Document:

ex10-2.htm

Exhibit 10.2

 

THIS NOTE AND THE SHARES OF SERIES I PREFERRED  SHARES ISSUABLE UPON CONVERSION HEREOF AND THE CLASS A COMMON SHARES ISSUABLE UPON THE CONVERSION OF THE SERIES I PREFERRED SHARES (THE “SECURITIES”) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THE SECURITIES MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS. DELIVERY OF THE SECURITIES MAY NOT CONSTITUTE “GOOD DELIVERY” IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA.  IF THESE SECURITIES ARE BEING SOLD AT ANY TIME THE COMPANY IS A “FOREIGN ISSUER” AS DEFINED IN RULE 902 UNDER THE 1933 ACT, A NEW NOTE CERTIFICATE REPRESENTING THE SECURITIES, BEARING NO LEGEND, THE DELIVERY OF WHICH WILL CONSTITUTE “GOOD DELIVERY” MAY BE OBTAINED FROM THE COMPANY'S TRANSFER AGENT UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN FORM SATISFACTORY TO THE COMPANY AND THE COMPANY'S TRANSFER AGENT TO THE EFFECT THAT THE SALE OF THE SECURITIES IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT.

NEUTRISCI INTERNATIONAL INC.

Senior Secured Convertible Promissory Note (the "Note")

	
Issuance Date: March 28, 2013

	
Principal Amount: USD$2,500,000.

 

For value received, NEUTRISCI INTERNATIONAL INC., a corporation incorporated in Alberta Canada with an address of Unit 2A, 4015- 1st Street S.E., Calgary, AB T2G 4X7 (the “Maker”) hereby promises to pay to the order of CHROMADEX CORPORATION, a corporation incorporated in the State of Delaware with an address of 10005 Muirlands, Suite G, Irvine, CA 92618 (together with its successors, representatives, and permitted assigns, the “Holder”), in accordance with the terms hereinafter provided, the principal amount of  Two Million Five Hundred Thousand  U.S. Dollars ($2,500,000.00), together with interest thereon.

 

The outstanding principal balance of this Note shall be due and payable as follows: (a) USD$416,667.00 shall be payable on August 15, 2013; (b) USD$416,667.00 shall be payable on November 15, 2013; (c) USD$416,667.00 shall be payable on February 15, 2014; (d) USD$416,667.00 shall be payable on May15, 2014; (e) USD$416,667.00 shall be payable on August15, 2014; and (f) USD$416,667.00 shall be payable on November 15, 2014 (the “Final Maturity Date”),  unless this Note is sooner converted or paid in accordance with the terms herein. The Maker and the Holder shall discuss in good faith a measured approach to accelerate the foregoing payment schedule based on mutually agreed upon growth and sales thresholds of the BluScience Products.

 

Upon the failure of the Maker to pay the Cash Balance (as defined in the Purchase Agreement (as defined below) to the Holder on or prior to the Cash Balance Payment Date (as defined in the Purchase Agreement, the Cash Balance will begin to accrue interest at a rate equal to 18% per annum from the Cash Balance payment Date and shall be an Event of Default under this Note. In the event that the Maker shall fail to pay the Cash Balance on or prior to the Cash Balance Payment Date to the Holder, then the outstanding principal amount of this Note shall be increased by the amount of the Cash Balance and this Note shall be payable on demand.

  

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ARTICLE I -  GENERAL TERMS

 

Section 1.1 Asset Purchase and Sale Agreement

 

This Note has been executed and delivered pursuant to Section 4.1(c) of the Asset Purchase and Sale Agreement dated March 28, 2013, between the Maker and the Holder (as amended, restated, supplemented or otherwise modified, the “Purchase Agreement”). This is the “Senior Secured Note” referenced in the Purchase Agreement.  Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement. Certain terms used herein are defined in Section 5.13 hereof.

 

Section 1.2 Interest

 

Except in an Event of Default (as defined in Section 2.1), no interest shall accrue on this Note from its original issuance date, March 28, 2013 (the “Issuance Date”), until this Note is repaid in full or converted as contemplated herein.  Notwithstanding the foregoing, upon the occurrence of an Event of Default, the Maker will pay interest to the Holder, payable on demand, on the outstanding principal balance of this Note and on all unpaid interest from the date of the Event of Default, at a per annum rate equal to the lesser of (i) eighteen percent (18%) or (ii) the maximum applicable legal rate per annum, calculated based on a 360-day year.   Interest shall be computed on the basis of a 360-day year of twelve (12) thirty-day months, compound monthly and shall start accruing on the date of an Event of Default.

 

Section 1.3 Payment of Principal; Prepayment

 

The Maker may prepay this Note in full or in part at a price equal to one hundred percent (100%) of the aggregate principal amount of this Note prepaid, plus all accrued and unpaid interest at the time of such request (the “Prepayment Price”); provided however, that the Maker deliver to the Holder a written notice of the Maker’s intent to make such prepayment at least ten (10) days prior to the date of prepayment, and that the Maker is obligated to honor all conversion requests delivered by the Holder during such ten (10) day period.

 

Section 1.4 Security Agreement

 

The obligations of the Maker hereunder are secured by: (i) a Security Agreement dated on  March 28, 2013 between the Maker and the Holder (the “Security Agreement”) and (ii) the Subsidiary Guarantee (as defined in the Purchase Agreement).  The Security Agreement and the Subsidiary Guarantee and any other subsidiary guaranty, if any, as contemplated pursuant to Section 9.1(d) of the Purchase Agreement are collectively referred to herein as the “Security Documents”.  The Security Documents, together with this Note, the Purchase Agreement, the Royalty Agreement and the Supply Agreement and all other documents or instruments in connection herewith or therewith or in furtherance hereof or thereof, are collectively referred to herein as the “Transaction Documents”.

 

Section 1.5 Payment on Non-Business Days

 

If payment shall be due on a Saturday, Sunday or a public holiday, under the laws of the State of New York or Calgary, Alberta, the payment shall be due on the next succeeding Business Day and such next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date.

 

Section 1.6 Transfer

 

Subject to the provisions of Section 5.8, this Note may be transferred, sold, pledged, hypothecated or otherwise granted as security by the Holder.

 

Section 1.7 Replacement

 

Upon receipt of a duly executed, notarized and unsecured written statement from the Holder with respect to the loss, theft or destruction of this Note (or any replacement hereof) and a standard indemnity, or, in the case of a mutilation of this Note, upon surrender and cancellation of such Note, the Maker shall issue a new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated Note.

 

  

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ARTICLE II -  EVENTS OF DEFAULT; REMEDIES

 

Section 2.1 Events of Default.

 

The occurrence of any of the following events shall be an “Event of Default” under this Note:

 

(a) the Maker defaults in any payment of (i) the principal amount when due, or (ii) interest on, or any other fees due in connection with this Note, as and when the same shall become due and payable (whether on the Maturity Date or by acceleration or otherwise); or

 

(b) the Maker fails to observe or perform any covenant or agreement contained in the Transaction Documents, which if possible to cure, is not cured within three (3) Business Days after the earliest of: (i) the date the Maker receives notice from the Holder of the occurrence thereof; (ii) the date the Maker knew of such default; or (iii) the date the Maker should have known of such default; or

 

(c) the Maker provides notice to the Holder, including by way of public announcement, at any time, of the Maker’s inability to comply (including without limitation for any of the reasons described in Section 3.7(a) hereof) or its intention not to comply with proper requests for conversion of this Note into Series I Preferred Shares (as defined in the Purchase Agreement); or

 

(d) the Maker fails to deliver the Series I Preferred on time, pursuant to the terms herein,  upon conversion of this Note; or

 

(e) the Maker fails to pay any fees or liquidated damages under  the Transaction Documents, and the failure is not remedied within five (5) Business Days after the occurrence thereof; or

 

(f) the Maker makes a representation or warranty made in the Transaction Documents, which proves to have been false or incorrect or breached on the date as of which it was made, and  results in a Material Adverse Effect; or

 

(g) the Maker defaults: (i) on any payment of any amount or amounts of the principal or interest on any Indebtedness (other than the Indebtedness hereunder), the aggregate principal amount of which Indebtedness is in excess of $25,000; or (ii) in the observance or performance of any other agreement or condition relating to any Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders or beneficiary or beneficiaries of such Indebtedness to cause with the giving of notice if required, such Indebtedness to become due prior to its stated maturity; or

 

(h) the Maker shall: (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or assets; (ii) make a general assignment for the benefit of its creditors; (iii) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect) (the "Bankruptcy Code") or under the comparable laws of any jurisdiction (foreign or domestic); (iv) file a petition seeking to take advantage of any bankruptcy, insolvency, moratorium, reorganization or other similar law affecting the enforcement of creditors’ rights generally; (v) acquiesce in writing to any petition filed against it in an involuntary case under the Bankruptcy Code or under comparable laws of any jurisdiction; (vi) issue a notice of bankruptcy or winding down of its operations or a press release regarding the same; or (vii) take any action under the laws of any jurisdiction  analogous to any of the foregoing; or

 

(i) the Maker is subject to a proceeding or case,  without its application or consent, in any court of competent jurisdiction, seeking: (i) the liquidation, reorganization, moratorium, dissolution, winding up, or composition or readjustment of its debts; (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets in connection with the liquidation or dissolution of the Maker; or (iii) similar relief, under any law providing for the relief of debtors, and such proceeding or case described in clause (i), (ii) or (iii), and shall continue undismissed, or unstayed and in effect, for a period of thirty (30) days or any order for relief shall be entered in an involuntary case under  the Bankruptcy Code or under the comparable laws of any jurisdiction against the Maker, or action under the laws of any jurisdiction analogous to any of the foregoing shall be taken with respect to the Maker and shall continue undismissed, or unstayed and in effect for a period of sixty (60) days; or

  

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(j) the Maker, upon obtaining a dual listing on a national securities exchange in the United States as contemplated pursuant to Section 9.1(c) of the Purchase Agreement, fails to instruct its transfer agent to remove any legends from shares of Common Shares eligible to be sold under Rule 144 (“Rule 144”) of the Securities Act of 1933, as amended (the “Securities Act”) and issues the un-legended certificates to the Holder, within three (3) Business Days of the Holder’s request, so long as the Holder has provided reasonable assurances to the Maker that such Common Shares can be sold pursuant to Rule 144; or

 

(k) the Maker commits any default or Event of Default under any of the Transaction Documents, or the occurrence of any event, which, with the passage of time or the giving of notice or both, would constitute a default or an Event of Default under any Transaction Document; or

 

(l) the Maker ceases to actively conduct operations relating to its current business as of the date hereof for a period of ten (10) or more consecutive Business Days in a manner consistent with past practices relating to such business; or

 

(m) any material portion of the property or assets of the Maker is seized by any government authority; or

 

(n) the Maker or any principal executive officer thereof is indicted for the commission of any criminal activity involving fraud or dishonesty; or

 

(o) the closing of a purchase, tender or exchange offer made to the holders of more than fifty percent (50%) of the outstanding Common Shares in which more than fifty percent (50%) of the outstanding Common Shares are tendered and accepted.

 

Section 2.2 ­Remedies Upon An Event of Default

 

 On and after the date that an Event of Default has occurred or is occurring, the Holder of this Note may at any time, at its option: (a) declare due and payable the following: (i) the entire unpaid principal balance of this Note and (ii) all interest accrued hereon, which shall be payable without presentment, demand, protest, or notice, all of which are hereby expressly unconditionally and irrevocably waived by the Maker; provided, that, no notice or declaration of acceleration by the Holder shall be required in case of an Event of Default as described in Section 2.1(j) or Section 2.1(k) above, the occurrence of which shall cause the outstanding principal balance and all accrued interest to become immediately due and payable; or (b) demand immediate prepayment of this Note at the Prepayment Price.

 

In addition, the Holder may exercise or otherwise enforce any of its rights, powers, privileges, remedies and interests under the Transaction Documents.  No course of delay on the part of the Holder shall operate as a waiver thereof or otherwise prejudice its rights. No remedy conferred hereby shall be exclusive of any other remedy referred to herein or now or hereafter available at law, in equity, by statute or otherwise.

 

Notwithstanding the foregoing, if an Event of Default occurs or is occurring, the Holder of this Note may at any time, at its option, demand that all or a portion of the Principal Amount, then outstanding and all accrued and unpaid interest thereon, be converted into Series I Preferred Shares at the Conversion Price (as defined in Section 3.2 hereof) per share based on the Conversion Price of the Business Day immediately preceding the date the Holder demands conversion.

 

ARTICLE III -  CONVERSION; ANTI-DILUTION; PREPAYMENT

 

Section 3.1 Conversion Option

 

At any time on or after the occurrence of an Event of Default, this Note shall be convertible (in whole or in part), at the option of the Holder (the “Conversion Option”).  The Note shall be converted into such number of fully paid and non-assessable Series I Preferred Shares as is determined by dividing (x), that portion of the outstanding principal balance plus any accrued but unpaid interest under this Note as of such date that the Holder elects to convert, by (y), the Conversion Price (the “Conversion Rate”), then in effect on the date (the “Conversion Date”) that the Holder faxes a notice of conversion (the “Conversion Notice”), duly executed, to the Maker (facsimile number (403) 252-2106, Attn.: Keith Bushfield (or current CEO, President or CFO)); however, the Conversion Price is subject to adjustment as described in Section 3.5 below.

  

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The Holder shall deliver this Note to the Maker, at the address designated in the Purchase Agreement, at such time that this Note is fully converted.  With respect to partial conversions of this Note, the Maker shall keep written records of the amount of this Note converted as of each Conversion Date, and the Maker shall issue and deliver a new certificate for the number of Series I Preferred Shares which have not been converted.

 

Section 3.2 Conversion Price

 

The term “Conversion Price” shall mean: (a) at any time prior to the Public Offering, USD$4.00, subject to adjustment under Section 3.4 and Section 3.5 hereof; or (b) at any time after the Public Offering, the price that is the product of four (4) times the lesser of: (i) the closing price of the Common Shares listed on the Stock Exchange or, (ii) if applicable, the closing bid price of the Common Shares listed a national securities exchange in the United States on the date immediately prior to the applicable Conversion Date.

 

Section 3.3 Mechanics of Conversion

 

(a) No later than three (3) Business Days after any Conversion Date, the Maker or its designated transfer agent, shall issue and deliver to the Holder, by express courier, a certificate or certificates representing the number of  Series I Preferred Shares being acquired (the “Certificates”), pursuant to the conversion of this Note (the “Delivery Date”).  If upon sending a Conversion Notice, the Certificates are not delivered to or as directed by the Holder by the Delivery Date, the Holder shall be entitled by written notice to the Maker, at any time on or before its receipt of the Certificates thereafter, to rescind such conversion.  If the conversion is rescinded, the Maker shall immediately return this Note tendered for conversion (if applicable), and the Maker and the Holder shall each be restored to their respective positions immediately prior to the delivery of the notice of revocation, except that any amounts described in Sections 3.3(b) and 3.3(c) shall be payable through the date notice of rescission is given to the Maker.

 

(b) The Maker understands that a delay in the delivery of the Certificates upon conversion of this Note beyond the Delivery Date could result in economic loss to the Holder.  If Maker fails to deliver to the Holder the Certificates by the Delivery Date, the Maker shall pay to the Holder, in cash, an amount per Business Day for each Business Day until  the Certificates are delivered, together with interest on such amount at a rate of 10% per annum, accruing until such amount and any accrued interest thereon is paid in full, equal to the greater of: (A) (i) 1% of the aggregate principal amount of the Note requested to be converted for the first five (5) Business Days after the Delivery Date and (ii) 2% of the aggregate principal amount of the Note requested to be converted for each Business Day thereafter; and (B) $1,000 per day (which shall be paid as liquidated damages and not as a penalty).  Nothing herein shall limit the Holder’s right to pursue actual damages for the Maker’s failure to deliver Certificates within the period specified herein, and the Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief).  Notwithstanding anything to the contrary contained herein, the Holder shall be entitled to withdraw a Conversion Notice, and upon such withdrawal the Maker shall only be obligated to pay the liquidated damages accrued in accordance with this section through the date the Conversion Notice is withdrawn.

 

(c) In addition to any other rights available to the Holder, if at any time after the Public Offering the Maker fails to cause its transfer agent to transmit to the Holder the  Certificates issuable upon conversion of this Note, on or before the Delivery Date, and if due to the Maker's failure the Holder is required by its broker to purchase (in an open market transaction or otherwise) Common Shares to deliver in satisfaction of a sale,  which the Holder anticipated receiving upon such conversion, the Maker shall (i) pay in cash to the Holder amount (x), the Holder’s total purchase price (including brokerage commissions, if any) for the Common Shares  purchased, exceeds (y), the amount obtained by multiplying (A) the number of shares of Common Shares issuable upon conversion of the Series I Preferred Shares issuable upon the conversion of this Note that Maker was required to deliver to the Holder and (B) the price at which the sell order giving rise to such purchase obligation was executed, and (ii) at the option of the Holder, either reinstate the portion of the Note and equivalent number of  Series I Preferred Shares for which conversion was not honored or deliver to the Holder the number of Series I Preferred Shares that would have been issued had the Maker timely complied with its conversion and delivery obligations hereunder (a “Buy-In”).  For example, if the Holder purchases Common Shares for $11,000 to cover a Buy-In with respect to an attempted conversion of shares of Common Shares issuable upon the conversion of the Series I Preferred Shares with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (ii) the Maker shall be required to pay the Holder $1,000. The Holder shall provide the Maker written notice indicating the amounts payable to the Holder with respect to the Buy-In, together with applicable confirmations and evidence reasonably requested by the Maker.  Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and injunctive relief with respect to the Maker’s failure to deliver the Certificates on time,  upon conversion of this Note as required pursuant to the terms hereof.

  

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Section 3.4 Anti-Dilution Protection.

 

Until the Note has been converted or paid in full, if  prior to the Public Offering, the Maker issues any Common Shares Equivalents at a price less than  $1.00 per share (other than an issuance pursuant to an option agreement with an employee or otherwise to compensate an employee pursuant to an option plan an amount not to exceed to 30% of the Maker’s outstanding capital stock ), or subsequent to a Public Offering at the price per share in such Public Offering (each, a “Dilutive Issuance”), then concurrently with such Dilutive Issuance, the Conversion Price shall be reduced to the product of four (4) times the price per share of such Dilutive Issuance. For the purposes of this Agreement, “Common Shares Equivalents” shall mean, any securities of the Maker which would entitle the holder thereof to acquire at any time common shares, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, common shares.

 

Section 3.5 Adjustment of Conversion Price.

 

(a) Until this Note has been converted or paid in full, the Conversion Price shall be subject to adjustment from time to time as follows (but shall not be increased, other than pursuant to Section 3.5(a)(i) hereof):

 

(a) Adjustments for Stock Splits and Combinations.  If the Maker shall at any time after the Issuance Date, effect a stock split of the outstanding Common Shares, the applicable Conversion Price in effect immediately prior to the stock split shall be proportionately decreased.  If the Maker shall at any time after the Issuance Date, combine the outstanding Common Shares, the applicable Conversion Price in effect immediately prior to the combination shall be proportionately increased.  Any adjustments under this Section 3.5(a)(i) shall be effective at the close of business on the date the stock split or combination occurs.

 

(b) Adjustments for Certain Dividends and Distributions.  If the Maker shall at any time after the Issuance Date, make, issue or set a record date for the determination of holders of Common Shares entitled to receive a dividend or other distribution payable in Common Shares, then, and in each event, the applicable Conversion Price in effect immediately prior to such event shall be decreased as of the time of such issuance or, in the event such record date shall have been fixed, as of the close of business on such record date, by multiplying the applicable Conversion Price then in effect by a fraction:

 

	
(1)  

	
the numerator of which shall be the total number of Common Shares issued and outstanding immediately prior to the time of such issuance or the close of business on the record date; and

 

	
(2)  

	
the denominator of which shall be the total number of Common Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of  Common Shares issuable in payment of such dividend or distribution.

 

(c) Adjustment for Other Dividends and Distributions.  If the Maker shall at any time after the Issuance Date, make, issue or set a record date for the determination of holders of Common Shares entitled to receive a dividend or other distribution payable in other than Common Shares, then, and in each event, an appropriate revision to the applicable Conversion Price shall be made and provisions shall be made (by adjustments of the Conversion Price or otherwise) so that the holders of this Note shall receive upon conversions thereof, in addition to the number of shares of Common Shares receivable thereon, the number of securities of the Maker, which they would have received had this Note been converted into Series I Preferred Stock and the subsequent conversion of such shares into Common Shares on the date of such event and had thereafter, during the period from the date of such event to and including the Conversion Date, retained such securities (together with any distributions payable thereon during such period), giving application to all adjustments called for during such period under this section with respect to the rights of the Holder; provided, however, that if such record date shall be fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions.

  

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(d) Adjustments for Reclassification, Exchange or Substitution.  If the Common Shares issuable upon conversion of the Series I Preferred Shares issuable upon the conversion of this Note at any time after the Issuance Date change to the same or different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than by way of a stock split or combination of shares or stock dividends provided for in Sections 3.5(a)(i), 3.5(a)(ii) and 3.5(a)(iii), or a reorganization, merger, consolidation, or sale of assets provided for in Section 3.5(a)(v)), then, and in each event, an appropriate revision to the Conversion Price shall be made and provisions shall be made (by adjustments of the Conversion Price or otherwise) so that the Holder shall have the right thereafter to convert this Note into the kind and amount of shares of stock and other securities receivable upon reclassification, exchange, substitution or other change, by holders of the number  Common Shares issuable upon the conversion of the Series I Preferred Shares into which this Note may have been converted immediately prior to such reclassification, exchange, substitution or other change, all subject to further adjustment as provided herein.

 

(e) Adjustments for Reorganization, Merger, Consolidation or Sales of Assets.  If at any time after the Issuance Date there is a capital reorganization of the Maker (other than by way of a stock split or combination of shares or stock dividends or distributions provided for in Section 3.5(a)(i), 3.5(a)(ii) and 3.5(a)(iii), or a reclassification, exchange or substitution of shares provided for in Section 3.5(a)(iv)), or a merger or consolidation of the Maker with or into another Person where the holders of outstanding voting securities prior to such merger or consolidation do not own over fifty percent (50%) of the outstanding voting securities of the merged or consolidated entity, immediately after such merger or consolidation, or the sale of all or substantially all of the Maker’s properties or assets to any other Person (an “Organic Change”), then as a part of the Organic Change, (A) if the surviving entity in the Organic Change is a public company that is registered pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and its Common Shares are listed or quoted on a national exchange or the OTC Bulletin Board, an appropriate revision to the Conversion Price shall be made and provisions shall be made (by adjustments of the Conversion Price or otherwise) so that the Holder shall have the right thereafter to convert this Note into the kind and amount of shares of stock and other securities or property of the Maker or any successor corporation resulting from Organic Change, and (B) if the surviving entity in any such Organic Change is not a public company registered pursuant to the Exchange Act, or its Common Shares are not listed or quoted on the Stock Exchange, a national exchange or the OTC Bulletin Board, the Holder shall have the right to demand prepayment pursuant to Section 3.6(b) hereof.  In any such case, appropriate adjustments shall be made in the application of this section with respect to the rights of the Holder after the Organic Change to the end that the provisions of this section  (including any adjustment in the applicable Conversion Price then in effect and the number of shares of stock or other securities deliverable upon conversion of this Note) shall be applied after that event in as equivalent a manner as may be practicable.

 

(b) Record Date.  In case the Maker shall take record of the holders of its Common Shares for the purpose of entitling them to subscribe for or purchase Common Shares or Common Shares Equivalents, then the date of the issue or sale of the Common Shares shall be deemed to be the record date.

 

(c) No Impairment.  The Maker shall not, by amendment of its Articles of Incorporation, Bylaws, Operating Agreement or other constitutional documents, or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder, and will at all times in good faith, assist in carrying out all provisions under this section and take all actions as may be necessary or appropriate in order to protect the Conversion Rights of the Holder against impairment.  In the event a Holder elects to convert any portion of the Note as provided herein, the Maker cannot refuse conversion based on any claim that the Holder, or anyone associated or affiliated with the Holder, has been engaged in any violation of law, violation of an agreement  the Holder is a party to, or for any reason whatsoever, unless, an injunction from a court, or notice, restraining or adjoining the conversion of all or of the Note has been issued and the Maker posts a surety bond for the benefit of the Holder in an amount equal to one hundred thirty percent (130%) of the amount of the Note that the Holder has elected to convert. The bond shall remain in effect until the completion of the arbitration or litigation of the dispute, and the proceeds shall be payable to the Holder (as liquidated damages), in the event the Holder obtains judgment.

  

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(d) Certificates as to Adjustments.  Upon the occurrence of an adjustment or readjustment of the Conversion Price or the number of Common Shares issuable upon conversion of the Series I Preferred Shares issuable upon the conversion of this Note, the Maker, at its own expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder an adjusted certificate, showing in detail the facts upon which the adjustment or readjustment is based.  The Maker shall, upon the written request of the Holder, at any time, furnish or cause to be furnished to the Holder a certificate setting forth: i) adjustments and readjustments; ii) the applicable Conversion Price in effect at the time; and iii) the number of Common Shares and the amount, if any, of any other securities or property, which would be received upon the conversion of the Series I Preferred Shares issuable upon the conversion of this Note.  Notwithstanding the foregoing, the Maker shall not be obligated to deliver a new certificate unless the certificate's adjusted amount reflects an increase or decrease of at least one percent (1%).

 

(e) Issue Taxes.  The Maker shall pay any and all issue taxes and other taxes, excluding Canadian, federal, state or local income taxes, that may be payable in respect of any issue or delivery of Common Shares on conversion of this Note pursuant thereto; provided, however, that the Maker shall not be obligated to pay any transfer taxes resulting from any transfer requested by the Holder in connection with any such conversion.

 

(f) Fractional Shares.  No fractional  Series I Preferred Shares shall be issued upon conversion of this Note.  All fractional shares shall be rounded up or down to the nearest whole share.

 

(g) Reservation of Common Shares.  The Maker shall at all times, while this Note is outstanding, reserve and keep available from its authorized but unissued Common Shares, such number of Common Shares as is sufficient to effect the conversion of the Series I Preferred Shares issuable upon the conversion of this Note and all interest accrued thereon; provided that the number of Common Shares reserved shall at no time be less than one hundred twenty percent (120%) of the number of Common Shares for which the Series I Preferred Shares issuable upon the conversion of this Note and all interest accrued thereon are at any time convertible.  The Maker shall, from time to time in accordance with the laws of Calgary, Alberta, increase the authorized number of Common Shares, if at any time the unissued number of authorized shares is not sufficient to satisfy the Maker’s obligations under this section.

 

(h) Regulatory Compliance.  If any Common Shares reserved for the purpose of conversion the Series I Preferred Shares issuable upon the conversion of this Note or interest accrued thereon require registration or listing with or approval of any governmental authority, stock exchange or other regulatory body under any federal or state law or regulation or otherwise before such shares may be validly issued or delivered, the Maker shall, at its sole cost and expense, in good faith and as expeditiously as possible, endeavor to secure such registration, listing or approval, as the case may be.

 

Section 3.6 Prepayment.

 

(a) Prepayment Upon an Event of Default.  Notwithstanding anything to the contrary contained herein, upon the occurrence of an Event of Default described in Sections 2.1(a)-(o) hereof, the Holder shall have the right, at the Holder’s option, to require the Maker to prepay in cash all or a portion of this Note at the Prepayment Price.  Nothing in this section shall limit the Holder’s rights under Section 2.2 hereof

 

(b) Prepayment Option Upon Major Transaction.  In addition to all other rights of the Holder contained herein, upon the occurrence of a Major Transaction (as defined below), the Holder shall have the right, at the Holder’s option, to require the Maker to prepay all or a portion of this Note in cash at a price equal to the sum of (i) one hundred percent (100%) of the aggregate principal amount of this Note, plus all accrued and unpaid interest and (ii) all other amounts, costs, expenses and liquidated damages due in respect of this Note and the other Transaction Documents (the “Major Transaction Prepayment Price”).

 

(c) “Major Transaction” A Major Transaction shall be deemed to have occurred upon the occurrence of any of the following events:

  

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(a) the consolidation, merger or other business combination of the Maker with or into another Person (other than (A) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Maker or (B) a consolidation, merger or other business combination in which the Maker is the surviving entity and the holders of the  Maker’s voting power immediately prior to the transaction continue to hold, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) after the transaction;

 

(b) the sale or transfer of more than fifty percent (50%) of the Maker’s assets (based on the fair market value, as determined in good faith by the Maker’s board of directors), other than inventory, in the ordinary course of business or otherwise and in one or a related series of transactions; or

 

(c) the closing of a purchase, tender or exchange offer made to the holders of more than fifty percent (50%) of the outstanding Common Shares in which more than fifty percent (50%) of the outstanding Common Shares were tendered and accepted.

 

(d) Mechanics of Prepayment at the Option of the Holder Upon a Major Transaction.  No sooner than fifteen (15) days nor later than ten (10) days prior to the consummation of a Major Transaction, but not prior to the public announcement of such Major Transaction, the Maker shall deliver written notice thereof via facsimile and overnight courier (the “Notice of Major Transaction”) to the Holder of this Note.  At any time after receipt of the Notice of Major Transaction (or, in the event a Notice of Major Transaction is not delivered at least ten (10) days prior to a Major Transaction, at any time within ten (10) days prior to a Major Transaction), the Holder may require the Maker to prepay, effective immediately prior to the consummation of the Major Transaction, this Note by delivering written notice thereof via facsimile and overnight courier (the “Notice of Prepayment at Option of Holder Upon Major Transaction”) to the Maker. The Notice of Prepayment at Option of Holder Upon Major Transaction shall indicate (i) the principal amount of the Note that the Holder is electing to have prepaid and (ii) the Major Transaction Prepayment Price, as calculated pursuant to Section 3.6(b) above.

 

(e) Payment of Prepayment Price.  Upon the Maker’s receipt of a Notice of Prepayment at Option of Holder upon Major Transaction from the Holder, the Maker shall deliver the Major Transaction Prepayment Price immediately prior to the consummation of the Major Transaction; provided, that, the Holder’s original Note has been delivered to the Maker.  If the Maker fails to prepay the Note (other than pursuant to a dispute as to the arithmetic calculation of the Prepayment Price), in addition to any remedy the Holder may have under the Transaction Documents, the Prepayment Price payable in respect of the Note shall bear interest at the rate of two percent (2%) per month (prorated for partial months) until paid in full.  Until the Maker pays the unpaid Prepayment Price in full to the Holder, the Holder shall have the option (the “Void Optional Prepayment Option”) to, in lieu of prepayment, require the Maker to promptly return the Note to the Holder,  by sending written notice  to the Maker via facsimile (the “Void Optional Prepayment Notice”).  Upon the Maker’s receipt of the Void Optional Prepayment Notice and prior to payment of the full  Prepayment Price to the Holder: (i) the Notice of Prepayment at Option of Holder Upon Triggering Event or the Notice of Prepayment at Option of Holder Upon Major Transaction, as the case may be, shall be null and void with respect to the Note submitted for prepayment and for which the Prepayment Price has not been paid; (ii) the Maker shall immediately return any Note submitted to the Maker by the Holder for prepayment under this section which has not been paid; and (iii) the Conversion Price of the returned Note shall be adjusted to the Conversion Price that was in effect on the date the Void Optional Prepayment Notice was delivered to the Maker; provided that no adjustment shall be made if the adjustment results in an increase of the Conversion Price then in effect.  The Holder’s delivery of a Void Optional Prepayment Notice and exercise of its rights following such notice shall not affect the Maker’s obligations to make any payments which have accrued prior to the date of such notice.  Payments provided for in this section shall have priority over payments owed to other stockholders in connection with a Major Transaction.

 

(f) The Maker acknowledges that, notwithstanding the provisions of this section, the occurrence of a Major Transaction without the Holder’s consent may constitute an Event of Default and nothing in this section shall limit the Holder’s remedies in respect thereof.

  

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Section 3.7 Inability to Fully Convert.

(a) Holder’s Option if the Maker Cannot Fully Convert. In addition to the Holder’s other remedies hereunder, if, upon the Maker’s receipt of a Conversion Notice, the Maker cannot issue Series I Preferred Shares or Common Shares issuable upon the conversion of the Series I Preferred Shares for any reason except as contemplated  in Section 3.9, including, without limitation, because the Maker (i) does not have a sufficient number of Series I Preferred Shares or Common Shares issuable upon the conversion of the Series I Preferred Shares  authorized and available, or (ii) is otherwise prohibited by applicable law, rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Maker or its securities, then the Maker shall issue as many Series I Preferred Shares or Common Shares issuable upon the conversion of the Series I Preferred Shares as it is able to and, with respect to the unconverted portion of this Note, the Holder, solely at Holder’s option, can elect to:

 

(a) if the Maker’s inability to honor any conversion fully is due to Section 3.7(a)(i),  the Holder may require the Maker to prepay that portion of this Note.  For the portion that the Maker is unable to issue Series I Preferred Shares or Common Shares issuable upon the conversion of the Series I Preferred Shares in accordance with the Holder’s Conversion Notice, the Maker shall pay the Holder the value of the Series I Preferred Shares (the “Mandatory Prepayment”) at a price per share equal to the Major Transaction Prepayment Price as at the  Conversion Date (the “Mandatory Prepayment Price”);

 

(b) if the Maker’s inability to fully convert is pursuant to Section 3.7(a)(ii), the Maker is required to issue restricted  Series I Preferred Shares in accordance with the Holder's  Conversion Notice;

 

(c) void its Conversion Notice and retain or have returned, as the case may be, this Note, which was to be converted pursuant to the Conversion Notice (however, the Holder’s voiding of its Conversion Notice shall not affect the Maker’s obligations to make any payments that have accrued prior to the date of such notice); or

 

(d) exercise its Buy-In rights pursuant to and in accordance with the terms and provisions of Section 3.3(c) of this Note.

 

(b) Mechanics of Fulfilling Holder’s Election.  Upon receipt of the Conversion Notice, the Maker shall immediately notify the Holder, via facsimile, notice of the Maker’s inability to fully satisfy the Conversion Notice (the “Inability to Fully Convert Notice”).  The Inability to Fully Convert Notice shall indicate the following: (i) the reason why the Maker is unable to fully satisfy the Holder’s Conversion Notice; (ii) the amount of the Note for which conversion has been requested; and (iii) the Mandatory Prepayment Price. The Holder shall notify the Maker of its election pursuant to Section 3.7(a) by delivering written notice via facsimile to the Maker (“Notice in Response to Inability to Convert”).

 

(c) Payment of Prepayment Price.  If the Holder  elects to have its Note prepaid pursuant to Section 3.7(a)(i), the Maker shall pay the Holder the Mandatory Prepayment Price within thirty (30) days of receipt of the Holder’s Notice in Response to Inability to Convert; provided, that, prior to the Maker’s receipt of the Holder’s Notice in Response to Inability to Convert the Maker has not delivered a notice to the Holder stating, to the satisfaction of the Holder, that the event or condition resulting in the Mandatory Prepayment has been cured and that all Conversion Shares issuable to the Holder can and will be delivered to the Holder in accordance with the terms of this Note.  If the Maker fails to pay the Mandatory Prepayment Price to the Holder on a date that is five (5) Business Days following the Maker’s receipt of the Holder’s Notice in Response to Inability to Convert (other than pursuant to a dispute as to the determination of the arithmetic calculation of the Prepayment Price), in addition to any remedy the Holder may have under this Note and the Purchase Agreement, such unpaid amount shall bear interest at the rate of two percent (2%) per month (prorated for partial months) until paid in full (or, if less, the highest rate permitted by law).  Until the full Mandatory Prepayment Price is paid in full to the Holder, the Holder may: (i) void the Mandatory Prepayment with respect to that portion of the Note for which the full Mandatory Prepayment Price has not been paid; (ii) receive back such Note; and (iii) require that the Conversion Price of the returned Note be adjusted to the Conversion Price, as in effect on the date the Holder voided the Mandatory Prepayment.

 

  

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Section 3.8 No Rights as Shareholder.

 

Nothing contained in this Note shall be construed as conferring upon the Holder, prior to the conversion of this Note, the right to vote, receive dividends or to consent or receive notice as a shareholder in respect of any meeting of shareholders for the election of directors of the Maker or of any other matter, or any other rights as a shareholder of the Maker.

 

ARTICLE IV - COVENANTS

 

For so long as this Note is outstanding, without the prior written consent of the holders of at least a majority of the aggregate principal amount of this Note:

 

Section 4.1 No Liens.

 

Other than Permitted Liens, the Maker shall not enter into, create, incur, assume or suffer to exist any liens, security interests, charges, claims or other encumbrances of any kind (collectively, “Liens”) on or with respect to any of its assets now owned or hereafter acquired or any interest therein or any income or profits therefrom.

 

Section 4.2 No Indebtedness.

 

Other than Permitted Indebtedness, Indebtedness of the Maker existing on the date hereof and disclosed in the Purchase Agreement (and any refinancing of such Indebtedness on or prior to the maturity thereof in like amount) and Permitted Purchase Money Indebtedness, the Maker shall not enter into, create, incur, guarantee, assume or suffer to exist any Indebtedness.

 

Section 4.3 Compliance with Transaction Documents.

 

The Maker shall comply with its obligations under the Transaction Documents.

 

Section 4.4 Transactions with Affiliates.

 

Without the prior written consent of the Holder, the Maker shall not engage in any transactions with any officer, director, employee or any Affiliate of the Maker, including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Maker, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $25,000, other than for: (i) payment of reasonable salary for services actually rendered, as approved by the board of directors of the Maker as fair in all respects to the Maker; (ii) reimbursement for expenses incurred on behalf of the Maker; or (iii) transactions which are on substantially equivalent terms as are provided to third parties in arm’s length transactions in which such officer, director, employee or Affiliate has agreed to participate.

 

Section 4.5 No Dividends.

 

For as long as this Note is outstanding, the Maker or any subsidiary thereof shall not (i) declare or pay any dividends or make any distributions to any holder(s) of Common Shares or other equity security of the Maker or (ii) purchase or otherwise acquire for value, directly or indirectly, any shares or other equity security of the Maker or any subsidiary thereof.  For the absence of doubt, the foregoing restriction shall be inapplicable to any conversion features or cashless exercise provisions of any notes, stock or other instrument or agreement and any consideration issued in connection with amendment, waiver or cancellation of any warrants, subscription terms or rights in existence as of the date hereof.

 

Section 4.6 No Merger or Sale of Assets.

 

For so long as this Note is outstanding, the Maker or any subsidiary thereof shall not: (i) merge or consolidate or sell or dispose of all its assets or any substantial portion thereof; (ii) change its name or state or organization; (iii) commence any liquidation or dissolution; or (iv) in any way or manner alter its organizational structure or effect a change of entity.

  

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Section 4.7 Payment of Taxes, Etc.

 

The Maker shall promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Maker, except for such failures to pay that, individually or in the aggregate, have not had and would not reasonably be expected to cause a Material Adverse Effect; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Maker shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Maker will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor.

 

Section 4.8 Corporate Existence.

 

The Maker shall maintain in full force and effect its corporate or limited liability existence, as the case may be, its rights and franchises and all licenses and other rights to use property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business; provided, that, the Maker shall not be obligated to maintain any permit or license if the failure to so could not reasonably be expected to result in a Material Adverse Effect.

 

Section 4.9 Investment Company Act.

 

The Maker shall conduct its businesses in a manner so that it will not become subject to the Investment Company Act of 1940, as amended.

 

Section 4.10 Indebtedness to Affiliates.

 

For as long as this Note is outstanding, the Maker shall not make any payment on any indebtedness owed to officers, directors or Affiliates.

 

Section 4.11 Registration and Listing

 

The Company will comply with Section 9.1(c) of the Purchase Agreement.

 

Section 4.12 Reporting Requirements

 

The Maker shall furnish the following to the Holder so long as the Holder beneficially owns the Note:

 

(a)       unaudited quarterly reports as soon as practical after the document is or would have been required to be filed with the Securities and Exchange Commission (the “SEC”) containing the information required to be filed with the SEC  on Form 10-Q;

 

(b)       audited annual reports as soon as practical after the document is or would have been required to be filed with the SEC containing the information required to be filed with the SEC on Form 10-K;

 

(c)       current reports as soon as practical after the document is or would have been required to be filed with the SEC  containing the information required to be filed with the SEC on Form 8-K; and

 

(d)       copies of all notices, information and proxy statements in connection with any meetings that are, in each case, provided to holders of shares of Common Shares, contemporaneously with the delivery of such notices or information to such holders of Common Shares.

 

Section 4.13 Other Agreements

 

The Maker shall not, without the Holder's approval, enter into any agreement in which the terms of such agreement would restrict or impair the right or ability of the Maker to perform its obligations under any Transaction Document.

 

Section 4.14 Reporting Status

 

At any time after the Maker complies with Section 9.1(c) of the Purchase Agreement, and for as long as the Holder beneficially owns this Note, the Maker shall timely file the following: i) all reports required under Canadian Law; ii) all reports required by the Stock Exchange; and iii) all quarterly and annual reports on Form 10-Q and 10-K required by the SEC pursuant to the Exchange Act pursuant to Section 12(b) or 12(g).

  

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Section 4.15 Disclosure of Material Information

 

At any time after the Public Offering and for so long as the Holder beneficially owns this Note, the Maker covenants and agrees that neither it nor any other person acting on its behalf has or will provide the Holder, its agents or counsel with any information that the Maker believes constitutes material non-public information, unless prior thereto, the Holder executes a written agreement regarding the confidentiality and use of such information.  The Maker understands and confirms that the Holder shall be relying on the foregoing representations in effecting transactions in securities of the Maker.

 

Section 4.16 Amendments

 

The Maker shall not amend or waive any provision of its organizational and corporate documents in any way that would adversely affect exercise or other rights of the Holder or create a class of preferred shares that is senior to or on parity with the holders of the Series I Preferred Shares. The Maker shall not issue any Series I preferred shares to any third party other than the Holder.

 

Section 4.17 Compliance with the Law

 

The Maker shall, and shall cause each of its subsidiaries to, comply with all applicable Alberta and New York laws, rules and regulations of all federal, state and local governmental and administrative authorities (including without limitation environmental laws, rules and regulations), duly observe and conform in all material respects to all valid requirements of all governmental authorities relating to the conduct of its business or to its properties or assets, and obtain and maintain in full force and effect all licenses and permits required by all applicable governmental authorities to conduct its business and own its properties and assets.  If the Maker fails to pay all or any portion of any fee required to maintain in full force and effect all licenses and permits required by all applicable governmental authorities to conduct its business and own its properties and assets, the Holder may elect to pay all or any portion of such fees, which shall be reimbursed within ten (10) days by the Maker and shall be (i) deemed Indebtedness to the Holder owed under this Note and (ii) secured by the Security Agreement.

 

Section 4.18 Maintenance of Assets

 

The Maker shall keep its properties in good repair, working order and condition, reasonable wear and tear excepted, expect as would not reasonably be expected to cause a Material Adverse Effect, and from time to time make all necessary and proper repairs, renewals, replacements, additions and improvements thereto.

 

Section 4.19 Opinions

 

For so long as either the Holder owns this Note or any Series I Preferred Shares, at any time after the Public Offering the Maker is subject to Rule 144 and the rules and regulations promulgated under the Securities Act, the Maker will provide, at the Maker’s expense, such legal opinions in the future as are reasonably necessary for the issuance and resale of the Series I Preferred Shares issuable upon conversion of this Note pursuant to an effective registration statement, Rule 144 or an exemption from registration under the Securities Act. In the event that Series I Preferred Shares are sold in a manner that complies with an exemption from registration under the Securities Act, the Maker will promptly instruct its counsel (at the Maker’s expense) to issue to the Maker’s transfer agent an opinion permitting removal of the legend (indefinitely, if more than one year has elapsed from the date hereof) or to permit sale of the shares if pursuant to the other provisions of Rule 144.

 

ARTICLE V -  MISCELLANEOUS

 

Section 5.1 Notices.

 

Any notice, demand, request, waiver or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery, electronic mail, telecopy or facsimile at the address or number designated in the Purchase Agreement (if delivered on a Business Day during normal business hours where such notice is to be received), or the first Business Day following such delivery (if delivered other than on a Business Day during normal business hours where such notice is to be received) or (b) on the second Business Day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The Maker will give written notice to the Holder at least ten (10) days prior to the date on which the Maker takes a record (x) with respect to any dividend or distribution upon the Common Shares, (y) with respect to any pro rata subscription offer to holders of Common Shares or (z) for determining rights to vote with respect to any Organic Change, dissolution, liquidation or winding-up and in no event shall such notice be provided to such holder prior to such information being made known to the public.  The Maker will also give written notice to the Holder at least ten (10) days prior to the date on which any Organic Change, dissolution, liquidation or winding-up will take place and in no event shall such notice be provided to the Holder prior to such information being made known to the public. The Maker shall promptly notify the Holder of this Note of any notices sent or received.

  

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Section 5.2 Governing Law.

 

This Note shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any of the conflicts of law principles which would result in the application of the substantive law of another jurisdiction.  This Note shall not be interpreted or construed with any presumption against the party causing this Note to be drafted.

 

Section 5.3  Interest Rates

 

All payment obligations arising under this Note are subject to the express condition that at no time shall the Maker be obligated or required to pay interest at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum rate which the Maker is permitted by law to contract or agree to pay. If by the terms of this Note, the Maker is at any time required or obligated to pay interest at a rate in excess of such maximum rate, the applicable rate of interest shall be deemed to be immediately reduced to such maximum rate, and interest thus payable shall be computed at such maximum rate, and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of principal.

 

Section 5.3 Headings.

 

Article and section headings in this Note are included herein for purposes of convenience of reference only and shall not constitute a part of this Note for any other purpose.

 

Section 5.4 Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief.

 

The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note, at law or in equity (including, without limitation, a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a holder’s right to pursue actual damages for any failure by the Maker to comply with the terms of this Note.  Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Maker (or the performance thereof).  The Maker acknowledges that a breach by it of its obligations hereunder will cause irreparable and material harm to the Holder and that the remedy at law for any such breach may be inadequate. Therefore the Maker agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available rights and remedies, at law or in equity, to seek and obtain such equitable relief, including but not limited to an injunction restraining any such breach or threatened breach, without the necessity of showing economic loss and without any bond or other security being required.

 

Section 5.5 Enforcement Expenses

 

The Maker agrees (a) to pay all reasonable costs and expenses of the Holder in the collection and enforcement of this Note, including, without limitation, reasonable attorneys’ fees and expenses, and (b) that such costs shall be deemed Indebtedness hereunder.

 

Section 5.6 Binding Effect.

 

The obligations of the Maker and the Holder set forth herein shall be binding upon the successors and assigns of each such party, whether or not such successors or assigns are permitted by the terms hereof.

 

Section 5.7 Amendments.

 

This Note may not be modified or amended in any manner except in writing executed by the  Maker and the Holder.

 

Section 5.8 Compliance with Securities Laws.

 

The Holder of this Note acknowledges that this Note is being acquired solely for the Holder’s own account and not as a nominee for any other party, and for investment, and that the Holder shall not offer, sell or otherwise dispose of this Note except in compliance with applicable securities laws.  This Note and any Note issued in substitution or replacement therefor shall be stamped or imprinted with a legend in substantially the following form:

  

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“THIS NOTE AND THE SERIES I PREFERRED SHARES ISSUABLE UPON CONVERSION HEREOF AND THE CLASS A COMMON SHARES ISSUABLE UPON THE CONVERSION OF THE SERIES I PREFERRED SHARES (THE “SECURITIES”) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THE SECURITIES MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS. DELIVERY OF THE SECURITIES MAY NOT CONSTITUTE “GOOD DELIVERY” IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA.  IF THESE SECURITIES ARE BEING SOLD AT ANY TIME THE COMPANY IS A “FOREIGN ISSUER” AS DEFINED IN RULE 902 UNDER THE 1933 ACT, A NEW NOTE CERTIFICATE REPRESENTING THE SECURITIES, BEARING NO LEGEND, THE DELIVERY OF WHICH WILL CONSTITUTE “GOOD DELIVERY” MAY BE OBTAINED FROM THE COMPANY'S TRANSFER AGENT UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN FORM SATISFACTORY TO THE COMPANY AND THE COMPANY'S TRANSFER AGENT TO THE EFFECT THAT THE SALE OF THE SECURITIES IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT.”

 

Section 5.9 Consent to Jurisdiction.

 

The Maker and the Holder (a) hereby irrevocably submit to the exclusive jurisdiction of the United States District Court sitting in the Southern District of New York and the courts of the State of New York located in New York county for the purposes of any suit, action or proceeding arising out of or relating to this Note and (b) hereby waive, and agree not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper.  The Maker and the Holder consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under the Purchase Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing in this section shall affect or limit any right to serve process in any other manner permitted by law.

 

Section 5.10 Parties in Interest.

 

This Note shall be binding upon, inure to the benefit of and be enforceable by the Maker, the Holder and their respective successors and permitted assigns.

 

Section 5.11 Failure or Indulgence Not Waiver.

 

No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

 

Section 5.12 Waivers; Dispute Resolution.

 

Except as otherwise specifically provided herein, the Maker and all others that may become liable for all or any part of the obligations evidenced by this Note, hereby waive presentment, demand, notice of nonpayment, protest and all other demands’ and notices in connection with the delivery, acceptance, performance and enforcement of this Note, and do hereby consent to any number of renewals of extensions of time or payment hereof and agree that any such renewals or extensions may be made without notice to any such persons and without affecting their liability herein and do further consent to the release of any person liable hereon, all without affecting the liability of the other persons, firms or the Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY JURY.

 

(a) No delay or omission on the part of the Holder in exercising its rights under this Note, or course of conduct relating hereto, shall operate as a waiver of such rights or any other right of the Holder, nor shall any waiver by the Holder of any such right or rights on any one occasion be deemed a waiver of the same right or rights on any future occasion.

  

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(b) THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.

 

Section 5.13 Definitions.

 

Terms used herein and not defined shall have the meanings set forth in the Purchase Agreement.  For the purposes hereof, the following terms shall have the following meanings:

 

“Common Shares” shall mean the Class “A” common shares of the Maker.

 

 “Indebtedness” means: (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations in respect of letters of credit, bankers acceptances, current swap agreements, interest rate hedging agreements, interest rate swaps, or other financial products; (c) all capital lease obligations that exceed $25,000 in the aggregate in any fiscal year (d) all obligations or liabilities secured by a lien or encumbrance on any asset of the Maker, irrespective of whether such obligation or liability is assumed; (e) all obligations for the deferred purchase price of assets, together with trade debt and other accounts payable that exceed $25,000 in the aggregate in any fiscal year; (f) all synthetic leases; and (g) any obligation guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse) any of the foregoing obligations of any other person; provided, however, Indebtedness shall not include usual and customary trade debt incurred in the ordinary course of business and endorsements for collection or deposit in the ordinary course of business.

 

“Material Adverse Effect” means any material adverse effect on or to any of (a) the business, assets, operations, prospects or condition (financial or otherwise) of the Maker, (b) the ability of the Maker to perform any of its obligations hereunder or under the Transaction Documents, or (c) the rights and benefits available to the Holder hereunder and the Transaction Documents.

 

“Preferred Shares" or "Series I Preferred Shares" means the series I preferred shares of the Maker, which may from time to time convert into four Common Shares for each Preferred Share surrendered.

 

“Permitted Indebtedness” means

 

(a) Unsecured Indebtedness which may, from time to time be incurred or guaranteed by the Maker which in the aggregate principal amount does not exceed $10,000;

 

(b) Indebtedness relating to capital leases in an aggregate amount not to exceed $10,000 (secured only by the equipment subject to such leases);

 

(c) accounts or notes payable arising out of the purchase of merchandise, supplies, equipment, software, computer programs or services in the ordinary course of business;

 

(d) Permitted Subordinated Indebtedness (as defined below); or

 

(e) Indebtedness outstanding on the date hereof and disclosed in the Purchase Agreement.

 

“Permitted Lien” means the individual and collective reference to the following: (a) Liens for taxes, assessments and other governmental charges or levies not yet due or Liens for taxes, assessments and other governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the Maker contesting the same) have been established in accordance with Canadian GAAP; (b) Liens imposed by law which were incurred in the ordinary course of the Maker’s business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in the ordinary course of the Maker’s business, and which (x) do not individually or in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Maker and its consolidated subsidiaries or (y) are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing for the foreseeable future the forfeiture or sale of the property or asset subject to such Lien; (c) any Permitted Subordinated Indebtedness disclosed in the purchase Agreement; and (d) any Liens outstanding on the date hereof disclosed in the Purchase Agreement.

  

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 “Permitted Subordinated Indebtedness” means Indebtedness that: (a) is expressly subordinate in right of payment and security to this Note and the security therefor; (b) shall not mature prior to the maturity of this Note; (c) shall not permit any payment of principal thereof or interest thereon prior to the payment in full of this Note; (d) shall not be secured by any asset, agreement or other collateral, other than, in each case and on a subordinated basis, the collateral securing this Note; and (e) is subject to a subordination and intercreditor agreement among the Maker, the Holder and the holder of such Permitted Subordinated Indebtedness in form and substance satisfactory to the Maker in its sole and absolute discretion.

 

“Person” means any individual, sole proprietorship, joint venture, partnership, corporation, limited liability company, association, joint-stock company, unincorporated organization, cooperative, trust, estate, governmental entity or any other entity of any kind or nature whatsoever.

[Signature Page Follows]

  

-17-

  

 

IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed by its duly authorized officer as of the date first above indicated.

 

NEUTRISCI INTERNATIONAL INC.

By:  /s/ Keith Bushfield

        Name: Keith Bushfield

    Title: President & CEO

  

-18-

  

 

FORM OF

 

NOTICE OF CONVERSION

 

(To be Executed by the Registered Holder in order to Convert the Note)

 

The undersigned hereby elects to convert $ ________________ of the principal amount [and accrued interest thereon] of the above Note into shares of Common Shares of NeutriSci International Inc. according to the conditions hereof, as of the date written below.

 

Date of Conversion _________________________________________________________

 

Applicable Conversion Price __________________________________________________

 

Number of shares of Common Shares beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion: _________________________

 

Signature___________________________________________________________________

 

[Name]

 

Address:__________________________________________________________________

 

__________________________________________________________________ex10-3.htm

Exhibit 10.3

 

SECURITY AGREEMENT

 

This SECURITY AGREEMENT, dated as of March 28, 2013 (this “Agreement”), is by and between NEUTRISCI INTERNATIONAL INC., a corporation incorporated pursuant to the laws of the Province of Alberta (the “Company”), and  CHROMADEX CORPORATION,  a corporation incorporated pursuant to the laws of the state of Delaware (together with its successors and assigns, the “Secured Party”).

 

WHEREAS, the Secured Party is the holder of a Secured Convertible Promissory Note issued by the Company bearing even date herewith in the aggregate original principal amount of USD$2,500,000 (the “Note”) pursuant to the terms of that certain Asset Purchase and Sale Agreement dated as of March 28, 2013 by and between the Company and the Secured Party (the “Purchase Agreement”);

 

WHEREAS, in order to induce the Secured Party to sell the Purchased Assets and to accept the Note as part of the Purchase Price pursuant to Purchase Agreement, the Company has agreed to execute and deliver to the Secured Party this Agreement and other collateral documents and to grant the Secured Party, a security interest in substantially all of the assets of the Company described herein to secure the prompt payment, performance and discharge in full of the obligations of the Company under the Note, the Purchase Agreement and the other Transaction Documents; and

 

WHEREAS, all capitalized terms not otherwise specifically defined in this Agreement shall have the meanings given thereto in the Note or if not expressly defined in the Note, then in the Purchase Agreement.

 

NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

 

	
Article 1 - Certain Definitions

 

As used in this Agreement, the following terms shall have the meanings set forth in this Article 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (as defined below), including without limitation the terms “account,” “as-extracted collateral,” “chattel paper,” “commercial tort claim,” “deposit account,” “document,” “equipment,” “fixtures,” “general intangibles,” “goods,” “instruments,” “inventory,” “investment property,” “letter-of-credit rights,” “proceeds,” “securities” and “supporting obligations,” shall have the respective meanings given such terms in Article 9 of the UCC.

 

1.1 “Collateral” means the collateral in which the Secured Party is granted a security interest by this Agreement and which shall include the following personal property of the Company, whether presently owned or existing or hereafter acquired or coming into existence, wherever situated, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith:

 

	
1.1.1  

	
All goods, including, without limitation, (A) all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, rigs, drilling equipment, towers, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items used and useful in connection with the Company's businesses and all improvements thereto; and (B) all inventory, including all materials, work in process and finished goods;

 

	
1.1.2  

	
All general intangibles, including, without limitation, all contract rights, choses in action, partnership interests, membership interests, stock or other securities, rights under any of the Organizational Documents (as defined below), licenses, distribution and other agreements, computer software (whether “off-the-shelf,” licensed from any third party or developed by the Company), computer software development rights, leases, franchises, licenses, permits, deposits, customer lists, quality control procedures, grants and rights, goodwill, Intellectual Property (as defined below), and all income tax, insurance and other refunds;

  

-1-

  

 

	
1.1.3  

	
All accounts, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each account, including any right of stoppage in transit;

 

	
1.1.4  

	
All documents, letter-of-credit rights, instruments and chattel paper;

 

	
1.1.5  

	
All commercial tort claims;

 

	
1.1.6  

	
All deposit accounts and all cash (whether or not deposited in such deposit accounts);

 

	
1.1.7  

	
All investment property;

 

	
1.1.8  

	
All as-extracted collateral;

 

	
1.1.9  

	
All supporting obligations;

 

	
1.1.10  

	
All files, records, books of account, business papers, and computer programs; and

 

	
1.1.11  

	
the products and proceeds of all of the foregoing Collateral set forth in clauses 1.1.1 through and including 1.1.10, above.

 

Notwithstanding the foregoing, nothing herein shall be deemed to constitute an assignment of any asset which, in the event of an assignment, becomes void by operation of applicable law or the assignment of which is otherwise prohibited by applicable law (in each case to the extent that such applicable law is not overridden by Sections 9-406, 9-407 and/or 9-408 of the UCC or other similar applicable law); provided, however, that to the extent permitted by applicable law, this Agreement shall create a valid security interest in such asset and, to the extent permitted by applicable law, this Agreement shall create a valid security interest in the proceeds of such asset.

 

1.2 “Intellectual Property” means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation: (i) all copyrights arising under the laws of the United States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office; (ii) all letters patent of the United States, any other country or any political subdivision thereof, all reissues and extensions thereof, and all applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof; (iii) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade dress, service marks, logos, domain names and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common law rights related thereto; (iv) all trade secrets arising under the laws of the United States, any other country or any political subdivision thereof; (v) all rights to obtain any reissues, renewals extensions of the foregoing; (vi) all licenses for any of the foregoing; and (vii) all causes of action for infringement of the foregoing.

 

1.3 “Necessary Endorsement” means undated stock powers endorsed in blank or other proper instruments of assignment duly executed and such other instruments or documents as the Secured Party may reasonably request.

 

1.4 “Obligations” means all of the liabilities and obligations (primary, secondary, direct, contingent, sole, joint or several) due or to become due, or that are now or may be hereafter contracted or acquired, or owing, of the Company to the Secured Party under this Agreement, the Note, the Purchase Agreement, the other Transaction Documents, and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or un-liquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Party as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time. Without limiting the generality of the foregoing, the term “Obligations” shall include, without limitation: (i) principal of, and interest on, the Note and the loans extended pursuant thereto; (ii) any and all other fees, legal fees and other expenses, indemnities, costs, obligations and liabilities of the Company from time to time under or in connection with this Agreement, the Note, the Purchase Agreement, the other Transaction Documents, and any other instruments, agreements or other documents executed and/or delivered in connection herewith or therewith; and (iii) all amounts (including but not limited to post-petition interest) in respect of the foregoing that would be payable but for the fact that the obligations to pay such amounts are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involving the Company.

  

-2-

  

 

1.5 “Organizational Documents” means, with respect to the Company, the documents by which the Company was organized (such as a certificate of incorporation, certificate of limited partnership or articles of organization, and including, without limitation, any certificates of designation for preferred stock or other forms of preferred equity) and which relate to the internal governance of the Company (such as bylaws, a partnership agreement or an operating, limited liability or members agreement).

 

1.6 “Pledged Securities” is defined in Article 3 below.

 

1.7 “UCC” means the Uniform Commercial Code of the State of New York and/or any other applicable law of any state or states which have jurisdiction with respect to all, or any portion of, the Collateral or this Agreement, from time to time. It is the intent of the parties that defined terms in the UCC should be construed in their broadest sense so that the term “Collateral” will be construed in its broadest sense. Accordingly if there are, from time to time, changes to defined terms in the UCC that broaden the definitions, they are incorporated herein, and if existing definitions in the UCC are broader than the amended definitions, the existing ones shall be controlling.

 

	
Article 2 - Grant of Security Interest in Collateral

 

As an inducement for the Secured Party to extend the loans as evidenced by the Note and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Company hereby unconditionally and irrevocably pledges, grants and hypothecates to the Secured Party, a security interest in and to, a lien upon, and a right of set-off against, all of its right, title and interest of whatsoever kind and nature in and to the Collateral (a “Security Interest” and collectively, the “Security Interests”).

 

	
Article 3 - Pledged Securities

 

The capital stock and other equity interests listed on Schedule 3 hereto (the “Pledged Securities”) represent all of the capital stock and other equity interests held by the Company, including without limitation in and to any and all subsidiaries of the Company, and represent all capital stock and other equity interests owned, directly or indirectly, by the Company.  All of the Pledged Securities are validly issued, fully paid and non-assessable, and the Company is the legal and beneficial owner of the Pledged Securities, free and clear of any lien, security interest or other encumbrance. The Company shall cause the pledge and security interest of the Secured Party to be duly noted in its books and records.

 

	
Article 4 - [INTENTIONALLY OMITTED]

 

	
Article 5 - Representations, Warranties and Covenants

 

Except as set forth under the corresponding section of the disclosure schedules delivered to the Secured Party concurrently herewith (the “Disclosure Schedules”), which Disclosure Schedules shall be deemed a part hereof, the Company represents and warrants to, and covenants and agrees with, the Secured Party as follows:

 

5.1 The Company has the requisite corporate, partnership, limited liability company or other power and authority to enter into this Agreement and otherwise to carry out its obligations hereunder. The execution, delivery and performance by the Company of this Agreement and the filings contemplated herein have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. This Agreement has been duly executed by the Company. This Agreement constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization and similar laws of general application relating to or affecting the rights and remedies of creditors and by general principles of equity.

 

5.2 The Company has no place of business or offices where its respective books of account and records are kept (other than temporarily at the offices of their attorneys or accountants) or places where Collateral is stored or located, except as set forth on Schedule 5.2 attached hereto. Except as disclosed on Schedule 5.2, none of such Collateral is in the possession of any consignee, bailee, warehouseman, agent or processor.

 

5.3 Except as disclosed on Schedule 5.3, the Company is the sole owner of the Collateral, free and clear of any liens, security interests, encumbrances, rights or claims, other than those created pursuant to this Agreement and is fully authorized to grant the Security Interests. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that will be filed in favor of the Secured Party pursuant to this Agreement or the other Transaction Documents) covering or affecting any of the Collateral. As long as this Agreement shall be in effect, the Company shall not execute and shall not knowingly permit to be on file in any such office or agency any other financing statement or other similar document or instrument (except to the extent filed or recorded in favor of the Secured Party pursuant to the terms of this Agreement).

  

-3-

  

 

5.4 No written claim has been received by the Company that any Collateral or the Company’s use of any Collateral violates the rights of any third party. There has been no adverse decision to the Company’s claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to the Company’s right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or, to the best knowledge of the Company, threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority.

 

5.5 The Company shall at all times maintain its books of account and records relating to the Collateral at its principal place of business (except when temporarily kept at the offices of its attorneys or accountants) and its Collateral at the locations set forth on Schedule 5.2 attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Party at least 30 days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States or Canada) and (ii) evidence that appropriate financing statements under the UCC or Personal Property Security Act (Alberta) ("PPSA"), as applicable, and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interests to create in favor of the Secured Party, a valid, perfected and continuing perfected lien in the Collateral.

 

5.6 This Agreement creates in favor of the Secured Party a valid security interest in the Collateral, securing the payment and performance of the Obligations. Upon making the filings described in the immediately following paragraph, all security interests created hereunder in any Collateral which may be perfected by filing UCC or PPSA financing statements shall have been duly perfected. Except for the filing of the UCC or PPSA financing statements referred to in the immediately following paragraph, no action is necessary to create, perfect or protect the security interests created hereunder. Without limiting the generality of the foregoing, except for the filing of said financing statements, no consent of any third parties and no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for (i) the execution, delivery and performance of this Agreement, (ii) the creation or perfection of the Security Interests created hereunder in the Collateral or (iii) the enforcement of the rights of the Secured Party hereunder.

 

5.7 The Company hereby authorizes the Secured Party to file one or more financing statements under the UCC and PPSA with respect to the Security Interests with the proper filing and recording agencies in any jurisdiction deemed proper by it, which UCC and PPSA financing statement may describe the collateral as “all assets.”

 

5.8 The execution, delivery and performance of this Agreement by the Company do not (i) violate any of the provisions of any Organizational Documents of the Company or any judgment, decree, order or award of any court, governmental body or arbitrator or any applicable law, rule or regulation applicable to the Company or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing the Company’s debt or otherwise) or other understanding to which the Company is a party or by which any property or asset of the Company is bound or affected. If any, all required consents (including, without limitation, from stockholders or creditors of the Company) necessary for the Company to enter into and perform its Obligations hereunder have been obtained.

 

5.9 The Company shall at all times maintain the liens and Security Interests provided for hereunder as valid and perfected liens and security interests in the Collateral in favor of the Secured Party until this Agreement and the Security Interests hereunder shall be terminated pursuant to Article 14 hereof. The Company hereby agrees to use commercially reasonable efforts to defend the same against the claims of any and all persons and entities and to safeguard and protect all Collateral for the account of the Secured Party. At the reasonable request of the Secured Party, the Company will sign and deliver to the Secured Party at any time or from time to time one or more financing statements pursuant to the UCC or PPSA in form reasonably satisfactory to the Secured Party and will pay the cost of filing the same in all public offices wherever filing is necessary to effect the rights and obligations provided for herein. Without limiting the generality of the foregoing, the Company shall pay all reasonable fees, taxes and other amounts necessary to maintain the Collateral and the Security Interests hereunder, and the Company shall obtain and furnish to the Secured Party from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain in accordance with this Agreement the priority of the Security Interests hereunder.

  

-4-

  

 

5.10 The Company will not transfer, pledge, hypothecate, encumber, license, sell or otherwise dispose of any of its assets, including without limitation all or any portion of the Collateral, without the prior written consent of the Secured Party.  Notwithstanding the foregoing, provided that no Event of Default (as defined in the Note) has occurred (unless such Event of Default has been waived by the Secured Party) or is continuing, the Company may:

 

	
5.10.1  

	
Sell inventory in the ordinary course of business; and

 

	
5.10.2  

	
Sell or otherwise dispose of equipment; provided, that, (A) such equipment is obsolete, (B) such sales are consistent with past practices, and (C) such sales do not total more than fifty thousand dollars (USD$50,000) in the aggregate in any calendar year.

 

5.11 The Company shall keep and preserve its equipment, inventory and other tangible Collateral in good condition, repair and order and shall not operate or locate any such Collateral (or cause to be operated or located) in any area excluded from insurance coverage.

 

5.12 The Company shall maintain with financially sound and reputable insurers, insurance with respect to the Collateral, including Collateral hereafter acquired, against loss or damage of the kinds and in the amounts customarily insured against by entities of established reputation having similar properties similarly situated and in such amounts as are customarily carried under similar circumstances by other such entities and otherwise as is prudent for entities engaged in similar businesses but in any event sufficient to cover the full replacement cost thereof. The Company shall cause each insurance policy issued in connection herewith to provide, and the insurer issuing such policy to certify to the Secured Party that: (a) the Secured Party will be named as lender loss payee (mortgagee, as applicable) and additional insured under each such insurance policy; (b) if such insurance be proposed to be cancelled or materially changed for any reason whatsoever, such insurer will promptly notify the Secured Party and such cancellation or change shall not be effective as to the Secured Party for at least thirty (30) days after receipt by the Secured Party of such notice, unless the effect of such change is to extend or increase coverage under the policy; and (c) the Secured Party will have the right (but no obligation) at its election to remedy any default in the payment of premiums within thirty (30) days of notice from the insurer of such default. If no Event of Default (as defined in the Note) exists and if the proceeds arising out of any claim or series of related claims do not exceed USD$100,000, loss payments in each instance will be applied by the Company to the repair and/or replacement of property with respect to which the loss was incurred to the extent reasonably feasible, and any loss payments or the balance thereof remaining, to the extent not so applied, shall be payable to the Company. If no Event of Default exists and such proceeds exceed USD$100,000, such proceeds shall be available to the Company solely for and shall be used by the Company solely for the repair or replacement of the loss or damage giving rise to such proceeds within sixty (60) days of receipt thereof. Prior to expenditure by the Company, any such proceeds in the Company's possession shall be segregated from the Company’s other funds. The Company shall promptly provide the Secured Party with a detailed written report of its use of any such proceeds. Proceeds not so used by the Company within such sixty (60) day period shall be immediately remitted to the Secured Party for application to the Obligations. After an Event of Default occurs, all proceeds then or thereafter in existence shall be paid to the Secured Party (for application to the Obligations) and, if received by the Company, shall be held in trust for the Secured Party and promptly paid over to the Secured Party (for application to the Obligations) unless otherwise directed in writing by the Secured Party. Copies of such policies or the related certificates, in each case, naming the Secured Party as lender loss payee and additional insured shall be delivered to the Secured Party at least annually and at the time any new policy of insurance is issued.

 

5.13 The Company shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Party promptly, in sufficient detail, of any material adverse change in the Collateral, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Party’s security interest therein.

 

5.14 The Company shall promptly execute and deliver to the Secured Party such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Secured Party may from time to time , upon advice of its counsel, request as necessary to perfect, protect or enforce the Secured Party's security interest in the Collateral in which the Secured Party has been granted a security interest hereunder, substantially in form and substance reasonably acceptable to the Secured Party.

 

5.15 The Company shall permit the Secured Party and their representatives and agents reasonable access to inspect the Collateral during normal business hours, upon reasonable prior notice and without undue interference with the Company’s business operations, and to make copies of records pertaining to the Collateral as may be reasonably requested by the Secured Party from time to time.

  

-5-

  

 

5.16 The Company shall take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral.

 

5.17 The Company shall promptly notify the Secured Party in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Company that would have a material adverse effect on the value of the Collateral, the Security Interest or the rights and remedies of the Secured Party hereunder.

 

5.18 All information heretofore, herein or hereafter supplied to the Secured Party by or on behalf of the Company with respect to the Collateral is accurate and complete in all material respects as of the date furnished.

 

5.19 The Company shall at all times preserve and keep in full force and effect its valid existence and good standing and any rights and franchises material to its businesses.

 

5.20 The Company will not change its name, type of organization, jurisdiction of organization, organizational identification number (if it has one), legal or corporate structure, or identity, or add any new fictitious name unless it provides at least 30 days' prior written notice to the Secured Party of such change and, at the time of such written notification, the Company provides any financing statements or fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.

 

5.21 The Company may not consign any of its inventory or sell any of its inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale.

 

5.22 The Company may not relocate its chief executive office to a new location without providing 30 days' prior written notification thereof to the Secured Party and so long as, at the time of such written notification, the Company provides any financing statements or fixture filings necessary to perfect and continue the perfection of the Security Interests granted and evidenced by this Agreement.

 

5.23 The Company was organized and remains organized solely under the laws of the province set forth next to the Company’s name in Schedule 5.23 attached hereto, which Schedule 5.23 sets forth the Company’s organizational identification number or, if the Company does not have one, states that one does not exist.

 

5.24 (i) The actual name of the Company is the name set forth in Schedule 5.23 attached hereto; (ii) the Company has no trade names except as set forth on Schedule 5.24 attached hereto; (iii) the Company has not used any name other than that stated in the preamble hereto or as set forth on Schedule 5.24 for the preceding five years; and (iv) no entity has merged into the Company or been acquired by the Company within the past five years except as set forth on Schedule 5.24.

 

5.25 At any time and from time to time, if any Collateral consists of instruments, certificated securities or other items that require or permit possession by the secured party to perfect the security interest created hereby, the Company shall deliver such Collateral to the Secured Party.

 

5.26 The Company shall cause all tangible chattel paper constituting Collateral to be delivered to the Secured Party, or, if such delivery is not possible, then to cause such tangible chattel paper to contain a legend noting that it is subject to the security interest created by this Agreement. To the extent that any Collateral consists of electronic chattel paper, the Company shall cause the underlying chattel paper to be “marked” within the meaning of Section 9-105 of the UCC (or successor section thereto).

 

5.27 If at any time there is any investment property or deposit account included as Collateral that can be perfected by “control” through an account control agreement, the Company shall cause such an account control agreement, in form and substance in each case reasonably satisfactory to the Secured Party, to be entered into and delivered to the Secured Party

 

5.28 To the extent that any Collateral consists of letter-of-credit rights, the Company shall cause the issuer of each underlying letter of credit to consent to an assignment of the proceeds thereof to the Secured Party.

 

5.29 To the extent that any Collateral is in the possession of any third party, the Company shall join with the Secured Party in notifying such third party of the Secured Party's security interest in such Collateral and shall use its commercially best effort to obtain an acknowledgement and agreement from such third party with respect to the Collateral, in form and substance reasonably satisfactory to the Secured Party.

  

-6-

  

 

5.30 If the Company shall at any time hold or acquire a commercial tort claim, the Company shall promptly notify the Secured Party in a writing signed by the Company of the particulars thereof and grant to the Secured Party in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to the Secured Party.

 

5.31 The Company shall promptly provide written notice to the Secured Party of any and all accounts which arise out of contracts with any governmental authority and, to the extent necessary to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof, shall execute and deliver to the Secured Party an assignment of claims for such accounts and cooperate with the Secured Party in taking any other steps required under the Federal Assignment of Claims Act or any similar federal, state or local statute or rule to perfect or continue the perfected status of the Security Interests in such accounts and proceeds thereof.

 

5.32 The Company shall cause each subsidiary of the Company (if any) with operations or material assets (which, if in doubt, shall be in the sole determination of the Secured Party) to immediately become a party hereto (an “Additional Debtor”), by executing and delivering an Additional Debtor Joinder in form and substance satisfactory to the Secured Party, and comply with the provisions hereof applicable to the Company. As of the date hereof, the Company represents and warrants that none of its subsidiaries have any operations or material assets. Concurrent therewith, the Additional Debtor shall deliver replacement schedules for, or supplements to all other Schedules to (or referred to in) this Agreement, as applicable, which replacement schedules shall supersede, or supplements shall modify, the Schedules then in effect. The Additional Debtor shall also deliver such opinions of counsel, authorizing resolutions, good standing certificates, incumbency certificates, organizational documents, financing statements and other information and documentation as the Secured Party may reasonably request. Upon delivery of the foregoing to the Secured Party, the Additional Debtor shall be and become a party to this Agreement with the same rights and obligations as the Company, for all purposes hereof as fully and to the same extent as if it were an original signatory hereto and shall be deemed to have made the representations, warranties and covenants set forth herein as of the date of execution and delivery of such Additional Debtor Joinder, and all references herein to the “Company” shall be deemed to include each Additional Debtor.

 

5.33 The Company will from time to time, at the joint and several expense of the Company, promptly execute and deliver all such further instruments and documents, and take all such further action as may be necessary or desirable, or as the Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder and with respect to any Collateral or to otherwise carry out the purposes of this Agreement.

 

5.34 Except as set forth on Schedule 5.34 attached hereto, none of the account debtors or other persons or entities obligated on any of the Collateral is a governmental authority covered by the Federal Assignment of Claims Act or any similar federal, state or local statute or rule in respect of such Collateral.

 

5.35 Schedule 5.35 lists all licenses and permits of every kind which the Company has in respect of its business operations.

 

5.36 The Company shall not amend any of its Organizational Documents without the prior written consent of the Secured Party, such consent not to be unreasonably withheld; provided, however, that the Company acknowledges that any amendment that adversely impairs the rights of the Secured Party under this Agreement or any other Transaction Document shall be deemed to be unreasonable.

 

5.37 The Company shall:

 

	
5.37.1  

	
Maintain its assets in a way which segregates and identifies such assets separate and apart from the assets of any other person or entity;

 

	
5.37.2  

	
Hold itself out to the public as a separate legal entity distinct from any other person or entity;

 

	
5.37.3  

	
Conduct business solely in its own name;

 

	
5.37.4  

	
Only engage in the business that it conducts as of the date hereof and in no other activities or business; and

 

	
5.37.5  

	
In addition to the obligations set forth in the Note and in the other Transaction Documents, the Company shall not incur or permit to exist any indebtedness, other than indebtedness to the Secured Party, indebtedness for trade payables incurred in the ordinary course of business and indebtedness disclosed on Schedule 5.3 .

  

-7-

  

 

5.38 The Company shall not without the prior written consent of the Secured Party, make or permit to exist any investment in any other person or entity, whether by way of extension of credit, loan, advance, purchase of stock or other ownership interest (other than ownership interests in such person or entity), bonds, notes, debentures or other securities, or otherwise, and whether existing on the date of this Agreement or thereafter made.

 

5.39 The Company shall not issue any ownership interests, debt instruments, warrants, options, or other instruments convertible into ownership instruments of the Company without the prior written consent of the Secured Party.

 

	
Article 6 - Effect of Pledge on Certain Rights

 

If any of the Collateral subject to this Agreement consists of non-voting equity or ownership interests (regardless of class, designation, preference or rights) that may be converted into voting equity or ownership interests upon the occurrence of certain events (including, without limitation, upon the transfer of all or any of the other stock or assets of the issuer), it is agreed that the pledge of such equity or ownership interests pursuant to this Agreement or the enforcement of any of the Secured Party's rights hereunder shall not be deemed to be the type of event which would trigger such conversion rights notwithstanding any provisions in the Organizational Documents or agreements to which the Company is subject or to which the Company is party.

 

	
Article 7 - Defaults

 

The following events shall be “Events of Default”:

 

7.1 The occurrence of an Event of Default under this Agreement, the Note, the Purchase Agreement or any other Transaction Documents;

 

7.2 Any representation or warranty of the Company in this Agreement, the Note, the Purchase Agreement or any other Transaction Documents shall prove to have been incorrect in any material respect when made; or

 

7.3 The failure by the Company to observe or perform any of its undertakings, covenants and obligations in this Agreement, the Note, the Purchase Agreement or any other Transaction Documents.

 

	
Article 8 - Duty To Hold In Trust

 

8.1 Upon the occurrence and during the continuance of any Event of Default, and at any time thereafter, the Company shall, upon receipt of any revenue, income, dividend, interest or other sums subject to the Security Interests, whether payable pursuant to the Note or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Party and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Party.

 

	
Article 9 - Rights and Remedies Upon Default.

 

9.1 Upon the occurrence of any Event of Default, and at any time thereafter, the Secured Party shall have the right to exercise all of the remedies conferred hereunder, under the Note, under any and all other Transaction Documents, and the Secured Party shall have all the rights and remedies of a secured party under the UCC and all rights and remedies available under any other applicable law and at equity. Without limitation, the Secured Party shall have the following rights and powers:

 

	
9.1.1  

	
The Secured Party shall have the right to take possession of the Collateral and, for that purpose, enter by reasonable means, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Company shall assemble the Collateral and make it available to the Secured Party at places which the Secured Party shall reasonably select, whether at the Company's premises or elsewhere, and make reasonably available to the Secured Party, without rent, all of the Company's respective premises and facilities for the purpose of the Secured Party taking possession of, removing or putting the Collateral in saleable or disposable form.

  

-8-

  

 

	
9.1.2  

	
Upon written notice to the Company by the Secured Party, all rights of the Company to exercise the voting and other consensual rights which it would otherwise be entitled to exercise and all rights of the Company to receive the dividends and interest which it would otherwise be authorized to receive and retain, shall cease. Upon such notice, the Secured Party shall have the right to receive any interest, cash dividends or other payments on the Collateral and, at the option of the Secured Party, to exercise in the Secured Party's discretion all voting rights pertaining thereto. Without limiting the generality of the foregoing, the Secured Party shall have the right (but not the obligation) to exercise all rights with respect to the Collateral as if it were the sole and absolute owner thereof, including, without limitation, to vote and/or to exchange, at its sole discretion, any or all of the Collateral in connection with a merger, reorganization, consolidation, recapitalization or other readjustment concerning or involving the Collateral or the Company or any of its direct or indirect subsidiaries.

 

	
9.1.3  

	
The Secured Party shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon commercially reasonable terms and conditions. Upon each such sale, lease, assignment or other transfer of Collateral, the Secured Party, may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released.

 

	
9.1.4  

	
The Secured Party shall have the right (but not the obligation) to notify any account debtors and any obligors under instruments or accounts to make payments directly to the Secured Party, and to enforce the Company’s rights against such account debtors and obligors.

 

	
9.1.5  

	
The Secured Party, may (but is not obligated to) direct any financial intermediary or any other person or entity holding any investment property to transfer the same to the Secured Party, or its designee.

 

	
9.1.6  

	
The Secured Party may (but is not obligated to) transfer any or all Intellectual Property registered in the name of the Company at the United States Patent and Trademark Office and/or Copyright Office into the name of the Secured Party or any designee or any purchaser of any Collateral.

 

9.2 No compliance by the Secured Party with any applicable law in connection with a disposition of Collateral will be considered adversely to affect the commercial reasonableness of any sale of the Collateral. The Secured Party may sell the Collateral without giving any warranties and may specifically disclaim such warranties. In addition, the Company waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Secured Party’s rights and remedies hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto.

 

9.3 For the purpose of enabling the Secured Party to further exercise rights and remedies under this Article 9 or elsewhere provided by agreement or applicable law, the Company hereby grants to the Secured Party, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to the Company) to use, license or sublicense following an Event of Default, any Intellectual Property now owned or hereafter acquired by the Company, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.

  

-9-

  

 

	
Article 10 - Applications of Proceeds

 

10.1           The proceeds of any such sale, lease or other disposition of the Collateral hereunder or from payments made on account of any insurance policy insuring any portion of the Collateral shall be applied first, to the reasonable and actual incurred expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs reasonably incurred in connection therewith) of the Collateral, to the reasonable attorneys’ fees and  expenses incurred by the Secured Party in enforcing the rights of the Secured Party hereunder or of the Secured Party under any other Transaction Documents and in connection with collecting, storing and disposing of the Collateral, and then to the satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Party shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Party is legally entitled, the Company will be liable for the deficiency, together with interest thereon, at the rate of 18% per annum or the lesser amount permitted by applicable law (the “Default Rate”) and the reasonable fees of any attorneys employed by the Secured Party to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Party arising out of the repossession, removal, retention or sale of the Collateral, unless due solely to the gross negligence or willful misconduct of the Secured Party as determined by a final judgment (not subject to further appeal) of a court of competent jurisdiction.

 

	
Article 11 - Costs and Expenses

 

11.1           The Company agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements pursuant to the UCC and PPSA, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Party. The Company shall also pay all other claims and charges which would be reasonably likely to prejudice, imperil or otherwise affect the Collateral or the Security Interests therein. The Company will also, upon demand, pay to the Secured Party the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Secured Party may incur in connection with (i) the enforcement of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (iii) the exercise or enforcement of any of the rights of the Secured Party under the Note and the other Transaction Documents. Until so paid, any fees payable hereunder shall be added to the principal amount of the Note and shall bear interest at the Default Rate.

 

	
Article 12 - Responsibility for Collateral

 

12.1           The Company assumes all liabilities and responsibility in connection with all Collateral, and the Obligations shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason. Without limiting the generality of the foregoing, (a) in no event shall the Secured Party (i) have any duty (either before or after an Event of Default) to collect any amounts in respect of the Collateral or to preserve any rights relating to the Collateral, or (ii) have any obligation to clean-up or otherwise prepare the Collateral for sale, and (b) the Company shall remain obligated and liable under each contract or agreement included in the Collateral to be observed or performed by the Company thereunder. The Secured Party shall not have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by the Secured Party of any payment relating to any of the Collateral, nor shall the Secured Party be obligated in any manner to perform any of the obligations of the Company under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Secured Party in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to the Secured Party or to which the Secured Party may be entitled at any time or times. The Secured Party shall be entitled, in its sole discretion, to abandon any and all Collateral and any and all records concerning the Collateral or the Company’s business at any time regardless of whether it had obtained possession thereof, without any liability or responsibility of any kind or nature therefore to the Company.

  

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Article 13 - Security Interests Absolute

 

13.1           All rights and all obligations of the parties hereunder, shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of this Agreement, the Note or any agreement entered into in connection with the foregoing, or any portion hereof or thereof; (b) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Note or any other agreement entered into in connection with the foregoing; (c) any exchange, release or non-perfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guarantee, or any other security, for all or any of the Obligations; (d) any action by the Secured Party to obtain, adjust, settle and cancel in its reasonable discretion any insurance claims or matters made or arising in connection with the Collateral; or (e) any other circumstance which might otherwise constitute any legal or equitable defense available to the Company, or a discharge of all or any part of the Security Interests granted hereby. Until the Obligations shall have been paid and performed in full, the rights of the Secured Party shall continue even if the Obligations are barred for any reason, including, without limitation, the running of the statute of limitations or bankruptcy. The Company expressly waives presentment, protest, notice of protest, demand, notice of nonpayment and demand for performance. In the event that at any time any transfer of any Collateral or any payment received by the Secured Party hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Party, then, in any such event and to the extent thereof, the Company's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Party to proceed against any other person or entity or to apply any Collateral which the Secured Party may hold at any time, or to marshal assets, or to pursue any other remedy.

 

	
Article 14 - Term of Agreement

 

14.1           This Agreement and the Security Interests shall terminate on the date on which all payments under the Note have been indefeasibly paid or otherwise satisfied in full (including by way of conversion of the Note) and all other Obligations have been indefeasibly paid or discharged (other than contingent indemnification obligations).

 

	
Article 15 - Power of Attorney; Further Assurances

 

15.1 The Company authorizes the Secured Party, and does hereby make, constitute and appoint the Secured Party and its officers, agents, successors or assigns with full power of substitution, as the Company’s true and lawful attorney-in-fact, with power, in the name of the Secured Party or the Company, to, after the occurrence (unless the Event of Default has been waived by the Secured Party) or during the continuance of an Event of Default, (i) endorse any note, checks, drafts, money orders or other instruments of  payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Secured Party, (ii) to sign and endorse any financing statement pursuant to the UCC or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; (v) to transfer any Intellectual Property or provide licenses respecting any Intellectual Property; and (vi) generally, at the option of the Secured Party, and at the expense of the Company, at any time, or from time to time, to execute and deliver any and all documents and instruments and to do all acts and things which the Secured Party, upon the advice of its counsel,  deems necessary to protect, preserve and realize upon the Collateral and the Security Interests granted therein in order to effect the intent of this Agreement and the Note all as fully and effectually as the Company might or could do; and the Company hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding. The designation set forth herein shall be deemed to amend and supersede any inconsistent provision in the Organizational Documents or other documents or agreements to which the Company is subject or to which the Company is a party. Without limiting the generality of the foregoing, after the occurrence and during the continuance of an Event of Default, the Secured Party is specifically authorized to execute and file any applications for or instruments of transfer and assignment of any patents, trademarks, copyrights or other Intellectual Property with the United States Patent and Trademark Office and the United States Copyright Office.

  

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15.2 On a continuing basis, the Company will make, execute, acknowledge, deliver, file and record, as the case may be, with the proper filing and recording agencies in any jurisdiction, including, without limitation, the jurisdictions indicated on Schedule 5.23 attached hereto, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Secured Party, to perfect the Security Interests granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Secured Party the grant or perfection of a perfected security interest in all the Collateral under the UCC and PPSA.

 

15.3 The Company hereby irrevocably appoints the Secured Party as the Company’s attorney-in-fact, with full authority in the place, on behalf of and in the name of the Company, from time to time in the Secured Party's discretion, to take any action and to execute any instrument which the Secured Party may , upon the advice of its counsel, deem necessary or advisable to accomplish the purposes of this Agreement, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Company where permitted by law, which financing statements may (but need not) describe the Collateral as “all assets” or “all personal property” or words of like import, and ratifies all such actions taken by the Secured Party. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding.

 

	
Article 16 - Notices

 

Any demand upon or notice to the Company hereunder shall be effective when delivered by hand or when properly deposited in the mails postage prepaid, or sent by e-mail or electronic facsimile transmission, receipt acknowledged, or delivered to an overnight courier, in each case addressed to the Company at the address shown below or such other address as the Company may advise the Secured Party in writing. Any notice by the Company to the Secured Party shall be given as aforesaid, addressed to the Secured Party at the address shown below or such other address as the Secured Party may advise the Company in writing.

 

Secured Party:

ChromaDex Corporation

10005 Muirlands Blvd, Ste G

Irvine, CA  92618, USA

Attention: Tom Varvaro

Fax:   (949) 419-0294

Email: tom.varvaro@chromadex.com

 

With a copy to:

Sichenzia Ross Friedman Ference LLP

61 Broadway,  32nd  Floor

New York, NY 10006

Attention:  Harvey Kesner, Esq.

Fax: (212) 930-9725

Email: hkesner@srff.com

Company:

NeutriSci International Inc.

c/o Tingle Merrett LLP, Barristers & Solicitors

1250 Standard Life Building

639 - 5th Avenue SW

Calgary, AB, Canada  T2P 0M9

Attention:  Cynthia Solano

Fax: (403) 571-8008

Email: csolano@tinglemerrett.com

  

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Article 17 - Other Security

 

To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Secured Party shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Party's rights and remedies hereunder.

 

	
Article 18 - Miscellaneous

 

18.1 No course of dealing between the Company and the Secured Party, nor any failure to exercise, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder or under the Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

 

18.2 All of the rights and remedies of the Secured Party with respect to the Collateral, whether established hereby or by the Note, the Transaction Documents or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently.

 

18.3 This Agreement, together with the exhibits and schedules hereto, the Note, the Transaction Documents, the instruments and agreements among the parties delivered on or about the date hereof, and the related agreements contemplated hereby and thereby contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into this Agreement and the exhibits and schedules hereto. No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Company and the Secured Party or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought.

 

18.4 If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

 

18.5 No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.

 

18.6 This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Secured Party.  The Secured Party may assign any or all of its rights under this Agreement to any Person to whom the Secured Party assigns or transfers the Note.

 

18.7 Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.

  

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18.8 All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. The Company agrees that all proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement, the Transaction Documents and the Note (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any proceeding, any claim that it is not personally subject to the jurisdiction of any such court or that such proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If any party shall commence a proceeding to enforce any provisions of this Agreement, then the prevailing party in such proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other reasonable costs and expenses incurred with the investigation, preparation and prosecution of such proceeding.

 

18.9 This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

 

18.10 The Company shall indemnify, reimburse and hold harmless the Secured Party and each of its and their partners, members, shareholders, officers, directors, employees and agents (and any other persons with other titles that have similar functions) (collectively, “Indemnitees”) from and against any and all losses, claims, liabilities, damages, penalties, suits, costs and expenses, of any kind or nature, (including fees relating to the cost of investigating and defending any of the foregoing) imposed on, incurred by or asserted against such Indemnitee in any way related to or arising from or alleged to arise from this Agreement or the Collateral, except any such losses, claims, liabilities, damages, penalties, suits, costs and expenses which result from the gross negligence or willful misconduct of the Indemnitee as determined by a final, non-appealable decision of a court of competent jurisdiction. This indemnification provision is in addition to, and not in limitation of, any other indemnification provision in the Note, the Transaction Documents or any other agreement, instrument or other document executed or delivered in connection herewith or therewith.

 

18.11 Nothing in this Agreement shall be construed to subject the Secured Party to liability as a partner in the Company or any of its direct or indirect subsidiaries that is a partnership or as a member in the Company or any of its direct or indirect subsidiaries that is a limited liability company, nor shall the Secured Party be deemed to have assumed any obligations under any partnership agreement or limited liability company agreement, as applicable, of the Company or any of its direct or indirect subsidiaries or otherwise, unless and until the Secured Party exercises its right to be substituted for the Company as a partner or member, as applicable, pursuant hereto.

 

18.12 To the extent that the grant of the security interest in the Collateral and the enforcement of the terms hereof require the consent, approval or action of any partner or member, as applicable, of the Company or any direct or indirect subsidiary of the Company or compliance with any provisions of any of the Organizational Documents, the Company hereby grants such consent and approval and waive any such noncompliance with the terms of said documents.

 

[Signature Page Follows]

  

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IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.

 

THE COMPANY:

 

 NEUTRISCI INTERNATIONAL INC.

By:/s/ Keith Bushfield

Name: Keith Bushfield

Title: President & CEO

SECURED PARTY:

CHROMADEX CORPORATION

By: /s/ Frank Jaksch

Name: Frank Jaksch

Title: President & CEO

  

-15-

  

Schedule 3

Capital Stock and other Equity Interests held by the Company

None other than 100% of the issued and outstanding shares of Britlor Health and Wellness Inc.

  

-16-

  

Schedule 5.2

Place of business or offices where the Company’s respective books of account and records are kept:

NeutriSci International Inc. Head Office:

4015 - 1st Street SE, Calgary, Alberta, Canada, T2G 4X7

NeutriSci International Inc. Registered Office (offices of Tingle Merrett LLP):

1250, 639 - 5th Avenue SW, Calgary, Alberta, Canada, T2P 0M9

NeutriSci International Inc. Auditor’s offices (offices of Kenway Mack Slusarchuk Stewart LLP)

Suite 1500, 333-11th Avenue SW, Calgary, Alberta T2R 1L9

Places where Collateral is stored or located:

NeutriSci International Inc. Head Office:

4015 - 1st Street SE, Calgary, Alberta, Canada, T2G 4X7

Collateral is in the possession of any consignee, bailee, warehouseman, agent or processor:

     N/A

  

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Schedule5.3

Schedule of Existing Liens and Indebtedness

(attached)

  

-18-

  

Schedule 5.23

State where the Company was organized and remains organized solely:

           Province of Alberta Canada

Company’s organizational identification number (if the Company does not have one, state that one does not exist):

Government of Alberta Corporate Access No. 2014908756

Actual name of the Company:

NeutriSci International Inc.

  

-19-

  

 

Schedule 5.24

Trade names of the Company:

NeutriSci

Britlor

Vendrome

Names used by the Company for the preceding five years:

NeutriSci International Inc.

Entities that have merged into the Company or been acquired by the Company within the past five years:

Britlor Health and Wellness Inc

  

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Schedule 5.34

Account debtors or other persons or entities obligated on any of the Collateral that are governmental authorities covered by the Federal Assignment of Claims Act or any similar federal, state or local statute or rule in respect of such Collateral:

None

  

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Schedule 5.35

All licenses and permits of every kind which the Company has in respect of its business operations:

 

Health Canada Product License Issuance No. (NPN) 80026287

 

 

City of Calgary Municipal Business License No. 13042304

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