-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ol6hdD3JZqsIkxKP0kLtYT0KqY0ehJELd8DStJFQvVPToIPgeHr0pv+zREvOoe8/ c9aZdiuMLgN1ky5wRFqg6g== 0000950134-07-016677.txt : 20070803 0000950134-07-016677.hdr.sgml : 20070803 20070803060200 ACCESSION NUMBER: 0000950134-07-016677 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20070730 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20070803 DATE AS OF CHANGE: 20070803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHAD THERAPEUTICS INC CENTRAL INDEX KEY: 0000713492 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 953792700 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12214 FILM NUMBER: 071022134 BUSINESS ADDRESS: STREET 1: 21622 PLUMMER STREET CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8188820883 MAIL ADDRESS: STREET 1: 21622 PLUMMER STREET CITY: CHATSWORTH STATE: CA ZIP: 91311 8-K 1 v32486e8vk.htm FORM 8-K CHAD Therapeutics, Inc.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): July 30, 2007
CHAD Therapeutics, Inc.
(Exact Name of Registrant as Specified in its Charter)
California
(State or Other Jurisdiction of Incorporation)
     
1-12214   95-3792700
(Commission File Number)   (I.R.S. Employer Identification No.)
21622 Plummer Street, Chatsworth, California
(Address of Principal Executive Offices) (Zip Code)
(818) 882-0883
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
     o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
     o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
     o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
     o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)
 
 

 


TABLE OF CONTENTS

Item 1.01. Results of Operations and Financial Condition
Item 9.01. Financial Statements and Exhibits
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.28
EXHIBIT 10.29
EXHIBIT 10.30
EXHIBIT 10.31
EXHIBIT 10.32
EXHIBIT 99.1


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Item 1.01. Results of Operations and Financial Condition.
     On July 30, 2007, CHAD Therapeutics, Inc. (the “Company”) entered into a financing transaction with Calliope Capital Corporation (the “Investor”), a Delaware corporation pursuant to which the Company issued to the Investor a $750,000 convertible term note (the “Term Note”) and a $2,750,000 revolving credit line (the “Credit Line”), all secured by the Company’s assets. The Term Note is payable in equal installments over 36 months and bears interest at prime plus 2%, and the Credit Line bears interest at prime plus 1.5%. A portion of the financing was used to pay all outstanding obligations on the Company’s factoring arrangement with a commercial bank.
     At the Investor’s option, the Convertible Note may be converted into shares of the Company’s common stock any time during the term of the note at a conversion price of $1.18. In addition, warrants to purchase up to 976,744 shares of the Company’s common stock were issued to the Investor with an exercise price of $1.24 per share. The Investor was granted registration rights with respect to the shares underlying the warrants. The warrants include a lock-up feature for a period of 12 months after any warrants are exercised.
     The above descriptions of the Security Agreement, Registration Rights Agreement, Term Note, Secured Revolving Note and Warrant are qualified in their entirety by reference to the respective exhibits to this Current Report on Form 8-K.
     A copy of the Company’s press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference. This Form 8-K and the attached exhibits are provided under Item 1.01 of Form 8-K and are furnished to, but shall not be deemed filed with, the Securities and Exchange Commission or incorporated by reference into the Company’s filings under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
The exhibit listed below is being furnished with this Form 8-K.
     
Exhibit    
Number   Description
10.28
  Security Agreement dated July 30, 2007
 
   
10.29
  Registration Rights Agreement dated July 30, 2007
 
   
10.30
  Secured Convertible Term Note dated July 30, 2007
 
   
10.31
  Secured Revolving Note dated July 30, 2007
 
   
10.32
  Warrant dated July 30, 2007
 
   
99.1
  Press Release, dated August 1, 2007

 


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
         
  CHAD Therapeutics, Inc.
 
 
Date: August 3, 2007  By:   /s/ Tracy A. Kern    
    Tracy A. Kern 
Chief Financial Officer 
 
 

 


Table of Contents

EXHIBIT INDEX
     
Exhibit    
Number   Description
10.28
  Security Agreement, dated July 30, 2007
 
   
10.29
  Registration Rights Agreement, dated July 30, 2007
 
   
10.30
  Secured Convertible Term Note, dated July 30, 2007
 
   
10.31
  Secured Revolving Note, dated July 30, 2007
 
   
10.32
  Warrant, dated July 30, 2007
 
   
99.1
  Press Release, dated August 1, 2007

 

EX-10.28 2 v32486exv10w28.htm EXHIBIT 10.28 Exhibit 10.28
 

Exhibit 10.28
SECURITY AGREEMENT
CALLIOPE
and
CHAD THERAPEUTICS, INC.
Dated: July 31, 2007
Security Agreement

 


 

             
1.
  General Definitions and Terms; Rules of Construction     4  
 
           
2.
  Loan Facility     5  
 
           
3.
  Repayment of the Loans     7  
 
           
4.
  Procedure for Revolving Loans     7  
 
           
5.
  Interest and Payments     7  
 
           
6.
  Security Interest     8  
 
           
7.
  Representations, Warranties and Covenants Concerning the Collateral     9  
 
           
8.
  Payment of Accounts     12  
 
           
9.
  Collection and Maintenance of Collateral     12  
 
           
10.
  Inspections and Appraisals     13  
 
           
11.
  Financial Reporting     13  
 
           
12.
  Additional Representations and Warranties     15  
 
           
13.
  Covenants     25  
 
           
14.
  Further Assurances     31  
 
           
15.
  Representations, Warranties and Covenants of Calliope     31  
 
           
16.
  Power of Attorney     33  
 
           
17.
  Term of Agreement     33  
 
           
18.
  Termination of Lien     34  
 
           
19.
  Events of Default     34  
 
           
20.
  Remedies     36  
 
           
21.
  Waivers     37  
 
           
22.
  Expenses     37  
 
           
23.
  Assignment     38  
 
           
24.
  No Waiver; Cumulative Remedies     38  
 
           
25.
  Application of Payments     38  
Security Agreement

 


 

             
26.
  Indemnity     39  
 
           
27.
  Revival     39  
 
           
28.
  Borrowing Agency Provisions     39  
 
           
29.
  Notices     40  
 
           
30.
  Governing Law, Jurisdiction and Waiver of Jury Trial     41  
 
           
31.
  Limitation of Liability     42  
 
           
32.
  Entire Understanding; Maximum Interest     42  
 
           
33.
  Severability     43  
 
           
34.
  Survival     43  
 
           
35.
  Captions     43  
 
           
36.
  Counterparts; Telecopier Signatures     43  
 
           
37.
  Construction     43  
 
           
38.
  Publicity     43  
 
           
39.
  Joinder     43  
 
           
40.
  Legends     44  
Security Agreement

 


 

SECURITY AGREEMENT
     This Security Agreement is made as of July 30, 2007 by and among CALLIOPE CAPITAL CORPORATION, a Delaware company having an address at c/o United Corporate Services, Inc. 874 Walker Road, Suite C Dover Delaware 19904 (“Calliope”) and CHAD THERAPUTICS, INC., a California corporation (the “Parent”).
BACKGROUND
     The Parent has requested that Calliope make advances available to the Parent; and
     Calliope has agreed to make such advances on the terms and conditions set forth in this Agreement.
AGREEMENT
     NOW, THEREFORE, in consideration of the mutual covenants and undertakings and the terms and conditions contained herein, the parties hereto agree as follows:
     1. General Definitions and Terms; Rules of Construction.
     (a) General Definitions. Capitalized terms used in this Agreement shall have the meanings assigned to them in Annex A.
     (b) Accounting Terms. Any accounting terms used in this Agreement that are not specifically defined shall have the meanings customarily given them in accordance with GAAP and all financial computations shall be computed, unless specifically provided herein, in accordance with GAAP consistently applied.
     (c) Other Terms. All other terms used in this Agreement and defined in the UCC, shall have the meaning given therein unless otherwise defined herein.
     (d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits hereto or expressly identified to this Agreement are incorporated herein by reference and taken together with this Agreement constitute but a single agreement. The words “herein”, “hereof” and “hereunder” or other words of similar import refer to this Agreement as a whole, including the Exhibits, Addenda, Annexes and Schedules thereto, as the same may be from time to time amended, modified, restated or supplemented, and not to any particular section, subsection or clause contained in this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. The term “or” is not exclusive. The term “including” (or any form thereof) shall not be limiting or exclusive. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references in this Agreement or in the Schedules, Addenda, Annexes and Exhibits to this Agreement to sections, schedules, disclosure schedules, exhibits, and attachments shall refer to the corresponding sections, schedules, disclosure schedules, exhibits, and attachments of or to this Agreement. All
Security Agreement

 


 

references to any instruments or agreements, including references to any of this Agreement or the Ancillary Agreements shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof.
     2. Loan Facility.
     (a) Revolving Loans.
          (i) Subject to the terms and conditions set forth herein and in the Ancillary Agreements, Calliope may make revolving loans (the “Revolving Loans”) to the Parent from time to time during the Term which, in the aggregate at any time outstanding, will not exceed the lesser of (x) (I) the Capital Availability Amount minus (II) such reserves as Calliope may reasonably in its good faith judgment deem proper and necessary from time to time (the “Reserves”) and (y) an amount equal to (I) the Accounts Availability plus (II) the Inventory Availability, minus (III) the Reserves. The amount derived at any time from Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus 2(a)(i)(y)(III) shall be referred to as the “Formula Amount.” The Parent shall execute and deliver to Calliope on the Closing Date the Secured Revolving Note and the Secured Convertible Term Note. The Parent hereby acknowledges and agrees that Calliope’s obligation to purchase the Secured Revolving Note and the Secured Convertible Term Note from the Parent on the Closing Date shall be contingent upon the satisfaction (or waiver by Calliope in its sole discretion) of the items and matters set forth in the closing checklist provided by Calliope to the Parent on or prior to the Closing Date. The Parent hereby further acknowledges and agrees that, immediately prior to each borrowing hereunder and immediately after giving effect thereto, the Parent shall be deemed to have certified to Calliope that at the time of each such proposed borrowing and also after giving effect thereto (i) there shall exist no Event of Default, (ii) all representations, warranties and covenants made by the Parent in connection with this Agreement and the Ancillary Agreements are true, correct and complete and (iii) all of Parent’s covenant requirements under this Agreement and the Ancillary Agreements have been met. The Parent hereby agrees to provide a certificate confirming the foregoing concurrently with each request for a borrowing hereunder.
          (ii) Notwithstanding the limitations set forth above, if requested by Parent, Calliope retains the right to lend to Parent from time to time such amounts in excess of such limitations as Calliope may determine in its sole discretion. In connection with each such request by Parent, the Parent shall be deemed to have certified, as of the time of such proposed borrowing and immediately after giving effect thereto, to the satisfaction of all Overadvance Conditions. For purposes hereof, “Overadvance Conditions” means (i) no Event of Default shall exist and be continuing as of such date; (ii) all representations, warranties and covenants made by the Parent in connection with the Security Agreement and the Ancillary Agreements shall be true, correct and complete as of such date; and (iii) the Parent shall have taken all action necessary to grant Calliope “control” over all of the Parent’s ’ Deposit Accounts (the “Control Accounts”), with any agreements establishing “control” to be in form and substance satisfactory to Calliope. “Control” over such Control Accounts shall be released upon the indefeasible repayment in full and termination of the Overadvance (together with all accrued interest and fees which remain unpaid in respect thereof). The Parent hereby agrees to provide a certificate confirming the satisfaction of the Overadvance Conditions concurrently with the request for same.
Security Agreement

 


 

          (iii) The Parent acknowledges that the exercise of Calliope’s discretionary rights hereunder may result during the Term in increases or decreases in the advance percentages used in determining Accounts Availability and/or Inventory Availability and Parent hereby consents to any such increases or decreases which may limit or restrict advances requested by the Parent.
          (iv) If any interest, fees, costs or charges payable to Calliope hereunder are not paid when due, Parent shall thereby be deemed to have requested, and Calliope is hereby authorized at its discretion to make and charge to the Parent’ account, a Loan as of such date in an amount equal to such unpaid interest, fees, costs or charges.
          (v) If Parent at any time fails to perform or observe any of the covenants contained in this Agreement or any Ancillary Agreement, Calliope may, but need not, perform or observe such covenant on behalf and in the name, place and stead of Parent (or, at Calliope’s option, in Calliope’s name) and may, but need not, take any and all other actions which Calliope may deem necessary to cure or correct such failure (including the payment of taxes, the satisfaction of Liens, the performance of obligations owed to Account Debtors, lessors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments). The amount of all monies expended and all costs and expenses (including attorneys’ fees and legal expenses) incurred by Calliope in connection with or as a result of the performance or observance of such agreements or the taking of such action by Calliope shall be charged to the Parent’s account as a Revolving Loan and added to the Obligations. To facilitate Calliope’s performance or observance of such covenants by Parent, Parent hereby irrevocably appoints Calliope, or Calliope’s delegate, acting alone, as Parent’s attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of Parent any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by Parent.
          (vi) Calliope will account to Company Agent monthly with a statement of all Loans and other advances, charges and payments made pursuant to this Agreement, and such account rendered by Calliope shall be deemed final, binding and conclusive unless Calliope is notified by Company Agent in writing to the contrary within thirty (30) days of the date each account was rendered specifying the item or items to which objection is made.
          (vii) During the Term, the Parent may borrow and prepay Loans in accordance with the terms and conditions hereof.
          (viii) If any Eligible Account is not paid by the Account Debtor within ninety (90) days after the date that such Eligible Account was invoiced or if any Account Debtor asserts a deduction, dispute, contingency, set-off, or counterclaim with respect to any Eligible Account, (a “Delinquent Account”), the Parent shall(i) repay Calliope for the amount of the Loans made with respect to such Delinquent Account or (ii) immediately replace such Delinquent Account with an otherwise Eligible Account.
Security Agreement

 


 

     (b) Term Loan. Subject to the terms and conditions set forth herein and in the Ancillary Agreements, Calliope shall make a term loan (the “Term Loan”) to Company Agent (for the benefit of Parent) in an aggregate amount equal to $750,000. The Term Loan shall be advanced on the Closing Date and shall be, with respect to principal, payable in consecutive monthly installments of principal commencing on November 1, 2007 and on the first day of each month thereafter, subject to acceleration upon the occurrence of an Event of Default or termination of this Agreement. The Term Loan shall be evidenced by the Secured Convertible Term Note.
     3. Repayment of the Loans. The Parent (a) may prepay the Obligations from time to time in accordance with the terms and provisions of the Notes (and Section 17 hereof if such prepayment is due to a termination of this Agreement); (b) shall repay on the Maturity Date (as defined in the Secured Convertible Term Note) (i) the then aggregate outstanding principal balance of the Term Loan together with accrued and unpaid interest, fees and charges and: (ii) all other amounts owed Calliope under the Secured Convertible Term Note; (c) shall repay on the expiration of the Term (i) the then aggregate outstanding principal balance of the Revolving Loans together with accrued and unpaid interest, fees and charges and; (ii) all other amounts owed Calliope under this Agreement and the Ancillary Agreements; and (d) subject to Section 2(a)(ii), shall repay on any day on which the then aggregate outstanding principal balance of the Loans are in excess of the Formula Amount at such time, Loans in an amount equal to such excess. Any payments of principal, interest, fees or any other amounts payable hereunder or under any Ancillary Agreement shall be made prior to 12:00 noon (New York time) on the due date thereof in immediately available funds.
     4. Procedure for Revolving Loans. Company Agent may by written notice request a borrowing of Revolving Loans prior to 12:00 noon (New York time) on the Business Day of its request to incur, on the next Business Day, a Revolving Loan. Together with each request for a Revolving Loan (or at such other intervals as Calliope may request), Company Agent shall deliver to Calliope a Borrowing Base Certificate in the form of Exhibit B attached hereto, which shall be certified as true and correct by the Chief Executive Officer or Chief Financial Officer of Company Agent together with all supporting documentation relating thereto. All Revolving Loans shall be disbursed from whichever office or other place Calliope may designate from time to time and shall be charged to the Parent’s account on Calliope’s books. The proceeds of each Revolving Loan made by Calliope shall be made available to Company Agent on the Business Day following the Business Day so requested in accordance with the terms of this Section 4 by way of credit to the applicable Company’s operating account maintained with such bank as Company Agent designated to Calliope. Any and all Obligations due and owing hereunder may be charged to the Parent’s account and shall constitute Revolving Loans.
     5. Interest and Payments.
     (a) Interest.
          (i) Except as modified by Section 5(a)(iii) below, the Parent shall pay interest at the Contract Rate on the unpaid principal balance of each Loan until such time as such Loan is collected in full in good funds in dollars of the United States of America.
Security Agreement

 


 

          (ii) Interest and payments shall be computed on the basis of actual days elapsed in a year of 360 days. At Calliope’s option, Calliope may charge the Parent’s account for said interest.
          (iii) Effective upon the occurrence of any Event of Default and for so long as any Event of Default shall be continuing, the Contract Rate shall automatically be increased as set forth in the Notes (such increased rate, the “Default Rate”), and all outstanding Obligations, including unpaid interest, shall continue to accrue interest from the date of such Event of Default at the Default Rate applicable to such Obligations.
          (iv) In no event shall the aggregate interest payable hereunder or under any Note exceed the maximum rate permitted under any applicable law or regulation, as in effect from time to time (the “Maximum Legal Rate”), and if any provision of this Agreement or any Ancillary Agreement is in contravention of any such law or regulation, interest payable under this Agreement and each Ancillary Agreement shall be computed on the basis of the Maximum Legal Rate (so that such interest will not exceed the Maximum Legal Rate).
          (v) The Parent shall pay principal, interest and all other amounts payable hereunder, or under any Ancillary Agreement, without any deduction whatsoever, including any deduction for any set-off or counterclaim.
     (b) Payment; Certain Closing Conditions.
          (i) Payment. Upon execution of this Agreement by Parent and Calliope, the Parent shall pay to Calliope Capital Management, LLC, the investment advisor of Calliope (“LCM”), a non-refundable payment in an amount equal to three and one-half percent (3.50%) of the Total Investment Amount. The foregoing payment is referred to herein as the “LCM Payment.” Such payment shall be deemed fully earned on the Closing Date and shall not be subject to rebate or proration for any reason.
          (ii) Overadvance Payment. Without affecting Calliope’s rights hereunder in the event the Loans exceed the Formula Amount (each such event, an “Overadvance”), all such Overadvances shall bear additional interest at a rate equal to two percent (2%) per month of the amount of such Overadvances for all times such amounts shall be in excess of the Formula Amount. All amounts that are incurred pursuant to this Section 5(b)(ii) shall be due and payable by the Parent monthly, in arrears, on the first business day of each calendar month and upon expiration of the Term.
          (iii) Expenses. The Parent shall reimburse Calliope for its expenses (including reasonable legal fees and expenses) incurred in connection with the entering into of this Agreement and the Ancillary Agreements, and expenses incurred in connection with Calliope’s due diligence review of Parent and its Subsidiaries and all related matters. Amounts required to be paid under this Section 5(b)(iii) will be paid on the Closing Date and shall be $45,000 for such expenses referred to in this Section 5(b)(iii).
Security Agreement

 


 

          6. Security Interest.
          (a) To secure the prompt payment to Calliope of the Obligations, Parent hereby assigns, pledges and grants to Calliope a continuing security interest in and Lien upon all of the Collateral. All of Parent’s Books and Records relating to the Collateral shall, until delivered to or removed by Calliope, be kept by Parent in trust for Calliope until all Obligations have been paid in full. Each confirmatory assignment schedule or other form of assignment hereafter executed by Parent shall be deemed to include the foregoing grant, whether or not the same appears therein.
          (b) Parent hereby (i) authorizes Calliope to file any financing statements, continuation statements or amendments thereto that (x) indicate the Collateral (1) as all assets and personal property of Parent or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the UCC of such jurisdiction, or (2) as being of an equal or lesser scope or with greater detail, and (y) contain any other information required by Part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment and (ii) ratifies its authorization for Calliope to have filed any initial financial statements, or amendments thereto if filed prior to the date hereof. Parent acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement without the prior written consent of Calliope and agrees that it will not do so without the prior written consent of Calliope, subject to Parent’s rights under Section 9-509(d)(2) of the UCC.
          (c) Parent hereby grants to Calliope an irrevocable, non-exclusive license (exercisable upon the termination of this Agreement due to an occurrence and during the continuance of an Event of Default without payment of royalty or other compensation to Parent) to use, transfer, license or sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by Parent, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer and automatic machinery software and programs used for the compilation or printout thereof, and represents, promises and agrees that any such license or sublicense is not and will not be in conflict with the contractual or commercial rights of any third Person; provided, that such license will terminate on the termination of this Agreement and the payment in full of all Obligations.
     (d) Calliope acknowledges that the Existing Indebtedness is secured by a first priority lien on the Company’s assets, which indebtedness will be paid in its entirety contemporaneously with the funding of the Loan Facility described above.
          7. Representations, Warranties and Covenants Concerning the Collateral. Parent represents, warrants (each of which such representations and warranties shall be deemed repeated upon the making of each request for a Revolving Loan and made as of the time of each and every Revolving Loan hereunder) and covenants as follows:
          (a) all of the Collateral (i) is owned by it free and clear of all Liens (including any claims of infringement) except those in Calliope’s favor and Permitted Liens and (ii) is not subject to any agreement prohibiting the granting of a Lien or requiring notice of or consent to the granting of a Lien.
Security Agreement

 


 

     (b) it shall not encumber, mortgage, pledge, assign or grant any Lien in any Collateral or any other assets to anyone other than Calliope and except for Permitted Liens.
     (c) the Liens granted pursuant to this Agreement, upon due completion of the filings of UCC-1 financing statements in respect of each grantor of such Liens in the applicable filing offices of the states of organization of such grantor and the completion of the other filings and actions listed on Schedule 7(c) (which, in the case of all filings and other documents referred to in said Schedule, have been delivered to Calliope in duly executed form) constitute valid perfected security interests in all of the Collateral in favor of Calliope as security for the prompt and complete payment and performance of the Obligations, enforceable in accordance with the terms hereof against any and all of its creditors and purchasers and, upon payment of the Existing Indebtedness, such security interest shall be prior to all other Liens in existence on the date hereof.
     (d) Except as disclosed on the attached Disclosure Schedule, no effective security agreement, mortgage, deed of trust, financing statement, equivalent security or Lien instrument or continuation statement covering all or any part of the Collateral is or will be on file or of record in any public office, except those relating to Permitted Liens.
     (e) it shall not dispose of any of the Collateral whether by sale, lease or otherwise except for the sale of Inventory in the ordinary course of business and for the disposition or transfer in the ordinary course of business during any fiscal year of obsolete and worn-out Equipment having an aggregate fair market value of not more than $25,000 and only to the extent that (i) the proceeds of any such disposition are used to acquire replacement Equipment which is subject to Calliope’s first priority security interest or are used to repay Loans or to pay general corporate expenses, or (ii) following the occurrence of an Event of Default which continues to exist the proceeds of which are remitted to Calliope to be held as cash collateral for the Obligations.
     (f) it shall defend the right, title and interest of Calliope in and to the Collateral against the claims and demands of all Persons whomsoever, and take such actions, including (i) all actions necessary to grant Calliope “control” of any Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic Chattel Paper owned by it, with any agreements establishing control to be in form and substance satisfactory to Calliope, (ii) the prompt (but in no event later than five (5) Business Days following Calliope’s request therefor) delivery to Calliope of all original Instruments, Chattel Paper, negotiable Documents and certificated Stock owned by it (in each case, accompanied by stock powers or other instruments of transfer executed in blank), (iii) notification of Calliope’s interest in Collateral at Calliope’s request, and (iv) the institution of litigation against third parties as shall be prudent in order to protect and preserve its and/or Calliope’s respective and several interests in the Collateral.
     (g) it shall promptly, and in any event within five (5) Business Days after the same is acquired by it, notify Calliope of any commercial tort claim (as defined in the UCC) acquired by it and unless otherwise consented by Calliope, it shall enter into a supplement to this Agreement granting to Calliope a Lien in such commercial tort claim.
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     (h) it shall place notations upon its Books and Records and any of its financial statements to disclose Calliope’s Lien in the Collateral.
     (i) if it retains possession of any Chattel Paper or Instrument with Calliope’s consent, upon Calliope’s request such Chattel Paper and Instruments shall be marked with the following legend: “This writing and obligations evidenced or secured hereby are subject to the security interest of Calliope ” Notwithstanding the foregoing, upon the reasonable request of Calliope, such Chattel Paper and Instruments shall be delivered to Calliope.
     (j) it shall perform in a reasonable time all other steps requested by Calliope to create and maintain in Calliope’s favor a valid perfected first Lien in all Collateral subject only to Permitted Liens.
     (k) it shall notify Calliope promptly and in any event within three (3) Business Days after obtaining knowledge thereof (i) of any event or circumstance that, to its knowledge, would cause Calliope to consider any then existing Account and/or Inventory as no longer constituting an Eligible Account or Eligible Inventory, as the case may be; (ii) of any material delay in its performance of any of its obligations to any Account Debtor; (iii) of any assertion by any Account Debtor of any material claims, offsets or counterclaims; (iv) of any allowances, credits and/or monies granted by it to any Account Debtor; (v) of all material adverse information relating to the financial condition of an Account Debtor; (vi) of any material return of goods; and (vii) of any loss, damage or destruction of any of the Collateral.
     (l) all Eligible Accounts (i) represent complete bona fide transactions which require no further act under any circumstances on its part to make such Accounts payable by the Account Debtors, (ii) are not subject to any present, future contingent offsets or counterclaims, and (iii) do not represent bill and hold sales, consignment sales, guaranteed sales, sale or return or other similar understandings or obligations of any Affiliate or Subsidiary of Parent. It has not made, nor will it make, any agreement with any Account Debtor for any extension of time for the payment of any Account, any compromise or settlement for less than the full amount thereof, any release of any Account Debtor from liability therefor, or any deduction therefrom except a discount or allowance for prompt or early payment allowed by it in the ordinary course of its business consistent with historical practice and as previously disclosed to Calliope in writing.
     (m) it shall keep and maintain its Equipment in good operating condition, except for ordinary wear and tear, and shall make all necessary repairs and replacements thereof so that the value and operating efficiency shall at all times be maintained and preserved. It shall not permit any such items to become a Fixture to real estate or accessions to other personal property.
     (n) it shall maintain and keep all of its Books and Records concerning the Collateral at its executive offices listed in Schedule 12(aa).
     (o) it shall maintain and keep the tangible Collateral at the addresses listed in Schedule 12(aa), provided, that it may change such locations or open a new location, provided that it provides Calliope at least thirty (30) days prior written notice of such changes or new location and (ii) prior to such change or opening of a new location where Collateral having a
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value of more than $50,000 will be located, it executes and delivers to Calliope such agreements deemed reasonably necessary or prudent by Calliope, including landlord agreements, mortgagee agreements and warehouse agreements, each in form and substance satisfactory to Calliope, to adequately protect and maintain Calliope’s security interest in such Collateral.
     (p) Schedule 7(p) lists all banks and other financial institutions at which it maintains deposits and/or other accounts, and such Schedule correctly identifies the name, address and telephone number of each such depository, the name in which the account is held, a description of the purpose of the account, and the complete account number. It shall not establish any depository or other bank account with any financial institution (other than the accounts set forth on Schedule 7(p)) without Calliope’s prior written consent.
     (q) All Inventory manufactured by it in the United States of America shall be produced in accordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto or promulgated thereunder.
     8. Payment of Accounts.
     (a) Parent will irrevocably direct all of its present and future Account Debtors and other Persons obligated to make payments constituting Collateral to make such payments directly to the lockboxes maintained by Parent (the “Lockboxes”) with North Fork Bank or such other financial institution accepted by Calliope in writing as may be selected by Parent (the “Lockbox Bank”) pursuant to the terms of the certain agreements among Parent, Calliope and/or the Lockbox Bank dated as of July ___, 2007. On or prior to the Closing Date, Parent shall and shall cause the Lockbox Bank to enter into all such documentation acceptable to Calliope pursuant to which, among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox on a daily basis and deposit all checks received therein to an account designated by Calliope in writing and (b) comply only with the instructions or other directions of Calliope concerning the Lockbox. All of Parent’s invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Account of Parent or any other amount constituting Collateral shall conspicuously direct that all payments be made to the Lockbox or such other address as Calliope may direct in writing. If, notwithstanding the instructions to Account Debtors, Parent receives any payments, Parent shall immediately remit such payments to Calliope in their original form with all necessary endorsements. Until so remitted, Parent shall hold all such payments in trust for and as the property of Calliope and shall not commingle such payments with any of its other funds or property.
     (b) At Calliope’s election, following the occurrence of an Event of Default which is continuing, Calliope may notify Parent’s Account Debtors of Calliope’s security interest in the Accounts, collect them directly and charge the collection costs and expenses thereof to Company’s and the Eligible Subsidiaries joint and several account.
     9. Collection and Maintenance of Collateral.
     (a) Calliope may verify Parent’s Accounts from time to time, but not more often than once every three (3) months, unless an Event of Default has occurred and is
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continuing or Calliope believes that such verification is necessary to preserve or protect the Collateral, utilizing an audit control company or any other agent of Calliope.
     (b) Proceeds of Accounts received by Calliope will be deemed received on the Business Day after Calliope’s receipt of such proceeds in good funds in dollars of the United States of America to an account designated by Calliope. Any amount received by Calliope after 12:00 noon (New York time) on any Business Day shall be deemed received on the next Business Day.
     (c) As Calliope receives the proceeds of Accounts of Parent, it shall (i) apply such proceeds, as required, to amounts outstanding under the Notes, and (ii) remit all such remaining proceeds (net of interest, fees and other amounts then due and owing to Calliope hereunder) to Company Agent (for the benefit of the applicable Parent) upon request (but no more often than twice a week). Notwithstanding the foregoing, following the occurrence and during the continuance of an Event of Default, Calliope, at its option, may (a) apply such proceeds to the Obligations in such order as Calliope shall elect, (b) hold all such proceeds as cash collateral for the Obligations and Parent hereby grants to Calliope a security interest in such cash collateral amounts as security for the Obligations and/or (c) do any combination of the foregoing.
     10. Inspections and Appraisals. Upon not less than one business day’s notice, Calliope, and/or any agent of Calliope shall have the right during normal business hours to (a) have access to, visit, inspect, review, evaluate and make physical verification and appraisals of Parent’s properties and the Collateral, (b) inspect, audit and copy (or take originals if necessary) and make extracts from Parent’s Books and Records, including management letters prepared by the Accountants, and (c) discuss with Parent’s directors, principal officers, and independent accountants, Parent’s business, assets, liabilities, financial condition, results of operations and business prospects. Parent will deliver to Calliope any instrument necessary for Calliope to obtain records from any service bureau maintaining records for Parent. If any internally prepared financial information, including that required under this Section is unsatisfactory in any manner to Calliope, Calliope may request that the Accountants review the same.
     11. Financial Reporting. Company Agent will deliver, or cause to be delivered, to Calliope each of the following, which shall be in form and detail acceptable to Calliope:
     (a) As soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Parent, Parent’s audited financial statements with a report of independent certified public accountants of recognized standing selected by the Parent and acceptable to Calliope (it being understood that the Parent’s current auditors, Rose Snyder & Jacobs shall be deemed acceptable to Calliope) (the “Accountants”), which annual financial statements shall be without qualification and shall include each of the Parent’s and each of its consolidated Subsidiaries’ balance sheet as at the end of such fiscal year and the related statements of each of the Parent’s and each of its consolidated Subsidiaries’ income, retained earnings and cash flows for the fiscal year then ended, prepared on a consolidating and consolidated basis to include the Parent and each consolidated Subsidiary of the Parent, all in reasonable detail and prepared in accordance with GAAP, together with (i) if and when
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available, copies of any management letters prepared by the Accountants; and (ii) a certificate of the Parent’s President, Chief Executive Officer or Chief Financial Officer stating that such financial statements have been prepared in accordance with GAAP and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto;
     (b) As soon as available and in any event within forty five (45) days after the end of each fiscal quarter of the Parent, an unaudited/internal balance sheet and statements of income, retained earnings and cash flows of the Parent as at the end of and for such quarter and for the year to date period then ended, prepared on a consolidating and consolidated basis to include the Parent and each consolidated Subsidiary of the Parent, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end adjustments and accompanied by a certificate of the Parent’s President, Chief Executive Officer or Chief Financial Officer, stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, and (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto;
     (c) As soon as available and in any event within twenty five (25) days after the end of each calendar month, an unaudited/internal balance sheet and statements of income, retained earnings and cash flows of the Parent and its consolidated Subsidiaries as at the end of and for such month and for the year to date period then ended, prepared on a consolidating and consolidated basis to include the Parent and each consolidated Subsidiary of the Parent, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end adjustments and accompanied by a certificate of the Parent’s President, Chief Executive Officer or Chief Financial Officer, stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, and (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto;
     (d) Within twenty five (25) days after the end of each month (or more frequently if Calliope so requests), agings of Parent’s Accounts, unaudited trial balances and their accounts payable and a calculation of Parent’s Accounts, Eligible Accounts, Inventory and/or Eligible Inventory, provided, however, that if Calliope shall request the foregoing information more often than as set forth in the immediately preceding clause, Parent shall have fifteen (15) days from each such request to comply with Calliope’s demand; and
     (e) Promptly after (i) the filing thereof, copies of the Parent’s most recent registration statements and annual, quarterly, monthly or other regular reports which the Parent files with the Securities and Exchange Commission (the “SEC”), and (ii) the issuance thereof, copies of such financial statements, reports and proxy statements as the Parent shall send to its stockholders.
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     (f) The Parent shall deliver, or cause the applicable Subsidiary of the Parent to deliver, such other information as the Purchaser shall reasonably request.
     12. Additional Representations and Warranties. Subject to the attached Disclosure Schedule, Parent hereby represents and warrants to Calliope as follows:
     (a) Organization, Good Standing and Qualification. It and each of its Subsidiaries is a corporation, partnership or limited liability company, as the case may be, duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. It and each of its Subsidiaries has the corporate, limited liability company or partnership, as the case may be, power and authority to own and operate its properties and assets and, insofar as it is or shall be a party thereto, to (i) execute and deliver this Agreement and the Ancillary Agreements, (ii) to issue and sell the Notes and the shares of Common Stock issuable upon conversion of the Secured Convertible Term Note (the “Note Shares”), (iii) to issue and sell the Warrants and the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”), and to (iv) carry out the provisions of this Agreement and the Ancillary Agreements and to carry on its business as presently conducted. It and each of its Subsidiaries is duly qualified and is authorized to do business and is in good standing as a foreign corporation, partnership or limited liability company, as the case may be, in all jurisdictions in which the nature or location of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so has not had, or could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.
     (b) Subsidiaries. The Parent has no Subsidiaries.
     (c) Capitalization; Voting Rights.
          (i) The authorized capital stock of the Parent, as of the date hereof consists of 50,000,000 shares, of which 40,000,000 are shares of Common Stock, par value $0.01 per share, 10,179,759 shares of which are issued and outstanding, and 1,000,000 are shares of preferred stock, par value $0.01 per share of which 0 shares of preferred stock are issued and outstanding.
          (ii) Except as disclosed on the Disclosure Schedule, other than: (i) the shares reserved for issuance under the Parent’s stock option plans; and (ii) shares which may be issued pursuant to this Agreement and the Ancillary Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Parent of any of its securities. Except as disclosed on the Disclosure Schedule, neither the offer, issuance or sale of any of the Notes or the Warrants or the issuance of any of the Note Shares or the Warrant Shares, nor the consummation of any transaction contemplated hereby will result in a change in the price or number of any securities of the Parent outstanding, under anti-dilution or other similar provisions contained in or affecting any such securities.
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          (iii) All issued and outstanding shares of the Parent’s Common Stock: (i) have been duly authorized and validly issued and are fully paid and non-assessable; and (ii) were issued in compliance with all applicable state and federal laws concerning the issuance of securities.
          (iv) The rights, preferences, privileges and restrictions of the shares of the Common Stock are as stated in the Parent’s Articles of Incorporation (the “Charter”). The Note Shares and the Warrant Shares have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Parent’s Charter, the Securities will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed.
     (d) Authorization; Binding Obligations. All corporate, partnership or limited liability company, as the case may be, action on its and its Subsidiaries’ part (including their respective officers and directors) necessary for the authorization of this Agreement and the Ancillary Agreements, the performance of all of its and its Subsidiaries’ obligations hereunder and under the Ancillary Agreements on the Closing Date and, the authorization, issuance and delivery of the Notes and the Warrant has been taken or will be taken prior to the Closing Date. This Agreement and the Ancillary Agreements, when executed and delivered and to the extent it is a party thereto, will be its and its Subsidiaries’ valid and binding obligations enforceable against each such Person in accordance with their terms, except:
          (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights; and
          (ii) general principles of equity that restrict the availability of equitable or legal remedies.
The issuance of the Notes and the subsequent conversion of the Secured Convertible Term Note into Note Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The issuance of the Warrants and the subsequent exercise of the Warrants for Warrant Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with.
     (e) Liabilities; Solvency. (i) it has no liabilities, except current liabilities incurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings.
          (ii) Both before and after giving effect to (a) the Loans incurred on the Closing Date or such other date as Loans requested hereunder are made or incurred, (b) the disbursement of the proceeds of, or the assumption of the liability in respect of, such Loans pursuant to the instructions or agreement of Parent and (c) the payment and accrual of all transaction costs in connection with the foregoing, Parent and each Subsidiary of Parent, is and will be, Solvent.
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     (f) Agreements; Action. Except as set forth on the Disclosure Schedule or as disclosed in any Exchange Act Filings:
          (i) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which it is a party or to its knowledge by which it is bound which may involve: (i) obligations (contingent or otherwise) of, or payments to, it in excess of $50,000 (other than obligations of, or payments to, it arising from purchase or sale agreements entered into in the ordinary course of business); or (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from it (other than licenses arising from the purchase of “off the shelf” or other standard products); or (iii) provisions restricting the development, manufacture or distribution of its ’ products or services; or (iv) indemnification by it with respect to infringements of proprietary rights.
          (ii) Since March 31, 2007 (the “Balance Sheet Date”) it has not: (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock; (ii) incurred any indebtedness for money borrowed or any other liabilities (other than ordinary course obligations) individually in excess of $50,000 or, in the case of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate; (iii) made any loans or advances to any Person not in excess, individually or in the aggregate, of $100,000, other than ordinary advances for travel expenses; or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its Inventory in the ordinary course of business.
          (iii) For the purposes of subsections (i) and (ii) of this Section 12(f), all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same Person (including Persons it or any of its applicable Subsidiaries has reason to believe are affiliated therewith or with any Subsidiary thereof) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections.
          (iv) the Parent maintains disclosure controls and procedures (“Disclosure Controls”) designed to ensure that information required to be disclosed by the Parent in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC.
          (v) The Parent makes and keeps books, records, and accounts, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of its assets. It maintains internal control over financial reporting (“Financial Reporting Controls”) designed by, or under the supervision of, its principal executive and principal financial officers, and effected by its board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including that:
                    (1) transactions are executed in accordance with management’s general or specific authorization;
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                    (2) unauthorized acquisition, use, or disposition of the Parent’s assets that could have a material effect on the financial statements are prevented or timely detected;
                    (3) transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that its receipts and expenditures are being made only in accordance with authorizations of the Parent’s management and board of directors;
                    (4) transactions are recorded as necessary to maintain accountability for assets; and
                    (5) the recorded accountability for assets is compared with the existing assets at reasonable intervals, and appropriate action is taken with respect to any differences.
          (vi) There is no weakness in any of its Disclosure Controls or Financial Reporting Controls that is required to be disclosed in any of the Exchange Act Filings, except as so disclosed.
     (g) Obligations to Related Parties. Except as set forth on the Disclosure Schedule, it has no obligations to their respective officers, directors, stockholders or employees other than:
          (i) for payment of salary for services rendered and for bonus payments;
          (ii) reimbursement for reasonable expenses incurred on its or its Subsidiaries’ behalf;
          (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by its and its Subsidiaries’ Board of Directors, as applicable); and
          (iv) obligations listed in its Exchange Act Filings.
Except as described above or set forth on the Disclosure Schedule, none of its officers, directors or, to the best of its knowledge, key employees or stockholders, any of its Subsidiaries or any members of their immediate families, are indebted to it , individually or in the aggregate, in excess of $50,000 or have any direct or indirect ownership interest in any Person with which it is affiliated or with which it has a business relationship, or any Person which competes with it , other than passive investments in publicly traded companies (representing less than one percent (1%) of such company) which may compete with it . Except as described above, none of its officers, directors or stockholders, or any member of their immediate families, is, directly or indirectly, interested in any material contract with it and no agreements, understandings or proposed transactions are contemplated between it and any such Person. Except as set forth on Schedule 12(g), it is not a guarantor nor indemnitor of any indebtedness of any other Person.
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     (h) Changes. Since the Balance Sheet Date, except as disclosed in any Schedule to this Agreement or to any of the Ancillary Agreements, there has not been:
          (i) any change in its ’ business, assets, liabilities, condition (financial or otherwise), properties, operations or prospects, which, individually or in the aggregate, has had, or could reasonably be expected to have, a Material Adverse Effect;
          (ii) any resignation or termination of any of its or its Subsidiaries’ officers, key employees or groups of employees;
          (iii) any material change, except in the ordinary course of business, in its ’ contingent obligations by way of guaranty, endorsement, indemnity, warranty or otherwise;
          (iv) any damage, destruction or loss, whether or not covered by insurance, which has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;
          (v) any waiver by it of a valuable right or of a material debt owed to it;
          (vi) any direct or indirect material loans made by it to any of its ’ stockholders, employees, officers or directors, other than advances made in the ordinary course of business;
          (vii) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder;
          (viii) any declaration or payment of any dividend or other distribution of its ’ assets;
          (ix) any labor organization activity related to it ;
          (x) any debt, obligation or liability incurred, assumed or guaranteed by it , except those for immaterial amounts and for current liabilities incurred in the ordinary course of business;
          (xi) any sale, assignment or transfer of any Intellectual Property or other intangible assets;
          (xii) any change in any material agreement to which it is a party or by which either it is bound which, either individually or in the aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;
          (xiii) any other event or condition of any character that, either individually or in the aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; or
          (xiv) any arrangement or commitment by it to do any of the acts described in subsection (i) through (xiii) of this Section 12(h).
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     (i) Title to Properties and Assets; Liens, Etc. Except as set forth on the Disclosure Schedule, it and each of its Subsidiaries has good and marketable title to their respective properties and assets, and good title to its leasehold interests, in each case subject to no Lien, other than Permitted Liens.
All facilities, Equipment, Fixtures, vehicles and other properties owned, leased or used by it are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. Except as set forth on the Disclosure Schedule, it and each of its Subsidiaries is in compliance with all material terms of each lease to which it is a party or is otherwise bound.
     (j) Intellectual Property.
          (i) It and each of its Subsidiaries owns or possesses sufficient legal rights to all Intellectual Property necessary for their respective businesses as now conducted and, to its knowledge as presently proposed to be conducted, without any known infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to its Intellectual Property, nor is it bound by or a party to any options, licenses or agreements of any kind with respect to the Intellectual Property of any other Person other than such licenses or agreements arising from the purchase of “off the shelf” or standard products.
          (ii) It has not received any communications alleging that it has violated any of the Intellectual Property or other proprietary rights of any other Person, nor is it aware of any basis therefor.
          (iii) It does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by it , except for inventions, trade secrets or proprietary information that have been rightfully assigned to it .
     (k) Compliance with Other Instruments. It is not in violation or default of (x) any term of its Charter or Bylaws, or (y) any provision of any indebtedness, mortgage, indenture, contract, agreement or instrument to which it is party or by which it is bound or of any judgment, decree, order or writ, which violation or default, in the case of this clause (y), has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. The execution, delivery and performance of and compliance with this Agreement and the Ancillary Agreements to which it is a party, and the issuance of the Notes and the other Securities each pursuant hereto and thereto, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term or provision, or result in the creation of any Lien upon any of its properties or assets or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to it , their businesses or operations or any of their assets or properties.
     (l) Litigation. Except as set forth on the Disclosure Schedule, there is no action, suit, proceeding or investigation pending or, to its knowledge, overtly threatened against it that prevents it from entering into this Agreement or the Ancillary Agreements, or from
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consummating the transactions contemplated hereby or thereby, or which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect, or could result in any change in its ’ current equity ownership, nor is it aware that there is any basis to assert any of the foregoing. It is nota party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by it currently pending or which it intends to initiate.
     (m) Tax Returns and Payments. It and each of its Subsidiaries has timely filed all tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and all other taxes due and payable by it and each of its Subsidiaries on or before the Closing Date, have been paid or will be paid prior to the time they become delinquent. Except as set forth on the Disclosure Schedule, it has not been advised:
          (i) that any of its returns, federal, state or other, have been or are being audited as of the date hereof; or
          (ii) of any adjustment, deficiency, assessment or court decision in respect of its federal, state or other taxes.
It has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for.
     (n) Employees. Except as set forth on the Disclosure Schedule, it has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to its knowledge, threatened with respect to it. Except as disclosed in the Exchange Act Filings or on the Disclosure Schedule, it is not a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To its knowledge, none of its ’ employees, nor any consultant with whom it has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, it because of the nature of the business to be conducted by it; and to its knowledge the continued employment by it and its Subsidiaries of their present employees, and the performance of its and its Subsidiaries contracts with its independent contractors, will not result in any such violation. It is not aware that any of its’ employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency that would interfere with their duties to it . It has not received any notice alleging that any such violation has occurred. Except for employees who have a current effective employment agreement with it, none of its ’ employees has been granted the right to continued employment by it or to any material compensation following termination of employment with it . Except as set forth on Schedule 12(n), it is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with it , as applicable, nor does it have a present intention to terminate the employment of any officer, key employee or group of employees.
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     (o) Registration Rights and Voting Rights. Except as set forth on the Disclosure Schedule and except as disclosed in Exchange Act Filings, it is not presently under any obligation, and it has not granted any rights, to register any of its ’ presently outstanding securities or any of its securities that may hereafter be issued. Except as set forth on the Disclosure Schedule and except as disclosed in Exchange Act Filings, to its knowledge, none of its ’ stockholders has entered into any agreement with respect to its ’ voting of equity securities.
     (p) Compliance with Laws; Permits. It is not in violation of the Sarbanes-Oxley Act of 2002 or any SEC related regulation or rule or any rule of the Principal Market promulgated thereunder or any other applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement or any Ancillary Agreement and the issuance of any of the Securities, except such as have been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing Date, as will be filed in a timely manner. It and each of its Subsidiaries has all material franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
     (q) Environmental and Safety Laws. It is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. Except as set forth on the Disclosure Schedule, no Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by it or, to its knowledge, by any other Person on any property owned, leased or used by it . For the purposes of the preceding sentence, “Hazardous Materials” shall mean:
          (i) materials which are listed or otherwise defined as “hazardous” or “toxic” under any applicable local, state, federal and/or foreign laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials; and
          (ii) any petroleum products or nuclear materials.
     (r) Valid Offering. Assuming the accuracy of the representations and warranties of Calliope contained in this Agreement, the offer and issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws.
     (s) Full Disclosure. It and each of its Subsidiaries has provided Calliope with all information requested by Calliope in connection with Calliope’s decision to enter into this
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Agreement, including all information Parent and its Subsidiaries believe is reasonably necessary to make such investment decision. Neither this Agreement, the Ancillary Agreements nor the exhibits and schedules hereto and thereto nor any other document delivered by it to Calliope or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading. Any financial projections and other estimates provided to Calliope by it were based on its and its Subsidiaries’ experience in the industry and on assumptions of fact and opinion as to future events which it , at the date of the issuance of such projections or estimates, believed to be reasonable.
     (t) Insurance. It and each of its Subsidiaries has general commercial, product liability, fire and casualty insurance policies with coverages which it believes are customary for companies similarly situated to it and its Subsidiaries in the same or similar business.
     (u) SEC Reports and Financial Statements. Except as set forth on the Disclosure Schedule, it and each of its Subsidiaries has filed all proxy statements, reports and other documents required to be filed by it under the Exchange Act. The Parent has furnished Calliope with copies of: (i) its Annual Report on Form 10-K for its fiscal years ended March 31, 2007; and (ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended September 30, 2006 and December 31, 2006, and the Form 8-K filings which it has made during the last twelve months (collectively, the “SEC Reports”). Except as set forth on the Disclosure Schedule, each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial condition, the results of operations and cash flows of the Parent and its Subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report.
     (v) Listing. The Parent’s Common Stock is listed or quoted, as applicable, on the Principal Market and satisfies all requirements for the continuation of such listing or quotation, as applicable, and the Parent shall do all things necessary for the continuation of such listing or quotation, as applicable. The Parent has not received any notice that its Common Stock will be delisted from, or no longer quoted on, as applicable, the Principal Market or that its Common Stock does not meet all requirements for such listing or quotation, as applicable.
     (w) No Integrated Offering. Neither it, nor any of its Affiliates, nor any Person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement or any Ancillary Agreement to be integrated with prior offerings by it for purposes of the Securities Act which would prevent it
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from issuing the Securities pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will it or any of its Affiliates or Subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings.
     (x) Stop Transfer. The Securities are restricted securities as of the date of this Agreement. It will not issue any stop transfer order or other order impeding the sale and delivery of any of the Securities at such time as the Securities are registered for public sale or an exemption from registration is available, except as required by state and federal securities laws.
     (y) Dilution. It specifically acknowledges that the Parent’s obligation to issue the shares of Common Stock upon conversion of the Secured Convertible Term Note and exercise of the Warrants is binding upon the Parent and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Parent.
     (z) Patriot Act. It certifies that, to the best of its knowledge, it has not been designated, nor is or shall be owned or controlled, by a “suspected terrorist” as defined in Executive Order 13224. It hereby acknowledges that Calliope seeks to comply with all applicable laws concerning money laundering and related activities. In furtherance of those efforts, it hereby represents, warrants and covenants that: (i) none of the cash or property that it will pay or will contribute to Calliope has been or shall be derived from, or related to, any activity that is deemed criminal under United States law; and (ii) no contribution or payment by it to Calliope, to the extent that they are within its or any such Subsidiary’s control shall cause Calliope to be in violation of the United States Bank Secrecy Act, the United States International Money Laundering Control Act of 1986 or the United States International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly notify Calliope if any of these representations, warranties and covenants ceases to be true and accurate regarding it . It shall provide Calliope with any additional information regarding it and each Subsidiary thereof that Calliope deems necessary or convenient to ensure compliance with all applicable laws concerning money laundering and similar activities. It understands and agrees that if at any time it is discovered that any of the foregoing representations, warranties and covenants are incorrect, or if otherwise required by applicable law or regulation related to money laundering or similar activities, Calliope may undertake appropriate actions to ensure compliance with applicable law or regulation, including but not limited to segregation and/or redemption of Calliope’s investment in it. It further understands that Calliope may release confidential information about it and its Subsidiaries and, if applicable, any underlying beneficial owners, to proper authorities if Calliope, in its sole discretion, determines that it is in the best interests of Calliope in light of relevant rules and regulations under the laws set forth in subsection (ii) above.
     (aa) Company Name; Locations of Offices, Records and Collateral. The Disclosure Schedule sets forth Parent’s name as it appears in official filings in the state of its organization, the type of entity of Parent, the organizational identification number issued by Parent’s state of organization or a statement that no such number has been issued, Parent’s state of organization, and the location of Parent’s chief executive office, corporate offices, warehouses, other locations of Collateral and locations where records with respect to Collateral are kept (including in each case the county of such locations) and, except as set forth in such Disclosure Schedule, such locations have not changed during the preceding twelve months. As
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of the Closing Date, during the prior five years, except as set forth in the Disclosure Schedule, no Company has been known as or conducted business in any other name (including trade names). Parent has only one state of organization.
     (bb) ERISA. Based upon the Employee Retirement Income Security Act of 1974 (“ERISA”), and the regulations and published interpretations thereunder: (i) it has not engaged in any Prohibited Transactions (as defined in Section 406 of ERISA and Section 4975 of the Code); (ii) it and each of its Subsidiaries has met all applicable minimum funding requirements under Section 302 of ERISA in respect of its plans; (iii) it has no knowledge of any event or occurrence which would cause the Pension Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA to terminate any employee benefit plan(s); (iv) it has no fiduciary responsibility for investments with respect to any plan existing for the benefit of persons other than its or such Subsidiary’s employees; and (v) it has not withdrawn, completely or partially, from any multi-employer pension plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980.
     13. Covenants. Parent, hereby covenants and agrees with Calliope as follows:
     (a) Stop-Orders. The Parent shall advise Calliope, promptly after it receives notice of issuance by the SEC, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Parent, or of the suspension of the qualification of the Common Stock of the Parent for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose.
     (b) Listing. The Parent shall promptly secure the listing or quotation, as applicable, of the shares of Common Stock issuable upon conversion of the Secured Convertible Term Note and exercise of the Warrants on the Principal Market upon which shares of Common Stock are listed or quoted, as applicable, (subject to official notice of issuance) and shall maintain such listing or quotation, as applicable, so long as any other shares of Common Stock shall be so listed or quoted, as applicable. The Parent shall maintain the listing or quotation, as applicable, of its Common Stock on the Principal Market, and will comply in all material respects with the Parent’s reporting, filing and other obligations under the rules of the American Stock Exchange.
     (c) Market Regulations. It shall notify the SEC, the American Stock Exchange and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to Calliope and promptly provide copies thereof to Calliope.
     (d) Reporting Requirements. It shall timely file with the SEC all reports required to be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination.
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     (e) Use of Funds. It shall use the proceeds of the Loans[(i) to repay in full the Existing Indebtedness and (ii) for general working capital purposes only.
     (f) Access to Facilities. It shall permit any representatives designated by Calliope (or any successor of Calliope), upon reasonable notice and during normal business hours, at Parent’s expense and accompanied by a representative of Parent (provided that no such prior notice shall be required to be given and no such representative shall be required to accompany Calliope in the event Calliope reasonably believes such access is necessary to preserve or protect the Collateral or following the occurrence and during the continuance of an Event of Default), toCalliopeCalliopeCalliope:
          (i) visit and inspect any of its or any such Subsidiary’s properties;
          (ii) examine its or any such Subsidiary’s corporate and financial records (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom; and
          (iii) discuss its or any such Subsidiary’s affairs, finances and accounts with its or any such Subsidiary’s directors, officers and Accountants.
Notwithstanding the foregoing, it shall not provide any material, non-public information to Calliope unless Calliope signs a confidentiality agreement and otherwise complies with Regulation FD, under the federal securities laws.
     (g) Taxes. It shall, and shall cause each of its Subsidiaries to, promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon it and its Subsidiaries’ income, profits, property or business, as the case may be; provided, however, that any such tax, assessment, charge or levy need not be paid currently if (i) the validity thereof shall currently and diligently be contested in good faith by appropriate proceedings, (ii) such tax, assessment, charge or levy shall have no effect on the Lien priority of Calliope in the Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall have set aside on its and/or such Subsidiary’s books adequate reserves with respect thereto in accordance with GAAP; and provided, further, that it shall, and shall cause each of its Subsidiaries to, pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor.
     (h) Insurance. (i) It shall bear the full risk of loss from any loss of any nature whatsoever with respect to the Collateral and it and each of its Subsidiaries will, , bear the full risk of loss from any loss of any nature whatsoever with respect to the assets pledged to Calliope as security for the Obligations. Furthermore, it will insure or cause the Collateral to be insured in Calliope’ name as an additional insured and lender loss payee, with an appropriate loss payable endorsement in form and substance satisfactory to Calliope, against loss or damage by fire, flood, sprinkler leakage, theft, burglary, pilferage, loss in transit and other risks customarily insured against by Parent in similar business similarly situated as it and its Subsidiaries including but not limited to workers compensation, public and product liability and business interruption, and such other hazards as Calliope shall specify in amounts and under insurance policies and
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bonds by insurers acceptable to Calliope and all premiums thereon shall be paid by Parent and the policies delivered to Calliope. If any Parent fails to obtain the insurance and in such amounts of coverage as otherwise required pursuant to this Section (h), Calliope may procure such insurance and the cost thereof shall be promptly reimbursed by the Parent, , and shall constitute Obligations.
          (ii) Parent’s insurance coverage shall be impaired or invalidated by any act or neglect of Parent and the insurer will provide Calliope with no less than thirty (30) days notice prior of cancellation;
          (iii) Calliope, in connection with its status as a lender loss payee, will be assigned at all times to a first lien position until such time as all Calliope Obligations have been indefeasibly satisfied in full.
     (i) Intellectual Property. It shall, and shall cause each of its Subsidiaries to, maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business.
     (j) Properties. It shall, and shall cause each of its Subsidiaries to, keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and it shall, and shall cause each of its Subsidiaries to, at all times comply with each provision of all leases to which it is a party or under which it occupies property if the breach of such provision could reasonably be expected to have a Material Adverse Effect.
     (k) Confidentiality. It shall not, and shall not permit any of its Subsidiaries to, disclose, and will not include in any public announcement, the name of Calliope, unless expressly agreed to by Calliope or unless and until such disclosure is required by law, applicable regulation or comment of the SEC Staff, and then only to the extent of such requirement. Notwithstanding the foregoing, Parent and its Subsidiaries may disclose Calliope’s identity and the terms of this Agreement and the Ancillary Agreements to its current and prospective debt and equity financing sources. Calliope shall be permitted to discuss, distribute or otherwise transfer any non-public information of the Parent in Calliope’s possession now or in the future to potential or actual (i) direct or indirect investors in Calliope and (ii) third party assignees or transferees of all or a portion of the obligations of Parent and/or any of its respective Subsidiaries hereunder and under the Ancillary Agreement, to the extent that such investor or assignee or transferee enters into a confidentiality agreement for the benefit of the Parent in such form as may be necessary to addresses the Parent’s Regulation FD requirements.
     (l) Required Approvals. It shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of Calliope, (i) create, incur, assume or suffer to exist any indebtedness (exclusive of trade debt) whether secured or unsecured other than Parent’s indebtedness to Calliope and as set forth on the Disclosure Schedule attached hereto and made a part hereof; (ii) cancel any debt owing to it in excess of $50,000 in the aggregate during any 12 month period; (iii) assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except the
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endorsement of negotiable instruments by it or its Subsidiaries for deposit or collection or similar transactions in the ordinary course of business; (iv) directly or indirectly declare, pay or make any dividend or distribution on any class of its Stock or apply any of its funds, property or assets to the purchase, redemption or other retirement of any of its or its Subsidiaries’ Stock, or issue any preferred stock; (v) purchase or hold beneficially any Stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including any partnership or joint venture, except (x) travel advances, (y) loans to its and its Subsidiaries’ officers and employees not exceeding at any one time an aggregate of $10,000, and (z) loans to its existing Subsidiaries so long as such Subsidiaries are designated as either a co-borrower hereunder or has entered into such guaranty and security documentation required by Calliope, including, without limitation, to grant to Calliope a first priority perfected security interest in substantially all of such Subsidiary’s assets to secure the Obligations; (vi) create or permit to exist any Subsidiary, other than any Subsidiary in existence on the date hereof and listed in the Disclosure Schedule unless such new Subsidiary is a wholly-owned Subsidiary and is designated by Calliope as either a co-borrower or guarantor hereunder and such Subsidiary shall have entered into all such documentation required by Calliope, including, without limitation, to grant to Calliope a first priority perfected security interest in substantially all of such Subsidiary’s assets to secure the Obligations; (vii) directly or indirectly, prepay any indebtedness (other than to Calliope and in the ordinary course of business), or repurchase, redeem, retire or otherwise acquire any indebtedness (other than to Calliope and in the ordinary course of business) except to make scheduled payments of principal and interest thereof; (viii) enter into any merger, consolidation or other reorganization with or into any other Person or acquire all or a portion of the assets or Stock of any Person or permit any other Person to consolidate with or merge with it, unless (1) Parent is the surviving entity of such merger or consolidation, (2) no Event of Default shall exist immediately prior to and after giving effect to such merger or consolidation, (3) Parent shall have provided Calliope copies of all documentation relating to such merger or consolidation and (4) Parent shall have provided Calliope with at least thirty (30) days’ prior written notice of such merger or consolidation; (ix) materially change the nature of the business in which it is presently engaged; (x) become subject to (including, without limitation, by way of amendment to or modification of) any agreement or instrument which by its terms would (under any circumstances) restrict its ’ right to perform the provisions of this Agreement or any of the Ancillary Agreements; (xi) change its fiscal year or make any changes in accounting treatment and reporting practices without prior written notice to Calliope except as required by GAAP or in the tax reporting treatment or except as required by law; (xii) enter into any transaction with any employee, director or Affiliate, except in the ordinary course on arms-length terms; (xiii) bill Accounts under any name except the present name of Parent; or (xiv) sell, lease, transfer or otherwise dispose of any of its properties or assets, or any of the properties or assets of its Subsidiaries, except for (1) sales, leases, transfer or dispositions by Parent to any other Company, (2) the sale of Inventory in the ordinary course of business, (3) sales permitted under Section 7(e) hereof and (4) the disposition or transfer in the ordinary course of business during any fiscal year of obsolete and worn-out Equipment and only to the extent that (x) the proceeds of any such disposition are used to acquire replacement Equipment which is subject to Calliope’s first priority security interest or are used to repay Loans or to pay general corporate expenses, or (y) following the occurrence of an Event of Default which continues to exist, the proceeds of which are remitted to Calliope to be held as cash collateral for the Obligations.
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     (m) Reissuance of Securities. The Parent shall reissue certificates representing the Securities without the legends set forth in Section 39 below at such time as:
          (i) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k) under the Securities Act; or
          (ii) upon resale subject to an effective registration statement after such Securities are registered under the Securities Act.
The Parent agrees to cooperate with Calliope in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Parent and its counsel receive reasonably requested representations from Calliope and broker, if any.
     (n) Opinion. On the Closing Date, it shall deliver to Calliope an opinion acceptable to Calliope from Parent’s legal counsel. Parent will provide, at the Parent’s expense, such other legal opinions in the future as are reasonably necessary for the resale and conversion of the Secured Convertible Term Note and the exercise of the Warrants.
     (o) Legal Name, etc. It shall not, without providing Calliope with 30 days prior written notice, change (i) its name as it appears in the official filings in the state of its organization, (ii) the type of legal entity it is, (iii) its organization identification number, if any, issued by its state of organization, (iv) its state of organization or (v) amend its certificate of incorporation, by-laws or other organizational document.
     (p) Compliance with Laws. The operation of each of its and each of its Subsidiaries’ business is and shall continue to be in compliance in all material respects with all applicable federal, state and local laws, rules and ordinances, including to all laws, rules, regulations and orders relating to taxes, payment and withholding of payroll taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health and safety and environmental matters.
     (q) Notices. It and each of its Subsidiaries shall promptly inform Calliope in writing of: (i) the commencement of all proceedings and investigations by or before and/or the receipt of any notices from, any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any way concerning any event which could reasonably be expected to have singly or in the aggregate, a Material Adverse Effect; (ii) any change which has had, or could reasonably be expected to have, a Material Adverse Effect; (iii) any Event of Default or Default; and (iv) any default or any event which with the passage of time or giving of notice or both would constitute a default under any agreement for the payment of money to which it is a party or by which it or any of its or any such Subsidiary’s properties may be bound the breach of which would have a Material Adverse Effect.
     (r) Margin Stock. It shall not permit any of the proceeds of the Loans made hereunder to be used directly or indirectly to “purchase” or “carry” “margin stock” or to repay indebtedness incurred to “purchase” or “carry” “margin stock” within the respective meanings of
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each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect.
     (s) Offering Restrictions. Except as previously disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock options granted to its employees or directors, it shall not, prior to the full repayment of the Notes (together with all accrued and unpaid interest and fees related thereto) and termination of this Agreement the full exercise by Calliope of the Warrants, (x) enter into any equity line of credit agreement or similar agreement with a floorless pricing feature or (y) issue, or enter into any agreement to issue, any securities with a floorless variable/floating conversion and/or pricing feature which are or could be (by conversion or registration) free-trading securities (i.e. common stock subject to a registration statement).
     (t) Authorization and Reservation of Shares. The Parent shall at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the full conversion of the Secured Convertible Term Note and the full exercise of the Warrants.
     (u) FIRPTA. It is not a “United States real property holding corporation” as such term is defined in Section 897(c)(2) of the Code and Treasury Regulation Section 1.897-2 promulgated thereunder and it and each of its Subsidiaries shall at no time take any action or otherwise acquire any interest in any asset or property to the extent the effect of which shall cause it and/or such Subsidiary, as the case may be, to be a “United States real property holding corporation” as such term is defined in Section 897(c)(2) of the Code and Treasury Regulation Section 1.897-2 promulgated thereunder.
     (v) Investor Relations/Public Relations. The Parent hereby agrees to incorporate into its annual budget an amount of funds reasonably necessary to maintain a comprehensive investor relations and public relations program (an “IR/PR Program”), which IR/PR Program shall incorporate elements customarily utilized by companies of similar size and in a similar industry as the Parent and its Subsidiaries.
     (w) Financing Right of First Refusal.
          (i) Parent hereby grants to Calliope a right of first refusal to provide any Additional Financing (as defined below) to be issued by Parent and/ (the “Additional Financing Parties”), subject to the following terms and conditions. From and after the date hereof, prior to the incurrence of any additional indebtedness and/or the sale or issuance of any equity interests of the Additional Financing Parties (an “Additional Financing”), Company Agent shall notify Calliope of such Additional Financing. In connection therewith, Company Agent shall submit a fully executed term sheet (a “Proposed Term Sheet”) to Calliope setting forth the terms, conditions and pricing of any such Additional Financing (such financing to be negotiated on “arm’s length” terms and the terms thereof to be negotiated in good faith) proposed to be entered into by the Additional Financing Parties. Calliope shall have the right, but not the obligation, to deliver to Company Agent its own proposed term sheet (the “Calliope Term Sheet”) setting forth the terms and conditions upon which Calliope would be willing to provide such Additional Financing to the Additional Financing Parties. The Calliope Term Sheet shall contain terms no less favorable to the Additional Financing Parties than those outlined in Proposed Term Sheet. Calliope shall deliver to Company Agent the Calliope Term Sheet within ten Business Days of
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receipt of each such Proposed Term Sheet. If the provisions of the Calliope Term Sheet are at least as favorable to the Additional Financing Parties as the provisions of the Proposed Term Sheet, the Additional Financing Parties shall enter into and consummate the Additional Financing transaction outlined in the Calliope Term Sheet.
          (ii) It shall not, and shall not permit its Subsidiaries to, agree, directly or indirectly, to any restriction with any Person which limits the ability of Calliope to consummate an Additional Financing with it .
     14. Further Assurances. At any time and from time to time, upon the written request of Calliope and at the sole expense of Parent, Parent shall promptly and duly execute and deliver any and all such further instruments and documents and take such further action as Calliope may request (a) to obtain the full benefits of this Agreement and the Ancillary Agreements, (b) to protect, preserve and maintain Calliope’s rights in the Collateral and under this Agreement or any Ancillary Agreement, and/or (c) to enable Calliope to exercise all or any of the rights and powers herein granted or any Ancillary Agreement.
     15. Representations, Warranties and Covenants of Calliope. Calliope hereby represents, warrants and covenants to Parent as follows:
     (a) Requisite Power and Authority. Calliope has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Ancillary Agreements and to carry out their provisions. All corporate action on Calliope’s part required for the lawful execution and delivery of this Agreement and the Ancillary Agreements have been or will be effectively taken prior to the Closing Date. Upon their execution and delivery, this Agreement and the Ancillary Agreements shall be valid and binding obligations of Calliope, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, and (b) as limited by general principles of equity that restrict the availability of equitable and legal remedies.
     (b) Investment Representations. Calliope understands that the Securities are being offered pursuant to an exemption from registration contained in the Securities Act based in part upon Calliope’s representations contained in this Agreement, including, without limitation, that Calliope is an “accredited investor” within the meaning of Regulation D under the Securities Act. Calliope has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Notes to be issued to it under this Agreement and the Securities acquired by it upon the conversion of the Secured Convertible Term Note and the exercise of the Warrants.
     (c) Calliope Bears Economic Risk. Calliope has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Parent so that it is capable of evaluating the merits and risks of its investment in the Parent and has the capacity to protect its own interests. Calliope must bear the economic risk of this investment until the Securities are sold pursuant to (i) an effective registration statement under the Securities Act, or (ii) an exemption from registration is available.
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     (d) Investment for Own Account. The Securities are being issued to Calliope for its own account for investment only, and not as a nominee or agent and not with a view towards or for resale in connection with their distribution.
     (e) Calliope Can Protect Its Interest. Calliope represents that by reason of its, or of its management’s, business and financial experience, Calliope has the capacity to evaluate the merits and risks of its investment in the Notes, and the Securities and to protect its own interests in connection with the transactions contemplated in this Agreement, and the Ancillary Agreements. Further, Calliope is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement or the Ancillary Agreements.
     (f) Accredited Investor. Calliope represents that it is an accredited investor within the meaning of Regulation D under the Securities Act.
     (g) Shorting. Neither Calliope nor any of its Affiliates or investment partners has, will, or will cause any Person, to directly engage in “short sales” of the Parent’s Common Stock as long as any amount under any Note shall remain outstanding.
     (h) Patriot Act. Calliope certifies that, to the best of Calliope’s knowledge, Calliope has not been designated, and is not owned or controlled, by a “suspected terrorist” as defined in Executive Order 13224. Calliope seeks to comply with all applicable laws concerning money laundering and related activities. In furtherance of those efforts, Calliope hereby represents, warrants and covenants that: (i) none of the cash or property that Calliope will use to make the Loans has been or shall be derived from, or related to, any activity that is deemed criminal under United States law; and (ii) no disbursement by Calliope to Parent to the extent within Calliope’s control, shall cause Calliope to be in violation of the United States Bank Secrecy Act, the United States International Money Laundering Control Act of 1986 or the United States International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. Calliope shall promptly notify the Company Agent if any of these representations ceases to be true and accurate regarding Calliope. Calliope agrees to provide the Company any additional information regarding Calliope that the Company deems necessary or convenient to ensure compliance with all applicable laws concerning money laundering and similar activities. Calliope understands and agrees that if at any time it is discovered that any of the foregoing representations are incorrect, or if otherwise required by applicable law or regulation related to money laundering similar activities, Calliope may undertake appropriate actions to ensure compliance with applicable law or regulation, including but not limited to segregation and/or redemption of Calliope’s investment in the Parent. Calliope further understands that the Parent may release information about Calliope and, if applicable, any underlying beneficial owners, to proper authorities if the Parent, in its sole discretion, determines that it is in the best interests of the Parent in light of relevant rules and regulations under the laws set forth in subsection (ii) above.
     (i) Limitation on Acquisition of Common Stock. Notwithstanding anything to the contrary contained in this Agreement, any Ancillary Agreement, or any document, instrument or agreement entered into in connection with any other transaction entered into by and between Calliope and Parent (and/or Subsidiaries or Affiliates of Parent), Calliope shall not acquire stock in the Parent (including, without limitation, pursuant to a contract to purchase, by
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exercising an option or warrant, by converting any other security or instrument, by acquiring or exercising any other right to acquire, shares of stock or other security convertible into shares of stock in the Parent, or otherwise, and such options, warrants, conversion or other rights shall not be exercisable) to the extent such stock acquisition would cause any interest (including any original issue discount) payable by Parent to Calliope not to qualify as portfolio interest, within the meaning of Section 881(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”) by reason of Section 881(c)(3) of the Code, taking into account the constructive ownership rules under Section 871(h)(3)(C) of the Code (the “Stock Acquisition Limitation”). The Stock Acquisition Limitation shall automatically become null and void without any notice to Parent upon the earlier to occur of either (a) the Parent’s delivery to Calliope of a Notice of Redemption (as defined in the Secured Convertible Term Note) or (b) the existence of an Event of Default at a time when the average closing price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for the immediately preceding five trading days is greater than or equal to 150% of the Fixed Conversion Price (as defined in the Secured Convertible Term Note).
     16. Power of Attorney. Parent hereby appoints Calliope, or any other Person whom Calliope may designate as Parent’s attorney with effect after the occurrence and during the continuance of an Event of Default, with power to: (a)(i) execute any security related documentation on Parent’s behalf and to supply any omitted information and correct patent errors in any documents executed by Parent or on Parent’s behalf; (ii) to file financing statements against Parent covering the Collateral (and, in connection with the filing of any such financing statements, describe the Collateral as “all assets and all personal property, whether now owned and/or hereafter acquired” (or any substantially similar variation thereof)); (iii) sign Parent’s name on any invoice or bill of lading relating to any Accounts, drafts against Account Debtors, schedules and assignments of Accounts, notices of assignment, financing statements and other public records, verifications of Account and notices to or from Account Debtors; and (iv) to do all other things Calliope deems necessary to carry out the terms of Section 6 of this Security Agreement and (b) upon the occurrence and during the continuance of an Event of Default; (v) endorse Parent’s name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into Calliope’ possession; (vi) verify the validity, amount or any other matter relating to any Account by mail, telephone, telegraph or otherwise with Account Debtors; (vii) do all other things necessary to carry out this Agreement, any Ancillary Agreement and all related documents; and (viii) notify the post office authorities to change the address for delivery of Parent’s mail to an address designated by Calliope, and to receive, open and dispose of all mail addressed to Parent. Parent hereby ratifies and approves all acts of the attorney. Neither Calliope, nor the attorney will be liable for any acts or omissions or for any error of judgment or mistake of fact or law, except for gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable so long as Calliope has a security interest and until the Obligations have been fully satisfied.
     17. Term of Agreement. Calliope’s agreement to make Loans and extend financial accommodations under and in accordance with the terms of this Agreement or any Ancillary Agreement shall continue in full force and effect until the expiration of the Term. At Calliope’s election following the occurrence of an Event of Default, Calliope may terminate this Agreement. The termination of the Agreement shall not affect any of Calliope’s rights hereunder or any Ancillary Agreement and the provisions hereof and thereof shall continue to be fully
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operative until all transactions entered into, rights or interests created and the Obligations have been irrevocably disposed of, concluded or liquidated. Notwithstanding the foregoing, Calliope shall release its security interests at any time after twenty (20) days notice upon irrevocable payment to it of all Obligations if Parent shall have (i) provided Calliope with an executed release of any and all claims which Parent may have or thereafter have under this Agreement and all Ancillary Agreements and (ii) paid to Calliope any early payment fees due under the Secured Convertible Term Note.
     18. Termination of Lien. The Liens and rights granted to Calliope hereunder and any Ancillary Agreements and the financing statements filed in connection herewith or therewith shall continue in full force and effect, notwithstanding the termination of this Agreement or the fact that Parent’s account may from time to time be temporarily in a zero or credit position, until all of the Obligations have been indefeasibly paid or performed in full and this Agreement has been terminated in accordance with the terms of this Agreement. Calliope shall not be required to send termination statements to Parent, or to file them with any filing office, unless and until this Agreement and the Ancillary Agreements shall have been terminated in accordance with their terms and all Obligations indefeasibly paid in full in immediately available funds.
     19. Events of Default. The occurrence of any of the following shall constitute an “Event of Default”:
     (a) failure to make payment of any of the Obligations when required hereunder, and, in any such case, such failure shall continue for a period of three (3) days following the date upon which any such payment was due;
     (b) failure by Parent to pay any taxes when due unless such taxes are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been provided on Parent’s and/or such Subsidiary’s books;
     (c) failure to perform under, and/or committing any breach of, in any material respect, this Agreement or any covenant contained herein, which failure or breach shall continue without remedy for a period of thirty (30) days after the occurrence thereof;
     (d) any representation, warranty or statement made by Parent hereunder, in any Ancillary Agreement, any certificate, statement or document delivered pursuant to the terms hereof, or in connection with the transactions contemplated by this Agreement should prove to be false or misleading in any material respect on the date as of which made or deemed made;
     (e) the occurrence of any default (or similar term) in the observance or performance of any other agreement or condition relating to any indebtedness or contingent obligation of Parent in amount in excess of $100,000, beyond the period of grace (if any), the effect of which default is to cause, or permit the holder or holders of such indebtedness or beneficiary or beneficiaries of such contingent obligation to cause, such indebtedness to become due prior to its stated maturity or such contingent obligation to become payable;
     (f) attachments or levies in excess of $100,000 in the aggregate are made upon Parent’s assets or a judgment is rendered against Parent’s property involving a liability of
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more than $100,000 which shall not have been vacated, discharged, stayed or bonded within thirty (30) days from the entry thereof;
     (g) any change in Parent’s condition or affairs (financial or otherwise) which results in a Material Adverse Effect;
     (h) any Lien created hereunder or under any Ancillary Agreement for any reason ceases to be or is not a valid and perfected Lien having a first priority interest, if such Lien is not reinstated as a first priority Lien within thirty (30) days;
     (i) Parent shall (i) apply for, consent to or suffer to exist the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of creditors, (iii) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesce to without challenge within ten (10) days of the filing thereof, or failure to have dismissed within sixty (60) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) take any action for the purpose of effecting any of the foregoing;
     (j) Parent shall admit in writing its inability, or be generally unable, to pay its debts as they become due or cease operations of its present business;
     (k) Parent directly or indirectly sells, assigns, transfers, conveys, or suffers or permits to occur any sale, assignment, transfer or conveyance of any assets of Parent or any interest therein, except as permitted herein;
     (l) any “Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of the Exchange Act, as in effect on the date hereof), other than Calliope, is or becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of 35% or more on a fully diluted basis of the then outstanding voting equity interest of the Parent (other than a “Person” or “group” that beneficially owns 35% or more of such outstanding voting equity interests of the Parent on the date hereof), (ii) the Board of Directors of the Parent shall cease to consist of a majority of the Board of Directors of the Parent on the date hereof (or directors appointed by a majority of the board of directors in effect immediately prior to such appointment) or (iii) the Parent merges or consolidates with, or sells all or substantially all of its assets to, any other person or entity;
     (m) the indictment of Parent or any of its named executive officers (as that term is used in Item 402 of Regulation S-K promulgated by the Securities and Exhange Commission, hereinafter the “NEOs”) under any criminal statute, or the commencement of criminal or civil proceedings in the United States by any governmental authority against the Parent or any of its NEOs, pursuant to which the prosecuting agency seeks forfeiture of a material portion of the Parent’s property;
     (n) an Event of Default (or similar term) shall occur under and as defined in any Note or in any other Ancillary Agreement;
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     (o) Parent shall breach any term or provision of any Ancillary Agreement to which it is a party (including, without limitation, Section 7(e) of the Registration Rights Agreement), in any material respect which breach is not cured within any applicable cure or grace period provided in respect thereof (if any);
     (p) Parent attempts to terminate, challenges the validity of, or its liability under this Agreement or any Ancillary Agreement, or any proceeding shall be brought to challenge the validity, binding effect of any Ancillary Agreement or any Ancillary Agreement ceases to be a valid, binding and enforceable obligation of Parent (to the extent such Persons are a party thereto);
     (q) an SEC stop trade order or Principal Market trading suspension of the Common Stock shall be in effect for five (5) consecutive trading days or five (5) days during a period of ten (10) consecutive trading days, excluding in all cases a suspension of all trading on a Principal Market, provided that the Parent shall not have been able to cure such trading suspension within thirty (30) days of the notice thereof or list the Common Stock on another Principal Market within sixty (60) days of such notice; or
     (r) The Parent’s failure to deliver Common Stock to Calliope pursuant to and in the form required by the Secured Convertible Term Note, the Warrant and this Agreement, if such failure to deliver Common Stock shall not be cured within three (3) Business Days or Parent is required to issue a replacement Note to Calliope and Parent shall fail to deliver such replacement Note within seven (7) Business Days.
     20. Remedies. Following the occurrence of an Event of Default, Calliope shall have the right to demand repayment in full of all Obligations, whether or not otherwise due. Until all Obligations have been fully and indefeasibly satisfied, Calliope shall retain its Lien in all Collateral. Calliope shall have, in addition to all other rights provided herein and in each Ancillary Agreement, the rights and remedies of a secured party under the UCC, and under other applicable law, all other legal and equitable rights to which Calliope may be entitled, including the right to take immediate possession of the Collateral, to require Parent to assemble the Collateral, at Parent’ joint and several expense, and to make it available to Calliope at a place designated by Calliope which is reasonably convenient to both parties and to enter any of the premises of Parent or wherever the Collateral shall be located, with or without force or process of law, and to keep and store the same on said premises until sold (and if said premises be the property of Parent, Parent agrees not to charge Calliope for storage thereof), and the right to apply for the appointment of a receiver for Parent’s property. Further, Calliope may, at any time or times after the occurrence of an Event of Default, sell and deliver all Collateral held by or for Calliope at public or private sale for cash, upon credit or otherwise, at such prices and upon such terms as Calliope, in Calliope’s sole discretion, deems advisable or Calliope may otherwise recover upon the Collateral in any commercially reasonable manner as Calliope, in its sole discretion, deems advisable. The requirement of reasonable notice shall be met if such notice is mailed postage prepaid to Company Agent at Company Agent’s address as shown in Calliope’s records, at least ten (10) days before the time of the event of which notice is being given. Calliope may be the purchaser at any sale, if it is public. In connection with the exercise of the foregoing remedies, Calliope is granted permission to use all of Parent’s Intellectual Property. The proceeds of sale shall be applied first to all costs and expenses of sale, including attorneys’
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fees, and second to the payment (in whatever order Calliope elects) of all Obligations. After the indefeasible payment and satisfaction in full of all of the Obligations, and after the payment by Calliope of any other amount required by any provision of law, including Section 9-608(a)(1) of the UCC (but only after Calliope has received what Calliope considers reasonable proof of a subordinate party’s security interest), the surplus, if any, shall be paid to Company Agent (for the benefit of the applicable Parent) or its representatives or to whosoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. The Parent shall remain liable to Calliope for any deficiency. Parent and Calliope acknowledge that the actual damages that would be incurred by Calliope after the occurrence of an Event of Default would be difficult to quantify and that Parent and Calliope have agreed that the fees and obligations set forth in this Section and in this Agreement would constitute fair and appropriate liquidated damages in the event of any such termination. The parties hereto each hereby agrees that the exercise by any party hereto of any right granted to it or the exercise by any party hereto of any remedy available to it (including, without limitation, the issuance of a notice of redemption, a borrowing request and/or a notice of default), in each case, hereunder or under any Ancillary Agreement shall not constitute confidential information and no party shall have any duty to the other party to maintain such information as confidential, except for the portions of such publicly filed documents that are subject to confidential treatment request made by the Parent to the SEC.
     21. Waivers. To the full extent permitted by applicable law, Parent hereby waives (a) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all of this Agreement and the Ancillary Agreements or any other notes, commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper and guaranties at any time held by Calliope on which Parent may in any way be liable, and hereby ratifies and confirms whatever Calliope may do in this regard; (b) all rights to notice and a hearing prior to Calliope’s taking possession or control of, or to Calliope’s replevy, attachment or levy upon, any Collateral or any bond or security that might be required by any court prior to allowing Calliope to exercise any of its remedies; and (c) the benefit of all valuation, appraisal and exemption laws. Parent acknowledges that it has been advised by counsel of its choices and decisions with respect to this Agreement, the Ancillary Agreements and the transactions evidenced hereby and thereby.
     22. Expenses. The Parent shall pay all of Calliope’ out-of-pocket costs and expenses, including reasonable fees and disbursements of in-house or outside counsel and appraisers, in connection with (x) subject to the limitations set forth in Section 5(b)(iii), the preparation, execution and delivery of this Agreement and the Ancillary Agreements, and (y) in connection with the prosecution or defense of any action, contest, dispute, suit or proceeding concerning any matter in any way arising out of, related to or connected with this Agreement or any Ancillary Agreement. The Parent shall also pay all of Calliope’ reasonable and documented fees, charges, out-of-pocket costs and expenses, including fees and disbursements of counsel and appraisers, in connection with (a) the preparation, execution and delivery of any waiver, any amendment thereto or consent proposed or executed in connection with the transactions contemplated by this Agreement or the Ancillary Agreements, (b) Calliope’ obtaining performance of the Obligations under this Agreement and any Ancillary Agreements, including, but not limited to, the enforcement or defense of Calliope’ security interests, assignments of rights and Liens hereunder as valid perfected security interests, (c) any attempt to inspect, verify,
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protect, collect, sell, liquidate or otherwise dispose of any Collateral, (d) any appraisals or re-appraisals of any property (real or personal) pledged to Calliope by Parent as Collateral for, or any other Person as security for, the Obligations hereunder and (e) any consultations in connection with any of the foregoing. The Parent shall also pay Calliope’ customary bank charges for all bank services (including wire transfers) performed or caused to be performed by Calliope for Parent at Parent’s or such Subsidiary’s request or in connection with Parent’s loan account with Calliope. All such costs and expenses together with all filing, recording and search fees, taxes and interest payable by the Parent to Calliope shall be payable within five (5) days of presentment and shall be secured by the Collateral. If any tax by any Governmental Authority is or may be imposed on or as a result of any transaction between Parent and/or any Subsidiary thereof, on the one hand, and Calliope on the other hand, which Calliope is or may be required to withhold or pay (including, without limitation, as a result of a breach by Parent of Section 13(u) herein), the Parent hereby indemnifies and holds Calliope harmless in respect of such taxes, and the Parent will repay to Calliope the amount of any such taxes which shall be charged to the Parent’ account; and until the Parent shall furnish Calliope with indemnity therefor (or supply Calliope with evidence satisfactory to it that due provision for the payment thereof has been made), Calliope may hold without interest any balance standing to Parent’s credit and Calliope shall retain its Liens in any and all Collateral.
     23. Assignment. Calliope may assign any or all of the Obligations together with any or all of the security therefor to any Person and any such assignee shall succeed to all of Calliope’s rights with respect thereto; provided that Calliope shall not be permitted to effect any such assignment to a competitor of Parent unless an Event of Default has occurred and is continuing. Upon such assignment, Calliope shall be released from all responsibility for the Collateral to the extent same is assigned to any transferee. Calliope may from time to time sell or otherwise grant participations in any of the Obligations and the holder of any such participation shall, subject to the terms of any agreement between Calliope and such holder, be entitled to the same benefits as Calliope with respect to any security for the Obligations in which such holder is a participant. Parent agrees that each such holder may exercise any and all rights of banker’s lien, set-off and counterclaim with respect to its participation in the Obligations as fully as though Parent were directly indebted to such holder in the amount of such participation. No Company may assign any of its rights or obligations hereunder without the prior written consent of Calliope. All of the terms, conditions, promises, covenants, provisions and warranties of this Agreement shall inure to the benefit of undersigned, and shall bind the representatives, successors and permitted assigns of Parent.
     24. No Waiver; Cumulative Remedies. Failure by Calliope to exercise any right, remedy or option under this Agreement, any Ancillary Agreement or any supplement hereto or thereto or any other agreement between or among Parent and Calliope or delay by Calliope in exercising the same, will not operate as a waiver; no waiver by Calliope will be effective unless it is in writing and then only to the extent specifically stated. Calliope’s rights and remedies under this Agreement and the Ancillary Agreements will be cumulative and not exclusive of any other right or remedy which Calliope may have.
     25. Application of Payments. Parent irrevocably waives the right to direct the application of any and all payments at any time or times hereafter received by Calliope from or on Parent’s behalf and Parent hereby irrevocably agrees that Calliope shall have the continuing
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exclusive right to apply and reapply any and all payments received at any time or times hereafter against the Obligations hereunder in such manner as Calliope may deem advisable notwithstanding any entry by Calliope upon any of Calliope’s books and records.
     26. Indemnity. Parent hereby indemnifies and holds Calliope, and its respective affiliates, employees, attorneys and agents (each, an “Indemnified Person”), harmless from and against any and all suits, actions, proceedings, claims, damages, losses, liabilities and expenses of any kind or nature whatsoever (including attorneys’ fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) which may be instituted or asserted against or incurred by any such Indemnified Person as the result of credit having been extended, suspended or terminated under this Agreement or any of the Ancillary Agreements or with respect to the execution, delivery, enforcement, performance and administration of, or in any other way arising out of or relating to, this Agreement, the Ancillary Agreements or any other documents or transactions contemplated by or referred to herein or therein and any actions or failures to act with respect to any of the foregoing, except to the extent that any such indemnified liability is finally determined by a court of competent jurisdiction to have resulted solely from such Indemnified Person’s gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO PARENT OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
     27. Revival. The Parent further agrees that to the extent Parent makes a payment or payments to Calliope, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment or repayment, the obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if said payment had not been made.
     28. Borrowing Agency Provisions.
     (a) Parent hereby irrevocably designates Company Agent to be its attorney and agent and in such capacity to borrow, sign and endorse notes, and execute and deliver all instruments, documents, writings and further assurances now or hereafter required hereunder, on behalf of Parent, and hereby authorizes Calliope to pay over or credit all loan proceeds hereunder in accordance with the request of Company Agent.
     (b) The handling of this credit facility as a co-borrowing facility with a borrowing agent in the manner set forth in this Agreement is solely as an accommodation to the Parent and at their request. Calliope shall not incur any liability to Parent as a result thereof. To induce Calliope to do so and in consideration thereof, Parent hereby indemnifies Calliope and holds Calliope harmless from and against any and all liabilities, expenses, losses, damages and
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claims of damage or injury asserted against Calliope by any Person arising from or incurred by reason of the handling of the financing arrangements of the Parent as provided herein, reliance by Calliope on any request or instruction from Company Agent or any other action taken by Calliope with respect to this Paragraph 28.
     (c) All Obligations shall be joint and several, and the Parent shall make payment upon the maturity of the Obligations by acceleration or otherwise, and such obligation and liability on the part of the Parent shall in no way be affected by any extensions, renewals and forbearance granted by Calliope to Parent, failure of Calliope to give Parent notice of borrowing or any other notice, any failure of Calliope to pursue to preserve its rights against Parent, the release by Calliope of any Collateral now or thereafter acquired from Parent, and such agreement by Parent to pay upon any notice issued pursuant thereto is unconditional and unaffected by prior recourse by Calliope to Parent or any Collateral for Parent’s Obligations or the lack thereof.
     (d) Parent expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which Parent may now or hereafter have against the other or other Person directly or contingently liable for the Obligations, or against or with respect to any other’s property (including, without limitation, any property which is Collateral for the Obligations), arising from the existence or performance of this Agreement, until all Obligations have been indefeasibly paid in full and this Agreement has been irrevocably terminated.
     (e) Parent represents and warrants to Calliope that (i) Parent have common shareholders, directors and officers, (ii) the businesses and corporate activities of Parent are closely related to, and substantially benefit, the business and corporate activities of Parent, (iii) the financial and other operations of Parent are performed on a combined basis as if Parent constituted a consolidated corporate group, (iv) Parent will receive a substantial economic benefit from entering into this Agreement and will receive a substantial economic benefit from the application of each Loan hereunder, in each case, whether or not such amount is used directly by Parent and (v) all requests for Loans hereunder by the Company Agent are for the exclusive and indivisible benefit of the Parent as though, for purposes of this Agreement, the Parent constituted a single entity.
     29. Notices. Any notice or request hereunder may be given to Parent, Company Agent or Calliope at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section. Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any officer of the party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given three (3) Business Days after the date when deposited in the mail or with the overnight mail carrier, and, in the case of a telecopy, when confirmed.
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Notices shall be provided as follows:
         
 
  If to Calliope:   Calliope Capital Corporation
 
      c/o United Corporate Services, Inc. 874 Walker
 
      Road, Suite C Dover Delaware 19904
 
      Facsimile: 212-541-4410
 
       
 
  With a copy to:   Laurus Capital Management, LLC
 
      335 Madison Avenue, 10th Fl.
 
      New York, New York 10017
 
      Attention: Portfolio Services
 
      Telephone: (212) 541-5800
 
      Telecopier: (212) 581-5037
 
       
 
  If to Parent, or Company Agent:   Chad Therapeutics, Inc.
 
      21622 Plummer Street
 
      Chatsworth, CA 91311
 
      Attention: Tracy Kern
 
      Telephone: (818) 882-8803 ext.288
 
      Facsimile: (818) 407-4122
 
       
 
  With a copy to:    
 
      Morrison & Foerster
 
      555 West Fifth Street, Suite 3500
 
      Los Angeles, California 90013-1024
 
       
 
      Attention: Hillel T. Cohn, Esq.
 
      Phone: (213) 892-5251
 
      Fax: (213) 892-5454
or such other address as may be designated in writing hereafter in accordance with this Section 29 by such Person.
     30. Governing Law, Jurisdiction and Waiver of Jury Trial.
     (a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
     (b) PARENT HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN PARENT, ON THE ONE HAND, AND CALLIOPE, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO
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THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT CALLIOPE AND PARENT ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE CALLIOPE FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF CALLIOPE. PARENT EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND PARENT HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. PARENT HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
     (c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN CALLIOPE, AND/OR PARENT ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
     31. Limitation of Liability. Parent acknowledges and understands that in order to assure repayment of the Obligations hereunder Calliope may be required to exercise any and all of Calliope’s rights and remedies hereunder and agrees that, except as limited by applicable law, neither Calliope nor any of Calliope’s agents shall be liable for acts taken or omissions made in connection herewith or therewith except for actual bad faith.
     32. Entire Understanding; Maximum Interest. This Agreement and the Ancillary Agreements contain the entire understanding between Parent and Calliope as to the subject matter hereof and thereof and any promises, representations, warranties or guarantees not herein contained shall have no force and effect unless in writing, signed by Parent’s and Calliope’s respective officers. Neither this Agreement, the Ancillary Agreements, nor any portion or provisions thereof may be changed, modified, amended, waived, supplemented, discharged, cancelled or terminated orally or by any course of dealing, or in any manner other than by an agreement in writing, signed by the party to be charged. Nothing contained in this
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Agreement, any Ancillary Agreement or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum rate permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum rate permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Parent to Calliope and thus refunded to the Parent.
     33. Severability. Wherever possible each provision of this Agreement or the Ancillary Agreements shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement or the Ancillary Agreements shall be prohibited by or invalid under applicable law such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions thereof.
     34. Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Calliope and the closing of the transactions contemplated hereby to the extent provided therein. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Parent pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Parent hereunder solely as of the date of such certificate or instrument. All indemnities set forth herein shall survive the execution, delivery and termination of this Agreement and the Ancillary Agreements and the making and repaying of the Obligations.
     35. Captions. All captions are and shall be without substantive meaning or content of any kind whatsoever.
     36. Counterparts; Telecopier Signatures. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which taken together shall constitute one and the same agreement. Any signature delivered by a party via telecopier transmission shall be deemed to be any original signature hereto.
     37. Construction. The parties acknowledge that each party and its counsel have reviewed this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments, schedules or exhibits thereto.
     38. Publicity. Parent hereby authorizes Calliope to make appropriate announcements of the financial arrangement entered into by and among Parent and Calliope, including, without limitation, announcements which are commonly known as tombstones, in such publications and to such selected parties as Calliope shall in its sole and absolute discretion deem appropriate, or as required by applicable law.
     39. Joinder. It is understood and agreed that any Person that desires to become a Company hereunder, or is required to execute a counterpart of this Agreement after the date hereof pursuant to the requirements of this Agreement or any Ancillary Agreement, shall become a Company hereunder by (a) executing a Joinder Agreement in form and substance
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satisfactory to Calliope, (b) delivering supplements to such exhibits and annexes to this Agreement and the Ancillary Agreements as Calliope shall reasonably request and (c) taking all actions as specified in this Agreement as would have been taken by Parent had it been an original party to this Agreement, in each case with all documents required above to be delivered to Calliope and with all documents and actions required above to be taken to the reasonable satisfaction of Calliope.
     40. Legends. The Securities shall bear legends as follows;
     (a) The Secured Convertible Term Note shall bear substantially the following legend:
“THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.”
     (b) Any shares of Common Stock issued pursuant to conversion of the Secured Convertible Term Note or exercise of the Warrants, shall bear a legend which shall be in substantially the following form until such shares are covered by an effective registration statement filed with the SEC:
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.”
     (c) The Warrants shall bear substantially the following legend:
“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
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AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.”
[Balance of page intentionally left blank; signature page follows.]
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     IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the date first written above.
             
    CHAD THERAPEUTICS, INC.    
 
           
 
  By:
Name:
  /s/ Earl Yager
 
Earl Yager
   
 
  Title:   President & CEO    
 
           
    CALLIOPE CAPITAL CORPORATION    
 
           
    By: LAURUS CAPITAL MANAGEMENT,
Its Investment Advisor
   
 
           
 
  By:
Name:
Title:
  /s/ David Grin
 
David Grin
 
Director
 
     
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Annex A — Definitions
     “Account Debtor” means any Person who is or may be obligated with respect to, or on account of, an Account.
     “Accountants” has the meaning given to such term in Section 11(a).
     “Accounts” means all “accounts”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, including: (a) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper or Instruments) (including any such obligations that may be characterized as an account or contract right under the UCC); (b) all of such Person’s rights in, to and under all purchase orders or receipts for goods or services; (c) all of such Person’s rights to any goods represented by any of the foregoing (including unpaid sellers’ rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods); (d) all rights to payment due to such Person for Goods or other property sold, leased, licensed, assigned or otherwise disposed of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or other contract, arising out of the use of a credit card or charge card, or for services rendered or to be rendered by such Person or in connection with any other transaction (whether or not yet earned by performance on the part of such Person); and (e) all collateral security of any kind given by any Account Debtor or any other Person with respect to any of the foregoing.
     “Accounts Availability” means ninety percent (90%) of the net face amount of Eligible Accounts.
     “Affiliate” means, with respect to any Person, (a) any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person, (b) any other Person that, directly or indirectly, owns or controls, whether beneficially, or as trustee, guardian or other fiduciary, 25% or more of the Stock having ordinary voting power in the election of directors of such Person, (c) any other Person who is a director, officer, joint venturer or partner (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above or (d) in the case of the Parent, the immediate family members, spouses and lineal descendants of individuals who are Affiliates of such Parent. For the purposes of this definition, control of a Person shall mean the power (direct or indirect) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; provided however, that the term “Affiliate” shall specifically exclude Calliope.
     “Ancillary Agreements” means the Notes, the Warrants, the Registration Rights Agreements, each Security Document and all other agreements, instruments, documents, mortgages, pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, trust agreements and guarantees whether heretofore, concurrently, or hereafter executed by or on behalf of Parent, any of its Subsidiaries or any other Person or delivered to Calliope, relating to this Agreement or to the transactions contemplated by this Agreement or
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otherwise relating to the relationship between or among Parent and Calliope, as same may be amended, supplemented, restated or otherwise modified from time to time.
     “Balance Sheet Date” has the meaning given such term in Section 12(f)(ii).
     “Books and Records” means all books, records, board minutes, contracts, licenses, insurance policies, environmental audits, business plans, files, computer files, computer discs and other data and software storage and media devices, accounting books and records, financial statements (actual and pro forma), filings with Governmental Authorities and any and all records and instruments relating to the Collateral or otherwise necessary or helpful in the collection thereof or the realization thereupon.
     “Business Day” means a day on which Calliope is open for business and that is not a Saturday, a Sunday or other day on which banks are required or permitted to be closed in the State of New York.
     “Capital Availability Amount” means $2,750,000.
     “Charter” has the meaning given such term in Section 12(c)(iv).
     “Chattel Paper” means all “chattel paper,” as such term is defined in the UCC, including electronic chattel paper, now owned or hereafter acquired by any Person.
     “Closing Date” means the date on which Parent shall first receive proceeds of the initial Loans or the date hereof, if no Loan is made under the facility on the date hereof.
     “Code” has the meaning given such term in Section 15(i).
     “Collateral” means all of Parent’s property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title or interests including all of the following property in which it now has or at any time in the future may acquire any right, title or interest:
     (a) all Inventory;
     (b) all Equipment;
     (c) all Fixtures;
     (d) all Goods;
     (e) all General Intangibles;
     (f) all Accounts;
     (g) all Deposit Accounts, other bank accounts and all funds on deposit therein;
     (h) all Investment Property;
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     (i) all Stock;
     (j) all Chattel Paper;
     (k) all Letter-of-Credit Rights;
     (l) all Instruments;
     (m) all commercial tort claims set forth on Schedule 1(A);
     (n) all Books and Records;
     (o) all Intellectual Property;
     (p) all Supporting Obligations including letters of credit and guarantees issued in support of Accounts, Chattel Paper, General Intangibles and Investment Property;
     (q) (i) all money, cash and cash equivalents and (ii) all cash held as cash collateral to the extent not otherwise constituting Collateral, all other cash or property at any time on deposit with or held by Calliope for the account of Parent (whether for safekeeping, custody, pledge, transmission or otherwise); and
     (r) all products and Proceeds of all or any of the foregoing, tort claims and all claims and other rights to payment including (i) insurance claims against third parties for loss of, damage to, or destruction of, the foregoing Collateral and (ii) payments due or to become due under leases, rentals and hires of any or all of the foregoing and Proceeds payable under, or unearned premiums with respect to policies of insurance in whatever form.
     “Common Stock” means the shares of stock representing the Parent’s common equity interests.
     “Company Agent” means the Parent.
     “Contract Rate” has the meaning given such term in the respective Note.
     “Default” means any act or event that, with the giving of notice or passage of time or both, would constitute an Event of Default.
     “Deposit Accounts” means all “deposit accounts” as such term is defined in the UCC, now or hereafter held in the name of any Person, including, without limitation, the Lockboxes.
     “Disclosure Controls” has the meaning given such term in Section 12(f)(iv).
     “Documents” means all “documents”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including all bills of lading, dock warrants, dock receipts, warehouse receipts, and other documents of title, whether negotiable or non-negotiable.
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     “Eligible Accounts” means each Account of Parent which conforms to the following criteria: (a) shipment of the merchandise or the rendition of services has been completed; (b) no return, rejection or repossession of the merchandise has occurred; (c) merchandise or services shall not have been rejected or disputed by the Account Debtor and there shall not have been asserted any offset, defense or counterclaim; (d) continues to be in full conformity with the representations and warranties made by Parent to Calliope with respect thereto; (e) Calliope is, and continues to be, satisfied with the credit standing of the Account Debtor in relation to the amount of credit extended; (f) there are no facts existing or threatened which are likely to result in any adverse change in an Account Debtor’s financial condition; (g) is documented by an invoice in a form approved by Calliope and shall not be unpaid more than ninety (90) days from invoice date; (h) not more than twenty-five percent (25%) of the unpaid amount of invoices due from such Account Debtor remains unpaid more than ninety (90) days from invoice date, provided, however, that invoices with 60 day payment terms may be considered Eligible Accounts if the unpaid amount of invoices due from such Account Debtor remains unpaid no more than one hundred twenty (120) days from invoice date ; (i) is not evidenced by chattel paper or an instrument of any kind with respect to or in payment of the Account unless such instrument is duly endorsed to and in possession of Calliope or represents a check in payment of an Account; (j) the Account Debtor is located in the United States; provided, however, Calliope may, from time to time, in the exercise of its sole discretion and based upon satisfaction of certain conditions to be determined at such time by Calliope, deem certain Accounts as Eligible Foreign Accounts notwithstanding that the Account is due from an Account Debtor located outside of the United States; (k) Calliope has a first priority perfected Lien in such Account and such Account is not subject to any Lien other than Permitted Liens; (l) does not arise out of transactions with any employee, officer, director, stockholder or Affiliate of Parent; (m) is payable to Parent; (n) does not arise out of a bill and hold sale prior to shipment and does not arise out of a sale to any Person to which Parent is indebted; (o) is net of any returns, discounts, claims, credits and allowances; (p) if the Account arises out of contracts between Parent, on the one hand, and the United States, on the other hand, any state, or any department, agency or instrumentality of any of them, Parent has so notified Calliope, in writing, prior to the creation of such Account, and there has been compliance with any governmental notice or approval requirements, including compliance with the Federal Assignment of Claims Act; (q) is a good and valid account representing an undisputed bona fide indebtedness incurred by the Account Debtor therein named, for a fixed sum as set forth in the invoice relating thereto with respect to an unconditional sale and delivery upon the stated terms of goods sold by Parent or work, labor and/or services rendered by Parent; (r) does not arise out of progress billings prior to completion of the order; (s) the total unpaid Accounts from such Account Debtor does not exceed twenty-five percent (25%) of all Eligible Accounts; (t) Parent’s right to payment is absolute and not contingent upon the fulfillment of any condition whatsoever; (u) Parent is able to bring suit and enforce its remedies against the Account Debtor through judicial process; (v) does not represent interest payments, late or finance charges owing to Parent, and (w) is otherwise satisfactory to Calliope as determined by Calliope in the exercise of its sole discretion. In the event Parent requests that Calliope include within Eligible Accounts certain Accounts of of Parent’s acquisition targets, Calliope shall at the time of such request consider such inclusion, but any such inclusion shall be at the sole option of Calliope and shall at all times be subject to the execution and delivery to Calliope of all such documentation (including, without limitation, guaranty and security documentation) as Calliope may require in its sole discretion.
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     “Eligible Inventory” means Inventory owned by a Company which Calliope, in its sole and absolute discretion, determines: (a) is subject to a first priority perfected Lien in favor of Calliope and is subject to no other Liens whatsoever (other than Permitted Liens); (b) is located on premises with respect to which Calliope has received a landlord or mortgagee waiver acceptable in form and substance to Calliope; (c) is not in transit; (d) is in good condition and meets all standards imposed by any governmental agency, or department or division thereof having regulatory Governmental Authority over such Inventory, its use or sale including the Federal Fair Labor Standards Act of 1938 as amended, and all rules, regulations and orders thereunder; (e) is currently either usable or salable in the normal course of Parent’s business; (f) is not placed by Parent on consignment or held by Parent on consignment from another Person; (g) is in conformity with the representations and warranties made by Parent to Calliope with respect thereto; (h) is not subject to any licensing, patent, royalty, trademark, tradename or copyright agreement with any third parties not disclosed on the Disclosure Schedules under the heading “Eligible Inventory IP Agreements (i) does not require the consent of any Person for the completion of manufacture, sale or other disposition of such Inventory and such completion, manufacture or sale does not constitute a breach or default under any contract or agreement to which Parent is a party or to which such Inventory is or may be subject; (j) is not work-in-process; (k) is covered by casualty insurance acceptable to Calliope and under which Calliope has been named as a lender’s loss payee and additional insured; and (l) not to be ineligible for any other reason.
     “Eligible Subsidiary” means each Subsidiary of the Parent set forth on Exhibit A hereto, as the same may be updated from time to time with Calliope’s written consent.
     “Equipment” means all “equipment” as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including any and all machinery, apparatus, equipment, fittings, furniture, Fixtures, motor vehicles and other tangible personal property (other than Inventory) of every kind and description that may be now or hereafter used in such Person’s operations or that are owned by such Person or in which such Person may have an interest, and all parts, accessories and accessions thereto and substitutions and replacements therefor.
     “ERISA” has the meaning given such term in Section 12(bb).
     “Event of Default” means the occurrence of any of the events set forth in Section 19.
     “Exchange Act” means the Securities Exchange Act of 1934, as amended.
     “Exchange Act Filings” means the Parent’s filings under the Exchange Act made prior to the date of this Agreement.
     “Existing Indebtedness” means the indebtedness of the Parent to Wells Fargo Bank arising in connection with that certain Account Purchase Agreement dated March 27, 2007 by and between Wells Fargo Bank, National Association and Parent.
     “Financial Reporting Controls” has the meaning given such term in Section 12(f)(v).
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     “Fixtures” means all “fixtures” as such term is defined in the UCC, now owned or hereafter acquired by any Person.
     “Formula Amount” has the meaning given such term in Section 2(a)(i).
     “GAAP” means generally accepted accounting principles, practices and procedures in effect from time to time in the United States of America.
     “General Intangibles” means all “general intangibles” as such term is defined in the UCC, now owned or hereafter acquired by any Person including all right, title and interest that such Person may now or hereafter have in or under any contract, all Payment Intangibles, customer lists, Licenses, Intellectual Property, interests in partnerships, joint ventures and other business associations, permits, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, Software, data bases, data, skill, expertise, experience, processes, models, drawings, materials, Books and Records, Goodwill (including the Goodwill associated with any Intellectual Property), all rights and claims in or under insurance policies (including insurance for fire, damage, loss, and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key-person, and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit accounts, rights to receive tax refunds and other payments, rights to received dividends, distributions, cash, Instruments and other property in respect of or in exchange for pledged Stock and Investment Property, and rights of indemnification.
     “Goods” means all “goods”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including embedded software to the extent included in “goods” as defined in the UCC, manufactured homes, fixtures, standing timber that is cut and removed for sale and unborn young of animals.
     “Goodwill” means all goodwill, trade secrets, proprietary or confidential information, technical information, procedures, formulae, quality control standards, designs, operating and training manuals, customer lists, and distribution agreements now owned or hereafter acquired by any Person.
     “Governmental Authority” means any nation or government, any state or other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
     “Instruments” means all “instruments”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including all certificated securities and all promissory notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper.
     “Intellectual Property” means any and all patents, trademarks, service marks, trade names, copyrights, trade secrets, Licenses, information and other proprietary rights and processes.
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     “Inventory” means all “inventory”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including all inventory, merchandise, goods and other personal property that are held by or on behalf of such Person for sale or lease or are furnished or are to be furnished under a contract of service or that constitute raw materials, work in process, finished goods, returned goods, or materials or supplies of any kind, nature or description used or consumed or to be used or consumed in such Person’s business or in the processing, production, packaging, promotion, delivery or shipping of the same, including all supplies and embedded software.
     “Inventory Availability” means the lesser of (a) fifty percent (50%) of the value of Parent’s Eligible Inventory (calculated on the basis of the lower of cost or market, on a first-in first-out basis) and (b) $1,000,000.
     “Investment Property” means all “investment property”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located.
     “Letter-of-Credit Rights” means “letter-of-credit rights” as such term is defined in the UCC, now owned or hereafter acquired by any Person, including rights to payment or performance under a letter of credit, whether or not such Person, as beneficiary, has demanded or is entitled to demand payment or performance.
     “License” means any rights under any written agreement now or hereafter acquired by any Person to use any trademark, trademark registration, copyright, copyright registration or invention for which a patent is in existence or other license of rights or interests now held or hereafter acquired by any Person.
     “Lien” means any mortgage, security deed, deed of trust, pledge, hypothecation, assignment, security interest, lien (whether statutory or otherwise), charge, claim or encumbrance, or preference, priority or other security agreement or preferential arrangement held or asserted in respect of any asset of any kind or nature whatsoever including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the UCC or comparable law of any jurisdiction.
     “Loans” has the meaning given such term in Section 2(a)(i) and shall include all other extensions of credit hereunder and under any Ancillary Agreement.
     “Lockboxes” has the meaning given such term in Section 8(a).
     “Material Adverse Effect” means a material adverse change with respect to (a) the business, assets, liabilities, condition (financial or otherwise), properties, operations or prospects of the Parent that materially and adversely affects the ability of the Parent to pay or perform the Obligations in accordance with the terms hereof or any Ancillary Agreement or (b) the sufficiency and/or value of the Collateral, the Liens on the Collateral or the priority of any such Lien. Without limiting the foregoing, any event or occurrence which results, or could reasonably be expected within the next 12 months to result in a loss of revenues in excess of 30% of the Parent’s consolidated revenues, or which results, or could reasonably be expected within the next
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12 months to result in a reduction of more than 30% of the Parent’s total shareholders’ equity determined on a consolidated basis, shall constitute a Material Adverse Effect.
     “NASD” has the meaning given such term in Section 13(b).
     “Note Shares” has the meaning given such term in Section 12(a).
     “Notes” means the Secured Revolving Note and the Secured Convertible Term Note made by Parent in favor of Calliope in connection with the transactions contemplated hereby, as same may be amended, supplemented, restated and/or otherwise modified from time to time.
     “Obligations” means all Loans, all advances, debts, liabilities, obligations, covenants and duties owing by Parent and each of its Subsidiaries to Calliope (or any corporation that directly or indirectly controls or is controlled by or is under common control with Calliope) of every kind and description (whether or not evidenced by any note or other instrument and whether or not for the payment of money or the performance or non-performance of any act), direct or indirect, absolute or contingent, due or to become due, contractual or tortious, liquidated or unliquidated, whether existing by operation of law or otherwise now existing or hereafter arising including any debt, liability or obligation owing from Parent and/or each of its Subsidiaries to others which Calliope may have obtained by assignment or otherwise and further including all interest (including interest accruing at the then applicable rate provided in this Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in this Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, whether or not a claim for post-filing or post-petition interest is allowed or allowable in such proceeding), charges or any other payments Parent and each of its Subsidiaries is required to make by law or otherwise arising under or as a result of this Agreement, the Ancillary Agreements or otherwise, together with all reasonable expenses and reasonable attorneys’ fees chargeable to the Parent’ or any of their Subsidiaries’ accounts or incurred by Calliope in connection therewith.
     “Payment Intangibles” means all “payment intangibles” as such term is defined in the UCC, now owned or hereafter acquired by any Person, including, a General Intangible under which the Account Debtor’s principal obligation is a monetary obligation.
     “Permitted Liens” means (a) Liens of carriers, warehousemen, artisans, bailees, mechanics and materialmen incurred in the ordinary course of business securing sums not overdue; (b) Liens incurred in the ordinary course of business in connection with worker’s compensation, unemployment insurance or other forms of governmental insurance or benefits, relating to employees, securing sums (i) not overdue or (ii) being diligently contested in good faith provided that adequate reserves with respect thereto are maintained on the books of the Parent in conformity with GAAP; (c) Liens in favor of Calliope; (d) Liens for taxes (i) not yet due or (ii) being diligently contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Parent in conformity with GAAP; and which have no effect on the priority of Liens in favor of Calliope or the value
Security Agreement

8


 

of the assets in which Calliope has a Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness to the extent permitted in this Agreement and (f) Liens specified on Schedule 2 hereto.
     “Person” means any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof), and shall include such Person’s successors and assigns.
     “Principal Market” means the NASD Over The Counter Bulletin Board, NASDAQ Capital Market, NASDAQ National Market System, American Stock Exchange or New York Stock Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock).
     “Proceeds” means “proceeds”, as such term is defined in the UCC and, in any event, shall include: (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Parent or any other Person from time to time with respect to any Collateral; (b) any and all payments (in any form whatsoever) made or due and payable to Parent from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any Collateral by any governmental body, governmental authority, bureau or agency (or any person acting under color of governmental authority); (c) any claim of Parent against third parties (i) for past, present or future infringement of any Intellectual Property or (ii) for past, present or future infringement or dilution of any trademark or trademark license or for injury to the goodwill associated with any trademark, trademark registration or trademark licensed under any trademark License; (d) any recoveries by Parent against third parties with respect to any litigation or dispute concerning any Collateral, including claims arising out of the loss or nonconformity of, interference with the use of, defects in, or infringement of rights in, or damage to, Collateral; (e) all amounts collected on, or distributed on account of, other Collateral, including dividends, interest, distributions and Instruments with respect to Investment Property and pledged Stock; and (f) any and all other amounts, rights to payment or other property acquired upon the sale, lease, license, exchange or other disposition of Collateral and all rights arising out of Collateral.
     “Purchase Money Indebtedness” means (a) any indebtedness incurred for the payment of all or any part of the purchase price of any fixed asset, including indebtedness under capitalized leases, (b) any indebtedness incurred for the sole purpose of financing or refinancing all or any part of the purchase price of any fixed asset, and (c) any renewals, extensions or refinancings thereof (but not any increases in the principal amounts thereof outstanding at that time).
     “Purchase Money Lien” means any Lien upon any fixed assets that secures the Purchase Money Indebtedness related thereto but only if such Lien shall at all times be confined solely to the asset the purchase price of which was financed or refinanced through the incurrence of the Purchase Money Indebtedness secured by such Lien and only if such Lien secures only such Purchase Money Indebtedness.
Security Agreement

9


 

     “Registration Rights Agreements” means that certain Registration Rights Agreement dated as of the Closing Date by and between the Parent and Calliope and each other registration rights agreement by and between the Parent and Calliope, as same may be amended, modified and supplemented from time to time.
     “Revolving Loans” shall have the meaning given such term in Section 2(a)(i).
     “SEC” means the Securities and Exchange Commission.
     “SEC Reports” has the meaning given such term in Section 12(u).
     “Secured Revolving Note” means that certain Secured Revolving Note dated as of the Closing Date made by the Parent in favor of Calliope in the original face amount of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000), as the same may be amended, supplemented, restated and/or otherwise modified from time to time.
     “Secured Convertible Term Note” means that certain Secured Convertible Term Note dated as of the Closing Date made by the Parent in favor of Calliope in the original face amount of Seven Hundred Fifty Thousand Dollars ($750,000), as the same may be amended, supplemented, restated and/or otherwise modified from time to time.
     “Securities” means the Notes and the Warrants and the shares of Common Stock which may be issued pursuant to conversion of the Secured Convertible Term Note in whole or in part exercise of such Warrants.
     “Securities Act” has the meaning given such term in Section 12(r).
     “Security Documents” means all security agreements, mortgages, cash collateral deposit letters, pledges and other agreements which are executed by Parent in favor of Calliope.
     “Software” means all “software” as such term is defined in the UCC, now owned or hereafter acquired by any Person, including all computer programs and all supporting information provided in connection with a transaction related to any program.
     “Solvent” means, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person; (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person’s property would constitute and unreasonably small capital. The amount of contingent liabilities (such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can reasonably be expected to become an actual or matured liability.
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10


 

     “Stock” means all certificated and uncertificated shares, options, warrants, membership interests, general or limited partnership interests, participation or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Securities Exchange Act of 1934).
     “Subsidiary” means, with respect to any Person, (i) any other Person whose shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the directors or other governing body of such other Person, are owned, directly or indirectly, by such Person or (ii) any other Person in which such Person owns, directly or indirectly, more than 50% of the equity interests at such time.
     “Supporting Obligations” means all “supporting obligations” as such term is defined in the UCC.
     “Term” means the Closing Date through the close of business on the day immediately preceding the third anniversary of the Closing Date, subject to acceleration at the option of Calliope upon the occurrence of an Event of Default hereunder or other termination hereunder.
     “Term Loan” has the meaning given such term in Section 2(a)(c).
     “Total Investment Amount” means Three Million Five Hundred Thousand Dollars ($3,500,000).
     “UCC” means the Uniform Commercial Code as the same may, from time to time be in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Calliope’s Lien on any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term “UCC” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Agreement relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions; provided further, that to the extent that UCC is used to define any term herein or in any Ancillary Agreement and such term is defined differently in different Articles or Divisions of the UCC, the definition of such term contained in Article or Division 9 shall govern.
     “Warrant Shares” has the meaning given such term in Section 12(a).
     “Warrants” means that certain Common Stock Purchase Warrant dated as of the Closing Date made by the Parent in favor of Calliope and each other warrant made by the Parent in favor Calliope, as each of the same may be amended, restated, modified and/or supplemented from time to time.
Security Agreement

11


 

Exhibit A
Eligible Subsidiaries
None
Security Agreement

 


 

Exhibit B
Borrowing Base Certificate
As of                            , 200__
                         
ACCOUNTS RECEIVABLE per __________ Aging
                    0.00  
 
                       
Ineligible Accounts:
                       
Accounts over 90 days from Invoice Date
            0.00          
Credit Balances Over 90 days from Invoice Date
            0.00          
Intercompany and Affiliate Accounts
            0.00          
__% Concentration Cap
            0.00          
Contra Accounts
            0.00          
Cash Sales and COD Accounts
            0.00          
Foreign Receivables
            0.00          
Government Receivables (without Assignment of Claims)
            0.00          
Discounts, Credits and Allowances
            0.00          
Cross-age (__% Past Due)
            0.00          
Bill and Hold Invoices
            0.00          
Finance/Service/Late Charges
            0.00          
Other:
            0.00       0.00  
 
                   
 
                       
ELIGIBLE ACCOUNTS RECEIVABLE
                    0.00  
 
                       
Accounts Receivable Advance Rate
    90 %                
 
                       
 
                   
ACCOUNTS RECEIVABLE AVAILABILITY
                    0.00  
 
                       
INVENTORY per __________ Balance Sheet
                    0.00  
 
                       
Ineligible Inventory:
                       
Work-in-Process
            0.00          
Excess/Slow Moving
            0.00          
Supplies/Packaging
            0.00          
Damaged
            0.00          
Other:
            0.00       0.00  
 
                     
 
                       
ELIGIBLE INVENTORY
                    0.00  
 
                       
Inventory Advance Rate
    50 %                
 
                       
Inventory Cap
                    1,000,000.00  
 
                       
 
                     
INVENTORY AVAILABILITY
                    0.00  
 
                     
 
                       
TOTAL AVAILABILITY
                    0.00  
 
                       
Less Reserves
                    0.00  
Security Agreement

 


 

                 
NET AVAILABILITY
            0.00  
 
               
REVOLVING CREDIT LINE
    0.00          
MINIMUM BORROWING NOTE
    0.00          
 
               
NET BORROWING AVAILABILITY (Lesser of Line or Net Availability)
            0.00  
 
               
Less: Calliope Loans
            0.00  
 
               
 
             
EXCESS/(DEFICIT) AVAILABILITY
            0.00  
 
             
The undersigned hereby certifies that all of the foregoing information regarding the Eligible Accounts and Eligible Inventory are true and correct on the date hereof and all such Accounts and Inventory listed as Eligible are Eligible within the meaning given such term in the Security Agreement dated ___/___/200___ among Borrower, the other Parent named therein and Calliope
                    , Borrowing Agent
By:                                                                                  
Name:
Title:
Security Agreement

14

EX-10.29 3 v32486exv10w29.htm EXHIBIT 10.29 Exhibit 10.29
 

Exhibit 10.29
REGISTRATION RIGHTS AGREEMENT
          This Registration Rights Agreement (this “Agreement”) is made and entered into as of July 30, 2007, by and between Chad Therapeutics, Inc., a California corporation (the “Company”), and Calliope Capital Corporation (the “Purchaser”).
          This Agreement is made pursuant to the Security Agreement, dated as of the date hereof, by and among the Purchaser, the Company (as amended, modified or supplemented from time to time, the “Security Agreement”), and pursuant to the Note and Warrants referred to therein.
          The Company and the Purchaser hereby agree as follows:
     1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Security Agreement shall have the meanings given such terms in the Security Agreement. As used in this Agreement, the following terms shall have the following meanings:
          “Commission” means the Securities and Exchange Commission.
          “Common Stock” means shares of the Company’s common stock, par value $0.01 per share.
          “Effectiveness Date” means, (i) with respect to the Registration Statement required to be filed in connection with the shares of Common Stock issuable upon conversion of the Note and exercise of the Warrants issued on the date hereof, a date no later than one hundred eighty (180) days following the Filing Date and (ii) with respect to each additional Registration Statement required to be filed hereunder (if any), a date no later than sixty (60) days following the applicable Filing Date.
          “Effectiveness Period” has the meaning set forth in Section 2(a).
          “Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor statute.
          “Filing Date” means, with respect to (1) the Registration Statement required to be filed in connection with the shares of Common Stock issuable to the Holder upon conversion of the Note and upon exercise of a Warrant, the date which is sixty (60) days after the issuance of such, Note and Warrants, and (2) the Registration Statement required to be filed in connection with the shares of Common Stock issuable to the Holder as a result of adjustments to the Conversion Price made pursuant to Section 3.5 of the Note or to the Exercise Price made pursuant to Section 4 of the Warrant or otherwise, thirty (30) days after the occurrence of such event or the date of the adjustment of the Exercise Price.
Registration Rights Agreement

 


 

          “Holder” or “Holders” means the Purchaser or any of its affiliates or transferees to the extent any of them hold Registrable Securities, other then those purchasing Registrable Securities in a market transaction.
          “Indemnified Party” has the meaning set forth in Section 5(c).
          “Indemnifying Party” has the meaning set forth in Section 5(c).
          “Note” shall mean the Secured Convertible Term Note.
          “Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.
          “Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.
          “Registrable Securities” means the shares of Common Stock issuable upon conversion of the Note and exercise of the Warrants.
          “Registration Statement” means each registration statement required to be filed hereunder, including the Prospectus therein, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.
          “Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
          “Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
          ”Secured Convertible Term Note” has the meaning set forth in the Security Agreement.
          “Securities Act” means the Securities Act of 1933, as amended, and any successor statute.
Registration Rights Agreement

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          “Security Agreement” has the meaning given to such term in the Preamble hereto.
          “Trading Market” means any of the NASD Over The Counter Bulletin Board, NASDAQ Capital Market, the NASDAQ National Markets System, the American Stock Exchange or the New York Stock Exchange
          “Warrants” means the Common Stock purchase warrants issued in connection with the Security Agreement, whether on the date thereof or thereafter.
     2. Registration.
          (a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the Registrable Securities for a selling stockholder resale offering to be made on a continuous basis pursuant to Rule 415. Each Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall cause each Registration Statement to become effective and remain effective as provided herein. The Company shall use its best efforts to cause each Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the Effectiveness Date. The Company shall use its reasonable commercial efforts to keep each Registration Statement continuously effective under the Securities Act until the date which is the earlier date of when (i) all Registrable Securities covered by such Registration Statement have been sold or (ii) all Registrable Securities covered by such Registration Statement may be sold immediately without registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (each, an “Effectiveness Period”).
          (b) If: (i) the Registration Statement is not filed on or prior to the Filing Date; (ii) the Registration Statement is not declared effective by the Commission by the Effectiveness Date; (iii) after the Registration Statement is filed with and declared effective by the Commission, the Registration Statement ceases to be effective (by suspension or otherwise) as to all Registrable Securities to which it is required to relate at any time prior to the expiration of the Effectiveness Period (without being succeeded immediately by an additional registration statement filed and declared effective) for a period of time which shall exceed 30 days in the aggregate per year or more than 20 consecutive calendar days (defined as a period of 365 days commencing on the date the Registration Statement is declared effective); or (iv) the Common Stock is not listed or quoted on any Trading Market, or is suspended from trading on its principal Trading Market and is not available for trading on any other Trading Market, for a period of three (3) consecutive Trading Days (provided the Company shall not have been able to cure such trading suspension within 30 days of the notice thereof or list the Common Stock on another Trading Market); (any such failure or breach being referred to as an “Event,” and for purposes of clause (i) or (ii) the date on which such Event occurs, or for purposes of clause (iii) the date which such 30 day or 20 consecutive day period (as the case may be) is exceeded, or for purposes of clause (iv) the date on which such three (3) Trading Day period is exceeded, being referred to as “Event Date”), then until the applicable Event is cured, the Company shall pay to
Registration Rights Agreement

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each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 1.0% for each thirty (30) day period (prorated for partial periods) on a daily basis of the original principal amount of the Note. While such Event continues, such liquidated damages shall be paid not less often than each thirty (30) days. Any unpaid liquidated damages as of the date when an Event has been cured by the Company shall be paid within three (3) days following the date on which such Event has been cured by the Company. Notwithstanding the foregoing, no liquidated damages shall be payable to any Holder with respect to an Event if such Holder proximately caused the Event to occur.
          (c) Within three business days of the Effectiveness Date, the Company shall cause its counsel to issue a blanket opinion in the form attached hereto as Exhibit A, to the transfer agent stating that the shares are subject to an effective registration statement and can be reissued free of restrictive legend upon notice of a sale by the Purchaser and confirmation by the Purchaser that it has complied with the prospectus delivery requirements, provided that the Company has not advised the transfer agent orally or in writing that the opinion has been withdrawn. Copies of the blanket opinion required by this Section 2(c) shall be delivered to the Purchaser within the time frame set forth above.
     3. Registration Procedures. If and whenever the Company is required by the provisions hereof to effect the registration of any Registrable Securities under the Securities Act, the Company will, as expeditiously as possible:
          (a) prepare and file with the Commission a Registration Statement with respect to such Registrable Securities, respond as promptly as possible to any comments received from the Commission, and use its best efforts to cause such Registration Statement to become and remain effective for the Effectiveness Period with respect thereto, and promptly provide to the Purchaser copies of all filings and Commission letters of comment relating thereto;
          (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement and to keep such Registration Statement effective until the expiration of the Effectiveness Period applicable to such Registration Statement;
          (c) furnish to the Purchaser such number of copies of the Registration Statement and the Prospectus included therein (including each preliminary Prospectus) as the Purchaser reasonably may request to facilitate the public sale or disposition of the Registrable Securities covered by such Registration Statement;
          (d) use its best efforts to register or qualify the Purchaser’s Registrable Securities covered by such Registration Statement under the securities or “blue sky” laws of such jurisdictions within the United States as the Purchaser may reasonably request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction;
Registration Rights Agreement

4


 

          (e) list the Registrable Securities covered by such Registration Statement with any securities exchange on which the Common Stock of the Company is then listed;
          (f) immediately notify the Purchaser at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the Prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and
          (g) make available for inspection by the Purchaser and any attorney, accountant or other agent retained by the Purchaser, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the attorney, accountant or agent of the Purchaser.
     4. Registration Expenses. All expenses relating to the Company’s compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or “blue sky” laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars, reasonable fees of, and disbursements incurred by, one counsel for the Holders are called “Registration Expenses”. All selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of any special counsel to the Holders beyond those included in Registration Expenses, are called “Selling Expenses.” The Company shall only be responsible for all Registration Expenses. The Holder shall be responsible for all Selling Expenses.
     5. Indemnification.
          (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless each Holder, and its officers, directors and each other person, if any, who controls such Holder within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Holder, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse such Holder, and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or
Registration Rights Agreement

5


 

alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of the Purchaser or any such person in writing specifically for use in any such document.
          (b) In the event of a registration of the Registrable Securities under the Securities Act pursuant to this Agreement, the Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact which was furnished in writing by the Purchaser to the Company expressly for use in (and such information is contained in) the Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Purchaser will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by or on behalf of the Purchaser specifically for use in any such document. Notwithstanding the provisions of this paragraph, the Purchaser shall not be required to indemnify any person or entity in excess of the amount of the aggregate net proceeds received by the Purchaser in respect of Registrable Securities in connection with any such registration under the Securities Act.
          (c) Promptly after receipt by a party entitled to claim indemnification hereunder (an “Indemnified Party”) of notice of the commencement of any action, such Indemnified Party shall, if a claim for indemnification in respect thereof is to be made against a party hereto obligated to indemnify such Indemnified Party (an “Indemnifying Party”), notify the Indemnifying Party in writing thereof, but the omission so to notify the Indemnifying Party shall not relieve it from any liability which it may have to such Indemnified Party other than under this Section 5(c) and shall only relieve it from any liability which it may have to such Indemnified Party under this Section 5(c) if and to the extent the Indemnifying Party is prejudiced by such omission. In case any such action shall be brought against any Indemnified Party and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such Indemnified Party, and, after notice from the Indemnifying Party to such Indemnified Party of its election so to assume and undertake the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section 5(c) for any legal expenses subsequently incurred by such Indemnified Party in connection with the defense thereof; if the Indemnified Party retains its own counsel, then the Indemnified Party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the Indemnified Party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be reasonable
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defenses available to it which are different from or additional to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred.
          (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Purchaser, or any officer, director or controlling person of the Purchaser, makes a claim for indemnification pursuant to this Section 5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Purchaser or such officer, director or controlling person of the Purchaser in circumstances for which indemnification is provided under this Section 5; then, and in each such case, the Company and the Purchaser will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Purchaser is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the Registration Statement bears to the public offering price of all securities offered by such Registration Statement, provided, however, that, in any such case, (A) the Purchaser will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such Registration Statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.
     6. Representations and Warranties.
          (a) The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and, except with respect to certain matters which the Company has disclosed to the Purchaser on Schedule 12(u) to the Security Agreement, the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Exchange Act. The Company has filed (i) its Annual Report on Form 10-K for its fiscal year ended March 31, 2007and (ii) its Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 2006, September 30, 2006, and December 31, 2006 (collectively, the “SEC Reports”). Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes
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thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial condition, the results of operations and the cash flows of the Company and its subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report.
          (b) The Common Stock is listed or quoted, as applicable, for trading on the American Stock Exchange and satisfies all requirements for the continuation of such listing or quotation, as applicable, and the Company shall do all things necessary for the continuation of such listing or quotation, as applicable. The Company has not received any notice that its Common Stock will be delisted from or no longer be quoted on, as applicable, the American Stock Exchange (except for prior notices which have been fully remedied) or that the Common Stock does not meet all requirements for the continuation of such listing or quotation, as applicable.
          (c) Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to the Security Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Common Stock pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Common Stock to be integrated with other offerings (other than such concurrent offering to the Purchaser).
          (d) The Note and the Warrants and the shares of Common Stock that the Purchaser may acquire pursuant to the Note and the Warrants are all restricted securities under the Securities Act as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Registrable Securities at such time as such Registrable Securities are registered for public sale or an exemption from registration is available, except as required by federal or state securities laws.
          (e) The Company understands the nature of the Registrable Securities issuable upon the conversion of the Note and the exercise of each Warrant and recognizes that the issuance of such Registrable Securities may have a potential dilutive effect. The Company specifically acknowledges that its obligation to issue the Registrable Securities is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company.
          (f) Except for agreements made in the ordinary course of business, there is no agreement that has not been filed with the Commission as an exhibit to a registration statement or to a form required to be filed by the Company under the Exchange Act, the breach of which could reasonably be expected to have a material and adverse effect on the Company and its subsidiaries, or would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement in any material respect.
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          (g) The Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for the full conversion of the Note and the full exercise of the Warrants.
          (h) The Company shall provide written notice to each Holder of (i) the occurrence of each Discontinuation Event (as defined below) and (ii) the declaration of effectiveness by the SEC of each Registration Statement required to be filed hereunder, in each case within one (1) business day of the date of each such occurrence and/or declaration.
     7. Miscellaneous.
          (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement.
          (b) No Piggyback on Registrations. Except as and to the extent set forth on Schedule 7(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in any Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right for inclusion of shares in the Registration Statement to any of its security holders. Except as and to the extent specified in Schedule 7(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been fully satisfied.
          (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to any Registration Statement.
          (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation Event (as defined below), such Holder will forthwith discontinue disposition of such Registrable Securities under the applicable Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of this Agreement, a “Discontinuation Event” shall mean (i) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); (ii) any request by the Commission or any other Federal or state governmental authority for amendments or supplements to such Registration Statement or Prospectus or for additional information; (iii) the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement
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covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and/or (v) the occurrence of any event or passage of time that makes the financial statements included in such Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
          (e) Piggy-Back Registrations. If at any time during the applicable Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities required to be covered during such Effectiveness Period and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen (15) days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered, to the extent the Company may do so without violating registration rights of others which exist as of the date of this Agreement, subject to customary underwriter cutbacks applicable to all holders of registration rights and subject to obtaining any required consent of any selling stockholder(s) to such inclusion under such registration statement.
          (f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of a majority of the then outstanding Registrable Securities.
          (g) Notices. Any notice or request hereunder may be given to the Company or the Purchaser at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section 7(g). Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail, Federal Express or other national overnight next day carrier (collectively, “Courier”) or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given three (3) business days after the date when deposited in the mail or with the overnight mail carrier, in the case of a Courier, the next business day following timely delivery of the package with the
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Courier, and, in the case of a telecopy, when confirmed. The address for such notices and communications shall be as follows:
         
 
  If to the Company:   Chad Therapeutics, Inc.
 
      Attention:      Chief Financial Officer
 
      Facsimile:
 
       
 
      with a copy to:
 
       
 
      Attention:
 
      Facsimile:
 
       
 
  If to a Purchaser:   To the address set forth under such Purchaser name on the signature pages hereto.
 
       
 
  If to any other Person who is then the registered Holder:   To the address of such Holder as it appears in the stock transfer books of the Company
or such other address as may be designated in writing hereafter in accordance with this Section 7(g) by such Person.
          (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the persons and entities as permitted under the Security Agreement.
          (i) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
          (j) Governing Law, Jurisdiction and Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. The Company hereby consents and agrees that the state or federal courts located in the County of New York, State of New York shall have exclusion jurisdiction to hear and determine any Proceeding between the Company, on the one hand, and the Purchaser, on the other hand, pertaining to this Agreement or to any matter arising out of or related to this Agreement; provided, that the Purchaser and the Company acknowledge that any appeals from those courts may have to be heard by a court located outside of the County
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of New York, State of New York, and further provided, that nothing in this Agreement shall be deemed or operate to preclude the Purchaser from bringing a Proceeding in any other jurisdiction to collect the obligations, to realize on the Collateral or any other security for the obligations, or to enforce a judgment or other court order in favor of the Purchaser. The Company expressly submits and consents in advance to such jurisdiction in any Proceeding commenced in any such court, and the Company hereby waives any objection which it may have based upon lack of personal jurisdiction, improper venue or forum non conveniens. The Company hereby waives personal service of the summons, complaint and other process issued in any such Proceeding and agrees that service of such summons, complaint and other process may be made by registered or certified mail addressed to the Company at the address set forth in Section 7(g) and that service so made shall be deemed completed upon the earlier of the Company’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid. The parties hereto desire that their disputes be resolved by a judge applying such applicable laws. Therefore, to achieve the best combination of the benefits of the judicial system and of arbitration, the parties hereto waive all rights to trial by jury in any Proceeding brought to resolve any dispute, whether arising in contract, tort, or otherwise between the Purchaser and/or the Company arising out of, connected with, related or incidental to the relationship established between then in connection with this Agreement. If either party hereto shall commence a Proceeding to enforce any provisions of this Agreement, the Security Agreement or any other Ancillary Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.
          (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
          (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
          (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
[Balance of page intentionally left blank; signature page follows]
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          IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
             
    CHAD THERAPEUTICS, INC.
 
           
 
  By:   /s/ Earl L. Yager    
 
  Name:  
 
Earl L. Yager
   
 
  Title:   Chief Executive Officer    
 
           
    CALLIOPE CAPITAL CORPORATION
 
           
    By:   LAURUS CAPITAL MANAGEMENT, LLC, its Investment Advisor
 
           
 
  By:   /s/ David Grin    
 
  Name:  
 
David Grin
   
 
  Title:   Director    
 
           
    Address for Notices:
 
           
    Calliope Capital Corporation
    c/o United Corporate Services, Inc. 874
    Walker Road, Suite C Dover Delaware
    19904 
 
  Facsimile:   (212) 541-4434    
 
           
    with copy to:
 
           
    Laurus Capital Management, LLC
    335 Madison Avenue, 10th Floor
    New York, NY 10017
 
  Attention:   Portfolio Services    
 
  Facsimile:   212-581-5037    
Registration Rights Agreement

 


 

EXHIBIT A
                    , 200         
[Continental Stock Transfer
& Trust Company
Two Broadway
New York, New York 10004
Attn: William Seegraber]
Re:     Chad Therapeutics, Inc. Registration Statement on Form [S-3]
Ladies and Gentlemen:
     As counsel to Chad Therapeutics, Inc. , a                      corporation (the “Company”), we have been requested to render our opinion to you in connection with the resale by the individuals or entitles listed on Schedule A attached hereto (the “Selling Stockholders”), of an aggregate of                      shares (the “Shares”) of the Company’s Common Stock.
     A Registration Statement on Form [S-3] under the Securities Act of 1933, as amended (the “Act”), with respect to the resale of the Shares was declared effective by the Securities and Exchange Commission on [date]. Enclosed is the Prospectus dated [date]. We understand that the Shares are to be offered and sold in the manner described in the Prospectus.
     Based upon the foregoing, upon request by the Selling Stockholders at any time while the registration statement remains effective, it is our opinion that the Shares have been registered for resale under the Act and new certificates evidencing the Shares upon their transfer or re-registration by the Selling Stockholders may be issued without restrictive legend. We will advise you if the registration statement is not available or effective at any point in the future.
Very truly yours,
[Company counsel]
Registration Rights Agreement

 

EX-10.30 4 v32486exv10w30.htm EXHIBIT 10.30 Exhibit 10.30
 

Exhibit 10.30
THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.
SECURED CONVERTIBLE TERM NOTE
     FOR VALUE RECEIVED, CHAD THERAPEUTICS, INC., a California corporation (the “Parent””), hereby promises to pay to CALLIOPE CAPITAL CORPORATION, c/o United Corporate Services, Inc. 874 Walker Road, Suite C Dover Delaware 19904 (the “Holder”) or its registered assigns or successors in interest, sum of Seven Hundred Fifty Thousand Dollars ($750,000), together with any accrued and unpaid interest hereon, on July 30, 2010 (the “Maturity Date”) if not indefeasibly sooner paid in full.
     Capitalized terms used herein without definition shall have the meanings ascribed to such terms in that certain Security Agreement dated as of the date hereof by and between the Parent and the Holder (as amended, modified and/or supplemented from time to time, the “Security Agreement”).
     The following terms shall apply to this Secured Convertible Term Note (this “Note”):
ARTICLE I
CONTRACT RATE AND AMORTIZATION
     1.1 Contract Rate. Subject to Sections 4.2 and 5.10, interest payable on the outstanding principal amount of this Note (the “Principal Amount”) shall accrue at a rate per annum equal to the “prime rate” published in The Wall Street Journal from time to time (the “Prime Rate”), plus two percent (2.0%) (the “Contract Rate”). The Contract Rate shall be increased or decreased as the case may be for each increase or decrease in the Prime Rate in an amount equal to such increase or decrease in the Prime Rate; each change to be effective as of the day of the change in the Prime Rate. The Contract Rate shall not at any time be less than ten percent (10.0%) per annum nor more than thirteen percent (13.0%) per annum. Interest shall be (i) calculated on the basis of a 360 day year, and (ii) payable monthly, in arrears, commencing on September 1, 2007, on the first business day of each consecutive calendar month thereafter through and including the Maturity Date, and on the Maturity Date, whether by acceleration or otherwise.
     1.2 Contract Rate Payments. The Contract Rate shall be calculated on the last business day of each calendar month hereafter (other than for increases or decreases in the Prime Rate which shall be calculated and become effective in accordance with the terms of Section 1.1) until the Maturity Date and shall be subject to adjustment as set forth herein.
Secured Convertible Term Note

 


 

     1.3 Principal Payments. Amortizing payments of the Principal Amount shall be made by the Parent on November 1, 2007 and on the first business day of each succeeding month thereafter through and including the Maturity Date (each, an “Amortization Date”). Subject to Article III below, commencing on the first Amortization Date, the Parent shall make monthly payments to the Holder on each Amortization Date, each such payment in the amount of $22,727.27 together with any accrued and unpaid interest on such portion of the Principal Amount plus any and all other unpaid amounts which are then owing under this Note, the Security Agreement and/or any other Ancillary Agreement (collectively, the “Monthly Amount”). Any outstanding Principal Amount together with any accrued and unpaid interest and any and all other unpaid amounts which are then owing by the Parent to the Holder under this Note, the Security Agreement and/or any other Ancillary Agreement shall be due and payable on the Maturity Date.
ARTICLE II
CONVERSION AND REDEMPTION
     2.1 Payment of Monthly Amount.
          (a) Payment in Cash or Common Stock. If the Monthly Amount (or a portion of such Monthly Amount if not all of the Monthly Amount may be converted into shares of Common Stock pursuant to Section 3.2) is required to be paid in cash pursuant to Section 2.1(b), then the Parent shall pay the Holder an amount in cash equal to 100% of the Monthly Amount (or such portion of such Monthly Amount to be paid in cash) due and owing to the Holder on the Amortization Date. If the Monthly Amount (or a portion of such Monthly Amount if not all of the Monthly Amount may be converted into shares of Common Stock pursuant to Section 3.2) is required to be paid in shares of Common Stock pursuant to Section 2.1(b), the number of such shares to be issued by the Parent to the Holder on such Amortization Date (in respect of such portion of the Monthly Amount converted into shares of Common Stock pursuant to Section 2.1(b)), shall be the number determined by dividing (i) the portion of the Monthly Amount converted into shares of Common Stock, by (ii) the then applicable Fixed Conversion Price. For purposes hereof, subject to Section 3.6 hereof, the initial “Fixed Conversion Price” means $1.18.
          (b) Monthly Amount Conversion Conditions. Subject to Sections 2.1(a), 2.2, and 3.2 hereof, the Holder shall convert into shares of Common Stock all or a portion of the Monthly Amount due on each Amortization Date if the following conditions (the “Conversion Criteria”) are satisfied: (i) the average closing price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for the five (5) consecutive trading days immediately preceding such Amortization Date shall be greater than or equal to one hundred fifteen percent (115%) of the Fixed Conversion Price and (ii) the amount of such conversion does not exceed twenty five percent (25%) of the average dollar trading volume of the Common Stock for the period of twenty-two (22) consecutive trading days immediately preceding and including such Amortization Date. If subsection (i) of the Conversion Criteria is met but subsection (ii) of the Conversion Criteria is not met as to the entire Monthly Amount, the Holder shall convert only such part of the Monthly Amount that meets subsection (ii) of the Conversion Criteria. Any portion of the Monthly Amount due on an Amortization Date that the Holder has not been able to convert into shares of Common Stock due to the failure to meet the Conversion
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Criteria, shall be paid in cash by the Companies, jointly and severally, at the rate of 100% of the Monthly Amount otherwise due on such Amortization Date, within three (3) business days of such Amortization Date.
     2.2 No Effective Registration. Notwithstanding anything to the contrary herein, the Parent shall not be permitted to pay any part of its obligations to the Holder hereunder in shares of Common Stock if (i) there fails to exist an effective current Registration Statement (as defined in the Registration Rights Agreement) covering the resale of the shares of Common Stock to be issued in connection with such payment and there fails to exist an exemption from registration for resale available pursuant to Rule 144 of the Securities Act and in respect of the Common Stock to be issued in connection with such payment or (ii) an Event of Default (as hereinafter defined) exists and is continuing, unless such Event of Default is cured within any applicable cure period or otherwise waived in writing by the Holder.
     2.3 Optional Redemption in Cash. The Parent may prepay this Note (“Optional Redemption”) by paying to the Holder a sum of money equal to (i) one hundred twenty five percent (125%) of the Principal Amount outstanding at such time together with accrued but unpaid interest thereon and any and all other sums due, accrued or payable to the Holder arising under this Note, the Security Agreement or any other Ancillary Agreement if prepaid on or before July 1, 2008; (ii) one hundred fifteen percent (115%) of the Principal Amount outstanding at such time together with accrued but unpaid interest thereon and any and all other sums due, accrued or payable to the Holder arising under this Note, the Security Agreement or any other Ancillary Agreement if prepaid after July 1, 2008 but on or before July 1, 2009; or (iii) one hundred ten percent (110%) of the Principal Amount outstanding at such time together with accrued but unpaid interest thereon and any and all other sums due, accrued or payable to the Holder arising under this Note, the Security Agreement or any other Ancillary Agreement if prepaid after July 1, 2009 but before the Maturity Date (each of the foregoing (i), (ii) and (iii) a “Redemption Amount”) outstanding on the Redemption Payment Date (as defined below). The Companies shall deliver to the Holder a written notice of redemption (the “Notice of Redemption”) specifying the date for such Optional Redemption (the “Redemption Payment Date”), which date shall be ten (10) business days after the date of the Notice of Redemption (the “Redemption Period”). A Notice of Redemption shall not be effective with respect to any portion of this Note for which the Holder has previously delivered a Notice of Conversion (as hereinafter defined) or for conversions elected to be made by the Holder pursuant to Article III during the Redemption Period. The Redemption Amount shall be determined as if the Holder’s conversion elections had been completed immediately prior to the date of the Notice of Redemption. On the Redemption Payment Date, the Redemption Amount must be paid in good funds to the Holder. In the event the Companies fail to pay the Redemption Amount on the Redemption Payment Date as set forth herein, then such Redemption Notice will be null and void.
ARTICLE III
HOLDER’S CONVERSION RIGHTS
     3.1 Optional Conversion. Subject to the terms set forth in this Article III, the Holder shall have the right, but not the obligation, to convert all or any portion of the issued and outstanding Principal Amount and/or accrued interest and fees due and payable into fully paid
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and nonassessable shares of Common Stock at the Fixed Conversion Price. The shares of Common Stock to be issued upon such conversion are herein referred to as, the “Conversion Shares.
     3.2 Conversion Limitation. Notwithstanding anything herein to the contrary, in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its Affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Note or the unexercised or unconverted portion of any other security of the Holder subject to a limitation on conversion analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its Affiliates of any amount greater than 9.99% of the then outstanding shares of Common Stock (whether or not, at the time of such exercise, the Holder and its Affiliates beneficially own more than 9.99% of the then outstanding shares of Common Stock). As used herein, the term “Affiliate” means any person or entity that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a person or entity, as such terms are used in and construed under Rule 144 under the Securities Act. For purposes of the second preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such sentence. For any reason at any time, upon written or oral request of the Holder, the Parent shall within one (1) business day confirm orally and in writing to the Holder the number of shares of Common Stock outstanding as of any given date. The limitations set forth herein (x) may be waived by the Holder upon provision of no less than sixty-one (61) days prior written notice to the Parent and (y) shall automatically become null and void (i) following notice to the Parent upon the occurrence and during the continuance of an Event of Default (as defined in the Security Agreement), or (ii) upon receipt by the Holder of a Notice of Redemption, except that at no time shall the Parent be obligated to issue any shares of Common Stock pursuant to the terms of this Note, the Security Agreement, any Ancillary Agreement (as defined in the Security Agreement) or if the issuance of such shares of Common Stock would exceed the aggregate number of shares of Common Stock which the Parent may issue pursuant to the terms of this Note, the Security Agreement, any Ancillary Agreement without violating the rules or regulations of the Principal Market (the “Exchange Cap”), except that such limitation shall not apply in the event that the Parent obtains the approval of its stockholders as required by the applicable rules or regulations of the Principal Market for issuances of Common Stock in excess of such amount.
     3.3 Mechanics of Holder’s Conversion. In the event that the Holder elects to convert this Note into Common Stock, the Holder shall give notice of such election by delivering an executed and completed notice of conversion in substantially the form of Exhibit A hereto (appropriate completed) (“Notice of Conversion”) to the Parent and such Notice of Conversion shall provide a breakdown in reasonable detail of the Principal Amount, accrued interest and fees that are being converted. On each Conversion Date (as hereinafter defined) and in accordance with its Notice of Conversion, the Holder shall make the appropriate reduction to the Principal Amount, accrued interest and fees as entered in its records and shall provide written notice thereof to the Parent within two (2) business days after the Conversion Date. Each date on which
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a Notice of Conversion is delivered or telecopied to the Parent in accordance with the provisions hereof shall be deemed a Conversion Date (the “Conversion Date”). Pursuant to the terms of the Notice of Conversion, the Parent will issue instructions to the transfer agent accompanied by an opinion of counsel within two (2) business days of the date of the delivery to the Parent of the Notice of Conversion and shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Holder’s designated broker with the Depository Trust Corporation (“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”) system within three (3) business days after receipt by the Parent of the Notice of Conversion (the “Delivery Date”). In the case of the exercise of the conversion rights set forth herein the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Parent of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of the Conversion Shares, unless the Holder provides the Parent written instructions to the contrary.
     3.4 Late Payments. The Parent understands that a delay in the delivery of the Conversion Shares in the form required pursuant to this Article beyond the Delivery Date could result in economic loss to the Holder. As compensation to the Holder for such loss, in addition to all other rights and remedies which the Holder may have under this Note, applicable law or otherwise, the Parent shall pay late payments to the Holder for any late issuance of Conversion Shares in the form required pursuant to this Article II upon conversion of this Note, in the amount equal to $500 per business day after the Delivery Date. The Parent shall, make any payments incurred under this Section in immediately available funds upon demand.
     3.5 Conversion Mechanics. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal and interest and fees to be converted, if any, by the then applicable Fixed Conversion Price. In the event of any conversions of a portion of the outstanding Principal Amount pursuant to this Article III, such conversions shall be deemed to constitute conversions of the outstanding Principal Amount applying to Monthly Amounts for the remaining Amortization Dates in chronological order.
     3.6 Adjustment Provisions. The Fixed Conversion Price and number and kind of shares or other securities to be issued upon conversion determined pursuant to this Note shall be subject to adjustment from time to time upon the occurrence of certain events during the period that this conversion right remains outstanding, as follows:
          (a) Reclassification. If the Parent at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note, as to the unpaid Principal Amount and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock (i) immediately prior to or (ii) immediately after, such reclassification or other change at the sole election of the Holder.
          (b) Stock Splits, Combinations and Dividends. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of
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Common Stock, or if a dividend is paid on the Common Stock or any preferred stock issued by the Parent in shares of Common Stock, the Fixed Conversion Price shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event.
     3.7 Reservation of Shares. During the period the conversion right exists, the Parent will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Conversion Shares upon the full conversion of this Note and the Warrants. The Parent represents that upon issuance, the Conversion Shares will be duly and validly issued, fully paid and non-assessable. The Parent agrees that its issuance of this Note shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for the Conversion Shares upon the conversion of this Note.
     3.8 Registration Rights. The Holder has been granted registration rights with respect to the Conversion Shares as set forth in the Registration Rights Agreement.
     3.9 Issuance of New Note. Upon any partial conversion of this Note, a new Note containing the same date and provisions of this Note shall, at the request of the Holder, be issued by the Parent to the Holder for the principal balance of this Note and interest which shall not have been converted or paid. Subject to the provisions of Article IV of this Note, the Parent shall not pay any costs, fees or any other consideration to the Holder for the production and issuance of a new Note.
     3.10 Rights of Shareholders. No Holder shall be entitled to vote or receive dividends or be deemed the holder of the Note Shares or any other securities of the Parent which may at any time be issuable upon conversion of this Note for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Parent or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon the recapitalization, issuance of shares, reclassification of shares, change of nominal value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise, in each case, until the Delivery Date applicable to the respective Note Shares purchasable upon the conversion hereof shall have occurred as provided herein.
ARTICLE IV
EVENTS OF DEFAULT
     4.1 Events of Default. The occurrence of an Event of Default under the Security Agreement shall constitute an event of default (“Event of Default”) hereunder.
     4.2 Default Interest. Following the occurrence and during the continuance of an Event of Default, the Parent shall pay additional interest on the outstanding principal balance of this Note in an amount equal to one percent (1%) per month, and all outstanding Obligations,
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including unpaid interest, shall continue to accrue interest at such additional interest rate from the date of such Event of Default until the date such Event of Default is cured or waived.
     4.3 Default Payment. Following the occurrence and during the continuance of an Event of Default, the Holder, at its option, may elect, in addition to all rights and remedies of the Holder under the Security Agreement and the Ancillary Agreements and all obligations of the Parent under the Security Agreement and the Ancillary Agreements, to accelerate the maturity of all obligations hereunder (“Default Payment”). The Default Payment shall be one hundred twenty percent (120%) of the outstanding principal amount of the Note, plus accrued but unpaid interest and all other fees then remaining unpaid, and all amounts payable hereunder. The Default Payment shall be applied first to any fees due and payable to the Holder pursuant to the Notes and/or the Ancillary Agreements, then to accrued and unpaid interest due on the Notes, the Security Agreement and then to the outstanding principal balance of the Notes. The Default Payment shall be due and payable immediately on the date that the Holder has demanded payment of the Default Payment pursuant to this Section 4.3.
ARTICLE V
MISCELLANEOUS
     5.1 Conversion Privileges. The conversion privileges set forth in Article III shall remain in full force and effect immediately from the date hereof until the date this Note is indefeasibly paid in full and irrevocably terminated.
     5.2 Cumulative Remedies. The remedies under this Note shall be cumulative.
     5.3 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
     5.4 Notices. Any notice herein required or permitted to be given shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Parent at the address provided for the Parent in the Security Agreement executed in connection herewith, and to the Holder at the address provided in the Security Agreement for the Holder, with a copy to Laurus Capital Management, LLC, Attn: Portfolio Services, 335 Madison Avenue, 10th Floor, New York, New York 10017, facsimile number (212) 581-5037, or at such other address as the Parent or the Holder may designate by ten days advance written notice to the other parties hereto. A Notice of Conversion shall be deemed given when made to the Parent pursuant to the Security Agreement.
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     5.5 Amendment Provision. The term “Note” and all references thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented, and any successor instrument as such successor instrument may be amended or supplemented.
     5.6 Assignability. This Note shall be binding upon the Parent and its subsidiaries, successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder in accordance with the requirements of the Security Agreement. The Parent may not assign any of its obligations under this Note without the prior written consent of the Holder, any such purported assignment without such consent being null and void.
     5.7 Cost of Collection. In case of any Event of Default under this Note, the Parent shall, pay the Holder the Holder’s reasonable costs of collection, including reasonable attorneys’ fees.
     5.8 Governing Law, Jurisdiction and Waiver of Jury Trial.
          (a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
          (b) THE PARENT HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE PARENT, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS PROVIDED, THAT THE PARENT ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE HOLDER. THE PARENT EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE PARENT HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. THE PARENT HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH PARENT AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND THAT SERVICE SO
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MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE PARENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID
          (c) THE PARENT DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, EACH PARENT HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE HOLDER, AND THE PARENT ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, THE SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
     5.9 Severability. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Note.
     5.10 Maximum Payments. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum rate permitted by such law, any payments in excess of such maximum rate shall be credited against amounts owed by the Parent to the Holder and thus refunded to the Parent.
     5.11 Security Interest . The Holder has been granted a security interest in certain assets of the Parent as more fully described in the Security Agreement dated as of the date hereof.
     5.12 Construction. Each party acknowledges that its legal counsel participated in the preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Note to favor any party against the other.
     5.13 Registered Obligation. This Note is intended to be a registered obligation within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i) and the Parent (or its agent) shall register this Note (and thereafter shall maintain such registration) as to both principal and any stated interest. Notwithstanding any document, instrument or agreement relating to this Note to the contrary, transfer of this Note (or the right to any payments of principal or stated interest thereunder) may only be effected by (i) surrender of this Note and either the reissuance by the Parent of this Note to the new holder or the issuance by the Parent of a new instrument to the new holder, or (ii) transfer through a book entry system maintained by the Parent (or its agent), within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).
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[Balance of page intentionally left blank; signature page follows]
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     IN WITNESS WHEREOF, the Parent has caused this Secured Convertible Term Note to be signed in its name effective as of this 30th day of July, 2007.
         
  CHAD THERAPEUTICS, INC.
 
 
  By:   /s/ Earl L. Yager    
    Name:   Earl L. Yager   
    Title:   Chief Executive Officer   
 
WITNESS:
     
/s/ Tracy A. Kern
   
 
   
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EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the Holder in order to convert all or part of
the Secured Convertible Term Note into Common Stock)
[Name and Address of Parent]
     The undersigned hereby converts $                     of the principal due on [specify applicable Repayment Date] under the Secured Convertible Term Note dated as of                     , 200___ (the “Note”) issued by Chad Therapeutics, Inc. (the “Parent”) by delivery of shares of Common Stock of the Parent (“Shares”) on and subject to the conditions set forth in the Note.
             
1.
  Date of Conversion        
 
     
 
   
 
           
2.
  Shares To Be Delivered:        
 
     
 
   
             
    [HOLDER]    
 
           
 
  By:        
 
  Name:  
 
   
 
  Title:  
 
   
 
     
 
   
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EX-10.31 5 v32486exv10w31.htm EXHIBIT 10.31 Exhibit 10.31
 

Exhibit 10.31
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO CHAD THERAPEUTICS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
SECURED REVOLVING NOTE
     FOR VALUE RECEIVED, CHAD THERAPEUTICS, INC., a California corporation (the “Parent”), promises to pay to CALLIOPE CAPITAL CORPORATION, c/o United Corporate Services, Inc. 874 Walker Road, Suite C Dover Delaware 19904 (the “Holder”) or its registered assigns or successors in interest, the sum of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000), or, if different, the aggregate principal amount of all Loans (as defined in the Security Agreement referred to below), together with any accrued and unpaid interest hereon, on July 30, 2010 (the “Maturity Date”) if not sooner indefeasibly paid in full.
     Capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Security Agreement between the Parent and the Holder dated as of the date hereof (as amended, modified and/or supplemented from time to time, the “Security Agreement”).
     The following terms shall apply to this Secured Revolving Note (this “Note”):
ARTICLE I
CONTRACT RATE
     1.1 Contract Rate. Subject to Sections 2.2 and 3.9, interest payable on the outstanding principal amount of this Note (the “Principal Amount”) shall accrue at a rate per annum equal to the “prime rate” published in The Wall Street Journal from time to time (the “Prime Rate”), plus one and one half percent (1.50%) (the “Contract Rate”). The Contract Rate shall be increased or decreased as the case may be for each increase or decrease in the Prime Rate in an amount equal to such increase or decrease in the Prime Rate; each change to be effective as of the day of the change in the Prime Rate. The Contract Rate shall not at any time be less than nine percent (9.0%) per annum and no more than twelve and one half percent (12.5%) per annum. Interest shall be (i) calculated on the basis of a 360 day year, and (ii) payable monthly, in arrears, commencing on September 1, 2007 on the first business day of each consecutive calendar month thereafter through and including the Maturity Date, and on the Maturity Date, whether by acceleration or otherwise.
     1.2 Contract Rate Payments. The Contract Rate shall be calculated on the last business day of each calendar month hereafter (other than for increases or decreases in the Prime
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Rate which shall be calculated and become effective in accordance with the terms of Section 1.1) until the Maturity Date and shall be subject to adjustment as set forth herein.
ARTICLE II
EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS
     2.1 Events of Default. The occurrence of an Event of Default under the Security Agreement shall constitute an event of default (“Event of Default”) hereunder.
     2.2 Default Interest. Following the occurrence and during the continuance of an Event of Default, the Parent shall pay additional interest on the outstanding principal balance of this Note in an amount equal to one percent (1%) per month, and all outstanding Obligations, including unpaid interest, shall continue to accrue interest at such additional interest rate from the date of such Event of Default until the date such Event of Default is cured or waived.
     2.3 Default Payment. Following the occurrence and during the continuance of an Event of Default, the Holder, at its option, may elect, in addition to all rights and remedies of the Holder under the Security Agreement and the other Ancillary Agreements and all obligations and liabilities of the Parent under the Security Agreement and the other Ancillary Agreements, to accelerate the maturity of all amounts due hereunder and to require payment in full of such amounts within thirty (30) days (“Default Payment”). The Default Payment shall be one hundred twenty percent (120%) of the outstanding principal amount of the Note, plus accrued but unpaid interest and all other fees then remaining unpaid, and all amounts payable hereunder, under the Security Agreement or any other Ancillary Agreement. The Default Payment shall be applied first to any fees due and payable to the Holder pursuant to the Note, the Security Agreement and/or the Ancillary Agreements, then to accrued and unpaid interest due on the Notes and then to the outstanding principal balance of the Note. The Default Payment shall be due and payable immediately on the date that the Holder has demanded payment of the Default Payment pursuant to this Section 2.3.
ARTICLE III
MISCELLANEOUS
     3.1 Issuance of New Note. Upon any partial redemption of this Note, a new Note containing the same date and provisions of this Note shall, at the request of the Holder, be issued by the Parent to the Holder for the principal balance of this Note and interest which shall not have been paid. Subject to the provisions of Article II of this Note, the Parent shall not pay any costs, fees or any other consideration to the Holder for the production and issuance of a new Note.
     3.2 Cumulative Remedies. The remedies under this Note shall be cumulative.
     3.3 Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude
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other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
     3.4 Notices. Any notice herein required or permitted to be given shall be in writing and shall be deemed effective given (a) upon personal delivery to the party notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Parent at the address provided in the Security Agreement executed in connection herewith, and to the Holder at the address provided in the Security Agreement for the Holder, with a copy to Laurus Capital Management, LLC, Attn: Portfolio Services, 335 Madison Avenue, 10th Floor, New York, New York 10017, facsimile number (212) 581-5037, or at such other address as the respective Parent or the Holder may designate by ten days advance written notice to the other parties hereto.
     3.5 Amendment Provision. The term “Note” and all references thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented, and any successor instrument as such successor instrument may be amended or supplemented.
     3.6 Assignability. This Note shall be binding upon the Parent and its subsidiaries, successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder in accordance with the requirements of the Security Agreement. The Parent may not assign any of its obligations under this Note without the prior written consent of the Holder, any such purported assignment without such consent being null and void.
     3.7 Cost of Collection. In case of an occurrence of an Event of Default under this Note, the Parent shall pay the Holder the Holder’s reasonable costs of collection, including reasonable attorneys’ fees.
     3.8 Governing Law, Jurisdiction and Waiver of Jury Trial.
          (a) THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW.
          (b) THE PARENT HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE PARENT, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS; PROVIDED,
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THAT, EACH PARENT ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT, NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE HOLDER. THE PARENT EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE PARENT HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. THE PARENT HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE PARENT AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE PARENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID
          (c) THE PARENT DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARENT HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE HOLDER, AND/OR THE PARENT ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, THE SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
     3.9 Severability. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Note.
     3.10 Maximum Payments. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum rate permitted by such law, any payments in excess of such maximum rate shall be credited against amounts owed by the Parent to the Holder and thus refunded to the Companies.
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     3.11 Security Interest. The Holder has been granted a security interest in certain assets of the Parent as more fully described in the Security Agreement.
     3.12 Construction. Each party acknowledges that its legal counsel participated in the preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Note to favor any party against the other.
     3.13 Registered Obligation. This Note is intended to be a registered obligation within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i) and the Parent (or its agent) shall register this Note (and thereafter shall maintain such registration) as to both principal and any stated interest. Notwithstanding any document, instrument or agreement relating to this Note to the contrary, transfer of this Note (or the right to any payments of principal or stated interest thereunder) may only be effected by (i) surrender of this Note and either the reissuance by the Parent of this Note to the new holder or the issuance by the Parent of a new instrument to the new holder, or (ii) transfer through a book entry system maintained by the Parent (or its agent), within the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).
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     IN WITNESS WHEREOF, the Parent has caused this Secured Revolving Note to be signed in its name effective as of this 30th day of July, 2007.
         
  CHAD THERAPEUTICS, INC.
 
 
  By:   /s/ Earl L. Yager    
    Name:   Earl L. Yager   
    Title:   Chief Executive Officer   
 
WITNESS:
     
/s/ Tracy A. Kern
   
 
   
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EX-10.32 6 v32486exv10w32.htm EXHIBIT 10.32 Exhibit 10.32
 

Exhibit 10.32
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO CHAD THERAPEUTICS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase up to 976,744 Shares of Common Stock of
CHAD THERAPEUTICS, INC.
(subject to adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
     
No. 1
  Issue Date: July 30, 2007
     Chad Therapeutics, Inc. , a corporation organized under the laws of the State of California (the “Company”), hereby certifies that, for value received, CALLIOPE CAPITAL CORPORATION, or assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through the close of business on July 30, 2014 (the “Expiration Date”), up to 976,744 fully paid and nonassessable shares of Common Stock (as hereinafter defined), $0.01 par value per share, at the applicable Exercise Price per share (as defined below). The number and character of such shares of Common Stock and the applicable Exercise Price per share are subject to adjustment as provided herein.
     As used herein the following terms, unless the context otherwise requires, have the following respective meanings:
     (a) The term “Common Stock” includes (i) the Company’s Common Stock, par value $0.01 per share; and (ii) any other securities into which or for which any of the securities described in the preceding clause (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.
     (b) The term “Company” shall include Chad Therapeutics, Inc. and any person or entity which shall succeed, or assume the obligations of, Chad Therapeutics, Inc. hereunder.
     (i) The “Exercise Price” applicable under this Warrant shall be $1.24.
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     (c) The term “Other Securities” refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise.
     (d) The term “Security Agreement” means the Security Agreement dated as of the date hereof among the Holder, the Company and various Subsidiaries of the Company party thereto, as amended, modified, restated and/or supplemented from time to time.
1. Exercise of Warrant.
          1.1 Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part, by delivery of an original or fax copy of an exercise notice in the form attached hereto as Exhibit A (the “Exercise Notice”), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4.
          1.2 Fair Market Value. For purposes hereof, the “Fair Market Value” of a share of Common Stock as of a particular date (the “Determination Date”) shall mean:
     (a) If the Company’s Common Stock is traded on the American Stock Exchange or another national exchange or is quoted on the National or Capital Market of The Nasdaq Stock Market, Inc. (“Nasdaq”), then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date.
     (b) If the Company’s Common Stock is not traded on the American Stock Exchange or another national exchange or on the Nasdaq but is traded on the NASD Over The Counter Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date.
     (c) Except as provided in clause (d) below, if the Company’s Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided.
     (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company’s charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all
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of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date.
          1.3 Company Acknowledgment. The Company will, at the time of the exercise of this Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights.
          1.4 Trustee for Warrant Holders. In the event that a bank or trust company shall have been appointed as trustee for the holders of this Warrant pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1.
2. Procedure for Exercise.
          2.1 Delivery of Stock Certificates, Etc., on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) business days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise.
          2.2 Exercise.
          (a) Payment may be made either (i) in cash by wire transfer of immediately available funds or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price, (ii) by delivery of this Warrant, or shares of Common Stock and/or Common Stock receivable upon exercise of this Warrant in accordance with the formula set forth in subsection (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly
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authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein.
     (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula:
     
X=
  Y(A-B) 
 
  A
 
   
Where X =
  the number of shares of Common Stock to be issued to the Holder
 
   
Y =
  the number of shares of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being exercised (at the date of such calculation)
 
   
A =
  the Fair Market Value of one share of the Company’s Common Stock (at the date of such calculation)
 
   
B =
  the Exercise Price per share (as adjusted to the date of such calculation)
Notwithstanding anything to the contrary set forth in Section 2.2(a) above, to the extent that a registration statement registering all the shares of Common Stock of the Company issuable upon exercise of this Warrant has been declared effective by the Securities and Exchange Commission and remains effective as of the date of the proposed exercise set forth in an Exercise Notice, the Holder shall upon such proposed exercise, make payment to the Company of each respective Exercise Price set forth in such Exercise Notice in cash by wire transfer of immediately available funds or by certified or official bank check only.
3. Effect of Reorganization, Adjustment of Exercise Price.
          3.1 Reorganization, Consolidation, Merger, Etc. (a) In case at any time or from time to time, the Company shall (i) effect a reorganization, (ii) consolidate with or merge into any other person (other than as contemplated in Section 3.1(b) below), or (iii) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash, where applicable) to which such Holder would have been
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entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4.
     (b) Notwithstanding anything to the contrary contained in Section 3.1(a) above, the Holder agrees that, in the event of a consolidation or merger of the Company with or into any other person in which the sole consideration is cash, the Holder shall, upon the written request of the Company, elect either (i) to exercise this Warrant, in which event such exercise will be deemed effective immediately prior to the consummation of such transaction or (ii) not to exercise this Warrant, in which event this Warrant will expire upon the consummation of such transaction. The Company shall provide the Holder with written notice of its request relating to the foregoing (together with such reasonable information as the Holder may request in connection with the contemplated transaction giving rise to such notice), which is to be delivered to the Holder not less than ten (10) days prior to the closing of the proposed transaction.
          3.2 Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Common Stock, shall at its expense deliver or cause to be delivered to the Holder the stock and other securities and property (including cash, where applicable) receivable by the Holder pursuant to Section 3.1, or, if the Holder shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in New York, NY as trustee for the Holder.
          3.3 Continuation of Terms. Upon any reorganization, consolidation or merger or transfer (and any dissolution following any transfer) referred to in this Section 3 (other than any consolidation or merger referred to in Section 3.1(b) above), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization consolidation or merger or transfer or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3 (other than any consolidation or merger referred to in Section 3.1(b) above), then the Company’s securities and property (including cash, where applicable) receivable by the Holder will be delivered to the Holder or the Trustee as contemplated by Section 3.2.
     4. Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock or any preferred stock issued by the Company, (b) subdivide its outstanding shares of Common Stock, (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then
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Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be adjusted to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise (taking into account the provisions of this Section 4). Notwithstanding the foregoing, in no event shall the Exercise Price be less than the par value of the Common Stock.
     5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of this Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder and any Warrant agent of the Company (appointed pursuant to Section 11 hereof).
     6. Reservation of Stock, Etc., Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of this Warrant.
     7. Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a “Transferor”) in whole or in part. On the surrender for exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B attached hereto (the “Transferor Endorsement Form”) and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include at the Company’s request, without limitation, a legal opinion from the Transferor’s counsel (at the Company’s expense) that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense (but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in
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such Transferor Endorsement Form (each a “Transferee”), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor.
     8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
     9. Registration Rights. The Holder has been granted certain registration rights by the Company. These registration rights are set forth in a Registration Rights Agreement entered into by the Company and Holder dated as of the date hereof, as the same may be amended, modified and/or supplemented from time to time.
     10. Maximum Exercise. Notwithstanding anything herein to the contrary, in no event shall the Holder be entitled to exercise any portion of this Warrant in excess of that portion of this Warrant upon exercise of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its Affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised portion of the Warrant or the unexercised or unconverted portion of any other security of the Holder subject to a limitation on conversion analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the exercise of the portion of this Warrant with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its Affiliates of any amount greater than 9.99% of the then outstanding shares of Common Stock (whether or not, at the time of such exercise, the Holder and its Affiliates beneficially own more than 9.99% of the then outstanding shares of Common Stock). As used herein, the term “Affiliate” means any person or entity that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a person or entity, as such terms are used in and construed under Rule 144 under the Securities Act. For purposes of the second preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such sentence. For any reason at any time, upon written or oral request of the Holder, the Company shall within one (1) business day confirm orally and in writing to the Holder the number of shares of Common Stock outstanding as of any given date. The limitations set forth herein (x) may be waived by the Holder upon provision of no less than sixty-one (61) days prior written notice to the Company and (y) shall automatically become null and void following notice to the Company upon the occurrence and during the continuance of an Event of Default (as defined in the Security Agreement), except that at no time shall the Company be obligated to issue any shares of Common Stock pursuant to the terms of this Warrant, the Security Agreement, any Ancillary Agreement (as defined in the Security Agreement) if the issuance of such shares of Common Stock would exceed the aggregate number of shares of Common Stock which the Company may issue pursuant to the terms of this Warrant, the Security Agreement, any Ancillary Agreement or without violating the rules or regulations of the Principal Market (the “Exchange Cap”), except
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that such limitation shall not apply in the event that the Company obtains the approval of its stockholders as required by the applicable rules or regulations of the Principal Market for issuances of Common Stock in excess of such amount.
     11. Warrant Agent. The Company may, by written notice to the each Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.
     12. Transfer on the Company’s Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
     13. Rights of Shareholders. No Holder shall be entitled to vote or receive dividends or be deemed the holder of the shares of Common Stock or any other securities of the Company which may at any time be issuable upon exercise of this Warrant for any purpose (the “Warrant Shares”), nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon the recapitalization, issuance of shares, reclassification of shares, change of nominal value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise, in each case, until the earlier to occur of (x) the date of actual delivery to Holder (or its designee) of the Warrant Shares issuable upon the exercise hereof or (y) the third business day following the date such Warrant Shares first become deliverable to Holder, as provided herein.
     14. Notices, Etc. All notices and other communications from the Company to the Holder shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder who has so furnished an address to the Company.
     15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS WARRANT SHALL BE BROUGHT ONLY IN STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT THE HOLDER MAY CHOOSE TO WAIVE THIS PROVISION AND BRING AN ACTION OUTSIDE THE STATE OF NEW YORK. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction
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of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorneys’ fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party.
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     IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above.
         
    CHAD THERAPEUTICS, INC.
 
       
WITNESS:
       
 
       
 
  By:   /s/ Earl L. Yager
 
       
 
  Name:   Earl L. Yager
 
       
/s/ Tracy A. Kern
  Title:   Chief Executive Officer
 
       
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EXHIBIT A
FORM OF SUBSCRIPTION
(To Be Signed Only On Exercise Of Warrant)
         
TO:
  Chad Therapeutics, Inc.    
 
       
 
 
 
   
 
       
 
       
       
  Attention:   Chief Financial Officer    
     The undersigned, pursuant to the provisions set forth in the attached Warrant (No.___), hereby irrevocably elects to purchase (check applicable box):
     
                    
                       shares of the common stock covered by such warrant; or
 
   
                    
  the maximum number of shares of common stock covered by such warrant pursuant to the cashless exercise procedure set forth in Section 2.
     The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $                    . Such payment takes the form of (check applicable box or boxes):
     
                    
  $                     in lawful money of the United States; and/or
 
   
                    
  the cancellation of such portion of the attached Warrant as is exercisable for a total of                      shares of Common Stock (using a Fair Market Value of $                     per share for purposes of this calculation); and/or
 
   
                    
  the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2.2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 2.
     The undersigned requests that the certificates for such shares be issued in the name of, and delivered to                                          whose address is                                                                                                                    .
     The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the “Securities Act”) or pursuant to an exemption from registration under the Securities Act.
             
Dated:
           
           
        (Signature must conform to name of holder as
        specified on the face of the Warrant)
 
      Address:    
 
           
 
           
 
           
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11


 

EXHIBIT B
FORM OF TRANSFEROR ENDORSEMENT
(To Be Signed Only On Transfer Of Warrant)
     For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Chad Therapeutics, Inc. into which the within Warrant relates specified under the headings “Percentage Transferred” and “Number Transferred,” respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Chad Therapeutics, Inc. with full power of substitution in the premises.
                 
            Percentage   Number
Transferees   Address       Transferred   Transferred
                 
             
 
           
Dated:
           
         
        (Signature must conform to name of holder as
        specified on the face of the Warrant)
 
      Address:    
 
           
 
           
 
           
 
           
        SIGNED IN THE PRESENCE OF:
 
           
         
 
          (Name)
     
ACCEPTED AND AGREED:
   
[TRANSFEREE]
   
 
   
 
(Name)
   
Warrant

12

EX-99.1 7 v32486exv99w1.htm EXHIBIT 99.1 Exhibit 99.1
 

Exhibit 99.1
         
(CHAD LOGO)

THERAPEUTICS
Innovative Respiratory Solutions
 

FOR IMMEDIATE RELEASE
  21622 Plummer Street
Chatsworth, CA 91311
Toll Free: 800.423.8870
Phone: 818.882.0883
Main Fax: 818.882.1809
     
Company Contact:   Investor Contact:
Earl L. Yager   Neil Berkman Associates
President and CEO   (310) 826 — 5051
www.CHADtherapeutics.com   info@BerkmanAssociates.com
CHAD Therapeutics Completes $3.5 Million Financing Package
     CHATSWORTH, California, August 1, 2007 . . . CHAD Therapeutics, Inc. (ASE:CTU) today announced the completion of a $3,500,000 financing package with a private investor that provides funding for the development and commercial roll-out of the Company’s initial products for the sleep disorder market and enhances the Company’s working capital.
     The financing package is comprised of a $750,000 convertible term note and a $2,750,000 revolving credit line, all secured by the Company’s assets. The term note is payable in equal installments over 33 months and bears interest at prime plus 2%, and the revolving credit line bears interest at prime plus 1.5%. A portion of the financing was used to pay all outstanding obligations on the Company’s factoring arrangement with a commercial bank.
     At the investor’s option, the convertible note may be converted into shares of the Company’s common stock any time during the term of the note at a conversion price of $1.18. In addition, warrants to purchase up to 976,744 shares of CHAD’s common stock were issued to the investor with an exercise price of $1.24 per share. The investor was granted registration rights with respect to the shares underlying the warrants. The warrants include a lock-up feature for a period of 12 months after any warrants are exercised. In connection with the financing, CHAD incurred brokerage and related fees of approximately $400,000 and issued 20,958 warrants with an exercise price of $1.24 to a brokerage firm that introduced the investor.
     Earl Yager, CHAD’s President and CEO said, “As previously announced, we currently are launching several new products for the oxygen market and expect to launch our initial products for the sleep disorder market this fall. We also are pursuing outsourcing and other cost-cutting measures to reduce manufacturing costs for many of our established products. We believe this financing package gives us the resources to complete these programs while maintaining our current operations.”
About CHAD Therapeutics
     CHAD Therapeutics, Inc. develops, manufactures and markets respiratory care devices designed to improve the efficiency of oxygen delivery systems for home health care and hospital treatment of patients suffering from pulmonary diseases. For more information, visit www.CHADtherapeutics.com.
Safe Harbor Statements under the Private Securities Litigation Reform Act of 1995.
     The foregoing statements regarding prospects for future earnings and revenues, future sales trends and the introduction of products under development are forward-looking statements that involve certain risks and uncertainties. A number of important factors could cause actual results to differ materially from those contemplated by such forward-looking statements. These include the loss of one or more major customers, increased competition, the introduction of new products with perceived competitive advantages over the Company’s products, changes or proposed changes in health care reimbursement which affect home care providers and CHAD’s ability to anticipate and respond to technological and economic changes in the home oxygen market. Moreover, the success of the Company’s products and products under development will depend on their efficacy, reliability and the health care community’s perception of the products’ capabilities and benefits, the degree of acceptance the products achieve among homecare providers and, with respect to products under development, obtaining timely regulatory approval. Additional factors that could cause actual results to differ materially from those contemplated in this press release can be found in the Company’s annual and quarterly reports filed with the Securities and Exchange Commission under the caption “Outlook: Issues and Risks.”
         
    * * * * *   #4384
CHAD, OXYMATIC, OXYMIZER, OXYLITE, and TOTAL O2 are Registered Trademarks of Chad Therapeutics, Inc.
ISO 13485 Certified Company
WWW.CHADTHERAPEUTICS.COM

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