SECURITY AGREEMENT
This
SECURITY AGREEMENT, dated as of February 13, 2008 (as the same may from time
to
time be amended, supplemented or otherwise modified, this “Security
Agreement”), by and between the individuals and entities set forth on the
signature pages hereto (the “Secured Party”) and Auriga Laboratories,
Inc., a Delaware corporation and all of the subsidiaries of the Company
(collectively, the “Debtor”).
W
I T
N E S S E T H:
WHEREAS,
the Company is engaged in an offering (the “Offering”) of up to $750,000
aggregate principal amount of its senior secured notes (collectively, the
“Notes”); and
WHEREAS,
the Secured Party has agreed to purchase Notes; and
WHEREAS,
it is a condition precedent to the obligations of each Secured Party to acquire
Notes that, interalia, the Debtor execute and deliver this
Security Agreement to the Secured Party.
NOW,
THEREFORE, the parties hereto hereby agree as follows:
ARTICLE
I
DEFINITIONS
1.1 Defined
Terms. As used herein, capitalized terms defined in this Agreement and not
otherwise defined herein are used herein as so defined.
“Account
Debtor” shall mean the person who is obligated on a Receivable.
“Accounts”
shall mean “accounts” as such term is defined in the UCC.
“Chattel
Paper” shall mean “chattel paper” as such term is defined in the
UCC.
“Collateral”
shall have the meaning assigned to it in Article II hereof.
“Collateral
Records” shall mean books, records, computer software, computer printouts,
customer lists, blueprints, technical specifications, manuals, and similar
items
which relate to any Collateral other than such items obtained under license
or
franchise security agreements which prohibit assignment or disclosure of such
items.
“Commercial
Tort Claims” shall mean “commercial tort claims” as defined in the
UCC.
“Deposit
Account” shall mean a “deposit account” as defined in the UCC.
“Documents”
shall mean “documents” as defined as in the UCC.
“Equipment”
shall mean “equipment” as defined in the UCC.
“Event
of Default” shall have the meaning assigned to it in the Notes.
“Financial
Assets” shall mean “financial assets” as defined in the UCC.
“General
Intangibles” shall mean “general intangibles” as such term is defined in the
UCC.
“Goods”
shall mean “goods” as defined in the UCC.
“Instruments”
shall mean instruments as defined in the UCC.
“Inventory”
shall mean “inventory” as such term is defined in the UCC, including without
limitation, all goods (whether such goods are in the possession of the Debtor
or
of a bailee or other Person for sale, lease, storage, transit, processing,
use
or otherwise and whether consisting of whole goods, spare parts, components,
supplies, materials or consigned or returned or repossessed goods), including
without limitation, all such goods which are held for sale or lease or are
to be
furnished (or which have been furnished) under any contract of service or which
are raw materials or work in progress or materials used or consumed in the
Debtor’s business.
“Investment
Property” shall mean “investment property” as such term is defined in the
UCC.
“Lien”
shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement,
encumbrance, lien (statutory or other), or preference, priority or other
security agreement of any kind or nature whatsoever, including, without
limitation, the filing of any financing statement or similar instrument under
the UCC or comparable law of any jurisdiction, domestic or foreign.
“Permitted
Liens” shall mean any of the following (1) Liens for taxes, fees,
assessments or other governmental charges which are not yet due and payable
or
which are being contested in good faith with a reserve or other appropriate
provision having been made therefor; (2) Liens incurred or deposits made
in the ordinary course of business in connection with workers’ compensation,
unemployment insurance and other types of social security; (3) easements,
reservations, rights of way, restrictions, minor defects or irregularities
in
title and other similar Liens not interfering in any material respect with
the
ordinary conduct of the business of the Debtor and not adversely affecting
the
Lien of the Secured Party in the Collateral; (4) Liens in favor of the
Secured Party; and (5) Liens in favor of a maker of a asset based line of
credit or credit facility after the date hereof and not to exceed $1.5 million
in the aggregate or a term loan(s) after the date hereof and not to exceed
$1.0
million in the aggregate.
“Person”
shall mean and include any individual, partnership, joint venture, firm,
corporation, association, trust or other enterprise or any government or
political subdivision or agency, department or instrumentality
thereof.
“Proceeds”
shall mean “proceeds” as such term is defined in the UCC.
“Receivables”
shall mean all rights to payment for goods sold or leased or services rendered,
whether or not earned by performance and all rights in respect of the Account
Debtor, including without limitation, all such rights in which the Debtor has
any right, title or interest by reason of the purchase thereof by the
Debtor.
“Receivables
Records” shall mean (a) all original copies of all documents,
instruments or other writings evidencing the Receivables, (b) all books,
correspondence, credit or other files, records, ledger sheets or cards,
invoices, and other papers relating to Receivables, including without limitation
all tapes, cards, computer tapes, computer discs, computer runs, record keeping
systems and other papers and documents relating to the Receivables, whether
in
the possession or under the control of the Debtor or any computer bureau or
agent from time to time acting for the Debtor or otherwise, (c) all
evidences of the filing of financing statements and the registration of other
instruments in connection therewith and amendments, supplements or other
modifications thereto, notices to other creditors or secured parties, and
certificates, acknowledgments, or other writings, including without limitation
lien search reports, from filing or other registration officers, (d) all
credit information, reports and memoranda relating thereto, and (e) all
other written or non-written forms of information related in any way to the
foregoing or any Receivable.
“Secured
Obligations” shall mean all obligations, liabilities and indebtedness of
every nature of the Debtor to the Secured Party, now existing or hereafter
incurred, arising under or in connection with the Notes and this Security
Agreement, as they may be amended, restated, supplemented or otherwise modified
from time to time.
“UCC”
shall mean the Uniform Commercial Code as the same may, from time to time,
be in
effect in the State of California; provided, however, in the event that any
or
all of the attachment, perfection or priority of the Secured Party’s security
interest in any Collateral is governed by the Uniform Commercial Code as in
effect in a jurisdiction other than the state of incorporation of the Debtor,
the term “UCC” shall mean the Uniform Commercial Code as in effect in such other
jurisdiction for purposes of the provisions hereof relating to such attachment,
perfection of priority and for purposes of definitions related to such
provisions.
ARTICLE
II
GRANT
OF
SECURITY INTERESTS
As
security for the timely and complete payment and performance in full of all
the
Secured Obligations, the Debtor hereby unconditionally and irrevocably assigns,
conveys, mortgages, pledges, hypothecates and transfers to the Secured Party
and
hereby grants to the Secured Party a continuing and perfected first priority
senior security interest in and to, a lien on and a right of set-off against
all
of the Debtor’s right, title and interest in, to and under the following, in
each case, whether now owned or existing or hereafter acquired or arising,
and
wherever located (all of which being hereinafter collectively called the
“Collateral”):
All
Goods
(including, without limitation, Inventory and Equipment, Accounts, Receivables
Records, Collateral Records, Investment Property, Financial Assets, Deposit
Accounts, money, General Intangibles, Chattel Paper, Commercial Tort Claims
and
Proceeds of any and all of the foregoing).
ARTICLE
III
RIGHTS
OF
THE SECURED PARTY; COLLECTION OF ACCOUNTS.
(a) The
Secured Party may, at any time following the occurrence and during the
continuance of any Event of Default which remains uncured for thirty (30) days
after its occurrence, without notice to Debtor, notify Account Debtors of Debtor
that the Accounts and the right, title and interest of the Debtor in and under
such Accounts have been assigned to the Secured Party and that payments shall
be
made directly to the Secured Party. Upon the request of the Secured
Party, the Debtor shall so notify such Account Debtors. Following the
occurrence and during the continuance of any Event of Default, the Secured
Party
may, in its name or in the name of others, communicate with such Account Debtors
to verify with such parties, to the Secured Party’s reasonable satisfaction, the
existence, amount and terms of any such Accounts.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES
The
Debtor hereby represents and warrants to the Secured Party, which
representations and warranties shall survive execution and delivery of this
Security Agreement, as follows:
4.1 Validity,
Perfection and Priority.
(a) The
security interests in the Collateral granted to the Secured Party hereunder
constitute valid and continuing security interests in the Collateral;
and
(b) upon
(i) filing financing statements (on Form UCC-1) naming the Debtor as
“debtor” and the Secured Party as “Secured Party” in the filing offices of the
Secretary of State of the State of California, the security interests in the
Collateral (other than money, registered copyrights, deposit accounts or
letter-of-credit rights) granted to the Secured Party hereunder will constitute
perfected security interests superior and prior to all Liens, rights or claims
with respect to the Collateral of all other Persons, except for Permitted
Liens.
4.2 No
Liens; Other Financing Statements.
(a) The
Debtor is the sole legal and equitable owner of each item of Collateral in
which
it purports to grant a security interest hereunder, and, as to all Collateral
whether now existing or hereafter acquired, will continue to own each item
of
the Collateral free and clear of any and all Liens, rights or claims of all
other Persons, except for Permitted Liens, and the Debtor shall defend the
Collateral against all claims and demands of all Persons at any time claiming
the same or any interest therein materially adverse to the Secured
Party.
(b) No
financing statement or other evidence of Lien covering or purporting to cover
any of the Collateral is on file in any public office other than
(i) financing statements filed in connection with the security interests
granted to the Secured Party hereunder, (ii) financing statements for which
proper termination statements have been delivered to the Debtor for filing
and
(iii) financing statements evidencing Permitted Liens set forth on
Schedule A.
(c) This
Security Agreement creates a legal, valid and continuing security interest
on
and in all of the Collateral in which Debtor now has rights and, except with
respect to money, registered copyrights, deposit accounts and letter-of-credit
rights, all filings and other actions necessary or desirable to perfect and
protect such security interest have been duly taken. Accordingly,
except for Permitted Liens, the Secured Party have a fully perfected first
priority security interest in all of the Collateral in which Debtor now has
rights. Except for Permitted Liens, this Security Agreement will
create a legal, valid, continuing and fully perfected first priority security
interest in the Collateral in which Debtor later acquires rights, when Debtor
acquires those rights.
4.3 Representations
and Covenants Related to Perfection. The Debtor represents and
warrants to the Secured Party as follows: (a) the Debtor’s exact
legal name is as indicated on page 1 of this Security Agreement and on the
signature page hereof; (b) the Debtor is an organization of the
type and is organized in the jurisdiction set forth on page 1 of this Security
Agreement; and (c) each of the Subsidiaries’ exact legal name is indicated the
signature page hereof.
ARTICLE
V
COVENANTS
The
Debtor covenants and agrees with the Secured Party that from and after the
date
of this Security Agreement:
5.1 Further
Assurances. The Debtor will from time to time at the expense of
the Debtor, promptly execute, deliver, file and record all further instruments,
endorsements and other documents, and take such further action as the Secured
Party may deem reasonably desirable in obtaining the full benefits of this
Security Agreement and of the rights, remedies and powers herein granted,
including, without limitation, the following:
(i) Cooperate
with the filing of any financing statements (on Form UCC-1_, in a form
reasonably acceptable to the Secured Party under the Uniform Commercial Code
in
effect in any jurisdiction with respect to the Liens and security interests
granted hereby. The Debtor also hereby authorizes the Secured Party
to file any such financing statements, including without limitation continuation
statements, and amendments thereto, in all jurisdictions and with all filing
offices as the Secured Party may determine, in its reasonable discretion, are
necessary or advisable to perfect the security interests granted to the Secured
Party in connection herewith, without the signature of the Debtor to the extent
permitted by applicable law. Such financing statements may describe
the Collateral in the same manner as described in this Agreement or may contain
an indication or description of Collateral that describes such property in
any
other manner as the Secured Party may determine, in its reasonable discretion,
is necessary, advisable or prudent to ensure the perfection of the security
interests in the Collateral granted to the Secured Party in connection
herewith. A photocopy or other reproduction of this Security
Agreement shall be sufficient as a financing statement and may be filed in
lieu
of the original to the extent permitted by applicable law. The Debtor
will pay or reimburse the Secured Party for all filing fees and related expenses
reasonably incurred in connection therewith; and
(ii) furnishing
to the Secured Party from time to time of statements and schedules further
identifying and describing the Collateral and such other reports in connection
with the Collateral as the Secured Party may reasonably request, all in
reasonable detail and in form reasonably satisfactory to the Secured
Party.
5.2 Change
of Name; Identity; Corporate Structure; Chief Executive Office; or Location
of
Inventory. The Debtor will not change its name, identity,
corporate structure or the location of its chief executive office or location
of
its Inventory (other than sales of Inventory in the ordinary course of business)
without (i) giving the Secured Party at least thirty (30) days’ prior
written notice clearly describing such new name, identity, corporate structure
or new location and providing such other information in connection therewith
as
the Secured Party may reasonably request, and (ii) taking all action
satisfactory to the Secured Party as the Secured Party may reasonably request
to
maintain the security interest of the Secured Party in the Collateral intended
to be granted hereby at all times fully perfected with the same or better
priority and in full force and effect.
(a) Maintain
Records. The Debtor will keep and maintain at its own cost and
expense reasonably satisfactory and complete records of the
Collateral.
5.3 Insurance.
The Debtor will maintain, with financially sound and reputable insurers
insurance with respect to the Collateral and its use, against loss or damage
of
the kinds customarily insured against by reputable companies in the same or
similar businesses, similarly situated, such insurance to be of such types
and
in such amounts (with such deductible amounts) as is customary for such
companies under the same or similar circumstances
5.4 Payment
Obligations. The Debtor will pay promptly when due all taxes, assessments
and governmental charges or levies imposed upon the Collateral, as well as
all
claims of any kind (including, without limitation, claims for labor, materials,
supplies and services) against or with respect to the Collateral, except that
no
such charge need be paid if (i) the validity thereof is being contested in
good faith by appropriate proceedings, (ii) the Debtor has promptly
notified the Secured Party of the existence of such proceedings and such
proceedings do not involve, in the good faith and reasonable opinion of the
Secured Party, any material danger for the sale, forfeiture or loss of any
material portion of the Collateral or any material interest therein and
(iii) such charge is adequately reserved against on the Debtor’s books in
accordance with generally accepted accounting principles.
5.5 Negative
Pledge. Without the consent of the Secured Party, the Debtor will
not create, incur or permit to exist, will defend the Collateral against, and
will take such other action as is necessary to remove, any Lien or claim on
or
to the Collateral, other than the Liens created hereby and other than Permitted
Liens.
5.6 Limitations
on Dispositions of Collateral. Without the consent of the Secured
Party, the Debtor will not sell, transfer, lease or otherwise dispose of any
of
the Collateral, or attempt, offer or contract to do so, except for sales of
Inventory in the ordinary course of its business.
ARTICLE
VI
REMEDIES;
RIGHTS UPON DEFAULT
6.1 Rights
and Remedies Generally. If an Event of Default shall occur and be
continuing, then and in every such case, the Secured Party shall have all the
rights of a secured party under the UCC, shall have all rights now or hereafter
existing under all other applicable laws, and, subject to any mandatory
requirements of applicable law then in effect, shall have all the rights set
forth in this Security Agreement and the Notes.
6.2 Assembly
of Collateral. If an Event of Default shall occur and be
continuing, upon five days’ notice to the Debtor, the Debtor shall, at its own
expense, assemble the Collateral (or from time to time any portion thereof)
and
make it available to the Secured Party at any place or places designated by
the
Secured Party which is reasonably convenient to both parties.
6.3 Disposition
of Collateral. The Secured Party will give the Debtor reasonable
notice of the time and place of any public sale of the Collateral or any part
thereof or the time after which any private sale or any other intended
disposition thereof is to be made. The Debtor agrees that the requirements
of
reasonable notice to it shall be met if such notice is mailed, postage prepaid
to its address specified in Section 7.4 of this Security Agreement (or such
other address that the Debtor may provide to the Secured Party in writing)
at
least ten (10) days before the time of any public sale or after which any
private sale may be made. The proceeds of any sale, disposition or
other realization upon all or any part of the Collateral shall be distributed
by
the Secured Party in the following order of priorities: First, to the Secured
Party in an amount sufficient to pay in full the reasonable costs of the Secured
Party in connection with such sale, disposition or other realization, including
all fees, costs, expenses, liabilities and advances reasonably incurred or
made
by the Secured Party in connection therewith, including, without limitation,
reasonable attorneys’ fees; Second, to the Secured Party in an amount equal to
the then unpaid Secured Obligations (with each Secured Party receiving its
pro
rata share based upon such Secured Party’s principal amount of Notes acquired
pursuant to the Offering; and finally, upon payment in full of the Secured
Obligations, to the Debtor or its representatives, in accordance with the UCC
or
as a court of competent jurisdiction may direct.
6.4 Recourse. The
Debtor shall remain liable for any deficiency if the proceeds of any sale or
other disposition of the Collateral are insufficient to satisfy the Secured
Obligations. The Debtor shall also be liable for all expenses of the
Secured Party reasonably incurred in connection with collecting such deficiency,
including, without limitation, the reasonable fees and disbursements of one
firm
of attorneys employed by the Secured Party to collect such
deficiency.
6.5 Expenses;
Attorneys’ Fees. The Debtor shall reimburse the Secured Party for
all their reasonable expenses in connection with the exercise of their rights
hereunder, including, without limitation, all reasonable attorneys’ fees and
legal expenses of one firm of attorneys incurred by the Secured
Party. Expenses of retaking, holding, preparing for sale, selling or
the like shall include the reasonable attorneys’ fees and legal expenses of one
firm of attorneys of the Secured Party. All such expenses shall be
secured hereby.
6.6 Limitation
on Duties Regarding Preservation of Collateral. The Secured
Party’ sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in their possession, under Section 9-207 of
the UCC or otherwise, shall be to deal with it in the same manner as the Secured
Party deal with similar property for their own account.
(a) The
Secured Party shall have no obligation to take any steps to preserve rights
against prior parties to any Collateral.
(b) None
of
the Secured Party nor any of their directors, officers, employees or agents
shall be liable for failure to demand, collect or realize upon all or any part
of the Collateral or for any delay in doing so or shall be under any obligation
to sell or otherwise dispose of any Collateral upon the request of the Debtor
or
otherwise.
ARTICLE
VII
MISCELLANEOUS
7.1 Limitation
on the Secured Party’s Duty in Respect of Collateral. The Secured
Parties shall be deemed to have acted reasonably in the custody, preservation
and disposition of any of the Collateral if they take such action as the Debtor
requests in writing, but failure of the Secured Party to comply with any such
request shall not in itself be deemed a failure to act reasonably, and no
failure of the Secured Party to do any act not so requested shall be deemed
a
failure to act reasonably.
7.2 Reinstatement. This
Security Agreement shall remain in full force and effect and continue to be
effective should any petition be filed by or against the Debtor for liquidation
or reorganization, should the Debtor become insolvent or make an assignment
for
the benefit of creditors or should a receiver or trustee be appointed for all
or
any significant part of the Debtor’s property and assets, and shall continue to
be effective or be reinstated, as the case may be, if at any time payment and
performance of the Secured Obligations, or any part thereof, is, pursuant to
applicable law, rescinded or reduced in amount, or must otherwise be restored
or
returned by any obligee of the Secured Obligations, whether as a “voidable
preference,” “fraudulent conveyance,” or otherwise, all as though such payment
or performance had not been made. In the event that any payment, or
any part thereof, is rescinded, reduced, restored or returned, the Secured
Obligations shall be reinstated and deemed reduced only by such amount paid
and
not so rescinded, reduced, restored or returned.
7.3 Governing
Law. THIS SECURITY AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH
AND
BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS.
7.4 Notices. All
notices shall be given in accordance with the provisions of the Subscription
Agreements.
7.5 Successors
and Assigns. This Security Agreement shall be binding upon and
inure to the benefit of the Debtor, the Secured Party, all future holders of
the
Secured Obligations and their respective successors and assigns, except that
the
Debtor may not assign or transfer any of its rights or obligations under this
Security Agreement without the prior written consent of the Secured
Party.
7.6 Waivers
and Amendments. Any provisions in this Security Agreement may be
waived, amended, supplemented or otherwise modified with the written consent
of
the Company and the Secured Party holding at least 51% in aggregate principal
amount of the Notes issued in the Offering.
7.7 No
Waiver; Remedies Cumulative. No failure or delay on the part of
the Secured Party in exercising any right, power or privilege hereunder and
no
course of dealing between the Debtor shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Secured Party of any right
or remedy hereunder on any one occasion shall not be construed as a bar to
any
right or remedy which the Secured Party would otherwise have on any future
occasion. The rights and remedies herein expressly provided are
cumulative and may be exercised singly or concurrently and as often and in
such
order as the Secured Party deem expedient and are not exclusive of any rights
or
remedies which the Secured Party would otherwise have whether by security
agreement or now or hereafter existing under applicable law. No
notice to or demand on the Debtor in any case shall entitle the Debtor to any
other or further notice or demand in similar or other circumstances or
constitute a waiver of the rights of the Secured Party to any other or future
action in any circumstances without notice or demand.
7.8 Termination;
Release. When the Secured Obligations have been indefeasibly paid
and performed in full this Security Agreement shall terminate, and the Secured
Party, at the request and sole expense of the Debtor, will execute and deliver
to the Debtor the proper instruments (including UCC termination statements)
acknowledging the termination of this Security Agreement, and will duly assign,
transfer and deliver to the Debtor, without recourse, representation or warranty
of any kind whatsoever, such of the Collateral as may be in the possession
of
the Secured Party and has not theretofore been disposed of, applied or
released.
7.9 Headings
Descriptive. The headings of the several Sections and subsections
of this Security Agreement are inserted for convenience only and shall not
in
any way affect the meaning or construction of any provision of this Security
Agreement.
7.10 Additional
Secured Party. Additional parties acquiring Notes pursuant to the Offering
after the date hereof may become parties to this Agreement by executing the
signature page hereto, whereupon such parties shall be included in the
definition of “Secured Party” for all purposes under this Agreement
7.11 Action
by Secured Party. Any action required or permitted to be taken under this
Agreement or with respect to the Collateral by the Secured Party, including
but
not limited to the granting of consents, amending or waiving any provision
of
this Agreement or declaring an Event of Default, may only be taken if consented
to each of the Secured Party.
7.12 Severability. In
case any provision in or obligation under this Security Agreement or the Secured
Obligations shall be invalid, illegal or unenforceable in any jurisdiction,
the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction,
shall
not in any way be affected or impaired thereby.
[Signature
Page Follows]
IN
WITNESS WHEREOF, the Debtor and the Secured Party have caused this Security
Agreement to be duly executed and delivered as of the date first above
written.
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By:
__________________________________
Name:
________________________________
Title:
_________________________________
Address: 0000
Xxxxxx Xxxx
Xxxxxxxxx,
XX
00000
Fax: (000)
000-0000
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SECURED
PARTY
PROSPECTOR
CAPITAL PARTNERS, LLC
________________________________________
By:
Xxxxxx & Co., LLC
Its:
Manager
Title:
Authorized Person
Address:
0000
Xxxxxxx Xxxx, Xxxxx X-000
Xxxxxx,
XX 00000
Fax:
000-000-0000
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