EXHIBIT 10.2

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT dated as of August 13, 2010 (this “Security Agreement”),
is made by and among ARYx THERAPEUTICS, INC., a Delaware corporation
(“Grantor”), and the secured parties listed on the signature pages hereto (each,
a “Secured Party” and, collectively, the “Secured Parties”).

 

RECITALS

 

A.                                    Each Secured Party has made and has agreed
to make certain advances of money and to extend certain financial accommodations
to Grantor, as evidenced by those certain Secured Promissory Notes of even date
herewith executed by Grantor in favor of each Secured Party and such other
Secured Promissory Notes which may be executed by Grantor in favor of each
Secured Party after the date hereof (each, a “Note” and, collectively, the
“Notes”), pursuant to that certain Note and Warrant Purchase Agreement dated
August 13, 2010 by and between Grantor and the Secured Parties (the “Purchase
Agreement”), such advances, future advances,  and financial accommodations being
referred to herein as the “Loans.”

 

B.                                    The Secured Parties are willing to make
the Loans to Grantor, but only upon the condition, among others, that Grantor
shall have executed and delivered to the Secured Parties this Security
Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in order to induce the Secured Parties to make the Loans and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, and intending to be legally bound, Grantor hereby
represents, warrants, covenants and agrees as follows:

 

1.                                      DEFINED TERMS.  When used in this
Security Agreement the following terms shall have the following meanings (such
meanings being equally applicable to both the singular and plural forms of the
terms defined):

 

“Bankruptcy Code” means Title XI of the United States Code.

 

“Collateral” shall have the meaning assigned to such term in Section 2 of this
Security Agreement.

 

“Contracts” means all contracts (including any customer, vendor, supplier,
service or maintenance contract), leases, licenses, undertakings, purchase
orders, permits, franchise agreements or other agreements (other than any right
evidenced by Chattel Paper, Documents or Instruments), whether in written or
electronic form, in or under which Grantor now holds or hereafter acquires any
right, title or interest, including, without limitation, with respect to an
Account, any agreement relating to the terms of payment or the terms of
performance thereof.

 

“Copyrights” means all of the following now owned or hereafter acquired or
created (as a work for hire for the benefit of Grantor) by Grantor or in which
Grantor now holds or hereafter acquires or receives any right or interest, in
whole or in part: (a) all copyrights, whether registered or unregistered, held
pursuant to the laws of the United States, any State thereof or any other
country; (b) registrations, applications, recordings and proceedings in the
United States Copyright Office or in any similar office or agency of the United
States, any State thereof or any other country; (c) any continuations, renewals
or extensions thereof; (d) any registrations to be issued in any pending
applications, and shall include any

 

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right or interest in and to work protectable by any of the foregoing which are
presently or in the future owned, created or authorized (as a work for hire for
the benefit of Grantor) or acquired by Grantor, in whole or in part; (e) prior
versions of works covered by copyright and all works based upon, derived from or
incorporating such works; (f) income, royalties, damages, claims and payments
now and hereafter due and/or payable with respect to copyrights, including,
without limitation, damages, claims and recoveries for past, present or future
infringement; (g) rights to sue for past, present and future infringements of
any copyright; and (h) any other rights corresponding to any of the foregoing
rights throughout the world.

 

“Event of Default” means (i) any failure by Grantor forthwith to pay or perform
any of the Secured Obligations; (ii) any breach by Grantor of any warranty,
representation, or covenant set forth herein or in the Purchase Agreement;
(iii) any “Event of Default” as defined in the Notes; (iv) if any material
portion of Grantor’s assets is attached or seized, or a levy is filed against
any such assets, or a judgment or judgments is/are entered for the payment of
money, individually or in the aggregate, of at least $100,000, or Borrower is
enjoined or in any way prevented by court order from conducting any part of its
business; and/or (v) any default under (x) that certain Oxford Loan and Security
Agreement No. 4521, dated as of March 28, 2005, by and between the Grantor and
Lighthouse Capital Partners V, L.P., as amended, modified or supplement from
time to time, (y) that certain Loan Agreement, dated as of December 31, 2008, by
and between the Grantor and Oxford Financial Corporation as amended, modified or
supplement from time to time and/or (z) any other agreement or obligation of
Grantor involving any indebtedness in excess of $100,000.

 

“Intellectual Property” means any intellectual property, in any medium, of any
kind or nature whatsoever, now or hereafter owned or acquired or received by
Grantor or in which Grantor now holds or hereafter acquires or receives any
right or interest, and shall include, in any event, any Copyright, Trademark,
Patent, License, trade secret, customer list, marketing plan, internet domain
name (including any right related to the registration thereof), proprietary or
confidential information, mask work, source, object or other programming code,
invention (whether or not patented or patentable), technical information,
procedure, design, knowledge, know-how, software, data base, data, skill,
expertise, recipe, experience, process, model, drawing, material or record.

 

“Investment” is any beneficial ownership interest in any Person (including
stock, partnership interest or other securities), and any loan, advance or
capital contribution to any Person.

 

“License” means any Copyright License, Patent License, Trademark License or
other license of rights or interests, whether in-bound or out-bound, whether in
written or electronic form, now or hereafter owned or acquired or received by
Grantor or in which Grantor now holds or hereafter acquires or receives any
right or interest, and shall include any renewals or extensions of any of the
foregoing thereof.

 

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

 

“Majority Holders” means each Secured Party, provided, that following any
assignment of the Secured Obligations by any Secured Party, the Majority Holders
shall mean any Secured Party or group of Secured Parties holding greater than
fifty percent (50%) of the outstanding and unpaid principal under all Loans of
all Secured Parties.

 

“Money” means a medium of exchange authorized or adopted by a domestic or
foreign government and includes a monetary unit of account established by an
intergovernmental organization or by agreement between two or more nations.

 

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“Patent License” means any agreement, whether in written or electronic form, in
which Grantor now holds or hereafter acquires any interest, granting any right
with respect to any invention on which a Patent is in existence (whether Grantor
is the licensee or the licensor thereunder).

 

“Patents” means all of the following in which Grantor now holds or hereafter
acquires any interest: (a) all letters patent of the United States or any other
country, all registrations and recordings thereof and all applications for
letters patent of the United States or any other country, including, without
limitation, registrations, recordings and applications in the United States
Patent and Trademark Office or in any similar office or agency of the United
States, any State thereof or any other country; (b)all reissues, divisions,
continuations, renewals, continuations-in-part or extensions thereof; (c) all
petty patents, divisionals and patents of addition; (d) all patents to issue in
any such applications; (e) income, royalties, damages, claims and payments now
and hereafter due and/or payable with respect to patents, including, without
limitation, damages, claims and recoveries for past, present or future
infringement; and (f) rights to sue for past, present and future infringements
of any patent.

 

“Permitted Indebtedness” has the meaning given it in the Purchase Agreement.

 

“Permitted Liens” means the Liens described on Schedule A.

 

“Person” is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.

 

“Pro Rata” means, as to any Secured Party at any time, the percentage equivalent
at such time of such Secured Party’s aggregate unpaid principal amount of Loans,
divided by the combined aggregate unpaid principal amount of all Loans of all
Secured Parties.

 

“Secured Obligations” means (a) the obligation of Grantor to repay the Secured
Parties all of the unpaid principal amount of, and accrued interest on
(including any interest that accrues after the commencement of bankruptcy), the
Loans and (b) the obligation of Grantor to pay any fees, costs and expenses of
Secured Party under the Notes, the Purchase Agreement or this Security
Agreement.

 

“Security Agreement” means this Security Agreement and all Schedules hereto, as
the same may from time to time be amended, modified, supplemented or restated.

 

“Trademark License” means any agreement, whether in written or electronic form,
in which Grantor now holds or hereafter acquires any interest, granting any
right in and to any Trademark or Trademark registration (whether Grantor is the
licensee or the licensor thereunder).

 

“Trademarks” means any of the following in which Grantor now holds or hereafter
acquires any interest: (a) any trademarks, tradenames, corporate names, company
names, business names, trade styles, service marks, logos, other source or
business identifiers, prints and labels on which any of the foregoing have
appeared or appear, designs and general intangibles of like nature, now existing
or hereafter adopted or acquired, all registrations and recordings thereof and
any applications in connection therewith, including, without limitation,
registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
State thereof or any other country (collectively, the “Marks”); (b) any
reissues, extensions or renewals thereof; (c) the goodwill of the business
symbolized by or associated with the Marks; (d) income, royalties, damages,
claims and payments now and hereafter due and/or payable with respect to the
Marks, including, without limitation, damages, claims and recoveries for past,
present or future infringement; and (e) rights to sue for past, present and
future infringements of the Marks.

 

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“UCC” means the Uniform Commercial Code as the same may from time to time be in
effect in the State of California (and each reference in this Security Agreement
to an Article thereof (denoted as a Division of the UCC as adopted and in effect
in the State of California) shall refer to that Article (or Division, as
applicable) as from time to time in effect, which in the case of Article 9 shall
include and refer to Revised Article 9 from and after the date Revised Article 9
shall become effective in the State of California); provided, however, in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of the Secured Parties’ security interest in
any Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of California, the term “UCC” shall mean the
Uniform Commercial Code (including the Articles thereof) as in effect at such
time in such other jurisdiction for purposes of the provisions hereof relating
to such attachment, perfection or priority and for purposes of definitions
related to such provisions.

 

In addition, the following terms shall be defined terms having the meaning set
forth for such terms in the UCC: “Account” , “Account Debtor”, “Chattel Paper”,
“Commercial Tort Claims”, “Commodity Account”, “Deposit Account”, “Documents”,
“Equipment”, “Fixtures”, “General Intangible”, “Goods”, “Instrument”,
“Inventory”, “Investment Property”, “Letter-of-Credit Right”, “Payment
Intangibles”, “Proceeds”, “Promissory Notes”, “Securities Account”, and
“Supporting Obligations”.  Each of the foregoing defined terms shall include all
of such items now owned, or hereafter acquired, by Grantor.

 

2.                                      GRANT OF SECURITY INTEREST.  As
collateral security for the full, prompt, complete and final payment and
performance when due (whether at stated maturity, by acceleration or otherwise)
of all the Secured Obligations and in order to induce the Secured Parties to
cause the Loans to be made, Grantor hereby assigns, conveys, mortgages, pledges,
hypothecates and transfers to the Secured Parties, and hereby grants to the
Secured Parties, a security interest in all of Grantor’s right, title and
interest in, to and under the following, whether now owned or hereafter
acquired, (all of which being collectively referred to herein as the
“Collateral”):

 

(a)                                  All Accounts of Grantor;

 

(b)                                  All Chattel Paper of Grantor;

 

(c)                                  All Commercial Tort Claims of Grantor;

 

(d)                                  All Commodity Accounts of Grantor;

 

(e)                                  All Contracts of Grantor;

 

(f)                                    All Deposit Accounts of Grantor;

 

(g)                                 All Documents of Grantor;

 

(h)                                 All General Intangibles of Grantor,
including, without limitation, Intellectual Property;

 

(i)                                    All Goods of Grantor, including, without
limitation, Equipment, Inventory, and Fixtures;

 

(j)                                    All Instruments of Grantor, including,
without limitation, Promissory Notes;

 

(k)                                All Investment Property of Grantor;

 

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(l)                                    All Letter-of Credit Rights of Grantor;

 

(m)                              All Money of Grantor;

 

(n)                                 All Securities Accounts of Grantor;

 

(o)                                  All Supporting Obligations of Grantor;

 

(p)                                  All property of Grantor held by any Secured
Party, or any other party for whom any Secured Party is acting as agent,
including, without limitation, all property of every description now or
hereafter in the possession or custody of or in transit to any Secured Party or
such other party for any purpose, including, without limitation, safekeeping,
collection or pledge, for the account of Grantor, or as to which Grantor may
have any right or power;

 

(q)                                  All other goods and personal property of
Grantor, wherever located, whether tangible or intangible, and whether now owned
or hereafter acquired, existing, leased or consigned by or to Grantor; and

 

(r)                                  To the extent not otherwise included, all
Proceeds of each of the foregoing and all accessions to, substitutions and
replacements for and rents, profits and products of each of the foregoing.

 

Notwithstanding the foregoing provisions of this Section 2, the grant,
assignment and transfer of a security interest as provided herein shall not
extend to, and the term “Collateral” shall not include:  (a) “intent-to-use”
trademarks at all times prior to the first use thereof, whether by the actual
use thereof in commerce, the recording of a statement of use with the United
States Patent and Trademark Office or otherwise or (b) any Account, Chattel
Paper, General Intangible or Promissory Note in which Grantor has any right,
title or interest if and to the extent such Account, Chattel Paper, General
Intangible or Promissory Note includes a provision containing a restriction on
assignment such that the creation of a security interest in the right, title or
interest of Grantor therein would be prohibited and would, in and of itself,
cause or result in a default thereunder enabling another person party to such
Account, Chattel Paper, General Intangible or Promissory Note to enforce any
remedy with respect thereto; provided that the foregoing exclusion shall not
apply if (i) such prohibition has been waived or such other person has otherwise
consented to the creation hereunder of a security interest in such Account,
Chattel Paper, General Intangible or Promissory Note or (ii) such prohibition
would be rendered ineffective pursuant to Sections 9-406, 9-407 or 9-408 of the
UCC, as applicable and as then in effect in any relevant jurisdiction, or any
other applicable law (including the Bankruptcy Code) or principles of equity);
provided further that immediately upon the ineffectiveness, lapse or termination
of any such provision, the Collateral shall include, and Grantor shall be deemed
to have granted on the date hereof a security interest in, all its rights, title
and interests in and to such Account, Chattel Paper, General Intangible or
Promissory Note as if such provision had never been in effect; and provided
further that the foregoing exclusion shall in no way be construed so as to
limit, impair or otherwise affect any Secured Party’s unconditional continuing
security interest in and to all rights, title and interests of Grantor in or to
any payment obligations or other rights to receive monies due or to become due
under any such Account, Chattel Paper, General Intangible or Promissory Note and
in any such monies and other proceeds of such Account, Chattel Paper, General
Intangible or Promissory Note.

 

If Grantor shall at any time acquire a Commercial Tort Claim, Grantor shall
immediately notify Secured Party in a writing signed by Grantor of the brief
details thereof and grant to Secured Party in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Security
Agreement, with such writing to be in form and substance satisfactory to Secured
Party.

 

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3.                                      REPRESENTATIONS AND WARRANTIES.  Grantor
hereby represents and warrants to the Secured Parties that:

 

(a)                                  The representations and warranties in
Section 4 of the Purchase Agreement are true and correct and incorporated herein
by reference.

 

(b)                                  Except for the security interest granted to
the Secured Parties under this Security Agreement and Permitted Liens, Grantor
is the sole legal and equitable owner of each item of the Collateral in which it
purports to grant a security interest hereunder.

 

(c)                                  No effective security agreement, financing
statement, equivalent security or lien instrument or continuation statement
covering all or any part of the Collateral exists, except such as may have been
filed by Grantor in favor of the Secured Parties pursuant to this Security
Agreement and except for Permitted Liens.

 

(d)                                  This Security Agreement creates a legal and
valid security interest on and in all of the Collateral in which Grantor now has
rights.

 

4.                                      COVENANTS.  Unless the Majority Holders
otherwise consent (which consent shall not be unreasonably withheld), Grantor
covenants and agrees with the Secured Parties that from and after the date of
this Security Agreement and until the Secured Obligations have been performed
and paid in full and any commitment of Secured Party to make Loans to Grantor
has expired or terminated:

 

4.1                               Change of Jurisdiction of Organization,
Relocation of Business.  Grantor shall not change its jurisdiction of
organization or relocate its chief executive office, principal place of business
or its records from such address(es) provided to the Secured Parties pursuant to
Section 4(d) above without at least ten (10) days prior notice to the Secured
Parties.  All Collateral shall be located at the locations specified on Schedule
B unless prior written notice is provided to the Secured Parties.

 

4.2                               Limitation on Liens on Collateral.  Grantor
shall not, directly or indirectly, create, permit or suffer to exist, and shall
defend the Collateral against and take such other action as is necessary to
remove, any Lien on the Collateral, except (a) Permitted Liens and (b) the Lien
granted to the Secured Parties under this Security Agreement.

 

4.3                               Insurance.  Grantor shall maintain insurance
policies insuring the Collateral against loss or damage from such risks and in
such amounts and forms and with such companies as are customarily maintained by
businesses similar to Grantor and shall deliver to the Secured Parties insurance
certificates evidencing such policies and naming each Secured Party as loss
payees and additional insureds.

 

4.4                               Taxes, Assessments, Etc.  Grantor shall pay
promptly when due all property and other taxes, assessments and government
charges or levies imposed upon, and all claims (including claims for labor,
materials and supplies) against, the Goods, except to the extent the validity or
amount thereof is being contested in good faith and adequate reserves are being
maintained in connection therewith.

 

4.5                               Inspection Right.  Grantor shall, at Grantor’s
expense, permit any representative that a Secured Party authorizes, including
its attorneys and accountants, to inspect the Collateral and examine and make
copies and abstracts of the books of account and records of Grantor at
reasonable times and upon reasonable notice during normal business hours,
provided, that such an inspection shall occur no more than once a calendar year
unless an Event of Default has occurred or is continuing.

 

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4.6                               Indebtedness.  Grantor shall not create,
incur, assume, guarantee or be or remain liable with respect to any Indebtedness
other than Permitted Indebtedness.

 

4.7                               Distributions; Investments.  Grantor shall not
(a) pay any dividends or make any distribution or payment or redeem, retire or
purchase any capital stock; or (b) directly or indirectly acquire or own any
Person, or make any Investment in any Person.

 

4.8                               Transfers.  Grantor shall not voluntarily or
involuntarily transfer, sell, lease, license, lend or in any other manner convey
any equitable, beneficial or legal interest in any material portion of their
assets except on commercially reasonable terms.

 

4.9                               Financial Statements and Reports.  If Grantor
is no longer subject to Securities Exchange Commission reporting obligations
under Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934
and/or Grantor has not complied with such reporting obligations, Grantor agrees
to deliver, (i) no later than thirty (30) days after the last day of each month,
financial statements (balance sheet, income statement and statement of cash
flows) prepared under GAAP, consistently applied, (ii) no later than ninety (90)
days after the last day of Grantor’s fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm and, (iii) as and when delivered, reports and other
financial materials provided to any other lender.

 

4.10                        Further Assurances.  At any time and from time to
time, upon the written request of a Secured Party, and at the sole expense of
Grantor, Grantor shall promptly and duly execute and deliver any and all such
further instruments and documents and take such further action as a Secured
Party may reasonably deem necessary or desirable to obtain the full benefits of
this Security Agreement, including, without limitation, (a) executing,
delivering and causing to be filed any financing or continuation statements
under the UCC with respect to the security interests granted hereby, (b) at a
Secured Party’s reasonable request, filing or cooperating with the Secured
Parties in filing any forms or other documents required to be recorded with the
United States Patent and Trademark Office, United States Copyright Office,
(c) at a Secured Party’s reasonable request, placing the interest of the Secured
Parties as lienholder on the certificate of title (or similar evidence of
ownership) of any vehicle, watercraft or other Equipment constituting Collateral
owned by Grantor which is covered by a certificate of title (or similar evidence
of ownership), (d) executing and delivering and using commercially reasonable
efforts to cause the applicable depository institution, securities intermediary,
commodity intermediary or issuer or nominated party under a letter of credit to
execute and deliver a collateral control agreement with respect to any Deposit
Account, Securities Account or Commodity Account or Letter-of-Credit Right in or
to which Grantor has any right or interest and (e) at a Secured Party’s
reasonable request, using commercially reasonable efforts to obtain
acknowledgments from bailees having possession of any Collateral and waivers of
liens from landlords and mortgagees of any location where any of the Collateral
may from time to time be stored or located.  Grantor also hereby authorizes the
Secured Parties to file any such financing or continuation statement without the
signature of Grantor.  Grantor hereby irrevocably appoints each Secured Party as
its lawful attorney-in-fact to effect the rights granted in the Loan Documents
including, without limitation, this Section 4.10 and Section 5.

 

5.                                      RIGHTS AND REMEDIES UPON DEFAULT.  If an
Event of Default shall have occurred and while such Event of Default is
continuing:

 

(a)                                  A Secured Party may exercise in addition to
all other rights and remedies granted to it under this Security Agreement, the
Notes or the Purchase Agreement all rights and remedies of a secured party under
the UCC.  Without limiting the generality of the foregoing, Grantor expressly
agrees that in any such event a Secured Party, without demand of performance or
other demand, advertisement

 

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or notice of any kind (except the notice specified below of time and place of
public or private sale) to or upon Grantor or any other person, may (i) reclaim,
take possession, recover, store, maintain, finish, repair, prepare for sale or
lease, shop, advertise for sale or lease and sell or lease (in the manner
provided herein) the Collateral, and in connection with the liquidation of the
Collateral and collection of the accounts receivable pledged as Collateral, use
any Trademark, Copyright, or process used or owned by Grantor and (ii) forthwith
collect, receive, appropriate and realize upon the Collateral, or any part
thereof, and may forthwith sell, lease, assign, give an option or options to
purchase or sell or otherwise dispose of and deliver said Collateral (or
contract to do so), or any part thereof, in one or more parcels at public or
private sale or sales, at any exchange or broker’s board or at any Secured
Party’s offices or elsewhere at such prices as it may deem commercially
reasonable, for cash or on credit or for future delivery without assumption of
any credit risk.  Grantor further agrees, at a Secured Party’s request, to
assemble the Collateral and make it available to the Secured Parties at places
which the Secured Parties shall reasonably select, whether at Grantor’s premises
or elsewhere.

 

(b)                                  Grantor also agrees to pay all fees, costs
and expenses of the Secured Parties, including, without limitation, attorneys’
fees, incurred in connection with the enforcement of any of its rights and
remedies hereunder.

 

(c)                                  Grantor hereby waives presentment, demand,
protest or any notice (to the maximum extent permitted by applicable law) of any
kind in connection with this Security Agreement or any Collateral.

 

(d)                                  The Proceeds of any sale, disposition or
other realization upon all or any part of the Collateral shall be distributed by
the Secured Parties in the following order of priorities:

 

FIRST, to each Secured Party in an amount sufficient to pay in full the costs of
such Secured Party in connection with such sale, disposition or other
realization, including all fees, costs, expenses, liabilities and advances
incurred or made by any Secured Party in connection therewith, including,
without limitation, attorneys’ fees;

 

SECOND, to the Secured Parties in amounts proportional to the Pro Rata share of
the then unpaid Secured Obligations of each Secured Party; and

 

FINALLY, upon payment in full of the Secured Obligations, to Grantor or its
representatives, in accordance with the UCC or as a court of competent
jurisdiction may direct.

 

(e)                                  The costs of enforcing or pursuing any
right or remedy hereunder, including without limitation any repossession, sale,
possession and management (including, without limitation, reasonable attorneys’
fees), and distribution shall be borne Pro Rata by the Secured Parties until
reimbursement by Grantor.  Each Secured Party shall reimburse the other Secured
Parties, as applicable, for its Pro Rata share of all such costs promptly upon
demand.

 

6.                                      [RESERVED.].

 

7.                                      UNEQUAL PAYMENT BY GRANTOR.  Each
Secured Party agrees that if it shall obtain or receive under the Notes or by
applicable law, including, but not limited to any right of set-off, any secured
claim under Section 506 of the Bankruptcy Code or any other security or
interest, any payment or payments greater than its Pro Rata share of all Loans,
as measured immediately prior to the receipt of such payment or payments, then
(a) such Secured Party shall hold such amounts in trust for the other Secured
Parties and promptly purchase at par (and shall be deemed to have thereupon
purchased) from other Secured Parties, a participation in the Loans of such
other Secured Parties, so that each Secured

 

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Party shall have received payments in proportion to its Pro Rata share
immediately prior to such transactions and (b) such other adjustments shall be
made from time to time as shall be equitable to ensure that the Secured Parties
share the benefits of such payment on a Pro Rata basis.  The term “Loan” as used
in this paragraph shall include accrued interest thereon.

 

8.                                      INDEMNITY.  Grantor agrees to defend,
indemnify and hold harmless the Secured Parties and their officers, employees,
and agents against (a) all obligations, demands, claims, and liabilities claimed
or asserted by any other party in connection with the transactions contemplated
by this Security Agreement and the other Loan Documents, and (b) all losses or
expenses in any way suffered, incurred, or paid by any Secured Party as a result
of or in any way arising out of, following or consequential to transactions
between any Secured Party and Grantor, whether under this Security Agreement,
the other Loan Documents or otherwise (including without limitation, reasonable
attorneys fees and expenses), except for losses arising from or out of such
Secured Party’s gross negligence or willful misconduct.

 

9.                                      REINSTATEMENT.  This Security Agreement
shall remain in full force and effect and continue to be effective should any
petition be filed by or against Grantor for liquidation or reorganization,
should Grantor become insolvent or make an assignment for the benefit of
creditors or should a receiver or trustee be appointed for all or any
significant part of Grantor’s property and assets, and shall continue to be
effective or be reinstated, as the case may be, if at any time payment and
performance of the Secured Obligations, or any part thereof, is, pursuant to
applicable law, rescinded or reduced in amount, or must otherwise be restored or
returned by any obligee of the Secured Obligations, whether as a “voidable
preference,” “fraudulent conveyance,” or otherwise, all as though such payment
or performance had not been made.  In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Secured Obligations
shall be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.

 

10.                               COLLATERAL AGENT.  If each Secured Party is
unable to perfect a security interest in any of the Collateral including,
without limitation, control over deposit accounts and securities accounts and/or
possession of certain property, each of the Secured Parties hereby appoints
Ayer, and Ayer agrees to act as their agent with respect to such Collateral for
perfection by possession or exercise of control and to promptly perform written
instructions received from such other Secured Parties with respect to such
Collateral that are reasonably necessary to undertake any remedies permitted by
Section 5

 

11.                               MISCELLANEOUS.

 

11.1                        Waivers; Modifications.  None of the terms or
provisions of this Security Agreement may be waived, altered, modified or
amended except by an instrument in writing, duly executed by Grantor and the
Majority Holders and all such waivers and amendments shall be at Grantor’s
expense.  Each Secured Party acknowledges that because this Security Agreement
may be amended with the consent of the Majority Holders, each Secured Party’s
rights hereunder may be amended or waived without such Secured Party’s consent. 
Notwithstanding the foregoing, the consent of each Secured Party shall be
necessary (i) to amend the definition of Collateral and (ii) as otherwise
specified in Section 7.8 of the Purchase Agreement.

 

11.2                        Termination of this Security Agreement.  Subject to
Section 9 hereof, this Security Agreement shall terminate upon the payment and
performance in full of the Secured Obligations.

 

11.3                        Successor and Assigns.  This Security Agreement
binds and is for the benefit of the successors and permitted assigns of each
party.  Grantor may not assign this Security Agreement, the Notes or the
Purchase Agreement or any rights or obligations thereunder without each Secured
Party’s prior written consent (which may be granted or withheld in the Secured
Parties’ discretion).  Each

 

9

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Secured Party has the right, without the consent of or notice to Grantor, to
sell, transfer, assign, negotiate, or grant participation in all or any part of,
or any interest in, such Secured Party’s obligations, rights, and benefits under
this Security Agreement, the Notes, the Purchase Agreement and the other Loan
Documents.  No sales of participations, other sales, assignments, transfers or
other dispositions of any agreement governing or instrument evidencing the
Secured Obligations or any portion thereof or interest therein shall in any
manner affect the lien granted to the Secured Parties hereunder.

 

11.4                        Counterparts.  This Security Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, is an original, and
all taken together, constitute one Agreement.

 

11.5                        Severability of Provisions.  Each provision of this
Security Agreement is severable from every other provision in determining the
enforceability of any provision.

 

11.6                        Governing Law.  In all respects, including all
matters of construction, validity and performance, this Security Agreement shall
be governed by, and construed and enforced in accordance with, the laws of the
State of California applicable to contracts made and performed in such state,
without regard to the principles thereof regarding conflict of laws, except to
the extent that the UCC provides for the application of the law of a different
jurisdiction.

 

[Signature pages follow.]

 

10

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

 

 

ADDRESS OF GRANTOR

 

ARYx THERAPEUTICS, INC.

 

 

 

 

 

 

6300 Dumbarton Circle

 

By:

/s/ Paul Goddard

 

 

 

Fremont, California 94555

 

Printed Name:

Paul Goddard, Ph.D.

 

 

 

 

 

Title:

Chairman and Chief Executive Officer

 

 

 

 

 

 

TAXPAYER IDENTIFICATION NUMBER OF GRANTOR

 

JURISDICTION OF ORGANIZATION OF GRANTOR

 

 

 

77-0456039

 

Delaware

 

SIGNATURE PAGE TO ARYx THERAPEUTICS, INC.

SECURITY AGREEMENT

 

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ACCEPTED AND ACKNOWLEDGED BY:

 

 

 

AYER CAPITAL PARTNERS MASTER FUND, L.P.

 

 

 

By: Ayer Capital Partners, LLC, its general partner

 

 

 

 

 

By:

/s/ Jay Venkatesan

 

 

 

 

Print Name:

Jay Venkatesan

 

 

 

 

Title:

Managing Member

 

 

 

 

Address:

Ayer Capital Management, L.P.

 

 

Attn: Jay Venkatesan

 

 

230 California Street, Suite 600

 

 

San Francisco, CA 94123

 

 

fax: (415) 651-9005

 

 

 

 

 

 

AYER CAPITAL PARTNERS KESTREL FUND, L.P.

 

 

 

By: Ayer Kestrel Partners, LLC, its general partner

 

 

 

 

 

 

 

By:

/s/ Jay Venkatesan

 

 

 

 

Print Name:

Jay Venkatesan

 

 

 

 

Title:

Managing Member

 

 

 

 

Address:

Ayer Capital Management, L.P.

 

 

Attn: Jay Venkatesan

 

 

230 California Street, Suite 600

 

 

San Francisco, CA 94123

 

 

fax: (415) 651-9005

 

 

SIGNATURE PAGE TO ARYx THERAPEUTICS, INC.

SECURITY AGREEMENT

 

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

 

ACCEPTED AND ACKNOWLEDGED BY:

 

MPM BIOVENTURES III, L.P.

 

 

 

By: MPM BioVentures III GP, L.P., its General Partner

 

 

 

By: MPM BioVentures III LLC, its General Partner

 

 

 

 

 

By:

/s/ Nicholas Simon III

 

 

 

Print Name:

Nicholas Simon III

 

 

 

Title:

Series A Member

 

 

 

Address:

200 Clarendon Street, 54th Floor

 

 

Boston, MA 02116

 

 

 

 

 

MPM BIOVENTURES III-QP, L.P.

 

 

 

By: MPM BioVentures III GP, L.P., its General Partner

 

 

 

By: MPM BioVentures III LLC, its General Partner

 

 

 

 

 

By:

/s/ Nicholas Simon III

 

 

 

Print Name:

Nicholas Simon III

 

 

 

Title:

Series A Member

 

 

 

Address:

200 Clarendon Street, 54th Floor

 

 

Boston, MA 02116

 

 

 

 

 

MPM BIOVENTURES III GMBH & CO. BETEILIGUNGS KG

 

 

 

By:

MPM BioVentures III GP, L.P., in its capacity as Managing Limited Partner

 

 

 

By: MPM BioVentures III LLC, its General Partner

 

 

 

 

 

By:

/s/ Nicholas Simon III

 

 

 

Print Name:

Nicholas Simon III

 

 

 

Title:

Series A Member

 

 

 

Address:

200 Clarendon Street, 54th Floor

 

 

Boston, MA 02116

 

 

SIGNATURE PAGE TO ARYx THERAPEUTICS, INC.

SECURITY AGREEMENT

 

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

 

ACCEPTED AND ACKNOWLEDGED BY:

 

MPM BIOVENTURES III PARALLEL FUND, L.P.

 

 

 

By: MPM BioVentures III GP, L.P., its General Partner

 

 

 

By: MPM BioVentures III LLC, its General Partner

 

 

 

 

 

By:

/s/ Nicholas Simon III

 

 

 

Print Name:

Nicholas Simon III

 

 

 

Title:

Series A Member

 

 

 

Address:

200 Clarendon Street, 54th Floor

 

 

Boston, MA 02116

 

 

 

 

 

MPM ASSET MANAGEMENT INVESTORS 2002 BVIII LLC

 

 

 

 

 

By:

/s/ Nicholas Simon III

 

 

 

Print Name:

Nicholas Simon III

 

 

 

Title:

Manager

 

 

 

Address:

200 Clarendon Street, 54th Floor

 

 

Boston, MA 02116

 

 

SIGNATURE PAGE TO ARYx THERAPEUTICS, INC.

SECURITY AGREEMENT

 

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SCHEDULE A

 

LIENS EXISTING ON THE DATE OF THIS SECURITY AGREEMENT

 

Liens granted pursuant to that certain Loan and Security Agreement No. 4521,
dated March 28, 2005, by and between the Grantor and Lighthouse Capital Partners
V, L.P., as amended.

 

Liens granted pursuant to that certain Loan Agreement, dated December 31, 2008,
by and between the Grantor and Oxford Financial Corporation.

 

Lien granted pursuant to this Security Agreement.

 

Liens on equipment financed in accordance with subsection (b) of the definition
of Permitted Indebtedness.

 

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SCHEDULE B

 

COLLATERAL LOCATIONS

 

6300 Dumbarton Circle, Fremont, CA 94555

 

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