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

            CHAD THERAPEUTICS, INC.
      By:   /s/ Earl L. Yager         Name:   Earl L. Yager        Title:  
Chief Executive Officer     

WITNESS:

     
/s/ Tracy A. Kern
   
 
   

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