THIS HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS, AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.  THIS NOTE MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT
OR OTHER LOAN SECURED BY SUCH SECURITIES.
 

 
Original Issue Date: February 13, 2008$750,000
 

 
SENIOR SECURED PROMISSORY NOTE
 
DUE
 
February 12, 2009
 
FOR VALUE RECEIVED, Auriga Laboratories, Inc., a Delaware corporation (the
“Company”) promises to pay to Prospector Capital Partners, LLC or its registered
assigns (the “Holder”), the principal sum of $750,000 on or before February 12,
2009 as set forth below (the “Maturity Date”). This Note is issued pursuant to
the Senior Secured Note and Warrant Purchase Agreement, dated the date hereof,
and is subject to the following additional provisions:
 
Section 1.  Definitions.  For the purposes hereof, the following terms shall
have the following meanings:
 
“Business Day” means any day except Saturday, Sunday and any day which shall be
a federal legal holiday in the United States or a day on which banking
institutions in the State of Georgia are authorized or required by law or other
government action to close.
 
“Event of Default” shall have the meaning set forth in Section 3.
 
 “Maturity Date” shall have the meaning set forth in Section 2 of this Note.
 
 “Original Issue Date” shall mean the date of the first issuance of this Note
regardless of the number of transfers of this Note and regardless of the number
of instruments which may be issued to evidence this Note.
 
“Person” means a corporation, an association, a partnership, organization, a
business, an individual, a government or political subdivision thereof or a
governmental agency.
 
“Trading Day” means a day on which the Common Stock is traded on a Trading
Market.
 
“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the Nasdaq
SmallCap Market, the American Stock Exchange, the New York Stock Exchange, the
Nasdaq National Market or the OTC Bulletin Board.
 
Section 2.  Maturity.     On January 31, 2009 (the “Maturity Date”), the entire
outstanding principal balance of this Note shall mature and be due and payable
to the Holder by the Company.  The Company may not prepay this Note without the
consent of the Holder.
 
Section 3.  Prepayment.  The Company may prepay this Note at any time without
prior consent of the Holder and all obligations of the Company under this Note
of shall terminate at such time.  Notwithstanding the above, prepayment shall
not affect the term of the Warrant or the parties’ ongoing rights and
obligations under the Senior Secured Note and Warrant Purchase Agreement and
Royalty Participation Agreement, each of even date herewith.
 
Section 4.  Events of Default.
 
(a)  “Event of Default”, wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
 
(i)  any default in the payment of the principal of amount of this Note, as and
when the same shall become due and payable (whether on the Maturity Date or by
acceleration or otherwise) which default is not cured, within 5 Trading Days;
 
(ii)  the Company shall fail to observe or perform any other covenant or
agreement contained in this Note which failure is not cured, if possible to
cure, within 5 Trading Days after notice of such default sent by the Holder;
 
(iii)  any representation or warranty made herein shall be untrue or incorrect
in any material respect as of the date when made or deemed made;
 
(iv)  (i) the Company shall commence, or there shall be commenced against the
Company, a case under any applicable bankruptcy or insolvency laws as now or
hereafter in effect or any successor thereto, or the Company commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or
(ii) there is commenced against the Company any such bankruptcy, insolvency or
other proceeding which remains undismissed for a period of 60 days; or (iii) the
Company is adjudicated by a court of competent jurisdiction insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or (iv) the Company suffers any appointment of any
custodian or the like for it or any substantial part of its property which
continues undischarged or unstayed for a period of 60 days; or (v) the Company
makes a general assignment for the benefit of creditors; or (vi) the Company
shall fail to pay, or shall state that it is unable to pay, or shall be unable
to pay, its debts generally as they become due; or (vii) the Company shall call
a meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company shall by any act or failure to
act expressly indicate its consent to, approval of or acquiescence in any of the
foregoing; or (ix) any corporate or other action is taken by the Company for the
purpose of effecting any of the foregoing; or
 
(v)  except with respect to those liabilities set forth on Schedule 4(a)(v),
attached hereto, the Company shall default in any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement of the Company in an amount
exceeding $100,000, whether such indebtedness now exists or shall hereafter be
created and such default shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable.
 
(b)  Remedies Upon Event of Default.  If any Event of Default occurs, the full
principal amount of this Note to the date of acceleration shall become, at the
Holder’s election, immediately due and payable in full.   The Holder need not
provide and the Company hereby waives any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law.  Such declaration may be
rescinded and annulled by the Holder at any time prior to payment hereunder and
the Holder shall have all rights as a Note holder until such time, if any, as
the full payment under this Section shall have been received by it.  No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.
 
Section 5.  Miscellaneous.
 
(a)  Notices.  Any and all notices or other communications or deliveries to be
provided by the Holder hereunder by facsimile, sent by a nationally recognized
overnight courier service, addressed to the Company, at 5284 Adolfo Road,
Camarillo, California 93012, facsimile number, (805) 299-4932, Attn: CEO and
Corporate Counsel, or such other address or facsimile number as the Company may
specify for such purposes by notice to the Holder delivered in accordance with
this Section.  Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service
addressed to the Holder at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the
Holder.  Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (local time in Los
Angeles, California), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified in this Section later than 5:30 p.m. (local time in Los
Angeles, California) on any date and earlier than 11:59 p.m. (local time in Los
Angeles, California) on such date, (iii) the second Business Day following the
date of mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required to be
given.
 
(b)  Absolute Obligation. Except as expressly provided herein, no provision of
this Note shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of this Note at the time, place, and
rate, and in the coin or currency, herein prescribed.  This Note is a direct
debt obligation of the Company.
 
(c)  Lost or Mutilated Note.  If this Note shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Note, or in lieu of or in substitution
for a lost, stolen or destroyed Note, a new Note for the principal amount of
this Note so mutilated, lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such Note, and of the ownership
hereof, and indemnity, if requested, all reasonably satisfactory to the Company.
 
(d)  Security Interest.  This Note is a direct debt obligation of the Company
and is secured by a first priority perfected security interest in all of the
assets of the Company for the benefit of the Holder.  The Holder and the Company
have agreed to and more fully provided the Holder’s Security Interest in that
certain Security Agreement, by and among the Parties hereto, of even date
herewith, attached hereto as Exhibit A (the “Security Agreement”).  The Security
Agreement is incorporated by reference herein in its entirety.
 
(e)  Governing Law.  All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and construed
and enforced in accordance with the internal laws of the State of Texas, without
regard to the principles of conflicts of law thereof.
 
(f)  Waiver.  Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note.  The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note.  Any waiver must
be in writing.
 
(g)  Severability.  If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any Person or circumstance, it shall nevertheless
remain applicable to all other Persons and circumstances.  If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Note as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this Note, and the Company (to the extent it may lawfully do so)
hereby expressly waives all benefits or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impede the
execution of any power herein granted to the Holder.
 
(h)  Next Business Day.  Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.
 
(i)  Headings.  The headings contained herein are for convenience only, do not
constitute a part of this Note and shall not be deemed to limit or affect any of
the provisions hereof.
 
(j)  Seniority.  This Note is senior in right of payment to any and all other
indebtedness of the Company, provided, however, Holder agrees to subordinate
this Note to (i) a receivables line of credit of up to $1.5 million; or (ii) a
term loan of up to $1.0 million, in the event that the Company enters into
either during the term of the Note with a reputable commercial bank.
 
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a
duly authorized officer as of the date first above indicated.
 

 
AURIGA LABORATORIES, INC.
 
 
By:                                                            
Name:                 ________________________
Title:                 Chief Executive Officer
 
 

AGREED AND ACKNOWLEDGED

PROSPECTOR CAPITAL PARTNERS, LLC

By: Hudson & Co., LLC, its manager
 

Name: Christopher S. Walton
Title: Authorized Person

      
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EXHIBIT A

Security Agreement

 
 

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Schedule 4(a)(v)

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

 
 

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