Exhibit 10.1
 
AMENDMENT NO. 2 TO SECURED PROMISSORY NOTE
AND SECURITY AGREEMENT
 
 
 
This AMENDMENT NO. 2 TO SECURED PROMISSORY NOTE (this “Amendment”), dated
September 30, 2020, is made by and between Charlie’s Holdings, Inc., a Nevada
corporation (“Holdings”), Charlie’s Chalk Dust, LLC, a Delaware limited
liability company (“Chalk Dust”), and Don Polly LLC, a Nevada limited liability
company (“Don Polly”, and together with Holdings and Chalk Dust, individually
and collectively, “Company”), on the one hand, and Red Beard Holdings, LLC, a
Delaware limited liability company (“Red Beard”) on the other. Company and Red
Beard are sometimes collectively referred to herein as the “Parties” and each
individually as a “Party”.
 
RECITALS
 
WHEREAS, the Parties executed that certain Secured Promissory Note on April 8,
2020, in favor of Red Beard in the original principal amount of $750,000, a copy
of which is attached hereto as Exhibit A (the “Note”), and on August 27, 2020,
the Parties executed Amendment No. 1 to the Note, a copy of which is attached
hereto as Exhibit B, to increase the principal amount of the Note to $1,400,000
(“Amendment No. 1”);
 
WHEREAS, to secure repayment of the Note, the Company executed and delivered to
Red Beard that certain Security Agreement also dated April 8, 2020, a copy of
which is attached hereto as Exhibit C (the “Security Agreement”); and
 
WHEREAS, the Note, as amended by Amendment No. 1, currently matures on October
1, 2020 (the “Maturity Date”); and
 
WHEREAS, Company has requested, and Red Beard has agreed, to extend the Maturity
Date to November 1, 2020.
 
AGREEMENT
 
NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties hereto agree as follows:
 
1. Amendment to Maturity Date. The Note, as amended by Amendment No. 1, is
hereby amended so that all references to the “Maturity Date” in the Note shall,
hereafter, mean November 1, 2020.
 
2. Amendment to Security Agreement. The Security Agreement is hereby amended so
that any reference to the “Note” in the Security Agreement shall mean the Note
as amended by this Amendment.
 
3. Event of Conflict. The provisions of the Note, as modified by Amendment No. 1
and in this Amendment, shall remain in full force and effect in accordance with
their terms and are hereby ratified and confirmed. In the event of any conflict
between the terms and conditions of this Amendment and the terms and conditions
set forth in the Note, as amended, the terms and conditions set forth herein
shall control. This Amendment shall be governed by and construed in accordance
with the laws of the State of California.
 
4. Counterparts; Electronic Execution. This Amendment may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement. Delivery of an executed counterpart of this Amendment by
telefacsimile or other electronic method of transmission (including without
limitation a PDF attachment) shall be equally as effective as delivery of an
original executed counterpart of this Amendment.
 

 
 
 
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IN WITNESS WHEREOF, this Amendment was duly executed on the date first written
above.
 
“COMPANY”
 
CHARLIE’S HOLDINGS, INC.,
a Nevada corporation

 
 
“RED BEARD”
 
RED BEARD HOLDINGS, LLC,
a Delaware limited liability company
 
 
By: /s/ Brandon Stump
Mr. Brandon Stump
Chief Executive Officer
 

 
 
 
By: /s/ Vincent C. Smith
Mr. Vincent C. Smith
General Partner
 
 
CHARLIE’S CHALK DUST, LLC
a Delaware limited liability company
 
 
 
 
By: /s/ Brandon Stump
Mr. Brandon Stump
Chief Executive Officer
 
 
 
 
DON POLLY LLC
a Nevada limited liability company
 
 
 
By: /s/ Brandon Stump
Mr. Brandon Stump
Chief Executive Officer
 
 
 
 

 
 
 
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EXHIBIT A
Secured Promissory Note
 
 
$750,000.00                                                                                                                      
April 8, 2020
 
THIS SECURED PROMISSORY NOTE (this "Note") is a duly authorized and validly
issued joint and several promissory note of Charlie's Holdings, Inc., a Nevada
corporation ("Holdings"), Charlie's Chalk Dust, LLC, a Delaware limited
liability company ("Chalk Dust"), and Don Polly LLC, a Nevada limited liability
company ("Don Polly" and together with Holdings and Chalk Dust, individually and
collectively, the “Company”), each of which have a principal place of business
located at 1007 Brioso Drive, Costa Mesa CA 92627.
 
FOR VALUE RECEIVED, the Company hereby promises to pay to the order of Red Beard
Holdings, LLC, a Delaware limited liability company ("Red Beard"), or its
successors and assigns (together with Red Beard, the “Holder”), the principal
sum of Seven Hundred Fifty Thousand Dollars ($750,000.00) (the “Principal
Amount”), together with interest thereon and other amounts payable hereunder at
the times and on the dates set forth herein and in any event no later than the
Maturity Date.
 
Capitalized terms used herein without definition have the meanings set forth on
Exhibit A hereto, which is incorporated herein by this reference as though set
forth herein in full. This Note is subject to the following additional
provisions:
 
Section 1.                        Advance of Funds: Conditions to Advance.
 
(a) On or substantially concurrently with the Effective Date, the Holder shall
advance to the Company by wire of immediately available funds the Principal
Amount less any amounts that may be deducted therefrom by agreement between the
Holder and the Company or otherwise pursuant to the terms of this Note. The
entire Principal Amount shall be deemed to have been advanced on the Effective
Date.
 
(b) Prior to the Holder having the obligation of making the foregoing advance,
the following shall have occurred to the satisfaction of the Holder in its sole
discretion (such date being the "Effective Date"): (i) this Note shall have been
duly executed and delivered by the Company to the Holder; (ii) the Security
Agreement shall have been duly executed and delivered by the Company to the
Holder; and (iii) if requested by the Holder, the Company shall have delivered
to the Holder true and correct copies of the Company’s organizational documents,
resolutions approving the transactions contemplated hereby and under the other
Transaction Documents, and current good standing certificates from each
jurisdiction requested by the Holder.
 
Section 2.                        Payment of Principal and Interest; Security.
 
(a) Payment of Principal. The Principal Amount shall be due and payable in full
by the Company to the Holder on the Maturity Date or, if earlier, upon
acceleration of this Note in accordance with the terms hereof. Any amount of
principal repaid hereunder may not be reborrowed.
 
(b) Payment of Interest. From the Effective Date until paid in full, interest on
the aggregate outstanding Principal Amount shall be equal to at least $75,000
(the "Guaranteed Minimum Interest"), which amount shall be the minimum amount
due and owing regardless of the duration of the loan evidenced by this Note. The
Guaranteed Minimum Interest shall accrue and be fully earned upon the advance by
Holder of the loan evidenced by this Note on or substantially concurrently with
the Effective Date. The Guaranteed Minimum Interest and any additional accrued
interest shall be due and payable by the Company to the Holder on the Maturity
Date or, if earlier, upon acceleration of this Note in accordance with the terms
hereof. Upon and after the occurrence of an Event of Default (as defined below),
then, in addition to the Guaranteed Minimum Interest, the principal and unpaid
interest and unpaid other amounts under this Note shall, at the election of the
Holder in its sole and absolute discretion, bear interest at the lesser of a
rate equal to 20% per annum or the Maximum Rate (as defined below) (the "Default
Rate"). Such interest shall accrue daily commencing on occurrence of such Event
of Default until payment in full of the Principal Amount, together with all
accrued and unpaid interest and other amounts which may become due hereunder,
has been made.
 
 

 
 
 
 

 
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(c) Prepayment. The Company may prepay all or any portion of the Principal
Amount, together with the Guaranteed Minimum Interest.
 
(d) Payments. Notwithstanding anything to the contrary contained herein or in
any other Transaction Document, all payments made by the Company shall be
applied to principal, interest, fees and other charges due the Holder hereunder
in such order of priority as the Holder shall elect.
 
(e) Security. The obligations of the Company under this Note are secured by the
collateral identified in the Security Agreement.
 
(f) Use of Proceeds. The proceeds of this Note shall be used by the Company for
working capital and for general corporate purposes. Notwithstanding the
foregoing, the proceeds of this Note shall not in any event be used to make or
pay any dividend or distribution or to redeem any equity of the Company or
securities convertible, exercisable or exchangeable into equity of the Company,
to settle any outstanding litigation or to make any payment or prepayment on any
existing indebtedness for borrowed money.
 
Section 3.                        Representations and Warranties. The Company
hereby represents and warrants to the Holder as follows:
 
(a) The Company has been duly formed, is validly existing and is in good
standing under the laws of its jurisdiction of formation, is in good standing or
duly qualified as a foreign corporation in all jurisdictions where the conduct
of its business so requires and where the failure to so qualify could reasonably
be expected to have a Material Adverse Effect, and has all requisite power and
authority to execute, deliver and perform its obligations under this Note and
all other Transaction Documents to which it is a party. Each of this Note and
all other Transaction Documents have been duly authorized, executed and
delivered by the Company and constitute its legal, valid and binding obligation,
enforceable against it in accordance with the terms hereof and thereof except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, or other laws of general application relating to or
affecting the enforcement of creditors’ rights generally. The execution,
delivery and performance by the Company of this Note and all other Transaction
Documents to which it is a party, and the incurrence by it of obligations
hereunder and thereunder, do not (i) contravene or conflict with the Company’s
certificate of formation, operating agreement or similar governing documents or
any law applicable to the Company or other instrument binding on or otherwise
affecting the Company, or (ii) give rise to any lien, security interest or other
charge or encumbrance (other than in favor of the Holder) upon any of the
Company’s properties. No consent or approval of or notice to or filing with any
governmental authority or other third party is or will be required on the part
of the Company as a condition to the validity or enforceability of this Note or
the other Transaction Documents, other than such consents which have been
obtained and are in full force and effect, true and complete copies of which
have been previously provided to the Holder.
 
(b) The Company is in compliance in all material respects with all laws and
regulatory requirements to which it or its properties are subject. There is no
litigation pending or, to the knowledge of the Company, threatened against the
Company. The Company’s principal place of business is at the address set forth
at the beginning of this Note. The Company has paid all federal, foreign, state
and local taxes required to be paid by it on or prior to the date they were due.
All documents, instruments and other written material heretofore or hereafter
furnished to the Holder pursuant to the terms of any Transaction Document
contain no misstatements of a material fact and do not fail to disclose any
material fact and the Company has not failed to disclose to the Holder any
material information.
 
 

 
 
 
 

 
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(c) All financial statements of the Company delivered to Holder, if any, fairly
present in all material respects the financial position of the Company as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. None of such financial reports, as of
their date, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
 
Section 4.                        Covenants. As long as any portion of this Note
remains outstanding, the Company agrees as follows:
 
(a) the Company shall not enter into, create, incur, assume or suffer to exist
any Lien on or with respect to any of its assets now owned or hereafter acquired
or any interest therein or any income or profits therefrom;
 
(b) the Company shall not amend its constitutional documents, including without
limitation, its certificate of formation, operating agreement or similar
governing documents, in any manner that adversely affects any rights of the
Holder;
 
(c) the Company shall not enter into, create, incur, assume or suffer to exist
any Indebtedness, other than Indebtedness existing on the date hereof in the
amount in effect on the date hereof that has been previously disclosed to Holder
in writing;
 
(d) the Company shall comply with its obligations under this Note and the other
Transaction Documents;
 
(e) the Company shall comply with all applicable laws and duly observe and
conform in all material respects to all valid requirements of governmental
authorities relating to the conduct of its business or to its properties or
assets;
 
(f) the Company shall not engage in any transactions with any officer, director,
employee, stockholder or any affiliate of the Company, including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee,
stockholder or, to the knowledge of the Company, any entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, stockholder, trustee or partner, other than any transactions
in which the terms of such transaction are, in all material respects, no less
favorable to the Company than would likely apply if such transaction was
negotiated on an arms’ length basis between unrelated parties;
 
(g) the Company shall not declare or pay any dividends or make any distributions
to any holder(s) of equity interests or other equity security of the Company, or
purchase or otherwise acquire for value, directly or indirectly, any equity
interests or other equity security of the Company; except that Holdings may pay
the one-time dividend equal to the eight percent (8%) Dividend Amount (as
defined in the Series A Certificate) as contemplated by Section 3 of the Series
A Certificate so long as (a) Holdings shall have used its best efforts to
satisfy the Equity Conditions (as defined in the Series A Certificate), (b) if
the Equity Conditions have been satisfied, such dividend payment shall be paid
in shares of common stock of Holdings and (c) in the event that Holdings has
failed to satisfy the Equity Conditions and such dividend is required the be
paid in cash, the aggregate amount of all such cash distributions shall not
exceed $1,650,000.
 
 

 
 
 
 

 
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(h) the Company shall not (i) merge or consolidate with any other Person
(regardless of which Person is the surviving entity); (ii) sell or dispose of
any of its assets other than immaterial dispositions in the ordinary course of
business and for fair equivalent value or (iii) in any way or manner alter its
organizational structure or effect a change of entity;
 
(i) the Company shall 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 the income, profits, property or business of the
Company; provided, however, that any such tax, assessment, charge or levy need
not be paid if the validity thereof shall currently be contested in good faith
by appropriate proceedings and if the Company shall have set aside on its books
adequate reserves with respect thereto, and provided, further, that the Company
will 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;
 
(j) the Company shall maintain in full force and effect its corporate existence,
rights and franchises and all licenses and other rights to use property owned or
possessed by it and reasonably deemed to be necessary to the conduct of its
business;
 
(k) the Company shall keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
necessary and proper repairs, renewals, replacements, additions and improvements
thereto; and the Company shall at all times comply with each provision of all
leases to which it is a party or under which it occupies property;
 
(l) the Company shall not make any payment on any indebtedness owed to officers,
directors or affiliates except with the prior written consent of the Holder;
 
(m) the Company shall maintain with financially sound and reputable insurance
companies not affiliates of the Company, insurance with respect to its
properties and business against loss or damage of the kinds customarily insured
against by Persons engaged in the same or similar business, of such types and in
such amounts as are customarily carried under similar circumstances by such
other Persons and providing for not less than 30 days’ prior notice to the
Holder of termination, lapse or cancellation of such insurance;
 
(n) If, notwithstanding any prohibitions in this Note on the incurrence of
Indebtedness, (i) any Indebtedness shall be incurred by any Company or any of
its subsidiaries or (ii) any equity interests shall be issued by any Company or
any of its subsidiaries, then, in each case, unless Holder otherwise provides
its prior written consent, Company shall immediately prepay the obligations
owing with respect to this Note in an amount equal to the net cash proceeds
received from such incurrence or issuance.
 
(o) the Company shall deliver to the Holder or provide access to the Holder, (i)
promptly upon the Holder’s request, such books, records, financial statements,
tax returns, investment statements, lists of property and accounts, budgets,
forecasts or reports as to the Company as the Holder may request; and
(ii) immediately upon knowledge of the same, notice of the occurrence of any
Event of Default.
 
Section 5.                        Events of Default.
 
(a) “Event of Default” means, wherever used herein, any of the following events
(whatever the reason for such event and whether such event shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):
 
 
 

 
 
 
 

 
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i. any default in the payment of (A) the principal amount of this Note or
(B) interest or other amounts owing to the Holder on this Note, as and when the
same shall become due and payable (whether on the Maturity Date or by
acceleration or otherwise);
 
ii. the Company shall fail to observe or perform any other covenant or agreement
contained in this Note or any other Transaction Document;
 
iii. a default or event of default shall occur under any of the Transaction
Documents, or the failure or invalidity of any of the Transaction Documents;
 
iv. any representation or warranty made in this Note, any other Transaction
Documents, any written statement pursuant hereto or thereto or any other report,
financial statement or certificate made or delivered to the Holder shall be
untrue or incorrect in any respect as of the date when made or deemed made;
 
v. the Company shall be subject to a Bankruptcy Event;
 
vi. the Company shall default on any other obligations under any promissory
note, mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be issued, or by
which there may be secured or evidenced, any indebtedness for borrowed money or
money due under any long term leasing or factoring arrangement, whether such
indebtedness now exists or shall hereafter be created;
 
vii. any monetary judgment, writ or similar final process in excess of $100,000
shall be entered or filed against the Company or its property or other assets,
and such judgment, writ or similar final process shall remain unvacated,
unbonded or unstayed for a period of 10 calendar days; or
 
viii. a Material Adverse Effect occurs.
 
(b) Remedies Upon Event of Default. If any Event of Default occurs, the entire
unpaid principal amount of this Note plus all accrued interest and other amounts
owing under this Note through the date of acceleration, shall become, at the
Holder’s election in its sole and absolute discretion, immediately due and
payable upon written notice to the Company, except that, with respect to a
default under Section 5(a)(v) above, no such notice shall be required and such
acceleration shall be automatic and immediate. In connection with such
acceleration described herein, the Holder need not provide, and the Company
hereby waives, any presentment, demand or protest of any kind, and the Holder
may immediately and without expiration of any grace period enforce any and all
of its rights and remedies hereunder and all other remedies available to it
under applicable law and the Transaction Documents. Such acceleration may be
rescinded and annulled by the Holder at any time prior to payment hereunder and
the Holder shall have all rights as the holder of the Note until such time, if
any, as the Holder receives full payment pursuant to this Section 5(b). No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
 
Section 6.                        Miscellaneous.
 
(a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder to the Company hereunder shall be delivered to the
address of the Company set forth in the first paragraph of this Note. Notices to
the Holder shall be delivered to its address at 2525 Main Street, Suite 400,
Irvine CA 92614 or such other address as may be designated by the Holder from
time to time.
 
 

 
 
 
 

 
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(b) Absolute Obligation. No provision of this Note shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of, and accrued interest, as applicable, on this Note at the time,
place, and rate, and in the coin or currency, herein prescribed. This Note is a
direct, unconditional and secured debt obligation of the Company. All payments
to be made by the Company hereunder and under the other Transaction Documents
shall be made, in lawful money of the United States of America, and without
condition or deduction for any counterclaim, defense, recoupment or setoff.
 
(c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or
destroyed, then the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Note, or in lieu of or in
substitution for a lost, stolen or destroyed Note, a new Note for the principal
amount of this Note so mutilated, lost, stolen or destroyed.
 
(d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Note or any other Transaction Document
shall be governed by and construed and enforced in accordance with the internal
laws of the State of California, without regard to the principles of conflict of
laws thereof. The Company hereby agrees that it will commence any and all legal
proceedings under, with respect to or related to any of the Transaction
Documents (whether brought against a party hereto or its respective affiliates,
directors, officers, members, employees or agents) only in the state and federal
courts sitting in the County of Orange, State of California (the “California
Courts”). The Company hereby irrevocably submits to the nonexclusive
jurisdiction of the California 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 of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such California Court, or that such California Court
is an 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 this Note 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 manner permitted by law. EACH PARTY HERETO
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS NOTE, THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY. If either party shall commence an action or
proceeding to enforce any provisions of this Note, then the prevailing party in
such action or proceeding shall be reimbursed by the other party for its
reasonable attorneys’ fees and other reasonable costs and expenses incurred with
the investigation, preparation and prosecution of such action or proceeding.
Nothing in this Note or any other Transaction Document shall affect any right
that the Holder may otherwise have to bring any action or proceeding relating to
this Note or any other Transaction Document against the Company or its
properties in the courts of any jurisdiction.
 
(e) Costs and Expenses. The Company agrees to pay all costs and expenses,
including the fees and expenses of any attorneys, accountants and other experts
retained by the Holder, which are expended or incurred by the Holder in
connection with (i) the preparation, negotiation, modification and/or
enforcement of this Note or any other Transaction Document, or the collection of
any sums due hereunder or thereunder, whether or not suit is commenced; (ii) any
actions for declaratory relief in any way related to this Note or any other
Transaction Document; (iii) the protection or preservation of any rights of the
Holder under this Note or any other Transaction Document; (iv) any actions taken
by the Holder in negotiating any amendment, waiver, consent or release of or
under this Note or any other Transaction Document; (v) any actions taken in
reviewing the Holder’s financial affairs if an Event of Default has occurred or
the Holder has determined in good faith that an Event of Default may likely
occur; (vi) the Holder’s participation in any refinancing, restructuring,
bankruptcy or insolvency proceeding involving the Company; (vii) verifying,
maintaining, or perfecting any security interest or other lien granted to the
Holder in any collateral; (viii) any effort by the Holder to protect, assemble,
complete, collect, sell, liquidate or otherwise dispose of any collateral,
including in connection with any action or proceeding; or (ix) any refinancing
or restructuring of this Note, including, without limitation, any restructuring
in the nature of a “work out” or in any insolvency or bankruptcy proceeding. All
sums due to the Holder pursuant to this clause (f) shall be due and payable
immediately on demand and shall bear interest at the same rate as then
applicable to the Principal Amount.
 
 

 
 
 
 

 
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(f) Waiver. Any waiver by the Holder of a breach of any provision of this Note
or any other Transaction Document shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Note or any other Transaction Document. The failure of the
Holder to insist upon strict adherence to any term of this Note or any other
Transaction Document on one or more occasions shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Note or such Transaction Document, as
applicable. Any waiver by the Holder must be in writing.
 
(g) Severability. If any provision of this Note or any other Transaction
Document is invalid, illegal or unenforceable, the balance of this Note or other
Transaction Document, as applicable, shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
 
(h) Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day.
 
(i) Headings. The headings contained herein are for convenience only, do not
constitute a part of this Note and shall not be deemed to limit or affect any of
the provisions hereof.
 
(j) Usury.
 
i. To the extent it may lawfully do so, the Company hereby agrees not to insist
upon or plead or in any manner whatsoever claim, and will resist any and all
efforts to be compelled to take the benefit or advantage of, usury laws wherever
enacted, now or at any time hereafter in force, in connection with any claim,
action or proceeding that may be brought by the Holder in order to enforce any
right or remedy under any Transaction Document; provided that, notwithstanding
any provision to the contrary contained in any Transaction Document, it is
expressly agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (taking into account any
usury exception or exemption available to the Holder, the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum Rate is paid by the Company to the Holder with respect to indebtedness
evidenced by the Transaction Documents, such excess shall be applied by the
Holder to the unpaid principal balance of any such indebtedness or be refunded
to the Company, the manner of handling such excess to be at the Holder’s
election.
 
ii. Without limiting the generality of; the foregoing, it is the intent of
Holder and Company that the loan evidenced by this Note comply with the usury
exemption set forth in California Corporations Code § 25118(b). In accordance
with such Section, Company hereby represents and warrants to Holder the
following:
 
(1)
Holder and Company, or any of their respective officers, directors, members,
managers or other controlling persons, have a preexisting personal or business
relationship.
 
(2)
Holder and Company, by reason of their own business and financial experience or
that of their professional advisers, have the capacity to protect their own
interests in connection with the transaction.
 
 
 

 
 
 
 

 
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(k) Indemnification. The Company will indemnify and hold the Holder harmless
from any loss, liability, damages, judgments, and costs of any kind
(“Liabilities”) relating to or arising directly or indirectly out of (i) this
Note or any other Transaction Document, (ii) any credit extended or committed by
the Holder to the Company hereunder, and (iii) any litigation or proceeding
related to or arising out of this Note, any such Transaction, Document, or any
such credit; provided, however that the Company shall have no obligation to
indemnify the Holder for any Liabilities that have arisen as a result of the
Holder’s gross negligence or willful misconduct as determined by a final
non-appealable judgment of a court of competent jurisdiction.. This indemnity
includes but is not limited to attorneys’ fees and expenses. This indemnity
extends to the Holder, its affiliates, partners, directors, officers, employees,
agents, successors, attorneys, and assigns. This indemnity will survive
repayment of the Company’s obligations to the Holder. All sums due to the Holder
hereunder shall be due and payable immediately without demand and shall bear
interest at the same rate as then applicable to the Principal Amount.
 
(l) Joint and Several Liability. Each of Holdings, Chalk Dust and Don Polly
acknowledge that each of the undersigned are parties to this note as the
"Company" as joint and several co-borrowers hereunder. Any references in this
Note to the "Company" shall refer to any of Holdings, Chalk Dust or Don Polly,
or both such Persons as the context may require. Each of Holdings, Chalk Dust
and Don Polly accept joint and several liability for the payment and performance
of all of the obligations of the Company hereunder, and each of such obligations
constitute the absolute and unconditional full recourse obligations of each such
Person enforceable against each such Person to the full extent of its properties
and assets. Each of Holdings, Chalk Dust and Don Polly hereby waive, to the
fullest extent permitted by law, any and all defenses or benefits that may be
derived from or afforded by applicable law limiting the liability of or
exonerating guarantors or sureties (including co-borrowers to the extent
applicable), including , including but not limited to any rights and defenses
that are or may become available to any such Person by reason of Sections 2787
to 2855, inclusive, 2899 and 3433 of the California Civil Code.
 
(m) Successors and Assigns; Assignments and Participations. This Note shall be
binding upon and inure to the benefit of the Company and the Holder and their
respective successors and assigns, except that the Company may not assign or
transfer any of its rights or obligations under this Note or any other
Transaction Document without the express written consent of the Holder.
 
(n) Counterparts; Electronic Execution. This Note may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Note.
Delivery of an executed counterpart of this Note by telefacsimile or other
electronic method of transmission (including without limitation a PDF
attachment) shall be equally as effective as delivery of an original executed
counterpart of this Note. The foregoing shall apply to each other Transaction
Document mutatis mutandis.
 

 

 
 
 
 

 
A-8

 
 
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by its
duly authorized officer as of the date first above indicated.
 
 
"Company"
 
CHARLIE'S HOLDINGS, INC.,
a Nevada corporation
 
 
By: Brandon Stump
                                                                

Name: Brandon Stump
                                                                
Title: Chief Executive Officer 
                                                                

 
 
CHARLIE'S CHALK DUST, LLC,
a Delaware limited liability company
 
 
By: Brandon Stump
                                                                

Name: Brandon Stump
                                                                
Title: Chief Executive Office
                                                                  
 
DON POLLY LLC,
a Nevada limited liability company
 
 
By: Brandon Stump
                                                                

Name: Brandon Stump
                                                                
Title: Chief Executive Officer
                                                           

 
 
AGREED AND ACKNOWLEDGED:
 
RED BEARD HOLDINGS, LLC,
a Delaware limited liability company
 
 
 
By: Vinny Smith

Name:  Vinny Smith

Title: General Partner

 
 
 
 
 
 

 
 
 
 

 
A-9

 
EXHIBIT A
 
(Certain Defined Terms)
 
“Bankruptcy Event” means any of the following events: (a) the Company commences
a case or other proceeding under any Debtor Relief Laws; (b) there is commenced
against the Company any case or proceeding under Debtor Relief Laws that is not
dismissed within 30 calendar days after commencement; (c) the Company is
adjudicated insolvent or bankrupt or any order of relief or other order
approving any such case or proceeding is entered; (d) the Company suffers any
appointment of any custodian or the like for it or any substantial part of its
property that is not discharged or stayed within 30 calendar days after such
appointment; (e) the Company makes a general assignment for the benefit of
creditors; (f) the Company calls a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts; or (g) the
Company, by any act or failure to act, expressly indicates its consent to,
approval of or acquiescence in any of the foregoing or takes any corporate or
other action for the purpose of effecting any of the foregoing.
 
“Business Day” means any day other than a Saturday, Sunday or other day on which
commercial banks are authorized to close under the laws of, or are in fact
closed in, Orange County, California.
 
“Debtor Relief Laws” means the Bankruptcy Code of the United States, and all
other liquidation, conservatorship, bankruptcy, assignment for the benefit of
creditors, moratorium, rearrangement, receivership, insolvency, reorganization,
or similar debtor relief laws of the United States or other applicable
jurisdictions from time to time in effect and affecting the rights of creditors
generally.
 
“Indebtedness” means (a) all obligations for borrowed money; (b) all obligations
evidenced by bonds, debentures, notes, or other similar instruments and all
reimbursement or other obligations in respect of letters of credit, bankers
acceptances, current swap agreements, interest rate hedging agreements, interest
rate swaps, or other financial products; (c) all capital lease obligations;
(d) all obligations or liabilities secured by a lien or encumbrance on any asset
of the Company, irrespective of whether such obligation or liability is assumed;
(e) all obligations for the deferred purchase price of assets; (f) all synthetic
leases; and (g) any obligation guaranteeing or intended to guarantee (whether
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse) any of the foregoing obligations of any other person; provided,
however, Indebtedness shall not include (x) usual and customary trade debt
incurred in the ordinary course of business and (y) endorsements for collection
or deposit in the ordinary course of business.
 
“Lien” means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge, or preference,
priority or other security interest or preferential arrangement in the nature of
a security interest of any kind or nature whatsoever (including any conditional
sale or other title retention agreement, any easement, right of way or other
encumbrance on title to real property, and any financing lease having
substantially the same economic effect as any of the foregoing).
 
"Liquidity Event" means any of the following, in each case with respect to
either Company (or both) or any of their respective subsidiaries and/or
affiliates: (a) the raising of any additional capital by any Company, whether in
the form of debt, equity or otherwise, in which Company receives aggregate net
cash proceeds therefrom of at least $1,000,000, including, without limitation,
the anticipated investment, whether in the form of equity, debt or otherwise, by
United Capital Partners LLC and/or any of its affiliates, (b) any merger or
consolidation in which any Company is a constituent party, or (c) the sale,
transfer, pledge or other disposition of any equity interests of any Company
and/or any of their respective subsidiaries and/or affiliates, or (d) the sale,
lease, transfer, exclusive license or other disposition, in a single transaction
or series of related transactions, by the Company or any subsidiary or affiliate
of the Company of all or substantially all the assets of the Company and its
subsidiaries and/or affiliates.
 
 

 
 
 
 

 
A-10

 
“Material Adverse Effect” means (a) a material adverse change in, or a material
adverse effect upon, the operations, business, properties, liabilities (actual
or contingent), condition (financial or otherwise) or prospects of the Company;
(b) a material impairment of the rights and remedies of the Holder under any
Transaction Document or of the ability of Company to perform its obligations
under any Transaction Document; (c) a material adverse effect upon the legality,
validity, binding effect or enforceability against the Company of any
Transaction Document; or (d) the issuance by any third party lender to the
Company of a notice of default on Indebtedness.
 
"Maturity Date" means the earlier to occur of (a) a Liquidity Event or (b)
October 1, 2020.
 
“Note” means this Secured Promissory Note, as amended, restated, supplemented,
extended or otherwise modified from time to time.
 
“Person” means any individual, firm, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
limited liability company, governmental authority or other entity of any kind.
 
“Security Agreement” means the Security Agreement of even date herewith made by
Company in favor of the Holder, as amended, restated, supplemented, extended or
otherwise modified from time to time.
 
"Series A Certificate" means that certain Certificate of Designations,
Preferences and Rights of the Series A Convertible Preferred Stock of True
Drinks Holdings, Inc. (now known as Charlie's Holdings, Inc.) as in effect as of
the date of this Agreement.
 
“Transaction Documents” means this Note, the Security Agreement, each guaranty
entered into in connection herewith, if any, and each other instrument, document
or agreement now or hereafter executed by the Company in favor of the Holder in
connection with this Note, in each case as amended, restated, supplemented,
extended or otherwise modified from time to time.
 
 

 
 
A-11

 
 
EXHIBIT B

AMENDMENT NO. 1
TO
SECURED PROMISSORY NOTE
AND SECURITY AGREEMENT
 
This AMENDMENT NO. 1 TO SECURED PROMISSORY NOTE AND SECURITY AGREEMENT (this
“Amendment”), dated August, 27, 2020, is made by and between Charlie’s Holdings,
Inc., a Nevada corporation (“Holdings”), Charlie’s Chalk Dust, LLC, a Delaware
limited liability company (“Chalk Dust”), and Don Polly LLC, a Nevada limited
liability company (“Don Polly”, and together with Holdings and Chalk Dust,
individually and collectively, “Company”), on the one hand, and Red Beard
Holdings, LLC, a Delaware limited liability company (“Red Beard”) on the other.
Company and Red Beard are sometimes collectively referred to herein as the
“Parties” and each individually as a “Party”.
 
RECITALS
 
WHEREAS, the Parties executed that certain Secured Promissory Note on April 8,
2020, in favor of Red Beard in the original principal amount of Seven Hundred
Fifty Thousand and 00/100 Dollars ($750,000.00), a copy of which is attached
hereto as Exhibit A and by this reference incorporated herein (the “Note”);
 
WHEREAS, to secure repayment of the Note, the Company executed and delivered to
Red Beard that certain Security Agreement also dated April 8, 2020, a copy of
which is attached hereto as Exhibit B and by this reference incorporated herein
(the “Security Agreement”); and
 
WHEREAS, Company has requested, and Red Beard has agreed, to increase the amount
that can be borrowed under the Note.
 
AGREEMENT
 
NOW, THEREFORE, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Parties hereto agree as follows:
 
1. Increase in Principal. The Principal Amount of the Note shall be increased
from Seven Hundred Fifty Thousand and 00/100 Dollars ($750,000.00) to One
Million Four Hundred Thousand and 00/100 Dollars ($1,400,000.00).
 
2. Increase in Guaranteed Minimum Interest. The Guaranteed Minimum Interest
shall be increased from Seventy Five Thousand and 00/100 Dollars ($75,000.00) to
One Hundred Thousand and 00/100 Dollars ($100,000.00).
 
3. Amendment to Security Agreement. The Security Agreement is hereby amended so
that any reference to the “Note” in the Security Agreement shall mean the Note
as amended by this Amendment.
 
4. Event of Conflict. The provisions of the Note, as modified in this Amendment,
shall remain in full force and effect in accordance with their terms and are
hereby ratified and confirmed. In the event of any conflict between the terms
and conditions of this Amendment and the terms and conditions set forth in the
Note, the terms and conditions set forth herein shall control. This Amendment
shall be governed by and construed in accordance with the laws of the State of
California.
 
5. Counterparts; Electronic Execution. This Amendment may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement. Delivery of an executed counterpart of this Amendment by
telefacsimile or other electronic method of transmission (including without
limitation a PDF attachment) shall be equally as effective as delivery of an
original executed counterpart of this Amendment.
 
 
 
B-1

 
 
 
IN WITNESS WHEREOF, this Amendment was duly executed on the date first written
above.
 
“COMPANY”
 
CHARLIE’S HOLDINGS, INC.,
a Nevada corporation

 
 
“RED BEARD”
 
RED BEARD HOLDINGS, LLC
a Delaware limited liability company
 
By: /s/ Brandon Stump 
Mr. Brandon Stump
Chief Executive Officer

 
 
By: /s/ Vinny Smith 
Vinny Smith
General Partner
 
 
CHARLIE’S CHALK DUST, LLC
a Delaware limited liability company
 
 
 
 
By: /s/ Brandon Stump 
Mr. Brandon Stump
Chief Executive Officer
 
 
 
 
DON POLLY LLC
a Nevada limited liability company
 
 
 
By: /s/ Brandon Stump 
Mr. Brandon Stump
Chief Executive Officer
 
 
 
 

 
 
 
 

 
 
B-2

 
 
EXHIBIT C
Security Agreement
 
THIS SECURITY AGREEMENT (as amended, restated, supplemented, extended or
otherwise modified from time to time, this "Agreement") dated as of April 8,
2020, is jointly and severally entered into by Charlie's Holdings, Inc., a
Nevada corporation ("Holdings"), Charlie's Chalk Dust, LLC, a Delaware limited
liability company ("Chalk Dust"), and Don Polly LLC, a Nevada limited liability
company ("Don Polly" and together with Holdings and Chalk Dust, individually and
collectively, the "Debtor"), as debtor in favor of Red Beard Holdings, LLC, a
Delaware limited liability Company ("Red Beard" and together with its successors
and assigns, "Secured Party").
 
WHEREAS, concurrently herewith, Debtor is issuing that certain Secured
Promissory Note of even date herewith in favor of Secured Party (as amended,
restated, supplemented, extended or otherwise modified from time to time, the
"Red Beard Note").
 
WHEREAS, as a condition to the obligation of Secured Party to enter into the Red
Beard Note and to loan and advance funds thereunder pursuant to the Red Beard
Note, Secured Party has required Debtor to enter into this Agreement, and Debtor
to grant the security interests described herein in the Collateral in favor of
Secured Party.
 
NOW THEREFORE, in consideration of the premises and mutual covenants contained
herein and for other good, valuable, and binding consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
 
1. Definitions.
 
(a)      Capitalized terms used herein and not otherwise defined herein shall
have the meanings provided in the Red Beard Note. This Agreement is the
"Security Agreement" referred to in the Red Beard Note. This Agreement is one of
the "Transaction Documents" referred to in the Red Beard Note. To the extent
that any terms or concepts defined or used herein are defined or used in the UCC
(as defined below), such terms or concepts shall be interpreted for purposes
hereof in a manner that is consistent with such definition or use in the UCC.
 
(b) The following terms shall have the meanings set forth below:
 
"Collateral" shall mean all right, title, and interest of the Debtor in and to
all of the following property of the Debtor, whether now owned or hereafter
acquired and whether now existing or hereafter coming into existence:
 
(i)           Accounts;
 
(ii)           Chattel Paper and rights to receive monies included thereby;
 
(iii)           Commercial Tort Claims;
 
(iv)           Deposit Accounts;
 
(v)           Documents;
 
(vi)           Equity Collateral;
 
(vii)           General Intangibles;
 
(viii)           Goods, including Inventory and Equipment;
 
(ix)           Instruments and rights to receive monies included thereby;
 
 

 
 
C-1

 
 
  
(x)           Intellectual Property;
 
(xi)           Investment Property, including Commodity Accounts and Commodity
Contracts;
 
(xii)           Letter-of-Credit Rights;
 
(xiii)           Notes;
 
(xiv)           other tangible and intangible personal property and Fixtures of
the Debtor;
 
(xv)           to the extent related to any property described in the clauses
(i) through (xiv), all books, correspondence, loan files, records, invoices, and
other papers, including without limitation all tapes, cards, computer runs, and
other papers and documents in the possession or under the control of the Debtor
or any computer service company from time to time acting for the Debtor; and
 
(xvi)           cash and non-cash Proceeds of any and all of the foregoing.
 
"Copyright Collateral" shall mean all Copyrights, whether now owned or hereafter
acquired by the Debtor.
 
"Copyrights" shall mean all copyrights, copyright registrations, and
applications for copyright registrations, including, without limitation, all
renewals and extensions thereof, the right to recover for all past, present, and
future infringements thereof, and all other rights of any kind whatsoever
accruing thereunder or pertaining thereto.
 
"Equity Collateral" shall mean Pledged Equity and Pledged Equity Proceeds.
 
"Intellectual Property" shall mean, collectively, all Copyright Collateral, all
Patent Collateral, and all Trademark Collateral, 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
Debtor 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, computer and
automatic machinery software and programs, splash screens, films, masters, and
artwork; (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; and (f) all licenses, consents, permits, variances, certifications, and
approvals of governmental agencies now or hereafter held by the Debtor.
 
"Lien" shall mean a pledge, assignment, lien, charge, mortgage, encumbrance, or
other security interest obtained under this Agreement or under any other
agreement or instrument with respect to any present or future assets, property,
contract rights, or revenues in order to secure the payment of indebtedness of
the party referred to in the context in which the term is used.
 
"Motor Vehicles" shall mean motor vehicles, tractors, trailers, and other like
property, whether or not the title thereto is governed by a certificate of title
or ownership.
 
"Notes" shall mean all Promissory Notes or other debt instruments (including,
without limitation, bonds and debentures of any nature whatsoever) from time to
time issued to, or held by, the Debtor.
 

 
 
C-2

 

 
"Obligations" shall mean (i) (x) the principal of and any interest on the Red
Beard Note (including, without limitation, any further advances), and (y) all
other obligations and liabilities of the Debtor, whether now existing or
hereafter incurred, under, arising out of, or in connection with, the Red Beard
Note and the due performance and compliance by the Debtor with all of the terms,
conditions, and agreements contained in the Red Beard Note; (ii) any and all
sums advanced by the Secured Party in order to preserve the Collateral or
preserve its Lien and security interest in the Collateral; (iii) in the event of
any proceeding for the collection or enforcement of any indebtedness,
obligations, or liabilities referred to in clauses (i) and (ii) above, all costs
and expenses of any exercise by the Secured Party of its rights hereunder,
together with attorneys' fees and court costs; and (iv) to the extent not
otherwise included in clauses (i), (ii), or (iii) above, the Debtor's
obligations set forth in this Agreement, including, without limitation, the
Debtor's obligations set forth in Section 21.
 
"Patent Collateral" shall mean all Patents, whether now owned or hereafter
acquired by the Debtor.
 
"Patents" shall mean all patents and patent applications, including, without
limitation, 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 under and with respect thereto, including,
without limitation, damages and payments for past or future infringements
thereof, the right to sue for past, present, and future infringements thereof,
and all rights corresponding thereto throughout the world.
 
"Pledged Equity" shall mean (i) the shares of stock of, or partnership and other
ownership interest in, any entity, and any and all equity interests now or
hereafter issued in substitution, exchange or replacement therefor or with
respect thereto, and (ii) all ownership interests of any class or character of a
successor entity formed by or resulting from a consolidation or merger in which
any such issuer is not the surviving entity; in each case, whether now or
hereafter owned by the Debtor, together with any certificates evidencing any of
the foregoing.
 
"Pledged Equity Proceeds" shall mean all shares, securities, moneys, or property
representing a dividend on any of the Pledged Equity, or representing a
distribution or return of capital upon or in respect of the Pledged Equity, or
resulting from a split-up, revision, reclassification, or other like change of
the Pledged Equity or otherwise received in exchange therefor, and any
subscription warrants, rights, or options issued to the holders of, or otherwise
in respect of, the Pledged Equity.
 
"Trademark Collateral" shall mean all Trademarks, whether now owned or hereafter
acquired by the Debtor.
 
"Trademarks" shall mean all trade names, trademarks and service marks, logos,
domain names, trademark and service mark registrations, and applications for
trademark and service mark registrations, including, without limitation, all
renewals of trademark and service mark registrations, all rights corresponding
thereto throughout the world, the right to recover for all past, present, and
future infringements thereof, all other rights of any kind whatsoever accruing
thereunder or pertaining thereto, 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.
 
"UCC" shall mean the Uniform Commercial Code as in effect in the State of
California from time to time.
 
2.  Grant of Liens
 
. As security for the due and punctual payment and performance in full of all
Obligations (whether at the stated maturity, by acceleration, or otherwise and
whether now owing or incurred in the future), the Debtor hereby pledges,
assigns, charges, delivers, and grants to the Secured Party a continuing
perfected first priority security interest in and a general Lien upon all of the
Debtor's right, title, and interest in and to the Collateral and all additions
thereto and substitutions therefor, whether heretofore, now or hereafter
received by or delivered or transferred to the Secured Party hereunder.
 
 
 
C-3

 

3. Continuing Security Interest. This Agreement creates an assignment, pledge,
charge, continuing perfected first priority security interest in, and general
Lien upon, the Collateral and shall (a) remain in full force and effect until
all Obligations have been indefeasibly paid in full in cash, (b) be binding upon
the Debtor and its successors, permitted transferees, and permitted assigns, and
(c) inure, together with the rights and remedies of the Secured Party hereunder,
to the benefit of the Secured Party and its successors, transferees, and
assigns.
 
4. Debtor Remains Liable
 
. Anything herein to the contrary notwithstanding, (a) the Debtor shall remain
liable under any agreements which have been (in whole or in part) pledged or
assigned herein to perform all of its duties and obligations thereunder to the
same extent as if this Agreement had not been executed; (b) the exercise by the
Secured Party of any of the rights hereunder shall not release the Debtor from
any of its duties or obligations under any such agreements; and (c) the Secured
Party shall not have any obligation or liability under any such agreements by
reason of this Agreement, nor shall the Secured Party be obligated to perform
any of the obligations or duties of the Debtor thereunder or to take any action
to collect or enforce any claim for payment assigned hereunder.
 
5. Delivery and Perfection
 
. The Debtor hereby authorizes the Secured Party to file one or more financing
or continuation statements, and amendments thereto, relating to all or any part
of the Collateral, and agrees to take all such other actions and to execute and
deliver and file or cause to be filed such other instruments or documents, as
the Secured Party may reasonably require in order to establish and maintain a
perfected, valid, and continuing security interest and Lien in the Collateral in
accordance with this Agreement and the UCC and other applicable law.
 
(a) The Debtor shall, at the request of the Secured Party:
 
(i) immediately deliver any and all Documents, Instruments, and Chattel Paper
(including, without limitation, any Certificates of Title) evidencing or
relating to the Collateral to the Secured Party at the time and place and manner
specified in the Secured Party's request;
 
(ii) immediately execute (if applicable) and deliver to the Secured Party (or
file or record in such offices as the Secured Party may deem necessary or
appropriate) any and all financing and continuation statements, other
agreements, instruments, or other documents or amendments thereto, and perform
any acts which may be necessary or desirable (A) to create, perfect, preserve,
or otherwise protect the security interest and Liens granted herein or (B) to
enable the Secured Party to exercise and enforce its rights hereunder;
 
(iii) with respect to any Certificated Security not otherwise credited to a
Securities Account, the Debtor shall immediately effect transfer thereof to the
Secured Party (A) by physical delivery of such Certificated Security to the
Secured Party endorsed to the Secured Party or its nominee or in blank or (B) in
the case of a Certificated Security in registered form, by physical delivery of
such Certificated Security to the Secured Party specially endorsed to the
Secured Party or its nominee and thereafter reregistered in the name of the
Secured Party or their nominee;
 
(iv) with respect to any Uncertificated Security not otherwise credited to a
Securities Account, the Debtor shall immediately (A) effect transfer thereof to
the Secured Party by registration thereof on the books and records of the issuer
in the name of the Secured Party or its nominee or (B) obtain the agreement of
the issuer of such Uncertificated Securities that it will comply with
instructions originated by the Secured Party without further consent by the
registered owner, through a written agreement in form and substance satisfactory
to the Secured Party; and
 
 
 
C-4

 
  
 
(v) mark all Certificates of Title in the manner specified in a written notice
of the Secured Party to the Debtor requesting such marking, to evidence the fact
that such Certificates of Title are subject to the security interest and Lien of
the Secured Party granted herein.
 
(b) Upon the request of the Secured Party, the Debtor agrees immediately to
deliver to the Secured Party, appropriately endorsed to the order of the Secured
Party, any Notes, trade acceptance, Chattel Paper, or other Instrument in which
a security interest must be perfected by delivery or transfer of such Collateral
to a secured party, which are acquired by the Debtor from time to time.
 
(c) Notwithstanding Section 9207 of the UCC, the Secured Party may hold as
additional security any Proceeds, including money and funds, received from the
Collateral, all of which shall constitute Collateral hereunder, and the Secured
Party shall not be required to apply such money or funds to reduce the
Obligations other than as expressly set forth herein.
 
6. Proceeds of Sale
 
. Nothing contained in this Agreement shall limit or restrict in any way the
Secured Party's right to receive Proceeds of the Collateral in any form in
accordance with the provisions of this Agreement. All Proceeds that are received
by the Debtor contrary to the provisions of this Agreement shall be received in
trust for the benefit of the Secured Party, shall be segregated from other
property or funds of the Debtor and shall be forthwith paid over to the Secured
Party as Collateral in the same form as so received (with any necessary
endorsement, document or instrument of transfer).
 
7. Records and Information
 
. The Debtor agrees to keep, at its office set forth in Section 11(d), its
records concerning the Collateral. The Debtor agrees to promptly furnish to the
Secured Party such information concerning itself, the Collateral, and any
Account Debtor as the Secured Party may request at any time and from time to
time.
 
8. Inspection
 
. The Debtor agrees upon notice provided by the Secured Party, to permit the
Secured Party, through its officers and agents, to examine and inspect the
Collateral and all records pertaining thereto, and to make extracts from such
records as the Secured Party may require.
 
9. Use of Collateral
 
. Except upon the occurrence and during the continuance of any Event of Default,
the Debtor may in the ordinary course of its business use, consume, exhibit,
demonstrate, sell, lease, or otherwise dispose of its Inventory in carrying on
its businesses substantially in the same manner as now conducted; provided,
however, that a sale, disposition or transfer in the ordinary course of business
shall not include any sale, disposition or transfer in satisfaction, partial or
complete, of a debt owed by the Debtor or any sale, transfer or disposition to
any shareholder or affiliate of the Debtor; and provided further that any such
sale, disposition or transfer shall be for fair equivalent value and shall not
be unlawful or inconsistent with the terms of this Agreement or of any policy of
insurance covering such Collateral.
 
10. No Disposition
 
. The Debtor covenants and agrees that it will not sell, assign, transfer,
exchange, or otherwise dispose of, or grant any option with respect to, any of
the Collateral, except as provided for in Section 9 hereof, nor will it create,
incur, or permit to exist any Lien on or with respect to any of the Collateral,
any interest therein, or any Proceeds thereof.
 
11. Representations and Warranties
 
. The Debtor represents, warrants and covenants to the Secured Party throughout
the term of this Agreement that:
 
(a) The Debtor is and will be the sole legal and beneficial owner of all of the
Collateral now owned or hereafter acquired free and clear of any Lien, security
interest, assignment, option, or other charge or encumbrance;
 
 
 
 
C-5

 
 

 
(b) This Agreement has been duly and validly authorized by the Debtor and
executed and delivered by the Debtor and constitutes the legal, valid, and
binding obligation of the Debtor, enforceable against the Debtor in accordance
with its terms (subject to applicable bankruptcy, reorganization, insolvency,
moratorium, or similar laws affecting creditors' rights generally) and, subject
to the performance of the relevant procedures as specified in Section 5 herein
with respect to such Collateral, creates a valid, binding, enforceable, and
first priority perfected security interest in and general first Lien upon all of
the Collateral, and the Debtor is duly authorized to make all filings and take
all other actions necessary or desirable to perfect and to continue perfected
such security interest;
 
(c) As of the date hereof and on the date of delivery or transfer to the Secured
Party of any Collateral under this Agreement, the Debtor has good and marketable
title to the Collateral;
 
(d) The office where the Debtor maintains all records relating to the Collateral
is located at:
 
 
1007 Brioso Drive
Costa Mesa CA 92627
 

(e) Holdings is a corporation duly incorporated and validly existing under the
laws of the State of Nevada. Chalk Dust is a limited liability company duly
organized and validly existing under the laws of the State of Delaware. Don
Polly is a limited liability company duly organized and validly existing under
the laws of the State of Nevada.
 
(f) The Debtor's exact legal name as that name appears on the Debtor's
Certificate of Formation or equivalent formation document is exactly as set
forth in the signature page for Debtor below.
 
(g) All Pledged Equity in which the Debtor currently has or shall hereafter
acquire an interest is and will be, as applicable, duly authorized, validly
existing, fully paid, and non-assessable (in the case of any equity interest in
a corporation) and duly issued and outstanding (in the case of any equity
interest in any other entity), and none of such Pledged Equity is or will be
subject to any contractual restriction, or any restriction under the charter,
by-laws, partnership agreement, or other organizational document of the
respective issuer, upon the transfer of such Pledged Equity;
 
(h) Except pursuant to licenses and other user agreements entered into by the
Debtor in the ordinary course of business, the Debtor owns and possesses the
right to use, and has done nothing to authorize or enable any other Person to
use, any Copyright, Patent or Trademark owned or used by the Debtor on the date
hereof, and all registrations therefor are valid and in full force and effect;
and the Debtor owns or possesses the right to use all such Copyrights, Patents
and Trademarks;
 
(i) To the Debtor's knowledge, (i) there is no violation by others of any right
of the Debtor with respect to any Copyright, Patent or Trademark of Debtor and
(ii) the Debtor is not infringing in any respect upon any Copyright, Patent or
Trademark of any other Person; and no proceedings have been instituted or are
pending against the Debtor or, to the Debtor's knowledge, threatened, and no
claim against the Debtor has been received by the Debtor, and
 
(j) To the best of Debtor's knowledge, there are no actions, suits, proceedings
or investigations pending or threatened in writing against Debtor before any
governmental authority which could reasonably be expected to cause any portion
of the Intellectual Property to be adjudged invalid or unenforceable, in whole
or in part.
 
 
 
 
C-6

 
  
 
12. Covenants.
 
(a)            The Debtor shall:
 
(i) Maintain, or cause to be maintained, all items of the Collateral in good
condition and repair, ordinary wear and tear excepted in the case of Equipment,
and pay, or cause to be paid, the costs of repairs to or maintenance of that
Collateral which is of a type that could be repaired or maintained;
 
(ii) Take all steps to preserve and protect the Collateral, including, with
respect to the Intellectual Property, the filing of any renewal affidavits and
applications;
 
(iii) Not use any Collateral in violation of applicable laws or any applicable
policy of insurance;
 
(iv) Pay or cause to be paid when due all taxes, assessments, and other charges
relating to the Collateral or this Agreement and reimburse the Secured Party for
all costs of and fees incurred in connection with any filing of the documents
and instruments referred to in Section 5;
 
(v) Not change its: (a) name or the name under which it does business; (b) chief
executive office; (c) type of organization; (d) jurisdiction of incorporation;
or (e) other legal structure without at least 30 day's prior written notice to
the Secured Party. Prior to effectuating any change described in the preceding
sentence, the Debtor shall take or cause to be taken all actions deemed by the
Secured Party to be necessary or desirable to prevent any financing or
continuation statement from becoming seriously misleading or rendered
ineffective, or the security interests granted herein from becoming unperfected
or the relative priority thereof otherwise impaired, as a result of such removal
or change;
 
(vi) Perform and observe all the terms and provisions of any agreement for the
sale or lease of goods, or any agreement for the rendering of services, giving
rise to an Account to be performed or observed by it, maintain any such
agreement in full force and effect, enforce any such agreement in accordance
with its terms, and take all such action to such end as may be from time to time
reasonably requested by the Secured Party;
 
(vii) Render any assistance, as Secured Party may solely determine is necessary,
to Secured Party in any proceeding before the USPTO, the USCO, any federal or
state court, or any similar office or agency in the United States of America, or
any State therein, to maintain any Patent Collateral, Trademark Collateral or
Copyright Collateral and to protect Secured Party's security interest therein,
including, without limitation, filing of renewals, affidavits of use, affidavits
of incontestability and opposition, interference, and cancellation proceedings;
 
(viii) Immediately notify Secured Party if Debtor learns of any use by any
Person of any term or design likely to cause confusion with any of the Trademark
Collateral, or of any use by any Person of any other process or product which
infringes upon any of the Trademark Collateral in a manner which is adverse to
Debtor's business, and if requested by Secured Party, Debtor, at its expense,
shall join with Secured Party in such action as Secured Party in Secured Party's
discretion may deem advisable for the protection of Secured Party's interest in
and to the Trademark Collateral;
 
 
 
 
C-7

 
  
 
(ix) Assume all responsibility and liability arising from the use of the
Intellectual Property, and Debtor hereby indemnifies and holds Secured Party
harmless from and against any claim, suit, loss, damage or expense (including
attorneys' fees) arising out of any alleged defect in any product manufactured,
promoted, or sold by Debtor in connection with any Intellectual Property or out
of the manufacture, promotion, labeling, sale, or advertisement of any such
product by Debtor;
 
(x) Immediately notify Secured Party in writing of any adverse determination in
any proceeding in the USPTO, USCO, or any other foreign or domestic governmental
authority, court or body, Debtor becomes aware of regarding Debtor's claim of
ownership in any of the Trademark Collateral, Patent Collateral or Copyright
Collateral, and in the event of any infringement of any Trademark, Patent or
Copyright owned by Debtor by a third party which is adverse to Debtor's
business, Debtor shall promptly notify Secured Party of such infringement and
sue for and diligently pursue damages for such infringement, and if Debtor shall
fail to take such action within one (1) month after such notice is given to
Secured Party, Secured Party may, but shall not be required to, itself take such
action in the name of Debtor, and Debtor hereby appoints Secured Party the true
and lawful attorney of Debtor, for it and in its name, place and stead, on
behalf of Debtor, solely, without limitation on any other rights of Secured
Party under this Agreement, to commence judicial proceedings in any court or
before any other tribunal to enjoin and recover damages for such infringement,
any such damages due to Debtor, net of costs and attorneys' fees, to be applied
to the Obligations;
 
(xi) (A) Maintain, with responsible insurance companies, insurance covering the
Collateral against such insurable losses as is consistent with sound business
practice and, in any event, as is required by the Transaction Documents and, (B)
cause Secured Party to be designated as loss payee (as customary for secured
parties based on the type of insurance) with respect to all insurance (whether
or not required by the Transaction Documents), (C) obtain the written agreement
of the insurers that such insurance shall not be cancelled, terminated or
materially modified to the detriment of Secured Party without at least 30 days'
prior written notice to Secured Party, and (D) furnish copies of such insurance
policies or certificates to Secured Party immediately upon request therefor and
otherwise comply with the terms and provisions of the Transaction Documents with
respect to such insurance coverage; and
 
(xii) with respect to the Copyright Collateral, at its sole expense, do, make,
execute and deliver all such additional and further acts, things, deeds,
assurances, and instruments, in each case in form and substance satisfactory to
Secured Party, relating to the creation, validity, or perfection of the security
interests provided for in this Agreement under 35 U.S.C. Section 261, 15 U.S.C.
Section 1051 et seq., 17 U.S.C. Sections 101, 201 et seq., the UCC or other law
of the United States of America, the State of California, other States or any
other domestic or foreign jurisdiction as Secured Party may from time to time
reasonably request, and shall take all such other action as Secured Party may
reasonably require to perfect Secured Party's security interest in any of the
Copyright Collateral and to completely vest in and assure to Secured Party its
rights hereunder in any of the Copyright Collateral; and
 
(xiii) within 10 days after any request by Secured Party, Debtor shall, and
shall cause each depository or intermediary holding any of the Debtor's Deposit
Accounts, Securities Accounts, or other deposit, brokerage, securities or other
similar accounts to, enter into control agreements in favor of Secured Party, in
form and substance satisfactory to Secured Party in its sole and absolute
discretion, over such accounts.
 
 
 
 
C-8

 
  
 
13. Further Assurances and Protections.
 
(a)       The Debtor shall at its expense do, file, record, make, execute, and
deliver all such acts, notices, instruments, statements, or other documents as
the Secured Party may request to perfect, preserve, or otherwise protect the
security interest and Liens of the Secured Party in the Collateral or any part
thereof or to give effect to the rights, powers, and remedies of the Secured
Party under this Agreement;
 
(b) The Debtor will give prompt written notice to the Secured Party of, and
defend the Collateral against, any suit, action, or proceeding related to the
Collateral or which could adversely affect the security interests and Liens
granted hereunder; and
 
(c) Debtor authorizes Secured Party to have this or any other similar agreement
recorded or filed with the USCO, USPTO or other appropriate federal, state or
foreign government office.
 
14. Events of Default
 
. The occurrence of any of the following events or conditions shall constitute
an event of default (each an "Event of Default") under this Agreement:
 
(a) The occurrence and continuation of an Event of Default as defined in the Red
Beard Note;
 
(b) any representation or warranty made in this Agreement or the Red Beard Note
or any written statement pursuant hereto or thereto or any other report,
financial statement or certificate made or delivered to the Secured Party shall
be untrue or incorrect in any respect as of the date when made or deemed made;
 
(c) The failure or refusal by the Debtor to perform, or the breach or violation
of, any of the terms, obligations, covenants, or warranties of this Agreement or
the Red Beard Note.
 
15. Remedies upon an Event of Default
 
. On and after the occurrence and continuance of an Event of Default, the
Secured Party may, in its discretion:
 
(a) request that the Debtor, and upon such request the Debtor shall, assemble
the Collateral at such place or places convenient to the Secured
Party designated in such request;
 
(b) enforce collection of any of the Collateral by suit or any other lawful
means available to the Secured Party, or demand, collect, or receive any money
or property at any time payable or receivable on account of or in exchange for
any of the Collateral;
 
(c) surrender, release, or exchange or otherwise modify the terms of all or any
part of the Collateral, or compromise or extend or renew for any period any
indebtedness thereunder or evidenced thereby;
 
 
 
 
C-9

 
  
 
(d) assert all other rights and remedies of a secured party under the UCC
(whether or not in effect in any applicable jurisdiction) and all other
applicable law, including, without limitation, the right to take possession of,
hold, collect, sell, lease, deliver, grant options to purchase, or otherwise
retain, liquidate, or dispose of all or any portion of the Collateral. The
proceeds of any collection, liquidation, or other disposition of the Collateral
shall be applied by the Secured Party first to the payment of all expenses
(including, without limitation, all fees, taxes, attorneys' fees and legal
expenses) incurred by the Secured Party in connection with retaking, holding,
collecting, or liquidating the Collateral. The balance of such proceeds, if any,
shall, to the extent permitted by law, be applied to the payment of the
Obligations in the order and manner designated by the Secured Party in its sole
discretion until all Obligations are indefeasibly paid in full in cash. After
all of the Obligations have been indefeasibly paid in full in cash, the balance
of such proceeds, if any, shall be remitted to the Debtor or as otherwise
required by law. In case of any deficiency, the Debtor shall, whether or not
then due, remain liable therefor. If notice prior to disposition of the
Collateral or any portion thereof is necessary under applicable law, written
notice mailed to the Debtor at its notice address specified in the Red Beard
Note ten (10) days prior to the date of such disposition shall constitute
commercially reasonable notice, but notice given in any other reasonable manner
shall be sufficient. Without precluding any other methods of sale or other
disposition, the sale or other disposition of the Collateral or any portion
thereof shall have been made in a commercially reasonable manner if conducted in
conformity with commercial practices of creditors disposing of similar property;
but in any event the Secured Party may sell, lease, deliver, grant options to
purchase or otherwise retain, liquidate or dispose such Collateral on such terms
and to such purchaser(s) (including the Secured Party) as the Secured Party in
its absolute discretion may choose, and for cash or for credit or for future
delivery, without assuming any credit risk, at public or private sale or other
disposition, without demand of performance, and without any obligation to
advertise or give notice of any kind other than that necessary under applicable
law. The Debtor hereby waives and releases to the fullest extent permitted by
law any right or equity of redemption with respect to the Collateral, whether
before or after sale or other disposition hereunder, and all rights, if any, of
marshalling the Collateral and any other security for the Obligations or
otherwise. At any such sale or other disposition, unless prohibited by
applicable law, the Secured Party may bid for and purchase all or any part of
the Collateral so sold free from any such right or equity of redemption. The
Secured Party shall not be liable for failure to collect or realize upon any or
all of the Collateral or for any delay in so doing nor shall it be under any
obligation to take any action whatsoever with regard thereto.
 
The Secured Party shall incur no liability as a result of the sale of the
Collateral, or any part thereof, at any private sale pursuant to this Agreement.
The Debtor hereby waives any claims against the Secured Party 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 Obligations, even if the
Secured Party accepts the first offer received and does not offer the Collateral
to more than one offeree.
 
The Debtor recognizes that, by reason of certain prohibitions contained in the
Securities Act of 1933, as amended, and applicable state securities laws, the
Secured Party 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 relevant Collateral for their own account, for investment and not
with a view to the distribution or resale thereof. The Debtor acknowledges that
any such private sale may be at prices and on terms less favorable to the
Secured Party 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 Secured Party 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 enable the registration of the Collateral or related
transaction so as to permit a public offer to be made with respect thereto;
 
 
 
 
C-10

 
  
 
(e) license or sublicense, whether general, special or otherwise, and whether on
an exclusive or non-exclusive basis, any Intellectual Property included in the
Collateral throughout the world for such term or terms, on such conditions and
in such manner as the Secured Party shall in its sole discretion determine;
 
(f) without assuming any obligation or liability thereunder, at any time and
from time to time, in its sole discretion, enforce (and shall have the exclusive
right to enforce) against any licensee or sublicensee all rights and remedies of
the Debtor in, to and under any of its Intellectual Property and take or refrain
from taking any action under any thereof, and the Debtor releases the Secured
Party from liability for, and agrees to hold the Secured Party free and harmless
from and against any claims and expenses arising out of, any lawful action so
taken or omitted to be taken with respect thereto;
 
(g) make a request upon the Debtor (which shall not be construed as implying any
limitation on the rights or powers of the Secured Party), and upon such request
the Debtor shall, execute and deliver to the Secured Party a power of attorney,
in form and substance satisfactory to the Secured Party, for the implementation
of any sale, lease, license or other disposition of Intellectual Property owned
by the Debtor or any such action related thereto. In connection with any such
disposition, the Debtor will supply to the Secured Party its know-how and
expertise relating to the relevant Intellectual Property, and its customer lists
and other records relating to such Intellectual Property and to the distribution
of said products or services;
 
(h) to the extent not already so transferred, transfer all or any part of the
Collateral into the Secured Party's names or the name of their nominee or
nominees; and
 
(i) give all consents, waivers, and ratifications in respect of the Collateral
and otherwise act with respect thereto as though it were the outright owner
thereof (the Debtor hereby irrevocably constituting and appointing the Secured
Party the proxy and attorney-in-fact of the Debtor, with full power of
substitution to do so, which power is coupled with an interest), including,
without limitation, the exercise of all voting, consensual and other powers of
ownership pertaining to the Collateral.
 
16. Secured Party Appointed Attorney-in-Fact
 
. Without limiting any rights or powers granted to the Secured Party pursuant to
this Agreement, applicable law or otherwise, the Debtor hereby appoints the
Secured Party as its attorney-in-fact, with full power and authority in the
place and stead of the Debtor and in the name of the Debtor or otherwise, from
time to time in the Secured Party's discretion to take any and all action and to
execute, file and record any and all instruments, agreements, and documents
which the Secured Party may deem necessary or advisable to accomplish the
purposes of this Agreement, including, without limitation, to execute any
assignment of Intellectual Property to the Secured Party or other transferee,
and to receive, endorse and collect all instruments made or payable to the
Debtor representing any Collateral or Proceeds in respect of the Collateral or
any part thereof and to give full discharge for the same. The appointment set
forth in this Section 16 is coupled with an interest and is irrevocable.
 
17. Secured Party May Perform
 
. If the Debtor fails to perform any agreement, covenant, or obligation
contained herein, the Secured Party may itself perform, or cause performance of
such agreement, covenant or obligation and the expenses and costs of the Secured
Party incurred in connection therewith shall be payable by the Debtor.
 
18. Security Interest Absolute
 
. All rights of the Secured Party and all Liens hereunder, and all obligations
of the Debtor hereunder, shall be absolute and unconditional irrespective of:
 
(a) lack of validity or enforceability of this Agreement or the Red Beard Note
or any other Transaction Document;
 
 
 
 
C-11

 
  
 
(b) any change in the time, manner, or place of payment of, or in any other term
of any or all of the Obligations or any amendment or waiver of any provision of
this Agreement or the Red Beard Note or any other Transaction Document;
 
(c) any release or non-perfection of any portion of the Collateral or any
exchange, release, or non-perfection of any other collateral, or any release,
amendment, or waiver of any guaranty for all or any of the Obligations; or
 
(d) any other circumstance which might otherwise constitute a defense available
to, or a discharge of the Debtor in respect of the Obligations or this Agreement
or the Red Beard Note or any other Transaction Document.
 
19. Secured Party's Duties
 
. The powers conferred to the Secured Party hereunder are solely to protect the
Secured Party's interest in the Collateral and shall not impose any duty upon it
to exercise any such powers except for the safe custody of any Collateral or any
portion thereof in its possession, and the Secured Party shall exercise that
standard of care with respect to the Collateral in its possession which it
exercises in the administration of its own assets and property; provided,
however, that the Secured Party shall not be liable for any action taken or
omitted with respect to the Collateral or this Agreement unless such liability
results solely from the gross negligence or willful misconduct of the Secured
Party as determined by a final non-appealable judgment by a court of competent
jurisdiction. The Secured Party shall have no duty as to the Collateral or as to
the taking of any necessary steps to preserve rights against other parties
pertaining to the Collateral.
 
20. Rights Cumulative
 
. The rights, powers, and remedies of the Secured Party under this Agreement
shall be in addition to all rights, powers, and remedies given to the Secured
Party by virtue of any statute or rule of law or any agreement, all of which
rights, powers and remedies shall be cumulative and may be exercised
successively or concurrently without impairing the Secured Party's security
interest, Lien, and assignment in the Collateral.
 
21. Indemnity and Expenses.
 
(a)            The Secured Party shall not have any liability to any Person and
shall be indemnified and held harmless by the Debtor for any liability incurred
by reason of taking or refraining from taking any action with respect to the
Collateral, except in the case such liability results solely from the gross
negligence or willful misconduct of the Secured Party as determined by a final
non-appealable judgment by a court of competent jurisdiction. The Debtor agrees
to indemnify the Secured Party from and against any and all claims, losses, and
liabilities arising out of or connected with this Agreement (including, without
limitation, enforcement of this Agreement), except such claims, losses, or
liabilities resulting solely from the Secured Party's gross negligence or
willful misconduct as determined by a final non-appealable judgment by a court
of competent jurisdiction. This Section 21(a) shall survive any termination of
this Agreement.
 
(b) The Debtor agrees to pay all expenses, costs, and disbursements incurred by
the Secured Party (including, without limitation, all attorneys' fees and other
legal expenses incurred by the Secured Party in connection therewith) in
connection with (i) retaking, holding, collecting, preparing for sale, and
selling or otherwise realizing upon, liquidating, or disposing of the
Collateral, (ii) the enforcement of its rights hereunder upon the occurrence and
during the continuance of an Event of Default, (iii) the performance by the
Secured Party of any agreement, covenant, or obligation of the Debtor contained
herein that the Debtor has failed or refused to perform, and (iv) the
participation or other involvement of the Secured Party with (x) bankruptcy,
insolvency, receivership, foreclosure, winding up, or liquidation proceedings,
or any actual or attempted sale, or any exchange, enforcement, collection,
compromise, or settlement in respect of any of the Collateral, and for the care
of the Collateral and defending or asserting rights and claims of the Secured
Party in respect thereof, by litigation or otherwise, including expenses of
insurance, (y) judicial or regulatory proceedings, and (z) workout,
restructuring, or other negotiations or proceedings (whether or not the workout,
restructuring or transaction contemplated thereby is consummated).
 
 
 
 
C-12

 
  
 
22. Amendment or Waiver
 
. Neither this Agreement nor any terms hereof may be changed, waived,
discharged, or terminated unless such change, waiver, discharge or termination
is in writing signed by the parties hereto.
 
23. Notices
 
. Except as otherwise expressly provided herein, all notices and other
communications provided for hereunder shall be in writing and mailed or
delivered to the Debtor or the Secured Party at the respective addresses
specified in the Red Beard Note; or at such other address as shall be designated
by any party in a written notice to the other parties hereto. All such notices
and communications shall, when mailed, be effective three business days after
deposit in the mails and shall, when delivered, be effective upon delivery of
such notice.
 
24. No Waiver
 
. No failure or delay on the part of the Secured Party in exercising any right,
power or privilege hereunder or under the UCC or any other applicable law shall
operate as a waiver hereof or thereof; nor shall any single or partial exercise
of any right, power, or privilege hereunder or under the UCC or any other
applicable law preclude any other or further exercise thereof or the exercise of
any other right, power or privilege hereunder or thereunder. No notice to or
demand on the Secured Party in any case shall entitle the Debtor to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Secured Party to any other or further action in any
circumstances without notice or demand.
 
25. Severability of Provisions
 
. Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
that prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of that provision
in any other jurisdiction.
 
26. Non-Assignment
 
. The Debtor shall not have the right to assign its rights or delegate its
obligations hereunder or any part thereof to any other person without the
Secured Party's prior written consent. This Agreement shall be binding upon any
successors or assigns of the Debtor, and shall benefit any successors or assigns
of the Secured Party.
 
27. Integration of Terms
 
. This Agreement contains the entire agreement between the parties with respect
to the subject matter hereof and supersedes all oral statements and prior
writings with respect thereto.
 
28. Governing Law
 
. This Agreement and the rights and obligations of the parties hereunder shall
be construed in accordance with and be governed by the law of the State of
California without regard to choice of law principles thereof that would cause
the laws of any other jurisdiction to apply.
 
29. Counterparts
 
. This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument.
 
30. Joint and Several Liability
 
. Each of Holdings, Chalk Dust and Don Polly acknowledge that each of the
undersigned are parties to this Agreement as the "Debtor" as joint and several
grantors hereunder. Any references in this Agreement to the "Debtor" shall refer
to any of Holdings, Chalk Dust or Don Polly, or both such Persons as the context
may require. Each of Holdings, Chalk Dust and Don Polly accept joint and several
liability for the payment and performance of all of the obligations of the
Debtor hereunder, and each of such obligations constitute the absolute and
unconditional full recourse obligations of each such Person enforceable against
each such Person to the full extent of its properties and assets. Each of
Holdings, Chalk Dust and Don Polly hereby waive, to the fullest extent permitted
by law, any and all defenses or benefits that may be derived from or afforded by
applicable law limiting the liability of or exonerating guarantors or sureties
(including co-borrowers to the extent applicable), including , including but not
limited to any rights and defenses that are or may become available to any such
Person by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the
California Civil Code.
 
[Signature Page Follows]
 
 
 
C-13

 
  
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered as of the day and year first written above.
 
DEBTOR:
CHARLIE'S HOLDINGS, INC.,
a Nevada corporation
 
 
By: Brandon Stump

Name: Brandon Stump                       
Title: Chief Executive Officer   
                     
 

CHARLIE'S CHALK DUST, LLC,
a Delaware limited liability company
 
 
By: Brandon Stump

Name: Brandon Stump                       
Title: Chief Executive Officer                        
 
DON POLLY LLC,
a Nevada limited liability company
 
 
By: Brandon Stump

Name: Brandon Stump                       
Title: Chief Executive Officer    
                     
 
SECURED PARTY:
RED BEARD HOLDINGS, LLC
a Delaware limited liability company
 
 
By: Vinny Smith

Name: Vinny Smith               

Title: General Partner                      

 
 
 

 
 
 
C-14