Document:

EXHIBIT 10.1

 

ARYX THERAPEUTICS, INC.

 

SECURED NOTE AND WARRANT PURCHASE
AGREEMENT

 

THIS SECURED NOTE AND WARRANT PURCHASE AGREEMENT (the “Agreement”) is made as of the 13th
day of August, 2010 (the “Effective Date”)
by and among ARYx THERAPEUTICS, INC., a
Delaware corporation (the “Company”),
and the persons and entities named on the Schedule of Purchasers attached
hereto (individually, a “Purchaser”
and collectively, the “Purchasers”).

 

RECITAL

 

WHEREAS,  to
provide the Company with additional resources to conduct its business, the
Purchasers are willing to loan to the Company, and the Company desires to
borrow from the Purchasers,  an aggregate
amount of four million dollars ($4,000,000.00) (the “Total
Loan Amount”), on the terms and subject to the conditions
specified herein.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing, and the
representations, warranties, covenants and conditions set forth below, the
Company and each Purchaser, intending to be legally bound, hereby agree as
follows:

 

1.                                      CERTAIN
DEFINITIONS

 

1.1          “Closing(s)”
means the Initial Closing and/or Second Closing, as applicable.

 

1.2          “Intercreditor Agreement”
means that certain Intercreditor Agreement, of even date herewith, by and
between Lighthouse Capital Partners V, L.P. and the Purchasers.

 

1.3          “Loan Documents”
means this Agreement, the Notes and Warrants, the Security Agreement and the
Registration Rights Agreement.

 

1.4          “Majority Holders”
means each Purchaser, provided, that following any assignment of the Secured
Obligations (as defined in the Security Agreement) by any Purchaser, the
Majority Holders shall mean any Purchaser or group of Purchasers holding
greater than fifty percent (50%) of the outstanding and unpaid principal amount
of the then-outstanding Notes.

 

1.5          “Material Adverse Change”
means any change in the assets, liabilities, financial condition or operations
of the Company and its subsidiaries, taken as a whole, from that reflected in
the financial statements included in the Company’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 2010 as filed with the Securities Exchange
Commission on May 13, 2010, other than changes in the ordinary course of
business, which individually or in the aggregate has had a material adverse
effect on such assets, liabilities, financial condition or operations of the
Company and its subsidiaries, taken as a whole.

 

1.6          “Note(s)”
means secured promissory note(s) in substantially the form attached hereto
as EXHIBIT A.

 

 

1.7          “Permitted Indebtedness”
means:

 

(a)           The Company’s indebtedness to the Purchasers
under this Agreement and the Loan Documents;

 

(b)           Equipment financing not to exceed $1.0
million and secured only by the financed equipment;

 

(c)           Unsecured indebtedness to trade creditors
incurred in the ordinary course of business;

 

(d)           Indebtedness existing on the Effective Date
more particularly described below:

 

(i)            Indebtedness pursuant to that certain Loan
and Security Agreement No. 4521, dated March 28, 2005, by and between
the Company and Lighthouse Capital Partners V, L.P., as amended (the “Lighthouse Agreement”), in the
principal amount not to exceed $6,357,335; and

 

(ii)           Indebtedness pursuant to that certain Loan
Agreement, dated December 31, 2008, by and between the Company and Oxford
Financial Corporation (the “Oxford Agreement”)
in the principal amount not to exceed $542,815;

 

(e)           Such other indebtedness as is approved by the
Majority Holders; or

 

(f)            extensions, refinancings, modifications,
amendments and restatements of any items of Permitted Indebtedness (a) through
(e) above, provided that the principal amount thereof is not increased or
the terms thereof are not modified to impose more burdensome terms upon the
Company.

 

1.8          “Registration Rights
Agreement” means that certain Registration Rights Agreement, of
even date herewith, by and among the Company and the Purchasers.

 

1.9          “Second Closing Conditions”
means that:

 

(a)           The Company shall have delivered to the
Purchasers the Second Closing Notice within three business days of September 15,
2010 and it is acceptable to each Purchaser in its reasonable discretion;

 

(b)           The Company shall not have created, incurred,
assumed, guaranteed, or otherwise have become, directly or indirectly, liable
with respect to any indebtedness, except for Permitted Indebtedness;

 

(c)           The Company is not in default under any of
its debt obligations unless waived by the applicable lender(s) in a manner
reasonably acceptable to the Purchasers; and

 

(d)           There has been no Material Adverse Change in
the Company or its business.

 

1.10        “Second Closing Date”
means September 30, 2010.

 

1.11        “Second Closing Notice”
means evidence of the following:

 

(a)           that the Company’s business development
efforts to divest assets has been proceeding, and continues to proceed, with
all commercially reasonable efforts and in a manner consistent with the Company’s
stated goals as presented to the Purchasers on or before the date hereof;
and/or

 

 

(b)           that the Company’s effort to raise
substantial equity has been proceeding, and continues to proceed, with all commercially
reasonable efforts and a funding within 45 days seems reasonably likely, which
evidence shall include, without limitation, the ability of the Purchasers to
contact a reasonable number of prospective investors.

 

1.12        “SEC Reports”
means, collectively, the Company’s (a) most recent Annual Report on Form 10-K
(the “Annual Report”), (b) Quarterly
Reports on Form 10-Q for the quarters ended subsequent to the period
covered by such Annual Report, including all exhibits thereto and documents
incorporated by reference therein, or (c) any other statement, report
(including, without limitation, Current Reports on Form 8-K), registration
statement or definitive proxy statement filed by the Company with the
Securities and Exchange Commission during the period commencing subsequent to
the period covered by such Annual Report.

 

1.13        “Securities”
means the Notes, Warrants and Conversion Securities.

 

1.14        “Security Agreement”
means that certain Security Agreement, of even date herewith, by and among the
Company and the Purchasers.

 

1.15        “Warrant(s)”
means a warrant in substantially the form attached hereto as EXHIBIT B.

 

1.16        “Warrant Shares”
means the shares of Common Stock
issuable upon exercise of the Warrants.

 

2.                                      AMOUNT
AND TERMS OF THE LOAN; ISSUANCE OF WARRANTS

 

2.1          The Loan.  Subject to the terms of this Agreement, each
Purchaser agrees to lend to the Company an amount set forth opposite each such
Purchaser’s name on the Schedule of Purchasers hereto (the “Loan Amount” or a “Loan”) against the
issuance and delivery by the Company of a Note for such amount.

 

2.2          Issuance of Warrants.  At each Closing (as defined below) the Company shall issue and sell to
each Purchaser, and each Purchaser shall purchase from the Company, a Warrant
for the purchase of common stock at a purchase price equal to $0.0125 per share
of Common Stock issuable upon exercise of such Warrant (the “Warrant Purchase Price”). 
Each Warrant will be exercisable for the number of shares of Common
Stock (rounded to the nearest whole share) equal to (x) twenty-five
percent (25%) of such Purchaser’s Loan Amount at such Closing, divided by (y) $0.50.

 

(a)           The Company and the Purchasers, as a result
of arm’s length bargaining, agree that:

 

(i)            Neither the Purchasers nor any affiliated
company has rendered any services to the Company in connection with this
Agreement;

 

(ii)           The Warrants are not being issued as
compensation;

 

(iii)         The aggregate fair market value of the Notes issued
at the Closings (as defined herein), if issued apart from the Warrants issued
at the Closings, is four million dollars ($4,000,000.00) and the aggregate fair
market value of the Warrants issued at the Closings, if issued apart from the
Notes issued at the Closings, is twenty-five thousand dollars and two cents
($25,000.02);  and

 

 

(iv)          All tax returns and other information return of each
party relative to this Agreement and the Notes and Warrants issued pursuant
hereto shall consistently reflect the matters agreed to in (i) through (iii) above.

 

3.                                      THE
CLOSINGS

 

3.1          Closing Dates.  Subject to the
terms and upon the conditions of this Agreement, each Purchaser agrees to lend
to the Company its respective Loan Amount against the issuance and delivery by
the Company of a Note and Warrant as follows:

 

(a)           Initial Closing.  The initial closing of the sale and purchase
of the Notes and Warrants  (the “Initial Closing”)
shall be held on the Effective Date.  At
the Initial Closing, the Company shall issue and sell to each Purchaser, and
each such Purchaser shall purchase, such Note and Warrant as are set forth
opposite such Purchaser’s name on the Schedule of Purchasers under the heading “Initial
Closing.”

 

(b)           Second Closing.  A second closing of the sale and purchase of
the Notes and Warrants (the “Second Closing”)
shall take place on the Second Closing Date; provided,
however, that the obligation of each Purchaser under this Section 3.1(b) is
subject to the fulfillment, on or before the Second Closing, of the Second
Closing Conditions, unless otherwise waived by the Majority Holders.  At the Second Closing, the Company shall
issue and sell to each Purchaser, and each such Purchaser shall purchase, such
Note and Warrant as are set forth opposite such Second Closing Purchaser’s name
on the Schedule of Purchasers under the heading “Second Closing.”

 

3.2          Delivery.

 

(a)           At each Closing, (i) each Purchaser
shall deliver to the Company a check or wire transfer funds in the amount of
such Purchaser’s Loan Amount to be funded by such Purchaser plus the applicable
Warrant Purchase Price; and (ii) the Company shall issue and deliver to
each Purchaser (a) a Note in favor of such Purchaser payable in the
principal amount of such Purchaser’s Loan Amount and (b) a corresponding
Warrant, as specified in Section 2.2(c).

 

(b)           Purchasers’ obligations to purchase the Notes
and Warrants at each Closing are subject to the satisfaction of the following
conditions:

 

(i)            On or before the Initial Closing, this
Agreement, the applicable Notes and Warrants, the Registration Rights Agreement
and Security Agreement shall have been executed and delivered by the parties
thereto.

 

(ii)           The representations and warranties in each of
the Loan Documents shall be true, accurate, and complete in all material
respects on the date of such Closing.

 

(iii)         No Event of Default (as defined in the Notes) shall
have occurred and be continuing under any Note on the date of such Closing.

 

(iv)          In Purchaser’s reasonable discretion, there has not
been a Material Adverse Change on or prior to the date of such Closing.

 

(v)            All Loan Documents shall be in full force and
effect on the date of such Closing.

 

 

(vi)          At or prior to such Closing, Purchasers shall have
received from legal counsel to the Company an opinion addressed to them, dated
as of the date of such Closing, in a form agreed upon by the Company and the
Majority Holders.

 

4.                                      REPRESENTATIONS,
WARRANTIES AND COVENANTS OF THE COMPANY

 

The
Company hereby represents and warrants to each Purchaser as follows:

 

4.1          Organization, Good Standing and Qualification.  The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware.  The Company has the requisite
corporate power to own and operate its properties and assets and to carry on
its business as now conducted and as described in the SEC Reports.  The Company is duly qualified and is
authorized to do business and is in good standing as a foreign corporation in
all jurisdictions in which the nature of its activities and of its properties
(both owned and leased) makes such qualification necessary, except for those
jurisdictions in which failure to do so would not have a material adverse
effect on the Company or its business.

 

4.2          Corporate  Power.  The Company has at the Effective Date all
requisite corporate power to execute and deliver each of the Loan Documents and
to carry out and perform its obligations under the terms of this Agreement and
the other Loan Documents.  The Company’s
Board of Directors has approved the Loan Documents based upon a reasonable
belief that the Loan is appropriate for the Company after reasonable inquiry
concerning the Company’s financing objectives and financial situation.

 

4.3          Authorization.  All corporate action on the part of the
Company, its directors and its stockholders necessary for the authorization,
execution, delivery and performance of this Agreement and the other Loan
Documents by the Company and the performance of the Company’s obligations
hereunder, including the issuance and delivery of the Notes, the Security
Agreement and Warrants and the reservation of the equity securities issuable
upon exercise of the Warrants (the “Conversion Securities”) has been taken or
will be taken prior to the issuance of such Conversion Securities.  This Agreement and the other Loan Documents,
when executed and delivered by the Company, shall constitute valid and binding
obligations of the Company enforceable in accordance with their terms, subject
to laws of general application relating to bankruptcy, insolvency, the relief
of debtors and, with respect to rights to indemnity, subject to federal and
state securities laws.  The Conversion
Securities, when issued in compliance with the provisions of this Agreement and
the Warrants will be validly issued, fully paid and nonassessable and free of
any liens or encumbrances and issued in compliance with all applicable federal
and securities laws.

 

4.4          Governmental Consents.  All consents, approvals, orders, or
authorizations of, or registrations, qualifications, designations,
declarations, or filings with, any governmental authority or stock exchange,
required on the part of the Company in connection with the valid execution and
delivery of this Agreement, the offer, sale or issuance of the Securities or
the consummation of any other transaction contemplated hereby shall have been
obtained and will be effective at each Closing.

 

4.5          Compliance with Laws.  To its knowledge, the Company nor any
subsidiary is in violation of any applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of
its properties, which violation of which would materially and adversely affect
the business, assets, liabilities, financial condition, operations or prospects
of the Company.

 

4.6          Compliance with Other Instruments. Neither
Company nor any subsidiary is in violation or default of any term of its
certificate of incorporation or bylaws, or of any provision of any 

 

 

mortgage, indenture or contract to which it is a
party and by which it is bound or of any judgment, decree, order or writ. The
execution, delivery and performance of this Agreement and the other Loan
Documents, and the consummation of the transactions contemplated hereby or
thereby will not result in any such violation or be in conflict with, or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, decree, order or writ
or an event that results in the creation of any lien, charge or encumbrance
upon any assets of the Company or the suspension, revocation, impairment,
forfeiture, or nonrenewal of any material permit, license, authorization or
approval applicable to the Company, its business or operations or any of its
assets or properties.  Without limiting
the foregoing, the Company has obtained all waivers reasonably necessary with
respect to any preemptive rights, rights of first refusal or similar rights,
including any notice or offering periods provided for as part of any such
rights, in order for the Company to consummate the transactions contemplated
hereunder and under the other Loan Documents without any third party obtaining
any rights to cause the Company to offer or issue any securities of the Company
as a result of the consummation of the transactions contemplated hereunder.

 

4.7          Full Disclosure.  No written representation, warranty or other
statement of the Company in any certificate or written statement given to the
Purchasers, as of the date such representation, warranty, or other statement
was made, taken together with all such written certificates and written
statements given to Purchasers, contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements contained
in the certificates or statements not misleading.

 

4.8          Offering.  Assuming the accuracy of the representations
and warranties of the Purchasers contained in Section 5 hereof, the offer,
issue, and sale of the Securities are and will be exempt from the registration
and prospectus delivery requirements of the Securities Act of 1933, as amended
(the “Act”), and have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit, or qualification requirements of all applicable
state securities laws.

 

5.                                      REPRESENTATIONS
AND WARRANTIES OF THE PURCHASERS

 

5.1          Purchase for Own Account.  Each Purchaser represents that it is
acquiring the Securities solely for its own account and beneficial interest for
investment and not for sale or with a view to distribution of the Securities or
any part thereof, has no present intention of selling (in connection with a
distribution or otherwise), granting any participation in, or otherwise
distributing the same, and does not presently have reason to anticipate a
change in such intention.

 

5.2          Information and Sophistication.  Without lessening or obviating the
representations and warranties of the Company set forth in Section 4, each
Purchaser hereby: (i) acknowledges that it has received all the
information it has requested from the Company and it considers necessary or
appropriate for deciding whether to acquire the Securities, (ii) represents
that it has had an opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the offering of the Securities
and to obtain any additional information necessary to verify the accuracy of
the information given the Purchaser and (iii) further represents that it has
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risk of this investment.

 

5.3          Ability to Bear Economic Risk.  Each Purchaser acknowledges that investment
in the Securities involves a high degree of risk, and represents that it is
able, without materially impairing its financial condition, to hold the
Securities for an indefinite period of time and to suffer a complete loss of
its investment.

 

 

5.4          Further Limitations on Disposition.  Without in any way limiting the representations
set forth above, each Purchaser further agrees not to make any disposition of
all or any portion of the Securities unless and until:

 

(a)           There is then in effect a Registration
Statement under the Act covering such proposed disposition and such disposition
is made in accordance with such Registration Statement; or

 

(b)           The Purchaser shall have notified the Company
of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition,
and if reasonably requested by the Company, such Purchaser shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration under the Act or any
applicable state securities laws, provided that no such opinion shall be
required for dispositions in compliance with Rule 144.

 

(c)           Notwithstanding the provisions of paragraphs (a) and
(b) above, no such registration statement or opinion of counsel shall be
necessary for a transfer by such Purchaser to a partner (or retired partner) or
member (or retired member) of such Purchaser in accordance with partnership or
limited liability company interests, or transfers by gift, will or intestate
succession to any spouse or lineal descendants or ancestors, if all transferees
agree in writing to be subject to the terms hereof to the same extent as if
they were Purchasers hereunder.

 

5.5          Accredited Investor Status.  Each Purchaser is an “accredited investor” as
such term is defined in Rule 501 under the Act.

 

5.6          Foreign Investor. If the Purchaser is not a
United States person (as defined by Section 7701(a)(30) of the Code), the
Purchaser hereby represents that it has satisfied itself as to the full
observance of the laws of its jurisdiction in connection with any invitation to
subscribe for the Securities or any use of this Agreement, including
(i) the legal requirements within its jurisdiction for the purchase of the
Securities, (ii) any foreign exchange restrictions applicable to such
purchase, (iii) any governmental or other consents that may need to be
obtained, and (iv) the income tax and other tax consequences, if any, that
may be relevant to the purchase, holding, redemption, sale, or transfer of the
Securities.  The Purchaser’s subscription
and payment for and continued beneficial ownership of the Securities will not
violate any applicable securities or other laws of the Purchaser’s
jurisdiction.

 

5.7          Further Assurances.  Each Purchaser agrees and covenants that at
any time and from time to time it will promptly execute and deliver to the
Company such further instruments and documents and take such further action as
the Company may reasonably require in order to carry out the full intent and
purpose of this Agreement and to comply with state or federal securities laws
or other regulatory approvals.

 

6.                                      FURTHER
AGREEMENTS

 

6.1          Use of Proceeds.  The proceeds from the sale
of the Notes and Warrants hereunder shall be used only for working capital
purposes, and shall not in any event be used for the repayment of indebtedness
for borrowed money (other than for scheduled payments under (i) the
Lighthouse Agreement as permitted by the Intercreditor Agreement, as each may
be amended from time to time, and (ii) the Oxford Agreement), redemption
or repurchase of securities (other than the repurchase of shares from employees
pursuant to the Company’s stock option plan), equity investments in another
entity, dividends or payments to employees other than regular salaries,
relocation expenses and reimbursements for costs incurred on behalf of the
Company in the ordinary course of business.

 

 

6.2          Further Assurances.  The Company agrees and covenants that at any
time and from time to time it will promptly execute and deliver to Purchasers
such further instruments and documents and take such further action as a
Purchaser may reasonably require in order to carry out the full intent and
purpose of this Agreement and to comply with state or federal securities laws
or other regulatory approvals.

 

7.                                      MISCELLANEOUS

 

7.1          Binding  Agreement.  The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties.  Nothing in this
Agreement, expressed or implied, is intended to confer upon any third party any
rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.

 

7.2          Governing Law.  This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents, made and to be performed entirely within the State
of California, without giving effect to conflicts of laws principles.

 

7.3          Consent to Jurisdiction and Venue.  All judicial proceedings (to the extent that
the reference requirement of Section 7.4 is not applicable) arising in or
under or related to this Agreement, the Security Agreement, the Notes or any of
the other Loan Documents may be brought in any state or federal court located
in the State of California.  By execution
and delivery of this Agreement, each party hereto generally and
unconditionally: (a) consents to nonexclusive personal jurisdiction in
Santa Clara County, State of California; (b) waives any objection as to
jurisdiction or venue in Santa Clara County, State of California;
(c) agrees not to assert any defense based on lack of jurisdiction or
venue in the aforesaid courts; and (d) irrevocably agrees to be bound by
any judgment rendered thereby, in each case, in connection with this Agreement,
the Security Agreement, the Notes or the other Loan Documents.  Service of process on any party hereto in any
action arising out of or relating to this Agreement shall be effective if given
in accordance with the requirements for notice set forth in Section 7.6,
and shall be deemed effective and received as set forth in
Section 7.6.  Nothing herein shall
affect the right to serve process in any other manner permitted by law or shall
limit the right of either party to bring proceedings in the courts of any other
jurisdiction.

 

7.4          Mutual Waiver of Jury Trial / Judicial Reference.

 

(a)             Because disputes arising in connection with
complex financial transactions are most quickly and economically resolved by an
experienced and expert person and the parties wish applicable state and federal
laws to apply (rather than arbitration rules), the parties desire that their
disputes be resolved by a judge applying such applicable laws.  EACH OF THE COMPANY AND THE PURCHASERS
SPECIFICALLY WAIVE ANY RIGHT IT MAY HAVE TO TRIAL BY JURY OF ANY CAUSE OF
ACTION, CLAIM, CROSS-CLAIM, COUNTERCLAIM, THIRD PARTY CLAIM OR ANY OTHER CLAIM
(COLLECTIVELY, “CLAIMS”) ASSERTED BY THE
COMPANY AGAINST ANY PURCHASER OR ITS ASSIGNEE OR BY ANY PURCHASER OR ITS
ASSIGNEE AGAINST THE COMPANY.  This
waiver extends to all such Claims, including Claims that involve Persons other
than the Company and any Purchaser; Claims that arise out of or are in any way
connected to the relationship between the Company and the Purchasers; and any Claims
for damages, breach of contract, tort, specific performance, or any equitable
or legal relief of any kind, arising out of this Agreement, the Security
Agreement, the Notes or any other Loan Document.

 

(b)             If the waiver of jury trial set forth in Section 7.4(a) is
ineffective or unenforceable, the parties agree that all Claims shall be
resolved by reference to a private judge sitting 

 

 

without a jury, pursuant to Code of Civil Procedure Section 638,
before a mutually acceptable referee or, if the parties cannot agree, a referee
selected by the Presiding Judge of the Santa Clara County, California.  Such proceeding shall be conducted in Santa
Clara County, California, with California rules of evidence and discovery
applicable to such proceeding.

 

(c)             In the event Claims are to be resolved by
judicial reference, either party may seek from a court identified in Section 7.3,
any prejudgment order, writ or other relief and have such prejudgment order,
writ or other relief enforced to the fullest extent permitted by law
notwithstanding that all Claims are otherwise subject to resolution by judicial
reference.

 

7.5          Counterparts.  This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

 

7.6          Titles and Subtitles.  The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

 

7.7          Notices.  All notices required or permitted under this
Agreement, the Notes, the Security Agreement or the other Loan Documents shall
be in writing and shall be deemed effectively given: (a) upon personal
delivery to the party to be notified, (b) when sent by confirmed telex, electronic
mail or facsimile if sent during normal business hours of the recipient, if
not, then on the next business day, (c) five (5) days after having
been sent by registered or certified mail, return receipt requested, postage
prepaid, or (d) one (1) day after deposit with a nationally recognized
overnight courier, specifying next day delivery, with written verification of
receipt.  All communications shall be
sent to the Company at the address set forth on the signature page hereto,
and to Purchaser at the address(es) set forth on the Schedule of Purchasers
attached hereto or at such other address(es) as the Company or Purchaser may
designate by ten (10) days advance written notice to the other parties
hereto.

 

7.8          Modification; Waiver.  No modification or waiver of any provision of
this Agreement or consent to departure therefrom shall be effective unless in
writing and approved by the Company and the Majority Holders.  The provisions of the Security Agreement, the
Notes or Warrants may be amended or waived by the written consent of the
Company and Majority Holders and only in a manner that applies to all such
agreements.  Notwithstanding the
foregoing, the consent of each affected Note holder shall be necessary to do the
following to any Note:

 

(a)           reduce the percentage of the principal and
interest amount of Loans whose holders must consent to constitute Majority
Holders’ consent;

 

(b)           reduce the rate
of or change the time for payment of interest on any Loan;

 

(c)           reduce the
principal of or change the fixed maturity of any Loan;

 

(d)           make any change
in the terms of any Note that adversely affects the right to convert any Note
or increases the Conversion Price (as defined in the Note); or

 

(e)           make any Loan
payable in money other than that stated in the Note.

 

7.9          Expenses.  The Company and each Purchaser shall each
bear its respective expenses and legal fees incurred with respect to this
Agreement, the Notes, the Security Agreement and the other Loan Documents and
the transactions contemplated therein; provided, however,
that the Company shall, at or promptly following the Initial Closing upon
receipt of an invoice, reimburse the reasonable fees and 

 

 

expenses of respective counsel for the Purchasers,
not to exceed $50,000.00 for Bingham McCutchen LLP, and not to exceed
$20,000.00 for Wilmer Cutler Pickering Hale and Dorr LLP.

 

7.10        Waiver of Conflicts.  Each party to this Agreement acknowledges
that Cooley LLP (“Cooley”),
outside general counsel to the Company, has in the past performed and is or may
now or in the future represent one or more Purchasers or their affiliates in
matters unrelated to the transactions contemplated by this Agreement (the “Bridge Financing”),
including representation of such Purchasers or their affiliates in matters of a
similar nature to the Bridge Financing. 
The applicable rules of professional conduct require that Cooley
inform the parties hereunder of this representation and obtain their
consent.  Cooley has served as outside
general counsel to the Company and has negotiated the terms of the Bridge
Financing solely on behalf of the Company. 
The Company and each Purchaser hereby (a) acknowledge that they
have had an opportunity to ask for and have obtained information relevant to
such representation, including disclosure of the reasonably foreseeable adverse
consequences of such representation; (b) acknowledge that with respect to the
Bridge Financing, Cooley has represented solely the Company, and not any
Purchaser or any stockholder, director or employee of the Company or any Purchaser;
and (c) gives its informed consent to Cooley’s representation of the
Company in the Bridge Financing.

 

7.11        Delays or Omissions.  It is agreed that no delay or omission to
exercise any right, power or remedy accruing to each Purchaser, upon any breach
or default of the Company under this Agreement or any Note, or Warrant shall
impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach or default, or any acquiescence therein, or of or in
any similar breach or default thereafter occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring.  It
is further agreed that any waiver, permit, consent or approval of any kind or
character by Purchaser of any breach or default under this Agreement, or any
waiver by any Purchaser of any provisions or conditions of this Agreement must
be in writing and shall be effective only to the extent specifically set forth
in writing and that all remedies, either under this Agreement, or by law or
otherwise afforded to the Purchaser, shall be cumulative and not alternative.

 

7.12        Entire
Agreement.  This
Agreement and the other Loan Documents constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any representations, warranties, covenants and agreements except
as specifically set forth herein or therein.

 

[signature page follows]

 

 

IN WITNESS WHEREOF,  the
parties have executed this SECURED  NOTE AND WARRANT PURCHASE AGREEMENT as of the date first
written above.

 

	
  COMPANY:

  	
  ARYx
  THERAPEUTICS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Paul Goddard

  
	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
  Paul
  Goddard, Ph.D.

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Chairman
  and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  6300
  Dumbarton Circle

  
	
   

  	
   

  	
  Fremont,
  CA 94555

  
						

 

SIGNATURE PAGE TO ARYx
THERAPEUTICS, INC.

SECURED NOTE AND WARRANT
PURCHASE AGREEMENT

 

 

	
  PURCHASERS:

  	
  MPM BIOVENTURES III, L.P.

  
	
   

  	
   

  
	
   

  	
  By:  MPM
  BioVentures III GP, L.P., its General Partner

  
	
   

  	
   

  
	
   

  	
  By: MPM BioVentures III
  LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Nicholas Simon III

  
	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
  Nicholas
  Simon III

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Series A
  Member

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  200 Clarendon Street, 54th Floor

  
	
   

  	
   

  	
  Boston, MA 02116

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MPM BIOVENTURES III-QP, L.P.

  
	
   

  	
   

  
	
   

  	
  By:  MPM
  BioVentures III GP, L.P., its General Partner

  
	
   

  	
   

  
	
   

  	
  By: MPM BioVentures III
  LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Nicholas Simon III

  
	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
  Nicholas
  Simon III

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Series A
  Member

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  200 Clarendon Street, 54th Floor

  
	
   

  	
   

  	
  Boston, MA 02116

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MPM BIOVENTURES III GMBH & CO. BETEILIGUNGS
  KG

  
	
   

  	
   

  
	
   

  	
  By:  MPM
  BioVentures III GP, L.P., in its capacity as Managing Limited Partner

  
	
   

  	
   

  
	
   

  	
  By: MPM BioVentures III
  LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Nicholas Simon III

  
	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
  Nicholas
  Simon III

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Series A
  Member

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  200 Clarendon Street, 54th Floor

  
	
   

  	
   

  	
  Boston, MA 02116

  
						

 

SIGNATURE PAGE TO ARYx
THERAPEUTICS, INC.

SECURED NOTE AND WARRANT
PURCHASE AGREEMENT

 

 

	
  PURCHASERS:

  	
  MPM BIOVENTURES III PARALLEL FUND, L.P.

  
	
   

  	
   

  
	
   

  	
  By:  MPM
  BioVentures III GP, L.P., its General Partner

  
	
   

  	
   

  
	
   

  	
  By: MPM BioVentures III
  LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Nicholas Simon III

  
	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
  Nicholas
  Simon III

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Series A
  Member

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  200 Clarendon Street, 54th Floor

  
	
   

  	
   

  	
  Boston, MA 02116

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MPM ASSET MANAGEMENT INVESTORS 2002 BVIII LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Nicholas Simon III

  
	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
  Nicholas
  Simon III

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Manager

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  200 Clarendon Street, 54th Floor

  
	
   

  	
   

  	
  Boston,
  MA 02116

  
						

 

SIGNATURE PAGE TO ARYx
THERAPEUTICS, INC.

SECURED NOTE AND WARRANT
PURCHASE AGREEMENT

 

 

	
  PURCHASER:

  	
  AYER CAPITAL PARTNERS MASTER
  FUND, L.P.

  
	
   

  	
   

  
	
   

  	
  By:
  Ayer Capital Partners, LLC, its general partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Jay Venkatesan

  
	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
  Jay
  Venkatesan

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Managing
  Member

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  Ayer Capital Management,
  L.P.

  
	
   

  	
   

  	
  Attn: Jay Venkatesan

  
	
   

  	
   

  	
  230 California Street,
  Suite 600

  
	
   

  	
   

  	
  San
  Francisco, CA 94111

  
	
   

  	
   

  	
  fax: (415) 651-9005

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  AYER CAPITAL PARTNERS KESTREL
  FUND, L.P.

  
	
   

  	
   

  
	
   

  	
  By:
  Ayer Kestrel Partners, LLC, its general partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Jay Venkatesan

  
	
   

  	
   

  
	
   

  	
  Print
  Name:

  	
  Jay
  Venkatesan

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Managing
  Member

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  Ayer Capital Management,
  L.P.

  
	
   

  	
   

  	
  Attn: Jay Venkatesan

  
	
   

  	
   

  	
  230 California Street,
  Suite 600

  
	
   

  	
   

  	
  San
  Francisco, CA 94111

  
	
   

  	
   

  	
  fax: (415) 651-9005

  
						

 

SIGNATURE PAGE TO ARYx
THERAPEUTICS, INC.

SECURED NOTE AND WARRANT
PURCHASE AGREEMENT

 

 

SCHEDULE OF PURCHASERS

 

INITIAL CLOSING: AUGUST 13, 2010

 

	
  NAME

  	
   

  	
  LOAN

  AMOUNT

  	
   

  	
  WARRANT

  PURCHASE

  PRICE

  	
   

  	
  TOTAL

  AGGREGATE

  PRICE

  	
   

  	
  WARRANT

  SHARES

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ayer Capital Partners Master Fund, L.P.

  	
   

  	
  $

  	
  965,000.00

  	
   

  	
  $

  	
  6,031.25

  	
   

  	
  $

  	
  971,031.25

  	
   

  	
  482,500

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ayer Capital Partners Kestrel Fund, L.P.

  	
   

  	
  $

  	
  35,000.00

  	
   

  	
  $

  	
  218.75

  	
   

  	
  $

  	
  35,218.75

  	
   

  	
  17,500

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM BioVentures III, L.P.

  	
   

  	
  $

  	
  55,950.00

  	
   

  	
  $

  	
  349.69

  	
   

  	
  $

  	
  56,299.69

  	
   

  	
  27,975

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM BioVentures III-QP, L.P.

  	
   

  	
  $

  	
  832,150.00

  	
   

  	
  $

  	
  5,200.94

  	
   

  	
  $

  	
  837,350.94

  	
   

  	
  416,075

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM BioVentures III GmbH & Co. Beteiligungs KG

  	
   

  	
  $

  	
  70,320.00

  	
   

  	
  $

  	
  439.50

  	
   

  	
  $

  	
  70,759.50

  	
   

  	
  35,160

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM BioVentures III Parallel Fund, L.P.

  	
   

  	
  $

  	
  25,140.00

  	
   

  	
  $

  	
  157.13

  	
   

  	
  $

  	
  25,297.13

  	
   

  	
  12,570

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM Asset Management Investors 2002 BVIII LLC

  	
   

  	
  $

  	
  16,440.00

  	
   

  	
  $

  	
  102.75

  	
   

  	
  $

  	
  16,542.75

  	
   

  	
  8,220

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL

  	
   

  	
  $

  	
  2,000,000.00

  	
   

  	
  $

  	
  12,500.01

  	
   

  	
  $

  	
  2,012,500.01

  	
   

  	
  1,000,000

  	
   

  

 

 

SCHEDULE OF PURCHASERS

 

SECOND CLOSING: SEPTEMBER 30, 
2010

 

	
  NAME

  	
   

  	
  LOAN

  AMOUNT

  	
   

  	
  WARRANT

  PURCHASE

  PRICE

  	
   

  	
  TOTAL

  AGGREGATE

  PRICE

  	
   

  	
  WARRANT

  SHARES

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ayer
  Capital Partners Master Fund, L.P.*

  	
   

  	
  $

  	
  1,000,000.00

  	
   

  	
  $

  	
  6,250.00

  	
   

  	
  $

  	
  1,006,250.00

  	
   

  	
  500,000

  	
   

  
	
  Ayer Capital Partners
  Kestrel Fund, L.P.*

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM BioVentures III, L.P.

  	
   

  	
  $

  	
  55,950.00

  	
   

  	
  $

  	
  349.69

  	
   

  	
  $

  	
  56,299.69

  	
   

  	
  27,975

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM BioVentures III-QP, L.P.

  	
   

  	
  $

  	
  832,150.00

  	
   

  	
  $

  	
  5,200.94

  	
   

  	
  $

  	
  837,350.94

  	
   

  	
  416,075

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM BioVentures III GmbH & Co. Beteiligungs KG

  	
   

  	
  $

  	
  70,320.00

  	
   

  	
  $

  	
  439.50

  	
   

  	
  $

  	
  70,759.50

  	
   

  	
  35,160

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM BioVentures III Parallel Fund, L.P.

  	
   

  	
  $

  	
  25,140.00

  	
   

  	
  $

  	
  157.13

  	
   

  	
  $

  	
  25,297.13

  	
   

  	
  12,570

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  MPM Asset Management Investors 2002 BVIII LLC

  	
   

  	
  $

  	
  16,440.00

  	
   

  	
  $

  	
  102.75

  	
   

  	
  $

  	
  16,542.75

  	
   

  	
  8,220

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL

  	
   

  	
  $

  	
  2,000,000.00

  	
   

  	
  $

  	
  12,500.01

  	
   

  	
  $

  	
  2,012,500.01

  	
   

  	
  1,000,000

  	
   

  

 

* Allocation of Loan Amount between such affiliated
Purchasers to be provided by such Purchasers prior to the Second Closing.

 

 

EXHIBIT A

 

FORM OF SECURED PROMISSORY NOTE

 

 

THIS SECURED PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.  NO
SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144
UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL FOR THE HOLDER REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.

 

SECURED PROMISSORY NOTE

 

	
  $[                                            ]

  	
  , 2010

  
	
   

  	
  Fremont, California

  

 

FOR VALUE RECEIVED, ARYx
THERAPEUTICS, INC., a Delaware corporation (“Borrower”), hereby promises to pay
to the order of                 (“Lender”),
in lawful money of the United States of America and in immediately available
funds, the principal sum of                 (the
“Loan”) together with accrued and
unpaid interest thereon, each due and payable on the dates and in the manner
set forth below.

 

This
Secured Promissory Note is one of a series of notes (collectively, the “Notes”) referred to in and is
executed and delivered in connection with that certain Security Agreement dated
as of even date herewith and executed by Borrower in favor of the Secured
Parties set forth therein (as the same may from time to time be amended,
modified or supplemented or restated, the “Security Agreement”).  Additional rights of Lender are set forth in
the Security Agreement.  All capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings given to them in the Security Agreement.

 

2.     Principal Repayment.  Beginning January 1, 2011 (the “Amortization Date”), and continuing
for so long as any principal amount is outstanding under this Note, Borrower
shall make monthly payments equal to 1/24 of the principal amount outstanding
on the Amortization Date.  On January 1,
2013 (the Maturity Date”), Borrower
shall pay Lender any principal amount that remains outstanding under this Note.

 

3.     Interest Rate.  Borrower further promises to pay interest on
the outstanding principal amount hereof from the date hereof until payment in
full, which interest shall be payable at the rate of twelve percent (12.0%) per
annum or the maximum rate permissible by law (which under the laws of the State
of California shall be deemed to be the laws relating to permissible rates of
interest on commercial loans), whichever is less.  Interest shall be due and payable monthly in
advance not later than the first day of each calendar month for upcoming month
and shall be calculated on the basis of a 365-day year for the actual number of
days elapsed.

 

4.     Place of Payment.  All amounts payable hereunder shall be
payable at the office of Lender,
                                       ,
unless another place of payment shall be specified in writing by Lender.

 

5.     Application of Payments.  Payment on this Note shall be applied first
to accrued interest, and thereafter to the outstanding principal balance
hereof.  All payments of interest and
principal shall be made pro rata among all holders of Notes.

 

 

6.     Early Repayment and Purchase of Equity Securities.

 

6.1          Prepayment.  The Borrower
may repay the entire outstanding principal balance and all accrued interest of
this Note at any time without the consent of the Lender.  All payments made pursuant to this Section 5.1
shall be made on a pro rata basis among all holders of Notes in accordance with
Section 4 above.

 

6.2          Qualified Strategic Transaction.  In the event Borrower (a) sells any or all
of its assets or (b) enters into a Strategic Collaboration Agreement
pursuant to which, in each case, the Borrower receives total proceeds of not
less than $15,000,000.00 (the “Cash Proceeds Threshold”)
on or before the Maturity Date, all unpaid principal, accrued interest and
other amounts owing hereunder shall be due and payable within ten (10) business
days of Borrower’s receipt of such funds, unless waived in writing by Lender.

 

6.3          Qualified Financing. 
In the event Borrower issues and sells shares of its Equity Securities
to investors (the “Investors”) on or before the
Maturity Date in an equity financing with total proceeds to Borrower of not
less than $30,000,000.00 (excluding cancellation of the Notes or other debt) (a
“Qualified Financing”), then Lender
shall have the option to surrender the Note to the Borrower and apply the
outstanding principal balance of this Note and any unpaid accrued interest
toward the purchase by Lender of the Equity Securities at a price equal to the
price per share paid by the Investors purchasing the Equity Securities and on
the same terms and conditions as given to the Investors.

 

6.4          Non-Qualified Transaction.  In the event Borrower, on or before the
Maturity Date, (a) sells any or all of its assets or enters into a Strategic
Collaboration Agreement which, in each case, does not meet the Cash Proceeds
Threshold; (b) issues and sells shares of its Equity Securities in an equity
financing that does not constitute a Qualified Financing; or (c) issues
and sells any debt securities described in the clause (e) of the
definition of Permitted Indebtedness (as defined in the Purchase Agreement)
(each a “Non-Qualified Transaction”),
then, in each case, an amount equal to the lesser of (i) all unpaid
principal, accrued interest and other amounts owing under the then-outstanding
Notes or (ii) fifty percent (50%) of the funds received pursuant to the
Non-Qualified Transaction shall be due and payable on a pro rata basis to the
holders of the Notes within ten (10) business days of Borrower’s receipt
of funds pursuant to the Non-Qualified Transaction, unless waived in writing by
a holder of a Note; provided, however,
that in the event the Non-Qualified Transaction is structured such that
Borrower receives funds in multiple closings or tranches, payment pursuant to
this Section 5.4 shall not be due until ten (10) business days
following the closing in which at least thirty percent (30%) of the total
committed funds has been received. All payments made pursuant to this Section 5.4
shall be made on a pro rata basis among all holders of Notes in accordance with
Section 4 above.

 

6.5          Certain Definitions.  For purposes of this Note, the following
terms shall have the following meanings:

 

(a)   “Equity Securities”
shall mean the Borrower’s capital stock, any securities conferring the right to
purchase the Borrower’s capital stock or securities convertible into or
exchangeable for (with or without additional consideration) the Borrower’s
capital stock (excluding the Notes and Warrants), in each case issued in the
Qualified Financing following the date hereof, except that such defined term
shall not include any capital stock or securities granted, issued and/or sold
by the Borrower to any employee, director or consultant in such capacity with
the unanimous approval of the Board of Directors.

 

(b)   “Strategic Collaboration
Agreement” shall mean any strategic collaboration agreement
including, without limitation, a license agreement, co-development agreement,
co-promotion

 

 

agreement or other agreement in which the Borrower
grants rights in its products or intellectual property, whether with a new or
existing strategic partner of Borrower.

 

7.     Secured Note.  The full amount of this Note is secured by
the Collateral identified and described as security therefor in the Security
Agreement executed by and delivered by Borrower to Lender.  Borrower shall not, directly or indirectly,
create, permit or suffer to exist, and shall defend the Collateral against and
take such other action as is necessary to remove, any Lien on or in the
Collateral, or in any portion thereof, except as permitted pursuant to the
Security Agreement.

 

8.     Default.  Each
of the following events shall be an “Event of Default”
hereunder:

 

(a)   Borrower fails to pay timely any of the principal
amount due under this Note or any accrued interest or other amounts due under
this Note on the date the same becomes due and payable or within five (5) business
days thereafter;

 

(b)   Borrower files any petition or action for relief
under any bankruptcy, reorganization, insolvency or moratorium law or any other
law for the relief of, or relating to, debtors, now or hereafter in effect, or
makes any assignment for the benefit of creditors or takes any corporate action
in furtherance of any of the foregoing; or

 

(c)   An involuntary petition is filed against Borrower
(unless such petition is dismissed or discharged within forty-five (45) days)
under any bankruptcy statute now or hereafter in effect, or a custodian,
receiver, trustee, assignee for the benefit of creditors (or other similar
official) is appointed to take possession, custody or control of any property
of Borrower.

 

(d)   An “Event of Default” under the Security Agreement.

 

Upon
the occurrence of an Event of Default hereunder, all unpaid principal, accrued
interest and other amounts owing hereunder shall, at the option of Lender, and,
in the case of an Event of Default pursuant to (b) or
(c) above, automatically, be
immediately due, payable and collectible by Lender pursuant to applicable law.

 

9.     Waiver. 
Borrower waives presentment and demand for payment, notice of dishonor,
protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including, without limitation, reasonable attorneys’
fees, costs and other expenses.

 

10.  Amendment. 
Except as otherwise provided for in Section 7.8 of the Purchase
Agreement, any provision of the Notes may be amended or waived by the written
consent of the Company and the Majority Holders (as defined in the Purchase
Agreement) and such amendment or waivers shall apply to all Notes in the same
manner.

 

11.  Statute of Limitations.  The right to
plead any and all statutes of limitations as a defense to any demands hereunder
is hereby waived to the full extent permitted by law.

 

12.  Governing Law.  This Note shall be governed by, and construed
and enforced in accordance with, the laws of the State of California, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.

 

13.  Successors and Assigns.  The provisions of this Note shall inure to
the benefit of and be binding on any successor to Borrower and shall extend to
any holder hereof.

 

 

	
  BORROWER

  	
  ARYx
  THERAPEUTICS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Printed
  Name:

  	
  Paul
  Goddard, Ph.D.

  
	
   

  	
   

  
	
   

  	
  Title:

  	
  Chairman
  and Chief Executive Officer

  
					

 

 

EXHIBIT B

 

FORM OF WARRANTEXHIBIT 10.2

 

SECURITY AGREEMENT

 

THIS SECURITY AGREEMENT dated as of August 13,
2010 (this “Security Agreement”), is made
by and among ARYx THERAPEUTICS, INC., a
Delaware corporation (“Grantor”),
and the secured parties listed on the signature pages hereto (each, a “Secured Party” and, collectively,
the “Secured Parties”).

 

RECITALS

 

A.                                    Each Secured
Party has made and has agreed to make certain advances of money and to extend
certain financial accommodations to Grantor, as evidenced by those certain
Secured Promissory Notes of even date herewith executed by Grantor in favor of
each Secured Party and such other Secured Promissory Notes which may be
executed by Grantor in favor of each Secured Party after the date hereof (each,
a “Note” and, collectively, the “Notes”), pursuant to that certain
Note and Warrant Purchase Agreement dated August 13, 2010 by and between
Grantor and the Secured Parties (the “Purchase Agreement”),
such advances, future advances,  and
financial accommodations being referred to herein as the “Loans.”

 

B.                                    The Secured
Parties are willing to make the Loans to Grantor, but only upon the condition,
among others, that Grantor shall have executed and delivered to the Secured
Parties this Security Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in order to induce the Secured Parties to
make the Loans and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, and intending to be legally bound,
Grantor hereby represents, warrants, covenants and agrees as follows:

 

1.                                      DEFINED
TERMS.  When used in this Security
Agreement the following terms shall have the following meanings (such meanings
being equally applicable to both the singular and plural forms of the terms
defined):

 

“Bankruptcy Code” means Title XI of
the United States Code.

 

“Collateral” shall have the meaning
assigned to such term in Section 2
of this Security Agreement.

 

“Contracts” means all contracts
(including any customer, vendor, supplier, service or maintenance contract),
leases, licenses, undertakings, purchase orders, permits, franchise agreements
or other agreements (other than any right evidenced by Chattel Paper, Documents
or Instruments), whether in written or electronic form, in or under which
Grantor now holds or hereafter acquires any right, title or interest,
including, without limitation, with respect to an Account, any agreement
relating to the terms of payment or the terms of performance thereof.

 

“Copyrights” means all of the
following now owned or hereafter acquired or created (as a work for hire for
the benefit of Grantor) by Grantor or in which Grantor now holds or hereafter
acquires or receives any right or interest, in whole or in part: (a) all
copyrights, whether registered or unregistered, held pursuant to the laws of
the United States, any State thereof or any other country; (b) registrations,
applications, recordings and proceedings in the United States Copyright Office
or in any similar office or agency of the United States, any State thereof or
any other country; (c) any continuations, renewals or extensions thereof; (d) any
registrations to be issued in any pending applications, and shall include any

 

1

 

right
or interest in and to work protectable by any of the foregoing which are
presently or in the future owned, created or authorized (as a work for hire for
the benefit of Grantor) or acquired by Grantor, in whole or in part; (e) prior
versions of works covered by copyright and all works based upon, derived from
or incorporating such works; (f) income, royalties, damages, claims and
payments now and hereafter due and/or payable with respect to copyrights,
including, without limitation, damages, claims and recoveries for past, present
or future infringement; (g) rights to sue for past, present and future
infringements of any copyright; and (h) any other rights corresponding to
any of the foregoing rights throughout the world.

 

“Event of Default” means (i) any
failure by Grantor forthwith to pay or perform any of the Secured Obligations; (ii) any
breach by Grantor of any warranty, representation, or covenant set forth herein
or in the Purchase Agreement; (iii) any “Event of Default” as defined in
the Notes; (iv) if any material portion of Grantor’s assets is attached or
seized, or a levy is filed against any such assets, or a judgment or judgments
is/are entered for the payment of money, individually or in the aggregate, of
at least $100,000, or Borrower is enjoined or in any way prevented by court
order from conducting any part of its business; and/or (v) any default
under (x) that certain Oxford Loan and Security Agreement No. 4521,
dated as of March 28, 2005, by and between the Grantor and Lighthouse
Capital Partners V, L.P., as amended, modified or supplement from time to time,
(y) that certain Loan Agreement, dated as of December 31, 2008, by
and between the Grantor and Oxford Financial Corporation as amended, modified
or supplement from time to time and/or (z) any other agreement or
obligation of Grantor involving any indebtedness in excess of $100,000.

 

“Intellectual Property” means any
intellectual property, in any medium, of any kind or nature whatsoever, now or
hereafter owned or acquired or received by Grantor or in which Grantor now
holds or hereafter acquires or receives any right or interest, and shall
include, in any event, any Copyright, Trademark, Patent, License, trade secret,
customer list, marketing plan, internet domain name (including any right
related to the registration thereof), proprietary or confidential information,
mask work, source, object or other programming code, invention (whether or not
patented or patentable), technical information, procedure, design, knowledge,
know-how, software, data base, data, skill, expertise, recipe, experience,
process, model, drawing, material or record.

 

“Investment” is any beneficial
ownership interest in any Person (including stock, partnership interest or
other securities), and any loan, advance or capital contribution to any Person.

 

“License” means any Copyright
License, Patent License, Trademark License or other license of rights or
interests, whether in-bound or out-bound, whether in written or electronic
form, now or hereafter owned or acquired or received by Grantor or in which
Grantor now holds or hereafter acquires or receives any right or interest, and
shall include any renewals or extensions of any of the foregoing thereof.

 

“Lien” means any mortgage, lien, deed
of trust, charge, pledge, security interest or other encumbrance.

 

“Majority Holders” means each Secured
Party, provided, that following any assignment of the Secured Obligations by
any Secured Party, the Majority Holders shall mean any Secured Party or group
of Secured Parties holding greater than fifty percent (50%) of the outstanding
and unpaid principal under all Loans of all Secured Parties.

 

“Money” means a medium
of exchange authorized or adopted by a domestic or foreign government and
includes a monetary unit of account established by an intergovernmental
organization or by agreement between two or more nations.

 

2

 

“Patent License” means any agreement,
whether in written or electronic form, in which Grantor now holds or hereafter
acquires any interest, granting any right with respect to any invention on which
a Patent is in existence (whether Grantor is the licensee or the licensor
thereunder).

 

“Patents” means all of the following
in which Grantor now holds or hereafter acquires any interest: (a) all
letters patent of the United States or any other country, all registrations and
recordings thereof and all applications for letters patent of the United States
or any other country, including, without limitation, registrations, recordings
and applications 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; (b)all reissues, divisions, continuations, renewals,
continuations-in-part or extensions thereof; (c) all petty patents,
divisionals and patents of addition; (d) all patents to issue in any such
applications; (e) income, royalties, damages, claims and payments now and
hereafter due and/or payable with respect to patents, including, without
limitation, damages, claims and recoveries for past, present or future infringement;
and (f) rights to sue for past, present and future infringements of any
patent.

 

“Permitted Indebtedness” has the meaning
given it in the Purchase Agreement.

 

“Permitted Liens” means the Liens
described on Schedule A.

 

“Person” is any individual, sole
proprietorship, partnership, limited liability company, joint venture, company,
trust, unincorporated organization, association, corporation, institution,
public benefit corporation, firm, joint stock company, estate, entity or
government agency.

 

“Pro Rata” means, as to any Secured
Party at any time, the percentage equivalent at such time of such Secured Party’s
aggregate unpaid principal amount of Loans, divided by the combined aggregate
unpaid principal amount of all Loans of all Secured Parties.

 

“Secured Obligations” means (a) the
obligation of Grantor to repay the Secured Parties all of the unpaid principal
amount of, and accrued interest on (including any interest that accrues after
the commencement of bankruptcy), the Loans and (b) the obligation of
Grantor to pay any fees, costs and expenses of Secured Party under the Notes,
the Purchase Agreement or this Security Agreement.

 

“Security Agreement” means this
Security Agreement and all Schedules hereto, as the same may from time to time
be amended, modified, supplemented or restated.

 

“Trademark License” means any
agreement, whether in written or electronic form, in which Grantor now holds or
hereafter acquires any interest, granting any right in and to any Trademark or
Trademark registration (whether Grantor is the licensee or the licensor
thereunder).

 

“Trademarks” means any of the
following in which Grantor now holds or hereafter acquires any interest: (a) any
trademarks, tradenames, corporate names, company names, business names, trade
styles, service marks, logos, other source or business identifiers, prints and
labels on which any of the foregoing have appeared or appear, designs and
general intangibles of like nature, now existing or hereafter adopted or
acquired, all registrations and recordings thereof and any applications in
connection therewith, including, without limitation, registrations, recordings
and applications 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 (collectively, the “Marks”); (b) any reissues, extensions or
renewals thereof; (c) the goodwill of the business symbolized by or
associated with the Marks; (d) income, royalties, damages, claims and
payments now and hereafter due and/or payable with respect to the Marks,
including, without limitation, damages, claims and recoveries for past, present
or future infringement; and (e) rights to sue for past, present and future
infringements of the Marks.

 

3

 

“UCC” means the Uniform Commercial
Code as the same may from time to time be in effect in the State of California
(and each reference in this Security Agreement to an Article thereof
(denoted as a Division of the UCC as adopted and in effect in the State of
California) shall refer to that Article (or Division, as applicable) as
from time to time in effect, which in the case of Article 9 shall include
and refer to Revised Article 9 from and after the date Revised
Article 9 shall become effective in the State of California); provided, however, in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection or priority of the
Secured Parties’ security interest in any Collateral is governed by the Uniform
Commercial Code as in effect in a jurisdiction other than the State of
California, the term “UCC” shall mean
the Uniform Commercial Code (including the Articles thereof) as in effect at
such time in such other jurisdiction for purposes of the provisions hereof relating
to such attachment, perfection or priority and for purposes of definitions
related to such provisions.

 

In
addition, the following terms shall be defined terms having the meaning set
forth for such terms in the UCC: “Account” , “Account Debtor”, “Chattel Paper”,
“Commercial Tort Claims”, “Commodity Account”, “Deposit Account”, “Documents”, “Equipment”,
“Fixtures”, “General Intangible”, “Goods”, “Instrument”, “Inventory”, “Investment
Property”, “Letter-of-Credit Right”, “Payment Intangibles”, “Proceeds”, “Promissory
Notes”, “Securities Account”, and “Supporting Obligations”.  Each of the foregoing defined terms shall
include all of such items now owned, or hereafter acquired, by Grantor.

 

2.                                      GRANT
OF SECURITY INTEREST.  As
collateral security for the full, prompt, complete and final payment and
performance when due (whether at stated maturity, by acceleration or otherwise)
of all the Secured Obligations and in order to induce the Secured Parties to
cause the Loans to be made, Grantor hereby assigns, conveys, mortgages,
pledges, hypothecates and transfers to the Secured Parties, and hereby grants
to the Secured Parties, a security interest in all of Grantor’s right, title
and interest in, to and under the following, whether now owned or hereafter
acquired, (all of which being collectively referred to herein as the “Collateral”):

 

(a)                                  All Accounts of
Grantor;

 

(b)                                  All Chattel
Paper of Grantor;

 

(c)                                  All Commercial
Tort Claims of Grantor;

 

(d)                                  All Commodity
Accounts of Grantor;

 

(e)                                  All Contracts
of Grantor;

 

(f)                                    All Deposit
Accounts of Grantor;

 

(g)                                 All Documents
of Grantor;

 

(h)                                 All General
Intangibles of Grantor, including, without limitation, Intellectual
Property;

 

(i)                                    All Goods of
Grantor, including, without limitation,
Equipment, Inventory, and Fixtures;

 

(j)                                    All Instruments
of Grantor, including, without limitation, Promissory Notes;

 

(k)                                All Investment
Property of Grantor;

 

4

 

(l)                                    All Letter-of
Credit Rights of Grantor;

 

(m)                              All Money of
Grantor;

 

(n)                                 All Securities
Accounts of Grantor;

 

(o)                                  All Supporting
Obligations of Grantor;

 

(p)                                  All property of
Grantor held by any Secured Party, or any other party for whom any Secured
Party is acting as agent, including, without limitation, all property of every
description now or hereafter in the possession or custody of or in transit to
any Secured Party or such other party for any purpose, including, without
limitation, safekeeping, collection or pledge, for the account of Grantor, or
as to which Grantor may have any right or power;

 

(q)                                  All other goods
and personal property of Grantor, wherever located, whether tangible or
intangible, and whether now owned or hereafter acquired, existing, leased or
consigned by or to Grantor; and

 

(r)                                  To the extent
not otherwise included, all Proceeds of each of the foregoing and all
accessions to, substitutions and replacements for and rents, profits and
products of each of the foregoing.

 

Notwithstanding
the foregoing provisions of this Section 2,
the grant, assignment and transfer of a security interest as provided herein
shall not extend to, and the term “Collateral”
shall not include:  (a) “intent-to-use”
trademarks at all times prior to the first use thereof, whether by the actual
use thereof in commerce, the recording of a statement of use with the United
States Patent and Trademark Office or otherwise or (b) any Account,
Chattel Paper, General Intangible or Promissory Note in which Grantor has any
right, title or interest if and to the extent such Account, Chattel Paper, General
Intangible or Promissory Note includes a provision containing a restriction on
assignment such that the creation of a security interest in the right, title or
interest of Grantor therein would be prohibited and would, in and of itself,
cause or result in a default thereunder enabling another person party to such
Account, Chattel Paper, General Intangible or Promissory Note to enforce any
remedy with respect thereto; provided that
the foregoing exclusion shall not apply if (i) such prohibition has been waived
or such other person has otherwise consented to the creation hereunder of a
security interest in such Account, Chattel Paper, General Intangible or
Promissory Note or (ii) such prohibition would be rendered ineffective
pursuant to Sections 9-406, 9-407 or 9-408 of the UCC, as applicable and as
then in effect in any relevant jurisdiction, or any other applicable law
(including the Bankruptcy Code) or principles of equity); provided
further that immediately upon the ineffectiveness, lapse or
termination of any such provision, the Collateral shall include, and Grantor
shall be deemed to have granted on the date hereof a security interest in, all
its rights, title and interests in and to such Account, Chattel Paper, General
Intangible or Promissory Note as if such provision had never been in effect;
and provided further that the foregoing
exclusion shall in no way be construed so as to limit, impair or otherwise
affect any Secured Party’s unconditional continuing security interest in and to
all rights, title and interests of Grantor in or to any payment obligations or
other rights to receive monies due or to become due under any such Account,
Chattel Paper, General Intangible or Promissory Note and in any such monies and
other proceeds of such Account, Chattel Paper, General Intangible or Promissory
Note.

 

If
Grantor shall at any time acquire a Commercial Tort Claim, Grantor shall
immediately notify Secured Party in a writing signed by Grantor of the brief
details thereof and grant to Secured Party in such writing a security interest
therein and in the proceeds thereof, all upon the terms of this Security
Agreement, with such writing to be in form and substance satisfactory to
Secured Party.

 

5

 

3.                                      REPRESENTATIONS
AND WARRANTIES.  Grantor
hereby represents and warrants to the Secured Parties that:

 

(a)                                  The
representations and warranties in Section 4 of the Purchase Agreement are
true and correct and incorporated herein by reference.

 

(b)                                  Except for the
security interest granted to the Secured Parties under this Security Agreement
and Permitted Liens, Grantor is the sole legal and equitable owner of each item
of the Collateral in which it purports to grant a security interest hereunder.

 

(c)                                  No effective
security agreement, financing statement, equivalent security or lien instrument
or continuation statement covering all or any part of the Collateral exists,
except such as may have been filed by Grantor in favor of the Secured Parties
pursuant to this Security Agreement and except for Permitted Liens.

 

(d)                                  This Security
Agreement creates a legal and valid security interest on and in all of the
Collateral in which Grantor now has rights.

 

4.                                      COVENANTS.  Unless the Majority Holders otherwise consent
(which consent shall not be unreasonably withheld), Grantor covenants and
agrees with the Secured Parties that from and after the date of this Security
Agreement and until the Secured Obligations have been performed and paid in
full and any commitment of Secured Party to make Loans to Grantor has expired
or terminated:

 

4.1                               Change
of Jurisdiction of Organization, Relocation of Business.  Grantor shall not change its jurisdiction of
organization or relocate its chief executive office, principal place of
business or its records from such address(es) provided to the Secured Parties
pursuant to Section 4(d) above
without at least ten (10) days prior notice to the Secured Parties.  All Collateral shall be located at the
locations specified on Schedule B unless prior written notice is provided to
the Secured Parties.

 

4.2                               Limitation
on Liens on Collateral. 
Grantor shall not, directly or indirectly, create, permit or suffer to
exist, and shall defend the Collateral against and take such other action as is
necessary to remove, any Lien on the Collateral, except (a) Permitted
Liens and (b) the Lien granted to the Secured Parties under this Security
Agreement.

 

4.3                               Insurance.  Grantor shall maintain insurance policies
insuring the Collateral against loss or damage from such risks and in such
amounts and forms and with such companies as are customarily maintained by
businesses similar to Grantor and shall deliver to the Secured Parties
insurance certificates evidencing such policies and naming each Secured Party
as loss payees and additional insureds.

 

4.4                               Taxes,
Assessments, Etc. 
Grantor shall pay promptly when due all property and other taxes,
assessments and government charges or levies imposed upon, and all claims
(including claims for labor, materials and supplies) against, the Goods, except
to the extent the validity or amount thereof is being contested in good faith
and adequate reserves are being maintained in connection therewith.

 

4.5                               Inspection
Right.  Grantor shall, at Grantor’s
expense, permit any representative that a Secured Party authorizes, including
its attorneys and accountants, to inspect the Collateral and examine and make
copies and abstracts of the books of account and records of Grantor at
reasonable times and upon reasonable notice during normal business hours, provided,
that such an inspection shall occur no more than once a calendar year unless an
Event of Default has occurred or is continuing.

 

6

 

4.6                               Indebtedness.  Grantor shall not create, incur, assume,
guarantee or be or remain liable with respect to any Indebtedness other than
Permitted Indebtedness.

 

4.7                               Distributions;
Investments.  Grantor
shall not (a) pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock; or (b) directly or
indirectly acquire or own any Person, or make any Investment in any Person.

 

4.8                               Transfers.  Grantor shall not voluntarily or
involuntarily transfer, sell, lease, license, lend or in any other manner
convey any equitable, beneficial or legal interest in any material portion of
their assets except on commercially reasonable terms.

 

4.9                               Financial
Statements and Reports.  If
Grantor is no longer subject to Securities Exchange Commission reporting
obligations under Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 and/or Grantor has not complied with such
reporting obligations, Grantor agrees to deliver, (i) no later than thirty
(30) days after the last day of each month, financial statements (balance
sheet, income statement and statement of cash flows) prepared under GAAP,
consistently applied, (ii) no later than ninety (90) days after the last
day of Grantor’s fiscal year, audited consolidated financial statements
prepared under GAAP, consistently applied, together with an unqualified opinion
on the financial statements from an independent certified public accounting
firm and, (iii) as and when delivered, reports and other financial
materials provided to any other lender.

 

4.10                        Further
Assurances.  At any time
and from time to time, upon the written request of a Secured Party, and at the
sole expense of Grantor, Grantor shall promptly and duly execute and deliver
any and all such further instruments and documents and take such further action
as a Secured Party may reasonably deem necessary or desirable to obtain the
full benefits of this Security Agreement, including, without limitation,
(a) executing, delivering and causing to be filed any financing or
continuation statements under the UCC with respect to the security interests
granted hereby, (b) at a Secured Party’s reasonable request, filing or
cooperating with the Secured Parties in filing any forms or other documents
required to be recorded with the United States Patent and Trademark Office,
United States Copyright Office, (c) at a Secured Party’s reasonable
request, placing the interest of the Secured Parties as lienholder on the
certificate of title (or similar evidence of ownership) of any vehicle,
watercraft or other Equipment constituting Collateral owned by Grantor which is
covered by a certificate of title (or similar evidence of ownership),
(d) executing and delivering and using commercially reasonable efforts to
cause the applicable depository institution, securities intermediary, commodity
intermediary or issuer or nominated party under a letter of credit to execute
and deliver a collateral control agreement with respect to any Deposit Account,
Securities Account or Commodity Account or Letter-of-Credit Right in or to
which Grantor has any right or interest and (e) at a Secured Party’s
reasonable request, using commercially reasonable efforts to obtain
acknowledgments from bailees having possession of any Collateral and waivers of
liens from landlords and mortgagees of any location where any of the Collateral
may from time to time be stored or located. 
Grantor also hereby authorizes the Secured Parties to file any such
financing or continuation statement without the signature of Grantor.  Grantor hereby irrevocably appoints each
Secured Party as its lawful attorney-in-fact to effect the rights granted in
the Loan Documents including, without limitation, this Section 4.10 and Section 5.

 

5.                                      RIGHTS
AND REMEDIES UPON DEFAULT.  If an Event of
Default shall have occurred and while such Event of Default is continuing:

 

(a)                                  A Secured Party
may exercise in addition to all other rights and remedies granted to it under
this Security Agreement, the Notes or the Purchase Agreement all rights and
remedies of a secured party under the UCC. 
Without limiting the generality of the foregoing, Grantor expressly
agrees that in any such event a Secured Party, without demand of performance or
other demand, advertisement 

 

7

 

or
notice of any kind (except the notice specified below of time and place of
public or private sale) to or upon Grantor or any other person, may (i) reclaim,
take possession, recover, store, maintain, finish, repair, prepare for sale or
lease, shop, advertise for sale or lease and sell or lease (in the manner
provided herein) the Collateral, and in connection with the liquidation of the
Collateral and collection of the accounts receivable pledged as Collateral, use
any Trademark, Copyright, or process used or owned by Grantor and (ii) forthwith
collect, receive, appropriate and realize upon the Collateral, or any part
thereof, and may forthwith sell, lease, assign, give an option or options to
purchase or sell or otherwise dispose of and deliver said Collateral (or
contract to do so), or any part thereof, in one or more parcels at public or
private sale or sales, at any exchange or broker’s board or at any Secured
Party’s offices or elsewhere at such prices as it may deem commercially
reasonable, for cash or on credit or for future delivery without assumption of
any credit risk.  Grantor further agrees,
at a Secured Party’s request, to assemble the Collateral and make it available
to the Secured Parties at places which the Secured Parties shall reasonably
select, whether at Grantor’s premises or elsewhere.

 

(b)                                  Grantor also
agrees to pay all fees, costs and expenses of the Secured Parties, including,
without limitation, attorneys’ fees, incurred in connection with the
enforcement of any of its rights and remedies hereunder.

 

(c)                                  Grantor hereby
waives presentment, demand, protest or any notice (to the maximum extent
permitted by applicable law) of any kind in connection with this Security
Agreement or any Collateral.

 

(d)                                  The Proceeds of
any sale, disposition or other realization upon all or any part of the
Collateral shall be distributed by the Secured Parties in the following order
of priorities:

 

FIRST, to each Secured Party in an amount sufficient to
pay in full the costs of such Secured Party in connection with such sale,
disposition or other realization, including all fees, costs, expenses,
liabilities and advances incurred or made by any Secured Party in connection
therewith, including, without limitation, attorneys’ fees;

 

SECOND, to the Secured Parties in amounts proportional to
the Pro Rata share of the then unpaid Secured Obligations of each Secured
Party; and

 

FINALLY, upon payment in full of the Secured Obligations,
to Grantor or its representatives, in accordance with the UCC or as a court of
competent jurisdiction may direct.

 

(e)                                  The costs of
enforcing or pursuing any right or remedy hereunder, including without
limitation any repossession, sale, possession and management (including,
without limitation, reasonable attorneys’ fees), and distribution shall be
borne Pro Rata by the Secured Parties until reimbursement by Grantor.  Each Secured Party shall reimburse the other
Secured Parties, as applicable, for its Pro Rata share of all such costs
promptly upon demand.

 

6.                                      [RESERVED.].

 

7.                                      UNEQUAL
PAYMENT BY GRANTOR.  Each
Secured Party agrees that if it shall obtain or receive under the Notes or by
applicable law, including, but not limited to any right of set-off, any secured
claim under Section 506 of the Bankruptcy Code or any other security or
interest, any payment or payments greater than its Pro Rata share of all Loans,
as measured immediately prior to the receipt of such payment or payments, then (a) such
Secured Party shall hold such amounts in trust for the other Secured Parties
and promptly purchase at par (and shall be deemed to have thereupon purchased)
from other Secured Parties, a participation in the Loans of such other Secured
Parties, so that each Secured 

 

8

 

Party
shall have received payments in proportion to its Pro Rata share immediately
prior to such transactions and (b) such other adjustments shall be made
from time to time as shall be equitable to ensure that the Secured Parties
share the benefits of such payment on a Pro Rata basis.  The term “Loan” as used in this paragraph
shall include accrued interest thereon.

 

8.                                      INDEMNITY.  Grantor agrees to defend, indemnify and hold
harmless the Secured Parties and their officers, employees, and agents against (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Security
Agreement and the other Loan Documents, and (b) all losses or expenses in
any way suffered, incurred, or paid by any Secured Party as a result of or in
any way arising out of, following or consequential to transactions between any
Secured Party and Grantor, whether under this Security Agreement, the other
Loan Documents or otherwise (including without limitation, reasonable attorneys
fees and expenses), except for losses arising from or out of such Secured Party’s
gross negligence or willful misconduct.

 

9.                                      REINSTATEMENT.  This Security Agreement shall remain in full
force and effect and continue to be effective should any petition be filed by
or against Grantor for liquidation or reorganization, should Grantor become
insolvent or make an assignment for the benefit of creditors or should a
receiver or trustee be appointed for all or any significant part of Grantor’s
property and assets, and shall continue to be effective or be reinstated, as
the case may be, if at any time payment and performance of the Secured
Obligations, or any part thereof, is, pursuant to applicable law, rescinded or
reduced in amount, or must otherwise be restored or returned by any obligee of
the Secured Obligations, whether as a “voidable preference,” “fraudulent
conveyance,” or otherwise, all as though such payment or performance had not
been made.  In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Secured Obligations shall be reinstated and deemed reduced only by such amount
paid and not so rescinded, reduced, restored or returned.

 

10.                               COLLATERAL
AGENT.  If each Secured Party is
unable to perfect a security interest in any of the Collateral including,
without limitation, control over deposit accounts and securities accounts
and/or possession of certain property, each of the Secured Parties hereby
appoints Ayer, and Ayer agrees to act as their agent with respect to such
Collateral for perfection by possession or exercise of control and to promptly
perform written instructions received from such other Secured Parties with
respect to such Collateral that are reasonably necessary to undertake any
remedies permitted by Section 5

 

11.                               MISCELLANEOUS.

 

11.1                        Waivers;
Modifications.  None of the
terms or provisions of this Security Agreement may be waived, altered, modified
or amended except by an instrument in writing, duly executed by Grantor and the
Majority Holders and all such waivers and amendments shall be at Grantor’s
expense.  Each Secured Party acknowledges
that because this Security Agreement may be amended with the consent of the
Majority Holders, each Secured Party’s rights hereunder may be amended or
waived without such Secured Party’s consent. 
Notwithstanding the foregoing, the consent of each Secured Party shall
be necessary (i) to amend the definition of Collateral and (ii) as
otherwise specified in Section 7.8 of the Purchase Agreement.

 

11.2                        Termination
of this Security Agreement.  Subject to Section 9
hereof, this Security Agreement shall terminate upon the payment and
performance in full of the Secured Obligations.

 

11.3                        Successor
and Assigns.  This
Security Agreement binds and is for the benefit of the successors and permitted
assigns of each party.  Grantor may not
assign this Security Agreement, the Notes or the Purchase Agreement or any
rights or obligations thereunder without each Secured Party’s prior written
consent (which may be granted or withheld in the Secured Parties’
discretion).  Each 

 

9

 

Secured
Party has the right, without the consent of or notice to Grantor, to sell,
transfer, assign, negotiate, or grant participation in all or any part of, or
any interest in, such Secured Party’s obligations, rights, and benefits under
this Security Agreement, the Notes, the Purchase Agreement and the other Loan
Documents.  No sales of participations,
other sales, assignments, transfers or other dispositions of any agreement
governing or instrument evidencing the Secured Obligations or any portion
thereof or interest therein shall in any manner affect the lien granted to the
Secured Parties hereunder.

 

11.4                        Counterparts.  This Security Agreement may be executed in
any number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, is an original, and all taken
together, constitute one Agreement.

 

11.5                        Severability
of Provisions.  Each
provision of this Security Agreement is severable from every other provision in
determining the enforceability of any provision.

 

11.6                        Governing
Law.  In all respects, including all
matters of construction, validity and performance, this Security Agreement
shall be governed by, and construed and enforced in accordance with, the laws
of the State of California applicable to contracts made and performed in such
state, without regard to the principles thereof regarding conflict of laws,
except to the extent that the UCC provides for the application of the law of a
different jurisdiction.

 

[Signature pages follow.]

 

10

 

IN WITNESS WHEREOF, each of the parties hereto
has caused this Security Agreement to be executed and delivered by its duly
authorized officer on the date first set forth above.

 

 

	
  ADDRESS
  OF GRANTOR

  	
   

  	
  ARYx
  THERAPEUTICS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  6300
  Dumbarton Circle

  	
   

  	
  By:
  

  	
  /s/
  Paul Goddard

  
	
   

  	
   

  	
   

  
	
  Fremont,
  California 94555

  	
   

  	
  Printed
  Name: 

  	
  Paul
  Goddard, Ph.D.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Chairman
  and Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  TAXPAYER
  IDENTIFICATION NUMBER OF GRANTOR

  	
   

  	
  JURISDICTION
  OF ORGANIZATION OF GRANTOR

  
	
   

  	
   

  	
   

  
	
  77-0456039

  	
   

  	
  Delaware

  
						

 

SIGNATURE PAGE TO ARYx
THERAPEUTICS, INC.

SECURITY AGREEMENT

 

 

	
  ACCEPTED
  AND ACKNOWLEDGED BY:

  	
   

  
	
   

  	
   

  
	
  AYER CAPITAL PARTNERS MASTER
  FUND, L.P.

  	
   

  
	
   

  	
   

  
	
  By:
  Ayer Capital Partners, LLC, its general partner

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Jay Venkatesan

  	
   

  
	
   

  	
   

  	
   

  
	
  Print
  Name:

  	
  Jay
  Venkatesan

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
  Managing
  Member

  	
   

  
	
   

  	
   

  	
   

  
	
  Address:

  	
  Ayer Capital Management,
  L.P.

  	
   

  
	
   

  	
  Attn: Jay Venkatesan

  	
   

  
	
   

  	
  230 California Street,
  Suite 600

  	
   

  
	
   

  	
  San
  Francisco, CA 94123

  	
   

  
	
   

  	
  fax: (415) 651-9005

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
  AYER CAPITAL PARTNERS KESTREL
  FUND, L.P.

  	
   

  
	
   

  	
   

  
	
  By: Ayer Kestrel Partners, LLC, its general
  partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Jay Venkatesan

  	
   

  
	
   

  	
   

  	
   

  
	
  Print
  Name:

  	
  Jay
  Venkatesan

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
  Managing
  Member

  	
   

  
	
   

  	
   

  	
   

  
	
  Address:

  	
  Ayer Capital Management,
  L.P.

  	
   

  
	
   

  	
  Attn: Jay Venkatesan

  	
   

  
	
   

  	
  230 California Street,
  Suite 600

  	
   

  
	
   

  	
  San
  Francisco, CA 94123

  	
   

  
	
   

  	
  fax:
  (415) 651-9005

  	
   

  
								

 

SIGNATURE PAGE TO ARYx
THERAPEUTICS, INC.

SECURITY AGREEMENT

 

 

ACCEPTED AND ACKNOWLEDGED BY:

 

	
  MPM BIOVENTURES III, L.P.

  	
   

  
	
   

  	
   

  
	
  By:  MPM
  BioVentures III GP, L.P., its General Partner

  	
   

  
	
   

  	
   

  
	
  By: MPM BioVentures III
  LLC, its General Partner

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Nicholas Simon III

  	
   

  
	
   

  	
   

  
	
  Print
  Name:

  	
  Nicholas
  Simon III

  	
   

  
	
   

  	
   

  
	
  Title:

  	
  Series A
  Member

  	
   

  
	
   

  	
   

  
	
  Address:

  	
  200 Clarendon Street, 54th Floor

  	
   

  
	
   

  	
  Boston, MA 02116

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  MPM BIOVENTURES III-QP, L.P.

  	
   

  
	
   

  	
   

  
	
  By:  MPM
  BioVentures III GP, L.P., its General Partner

  	
   

  
	
   

  	
   

  
	
  By: MPM BioVentures III
  LLC, its General Partner

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Nicholas Simon III

  	
   

  
	
   

  	
   

  
	
  Print
  Name:

  	
  Nicholas
  Simon III

  	
   

  
	
   

  	
   

  
	
  Title:

  	
  Series A
  Member

  	
   

  
	
   

  	
   

  
	
  Address:

  	
  200 Clarendon Street, 54th Floor

  	
   

  
	
   

  	
  Boston, MA 02116

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  MPM BIOVENTURES III GMBH & CO. BETEILIGUNGS
  KG

  	
   

  
	
   

  	
   

  
	
  By:

  	
  MPM BioVentures III GP,
  L.P., in its capacity as Managing Limited Partner

  	
   

  
	
   

  	
   

  
	
  By: MPM BioVentures III
  LLC, its General Partner

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Nicholas Simon III

  	
   

  
	
   

  	
   

  
	
  Print
  Name:

  	
  Nicholas
  Simon III

  	
   

  
	
   

  	
   

  
	
  Title:

  	
  Series A
  Member

  	
   

  
	
   

  	
   

  
	
  Address:

  	
  200 Clarendon Street, 54th Floor

  	
   

  
	
   

  	
  Boston,
  MA 02116

  	
   

  
								

 

SIGNATURE PAGE TO ARYx
THERAPEUTICS, INC.

SECURITY AGREEMENT

 

 

ACCEPTED
AND ACKNOWLEDGED BY:

 

	
  MPM BIOVENTURES III PARALLEL FUND, L.P.

  	
   

  
	
   

  	
   

  
	
  By:  MPM
  BioVentures III GP, L.P., its General Partner

  	
   

  
	
   

  	
   

  
	
  By: MPM BioVentures III
  LLC, its General Partner

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Nicholas Simon III

  	
   

  
	
   

  	
   

  
	
  Print
  Name:

  	
  Nicholas
  Simon III

  	
   

  
	
   

  	
   

  
	
  Title:

  	
  Series A
  Member

  	
   

  
	
   

  	
   

  
	
  Address:

  	
  200 Clarendon Street, 54th Floor

  	
   

  
	
   

  	
  Boston, MA 02116

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  MPM ASSET MANAGEMENT INVESTORS 2002 BVIII LLC

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/
  Nicholas Simon III

  	
   

  
	
   

  	
   

  
	
  Print
  Name:

  	
  Nicholas
  Simon III

  	
   

  
	
   

  	
   

  
	
  Title:

  	
  Manager

  	
   

  
	
   

  	
   

  
	
  Address:

  	
  200 Clarendon Street, 54th Floor

  	
   

  
	
   

  	
  Boston,
  MA 02116

  	
   

  
						

 

SIGNATURE PAGE TO ARYx
THERAPEUTICS, INC.

SECURITY AGREEMENT

 

 

SCHEDULE A

 

LIENS EXISTING ON THE DATE OF
THIS SECURITY AGREEMENT

 

Liens
granted pursuant to that certain Loan and Security Agreement No. 4521,
dated March 28, 2005, by and between the Grantor and Lighthouse Capital
Partners V, L.P., as amended.

 

Liens
granted pursuant to that certain Loan Agreement, dated December 31, 2008,
by and between the Grantor and Oxford Financial Corporation.

 

Lien
granted pursuant to this Security Agreement.

 

Liens
on equipment financed in accordance with subsection (b) of the definition
of Permitted Indebtedness.

 

 

SCHEDULE B

 

COLLATERAL LOCATIONS

 

6300 Dumbarton Circle, Fremont, CA 94555

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