including, without limitation, bankruptcy or insolvency laws, in which case this Agreement, shall be enforceable against Guarantor/Pledgor as if the returned, disgorged, or rescinded payment or credit had not been received or given by Lender, and whether or not Lender relied upon this payment or credit or changed its position as a consequence of it.  In the event of continuation or reinstatement of this Agreement, Guarantor/Pledgor agrees upon demand by Lender to execute and deliver to Lender those documents which Lender determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of Guarantor/Pledgor to do so shall not affect in any way the reinstatement or continuation.

8.11. Successors and Assigns.   This Agreement and all of the rights and remedies of Lender under this Agreement shall inure to the benefit of Lender's successors and assigns and to any other holder who derives from Lender title to or an interest in the Indebtedness or any portion of it, and shall bind Guarantor/Pledgor and the heirs, legal representatives, successors, and assigns of Guarantor/Pledgor.  Nothing in this Section 8.11 is or shall be deemed to constitute consent by Lender to any assignment by Guarantor/Pledgor.

8.12. Joint and Several Undertakings.   If there is more than one Guarantor/Pledgor, all undertakings, warranties and covenants made by Guarantor/Pledgor and all rights, powers and authorities given to or conferred upon Lender are made or given jointly and severally.

8.13. Meanings Except as otherwise provided in this Agreement.   All terms in this Agreement have the meanings assigned to them in Division 9 (or, absent definition in Division 9, in any other division) of the Code in effect as of the date of this Agreement.

8.14. No Exercise or Delay in Exercise of Rights Shall Preclude Exercise by Lender of any Other Right.   No single or partial exercise, or delay in the exercise, of any right or power under this Agreement, shall

8.15. Choice of Law.  This Agreement shall in all respects be governed by and construed in accordance with the internal laws of the State of California without regard to conflict of laws principles.

8.16. Venue.  The parties agree that all actions or proceedings arising in connection with this Agreement and/or the Loan Documents shall be tried and litigated only in the State and Federal courts located in the County of Santa Clara, State of California or, at the sole option of Lender, in any other court in which Lender shall initiate legal or equitable proceedings and which has subject matter jurisdiction over the matter in controversy.  Each of Guarantor/Pledgor and Lender waives, to the extent permitted under applicable law, any right each may have to assert the doctrine of forum non conveniens or to object to venue to the extent any proceeding is brought in accordance with this section.

8.17. Counterparts.   This Agreement may be executed in any number of counterparts, all of which, taken together, shall constitute a single original.

8.18. Chief Executive Office; Other Locations.  Guarantor/Pledgor's Chief Executive Office is located and shall be maintained at 1000 1st Avenue South, Suite 100,  Seattle,  Washington 98134.  If any Collateral is located at other than the Chief Executive Office, such Collateral is located and shall be maintained at the following locations:

8.19. Termination.   This Agreement shall be terminated only by the filing of a termination statement in accordance with the applicable provisions of the Code, but the obligations contained in Sections 4.13 (indemnification for violations of law by Guarantor/Pledgor), 5.3 (as to indemnification for processing by Lender) and 8.10 (reinstatement of Indebtedness) of this Agreement shall survive termination.

8.20. Address and Method of Notice.  Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any of the other Loan Documents shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by overnight mail, registered or certified mail, postage prepaid, return receipt requested, or by prepaid telex, TWX, telefacsimile, or telegram (with messenger delivery specified) to Borrower or to Lender, as the case may be, at its address set forth below:

8.21. Captions.   Captions are solely to be used for the convenience of the parties hereto and shall not be used to construe the meaning of the terms of this Agreement.

8.22. Further Assurances.   Guarantor/Pledgor shall execute such other and further documents and instruments as Lender may reasonably request in order to implement the provisions of this Agreement and to perfect and protect the security interest of Lender.

8.23. Integration.   This is an integrated agreement and taken together with the documents executed in connection herewith, represents the final agreement of the parties with respect to the subject matter hereof. Any amendments hereto shall be in writing and signed by the party to be charged.

9. WAIVER OF JURY TRIAL.   GUARANTOR/PLEDGOR AND LENDER ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED.  EACH PARTY AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF THE PARTIES WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE INDEBTEDNESS.

10. Oral Agreements; Oral Commitments; Choice of Law.  Oral agreements or Oral Commitments to loan money, extend credit, or forbear from enforcing repayment of a debt are not enforceable under Washington Law.  All acts and transactions hereunder and the rights and obligations of the parties hereto shall be governed, construed, and interpreted in accordance with the laws of the State of California.

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