Exhibit 10.4

EXECUTION VERSION

 

 

SECURITY AGREEMENT

 

This Security Agreement (as amended, restated, modified or otherwise
supplemented from time to time, this “Agreement”), dated as of April 5, 2013, is
entered into between Scientific Learning Corporation, a Delaware corporation
(the “Obligor”), in favor of the entities identified as secured parties on the
signature pages of this Agreement (individually, a “Secured Party,” and
together, the “Secured Parties”).

 

W I T N E S S E T H:

 

WHEREAS, Obligor has entered into a Subordinated Note and Warrant Purchase
Agreement, dated as of the date hereof (as amended, restated, modified or
otherwise supplemented from time to time, the “Purchase Agreement”), with the
Secured Parties;

WHEREAS, Obligor wishes to grant to the Secured Parties a security interest in
certain collateral of the Obligor and the Secured Parties wish to receive such
security interest on the date hereof, all as more fully set forth herein;

NOW, THEREFORE, in consideration of the mutual agreements set forth herein,
Obligor and the Secured Parties agree as follows:

1.    Grant of Security Interest.

(a)

To secure payment and performance of the Obligations, Obligor hereby grants to
the Secured Parties a security interest in all property and interests in
property of Obligor, whether now owned or hereafter acquired or existing, and
wherever located (the “Collateral”), including, without limitation, the
following (the “Security Interest”):

(i)

all Accounts;

(ii)

all Receivables;

(iii)

all Equipment;

(iv)

all General Intangibles;

(v)

all Inventory;

(vi)

all Intellectual Property;

(vii)

all Investment Property; and

(viii)

all proceeds and products of the foregoing.

1

 

--------------------------------------------------------------------------------

 

(b)

Notwithstanding anything herein to the contrary, in no event shall the Security
Interest granted hereunder attach to, and the Collateral shall not include, (i)
any asset of the Obligor to the extent that and for so long as the grant of a
security interest therein is prohibited by any applicable law, rule, regulation,
statute or order of any Governmental Authority, (ii) more than 65% of the issued
and outstanding voting equity interests of any Foreign Subsidiary, (iii) any
contract or agreement to which the Obligor is a party or any of its rights or
interests thereunder if and for so long as the grant of such Security Interest
shall constitute or result in (A) the unenforceability of any right of the
Obligor therein or (B) in a breach or termination pursuant to the terms of, or a
default under, any such contract or agreement (other than to the extent that any
such term would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408
or 9-409 of the New York UCC or any other applicable law or principles of
equity); provided,  however, that such Security Interest shall attach
immediately at such time as the condition causing such unenforceability shall be
remedied and, to the extent severable, shall attach immediately to any portion
of such contract or agreement that does not result in any of the consequences
specified in subclauses (A) or (B) of this clause (iii), including any proceeds
of such contract or agreement, (iv) any trust accounts, payroll accounts and
escrow accounts maintained by the Obligor, and (v) any asset or property that is
subject to a purchase money Lien or Lien securing any capital lease obligations
permitted under the Purchase Agreement to the extent that the documents relating
to such purchase money Lien or capital lease obligations would not permit such
asset or property to be subject to the Security Interests created hereby.

2.    Obligor’s Representations and Warranties. The Obligor represents and
warrants to the Secured Parties as follows:

(a)

The Obligor has, and as to Collateral acquired or arising after the date hereof,
will have, good and valid rights in, and title to, the Collateral with respect
to which it has purported to grant a Security Interest hereunder, except for the
Security Interest and Liens in respect of the Permitted Indebtedness and minor
defects in title that do not interfere with its ability to conduct its business
as currently conducted or to utilize the Collateral for its intended purposes,
and has full power and authority to grant to the Secured Parties the Security
Interest in the Collateral pursuant hereto and to execute, deliver and perform
its obligations in accordance with the terms of this Agreement, without the
consent or approval of any other Person other than any consent or approval which
has been obtained;

(b)

There is no agreement in effect on the date hereof that prohibits the creation
of the Security Interest by the Obligor; and

(c)

All written information heretofore or hereafter furnished by the Obligor to each
Secured Party is or will be true and correct in all material respects as of the
date with respect to which such information was or will be furnished.

3.    Obligor’s Covenants.  The Obligor warrants, covenants and agrees with the
Secured Parties that, from and after the date of this Agreement until any and
all amounts owed by the Obligor to any Secured Party are paid in full:

(a)

The Obligor shall not enter into any such agreement prohibiting or limiting the
creation of the Security Interest by the Obligor other than (i) restrictions or
conditions imposed

2

 

--------------------------------------------------------------------------------

 

by any agreement relating to secured Permitted Indebtedness if such restrictions
or conditions apply only to the property or assets permitted to secure such
Indebtedness (or other secured obligations, as the case may be) and the products
and proceeds thereof, (ii) customary restrictions and conditions contained in
agreements relating to any assets pending such sale; provided that such
restrictions apply only to the assets that are to be sold and such sale is
permitted under the Purchase Agreement, (iii) customary provisions in leases,
licenses and other agreements restricting the assignment thereof or the
subletting of the premises subject thereto, (iv) the Transaction Documents, (v)
restrictions on cash or other deposits or net worth imposed by customers or
lessors or required by insurance, surety or bonding companies under contracts
entered into in the ordinary course of business, and (vi) encumbrances or
restrictions arising or existing by reason of applicable law or any applicable
rule, regulation, order, permit or grant.

(b)

The Obligor shall defend the title to the Collateral against any and all Persons
and against any and all claims.

(c)

At any time and from time to time, at the request of any Secured Party, the
Obligor shall execute and deliver one or more financing statements and/or
continuation statements (whether pursuant to the New York UCC or otherwise), and
any amendments thereof and supplements thereto, and such other instruments as
the Secured Parties shall reasonably require in order to perfect, protect,
preserve and maintain the Security Interest, and shall pay the cost of filing
and recording the same or filing and recording this Agreement or any such
statements in all public offices wherever filing or recording is reasonably
deemed by any Secured Party to be necessary or desirable.  The Obligor agrees
that a carbon, photographic or other reproduction of this Agreement or a
financing statement is sufficient as a financing statement.

(d)

The Obligor shall diligently collect all of its accounts and accounts receivable
constituting Collateral unless and until the Secured Parties exercise their
right to collect the accounts and accounts receivable.  Upon any Default, the
Obligor shall, at the request of the Secured Parties, notify its account debtors
of the Security Interest in any account or account receivable and that payment
thereof is to be made directly to the Secured Parties.

(e)

The Obligor shall keep the Collateral (consisting of tangible personal property)
at its present location and not to remove the same (other than motor vehicles or
inventory sold as permitted under the Purchase Agreement) without the prior
written consent of the Majority in Interest in each instance.

4.    Secured Parties’ Covenants.  Each of the Secured Parties agrees that
(i) such party will not, directly or indirectly, take any action with respect to
the Collateral or the Security Interest or its rights and remedies provided for
herein without the prior agreement of Secured Parties representing a Majority in
Interest., (ii) such party will take such actions as are reasonably necessary to
effectuate the instructions or decisions of the Secured Parties representing a
Majority in Interest in respect of all rights and remedies under this Agreement,
including, without limitation, appointing one or more agents selected by the
Secured Parties representing a Majority in Interest to act as collateral agent
with respect to the Collateral.

3

 

--------------------------------------------------------------------------------

 

5.    Remedies on Default.

(a)

Upon any Event of Default and upon demand by the Secured Parties representing a
Majority in Interest, the Obligor agrees immediately to assemble the Collateral
and make it available to the Secured Parties at the place and time designated in
such demand.  The Secured Parties shall be entitled to immediate possession of
the Collateral and the Secured Parties may: (i) enter any premises where any
Collateral may be located for the purpose of assembling or taking possession of
and removing same and (ii) sell, assign, lease or otherwise dispose of the
Collateral or any part thereof, either at public or private sale acceptable to
the Secured Parties.  Any Secured Party may, in its discretion and as it may
deem advisable, bid or become the purchaser at any such sale described in clause
(ii) above, free from any right of redemption (which is hereby expressly waived
by the Obligor).  Until any such sale, the Secured Parties may store the
Collateral on the premises where it is located when seized, and if said premises
are the property of the Obligor, the Obligor agrees not to charge the Secured
Parties for storage thereof for a period of ninety (90) days before or after
sale or disposition of said Collateral.  The Secured Parties will give the
Obligor reasonable notice of time and place of any public sale or the time after
which any private sale or other intended disposition will be made.  The
requirement of reasonable notice shall be met if such notice is mailed to the
Obligor at least five (5) days before the time of the sale or disposition.

(b)

The net cash proceeds resulting from the collection, liquidation, sale or other
disposition of the Collateral shall be applied: first to the expenses (including
all attorneys’ fees) of preparing for sale, storing, processing, selling,
collecting, and/or liquidating the Collateral and the like; second to the
Secured Parties, for the principal and interest due under the Notes in an amount
equal to their respective pro rata portions of such proceeds.  The Obligor shall
be liable to the Secured Parties and shall pay to the Secured Parties on demand
any deficiency which may remain after such sale, disposition, collection or
liquidation of Collateral, and the Secured Parties in turn agree to remit to the
Obligor, or other such persons as their interests may appear, any surplus
remaining after all such liabilities have been paid in full.

(c)

Upon the request of the Secured Parties representing a Majority in Interest,
after the occurrence of any Event of Default, any proceeds of accounts, accounts
receivable or inventory constituting Collateral received by the Obligor, whether
in the form of cash, checks, notes or other instruments, shall be held in trust
by the Obligor in favor of the Secured Parties and the Obligor shall deliver
said proceeds daily to the Secured Parties, without commingling, in the
identical form received.

(d)

In the event the Secured Parties seek to take possession of any or all
Collateral by court process, the Obligor hereby irrevocably waives any bonds and
any surety or security relating thereto required by any statute, court rule or
otherwise as an incident to such possession, and waives any demand for
possession prior to the commencement of any suit or action to recover with
respect thereto and waives the right to demand a jury in any action in which any
of the Secured Parties is a party.

6.    Other Rights upon Event of Default.  In addition to all rights and
remedies herein, upon an Event of Default, each Secured Party shall have such
other rights and remedies as are set forth in

4

 

--------------------------------------------------------------------------------

 

the New York UCC, to the extent the same are not inconsistent with the
provisions of this Agreement.

7.    Definitions.  Capitalized terms used in this Agreement and not otherwise
defined herein have the meanings specified in the Purchase Agreement.  All terms
defined in the New York UCC and not defined herein or in the Purchase Agreement
have the meanings specified in the New York UCC.

“New York UCC” means the Uniform Commercial Code as from time to time in effect
in the State of New York. 

8.    Notices.  Any notices required or permitted to be given under the terms
hereof shall be sent by certified or registered mail (return receipt requested)
or delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile or by electronic mail (if such party designates an
e-mail address herein for such purpose) and shall be effective five (5) days
after being placed in the mail, if mailed by regular United States mail, or upon
receipt, if delivered personally or by courier (including a recognized overnight
delivery service) or by facsimile, or when read by electronic mail (sender shall
have received a “read by recipient” confirmation) in each case addressed to a
party.  The addresses for such communications shall be:

For the Obligor:

300 Frank H. Ogawa Plaza, Suite 600

Oakland, CA 94612

Attn: General Counsel
Email: legal@scilearn.com

 

 

with a courtesy copy to:

Wilson Sonsini Goodrich & Rosati, Professional Corporation

650 Page Mill Road

Palo Alto, CA  94304

Fax: 650-493-6811

Email:  sbernard@wsgr.com

Attn:  Steven Bernard

 

 

For the Secured Parties, to each at its address on Schedule 1 to the Purchase
Agreement, with a copy to

 

Fulbright & Jaworski L.L.P.

666 Fifth Avenue

New York, NY 10103

Fax: 212-318-3400

 

Attn: Michael Flynn

 

5

 

--------------------------------------------------------------------------------

 

9.    General.  

(a)

This Agreement shall bind and inure to the respective successors and assigns of
the Obligor and the Secured Parties, except that the Obligor may not assign or
otherwise transfer all or any part of its rights under the this Agreement
without the prior written consent of the Secured Parties.

(b)

This Agreement, taken together with the other Transaction Documents, contains
the entire understanding of the Parties with respect to the matters covered
thereby and supersede any and all other written and oral communications,
negotiations, commitments and writings with respect thereto.  The provisions of
this Agreement may be waived, modified, supplemented or amended only as provided
in Section 6.6 of the Purchase Agreement.

(c)

All questions concerning the construction, validity, enforcement and
interpretation of 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 to be performed in such State.

(d)

This Agreement may be executed in several counterparts, and by each party on
separate counterparts, each of which and any photocopies and facsimile copies
thereof shall be deemed an original, but all of which together shall constitute
one and the same agreement.

(e)

(i) This Agreement, the Security Interest and all other security interests
granted hereby shall terminate when all the Obligations (other than contingent
obligations not yet accrued and payable) have been paid in full.

(ii)              Upon any sale or other transfer by Obligor of any Collateral
that is not prohibited under the Purchase Agreement, or upon the effectiveness
of any written consent to the release of the Security Interest granted hereby in
any Collateral pursuant to the Purchase Agreement, including upon the written
consent of a Majority in Interest of the Lenders under the Purchase Agreement,
the Security Interest in such Collateral shall be automatically released.

(f)

In connection with any termination or release pursuant to clause (i) or (ii) of
Section 9(e), the Secured Parties shall execute and deliver to the Obligor, at
the Obligor’s expense, all documents that the Obligor shall reasonably request
to evidence such termination or release of its obligations or the Security
Interests in its Collateral.  A Majority in Interest of the Lenders under the
Purchase Agreement may take any such action or release any or all security
hereunder.

(g)

If any provision contained in this Agreement shall be invalid, illegal or
unenforceable in any respect under any law, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.  The Parties shall endeavor in good faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provision.

(h)

From time to time, the Obligor shall perform any and all acts and execute and
deliver to the Secured Parties such additional documents as may be necessary or
as reasonably

6

 

--------------------------------------------------------------------------------

 

requested by the Secured Parties to carry out the purposes of this Agreement or
to preserve and protect the Secured Parties’ rights as contemplated herein.

[Signature page follows]

 

 

7

 

--------------------------------------------------------------------------------

 

 

IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be
executed and delivered by its duly authorized officer on the date first set
forth above.

 

OBLIGOR:

 

SCIENTIFIC LEARNING CORPORATION

 

 

By:  /s/ Jane A. Freeman

Name:  Jane A. Freeman

Title:    CFO

 

 

 

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------

 

SECURED PARTIES:

 

 

BLACKWELL PARTNERS LLC

 

By: Nantahala Capital Management, LLC

Its Investment Manager

 

 

By: __/s/ Wilmot Harkey ____________________

Name: Wilmot Harkey

Title: Manager

 

 

NANTAHALA CAPITAL PARTNERS II,
LIMITED PARTNERSHIP

 

By: Nantahala Capital Management, LLC

Its General Partner

 

 

By: __/s/ Wilmot Harkey ___________________

Name: Wilmot Harkey

Title: Manager

 

 

NANTAHALA CAPITAL PARTNERS,
LIMITED PARTNERSHIP

 

By: Nantahala Capital Management, LLC

Its General Partner

 

 

By: __/s/ Wilmot Harkey  ___________________

     Name: Wilmot Harkey

     Title: Manager

 

 

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------

 

TRIGRAN INVESTMENTS, LP

 

By: Trigran Investments, Inc.

its General Partner

 

 

 

By: __/s/ Lawrence Oberman  ________________

Name: Lawrence Oberman

Title: Executive Vice President

 

 

 

TRIGRAN INVESTMENTS, LP II

 

By: Trigran Investments, Inc.

its General Partner

 

 

 

By: __/s/ Lawrence Oberman  ________________

Name: Lawrence Oberman

Title: Executive Vice President

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------

 

RJ PARTNERS, LLC

 

 

 

By: ___/s/ Robert J. Schmiedeler ___________

Name: Robert J. Schmiedeler

Title: Manager

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------

 

PAULA A. TALLAL, REVOCABLE TRUST

 

 

By: ___/s/ Paula A. Tallal _________________

Name: Paula A. Tallal

Title: Trustee

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------

 

JANE A. FREEMAN LIVING TRUST (5/30/12)

 

 

__/s/ Jane A. Freeman_______________________

Name: Jane A. Freeman

Title: Trustee

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------

 

THE RODMAN W. MOORHEAD III REVOCABLE TRUST

 

 

 

By: ___/s/ Rodman W. Moorhead, III_________

Name: Rodman W. Moorhead, III

Title: Trustee

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------

 

ROBERT BOWEN

 

 

 

___/s/ Robert C. Bowen_________________

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------

 

NOEL MOORE

 

 

 

____/s/ Noel S. Moore__________________

 

[Signature Page to Security Agreement]

 

--------------------------------------------------------------------------------