Exhibit 10.2

 

SECURITY AGREEMENT

 

SECURITY AGREEMENT, dated as of June 22, 2015 (this “Agreement”), between Vapor
Corp., a Delaware corporation (the “Grantor”), and Redwood Management, LLC, in
its capacity as collateral agent (the “Collateral Agent”) on behalf of the
Secured Parties (as defined below).

 

The Grantor and certain Purchasers (together with the Collateral Agent, each a
“Secured Party” and collectively, the “Secured Parties”), are or will be parties
to a certain Securities Purchase Agreement (as amended, amended and restated,
supplemented or otherwise modified from time to time, the “Purchase Agreement”),
providing, subject to the terms and conditions thereof, for the purchase of the
Debentures (as defined therein).

 

Accordingly, the parties hereto agree as follows:

 

Section 1. Definitions, Terms Generally; Etc.

 

1.01 Definitions. Capitalized terms used but not defined herein shall have the
meanings given to them in the Purchase Agreements.

 

1.02 Certain Uniform Commercial Code Terms. As used herein, the terms
“Accession”, “Account”, “As-Extracted Collateral”, “Chattel Paper”, “Commodity
Account”, “Commodity Contract”, “Deposit Account”, “Document”, “Electronic
Chattel Paper”, “Equipment”, “Fixture”, “General Intangible”, “Goods”,
“Instrument”, “Inventory”, “Investment Property”, “Letter-of-Credit Right”,
“Payment Intangible”, “Proceeds”, “Promissory Note”, “Software” and “Tangible
Chattel Paper” have the respective meanings set forth in Article 9 of the NYUCC,
and the terms “Certificated Security”, “Financial Asset”, “Instruction”,
“Securities Account”, “Security”, “Security Certificate”, “Security Entitlement”
and “Uncertificated Security” have the respective meanings set forth in
Article 8 of the NYUCC.

 

1.03 Additional Definitions. In addition, as used herein:

 

“Collateral” has the meaning assigned to such term in Section 3.

 

“Contingent Secured Obligations” means obligations of the Grantor in respect
of any claim that may be payable to the Secured Party by the Grantor under any
Transaction Document that is not yet due and payable.

 

“Copyright Collateral” means all Copyrights of the Grantor, whether now owned or
hereafter acquired by the Grantor, including each Copyright identified in
Annex 4.

 

“Copyrights” means all copyrights, copyright registrations and applications for
copyright registrations, including all renewals and extensions thereof, all
rights to recover for past, present or future infringements thereof and all
other rights whatsoever accruing thereunder or pertaining thereto.

 

“Default” means any of the following events: (a) any of the Secured Obligations
shall have been declared, or shall become, due and payable prior to the stated
maturity therefor, (b) the Grantor shall fail to pay when due any principal
amount in respect of a Secured Obligation, (c) the Grantor shall fail to pay any
interest, fees, commissions, indemnities, costs and other expenses in respect of
any Secured Obligations for three or more business days after the date on which
such amounts first become due or (d) any event of default or termination
(however described) under any Transaction Document shall occur and be
continuing.

 

Annex 8 to Security Agreement

 

 

 

 

“Foreign Subsidiary” means any subsidiary of the Grantor with respect to which
the Collateral Agent determines that a pledge of more than 66-2/3% of the total
number of shares of voting stock of such subsidiary would result in material
adverse tax consequences under Section 956 of the Code.

 

“Initial Pledged Shares” means the Shares of each Issuer beneficially owned by
the Grantor on the date hereof and identified in Annex 3 (Part A).

 

“Intellectual Property” means, collectively, all Copyright Collateral, all
Patent Collateral, all Trademark Collateral and all improvements, modifications,
derivative works now known or later developed related thereto, together with
(a) all inventions, processes, production methods, proprietary information,
know-how and trade secrets; (b) all licenses or user or other agreements granted
to the Grantor with respect to any of the foregoing, in each case whether now or
hereafter owned or used; (c) all information, customer lists, identification of
suppliers, data, plans, blueprints, specifications, designs, drawings, recorded
knowledge, surveys, engineering reports, test reports, manuals, materials
standards, processing standards, performance standards, catalogs, source code
computer and automatic machinery software and programs; (d) all field repair
data, sales data and other information relating to sales or service of products
now or hereafter manufactured; (e) all accounting information and all media in
which or on which any information or knowledge or data or records may be
recorded or stored and all computer programs used for the compilation or
printout of such information, knowledge, records or data; (f) all licenses,
consents, permits, variances, certifications and approvals of governmental
agencies now or hereafter held by the Grantor; and (g) all causes of action,
claims and warranties now or hereafter owned or acquired by the Grantor in
respect of any of the items listed above.

 

“Issuers” means, collectively, (a) the respective Persons identified on Annex 3
(Part A) under the caption “Issuer”, (b) any other Person that shall at any time
be a subsidiary of the Grantor, and (c) the issuer of any equity securities
hereafter owned by the Grantor.

 

“Liens” means any pledge, hypothecation, assignment, deposit arrangement, lien,
charge, claim, security interest, security title, mortgage, security deed or
deed of trust, easement or encumbrance, or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security interest
under the Uniform Commercial Code or comparable law of any jurisdiction).

 

“Motor Vehicles” means motor vehicles, tractors, trailers and other like
property, if the title thereto is governed by a certificate of title or
ownership.

 

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

 

“Patent Collateral” means all Patents of the Grantor, whether now owned or
hereafter acquired by the Grantor, including each Patent identified in Annex 5,
and all income, royalties, damages and payments now or hereafter due and/or
payable under or with respect thereto.

 

 

 

 

“Patents” means all patents and patent applications, including the inventions
and improvements described and claimed therein together with the reissues,
divisions, continuations, renewals, extensions and continuations-in-part
thereof, all income, royalties, damages and payments now or hereafter due and/or
payable with respect thereto, all damages and payments for past or future
infringements thereof and rights to sue therefor, and all rights corresponding
thereto throughout the world.

 

“Person” means any individual, corporation, company, voluntary association,
partnership, limited liability company, joint venture, trust, unincorporated
organization or government (or any agency, instrumentality or political
subdivision thereof).

 

“Permitted Lien” means (a) Liens imposed by law for taxes that are not yet due
or are being contested in good faith and for which adequate reserves have been
established in accordance with generally accepted accounting principles; (b)
carriers’, warehousemen’s, mechanic’s, material men’s, repairmen’s and other
like Liens imposed by law, arising in the ordinary course of business and
securing obligations that are not overdue by more than 30 days or that are being
contested in good faith and by appropriate proceedings; (c) pledges and deposits
made in the ordinary course of business in compliance with workers’
compensation, unemployment insurance and other social security laws or
regulations; (d) deposits to secure the performance of bids, trade contracts,
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature, in each case in the ordinary course of
business; (e) Liens created with respect to the financing of the purchase of new
property in the ordinary course of the Grantor’s business up to the amount of
the purchase price of such property; (f) easements, zoning restrictions,
rights-of-way and similar encumbrances on real property imposed by law or
arising in the ordinary course of business that do not secure any monetary
obligations and do not materially detract from the value of the affected; (g)
Liens which are junior to the Lien held by the Secured Parties hereunder; and
(h) the Liens in favor of Entrepreneur Growth Capital LLC, certain note holders
who entered into a Secured Line of Credit Agreement with Emagine the Vape
Stores, LLC on December 1, 2014 and the real party in interest to the extent
reflected on Exhibit A.

 

“Pledged Shares” means, collectively, (i) the Initial Pledged Shares and
(ii) all other Shares of any Issuer now or hereafter owned by the Grantor,
together in each case with (a) all certificates representing the same, (b) all
shares, securities, moneys or other property representing a dividend on or a
distribution or return of capital on or in respect of the Pledged Shares, or
resulting from a split-up, revision, reclassification or other like change of
the Pledged Shares or otherwise received in exchange therefor, and any warrants,
rights or options issued to the holders of, or otherwise in respect of, the
Pledged Shares, and (c) without prejudice to any provision of any of the
Transaction Documents prohibiting any merger or consolidation by an Issuer, all
Shares of any successor entity of any such merger or consolidation.

 

“Secured Obligations” means, collectively, the obligations of the Grantor to the
Secured Parties in respect of the principal of and interest on any amounts owed
to the Secured Parties under the Transaction Documents, and all other amounts
from time to time owing to the Secured Parties by the Grantor under the
Transaction Documents, together with in each case interest thereon and expenses
relating thereto, including any interest or expenses accruing or arising after
the commencement of any case with respect to the Grantor under the United States
Bankruptcy Code or any other bankruptcy or insolvency law (whether or not such
interest or expenses are allowed or allowable as a claim in whole or in part in
such case).

 

“Shares” means shares of capital stock of a corporation, limited liability
company interests, partnership interests and other ownership or equity interests
of any class in any Person.

 

 

 

 

“Trademark Collateral” means all Trademarks of the Grantor, whether now owned or
hereafter acquired by the Grantor, including each Trademark identified in
Annex 6, together, in each case, with the product lines and goodwill of the
business connected with the use of, and symbolized by, each such trade name,
trademark and service mark. Notwithstanding the foregoing, the Trademark
Collateral does not and shall not include any Trademark that would be rendered
invalid, abandoned, void or unenforceable by reason of its being included as
part of the Trademark Collateral.

 

“Trademarks” means all trade names, trademarks and service marks, logos,
trademark and service mark registrations, and applications for trademark and
service mark registrations, including all renewals of trademark and service mark
registrations, all rights to recover for all past, present and future
infringements thereof and all rights to sue therefor, and all rights
corresponding thereto throughout the world.

 

Section 2. Representations and Warranties. The Grantor represents, warrants and
covenants to the Secured Party that:

 

2.01 Names, Etc. The full and correct legal name, type of organization,
jurisdiction of organization, organizational ID number (if applicable) and
mailing address of the Grantor as of the date hereof are correctly set forth in
Annex 1. Said Annex 1 correctly specifies (a) the place of business of the
Grantor or, if the Grantor has more than one place of business, the location of
the chief executive office of the Grantor and (b) each location where any
financing statement naming the Grantor as debtor is currently on file.

 

2.02 Changes in Circumstances. The Grantor has not (a) within the period of four
months prior to the date hereof, changed its location (as defined in Section 9
307 of the NYUCC), (b) except as specified in Annex 1, heretofore changed its
name, or (c) except as specified in Annex 2, heretofore become a “new debtor”
(as defined in Section 9 102(a)(56) of the NYUCC) with respect to a currently
effective security agreement previously entered into by any other Person.

 

2.03 Pledged Shares.

 

(a) The Initial Pledged Shares constitute (i) 100% of the issued and outstanding
Shares of each Issuer other than a Foreign Subsidiary beneficially owned by the
Grantor on the date hereof (other than any Shares held in a Securities Account
referred to in Annex 7), whether or not registered in the name of the Grantor
and (ii) in the case of each Issuer that is a Foreign Subsidiary, (A) 65% of the
issued and outstanding shares of voting stock of such Issuer and (B) 100% of all
other issued and outstanding shares of capital stock of whatever class of such
Issuer beneficially owned by the Grantor on the date hereof, in each case
whether or not registered in the name of the Grantor. Annex 3 (Part A) correctly
identifies, as at the date hereof, the respective Issuers of the Initial Pledged
Shares.

 

(b) The Initial Pledged Shares are, and all other Pledged Shares in which the
Grantor shall hereafter grant a security interest pursuant to Section 3 will be,
(i) duly authorized, validly existing, fully paid and non assessable (in the
case of any Shares issued by a corporation) and (ii) duly issued and outstanding
(in the case of any equity interest in any other entity), and none of such
Pledged Shares are or will be subject to any contractual restriction, or any
restriction under the charter, by laws, partnership agreement or other
organizational instrument of the respective Issuer thereof, upon the transfer of
such Pledged Shares (except for any such restriction contained herein or in the
Transaction Documents, or under such organizational instruments).

 

 

 

 

2.04 Promissory Notes. Annex 3 (Part B) sets forth a complete and correct list
of all Promissory Notes (other than any held in a Securities Account referred to
in Annex 7) held by the Grantor on the date hereof having an aggregate principal
amount in excess of $50,000.

 

2.05 Intellectual Property.

 

(a) Annexes 4, 5 and 6, respectively, set forth a complete and correct list of
all copyright registrations, patents, patent applications, trademark
registrations and trademark applications owned by the Grantor on the date hereof
(or, in the case of any supplement to said Annexes 4, 5 and 6, effecting a
pledge thereof, as of the date of such supplement).

 

(b) Except pursuant to licenses and other user agreements entered into by the
Grantor in the ordinary course of business that are listed in said Annexes 4, 5
and 6 (including as supplemented by any supplement effecting a pledge thereof),
the Grantor has done nothing to authorize or enable any other Person to use any
Copyright, Patent or Trademark listed in said Annexes 4, 5 and 6 (as so
supplemented), and all registrations listed in said Annexes 4, 5 and 6 (as so
supplemented) are, except as noted therein, in full force and effect.

 

(c) To the Grantor’s knowledge, (i) except as set forth in said Annexes 4, 5 and
6 (as supplemented by any supplement effecting a pledge thereof), there is no
violation by others of any right of the Grantor with respect to any Copyright,
Patent or Trademark listed in said Annexes 4, 5 and 6 (as so supplemented),
respectively, and (ii) the Grantor is not infringing in any respect upon any
Copyright, Patent or Trademark of any other Person; and no proceedings alleging
such infringement have been instituted or are pending against the Grantor and no
written claim against the Grantor has been received by the Grantor, alleging any
such violation, except as may be set forth in said Annexes 4, 5 and 6 (as so
supplemented).

 

(d) The Grantor does not own any Trademarks registered in the United States of
America to which the last sentence of the definition of Trademark Collateral
applies.

 

2.06 Deposit Accounts and Securities Accounts. Annex 7 sets forth a complete and
correct list of all Deposit Accounts, Securities Accounts and Commodity Accounts
of the Grantor on the date hereof.

 

2.07 Commercial Tort Claims. Annex 8 sets forth a complete and correct list of
all commercial tort claims of the Grantor in existence on the date hereof.

 

2.08 Fair Labor Standards Act. Any goods now or hereafter produced by the
Grantor or any of its subsidiaries included in the Collateral have been and will
be produced in compliance with the requirements of the Fair Labor Standards Act,
as amended.

 

Section 3. Collateral. As collateral security for the payment in full when due
(whether at stated maturity, by acceleration or otherwise) of the Secured
Obligations in accordance with the terms of the Transaction Documents, the
Grantor hereby pledges and grants to the Collateral Agent, for the ratable
benefit of the Secured Parties, as hereinafter provided a first priority
(subject to Permitted Liens) security interest in all of the Grantor’s right,
title and interest in, to and under the following property, in each case whether
tangible or intangible, wherever located, and whether now owned by the Grantor
or hereafter acquired and whether now existing or hereafter coming into
existence (all of the property described in this Section 3 being collectively
referred to herein as “Collateral”):

 

(a) all Accounts;

 

(b) all As-Extracted Collateral;

 

 

 

 

(c) all Chattel Paper;

 

(d) all Deposit Accounts;

 

(e) all Documents;

 

(f) all Equipment;

 

(g) all Fixtures;

 

(h) all General Intangibles;

 

(i) all Goods not covered by the other clauses of this Section 3;

 

(j) the Pledged Shares;

 

(k) all Instruments, including all Promissory Notes;

 

(l) all Intellectual Property;

 

(m) all Inventory;

 

(n) all Investment Property not covered by other clauses of this Section 3,
including all Securities, all Securities Accounts and all Security Entitlements
with respect thereto and Financial Assets carried therein, and all Commodity
Accounts and Commodity Contracts;

 

(o) all Letter-of-Credit Rights;

 

(p) all commercial tort claims, as defined in Section 9-102(a)(13) of the NYUCC,
arising out of the events described in Annex 8;

 

(q) all other tangible and intangible personal property whatsoever of the
Grantor; and

 

(r) all Proceeds of any of the Collateral, all Accessions to and substitutions
and replacements for, any of the Collateral, and all offspring, rents, profits
and products of any of the Collateral, and, to the extent related to any
Collateral, all books, correspondence, credit files, records, invoices and other
papers (including all tapes, cards, computer runs and other papers and documents
in the possession or under the control of the Grantor or any computer bureau or
service company from time to time acting for the Grantor),

 

IT BEING UNDERSTOOD, HOWEVER, that (A) in the case of any of the foregoing that
consists of general or limited partnership interests in a general or limited
partnership, the security interest hereunder shall be deemed to be created only
to the maximum extent permitted under the applicable organizational instrument
pursuant to which such partnership is formed, (B) in no event shall the security
interest granted under this Section 3 attach to any lease, license, contract,
property rights or agreement to which the Grantor is a party (or to any of its
rights or interests thereunder) if the grant of such security interest would
constitute or result in either (i) the abandonment, invalidation or
unenforceability of any right, title or interest of the Grantor therein or
(ii) in a breach or termination pursuant to the terms of, or a default under,
any such lease, license, contract, property rights or agreement (other than to
the extent that any such term would be rendered ineffective by Section 9-406,
9-407, 9-408 or 9-409 of the Uniform Commercial Code as in effect in the
relevant jurisdiction), and (C) the security interest created hereby in Shares
constituting voting stock of any Issuer that is a Foreign Subsidiary shall be
limited to that portion of such voting stock that does not exceed 65% of the
aggregate issued and outstanding voting stock of such Issuer.

 

 

 

 

Section 4. Intentionally Omitted.

 

Section 5. Further Assurances; Remedies. In furtherance of the grant of the
security interest pursuant to Section 3, the Grantor hereby agrees with the
Collateral Agent and the other Secured Parties as follows:

 

5.01 Delivery and Other Perfection. The Grantor shall promptly from time to time
give, execute, deliver, file, record, authorize or obtain all such financing
statements, continuation statements, notices, instruments, documents, agreements
or consents or other papers as may be necessary or desirable in the judgment of
the Collateral Agent (including, without limitation, any filings that may be
required by the United States Patent and Trademark Office (the “USPTO”) and the
United States Copyright Office in order to perfect the security interest granted
by the Grantor in and to the Intellectual Property) to create, preserve,
perfect, maintain the perfection of or validate the first priority (subject to
Permitted Liens) security interest granted pursuant hereto or to enable the
Collateral Agent to exercise and enforce its rights hereunder with respect to
such security interest, and without limiting the foregoing, shall:

 

(a) if any of the Pledged Shares, Investment Property or Financial Assets
constituting part of the Collateral are received by the Grantor, forthwith
(x) deliver to the Collateral Agent the certificates or instruments representing
or evidencing the same, duly endorsed in blank or accompanied by such
instruments of assignment and transfer in such form and substance as the
Collateral Agent may reasonably request, all of which thereafter shall be held
by the Collateral Agent, pursuant to the terms of this Agreement, as part of the
Collateral and (y) take such other action as the Collateral Agent may reasonably
deem necessary or appropriate to duly record or otherwise perfect the security
interest created hereunder in such Collateral;

 

(b) promptly from time to time deliver to the Collateral Agent any and all
Instruments constituting part of the Collateral, endorsed and/or accompanied by
such instruments of assignment and transfer in such form and substance as the
Collateral Agent may request; provided that (other than in the case of the
promissory notes described in Annex 3 (Part B)) so long as no Default shall have
occurred and be continuing, the Grantor may retain for collection in the
ordinary course any Instruments received by the Grantor in the ordinary course
of business and the Collateral Agent shall, promptly upon request of the
Grantor, make appropriate arrangements for making any Instrument delivered by
the Grantor available to the Grantor for purposes of presentation, collection or
renewal (any such arrangement to be effected, to the extent requested by the
Collateral Agent, against trust receipt or like document);

 

(c) promptly from time to time enter into such control agreements, each in form
and substance reasonably acceptable to the Collateral Agent, as may be required
to perfect the security interest created hereby in any and all Deposit Accounts,
Investment Property, Electronic Chattel Paper and Letter-of-Credit Rights, and
will promptly furnish to the Collateral Agent true copies thereof;

 

 

 

 

(d) promptly from time to time upon the request of the Collateral Agent, execute
and deliver such short-form security agreements as the Collateral Agent may
reasonably deem necessary or desirable to protect the interests of the Secured
Parties in respect of that portion of the Collateral consisting of Intellectual
Property;

 

(e) promptly upon request of the Collateral Agent, cause the Collateral Agent to
be listed as the lienholder on any certificate of title or ownership covering
any Motor Vehicle (other than Motor Vehicles constituting Inventory) and within
120 days of such request deliver evidence of the same to the Collateral Agent;

 

(f) keep full and accurate books and records relating to the Collateral, and
stamp or otherwise mark such books and records in such manner as the Collateral
Agent may reasonably require in order to reflect the security interests granted
by this Agreement; and

 

(g) permit representatives of the Collateral Agent, upon reasonable notice, at
any time during normal business hours to inspect and make abstracts from its
books and records pertaining to the Collateral, and permit representatives of
the Collateral Agent to be present at the Grantor’s place of business to receive
copies of communications and remittances relating to the Collateral, and forward
copies of any notices or communications received by the Grantor with respect to
the Collateral, all in such manner as the Collateral Agent may require.

 

5.02 Other Financing Statements or Control. Except as otherwise permitted under
the Transaction Documents, other than with respect to Permitted Liens, the
Grantor shall not (a) file or suffer to be on file, or authorize or permit to be
filed or to be on file, in any jurisdiction, any financing statement or like
instrument with respect to any of the Collateral in which the Collateral Agent
is not named as the sole secured party, or (b) cause or permit any Person other
than the Collateral Agent or a Secured Party to have “control” (as defined in
Section 9-104, 9-105, 9-106 or 9-107 of the NYUCC) of any Deposit Account,
Electronic Chattel Paper, Investment Property or Letter-of-Credit Right
constituting part of the Collateral.

 

5.03 Preservation of Rights. The Collateral Agent shall not be required to take
steps necessary to preserve any rights against prior parties to any of the
Collateral.

 

5.04 Special Provisions Relating to Certain Collateral.

 

(a) Pledged Shares.

 

(i) The Grantor will cause the Pledged Shares to constitute at all times (1)
100% of the total number of Shares of each Issuer other than a Foreign
Subsidiary then outstanding owned by the Grantor and (2) in the case of any
Issuer that is a Foreign Subsidiary, 65% of the total number of shares of voting
stock of such Issuer and 100% of the total number of shares of all other classes
of capital stock of such Issuer then issued and outstanding owned by the
Grantor.

 

(ii) So long as no Default shall have occurred and be continuing, the Grantor
shall have the right to exercise all voting, consensual and other powers of
ownership pertaining to the Pledged Shares for all purposes not inconsistent
with the terms of this Agreement, the Transaction Documents or any other
instrument or agreement referred to herein or therein, provided that the Grantor
agrees that it will not vote the Pledged Shares in any manner that is
inconsistent with the terms of this Agreement, the Transaction Documents or any
such other instrument or agreement; and the Collateral Agent shall execute and
deliver to the Grantor or cause to be executed and delivered to the Grantor all
such proxies, powers of attorney, dividend and other orders, and all such
instruments, without recourse, as the Grantor may reasonably request for the
purpose of enabling the Grantor to exercise the rights and powers that it is
entitled to exercise pursuant to this Section 5.04(a)(ii).

 

 

 

 

(iii) Unless and until a Default shall have occurred and be continuing, the
Grantor shall be entitled to receive and retain any dividends, distributions or
proceeds on the Pledged Shares paid in cash out of earned surplus.

 

(iv) intentionally omitted.

 

(b) Intellectual Property.

 

(i) For the purpose of enabling the Collateral Agent to exercise rights and
remedies under Section 5.05 at such time as the Collateral Agent shall be
lawfully entitled to exercise such rights and remedies, and for no other
purpose, the Grantor hereby grants to the Collateral Agent, to the extent
assignable, an irrevocable, non-exclusive license (exercisable without payment
of royalty or other compensation to the Grantor) to use, assign, license or
sublicense any of the Intellectual Property now owned or hereafter acquired by
the Grantor, wherever the same may be located, including in such license
reasonable access to all media in which any of the licensed items may be
recorded or stored and to all computer programs used for the compilation or
printout thereof.

 

(ii) Notwithstanding anything contained herein to the contrary, but subject to
any provision of the Transaction Documents that limit the rights of the Grantor
to dispose of its property, so long as no Default shall have occurred and be
continuing, the Grantor will be permitted to exploit, use, enjoy, protect,
license, sublicense, assign, sell, dispose of or take other actions with respect
to the Intellectual Property in the ordinary course of the business of the
Grantor. In furtherance of the foregoing, so long as no Default shall have
occurred and be continuing, the Collateral Agent shall from time to time, upon
the request of the Grantor, execute and deliver any instruments, certificates or
other documents, in the form so requested, that the Grantor shall have certified
are appropriate in its judgment to allow it to take any action permitted above
(including relinquishment of the license provided pursuant to clause (i)
immediately above as to any specific Intellectual Property). Further, upon the
payment in full of all of the Secured Obligations and the expiration and
termination of all obligations of the Secured Parties to the Grantor, or earlier
expiration of this Agreement or release of the Collateral, the Collateral Agent
shall grant back to the Grantor the license granted pursuant to clause (i)
immediately above. The exercise of rights and remedies under Section 5.05 by the
Collateral Agent shall not terminate the rights of the holders of any licenses
or sublicenses theretofore granted by the Grantor in accordance with the first
sentence of this clause (ii).

 

(iii) The Grantor shall deliver a copy of an updated source code as soon as
reasonably practicable after such update to the source code is made available.

 

(c) Chattel Paper. The Grantor will (i) deliver to the Secured Party each
original of each item of Chattel Paper at any time constituting part of the
Collateral, and (ii) cause each such original and each copy thereof to bear a
conspicuous legend, in form and substance reasonably satisfactory to the Secured
Party, indicating that such Chattel Paper is subject to the security interest
granted hereby and that purchase of such Chattel Paper by a Person other than
the Secured Party without the consent of the Secured Party would violate the
rights of the Secured Party.

 

 

 

 

5.05 Remedies.

 

(a) Rights and Remedies Generally upon Default. If a Default shall have occurred
and is continuing, and any Purchaser or the Grantor shall have notified the
Collateral Agent in writing thereof, the Collateral Agent, on behalf of the
Secured Parties, shall have all of the rights and remedies with respect to the
Collateral of a secured party under the NYUCC (whether or not the Uniform
Commercial Code is in effect in the jurisdiction where the rights and remedies
are asserted) and such additional rights and remedies to which a secured party
is entitled under the laws in effect in any jurisdiction where any rights and
remedies hereunder may be asserted, including the right, to the fullest extent
permitted by law, to exercise all voting, consensual and other powers of
ownership pertaining to the Collateral as if the Collateral Agent were the sole
and absolute owner thereof (and the Grantor agrees to take all such action as
may be appropriate to give effect to such right); and without limiting the
foregoing, the Collateral Agent may:

 

(i) in its discretion, in its name or in the name of the Grantor or otherwise,
demand, sue for, collect or receive any money or other property at any time
payable or receivable on account of or in exchange for any of the Collateral,
but shall be under no obligation to do so;

 

(ii) make any reasonable compromise or settlement deemed desirable with respect
to any of the Collateral and may extend the time of payment, arrange for payment
in installments, or otherwise modify the terms of, any of the Collateral;

 

(iii) require the Grantor to notify (and the Grantor hereby authorizes the
Collateral Agent to so notify) each account debtor in respect of any Account,
Chattel Paper or General Intangible, and each obligor on any Instrument,
constituting part of the Collateral that such Collateral has been assigned to
the Collateral Agent hereunder, and to instruct that any payments due or to
become due in respect of such Collateral shall be made directly to the
Collateral Agent or as it may direct (and if any such payments, or any other
Proceeds of Collateral, are received by the Grantor they shall be held in trust
by the Grantor for the benefit of the Collateral Agent and as promptly as
possible remitted or delivered to the Collateral Agent for application as
provided herein);

 

(iv) require the Grantor to assemble the Collateral at such place or places,
reasonably convenient to the Collateral Agent and the Grantor, as the Collateral
Agent may direct;

 

(v) intentionally omitted;

 

(vi) require the Grantor to cause the Pledged Shares to be transferred of record
into the name of the Collateral Agent or its nominee (and the Collateral Agent
agrees that if any of such Pledged Shares is transferred into its name or the
name of its nominee, the Collateral Agent will thereafter promptly give to the
Grantor copies of any notices and communications received by it with respect to
such Pledged Shares); and

 

 

 

 

(vii) sell, lease, assign or otherwise dispose of all or any part of the
Collateral, at such place or places as the Collateral Agent deems best, and for
cash or for credit or for future delivery (without thereby assuming any credit
risk), at public or private sale, without demand of performance or notice of
intention to effect any such disposition or of the time or place thereof (except
such notice as is required by applicable statute and cannot be waived), and the
Collateral Agent, any Secured Party or anyone else may be the purchaser, lessee,
assignee or recipient of any or all of the Collateral so disposed of at any
public sale (or, to the extent permitted by law, at any private sale) and
thereafter hold the same absolutely, free from any claim or right of whatsoever
kind, including any right or equity of redemption (statutory or otherwise), of
the Grantor, any such demand, notice and right or equity being hereby expressly
waived and released. In the event of any sale, assignment, or other disposition
of any of the Trademark Collateral, the goodwill connected with and symbolized
by the Trademark Collateral subject to such disposition shall be included. The
Collateral Agent may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for the sale, and such sale may be made at any time
or place to which the sale may be so adjourned.

 

The Proceeds of each collection, sale or other disposition under this
Section 5.05, including by virtue of the exercise of any license granted to the
Secured Party in Section 5.04(b), shall be applied in accordance with
Section 5.09.

 

(b) Certain Securities Act Limitations. The Grantor recognizes that, by reason
of certain prohibitions contained in the Securities Act of 1933, as amended, and
applicable state securities laws, the Collateral Agent may be compelled, with
respect to any sale of all or any part of the Collateral, to limit purchasers to
those who will agree, among other things, to acquire the Collateral for their
own account, for investment and not with a view to the distribution or resale
thereof. The Grantor acknowledges that any such private sales may be at prices
and on terms less favorable to the Secured Parties than those obtainable through
a public sale without such restrictions, and, notwithstanding such
circumstances, agrees that any such private sale shall be deemed to have been
made in a commercially reasonable manner and that the Collateral Agent shall
have no obligation to engage in public sales and no obligation to delay the sale
of any Collateral for the period of time necessary to permit the issuer thereof
to register it for public sale.

 

(c) Notice. The Grantor agrees that to the extent the Collateral Agent is
required by applicable law to give reasonable prior notice of any sale or other
disposition of any Collateral, ten business days’ notice shall be deemed to
constitute reasonable prior notice.

 

5.06 Deficiency. If the proceeds of sale, collection or other realization of or
upon the Collateral pursuant to Section 5.05 are insufficient to cover the costs
and expenses of such realization and the payment in full of the Secured
Obligations, the Grantor shall remain liable for any deficiency.

 

5.07 Locations; Names, Etc. Without at least 30 days’ prior written notice to
the Collateral Agent, the Grantor shall not (i) change its location (as defined
in Section 9-307 of the NYUCC), (ii) change its name from the name shown as its
current legal name on Annex 1, or (iii) agree to or authorize any modification
of the terms of any item of Collateral that would result in a change thereof
from one Uniform Commercial Code category to another such category (such as from
a General Intangible to Investment Property), if the effect thereof would be to
result in a loss of perfection of, or diminution of priority for, the security
interests created hereunder in such item of Collateral, or the loss of control
(within the meaning of Section 9-104, 9-105, 9-106 or 9-107 of the NYUCC) over
such item of Collateral.

 

5.08 Private Sale. The Collateral Agent shall incur no liability as a result of
the sale of the Collateral, or any part thereof, at any private sale pursuant to
Section 5.05 conducted in a commercially reasonable manner. The Grantor hereby
waives any claims against the Collateral Agent arising by reason of the fact
that the price at which the Collateral may have been sold at such a private sale
was less than the price that might have been obtained at a public sale or was
less than the aggregate amount of the Secured Obligations, even if the
Collateral Agent accepts the first offer received and does not offer the
Collateral to more than one offeree.

 

 

 

 

5.09 Application of Proceeds. Except as otherwise herein expressly provided and
except as provided below in this Section 5.09, the Proceeds of any collection,
sale or other realization of all or any part of the Collateral pursuant hereto,
and any other cash at the time held by the Collateral Agent under Section 3 or
this Section 5, shall be applied by the Collateral Agent:

 

First, to the payment of the costs and expenses of such collection, sale or
other realization, including reasonable out-of-pocket costs and expenses of the
Collateral Agent and the fees and expenses of its agents and counsel, and all
expenses incurred and advances made by the Collateral Agent in connection
therewith;

 

Next, to the payment in full of the Secured Obligations (or, in the case of any
Contingent Secured Obligations, to the provision of cover as provided below), in
such order as the Collateral Agent shall in its sole discretion determine; and

 

Finally, to the payment to the Grantor, or its successors or assigns, or as a
court of competent jurisdiction may direct, of any surplus then remaining.

 

5.10 Attorney-in-Fact. Without limiting any rights or powers granted by this
Agreement to any Secured Party or the Collateral Agent while no Default has
occurred and is continuing, upon the occurrence and during the continuance of
any Default the Collateral Agent is hereby appointed the attorney-in-fact of the
Grantor for the purpose of carrying out the provisions of this Section 5 and
taking any action and executing any instruments that the Collateral Agent may
deem necessary or advisable to accomplish the purposes hereof, which appointment
as attorney-in-fact is irrevocable and coupled with an interest. Without
limiting the generality of the foregoing, so long as the Collateral Agent shall
be entitled under this Section 5 to make collections in respect of the
Collateral, the Collateral Agent shall have the right and power to receive,
endorse and collect all checks made payable to the order of Grantor representing
any dividend, payment or other distribution in respect of the Collateral or any
part thereof and to give full discharge for the same.

 

5.11 Perfection and Recordation. The Grantor hereby authorizes the Collateral
Agent to (a) file Uniform Commercial Code financing statements describing the
Collateral as “all assets” or “all personal property and fixtures” of the
Grantor (provided that no such description shall be deemed to modify the
description of Collateral set forth in Section 3), (b) file all necessary
agreements, documents, applications and instruments with the USPTO and/or the
United States Copyright Office necessary or desirable for the Collateral Agent
to perfect, monitor and maintain the first priority (subject to Permitted Liens)
security interest in the Intellectual Property granted by the Grantor under this
Agreement, and (c) take possession of Collateral and/or take any other action
necessary in order for the Collateral Agent to perfect its first priority
(subject to Permitted Liens) security interest in the Collateral.

 

5.12 Termination. When all Secured Obligations shall have been paid in full or
converted into Common Stock and all obligations of the Collateral Agent to the
Grantor shall have expired or terminated, this Agreement shall terminate, and
the Collateral Agent shall forthwith cause to be assigned, transferred and
delivered, against receipt but without any recourse, warranty or representation
whatsoever, any remaining Collateral and money received in respect thereof, to
or on the order of the Grantor and to be released and canceled all licenses and
rights referred to in Section 5.04(b). The Collateral Agent shall also, at the
expense of the Grantor, execute and deliver to the Grantor upon such termination
such Uniform Commercial Code termination statements, certificates for
terminating the liens on the Motor Vehicles and such other documentation as
shall be reasonably requested by the Grantor to effect the termination and
release of the liens on the Collateral as required by this Section 5.12. For
avoidance of doubt, following a termination of this Agreement in accordance with
this Section 5.12, there shall be no collateral securing the Debentures.

 

 

 

 

5.13 Further Assurances. The Grantor agrees that, from time to time upon the
written request of the Secured Party, the Grantor will execute and deliver such
further documents and do such other acts and things as the Collateral Agent may
reasonably request in order fully to effect the purposes of this Agreement. The
Collateral Agent shall release any lien covering any asset that has been
disposed of in accordance with the provisions of the Transaction Documents.

 

Section 6. Miscellaneous.

 

6.01 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY,
ENFORCEMENT AND INTERPRETATION OF THE TRANSACTION DOCUMENTS SHALL BE GOVERNED BY
AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. EACH
PARTY AGREES THAT ALL LEGAL PROCEEDINGS CONCERNING THE INTERPRETATION,
ENFORCEMENT AND DEFENSE OF THE TRANSACTIONS CONTEMPLATED BY ANY OF THE
TRANSACTION DOCUMENTS (WHETHER BROUGHT AGAINST A PARTY HERETO OR ITS RESPECTIVE
AFFILIATES, DIRECTORS, OFFICERS, SHAREHOLDERS, EMPLOYEES OR AGENTS) SHALL BE
COMMENCED IN THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK,
COUNTY OF NEW YORK (THE “NEW YORK COURTS”). EACH PARTY HERETO HEREBY IRREVOCABLY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE NEW YORK COURTS FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY
TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO
THE ENFORCEMENT OF ANY TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES,
AND AGREES NOT TO ASSERT IN ANY SUITE, ACTION OR PROCEEDING, ANY CLAIM THAT IS
NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH NEW YORK COURTS, OR SUCH NEW
YORK COURTS ARE IMPROPER OR INCONVENIENT VENUE FOR SUCH PROCEEDING. EACH PARTY
HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS
BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF
VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF
DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THE
TRANSACTION DOCUMENTS AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND
SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL
BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY APPLICABLE LAW. IF EITHER PARTY SHALL COMMENCE A PROCEEDING TO
ENFORCE ANY PROVISION OF THE TRANSACTION DOCUMENTS, THEN THE PREVAILING PARTY IN
SUCH ACTION OR PROCEEDING SHALL BE REIMBURSED FOR ITS REASONABLE ATTORNEYS’ FEES
AND OTHER REASONABLE COSTS AND EXPENSES INCURRED IN THE INVESTIGATION,
PREPARATION AND PROSECUTION OF SUCH ACTION OR PROCEEDING.

 

6.02 WAIVER OF JURY TRIAL. IN ANY ACTION, SUIT OR PROCEEDING IN ANY JURISDICTION
BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY ARISING OUT OF OR RELATING TO THE
TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, THE
PARTIES EACH KNOWINGLY AND INTENTIONALLY, TO THE GREATEST EXTENT PERMITTED BY
APPLICABLE LAW, HEREBY ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND EXPRESSLY
WAIVERS FOREVER TRIAL BY JURY.

 

 

 

 

6.03 Amendments. The terms of this Agreement may be waived, altered or amended
only by an instrument in writing duly executed by the Grantor and the Collateral
Agent.

 

6.04 Agents and Attorneys in Fact. The Collateral Agent may employ agents and
attorneys in fact in connection herewith and shall not be responsible for the
negligence or misconduct of any such agents or attorneys in fact selected in
good faith.

 

6.05 Expenses. Grantor shall pay on demand all reasonable fees and expenses,
including reasonable attorneys’ fees and expenses, incurred by the Secured
Parties in connection with the custody, preservation or sale of, or other
realization on, any of the Collateral or the enforcement or attempt to enforce
any of the Secured Obligations which are not performed as and when required by
this Agreement.

 

6.06 Indemnification. The Grantor agrees to pay, indemnify and hold harmless
each of the Collateral Agent and its Affiliates, agents, sub-agents and
attorneys-in-fact and their respective officers, directors, employees, agents
and advisors, from and against any and all obligations, claims, damages, losses,
penalties, suits, costs, liabilities and expenses (including, without
limitation, the costs, fees and expenses of its legal counsel and of any experts
and agents) that may at any time be imposed on, incurred by or asserted or
awarded against any such Person, in each case arising out of or in connection
with or resulting from this Agreement or the other Transaction Documents, as
applicable, except to the extent that such claim, damage, loss, liability or
expense is caused by the indemnified party’s gross negligence or willful
misconduct as determined by a final and non-appealable judgment of a court of
competent jurisdiction. The foregoing indemnity in this Section shall survive
any resignation of the Collateral Agent.

 

[Signatures on following page]

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
duly executed and delivered as of the day and year first above written.

 

  VAPOR CORP.,   as Grantor         By:   Name: Jim Martin   Title: Chief
Financial Officer

 

REDWOOD MANAGEMENT LLC,   as Collateral Agent       By     Name:     Title: