Exhibit 10.1

 

Settlement Agreement and

 

First Amendment to the

 

License, Manufacture, and Distribution Agreement

 

by and between

 

Nutraceutix, Inc. and SCOLR Pharma, Inc.

 

This Settlement Agreement and First Amendment (“Agreement”) is entered into by
and between Nutraceutix, Inc., a Washington corporation, (“Nutraceutix”) and
SCOLR Pharma, Inc., a Delaware corporation (f/k/a SCOLR, Inc., and referred to
herein as “SCOLR”) effective as of the Effective Date set forth below
(collectively, Nutraceutix and SCOLR are referred to herein as “Parties”). The
purpose of this Agreement is to reflect certain agreements and understandings of
the Parties regarding the Asset Purchase Agreement between the Parties, dated
December 31, 2003 (“Purchase Agreement”) and other matters described herein and
to amend that certain License, Manufacture, and Distribution Agreement, between
the Parties dated December 31, 2003 (“Licensing Agreement”).

 

Agreement

 

NOW, THEREFORE, in consideration of the mutual promises and representations
contained herein, and other good and valuable consideration, the sufficiency of
which is hereby acknowledged, the Parties hereto do mutually covenant, stipulate
and agree as follows:

 

1. Purchase Agreement. After fulfillment of the obligations set forth in this
Section 1 below by Nutraceutix, the obligations of Nutraceutix to make payment
under Sections 2.2 – 2.4 of the Purchase Agreement shall be deemed complete and
fully satisfied, including but not limited to obligations to pay the Purchase
Price, Deferred Purchase Price and the Minimum Deferred Purchase Price as such
terms are defined in the Purchase Agreement. Notwithstanding the foregoing and
subject to Section 2 below, Nutraceutix’s obligations to make payments under the
Licensing Agreement shall continue, including but not limited to Royalty
Payments (as defined in the Licensing Agreement). Nutraceutix hereby agrees to:

 

(a) Pay, in cash, the amount of $197,652 on the date of execution of this
Agreement by Nutraceutix;

 

(b) Deliver to SCOLR on the date of execution of this Agreement by Nutraceutix a
fully executed promissory note, in substantially the form attached hereto as
Exhibit A, in the principal amount of $758,891 (the “Promissory Note”); and

 

(c) Pay Interim Royalty Payments, in accordance with Section 3 below.

 

Nutraceutix’s satisfaction of the payment obligations under Sections 2.2 – 2.4
of the Purchase Agreement does not and shall not in any way alter or diminish
other terms or conditions of the Purchase Agreement for SCOLR and Nutraceutix,
including survival of the Parties’ indemnification obligations. However, the
Parties acknowledge and understand that because the obligation to make payments
under Sections 2.2 – 2.4 will be satisfied following completion of Nutraceutix’s
obligations hereunder, the following provisions of the Purchase

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Agreement are no longer applicable: Section 2.4(c) (with respect to future
periods only), and Section 2.5 (which will be governed solely by the License
Agreement, as herein amended). In addition, Section 6.7 of the Purchase
Agreement is deleted.

 

Nutraceutix represents and warrants to SCOLR that it has complied with the
provisions of Section 6.6 of the Purchase Agreement from the date of the
Purchase Agreement through the date of execution of this Agreement.

 

2. Licensing Agreement Amendments. Subject to the fulfillment of the obligations
set forth in Section 1(a) and 1(b) above by Nutraceutix, the Licensing Agreement
shall be amended as follows, effective as of July 1, 2005:

 

(a) Section 2(a) shall be replaced in its entirety with the following:

 

“SCOLR grants to Nutraceutix and Nutraceutix accepts a limited license to use
CDT to manufacture, package, ship, distribute and sell the Products solely to
Customers, as defined below, in the United States in accordance with and for the
Term of this Agreement (the “License”). Except as otherwise provided in this
Agreement, the grant of this License shall mean that no other party shall have
the right, directly or indirectly, to use CDT to manufacture, package, ship,
distribute or sell the Products, or any reasonable variation thereof, to the
Customers in the United States for the Term of this Agreement. Without limiting
the generality of the preceding sentence, Nutraceutix shall have no right to
manufacture the Products except as specifically set forth on Exhibit B-2 without
the prior written consent of SCOLR. The License does not cover the sale or
distribution by Nutraceutix to non-Customers, the sale or distribution by
Nutraceutix outside of the United States, or the manufacturing, packaging,
shipping, distribution or sale by Nutraceutix of pharmaceutical or
over-the-counter CDT product formulations.”

 

(b) Section 2(b) shall be replaced in its entirety with the following:

 

“Subject to the terms and conditions of this Agreement, SCOLR hereby appoints
Nutraceutix as the manufacturer and distributor of the Products to the
Customers. For purposes of this Agreement, a “Customer” is any one of the
following entities(collectively the “Customers”): Trader Joe’s, Supplemental
Sciences (aka Nutrition Now, Inc.), Bio Innovations, BioScientifics, Inc., or
IMRS/GHC Group, Inc. (aka IGGI).”

 

(c) The “Royalty Payments” set forth in Section 3 shall be amended to change
“ten (10%) percent” to “seven percent (7%)”. The last sentence of Section 3 is
hereby amended to read as follows: “Payments hereunder shall be made quarterly
in arrears not more than forty-five (45) days following the end of the
applicable quarter; provided however, that Nutraceutix shall report the amount
of Royalty Payments (and the number of tablets sold) within twenty (20) days
following the end of the applicable quarter. In addition, the following two
paragraphs shall be added to the end of Section 3:

 

“Promptly after the end of each calendar year during the term of this Agreement,
Nutraceutix shall provide SCOLR with a statement prepared by Nutraceutix’s
certified public accountant for the preceding year containing a statement of the
Net Sales (“Statement”). During the Term of this Agreement, SCOLR shall have the
right to review, during regular business hours and upon reasonable notice, only
those books and records of Nutraceutix reasonably necessary for purposes of
determining the Net Sales, which may include, without limitation,

 

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books and records regarding total Nutraceutix sales by customer and product.
SCOLR may object to any item or information contained in the Statement by
providing Nutraceutix a written statement in reasonable detail of SCOLR’s
objections thereto (an “Objection Notice”). SCOLR’s failure to deliver an
Objection Notice to the Nutraceutix within thirty (30) days after completion of
SCOLR’s review shall constitute SCOLR’s binding acceptance of the Statement and
all matters identified therein.

 

“If Nutraceutix and SCOLR fail to resolve any objection described in the
Objection Notice within ten (10) days after the date the Objection Notice is
delivered to Nutraceutix, then at the request of either party, Nutraceutix and
SCOLR shall meet in an attempt to resolve an objection described in the
Objection Notice and reach a written agreement with respect thereto. If the
parties enter into a settlement agreement, the Statement shall be deemed to be
as agreed thereon. If the parties are unable to resolve the objection described
in the Objection Notice, then the Nutraceutix and SCOLR shall mutually select an
independent accounting firm (“Independent Accountant”) and submit the Statement
and Objection Notice to the Independent Accountant; provided, however, that such
selected accounting firm shall not be performing services for either SCOLR or
Nutraceutix (i) at the time of the selection, (ii) within twenty-four
(24) months of the time of selection, or (iii) during the period commencing on
the selection and ending upon its delivery of the Independent Accountant’s
Determination (as defined below). The Independent Accountant referred to in the
previous sentence shall resolve such objection as promptly as possible and a
decision by the Independent Accountant as to the resolution of such objection
shall be conclusive and binding upon the parties for purposes of this Agreement
(the “Independent Accountant’s Determination”). The Independent Accountant’s
Determination shall be (i) in writing, (ii) made in accordance with generally
accepted accounting principles in the United States (GAAP), and
(iii) nonappealable and incontestable by either party. All fees and costs
payable to the Independent Accountant shall be borne by the nonprevailing party
(it being understood that the “nonprevailing party” shall be the party who
benefits less from the Independent Accountant’s Determination.)”

 

(d) Section 4 shall be eliminated in its entirety.

 

(e) Section 6 shall be replaced in its entirety with the following:

 

“Sale of Products. Nutraceutix will be responsible for all manufacturing,
distribution and invoicing of the Products to the Customers. Nutraceutix shall
manufacture, ship and deliver the Products in a timely manner in accordance with
the purchase orders submitted by each Customer and Nutraceutix’s obligations
pursuant to Section 9 hereof.”

 

(f) Section 8.c shall be replaced in its entirety with the following:

 

“Nutraceutix shall not use any trademarks, logos, or patent notifications of
SCOLR, including those related to CDT, in any of its advertisements, promotional
materials, or product labeling. In addition, Nutraceutix’s agreements with the
Customers shall prohibit the use of SCOLR’s trademarks, logos, patent
notifications, including those related to CDT, in any advertising, promotional
materials or product labeling of the Customer.”

 

(g) In Section 9(a) the following sentence shall be deleted: “Nutraceutix shall
provide SCOLR with the opportunity to inspect its manufacturing facilities for
the purpose of assuring compliance with the Agreement during reasonable business
hours and upon reasonable notice.”

 

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(h) Section 9(d) shall be deleted in its entirety.

 

3. Interim Royalty Payments. The Parties acknowledge and agree that Nutraceutix
shall pay, or has already paid, as the case may be, the following amounts in
full satisfaction (subject to completion of SCOLR’s review of 2005 Net Sales) of
“Royalty Payments” due under the Licensing Agreement and “Deferred Purchase
Price” owing under the Purchase Agreement for the period January 1, 2005 through
June 30, 2005 (collectively referred to as “Interim Royalty Payments”):

 

(a) For the period January 1, 2005 through March 31, 2005, Nutraceutix has paid,
in cash, the amount of $172,347.70.

 

(b) For the period April 1, 2005 through May 31, 2005, Nutraceutix has included
the amount of $62,500 (of which $44,880.64 represent Royalty Payments) in the
cash payment described in Section 1(a) of this Agreement.

 

(c) For the period June 1, 2005 through June 30, 2005, Nutraceutix shall pay
$16,962.02 in Royalty Payments no later than August 15, 2005.

 

Lallemand. In connection with this Agreement, Nutraceutix and SCOLR have entered
into a settlement agreement with Lallemand Specialties, Inc., and certain of its
affiliates.

 

4. Other Sales. Upon the due execution by the Parties of this Agreement
Nutraceutix releases and forever discharges SCOLR and its officers, managers,
directors, owners, shareholders, employees, agents, successors, and assigns
(collectively, the “Released Parties”) from any and all claims, demands,
damages, actions, causes of action or suits of any kind or nature whatsoever
which Nutraceutix may have now or in the future with respect to the sale of
Niacin using controlled delivery technology by Rite Aid, whether arising in law
or in equity, or by contract or tort against the Released Parties.

 

5. Effective Date. The Effective Date of this Agreement shall be July 29, 2005.

 

6. Publicity. The Parties agree not to prepare or release any press release
regarding the existence or terms and conditions of this Agreement. It is
understood and agreed that SCOLR may disclose the existence of this Agreement
and its terms and conditions, including providing a copy and summary of the
Agreement, in filings required by the Securities and Exchange Commission and may
refer to the agreement in the ordinary course of the issuance of press releases
(including earnings releases).

 

7. No Assignment, Successors, Assigns, Etc. The terms and conditions of this
Agreement shall inure to the benefit of, and shall be binding upon, the parties
hereto, their respective heirs, personal representatives, successors and
assigns; provided, however, that this Agreement shall not be assigned or
conveyed by any party to any person or entity without the prior written consent
of the other party hereto.

 

8. Counterparts. This Agreement may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same instrument.

 

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9. Entire Agreement. This Agreement and the other documents and agreements
referred to herein contain the entire understanding of the parties hereto and
thereto relating to the subject matter herein.

 

10. Waiver. Any default or breach of any term or condition by a party in
connection with this Agreement may be waived in writing by the other party. No
such waiver shall be deemed to extend to any prior or subsequent default or
breach of any term or condition, or affect any rights arising by virtue of any
prior or subsequent default or breach of any term or condition.

 

11. Governing Law and Venue. This Agreement shall be construed and enforced in
accordance with, and governed by, the laws of the State of Washington applicable
to agreements made and to be performed wholly within this jurisdiction, without
regard to the State of Washington conflicts of law rules and without the aid of
any canon, custom, or rule of law requiring construction against the drafter.
Any action or proceeding seeking to enforce any provision of, or based on any
right arising out of, this Agreement may be brought against any of the parties
in the courts of the State of Washington, County of King, or, if it has or can
acquire jurisdiction, in the United States District Court for the Western
District of Washington.

 

12. Attorneys Fees. In the event of any legal action between the parties
relating to or arising from this Agreement, the prevailing party shall be
entitled to receive reasonable attorney’s fees, costs and other expenses in
addition to whatever other relief may be awarded.

 

IN WITNESS WHEREOF, the parties have caused this agreement to be executed by
their respective duly authorized representatives as of the Effective Date on
this 3rd day of August, 2005.

 

Nutraceutix, Inc.

     

SCOLR Pharma, Inc.

By:  

/s/ Steven H. Moger

      By:  

/s/ Daniel O. Wilds

   

Steven H. Moger, President

     

Its:

 

President and Chief Executive Officer

 

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EXHIBIT A

 

FORM OF PROMISSORY NOTE

(“Note”)

 

$758,891

  August 1, 2005

 

For value received Nutraceutix, Inc. (“Borrower”), hereby promises to pay to the
order of SCOLR Pharma, Inc. or its assigns (“Lender”) at 3625 132nd Avenue S.E.,
Suite 300, Bellevue, WA 98006 ATTN: Alan Mitchel , or such other place or places
as the holder hereof may designate in writing, the principal sum of Seven
Hundred Fifty-Eight Thousand Eight Hundred Ninety-One Dollars ($758,891) and to
pay interest on the unpaid principal thereof from the date hereof at the rates
hereinafter set forth, together with all costs and fees, including reasonable
attorney fees, incurred by Lender in enforcing the obligations of this Note.

 

Principal and interest shall be payable as hereinafter provided:

 

1. Principal and interest shall be payable in twelve (12) equal monthly
installments of principal, plus accrued but unpaid interest, on or before the
last day of each month commencing August 31, 2005 until July 31, 2006, at which
time the entire unpaid balance, both principal and interest, shall be paid in
full.

 

2. Interest Rate. Interest shall accrue at a rate of five percent (5%) per annum
from the date set forth above.

 

3. Prepayment. Borrower shall have the right, at any time, to prepay the whole
or any part hereof without prepayment penalties. Any such additional payments
shall be credited first to accrued interest and then to principal.

 

4. Default. If there is a default with respect to any payment herein that goes
uncured for a period of ten (10) days then the entire principal balance of this
Note shall thereafter bear interest at the rate of twenty percent (20%) and the
principal of this Note and any accrued interest may be declared due and payable.
Failure to exercise this option shall not constitute a waiver of the right to
exercise the same at any other time. In addition, if any default in payment
herein, goes uncured for a period of sixty (60) days then the Lender shall have
the right to terminate that certain License, Manufacture, and Distribution
Agreement by and between the Lender and Borrower dated December 31, 2003, as
amended.

 

5. Change in Control. If there is a “change in control” as defined below, of the
Borrower, the unpaid principal of this Note and any accrued interest may be
declared due and payable immediately by the Lender. A “change in control” means
(a) any merger, consolidation, statutory or contractual share exchange, or other
transaction to which the Borrower (or any subsidiary or shareholder of the
Borrower) is a party if, immediately following the transaction, the persons who
held common stock of the Borrower (or securities convertible into such common
stock) immediately before the transaction hold less than a majority of: (i) the
common stock (including any securities convertible into common stock on an
as-converted basis) of the surviving corporation; or (ii) if, pursuant to the
transaction, shares of common stock of the Borrower are changed or converted
into or exchanged for in whole or part, securities of another corporation or
entity, the combined outstanding equity (on a fully-diluted basis) of that

 

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corporation or entity; (b) any liquidation or dissolution of the Borrower; or
(c) any sale, lease, exchange or other transfer not in the ordinary course of
business (in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Borrower.

 

6. Fees and Expenses. In the event that Borrower defaults with respect to any
payment herein Borrower hereby promises to pay all costs, fees and expenses
incurred by Lender, including, without limitation, reasonable attorneys fees, in
the event that a suit or action is instituted by Lender to enforce this Note.

 

7. Assignment. Borrower may not assign its rights or transfer its obligations
under this Note without Lender’s prior written consent.

 

8. Waiver. Borrower waives presentment for payment, demand, notice of
nonpayment, notice of protest, protest of this Note, and all other notices in
connection with the delivery, acceptance, performance, default, dishonor, or
enforcement of the payment of this Note except such notices as are specifically
required by this Note.

 

9. Notice. Any notices or other communications shall be in writing and shall be
considered to have been duly given on the earlier of (a) the date of actual
receipt or (b) three days after deposit in the first-class certified U.S. mail,
postage prepaid, return receipt requested:

 

If to Lender, to:

  

SCOLR Pharma, Inc.

3625 – 132nd Avenue SE, Ste. #300

Bellevue, Washington 98006

Attn: Alan Mitchel, Esq.

If to Borrower, to:

  

Steven H. Moger, President

Nutraceutix, Inc.

9609 - 153rd Avenue N.E.

Redmond, WA 98052

 

10. Time is of the Essence. All reimbursements and payments other than payments
of principal or interest required by this Note shall be immediately due and
payable on demand.

 

11. Governing Law. This Note is governed by the law of the state of Washington
without regard for conflict of laws principles; provided, however, that to the
extent the holder of this Note has greater rights or remedies under federal law,
this provision shall not be deemed to deprive the holder of such rights and
remedies as may be available under federal law.

 

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12. Statutory Notice. BORROWER ACKNOWLEDGES THAT ORAL AGREEMENTS OR ORAL
COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT
OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.

 

BORROWER: Nutraceutix, Inc.

Specimen

 

Steven H. Moger, President

 

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