Exhibit 10.1

THIS PROMISSORY NOTE IS SUBORDINATE TO CERTAIN OBLIGATIONS OF THE COMPANY AS
DESCRIBED IN THE BFI LOAN DOCUMENTS (DEFINED HEREIN) AND SUBJECT TO THAT CERTAIN
DEBT SUBORDINATION AGREEMENT DATED MARCH 19, 2010 AMONG BFI BUSINESS FINANCE AND
THE HOLDER.

THIS PROMISSORY NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, OR QUALIFIED UNDER ANY STATE
SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR QUALIFICATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.

THIS PROMISSORY NOTE HAS BEEN ISSUED WITH “ORIGINAL ISSUE DISCOUNT” WITHIN THE
MEANING OF SECTION 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. UPON
WRITTEN REQUEST, THE COMPANY WILL PROMPTLY MAKE AVAILABLE TO ANY HOLDER OF THIS
NOTE THE FOLLOWING INFORMATION: (1) THE ISSUE PRICE AND DATE OF THE NOTE,
(2) THE AMOUNT OF ORIGINAL ISSUE DISCOUNT ON THE NOTE AND (3) THE YIELD TO
MATURITY OF THE NOTE. TO OBTAIN THIS INFORMATION, A HOLDER SHOULD CONTACT THE
CHIEF FINANCIAL OFFICER AT 2070 LAS PALMAS DRIVE, CARLSBAD, CA 92011.

PROMISSORY NOTE

 

$1,000,000

   November 1, 2010    San Diego, California

FOR VALUE RECEIVED, Orange 21 North America Inc. (formerly known as Spy Optic,
Inc.), a California corporation (the “Company”), promises to pay to the order of
Costa Brava Partnership III, L.P., a Delaware limited partnership, or its
registered assigns (“Holder”), the principal sum of One Million Dollars
($1,000,000) on July 29, 2011 (the “Maturity Date”), together with fees and
interest thereon as provided in Section 2 of this Note (the “Note”).

1. Definitions. For purposes of this Note, the following terms shall have the
following meanings:

“Affiliate” shall mean with respect to any Person, any other Person which
directly or indirectly through one or more intermediaries Controls, or is
Controlled by, or is under common Control with, such first Person.

“BFI Loan Documents” shall mean the Loan and Security Agreement, dated as of
February 26, 2007, between the Company and BFI Business Finance, as modified by
the First Modification to Loan and Security Agreement, dated as of December 7,
2007, as further modified by the Second Modification to Loan and Security
Agreement dated as of February 12, 2008, and as further modified by the Third
Modification to Loan and Security Agreement dated as of June 23, 2008, and the
other Loan Documents as defined therein.

 

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“Business” means the business of the Company or its Subsidiaries of designing,
developing, manufacturing and marketing products for the action sports,
motorsports and youth lifestyle markets, and related activities, as conducted or
proposed to be conducted by the Company or its Subsidiaries on the date hereof
and reasonable extensions thereof.

“Business Day” means any day which is not a Saturday or Sunday or a legal
holiday on which national banks are authorized or required to be closed.

“Control” shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a person, whether
through the ownership of voting securities, by contract or otherwise, and the
terms “Controlling” and “Controlled” (and the lower-case versions of the same)
shall have meanings correlative thereto.

“Debt” shall mean all liabilities, obligations and indebtedness of every kind
and nature of any Person, including, without limitation: (i) all obligations for
borrowed money, including, without limitation, all obligations of such Person
evidenced by bonds, debentures, notes, loan agreements or other similar
instruments or deferred purchase price of property; (ii) obligations as lessee
under any leases (including under any capital leases); (iii) any reimbursement
or other obligations under any performance or surety bonds, any letters of
credit and similar instruments issued for the account of such Person; (iv) all
net obligations in respect of any derivative products; (v) all guaranties,
endorsements (other than for collection or deposit in the ordinary course of
business), and other contingent obligations to purchase, to provide funds for
payment, to supply funds to invest in any other Person, or otherwise to assure a
creditor against loss; and (vi) obligations secured by any Lien on property
owned by such Person, whether or not the obligations have been assumed or are
limited in recourse.

“GAAP” means generally accepted principles of good accounting practice in the
United States, consistently applied.

“Governmental Authority” shall mean any federal, state, local or other
governmental department, commission, board, bureau, agency or other
instrumentality or authority, domestic or foreign, exercising executive,
legislative, judicial, regulatory or administrative authority or functions of or
pertaining to government.

“Investment” shall mean, with respect to any Person, any direct or indirect
acquisition or investment by such Person, whether by means of any loan, advance
to, guarantee or assumption of Debt of, or purchase or other acquisition or any
other debt participation or interest in such Person, any purchase or other
acquisition of any capital stock, debt or other securities of such Person, any
capital contribution to such Person in, or any other investment in, or
acquisition (in one transaction or a series of transactions) of, any interest or
all or substantially all of the property and assets or business of another
Person or assets constituting a business unit, line of business or division of,
such Person.

“Legal Requirement” means any present or future requirement imposed upon the
Company or any of its Subsidiaries by any law, statute, rule, regulation,
directive, order, decree or guideline (or any interpretation thereof by courts
or of administrative bodies) of the United States of America, or any state, or
other political subdivision thereof, or by any board,

 

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governmental or administrative agency, central bank or monetary authority of the
United States of America or any other jurisdiction in which the Company owns
property or conducts its business, or any political subdivision of any of the
foregoing.

“Lien” shall mean any security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory, judgment or
other), claim or other priority or preferential arrangement 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 capital lease having substantially the same economic effect as
any of the foregoing (other than a financing statement filed by a lessor in
respect of an operating lease not intended as security).

“Material Adverse Effect” shall mean any event, matter, condition or
circumstance which (i) has or would reasonably be expected to have a material
adverse effect on the business, properties, operations, condition (financial or
otherwise) or prospects of the Company and its Subsidiaries, taken as a whole;
(ii) would materially impair the ability of the Company or any other Person to
perform or observe their respective obligations under or in respect of this
Note; (iii) would materially impair the rights and remedies of Holder under this
Note, or (iv) affects the legality, validity, binding effect or enforceability
of this Note.

“Obligations” shall mean all debts, liabilities, obligations, covenants and
duties of the Company howsoever created, arising or evidenced, whether direct or
indirect, joint or several, absolute or contingent, or now or hereafter
existing, or due or to become due, which arise out of or in connection with this
Note, including, without limitation, all costs and expenses incurred by Holder
in connection with the enforcement of this Note and any interest and fees that
accrue to Holder after the commencement by or against the Company of any
proceeding under any laws naming the Company as a debtor in such proceeding,
regardless of whether such interest and fees are allowed claims in such
proceeding.

“Organic Document” means, relative to any Person, its articles or certificate of
incorporation, or certificate of limited partnership or formation, its bylaws,
partnership or operating agreement or other organizational documents, and all
stockholders agreements, voting trusts and similar arrangements applicable to
any of its capital stock, partnership interests or other ownership interests.

“Permitted Debt” shall mean (i) Obligations of the Company to Holder hereunder
or under any other document related to or in connection with the Note;
(ii) Obligations of the Company under (a) the Promissory Note dated as March 19,
2010 (the “March 2010 Note”), by the Company in favor of Holder and under any
other document related to or in connection therewith and (b) the Promissory Note
dated as of October 4, 2010 (the “October 2010 Note”), by the Company in favor
of Holder and under any other document related to or in connection therewith;
(iii) Debt of the Company under the BFI Loan Documents not to exceed $4,000,0000
at any one time outstanding, or extensions, renewals and refinancings of such
Debt, provided that the principal amount of such Debt being extended, renewed or
refinanced under the BFI Loan Documents does not increase and in no case shall
the Company be permitted to draw in excess of $4,000,000 at any one time
outstanding under the BFI Loan Documents; (iv) Debt of the Company and any
Subsidiary of the Company existing on the date hereof and disclosed to

 

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Holder on Schedule A hereto or extensions, renewals and refinancings of such
Debt, provided that the principal amount of such Debt being extended, renewed or
refinanced does not increase and the terms thereof are not modified to impose
more burdensome terms upon Company or the relevant Subsidiary; (v) Debt of
Orange 21 Europe, S.r.l. (formerly known as Spy Optic, S.r.l.) and LEM S.r.l.
and extensions, renewals and refinancings of such Debt; (vi) accounts payable to
trade creditors for goods and services and current operating liabilities (not
the result of the borrowing of money) incurred in the ordinary course of
business of Company or any Subsidiary of the Company in accordance with
customary terms; (vii) Debt consisting of guarantees resulting from endorsement
of negotiable instruments for collection by the Company or a Subsidiary of the
Company in the ordinary course of business; (viii) interest rate swaps, currency
swaps and similar financial products entered into or obtained in the ordinary
course of business; and (viii) capital leases or other Debt incurred solely to
acquire equipment, computers, software or implement tenant improvements which is
secured in accordance with clause (ix) of the definition of “Permitted Liens”
and is not in excess of the lesser of the purchase price or the fair market
value of such equipment, computers, software or tenant improvements on the date
of acquisition.

“Permitted Investments” shall mean debt obligations maturing within twelve
months of the time of acquisition thereof which are accorded a rating of AA- or
better by S&P (or an equivalent rating by another recognized credit rating
agency of similar standing), commercial paper with a maturity of 270 calendar
days or less which is accorded a rating of A4 or better by S&P (or an equivalent
rating by another recognized credit rating agency of similar standing),
certificates of deposit maturing within twelve months of the time of acquisition
thereof issued by commercial banks that are accorded a rating by a recognized
rating service then in the business of rating commercial banks which is in the
first quartile of the rating categories used by such service, obligations
maturing within twelve months of the time of acquisition thereof of any
Governmental Authority which obligations from time to time are accorded a rating
of BBB or better by S&P (or an equivalent rating by another recognized credit
rating agency of similar standing), and demand deposits, certificates of
deposit, bankers acceptance and time deposits (having a tenor of less than one
year) of United States banks having total assets in excess of $1,000,000,000.

“Permitted Liens” shall mean (i) the existing Liens as of the date hereof
disclosed to Holder on Schedule B hereto, or incurred in connection with the
extension, renewal or refinancing of the Debt secured by such existing Liens,
provided that any extension, renewal or replacement Lien shall be limited to the
property encumbered by the existing Lien and the principal amount of the Debt
being extended, renewed or refinanced does not increase; (ii) Liens on the
assets of Orange 21 Europe, S.r.l. (formerly known as Spy Optic, S.r.1.) and LEM
S.r.l. securing Debt permitted by clause (iv) of the definition of Permitted
Debt; (iii) Liens for taxes, fees, assessments or other governmental charges or
levies, either not delinquent or being contested in good faith by appropriate
proceedings and which are adequately reserved for in accordance with GAAP;
(iv) Liens of materialmen, mechanics, warehousemen, carriers or employees or
other like Liens arising in the ordinary course of business and securing
obligations either not delinquent or being contested in good faith by
appropriate proceedings which are adequately reserved for in accordance with
GAAP and which do not in the aggregate materially impair the use or value of the
property or risk the loss or forfeiture of title thereto; (v) Liens consisting
of deposits or pledges to secure the payment of worker’s compensation,

 

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unemployment insurance or other social security benefits or obligations, or to
secure the performance of bids, trade contracts, leases, public or statutory
obligations, surety or appeal bonds or other obligations of a like nature
incurred in the ordinary course of business (other than for Debt or any Liens
arising under ERISA); (vi) easements, rights of way, servitudes or zoning or
building restrictions and other minor encumbrances on real property and
irregularities in the title to such property which do not in the aggregate
materially impair the use or value of such property or risk the loss or
forfeiture of title thereto; (vii) statutory landlord’s Liens under leases to
which Company or any of its Subsidiaries is a party; and (viii) Liens (A) upon
or in any equipment, computers or software acquired or held by Company or any of
its Subsidiaries or tenant improvements implemented by Company or any of its
Subsidiaries to secure the purchase price of such equipment, computers or
software or Debt incurred solely for the purpose of financing the acquisition of
such equipment, computers or software or the implementation of such tenant
improvements, or (B) existing on such equipment, computers or software at the
time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, or the proceeds of such
equipment, computers, software or tenant improvements.

“Person” shall mean an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.

“SEC Reports” shall mean reports, schedules, forms and registration statements,
and any amendments thereto, filed with the Securities and Exchange Commission
(the “Commission”) pursuant to the Securities Act of 1933 or Securities Exchange
Act of 1934 and the rules and regulations of the Commission promulgated
thereunder.

“Subsidiary” shall mean, with respect to any Person (herein referred to as the
“parent”), any corporation, limited liability company, partnership, association
or other business entity (i) of which securities or other ownership interests
representing more than 50% of the equity or more than 50% of the ordinary voting
power or more than 50% of the general partnership interests are, at the time any
determination is being made, owned, controlled or held by the parent, or
(ii) that is, at any time any determination is made, otherwise Controlled by,
the parent or one or more Subsidiaries of the parent and one or more
Subsidiaries of the parent.

2. Payment of Interest and Fees.

(a) Interest Generally. Interest shall accrue from the date hereof on a daily
basis on the unpaid principal amount of this Note outstanding from time to time
(computed on the basis of actual calendar days elapsed and a year of 365 days)
at a rate equal to, from the date hereof through through the Maturity Date,
(a) 9% per annum payable in cash monthly in arrears on the last day of each
calendar month, and (b) 3% per annum payable in cash on the Maturity Date.

(b) Default Interest. Upon the occurrence and during the continuance of any
Event of Default, this Note shall bear interest at a rate per annum equal to 2%
plus the rate otherwise applicable to the Note.

 

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(c) Fees. On each of December 31, 2010 and the Maturity Date, the Company shall
pay the Holder a facility fee of 0.55% of the original principal amount of this
Note.

3. Payments.

(a) Form of Payment. All payments of interest and principal shall be in lawful
money of the United States of America by a check drawn on the account of the
Company and sent via overnight courier service to Holder at such address as
previously provided to the Company in writing (which address, in the case of
Holder as of the date of issuance hereof, shall initially be the address for
Holder as set forth in this Note); provided that Holder may elect to receive a
payment of cash via wire transfer of immediately available funds by providing
the Company with prior written notice setting out such request and Holder’s wire
transfer instructions. Whenever any payment to be made shall otherwise be due on
a day which is not a Business Day, such payment shall be made on the immediately
succeeding Business Day and such extension of time shall be included in the
computation of accrued interest. All payments shall be applied first to accrued
interest, and thereafter to principal.

(b) No Set-Off. The Company agrees to make all payments under this Note without
set-off or deduction and regardless of any counterclaim or defense.

(c) Prepayment. The Company shall have the right to prepay all amounts owed
under this Note in whole or in part at any time upon five (5) Business Days
prior written notice to Holder.

4. Representations and Warranties. The Company hereby makes the following
representations and warranties to Holder, which are made and given subject to,
and qualified in their entirety by the schedule of exceptions attached hereto as
Schedule C:

(a) Organization, Good Standing and Qualification. The Company is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all requisite power and authority to
execute, deliver and perform its obligations under this Note. Each of the
Company and its Subsidiaries is qualified to do business and is in good standing
in each jurisdiction in which the failure so to qualify or be in good standing
would have a Material Adverse Effect, and has all requisite power and authority
to own its assets and carry on its business.

(b) Corporate Power and Authorization; Consents. The execution, delivery and
performance by the Company of this Note have been duly authorized by all
necessary action of the Company and do not and will not (i) contravene the terms
of the Company’s Organic Documents; (ii) result in a breach of, or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any lease, instrument, contract or other agreement to which the Company or any
of its Subsidiaries are party or by which they or their properties may be bound
or affected; (iii) necessitate the consent, approval, order or authorization of,
or registration, qualification, designation, declaration or filing with, any
Governmental Authority or any third party; or (iv) violate any provision of any
law, rule, regulation, order, judgment, decree or the like binding on or
affecting the Company, except in the case of each of clauses (ii), (iii) and
(iv), such as would not result in a Material Adverse Effect.

 

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(c) Enforceability. This Note constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms

(d) Financial Statements and Other Information. Orange 21, Inc., a Delaware
corporation and sole owner of the Company (“Parent”), has previously furnished
to Holder copies of (i) its audited consolidated financial statements for the
fiscal year ended December 31, 2009, including the balance sheet as of the close
of the fiscal year and the income statement for such year, together with a
statement of cash flows and (ii) unaudited copies of its consolidated balance
sheet, income statement and statement of cash flows as of and for the six month
period ended June 30, 2010 (the “Financial Statements”). The Financial
Statements fairly present, in all material respects, in conformity with GAAP
(except as may be indicated in the notes thereto), the financial position of the
Company taken as a whole as of the date thereof for the period specified therein
(subject to normal year-end adjustments). There are no material liabilities
required in accordance with GAAP to be set forth in the Financial Statements
that are not so set forth. Since December 31, 2009, there has been no event or
circumstance, either individually or in the aggregate, that has had or would
reasonably be expected to have a Material Adverse Effect. All forecasts and
projections that Parent and/or the Company have provided to Holder have been
prepared in good faith on the basis of the assumptions stated therein, which
assumptions were believed to be reasonable at the time made, it being understood
that projections as to future events are not to be viewed as facts and actual
results may vary materially from such forecasts.

(e) Litigation. There is no action, suit, proceeding or investigation pending
or, to the knowledge of Company and its Subsidiaries, currently threatened
against the Company and its Subsidiaries which questions the validity of this
Note or any related document or the right of the Company and its Subsidiaries to
enter into such agreements, or to consummate the transactions contemplated
hereby or thereby, or which would reasonably be expected to result, either
individually or in the aggregate, in any Material Adverse Effect, nor, to the
knowledge of the Company, is there any reasonable basis for the foregoing. The
Company and its Subsidiaries are not parties or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality which would reasonably be expected to have a Material Adverse
Effect. There is no material action, suit, proceeding or investigation by
Company and its Subsidiaries currently pending or which Company and its
Subsidiaries intend to initiate.

(f) Operations in Conformity With Law, etc. The operations of the Business as
conducted by the Company and its Subsidiaries are not in violation of any Legal
Requirement presently in effect, except for such violations and defaults as do
not and will not, in the aggregate, result, or create a material risk of
resulting, in any Material Adverse Effect. The Company and its Subsidiaries have
not received notice of any such violation or default, and the Company and its
Subsidiaries have no knowledge of any reasonable basis on which the operations
of the Business as conducted by the Company and its Subsidiaries would
reasonably be expected to violate or to give rise to any such violation or
default.

 

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(g) Intellectual Property. The Company and its Subsidiaries have obtained all
material patents, trademarks, service marks, trade names, copyrights, licenses
and other rights, free from materially burdensome restrictions, that are
necessary for the operation of the Business, except for those for which the
failure to obtain is not reasonably likely to have a Material Adverse Effect.
The Company and its Subsidiaries have not received or otherwise been made aware
of any communications alleging that the Company and its Subsidiaries have
violated or, by conducting the Business, would violate, in any material respect,
any patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes of any other person or entity used
in the conduct of its Business.

(h) Title to Property and Assets. The Company and its Subsidiaries have good and
marketable title to, or valid leasehold interests in or rights to use, all of
the material assets and properties used by the Company and its Subsidiaries in
the Business (collectively, the “Properties and Facilities”), subject to no
Liens except for the Permitted Liens. Taken as a whole, the Properties and
Facilities are in good repair, working order and condition (ordinary wear and
tear excepted) and all such assets and properties are owned or leased by the
Company and its Subsidiaries free and clear of all Liens, except for the
Permitted Liens, or as otherwise permitted hereunder. The Properties and
Facilities constitute all of the material assets, properties and rights of any
type used in or necessary for the conduct of the Business.

(i) Tax Returns, Payments and Elections. The Company and its Subsidiaries have
filed all material tax returns and reports (or timely extensions) as required by
law relating to any material tax liability of the Company and its Subsidiaries.
Such returns and reports are true and correct in all material respects and the
Company and its Subsidiaries have paid all material taxes and other assessments
due, except where the validity or amount thereof is being contested in good
faith by appropriate proceedings and adequate reserves have been set aside on
the Financial Statements. There are no pending, or to the knowledge of the
Company and its Subsidiaries, contemplated reviews, audits or proceedings with
respect to any tax return, report or other tax liability of the Company or any
of its Subsidiaries, which, in either case, relates to any material tax
liability of the Company or any such Subsidiary.

(j) Employment Matters. The Company and its Subsidiaries have complied in all
material respects with all applicable state and federal equal employment
opportunity laws and with other laws related to employment, including without
limitation all laws relating to withholding of taxes and other sums. All persons
classified by the Company and its Subsidiaries as independent contractors for
employee benefit and state and federal tax purposes are appropriately
classified, except where the failure to do so would not reasonably be expected
to have a Material Adverse Effect. The Company and its Subsidiaries are not
delinquent in material payments to any of its employees, consultants or
independent contractors for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed for it to the date hereof, except
where such a delinquency would not reasonably be expected to have a Material
Adverse Effect.

(k) Affiliate Arrangements. There are no contractual arrangements or obligations
owed to or by the Company and its Subsidiaries by or to any Affiliate other than
this Note, the March 2010 Note and the October 2010 Note and obligations to
employees and officers for (i) payment of salary and commissions and bonuses for
services rendered, (ii) reimbursement for reasonable expenses incurred on its
behalf and (iii) other standard employee benefits made generally available to
all employees.

 

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(l) Permits and Licenses. The Company and its Subsidiaries have all permits,
licenses and any similar authority necessary for the conduct of their Business,
the lack of which could reasonably be expected to have a Material Adverse
Effect. The Company and its Subsidiaries are not in default in any material
respect under any of such permits, licenses or other similar authority.

(m) Customer and Trade Relations. As of the date hereof, there exists no actual
or, to the knowledge of the Company and its Subsidiaries, threatened termination
or cancellation of, or any material adverse modification or change in the
business relationship of the Company and its Subsidiaries with any customer,
supplier or licensor material to its operations.

5. Affirmative Covenants. So long as any indebtedness under this Note remains
outstanding, the Company shall, and shall cause each of its Subsidiaries to:

(a) Compliance with Laws. Comply in all material respects with applicable laws,
rules, regulations and orders, such compliance to include, without limitations,
paying before the same become delinquent all taxes, assessments, and charges
imposed upon it or upon its property by any Governmental Authority except for
good faith contests for which adequate reserves are being maintained.

(b) Insurance. Carry and maintain in full force and effect, at its own expense
and with financially sound and reputable insurance companies, insurance in such
amounts, with such deductibles and covering such risks as is customarily carried
by companies engaged in the same or similar businesses and owning similar
properties in the localities where the Company or any such Subsidiary operates.

(c) Continuance of Business. Maintain its legal existence, licenses and
privileges in good standing under and in compliance with all applicable laws and
continue to operate its business as currently conducted. Without limiting the
generality of the foregoing, the Company and its Subsidiaries shall do and cause
to be done all things necessary to apply for, preserve, maintain and keep in
full force and effect all of its registrations of trademarks, service marks and
other marks, trade names and other trade rights, patents, copyrights and other
intellectual property in accordance with prudent business practices.

(d) Maintenance. Conduct its business in a manner consistent with relevant
industry standards, keep its material assets and properties in good working
order and condition and make all needful and proper repairs, replacements and
improvements thereof so that such business may be properly and prudently
conducted at all times.

(e) Leases. Pay when due all rents and other amounts payable under any leases to
which the Company or any Subsidiary is a party or by which the Company or such
Subsidiary’s properties and assets are bound, unless such payments are the
subject of a permitted protest.

 

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(f) Books and Records. Keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP, reflecting all financial
transactions of the Company and any such Subsidiary.

(g) Inspection. At any reasonable time and from time to time permit Holder or
any of its agents or representatives to visit and inspect any of the properties
of the Company and any such Subsidiary and to examine and make copies of and
abstracts from the records and books of account of the Company and such
Subsidiary, and to discuss the business affairs, finances and accounts of the
Company and such Subsidiary with any of the officers, employees or accountants
of such Loan Party and such Subsidiary. The Company hereby irrevocably
authorizes all accountants and third parties to disclose and deliver to Holder
at the Company’s expense all financial information, books and records, work
papers, management reports and other information in their possession relating to
the Company whether verbally, in writing (by record or authenticated record) or
otherwise.

(h) Notice of Litigation. Provide to Holder promptly after the filing or
commencement thereof, notice of all actions, suits, and proceedings before any
court or Governmental Authority affecting the Company or any such Subsidiary,
and in any event within three (3) days after the occurrence thereof, which could
have a Material Adverse Effect.

(i) Notice of Material Adverse Effect, Etc. So long as any amount payable
hereunder shall remain unpaid, furnish to Holder: (i) prompt written notice, and
in any event within three (3) days after the occurrence thereof, of any other
condition or event, which has resulted, or that could reasonably be expected to
result, in a Material Adverse Effect; and (ii) such other statements, lists of
property and accounts, budgets, forecasts, projections, reports, or other
information respecting the operations, properties, business or condition
(financial or otherwise) of the Company or any Subsidiary as Holder may from
time to time reasonably request; provided that any such information shall be
kept confidential and will be subject to the terms and conditions of a
non-disclosure agreement between the parties.

(j) Notice of Defaults and Events of Defaults. Provide to Holder, as soon as
possible and in any event within three (3) days after the occurrence thereof,
written notice of each event which either (i) is an Event of Default, or
(ii) with the giving of notice or lapse of time or both would constitute an
Event of Default, in each case setting forth the details of such event and the
action which is proposed to be taken by the Company and any such Subsidiary with
respect thereto.

(k) Taxes. Pay and discharge (i) all federal and other material taxes, fees,
assessments and governmental charges or levies imposed upon it or upon its
properties or assets prior to the date on which penalties attach thereto, and
all lawful claims for labor, materials and supplies which, if unpaid, might
become a Lien upon any of its properties or assets, except to the extent such
taxes, fees, assessments or governmental charges or levies, or such claims, are
being contested in good faith by appropriate proceedings and are adequately
reserved against in accordance with GAAP; and (ii) all other lawful claims
which, if unpaid, would by law become a Lien upon its property not constituting
a Permitted Lien.

 

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(l) Governmental Approvals. Promptly obtain and maintain any and all
authorizations, consents, approvals, licenses, franchises, concessions, leases,
rulings, permits, certifications, exemptions, filings or registrations by or
with any Governmental Authority material and necessary for the Company and any
such Subsidiary to conduct its business and own (or lease) its properties or to
execute, deliver and perform this Note.

(m) Preliminary Annual Financial Statements. If Seth Hamot is no longer a member
of Parent’s board of directors, provide Holder as soon as possible after the end
of each fiscal year of the Company, and in any event within sixty (60) days of
the end of the Company’s fiscal year, preliminary year end financial statements,
including but not limited to, the balance sheet and income statement for such
year.

(n) Reviewed Annual Financial Statements. If Seth Hamot is no longer a member of
Parent’s board of directors, provide Holder as soon as possible after the end of
each fiscal year of the Company, and in any event within one hundred twenty
(120) days of the end of the Company’s fiscal year:

(i) a complete copy of the Company’s financial statements, including but not
limited to (1) the management letter, if any; (2) the balance sheet as of the
close of the fiscal year; and (3) the income statement for such year, together
with a statement of cash flows, reviewed by a firm of independent certified
public accountants of recognized standing and acceptable to Holder, or if
permitted by Holder in writing, by the Company.

(ii) a statement certified by the chief financial officer of the Company that
the Company is in compliance with all the terms, conditions, covenants, and
warranties of this Note; and

(iii) a complete copy of all filings required under securities law.

(o) Other Financial Statements. No later than thirty (30) days after the close
of each month (each, an “Accounting Period”), if Seth Hamot is no longer a
member of Parent’s board of directors, provide Holder with the balance sheet of
the Company as of the close of such Accounting Period and its income statement
for that portion of the then current fiscal year through the end of such
Accounting Period certified by the chief financial officer of the Company as
being complete, correct, and fairly representing its financial condition and the
results of operations.

(p) Tax Returns. If Seth Hamot is no longer a member of Parent’s board of
directors, provide Holder copies of each of the Company’s federal income tax
returns, and any amendments thereto, within one hundred twenty (120) days after
the end of the Company’s fiscal year.

(q) Fees and Expenses. Pay the out-of-pocket fees and expenses incurred by
Holder in connection with the preparation and administration of this Note and
any amendments, modifications or waivers of the provisions hereof, including
attorneys’ fees. Such fees will be indebtedness under this Note, and shall be
due and payable on the date hereof and deducted from the proceeds of this Note.

 

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6. Negative Covenants. So long as Obligations under this Note remain
outstanding, the Company shall not, and, with respect to paragraphs (a) through
(g) below, shall not permit any of its Subsidiaries to:

(a) Liens. Create or suffer to exist any Lien on any assets of the Company or
any such Subsidiary except Permitted Liens.

(b) Debt. Incur any Debt other than Permitted Debt; prepay, redeem, purchase,
defease or otherwise satisfy in any manner prior to the scheduled repayment
thereof any Permitted Debt (other than amounts due or permitted to be prepaid in
respect of this Note, the March 2010 Note, the October 2010 Note and Debt
permitted by clause (v) of the definition of Permitted Debt); or amend, modify
or otherwise change the terms of any Permitted Debt (other than this Note, the
March 2010 Note, and Debt permitted by clause (v) of the definition of Permitted
Debt) so as to accelerate the scheduled repayment thereof or increase the
principal amount of such Permitted Debt.

(c) Restrictions on Fundamental Changes. Enter into any acquisition, merger,
consolidation, reorganization, or recapitalization, or reclassify its capital
stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), become a partner in a partnership, a member or equityholder of a
joint venture, limited liability company or similar entity, or convey, sell,
assign, lease, license, transfer, or otherwise dispose of, in one transaction or
a series of transactions, all or any substantial part of its business, property,
or assets (including shares of capital stock of the Company or any of its
Subsidiaries), whether now owned or hereafter acquired, or acquire by purchase
or otherwise all or substantially all of the properties, assets, stock, or other
evidence of beneficial ownership of any Person.

(d) Extraordinary Transactions and Disposal of Assets. Enter into any
transaction not in the ordinary course of the Business, including the sale,
lease, license, moving, relocation, transfer or other disposition, whether by
sale or otherwise, of any of the assets of the Company or its Subsidiaries
except for sales of inventory in the ordinary course of business or except as
expressly permitted by this Note.

(e) Change Name. Change the name of the Company or any of its Subsidiaries,
Federal Employer Identification Number, business structure, or identity, or add
any new fictitious name. To that effect, the Company shall not do business under
any name other than the correct legal name of the Company and its Subsidiaries,
unless the Company has provided to Holder evidence that Company or such
Subsidiary has taken such legal steps required with respect to fictitious or
assumed names under the applicable laws of the jurisdictions in which the
Company or such Subsidiary is located and/or does business.

(f) Changes in Business. Enter into or engage in any business other than that
carried on (or contemplated to be carried on) as of the date hereof.

(g) Distributions. Declare or pay any dividends or make any distribution of any
kind on the Company’s or any such Subsidiary’s capital stock, or purchase,
redeem or otherwise acquire, directly or indirectly, any shares of the Company’s
or such Subsidiary’s capital stock, any rights to acquire shares of capital
stock of the Company or such Subsidiary, except for

 

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the repurchase of such securities from former employees of or consultants to the
Company or such Subsidiary at the original issue price paid therefor pursuant to
contractual rights of the Company or such Subsidiary upon the termination of
such employees’ or consultants’ employment by or provision of service to the
Company or such Subsidiary.

(h) Amendment of Organic Documents. Amend, supplement, or otherwise modify any
of the provisions of the Organic Documents of the Company.

(i) Investments. Make any Investments except Permitted Investments.

(j) Accounting Changes. Change its fiscal year or make or permit any change in
accounting policies or reporting practices, except as required by GAAP.

(k) Subsidiaries. Organize, create or acquire any Subsidiary.

(l) Transactions with Affiliates. Directly or indirectly enter into or permit to
exist any material transaction with any of its Affiliates except for
transactions that are in the ordinary course of the business of the Company or
unanimously approved by the Parent’s board of directors, upon fair and
reasonable terms, that are fully disclosed to Holder prior to the entering of
such transactions, and that are no less favorable to the Company than would be
obtained in arm’s length transaction with a non-Affiliate.

(m) Management. Make any significant change in its management without a minimum
thirty (30) days’ prior written notice to Holder.

(n) Suspension. Suspend or cease operations with respect to a substantial
portion of its business except as unanimously approved by the Parent’s board of
directors.

7. Use of Proceeds. The Company shall use the proceeds from the amounts loaned
to the Company under this Note for general working capital and other lawful
corporate purposes.

8. Default.

(a) Events of Default. For purposes of this Note, any of the following events
which shall occur shall constitute an “Event of Default”:

(i) any indebtedness under this Note is not paid when and as the same shall
become due and payable, whether at maturity, by acceleration, five (5) days
following notice of prepayment or otherwise;

(ii) default shall occur in the observance or performance of (A) any covenant,
obligation or agreement of the Company contained in Sections 5 or 6, or (B) any
other provision of this Note, and, in the case of this clause (B), such default
shall continue uncured for a period of ten (10) days;

(iii) any representation, warranty or certification made herein by or on behalf
of the Company or any of its Subsidiaries shall prove to have been false or
incorrect in any material respect on the date or dates as of which made (any
such falsity being a “Representation Default”);

 

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(iv) the Company shall (A) apply for or consent to the appointment of a
receiver, trustee, custodian or liquidator of itself or any part of its
property, (B) become subject to the appointment of a receiver, trustee,
custodian or liquidator for itself or any part of its property, (C) make an
assignment for the benefit of creditors, (D) fail generally, become unable or
admit in writing to its inability to pay its debts as they become due,
(E) institute any proceedings under the United States Bankruptcy Code or any
other federal or state bankruptcy, reorganization, receivership, insolvency or
other similar law affecting the rights of creditors generally, or file a
petition or answer seeking reorganization or an arrangement with creditors to
take advantage of any insolvency law, or file an answer admitting the material
allegations of a bankruptcy, reorganization or insolvency petition filed against
it, or (F) become subject to any involuntary proceedings under the United States
Bankruptcy Code or any other federal or state bankruptcy, reorganization,
receivership, insolvency or other similar law affecting the rights of creditors
generally;

(v) the Company shall (i) liquidate, wind up or dissolve (or suffer any
liquidation, wind-up or dissolution), except to the extent expressly permitted
by Section 6, (ii) suspend its operations other than in the ordinary course of
business, or (iii) take any action to authorize any of the actions or events set
forth above in this Section 8(a)(v);

(vi) the Company or any Subsidiary (i) fails to make any payment beyond the
applicable grace period, if any, whether by scheduled maturity, required
prepayment, acceleration, demand, or otherwise, (a) under the BFI Loan
Documents, (b) under the March 2010 Note, (c) under the October 2010 Note or
(d) in respect of any Debt (other than the Debt hereunder, the Debt under the
BFI Loan Documents and the Debt under the March 2010 Note and October 2010 Note)
having an aggregate outstanding principal amount (individually or in the
aggregate with all other Debt as to which such a failure shall exist) of not
less than $5,000, (ii) fails to observe or perform any other agreement or
condition relating to (a) the BFI Loan Documents, (b) the March 2010 Note,
(c) the October 2010 Note or (d) any such Debt described in clause (i)(d) above,
or any other event occurs, the effect of which default or other event is to
cause, or to permit the holder or holders of the BFI Loan Documents, the March
2010 Note, the October 2010 Note or any such Debt described in (i)(d) above (or
a trustee or agent on behalf of such holder or holders or beneficiary or
beneficiaries) to cause, with the giving of notice if required, the Debt under
the BFI Loan Documents, the March 2010 Note, the October 2010 Note or the Debt
described in (i)(d) above to become due or to be repurchased, prepaid, defeased
or redeemed (automatically or otherwise);

(vii) Parent shall breach the terms of the Design, Manufacturing and
Distribution License between O’Neill Trademark BV as Licensor and Parent as
Licensee, or the Trademark Sublicense Agreement by and between Margaritaville
Eyewear, LLC as Sublicensor and Parent as Sublicensee (each, a “License
Agreement”), or any other event occurs under or in connection with a License
Agreement, the effect of such breach or other event is to cause, or to permit to
cause, the licensor under such License Agreement to terminate the License
Agreement or reduce in scope or duration any aspect of the License Agreement;

 

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(viii) any final judgment or judgments for the payment of money shall be
rendered against the Company in excess of $5,000 which judgments are not, within
thirty (30) days after the entry thereof, bonded, discharged or stayed pending
appeal, or are not discharged within thirty (30) days after the expiration of
such stay, other than any judgment which is covered by insurance or an indemnity
from a credit worthy party; provided that the Company provides Holder a written
statement from such insurer or indemnity provider (which written statement shall
be reasonably satisfactory to Holder) to the effect that such judgment is
covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within 30 days of the issuance of such judgment;
or

(ix) this Note shall for any reason cease to be, or shall be asserted by the
Company not to be, a legal, valid and binding obligation of the Company.

(b) Consequences of Events of Default.

(i) If any Event of Default shall occur for any reason, whether voluntary or
involuntary, and be continuing, Holder may, upon notice or demand, declare the
outstanding Obligations under this Note to be due and payable, whereupon the
outstanding Obligations under this Note shall be and become immediately due and
payable, and the Company shall immediately pay to Holder all such Obligations.
Upon the occurrence of an actual or deemed entry of an order for relief with
respect to the Company under the United States Bankruptcy Code, then all
Obligations under this Note shall automatically be due immediately without
notice of any kind. The Company agrees to pay Holder all out-of-pocket costs and
expenses incurred by Holder (including attorney’s fees) in connection with the
enforcement or protection of its rights in relation to this Agreement, including
any suit, action, claim or other activity of the Holder to collect or otherwise
enforce the Obligations under this Note or any portion thereof, or in connection
with the transactions contemplated hereby.

(ii) Holder shall also have any other rights which Holder may have been afforded
under any contract or agreement at any time and any other rights which Holder
may have pursuant to applicable law.

9. Lost, Stolen, Destroyed or Mutilated Note. In case this Note shall be
mutilated, lost, stolen or destroyed, the Company shall issue a new Note of like
date, tenor and denomination and deliver the same in exchange and substitution
for and upon surrender and cancellation of such mutilated Note, or in lieu of
this Note being lost, stolen or destroyed, upon receipt of evidence satisfactory
to the Company of such loss, theft or destruction.

10. Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH
CANNOT BE WAIVED, THE COMPANY (BY ITS EXECUTION HEREOF) AND THE HOLDER (BY ITS
ACCEPTANCE OF THIS NOTE) WAIVES AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER
AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN
RESPECT OF ANY ISSUE OR ACTION ARISING OUT OF OR BASED UPON OR RELATING TO THIS
NOTE OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE TRANSACTIONS
CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING.

 

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11. Governing Law. This Note shall be deemed to be a contract made under the
laws of the State of New York and for all purposes shall be governed by,
construed under, and enforced in accordance with the laws of the State of New
York.

12. Amendment and Waiver. Any term of this Note may be amended and the
observance of any term of this Note may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Holder.

13. Notices. Any notice or other communication in connection with this Note may
be made and is deemed to be given as follows: (i) if in writing and delivered in
person or by courier, on the date when it is delivered; (ii) if by facsimile,
when received at the correct number (proof of which shall be an original
facsimile transmission confirmation slip or equivalent); or (iii) if sent by
certified or registered mail or the equivalent (return receipt requested), on
the date such mail is delivered, unless the date of that delivery is not a
Business Day or that communication is delivered on a Business Day but after the
close of business on such Business Day in which case such communication shall be
deemed given and effective on the first following Business Day. Any such notice
or communication given pursuant to this Note shall be addressed to the intended
recipient at its address or number (which may be changed by either party at any
time) specified as follows:

 

If to the Company:

 

Orange 21 North America, Inc.

2070 Las Palmas Drive

Carlsbad, CA 92011

Facsimile No.: (760) 804-8420

Telephone No.: (760) 804-8421

Attention: Chief Executive Officer

With a copy to:

 

Sheppard, Mullin, Richter & Hampton LLP

12275 El Camino Real, Suite 200

San Diego, CA 92130-2006

Facsimile No.: (858) 509-3691

Attention: John Hentrich, Esq.

If to Holder:

 

Costa Brava Partnership III, L.P.

c/o Roark, Rearden & Hamot, LLC

420 Boylston St, Suite 5-F

Boston, MA 02116

Facsimile No: (617) 267-6785

Attention: Seth W. Hamot, President

With a copy to:

 

Ropes & Gray LLP

Prudential Tower

Boston, MA 02199

Facsimile No: (617) 951-7050

Attention: David A. Fine, Esq. and Jeffrey R. Katz, Esq.

 

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14. Severability. If at any time any provision of this Note shall be held by any
court of competent jurisdiction to be illegal, void or unenforceable, such
provision shall be of no force and effect, but the illegality or
unenforceability of such provision shall have no effect upon the legality or
enforceability of any other provision of this Note.

15. Assignment. The provisions of this Note shall be binding upon and inure to
the benefit of each of the Company and the Holder and their respective
successors and assigns, provided that the Company shall not have the right to
assign its rights and obligations hereunder or any interest herein. This Note
may be endorsed, assigned and transferred in whole or in part by the Holder to
any other Person.

16. Indemnity. The Company agrees to indemnify the Holder, and its respective
directors, officers, employees and agents (each such Person being called an
“Indemnitee”) against, and to hold each Indemnitee harmless from, any and all
losses, claims, damages, liabilities and related expenses, including reasonable
counsel fees, charges and disbursements, incurred by or asserted against any
Indemnitee arising out of in any way connected with, or as a result of (i) the
execution or delivery of this Note or any agreement or instrument contemplated
thereby, the performance by the parties thereto of their respective obligations
thereunder or the consummation of the transactions contemplated thereby or
(ii) any breach by the Company of its obligations under this Note or any
agreement or instrument contemplated thereby.

17. Remedies Cumulative; Failure or Indulgence Not a Waiver. The remedies
provided in this Note shall be cumulative and in addition to all other remedies
available under this Note. No failure or delay on the part of Holder 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 other or further exercise thereof or of any other right,
power or privilege.

18. Excessive Interest. Notwithstanding any other provision herein to the
contrary, this Note is hereby expressly limited so that the interest rate
charged hereunder shall at no time exceed the maximum rate permitted by
applicable law. If, for any circumstance whatsoever, the interest rate charged
exceeds the maximum rate permitted by applicable law, the interest rate shall be
reduced to the maximum rate permitted, and if Holder shall have received an
amount that would cause the interest rate charged to be in excess of the maximum
rate permitted, such amount that would be excessive interest shall be applied to
the reduction of the principal amount owing hereunder (without charge for
prepayment) and not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal, such excess shall be refunded to the
Company.

Further, notwithstanding any other provision herein to the contrary, and without
any further action from the parties to this Note, if the fees (except with
respect to paragraph 16) and interest charged hereunder shall be determined by a
court of competent jurisdiction to be a “financial benefit” for purposes of 8 §
203(c)(v) of the General Corporation Law of the State of Delaware, this Note
shall be deemed amended to eliminate such fees and reduce such interest rate to
0%. If Holder shall have received any such fees or interest, such amounts shall
be applied to the reduction of the principal amount owing hereunder (without
charge for prepayment), or if such fees and interest paid to the Holder exceed
the unpaid balance of principal, such excess shall be refunded to the Company.

 

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19. Registered Obligation. The Company shall establish and maintain a record of
ownership (the “Register”) in which it will register by book entry the interest
of the initial Holder and of each subsequent assignee in this Note, and in the
right to receive any payments of principal and interest or any other payments
hereunder, and any assignment of any such interest. The Company shall make
appropriate entries in the Register to reflect any assignment promptly following
receipt of written notice from the assignor of such assignment. Notwithstanding
anything herein to the contrary, this Note is intended to be treated as a
registered obligation for federal income tax purposes and the right, title, and
interest of the Holder and its assignees in and to payments under this Note
shall be transferable only upon notation of such transfer in the Register. This
Section shall be construed so that the Note is at all times maintained in
“registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2)
of the Internal Revenue Code and any related regulations (or any successor
provisions of the Code or such regulations).

20. Entire Agreement. This Note contains the entire understanding of the parties
with respect to the subject matter hereof and supersedes all prior agreements,
understandings, discussions and representations, oral or written, with respect
to such matters, which the parties acknowledge have been merged into this Note.

21. Waiver of Notice. To the extent permitted by law, the Company hereby waives
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note.

22. Subordination. This Promissory Note and each of Holder’s rights and
privileges hereunder is expressly subject to the terms of that certain Debt
Subordination Agreement by and between BFI Business Finance and Holder dated the
date hereof.

[Remainder of Page Intentionally Left Blank]

 

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IN WITNESS WHEREOF, the each of the undersigned has caused this Note to be duly
executed by its officers, thereunto duly authorized as of the date first above
written.

 

THE COMPANY: ORANGE 21 NORTH AMERICA INC.

By:

 

/s/ A. Stone Douglass

Name:

  A. Stone Douglass

Title:

  CFO

 

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SCHEDULE A

Debt

See attached.

 

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SCHEDULE B

Liens

See attached.

 

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SCHEDULE C

Exceptions

See attached.

 

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