Document:

Exhibit 4.4

 

SECURITIES
PURCHASE AGREEMENT

 

LAURUS
MASTER FUND, LTD.

and

HOUSE
OF BRUSSELS CHOCOLATES INC.

Dated:
March 29, 2005

 

	
      1.
	Agreement
      to Sell and Purchase	
      1

	 	 	 
	
      2.
	Fees
      and Warrant	
      1

	 	 	 
	
      3.
	Closing,
      Delivery and Payment	
      2

	 	
      3.1
	
      Closing
	
      2

	 	
      3.2
	
      Delivery
	
      2

	 	 	 	 
	
      4.
	Representations
      and Warranties of the Company	
      2

	 	
      4.1
	
      Organization,
      Good Standing and Qualification
	
      2

	 	
      4.2
	
      Subsidiaries
	
      3

	 	
      4.3
	
      Capitalization;
      Voting Rights
	
      3

	 	
      4.4
	
      Authorization;
      Binding Obligations
	
      4

	 	
      4.5
	
      Liabilities
	
      5

	 	
      4.6
	
      Agreements;
      Action
	
      5

	 	
      4.7
	
      Obligations
      to Related Parties
	
      6

	 	
      4.8
	
      Changes
	
      7

	 	
      4.9
	
      Title
      to Properties and Assets; Liens, Etc
	
      8

	 	
      4.10
	
      Intellectual
      Property
	
      9

	 	
      4.11
	
      Compliance
      with Other Instruments
	
      9

	 	
      4.12
	
      Litigation
	
      10

	 	
      4.13
	
      Tax
      Returns and Payments
	
      10

	 	
      4.14
	
      Employees
	
      10

	 	
      4.15
	
      Registration
      Rights and Voting Rights
	
      11

	 	
      4.16
	
      Compliance
      with Laws; Permits
	
      11

	 	
      4.17
	
      Environmental
      and Safety Laws
	
      11

	 	
      4.18
	
      Valid
      Offering
	
      12

	 	
      4.19
	
      Full
      Disclosure
	
      12

	 	
      4.20
	
      Insurance
	
      12

	 	
      4.21
	
      SEC
      Reports
	
      12

	 	
      4.22
	
      Listing
	
      13

	 	
      4.23
	
      No
      Integrated Offering
	
      13

	 	
      4.24
	
      Stop
      Transfer
	
      13

	 	
      4.25
	
      Dilution
	
      13

	 	
      4.26
	
      Patriot
      Act
	
      13

	 	
      4.27
	
      ERISA
	
      14

	 	 	 	 
	
      5.
	Representations
      and Warranties of the Purchaser	
      14

	 	
      5.1
	
      No
      Shorting
	
      14

	 	
      5.2
	
      Requisite
      Power and Authority
	
      15

	 	
      5.3
	
      Investment
      Representations
	
      15

	 	
      5.4
	
      The
      Purchaser Bears Economic Risk
	
      15

	 	
      5.5
	
      Acquisition
      for Own Account
	
      15

	 	
      5.6
	
      The
      Purchaser Can Protect Its Interest
	
      16

	 	
      5.7
	
      Accredited
      Investor
	
      16

	 	
      5.8
	
      Legends
	
      16

 

i

 

	
      6.
	Covenants
      of the Company	
      17

	 	
      6.1
	
      Stop-Orders
	
      17

	 	
      6.2
	
      Listing
	
      17

	 	
      6.3
	
      Market
      Regulations
	
      17

	 	
      6.4
	
      Reporting
      Requirements
	
      17

	 	
      6.5
	
      Use
      of Funds
	
      17

	 	
      6.6
	
      Access
      to Facilities
	
      17

	 	
      6.7
	
      Taxes
	
      18

	 	
      6.8
	
      Insurance
	
      19

	 	
      6.9
	
      Intellectual
      Property
	
      20

	 	
      6.10
	
      Properties
	
      20

	 	
      6.11
	
      Confidentiality
	
      20

	 	
      6.12
	
      Required
      Approvals
	
      21

	 	
      6.13
	
      Reissuance
      of Securities
	
      22

	 	
      6.14
	
      Opinion
	
      22

	 	
      6.15
	
      Margin
      Stock
	
      22

	 	
      6.16
	
      Financing
      Right of First Refusal
	
      22

	 	 	 	 
	
      7.
	Covenants
      of the Purchaser	
      23

	 	
      7.1
	
      Confidentiality
	
      23

	 	
      7.2
	
      Non-Public
      Information
	
      23

	 	
      7.3
	
      Limitation
      on Acquisition of Common Stock of the Company
	
      23

	 	 	 	 
	
      8.
	Covenants
      of the Company and the Purchaser Regarding Indemnification	
      24

	 	
      8.1
	
      Company
      Indemnification
	
      24

	 	
      8.2
	
      Purchaser’s
      Indemnification
	
      24

	 	 	 	 
	
      9.
	Conversion
      of Convertible Note	
      24

	 	
      9.1
	
      Mechanics
      of Conversion
	
      24

	 	 	 	 
	
      10.
	Registration
      Rights	
      26

	 	
      10.1
	
      Registration
      Rights Granted
	
      26

	 	
      10.2
	
      Offering
      Restrictions
	
      26

	 	 	 	 
	
      11.
	
      Miscellaneous
	
      26

	 	
      11.1
	
      Governing
      Law
	
      26

	 	
      11.2
	
      Survival
	
      27

	 	
      11.3
	
      Successors
	
      27

	 	
      11.4
	
      Entire
      Agreement; Maximum Interest
	
      28

	 	
      11.5
	
      Severability
	
      28

	 	
      11.6
	
      Amendment
      and Waiver
	
      28

	 	
      11.7
	
      Delays
      or Omissions
	
      28

	 	
      11.8
	
      Notices
	
      28

	 	
      11.9
	
      Attorneys’
      Fees
	
      29

	 	
      11.10
	
      Titles
      and Subtitles
	
      30

	 	
      11.11
	
      Facsimile
      Signatures; Counterparts
	
      30

	 	
      11.12
	
      Broker’s
      Fees
	
      30

	 	
      11.13
	
      Construction
	
      30

 

ii

 

LIST
OF EXHIBITS

	
      Form
      of Convertible Term Note
	
      Exhibit
      A

	
      Form
      of Warrant
	
      Exhibit
      B

	
      Form
      of Opinion
	
      Exhibit
      C

	
      Form
      of Escrow Agreement
	
      Exhibit
      D

 

iii

SECURITIES
PURCHASE AGREEMENT

THIS
SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of
March 29, 2005, by and between HOUSE OF BRUSSELS CHOCOLATES INC., a Nevada
corporation (the “Company”), and LAURUS MASTER FUND, LTD., a Cayman Islands
company (the “Purchaser”).

RECITALS

WHEREAS,
the Company has authorized the sale to the Purchaser of a Secured Convertible
Term Note in the aggregate principal amount of Three Million Five Hundred
Thousand Dollars ($3,500,000) in the form of Exhibit A hereto (as amended,
modified or supplemented from time to time, the “Note”), which Note is
convertible into shares of the Company’s common stock, $0.001 par value per
share (the “Common Stock”) at an initial fixed conversion price of $0.88 per
share of Common Stock (“Fixed Conversion Price”);

WHEREAS,
the Company wishes to issue to the Purchaser a warrant in the form of Exhibit B
hereto (as amended, modified or supplemented from time to time, the “Warrant”)
to purchase up to 1,500,000 shares of the Company’s Common Stock (subject to
adjustment as set forth therein) in connection with the Purchaser’s purchase of
the Note;

WHEREAS,
the Purchaser desires to purchase the Note and the Warrant on the terms and
conditions set forth herein; and

WHEREAS,
the Company desires to issue and sell the Note and Warrant to the Purchaser on
the terms and conditions set forth herein.

AGREEMENT

NOW,
THEREFORE, in consideration of the foregoing recitals and the mutual promises,
representations, warranties and covenants hereinafter set forth and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

1.  Agreement
to Sell and Purchase.
Pursuant to the terms and conditions set forth in this Agreement, on the Closing
Date (as defined in Section 3), the Company shall sell to the Purchaser, and the
Purchaser shall purchase from the Company, the Note. The sale of the Note on the
Closing Date shall be known as the “Offering.” The Note will mature on the
Maturity Date (as defined in the Note). Collectively, the Note and Warrant and
Common Stock issuable upon conversion of the Note and upon exercise of the
Warrant are referred to as the “Securities.”

 

2.  Fees
and Warrant. On the
Closing Date:

(a)  The
Company will issue and deliver to the Purchaser the Warrant to purchase up to
1,500,000 shares of Common Stock (subject to adjustment as set forth therein) in
connection with the Offering, pursuant to Section 1 hereof. All the
representations, covenants, warranties, undertakings, and indemnification, and
other rights made or granted to or for the benefit of the Purchaser by the
Company are hereby also made and granted in respect of the Warrant and shares of
the Company’s Common Stock issuable upon exercise of the Warrant (the “Warrant
Shares”).

 

(b)  Subject
to the terms of Section 2(d) below, the Company shall pay to Laurus Capital
Management, LLC, the manager of the Purchaser, a closing payment in an amount
equal to three and six tenths percent (3.60%) of the aggregate principal amount
of the Note. The foregoing fee is referred to herein as the “Closing
Payment.”

(c)  The
Company shall reimburse the Purchaser for its reasonable expenses (including
legal fees and expenses) incurred in connection with the preparation and
negotiation of this Agreement and the Related Agreements (as hereinafter
defined), and expenses incurred in connection with the Purchaser’s due diligence
review of the Company and its Subsidiaries (as defined in Section 4.2) and all
related matters. Amounts required to be paid under this Section 2(c) together
with amounts required to be paid pursuant to Section 5(b)(iv) of the Security
Agreement (as defined below), will be paid on the Closing Date and shall be
$52,500, plus the cost of California real estate counsel and Canadian local
counsel for the Purchaser, for such expenses referred to in this Section
2(c).

(d)  The
Closing Payment and the expenses referred to in the preceding clause (c) (net of
deposits previously paid by the Company) shall be paid at closing out of funds
held pursuant to the Escrow Agreement (as defined below) and a disbursement
letter (the “Disbursement Letter”).

 

3.  Closing,
Delivery and Payment.

 

3.1  Closing. Subject
to the terms and conditions herein, the closing of the transactions contemplated
hereby (the “Closing”), shall take place on the date hereof, at such time or
place as the Company and the Purchaser may mutually agree (such date is
hereinafter referred to as the “Closing Date”).

 

3.2  Delivery.
Pursuant to the Escrow Agreement, at the Closing on the Closing Date, the
Company will deliver to the Purchaser, among other things, the Note and the
Warrant and the Purchaser will deliver to the Company, among other things, the
amounts set forth in the Disbursement Letter by certified funds or wire
transfer.

 

4.  Representations
and Warranties of the Company. The
Company hereby represents and warrants to the Purchaser as follows (which
representations and warranties are supplemented by the Company’s filings under
the Securities Exchange Act of 1934 (“Exchange Act”) made prior to the date of
this Agreement (collectively, the “Exchange Act Filings”), copies of which have
been provided to the Purchaser):

 

4.1  Organization,
Good Standing and Qualification. Except
as set forth in Schedule 4.1, each of the Company and each of its Subsidiaries
is a corporation, partnership or limited liability company, as the case may be,
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Each of the Company and each of its Subsidiaries
has the corporate, limited liability company or partnership, as the case may be,
power and authority to own and operate its properties and assets and, insofar as
it is or shall be a party thereto, to (1) execute and deliver (i) this
Agreement, (ii) the Note and the Warrant to be issued in connection with this
Agreement, (iii) the Master Security Agreement dated as of the date hereof
between the Company, certain Subsidiaries of the Company and the Purchaser (as
amended, modified or supplemented from time to time, the “Master Security
Agreement”), (iv) the Registration Rights Agreement relating to the Securities
dated as of the date hereof between the Company and the Purchaser (as amended,
modified or supplemented from time to time, the “Registration Rights
Agreement”), (v) the Subsidiary Guaranty dated as of the date hereof made by
certain Subsidiaries of the Company (as amended, modified or supplemented from
time to time, the “Subsidiary Guaranty”), (vi) the Share Pledge Agreement dated
as of the date hereof among the Company, certain Subsidiaries of the Company and
the Purchaser (as amended, modified or supplemented from time to time, the
“Share Pledge Agreement”), (vii) the Funds Escrow Agreement dated as of the date
hereof among the Company, the Purchaser and the escrow agent referred to
therein, substantially in the form of Exhibit D hereto (as amended, modified or
supplemented from time to time, the “Escrow Agreement”), (viii) the Deed of
Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of
the date hereof made by Debas Chocolate Inc. in favor of Purchaser (as amended,
modified or supplemented from time to time, the “Deed of Trust”) and (x) all
other documents, instruments and agreements entered into in connection with the
transactions contemplated hereby and thereby (the preceding clauses (ii) through
(x), collectively, the “Related Agreements”); (2) issue and sell the Note and
the shares of Common Stock issuable upon conversion of the Note (the “Note
Shares”); (3) issue and sell the Warrant and the Warrant Shares; and (4)
carry out the provisions of this Agreement and the Related Agreements and to
carry on its business as presently conducted. Each of the Company and each of
its Subsidiaries is duly qualified and is authorized to do business and is in
good standing as a foreign corporation, partnership or limited liability
company, as the case may be, in all jurisdictions in which the nature or
location 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 has not, or could not reasonably be expected to have, individually or in
the aggregate, a material adverse effect on the business, assets, liabilities,
condition (financial or otherwise), properties, operations or prospects of the
Company and its Subsidiaries, taken individually and as a whole (a “Material
Adverse Effect”).

 

2

 

4.2  Subsidiaries. Each
direct and indirect Subsidiary of the Company, the direct owner of such
Subsidiary and its percentage ownership thereof, is set forth on Schedule 4.2.
For the purpose of this Agreement, a “Subsidiary” of any person or entity means
(i) a corporation or other entity whose shares of stock or other ownership
interests having ordinary voting power (other than stock or other ownership
interests having such power only by reason of the happening of a contingency) to
elect a majority of the directors of such corporation, or other persons or
entities performing similar functions for such person or entity, are owned,
directly or indirectly, by such person or entity or (ii) a corporation or other
entity in which such person or entity owns, directly or indirectly, more than
50% of the equity interests at such time. 

 

4.3  Capitalization;
Voting Rights.

(a)  The
authorized capital stock of the Company, as of the date hereof consists of
64,000,000 shares, of which 60,000,000 are shares of Common Stock, par value
$0.001 per share, 31,104,579
shares of
which are issued and outstanding , and 4,000,000 are shares of preferred stock,
par value $0.001 per share of which 0 shares of preferred stock are issued and
outstanding. The authorized and outstanding capital stock of each Subsidiary of
the Company is set forth on Schedule 4.3.

3

 

(b)  Except as
disclosed on Schedule 4.3, other than: (i) the shares reserved for issuance
under the Company’s stock option plans; and (ii) shares which may be granted
pursuant to this Agreement and the Related Agreements, there are no outstanding
options, warrants, rights (including conversion or preemptive rights and rights
of first refusal), proxy or stockholder agreements, or arrangements or
agreements of any kind for the purchase or acquisition from the Company of any
of its securities. Except as disclosed on Schedule 4.3, neither the offer,
issuance or sale of any of the Note or the Warrant, or the issuance of any of
the Note Shares or Warrant Shares, nor the consummation of any transaction
contemplated hereby will result in a change in the price or number of any
securities of the Company outstanding, under anti-dilution or other similar
provisions contained in or affecting any such securities.

(c)  All
issued and outstanding shares of the Company’s Common Stock: (i) have been
duly authorized and validly issued and are fully paid and nonassessable; and
(ii) were issued in compliance with all applicable state and federal laws
concerning the issuance of securities.

(d)  The
rights, preferences, privileges and restrictions of the shares of the Common
Stock are as stated in the Company’s Certificate of Incorporation (the
“Charter”). The Note Shares and Warrant Shares have been duly and validly
reserved for issuance. When issued in compliance with the provisions of this
Agreement and the Company’s Charter, the Securities will be validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances;
provided, however, that the Securities may be subject to restrictions on
transfer under state and/or federal securities laws as set forth herein or as
otherwise required by such laws at the time a transfer is proposed.

 

4.4  Authorization;
Binding Obligations. All
corporate, partnership or limited liability company, as the case may be, action
on the part of the Company and each of its Subsidiaries (including their
respective officers and directors) necessary for the authorization of this
Agreement and the Related Agreements, the performance of all obligations of the
Company and its Subsidiaries hereunder and under the other Related Agreements at
the Closing and, the authorization, sale, issuance and delivery of the Note and
Warrant has been taken or will be taken prior to the Closing. This Agreement and
the Related Agreements, when executed and delivered and to the extent it is a
party thereto, will be valid and binding obligations of each of the Company and
each of its Subsidiaries, enforceable against each such entity in accordance
with their terms, except:

(a)  as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and

4

 

(b)  general
principles of equity that restrict the availability of equitable or legal
remedies.

The sale
of the Note and the subsequent conversion of the Note into Note Shares are not
and will not be subject to any preemptive rights or rights of first refusal that
have not been properly waived or complied with. The issuance of the Warrant and
the subsequent exercise of the Warrant for Warrant Shares are not and will not
be subject to any preemptive rights or rights of first refusal that have not
been properly waived or complied with. 

 

4.5  Liabilities. Neither
the Company nor any of its Subsidiaries has any liabilities, except current
liabilities incurred in the ordinary course of business and liabilities
disclosed in any Exchange Act Filings.

 

4.6  Agreements;
Action. Except
as set forth on Schedule 4.6 or as disclosed in any Exchange Act
Filings:

(a)  there are
no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which the Company or any of its
Subsidiaries is a party or by which it is bound which may involve: (i)
obligations (contingent or otherwise) of, or payments to, the Company or any
such Subsidiary in excess of $100,000 (other than obligations of, or payments
to, the Company or any such Subsidiary arising from purchase or sale agreements
entered into in the ordinary course of business); or (ii) the transfer or
license of any patent, copyright, trade secret or other proprietary right to or
from the Company or any such Subsidiary (other than licenses arising from the
purchase of “off the shelf” or other standard products); or (iii) provisions
restricting the development, manufacture or distribution of the Company’s or any
such Subsidiary’s products or services; or (iv) indemnification by the Company
or any such Subsidiary with respect to infringements of proprietary
rights.

(b)  Since
April 30, 2004 (the “Balance Sheet Date”), neither the Company nor any of its
Subsidiaries has: (i) declared or paid any dividends, or authorized or made any
distribution upon or with respect to any class or series of its capital stock;
(ii) incurred any indebtedness for money borrowed or any other liabilities
(other than ordinary course obligations) individually in excess of $50,000 or,
in the case of indebtedness and/or liabilities individually less than $50,000,
in excess of $100,000 in the aggregate; (iii) made any loans or advances to any
person or entity not in excess, individually or in the aggregate, of $100,000,
other than ordinary course advances for travel expenses; or (iv) sold, exchanged
or otherwise disposed of any of its assets or rights, other than the sale of its
inventory in the ordinary course of business.

(c)  For the
purposes of subsections (a) and (b) above, all indebtedness, liabilities,
agreements, understandings, instruments, contracts and proposed transactions
involving the same person or entity (including persons or entities the Company
or any applicable Subsidiary of the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual minimum
dollar amounts of such subsections.

5

 

(d)  The
Company maintains disclosure controls and procedures (“Disclosure Controls”)
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
rules and forms of the Securities and Exchange Commission (“SEC”).

(e)  The
Company makes and keep books, records, and accounts, that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the Company’s
assets. The Company maintains internal control over financial reporting
(“Financial Reporting Controls”) designed by, or under the supervision of, the
Company’s principal executive and principal financial officers, and effected by
the Company’s board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles (“GAAP”), including that:

(i) 
  transactions
are executed in accordance with management’s general or specific
authorization;

(ii)
 
unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements are prevented or timely
detected;

(iii)  transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that the Company’s receipts and expenditures are being
made only in accordance with authorizations of the Company’s management and
board of directors; 

(iv)  transactions
are recorded as necessary to maintain accountability for assets;
and

(v)  the
recorded accountability for assets is compared with the existing assets at
reasonable intervals, and appropriate action is taken with respect to any
differences.

(f)  There is
no weakness in any of the Company’s Disclosure Controls or Financial Reporting
Controls that is required to be disclosed in any of the Exchange Act Filings,
except as so disclosed.

 

4.7  Obligations
to Related Parties. Except
as set forth on Schedule 4.7, there are no obligations of the Company or any of
its Subsidiaries to officers, directors, stockholders who own greater than or
equal to 5% of the issued and outstanding common stock of the Company or any of
its Subsidiaries or key employees of the Company or any of its Subsidiaries
other than:

(a)  for
payment of salary for services rendered and for bonus payments;

6

 

(b)  reimbursement
for reasonable expenses incurred on behalf of the Company and its
Subsidiaries;

(c)  for other
standard employee benefits made generally available to all employees (including
stock option agreements outstanding under any stock option plan approved by the
Board of Directors of the Company and each such Subsidiary of the Company, as
applicable); and

(d)  obligations
listed in the Company’s and each of its Subsidiary’s financial statements or
disclosed in any of the Company’s Exchange Act Filings.

Except as
described above or set forth on Schedule 4.7, none of the officers, directors
or, to the best of the Company’s knowledge, key employees or
stockholders who own
greater than or equal to 5% of the issued and outstanding common stock
of the
Company or any of its Subsidiaries or any members of their immediate families,
are indebted to the Company or any of its Subsidiaries, individually or in the
aggregate, in excess of $50,000 or have any direct or indirect ownership
interest in any firm or corporation with which the Company or any of its
Subsidiaries is affiliated or with which the Company or any of its Subsidiaries
has a business relationship, or any firm or corporation which competes with the
Company or any of its Subsidiaries, other than passive investments in publicly
traded companies (representing less than one percent (1%) of such company) which
may compete with the Company or any of its Subsidiaries. Except as described
above, no officer, director or stockholder who own
greater than or equal to 5% of the issued and outstanding common
stock of the
Company or any of its Subsidiaries, or any member of their immediate families,
is, directly or indirectly, interested in any material contract with the Company
or any of its Subsidiaries and no agreements, understandings or proposed
transactions are contemplated between the Company or any of its Subsidiaries and
any such person. Except as set forth on Schedule 4.7, neither the Company nor
any of its Subsidiaries is a guarantor or indemnitor of any indebtedness of any
other person, firm or entity.

 

4.8  Changes. Since
the Balance Sheet Date, except as disclosed in any Exchange Act Filing or in any
Schedule to this Agreement or to any of the Related Agreements, there has not
been:

(a)  any
change in the business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects of the Company or any of its Subsidiaries,
which individually or in the aggregate has had, or could reasonably be expected
to have, individually or in the aggregate, a Material Adverse
Effect;

(b)  any
resignation or termination of any officer, key employee or group of employees of
the Company or any of its Subsidiaries; 

(c)  any
material change, except in the ordinary course of business, in the contingent
obligations of the Company or any of its Subsidiaries by way of guaranty,
endorsement, indemnity, warranty or otherwise;

(d)  any
damage, destruction or loss, whether or not covered by insurance, which has had,
or could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;

7

 

(e)  any
waiver by the Company or any of its Subsidiaries of a valuable right or of a
material debt owed to it;

(f)  any
direct or indirect loans made by the Company or any of its Subsidiaries to any
stockholder, employee, officer or director of the Company or any of its
Subsidiaries, other than advances made in the ordinary course of
business;

(g)  any
material change in any compensation arrangement or agreement with any key
employee, officer, director or stockholder of the Company or any of its
Subsidiaries; 

(h)  any
declaration or payment of any dividend or other distribution of the assets of
the Company or any of its Subsidiaries;

(i)  any labor
organization activity related to the Company or any of its
Subsidiaries;

(j)  any debt,
obligation or liability incurred, assumed or guaranteed by the Company or any of
its Subsidiaries, except those for immaterial amounts and for current
liabilities incurred in the ordinary course of business;

(k)  any sale,
assignment or transfer of any patents, trademarks, copyrights, trade secrets or
other intangible assets owned by the Company or any of its
Subsidiaries;

(l)  any
change in any material agreement to which the Company or any of its Subsidiaries
is a party or by which either the Company or any of its Subsidiaries is bound
which either individually or in the aggregate has had, or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect;

(m)  any other
event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; or

(n)  any
arrangement or commitment by the Company or any of its Subsidiaries to do any of
the acts described in subsection (a) through (m) above.

 

4.9  Title
to Properties and Assets; Liens, Etc. Except
as set forth on Schedule 4.9, each of the Company and each of its
Subsidiaries has good and marketable title to its properties and assets, and
good title to its leasehold interests, in each case subject to no mortgage,
pledge, lien, lease, encumbrance or charge, other than:

(a)  those
resulting from taxes which have not yet become delinquent;

(b)  minor
liens and encumbrances which do not materially detract from the value of the
property subject thereto or materially impair the operations of the Company or
any of its Subsidiaries, so long as in each such case, such liens and
encumbrances have no effect on the lien priority of the Purchaser in such
property; and

8

 

(c)  those
that have otherwise arisen in the ordinary course of business, so long as they
have no effect on the lien priority of the Purchaser therein.

All
facilities, machinery, equipment, fixtures, vehicles and other properties owned,
leased or used by the Company and its Subsidiaries are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used. Except as set forth on Schedule 4.9, the Company and
its Subsidiaries are in compliance with all material terms of each lease to
which it is a party or is otherwise bound.

 

4.10  Intellectual
Property. Except
as set forth on schedule 4.10

(a)  Each of
the Company and each of its Subsidiaries owns or possesses sufficient legal
rights to all patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information and other proprietary rights and processes
necessary for its business as now conducted and, to the Company’s knowledge, as
presently proposed to be conducted (the “Intellectual Property”), without any
known infringement of the rights of others. There are no outstanding options,
licenses or agreements of any kind relating to the foregoing proprietary rights,
nor is the Company or any of its Subsidiaries bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes of any other person or
entity other than such licenses or agreements arising from the purchase of “off
the shelf” or standard products.

(b)  Neither
the Company nor any of its Subsidiaries has received any communications alleging
that the Company or any of its Subsidiaries has violated any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity, nor is the Company or any of
its Subsidiaries aware of any basis therefor.

(c)  The
Company does not believe it is or will be necessary to utilize any inventions,
trade secrets or proprietary information of any of its employees made prior to
their employment by the Company or any of its Subsidiaries, except for
inventions, trade secrets or proprietary information that have been rightfully
assigned to the Company or any of its Subsidiaries.

 

4.11  Compliance
with Other Instruments. Neither
the Company nor any of its Subsidiaries is in violation or default of (x) any
term of its Charter or Bylaws, or (y) any provision of any indebtedness,
mortgage, indenture, contract, agreement or instrument to which it is party or
by which it is bound or of any judgment, decree, order or writ, which violation
or default, in the case of this clause (y), has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect. The execution, delivery and performance of and compliance with this
Agreement and the Related Agreements to which it is a party, and the issuance
and sale of the Note by the Company and the other Securities by the Company each
pursuant hereto and thereto, will not, with or without the passage of time or
giving of notice, result in any such material violation, or be in conflict with
or constitute a default under any such term or provision, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company or any of its Subsidiaries or the
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to the Company, its business or
operations or any of its assets or properties. 

 

9

 

4.13  Tax
Returns and Payments. Except
as set forth on Schedule 4.13, each of the Company and each of its Subsidiaries
has timely filed all tax returns (federal, state and local) required to be filed
by it. All taxes shown to be due and payable on such returns, any assessments
imposed, and all other taxes due and payable by the Company or any of its
Subsidiaries on or before the Closing, have been paid or will be paid prior to
the time they become delinquent. Except as set forth on Schedule 4.13,
neither the Company nor any of its Subsidiaries has been advised:

(a)  that any
of its returns, federal, state, provincial or other, have been or are being
audited as of the date hereof; or

(b)  of any
adjustment, deficiency, assessment or court decision in respect of its federal,
state, provincial or other taxes.

The
Company has no knowledge of any liability for any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for. 

 

 4.14  Employees. Except
as set forth on Schedule 4.14, neither the Company nor any of its Subsidiaries
has any collective bargaining agreements with any of its key employees. There is
no labor union organizing activity pending or, to the Company’s knowledge,
threatened with respect to the Company or any of its Subsidiaries. Except as
disclosed in the Exchange Act Filings or on Schedule 4.14, neither the Company
nor any of its Subsidiaries is a party to or bound by any currently effective
employment contract, deferred compensation arrangement, bonus plan, incentive
plan, profit sharing plan, retirement agreement or other employee compensation
plan or agreement. To the Company’s knowledge, no key employee of the Company or
any of its Subsidiaries, nor any consultant with whom the Company or any of its
Subsidiaries has contracted, is in violation of any term of any employment
contract, proprietary information agreement or any other agreement relating to
the right of any such individual to be employed by, or to contract with, the
Company or any of its Subsidiaries because of the nature of the business to be
conducted by the Company or any of its Subsidiaries; and to the Company’s
knowledge the continued employment by the Company and its Subsidiaries of their
present key employees, and the performance of the Company’s and its
Subsidiaries’ contracts with its independent contractors, will not result in any
such violation. Neither the Company nor any of its Subsidiaries is aware that
any of its key employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency that would
interfere with their duties to the Company or any of its Subsidiaries. Neither
the Company nor any of its Subsidiaries has received any notice alleging that
any such violation has occurred. Except for key employees who have a current
effective employment agreement with the Company or any of its Subsidiaries, no
key employee of the Company or any of its Subsidiaries has been granted the
right to continued employment by the Company or any of its Subsidiaries or to
any material compensation following termination of employment with the Company
or any of its Subsidiaries. Except as set forth on Schedule 4.14, the Company is
not aware that any officer, key employee or group of employees intends to
terminate his, her or their employment with the Company or any of its
Subsidiaries, nor does the Company or any of its Subsidiaries have a present
intention to terminate the employment of any officer, key employee or group of
employees.

 

10

 

 4.15  Registration
Rights and Voting Rights. Except
as set forth on Schedule 4.15 and except as disclosed in Exchange Act
Filings, neither the Company nor any of its Subsidiaries is presently under any
obligation, and neither the Company nor any of its Subsidiaries has granted any
rights, to register any of the Company’s or its Subsidiaries’ presently
outstanding securities or any of its securities that may hereafter be issued.
Except as set forth on Schedule 4.15 and except as disclosed in Exchange Act
Filings, to the Company’s knowledge, no stockholder of the Company or any of its
Subsidiaries has entered into any agreement with respect to the voting of equity
securities of the Company or any of its Subsidiaries.

 

4.16  Compliance
with Laws; Permits. Neither
the Company nor any of its Subsidiaries is in violation of any provision of the
Sarbanes-Oxley Act of 2002 or any
other applicable Canadian corporate governance law, or SEC
rule or rule of the Principal Market (as hereafter defined) promulgated
thereunder or 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
has had, or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect. No governmental orders, permissions,
consents, approvals or authorizations are required to be obtained and no
registrations or declarations are required to be filed in connection with the
execution and delivery of this Agreement or any other Related Agreement and the
issuance of any of the Securities, except such as have been duly and validly
obtained or filed, or with respect to any filings that must be made after the
Closing, as will be filed in a timely manner. Each of the Company and its
Subsidiaries has all material franchises, permits, licenses and any similar
authority necessary for the conduct of its business as now being conducted by
it, the lack of which could, either individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect.

 

11

 

4.17  Environmental
and Safety Laws. Neither
the Company nor any of its Subsidiaries is in violation of any applicable
statute, law or regulation relating to the environment or occupational health
and safety, and to its knowledge, no material expenditures are or will be
required in order to comply with any such existing statute, law or regulation.
Except as set forth on Schedule 4.17, no Hazardous Materials (as defined below)
are used or have been used, stored, or disposed of by the Company or any of its
Subsidiaries or, to the Company’s knowledge, by any other person or entity on
any property owned, leased or used by the Company or any of its Subsidiaries.
For the purposes of the preceding sentence, “Hazardous Materials” shall
mean:

(a)  materials
which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, provincial, federal and/or foreign laws and regulations
that govern the existence and/or remedy of contamination on property, the
protection of the environment from contamination, the control of hazardous
wastes, or other activities involving hazardous substances, including building
materials; or

(b)  any
petroleum products or nuclear materials.

 

4.18  Valid
Offering.
Assuming the accuracy of the representations and warranties of the Purchaser
contained in this Agreement, the offer, sale and issuance of the Securities will
be exempt from the registration requirements of the Securities Act of 1933, as
amended (the “Securities Act”), and will 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. 

 

4.19  Full
Disclosure. Each of
the Company and each of its Subsidiaries has provided the Purchaser with all
information requested in writing by the Purchaser in connection with its
decision to purchase the Note and Warrant, including all information the Company
and its Subsidiaries believe is reasonably necessary to make such investment
decision. Neither this Agreement, the Related Agreements, the exhibits and
schedules hereto and thereto nor any other document delivered by the Company or
any of its Subsidiaries to Purchaser or its attorneys or agents in connection
herewith or therewith or with the transactions contemplated hereby or thereby,
contain any untrue statement of a material fact nor omit to state a material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading. Any financial
projections and other estimates provided to the Purchaser by the Company or any
of its Subsidiaries were based on the Company’s and its Subsidiaries’ experience
in the industry and on assumptions of fact and opinion as to future events which
the Company or any of its Subsidiaries, at the date of the issuance of such
projections or estimates, believed to be reasonable. 

 

4.20  Insurance. Each of
the Company and each of its Subsidiaries has general commercial, product
liability, fire and casualty insurance policies with coverages which the Company
believes are customary for companies similarly situated to the Company and its
Subsidiaries in the same or similar business.

 

4.21  SEC
Reports. Except
as set forth on Schedule 4.21, the Company has filed all proxy statements,
reports and other documents required to be filed by it under the Securities
Exchange Act 1934, as amended (the “Exchange Act”). The Company has furnished
the Purchaser copies of: (i) its Annual Reports on Form 10-KSB for its fiscal
year ended April 30, 2004; and (ii) its Quarterly Reports on Form 10-QSB for its
fiscal quarters ended July 31, 2004, October 31, 2004, and January 31, 2005, and
the Form 8-K filings which it has made after October 31, 2004 to date
(collectively, the “SEC Reports”). Except as set forth on Schedule 4.21, each
SEC Report was, at the time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports, as of
their respective filing dates, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.

 

12

 

4.22  Listing. The
Company’s Common Stock is listed for trading on a Principal Market (as hereafter
defined) and satisfies and at all times hereafter will satisfy all requirements
for the continuation of such listing. The Company has not received any notice
that its Common Stock will be delisted from the Principal Market or that its
Common Stock does not meet all requirements for listing. For
purposes hereof, the term “Principal Market” means the NASD OTC Bulletin Board,
NASDAQ SmallCap Market, NASDAQ National Marketing System, American Stock
Exchange or New York Stock Exchange (whichever of the foregoing is at the time
the principal trading exchange or market for the Common Stock).

 

4.23  No
Integrated Offering. Neither
the Company, nor any of its Subsidiaries or affiliates, nor any person acting on
its or their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security (other
than a concurrent offering to the Purchaser under a Security Agreement among the
Company, certain Subsidiaries of the Company and the Purchaser dated as of the
date hereof (as amended, modified or supplemented from time to time, the
“Security Agreement”)) under
circumstances that would cause the offering of the Securities pursuant to this
Agreement or any of the Related Agreements to be integrated with prior offerings
by the Company for purposes of the Securities Act which would prevent the
Company from selling the Securities pursuant to Rule 506 under the Securities
Act, or any applicable exchange-related stockholder approval provisions, nor
will the Company or any of its affiliates or Subsidiaries take any action or
steps that would cause the offering of the Securities to be integrated with
other offerings.

 

4.24  Stop
Transfer. The
Securities are restricted securities as of the date of this Agreement. Neither
the Company nor any of its Subsidiaries will issue any stop transfer order or
other order impeding the sale and delivery of any of the Securities at such time
as the Securities are registered for public sale or an exemption from
registration is available, except as required by state and federal securities
laws.

 

4.25  Dilution. The
Company specifically acknowledges that its obligation to issue the shares of
Common Stock upon conversion of the Note and exercise of the Warrant is binding
upon the Company and enforceable regardless of the dilution such issuance may
have on the ownership interests of other shareholders of the
Company. 

 

4.26  Patriot
Act, etc.
The
Company certifies that, to the best of Company’s knowledge, neither the Company
nor any of its Subsidiaries has been designated, nor is or shall be owned or
controlled, by a “suspected terrorist” as defined in Executive Order 13224. The
Company hereby acknowledges that the Purchaser seeks to comply with all
applicable laws concerning money laundering and related activities. In
furtherance of those efforts, the Company hereby represents, warrants and
covenants that: (i) none of the cash or property that the Company or any of its
Subsidiaries will pay or will contribute to the Purchaser has been or shall be
derived from, or related to, any activity that is deemed criminal under United
States law or
Canadian law; and
(ii) no contribution or payment by the Company or any of its Subsidiaries to the
Purchaser, to the extent that they are within the Company’s and/or its
Subsidiaries’ control shall cause the Purchaser to be in violation of the United
States Bank Secrecy Act, the United States International Money Laundering
Control Act of 1986 or the United States International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001, or the
Canadian Proceeds of Crime (Money Laundering) and Terrorist Financing
Act. The
Company shall promptly notify the Purchaser if any of these representations,
warranties or covenants ceases to be true and accurate regarding the Company or
any of its Subsidiaries. The Company shall provide the Purchaser any and all
additional information regarding the Company or any of its Subsidiaries that the
Purchaser deems necessary or convenient to ensure compliance with all applicable
laws concerning money laundering and similar activities. The Company understands
and agrees that if at any time it is discovered that any of the foregoing
representations, warranties or covenants are incorrect, or if otherwise required
by applicable law or regulation related to money laundering or similar
activities, the Purchaser may undertake appropriate actions to ensure compliance
with applicable law or regulation, including but not limited to segregation
and/or redemption of the Purchaser’s investment in the Company. The Company
further understands that the Purchaser may release confidential information
about the Company and its Subsidiaries and, if applicable, any underlying
beneficial owners, to proper authorities if the Purchaser, in its sole
discretion, determines that it is in the best interests of the Purchaser in
light of relevant rules and regulations under the laws set forth in subsection
(ii) above.

 

13

 

4.27  ERISA. Based
upon the Employee Retirement Income Security Act of 1974 (“ERISA”), and
the regulations and published interpretations thereunder: (i) neither the
Company nor any of its Subsidiaries has engaged in any Prohibited Transactions
(as defined in Section 406 of ERISA and Section 4975 of the Internal
Revenue Code of 1986, as amended (the “Code”)); (ii)
each of the Company and each of its Subsidiaries has met all applicable minimum
funding requirements under Section 302 of ERISA in respect of its plans; (iii)
neither the Company nor any of its Subsidiaries has any knowledge of any event
or occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) neither the Company nor any of its Subsidiaries has any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than the Company’s or such Subsidiary’s employees; and (v)
neither the Company nor any of its Subsidiaries has withdrawn, completely or
partially, from any multi-employer pension plan so as to incur liability under
the Multiemployer Pension Plan Amendments Act of 1980. Neither
the Company nor any of its Subsidiaries contributes to, or maintains, any
Canadian Pension Plan.

 

14

 

5. 
Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Company as follows (such representations and
warranties do not lessen or obviate the representations and warranties of the
Company set forth in this Agreement):

 

5.1  No
Shorting. The
Purchaser or any of its affiliates and investment partners has not, will not and
will not cause any person or entity, to directly engage or cause or participate
with any third party to directly engage in “short sales” of the Company’s Common
Stock as long as the Note shall be outstanding.

 

5.2  Requisite
Power and Authority. The
Purchaser has all necessary power and authority under all applicable provisions
of law to execute and deliver this Agreement and the Related Agreements and to
carry out their provisions. All corporate action on the Purchaser’s part
required for the lawful execution and delivery of this Agreement and the Related
Agreements have been or will be effectively taken prior to the Closing. Upon
their execution and delivery, this Agreement and the Related Agreements will be
valid and binding obligations of the Purchaser, enforceable in accordance with
their terms, except:

(a)  as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and

(b)  as
limited by general principles of equity that restrict the availability of
equitable and legal remedies.

 

5.3  Investment
Representations. The
Purchaser understands that the Securities are being offered and sold pursuant to
an exemption from registration contained in the Securities Act based in part
upon the Purchaser’s representations contained in this Agreement, including,
without limitation, that the Purchaser is an “accredited investor” within the
meaning of Regulation D under the Securities Act of 1933, as amended (the
“Securities Act”). The Purchaser confirms that it has received or has had full
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the Note and the Warrant to be
purchased by it under this Agreement and the Note Shares and the Warrant Shares
acquired by it upon the conversion of the Note and the exercise of the Warrant,
respectively. The Purchaser further confirms that it has had an opportunity to
ask questions and receive answers from the Company regarding the Company’s and
its Subsidiaries’ business, management and financial affairs and the terms and
conditions of the Offering, the Note, the Warrant and the Securities and to
obtain additional information (to the extent the Company possessed such
information or could acquire it without unreasonable effort or expense)
necessary to verify any information furnished to the Purchaser or to which the
Purchaser had access.

 

5.4  The
Purchaser Bears Economic Risk. The
Purchaser has substantial experience in evaluating and investing in private
placement transactions of securities in companies similar to the Company so that
it is capable of evaluating the merits and risks of its investment in the
Company and has the capacity to protect its own interests. The Purchaser must
bear the economic risk of this investment until the Securities are sold pursuant
to: (i) an effective registration statement under the Securities Act; or (ii) an
exemption from registration is available with respect to such sale.

 

15

 

5.5  Acquisition
for Own Account. The
Purchaser is acquiring the Note and Warrant and the Note Shares and the Warrant
Shares for the Purchaser’s own account for investment only, and not as a nominee
or agent and not with a view towards or for resale in connection with their
distribution.

 

5.6  The
Purchaser Can Protect Its Interest. The
Purchaser represents that by reason of its, or of its management’s, business and
financial experience, the Purchaser has the capacity to evaluate the merits and
risks of its investment in the Note, the Warrant and the Securities and to
protect its own interests in connection with the transactions contemplated in
this Agreement and the Related Agreements. Further, the Purchaser is aware of no
publication of any advertisement in connection with the transactions
contemplated in the Agreement or the Related Agreements.

 

5.7  Accredited
Investor. The
Purchaser represents that it is an accredited investor within the meaning of
Regulation D under the Securities Act.

 

5.8  Legends.

(a)  The Note
shall bear substantially the following legend: 

“THIS
NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS
NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO HOUSE OF BRUSSELS CHOCOLATES INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.”

(b)  The Note
Shares and the Warrant Shares, if not issued by DWAC system (as hereinafter
defined), shall bear a legend which shall be in substantially the following form
until such shares are covered by an effective registration statement filed with
the SEC:

“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO HOUSE
OF BRUSSELS CHOCOLATES INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.”

16

 

The
Warrant shall bear substantially the following legend:

“THIS
WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO HOUSE OF BRUSSELS
CHOCOLATES INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

6.  Covenants
of the Company. The
Company covenants and agrees with the Purchaser as follows:

6.1  Stop-Orders. The
Company will advise the Purchaser, promptly after it receives notice of issuance
by the SEC, any state securities commission or any other regulatory authority of
any stop order or of any order preventing or suspending any offering of any
securities of the Company, or of the suspension of the qualification of the
Common Stock of the Company for offering or sale in any jurisdiction, or the
initiation of any proceeding for any such purpose.

6.2  Listing. The
Company shall promptly secure the listing of the shares of Common Stock issuable
upon conversion of the Note and upon the exercise of the Warrant on the
Principal Market upon which shares of Common Stock are listed (subject to
official notice of issuance) and shall maintain such listing so long as any
other shares of Common Stock shall be so listed. The Company will maintain the
listing of its Common Stock on the Principal Market, and will comply in all
material respects with the Company’s reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities Dealers
(“NASD”) and such exchanges, as applicable. 

6.3  Market
Regulations. The
Company shall notify the SEC, NASD and applicable state authorities, in
accordance with their requirements, of the transactions contemplated by this
Agreement, and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and
valid issuance of the Securities to the Purchaser and promptly provide copies
thereof to the Purchaser.

6.4  Reporting
Requirements. The
Company shall timely file with the SEC all reports required to be filed pursuant
to the Exchange Act and refrain from terminating its status as an issuer
required by the Exchange Act to file reports thereunder even if the Exchange Act
or the rules or regulations thereunder would permit such
termination. 

17

                    

6.5 
 
Use of
Funds. The
Company shall use (x) up to $1,400,000 of the proceeds of the sale of the Note
to refinance certain outstanding indebtedness of the Company and its
Subsidiaries and (y) the remainder of the proceeds of the sale of the Note and
the proceeds of the sale of the Warrant for general working capital
purposes.

6.6  
 
Access
to Facilities. Each of
the Company and each of its Subsidiaries will permit any representatives
designated by the Purchaser (or any successor of the Purchaser), upon reasonable
notice and during normal business hours, at such person’s expense and
accompanied by a representative of the Company or any Subsidiary (provided that
no such prior notice shall be required to be given and no such representative of
the Company or any Subsidiary shall be required to accompany the Purchaser in
the event the Purchaser believes such access is necessary to preserve or protect
the Collateral (as defined in the Master Security Agreement) or following the
occurrence and during the continuance of an Event of Default (as defined in the
Note)), to:

    6.6       
 Access
to Facilities. Each of
the Company and each of its Subsidiaries will permit any representatives
designated by the Purchaser (or any successor of the Purchaser), upon reasonable
notice and during normal business hours, at such person’s expense and
accompanied by a representative of the Company or any Subsidiary (provided that
no such prior notice shall be required to be given and no such representative of
the Company or any Subsidiary shall be required to accompany the Purchaser in
the event the Purchaser believes such access is necessary to preserve or protect
the Collateral (as defined in the Master Security Agreement) or following the
occurrence and during the continuance of an Event of Default (as defined in the
Note)), to:

(a)  visit and
inspect any of the properties of the Company or any of its
Subsidiaries;

(b)  examine
the corporate and financial records of the Company or any of its Subsidiaries
(unless such examination is not permitted by federal, state or local law or by
contract) and make copies thereof or extracts therefrom; and

(c)  discuss
the affairs, finances and accounts of the Company or any of its Subsidiaries
with the directors, officers and independent accountants of the Company or any
of its Subsidiaries.

Notwithstanding
the foregoing, neither the Company nor any of its Subsidiaries will provide any
material, non-public information to the Purchaser unless the Purchaser signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.

6.7  Taxes.  
(i) Each of the Company and each of its Subsidiaries will promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all lawful
taxes, assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company and its Subsidiaries; provided,
however, that any such tax, assessment, charge or levy need not be paid if the
validity thereof shall currently be contested in good faith by appropriate
proceedings and if the Company and/or such Subsidiary shall have set aside on
its books adequate reserves with respect thereto, and provided, further, that
the Company and its Subsidiaries will pay all such taxes, assessments, charges
or levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefor.

(ii)  
If Company or any of its Subsidiaries shall be required by law to deduct or
withhold in respect of any and all present or future taxes, levies, imposts,
deductions and other governmental charges or withholdings, and all interest,
penalties and other liabilities with respect thereto, imposed by any
jurisdiction (or any political subdivision thereof) (“Taxes”) other than, with
respect to the Purchaser, any Taxes (including income, branch profits or
franchise taxes) imposed on or measured by its net income (“Indemnified Taxes”)
from or in respect of any sum payable hereunder to the Purchaser,
then:

18

 

(a)  the sum
payable shall be increased by such additional amount (the "Additional Amount")
as necessary so that after making all required deductions and withholdings
(including deductions and withholdings applicable to such Additional Amount) the
Purchaser receives an amount equal to the sum it would have received had no such
deductions or withholdings been made;

(b)  the
Company or such Subsidiary shall make the appropriate deductions or withholdings
and shall pay the full amount deducted or withheld to the relevant taxing
authority or other authority in accordance with applicable law;

(c)  within
thirty (30) days after the date of such payment, upon the Purchaser’s request,
the Company or such Subsidiary shall furnish to the Purchaser the original or a
certified copy of a receipt evidencing payment thereof, or other evidence of
payment reasonably satisfactory to the Purchaser; 

(d)  if the
Company or such Subsidiary fails to pay amounts in accordance with paragraph (b)
above, the Company or such Subsidiary shall indemnify the Purchaser for any
incremental Indemnified Taxes that is paid by the Purchaser as a result of the
failure;

(e)  the
Company will indemnify the Purchaser for the full amount of any Taxes imposed by
any jurisdiction and paid by the Purchaser with respect to any Additional Amount
payable pursuant to paragraph (a) above and any liability (including penalties,
interest and expenses) arising therefrom or with respect thereto, whether or not
such Taxes are correctly asserted; and

(f)  the
indemnification contemplated in paragraphs (d) and (e) above shall be made
within 30 days from the date the Purchaser makes written demand therefor (which
demand shall identify the nature and amount of Taxes for which indemnification
is being sought and shall include a copy of the relevant portion of any written
assessment from the governmental authority demanding payment of such
Taxes).

6.8  Insurance. Each of
the Company and its Subsidiaries will keep its assets which are of an insurable
character insured by financially sound and reputable insurers against loss or
damage by fire, explosion and other risks customarily insured against by
companies in similar business similarly situated as the Company and its
Subsidiaries; and the Company and its Subsidiaries will maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
which the Company reasonably believes is customary for companies in similar
business similarly situated as the Company and its Subsidiaries and to the
extent available on commercially reasonable terms. The Company, and each of its
Subsidiaries, will jointly and severally bear the full risk of loss from any
loss of any nature whatsoever with respect to the assets pledged to the
Purchaser as security for their respective obligations hereunder and under the
Related Agreements. At the Company’s and each of its Subsidiaries’ joint and
several cost and expense in amounts and with carriers reasonably acceptable to
the Purchaser, each of the Company and each of its Subsidiaries shall (i) keep
all its insurable properties and properties in which it has an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to the
Company’s or the respective Subsidiary’s including business interruption
insurance; (ii) maintain a bond in such amounts as is customary in the case of
companies engaged in businesses similar to the Company’s or the respective
Subsidiary’s insuring against larceny, embezzlement or other criminal
misappropriation of insured’s officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of the
Company or any of its Subsidiaries either directly or through governmental
authority to draw upon such funds or to direct generally the disposition of such
assets; (iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all
such worker’s compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which the Company or the respective
Subsidiary is engaged in business; and (v) furnish the Purchaser with (x) copies
of all policies and evidence of the maintenance of such policies at least thirty
(30) days before any expiration date, (y) excepting the Company’s workers’
compensation policy, endorsements to such policies naming the Purchaser as
“co-insured” or “additional insured” and appropriate loss payable endorsements
in form and substance satisfactory to the Purchaser, naming the Purchaser as
loss payee, and (z) evidence that as to the Purchaser the insurance coverage
shall not be impaired or invalidated by any act or neglect of the Company or any
Subsidiary and the insurer will provide the Purchaser with at least thirty (30)
days notice prior to cancellation. The Company and each Subsidiary shall
instruct the insurance carriers that in the event of any loss thereunder, the
carriers shall make payment for such loss to the Company and/or the Subsidiary
and the Purchaser jointly. In the event that as of the date of receipt of each
loss recovery upon any such insurance, the Purchaser has not declared an event
of default with respect to this Agreement or any of the Related Agreements, then
the Company and/or such Subsidiary shall be permitted to direct the application
of such loss recovery proceeds toward investment in property, plant and
equipment that would comprise “Collateral” secured by the Purchaser’s security
interest pursuant to the Master Security Agreement or such other security
agreement as shall be required by the Purchaser, with any surplus funds to be
applied toward payment of the obligations of the Company to the Purchaser. In
the event that the Purchaser has properly declared an event of default with
respect to this Agreement or any of the Related Agreements, then all loss
recoveries received by the Purchaser upon any such insurance thereafter may be
applied to the obligations of the Company hereunder and under the Related
Agreements, in such order as the Purchaser may determine. Any surplus (following
satisfaction of all Company obligations to the Purchaser) shall be paid by the
Purchaser to the Company or applied as may be otherwise required by law. Any
deficiency thereon shall be paid by the Company or the Subsidiary, as
applicable, to the Purchaser, on demand. 

 

19

 

6.9  Intellectual
Property. Each of
the Company and each of its Subsidiaries shall maintain in full force and effect
its existence, rights and franchises and all licenses and other rights to use
Intellectual Property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business.

6.10    
Properties. Each of
the Company and each of its Subsidiaries will keep its properties in good
repair, working order and condition, reasonable wear and tear excepted, and from
time to time make all needful and proper repairs, renewals, replacements,
additions and improvements thereto; and each of the Company and each of its
Subsidiaries will at all times comply with each provision of all leases to which
it is a party or under which it occupies property if the breach of such
provision could, either individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect.

 

20

 

6.11  Confidentiality. The
Company will not, and will not permit any of its Subsidiaries to, disclose, and
will not include in any public announcement, the name of the Purchaser, unless
expressly agreed to by the Purchaser or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement. Notwithstanding the foregoing, the Company may disclose the
Purchaser’s identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.

 

6.12  Required
Approvals. For so
long as twenty-five percent (25%) of the principal amount of the Note is
outstanding, the Company, without the prior written consent of the Purchaser,
shall not, and shall not permit any of its Subsidiaries to:

(a)  (i)
directly or indirectly declare or pay any dividends, other than dividends paid
to the parent of the Company or the parent of any Subsidiary of the Company,
(ii) issue any preferred stock that is manditorily redeemable prior to the
one year anniversary of Maturity Date (as defined in the Note) or (iii) redeem
any of its preferred stock or other equity interests;

(b)  liquidate,
dissolve or effect a material reorganization (it being understood that in no
event shall the Company or any of its Subsidiaries dissolve, liquidate or merge
with any other person or entity (unless the Company or such Subsidiary, as
applicable, is the surviving entity);

(c)  become
subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances) restrict the Company’s or any of its Subsidiaries right to
perform the provisions of this Agreement, any Related Agreement or any of the
agreements contemplated hereby or thereby; 

(d)  materially
alter or change the scope of the business of the Company and its Subsidiaries
taken as a whole; 

(e)  (i)
create, incur, assume or suffer to exist any indebtedness (exclusive of trade
debt and debt incurred to finance the purchase of equipment (not in excess of
eight percent (8%) of the fair market value of the Company’s and its
Subsidiaries’ assets)) whether secured or unsecured other than (x) the Company’s
indebtedness to the Purchaser, (y) indebtedness set forth on Schedule 6.12(e)
attached hereto and made a part hereof and any refinancings or replacements
thereof on terms no less favorable to the Purchaser than the indebtedness being
refinanced or replaced, and (z) any debt incurred in connection with the
purchase of assets in the ordinary course of business, or any refinancings or
replacements thereof on terms no less favorable to the Purchaser than the
indebtedness being refinanced or replaced, so long as any lien relating thereto
shall only encumber the fixed assets so purchased and no other assets of the
Company or any of its Subsidiaries; (ii) cancel any debt owing to it in excess
of $50,000 in the aggregate during any 12 month period; (iii) assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other person or entity, except the endorsement of
negotiable instruments by the Company for deposit or collection or similar
transactions in the ordinary course of business or guarantees of indebtedness
otherwise permitted to be outstanding pursuant to this clause (e);
and

21

 

(f)  create or
acquire any Subsidiary after the date hereof unless (i) such Subsidiary is a
wholly-owned Subsidiary of the Company and (ii) such Subsidiary becomes a party
to the Master Security Agreement, the Stock Pledge Agreement and the Subsidiary
Guaranty (either by executing a counterpart thereof or an assumption or joinder
agreement in respect thereof) and, to the extent required by the Purchaser,
satisfies each condition of this Agreement and the Related Agreements as if such
Subsidiary were a Subsidiary on the Closing Date.

 

6.13  Reissuance
of Securities. The
Company agrees to reissue certificates representing the Securities without the
legends set forth in Section 5.8 above at such time as:

(a)  the
holder thereof is permitted to dispose of such Securities pursuant to Rule
144(k) under the Securities Act; or

(b)  upon
resale subject to an effective registration statement after such Securities are
registered under the Securities Act.

The
Company agrees to cooperate with the Purchaser in connection with all resales
pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to
allow such resales provided the Company and its counsel receive reasonably
requested representations from the Purchaser and broker, if any.

 

6.14  Opinion. On the
Closing Date, the Company will deliver to the Purchaser an opinion acceptable to
the Purchaser from the Company’s external legal counsel. The Company will
provide, at the Company’s expense, such other legal opinions in the future as
are deemed reasonably necessary by the Purchaser (and acceptable to the
Purchaser) in connection with the conversion of the Note and exercise of the
Warrant.

 

6.15  Margin
Stock. The
Company will not permit any of the proceeds of the Note or the Warrant to be
used directly or indirectly to “purchase” or “carry” “margin stock” or to repay
indebtedness incurred to “purchase” or “carry” “margin stock” within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect.

 

6.16  Financing
Right of First Refusal.

(a)  The
Company hereby grants to the Purchaser a right of first refusal to provide any
Additional Financing (as defined below) to be issued by the Company and/or any
of its Subsidiaries, subject to the following terms and conditions. From and
after the date hereof, prior to the incurrence of any additional indebtedness of
the Company or any of its Subsidiaries
convertible into the Common Stock of the Company (an
“Additional Financing”), the Company and/or any Subsidiary of the Company, as
the case may be, shall notify the Purchaser of its intention to enter into such
Additional Financing. In connection therewith, the Company and/or the applicable
Subsidiary thereof shall submit a fully executed term sheet (a “Proposed Term
Sheet”) to the Purchaser setting forth the terms, conditions and pricing of any
such Additional Financing (such financing to be negotiated on “arm’s length”
terms and the terms thereof to be negotiated in good faith) proposed to be
entered into by the Company and/or such Subsidiary. The Purchaser shall have the
right, but not the obligation, to deliver its own proposed term sheet (the
“Purchaser Term Sheet”) setting forth the terms and conditions upon which the
Purchaser would be willing to provide such Additional Financing to the Company
and/or such Subsidiary. The Purchaser Term Sheet shall contain terms no less
favorable to the Company and/or such Subsidiary than those outlined in Proposed
Term Sheet. The Purchaser shall deliver such Purchaser Term Sheet within ten
business days of receipt of each such Proposed Term Sheet. If the provisions of
the Purchaser Term Sheet are at least as favorable to the Company and/or such
Subsidiary, as the case may be, as the provisions of the Proposed Term Sheet,
the Company and/or such Subsidiary shall enter into and consummate the
Additional Financing transaction outlined in the Purchaser Term
Sheet.
Notwithstanding anything to the contrary contained above, this Section 6.16(a)
shall only apply to the extent that the aggregate principal amount of all
Additional Financings consummated in such fiscal year of the Parent (after
giving effect to the proposed Additional Financing) exceed
$100,000.

22

 

(b) The
Company will not, and will not permit its Subsidiaries to, agree, directly or
indirectly, to any restriction with any person or entity which limits the
ability of the Purchaser to consummate an Additional Financing with the Company
or any of its Subsidiaries.

 

7.  Covenants
of the Purchaser. The
Purchaser covenants and agrees with the Company as follows:

 

7.1  Confidentiality. The
Purchaser will not disclose, and will not include in any public announcement,
the name of the Company, unless expressly agreed to by the Company or unless and
until such disclosure is required by law or applicable regulation, and then only
to the extent of such requirement.

 

7.2  Non-Public
Information. The
Purchaser will not effect any sales in the shares of the Company’s Common Stock
while in possession of material, non-public information regarding the Company if
such sales would violate applicable securities law.

 

7.3  Limitation
on Acquisition of Common Stock of the Company.
Notwithstanding anything to the contrary contained herein, in any Related
Agreement or any document, instrument or agreement entered into in connection
with any other transactions between the Purchaser and the Company, the Purchaser
may not acquire stock in the Company (including, without limitation, pursuant to
a contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Company, or otherwise, and such contracts, options, warrants, conversion or
other rights shall not be enforceable or exercisable) to the extent such stock
acquisition would cause any interest (including any original issue discount)
payable by the Company to Laurus not to qualify as “portfolio interest” within
the meaning of Section 881(c)(2) of the Code, by reason of
Section 881(c)(3) of the Code, taking into account the constructive
ownership rules under Section 871(h)(3)(C) of the Code (the “Stock Acquisition
Limitation”). The Stock Acquisition Limitation shall automatically become null
and void without any notice to the Company upon the earlier to occur of either
(a) the Company’s delivery to Laurus of a Notice of Redemption (as defined in
the Note) or (b) the existence of an Event of Default (as defined in the Note)
at a time when the average closing price of the Company’s common stock as
reported by Bloomberg, L.P. on the Principal Market for the immediately
preceding five trading days is greater than or equal to 150% of the Fixed
Conversion Price (as defined in the Note).

 

23

 

8.  Covenants
of the Company and the Purchaser Regarding Indemnification.

 

8.1  Company
Indemnification. The
Company agrees to indemnify, hold harmless, reimburse and defend the Purchaser,
each of the Purchaser’s officers, directors, agents, affiliates, control
persons, and principal shareholders, against any and all claims, costs,
expenses, liabilities, obligations, losses or damages (including reasonable
legal fees) of any nature, incurred by or imposed upon the Purchaser which
result, arise out of or are based upon: (i) any misrepresentation by the Company
or any of its Subsidiaries or breach of any warranty by the Company or any of
its Subsidiaries in this Agreement, any Related Agreement or in any exhibits or
schedules attached hereto or thereto; or (ii) any breach or default in
performance by Company or any of its Subsidiaries of any covenant or undertaking
to be performed by Company or any of its Subsidiaries hereunder, under any
Related Agreement or any other agreement entered into by the Company and/or any
of its Subsidiaries and the Purchaser relating hereto or thereto.

 

8.2  Purchaser’s
Indemnification. The
Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company
and each of the Company’s officers, directors, agents, affiliates, control
persons and principal shareholders, at all times against any claims, costs,
expenses, liabilities, obligations, losses or damages (including reasonable
legal fees) of any nature, incurred by or imposed upon the Company which result,
arise out of or are based upon: (i) any misrepresentation by the Purchaser or
breach of any warranty by the Purchaser in this Agreement or any Related
Agreement or in any exhibits or schedules attached hereto or thereto; or
(ii) any breach or default in performance by the Purchaser of any covenant
or undertaking to be performed by the Purchaser hereunder, under any Related
Agreement or any other agreement entered into by the Company and/or any of its
subsidiaries and the Purchaser relating hereto or thereto.

 

9.  Conversion
of Convertible Note.

 

9.1  Mechanics
of Conversion.

(a)  Provided
the Purchaser has notified the Company of the Purchaser’s intention to sell the
Note Shares and the Note Shares are included in an effective registration
statement or are otherwise exempt from registration when sold: (i) upon the
conversion of the Note or part thereof, the Company shall, at its own cost and
expense, take all necessary action (including the issuance of an opinion of
counsel reasonably acceptable to the Purchaser following a request by the
Purchaser) to assure that the Company’s transfer agent shall issue shares of the
Company’s Common Stock in the name of the Purchaser (or its nominee) or such
other persons as designated by the Purchaser in accordance with Section 9.1(b)
hereof and in such denominations to be specified representing the number of Note
Shares issuable upon such conversion; and (ii) the Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company’s Common Stock and that after the Effectiveness
Date (as defined in the Registration Rights Agreement) the Note Shares issued
will be freely transferable subject to the prospectus delivery requirements of
the Securities Act and the provisions of this Agreement, and will not contain a
legend restricting the resale or transferability of the Note
Shares.

24

 

(b)  The
Purchaser will give notice of its decision to exercise its right to convert the
Note or part thereof by telecopying or otherwise delivering an executed and
completed notice of the number of shares to be converted to the Company (the
“Notice of Conversion”). The Purchaser will not be required to surrender the
Note until the Purchaser receives a credit to the account of the Purchaser’s
prime broker through the DWAC system (as defined below), representing the Note
Shares or until the Note has been fully satisfied. Each date on which a Notice
of Conversion is telecopied or delivered to the Company in accordance with the
provisions hereof shall be deemed a “Conversion Date.” Pursuant to the terms of
the Notice of Conversion, the Company will issue instructions to the transfer
agent accompanied by an opinion of counsel within one (1) business day of the
date of the delivery to the Company of the Notice of Conversion and shall cause
the transfer agent to transmit the certificates representing the Conversion
Shares to the Holder by crediting the account of the Purchaser’s prime broker
with the Depository Trust Company (“DTC”) through its Deposit Withdrawal Agent
Commission (“DWAC”) system within three (3) business days after receipt by the
Company of the Notice of Conversion (the “Delivery Date”).

(c)  The
Company understands that a delay in the delivery of the Note Shares in the form
required pursuant to Section 9 hereof beyond the Delivery Date could result in
economic loss to the Purchaser. In the event that the Company fails to direct
its transfer agent to deliver the Note Shares to the Purchaser via the DWAC
system within the time frame set forth in Section 9.1(b) above and the Note
Shares are not delivered to the Purchaser by the Delivery Date, as compensation
to the Purchaser for such loss, the Company agrees to pay late payments to the
Purchaser for late issuance of the Note Shares in the form required pursuant to
Section 9 hereof upon conversion of the Note in the amount equal to the greater
of: (i) $500 per business day after the Delivery Date; or (ii) the Purchaser’s
actual damages from such delayed delivery. Notwithstanding the foregoing, the
Company will not owe the Purchaser any late payments if the delay in the
delivery of the Note Shares beyond the Delivery Date is solely out of the
control of the Company and the Company is actively trying to cure the cause of
the delay. The Company shall pay any payments incurred under this Section in
immediately available funds upon demand and, in the case of actual damages,
accompanied by reasonable documentation of the amount of such damages. Such
documentation shall show the number of shares of Common Stock the Purchaser is
forced to purchase (in an open market transaction) which the Purchaser
anticipated receiving upon such conversion, and shall be calculated as the
amount by which (A) the Purchaser’s total purchase price (including customary
brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (B) the aggregate principal and/or interest amount of the Note, for
which such Conversion Notice was not timely honored.

 

25

 

10.  Registration
Rights.

 

10.1  Registration
Rights Granted. The
Company hereby grants registration rights to the Purchaser pursuant to the
Registration Rights Agreement. 

 

10.2  Offering
Restrictions. Except
as previously disclosed in the SEC Reports or in the Exchange Act Filings, or
stock or stock options granted to employees or directors of the Company (these
exceptions hereinafter referred to as the “Excepted Issuances”), neither the
Company nor any of its Subsidiaries will, prior to the full repayment or
conversion of the Note (together with all accrued and unpaid interest and fees
related thereto), (x) enter into any equity line of credit agreement or similar
agreement or (y) issue, or enter into any agreement to issue, any securities
with a variable/floating conversion and/or pricing feature which are or could be
(by conversion or registration) free-trading securities (i.e. common stock
subject to a registration statement).

 

11.  Miscellaneous.

 

11.1  Governing
Law, Jurisdiction and Waiver of Jury Trial.

(a)  THIS
AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS.

(b)  THE
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND,
AND THE PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE
RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT
OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED, THAT
THE PURCHASER AND THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY
HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
NEW YORK; AND FURTHER PROVIDED, THAT
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PURCHASER
FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL (AS DEFINED IN THE MASTER
SECURITY AGREEMENT) OR ANY OTHER SECURITY FOR THE OBLIGATIONS (AS DEFINED IN THE
MASTER SECURITY AGREEMENT), OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN
FAVOR OF THE PURCHASER. THE COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO
SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE
COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS. THE
COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.9 AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.

26

 

(c) THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO
TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PURCHASER AND/OR THE
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
THERETO.

11.2  Severability.
Wherever possible each provision of this Agreement and the Related Agreements
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or any Related Agreement
shall be prohibited by or invalid under applicable law such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions
thereof.

11.3  Survival. The
representations, warranties, covenants and agreements made herein shall survive
any investigation made by the Purchaser and the closing of the transactions
contemplated hereby to the extent provided therein. All statements as to factual
matters contained in any certificate or other instrument delivered by or on
behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or
instrument.

 

11.4  Successors. Except
as otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the successors, heirs, executors and
administrators of the parties hereto and shall inure to the benefit of and be
enforceable by each entity which shall be a holder of the Securities from time
to time, other than the holders of Common Stock which has been sold by the
Purchaser pursuant to Rule 144 or an effective registration statement. The
Purchaser may not assign its rights hereunder to a competitor of the
Company.

 

27

 

11.5  Entire
Agreement; Maximum Interest. This
Agreement, the Related Agreements, the exhibits and schedules hereto and thereto
and the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and no party shall be liable or bound to any other in any manner by any
representations, warranties, covenants and agreements except as specifically set
forth herein and therein. Nothing contained herein or in any document referred
to herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
amount permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Purchaser and thus refunded
to the Company.

 

11.6  Severability. In case
any provision of the Agreement shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.

 

11.7  Amendment
and Waiver.

(a)  This
Agreement may be amended or modified only upon the written consent of the
Company and the Purchaser.

(b)  The
obligations of the Company and the rights of the Purchaser under this Agreement
may be waived only with the written consent of the Purchaser. 

(c)  The
obligations of the Purchaser and the rights of the Company under this Agreement
may be waived only with the written consent of the Company.

 

11.8  Delays
or Omissions. It is
agreed that no delay or omission to exercise any right, power or remedy accruing
to any party, upon any breach, default or noncompliance by another party under
this Agreement or the Related Agreements, shall impair any such right, power or
remedy, nor shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. All remedies, either under this
Agreement or the Related Agreements, by law or otherwise afforded to any party,
shall be cumulative and not alternative.

 

11.9  Notices. All
notices required or permitted hereunder 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 facsimile if sent during normal business hours of the recipient, if
not, then on the next business day;

28

 

(c)  three (3)
business 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 as follows:

 

	 	
      If
      to the Company, to:
	 	
      House
      of Brussels Chocolates Inc.

      One
      Riverway, Suite 1700

      Houston,
      Texas 77056

      Attention: Robert
      Wesolek, Chief Financial Officer

      Facsimile:

	 	 	 	 
	 	 	 	
      with
      a copy to:

	 	 	 	 
	 	 	 	
      Axelrod,
      Smith & Kirshbaum

      5300
      Memorial Drive, Ste. 700

      Houston,
      Texas 77007

      Attention: Robert
      D. Axelrod

      Facsimile: 713-552-0202

	 	 	 	 
	 	
      If
      to the Purchaser, to:
	 	
      Laurus
      Master Fund, Ltd.

      c/o
      M&C Corporate Services Limited

      P.O.
      Box 309 GT

      Ugland
      House 

      George
      Town

      South
      Church Street

      Grand
      Cayman, Cayman Islands

      Facsimile: 345-949-8080

	 	 	 	 
	 	 	 	
      with
      a copy to:

	 	 	 	 
	 	 	 	
      John
      E. Tucker, Esq.

      825
      Third Avenue 14th Floor

      New
      York, NY 10022

      Facsimile: 212-541-4434

or at
such other address as the Company or the Purchaser may designate by written
notice to the other parties hereto given in accordance herewith.

 

11.10  Attorneys’
Fees. In the
event that any suit or action is instituted to enforce any provision in this
Agreement or any Related Agreement, the prevailing party in such dispute shall
be entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect to this
Agreement and/or such Related Agreement, including, without limitation, such
reasonable fees and expenses of attorneys and accountants, which shall include,
without limitation, all fees, costs and expenses of appeals.

 

29

 

11.11  Titles
and Subtitles. The
titles of the sections and subsections of this Agreement are for convenience of
reference only and are not to be considered in construing this
Agreement.

 

11.12  Facsimile
Signatures; Counterparts. This
Agreement may be executed by facsimile signatures and in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one agreement.

 

11.13  Broker’s
Fees. Except
as set forth on Schedule 11.13 hereof, each party hereto represents and warrants
that no agent, broker, investment banker, person or firm acting on behalf of or
under the authority of such party hereto is or will be entitled to any broker’s
or finder’s fee or any other commission directly or indirectly in connection
with the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 11.13 being
untrue.

 

11.14  Construction. Each
party acknowledges that its legal counsel participated in the preparation of
this Agreement and the Related Agreements and, therefore, stipulates that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be applied in the interpretation of this Agreement or any
Related Agreement to favor any party against the other.

[THE
REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK

 

30

IN
WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE
AGREEMENT as of the date set forth in the first paragraph hereof.

 

	
      COMPANY:
	 	
      PURCHASER:

	 	 	 
	
      HOUSE
      OF BRUSSELS CHOCOLATES INC.
	 	
      LAURUS
      MASTER FUND, LTD.

	 	 	 
	
      By:
      
	 	
      By:
      

	 	 	 
	
      Name:
      
	 	
      Name:
      

	 	 	 
	
      Title:
      
	 	
      Title:
      

	 	 	 

 

31

 

EXHIBIT
A

FORM
OF CONVERTIBLE NOTE

 

A-1

 

EXHIBIT
B

FORM
OF WARRANT

 

B-1

 

EXHIBIT
C

FORM
OF OPINION1 

1.  Each of
the Company and each of its Subsidiaries is a corporation duly incorporated,
validly existing and in good standing under the laws of the jurisdiction of its
formation and has all requisite corporate power and authority to own, operate
and lease its properties and to carry on its business as it is now being
conducted. 

2.  Each of
the Company and each of its Subsidiaries has the requisite corporate power and
authority to execute, deliver and perform its obligations under the Agreement
and the Related Agreements. All corporate action on the part of the Company and
each of its Subsidiaries and its officers, directors and stockholders necessary
has been taken for: (i) the authorization of the Agreement and the Related
Agreements and the performance of all obligations of the Company and each of its
Subsidiaries thereunder; and (ii) the authorization, sale, issuance and delivery
of the Securities pursuant to the Agreement and the Related Agreements. The Note
Shares and the Warrant Shares, when issued pursuant to and in accordance with
the terms of the Agreement and the Related Agreements and upon delivery shall be
validly issued and outstanding, fully paid and non assessable. 

3.  The
execution, delivery and performance by each of the Company and each of its
Subsidiaries of the Agreement and the Related Agreements (to which it is a
party) and the consummation of the transactions on its part contemplated by any
thereof, will not, with or without the giving of notice or the passage of time
or both:

(a)  Violate
the provisions of their respective Charter or bylaws; or

(b)  Violate
any judgment, decree, order or award of any court binding upon the Company or
any of its Subsidiaries; or

(c)  Violate
any [insert jurisdictions in which counsel is qualified] or federal
law

4.  The
Agreement and the Related Agreements will constitute, valid and legally binding
obligations of each of the Company and each of its Subsidiaries (to the extent
such entity is a party thereto), and are enforceable against each of the Company
and each of its Subsidiaries party thereto in accordance with their respective
terms, except:

(a)  as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and

 

_______________________

1 Please
provide corresponding opinions for the Security Agreement and the Ancillary
Agreements.

 

C-1

 

(b)  general
principles of equity that restrict the availability of equitable or legal
remedies.

5.  To such
counsel’s knowledge, the sale of the Note and the subsequent conversion of the
Note into Note Shares are not subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with. To such
counsel’s knowledge, the sale of the Warrant and the subsequent exercise of the
Warrant for Warrant Shares are not subject to any preemptive rights or, to such
counsel’s knowledge, rights of first refusal that have not been properly waived
or complied with.

6.  Assuming
the accuracy of the representations and warranties of the Purchaser contained in
the Agreement, the offer, sale and issuance of the Securities on the Closing
Date will be exempt from the registration requirements of the Securities Act. To
such counsel’s knowledge, neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales of any security or solicited any offers to buy and security
under circumstances that would cause the offering of the Securities pursuant to
the Agreement or any Related Agreement to be integrated with prior offerings by
the Company for purposes of the Securities Act which would prevent the Company
from selling the Securities pursuant to Rule 506 under the Securities Act, or
any applicable exchange-related stockholder approval provisions. 

7.  There is
no action, suit, proceeding or investigation pending or, to such counsel’s
knowledge, currently threatened against the Company or any of its Subsidiaries
that prevents the right of the Company or any of its Subsidiaries to enter into
this Agreement or any Related Agreement, or to consummate the transactions
contemplated thereby. To such counsel’s knowledge, the Company is not a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality; nor is there any action,
suit, proceeding or investigation by the Company currently pending or which the
Company intends to initiate.

8.  The terms
and provisions of the Master Security Agreement and the Stock Pledge Agreement
create a valid security interest in favor of the Purchaser, in the respective
rights, title and interests of the Company and its Subsidiaries in and to the
Collateral (as defined in each of the Master Security Agreement and the Stock
Pledge Agreement). Each UCC-1 Financing Statement naming the Company or any
Subsidiary thereof as debtor and the Purchaser as secured party are in proper
form for filing and assuming that such UCC-1 Financing Statements have been
filed with the Secretary of State of [Nevada] [Insert other jurisdictions], the
security interest created under the Master Security Agreement will constitute a
perfected security interest under the Uniform Commercial Code in favor of the
Purchaser in respect of the Collateral that can be perfected by filing a
financing statement. After giving effect to the delivery to the Purchaser of the
stock certificates representing the ownership interests of each Subsidiary of
the Company (together with effective endorsements) and assuming the continued
possession by the Purchaser of such stock certificates in the State of New York,
the security interest created in favor of the Purchaser under the Stock Pledge
Agreement constitutes a valid and enforceable first perfected security interest
in such ownership interests (and the proceeds thereof) in favor of the
Purchaser, subject to no other security interest. No filings, registrations or
recordings are required in order to perfect (or maintain the perfection or
priority of) the security interest created under the Stock Pledge Agreement in
respect of such ownership interests.

 

C-2

 

EXHIBIT
D

FORM
OF ESCROW AGREEMENT

D-1Exhibit 4.5

SECURITY
AGREEMENT

 

This
Security Agreement is made as of March 29, 2005 by and among LAURUS MASTER FUND,
LTD., a Cayman Islands corporation (“Laurus”), HOUSE
OF BRUSSELS CHOCOLATES, INC., a Nevada corporation (the “Parent”), each party
listed on Part I of Exhibit
A attached
hereto (together with each other U.S. entity that becomes a party hereto in
accordance with Section 38, each an “Eligible
U.S. Subsidiary” and
collectively, the “Eligible
U.S. Subsidiaries”) and
each party listed on Part II of Exhibit A attached hereto (together with each
other Canadian entity that becomes a party hereto in accordance with Section 38,
each an “Eligible
Canadian Subsidiary” and
collectively, the “Eligible
Canadian Subsidiaries”) (the
Parent and each Eligible U.S. Subsidiary, each a “U.S.
Company” and
collectively, the “U.S.
Companies”) (the
“Eligible U.S. Subsidiaries” and the “Eligible Canadian Subsidiaries”, each an
“Eligible Subsidiary” and collectively, the “Eligible Subsidiaries”) (the Parent
and each Eligible Subsidiary, each a “Company” and
collectively, the “Companies”).

 

BACKGROUND

 

U.S.
Companies have requested that Laurus make advances available to U.S. Companies;
and

 

Laurus
has agreed to make such advances on the terms and conditions set forth in this
Agreement.

 

AGREEMENT

 

NOW,
THEREFORE, in consideration of the mutual covenants and undertakings and the
terms and conditions contained herein, the parties hereto agree as
follows:

 

	
      1.
	
      General
      Definitions and Terms; Rules of
Construction.

 

(a)    General
Definitions.
Capitalized terms used in this Agreement shall have the meanings assigned to
them in Annex A.

 

(b)    Accounting
Terms. Any
accounting terms used in this Agreement which are not specifically defined shall
have the meanings customarily given them in accordance with GAAP and all
financial computations shall be computed, unless specifically provided herein,
in accordance with GAAP consistently applied.

 

(c)    Other
Terms. All
other terms used in this Agreement and defined in the UCC, shall have the
meaning given therein unless otherwise defined herein.

 

(d)    Rules
of Construction. All
Schedules, Addenda, Annexes and Exhibits hereto or expressly identified to this
Agreement are incorporated herein by reference and taken together with this
Agreement constitute but a single agreement. The words “herein”, “hereof” and
“hereunder” or other words of similar import refer to this Agreement as a whole,
including the Exhibits, Addenda, Annexes and Schedules thereto, as the same may
be from time to time amended, modified, restated or supplemented, and not to any
particular section, subsection or clause contained in this Agreement. Wherever
from the context it appears appropriate, each term stated in either the singular
or plural shall include the singular and the plural, and pronouns stated in the
masculine, feminine or neuter gender shall include the masculine, the feminine
and the neuter. The term “or” is not exclusive. The term “including” (or any
form thereof) shall not be limiting or exclusive. All references to statutes and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references in this Agreement or in the Schedules,
Addenda, Annexes and Exhibits to this Agreement to sections, schedules,
disclosure schedules, exhibits, and attachments shall refer to the corresponding
sections, schedules, disclosure schedules, exhibits, and attachments of or to
this Agreement. All references to any instruments or agreements, including
references to any of this Agreement or the Ancillary Agreements shall include
any and all modifications or amendments thereto and any and all extensions or
renewals thereof.

 

-2-

 

	
      2.
	
      Loan
      Facility.

 

(a)     
Loans.

            

            (i)    Subject
to the terms and conditions set forth herein and in the Ancillary Agreements,
Laurus may make loans (the “Loans”) to
U.S. Companies from time to time during the Term which, in the aggregate at any
time outstanding, will not exceed the lesser of (x) (I) the Capital Availability
Amount minus (II) such reserves as Laurus may reasonably in its good faith
judgment deem proper and necessary from time to time (the “Reserves”) and
(y) an amount equal to (I) the Accounts Availability minus (II) the Reserves.
The amount derived at any time from Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II)
shall be referred to as the “Formula
Amount.” U.S.
Companies shall, jointly and severally, execute and deliver to Laurus on the
Closing Date the Revolving Note and a Minimum Borrowing Note evidencing the
Loans funded on the Closing Date. From time to time thereafter, Companies shall
jointly and severally execute and deliver to Laurus immediately prior to the
final funding of each additional $500,000 tranche of Loans allocated to any
Minimum Borrowing Note issued after the date hereof (calculated on a cumulative
basis for each such tranche) an additional Minimum Borrowing Note evidencing
such tranche, substantially in the form of the Minimum Borrowing Note delivered
by U.S. Companies to Laurus on the Closing Date. Notwithstanding anything herein
to the contrary, whenever during the Term the outstanding balance on the
Revolving Note should equal or exceed $500,000 to the extent that the
outstanding balance on the Minimum Borrowing Note shall be less than or equal to
$500,000 (the difference of $1,000,000 less the actual balance of the Minimum
Borrowing Note, the “Available
Minimum Borrowing”), such
portion of the balance of the Revolving Note as shall equal the Available
Minimum Borrowing shall be deemed to be simultaneously extinguished on the
Revolving Note and transferred to, and evidenced by, the Minimum Borrowing
Note.

 

(ii)    Notwithstanding
the limitations set forth above, if requested by any U.S. Company, Laurus
retains the right to lend to such U.S. Company from time to time such amounts in
excess of such limitations as Laurus may determine in its sole
discretion.

 

(iii)    Companies
acknowledge that the exercise of Laurus’ discretionary rights hereunder may
result during the Term in one or more increases or decreases in the advance
percentages used in determining Accounts Availability and Companies hereby
consent to any such increases or decreases which may limit or restrict advances
requested by U.S. Companies.

 

(iv)    If any
interest, fees, costs or charges payable to Laurus hereunder are not paid when
due, U.S. Companies shall thereby be deemed to have requested, and Laurus is
hereby authorized at its discretion to make and charge to U.S. Companies’
account, a Loan as of such date in an amount equal to such unpaid interest,
fees, costs or charges.

 

-3-

 

(v)    If any
Company at any time fails to perform or observe any of the covenants contained
in this Agreement or any Ancillary Agreement, Laurus may, but need not, perform
or observe such covenant on behalf and in the name, place and stead of such
Company (or, at Laurus’ option, in Laurus’ name) and may, but need not, take any
and all other actions which Laurus may deem necessary to cure or correct such
failure (including the payment of taxes, the satisfaction of Liens, the
performance of obligations owed to Account Debtors, lessors or other obligors,
the procurement and maintenance of insurance, the execution of assignments,
security agreements and financing statements, and the endorsement of
instruments). The amount of all monies expended and all costs and expenses
(including legal fees and expenses) incurred by Laurus in connection with or as
a result of the performance or observance of such agreements or the taking of
such action by Laurus shall be charged to U.S. Companies’ account as a Loan and
added to the Obligations. To facilitate Laurus’ performance or observance of
such covenants of each Company, each Company hereby irrevocably appoints Laurus,
or Laurus’ delegate, acting alone, as such Company’s attorney in fact (which
appointment is coupled with an interest) with the right (but not the duty) from
time to time to create, prepare, complete, execute, deliver, endorse or file in
the name and on behalf of such Company any and all instruments, documents,
assignments, security agreements, financing statements, applications for
insurance and other agreements and writings required to be obtained, executed,
delivered or endorsed by such Company.

 

(vi)    Laurus
will account to Company Agent monthly with a statement of all Loans and other
advances, charges and payments made pursuant to this Agreement, and such account
rendered by Laurus shall be deemed final, binding and conclusive unless Laurus
is notified by Company Agent in writing to the contrary within thirty (30) days
of the date each account was rendered specifying the item or items to which
objection is made.

 

(vii)    During
the Term, U.S. Companies may borrow and prepay Loans in accordance with the
terms and conditions hereof. 

 

(viii)    If any
Eligible Account is not paid by the Account Debtor within ninety (90) days after
the date that such Eligible Account was invoiced or if any Account Debtor
asserts a deduction, dispute, contingency, set-off, or counterclaim with respect
to any Eligible Account, (a “Delinquent
Account”), U.S.
Companies shall jointly and severally (i) reimburse Laurus for the amount of the
Loans made with respect to such Delinquent Account plus an adjustment fee in an
amount equal to one-half of one percent (0.50%) of the gross face amount of such
Eligible Account or (ii) immediately replace such Delinquent Account with an
otherwise Eligible Account.

 

(b)    Receivables
Purchase.
Following the occurrence and during the continuance of an Event of Default,
Laurus may, at its option, elect to convert the credit facility contemplated
hereby to an accounts receivable purchase facility. Upon such election by Laurus
(subsequent notice of which Laurus shall provide to Company Agent), Companies
shall be deemed to hereby have sold, assigned, transferred, conveyed and
delivered to Laurus, and Laurus shall be deemed to have purchased and received
from Companies, all right, title and interest of Companies in and to all
Accounts which shall at any time constitute Eligible Accounts (the “Receivables
Purchase”). All
outstanding Loans hereunder shall be deemed obligations under such accounts
receivable purchase facility. The conversion to an accounts receivable purchase
facility in accordance with the terms hereof shall not be deemed an exercise by
Laurus of its secured creditor rights under Article 9 of the UCC. Immediately
following Laurus’ request, U.S. Companies shall execute all such further
documentation as may be required by Laurus to more fully set forth the accounts
receivable purchase facility herein contemplated, including, without limitation,
Laurus’ standard form of accounts receivable purchase agreement and account
debtor notification letters, but any U.S. Company’s failure to enter into any
such documentation shall not impair or affect the Receivables Purchase in any
manner whatsoever.

 

-4-

 

(c)    Minimum
Borrowing Amount. After a
registration statement registering the Registrable Securities has been declared
effective by the SEC, conversions of the Minimum Borrowing Amount into the
Common Stock may be initiated as set forth in the respective Minimum Borrowing
Note. From and after the date upon which any outstanding principal of the
Minimum Borrowing Amount (as evidenced by the first Minimum Borrowing Note) is
converted into Common Stock (the “First
Conversion Date”), (i)
corresponding amounts of all outstanding Loans (not attributable to the then
outstanding Minimum Borrowing Amount) existing on or made after the First
Conversion Date will be aggregated until they reach the sum of $1,000,000 and
(ii) U.S. Companies will issue a new (serialized) Minimum Borrowing Note to
Laurus in respect of such $1,000,000 aggregation, and (iii) the Parent shall
prepare and file a subsequent registration statement with the SEC to register
such subsequent Minimum Borrowing Note as set forth in the Registration Rights
Agreement.

 

	
      3.
	
      Repayment
      of the Loans.

 

U.S.
Companies (a) may prepay the Obligations from time to time in accordance with
the terms and provisions of the Notes (and Section 17 hereof
if such prepayment is due to a termination of this Agreement); and (b) shall
repay on the expiration of the Term (i) the then aggregate outstanding principal
balance of the Loans together with accrued and unpaid interest, fees and charges
and (ii) all other amounts owed Laurus under this Agreement and the Ancillary
Agreements. Any payments of principal, interest, fees or any other amounts
payable hereunder or under any Ancillary Agreement shall be made prior to 12:00
noon (New York time) on the due date thereof in immediately available
funds.

 

	
      4.
	
      Procedure
      for Loans.

 

Company
Agent may by written notice request a borrowing of Loans prior to 12:00 noon
(New York time) on the Business Day of its request to incur, on the next
Business Day, a Loan. Together with each request for a Loan (or at such other
intervals as Laurus may request), Company Agent shall deliver to Laurus a
Borrowing Base Certificate in the form of Exhibit
B attached
hereto, which shall be certified as true and correct by the Chief Executive
Officer or Chief Financial Officer of Company Agent together with all supporting
documentation relating thereto. All Loans shall be disbursed from whichever
office or other place Laurus may designate from time to time and shall be
charged to U.S. Companies’ account on Laurus’ books. The proceeds of each Loan
made by Laurus shall be made available to Company Agent on the Business Day
following the Business Day so requested in accordance with the terms of this
Section 4 by way
of credit to the applicable U.S. Company’s operating account maintained with
such bank as Company Agent designated to Laurus. Any and all Obligations due and
owing hereunder may be charged to U.S. Companies’ account and shall constitute
Loans.

 

-5-

 

	
      5.
	
      Interest
      and Payments.

 

(a)    Interest.

 

(i)    Except as
modified by Section 5(a)(iii) below,
U.S. Companies shall jointly and severally pay interest at the Contract Rate on
the unpaid principal balance of each Loan until such time as such Loan is
collected in full in good funds in dollars of the United States of
America.

 

(ii)    Interest
and payments shall be computed on the basis of actual days elapsed in a year of
360 days. At Laurus’ option, Laurus may charge U.S. Companies’ account for said
interest.

 

(iii)    Effective
upon the occurrence of any Event of Default and for so long as any Event of
Default shall be continuing, the Contract Rate shall automatically be increased
as set forth in the Notes (such increased rate, the “Default
Rate”), and
all outstanding Obligations, including unpaid interest, shall continue to accrue
interest from the date of such Event of Default at the Default Rate applicable
to such Obligations. 

 

(iv)    In no
event shall the aggregate interest payable hereunder exceed the maximum rate
permitted under any applicable law or regulation, as in effect from time to time
(the “Maximum
Legal Rate”), and
if any provision of this Agreement or any Ancillary Agreement is in
contravention of any such law or regulation, interest payable under this
Agreement and each Ancillary Agreement shall be computed on the basis of the
Maximum Legal Rate (so that such interest will not exceed the Maximum Legal
Rate). 

 

(v)    U.S.
Companies shall jointly and severally pay principal, interest and all other
amounts payable hereunder, or under any Ancillary Agreement, without any
deduction whatsoever, including any deduction for any set-off, counterclaim,
defense, Taxes restrictions or conditions of any kind. If Company or any
Eligible Subsidiary shall be required by law to deduct or withhold in respect of
any Indemnified Taxes from or in respect of any sum payable hereunder to Laurus,
then:

 

(A) the sum
payable shall be increased by such additional amount (the "Additional Amount")
as necessary so that after making all required deductions and withholdings
(including deductions and withholdings applicable to such Additional Amount)
Laurus receives an amount equal to the sum it would have received had no such
deductions or withholdings been made;

 

(B) such
Company or Eligible Subsidiary shall make the appropriate deductions or
withholdings and shall pay the full amount deducted or withheld to the relevant
taxing authority or other authority in accordance with applicable
law;

 

(C) within
thirty (30) days after the date of such payment, upon Laurus’ request, such
Company or Eligible Subsidiary shall furnish to Laurus the original or a
certified copy of a receipt evidencing payment thereof, or other evidence of
payment reasonably satisfactory to Laurus; 

 

-6-

 

(D) if such
Company or Eligible Subsidiary fails to pay amounts in accordance with paragraph
(B) above, such Company or Eligible Subsidiary shall indemnify Laurus for any
incremental Indemnified Taxes that is paid by Laurus as a result of the
failure;

 

(E) such U.S.
Company will indemnify Laurus for the full amount of any Taxes imposed by any
jurisdiction and paid by Laurus with respect to any Additional Amount payable
pursuant to paragraph (A) above and any liability (including penalties, interest
and expenses) arising therefrom or with respect thereto, whether or not such
Taxes are correctly asserted; and

 

(F) the
indemnification contemplated in paragraphs (D) and (E) above shall be made
within 30 days from the date Laurus makes written demand therefor (which demand
shall identify the nature and amount of Taxes for which indemnification is being
sought and shall include a copy of the relevant portion of any written
assessment from the Governmental Authority demanding payment of such
Taxes).

 

(vi)    For
purposes of disclosure under the Interest Act (Canada), where interest is
calculated pursuant thereto at a rate based upon a year of 360, 365 or 366 days,
as the case may be (the “First Rate”), the rate or percentage of interest on a
yearly basis is equivalent to such First Rate multiplied by the actual number of
days in the year divided by 360, 365 or 366, as the case may be.

 

(vii)    Notwithstanding
the provisions of this Section 5 or any
other provision of this Agreement in no event shall the aggregate “interest” (as
that term is defined in Section 347 of the Criminal Code (Canada)) with respect
to any Loans by Laurus result in the receipt by Laurus of interest with respect
of the Obligations at a "criminal rate" (as such term is construed under the
Criminal Code (Canada)). The effective annual rate of interest for such purpose
shall be determined in accordance with generally accepted actuarial practices
and principles over the term of the Loan by Laurus, and in the event of a
dispute, a certificate of a Fellow of the Canadian Institute of Actuaries
appointed by Laurus will be conclusive for the purposes of such
determination.

 

(viii)    For
greater certainty, unless otherwise specified in this Agreement or any of the
other Ancillary Agreements, as applicable, whenever any amount is payable under
this Agreement or any of the other Ancillary Agreements by any Eligible
Subsidiary as interest or as a fee which requires the calculation of an amount
using a percentage per annum, each party to this Agreement acknowledges and
agrees that such amount shall be calculated as of the date payment is due
without application of the “deemed reinvestment principle” or the “effective
yield method.” As an example, when interest is calculated and payable monthly
the rate of interest payable per month is one twelfth (1/12) of the stated rate
of interest per annum.

 

(b)    Payments;
Certain Closing Conditions.

 

-7-

 

(i)    Closing/Annual
Payments. Upon
execution of this Agreement by each Company and Laurus, U.S. Companies shall
jointly and severally pay to Laurus Capital Management, LLC a closing payment in
an amount equal to three and six-tenths percent (3.60%) of the Capital
Availability Amount. Such payment shall be deemed fully earned on the Closing
Date and shall not be subject to rebate or proration for any
reason.

 

(ii)    Overadvance
Payment. Without
affecting Laurus’ rights hereunder in the event the Loans exceed the Formula
Amount (each such event, an “Overadvance”), all such Overadvances shall bear
interest at a rate equal to two percent (2%) per month on the amount of such
Overadvances. 

 

(iii)    Financial
Information Default. Without
affecting Laurus’ other rights and remedies, in the event any U.S. Company fails
to deliver the financial information required by Section 11 on or
before the date required by this Agreement, U.S. Companies shall jointly and
severally pay Laurus an aggregate fee in the amount of $350.00 per week (or
portion thereof) for each such failure until such failure is cured to Laurus’
satisfaction or waived in writing by Laurus. Such fee shall be charged to U.S.
Companies’ account upon the occurrence of each such failure. 

 

(iv)    Expenses. The
U.S. Companies shall jointly and severally reimburse Laurus for its reasonable
expenses (including legal fees and expenses) incurred in connection with the
preparation and negotiation of this Agreement and the Ancillary Agreements, and
expenses incurred in connection with Laurus’ due diligence review of each
Company and its Subsidiaries and all related matters. Amounts required to be
paid under this Section 5(b)(iv) together with amounts required to be paid
pursuant to Section 2(d) of the Securities Purchase Agreement (as defined below)
will be paid on the Closing Date and shall be $52,500, plus the cost of
California local counsel and Canadian local counsel for the
Purchaser.

 

	
      6.
	
      Security
      Interest.

 

(a)    To secure
the prompt payment to Laurus of the Obligations, each Company hereby assigns,
pledges and grants to Laurus a continuing security interest in and Lien upon all
of the Collateral. All of each Company’s Books and Records relating to the
Collateral shall, until delivered to or removed by Laurus, be kept by such
Company in trust for Laurus until all Obligations have been paid in full. Each
confirmatory assignment schedule or other form of assignment hereafter executed
by each Company shall be deemed to include the foregoing grant, whether or not
the same appears therein. 

 

(b)    Each
Company hereby (i) authorizes Laurus to file any financing statements,
continuation statements, financing change statement or amendments thereto that
(x) indicate the Collateral (1) as all assets and personal property of such
Company or words of similar effect, regardless of whether any particular asset
comprised in the Collateral falls within the scope of Article 9 of the UCC of
such jurisdiction, or (2) as being of an equal or lesser scope or with greater
detail, and (y) contain any other information required by Part 5 of Article 9 of
the UCC for the sufficiency or filing office acceptance of any financing
statement, continuation statement financing change statement, or amendment and
(ii) ratifies its authorization for Laurus to have filed any initial financial
statements, or amendments thereto if filed prior to the date hereof. Each
Company acknowledges that it is not authorized to file any financing statement,
financing change statement, amendment, termination statement or discharge
statement with respect to any financing statement without the prior written
consent of Laurus and agrees that it will not do so without the prior written
consent of Laurus, subject to such Company’s rights under Section 9-509(d)(2) of
the UCC.

 

-8-

 

(c)    Each
Company hereby grants to Laurus an irrevocable, non-exclusive license
(exercisable upon the termination of this Agreement due to an occurrence and
during the continuance of an Event of Default without payment of royalty or
other compensation to such Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by such
Company, and wherever the same may be located, and including in such license
access to all media in which any of the licensed items may be recorded or stored
and to all computer and automatic machinery software and programs used for the
compilation or printout thereof, and represents, promises and agrees that any
such license or sublicense is not and will not be in conflict with the
contractual or commercial rights of any third Person; provided, that such
license will terminate on the termination of this Agreement and the payment in
full of all Obligations.

 

	
      7.
	
      Representations,
      Warranties and Covenants Concerning the
Collateral.

 

Each
Company represents, warrants (each of which such representations and warranties
shall be deemed repeated upon the making of each request for a Loan and made as
of the time of each and every Loan hereunder) and covenants as
follows:

 

(a)    all of
the Collateral (i) is owned by it free and clear of all Liens (including any
claims of infringement) except those in Laurus’ favor and Permitted Liens and
(ii) is not subject to any agreement prohibiting the granting of a Lien or
requiring notice of or consent to the granting of a Lien.

 

(b)    it shall
not encumber, mortgage, pledge, assign or grant any Lien in any Collateral or
any other assets to anyone other than Laurus and except for Permitted
Liens.

 

(c)    the Liens
granted pursuant to this Agreement, upon completion of the filings and other
actions listed on Schedule
7(c) (which,
in the case of all filings and other documents referred to in said Schedule,
have been delivered to Laurus in duly executed form) constitute valid perfected
security interests in all of the Collateral in favor of Laurus as security for
the prompt and complete payment and performance of the Obligations, enforceable
in accordance with the terms hereof against any and all of its creditors and
purchasers and such security interest is prior to all other Liens in existence
on the date hereof.

 

(d)    no
effective security agreement, mortgage, deed of trust, financing statement,
equivalent security or Lien instrument or continuation statement covering all or
any part of the Collateral is or will be on file or of record in any public
office, except those relating to Permitted Liens.

 

(e)    it shall
not dispose of any of the Collateral whether by sale, lease or otherwise except
for the sale of Inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment having an aggregate fair market value of
not more than $50,000 and only to the extent that (i) the proceeds of any such
disposition are used to acquire replacement Equipment which is subject to
Laurus’ first priority security interest or are used to repay Loans or to pay
general corporate expenses, or (ii) following the occurrence of an Event of
Default which continues to exist the proceeds of which are remitted to Laurus to
be held as cash collateral for the Obligations.

 

-9-

 

(f)    it shall
defend the right, title and interest of Laurus in and to the Collateral against
the claims and demands of all Persons whomsoever, and take such actions,
including (i) all actions necessary to grant Laurus “control” of any Investment
Property, Deposit Accounts, Letter-of-Credit Rights or electronic Chattel Paper
owned by it, with any agreements establishing control to be in form and
substance satisfactory to Laurus, (ii) the prompt (but in no event later than
five (5) Business Days following Laurus’ request therefor) delivery to Laurus of
all original Instruments, Chattel Paper, negotiable Documents and certificated
Stock owned by it (in each case, accompanied by stock powers, allonges or other
instruments of transfer executed in blank), (iii) notification of Laurus’
interest in Collateral at Laurus’ request, and (iv) the institution of
litigation against third parties as shall be prudent in order to protect and
preserve its and/or Laurus’ respective and several interests in the Collateral.

 

(g)    it shall
promptly, and in any event within five (5) Business Days after the same is
acquired by it, notify Laurus of any commercial tort claim (as defined in the
UCC) acquired by it and unless otherwise consented by Laurus, it shall enter
into a supplement to this Agreement granting to Laurus a Lien in such commercial
tort claim.

 

(h)    it shall
place notations upon its Books and Records and any of its financial statements
to disclose Laurus’ Lien in the Collateral.

 

(i)    if it
retains possession of any Chattel Paper or Instrument with Laurus’ consent, upon
Laurus’ request such Chattel Paper and Instruments shall be marked with the
following legend: “This writing and obligations evidenced or secured hereby are
subject to the security interest of Laurus Master Fund, Ltd.”

 

(j)    it shall
perform in a reasonable time all other steps requested by Laurus to create and
maintain in Laurus’ favor a valid perfected first Lien in all Collateral subject
only to Permitted Liens.

 

(k)    it shall
notify Laurus promptly and in any event within three (3) Business Days after
obtaining knowledge thereof (i) of any event or circumstance that, to its
knowledge, would cause Laurus to consider any then existing Account as no longer
constituting an Eligible Account; (ii) of any material delay in its performance
of any of its obligations to any Account Debtor; (iii) of any assertion by any
Account Debtor of any material claims, offsets or counterclaims; (iv) of any
allowances, credits and/or monies granted by it to any Account Debtor; (v) of
all material adverse information relating to the financial condition of an
Account Debtor; (vi) of any material return of goods; and (vii) of any loss,
damage or destruction of any of the Collateral.

 

(l)    all
Eligible Accounts (i) represent complete bona fide transactions which require no
further act under any circumstances on its part to make such Accounts payable by
the Account Debtors, (ii) are not subject to any present, future contingent
offsets or counterclaims, and (iii) do not represent bill and hold sales,
consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any Affiliate or Subsidiary of such Company. It
has not made, nor will it make, any agreement with any Account Debtor for any
extension of time for the payment of any Account, any compromise or settlement
for less than the full amount thereof, any release of any Account Debtor from
liability therefor, or any deduction therefrom except a discount or allowance
for prompt or early payment allowed by it in the ordinary course of its business
consistent with historical practice and as previously disclosed to Laurus in
writing.

 

-10-

 

(m)    it shall
keep and maintain its Equipment in good operating condition, except for ordinary
wear and tear, and shall make all necessary repairs and replacements thereof so
that the value and operating efficiency shall at all times be maintained and
preserved. It shall not permit any such items to become a Fixture to real estate
or accessions to other personal property.

 

(n)    it shall
maintain and keep all of its Books and Records concerning the Collateral at its
executive offices listed in Schedule
12(aa).

 

(o)    it shall
maintain and keep the tangible Collateral at the addresses listed in
Schedule
12(bb),
provided, that it may change such locations or open a new location, provided
that it provides Laurus at least thirty (30) days prior written notice of such
changes or new location and (ii) prior to such change or opening of a new
location where Collateral having a value of more than $50,000 will be located,
it executes and delivers to Laurus such agreements as Laurus may request,
including landlord agreements, mortgagee agreements and warehouse agreements,
each in form and substance satisfactory to Laurus.

 

(p)    Schedule
7(p) lists
all banks and other financial institutions at which it maintains deposits and/or
other accounts, and such Schedule correctly identifies the name, address and
telephone number of each such depository, the name in which the account is held,
a description of the purpose of the account, and the complete account number. It
shall not establish any depository or other bank account with any financial
institution (other than the accounts set forth on Schedule
7(p)) without
Laurus’ prior written consent.

 

	
      8.
	
      Payment
      of Accounts. 

 

(a)    Each
Company will irrevocably direct all of its present and future Account Debtors
and other Persons obligated to make payments constituting Collateral to make
such payments directly to the lockboxes maintained by such Company (the
“Lockboxes”) with
________ Bank or such other financial institution accepted by Laurus in writing
as may be selected by such Company (the “Lockbox
Bank”)
pursuant to the terms of those certain agreements entered into by and among the
Lockbox Bank, each Company and/or the Purchaser. On or prior to the Closing
Date, each Company shall and shall cause the Lockbox Bank to enter into all such
documentation acceptable to Laurus pursuant to which, among other things, the
Lockbox Bank agrees to: (a) sweep the Lockbox on a daily basis and deposit all
checks received therein to an account designated by Laurus in writing and (b)
comply only with the instructions or other directions of Laurus concerning the
Lockbox. All of each Company’s invoices, account statements and other written or
oral communications directing, instructing, demanding or requesting payment of
any Account of any Company or any other amount constituting Collateral shall
conspicuously direct that all payments be made to the Lockbox or such other
address as Laurus may direct in writing. If, notwithstanding the instructions to
Account Debtors, any Company receives any payments, such Company shall
immediately remit such payments to Laurus in their original form with all
necessary endorsements. Until so remitted, such Company shall hold all such
payments in trust for and as the property of Laurus and shall not commingle such
payments with any of its other funds or property.

 

-11-

 

(b)    At
Laurus’ election, following the occurrence of an Event of Default which is
continuing, Laurus may notify each Company’s Account Debtors of Laurus’ security
interest in the Accounts, collect them directly and charge the collection costs
and expenses thereof to Company’s and the Eligible Subsidiaries joint and
several account.

 

	
      9.
	
      Collection
      and Maintenance of Collateral.

 

(a)    Laurus
may verify each Company’s Accounts from time to time, but not more often than
once every three (3) months, unless an Event of Default has occurred and is
continuing, utilizing an audit control company or any other agent of
Laurus.

 

(b)    Proceeds
of Accounts received by Laurus will be deemed received on the Business Day after
Laurus’ receipt of such proceeds in good funds in dollars of the United States
of America to an account designated by Laurus. Any amount received by Laurus
after 12:00 noon (New York time) on any Business Day shall be deemed received on
the next Business Day.

 

(c)    As Laurus
receives the proceeds of Accounts of any Company, it shall (i) apply such
proceeds, as required, to amounts outstanding under the Notes, and (ii) remit
all such remaining proceeds (net of interest, fees and other amounts then due
and owing to Laurus hereunder) to Company Agent (for the benefit of the
applicable Companies) upon request (but no more often than twice a week).
Notwithstanding the foregoing, following the occurrence and during the
continuance of an Event of Default, Laurus, at its option, may (a) apply such
proceeds to the Obligations in such order as Laurus shall elect, (b) hold all
such proceeds as cash collateral for the Obligations and each Company hereby
grants to Laurus a security interest in such cash collateral amounts as security
for the Obligations and/or (c) do any combination of the foregoing.

 

	
      10.
	
      Inspections
      and Appraisals.

 

At all
times during normal business hours, Laurus, and/or any agent of Laurus shall
have the right to (a) have access to, visit, inspect, review, evaluate and make
physical verification and appraisals of each Company’s properties and the
Collateral, (b) inspect, audit and copy (or take originals if necessary) and
make extracts from each Company’s Books and Records, including management
letters prepared by the Accountants, and (c) discuss with each Company’s
directors, principal officers, and independent accountants, each Company’s
business, assets, liabilities, financial condition, results of operations and
business prospects. Each Company will deliver to Laurus any instrument necessary
for Laurus to obtain records from any service bureau maintaining records for
such Company. If any internally prepared financial information, including that
required under this Section is unsatisfactory in any manner to Laurus, Laurus
may request that the Accountants review the same.

 

	
      11.
	
      Financial
      Reporting.

 

Company
Agent will deliver, or cause to be delivered, to Laurus each of the following,
which shall be in form and detail acceptable to Laurus:

 

-12-

 

(a)    As soon
as available, and in any event within ninety (90) days after the end of each
fiscal year of the Parent, each Company’s audited financial statements with a
report of independent certified public accountants of recognized standing
selected by the Parent and acceptable to Laurus (the “Accountants”), which
annual financial statements shall include each Company’s balance sheet as at the
end of such fiscal year and the related statements of each Company’s income,
retained earnings and cash flows for the fiscal year then ended, prepared, if
Laurus so requests, on a consolidating and consolidated basis to include all
Subsidiaries and Affiliates of each Company, all in reasonable detail and
prepared in accordance with GAAP, together with (i) if and when available,
copies of any management letters prepared by the Accountants; and (ii) a
certificate of the Parent’s President, Chief Executive Officer or Chief
Financial Officer stating that such financial statements have been prepared in
accordance with GAAP and whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder and, if so, stating in
reasonable detail the facts with respect thereto;

 

(b)    As soon
as available and in any event within forty five (45) days after the end of each
quarter, an unaudited/internal balance sheet and statements of income, retained
earnings and cash flows of each Company as at the end of and for such quarter
and for the year to date period then ended, prepared, if Laurus so requests, on
a consolidating and consolidated basis to include all Subsidiaries and
Affiliates of each Company, in reasonable detail and stating in comparative form
the figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end adjustments and
accompanied by a certificate of the Parent’s President, Chief Executive Officer
or Chief Financial Officer, stating (i) that such financial statements have been
prepared in accordance with GAAP, subject to year-end audit adjustments, and
(ii) whether or not such officer has knowledge of the occurrence of any Default
or Event of Default hereunder not theretofore reported and remedied and, if so,
stating in reasonable detail the facts with respect thereto; 

 

(c)    Within
thirty (30) days after the end of each month (or more frequently if Laurus so
requests), agings of each Company’s Accounts, unaudited trial balances and their
accounts payable and a calculation of each Company’s Accounts and Eligible
Accounts, provided, however, that if Laurus shall request the foregoing
information more often than as set forth in the immediately preceding clause,
each Company shall have thirty (30) days from each such request to comply with
Laurus’ demand; and

 

(d)    Promptly
after (i) the filing thereof, copies of the Parent’s most recent registration
statements and annual, quarterly, monthly or other regular reports which the
Parent files with the Securities and Exchange Commission (the “SEC”), and
(ii) the issuance thereof, copies of such financial statements, reports and
proxy statements as the Parent shall send to its stockholders.

 

	
      12.
	
      Additional
      Representations and Warranties.

 

Each
Company hereby represents and warrants to Laurus as follows (which
representations and warranties are supplemented by, and subject to, the Parent’s
filings under the Exchange Act made prior to the date of this Agreement
(collectively, the “Exchange Act Filings”), copies of which have been provided
to Laurus:

 

-13-

 

(a)    Organization,
Good Standing and Qualification. It and
each of its Subsidiaries is a corporation, partnership or limited liability
company, as the case may be, duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization. It and each of its
Subsidiaries has the corporate, limited liability company or partnership, as the
case may be, power and authority to own and operate its properties and assets
and, insofar as it is or shall be a party thereto, to (i) execute and deliver
this Agreement and the Ancillary Agreements, (ii) to issue the Notes and the
shares of Common Stock issuable upon conversion of the Notes (the “Note
Shares”), (iii)
to issue the Warrants and the shares of Common Stock issuable upon conversion of
the Warrants (the “Warrant
Shares”), and
to (iv) carry out the provisions of this Agreement and the Ancillary Agreements
and to carry on its business as presently conducted. It and each of its
Subsidiaries is duly qualified and is authorized to do business and is in good
standing as a foreign corporation, partnership or limited liability company, as
the case may be, in all jurisdictions in which the nature or location 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 has not had, or could not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect.

 

(b)    Subsidiaries. Each of
its direct and indirect Subsidiaries, the direct owner of each such Subsidiary
and its percentage ownership thereof, is set forth on Schedule
12(b).

 

(c)    Capitalization;
Voting Rights.

 

(i)    The
authorized capital stock of the Parent, as of the date hereof consists of
64,000,000 shares, of which 60,000,000 are shares of Common Stock, par value
$0.001 per share, 31,104,579
shares of
which are issued and outstanding, and 4,000,000 are shares of preferred stock,
par value $0.001 per share of which 0 shares of preferred stock are issued and
outstanding. The authorized capital stock of each Subsidiary of each Company is
set forth on Schedule
12(c).

 

(ii)    Except as
disclosed on Schedule
12(c), other
than: (i) the shares reserved for issuance under the Parent’s stock option
plans; and (ii) shares which may be issued pursuant to this Agreement and the
Ancillary Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Parent of any of its securities. Except as
disclosed on Schedule
12(c), neither
the offer or issuance of any of the Notes or the Warrants, or the issuance of
any of the Note Shares or the Warrant Shares, nor the consummation of any
transaction contemplated hereby will result in a change in the price or number
of any securities of the Parent outstanding, under anti-dilution or other
similar provisions contained in or affecting any such securities.

 

(iii)    All
issued and outstanding shares of the Parent’s Common Stock: (i) have been duly
authorized and validly issued and are fully paid and nonassessable; and (ii)
were issued in compliance with all applicable state and federal laws concerning
the issuance of securities.

 

(iv)    The
rights, preferences, privileges and restrictions of the shares of the Common
Stock are as stated in the Parent’s Certificate of Incorporation (the
“Charter”). The
Note Shares and the Warrant Shares have been duly and validly reserved for
issuance. When issued in compliance with the provisions of this Agreement or the
Ancillary Agreements and the Parent’s Charter, the Securities will be validly
issued, fully paid and nonassessable, and will be free of any liens or
encumbrances; provided,
however, that
the Securities may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by such
laws at the time a transfer is proposed.

 

-14-

 

(d)    Authorization;
Binding Obligations. All
corporate, partnership or limited liability company, as the case may be, action
on its and its Subsidiaries’ part (including their respective officers and
directors) necessary for the authorization of this Agreement and the Ancillary
Agreements, the performance of all of its and its Subsidiaries’ obligations
hereunder and under the Ancillary Agreements on the Closing Date and, the
authorization, issuance and delivery of the Notes and the Warrant has been taken
or will be taken prior to the Closing Date. This Agreement and the Ancillary
Agreements, when executed and delivered and to the extent it is a party thereto,
will be its and its Subsidiaries’ valid and binding obligations enforceable
against each such Person in accordance with their terms, except:

 

(i)    as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and

 

(ii)    general
principles of equity that restrict the availability of equitable or legal
remedies.

 

The
issuance of the Notes and the subsequent conversion of the Notes into Note
Shares are not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with. The issuance
of the Warrants and the subsequent exercise of the Warrants for Warrant Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with. 

 

(e)    Liabilities. Neither
it nor any of its Subsidiaries has any liabilities, except current liabilities
incurred in the ordinary course of business and liabilities disclosed in any
Exchange Act Filings.

 

(f)    Agreements;
Action. Except
as set forth on Schedule
12(f) or as
disclosed in any Exchange Act Filings:

 

(i)    There are
no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which it or any of its Subsidiaries is a
party or to its knowledge by which it is bound which may involve: (i)
obligations (contingent or otherwise) of, or payments to, it or any of its
Subsidiaries in excess of $100,000 (other than obligations of, or payments to,
it or any of its Subsidiaries arising from purchase or sale agreements entered
into in the ordinary course of business); or (ii) the transfer or license of any
patent, copyright, trade secret or other proprietary right to or from it (other
than licenses arising from the purchase of “off the shelf” or other standard
products); or (iii) provisions restricting the development, manufacture or
distribution of its or any of its Subsidiaries’ products or services; or (iv)
indemnification by it or any of its Subsidiaries with respect to infringements
of proprietary rights.

 

-15-

 

(ii)    Since
April 30, 2004 (the “Balance
Sheet Date”)
neither it nor any of its Subsidiaries has: (i) declared or paid any dividends,
or authorized or made any distribution upon or with respect to any class or
series of its capital stock; (ii) incurred any indebtedness for money borrowed
or any other liabilities (other than ordinary course obligations) individually
in excess of $50,000 or, in the case of indebtedness and/or liabilities
individually less than $50,000, in excess of $100,000 in the aggregate; (iii)
made any loans or advances to any Person not in excess, individually or in the
aggregate, of $100,000, other than ordinary advances for travel expenses; or
(iv) sold, exchanged or otherwise disposed of any of its assets or rights, other
than the sale of its Inventory in the ordinary course of business.

 

(iii)    For the
purposes of subsections (i) and (ii) of this Section 12(f), all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons it or any
of its applicable Subsidiaries has reason to believe are affiliated therewith or
with any Subsidiary thereof) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.

 

(iv)    the
Parent maintains disclosure controls and procedures (“Disclosure
Controls”)
designed to ensure that information required to be disclosed by the Parent in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
rules and forms of the SEC.

 

(v)    the
Parent makes and keeps books, records, and accounts, that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of its assets.
It maintains internal control over financial reporting (“Financial
Reporting Controls”)
designed by, or under the supervision of, its principal executive and principal
financial officers, and effected by its board of directors, management, and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP, including that:

 

(1) transactions
are executed in accordance with management’s general or specific
authorization;

 

(2) unauthorized
acquisition, use, or disposition of the Parent’s assets that could have a
material effect on the financial statements are prevented or timely
detected;

 

(3) transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that its receipts and expenditures are being made only
in accordance with authorizations of the Parent’s management and board of
directors;

 

(4) transactions
are recorded as necessary to maintain accountability for assets;
and

 

(5) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals, and appropriate action is taken with respect to any
differences.

 

(vi)    There is
no weakness in any of its Disclosure Controls or Financial Reporting Controls
that is required to be disclosed in any of the Exchange Act Filings, except as
so disclosed.

 

-16-

 

(g)    Obligations
to Related Parties. Except
as set forth on Schedule
12(g), neither
it nor any of its Subsidiaries has any obligations to their respective officers,
directors, stockholders who own greater than or equal to 5% of the issued and
outstanding common stock of the Company or any of its Subsidiaries or key
employees other than:

 

(i) 
    for
payment of salary for services rendered and for bonus payments;

 

(ii)
    reimbursement
for reasonable expenses incurred on its or its Subsidiaries’
behalf;

 

(iii)    for other
standard employee benefits made generally available to all employees (including
stock option agreements outstanding under any stock option plan approved by its
and its Subsidiaries’ Board of Directors, as applicable); and

 

(iv)    obligations
listed in its and each of its Subsidiary’s financial statements or disclosed in
any of the Parent’s Exchange Act Filings.

 

Except as
described above or set forth on Schedule
12(g), none of
its officers, directors or, to the best of its knowledge, key employees or
stockholders who own greater than or equal to 5% of the issued and outstanding
common stock of the Company or any of its Subsidiaries, any of its Subsidiaries
or any members of their immediate families, are indebted to it or any of its
Subsidiaries, individually or in the aggregate, in excess of $50,000 or have any
direct or indirect ownership interest in any Person with which it or any of its
Subsidiaries is affiliated or with which it or any of its Subsidiaries has a
business relationship, or any Person which competes with it or any of its
Subsidiaries, other than passive investments in publicly traded companies
(representing less than one percent (1%) of such company) which may compete with
it or any of its Subsidiaries. Except as described above, none of its officers,
directors or stockholders who own greater than or equal to 5% of the issued and
outstanding common stock of the Company or any of its Subsidiaries, or any
member of their immediate families, is, directly or indirectly, interested in
any material contract with it or any of its Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between it or any of
its Subsidiaries and any such Person. Except as set forth on Schedule
12(g), neither
it nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness
of any other Person.

 

(h)    Changes. Since
the Balance Sheet Date, except as disclosed in any Exchange Act Filing or in any
Schedule to this Agreement or to any of the Ancillary Agreements, there has not
been:

 

(i)    any
change in its or any of its Subsidiaries’ business, assets, liabilities,
condition (financial or otherwise), properties, operations or prospects, which,
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;

 

(ii)    any
resignation or termination of any of its or its Subsidiaries’ officers, key
employees or groups of employees; 

 

(iii)   any
material change, except in the ordinary course of business, in its or any of its
Subsidiaries’ contingent obligations by way of guaranty, endorsement, indemnity,
warranty or otherwise;

 

-17-

 

(iv)   any
damage, destruction or loss, whether or not covered by insurance, which has had,
or could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;

 

(v)    any
waiver by it or any of its Subsidiaries of a valuable right or of a material
debt owed to it;

 

(vi)   any
direct or indirect material loans made by it or any of its Subsidiaries to any
of its or any of its Subsidiaries’ stockholders, employees, officers or
directors, other than advances made in the ordinary course of
business;

 

(vii)   any
material change in any compensation arrangement or agreement with any key
employee, officer, director or stockholder; 

 

(viii)   any
declaration or payment of any dividend or other distribution of its or any of
its Subsidiaries’ assets;

 

(ix)    any labor
organization activity related to it or any of its Subsidiaries;

 

(x)    any debt,
obligation or liability incurred, assumed or guaranteed by it or any of its
Subsidiaries, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;

 

(xi)    any sale,
assignment or transfer of any Intellectual Property or other intangible
assets;

 

(xii)    any
change in any material agreement to which it or any of its Subsidiaries is a
party or by which either it or any of its Subsidiaries is bound which, either
individually or in the aggregate, has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect;

 

(xiii)    any other
event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; or

 

(xiv)    any
arrangement or commitment by it or any of its Subsidiaries to do any of the acts
described in subsection (i) through (xiii) of this Section 12(h).

 

(i)    Title
to Properties and Assets; Liens, Etc. Except
as set forth on Schedule
12(i), it and
each of its Subsidiaries has good and marketable title to their respective
properties and assets, and good title to its leasehold interests, in each case
subject to no Lien, other than Permitted Liens.

 

All
facilities, Equipment, Fixtures, vehicles and other properties owned, leased or
used by it or any of its Subsidiaries are in good operating condition and repair
and are reasonably fit and usable for the purposes for which they are being
used. Except as set forth on Schedule
12(i), it and
each of its Subsidiaries is in compliance with all material terms of each lease
to which it is a party or is otherwise bound.

 

-18-

 

(j)    Intellectual
Property. Except
as set forth on schedule 12 (j).

 

(i)    It and
each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now conducted
and, to its knowledge as presently proposed to be conducted, without any known
infringement of the rights of others. There are no outstanding options, licenses
or agreements of any kind relating to its or any of its Subsidiary’s
Intellectual Property, nor is it or any of its Subsidiaries bound by or a party
to any options, licenses or agreements of any kind with respect to the
Intellectual Property of any other Person other than such licenses or agreements
arising from the purchase of “off the shelf” or standard products.

 

(ii)    Neither
it nor any of its Subsidiaries has received any communications alleging that it
or any of its Subsidiaries has violated any of the Intellectual Property or
other proprietary rights of any other Person, nor is it or any of its
Subsidiaries aware of any basis therefor.

 

(iii)    Neither
it nor any of its Subsidiaries believes it is or will be necessary to utilize
any inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by it or any of its Subsidiaries, except for
inventions, trade secrets or proprietary information that have been rightfully
assigned to it or any of its Subsidiaries.

 

(k)    Compliance
with Other Instruments. Neither
it nor any of its Subsidiaries is in violation or default of (x) any term of its
Charter or Bylaws, or (y) any provision of any indebtedness, mortgage,
indenture, contract, agreement or instrument to which it is party or by which it
is bound or of any judgment, decree, order or writ, which violation or default,
in the case of this clause (y), has had, or could reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect. The
execution, delivery and performance of and compliance with this Agreement and
the Ancillary Agreements to which it is a party, and the issuance of the Notes
and the other Securities each pursuant hereto and thereto, will not, with or
without the passage of time or giving of notice, result in any such material
violation, or be in conflict with or constitute a default under any such term or
provision, or result in the creation of any Lien upon any of its or any of its
Subsidiary’s properties or assets or the suspension, revocation, impairment,
forfeiture or nonrenewal of any permit, license, authorization or approval
applicable to it or any of its Subsidiaries, their businesses or operations or
any of their assets or properties. 

 

(l)    Litigation. Except
as set forth on Schedule
12(l), there
is no action, suit, proceeding or investigation pending or, to its knowledge,
currently threatened against it or any of its Subsidiaries that prevents it or
any of its Subsidiaries from entering into this Agreement or the Ancillary
Agreements, or from consummating the transactions contemplated hereby or
thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result in
any change in its or any of its Subsidiaries’ current equity ownership, nor is
it aware that there is any basis to assert any of the foregoing. Neither it nor
any of its Subsidiaries is a party to or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by it or
any of its Subsidiaries currently pending or which it or any of its Subsidiaries
intends to initiate.

 

-19-

 

(m)    Tax
Returns and Payments. Except
as set forth in Schedule 12 (m) it and each of its Subsidiaries has timely filed
all tax returns (federal, state and local) required to be filed by it. Except as
set forth in Schedule 12 (m) all taxes shown to be due and payable on such
returns, any assessments imposed, and all other taxes due and payable by it and
each of its Subsidiaries on or before the Closing Date, have been paid or will
be paid prior to the time they become delinquent. Except as set forth on
Schedule
12(m), neither
it nor any of its Subsidiaries has been advised:

 

(i)    that any
of its returns, federal, state, provincial or other, have been or are being
audited as of the date hereof; or

 

(ii)    of any
adjustment, deficiency, assessment or court decision in respect of its federal,
state, provincial or other taxes.

 

Neither
it nor any of its Subsidiaries has any knowledge of any liability of any tax to
be imposed upon its properties or assets as of the date of this Agreement that
is not adequately provided for. 

 

(n)    Employees. Except
as set forth on Schedule
12(n), neither
it nor any of its Subsidiaries has any collective bargaining agreements with any
of its key employees. There is no labour union organizing activity pending or,
to its knowledge, threatened with respect to it or any of its Subsidiaries.
Except as disclosed in the Exchange Act Filings or on Schedule
12(n), neither
it nor any of its Subsidiaries is a party to or bound by any currently effective
employment contract, deferred compensation arrangement, bonus plan, incentive
plan, profit sharing plan, retirement agreement or other employee compensation
plan or agreement. To its knowledge, none of its or any of its Subsidiaries’ key
employees, nor any consultant with whom it or any of its Subsidiaries has
contracted, is in violation of any term of any employment contract, proprietary
information agreement or any other agreement relating to the right of any such
individual to be employed by, or to contract with, it or any of its Subsidiaries
because of the nature of the business to be conducted by it or any of its
Subsidiaries; and to its knowledge the continued employment by it and its
Subsidiaries of their present key employees, and the performance of its and its
Subsidiaries contracts with its independent contractors, will not result in any
such violation. Neither it nor any of its Subsidiaries is aware that any of its
or any of its Subsidiaries’ key employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency that would interfere with their duties to it or any of its Subsidiaries.
Neither it nor any of its Subsidiaries has received any notice alleging that any
such violation has occurred. Except for key employees who have a current
effective employment agreement with it or any of its Subsidiaries, none of its
or any of its Subsidiaries’ key employees has been granted the right to
continued employment by it or any of its Subsidiaries or to any material
compensation following termination of employment with it or any of its
Subsidiaries. Except as set forth on Schedule 12(n), neither it nor any of its
Subsidiaries is aware that any officer, key employee or group of employees
intends to terminate his, her or their employment with it or any of its
Subsidiaries, as applicable, nor does it or any of its Subsidiaries have a
present intention to terminate the employment of any officer, key employee or
group of employees.

 

-20-

 

(o)    Registration
Rights and Voting Rights. Except
as set forth on Schedule
12(o) and
except as disclosed in Exchange Act Filings, neither it nor any of its
Subsidiaries is presently under any obligation, and neither it nor any of its
Subsidiaries has granted any rights, to register any of its or any of its
Subsidiaries’ presently outstanding securities or any of its securities that may
hereafter be issued. Except as set forth on Schedule
12(o) and
except as disclosed in Exchange Act Filings, to its knowledge, none of its or
any of its Subsidiaries’ stockholders has entered into any agreement with
respect to its or any of its Subsidiaries’ voting of equity
securities.

 

(p)    Compliance
with Laws; Permits. Neither
it nor any of its Subsidiaries is in violation of the Sarbanes-Oxley Act of 2002
or any other applicable Canadian corporate governance law, or any SEC rule or
rule of the Principal Market promulgated thereunder or 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 has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect. No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no registrations or declarations
are required to be filed in connection with the execution and delivery of this
Agreement or any Ancillary Agreement and the issuance of any of the Securities,
except such as have been duly and validly obtained or filed, or with respect to
any filings that must be made after the Closing Date, as will be filed in a
timely manner. It and each of its Subsidiaries has all material franchises,
permits, licenses and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

 

(q)    Environmental
and Safety Laws. Neither
it nor any of its Subsidiaries is in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and to
its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation. Except as set forth on
Schedule
12(q), no
Hazardous Materials (as defined below) are used or have been used, stored, or
disposed of by it or any of its Subsidiaries or, to its knowledge, by any other
Person on any property owned, leased or used by it or any of its Subsidiaries.
For the purposes of the preceding sentence, “Hazardous
Materials” shall
mean:

 

(i)    materials
which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, provincial, federal and/or foreign laws and regulations
that govern the existence and/or remedy of contamination on property, the
protection of the environment from contamination, the control of hazardous
wastes, or other activities involving hazardous substances, including building
materials; and

 

(ii) any
petroleum products or nuclear materials.

 

(r)    Valid
Offering.
Assuming the accuracy of the representations and warranties of Laurus contained
in this Agreement, the offer and issuance of the Securities will be exempt from
the registration requirements of the Securities Act of 1933, as amended (the
“Securities
Act”), and
will 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. 

 

-21-

 

(s)    Full
Disclosure. It and
each of its Subsidiaries has provided Laurus with all information requested in
writing by Laurus in connection with Laurus’ decision to enter into this
Agreement, including all information each Company and its Subsidiaries believe
is reasonably necessary to make such investment decision. Neither this
Agreement, the Ancillary Agreements nor the exhibits and schedules hereto and
thereto nor any other document delivered by it or any of its Subsidiaries to
Laurus or its legal counsel or agents in connection herewith or therewith or
with the transactions contemplated hereby or thereby, contain any untrue
statement of a material fact nor omit to state a material fact necessary in
order to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading. Any financial projections
and other estimates provided to Laurus by it or any of its Subsidiaries were
based on its and its Subsidiaries’ experience in the industry and on assumptions
of fact and opinion as to future events which it or any of its Subsidiaries, at
the date of the issuance of such projections or estimates, believed to be
reasonable. 

 

(t)    Insurance. It and
each of its Subsidiaries has general commercial, product liability, fire and
casualty insurance policies with coverages which it believes are customary for
companies similarly situated to it and its Subsidiaries in the same or similar
business.

 

(u)    SEC
Reports and Financial Statements. Except
as set forth on Schedule
12(u), it and
each of its Subsidiaries has filed all proxy statements, reports and other
documents required to be filed by it under the Exchange Act. The Parent has
furnished Laurus with copies of: (i) its Annual Report on Form 10-KSB for its
fiscal year ended April 30, 2004; and (ii) its Quarterly Reports on Form 10-QSB
for its fiscal quarters ended July 31, 2004, October 31, 2004, and January 31,
2005, and the Form 8-K filings which it has made after October 31, 2004 to date
(collectively, the “SEC
Reports”).
Except as set forth on Schedule
12(u), each
SEC Report was, at the time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports, as of
their respective filing dates, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed) and fairly present in all
material respects the financial condition, the results of operations and cash
flows of the Parent and its Subsidiaries, on a consolidated basis, as of, and
for, the periods presented in each such SEC Report.

 

(v)    Listing. The
Parent’s Common Stock is traded on the Principal Market and satisfies and at all
times hereafter will satisfy all requirements for the continuation of such
trading. The Parent has not received any notice that its Common Stock will be
ineligible to trade on the Principal Market or that its Common Stock does not
meet all requirements for such trading.

 

(w)    No
Integrated Offering. Neither
it, nor any of its Subsidiaries nor any of its Affiliates, nor any Person acting
on its or their behalf, has directly or indirectly made any offers or sales of
any security or solicited any offers to buy any security (other than an offering
to Laurus under a Securities Purchase Agreement between the Parent and Laurus
dated as of the date hereof (as amended, modified or supplemented from time to
time, the “Securities Purchase Agreement”) under circumstances that would cause
the offering of the Securities pursuant to this Agreement or any Ancillary
Agreement to be integrated with prior offerings by it for purposes of the
Securities Act which would prevent it from issuing the Securities pursuant to
Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will it or any of its Affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.

 

-22-

 

(x)    Stop
Transfer. The
Securities are restricted securities as of the date of this Agreement. Neither
it nor any of its Subsidiaries will issue any stop transfer order or other order
impeding the sale and delivery of any of the Securities at such time as the
Securities are registered for public sale or an exemption from registration is
available, except as required by state and federal securities laws.

 

(y)    Dilution. It
specifically acknowledges that the Parent’s obligation to issue the shares of
Common Stock upon conversion of the Notes and exercise of the Warrants is
binding upon the Parent and enforceable regardless of the dilution such issuance
may have on the ownership interests of other shareholders of the Parent.

 

(z)    Patriot
Act. It
certifies that, to the best of its knowledge, neither it nor any of its
Subsidiaries has been designated, nor is or shall be owned or controlled, by a
“suspected terrorist” as defined in Executive Order 13224. It hereby
acknowledges that Laurus seeks to comply with all applicable laws concerning
money laundering and related activities. In furtherance of those efforts, it
hereby represents, warrants and covenants that: (i) none of the cash or property
that it or any of its Subsidiaries will pay or will contribute to Laurus has
been or shall be derived from, or related to, any activity that is deemed
criminal under United States law or Canadian law; and (ii) no contribution or
payment by it or any of its Subsidiaries to Laurus, to the extent that they are
within its or any such Subsidiary’s control shall cause Laurus to be in
violation of the United States Bank Secrecy Act, the United States International
Money Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001, or the Canadian
Proceeds of Crime (Money Laundering) and Terrorist Financing Act. It shall
promptly notify Laurus if any of these representations, warranties and covenants
ceases to be true and accurate regarding it or any of its Subsidiaries. It shall
provide Laurus with any additional information regarding it and each Subsidiary
thereof that Laurus deems necessary or convenient to ensure compliance with all
applicable laws concerning money laundering and similar activities. It
understands and agrees that if at any time it is discovered that any of the
foregoing representations, warranties and covenants are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
or similar activities, Laurus may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of Laurus’ investment in it. It further
understands that Laurus may release confidential information about it and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the best
interests of Laurus in light of relevant rules and regulations under the laws
set forth in subsection (ii) above.

 

(aa)    Company
Name; Locations of Offices, Records and Collateral.
Schedule
12(aa) sets
forth each Company’s name as it appears in official filings in the state of its
organization, the type of entity of each Company, the organizational
identification number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s state of
organization, and the location of each Company’s chief executive office,
corporate offices, warehouses, other locations of Collateral and locations where
records with respect to Collateral are kept (including in each case the county
of such locations) and, except as set forth in such Schedule
12(aa), such
locations have not changed during the preceding twelve months. As of the Closing
Date, during the prior five years, except as set forth in Schedule
12(aa), no
Company has been known as or conducted business in any other name (including
trade names). Each Company has only one state of organization.

 

-23-

 

(bb)    ERISA. Based
upon the Employee Retirement Income Security Act of 1974 (“ERISA”), and
the regulations and published interpretations thereunder: (i) neither it nor any
of its Subsidiaries has engaged in any Prohibited Transactions (as defined in
Section 406 of ERISA and Section 4975 of the Code); (ii) it and each of its
Subsidiaries has met all applicable minimum funding requirements under Section
302 of ERISA in respect of its plans; (iii) neither it nor any of its
Subsidiaries has any knowledge of any event or occurrence which would cause the
Pension Benefit Guaranty Corporation to institute proceedings under Title IV of
ERISA to terminate any employee benefit plan(s); (iv) neither it nor any of its
Subsidiaries has any fiduciary responsibility for investments with respect to
any plan existing for the benefit of persons other than its or such Subsidiary’s
employees; and (v) neither it nor any of its Subsidiaries has withdrawn,
completely or partially, from any multi-employer pension plan so as to incur
liability under the Multiemployer Pension Plan Amendments Act of
1980.

 

(cc)    Each
Company does not maintain or contribute to any Canadian Pension Plan
..

 

	
      13.
	
      Covenants.

 

Each
Company, as applicable, covenants and agrees with Laurus as
follows:

 

(a)    Stop-Orders. It
shall advise Laurus, promptly after it receives notice of issuance by the SEC,
any state securities commission or any other regulatory authority of any stop
order or of any order preventing or suspending any offering of any securities of
the Parent, or of the suspension of the qualification of the Common Stock of the
Parent for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.

 

(b)    Listing. It
shall promptly secure the listing of the shares of Common Stock issuable upon
conversion of the Notes and exercise of the Warrants on the Principal Market
upon which shares of Common Stock are listed (subject to official notice of
issuance) and shall maintain such listing so long as any other shares of Common
Stock shall be so listed. the Parent shall maintain the listing of its Common
Stock on the Principal Market, and will comply in all material respects with the
Parent’s reporting, filing and other obligations under the bylaws or rules of
the National Association of Securities Dealers (“NASD”) and
such exchanges, as applicable. 

 

(c)    Market
Regulations. It
shall notify the SEC, NASD and applicable state authorities, in accordance with
their requirements to the extent applicable to such Company, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to Laurus and
promptly provide copies thereof to Laurus.

 

(d)    Reporting
Requirements. It
shall timely file with the SEC all reports required to be filed pursuant to the
Exchange Act to the extent applicable to such Company and refrain from
terminating its status as an issuer required by the Exchange Act to file reports
thereunder even if the Exchange Act or the rules or regulations thereunder would
permit such termination.

 

-24-

 

(e)    Use of
Funds. It
shall use the proceeds of the Loans and will cause its Subsidiaries to use the
proceeds of the Loans for general working capital purposes.

 

(f)    Access
to Facilities. It
shall, and shall cause each of its Subsidiaries to, permit any representatives
designated by Laurus (or any successor of Laurus), upon reasonable notice and
during normal business hours, at Laurus’ expense (or, so long as an Event of
Default has occurred and is continuing, at the Company’s joint and several
expense) and accompanied by a representative of Company Agent (provided that no
such prior notice shall be required to be given and no such representative shall
be required to accompany Laurus in the event Laurus believes such access is
necessary to preserve or protect the Collateral or following the occurrence and
during the continuance of an Event of Default), to:

 

(i)    visit and
inspect any of its or any such Subsidiary’s properties;

 

(ii)    examine
its or any such Subsidiary’s corporate and financial records (unless such
examination is not permitted by federal, state, provincial or local law or by
contract) and make copies thereof or extracts therefrom; and

 

(iii)    discuss
its or any such Subsidiary’s affairs, finances and accounts with its or any such
Subsidiary’s directors, officers and Accountants.

 

Notwithstanding
the foregoing, neither it nor any of its Subsidiaries shall provide any
material, non-public information to Laurus unless Laurus signs a confidentiality
agreement and otherwise complies with Regulation FD, under the federal
securities laws.

 

(g)    Taxes. It
shall, and shall cause each of its Subsidiaries to, promptly pay and discharge,
or cause to be paid and discharged, when due and payable, all lawful taxes,
assessments and governmental charges or levies imposed upon it and its
Subsidiaries’ income, profits, property or business, as the case may be;
provided, however, that any such tax, assessment, charge or levy need not be
paid currently if the validity thereof shall currently and diligently be
contested in good faith by appropriate proceedings, such tax, assessment, charge
or levy shall have no effect on the Lien priority of Laurus in the Collateral
and if it and/or such Subsidiary, as applicable, shall have set aside on its
and/or such Subsidiary’s books adequate reserves with respect thereto in
accordance with GAAP, and provided, further, that it shall, and shall cause each
of its Subsidiaries to, pay all such taxes, assessments, charges or levies
forthwith upon the commencement of proceedings to foreclose any lien which may
have attached as security therefor.

 

-25-

 

(h)    Insurance. It
shall bear the full risk of loss from any loss of any nature whatsoever with
respect to the Collateral. It and each of its Subsidiaries shall keep its assets
which are of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, explosion and other risks customarily
insured against by companies in similar business similarly situated as it and
its Subsidiaries; and it and its Subsidiaries shall maintain, with financially
sound and reputable insurers, insurance against other hazards and risks and
liability to persons and property to the extent and in the manner which it
and/or such Subsidiary thereof reasonably believes is customary for companies in
similar business similarly situated as it and its Subsidiaries and to the extent
available on commercially reasonable terms. It and each of its Subsidiaries will
jointly and severally bear the full risk of loss from any loss of any nature
whatsoever with respect to the assets pledged to Laurus as security for its
obligations hereunder and under the Ancillary Agreements. At its own cost and
expense in amounts and with carriers reasonably acceptable to Laurus, it and
each of its Subsidiaries shall (i) keep all their insurable properties and
properties in which they have an interest insured against the hazards of fire,
flood, sprinkler leakage, those hazards covered by extended coverage insurance
and such other hazards, and for such amounts, as is customary in the case of
companies engaged in businesses similar to it or the respective Subsidiary’s
including business interruption insurance; (ii) maintain a bond in such amounts
as is customary in the case of companies engaged in businesses similar to it and
its Subsidiaries’ insuring against larceny, fraud, embezzlement or other
criminal misappropriation of insured’s officers and employees who may either
singly or jointly with others at any time have access to its or any of its
Subsidiaries assets or funds either directly or through governmental authority
to draw upon such funds or to direct generally the disposition of such assets;
(iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all
such worker’s compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which it or any of its Subsidiaries is
engaged in business; and (v) furnish Laurus with (x) copies of all policies and
evidence of the maintenance of such policies at least thirty (30) days before
any expiration date, (y) excepting its and its Subsidiaries’ workers’
compensation policy, endorsements to such policies naming Laurus as “co-insured”
or “additional insured” and appropriate loss payable endorsements in form and
substance satisfactory to Laurus, naming Laurus as lenders loss payee, and (z)
evidence that as to Laurus the insurance coverage shall not be impaired or
invalidated by any act or neglect of any Company or any of its Subsidiaries and
the insurer will provide Laurus with at least thirty (30) days notice prior to
cancellation. It shall instruct the insurance carriers that in the event of any
loss thereunder, the carriers shall make payment for such loss to Laurus and not
to any Company or any of its Subsidiaries and Laurus jointly. If any insurance
losses are paid by check, draft or other instrument payable to any Company
and/or any of its Subsidiaries and Laurus jointly, Laurus may endorse, as
applicable, such Company’s and/or any of its Subsidiaries’ name thereon and do
such other things as Laurus may deem advisable to reduce the same to cash.
Laurus is hereby authorized to adjust and compromise claims. All loss recoveries
received by Laurus upon any such insurance may be applied to the Obligations, in
such order as Laurus in its sole discretion shall determine or shall otherwise
be delivered to Company Agent for the benefit of the applicable Company and/or
its Subsidiaries. Any surplus shall be paid by Laurus to Company Agent for the
benefit of the applicable Company and/or its Subsidiaries, or applied as may be
otherwise required by law. Any deficiency thereon shall be paid, as applicable,
by Companies and their Subsidiaries to Laurus, on demand.

 

(i)    Intellectual
Property. It
shall, and shall cause each of its Subsidiaries to, maintain in full force and
effect its corporate existence, rights and franchises and all licenses and other
rights to use Intellectual Property owned or possessed by it and reasonably
deemed to be necessary to the conduct of its business.

 

-26-

 

(j)    Properties. It
shall, and shall cause each of its Subsidiaries to, keep its properties in good
repair, working order and condition, reasonable wear and tear excepted, and from
time to time make all needful and proper repairs, renewals, replacements,
additions and improvements thereto; and it shall, and shall cause each of its
Subsidiaries to, at all times comply with each provision of all leases to which
it is a party or under which it occupies property if the breach of such
provision could reasonably be expected to have a Material Adverse
Effect.

 

(k)   Confidentiality. It
shall not, and shall not permit any of its Subsidiaries to, disclose, and will
not include in any public announcement, the name of Laurus, unless expressly
agreed to by Laurus or unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
Notwithstanding the foregoing, each Company and its Subsidiaries may disclose
Laurus’ identity and the terms of this Agreement to its current and prospective
debt and equity financing sources.

 

(l)    Required
Approvals. It
shall not, and shall not permit any of its Subsidiaries to, without the prior
written consent of Laurus, (i) create, incur, assume or suffer to exist any
indebtedness (exclusive of trade debt) whether secured or unsecured other than
each Company’s indebtedness to Laurus and as set forth on Schedule
13(l)(i) attached
hereto and made a part hereof; (ii) cancel any debt owing to it in excess of
$50,000 in the aggregate during any 12 month period; (iii) assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except the endorsement of negotiable
instruments by it or its Subsidiaries for deposit or collection or similar
transactions in the ordinary course of business; (iv) directly or indirectly
declare, pay or make any dividend or distribution on any class of its Stock or
apply any of its funds, property or assets to the purchase, redemption or other
retirement of any of its or its Subsidiaries’ Stock outstanding on the date
hereof, or issue any preferred stock; (v) purchase or hold beneficially any
Stock or other securities or evidences of indebtedness of, make or permit to
exist any loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including any partnership or joint venture,
except (x) travel advances, (y) loans to its and its Subsidiaries’ officers and
employees not exceeding at any one time an aggregate of $10,000, and (z) loans
to its existing Subsidiaries so long as such Subsidiaries are designated as
either a co-borrower hereunder or has entered into such guaranty and security
documentation required by Laurus, including, without limitation, to grant to
Laurus a first priority perfected security interest in substantially all of such
Subsidiary’s assets to secure the Obligations; (vi) create or permit to exist
any Subsidiary, other than any Subsidiary in existence on the date hereof and
listed in Schedule
12(b) unless
such new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus as
either a co-borrower or guarantor hereunder and such Subsidiary shall have
entered into all such documentation required by Laurus, including, without
limitation, to grant to Laurus a first priority perfected security interest in
substantially all of such Subsidiary’s assets to secure the Obligations; (vii)
directly or indirectly, prepay any indebtedness (other than to Laurus and in the
ordinary course of business), or repurchase, redeem, retire or otherwise acquire
any indebtedness (other than to Laurus and in the ordinary course of business)
except to make scheduled payments of principal and interest thereof; (viii)
enter into any merger, consolidation or other reorganization with or into any
other Person or acquire all or a portion of the assets or Stock of any Person or
permit any other Person to consolidate with or merge with it, unless (1) such
Company is the surviving entity of such merger or consolidation, (2) no Event of
Default shall exist immediately prior to and after giving effect to such merger
or consolidation, (3) such Company shall have provided Laurus copies of all
documentation relating to such merger or consolidation and (4) such Company
shall have provided Laurus with at least fifteen (15) business days’ prior
written notice of such merger or consolidation; (ix) materially change the
nature of the business in which it is presently engaged; (x) become subject to
(including, without limitation, by way of amendment to or modification of) any
agreement or instrument which by its terms would (under any circumstances)
restrict its or any of its Subsidiaries’ right to perform the provisions of this
Agreement or any of the Ancillary Agreements; (xi) change its fiscal year or
make any changes in accounting treatment and reporting practices without prior
written notice to Laurus except as required by GAAP or in the tax reporting
treatment or except as required by law; (xii) enter into any transaction with
any employee, director or Affiliate, except in the ordinary course on
arms-length terms; (xiii) bill Accounts under any name except the present name
of such Company; or (xiv) sell, lease, transfer or otherwise dispose of any of
its properties or assets, or any of the properties or assets of its
Subsidiaries, except for (1) the sale of Inventory in the ordinary course of
business and (2) the disposition or transfer in the ordinary course of business
during any fiscal year of obsolete and worn-out Equipment and only to the extent
that (x) the proceeds of any such disposition are used to acquire replacement
Equipment which is subject to Laurus’ first priority security interest or are
used to repay Loans or to pay general corporate expenses, or (y) following the
occurrence of an Event of Default which continues to exist, the proceeds of
which are remitted to Laurus to be held as cash collateral for the
Obligations.

 

-27-

 

(m)    Reissuance
of Securities. The
Parent shall reissue certificates representing the Securities without the
legends set forth in Section 39 below at such time as:

 

(i)    the
holder thereof is permitted to dispose of such Securities pursuant to Rule
144(k) under the Securities Act; or

 

(ii)    upon
resale subject to an effective registration statement after such Securities are
registered under the Securities Act.

 

The
Parent agrees to cooperate with Laurus in connection with all resales pursuant
to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow
such resales provided the Parent and its counsel receive reasonably requested
representations from Laurus and broker, if any.

 

(n)    Opinion. On the
Closing Date, it shall deliver to Laurus an opinion acceptable to Laurus from
each Company’s legal counsel. Each Company will provide, at Companies’ expense,
such other legal opinions in the future as are reasonably necessary for the
conversion of the Notes and the exercise of the Warrants.

 

(o)    Legal
Name, etc. It and
each of its Subsidiaries shall not, without providing Laurus with 30 days prior
written notice, change (i) its name as it appears in the official filings in the
state or province of its organization, (ii) the type of legal entity it is,
(iii) its organization identification number, if any, issued by its state or
province of organization, (iv) its state or province of organization or (v)
amend its certificate of incorporation, by-laws or other organizational
document. 

 

(p)    Compliance
with Laws. The
operation of each of its and each of its Subsidiaries’ business is and shall
continue to be in compliance in all material respects with all applicable
federal, state, provincial and local laws, rules and ordinances, including to
all laws, rules, regulations and orders relating to taxes, payment and
withholding of payroll taxes, employer and employee contributions and similar
items, securities, employee retirement and welfare benefits, employee health and
safety and environmental matters.

 

-28-

 

(q)    Notices. It and
each of its Subsidiaries shall promptly inform Laurus in writing of: (i) the
commencement of all proceedings and investigations by or before and/or the
receipt of any notices from, any governmental or nongovernmental body and all
actions and proceedings in any court or before any arbitrator against or in any
way concerning any event which could reasonably be expected to have singly or in
the aggregate, a Material Adverse Effect; (ii) any change which has had, or
could reasonably be expected to have, a Material Adverse Effect; (iii) any Event
of Default or Default; and (iv) any default or any event which with the passage
of time or giving of notice or both would constitute a default under any
agreement for the payment of money to which it or any of its Subsidiaries is a
party or by which it or any of its Subsidiaries or any of its or any such
Subsidiary’s properties may be bound the breach of which would have a Material
Adverse Effect.

 

(r)    Margin
Stock. It
shall not permit any of the proceeds of the Loans made hereunder to be used
directly or indirectly to “purchase” or “carry” “margin stock” or to repay
indebtedness incurred to “purchase” or “carry” “margin stock” within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect. 

 

(s)    Offering
Restrictions. Except
as previously disclosed in the SEC Reports or in the Exchange Act Filings, or
stock or stock options granted to its employees or directors, neither it nor any
of its Subsidiaries shall, prior to the full repayment or conversion of the
Notes (together with all accrued and unpaid interest and fees related thereto),
(x) enter into any equity line of credit agreement or similar agreement or (y)
issue, or enter into any agreement to issue, any securities with a
variable/floating conversion and/or pricing feature which are or could be (by
conversion or registration) free-trading securities (i.e. common stock subject
to a registration statement).

 

(t) Authorization
and Reservation of Shares. The
Parent shall at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the conversion of the Notes and exercise
of the Warrants.

 

(u)    Financing
Right of First Refusal.

 

(i)    It hereby
grants to Laurus a right of first refusal to provide any Additional Financing
(as defined below) to be issued by any Company and/or any of its Subsidiaries
(the “Additional
Financing Parties”),
subject to the following terms and conditions. From and after the date hereof,
prior to the incurrence of any indebtedness of the Additional Financing Parties
convertible into the Common Stock of the Parent (an “Additional
Financing”),
Company Agent shall notify Laurus of such Additional Financing. In connection
therewith, Company Agent shall submit a fully executed term sheet (a
“Proposed
Term Sheet”) to
Laurus setting forth the terms, conditions and pricing of any such Additional
Financing (such financing to be negotiated on “arm’s length” terms and the terms
thereof to be negotiated in good faith) proposed to be entered into by the
Additional Financing Parties. Laurus shall have the right, but not the
obligation, to deliver to Company Agent its own proposed term sheet (the
“Laurus
Term Sheet”)
setting forth the terms and conditions upon which Laurus would be willing to
provide such Additional Financing to the Additional Financing Parties. The
Laurus Term Sheet shall contain terms no less favorable to the Additional
Financing Parties than those outlined in Proposed Term Sheet. Laurus shall
deliver to Company Agent the Laurus Term Sheet within ten Business Days of
receipt of each such Proposed Term Sheet. If the provisions of the Laurus Term
Sheet are at least as favorable to the Additional Financing Parties as the
provisions of the Proposed Term Sheet, the Additional Financing Parties shall
enter into and consummate the Additional Financing transaction outlined in the
Laurus Term Sheet. Notwithstanding anything to the contrary contained above,
this clause (u)(i) shall only apply to the extent that the aggregate principal
amount of all Additional Financings consummated in such fiscal year of the
Parent (after giving effect to the proposed Additional Financing) exceed
$100,000. 

 

-29-

 

(ii)    It shall
not, and shall not permit its Subsidiaries to, agree, directly or indirectly, to
any restriction with any Person which limits the ability of Laurus to consummate
an Additional Financing with it or any of its Subsidiaries.

 

	
      14.
	
      Further
      Assurances.

 

At any
time and from time to time, upon the written request of Laurus and at the sole
expense of Companies, each Company shall promptly and duly execute and deliver
any and all such further instruments and documents and take such further action
as Laurus may request (a) to obtain the full benefits of this Agreement and the
Ancillary Agreements, (b) to protect, preserve and maintain Laurus’ rights in
the Collateral and under this Agreement or any Ancillary Agreement, and/or (c)
to enable Laurus to exercise all or any of the rights and powers herein granted
or any Ancillary Agreement.

 

	
      15.
	
      Representations,
      Warranties and Covenants of Laurus.

 

Laurus
hereby represents, warrants and covenants to each Company as
follows:

 

(a)    Requisite
Power and Authority. Laurus
has all necessary power and authority under all applicable provisions of law to
execute and deliver this Agreement and the Ancillary Agreements and to carry out
their provisions. All corporate action on Laurus’ part required for the lawful
execution and delivery of this Agreement and the Ancillary Agreements have been
or will be effectively taken prior to the Closing Date. Upon their execution and
delivery, this Agreement and the Ancillary Agreements shall be valid and binding
obligations of Laurus, enforceable in accordance with their terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights,
and (b) as limited by general principles of equity that restrict the
availability of equitable and legal remedies.

 

(b)    Investment
Representations. Laurus
understands that the Securities are being offered pursuant to an exemption from
registration contained in the Securities Act based in part upon Laurus’
representations contained in this Agreement, including, without limitation, that
Laurus is an “accredited investor” within the meaning of Regulation D under the
Securities Act. Laurus has received or has had full access to all the
information it considers necessary or appropriate to make an informed investment
decision with respect to the Notes to be issued to it under this Agreement and
the Securities acquired by it upon the conversion of the Notes. Laurus further
confirms that it has had an opportunity to ask questions and receive answers
from the Companies regarding the Companies’ business, management and financial
affairs and the terms and conditions of the Offering, the Note, the Warrant and
the Securities and to obtain additional information (to the extent the Companies
possessed such information or could acquire it without unreasonable effort or
expense) necessary to verify any information furnished to Laurus or to which
Laurus had access.

 

-30-

 

(c)    Laurus
Bears Economic Risk. Laurus
has substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Parent so that it is
capable of evaluating the merits and risks of its investment in the Parent and
has the capacity to protect its own interests. Laurus must bear the economic
risk of this investment until the Securities are sold pursuant to (i) an
effective registration statement under the Securities Act, or (ii) an exemption
from registration is available.

 

(d)    Investment
for Own Account. The
Securities are being issued to Laurus for its own account for investment only,
and not as a nominee or agent and not with a view towards or for resale in
connection with their distribution.

 

(e)    Laurus
Can Protect Its Interest. Laurus
represents that by reason of its, or of its management’s, business and financial
experience, Laurus has the capacity to evaluate the merits and risks of its
investment in the Notes, and the Securities and to protect its own interests in
connection with the transactions contemplated in this Agreement, and the
Ancillary Agreements. Further, Laurus is aware of no publication of any
advertisement in connection with the transactions contemplated in the Agreement
or the Ancillary Agreements.

 

(f)    Accredited
Investor. Laurus
represents that it is an accredited investor within the meaning of Regulation D
under the Securities Act.

 

(g)    Shorting. Neither
Laurus nor any of its Affiliates or investment partners has, will, or will cause
any Person, to directly engage or cause or participate with any third party to
directly engage in “short sales” of the Parent’s Common Stock as long as any
Minimum Borrowing Note shall be outstanding.

 

(h)    Patriot
Act. Laurus
certifies that, to the best of Laurus’ knowledge, Laurus has not been
designated, and is not owned or controlled, by a “suspected terrorist” as
defined in Executive Order 13224. Laurus seeks to comply with all applicable
laws concerning money laundering and related activities. In furtherance of those
efforts, Laurus hereby represents, warrants and covenants that: (i) none of the
cash or property that Laurus will use to make the Loans has been or shall be
derived from, or related to, any activity that is deemed criminal under United
States law or Canadian law; and (ii) no disbursement by Laurus to any Company to
the extent within Laurus’ control, shall cause Laurus to be in violation of the
United States Bank Secrecy Act, the United States International Money Laundering
Control Act of 1986 or the United States International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001 or the Canadian Proceds of
Crime (Money Laundering) and Terrorist Financing Act. Laurus shall promptly
notify the Company Agent if any of these representations ceases to be true and
accurate regarding Laurus. Laurus agrees to provide the Company any additional
information regarding Laurus that the Company deems necessary or convenient to
ensure compliance with all applicable laws concerning money laundering and
similar activities. Laurus understands and agrees that if at any time it is
discovered that any of the foregoing representations are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
similar activities, Laurus may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of Laurus’ investment in the Parent. Laurus
further understands that the Parent may release information about Laurus and, if
applicable, any underlying beneficial owners, to proper authorities if the
Parent, in its sole discretion, determines that it is in the best interests of
the Parent in light of relevant rules and regulations under the laws set forth
in subsection (ii) above.

 

-31-

 

(i)    Limitation
on Acquisition of Common Stock.
Notwithstanding anything to the contrary contained in this Agreement, any
Ancillary Agreement, or any document, instrument or agreement entered into in
connection with any other transaction entered into by and between Laurus and any
Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall not
acquire stock in the Parent (including, without limitation, pursuant to a
contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Parent, or otherwise, and such options, warrants, conversion or other rights
shall not be exercisable) to the extent such stock acquisition would cause any
interest (including any original issue discount) payable by any Company to
Laurus not to qualify as portfolio interest, within the meaning of Section
881(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”) by
reason of Section 881(c)(3) of the Code, taking into account the constructive
ownership rules under Section 871(h)(3)(C) of the Code (the “Stock
Acquisition Limitation”). The
Stock Acquisition Limitation shall automatically become null and void without
any notice to any Company upon the earlier to occur of either (a) the Parent’s
delivery to Laurus of a Notice of Redemption (as defined in the Notes) or (b)
the existence of an Event of Default at a time when the average closing price of
the Common Stock as reported by Bloomberg, L.P. on the Principal Market for the
immediately preceding five trading days is greater than or equal to 150% of the
Fixed Conversion Price (as defined in the Notes).

 

	
      16.
	
      Power
      of Attorney.

 

Each
Company hereby appoints Laurus, or any other Person whom Laurus may designate as
such Company’s attorney, with power to: (i) if an Event of Default has occurred
and is continuing, endorse such Company’s name on any checks, notes,
acceptances, money orders, drafts or other forms of payment or security that may
come into Laurus’ possession; (ii) if an Event of Default has occurred and is
continuing, sign such Company’s name on any invoice or bill of lading relating
to any Accounts, drafts against Account Debtors, schedules and assignments of
Accounts, notices of assignment, financing statements and other public records,
verifications of Account and notices to or from Account Debtors; (iii) verify
the validity, amount or any other matter relating to any Account by mail,
telephone, telegraph or otherwise with Account Debtors; (iv) do all things
necessary to carry out this Agreement, any Ancillary Agreement and all related
documents; and (v) on or after the occurrence and during the continuation of an
Event of Default, notify the post office authorities to change the address for
delivery of such Company’s mail to an address designated by Laurus, and to
receive, open and dispose of all mail addressed to such Company. Each Company
hereby ratifies and approves all acts of the attorney. Neither Laurus, nor the
attorney will be liable for any acts or omissions or for any error of judgment
or mistake of fact or law, except for gross negligence or willful misconduct.
This power, being coupled with an interest, is irrevocable so long as Laurus has
a security interest and until the Obligations have been fully
satisfied.

 

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      17.
	
      Term
      of Agreement.

 

Laurus’
agreement to make Loans and extend financial accommodations under and in
accordance with the terms of this Agreement or any Ancillary Agreement shall
continue in full force and effect until the expiration of the Term. At Laurus’
election following the occurrence of an Event of Default, Laurus may terminate
this Agreement. The termination of the Agreement shall not affect any of Laurus’
rights hereunder or any Ancillary Agreement and the provisions hereof and
thereof shall continue to be fully operative until all transactions entered
into, rights or interests created and the Obligations have been irrevocably
disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus
shall release its security interests at any time after fifteen (15) days notice
upon irrevocable payment to it of all Obligations if each Company shall have (i)
provided Laurus with an executed release of any and all claims which such
Company may have or thereafter have under this Agreement and all Ancillary
Agreements and (ii) paid to Laurus an early payment fee in an amount equal to
(1) five percent (5%) of the Capital Availability Amount if such payment occurs
prior to the first anniversary of the Closing Date, (2) four percent (4%) of the
Capital Availability Amount if such payment occurs on or after the first
anniversary of the Closing Date and prior to the second anniversary of the
Closing Date and (3) three percent (3%) of the Capital Availability Amount if
such termination occurs thereafter during the Term; such fee being intended to
compensate Laurus for its costs and expenses incurred in initially approving
this Agreement or extending same. Such early payment fee shall be due and
payable jointly and severally by Companies to Laurus upon termination by
acceleration of this Agreement by Laurus due to the occurrence and continuance
of an Event of Default.

 

	
      18.
	
      Termination
      of Lien.

 

The Liens
and rights granted to Laurus hereunder and any Ancillary Agreements and the
financing statements filed in connection herewith or therewith shall continue in
full force and effect, notwithstanding the termination of this Agreement or the
fact that any Company’s account may from time to time be temporarily in a zero
or credit position, until all of the Obligations have been paid indefeasibly or
performed in full after the termination of this Agreement. Laurus shall not be
required to send termination statements to any Company, or to file them with any
filing office, unless and until this Agreement and the Ancillary Agreements
shall have been terminated in accordance with their terms and all Obligations
indefeasibly paid in full in immediately available funds.

 

	
      19.
	
      Events
      of Default.

 

The
occurrence of any of the following shall constitute an “Event
of Default”:

 

(a)    failure
to make payment of any of the Obligations when required hereunder, and, in any
such case, such failure shall continue for a period of five (5) days following
the date upon which any such payment was due; 

 

(b)    failure
by any Company or any of its Subsidiaries to pay any taxes when due unless such
taxes are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been provided on such Company’s and/or
such Subsidiary’s books;

 

-33-

 

(c)    failure
to perform under, and/or committing any breach of, in any material respect, this
Agreement, which failure or breach shall continue for a period of fifteen (15)
days after the occurrence thereof;

 

(d)    any
representation, warranty or statement made by any Company or any of its
Subsidiaries hereunder, in any Ancillary Agreement, any certificate, statement
or document delivered pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should at any time be false or
misleading in any material respect; 

 

(e)    the
occurrence of any default or event of default (or similar term) under any
indebtedness of any Company which permits the holder of such indebtedness to
accelerate such indebtedness, solely to the extent that the principal amount of
any such indebtedness exceeds, when taken together, $100,000 in the aggregate
and such default or event of default (or similar term) has not been cured or
waived by the holder of such indebtedness on or prior to the fifteenth
(15th) day
after the occurrence thereof;

 

(f)    an
attachment or levy is made upon any Company’s assets having an aggregate value
in excess of $100,000 or a judgment is rendered against any Company’s property
involving a liability of more than $100,000 which shall not have been vacated,
discharged, stayed or bonded within thirty (30) days from the entry
thereof;

 

(g)    any Lien
created hereunder or under any Ancillary Agreement for any reason ceases to be
or is not a valid and perfected Lien having a first priority
interest;

 

(h)    any
Company or any of its Subsidiaries shall (i) apply for, consent to or suffer to
exist the appointment of, or the taking of possession by, a receiver, interim
receiver, receiver and manager, custodian, trustee or liquidator of itself or of
all or a substantial part of its property, (ii) make a general assignment for
the benefit of creditors, (iii) commence a voluntary case under the United
States or Canadian Federal bankruptcy laws (including without limitation, the
Bankruptcy and Insolvency Act (Canada) or the Companies’ Creditors Arrangement
Act) (as now or hereafter in effect), (iv) be adjudicated a bankrupt or
insolvent, (v) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vi) acquiesce to, or fail to have
dismissed, within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (vii) take any action for the
purpose of effecting any of the foregoing;

 

(i)    any
Company or any of its Subsidiaries shall admit in writing its inability, or be
generally unable to pay its debts as they become due or cease operations of its
present business;

 

(j)    any
Company directly or indirectly sells, assigns, transfers, conveys, or suffers or
permits to occur any sale, assignment, transfer or conveyance of any assets of
such Company or any interest therein, except as permitted herein;

 

-34-

 

(k)    any
“Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of
the Exchange Act, as in effect on the date hereof) is or becomes the “beneficial
owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act),
directly or indirectly, of 35% or more on a fully diluted basis of the then
outstanding voting equity interest of the Parent (other than a “Person” or
“group” that beneficially owns 35% or more of such outstanding voting equity
interests of the Parent on the date hereof) or (ii) the Board of Directors of
the Parent shall cease to consist of a majority of the Board of Directors of the
Parent on the date hereof (or directors appointed by a majority of the Board of
Directors of the Parent in effect immediately prior to such
appointment);

 

(l)    the
indictment or threatened indictment of any Company or any of its Subsidiaries or
any executive officer of any Company or any of its Subsidiaries under any
criminal statute, or commencement or threatened commencement of criminal or
civil proceeding against any Company or any of its Subsidiaries or any executive
officer of any Company or any of its Subsidiaries pursuant to which statute or
proceeding penalties or remedies sought or available include forfeiture of any
of the property of any Company or any of its Subsidiaries; 

 

(m)    an Event
of Default shall occur under and as defined in any Note, any other Ancillary
Agreement, the Securities Purchase Agreement or any Related Agreement referred
to in the Securities Purchase Agreement;

 

(n)    any
Company or any of its Subsidiaries shall breach any term or provision of any
Ancillary Agreement to which it is a party, in any material respect which breach
is not cured within any applicable cure or grace period;

 

(o)    any
Company or any of its Subsidiaries attempts to terminate, challenges the
validity of, or its liability under any Ancillary Agreement, or any proceeding
shall be brought to challenge the validity, binding effect of any Ancillary
Agreement or any Ancillary Agreement ceases to be a valid, binding and
enforceable obligation of such Company or any of its Subsidiaries (to the extent
such Persons are a party thereto);

 

(p)    an SEC
stop trade order or Principal Market trading suspension of the Common Stock
shall be in effect for five (5) consecutive days or five (5) days during a
period of ten (10) consecutive days, excluding in all cases a suspension of all
trading on a Principal Market, provided that the Parent shall not have been able
to cure such trading suspension within thirty (30) days of the notice thereof or
list the Common Stock on another Principal Market within sixty (60) days of such
notice; or

 

(q)    the
Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form
required by the Notes and this Agreement, if such failure to deliver Common
Stock shall not be cured within two (2) Business Days (or up to five (5)
business days with respect to no more than two (2) delays in any calendar year,
so long as such delay is soley out of the control of the Company) or any Company
is required to issue a replacement Note to Laurus and such Company shall fail to
deliver such replacement Note within seven (7) Business Days. 

 

	
      20.
	
      Remedies.

 

-35-

 

(a)    Following
the occurrence of an Event of Default, Laurus shall have the right to demand
repayment in full of all Obligations, whether or not otherwise due. Until all
Obligations have been fully satisfied, Laurus shall retain its Lien in all
Collateral. Laurus shall have, in addition to all other rights provided herein
and in each Ancillary Agreement, the rights and remedies of a secured party
under the UCC, and the PPSA as applicable and under other applicable law, all
other legal and equitable rights to which Laurus may be entitled, including the
right to take immediate possession of the Collateral, to require each Company to
assemble the Collateral, at Companies’ joint and several expense, and to make it
available to Laurus at a place designated by Laurus which is reasonably
convenient to both parties and to enter any of the premises of any Company or
wherever the Collateral shall be located, with or without force or process of
law, and to keep and store the same on said premises until sold (and if said
premises be the property of any Company, such Company agrees not to charge
Laurus for storage thereof), and the right to apply for the appointment of a
receiver for such Company’s property. Further, Laurus may, at any time or times
after the occurrence of an Event of Default, sell and deliver all Collateral
held by or for Laurus at public or private sale for cash, upon credit or
otherwise, at such prices and upon such terms as Laurus, in Laurus’ sole
discretion, deems advisable or Laurus may otherwise recover upon the Collateral
in any commercially reasonable manner as Laurus, in its sole discretion, deems
advisable. The requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Company Agent at Company Agent’s address as shown in
Laurus’ records, at least ten (10) days before the time of the event of which
notice is being given. Laurus may be the purchaser at any sale, if it is public.
In connection with the exercise of the foregoing remedies, Laurus is granted
permission to use all of each Company’s Intellectual Property. The proceeds of
sale shall be applied first to all costs and expenses of sale, including
attorneys’ fees, and second to the payment (in whatever order Laurus elects) of
all Obligations. After the indefeasible payment and satisfaction in full of all
of the Obligations, and after the payment by Laurus of any other amount required
by any provision of law, including Section 9 608(a)(1) of the UCC and 64(1) of
the PPSA (but only after Laurus has received what Laurus considers reasonable
proof of a subordinate party’s security interest), the surplus, if any, shall be
paid to Company Agent (for the benefit of the applicable Companies) or its
representatives or to whosoever may be lawfully entitled to receive the same, or
as a court of competent jurisdiction may direct. Companies shall remain jointly
and severally liable to Laurus for any deficiency. In addition, Companies shall
jointly and severally pay Laurus a liquidation fee (“Liquidation
Fee”) in the
amount of five percent (5%) of the actual amount collected in respect of each
Account outstanding at any time during a Liquidation Period”. For purposes
hereof, “Liquidation
Period” means a
period: (i) beginning on the earliest date of (x) an event referred to in
Section 19(i) or 19(j), or (y) the cessation of any Company’s business; and (ii)
ending on the date on which Laurus has actually received all Obligations due and
owing it under this Agreement and the Ancillary Agreements. The Liquidation Fee
shall be paid on the date on which Laurus collects the applicable Account by
deduction from the proceeds thereof. Each Company and Laurus acknowledge that
the actual damages that would be incurred by Laurus after the occurrence of an
Event of Default would be difficult to quantify and that such Company and Laurus
have agreed that the fees and obligations set forth in this Section and in this
Agreement would constitute fair and appropriate liquidated damages in the event
of any such termination.

 

-36-

 

(b)    Upon the
occurrence of and during the continuance of any Event of Default, Laurus may
appoint or reappoint by instrument in writing, any person or persons, whether an
officer or officers or an employee or employees of Laurus or not, to be an
interim receiver, receiver or receivers (hereinafter called a “Receiver”, which
term when used herein shall include a receiver and manager) of any Collateral of
any Canadian Eligible Subsidiary (including any interest, income or profits
therefrom) and may remove any Receiver so appointed and appoint another in
his/her/its stead. Any such Receiver shall, so far as concerns responsibility
for his/her/its acts, be deemed the agent of each Canadian Eligible Subsidiary
and not Laurus, and Laurus shall not be in any way responsible for any
misconduct, negligence or non-feasance on the part of any such Receiver or
his/her/its servants, agents or employees. Subject to the provisions of the
instrument appointing him/her/it, any such Receiver shall have power to take
possession of Collateral, to preserve Collateral or its value, to carry on or
concur in carrying on all or any part of the business of each Canadian Eligible
Subsidiary and to sell, lease, license or otherwise dispose of or concur in
selling, leasing, licensing or otherwise disposing of Collateral. To facilitate
the foregoing powers, any such Receiver may, to the exclusion of all others,
including any Canadian Eligible Subsidiary, enter upon, use and occupy all
premises owned or occupied by each Canadian Eligible Subsidiary wherein
Collateral may be situate, maintain Collateral upon such premises, borrow money
on a secured or unsecured basis and use Collateral directly in carrying on each
Canadian Eligible Subsidiary’s business or as security for loans or advances to
enable the Receiver to carry on each Canadian Eligible Subsidiary’s business or
otherwise, as such Receiver shall, in its discretion, determine. Except as may
be otherwise directed by Laurus, all money received from time to time by such
Receiver in carrying out his/her/its appointment shall be received in trust for
and be paid over to Laurus. Every such Receiver may, in the discretion of
Laurus, be vested with all or any of the rights and powers of Laurus.

 

(c)    Upon and
during the continuance of any Event of Default, Laurus may, either directly or
through its agents or nominees, exercise any or all of the powers and rights
given to a Receiver by virtue of Section 20.

 

	
      21.
	
      Waivers.

 

To the
full extent permitted by applicable law, each Company hereby waives (a)
presentment, demand and protest, and notice of presentment, dishonor, intent to
accelerate, acceleration, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of any or all of this Agreement and
the Ancillary Agreements or any other notes, commercial paper, Accounts,
contracts, Documents, Instruments, Chattel Paper and guaranties at any time held
by Laurus on which such Company may in any way be liable, and hereby ratifies
and confirms whatever Laurus may do in this regard; (b) all rights to notice and
a hearing prior to Laurus’ taking possession or control of, or to Laurus’
replevy, attachment or levy upon, any Collateral or any bond or security that
might be required by any court prior to allowing Laurus to exercise any of its
remedies; and (c) the benefit of all valuation, appraisal and exemption laws.
Each Company acknowledges that it has been advised by counsel of its choices and
decisions with respect to this Agreement, the Ancillary Agreements and the
transactions evidenced hereby and thereby. 

 

	
      22.
	
      Expenses.

 

-37-

 

Companies
shall jointly and severally pay amounts required to be paid pursuant to Section
5(b) (iv) hereof, and and all of Laurus’ reasonable out-of-pocket costs and
expenses, including reasonable fees and disbursements of in house or outside
counsel and appraisers in connection with the prosecution or defense of any
action, contest, dispute, suit or proceeding concerning any matter in any way
arising out of, related to or connected with this Agreement or any Ancillary
Agreement. Companies shall also jointly and severally pay all of Laurus’
reasonable fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the preparation,
execution and delivery of any waiver, any amendment thereto or consent proposed
or executed in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements, (b) Laurus’ obtaining performance of the
Obligations under this Agreement and any Ancillary Agreements, including, but
not limited to, the enforcement or defense of Laurus’ security interests,
assignments of rights and Liens hereunder as valid perfected security interests,
(c) any attempt to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral, (d) any appraisals or re appraisals of any
property (real or personal) pledged to Laurus by any Company or any of its
Subsidiaries as Collateral for, or any other Person as security for, the
Obligations hereunder and (e) any consultations in connection with any of the
foregoing. Companies shall also jointly and severally pay Laurus’ customary bank
charges for all bank services (including wire transfers) performed or caused to
be performed by Laurus for any Company or any of its Subsidiaries at any
Company’s or such Subsidiary’s request or in connection with any Company’s loan
account with Laurus. All such costs and expenses together with all filing,
recording and search fees, taxes and interest payable by Companies to Laurus
shall be payable on demand and shall be secured by the Collateral. If any tax by
any Governmental Authority is or may be imposed on or as a result of any
transaction between any Company and/or any Subsidiary thereof, on the one hand,
and Laurus on the other hand, which Laurus is or may be required to withhold or
pay, Companies hereby jointly and severally indemnifies and holds Laurus
harmless in respect of such taxes, and Companies will repay to Laurus the amount
of any such taxes which shall be charged to Companies’ account; and until
Companies shall furnish Laurus with indemnity therefor (or supply Laurus with
evidence satisfactory to it that due provision for the payment thereof has been
made), Laurus may hold without interest any balance standing to each Company’s
credit and Laurus shall retain its Liens in any and all Collateral.

 

	
      23.
	
      Assignment
      By Laurus.

 

Laurus
may assign any or all of the Obligations together with any or all of the
security therefor to any Person which is not a competitor of any Company and any
such transferee shall succeed to all of Laurus’ rights with respect thereto.
Upon such transfer, Laurus shall be released from all responsibility for the
Collateral to the extent same is assigned to any transferee. Laurus may from
time to time sell or otherwise grant participations in any of the Obligations
and the holder of any such participation shall, subject to the terms of any
agreement between Laurus and such holder, be entitled to the same benefits as
Laurus with respect to any security for the Obligations in which such holder is
a participant. Each Company agrees that each such holder may exercise any and
all rights of banker’s lien, set-off and counterclaim with respect to its
participation in the Obligations as fully as though such Company were directly
indebted to such holder in the amount of such participation.

 

	
      24.
	
      No
      Waiver; Cumulative Remedies.

 

Failure
by Laurus to exercise any right, remedy or option under this Agreement, any
Ancillary Agreement or any supplement hereto or thereto or any other agreement
between or among any Company and Laurus or delay by Laurus in exercising the
same, will not operate as a waiver; no waiver by Laurus will be effective unless
it is in writing and then only to the extent specifically stated. Laurus’ rights
and remedies under this Agreement and the Ancillary Agreements will be
cumulative and not exclusive of any other right or remedy which Laurus may
have.

 

-38-

 

	
      25.
	
      Application
      of Payments.

 

Each U.S.
Company irrevocably waive the right to direct the application of any and all
payments at any time or times hereafter received by Laurus from or on such U.S
Company’s behalf and each U.S. Company hereby irrevocably agrees that Laurus
shall have the continuing exclusive right to apply and reapply any and all
payments received at any time or times hereafter against the Obligations
hereunder in such manner as Laurus may deem advisable notwithstanding any entry
by Laurus upon any of Laurus’ books and records.

 

	
      26.
	
      Indemnity.

 

Each
Company hereby jointly and severally indemnify and hold Laurus, and its
respective affiliates, employees, attorneys and agents (each, an “Indemnified
Person”),
harmless from and against any and all suits, actions, proceedings, claims,
damages, losses, liabilities and expenses of any kind or nature whatsoever
(including legal fees and disbursements and other costs of investigation or
defense, including those incurred upon any appeal) which may be instituted or
asserted against or incurred by any such Indemnified Person as the result of
credit having been extended, suspended or terminated under this Agreement or any
of the Ancillary Agreements or with respect to the execution, delivery,
enforcement, performance and administration of, or in any other way arising out
of or relating to, this Agreement, the Ancillary Agreements or any other
documents or transactions contemplated by or referred to herein or therein and
any actions or failures to act with respect to any of the foregoing, except to
the extent that any such indemnified liability is finally determined by a court
of competent jurisdiction to have resulted from such Indemnified Person’s gross
negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR
LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR
THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY
THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES
WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR
TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY
OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

 

	
      27.
	
      Revival.

 

U.S.
Companies further agree that to the extent any U.S. Company makes a payment or
payments to Laurus, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy act, state or federal law, common law or equitable cause, then, to
the extent of such payment or repayment, the obligation or part thereof intended
to be satisfied shall be revived and continued in full force and effect as if
said payment had not been made.

 

	
      28.
	
      Borrowing
      Agency Provisions. 

 

(a)    Each
Company hereby irrevocably designates Company Agent to be its attorney and agent
and in such capacity to borrow, sign and endorse notes, and execute and deliver
all instruments, documents, writings and further assurances now or hereafter
required hereunder, on behalf of such Company, and hereby authorizes Laurus to
pay over or credit all loan proceeds hereunder in accordance with the request of
Company Agent.

 

-39-

 

(b)    The
handling of this credit facility as a co-borrowing facility with a borrowing
agent in the manner set forth in this Agreement is solely as an accommodation to
U.S. Companies and at their request. Laurus shall not incur any liability to any
Company as a result thereof. To induce Laurus to do so and in consideration
thereof, each Company hereby indemnifies Laurus and holds Laurus harmless from
and against any and all liabilities, expenses, losses, damages and claims of
damage or injury asserted against Laurus by any Person arising from or incurred
by reason of the handling of the financing arrangements of U.S. Companies as
provided herein, reliance by Laurus on any request or instruction from Company
Agent or any other action taken by Laurus with respect to this Paragraph
28.

 

(c)    All
Obligations shall be joint and several, and U.S. Companies shall make payment
upon the maturity of the Obligations by acceleration or otherwise, and such
obligation and liability on the part of U.S. Companies shall in no way be
affected by any extensions, renewals and forbearance granted by Laurus to any
U.S. Company, failure of Laurus to give any U.S. Company notice of borrowing or
any other notice, any failure of Laurus to pursue to preserve its rights against
any Company, the release by Laurus of any Collateral now or thereafter acquired
from any Company, and such agreement by any Company to pay upon any notice
issued pursuant thereto is unconditional and unaffected by prior recourse by
Laurus to any Company or any Collateral for such U.S. Company’s Obligations or
the lack thereof.

 

(d)    Each
Company expressly waives any and all rights of subrogation, reimbursement,
indemnity, exoneration, contribution or any other claim which such Company may
now or hereafter have against the other or other Person directly or contingently
liable for the Obligations, or against or with respect to any other’s property
(including, without limitation, any property which is Collateral for the
Obligations), arising from the existence or performance of this Agreement, until
all Obligations have been indefeasibly paid in full and this Agreement has been
irrevocably terminated.

 

(e)    Companies
represent and warrant to Laurus that (i) Companies have one or more common
shareholders, directors and officers, (ii) the businesses and corporate
activities of Companies are closely related to, and substantially benefit, the
business and corporate activities of Companies, (iii) the financial and other
operations of Companies are performed on a combined basis as if Companies
constituted a consolidated corporate group, (iv) Companies will receive a
substantial economic benefit from entering into this Agreement and will receive
a substantial economic benefit from the application of each Loan hereunder, in
each case, whether or not such amount is used directly by any Company and (v)
all requests for Loans hereunder by the Company Agent are for the exclusive and
indivisible benefit of Companies as though, for purposes of this Agreement,
Companies constituted a single entity.

 

	
      29.
	
      Notices.

 

-40-

 

Any
notice or request hereunder may be given to any Company, Company Agent or Laurus
at the respective addresses set forth below or as may hereafter be specified in
a notice designated as a change of address under this Section. Any notice or
request hereunder shall be given by registered or certified mail, return receipt
requested, hand delivery, overnight mail or telecopy (confirmed by mail).
Notices and requests shall be, in the case of those by hand delivery, deemed to
have been given when delivered to any officer of the party to whom it is
addressed, in the case of those by mail or overnight mail, deemed to have been
given three (3) Business Days after the date when deposited in the mail or with
the overnight mail carrier, and, in the case of a telecopy, when
confirmed.

 

Notices
shall be provided as follows:

 

	
      If
      to Laurus:
	
      Laurus
      Master Fund, Ltd.

      c/o
      Laurus Capital Management, L.L.C.

      825
      Third Avenue 14th Fl.

      New
      York, New York 10022

	 	
      Attention:
	
      John
      E. Tucker, Esq.

	 	
      Telephone:
	
      (212)
      541-4434

	 	
      Telecopier:
	
      (212)
      541-5800

	 	 
	
      With
      a copy to
	 
	 	 
	 	
      Attention:
	 
	 	
      Telephone:
	 
	 	
      Facsimile:
	 
	 	 	 
	
      If
      to any Company,

      or
      Company Agent:
	
      House
      of Brussels Chocolates Inc.

      One
      Riverway, Suite 1700

      Houston,
      Texas 77056

       

	 	
      Attention:
	
      Robert
      Wesolek, Chief Financial Officer

	 	
      Telephone:
	 
	 	
      Facsimile:
	 
	
      With
      a copy to:
	
      Axelrod
      Smith & Kirshbaum

      5300
      Memorial Drive, Suite 700

	 	
      Attention:
	
      Robert
      D. Axelrod

	 	
      Telephone:
	
      713-861-1996

	 	
      Facsimile:
	
      713-552-0202

 

or such
other address as may be designated in writing hereafter in accordance with this
Section 29 by such
Person.

 

	
      30.
	
      Governing
      Law, Jurisdiction and Waiver of Jury Trial.

 

(a)    THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.

 

-41-

 

(b)    EACH
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND,
AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE
ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT
LAURUS AND EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE
TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW
YORK; AND FURTHER PROVIDED, THAT
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM
BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT
THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LAURUS.
EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN
ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES
ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM
NON CONVENIENS. EACH
COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.

 

(c)    THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO
TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS, AND/OR ANY
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

 

	
      31.
	
      Judgment
      Currency. 

 

If, for
the purpose of obtaining or enforcing judgment against any Company in any court
in any jurisdiction, it becomes necessary to convert into any other currency
(such other currency being hereinafter in this section referred to as the
“Judgment Currency”) an amount due under this Security Agreement or any
Ancillary Agreement in any currency (the “Obligation Currency”) other than the
Judgment Currency, the conversion shall be made at the rate of exchange
prevailing on the business day immediately preceding (a) the date of actual
payment of the amount due, in the case of any proceeding in the courts of New
York or in the courts of any other jurisdiction that will give effect to such
conversion being made on such date, or (b) the date on which the foreign court
determines, in the case of any proceeding in the courts of any other
jurisdiction (the applicable date as of which such conversion is made pursuant
to this section being hereinafter in this section referred to as the “Judgment
Conversion Date”).

 

-42-

 

If, in
the case of any proceeding in the court of any jurisdiction referred to in the
preceding paragraph, there is a change in the rate of exchange prevailing
between the Judgment Conversion Date and the date of actual receipt of the
amount due in immediately available funds, such Company shall pay such
additional amount (if any, but in any event not a lesser amount) as may be
necessary to ensure that the amount actually received in the Judgment Currency,
when converted at the rate of exchange prevailing on the date of payment, will
produce the amount of the Obligation Currency which could have been purchased
with the amount of the Judgment Currency stipulated in the judgment or judicial
order at the rate of exchange prevailing on the Judgment Conversion Date. Any
amount due from any such Company under this section shall be due as a separate
debt and shall not be affected by judgment being obtained for any other amounts
due under or in respect of this Security Agreement or any Ancillary
Agreement.

 

	
      32.
	
      Limitation
      of Liability.

 

Each
Company acknowledges and understands that in order to assure repayment of the
Obligations hereunder Laurus may be required to exercise any and all of Laurus’
rights and remedies hereunder and agrees that, except as limited by applicable
law, neither Laurus nor any of Laurus’ agents shall be liable for acts taken or
omissions made in connection herewith or therewith except for actual bad
faith.

 

	
      33.
	
      Entire
      Understanding.

 

This
Agreement and the Ancillary Agreements contain the entire understanding among
each Company and Laurus as to the subject matter hereof and thereof and any
promises, representations, warranties or guarantees not herein contained shall
have no force and effect unless in writing, signed by each Company’s and Laurus’
respective officers. Neither this Agreement, the Ancillary Agreements, nor any
portion or provisions thereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged.

 

	
      34.
	
      Severability.

 

Wherever
possible each provision of this Agreement or the Ancillary Agreements shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement or the Ancillary Agreements shall be
prohibited by or invalid under applicable law such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions
thereof.

 

	
      35.
	
      Captions.

 

All
captions are and shall be without substantive meaning or content of any kind
whatsoever.

 

	
      36.
	
      Counterparts;
      Telecopier Signatures.

 

-43-

 

This
Agreement may be executed in one or more counterparts, each of which shall
constitute an original and all of which taken together shall constitute one and
the same agreement. Any signature delivered by a party via telecopier
transmission shall be deemed to be any original signature hereto.

 

	
      37.
	
      Construction.

 

The
parties acknowledge that each party and its counsel have reviewed this Agreement
and that the normal rule of construction to the effect that any ambiguities are
to be resolved against the drafting party shall not be employed in the
interpretation of this Agreement or any amendments, schedules or exhibits
thereto.

 

	
      38.
	
      Publicity.

 

Each
Company hereby authorizes Laurus to make appropriate announcements of the
financial arrangement entered into by and among each Company and Laurus,
including, without limitation, announcements which are commonly known as
tombstones, in such publications and to such selected parties as Laurus shall in
its sole and absolute discretion deem appropriate, or as required by applicable
law.

 

38. Joinder. It is
understood and agreed that any Person that desires to become a Company
hereunder, or is required to execute a counterpart of this Agreement after the
date hereof pursuant to the requirements of this Agreement or any Ancillary
Agreement, shall become a Company hereunder by (a) executing a Joinder Agreement
in form and substance satisfactory to Laurus, (b) delivering supplements to such
exhibits and annexes to this Agreement and the Ancillary Agreements as Laurus
shall reasonably request and (c) taking all actions as specified in this
Agreement as would have been taken by such Company had it been an original party
to this Agreement, in each case with all documents required above to be
delivered to Laurus and with all documents and actions required above to be
taken to the reasonable satisfaction of Laurus.

 

	
      39.
	
      Legends.

 

The
Securities shall bear legends as follows;

 

(a)    The Notes
shall bear substantially the following legend: 

 

“THIS
NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO HOUSE OF BRUSSELS CHOCOLATES INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

-44-

 

(b)    Any
shares of Common Stock issued pursuant to conversion of the Notes or exercise of
the Warrants, shall bear a legend which shall be in substantially the following
form until such shares are covered by an effective registration statement filed
with the SEC:

 

“THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO HOUSE OF BRUSSELS CHOCOLATES INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.”

 

(c)    The
Warrants shall bear substantially the following legend:

 

“THIS
WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE
UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO HOUSE OF BRUSSELS
CHOCOLATES INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

[Balance
of page intentionally left blank; signature page follows.]

 

IN
WITNESS WHEREOF, the parties have executed this Security Agreement as of the
date first written above.

 

-45-

 

 

 

	 	 	 
	 	
      HOUSE
      OF BRUSSELS CHOCOLATES INC.

	 
 	 
 	 
 
	 	By:  	
	 	
      

    
	 	Name
	 	Title

 

	 	 	 
	 	
      HOUSE
      OF BRUSSELS HOLDINGS LTD.

	 
 	 
 	 
 
	 	By:  	
	 	
      

    
	 	Name
	 	Title

 

	 	 	 
	 	
      
      BRUSSELS
      CHOCOLATES
    LTD.

	 
 	 
 	 
 
	 	By:  	
	 	
      

    
	 	Name
	 	Title

 

	 	 	 
	 	
      HOUSE
      OF BRUSSELS CHOCOLATES (USA)
  LTD.

	 
 	 
 	 
 
	 	By:  	
	 	
      

    
	 	Name
	 	Title

 

	 	 	 
	 	
      DEBAS
      CHOCOLATE INC.

	 
 	 
 	 
 
	 	By:  	
	 	
      

    
	 	Name
	 	Title

 

 

 

 

 

-46-

 

 

 

	 	 	 
	 	
      CHOCOMED,
      INC.

	 
 	 
 	 
 
	 	By:  	
	 	
      

    
	 	Name
	 	Title

 

	 	 	 
	 	
      LAURUS
      MASTER FUND, LTD.

	 
 	 
 	 
 
	 	By:  	
	 	
      

    
	 	Name
	 	Title

 

 

Annex
A - Definitions

 

“Account
Debtor” means
any Person who is or may be obligated with respect to, or on account of, an
Account.

 

“Accountants” has the
meaning given to such term in Section 11(a).

 

“Accounts” means
all “accounts”, as such term is defined in the UCC, and as such term is defined
in the PPSA, now owned or hereafter acquired by any Person, including: (a) all
accounts receivable, other receivables, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper or
Instruments) (including any such obligations that may be characterized as an
account or contract right under the UCC or the PPSA); (b) all of such Person’s
rights in, to and under all purchase orders or receipts for goods or services;
(c) all of such Person’s rights to any goods represented by any of the foregoing
(including unpaid sellers’ rights of rescission, replevin, reclamation and
stoppage in transit and rights to returned, reclaimed or repossessed goods); (d)
all rights to payment due to such Person for Goods or other property sold,
leased, licensed, assigned or otherwise disposed of, for a policy of insurance
issued or to be issued, for a secondary obligation incurred or to be incurred,
for energy provided or to be provided, for the use or hire of a vessel under a
charter or other contract, arising out of the use of a credit card or charge
card, or for services rendered or to be rendered by such Person or in connection
with any other transaction (whether or not yet earned by performance on the part
of such Person); and (e) all collateral security of any kind given by any
Account Debtor or any other Person with respect to any of the foregoing.

 

“Accounts
Availability” means
the amount of Loans against Eligible Accounts Laurus may from time to time make
available to Company Agent up to ninety percent (90%) of the net face amount of
Eligible Accounts based on Accounts of Companies.

 

“Affiliate” means,
with respect to any Person, (a) any other Person (other than a Subsidiary)
which, directly or indirectly, is in control of, is controlled by, or is under
common control with such Person or (b) any other Person who is a director or
officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of
any Person described in clause (a) above. For the purposes of this definition,
control of a Person shall mean the power (direct or indirect) to direct or cause
the direction of the management and policies of such Person whether by contract
or otherwise.

 

“Ancillary
Agreements” means
the Notes, the Warrants, the Registration Rights Agreements, each Security
Document and all other agreements, instruments, documents, mortgages, pledges,
powers of attorney, consents, assignments, contracts, notices, security
agreements, trust agreements and guarantees whether heretofore, concurrently, or
hereafter executed by or on behalf of any Company, any of its Subsidiaries or
any other Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and Laurus, as each of the same may be
amended, supplemented, restated or otherwise modified from time to
time.

 

“Available
Minimum Borrowing” has the
meaning given such term in Section 2(a)(i).

 

-2-

 

“Balance
Sheet Date” has the
meaning given such term in Section 12(f)(ii).

 

“Books
and Records” means
all books, records, board minutes, contracts, licenses, insurance policies,
environmental audits, business plans, files, computer files, computer discs and
other data and software storage and media devices, accounting books and records,
financial statements (actual and pro forma), filings with Governmental
Authorities and any and all records and instruments relating to the Collateral
or otherwise necessary or helpful in the collection thereof or the realization
thereupon.

 

“Business
Day” means a
day on which Laurus is open for business and that is not a Saturday, a Sunday or
other day on which banks are required or permitted to be closed in the State of
New York.

 

“Canadian
Companies” shall
have the meaning set forth in Section 20(b).

 

“Canadian
Pension Plan” means any plan, program or arrangement (other than the Canada
Pension Plan) that is a pension plan for the purposes of any applicable pension
benefits legislation or any tax laws of Canada or a province thereof, whether or
not registered under any such laws, which is maintained or contributed to by, or
to which there is or may be an obligation to contribute by, any Eligible
Subsidiaries in respect of any Person’s employment in Canada with such Eligible
Subsidiary.

 

“Capital
Availability Amount” means
$2,500,000.

 

“Charter” has the
meaning given such term in Section 12(c)(iv).

 

“Chattel
Paper” means
all “chattel paper,” as such term is defined in the UCC and as such term is
defined in the PPSA, including electronic chattel paper, now owned or hereafter
acquired by any Person.

 

“Closing
Date” means
the date on which any Company shall first receive proceeds of the initial Loans
or the date hereof, if no Loan is made under the facility on the date
hereof.

 

“Code” has the
meaning given such term in Section 15(i).

 

“Collateral” means
all of each Company’s property and assets, whether real or personal, tangible or
intangible, and whether now owned or hereafter acquired, or in which it now has
or at any time in the future may acquire any right, title or interests including
all of the following property in which it now has or at any time in the future
may acquire any right, title or interest:

 

(a)    all
Inventory;

 

(b)    all
Equipment;

 

(c)    all
Fixtures;

 

(d)    all
General Intangibles;

 

-3-

 

(e)    all
Accounts;

 

(f)    all
Deposit Accounts, other bank accounts and all funds on deposit
therein;

 

(g)    all
Investment Property;

 

(h)    all
Stock;

 

(i)    all
Chattel Paper;

 

(j)    all
Letter-of-Credit Rights;

 

(k)    all
Instruments;

 

(l)     all
commercial tort claims set forth on Schedule 1(A);

 

(m)    all Books
and Records;

 

(n)    all
Intellectual Property;

 

(o)    all
Supporting Obligations including letters of credit and guarantees issued in
support of Accounts, Chattel Paper, General Intangibles and Investment
Property;

 

(p)    (i) all
money, cash and cash equivalents and (ii) all cash held as cash collateral to
the extent not otherwise constituting Collateral, all other cash or property at
any time on deposit with or held by Laurus for the account of any Company
(whether for safekeeping, custody, pledge, transmission or otherwise);
and

 

(q)    all
products and Proceeds of all or any of the foregoing, tort claims and all claims
and other rights to payment including (i) insurance claims against third parties
for loss of, damage to, or destruction of, the foregoing Collateral and (ii)
payments due or to become due under leases, rentals and hires of any or all of
the foregoing and Proceeds payable under, or unearned premiums with respect to
policies of insurance in whatever form.

 

“Common
Stock” means
the shares of stock representing the Parent common equity
interests.

 

“Company
Agent” means
the Parent.

 

“Contract
Rate” has the
meaning given such term in the respective Note. 

 

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

 

“Deposit
Accounts” means
all “deposit accounts” as such term is defined in the UCC, now or hereafter held
in the name of any Person, including, without limitation, the
Lockboxes.

 

“Disclosure
Controls” has the
meaning given such term in Section 12(f)(iv).

 

-4-

 

“Documents” means
all “documents”, as such term is defined in the UCC, and all “documents of
title” as such term is defined in the PPSA, now owned or hereafter acquired by
any Person, wherever located, including all bills of lading, dock warrants, dock
receipts, warehouse receipts, and other documents of title, whether negotiable
or non-negotiable.

 

“Eligible
Accounts” means
each Account of each Company which conforms to the following criteria: (a)
shipment of the merchandise or the rendition of services has been completed; (b)
no return, rejection or repossession of the merchandise has occurred; (c)
merchandise or services shall not have been rejected or disputed by the Account
Debtor and there shall not have been asserted any offset, defense or
counterclaim; (d) continues to be in full conformity with the representations
and warranties made by such Company to Laurus with respect thereto; (e) Laurus
is, and continues to be, satisfied with the credit standing of the Account
Debtor in relation to the amount of credit extended; (f) there are no facts
existing or threatened which are likely to result in any adverse change in an
Account Debtor’s financial condition; (g) is documented by an invoice in a form
approved by Laurus and shall not be unpaid more than ninety (90) days from
invoice date; (h) not more than twenty-five percent (25%) of the unpaid amount
of invoices due from such Account Debtor remains unpaid more than ninety (90)
days from invoice date; (i) is not evidenced by chattel paper or an instrument
of any kind with respect to or in payment of the Account unless such instrument
is duly endorsed to and in possession of Laurus or represents a check in payment
of an Account; (j) the Account Debtor is located in the United States;
provided,
however, Laurus
may, from time to time, in the exercise of its sole discretion and based upon
satisfaction of certain conditions to be determined at such time by Laurus, deem
certain Accounts as Eligible Accounts notwithstanding that such Account is due
from an Account Debtor located outside of the United States; (k) Laurus has a
first priority perfected Lien in such Account and such Account is not subject to
any Lien other than Permitted Liens; (l) does not arise out of transactions with
any employee, officer, director, stockholder or Affiliate of any Company; (m) is
payable to such Company; (n) does not arise out of a bill and hold sale prior to
shipment and does not arise out of a sale to any Person to which such Company is
indebted; (o) is net of any returns, discounts, claims, credits and allowances;
(p) if the Account arises out of contracts between such Company, on the one
hand, and the United States, on the other hand, any state, or any department,
agency or instrumentality of any of them, such Company has so notified Laurus,
in writing, prior to the creation of such Account, and there has been compliance
with any governmental notice or approval requirements, including compliance with
the Federal Assignment of Claims Act; (q) is a good and valid account
representing an undisputed bona fide indebtedness incurred by the Account Debtor
therein named, for a fixed sum as set forth in the invoice relating thereto with
respect to an unconditional sale and delivery upon the stated terms of goods
sold by such Company or work, labor and/or services rendered by such Company;
(r) does not arise out of progress billings prior to completion of the order;
(s) the total unpaid Accounts from such Account Debtor does not exceed
twenty-five percent (25%) of all Eligible Accounts; (t) such Company’s right to
payment is absolute and not contingent upon the fulfillment of any condition
whatsoever; (u) such Company is able to bring suit and enforce its remedies
against the Account Debtor through judicial process; (v) does not represent
interest payments, late or finance charges owing to such Company, and (w) is
otherwise satisfactory to Laurus as determined by Laurus in the exercise of its
sole discretion. In the event any Company requests that Laurus include within
Eligible Accounts certain Accounts of one or more of such Company’s acquisition
targets, Laurus shall at the time of such request consider such inclusion, but
any such inclusion shall be at the sole option of Laurus and shall at all times
be subject to the execution and delivery to Laurus of all such documentation
(including, without limitation, guaranty and security documentation) as Laurus
may require in its sole discretion.

 

-5-

 

“Eligible
Canadian Subsidiary” shall
have the meaning set forth in the first paragraph of this
Agreement.

 

“Eligible
Subsidiary” shall
have the meaning set forth in the first paragraph of this
Agreement.

 

“Eligible
U.S. Subsidiary” shall
have the meaning set forth in the first paragraph of this
Agreement.

 

“Equipment” means
all “equipment” as such term is defined in the UCC and as such term is defined
in the PPSA, now owned or hereafter acquired by any Person, wherever located,
including any and all machinery, apparatus, equipment, fittings, furniture,
Fixtures, motor vehicles and other tangible personal property (other than
Inventory) of every kind and description that may be now or hereafter used in
such Person’s operations or that are owned by such Person or in which such
Person may have an interest, and all parts, accessories and accessions thereto
and substitutions and replacements therefor.

 

“ERISA” has the
meaning given such term in Section 12(bb).

 

“Event
of Default” means
the occurrence of any of the events set forth in Section 19.

 

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

 

“Exchange
Act Filings” has the
meaning given such term in Section 12.

 

“Financial
Reporting Controls” has the
meaning given such term in Section 12(f)(v).

 

“Fixtures” means
all “fixtures” as such term is defined in the UCC, now owned or hereafter
acquired by any Person.

 

“Formula
Amount” has the
meaning given such term in Section 2(a)(i).

 

“GAAP” means
generally accepted accounting principles, practices and procedures in effect
from time to time in the United States of America.

 

“General
Intangibles” means
all “general intangibles” as such term is defined in the UCC and all
“Intangibles” as such term is defined in the PPSA, now owned or hereafter
acquired by any Person including all right, title and interest that such Person
may now or hereafter have in or under any contract, all Payment Intangibles,
customer lists, Licenses, Intellectual Property, interests in partnerships,
joint ventures and other business associations, permits, proprietary or
confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, Software, data
bases, data, skill, expertise, experience, processes, models, drawings,
materials, Books and Records, Goodwill (including the Goodwill associated with
any Intellectual Property), all rights and claims in or under insurance policies
(including insurance for fire, damage, loss, and casualty, whether covering
personal property, real property, tangible rights or intangible rights, all
liability, life, key-person, and business interruption insurance, and all
unearned premiums), uncertificated securities, choses in action, deposit
accounts, rights to receive tax refunds and other payments, rights to received
dividends, distributions, cash, Instruments and other property in respect of or
in exchange for pledged Stock and Investment Property, and rights of
indemnification.

 

-6-

 

“Goods” means
all “goods”, as such term is defined in the UCC and as such term is defined in
the PPSA, now owned or hereafter acquired by any Person, wherever located,
including embedded software to the extent included in “goods” as defined in the
UCC, manufactured homes, standing timber that is cut and removed for sale and
unborn young of animals.

 

“Goodwill” means
all goodwill, trade secrets, proprietary or confidential information, technical
information, procedures, formulae, quality control standards, designs, operating
and training manuals, customer lists, and distribution agreements now owned or
hereafter acquired by any Person.

 

“Governmental
Authority” means
any nation or government, any state, provincial or other political subdivision
thereof, and any agency, department or other entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government. 

 

“Instruments” means
all “instruments”, as such term is defined in the UCC and as such term is
defined in the PPSA, now owned or hereafter acquired by any Person, wherever
located, including all certificated securities and all promissory notes and
other evidences of indebtedness, other than instruments that constitute, or are
a part of a group of writings that constitute, Chattel Paper.

 

“Intellectual
Property” means
any and all patents, trademarks, service marks, trade names, copyrights, trade
secrets, industrial designs, Licenses, information and other proprietary rights
and processes.

 

“Inventory” means
all “inventory”, as such term is defined in the UCC and as such term is defined
in the PPSA, now owned or hereafter acquired by any Person, wherever located,
including all inventory, merchandise, goods and other personal property that are
held by or on behalf of such Person for sale or lease or are furnished or are to
be furnished under a contract of service or that constitute raw materials, work
in process, finished goods, returned goods, or materials or supplies of any
kind, nature or description used or consumed or to be used or consumed in such
Person’s business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including all supplies and embedded
software.

 

“Investment
Property” means
all “investment property”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located.

 

“Letter-of-Credit
Rights” means
“letter-of-credit rights” as such term is defined in the UCC, now owned or
hereafter acquired by any Person, including rights to payment or performance
under a letter of credit, whether or not such Person, as beneficiary, has
demanded or is entitled to demand payment or performance.

 

-7-

 

“License” means
any rights under any written agreement now or hereafter acquired by any Person
to use any trademark, trademark registration, copyright, copyright registration
or invention for which a patent is in existence or other license of rights or
interests now held or hereafter acquired by any Person.

 

“Lien” means
any mortgage, security deed, deed of trust, pledge, hypothecation, assignment,
security interest, lien (whether statutory or otherwise), charge, claim or
encumbrance, or preference, priority or other security agreement or preferential
arrangement held or asserted in respect of any asset of any kind or nature
whatsoever including any conditional sale or other title retention agreement,
any lease having substantially the same economic effect as any of the foregoing,
and the filing of, or agreement to give, any financing statement under the UCC,
PPSA or comparable law of any jurisdiction.

 

“Loans” has the
meaning given such term in Section 2(a)(i)) and
shall include all other extensions of credit hereunder and under any Ancillary
Agreement.

 

“Lockboxes” has the
meaning given such term in Section 8(a).

 

“Material
Adverse Effect” means a
material adverse effect on (a) the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of any Company or
any of its Subsidiaries (taken individually or as a whole), (b) any Company’s or
any of its Subsidiary’s ability to pay or perform the Obligations in accordance
with the terms hereof or any Ancillary Agreement, (c) the value of the
Collateral, the Liens on the Collateral or the priority of any such Lien or (d)
the practical realization of the benefits of Laurus’ rights and remedies under
this Agreement and the Ancillary Agreements.

 

“Minimum
Borrowing Amount” means
(i) with respect to the Minimum Borrowing Note issued on the date hereof,
$1,000,000 and (ii) with respect to each additional Minimum Borrowing Note
issued after the date hereof, $500,000.

 

“Minimum
Borrowing Notes” means
that certain Secured Convertible Minimum Borrowing Note dated as of the Closing
Date made by U.S. Companies in favour of Laurus evidencing the Minimum Borrowing
Amount and each other Secured Convertible Minimum Borrowing Note made by U.S.
Companies in favour of Laurus which evidences the Minimum Borrowing Amount, as
each of the same may be amended, supplemented, restated and/or otherwise
modified from time to time.

 

“NASD” has the
meaning given such term in Section 13(b).

 

“Note
Shares” has the
meaning given such term in Section 12(a).

 

“Notes” means
the Minimum Borrowing Notes and the Revolving Note made by U.S. Companies in
favor of Laurus in connection with the transactions contemplated hereby, as each
of the same may be amended, supplemented, restated and/or otherwise modified
from time to time.

 

-8-

 

“Obligations” means
all Loans, all advances, debts, liabilities, obligations, covenants and duties
owing by each Company and each of its Subsidiaries to Laurus (or any corporation
that directly or indirectly controls or is controlled by or is under common
control with Laurus) of every kind and description (whether or not evidenced by
any note or other instrument and whether or not for the payment of money or the
performance or non-performance of any act), direct or indirect, absolute or
contingent, due or to become due, contractual or tortious, liquidated or
unliquidated, whether existing by operation of law or otherwise now existing or
hereafter arising including any debt, liability or obligation owing from any
Company and/or each of its Subsidiaries to others which Laurus may have obtained
by assignment or otherwise and further including all interest (including
interest accruing at the then applicable rate provided in this Agreement after
the maturity of the Loans and interest accruing at the then applicable rate
provided in this Agreement after the filing of any petition in bankruptcy, or
the commencement of any insolvency, reorganization or like proceeding, whether
or not a claim for post-filing or post-petition interest is allowed or allowable
in such proceeding), charges or any other payments each Company and each of its
Subsidiaries is required to make by law or otherwise arising under or as a
result of this Agreement, the Ancillary Agreements or otherwise, together with
all reasonable expenses and reasonable attorneys’ fees chargeable to Companies’
or any of their Subsidiaries’ accounts or incurred by Laurus in connection
therewith.

 

“PPSA” means
the Personal Property Security Act (British Columbia), as amended from time to
time, including amendments thereto and any Act substituted therefore and
amendment thereto.

 

“Payment
Intangibles” means
all “payment intangibles” as such term is defined in the UCC, now owned or
hereafter acquired by any Person, including, a General Intangible under which
the Account Debtor’s principal obligation is a monetary obligation.

 

“Permitted
Liens” means
(a) Liens of carriers, warehousemen, artisans, bailees, mechanics and
materialmen incurred in the ordinary course of business securing sums not
overdue; (b) Liens incurred in the ordinary course of business in connection
with worker’s compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (i) not
overdue or (ii) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of the Companies and
their Subsidiaries, as applicable, in conformity with GAAP; (c) Liens in favor
of Laurus; (d) Liens for taxes (i) not yet due or (ii) being diligently
contested in good faith by appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the books of the Companies and
their Subsidiaries, as applicable, in conformity with GAAP; provided, that, the
Lien shall have no effect on the priority of Liens in favor of Laurus or the
value of the assets in which Laurus has a Lien; (e) Purchase Money Liens
securing Purchase Money Indebtedness to the extent permitted in this Agreement
and (f) Liens specified on Schedule 2 hereto.

 

“Person” means
any individual, sole proprietorship, partnership, limited liability partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, public benefit corporation, entity or
government (whether federal, state, county, city, municipal or otherwise,
including any instrumentality, division, agency, body or department thereof),
and shall include such Person’s successors and assigns.

 

-9-

 

“Principal
Market” means
the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market
System, American Stock Exchange or New York Stock Exchange (whichever of the
foregoing is at the time the principal trading exchange or market for the Common
Stock).

 

“Proceeds” means
“proceeds”, as such term is defined in the UCC and as such term is defined in
the PPSA, in any event, shall include: (a) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to any Company or any other
Person from time to time with respect to any Collateral; (b) any and all
payments (in any form whatsoever) made or due and payable to any Company from
time to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of any Collateral by any governmental body, governmental
authority, bureau or agency (or any person acting under color of governmental
authority); (c) any claim of any Company against third parties (i) for past,
present or future infringement of any Intellectual Property or (ii) for past,
present or future infringement or dilution of any trademark or trademark license
or for injury to the goodwill associated with any trademark, trademark
registration or trademark licensed under any trademark License; (d) any
recoveries by any Company against third parties with respect to any litigation
or dispute concerning any Collateral, including claims arising out of the loss
or nonconformity of, interference with the use of, defects in, or infringement
of rights in, or damage to, Collateral; (e) all amounts collected on, or
distributed on account of, other Collateral, including dividends, interest,
distributions and Instruments with respect to Investment Property and pledged
Stock; and (f) any and all other amounts, rights to payment or other property
acquired upon the sale, lease, license, exchange or other disposition of
Collateral and all rights arising out of Collateral.

 

“Purchase
Money Indebtedness” means
(a) any indebtedness incurred for the payment of all or any part of the purchase
price of any fixed asset, including indebtedness under capitalized leases, (b)
any indebtedness incurred for the sole purpose of financing or refinancing all
or any part of the purchase price of any fixed asset, and (c) any renewals,
extensions or refinancings thereof (but not any increases in the principal
amounts thereof outstanding at that time).

 

“Purchase
Money Lien” means
any Lien upon any fixed assets that secures the Purchase Money Indebtedness
related thereto but only if such Lien shall at all times be confined solely to
the asset the purchase price of which was financed or refinanced through the
incurrence of the Purchase Money Indebtedness secured by such Lien and only if
such Lien secures only such Purchase Money Indebtedness.

 

“Registration
Rights Agreements” means
that certain Minimum Borrowing Note Registration Rights Agreement dated as of
the Closing Date by and between the Parent and Laurus and each other
registration rights agreement by and between the Parent and Laurus, as each of
the same may be amended, modified and supplemented from time to
time.

 

“Revolving
Note” means
that certain Secured Revolving Note dated as of the Closing Date made by the
U.S. Companies in favour of Laurus in the original principal amount of
$2,500,000, as the same may be amended, supplemented, restated and/or otherwise
modified from time to time.

 

“SEC” means
the Securities and Exchange Commission.

 

-10-

 

“SEC
Reports” has the
meaning given such term in Section 12(u).

 

“Securities” means
the Notes and the Warrants and the shares of Common Stock which may be issued
pursuant to conversion of such Notes in whole or in part or exercise of such
Warrants.

 

“Securities
Act” has the
meaning given such term in Section 12(r).

 

“Security
Documents” means
all security agreements, mortgages, cash collateral deposit letters, pledges and
other agreements which are executed by any Company or any of its Subsidiaries in
favour of Laurus.

 

“Software” means
all “software” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, including all computer programs and all supporting
information provided in connection with a transaction related to any
program.

 

“Stock” means
all “security” as such term is defined in the PPSA andall certificated and
uncertificated shares, options, warrants, membership interests, general or
limited partnership interests, participation or other equivalents (regardless of
how designated) of or in a corporation, partnership, limited liability company
or equivalent entity whether voting or nonvoting, including common stock,
preferred stock, or any other “equity security” (as such term is defined in Rule
3a11-1 of the General Rules and Regulations promulgated by the SEC under the
Securities Exchange Act of 1934).

 

“Subsidiary” means,
with respect to any Person, (i) any other Person whose shares of stock or other
ownership interests having ordinary voting power (other than stock or other
ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the directors or other governing body of
such other Person, are owned, directly or indirectly, by such Person or (ii) any
other Person in which such Person owns, directly or indirectly, more than 50% of
the equity interests at such time.

 

“Supporting
Obligations” means
all “supporting obligations” as such term is defined in the UCC.

 

“Term” means
the Closing Date through the close of business on the day immediately preceding
the third anniversary of the Closing Date, subject to acceleration at the option
of Laurus upon the occurrence of an Event of Default hereunder or other
termination hereunder.

 

“UCC” means
the Uniform Commercial Code as the same may, from time to time be in effect in
the State of New York; provided, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection or priority of, or
remedies with respect to, Laurus’ Lien on any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than the State of
New York, the term “UCC” shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions of this Agreement
relating to such attachment, perfection, priority or remedies and for purposes
of definitions related to such provisions; provided further, that to the extent
that UCC is used to define any term herein or in any Ancillary Agreement and
such term is defined differently in different Articles or Divisions of the UCC,
the definition of such term contained in Article or Division 9 shall
govern.

 

-11-

 

“Warrant
Shares” has the
meaning given such term in Section 12(a).

 

“Warrants” means
that certain Common Stock Purchase Warrant dated as of the Closing Date made by
the Parent in favor of Laurus and each other warrant made by the Parent in favor
Laurus, as each of the same may be amended, restated, modified and/or
supplemented from time to time.

 

 

 

Exhibit
A

 

Eligible
Subsidiaries

 

	 	
      I.
	
      Eligible
      U.S. Subsidiaries

 

	 	
      a.
	
      House
      of Brussels Chocolates (USA) Ltd., a Nevada
corporation

 

	 	
      b.
	
      DeBas
      Chocolate Inc., a California corporation

 

	 	
      c.
	
      ChocoMed,
      Inc., a Nevada corporation

 

 

	 	
      II.
	
      Eligible
      Canadian Subsidiaries

 

	 	
      a.
	
      House
      of Brussels Holdings Ltd., a corporation organized under the laws of
      British Columbia.

 

	 	
      b.
	
      Brussels
      Chocolate Ltd., a corporation organized under the laws of British
      Columbia.

 

 

Exhibit
B

 

Borrowing
Base Certificate

 

[To be
inserted]

 

 

 

 

SECURITY
AGREEMENT

 

LAURUS
MASTER FUND, LTD.,

 

 

 

HOUSE OF
BRUSSELS CHOCOLATES INC.,

 

House of
Brussels Holdings Ltd.,

 

Brussels
Chocolates Ltd.,

 

House of
Brussels (USA) Ltd.,

 

DeBas
Chocolate Inc.

 

and

 

ChocoMed,
Inc.

 

Dated as
of: March 29, 2005

 

 

	
      TABLE
      OF CONTENTS

	 	 	
      Page

	
      1.
	
      General
      Definitions and Terms; Rules of Construction.
	
      1

	 	 	 
	
      2.
	
      Loan
      Facility.
	
      2

	 	 	 
	
      3.
	
      Repayment
      of the Loans.
	
      4

	 	 	 
	
      4.
	
      Procedure
      for Loans.
	
      4

	 	 	 
	
      5.
	
      Interest
      and Payments.
	
      5

	 	 	 
	
      6.
	
      Security
      Interest.
	
      7

	 	 	 
	
      7.
	
      Representations,
      Warranties and Covenants Concerning the Collateral.
	
      8

	 	 	 
	
      8.
	
      Payment
      of Accounts.
	
      10

	 	 	 
	
      9.
	
      Collection
      and Maintenance of Collateral.
	
      11

	 	 	 
	
      10.
	
      Inspections
      and Appraisals.
	
      11

	 	 	 
	
      11.
	
      Financial
      Reporting.
	
      11

	 	 	 
	
      12.
	
      Additional
      Representations and Warranties.
	
      12

	 	 	 
	
      13.
	
      Covenants.
	
      23

	 	 	 
	
      14.
	
      Further
      Assurances.
	
      29

	 	 	 
	
      15.
	
      Representations,
      Warranties and Covenants of Laurus.
	
      29

	 	 	 
	
      16.
	
      Power
      of Attorney.
	
      31

	 	 	 
	
      17.
	
      Term
      of Agreement.
	
      32

	 	 	 
	
      18.
	
      Termination
      of Lien.
	
      32

	 	 	 
	
      19.
	
      Events
      of Default.
	
      32

	 	 	 
	
      20.
	
      Remedies.
	
      34

	 	 	 
	
      21.
	
      Waivers.
	
      36

	 	 	 
	
      22.
	
      Expenses.
	
      36

	 	 	 
	
      23.
	
      Assignment
      By Laurus.
	
      37

	 	 	 
	
      24.
	
      No
      Waiver; Cumulative Remedies.
	
      37

 

-ii-

 

	 	 	 
	
      25.
	
      Application
      of Payments.
	
      38

	 	 	 
	
      26.
	
      Indemnity.
	
      38

	 	 	 
	
      27.
	
      Revival.
	
      38

	 	 	 
	
      28.
	
      Borrowing
      Agency Provisions.
	
      38

	 	 	 
	
      29.
	
      Notices.
	
      39

	 	 	 
	
      30.
	
      Governing
      Law, Jurisdiction and Waiver of Jury Trial.
	
      40

	 	 	 
	
      31.
	
      Judgment
      Currency.
	
      41

	 	 	 
	
      32.
	
      Limitation
      of Liability.
	
      42

	 	 	 
	
      33.
	
      Entire
      Understanding.
	
      42

	 	 	 
	
      34.
	
      Severability.
	
      42

	 	 	 
	
      35.
	
      Captions.
	
      42

	 	 	 
	
      36.
	
      Counterparts;
      Telecopier Signatures.
	
      42

	 	 	 
	
      37.
	
      Construction.
	
      43

	 	 	 
	
      38.
	
      Publicity.
	
      43

	 	 	 
	
      39.
	
      Legends.
	
      43

-iii-

SECURITY
AGREEMENT

BETWEEN
LAURUS MASTER FUND, LTD., 

CERTAIN
SUBSIDIARIES OF HOUSE OF BRUSSELS CHOCOLATES, INC.

AND
HOUSE OF BRUSSELS CHOCOLATES, INC

EXHIBIT
A

Eligible
Subsidiaries

 

 

	 	
      III.
	
      Eligible
      U.S. Subsidiaries

 

	 	
      a.
	
      House
      of Brussels Chocolates (USA) Ltd., a Nevada
corporation

 

	 	
      b.
	
      DeBas
      Chocolate Inc., a California corporation

 

	 	
      c.
	
      ChocoMed,
      Inc., a Nevada corporation

 

 

	 	
      IV.
	
      Eligible
      Canadian Subsidiaries

 

	 	
      a.
	
      House
      of Brussels Holdings Ltd., a corporation organized under the laws of
      British Columbia, Canada.

 

	 	
      b.
	
      Brussels
      Chocolate Ltd., a corporation organized under the laws of British
      Columbia, Canada.

 

-iv-

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