Document:

ex1021.htm

    

      

       

      COMMERCIAL
SECURITY AGREEMENT

       

      
        	
                Principal

              	
                Loan
      Date

              	
                Maturity

              	
                Loan
      No

              	
                Call/Coll

              	
                Account

              	
                Officer

              	
                Initials

              
	
                $241,932.71

              	
                03-04-2008

              	
                03-04-2011

              	
                9002

              	 
      	
                4149431

              	
                792

              	 
      

      

       

      References
in the boxes above are for Lender’s use only and do not limit the applicability
of this document to any particular loan or item.

       

      Any item
above containing ***** has been omitted due to text length
limitations.

       

      

      
        	
                Grantor:

              	
                Labwire,
      Inc. (TIN: 37-1501818)

                14133
      Memorial Ste 1

                Houston,
      Tx 77079

              	 
      	
                Lender:

              	
                The
      Frost National Bank

                Bellaire
      Financial Center

                PO
      Box 1600

                San
      Antonio, Tx 78296

              

      

       

      

       

      THIS COMMERCIAL SECURITY
AGREEMENT dated March 4, 2008, Is made and executed between LABWlRE, INC.
(“Grantor”) and THE FROST NATIONAL BANK (“Lender”).

       

      GRANT OF SECURITY INTEREST.
For valuable consideration. Grantor grants to Lender II security interest in the
Collateral to secure the Indebtedness and agrees that Lender shall have the
rights stated in this Agreement with respect to the Collateral. In addition to
all other rights which Lender may have by law.

       

      COLLATERAL DESCRIPTION. The
word “Collateral”·as used in this Agreement means the following described
property. whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located, in which Grantor is giving to Lender a
security interest for the payment of the Indebtedness and performance of all
other obligations under the Note and this Agreement:

       

      All
Accounts

       

      In
addition, the word “Collateral” also includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:

       

      (A) All
accessions, attachments, accessories, replacements of and additions to any of
the collateral described herein, whether added now or later.

       

      (B) All
products and produce of any of the property described in this Collateral
section.

       

      (C) All
accounts, general intangibles, instruments, rents, monies, payments, and all
other rights, arising out of a sale, lease, consignment or other disposition of
any of the property described in this Collateral section.

       

      (D) All
proceeds (including insurance proceeds) from the sale, destruction, loss, or
other disposition of any of the property described in this Collateral section,
and sums due from a third party who has damaged or destroyed the Collateral or
from that party’s insurer, whether due to judgment, settlement or other
process.

       

      (E) All
records and data relating to any of the property described in this Collateral
section, whether in the form of a writing, photograph, microfilm, microfiche, or
electronic media, .together with all of Grantor’s right, title, and interest in
and to all computer software required to utilize-, create, maintain, and process
any such records or data on electronic media.

       

      CROSS-COLLATERALIZATION. In
addition to the Note, this Agreement secures all obligations, debts and
liabilities, plus interest thereon, of Grantor of Lender, or anyone or more of
them, as well as all claims by lender against Grantor or anyone or more of them,
whether now existing or hereafter arising, whether related or unrelated to the
purpose of the Note, whether voluntary or otherwise, whether due or not due,
direct or indirect, determined Of undetermined, absolute or contingent,
liquidated or unliquidated, whether Grantor may be liable Individually or
jointly with others, whether obligated as guarantor, surety, accommodation party
or otherwise. However, this Agreement shall not secure, and the “Indebtedness”
shall not include, any obligations arising under Subchapters E end F of Chapter
342 of the Texas Finance Code, as amended.

       

      RIGHT OF SETOFF, To the extent
permitted by applicable law, Lender reserves a right of setoff in all Grantor’s
accounts with lender (whether checking, savings, or some other account). This
includes all accounts Grantor holds jointly with someone else and all accounts
Grantor may open In the future, However, this does not Include any IRA or Keogh
accounts, or any trust accounts for which setoff would be prohibited by law,
Grantor authorizes lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such
accounts.

       

      GRANTOR’S REPRESENTATIONS AND
WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the
Collateral, Grantor represents and promises to lender that:

       

      Perfection of Security
Interest. Grantor agrees to take whatever actions are requested by lender
to perfect and continue Lender’s security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the documents
evidencing or constituting the Collateral and Grantor will note Lender’s
interest upon any and all chattel paper and instruments if not delivered to
Lender for possession by lender. This is a continuing Security Agreement and
will continue in effect even though all or any part of the Indebtedness is paid
in full and even though for a period of time Grantor may not be indebted to
lender.

       

      Notices to Lender. Grantor
will promptly notify lender in writing at lender’s address shown above (or such
other addresses as Lender may designate from time to time prior to any (1)
change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (3)
change in the management of the Corporation Grantor; (4) change in the
authorized signer(s); (5) change in Grantor’s principal office address; (6)
change In Grantor’s state of organization; (7) conversion of Grantor to a new or
different type of business entity: or (8) change in any other aspect of Grantor
that directly or indirectly relates to any agreements between Grantor and
lender. No change in Grantor’s name or state of organization will take effect
until after Lender has received notice.

       

      No Violation. The execution
and delivery of this Agreement will not violate any law or agreement governing
Grantor or to which Grantor Is a party, and its certificate or articles of
incorporation and bylaws do not prohibit any term or condition of this
Agreement.

      
        
           

        

        
           

          
            

          

        

        
           

          
            
              
                	
                        Loan
      No: 9002

                      	
                        COMMERCIAL
      SECURITY AGREEMENT

                        
                          (Continued)

                        

                      	
                        Page 2
      of 6

                      

              

            

            
               

            

          

        

      

      
 

       

      Enforceability of Collateral.
To the extent the Collateral consists of accounts, chattel paper, or general
intangibles, as defined by the Uniform Commercial Code, the Collateral is
enforceable in accordance with its terms, is genuine, and fully complies with
all applicable laws and regulations concerning form, content and manner of
preparation and execution, and all persons appearing to be obligated on the
Collateral have authority and capacity to contract and are in fact obligated as
they appear to be on the Collateral. At the time any account becomes subject to
a security interest In favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
previously shipped or delivered pursuant to a contract of sale, or for services
previously performed by Grantor with or for the account debtor. So 10nlI as this
Agreement remains in effect, Grantor shall not, without Lender’s prior written
consent, compromise, settle, adjust, or extend payment under or with regard to
any such Accounts. There shall be no setoffs or counterclaims against any of the
Collateral, and no agreement shall have been made under which any deductions or
discounts may be claimed concerning the Collateral except those disclosed to
Lender in writing.

       

      Location of the Collateral.
Except in the ordinary course of Grantor’s business, Grantor agrees to keep the’
Collateral (or to the extent the Collateral consists of intangible property such
as accounts or general Intangibles, the records concerning the Collateral at
Grantor’s address shown above or at such other locations as are acceptable to
Lender. Upon Lender’s request, Grantor will deliver to Lender in form
satisfactory to Lender a schedule of real properties and Collateral locations
relating to Grantor’s operations, including without limitation the following:
(11 all real property Grantor owns or is purchasing; (2) all real property
Grantor is renting or leasing: (3) all storage facilities Grantor owns, rents,
leases, or uses; end (4) all other properties where Collateral is or may be
located.

       

      Removal of the Collateral.
Except in the ordinary course of Grantor’s business, Grantor shall not remove
the Collateral from its existing location without Lender’s prior written
consent. Grantor shall, whenever requested advise Lender of the exact location
of the Collateral.

       

      Transactions Involving
Collateral. Except for inventory sold or accounts collected in the
ordinary course of Grantor’s business, or as otherwise provided for In this
Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or
dispose of the Collateral. Grantor shall not pledge, mortgage, encumber or
otherwise permit the Collateral to be subject to any lien, security interest,
encumbrance, or charge, other than the security interest provided for in this
Agreement, without the prior written consent of Lender. This Includes security
interests even if junior in right to the security interests granted under this
Agreement. Unless waived by Lender, all proceeds from any disposition of the
Collateral (for whatever reason shall be held in trust for Lender and shall not
be commingled with any other funds: provided however, this requirement shall not
constitute consent by Lender to any sale or other disposition. Upon receipt,
Grantor shall immediately deliver any such proceeds to Lender.

       

      Title. Grantor represents and
warrants to Lender that Grantor holds good and marketable title to the
Collateral, free and clear of all liens and encumbrances except for the lien of
this Agreement. No financing statement covering any of the Collateral is on file
in any public office other than those which reflect the security interest
created by this Agreement or to which lender has specifically consented. Grantor
shall defend Lender’s rights in the Collateral against the claims end demands of
all other persons.

       

      Repairs and Maintenance.
Grantor agrees to keep and maintain, and to cause others to keep and maintain,
the Collateral in good order, repair and condition at all times while this
Agreement remains in effect. Grantor further agrees to pay when due all claims
for work done on, or services rendered or material furnished in connection with
the Collateral so that no lien or encumbrance may ever attach to or be filed
against the Collateral,

       

      Inspection of Collateral.
Lender and Lender’s designated representatives and agents shall have the right
at all reasonable times to examine and Inspect the Collateral wherever
located.

       

      Taxes, Assessments and Liens.
Grantor will pay when due all taxes, assessments and liens upon the Collateral,
its use or operation, upon this Agreement, upon any promissory note or notes
evidencing the Indebtedness, or upon any of the other Related Documents. Grantor
may withhold any such payment or may elect to contest any lien if Grantor is in
good faith conducting an appropriate proceeding to contest the obligation to pay
and so long as Lender’s Interest in the Collateral is not Jeopardized In
lender’s sole opinion. In any contest Grantor shall defend itself and Lender and
shall satisfy any final adverse judgment before enforcement against the
Collateral Grantor shall name Lender as an additional obligee under any surety
bond furnished in the contest proceedings. Grantor further agrees to furnish
Lender with evidence that such taxes, assessments, and governmental and other
charges have been paid in full and in a timely manner. Grantor may withhold any
such payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and 90
long as lender’s interest in the Collateral is not jeopardized.

       

      Compliance with Governmental
Requirements. Grantor shall comply promptly with all laws, ordinances,
rules and regulations of all governmental authorities, now or hereafter in
effect. applicable to the ownership, production, disposition, or use of the
Collateral, including all laws or regulations relating to the undue erosion of
highly erodible land or relating to the conversion of wetlands for the
production of an agricultural product or commodity. Grantor may contest in good
faith any such law, ordinance or regulation and withhold compliance during any
proceeding, including appropriate appeals, so long as Lander’s interest in the
Collateral, in Lender’s opinion, is not jeopardized.

       

      Hazardous Substances. Grantor
represents and warrants that the Collateral never has been, and never will be so
long as this Agreement remains a lien on the Collateral, used in violation of
any Environmental Laws or for the generation manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
Hazardous Substance. The representations and warranties contained heroin are
based on Grantor’s due diligence in investigating the Collateral for Hazardous
Substances. Grantor hereby (1) releases and waives any future claims against
Lender for indemnity or contribution in the event Grantor becomes liable for
cleanup or other costs under any Environmental laws, and (2) agrees to
indemnify, defend and hold harmless Lender against any and all claims and losses
resulting from n breach of this provision of this Agreement. This obligation to
indemnify and defend shall survive the payment of the Indebtedness and the
satisfaction of this Agreement.

       

      Maintenance of Casualty
Insurance. Grantor shall procure and maintain ell risks insurance,
including without limitation fire, theft and liability coverage together with
such other insurance as Lender may require with respect to the Collateral, in
form, amounts, coverages and basis reasonably acceptable to Lender. Grantor,
upon request of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to lender, including stipulations
that coverages will not be cancelled or diminished without at least ten (10)
days’ prior written notice to Lender and not including any disclaimer of the
Insurer’s liability for failure to give such a notice. Each insurance policy
also shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor or
any other person. In connection with all policies covering assets in which
Lender holds or is offered a security interest, Grantor will provide lender with
such loss payable or other endorsements as Lender may require. If Grantor at any
time fails to obtain or maintain any insurance as required under this Agreement,
lender may (but shall not be obligated to) obtain such Insurance as Lender deems
appropriate, including if Lender so chooses “single Interest insurance,” which
will cover only Lender’s interest in the Collateral.

       

      Application of Insurance
Proceeds. Grantor shall promptly notify Lender of any loss or damage to
the Collateral, whether or not such casualty or loss is covered by Insurance.
Lender may make proof of loss if Grantor fails to do so within fifteen (15) days
of the casualty.

      
        
           

        

        
           

          
            

          

        

        
           

          
            
              
                	
                        Loan
      No: 9002

                      	
                        COMMERCIAL
      SECURITY AGREEMENT

                        
                          (Continued)

                        

                      	
                        Page 3
      of 6

                      

              

            

            
               

            

          

        

      

       

      

       

      All
proceeds of any insurance on the Collateral, including accrued proceeds thereon,
shall be held by Lender as part of the Collateral. If Lender consents to repair
or replacement of the damaged or destroyed Collateral, Lender shall, upon
satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds
for the reasonable cost of repair or restoration. If Lender does not consent to
repair or replacement of the Collateral, Lender shall retain a sufficient amount
of the proceeds to pay all of the Indebtedness, and shall pay the balance to
Grantor. Any proceeds which have not been disbursed within six (6) months after
their receipt and which Grantor has not committed to the repair or restoration
of the Collateral shall be used to prepay the Indebtedness.

       

      Insurance Reserves. Lender may
require Grantor to maintain with Lender reserves for payment of insurance
premiums, which reserves shall be created by monthly payments from Grantor of a
sum estimated by Lender to be sufficient to produce, at least fifteen (15) days
before the premium due data, amounts at least equal to the Insurance premiums to
be paid. If fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shell constitute
a non-interest-bearing account which Lender may satisfy by payment of the
insurance premiums required to be paid by Grantor as they become due. Lender
does not hold the reserve funds in trust for Grantor, and Lender Is not the
agent of Grantor for payment of the insurance premiums required to be paid by
Grantor. The responsibility for the payment of premiums shall remain Grantor’s
sale responsibility.

       

      Insurance Reports. Grantor,
upon request of Lender, shall furnish to Lender reports on each existing policy
of Insurance showing such information as Lender may reasonably request including
the following: (1) the name of the insurer; (2) the risks insured; (31 the
amount of the policy; (4) the property insured; (5) the then current value on
the basis of which Insurance has been obtained and the manner of determining
that value; end (6) the expiration date of the policy. In addition, Grantor
shall upon request by Lander (however not more often than annually have an
independent appraiser satisfactory to Lender determine, as applicable, the cash
value or replacement cost of the Collateral.

       

      Financing Statements. Grantor
authorizes Lender to file a UCC Financing statement, or alternatively, a copy of
this Agreement to perfect Lender’s security interest. At Lender’s request,
Grantor additionally agrees to sign all other documents that are necessary to
perfect, protect, and continue Lender’s security interest in the Property.
Grantor will pay all filing fees, title transfer fees, and other fees and costs
involved unless prohibited by law or unless Lender is required by law to pay
such fees and costs. Grantor irrevocably appoints Lender to execute documents
necessary to transfer title if there is a default. Lender may file a copy of
this Agreement as a financing statement. If Grantor changes Grantor’s name or
address, or the name or address of any person granting a security interest under
this Agreement changes, Grantor will promptly notify the Lender of such
change.

       

      GRANTOR’S RIGHT TO POSSESSION AND TO
COLLECT ACCOUNTS. Until default and except as otherwise provided below
with respect to accounts, Grantor may have possession of the tangible personal
property and beneficial use of all the Collateral and may use it in any lawful
manner not inconsistent with this Agreement or any Related Documents, provided
that Grantor’s right to possession and beneficial use shall not apply to any
Collateral where possession of the Collateral by Lender is required by law to
perfect Lender’s security interest in such Collateral. Until otherwise notified
by lender, Grantor may collect any of the Collateral consisting at accounts. At
any time and even though no Event of Default exists, Lender may exercise its
rights to collect the accounts and to notify account debtors to make payments
directly to Lender for application to the Indebtedness. If Lender at any time
has possession of any Collateral, whether before or after an Event of Default,
Lender shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral if Lender takes such action for that purposes
Grantor shall request or as Lender, in Lender’s sale discretion, shall deem
appropriate under the circumstances, but failure to honor any request by Grantor
shall not of itself be deemed to be a failure to exercise reasonable care,
Lender shell not be required to take any steps necessary to preserve any rights
in the Collateral against prior parties, nor to protect, preserve or maintain
any security interest given to secure the Indebtedness.

       

      LENDER’S EXPENDITURES. If any
action or proceeding is commenced that would materially affect Lender’s interest
in the Collateral or if Grantor fails to comply with any provision of this
Agreement or any Related Documents, including but not limited to Grantor’s
failure to discharge or pay when due any amounts Grantor is required to
discharge or pay under this Agreement or any Related Documents, Lender on
Grantor’s behalf may (but shall not be Obligated to take any action that Lender
deems appropriate, Including but not limited to discharging or paying all taxes,
liens, security Interests, encumbrances and other claims, at any time levied or
placed on the Collateral and Paying all costs for insuring, maintaining and
preserving the Collateral. All such expenditures paid by lender for such
purposes will then bear interest at the Note rate from the date paid by Lender
to the date of repayment by Grantor. To the extent permitted by applicable law,
all such expenses will become a part of the Indebtedness and, at Lender’s
option, will (A) be payable on demand; (B) be added to the balance of the Note
and, be portioned among end be payable with any installment payments to become
due during either (1) the term of any applicable Insurance policy; or (2) the
remaining term of the Note; or (C) be treated as a balloon payment which will be
due and payable at the Note’s maturity. The Agreement’ also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lander may be entitled upon Default.

       

      DEFAULT. Each of the following
shall constitute an Event of Default under this Agreement:

       

      Payment Default. Grantor fails
to make any payment when due under the Indebtedness.

       

      Other Defaults. Grantor fails
to comply with or to perform any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents or to comply with
or to perform any term, obligation, covenant or condition contained in any other
agreement between lender and Grantor.

       

      Default in Favor of Third
Parties. Should Borrower or any Grantor default under any loan, extension
of credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially affect
any of Grantor’s property or Grantor’s or any Grantor’s ability to repay the
Indebtedness or perform their respective obligations under this Agreement or any
of the Related Documents.

       

      False Statements. Any
warranty, representation or statement made or furnished to Lender by Grantor or
on Grantor’s behalf under this Agreement or the Related Documents is false or
misleading in any material respect, either now or at the time made or furnished
or becomes false or misleading at any time thereafter.

       

      Defective Collateralization.
This Agreement or any o’ the Related Documents ceases to be in full force and
effect (including failure of any collateral document to create e valid and
perfected security Interest or lien) at any time and for any
reason.

       

      Insolvency. The dissolution or
termination of Grantor’s existence as a going business, the insolvency of
Grantor, the appointment of a receiver for any pan of Grantor’s property, any
assignment for the benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws by or
against Grantor,

       

      Creditor or Forfeiture
Proceedings. Commencement of foreclosure or forfeiture proceedings,
whether by judicial proceeding, self-help, repossession or any other’ method, by
any creditor of Grantor or by any governmental agency against any collateral
securing the Indebtedness. This includes a garnishment of any of Grantor’s
accounts, including deposit accounts, with Lender. However, this Event of
Default shall not apply II there is a good faith dispute by Grantor as to the
validity or reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the creditor
or forfeiture proceeding and deposits with Lender monies or 8 surety bond for
the creditor or forfeiture proceeding, in an amount determined by Lender, in its
sale discretion, as being an adequate reserve or bond for the
dispute.

      
        
           

        

        
           

          
            

          

        

        
           

          
            
              
                	
                        Loan
      No: 9002

                      	
                        COMMERCIAL
      SECURITY AGREEMENT

                        
                          (Continued)

                        

                      	
                        Page 4 of 6
       

                      

              

            

            
              

            

          

        

      

       

      

       

      Events Affecting Guarantor.
Any of the preceding events occurs with respect to any Guarantor of any of the
Indebtedness or Guarantor dies or becomes Incompetent or revokes or disputes the
validity of, or liability under, any Guaranty of the Indebtedness.

       

      Adverse Change. A material
adverse change occurs In Grantor’s financial condition, or lender believes the
prospect of payment or performance of the Indebtedness is Impaired.

       

      Insecurity. Lender in good
faith believes itself insecure.

       

      RIGHTS AND REMEDIES ON DEFAULT.
If an Event of Default occurs under this Agreement, at any time thereafter, Lender
shall have all the rights of a secured party under the Texas Uniform Commercial
Code. In addition and without limitation, lender may exercise anyone or more of
the following rights and remedies:

       

      Accelerate Indebtedness.
Lender may declare the entire Indebtedness immediately due and payable,
without notice of any kind to Grantor. Assemble Collateral. lender may require
Grantor to deliver to Lender all or any portion of the Collateral and any and
all certificates of title and other documents relating to the Collateral, Lender
may require Grantor to ·assemble the Collateral and make it available to Lender
at a place to be designated by Lender. Lender also shall have full power to
enter, provided lender does so without a breach of the peace or a trespass, upon
the property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the lime of
repossession, Grantor agrees Lender may take such other goods, provided that
Lender makes reasonable efforts to return them to Grantor alter
repossession.

       

      Sell the Collateral. Lender
shall have full power to sell, lease, transfer, or otherwise deal with the
Collateral or proceeds thereof in Lender’s own name or that of Grantor. Lender
may sell the Collateral at public auction or private sale. Unless the Collateral
threatens to decline speedily in value or is of a type customarily sold on a
recognized market, lender will give Grantor, and other persons as required by
law, reasonable notice of the time and place at any public sale, or the time
after which any private sale or any other disposition of the Collateral is to be
made. However, no notice need be provided to any person who, after Event of
Default occurs, enters into and authenticates an agreement waiving that person’s
right to notification of sale. The requirements at reasonable notice shall be
met if such notice is given at least ten (10) days before the time of the sale
or disposition. All expenses relating to the disposition of the Collateral,
including without limitation the expenses of retaking, holding, insuring,
preparing for sale and selling the Collateral, shall become a part at the
Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.

       

      Appoint Receiver. Lender shall
have the right to have a receiver appointed to take possession of all or any
part of the Collateral, with the power to protect and preserve the Collateral,
to operate the Collateral preceding foreclosure or sale, and to collect the
Rents from the Collateral and apply the proceeds, over and above the cost of the
receivership, against the Indebtedness. The receiver may serve without bond If
permitted by law. Lender’s right to the appointment of a receiver shall exist
whether or not the apparent value of the Collateral exceeds the Indebtedness by
a substantial amount. Employment by Lender shall not disqualify e person from
serving as a receiver.

       

      Collect Revenues, Apply
Accounts. Lender, either itself or through a receiver, may collect the
payments, rents, income, and revenues from the Collateral, Lender may at any
time In Lender’s discretion transfer any Collateral into Lender’s own name or
that of lender’s nominee and receive the payments, rents, income, and revenues
therefrom and hold the same as security for the Indebtedness or apply
it to payment of the Indebtedness in such order of preference as lender may
determine. Insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chattel paper, chases in action, or similar
property, Lender may demand, collect receipt for settle, compromise, adjust, sue
for, foreclose, or realize on the Collateral so Lender may determine, whether or
not Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to be
sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items
pertaining to payment, shipment, or storage of any Collateral. To facilitate
collection, Lender may notify account debtors and obligors on any Collateral to
make payments directly to Lender.

       

      Obtain Deficiency. If Lender
chooses to sell any or
all of the Collateral, Lender may obtain a judgment against Grantor for any
deficiency remaining on the Indebtedness due to Lender after application of all
amounts received from the exercise at the rights provided in this Agreement.
Grantor shall be liable for a deficiency even if the transaction described in
this subsection is a sale of accounts or chattel paper.

       

      Other Rights and Remedies.
Lender shall have all the rights end remedies of a secured creditor under the
provisions of the Uniform Commercial Code, as may be amended tram time to time.
In addition, Lender shall have and may exercise any or all other tights and remedies
It may have available at law, in equity, or otherwise,

       

      Election of Remedies. Except
as may be prohibited by applicable law, all of Lender’s rights and remedies,
whether evidenced by this Agreement, the Related Documents, or by any other
writing, shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform en
obligation of Grantor under this Agreement, after Grantor’s failure to perform,
shall not affect lender’s right to declare a default and exercise its
remedies.

       

      WAIVER OF
RIGHT TO TRIAL BY JURY. THE UNDERSIGNED HEREBY WAIVES TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT TO ENFORCE THIS AGREEMENT, TO COLLECT
DAMAGES FOR THE BREACH OF THIS AGREEMENT, OR WHICH IN ANY OTHER WAY ARISE OUT
OF, ARE CONNECTED TO OR ARE RELATED TO THIS AGREEMENT OR THE SUBJECT MANNER OF
THIS AGREEMENT. ANY SUCH ACTION SHALL BE TRIED BY THE JUDGE WITHOUT A
JURY.

       

      FACSIMILE DOCUMENTS AND
SIGNATURES. For purposes of negotiating and finalizing this document, if
this document is transmitted by facsimile machine (“fax”), it shall be treated
for all purposes as an original document. Additionally, the signature of any
party on this document transmitted by way of a fax machine shall be considered
for all purposes as an original signature. Any such faxed document shall be
considered to have the same binding legal effect as an original document. At the
request of any party, any faxed document shall be re-executed by each signatory
party in an original form.

       

      MISCELLANEOUS PROVISIONS. The
following miscellaneous provisions are a part of this Agreement:

       

      Amendments. This Agreement,
together with any Related Documents constitutes the entire understanding and
agreement of the parties as to the matters set forth in this Agreement. No
alteration of or amendment to this Agreement shall be effective unless given in
writing and signed by the party or parties sought to be charged or bound by the
alteration or amendment.

       

      

      
        
           

        

        
           

          
            

          

        

        
           

          
            
              
                	
                        Loan
      No: 9002

                      	
                        COMMERCIAL
      SECURITY AGREEMENT

                        
                          (Continued)

                        

                      	
                        Page
      5 of 6

                      

              

            

            
              

            

          

        

      

       

      

       

      Attorneys’ Fees; Expenses.
Grantor agrees to pay upon demand all of Lender’s costs and expenses including
Lender’s reasonable attorneys’ fees and Lender’s legal expenses incurred in
connection with the enforcement of this Agreement. Lender may hire or pay
someone else to help enforce this Agreement and Grantor shall pay the costs and
expenses of such enforcement. Costs and expenses include Lender’s reasonable
attorneys’ fees and legal expenses whether or not there is a lawsuit, including
Lender’s reasonable attorneys’ fees and legal expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or
injunction), appeals, and any anticipated post-judgment collection services.
Grantor also shall pay all court costs and such additional fees as may be
directed by the court.

       

      Caption Headings. Caption
headings in this Agreement are for convenience purposes only and are not to be
used to interpret or define the provisions of this Agreement.

       

      Governing Law. This Agreement
will be governed by federal law applicable to lender and, to the extent not
preempted by federal law. the laws of the State of Texas without regard to its
conflicts of law provisions. This Agreement has been accepted by lender in the
State of Texas.

       

      Choice of Venue. II there is a
lawsuit, and if the transaction evidenced by this Agreement occurred In BEXAR
County, Grantor agrees upon Lender’s request to submit to the jurisdiction of
the courts of BEXAR County, State of Texas.

       

      No Waiver by Lender. Lender
shell not be deemed to have waived any rights under this Agreement unless such
waiver is given in writing and signed by Lender. No delay or omission on the
part of Lender In exercising any right shall operate as a waiver of such right
or any other right. A waiver by Lender of e provision of this Agreement shall
not prejudice or constitute a waiver of Lender’s right otherwise to demand
strict compliance with that provision or any other provision of this Agreement.
No prior waiver by Lender nor any course of dealing between Lender and Grantor,
shall constitute a waiver of any of Lender’s rights or of any of Grantor’s
obligations as to any future transactions. Whenever the consent of Lender is
required under this Agreement the granting of such consent by lender in any
instance shall not constitute continuing consent to subsequent instances where
such consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.

       

      Notices. Any notice required
to be given under this Agreement shall be given in writing, and shall be
effective when actually delivered, when actually received by tale facsimile
(unless otherwise required by law), when deposited with a nationally recognized
overnight courier, or, if mailed when deposited in the United States mail as
first class, certified or registered mail postage prepaid, directed to the
addresses shown near the beginning of this Agreement. Any party may change its
address for notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpo.se of the notice is to change the
party’s address. For notice purposes, Grantor agrees to keep Lender informed at
all times of Grantor’s current address. Unless otherwise provided or required by
law if there is more than one Grantor, any notice given by Lender to any Grantor
is deemed to be notice given to all Grantors.

       

      Power of Attorney. Grantor
hereby appoints Lender as Grantor’s irrevocable attorney-in-fact for the purpose
of executing any documents necessary to perfect, amend, or to continue the
security interest granted in this Agreement or to demand termination of filings
of other secured parties Lender may at any time and without further
authorization from Grantor file a carbon, photographic or, other reproduction of
any financing statement or of this Agreement for use as a financing statement.
Grantor will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender’s security interest in the
Collateral.

       

      Severability. If a court of
competent jurisdiction finds any provision of this Agreement to be illegal
invalid; or unenforceable as to any circumstance, that finding shall not make
the offending provision illegal, invalid, or unenforceable as to any other
circumstance. If feasible, the offending provision shall be considered modified
so that it becomes legal, valid and enforceable. If the offending provision
cannot be so modified. It shall be considered deleted from this Agreement.
Unless otherwise required by law, the illegality, invalidity or unenforceability
of any provision of this Agreement shall not affect the legality, validity or
enforceability of any other provision of this Agreement.

       

      Successors and Assigns.
Subject to any limitations stated in this Agreement on transfer of Grantor’s
Interest this Agreement shall be binding upon and Inure to the benefit of the
parties their successors and assigns. If ownership of the Collateral becomes
vested in a person other than Grantor, lender. without notice to Grantor, may
deal with Grantor’s successors with reference to this Agreement end the
Indebtedness by way of forbearance or extension without releasing Grantor from
the obligations of this Agreement or liability under the
Indebtedness.

       

      Survival of Representations and
Warranties. All representations, warranties, and agreements made by
Grantor in this Agreement shall survive the execution and delivery of this
Agreement shall be continuing in nature and shall remain in full force and
effect until such time as Grantor’s Indebtedness shall be paid in
full.

       

      Time is of the Essence. Time
is of the essence in the performance of this Agreement.

       

      DEFINITIONS. The following
capitalized words and terms shall have the following meanings when used in this
Agreement. Unless specifically stated to the contrary, all references to dollar
amounts shall mean amounts in lawful money of the United States of America.
Words and terms used in the singular shall include the plural, and the plural
shall include the singular, as the context may require. Words and terms not
..otherwise defined in this Agreement shall have the meanings attributed to such
terms in the Uniform Commercial Code:

       

      Agreement. The word
“Agreement” means this Commercial Security Agreement as this Commercial Security
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Commercial Security Agreement from time
to time.

       

      Borrower. The word “Borrower”
means LABWIRE, INC. end includes all co-signers and co-makers signing the Note
and all their successors and assigns.

       

      Collateral. The word
‘Collateral” means ell of Grantor’s right, title and interest in and to all the
Collateral as described in the Collateral Description section of this
Agreement.

       

      Default. The word “Default”
means the Default set forth in this Agreement in the section titled
“Default”.

       

      Environmental Laws. The words
“Environmental Laws” mean any and all state, federal and local statutes,
regulations and ordinances relating to the protection of human health or the
environment, including without limitation the Comprehensive Environmental
Response. Compensation and Liability Act of 1980, as amended. 42 U.S.C, Section
9601. et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of
1986. Pub. L. No. 99·499 ‘‘‘SARA “I, the Hazardous Materials Transportation Act,
49 U.S.C. Section 1801, et seq. the Resource Conservation and Recovery Act. 42
U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules
or regulations adopted pursuant thereto.

       

      Event of Default. The words
“Event of Default” mean any of the events of default set forth in this Agreement
in the default section of this Agreement.

      
        
           

        

        
           

          
            

          

        

        
           

          
            
              
                	
                        Loan
      No: 9002

                      	
                        COMMERCIAL
      SECURITY AGREEMENT

                        
                          (Continued)

                        

                      	
                        Page
      6 of 6

                      

              

            

            
               

            

          

        

      

       

      

       

      Grantor. The word “Grantor”
means LABWIRE, INC.

       

      Guarantor. The word
“Guarantor” means any guarantor, surety, or accommodation party of any or all of
the Indebtedness.

       

      Guaranty. The word “Guaranty”
means the guaranty from Guarantor to Lender, including without limitation a
guaranty of all or part of the Note.

       

      Hazardous Substances. The
words “Hazardous Substances” mean materials that because of their quantity,
concentration or physical, chemical or infectious characteristics, may cause or
pose a present or potential hazard to human health or the environment when
improperly used, treated, stored. disposed of, generated, manufactured,
transported or otherwise handled. The words “Hazardous Substances” are used in
their very broadest sense and include without limitation any and all hazardous
or toxic substances, materials or waste as defined by or listed under the
Environmental Laws. The term “Hazardous Substances” also includes, without
limitation, petroleum and petroleum by-products or any fraction thereof and
asbestos.

       

      Indebtedness. The word
“Indebtedness” means the indebtedness evidenced by the Note or Related
Documents, including all principal and interest together with all other
indebtedness and costs and expenses for which Grantor is responsible under this
Agreement or under any of the Related Documents. Specifically, without
limitation, Indebtedness includes all amounts that may be indirectly secured by
the Cross-Collateralization provision of this Agreement.

       

      Lender. The word “Lender”
means THE FROST NATIONAL BANK its successors and assigns.

       

      Note. The word “Note” means
the Note executed by LABWIRE, INC. in the principal amount of $241,932.71 dated
March 4, 2008, together with all renewals of, extensions of, modifications of,
refinancing of, consolidations of, and substitutions for the note or credit
agreement.

       

      Property. The word “Property”
means all of Grantor’s right, title and interest in and to all the Property as
described in the “Collateral Description” section of this
Agreement.

       

      Related Documents. The words
“Related Documents” mean all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, security deeds, collateral mortgages, and ail other
instruments, agreements and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.

       

      GRANTOR
HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT
AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED MARCH 4, 2008.

       

      

       

      GRANTOR:

       

      

       

      LABWIRE,
INC.

       

      

       

      By: //s// Dexter
Morris                                 

       

      George D.
Morris, President of LABWIRE, INC.United States Securities and Exchange Commission Edgar Filing

EXHIBIT 4.1

CERTIFICATE OF DESIGNATION

OF

SERIES J 6% REDEEMABLE CONVERTIBLE PREFERRED STOCK

OF

BAYWOOD INTERNATIONAL, INC.

Pursuant to Section 78.1955 of the

Nevada Revised Statutes

The undersigned, being the President and Chief Executive Officer of Baywood International, Inc., a corporation organized and existing under the laws of the State of Nevada (the "Company"), does hereby certify that the Board of Directors of the Company, pursuant to the authority granted to them under Article Four of the Company’s Articles of Incorporation, as amended, has adopted the following resolutions:

WHEREAS, the Articles of Incorporation of the Company, as amended, provides for a class of shares known as preferred stock, comprised of 10,000,000 shares, par value $0.001 per share, issuable from time-to-time in one or more classes;

WHEREAS, the Board of Directors of the Company is authorized to prescribe the classes, series and the number of each class or series of stock and the voting powers, designations, preferences, conversion features, restrictions and relative rights of each class or series of stock and that the foregoing may be fixed and determined by resolution of the Board of Directors, without further amendment to the Articles of Incorporation; and

WHEREAS, it is the desire of the Board of Directors of the Company, pursuant to the authority as aforesaid, to prescribe the powers, designations, preferences, conversion features, restrictions, relative rights and other matters relating to a series of the preferred stock, which shall consist of 100,000 shares of the preferred stock which the Company has the authority to issue.

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby authorizes the issuance of a new series of preferred stock to be designated "Series J 6% Redeemable Convertible Preferred Stock" (the "Series J Preferred Stock"), which shall have the following rights, powers, privileges and preferences:

ARTICLE 1

DEFINITIONS

The terms defined in this Article 1 whenever used in this Certificate of Designation have the following respective meanings:

“Affiliate” has the meaning ascribed to such term in Rule 12b-2 under the Exchange Act.  

“Board” or “Board of Directors” means the Board of Directors of the Company. 

“Business Day” means a day other than Saturday, Sunday or any day on which banks located in the State of New York are authorized or obligated to close.

“Capital Shares” or “Capital Stock” means the Common Shares and any other shares of any other class or series of capital stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Company.

“Common Shares” or “Common Stock” means shares of common stock, par value $ 0.001 per share, of the Company.

“Contingent Conversion Date” has the meaning set forth in Section 6.2(b).

 

“Conversion Notice” means a written notice of conversion substantially in the form annexed hereto as Annex I.

“Conversion Price” has the meaning set forth in Section 6.3.

“Conversion Share” means a share of Common Stock issuable upon the conversion of any Series J Preferred Stock.

“Company” means Baywood International, Inc., a Nevada corporation.

“Current Market Price” means on any date of determination the closing sale price (or if no closing sale price is reported, the average of the closing bid and closing ask prices or, if there is more than one in either case, the average of the average closing bid and closing ask prices) as reported in composite transactions for the principal United States securities exchange on which the Common Stock is traded at such time or, if the Common Stock is not listed on a United States national or regional securities exchange, as reported on the Over-The-Counter Bulletin Board, or, if not so reported, as determined by the Board in its good faith discretion.

“Dividend Period” means the period commencing on and including the Issue Date or, if a dividend has previously been paid, the day after the immediately preceding Dividend Payment Due Date, and ending on and including the immediately subsequent Dividend Payment Due Date.

“Dividend Payment Due Date” means June 30 and December 31 of each year.

“Dividend Rate” means six percent (6%) per annum, computed on the basis of a 360 day year.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

2

“Issue Date” means, as to any share of Series J Preferred Stock, the date of issuance of such share.

“Liquidation Event” has the meaning set forth in Section 5.1.

“Liquidation Preference” means, with respect to a share of the Series J Preferred Stock, cash, property or securities valued as to (i) securities, at the Current Market Price, (ii) property, as determined in the good faith discretion of the Board, and (ii) cash at the face value thereof, in an amount equal to the sum of (x) the Stated Value for such outstanding share of Series J Preferred Stock (as adjusted for any stock dividends, stock combinations or stock splits with respect to such share) plus (y) the aggregate of all accrued and unpaid dividends on such share of Series J Preferred Stock through the date of the payment of the Liquidation Preference.

“Outstanding”, when used with reference to Common Shares or Capital Shares (collectively, “Shares”), means, on any date of determination, all issued and outstanding Shares, and includes all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that any such Shares directly or indirectly owned or held by or for the account of the Company or any wholly-owned subsidiary of the Company shall not be deemed “Outstanding” for purposes hereof.

“Person” means an individual, a corporation, a partnership, an association, a limited liability company, an unincorporated business organization, a trust or other entity or organization, and any government or political subdivision or any agency or instrumentality thereof.

“SEC” means the United States Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended.

“Series J Preferred Shares” or “Series J Preferred Stock” means the shares of Series J 6% Redeemable Convertible Preferred Stock of the Company.

“Trading Day” means a day the Common Stock is traded on the principal Trading Market (as defined below). 

“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 American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.

All references to “cash” or “$” herein mean currency of the United States of America.

3

ARTICLE 2

DESIGNATION AND AMOUNT

The designation of this series, which consists of one hundred thousand (100,000) shares, shall be designated Series J 6% Redeemable Convertible Preferred Stock and the stated value thereof shall be Ten Dollars ($10) per share (the “Stated Value”).

ARTICLE 3

RANK

The Series J Preferred Stock shall rank senior to all other Capital Stock of the Company outstanding at the time of the Issue Date other than the Series I 8% Convertible Preferred Stock of the Company (the “Series I Preferred Stock”) and shall rank junior to the Series I Preferred Stock, any series of senior preferred stock outstanding at the time of the Issue Date and all outstanding indebtedness outstanding at the time of the Issue Date of the Company.  

ARTICLE 4

DIVIDENDS

4.1

Each holder of the Series J Preferred Stock shall be entitled to receive, out of funds legally available for the payment of dividends, dividends payable in cash at the Dividend Rate on the Stated Value of each share of Series J Preferred Stock on and as of each Dividend Payment Due Date with respect to each Dividend Period; provided, however, subject to the next sentence, if funds are not legally available for the payment of dividends, dividends will be paid in shares of Common Stock which shall be valued (the “Common Stock Dividend Price”) solely for such purpose at 90% of the average of the Current Market Price for the 20 consecutive Trading Days ending on the Trading Day that is immediately prior to the Dividend Payment Due Date; provided, however, that in no event shall the Common Stock Dividend Price be less than $0.85.  If the Common Stock Dividend Price would be less than $0.85, as calculated in the immediately preceding sentence (without giving effect to the second proviso thereof), the holder may elect to either (i) accept the number of shares of Common Stock calculated as if the Common Stock Dividend Price was then $0.85 as full payment of such dividend or (ii) elect to postpone any dividend payment until funds are legally available for payment of such dividends (“Elected Dividends”).  Holders of shares of Series J Preferred Stock with respect to which Elected Dividends remain outstanding shall be entitled to elect at any time to convert such Elected Dividends into Common Stock at the Common Stock Dividend Price; provided, however, that in no event shall the Common Stock Dividend Price for such purpose be less than $0.85; and provided, further, however, that if Common Stock Dividend Price would be less than $0.85, as calculated in the immediately preceding sentence (without giving effect to the second proviso thereof), the holder may elect to accept the number of shares of Common Stock calculated as if the Common Stock Dividend Price was then $0.85 as full payment of such dividend.  Dividends on the Series J Preferred Stock shall be cumulative from the date of issue, whether or not declared for any reason, including if such declaration is prohibited under any outstanding indebtedness or borrowings of the Company or any of its wholly-owned 

4

subsidiaries, or any other contractual provision binding on the Company or any of its wholly-owned subsidiaries, and whether or not there shall be funds legally available for the payment thereof.  Dividends payable on December 31, 2008 shall be calculated on a pro rata basis based on the number of days between the Issue Date and December 31, 2008.  Additionally, the final interest payment will be calculated on a pro rata basis using the date the Series J Preferred Stock is sold, transferred, converted, redeemed or other similar transaction.

4.2

Each dividend shall be payable within ten Business Days of each Dividend Payment Due Date, commencing December 31, 2008, to the holders of record of the Series J Preferred Stock, as they appear on the stock records of the Company at the close of business on the fifth Business Day immediately preceding such Dividend Payment Due Date.  Accrued and unpaid dividends for any past Dividend Period shall be paid to holders of record upon the occurrence of a Liquidation Event and upon conversion of shares of Series J Preferred Stock pursuant to Article 6. 

ARTICLE 5

LIQUIDATION PREFERENCE

5.1

Upon the occurrence of any Liquidation Event, no distribution shall be made to the holders of any shares of Capital Stock of the Company unless prior thereto, the holders of shares of Series J Preferred Stock, subject to this Article 5, shall have received the Liquidation Preference with respect to each share.  

For purposes hereof, the term “Liquidation Event” means (i)(a) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of Capital Stock of the Company, by contract or otherwise) of in excess of fifty percent (50%) of the voting securities of the Company, (b) the merger or consolidation of the Company or any wholly-owned subsidiary in one or a series of related transactions with or into another entity as a result of which the Company  ceases to exist or as a result of which the Common Stock ceases to be a class of securities registered under the Exchange Act, other than (i) a merger solely for the purpose of changing the jurisdiction of incorporation of the Company and resulting in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of common stock of the surviving entity, or (ii) a merger or consolidation pursuant to which holders of the Capital Stock of the Company immediately prior to such transaction have the right to exercise, directly or indirectly, fifty percent (50%) or more of the total voting power of all shares of the Capital Stock entitled to vote generally in elections of directors of the continuing or surviving person immediately after giving effect to such issuance, (c) the sale, lease, license or other disposition of all or substantially all the assets or any substantial asset of the Company in one or a series of related transactions, or (d) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (a), (b) or (c), or (ii) any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary.

5

5.2

Upon the occurrence of any Liquidation Event, before any distribution or payment shall be made to the holders of any junior stock and after any payments made to holders of Series I Preferred Stock and any future series of preferred stock senior in right of preference to the Series J Preferred Stock with respect to the entitlement to receive liquidation proceeds upon the occurrence of a Liquidation Event, including for avoidance of doubt the right of the Series I Preferred Stock to receive the amount it would have received pursuant to Section 5.3 of the Certificate of Designations governing the rights of the Series I Preferred Stock as if there were no shares of Series J Preferred stock outstanding at the time of such Liquidation Event, the holders of Series J Preferred Stock shall be entitled to be paid out of the assets of the Company legally available therefore the Liquidation Preference ratably with respect to each share of Series J Preferred Stock held by such holder.  If, upon any such Liquidation Event, the remaining assets of the Company legally available for payment of the aggregate amount of all Liquidation Preferences payable in respect of outstanding shares of Series J Preferred Stock (after payment of requisite liquidation distributions or payments to holders of shares Series I Preferred Stock and holders of any future series of preferred stock senior in preference to the Series J Preferred Stock), shall be insufficient to make payment in full of all Liquidation Preferences payable with respect to outstanding shares of Series J Preferred Stock, then all such remaining assets legally available therefore shall be distributed among the holders of shares of Series J Preferred Stock, ratably in proportion to the full amounts to which they would otherwise be respectively entitled.

5.3

If, upon any Liquidation Event, the remaining assets and funds of the Company legally available for payments of the aggregate amount of all Liquidation Preferences payable in respect of shares of Series J Preferred Stock outstanding (after payment of requisite liquidation distributions or payments to holders of shares of Series A Preferred Stock, Series H Preferred Stock, Series I Preferred Stock and any future series of preferred stock) shall be in excess of the amounts necessary to make payment in full of all Liquidation Preferences available with respect to any outstanding shares of Series J Preferred Stock, then all such excess assets and funds remaining and legally available for distribution shall be distributed among the holders of shares of Series J Preferred Stock at the time outstanding, the holders of outstanding shares of other preferred stock entitled to participate in the distribution to the holders of Common Stock upon a Liquidation Event (other than the Series I Preferred Stock to the extent holders thereof have already so participated), and the holders of the Common Stock, pro rata in proportion to the number of shares of Common Stock then owned or into which shares of Series J Preferred Stock or shares of any other such participating convertible preferred stock would then be convertible.

ARTICLE 6

CONVERSION OF PREFERRED STOCK; CONVERSION PRICE

6.1 

Voluntary Conversion.  

(a)  

Each share of Series J Preferred Stock may be converted, at the option of the holder thereof, at any time and from time to time into such number of Common Shares as shall be determined by dividing the Stated Value by the Conversion Price (as hereinafter defined) in effect at the time of conversion.  

6

(b)

In order for a holder of Series J Preferred Stock to convert such shares into shares of Common Stock, such holder shall surrender the certificate or certificates representing such shares of Series J Preferred Stock to be converted, to the Company, together with a Conversion Notice in the form attached as Annex A.  Each Notice of Conversion shall specify the number of shares of Series J Preferred Stock to be converted, the number of shares of Series J Preferred Stock owned prior to the conversion at issue, the number of shares of Series J Preferred Stock owned subsequent to the conversion at issue and the date on which the conversion is to be effected, which date may not be prior to the date the applicable holder delivers such Notice of Conversion to the Company (such date, the “Conversion Date”). If no such Conversion Date is specified in the Notice of Conversion, the Conversion Date shall be such date that such Notice of Conversion to the Company is deemed delivered hereunder.   If required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or its attorney duly authorized in writing.  As promptly as practicable after receipt of the Conversion Notice, the Company shall (i) issue the Common Stock issued upon conversion in accordance with the provisions of this Article 6, and (ii) cause to be mailed for delivery by overnight courier to such holder (x) a certificate or certificate(s) representing the number of Common Shares to which the Holder is entitled by virtue of such conversion, (y) cash, as provided in Section 6.5, in respect of any fraction of a Common Share issuable upon such conversion and (z) cash in the amount of accrued and unpaid dividends as of the Conversion Date.  The Conversion Notice shall constitute a contract between the holder and the Company, whereby the holder shall be deemed to subscribe for the number of Common Shares which it will be entitled to receive upon such conversion and, in payment and satisfaction of such subscription (and for any cash adjustment to which it is entitled pursuant to Section 6.5), to surrender the Series J Preferred Stock and to release the Company from all liability thereon. No cash payment aggregating less than $1.00 shall be required to be given unless specifically requested by the holder. 

(c)

Fractional Shares.  No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Series J Preferred Stock.  As to any fraction of a share which a holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.  Additionally, the Company may not issue fractional shares of Series J Preferred Stock.

(d)

Transfer Taxes.  The issuance of certificates for shares of Common Stock on conversion of this Series J Preferred Stock shall be made without charge to any holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the holder of such shares of Series J Preferred Stock and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance 

7

thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

6.2

Contingent Conversion Rights of the Company.  

(a)

At any time after November 30, 2009, in the event that the Current Market Price in effect for any 15 Trading Days in any consecutive 30-Trading Day period shall have exceeded two hundred percent (200%) of the Conversion Price, the Company may (but is not required to) cause the conversion of the Series J Preferred Stock into shares of Common Stock as shall be determined by dividing the Stated Value of each share of Series J Preferred Stock by the Conversion Price in effect at the time of conversion.  Such right may be exercised by the Company only upon written notice to the holders of the Series J Preferred Stock delivered within sixty (60) days of the end of such consecutive 30-day trading period.

(b)

All holders of record of shares of Series J Preferred Stock will be given at least fifteen (15) Business Days prior written notice of the date (the “Contingent Conversion Date”) fixed and the place designated for conversion of all shares of Series J Preferred Stock pursuant to this Section 6.2.  Such notice shall be delivered to each registered holder of Series J Preferred Stock in accordance with the terms hereof.  If required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or its attorney duly authorized in writing.  On and after the Contingent Conversion Date, all rights with respect to the Series J Preferred Stock so converted, including the rights, if any, to receive notices and to vote, will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock into which such Series J Preferred Stock has been converted, and payment of any accrued but unpaid dividends thereon.  As promptly as practicable, the Company shall (i) issue the Common Stock issued upon conversion in accordance with the provisions of this Article 6, and (ii) cause to be mailed for delivery by overnight courier to such holder (x) a certificate or certificate(s) representing the number of Common Shares to which the Holder is entitled by virtue of such conversion, (y) cash, as provided in Section 6.5, in respect of any fraction of a Common Share issuable upon such conversion and (z) cash in the amount of accrued and unpaid dividends as of the Contingent Conversion Date.

6.3 

Conversion Price.  The initial conversion price shall be $0.87 per share of Common Stock, and shall be subject to adjustment from time to time, and such conversion price as adjusted shall be likewise subject to further adjustment, as hereinafter set forth.  The term “Conversion Price” shall mean, as of any time, the conversion price of the Series J Preferred Stock at that time, as specified in this Section 6.3 in case no adjustment shall have been required, or such conversion price as adjusted pursuant to Section 6.4, as the case may be.     

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6.4

Effect on Conversion Price of Certain Events.  

(a)

If the Company, at any time while shares of Series J Preferred Stock is outstanding: (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event.  Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification.

(b)

If the Company or any wholly-owned subsidiary of the Company, at any time shall sell or grant any option to purchase or sell or grant any right to re-price, or otherwise dispose of or issue, any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then current Conversion Price (if the holder of the Common Stock or Common Stock Equivalent (as defined herein) so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights issued in connection with such issuance, be entitled to receive shares of Common Stock at a price less than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price) (such lower price, the “New Conversion Price” and such issuances, individually and collectively, a “Dilutive Issuance”), then the Conversion Price shall be reduced to equal the New Conversion Price.  Such adjustment to the Conversion Price shall be made upon each occurrence of a Dilutive Issuance (at the time of issuance).  The Company shall notify the holder in writing as soon as practicable following the issuance of any Common Stock or Common Stock Equivalent subject to this Section, indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms.  Notwithstanding the foregoing, no adjustment to the Conversion Price shall be made under this Section in respect of an Exempt Issuance.  “Exempt Issuance” means the issuance of (i) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan duly adopted by the Board of Directors of the Company or a majority of the members of a committee, the majority of which are non-employee directors, established for such purpose, among others; (ii) securities upon the exercise or exchange of or conversion of Common Stock Equivalents issued and outstanding on the date of this Certificate, provided, however, that such securities have not been amended since the date of this Certificate to increase the number of such securities or to decrease the exercise, exchange or conversion price of any such securities; (iii) securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a Person which is, (A) itself or 

9

through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds or (B) a natural person that is a control person of such operating company if the sole purpose of such issuance is to effect an acquisition of the operating company, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities; (iv) securities issuable in accordance with existing obligations of the Company to Company or subsidiary employees, officers, directors or agents and (v) securities issued to commercial banks in connection with the Company obtaining bank financing.    

 

(c)

As used in this Section, “Common Stock Equivalents” means any securities of the Company or any wholly-owned subsidiary which entitle the holder thereof to acquire Common Stock at any time, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock or other securities that entitle the holder to receive, directly or indirectly, Common Stock.

(d)

If the Company, at any time while any shares of Series J Preferred Stock are outstanding, shall distribute to all or substantially all holders of Common Stock (and not to the holders of Series J Preferred Stock) evidence of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 6.4(a)), then in each such case the Conversion Price shall be adjusted by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which (i) the denominator shall be the Current Market Price per share of Common Stock determined as of the record date mentioned above and (ii) the numerator shall be such Current Market Price per share of Common Stock on such record date less the then per share fair market value at such record date of the portion of such evidence of indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock so distributed applicable to one outstanding share of the Common Stock, which fair market value shall be reduced by the fair market value of consideration, if any, paid to the Company by holders of Common Stock in exchange for such evidence of indebtedness or assets or rights or warrants so distributed, in each case as such fair market value is determined by the Board of Directors of the Company in good faith.   

(e)

All calculations under this Section 6.4 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be.

(f)

Whenever there shall be an adjustment as provided in this Section 6.4, the Company shall within 15 Business Days thereafter cause written notice thereof to be sent to the holder in accordance with the terms hereof, which notice shall be accompanied by a certificate setting forth the number of Conversion Shares issuable and the Conversion Price thereof after such adjustment and setting forth a brief statement of the facts 

10

requiring such adjustment and the computation thereof, which certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error.

6.5

The Company shall not be required to issue fractions of shares of Common Stock or other Capital Stock of the Company upon the conversion of Series J Preferred Stock. If any fraction of a share of Capital Stock would be issuable on the conversion of Series J Preferred Stock (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the Current Market Price of such share of Common Stock on the date of conversion of Series J Preferred Stock.

6.6

Taxes.  The Company will pay all stock transfer taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series J Preferred Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series J Preferred Stock so converted were registered.

6.7

Return.  All shares of the Series J Preferred Stock converted pursuant to this Section 6, or otherwise acquired by the Company in any manner whatsoever, shall be returned to the pool of the Company’s authorized but unissued shares of undesignated preferred stock; and the Company may from time to time take such appropriate corporate action as may be necessary to reduce the number of authorized shares of Series J Preferred Stock accordingly.  

6.8

Reserve.  The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series J Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series J Preferred Stock.  The Company shall, from time to time, subject to and in accordance with applicable law, increase the authorized shares of Common Stock if at any time the number of authorized shares of Common Stock remaining unissued shall not be sufficient to permit the conversion at such time of all then outstanding Series J Preferred Stock.

6.9

Avoidance.  The Company shall not amend this Certificate of Designation, its Articles of Incorporation, its By-laws or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed by the Company pursuant to this Section 6, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the rights of the holders of Series J Preferred Stock against dilution or other impairment as provided herein.

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ARTICLE 7

REDEMPTION

7.1

Redemption Price.  At any time after November 30, 2011, the Company may redeem in cash, out of legally available funds therefor, all or any portion of the shares of Series J Preferred Stock outstanding at a per share redemption price equal to 115% of the Stated Value of such share, plus an amount equal to any accrued and unpaid dividends to the Redemption Date (as hereafter defined) with respect to such share.

7.2

Notice of Redemption.  The Company shall provide written notice of any redemption of Series J Preferred Stock to each record holder of any shares of Series J Preferred Stock subject to such redemption not more than 60 nor less than 30 calendar days prior to the date on which such redemption is to be made. The date specified in such notice for redemption is herein referred to as the "Redemption Date."

7.3

Termination of Rights.  On the Redemption Date, all rights pertaining to the Series J Preferred Stock, including, but not limited to, any right of conversion, will cease, and such Series J Preferred Stock will no longer be deemed to be outstanding. All certificates representing the Series J Preferred Stock subject to redemption will represent only the right to receive payment in accordance with the provisions of this Article 7.

7.4

Redeemed or Otherwise Acquired Shares.  Any shares of Series J Preferred Stock which are redeemed or otherwise acquired by the Company shall be canceled, may not be reissued as Series J Preferred Stock, and shall be returned to the status of authorized and unissued shares of Preferred Stock without designation as to series.

ARTICLE 8

VOTING RIGHTS

Except as otherwise provided by the Nevada Revised Statutes, each holder of shares of Series J Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series J Preferred Stock may be converted at the record date for any vote, and shall (except as otherwise expressly provided herein or as required by law) have voting rights and powers equal to the voting rights and powers of the Common Stock, voting together with the Common Stock as a single class and shall be entitled to notice of any shareholder’s meeting in accordance with the bylaws of the Company.  Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Series J Preferred Stock held by each holder may be converted) shall be rounded upward to the nearest whole number.  Holders of shares of Series J Preferred Stock shall not have cumulative voting rights.

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ARTICLE 9

MISCELLANEOUS

9.1 

Loss, Theft, Destruction of Preferred Stock.  Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of a certificate or certificates representing shares of Series J Preferred Stock and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of such certificate(s), the Company shall make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated certificate(s), new certificate(s) representing shares of Series J Preferred Stock of like tenor. The Series J Preferred Stock shall be held and owned upon the express condition that the provisions of this Section 9.1 are exclusive with respect to the replacement of mutilated, destroyed, lost or stolen certificate(s) and shall preclude any and all other rights and remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of negotiable instruments or other securities without the surrender thereof.

9.2 

Who Deemed Absolute Owner.  The Company may deem the Person in whose name the Series J Preferred Stock shall be registered upon the registry books of the Company to be, and may treat it as, the absolute owner of the Series J Preferred Stock for the purpose of receiving payment of dividends on the Series J Preferred Stock, for the conversion of the Series J Preferred Stock and for all other purposes, and the Company shall not be affected by any notice to the contrary. All such payments and such conversion shall be valid and effectual to satisfy and discharge the liability upon the Series J Preferred Stock to the extent of the sum or sums so paid or the conversion so made.

9.3 

Permits, Consents and Approvals.  The Company will (a) obtain and keep effective any and all permits, consents and approvals of Federal or state governmental agencies and authorities and make all filings under Federal and state securities laws, that are required in connection with the issuance of Series J Preferred Stock, the conversion of Series J Preferred Stock, and the issuance and delivery of the Conversion Shares issued upon conversion of Series J Preferred Stock, and (b) have the Conversion Shares, upon their issuance and eligibility for listing, listed on each securities exchange on which the Common Stock are then listed.

9.4

Withholding.  To the extent required by applicable law, the Company may withhold amounts for or on account of any taxes imposed or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Company from any payments made pursuant to the Series J Preferred Stock. 

9.5

Amendments.  No amendment or modification of this Certificate of Designation shall be binding or effective without the prior written consent of the holders of two-thirds of the Series J Preferred Stock outstanding at the time such action is taken; provided, however, that the Company may amend this Certificate of Designation from time to time without the prior consent of any holder of Series J Preferred Stock solely to increase the number of shares of Series J Preferred Stock authorized for issuance; 

13

provided, that the number of such shares so authorized does not exceed two hundred and fifty thousand (250,000).  

9.6

 Headings. The headings of the Articles and Sections of this Certificate of Designation are inserted for convenience only and do not constitute a part of this Certificate of Designation.

9.7

Severability.  If any provision of this Certificate of Designation, or the application thereof to any person or entity or any circumstance, is invalid or unenforceable, (i) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision, and (ii) the remainder of this Certificate of Designation and the application of such provision to other persons, entities or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction.

9.8

Notices. 

All notices that are required or permitted hereunder shall be in writing and shall be sufficient if personally delivered, sent by facsimile in the case of notice to the Company only, or sent by registered or certified mail or Federal Express or other nationally recognized overnight delivery service.  Any notices shall be deemed given upon the earlier of the date when received at, the day when delivered via facsimile or the third day after the date when sent by registered or certified mail or the day after the date when sent by Federal Express to, the address set forth below, unless such address is changed by notice to the other party hereto:

if to the Company:

Baywood International, Inc.

9380 E. Bahia Drive, Suite A201

Scottsdale, Arizona 85260

Attention:  Chief Executive Officer

Facsimile: (480) 483-2168

   

if to the holder:  As set forth in the register of the Company.

The Company or the holder by notice to the other party may designate additional or different addresses as shall be furnished in writing by such party.  

[Signature Page Follows]

14

IN WITNESS WHEREOF, the Company has caused this Certificate of Designation to be executed by its duly authorized officers as of December 22, 2008.

			
	         

	BAYWOOD INTERNATIONAL, INC

	 
	 
	  

	 
	 
	 

	 
	By:  

	/s/ NEIL REITHINGER

	 
	Name:

	Neil Reithinger

President and Chief Executive Officer  

	 
	Title:

15

ANNEX I

 

NOTICE OF CONVERSION

(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED STOCK)

The undersigned hereby elects to convert the number of shares of Series J 6% Redeemable Convertible Preferred Stock (the “Series J Preferred Stock”) indicated below into shares of common stock, par value $0.001 per share (the “Common Stock”), of Baywood International, Inc., a Nevada corporation (the “Corporation”), according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as may be required by the Company. No fee will be charged to the holders for any conversion, except for any transfer taxes.

Conversion calculations:

	
	Date to Effect Conversion: ______________________________________________________

	 

	Number of shares of Series J Preferred Stock owned prior to Conversion: _________________

	 

	Number of shares of Series J Preferred Stock to be Converted: __________________________

	 

	Stated Value of shares of Series J Preferred Stock to be Converted: ______________________

	 

	Number of shares of Common Stock to be Issued: ____________________________________

	 

	Applicable Conversion Price:_______________________________________ _____________

	 

	Number of shares of Series J Preferred Stock subsequent to Conversion: __________________

	 

	Address for Delivery: __________________________________________________________

		
	[HOLDER]

	 

	 

	By:

	 

	 

	Name:

	 

	Title:

16

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