Document:

ex10_1.htm

 

THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.  THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

 

 

HZO, INC.

 

SECURED CONVERTIBLE PROMISSORY NOTE

 

$1,150,000                                                                                                                                                                                       September
25, 2009

                                                 Salt
Lake City, Utah

 

FOR VALUE RECEIVED, hZo, Inc., a Delaware corporation (the “Company”), promises to pay to Zagg, Inc. (“Investor”),
or its registered assigns, in lawful money of the United States of America the principal sum of One Million One Hundred and Fifty Thousand Dollars ($1,150,000), or such lesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this Note on the unpaid principal balance at a rate equal to 0.84% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days.  All unpaid principal, together with any then unpaid and accrued
interest and other amounts payable hereunder, shall be due and payable on the earlier of (i)  February 25, 2010 (the “Maturity Date”), (ii) immediately prior to a Change of Control (as defined below) or (iii) when, upon or after the occurrence of an Event of Default (as defined below), such amounts are declared due and payable by holders of a Majority in Interest (as defined below) or made automatically due and payable
in accordance with the terms hereof.  This Note is one of the “Notes” issued pursuant to the Note and Warrant Purchase Agreement dated as of September 25, 2009 (as amended, modified or supplemented, the “Purchase Agreement”) between the Company and the Investors (as defined in the Purchase Agreement).

 

THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT (THE “SECURITY AGREEMENT”) DATED AS OF THE DATE OF THE PURCHASE AGREEMENT AND EXECUTED BY COMPANY IN FAVOR OF COLLATERAL AGENT (AS DEFINED THEREIN) FOR THE BENEFIT OF THE INVESTOR.  ADDITIONAL
RIGHTS OF INVESTOR ARE SET FORTH IN THE SECURITY AGREEMENT.

 

The following is a statement of the rights of Investor and the conditions to which this Note is subject, and to which Investor, by the acceptance of this Note, agrees:

 

1. Definitions. As used in this Note, the following capitalized terms have the following meanings:

 

(a) “Change of Control” means (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions to
which the Company is party (including, without limitation, any stock acquisition, reorganization, merger or consolidation but excluding any sale of stock for capital raising purposes) other than a transaction or series of transactions in which the holders of the voting securities of the Company outstanding immediately prior to such transaction continue to retain (either by such voting securities remaining outstanding or by such voting securities being converted into voting securities of the surviving entity or
the entity controlling such surviving entity), as a result of shares in the Company held by such holders prior to such transaction, at least fifty percent (50%) of the total voting power represented by the voting securities of the Company, such surviving entity or the entity that controls such surviving entity outstanding immediately after such transaction or series of transactions, or (ii) a sale, lease or other conveyance of all or substantially all of the assets of the Company.

 

 

 

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(b) the “Company” includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company
under this Note.

 

(c) “Event of Default” has the meaning given in Section 4 hereof.

 

(d)  “Investor” shall mean the Person specified in the introductory paragraph of this Note or any Person who shall at the time be the registered
holder of this Note. A reference to a Lien of Investor or a security agreement executed in favor of Investor shall be deemed to include a Lien granted to a collateral agent on behalf of Investor and a security agreement executed in favor of a collateral agent on behalf of Investor, respectively.

 

(e) “Lien” shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or
on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction.

 

(f) “Majority in Interest” shall mean more than fifty percent (50%) of the aggregate outstanding principal amount of the Notes issued pursuant to
the Purchase Agreement.

 

(g)  “Obligations” shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to
Investor of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note, the Purchase Agreement and the other Transaction Documents, including, all interest, fees, charges, expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable to and payable by the Company hereunder and thereunder, in each case, whether direct or indirect, absolute
or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding. Notwithstanding the foregoing, the term “Obligations” shall not include any obligations of Company under or with respect
to the Warrant (as defined below).

 

(h) “Person” shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability
company, an unincorporated association, a joint venture or other entity or a governmental authority.

 

 

 

 

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(i) “Purchase Agreement” has the meaning given in the introductory paragraph hereof.

 

(j) “Securities Act” shall mean the Securities Act of 1933, as amended.

 

(k)  “Security Agreement” has the meaning given in the introductory paragraphs to this Note.

 

(l) “Senior Indebtedness” shall mean, unless expressly subordinated to or made on a parity with the amounts due under this Note, the principal of
(and premium, if any), unpaid interest on and amounts reimbursable, fees, expenses, costs of enforcement and other amounts due in connection with, indebtedness of Company, to banks, commercial finance lenders, insurance companies, leasing or equipment financing institutions or other lending institutions regularly engaged in the business of lending money, which is for money borrowed , or purchase or leasing of equipment in the case of the lease or other equipment financing, whether or not secured.

 

(m) “Transaction Documents” shall mean this Note, each of the other Notes issued under the Purchase Agreement, the Purchase Agreement, the Warrants
issued under the Purchase Agreement (each a “Warrant,” and collectively, the “Warrants”) and the Security Agreement.

 

2. Interest.  Accrued interest on this Note shall be payable at maturity.

 

3. Prepayment. This Note may not be prepaid.

 

4. Events of Default. The occurrence of any of the following shall constitute an “Event
of Default” under this Note and the other Transaction Documents:

 

(a) Failure to Pay.  The Company shall fail to pay (i) when due any principal or interest payment on the due date hereunder or (ii) any other
payment required under the terms of this Note or any other Transaction Document on the date due and such payment shall not have been made within five days of the Company’s receipt of Investor’s written notice to the Company of such failure to pay; or

 

(b) Representations, Warranties and Covenants. Any representation, warranty, or certificate delivered by or on behalf of the Company to Investor pursuant to
the Transaction Documents, shall be false, incorrect, incomplete or misleading in any material respect when made or delivered, or any covenant made by the Company pursuant to the Transaction Documents shall be breached; or

 

(c) Other Payment Obligations. Any indebtedness under any bonds, debentures, notes or other evidences of indebtedness for money borrowed (or any guarantees thereof,
excluding this Note and the other Transactions Documents) by the Company or any of its Subsidiaries in an aggregate principal amount in excess of $50,000 is not paid when due either at its stated maturity or upon acceleration thereof, and such indebtedness is not discharged, or such acceleration is not rescinded or annulled; or

 

 

 

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(d) Voluntary Bankruptcy or Insolvency Proceedings. The Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of a receiver,
trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing; or

 

(e) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or any of
its Subsidiaries or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or any of its Subsidiaries or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 30 days of commencement.

 

5. Rights of Investor upon Default. Upon the occurrence or existence of any Event of Default (other than an Event of Default described in Sections 4(d) or
4(e)) and at any time thereafter during the continuance of such Event of Default, Investor may, with the consent of holders of a Majority in Interest, by written notice to the Company, declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding.  Upon the
occurrence or existence of any Event of Default described in Sections 4(d) and 4(e), immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding.  In addition to the foregoing remedies, upon the occurrence
or existence of any Event of Default, Investor may exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both.

 

6. Conversion.

 

(a) Automatic Conversion. In the event the Company consummates an equity financing prior to the
Maturity Date pursuant to which the Company sells shares of a series of preferred stock in a transaction or series of related transactions with an aggregate sales price of not less than $1,000,000, excluding cancellation of indebtedness or conversion of any and all convertible bridge notes which are converted into preferred stock (including the Notes), and with the principal purpose of raising capital (a “Qualified Financing”),
then this the outstanding principal amount of, and all accrued but unpaid interest under this Note shall automatically convert into Qualified Securities, as defined below, at the same price and on the same terms as the other investors purchasing such Qualified Securities in the Qualified Financing (the “Conversion Price”). The term “Qualified Securities”
means the preferred stock issued in a Qualified Financing.  In conjunction with such conversion, Investor shall become a party and shall execute all related Qualified Financing documentation.

 

 

 

 

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(b) Optional Conversion.  If the Company has not consummated a Qualified Financing prior to the Maturity Date or immediately prior to a Change of Control,
or if an Event of Default occurs, then all or a portion of the outstanding principal amount of, and all accrued but unpaid interest under, this Note shall be convertible at the option of Investor into shares of the Company’s Common Stock (the “Common Stock”), at a conversion price per share to be determined in good faith by the Company’s Board of Directors and the Investors (the “Common
Stock Conversion Price”).  The Company shall be required to provide Investor at least fifteen (15) days prior written notice of a Change of Control.

 

(c) Conversion Procedure.

 

(i) Conversion Pursuant to Section 6(a).  If this Note is automatically converted, written notice shall be delivered to Investor at the address last shown
on the records of the Company for Investor or given by Investor to the Company for the purpose of notice or, if no such address appears or is given, at the place where the principal executive office of the Company is located, notifying Investor of the conversion to be effected, specifying the Conversion Price, the principal amount of the Note to be converted, the date on which such conversion is expected to occur and calling upon such Investor to surrender to the Company, in the manner and at the place designated,
the Note.  Upon such conversion of this Note, Investor shall surrender this Note, duly endorsed, at the principal office of the Company.  At its expense, the Company shall, as soon as practicable thereafter, issue and deliver to such Investor at such principal office a certificate or certificates for the number of shares to which Investor shall be entitled upon such conversion (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to
the Company), together with any other securities and property to which Investor is entitled upon such conversion under the terms of this Note, including a check payable to Investor for any cash amounts payable as described in Section 6(c)(iii).  Any conversion of this Note pursuant to Section 6(a) shall be deemed to have been made immediately prior to the closing of the issuance and sale of shares as described in Section 6(a) and on and after such date the Persons entitled to receive the shares issuable
upon such conversion shall be treated for all purposes as the record holder of such shares and a purchaser of such shares under the Qualified Financing documentation and shall be bound by the terms of the Qualified Financing documentation.

 

(ii) Conversion Pursuant to Section 6(b).  Before Investor shall be entitled to convert this Note into shares of Common Stock pursuant to Section 6(b), it shall
surrender this Note, duly endorsed, at the principal office of the Company and shall give written notice to the Company at its principal corporate office, of the election to convert the same pursuant to Section 6(b), and shall state therein the amount of the unpaid principal amount of this Note to be converted and the name or names in which the certificate or certificates for shares of Common Stock are to be issued.  The Company shall, as soon as practicable thereafter, issue and deliver at such office
to Investor a certificate or certificates for the number of shares of Common Stock to which Investor shall be entitled upon conversion (bearing such legends as may be required by law and any applicable agreements to which the Company’s stockholders are bound, the Rights Agreement, the Voting Agreement and the Co-Sale Agreement, and in the opinion of counsel to the Company), together with a replacement Note (if any principal amount is not converted) and any other securities and property to which Investor
is entitled upon such conversion under the terms of this Note, including a check payable to Investor for any cash amounts payable as described in Section 6(c)(iii) below.  The conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of this Note, and the Person or Persons entitled to receive the shares of Common Stock upon such conversion shall be treated for all purposes as the record holder or holders of shares of such Common Stock as of
such date.

 

 

 

 

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(iii) Fractional Shares; Interest; Effect of Conversion. No fractional shares shall be issued upon conversion of
this Note.  In lieu of the Company issuing any fractional shares to Investor upon the conversion of this Note, the Company shall pay to Investor an amount equal to the product obtained by multiplying the applicable Conversion Price by the fraction of a share not issued pursuant to the previous sentence.  In addition, the Company shall pay to Investor any interest accrued on the amount converted and on the amount to be paid to the Company pursuant to the previous sentence.  Upon conversion
of this Note in full and the payment of the amounts specified in this Section 6(c)(iii), the Company shall be forever released from all its obligations and liabilities under this Note.

 

7. Successors and Assigns.  Subject to the restrictions on transfer described in Sections 9 and 10 below,
the rights and obligations of the Company and Investor shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

 

8. Waiver and Amendment.  Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the holders of a
Majority in Interest.

 

9. Restrictions on Transfer.  This Note may be transferred only in compliance with applicable United States federal and state securities laws and only
upon surrender of the original Note for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to the Company, together, if reasonably requested by the Company, with a written opinion of Investor’s United States counsel, to the effect that such transfer may be effected without registration or qualification under any United States federal or state law then in effect.  A new Note for like principal amount and interest will be
issued to, and registered in the name of, the transferee.  Interest and principal are payable only to the registered holder of this Note.  Investor agrees to provide a Form W-9 to the Company upon request.

 

Notwithstanding the provisions above, no such opinion of counsel shall be required:  (i) for any transfer of this Note or securities into which such Note may be converted in compliance with SEC Rule 144 or Rule 144A, or (ii) for any transfer of this Note or such securities by an Investor that is a partnership or a corporation
to (A) a partner of such partnership or stockholder of such corporation, (B) a controlled affiliate of such partnership or corporation, (C) a retired partner of such partnership who retires after the date hereof, (D) the estate of any such partner or stockholder, or (iii) for the transfer by gift, will or intestate succession by any Investor to his or her spouse or lineal descendants or ancestors or any trust for any of the foregoing; provided that
in each of the foregoing cases under subsections (ii) and (iii) the transferee agrees in writing to be subject to the terms of this Section 9 to the same extent as if the transferee were an original Investor hereunder.

 

10. Assignment by the Company.  Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise,
in whole or in part, by the Company without the prior written consent of the holders of a Majority in Interest.

 

11. Subordination.  The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of Company’s Senior Indebtedness, provided that, as of the date this Note is issued, the Company has no Senior Indebtedness.

 

 

 

 

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(a)           Insolvency Proceedings.  If there shall occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant
to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of Company, (i) no amount shall be paid by Company in respect of the principal of, interest on or other amounts due with respect to this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with Company
by or on behalf of the holder of this Note which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding.

 

(b)           Default on Senior Indebtedness.  If there shall occur an event of default which has been declared in writing with respect to any Senior Indebtedness, as defined therein, or in the instrument under which
it is outstanding, permitting the holder to accelerate the maturity thereof and the holder of this Note shall have received written notice thereof from the holder of such Senior Indebtedness, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Note, unless within ninety (90) days after the happening of such event of default,
the maturity of such Senior Indebtedness shall not have been accelerated.  Not more than one notice may be given to the holder of this Note pursuant to the terms of this Section 11(b) during any 360 day period.

 

12. Notices.  All notices, requests, demands, consents, instructions or other communications required or permitted hereunder shall in writing and faxed,
mailed or delivered to each party at the respective addresses of the parties as set forth in the Purchase Agreement, or at such other address or facsimile number as the Company shall have furnished to Investor in writing.  All such notices and communications will be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one business day after being delivered by facsimile (with receipt of appropriate confirmation), (iv) one business day after
being deposited with an overnight courier service of recognized standing or (v) four days after being deposited in the U.S. mail, first class with postage prepaid.

 

13. Pari Passu Notes.  Investor acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all
interest hereon shall be pari passu in right of payment and in all other respects to the other Notes issued pursuant to the Purchase Agreement or pursuant to the terms of such Notes.  In the event Investor receives payments in excess of its pro rata share of the Company’s payments to the Investors of all of the Notes, then Investor shall hold in trust all such excess payments for the benefit of the holders of the other Notes and shall pay
such amounts held in trust to such other holders upon demand by such holders.

 

14. Payment.  Payment shall be made in lawful tender of the United States.

 

15. Default Rate; Usury. During any period in which an Event of Default has occurred and is continuing, the Company shall pay interest on the unpaid principal
balance hereof at a rate per annum equal to the rate otherwise applicable hereunder plus five percent (5%).  In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note, or returned to the Company, at the election of Investor.

 

16. Expenses; Waivers.  If action is instituted to collect this Note, the Company promises to pay all costs and expenses, including, without limitation,
reasonable attorneys’ fees and costs, incurred in connection with such action.  The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument.

 

17. Governing Law.  This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the
laws of the State of Utah, without regard to the conflicts of law provisions of the State of Utah, or of any other state.

 

[Signature Page Follows]

 

 

 

 

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The Company has caused this Note to be issued as of the date first written above.

HZO, INC.

a Delaware corporation

By:   /s/Robert G. Pedersen, II                                                   

        Robert G. Pedersen II, Presidentex10_2.htm

 

HZO, INC.

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT (as amended, modified or otherwise supplemented from time to time, this “Security Agreement”), dated as of September 25, 2009 (the “Closing
Date”), is executed by hZo, Inc., a Delaware corporation, (together with its successors and assigns, “Debtor”), in favor of Collateral Agent (as defined below) on behalf of the Secured Parties listed on the signature pages hereof (the “Secured Parties”).

 

RECITALS

 

A.           Debtor has executed secured convertible promissory notes in favor of the Secured Parties, (as amended, modified or otherwise supplemented from time to time, each a “Note”
and collectively, the “Notes”).

 

B.           In order to induce each Secured Party to extend the credit evidenced by the Notes, Debtor has agreed to enter into this Security Agreement and to grant Collateral Agent, for the benefit of itself and the Secured Parties, the security interest in the Collateral (as defined
below) described below.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor hereby agrees with Collateral Agent and the Secured Parties as follows:

 

1. Definitions and Interpretation.  When used in this Security Agreement, the following terms have the following respective meanings:

 

“Collateral” has the meaning given to that term in Section 2 hereof.

 

“Lien” shall mean, with respect to any property, any security interest, mortgage, pledge, lien, claim, charge or other encumbrance in, of, or on such property or the income therefrom, including, without
limitation, the interest of a vendor or lessor under a conditional sale agreement, capital lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the UCC or comparable law of any jurisdiction.

 

“Obligations” means all loans, advances, debts, liabilities and obligations, howsoever arising, owed by Debtor to Collateral Agent and the Secured Parties of every kind and description (whether or not evidenced by any note or instrument and whether
or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of the Notes and this Security Agreement, including all interest, fees, charges, expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable to and payable by Debtor hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code
(11 U.S.C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding.

 

 

 

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“Permitted Liens” means (a) Liens for taxes not yet delinquent or Liens for taxes being contested in good faith and by appropriate proceedings for which adequate reserves have been established; (b) Liens in respect of property or assets imposed by law
which were incurred in the ordinary course of business, such as carriers’, warehousemen’s, materialmen’s and mechanics’ Liens and other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings; (c) Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social
security, and mechanic’s Liens, carrier’s Liens and other Liens to secure the performance of tenders, statutory obligations, contract bids, government contracts, performance and return of money bonds and other similar obligations, incurred in the ordinary course of business, whether pursuant to statutory requirements, common law or consensual arrangements; (d) Liens in favor of the Collateral Agent in its capacity as such arising under this Security Agreement; (e) Liens
securing obligations under a capital lease if such Liens do not extend to property other than the property leased under such capital lease; and (f) Liens upon any equipment acquired or held by Debtor to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition of such equipment, so long as such Lien extends only to the equipment financed, and any accessions, replacements, substitutions and proceeds (including insurance proceeds) thereof or thereto.

 

“UCC” means the Uniform Commercial Code as in effect in the State of Utah from time to time.

 

Unless otherwise defined herein, all terms defined in the UCC have the respective meanings given to those terms in the UCC.

 

2. Grant of Security Interest.  As security for the Obligations, Debtor hereby pledges to Collateral Agent and grants to Collateral Agent a security
interest in all right, title and interests of Debtor in and to the property described in Attachment 1 hereto, whether now existing or hereafter from time to time acquired (collectively, the “Collateral”).  Notwithstanding the foregoing, the security interest granted herein shall not extend to and the term “Collateral”
shall not include (a) any equipment and accessions, replacements and proceeds thereof, leased from or financed by third parties to the extent the contracts evidencing such lease or financing prohibit the granting by Debtor of any security interest therein and (b) any property, rights or licenses to the extent the granting of a security interest therein would be contrary to applicable law.

 

3. General Representations and Warranties.  Debtor represents and warrants to Collateral Agent and the Secured Parties that (a) Debtor is the owner
of the Collateral (or, in the case of after-acquired Collateral, at the time Debtor acquires rights in the Collateral, will be the owner thereof) and that no other person has (or, in the case of after-acquired Collateral, at the time Debtor acquires rights therein, will have) any right, title, claim or interest (by way of Lien or otherwise) in, against or to the Collateral, other than Permitted Liens; (b) upon the filing of UCC-1 financing statements in the office of the Secretary of State of the State of
Delaware, Collateral Agent has (or in the case of after-acquired Collateral, at the time Debtor acquires rights therein, will have) a first priority perfected security interest in the Collateral, except for Permitted Liens; (c) all inventory has been (or, in the case of hereafter produced inventory, will be) produced in compliance with applicable laws; and (d) all accounts receivable and payment intangibles are genuine and enforceable against the party obligated to pay the same.

 

 

 

 

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4. Covenants Relating to Collateral.  Debtor hereby agrees (a) to perform all acts that may be necessary to maintain, preserve, protect and perfect
the Collateral, the Lien granted to Collateral Agent therein, and the perfection and priority of such Lien, except for Permitted Liens; (b) not to use or permit any Collateral to be used (i) in violation in any material respect of any applicable law, rule or regulation, or (ii) in violation of any policy of insurance covering the Collateral; (c) to pay promptly when due all taxes and other governmental charges, all Liens and all other charges now or hereafter imposed upon or affecting any
Collateral; (d) not to otherwise encumber the Collateral, except for Permitted Liens; and (e) to procure, execute and deliver from time to time any endorsements, assignments, financing statements and other writings reasonably deemed necessary or appropriate by Collateral Agent to perfect, maintain and protect its Lien hereunder and the priority thereof and to deliver promptly to Collateral Agent all originals of Collateral consisting of instruments.

 

5. Authorized Action by Collateral Agent.  Debtor hereby irrevocably appoints Collateral Agent as its attorney-in-fact (which appointment is coupled
with an interest) and agrees that Collateral Agent may perform (but Collateral Agent shall not be obligated to and shall incur no liability to Debtor or any third party for failure so to do) any act which Debtor is obligated by this Security Agreement to perform, and to exercise such rights and powers as Debtor might exercise with respect to the Collateral, including the right to (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds
and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral; (d) insure, process and preserve the Collateral; (e) pay any indebtedness of Debtor relating
to the Collateral; and (f) execute UCC financing statements and other documents, instruments and agreements required hereunder; provided, however, that Collateral Agent shall not exercise any such powers granted pursuant to subsections (a) through (c) prior to the occurrence of an Event of Default (as defined in the Notes) and shall only exercise such powers during the continuance of an Event of Default.

 

6. Default and Remedies.

 

(a) Default.  Debtor shall be deemed in default under this Security Agreement upon the occurrence and during the continuance of an Event of Default.

 

(b) Remedies.  Upon the occurrence and during the continuance of any such Event of Default, Collateral Agent shall have the rights of a secured creditor
under the UCC, all rights granted by this Security Agreement and by law, including the right to: (a) require Debtor to assemble the Collateral and make it available to Collateral Agent and the Secured Parties at a place to be designated by Collateral Agent and the Secured Parties; and (b) prior to the disposition of the Collateral, store, process, repair or recondition it or otherwise prepare it for disposition in any manner and to the extent Collateral Agent and the Secured Parties deem appropriate
and in connection with such preparation and disposition, without charge, use any trademark, trade name, copyright, patent or technical process used by Debtor.  Debtor hereby agrees that ten (10) days’ notice of any intended sale or disposition of any Collateral is reasonable.  In furtherance of Collateral Agent’s rights hereunder, Debtor hereby grants to Collateral Agent an irrevocable, non-exclusive license (exercisable without royalty or other payment by Collateral Agent, but
only in connection with the exercise of remedies hereunder) to use, license or sublicense any patent, trademark, trade name, copyright or other intellectual property in which Debtor now or hereafter has any right, title or interest together with the right of access to all media in which any of the foregoing may be recorded or stored.

 

 

 

 

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7. Collateral Agent.

 

(a) Appointment.  The Secured Parties hereby appoint ZAGG, Inc. as collateral agent for the Secured Parties under this Security Agreement (in such
capacity, the “Collateral Agent”) to serve from the date hereof until the termination of the Security Agreement, provided that ZAGG, Inc. may resign upon five (5) days written notice to the Company and the Secured Parties, whereupon the holders of a majority in interest of the Notes shall promptly appoint a substitute collateral agent by written notice to the Company and the Secured
Parties.

 

(b) Powers and Duties of Collateral Agent, Indemnity by Secured Parties.

 

(i) Each Secured Party hereby irrevocably authorizes the Collateral Agent to take such action and to exercise such powers hereunder as provided herein or as requested in writing by the holders of at least a majority in interest of the
Notes in accordance with the terms hereof, together with such powers as are reasonably incidental thereto.  Collateral Agent may execute any of its duties hereunder by or through agents or employees and shall be entitled to request and act in reliance upon the advise of counsel concerning all matters pertaining to its duties hereunder and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance therewith.

 

(ii) Neither the Collateral Agent nor any of its directors, officers or employees shall be liable or responsible to any Secured Party or to Debtor for any action taken or omitted to be taken by Collateral Agent or any other such person
hereunder or under any related agreement, instrument or document, except in the case of gross negligence or willful misconduct on the part of the Collateral Agent, nor shall the Collateral Agent or any of its directors, officers or employees be liable or responsible for (i) the validity, effectiveness, sufficiency, enforceability or enforcement of the Notes, this Security Agreement or any instrument or document delivered hereunder or relating hereto; (ii) the title of Debtor to any of the Collateral
or the freedom of any of the Collateral from any prior or other liens or security interests; (iii) the determination, verification or enforcement of Debtor’s compliance with any of the terms and conditions of this Security Agreement; (iv) the failure by Debtor to deliver any instrument  or document required to be delivered pursuant to the terms hereof; or (v) the receipt, disbursement, waiver, extension or other handling of payments or proceeds made or received with respect to the
Collateral, the servicing of the Collateral or the enforcement or the collection of any amounts owing with respect to the Collateral.

 

(iii) In the case of this Security Agreement and the transactions contemplated hereby and any related document relating to any of the Collateral, each of the Secured Parties agrees to pay to the Collateral Agent, on demand, its pro
rata share of all fees and all expenses incurred in connection with the operation and enforcement of this Security Agreement, the Notes or any related agreement to the extent that such fees or expenses have not been paid by Debtor.  In the case of this Security Agreement and each instrument and document relating to any of the Collateral, each of the Secured Parties and the Debtor hereby agrees to hold the Collateral Agent harmless, and to indemnify the Collateral Agent from and against any and
all loss, damage, expense or liability which may be incurred by the Collateral Agent under this Security Agreement and the transactions contemplated hereby and any related agreement or other instrument or document, as the case may be, unless such liability shall be caused by the willful misconduct or gross negligence of the Collateral Agent.

 

 

 

 

4

 

 

 

8. Miscellaneous.

 

(a) Notices.  Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Debtor
or Collateral Agent under this Security Agreement shall be directed as set forth below (or as the recipient thereof shall otherwise have directed in writing in accordance herewith) and shall be effective (i) when sent by Federal Express or other overnight service of recognized standing, on the business day following the deposit with such service; (ii) when mailed, by registered or certified mail, postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (iii) when delivered
by hand, upon delivery; and (iv) when telecopied, upon confirmation of receipt.

 

Collateral Agent:

ZAGG, Inc.

3855 South 500 West, Suite B

Salt Lake City, UT 84115

Telephone: (801) 263-0699

Facsimile: (801) [_____________]

Attention: Robert G. Pedersen II

 

Debtor:

hZo, Inc.

3855 South 500 West, Suite J

Salt Lake City, UT 84115

Telephone:(801) 918-4343

Facsimile: (888) 291-8354

Attention: Robert G. Pedersen II

 

(b) Nonwaiver.  No failure or delay on Collateral Agent’s part in exercising any right hereunder shall operate as a waiver thereof or of any
other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right.

 

(c) Amendments and Waivers.  This Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments
signed by Debtor and Collateral Agent, provided that if the Debtor issues additional Notes after the date hereof, any purchaser of such Notes may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and thereafter shall be deemed a “Secured Party” for all purposes hereunder.  Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given.

 

(d) Assignment.  This Security Agreement shall be binding upon and inure to the benefit of Collateral Agent and Debtor and their respective successors
and assigns; provided, however, that Debtor may not sell, assign or delegate rights and obligations hereunder without the prior written consent of Collateral Agent.

 

(e) Cumulative Rights, etc.  The rights, powers and remedies of Collateral Agent under this Security Agreement shall be in addition to all rights,
powers and remedies given to Collateral Agent by virtue of any applicable law, rule or regulation of any governmental authority, or any of the Notes, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Collateral Agent’s rights hereunder.  Debtor waives any right to require Collateral Agent to proceed against any person or entity or to exhaust any Collateral or to pursue any remedy in Collateral Agent’s power.

 

 

 

5

 

 

 

(f) Expenses.  Debtor shall pay on demand all reasonable fees and expenses, including reasonable attorneys’ fees and expenses, incurred by Collateral
Agent in connection with custody, preservation or sale of, or other realization on, any of the Collateral or the enforcement or attempt to enforce any of the Obligations which is not performed as and when required by this Security Agreement.

 

(g) Entire Agreement.  This Security Agreement, each of the Notes, taken together and that certain Note and Warrant Purchase Agreement dated as of
September 25, 2009 between the Company, Collateral Agent and the Secured Parties constitute and contain the entire agreement of Debtor, Secured Parties and Collateral Agent and supersede any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter hereof.

 

(h) Governing Law.  This Security Agreement shall be governed by and construed in accordance with the laws of the State of Utah without reference to
conflicts of law rules.

 

(i) Counterparts.  This Security Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together
shall constitute one instrument.

 

(j) Termination of Security Interest.  Upon the payment in full of all Obligations, the security interest granted herein shall terminate and all rights
to the Debtor Collateral shall revert to Debtor.  Upon such termination Collateral Agent hereby authorizes Debtor to file any UCC termination statements necessary to effect such termination and Collateral Agent will execute and deliver to Debtor any additional documents or instruments as Debtor shall reasonably request to evidence such termination.

 

[Signature page follows]

 

 

 

 

6

 

 

IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be executed as of the day and year first above written.

 

DEBTOR:

HZO, INC.

a Delaware corporation

 

By:           

                      Robert
G. Pedersen II, President

Agreed and Accepted:

As Collateral Agent and Secured Party:

ZAGG, INC.

a Nevada corporation

By:                                                                

Name:                                                                           

Title:                                                                

 

 

 

 

ATTACHMENT 1

 

TO SECURITY AGREEMENT

 

All right, title, interest, claims and demands of Debtor in and to the following property:

 

(i) All goods and equipment now owned or hereafter acquired, including, without limitation, all laboratory equipment, computer equipment, office equipment, machinery, fixtures, vehicles, and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located;

 

(ii) All inventory now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is
temporarily out of Debtor’s custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above, and Debtor’s books relating to any of the foregoing;

 

(iii) All contract rights, general intangibles, health care insurance receivables, payment intangibles and commercial tort claims, now owned or hereafter acquired, including, without limitation, all patents, patent rights (and applications
and registrations therefor), trademarks and service marks (and applications and registrations therefor), inventions, copyrights, mask works (and applications and registrations therefor), trade names, trade styles, software and computer programs including source code, trade secrets, methods, processes, know how, drawings, specifications, descriptions, and all memoranda, notes, and records with respect to any research and development, goodwill, license agreements, franchise agreements, blueprints, drawings, purchase
orders, customer lists, route lists, infringements, claims, computer programs, computer disks, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind and whether in tangible or intangible form or contained on magnetic media readable by machine together with all such magnetic media;

 

(iv) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Debtor arising out of the sale or lease of goods, the licensing of technology or the rendering
of services by Debtor (subject, in each case, to the contractual rights of third parties to require funds received by Debtor to be expended in a particular manner), whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Debtor and Debtor’s books relating to any of the foregoing;

 

(v) All documents, cash, deposit accounts, letters of credit, letter of credit rights, supporting obligations, certificates of deposit, instruments, chattel paper, electronic chattel paper, tangible chattel paper and investment property,
including, without limitation, all securities (including of subsidiaries), whether certificated or uncertificated, security entitlements, securities accounts, commodity contracts and commodity accounts, and all financial assets held in any securities account or otherwise, wherever located, now owned or hereafter acquired and Debtor’s books relating to the foregoing;

 

(vi)           All other goods and personal property of Debtor, wherever located, whether tangible or intangible, and whether now owned or hereafter acquired; and

 

(vi) Any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof, including, without limitation, insurance, condemnation, requisition or similar payments and
the proceeds thereof.

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