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AURIGA LABORATORIES, INC.
 
SENIOR SECURED CONVERTIBLE PROMISSORY NOTE
 
PURCHASE AGREEMENT
 
This Senior Secured Convertible Promissory Note Purchase Agreement (the
“Agreement”) is made as of the 9th day of June, 2008, by and between Auriga
Laboratories, Inc., a Delaware corporation (the “Company”), and Prospector
Capital Partners II, LLC, a Delaware limited liability company (the
“Purchaser”).
 
RECITALS
 
The Company desires to issue and sell, and the Purchaser desires to purchase a
senior secured convertible promissory note in substantially the form attached
hereto as Exhibit B (the “First Note”). The Purchaser shall also have the right
to purchase from the Company two additional senior secured convertible
promissory notes in substantially the form of the First Note (the “Second Note”
and “Third Note”, respectively, and collectively with the First Note, the
“Notes”) in the principal amount set forth opposite Purchaser’s name on
Exhibit A. The Notes and any securities issuable upon conversion of the Notes
are collectively referred to herein as the “Securities.”  Any capitalized term
not defined herein shall have the meaning ascribed to it in the Notes, the
Security Agreement, dated February 13, 2008, by and between the Company and
Purchaser and amended pursuant to Amendment No. 1 to the Security Agreement (the
“Security Agreement Amendment”) the Royalty Participation Agreement, dated as
the date hereof, by and between the Company and Purchaser (the “Royalty
Agreement” and together with the Security Agreement Amendment, the “Ancillary
Agreements”).  This Agreement and the Ancillary Agreements shall be referred to
collectively as the “Transaction Documents”.  In connection with entering into
this Agreement, the parties also wish to cancel the Senior Secured Promissory
Note, dated February 13, 2008, held by Prospector Capital Partners, LLC (the
“Prior Note”) and replace it with the Amended and Restated Senior Secured
Promissory Note, dated as of the date hereof (the “Amended Prior Note”).
 
AGREEMENT
 
In consideration of the mutual promises contained herein and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties to
this Agreement agree as follows:
 
1.           Purchase and Sale of First Note.
 
(a)           Sale and Issuance of First Note.  Subject to the terms and
conditions of this Agreement, the Purchaser agrees to purchase at the First
Closing (as defined below) and the Company agrees to sell and issue to the
Purchaser the First Note in the principal amount of $287,500.
 
(b)           Closing; Delivery.
 
(i)           The purchase and sale of the First Note shall take place at the
offices of Prospector Capital Partners, LLC, 3112 Windsor Road, Suite A-137,
Austin, TX 78703, on June 9, 2008, or at such other time and place as the
Company and the Purchaser mutually agree upon, orally or in writing (which time
and place are designated as the “First Closing”). In the event there are more
closings than the Initial Closing, the term “Closing” shall apply to the Initial
Closing and each such closing unless otherwise specified herein.
 
(ii)           At the First Closing, the Company shall deliver to Purchaser the
executed First Note along with signed copies of the Ancillary Agreements and the
Amended Prior Note against (1) payment of the Purchase Price (as defined below)
therefor by check payable to the Company or by wire transfer to a bank
designated by the Company, and (2) delivery of counterpart signature pages to
this Agreement and the Ancillary Agreements.
 
(iii)           The “Purchase Price” of each of the Notes shall equal the
principal amount of the Note minus the Loan Origination Fee. The “Loan
Origination Fee” shall equal 15% of the principal amount of the Note, payable or
deducted from each Purchase Price as agreed to between the parties.  The parties
hereto agree that the “Loan Origination Fee” has been fully earned by Purchaser
and is non-refundable.  Purchaser, in its sole discretion, may off-set the Loan
Origination Fee from any amounts provided under such Note.
 
(c) Additional Closings.
 
(i) Conditions of Additional Closings.  On or around the dates set forth on
Exhibit A, Purchaser shall have the option, in its sole discretion, to purchase
from the Company the Second Note and the Third Note in the principal amounts set
forth opposite Purchaser’s name on Exhibit A. At each Closing, the Company shall
deliver to Purchaser the executed Note against payment of the Purchase Price
therefor by check payable to the Company or by wire transfer to a bank
designated by the Company.
 
2.           Security Interest.  The indebtedness represented by the Notes shall
be secured by Collateral of the Company in accordance with the provisions of the
existing Security Agreement, dated February 13, 2008, by and between the Company
and the Purchaser pursuant to the Security Agreement Amendment.
 
3.           Representations and Warranties of the Company.  The Company hereby
represents and warrants to each Purchaser that:
 
(a)           Organization, Good Standing and Qualification.  The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted (the
“Business”).  The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure so to qualify would have a
material adverse effect on its Business or properties.
 
(b)           Authorization.  All corporate action required on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement and the Ancillary
Agreements and the authorization, sale, issuance and delivery of the Notes, and
the performance of all obligations of the Company hereunder and under the
Ancillary Agreements has been taken or will be taken prior to the Closing. All
corporate action required to authorize the issuance of the Securities will be
taken prior to the issuance thereof.  The Agreement, and each of the Ancillary
Agreements, when executed and delivered by the Company, shall constitute valid
and legally binding obligations of the Company, enforceable against the Company
in accordance with their respective terms except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
other laws of general application affecting enforcement of creditors’ rights
generally, and as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
 
(c)           Issuance of the Securities.  The Securities are duly authorized
and, when issued and paid for in accordance with the Transaction Documents, will
be duly and validly issued, fully paid and nonassessable, free and clear of all
liens.  The Company has reserved from its duly authorized capital stock the
maximum number of shares of Common Stock issuable upon the conversion of the
Notes.
 
(d)           Litigation.  Except as set forth on Schedule 3.(d), attached
hereto, there is no claim, action, suit, proceeding, arbitration, complaint,
charge or investigation pending with respect to which the Company has been
notified or is aware, to the Company’s knowledge, currently threatened against
the Company that, if successful, would reasonably be expected to have, either
individually or in the aggregate, a material adverse effect on its Business or
properties, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing.
 
(e)           SEC Reports; Financial Statements.  To the best of its knowledge,
the Company has filed all material reports required to be filed by it under the
Securities Act and the Exchange Actfor the two years preceding (collectively,
the “SEC Reports”) on a timely basis. As of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
 
4.           Representations and Warranties of the Purchaser.  The Purchaser
hereby represents and warrants to the Company that:
 
(a)           Authorization.  The Purchaser has full power and authority to
enter into this Agreement.  This Agreement, when executed and delivered by the
Purchaser, will constitute a valid and legally binding obligation of the
Purchaser, enforceable in accordance with its terms, except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement of
creditors’ rights generally, and as limited by laws relating to the availability
of a specific performance, injunctive relief, or other equitable remedies.
 
(b)           Purchase Entirely for Own Account.  This Agreement is made with
the Purchaser in reliance upon the Purchaser’s representation to the Company,
which by the Purchaser’s execution of this Agreement, the Purchaser hereby
confirms, that the Securities to be acquired by the Purchaser will be acquired
for investment for the Purchaser’s own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same.  By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
 
(c)           Knowledge.  The Purchaser is aware of the Company’s business
affairs and financial condition and has acquired sufficient information about
the Company to reach an informed and knowledgeable decision to acquire the
Securities.
 
(d)           Restricted Securities.  The Purchaser understands that the
Securities have not been, and will not be, registered under the Securities Act
of 1933, as amended (the “Securities Act”), by reason of a specific exemption
from the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchaser’s representations as expressed herein.  The Purchaser understands
that the Securities are “restricted securities” under applicable U.S. federal
and state securities laws and that, pursuant to these laws, the Purchaser must
hold the Securities indefinitely unless they are registered with the Securities
and Exchange Commission and qualified by state authorities, or an exemption from
such registration and qualification requirements is available.  The Purchaser
acknowledges that the Company has no obligation to register or qualify the
Securities for resale.  The Purchaser further acknowledges that if an exemption
from registration or qualification is available, it may be conditioned on
various requirements including, but not limited to, the time and manner of sale,
the holding period for the Securities, and on requirements relating to the
Company which are outside of the Purchaser’s control, and which the Company is
under no obligation and may not be able to satisfy.
 
(e)           Legends.  The Purchaser understands that the Securities may bear
one or all of the following legends:
 
(i)           “THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR INSTRUMENT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF.  NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933.”
 
(ii)           Any other legend required by the Blue Sky laws of any state to
the extent such laws are applicable to the shares represented by the certificate
so legended.
 
(f)           Accredited Investor. The Purchaser is an accredited investor as
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
 
5.           Conditions of the Purchasers’ Obligations at Closing.  The
obligations of each Purchaser to the Company under this Agreement are subject to
the fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
 
(a)           Representations and Warranties.  The representations and
warranties of the Company contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of the Closing.
 
(b)           Qualifications.  All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Notes pursuant to this Agreement shall be obtained and effective as of the
Closing.
 
(c)           Security Agreement.  The Company and the Purchaser shall have
executed the Security Agreement.
 
(d)           Royalty Participation Agreement.  The Company and the Purchaser
shall have executed the Royalty Participation Agreement attached hereto as
Exhibit D.
 
(e)           Good Standing Certificates. The Company shall have delivered a
certified copy of its Certificate of Incorporation, a certified copy of any form
qualifying it to do business issued by the jurisdictions in which the Company
conducts or intends to conduct its business or operations within the period
prior to the Initial Financing and, shall have ordered good standing
certificates from such jurisdictions and its state of incorporation
 
6.           Conditions of the Company’s Obligations at Closing.  The
obligations of the Company to each Purchaser under this Agreement are subject to
the fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
 
(a)           Representations and Warranties.  The representations and
warranties of the Purchaser contained in Section 4 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
 
(b)           Qualifications.  All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Notes pursuant to this Agreement shall be obtained and effective as of the
Closing.
 
(c)           Ancillary Agreements.  The Company and the Purchaser, and the
other parties thereto, if any, shall have executed all of the Ancillary
Agreements.
 
7.           Additional Agreements
 
(a)           Indemnification of Purchaser.  The Company hereby indemnifies and
holds the Purchaser and its managers, members, affiliates and agents (each, a
“Purchaser Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation (collectively, “Losses”) that any such Purchaser Party
may suffer or incur as a result of or relating to (a) any misrepresentation,
breach or inaccuracy, or any allegation by a third party that, if true, would
constitute a breach or inaccuracy, of any of the representations, warranties,
covenants or agreements made by the Company in this Agreement or in the other
Transaction Documents; or (b) any cause of action, suit or claim brought or made
against such Purchaser Party and solely arising out of or solely resulting from
the execution, delivery, performance or enforcement of this Agreement or any of
the other Transaction Documents.  Notwithstanding the above, the Company shall
not be liable in any such case for any loss, liability, obligation, claim,
contingency, damage, cost or expense to the extent that it arises out of or is
based written information furnished, or any other act or omission, by any such
Purchaser Party. The Company will reimburse such Purchaser for its reasonable
legal and other expenses incurred in connection therewith, as such expenses are
incurred.  The Purchaser Party may not, without the prior written consent of the
Company, agree to any settlement of any claim or action with respect to which
the Company is required to indemnify the Purchaser Party pursuant to this
Section 7(a). The obligations of the Company under this Section 7(a) shall
survive the payment and performance of the Company’s obligations under the
Transaction Documents.
 
(b)           Non-Public Information.  The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such Purchaser
shall have executed a written agreement regarding the confidentiality and use of
such information.  The Company understands and confirms that each Purchaser
shall be relying on the foregoing representations in effecting transactions in
securities of the Company.
 
(c)           Release.  The Company, its subsidiaries, officers, directors,
managers, employees, shareholders, creditors, agents, heirs, representatives and
any permitted successors, and assigns (each a “Company Releasing Party”) hereby
fully, finally, completely, and forever releases, discharges, acquits, and
relinquishes the Purchaser, its managers, members and agents and the affiliates
of each of the foregoing(the “Purchaser Released Parties”) from and against all
loss, cost, damage, claim, liability, or expense, including reasonable
attorneys’ fees and costs , in any way arising from or related to the sale and
issuance of the Notes and the entering into by the parties of the remaining
Ancillary Agreements.  The Company (for and on behalf of each Company Releasing
Party) hereby agrees (a) not to file any lawsuit or pursue any other action with
respect to any of the foregoing matters and (b) to indemnify and hold harmless,
jointly and severally, any and all of the Company Released Parties from any and
all injuries, harm, damages, costs, losses, expenses and/or liability, including
reasonable attorneys’ fees and court costs, as incurred and when incurred as a
result of the filing of any such lawsuit or the pursuit of any other action with
respect to any of the foregoing matters. The agreement and obligations of the
Company under this Section 7(c) shall survive the payment and performance of the
Company’s obligations under the Transaction Documents.
 
(d)SEC Reporting.  With a view to making available to the Purchaser the benefits
of Rule 144 (or its successor rule) and any other rule or regulation of the SEC
that may at any time permit the Purchaser to sell shares of Common Stock issued
or issuable upon conversion of the Notes or the Prior Note (the “Conversion
Stock”) to the public without registration, the Company covenants and agrees so
long that it is subject to the requirements of the Securities Exchange Act of
1934, as amended (the “1934 Act”) to:  (i) make and keep public information
available, as those terms are understood and defined in Rule 144, until the
earlier of (A) six months after such date as all of the shares of Conversion
Stock may be resold pursuant to Rule 144(k) or any other rule of similar effect,
(B) such date as all of the shares of the Conversion Stock shall have been
resold or (C) the date that the Notes are repaid in full if no Conversion Stock
is issued; (ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1934 Act; and (iii) furnish to
Purchaser upon request, (A) a written statement by the Company that it has
complied with the reporting requirements of the 1934 Act and (B) such other
information as may be reasonably requested in order to avail Purchaser of any
rule or regulation of the SEC that permits the selling of any such shares of
Conversion Stock without registration.
 
8.           Miscellaneous.
 
(a)           Assignment; Successors and Assigns.  The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties.  Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations,
or liabilities under or by reason of this Agreement, except as expressly
provided in this Agreement.
 
(b)           Waiver
of Conflicts.                                                      Each party to
this Agreement acknowledges that each of Christopher Walton, the authorized
signer of the Purchaser’s manager and Kiril Dobrovolsky, counsel for the
Purchaser, have in the past performed and may continue to perform legal and/or
consulting services for the Company in matters unrelated to the transactions
described in this Agreement, including the representation of the Company in
financings and other matters.  Accordingly, each party to this Agreement hereby
(a) acknowledges that they have had an opportunity to ask for information
relevant to this disclosure; and (b) gives its informed consent to Christopher
Walton’s and Kiril Dobrovolsky’s representation of and/or performance of
consulting services for the Company in such unrelated matters and to Kiril
Dobrovolsky’s representation of the Purchaser in connection with this Agreement
and the transactions contemplated hereby.
 
(d) Governing Law.  This Agreement and all acts and transactions pursuant hereto
and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of Delaware,
without giving effect to principles of conflicts of law.
 
(e) Counterparts.  This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one instrument.
 
(f) Titles and Subtitles.  The titles and subtitles used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.
 
(g) Notices.  Any notice required or permitted by this Agreement shall be in
writing and shall be deemed sufficient upon receipt, when delivered personally
or by courier, overnight delivery service or confirmed facsimile, or 48 hours
after being deposited in the U.S. mail as certified or registered mail with
postage prepaid, if such notice is addressed to the party to be notified at such
party’s address or facsimile number as set forth below or as subsequently
modified by written notice.
 
(h) Amendments and Waivers.  Any term of this Agreement may only be amended or
waived with the written consent of the Company and the holders of at least a
majority in interest of the Notes.  Any amendment or waiver effected in
accordance with this Section 8(h) shall be binding upon each Purchaser and each
transferee of the Securities, each future holder of all such Securities, and the
Company.
 
(i) Severability.  If one or more provisions of this Agreement are held to
be unenforceable under applicable law, the parties agree to renegotiate such
provision in good faith, in order to maintain the economic position enjoyed by
each party as close as possible to that under the provision rendered
unenforceable.  In the event that the parties cannot reach a mutually agreeable
and enforceable replacement for such provision, then (i) such provision shall be
excluded from this Agreement, (ii) the balance of the Agreement shall be
interpreted as if such provision were so excluded and (iii) the balance of the
Agreement shall be enforceable in accordance with its terms.
 
(j) Entire Agreement.  This Agreement, and the documents and agreements referred
to herein constitute the entire agreement between the parties hereto pertaining
to the subject matter hereof, and any and all other written or oral agreements
existing between the parties hereto are expressly canceled.
 

[Signature Pages Follow]

 
 

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The parties have executed this Senior Secured Convertible Promissory Note
Purchase Agreement as of the date first written above.
 
COMPANY
 
AURIGA LABORATORIES, INC.
 

By:
 

 
 
Name:

 
 
Title:

 
Address: 5284 Adolfo Road
Camarillo, CA 93012

 

PURCHASER:
 
PROSPECTOR CAPITAL PARTNERS II, LLC
 
By:  Hudson & Co., LLC, its manager
 
By:  ____________________________
Name: Christopher S. Walton
Title: Authorized Person

Address: 3112 Windsor Road
Suite A-137
Austin, TX 78703

 
 

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EXHIBITS
 
Exhibit A -                                Purchase Schedule
 
Exhibit B -                                Form of Senior Secured Convertible
Promissory Note
 
Exhibit C -                                Form of Security Agreement Amendment
 
Exhibit D -                                Form of Royalty Participation
Agreement
 

 
 

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EXHIBIT A
 
PURCHASE SCHEDULE
 
Note
Date
Principal Amount of Note
Proceeds to Company*
First Note
June 9, 2008
$287,500.00
$250,000.00
Second Note**
June 20, 2008
$287,500.00
$250,000.00
Third Note**
July 3, 2008
$287,500.00
$250,000.00
TOTAL
 
$862,500.00
$750,000.00

 
* After payment of Origination Fee
 
** The purchase of the Second Note and the Third Note shall be at the option of
Purchaser.
 

 
 

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EXHIBIT B
 
FORM OF SENIOR SECURED CONVERIBLE PROMISSORY NOTE
 

 
 

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EXHIBIT C
 
SECURITY AGREEMENT AMENDMENT
 

 
 

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EXHIBIT D
 
FORM OF ROYALTY PARTICIPATION AGREEMENT

 
 

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Schedule 3(d)

Gardena Hospital, L.P., et. al. v. Auriga Laboratories, Inc., Los Angeles County
Superior Court Case No. SC097013

Laboratories Carilene S.A.S. v. Auriga Laboratories, United States District
Court, Southern District of New York Case No. ’07 CIV 9616

Threatened employment litigation by former employee, Monika Williams, against
Auriga Laboratories

 
 

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