Document:

Exhibit 10.1

 

SEPARATION AND RELEASE AGREEMENT

THIS SEPARATION AND RELEASE AGREEMENT (“Agreement”) is made between Lincoln Educational Services Corporation (the “Company”) and Kenneth M. Swisstack (“you”), and is in consideration of their mutual undertakings as set forth in this Agreement.

WHEREAS, the Company and you entered into that certain Employment Agreement, dated June 2, 2004 as amended on March 12, 2015 (the “Employment Agreement”);

WHEREAS, you have voluntarily resigned your position with the Company and the parties wish to enter into this Agreement, to set forth the terms of your separation of employment from the Company which Agreement shall supersede the terms of the Employment Agreement except as expressly preserved herein; and

 

WHEREAS, in consideration for the payments provided hereunder, you agree to comply with the terms of this Agreement and subject to the express modifications contained in Section 6(a), the continuing non-competition, non-solicitation and other restrictive covenants set forth in Section 9 of the Employment Agreement which, as amended, survives the termination of the Employment Agreement;

 

NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth in this Agreement, the parties hereby agree as follows:

1.                    Resignation.  Effective as of the close of business on January 22, 2016  (the “Effective Date”), you shall have officially resigned from your position as the Company’s General Counsel.

2.                    Nonadmission of Liability.  This Agreement shall not be construed as an admission by the Company that it acted wrongfully with respect to you, nor shall this Agreement be construed as an admission by you of any misconduct.

3.                    Severance Pay and Benefits.  In consideration of your service to the Company and the waiver and release of claims set forth below, the Company shall provide you with the following:

(a)            a lump sum payment equal to one and one-half times the sum of your current annual base salary as of Effective Date plus the average of the Annual Bonus paid to you for the two years immediately preceding the year of the termination of your Employment Agreement (calendar years 2013 and 2014), or $613,402.00, less all lawful or required deductions, which shall be paid no later than 60 days after execution of this Agreement unless it is revoked in accordance with Section 7(b);

(b)            a lump sum payment for all outstanding reasonable travel and other business expenses incurred as of the date of termination, which shall be paid no later than 60 days after execution of this Agreement unless it is revoked in accordance with Section 7(b);

 

(c)            a lump sum payment equal to the Company’s estimate of the employer portion of the premiums necessary to continue your health care coverage under the Company’s plan until January 31, 2017, which shall be paid no later than 60 days after execution of this Agreement unless it is revoked in accordance with Section 7(b); provided however, that if prior to the payment of such amount you become covered under another group health plan (which coverage, once obtained, must be disclosed immediately to the Company by you), such cash amount shall be prorated to cover only the period from the Effective Date until the date on which such alternate coverage starts;

(d)            a lump sum Annual Bonus for 2015, which shall be paid on the date that bonuses for 2015 are paid generally to the Company’s senior executives, but no later than March 15, 2016;

(e)            a prorated Annual Bonus for 2016, calculated by multiplying (A) the Annual Bonus to which you would have been entitled to if your employment had continued through the end of 2016 by (B) a proration fraction the numerator of which is the number of days worked in such calendar year up to and including the date of the Effective Date and the denominator of which is 365;

(f)            immediate vesting of 85,005 of your restricted shares as of the Effective Date under the Company’s current stock option plan; and

(g)            the right to exercise your vested stock options as of the Effective Date in accordance with the Company’s current stock option plan.

Except as otherwise specifically provided herein or as required by applicable law, you shall not be entitled to any compensation or benefits or to participate in any past, present or future  benefit programs or arrangements of the Company (including, without limitation, any compensation or benefits under any severance plan, program or arrangement) on or after the Effective Date.

This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A) or an exemption thereunder and shall be construed and administered in accordance with Section 409A. Notwithstanding any other provision of this Agreement, payments provided under this Agreement may only be made upon an event and in a manner that complies with Section 409A or an applicable exemption. Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service or as a short-term deferral shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, each installment payment provided under this Agreement shall be treated as a separate payment. Any payments to be made under this Agreement upon a termination of employment shall only be made upon a "separation from service" under Section 409A. Notwithstanding the foregoing, the Employer makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall the Employer be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Employee on account of non-compliance with Section 409A.

 

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4.                    References.  All requests for references shall be routed to the Company’s Senior Vice President of Human Resources.  The Company’s response shall be limited to the dates of your employment and your job title.  No additional information shall be released.

5.                   Support for Legal Matters.  You also agree, within reasonable convenience to you, to cooperate with the Company in any legal action for which your participation is needed.  The Company agrees to try to schedule all such meetings so that they do not unduly interfere with your pursuits after the Effective Date.  The Company agrees to reimburse you for reasonable out-of-pocket expenses incurred in connection with your services described in this Section 5.

6.                    Restrictive Covenants.

(a)            Post-Employment Restrictions: Subject to the modification set forth in this Section 6(a), you acknowledge and agree that you remain bound by the post-termination Restrictive Covenants contained in Section 9 of the Employment Agreement, incorporated in full by reference herein, including but not limited to the Noncompetition, Nonsolicitation, Confidentiality and Exclusive Property provisions.  The definition of “Competing Business” contained in Section 9 of the Employment Agreement is hereby amended to be defined as any business within the United States that involves for-profit, post-secondary education in the automotive and skilled trades disciplines.

(b)            Return of Property. On or before the Effective Date, you will return to the Company all property owned by the Company in your possession, specifically including all keys and keycard badges, all company-owned equipment and all Company documents, and computer-stored or transmitted information, specifically including all trade secrets, and/or confidential information of the Company.

(c)            Compliance with Restrictive Covenants.  Without intending to limit any other remedies available to the Company and except as required by law, in the event that you breach or threaten to breach any of your restrictive covenants set forth in this Section 6 and Section 9 of the Employment Agreement, as modified herein, (i) the Company shall be entitled to seek a temporary restraining order and/or a preliminary or permanent injunction restraining you from engaging in activities prohibited by this Section 6 and Section 9 of the Employment Agreement, or such other relief as may be required to enforce any of such covenants and (ii) all obligations of the Company to make payments and provide benefits under this Agreement shall immediately cease.

 

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7.                    Release of Claims.

(a)            General Release.  In consideration of the payments and benefits provided to you under this Agreement and after consultation with counsel, you, and each of the your respective heirs, executors, administrators, representatives, agents, successors and assigns (collectively, the “Releasors”) hereby irrevocably and unconditionally release and forever discharge the Company, its affiliated entities and each of their respective officers, employees, directors, shareholders and agents from any and all claims, actions, causes of action, rights, judgments, obligations, damages, demands, accountings or liabilities of whatever kind or character (collectively, “Claims”), including, without limitation, any Claims under any federal, state, local or foreign law, that the Releasors may have, or in the future may possess, arising out of (i) your employment relationship with and service as an employee or officer of the Company, and the termination of such relationship or service, or (ii) any event, condition, circumstance or obligation that occurred, existed or arose on or prior to the date hereof; provided, however, that the release set forth in this Section 7 shall not apply to (i) the obligations of the Company under this Agreement, (ii) claims for vested benefits under Company benefit plans, (iii) claims for indemnification or contribution,  (iv) claims related to your vested equity, (v) claims that arise after your execution of this Agreement, (vi) a charge or complaint filed by you with the Equal Employment Opportunity Commission or comparable State agency, provided however, that you may be barred from recovering any monetary relief in any such proceeding; or (vii) any other claims that cannot be waived herein under state or federal law.

Without limiting the scope of the foregoing provision in any way, you hereby release all claims relating to or arising out of any aspect of your employment with the Company, including but not limited to, all claims under Title VII of the Civil Rights Act, the Civil Rights Act of 1991 and the laws amended thereby; the Age Discrimination in Employment Act of 1967; the Older Workers Benefit Protection Act of 1990; the Americans with Disabilities Act; the Family and Medical Leave Act of 1993; the Fair Labor Standards Act of 1963; the New Jersey Law Against Discrimination, the New Jersey Family Leave Act; the New Jersey Conscientious Employee Protection Act; any contract of employment, express or implied; any provision of the Constitution of the United States or of any particular State; and any other law, common or statutory, of the United States, or any particular State; any claim for the negligent and/or intentional infliction of emotional distress or specific intent to harm; any claims for attorney’s fees, costs and/or expenses; any claims for unpaid or withheld wages, severance pay, benefits, bonuses, commissions and/or other compensation of any kind; and/or any other federal, state or local human rights, civil rights, wage and hour, wage payment, pension or labor laws, rules and/or regulations; all claims growing out of any legal restrictions on the Company’s right to hire and/or terminate its employees, including all claims that were asserted and/or that could have been asserted by you and all claims for breach of promise, public policy, negligence, retaliation, defamation, impairment of economic opportunity, loss of business opportunity, fraud, misrepresentation, etc.

The Releasors further agree that the payments and benefits described in this Agreement shall be in full satisfaction of any and all Claims for payments or benefits, whether express or implied, that the Releasors may have against the Company arising out of the your employment relationship or your service as an employee or officer of the Company and the termination thereof.

 

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(b)            Specific Release of ADEA Claims.  In consideration of the payments and benefits provided to you under this Agreement, the Releasors hereby unconditionally release and forever discharge the Company from any and all Claims arising under the Federal Age Discrimination in Employment Act of 1967, as amended, and the applicable rules and regulations promulgated thereunder (“ADEA”) that you may have as of the date of the your signature to this Agreement.  By signing this Agreement, you hereby acknowledge and confirm the following:

 

(i)            You were advised by the Company in connection with your termination to consult with an attorney of your choice prior to signing this Agreement and to have such attorney explain to him the terms of this Agreement, including, without limitation, the terms relating to your release of claims arising under ADEA;

(ii)            You were given a period of not fewer than 21 days to consider the terms of this Agreement and to consult with an attorney of your choosing with respect thereto, and were given the option to sign the Agreement in fewer than 21 days if you desired;

(iii)            You are providing the release and discharge set forth in this Section 7(b) only in exchange for consideration in addition to anything of value to which you is already entitled; and

(iv)            You knowingly and voluntarily accept the terms of this Agreement.

You acknowledge that you understand that you may revoke the release contained in this Section 7(b) within seven days following the date on which you sign this Agreement (the “Revocation Period”) by providing to the Company written notice of your revocation of the release and waiver contained in this Section 7(b) prior to the expiration of the Revocation Period.  This right of revocation relates only to the ADEA release set forth in this Section 7(b) and does not act as a revocation of any other term of this Agreement.  Any payments or benefits provided to you under this Agreement shall not commence until the expiration of the Revocation Period.

 

(c)            No Claims.  You agree that you have not instituted, assisted or otherwise participated in connection with, any action, complaint, claim, charge, grievance, arbitration, lawsuit, or administrative agency proceeding, or action at law or otherwise against the Company and any of its affiliated entities, or any of their respective officers, employees, directors, shareholders or agents.

(d)            No Assignment of Claims.  You represent and warrant that you have not assigned any of the Claims being released under this Section 7.

 

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(e)            Voluntary Execution of Agreement.  You acknowledge that, except as expressly set forth herein, no representations of any kind or character have been made to you by the Company or by any of its agents, representatives, or attorneys to induce the execution of this Agreement.  You understand and acknowledge the significance and consequences of this Agreement, that it is voluntary, that it has not been entered into as a result of any coercion, duress or undue influence, and expressly confirm that it is to be given full force and effect according to all of its terms, including those relating to unknown Claims.  You acknowledge that you had full opportunity to discuss any and all aspects of this Agreement with legal counsel, and have availed yourself of that opportunity to the extent desired.  You acknowledge that you have carefully read and fully understand all of the provisions of this Agreement and have signed this Agreement only after full reflection and analysis.

8.                    Confidentiality.

(a)            Except as otherwise provided in Section 8(b), subsequent to the execution of this Agreement and to the extent permitted by law, you agree not to disclose, either directly or indirectly, any information whatsoever relating to the existence or substance of the Agreement, the business of the Company or its affiliated entities, your employment with the Company, or any information about the Company’s officers, directors, employees or students to any person or entity, members of the media, present or former employees of the Company or to attorneys or private investigators representing other employees or entities.  Without intending to limit any other remedies available to the Company and except as required by law, in the event that you breach or threaten to breach any of your obligations under this Section 8 the Company shall be entitled to seek a temporary restraining order and/or a preliminary or permanent injunction restraining you from engaging in activities prohibited by this Section.

(b)            You may, however, disclose the terms of the Agreement to (i) your  accountants, counsel or family members with whom you choose to consult or seek advice regarding your consideration of the decision to execute this Agreement, provided, however, that those to whom you make such disclosure agree to keep such information confidential and not disclose it to others; or (ii) as required by lawful process in connection with any matrimonial and/or family proceeding; if compelled by subpoena or if legally compelled to do so by any regulatory body or agency.  In the event you receive a subpoena or other legal process or directive from an attorney, regulatory body or other agency which you believe compels you to cooperate and provide information relative to your termination or this Agreement, you shall immediately provide notice to the Company prior to responding to said subpoena, legal process or directive.

9.                    Non-Disparagement.  Except as hereinafter provided, you agree that you will not communicate or publish, directly or indirectly, any disparaging or defamatory comments or information about the Company or its business  or that of its affiliated entities, their officers, directors,  employees, or students to any third party individual or entity.  Without intending to limit any other remedies available to the Company and except as required by law, in the event that you breach or threaten to breach any of your obligations under this Section 9 the Company shall be entitled to seek a temporary restraining order and/or a preliminary or permanent injunction restraining you from engaging in activities prohibited by this Section.

 

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10.                 No Cooperation. You agree not to act in any manner that might damage the business of the Company or its affiliated entity. You further agree that you will not knowingly encourage, counsel, or assist any attorneys or their clients in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints by any third party against any of the Released Parties, unless under a subpoena or other court order to do so accept as otherwise permitted in this Agreement. You agree both to immediately notify the Company upon receipt of any such subpoena or court order, and to furnish, within three (3) business days of its receipt, a copy of such subpoena or other court order. If approached by anyone for counsel or assistance in the presentation or prosecution of any disputes, differences, grievances, claims, charges, or complaints against any of the Released Parties, You shall state no more than that you cannot provide counsel or assistance.

11.                 Miscellaneous.

(a)            Severability.  In the event that any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remainder of the Agreement shall not in any way be affected or impaired thereby.  Moreover, if any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity or subject, such provisions shall be construed by limiting and reducing them so as to be enforceable to the maximum extent allowed by applicable law.

(b)            Entire Agreement.  This Agreement and the Employment Agreement set forth the entire understanding between the parties and supersede and replace any express or implied, written or oral, prior agreement of plans or arrangement with respect to the terms of the your employment and the termination thereof which you may have had with the Company .  You acknowledge that in signing this Agreement, you have not relied upon any representation or statement not set forth in this Agreement or the Employment Agreement made by the Company or any of its representatives.  This Agreement may be amended only by a written document signed by the parties hereto.

(c)            Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the state of New Jersey, without reference to its conflict of laws principles.  Any action regarding the enforcement or interpretation of this Agreement shall be commenced only in the state of New Jersey.

(d)            Withholding Taxes.  Any payments made or benefits provided to you under this Agreement shall be reduced by any applicable withholding taxes.

(e)            Waiver.  The failure of any party to this Agreement to enforce any of its terms, provisions or covenants shall not be construed as a waiver of the same or of the right of such party to enforce the same.  Waiver by any party hereto of any breach or default by another party of any term or provision of this Agreement shall not operate as a waiver of any other breach or default.

 

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(f)            Notices.  Any notices required or made pursuant to this Agreement shall be in writing and shall be deemed to have been given when delivered or mailed by United States certified mail, return receipt requested, postage prepaid, as follows:

	 	
if to you:

	 
	 	 	 
	 	
Kenneth M. Swisstack

	 
	 	
(address on file with Human Resources)

	 
	 	 	 
	 	
if to the Company:

	 
	 	 	 
	 	
Lincoln Educational Services Corporation

	 
	 	
200 Executive Drive, Suite 340

	 
	 	
West Orange, New Jersey 07052

	 
	 	
Attention: General Counsel

	 

or to such other address as either party may furnish to the other in writing in accordance with this Section 11 (f).  Notices of change of address shall be effective only upon receipt.

 

(g)            Descriptive Headings.  The paragraph headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement.

(h)            Counterparts.  This Agreement may be executed in one or more counterparts, which, together, shall constitute one and the same agreement.

(i)            Successors and Assigns.  This Agreement is personal to you and may not be assigned by you without the prior written consent of the Company.  This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company.

(j)            Arbitration.  Any dispute or controversy arising under this Agreement, other than as provided in Section 6(c), Section 8(a) and Section 9 hereof, that cannot be mutually resolved by you and the Company shall be settled exclusively by arbitration in accordance with the Employment Arbitration Rules of the American Arbitration Association (“AAA”), and shall take place at the AAA’s Regional Office in Somerset, New Jersey, unless another location is mutually agreed upon by the parties.  Judgment may be entered on the arbitrators’ award in any court having jurisdiction.  The Company and you hereby agree that the arbitrators shall be empowered to enter an equitable decree mandating specific enforcement of the provisions of this Agreement.  The cost of the arbitration shall be borne by the parties in the manner determined by the arbitrators.

(k)            Expiration.  This Agreement shall be null, void and of no further force and effect unless you sign and return this Agreement to the Company by no later than twenty-one (21) days from the date you receive it.

 

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IN WITNESS WHEREOF, the Company has executed this Agreement as of the date first set forth above, and you have executed this Agreement as of the date set forth below.

 

LINCOLN EDUCATIONAL SERVICES CORPORATION

 

	
By:

	
/s/ Scott M. Shaw

	
 

	
Name:

	
Scott M. Shaw

	
Title:

	
President and Chief Executive Officer

	 	 
	
Date:

	
January 14, 2016

 

By signing this Agreement, I acknowledge that: (a) I have read this Agreement; (b) I understand this Agreement and know that I am giving up important rights; (c) this Agreement shall not become effective or enforceable for a period of seven (7) days following its execution; (d) I was advised by the Company, and I am aware, of my right to consult with an attorney before signing this Agreement; and (e) I have signed this Agreement knowingly and voluntarily and without any duress or undue influence on the part or behalf of the Company.

	
ACCEPTED AND AGREED:

	 
	 	 
	
/s/ Kenneth M. Swisstack

	 
	
Kenneth M. Swisstack

	 
	 	 
	
Date:  January 15, 2016

	 

 

 

9glla_ex1022.htm

Exhibit 10.22

 

 

LOAN AGREEMENT

 

Loan agreement dated January 18, 2016 (this “Agreement”) between Gilla Inc. (the “Borrower”) and Sarasvati Investments Inc. (the “Lender”).

 

RECITALS

 

WHEREAS the Borrower and the Lender entered into a revolving credit facility loan agreement, dated August 1, 2014;

 

WHEREAS the Borrower and the Lender have mutually agreed to terminate and retire the revolving credit facility loan agreement as of the date hereof and wish to replace such facility with this Agreement;

 

WHEREAS the Borrower desires that the Lender make available a term loan facility to the Borrower in the aggregate principal amount of $1,000,000;

 

AND WHEREAS the Lender is prepared to extend such a term loan facility to the Borrower subject to the terms and conditions set out herein;

 

NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the Borrower and the Lender agree as follows:

 

ARTICLE 1

INTERPRETATION

 

Section 1.1 Defined Terms.

 

As used in this Agreement, the following terms have the following meanings:

 

“Applicable Rate” means, at any given time, the greater of: (a) 16% per annum; and (b) from the Closing Date up to and including the Maturity Date, the highest interest rate per annum paid, or payable, by the Borrower to any arm’s length commercial lender (or syndicate of lenders) pursuant to a financing arrangement with such lender (or lenders) for the purposes set out in Section 2.2 on terms and conditions equivalent to the terms and conditions of this Agreement.

 

“Borrower” means Gilla Inc. and its successors and permitted assigns.

 

“Business Day” means any day of the year, other than a Saturday, Sunday or any day on which major banks are closed for business in Toronto, Ontario.

 

“Cash Sweep Report” means a monthly Cash Sweep Report, substantially in the form of Schedule “A”, certified by the Borrower’s management.

 

“CFADS” means the cash flow available for debt service on the Loan as indicated in the monthly Cash Sweep Report.

 

  

  

  

 

“Closing Date” means the date on which this Agreement becomes effective.

 

“Default” means an event which, with the giving of notice or passage of time, or both, would constitute an Event of Default.

 

“Draw” means the initial draw on the Loan facility by the Borrower from the Lender pursuant to this Agreement on the Closing Date.

 

“Early Repayment Penalty” has the meaning specified in Section 2.4.

 

“Event of Default” has the meaning specified in Section 6.1.

 

“E-Liquid Bottle” means the e-liquid bottles sold by the Borrower under the brands as listed in Schedule “B”.  Schedule “B” to be amended or restated from time to time upon mutual agreement between the Borrower and the Lender.

 

“Funded Debt” of any Person means (i) all indebtedness of such Person for or in respect of, borrowed money, bankers acceptances, letters of credit or letters of guarantee, (ii) all indebtedness of such Person for the deferred purchase price of property or services represented by a note, bond, debenture or other evidence of indebtedness, (iii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all current liabilities of such Person represented by a note, bond, debenture or other evidence of indebtedness, and (v) all obligations under leases which have been or should be, in accordance with U.S. GAAP, recorded as capital leases in respect of which such Person is liable as lessee.

 

“U.S. GAAP” means generally accepted accounting principles in the United States, as approved by the Financial Accounting Standards Board, as in effect from time to time.

 

“Governmental Entity” means (i) any international, multinational, national, federal, provincial, state, municipal, local or other governmental or public department, central bank, court, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) any subdivision or authority of any of the above, (iii) any stock exchange and (iv) any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of the above.

 

“Indemnified Person” has the meaning specified in Section 7.4.

 

“Intercreditor and Subordination Agreement” means the intercreditor and subordination agreement, dated August 1, 2014, among Gravitas Financial Inc., the Lender and the Borrower, as amended, restated, amended and restated or replaced from time to time.

 

“Key Personnel” means J. Graham Simmonds serving as the Borrower’s Chief Executive officer and Ashish Kapoor serving as the Borrower’s Chief Financial Officer.

 

“Lender” means Sarasvati Investments Inc. and its successors and assigns.

 

  

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”Loan” means the term loan facility in the aggregate principal amount of $1,000,000 to be made available to the Borrower by the Lender under this Agreement for the purposes set out in Section 2.2.

 

“Lien” means any mortgage, charge, pledge, hypothecation, security interest, assignment, encumbrance, lien (statutory or otherwise), title retention agreement or arrangement, restrictive covenant or other encumbrance of any nature or any other arrangement or condition that in substance secures payment or performance of an obligation.

 

“Loan Documents” means this Agreement, the Intercreditor and Subordination Agreement, the Warrant, the Warrant Extension, the Security Documents and all other documents to be executed and delivered to the Lender by the Borrower pursuant to or in connection with this Agreement.

 

“Material Adverse Effect” means a material adverse effect on the business, operations, results of operations, prospects, assets, liabilities or financial condition of the Borrower.

 

“Material Agreement” means any contract or agreement to which the Borrower is a party or by which it is bound, the termination or cancellation of which (prior to the scheduled termination date) could have a Material Adverse Effect.

 

“Maturity Date” means July 3, 2017.

 

“Permitted Liens” means, in respect of any Person, any one or more of the following:

 

	
(a)  

	
Liens for taxes, assessments or governmental charges or levies which are not delinquent or the validity of which is being contested at the time by the Person in good faith by proper legal proceedings if, in the Lender’s opinion, adequate provision has been made for payment;

 

	
(b)  

	
inchoate or statutory Liens of contractors, subcontractors, mechanics, workers, suppliers, materialmen, carriers and others in respect of construction, maintenance, repair or operation of assets of the Person, provided that such Liens are related to obligations not due or delinquent, are not registered against title to any assets of the Person and in respect of which adequate holdbacks are being maintained as required by applicable law or such Liens are being contested in good faith by appropriate proceedings and in respect of which there has been set aside a reserve (segregated to the extent required by U.S. GAAP) in an adequate amount and provided further that such Liens do not, in the Lender’s reasonable opinion, reduce the value of the asset so affected or materially interfere with the use of such asset in the operation of the business of the Person;

 

	
(c)  

	
the right reserved to or vested in any Governmental Entity by any statutory provision or by the terms of any lease, licence, franchise, grant or permit of the Person, to terminate any such lease, licence, franchise, grant or permit, or to require annual or other payments as a condition to the continuance thereof; and

 

	
(d)  

	
Liens in favour of the Lender created by the Security Documents.

 

  

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“Person” means a natural person, partnership, corporation, joint stock company, trust, unincorporated association, joint venture or other entity or Governmental Entity and pronouns have a similarly extended meaning.

 

“Security” means, at any time, the security interest in favour of the Lender, in those assets and properties of the Borrower securing its obligations under this Agreement and the other Loan Documents to which it is a party.

 

"Security Agreement” means the security agreement, dated August 1, 2014, by the Borrower in favour of the Lender.

 

“Security Documents” means the Security Agreement and any other security granted to the Lender, as security for the obligations of the Borrower under this Agreement and the other Loan Documents.

 

“Warrant” means the warrant granted by Borrower to Karen Gautam, containing terms acceptable to Karen Gautam in its sole and reasonable discretion, entitling Karen Gautam to purchase 250,000 common shares of the Borrower at an exercise price equal to US$0.20, which warrant is to remain in effect from the Closing Date until December 31, 2017.

 

“Warrant Extension” means the warrant extension granted by Borrower to Karen Gautam, extending the term of the warrants issued on August 1, 2014 to Karen Gautam to December 31, 2017, with all other terms of the warrants remaining the same.

 

Section 1.2       Gender and Number.

 

Any reference in the Loan Documents to gender includes all genders and words importing the singular number only include the plural and vice versa.

 

Section 1.3       Headings, etc.

 

The division of this Agreement into Articles and Sections and the insertion of headings are for convenient reference only and are not to affect the interpretation of this Agreement.

 

Section 1.4       Currency.

 

All references in the Loan Documents to dollars, unless otherwise specifically indicated, are expressed in Canadian currency.

 

Section 1.5       Certain Phrases, etc.

 

In any Loan Document (i) (a) the words “including” and “includes” mean “including (or includes) without limitation” and (b) the phrase “the aggregate of”, “the total of”, “the sum of”, or a phrase of similar meaning means “the aggregate (or total or sum), without duplication, of”, and (ii) in the computation of periods of time from a specified date to a later specified date, unless otherwise expressly stated, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding”.

 

  

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Section 1.6       Accounting Terms.

 

All accounting terms not specifically defined in this Agreement shall be interpreted in accordance with U.S. GAAP.

 

Section 1.7       Conflict.

 

The provisions of this Agreement prevail in the event of any conflict or inconsistency between its provisions and the provisions of any of the other Loan Documents.

 

ARTICLE 2

CREDIT FACILITY

 

Section 2.1       Availability.

 

	
(1)  

	
The Lender agrees, on the terms and subject to the conditions of this Agreement, to make the Loan available on the Closing Date.

 

	
(2)  

	
The Loan shall be a term loan facility. For greater certainty, the Borrower shall be entitled to Draw the Loan on the Closing Date and, subject to Section 2.4, repay the outstanding principal amount under the Loan with the Early Repayment Penalty.

 

	
(3)  

	
The Lender shall maintain, in accordance with its usual practice, records evidencing the amounts owing under this Agreement; and the information entered into such records shall constitute conclusive evidence of such amounts owed absent manifest error.

 

Section 2.2      Purpose.

 

The Loan shall be used by the Borrower, or any of its subsidiaries’, for capital expenditures, marketing expenditures and working capital.

Section 2.3       Repayment of Principal and Interest Payments.

 

	
(1)  

	
The principal amount of the outstanding Loan shall bear interest at the Applicable Rate.

 

	
(2)  

	
Interest shall accrue daily and shall be calculated and payable monthly, in arrears.

 

	
(3)  

	
Borrower shall disburse the CFADS as indicated in the monthly Cash Sweep Report to the Lender in the following priority:

 

	
a)  

	
First, the funds required to make the monthly interest payable on the Loan; and

 

	
b)  

	
Second, the residual monthly CFADS to repay principal outstanding on the Loan.

 

	
(4)  

	
Borrower shall be required to pay the monthly interest payment on the Loan regardless of the sufficiency of the CFADS to cover such interest payment.

 

  

- 5 -

  

 

	
(5)  

	
Borrower shall make one (1) monthly installment of interest and principal repayment within fifteen (15) Business Days of each months’ end.

 

	
(6)  

	
Subject to Section 6.2, the outstanding principal amount of the Loan together with all accrued and unpaid interest thereon shall become due and payable on the Maturity Date, if any.

 

	
(7)  

	
If a change in Key Personnel shall occur (a) the Borrower will, within ten (10) Business Days of occurrence thereof, give the Lender notice thereof describing in reasonable detail the facts and circumstances giving rise thereto and (b) the Lender may, by fifteen (15) Business Days’ notice to the Borrower given not later than ten (10) Business Days after receipt of such notice of change in Key Personnel, terminate the Loan, which shall thereupon be terminated, and declare the principal amount of the Loan together with all accrued and unpaid interest thereon become, immediately due and payable.

 

Section 2.4       Early Repayment.

 

In the event that the Borrower elects to repay the Loan together with all accrued and unpaid interest thereon prior to the Maturity Date, the Borrower shall also pay an Early Repayment Penalty of the maximum of i) three (3) months interest on the outstanding principal amount under the Loan; or ii) fifty percent (50%) of the interest payable on the outstanding principal amount under the Loan until the Maturity Date.

 

Section 2.5       Payments under this Agreement.

 

	
(1)  

	
Unless otherwise expressly provided in this Agreement or by the parties in writing, the Borrower shall make any payment required to be made by it to the Lender by depositing the amount of the payment to an account specified by the Lender not later than 4:00 p.m. (Toronto time) on the date the payment is due.

 

	
(2)  

	
All amounts owed by the Borrower to the Lender, which are not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest (both before and after default and judgment), from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal to the Applicable Rate, plus 2%

 

Section 2.6       Computations of Interest.

 

	
(1)  

	
All computations of interest shall be made by the Lender taking into account the actual number of days occurring in the period for which such interest is payable, on the basis of a year of 365 days.

 

	
(2)  

	
For purposes of the Interest Act (Canada), (i) whenever any interest or fee under this Agreement is calculated using a rate based on a year of 365 days, the rate determined pursuant to such calculation, when expressed as an annual rate, is equivalent to (x) the Applicable Rate based on a year of 365 or 366 days, as the case may be, (y) multiplied by the actual number of days in the calendar year in which the period for which such interest or fee is payable (or compounded) ends, and (z) divided by 365 or 366 days, as the case may be, (ii) the principle of deemed reinvestment of interest does not apply to any interest calculation under this Agreement, and (iii) the rates of interest stipulated in this Agreement are intended to be nominal rates and not effective rates or yields.

 

  

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Section 2.7       Cash Sweep Report.

 

The Borrower shall provide to the Lender a monthly Cash Sweep Report, substantially in the form of Schedule “A”, certified by the Borrower’s management and deliverable within ten (10) Business Days of each month until the earlier of i) the Maturity Date or ii) the principal amount of the Loan together with all accrued and unpaid interest thereon is repaid in full. The Cash Sweep Report shall indicate the CFADS on the Loan based on the following:

 

	
a)  

	
$0.50 per 0-15ml E-Liquid Bottle sold by the Borrower, and its subsidiaries, within the monthly period; and

 

	
b)  

	
$1.00 per >15ml E-Liquid Bottle sold by the Borrower, and its subsidiaries, within the monthly period.

 

The Cash Sweep Report shall total the CFADS and will indicate the appropriate disbursement of such funds towards interest payments and principal re-payments on the Loan.

 

ARTICLE 3

CONDITIONS OF LENDING

 

Section 3.1       Conditions Precedent to Initial Draw.

 

The Lender shall have no obligation to make the initial Draw hereunder unless at the time of making such draw the following terms and conditions shall have been satisfied:

 

	
(a)  

	
the Lender has received, in form, substance, scope and dated a date satisfactory to it and its counsel:

 

	
(i)  

	
an executed copy of each of the Loan Documents; and

 

	
(ii)  

	
evidence of registration of the Security Documents in such jurisdictions as the Lender may reasonably require, including all required consents to obtain such registrations.

 

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

 

Section 4.1       Representations and Warranties.

 

The Borrower represents and warrants to the Lender, acknowledging and confirming that the Lender is relying on such representations and warranties without independent inquiry in entering into this Agreement and providing the Loan that:

 

	
(a) 

	
Incorporation and Qualification. The Borrower is a corporation duly incorporated, organized and validly existing under the laws of the State of Nevada. The Borrower is qualified, licensed or registered to carry on business under the laws applicable to it in all jurisdictions in which such qualification, licensing or registration is necessary or where failure to be so qualified would have a Material Adverse Effect;

 

  

- 7 -

  

 

	
(b) 

	
Corporate Power. The Borrower has all requisite corporate power and authority to (i) own, lease and operate its properties and assets and to carry on its business as now being conducted by it, and (ii) enter into and perform its obligations under the Loan Documents;

 

	
(c) 

	
Conflict with Other Instruments. The execution and delivery by the Borrower and the performance by it of its obligations under, and compliance with the terms, conditions and provisions of, the Loan Documents will not (i) conflict with or result in a breach of any of the terms or conditions of (t) its constating documents, (u) any applicable law, rule or regulation, (v) any contractual restriction binding on or affecting it or its properties, or (w) any judgment, injunction, determination or award which is binding on it, or (ii) result in, require or permit (x) the imposition of any Lien in, on or with respect to any of its assets or property (except in favour of the Lender), (y) the acceleration of the maturity of any Funded Debt binding on or affecting the Borrower, or (z) any third party to terminate or acquire rights under any Material Agreement;

 

	
(d) 

	
Corporate Action, Governmental Approvals, etc. The execution and delivery of each of the Loan Documents by the Borrower and the performance by the Borrower of its obligations under the Loan Documents has been duly authorized by all necessary corporate action including, without limitation, the obtaining of all necessary shareholder consents. No authorization, consent, approval, registration, qualification, designation, declaration or filing with any Governmental Entity or other Person, is or was necessary in connection with the execution, delivery and performance of obligations under the Loan Documents except as are in full force and effect, unamended, at the date of this Agreement;

 

	
(e) 

	
Execution and Binding Obligation. This Agreement and the other Loan Documents have been duly executed and delivered by the Borrower and constitute legal, valid and binding obligations of the Borrower enforceable against it in accordance with its terms, subject only to any limitation under applicable laws relating to (i) bankruptcy, insolvency, arrangement or creditors’ rights generally, and (ii) the discretion that a court may exercise in the granting of equitable remedies;

 

	
(f) 

	
Authorizations, etc. The Borrower possesses all authorizations, permits, consents, registrations and approvals necessary to properly conduct its businesses and to enter into and perform its obligations under the Loan Documents and all such authorizations, permits, consents, registrations and approvals are in good standing and in full force and effect;

 

	
(g) 

	
Ownership and Use of Property. Except for Permitted Liens, the Borrower has good and marketable title to all the real and personal property reflected as assets in its books and records. The Borrower owns, leases or has the lawful right to use all of the assets necessary for the conduct of its businesses;

 

  

- 8 -

  

 

	
(h) 

	
Compliance with Laws. The Borrower is in compliance with all applicable laws, judgments and orders and rulings, guidelines and decisions having force of law;

 

	
(i) 

	
No Default. The Borrower is not in violation of its constating documents, or any shareholders’ agreement applicable to it or any Material Agreement; and

 

	
(j) 

	
No Material Adverse Agreements. The Borrower is not party to any agreement or instrument or subject to any restriction (including any restriction set forth in its constating documents, any shareholders’ agreement applicable to it or any Material Agreement) which has or may have a Material Adverse Effect.

 

Section 4.2       Survival of Representations and Warranties.

 

The representations and warranties in this Agreement and in any certificates or documents delivered to the Lender shall not merge in or be prejudiced by and shall continue in full force and effect so long as any amounts are owing by the Borrower to the Lender under this Agreement.

 

ARTICLE 5

COVENANTS OF THE BORROWER

 

Section 5.1       Affirmative Covenants.

 

So long as there remains any outstanding amount owing under the Loan or the Lender has any obligation under this Agreement, the Borrower shall:

 

	
(a) 

	
Corporate Existence. Preserve and maintain its corporate existence;

 

	
(b) 

	
Compliance with Laws, etc. Comply with the requirements of all applicable laws, judgments, orders, decisions, awards, Material Agreements and Loan Documents;

 

	
(c) 

	
Payment of Taxes and Claims. Pay when due, (i) all taxes, assessments and governmental charges or levies imposed upon it or upon its income, sales, capital or profit or any other property belonging to, and (ii) all claims which, if unpaid, might by law become a Lien upon the assets, except any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings and in respect of which the Borrower has established adequate reserves in accordance with U.S. GAAP or which are Permitted Liens;

 

	
(d) 

	
Keeping of Books. Keep proper books of record and account, in which full and correct entries shall be made in respect of its business and operations;

 

	
(e) 

	
Ordinary Course. The Borrower shall conduct its business in a manner consistent with past practices, and in the ordinary course of its normal day-to-day operations; and

 

	
(f) 

	
Further Assurances. At its cost and expense, upon the reasonable request of the Lender, execute and deliver or cause to be executed and delivered to the Lender such further instruments, agreements and security documents and do and cause to be done such further acts as may be necessary or proper in the reasonable opinion of the Lender to carry out more effectually the provisions and purposes of the Loan Documents.

 

  

- 9 -

  

 

Section 5.2       Negative Covenants.

 

So long as there remains any outstanding amount owing under the Loan or the Lender has any obligation under this Agreement, the Borrower shall not create, incur, assume or suffer to exist any Lien on any of its property or assets covered by the Security other than Permitted Liens.

 

ARTICLE 6

EVENTS OF DEFAULT

 

Section 6.1       Events of Default.

 

If any of the following events (each an “Event of Default”) occurs and is continuing:

 

	
(a)  

	
the Borrower fails to pay any amount under the Loan, any interest thereon or any other amounts due under any Loan Document when such amount becomes due and payable;

 

	
(b)  

	
any representation or warranty or certification made or deemed to be made by the Borrower or any of its respective directors or officers in any Loan Document shall prove to have been incorrect when made or deemed to be made;

 

	
(c)  

	
the Borrower fails to perform, observe or comply with any other term, covenant or agreement contained in any Loan Document to which it is a party and such failure remains unremedied for thirty (30) days;

 

	
(d)  

	
any judgment or order for the payment of money in excess of $3,000,000 (or the equivalent amount in any other currency) is rendered against the Borrower and either (i) enforcement proceedings have been commenced by a creditor upon the judgment or order, or (ii) there is any period of fifteen (15) consecutive days during which a stay of enforcement of the judgment or order, by reason of a pending appeal or otherwise, is not in effect; or

 

	
(e)  

	
the Borrower (i) becomes insolvent or generally not able to pay its debts as they become due, (ii) admits in writing its inability to pay its debts generally or makes a general assignment for the benefit of its creditors, (iii) institutes or has instituted against it any proceeding seeking (x) to adjudicate it a bankrupt or insolvent, (y) liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors including any plan of compromise or arrangement or other corporate proceeding involving or affecting its creditors, or (z) the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its properties and assets, and in the case of any such proceeding instituted against it (but not instituted by it), either the proceeding remains undismissed or unstayed for a period of forty-five (45) days, or any of the actions sought in such proceeding (including the entry of an order for relief against it or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its properties and assets) occurs, or (iv) takes any corporate action to authorize any of the above actions.

 

  

- 10 -

  

 

then the Lender may declare that the Loan, all accrued interest and fees and all other amounts payable under this Agreement to be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are expressly waived by the Borrower.

 

Section 6.2       Remedies Upon Default.

 

	
(1)  

	
Upon a declaration that the Loan is immediately due and payable pursuant to Section 6.1, the Lender may commence such legal action or proceedings as it, in its sole discretion, deems expedient, including, the commencement of enforcement proceedings under the Loan Documents all without any additional notice, presentation, demand, protest, notice of dishonour, entering into of possession of any property or assets, or any other action or notice, all of which are expressly waived by the Borrower.

 

	
(2)  

	
The rights and remedies of the Lender under the Loan Documents are cumulative and are in addition to, and not in substitution for, any other rights or remedies. Nothing contained in the Loan Documents with respect to the indebtedness or liability of the Borrower to the Lender, nor any act or omission of the Lender with respect to the Loan Documents or the Security shall in any way prejudice or affect the rights, remedies and powers of the Lender under the Loan Documents and the Security.

 

ARTICLE 7

MISCELLANEOUS

 

Section 7.1       Amendments, etc.

 

No amendment or waiver of any provision of any of the Loan Documents, nor consent to any departure by the Borrower or any other Person from such provisions, is effective unless in writing and approved by the Lender. Any amendment, waiver or consent is effective only in the specific instance and for the specific purpose for which it was given.

 

Section 7.2       Waiver.

 

	
(1)  

	
No failure on the part of the Lender to exercise, and no delay in exercising, any right under any of the Loan Documents shall operate as a waiver of such right; nor shall any single or partial exercise of any right under any of the Loan Documents preclude any other or further exercise of such right or the exercise of any other right.

 

	
(2)  

	
Except as otherwise expressly provided in this Agreement, the covenants, representations and warranties shall continue in full force and effect. The closing of this transaction shall not prejudice any right of one party against any other party in respect of anything done or omitted under this Agreement or in respect of any right to damages or other remedies.

 

Section 7.3       Notices, etc.

 

Any notice, direction or other communication to be given under this Agreement shall, except as otherwise permitted, be in writing and given by delivering it or sending it by facsimile or other similar form of recorded communication addressed:

 

  

- 11 -

  

 

	
(a)  

	
to the Lender at:

 

33 Kennedy Park Road

Toronto, Ontario

M6P 3H2

karen.gautam@gmail.com (with a copy to rajeevuofw@gmail.com)

 

	
(b)  

	
to the Borrower at:

 

70 York Street, Suite 1610

Toronto, Ontario, M5J 1S9

graham@gillainc.com (with a copy to ashish@gillainc.com)

Any such communication shall be deemed to have been validly and effectively given if (i) personally delivered, on the date of such delivery if such date is a Business Day and such delivery was made prior to 4:00 p.m. (Toronto time), otherwise on the next Business Day, (ii) transmitted by facsimile or similar means of recorded communication on the Business Day following the date of transmission. Any party may change its address for service from time to time by notice given in accordance with the foregoing and any subsequent notice shall be sent to the party at its changed address.

 

Section 7.4       Indemnity.

 

The Borrower shall, whether or not the transaction contemplated by this Agreement is completed, indemnify and hold the Lender and its officers, directors, employees and agents (each an “Indemnified Person”) harmless from, and shall pay to such Indemnified Person on demand any amounts required to compensate the Indemnified Person for, any cost, expense, claim or loss suffered by, imposed on, or asserted against, the Indemnified Person as a result of, or arising out of (i) the preparation, execution and delivery of, preservation of rights under, enforcement of, or refinancing, renegotiation or restructuring of, the Loan Documents and any related amendment, waiver or consent, (ii) a Default (whether or not constituting a Default or an Event of Default), and (iii) any proceedings brought by or against the Indemnified Person, or in which the Indemnified Person otherwise participates, due to its entering into or being a party to any of the Loan Documents, or by reason of its exercising or performing, or causing the exercise or performance of, any right, power or obligation under any of the Loan Documents, whether or not such proceedings are directly related to the enforcement of any Loan Document, except to the extent caused by the gross negligence or wilful misconduct of the Indemnified Person.

 

Section 7.5       Successors and Assigns.

 

	
(1)  

	
This Agreement shall become effective when executed by the Borrower and the Lender and after that time shall be binding upon and enure to the benefit of the Borrower and the Lender and their respective successors and permitted assigns.

 

	
(2)  

	
The Borrower shall not have the right to assign its rights or obligations under this Agreement or any interest in this Agreement without the prior consent of the Lender, which consent may not be unreasonably withheld.

 

  

- 12 -

  

 

Section 7.6       Right of Set-off.

 

Upon the occurrence and during the continuance of any Event of Default, the Lender is authorized at any time and from time to time, to the fullest extent permitted by law (including general principles of common-law), to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by it to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower under any of the Loan Documents, irrespective of whether or not the Lender has made demand under any of the Loan Documents and although such obligations may be unmatured or contingent. If an obligation is unascertained, the Lender may, in good faith, estimate the obligation and exercise its right of set-off in respect of the estimate, subject to providing the Borrower with an accounting when the obligation is finally determined. The Lender shall promptly notify the Borrower after any set-off and application is made by it, provided that the failure to give notice shall not affect the validity of the set-off and application. The rights of the Lender under this Section 7.6 are in addition to other rights and remedies (including all other rights of set-off) which the Lender may have.

 

Section 7.7       Entire Agreement

 

This Agreement, together with the Loan Documents, contain the entire agreement between the Lender and the Borrower with respect to the matters hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters.

 

Section 7.8       Governing Law.

 

This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

 

Section 7.9       Counterparts.

 

This Agreement may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.  Delivery of an executed counterpart of this Agreement by electronic means, including, without limitation, by facsimile transmission or by electronic delivery in portable document format (“.pdf”) or tagged image file format (“.tif”), shall constitute the valid and binding signature of such party with the same effect as if it were an original signature endorsed on this Agreement.

 

Section 7.10 Language.

 

The parties hereto acknowledge that they have required and are satisfied that this Agreement and all communications to be delivered pursuant hereto be drawn in the English language.

 

Section 7.11 Syndication.

 

The Borrower acknowledges that the Lender is acting for and on behalf of itself and certain other Persons with respect to the establishment and maintenance of the Loan and that, except for the Warrant, the Loan Documents shall be granted in favour of and held by the Lender for and on behalf of itself and certain other Persons.

 

  

- 13 -

  

 

IN WITNESS WHEREOF the parties have executed this Agreement as of the date indicated above.

 

	  	
GILLA INC.

 

By: /s/ J. Graham Simmonds                                  

      Authorized Signing Officer

 

	  	
 

SARASVATI INVESTMENTS INC.

 

By: /s/ Ashok Gautam                                            

      Authorized Signing Officer

 

  

- 14 -

  

 

SCHEDULE “A”

Monthly Cash Sweep Report

[intentionally left blank]

 

 

 

 

 

 

 

 

 

 

 

  

- 15 -

  

SCHEDULE “B”

E-Liquid Brands

[intentionally left blank]

 

 

 

 

 

 

 

 

 

- 16 -

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