Document:

securityagreement.htm

    SECURITY
      AGREEMENT

     

    This
      SECURITY AGREEMENT, dated as of February 13, 2008 (as the same may from time
      to
      time be amended, supplemented or otherwise modified, this “Security
      Agreement”), by and between the individuals and entities set forth on the
      signature pages hereto (the “Secured Party”) and Auriga Laboratories,
      Inc., a Delaware corporation and all of the subsidiaries of the Company
      (collectively, the “Debtor”).

     

    W
      I T
      N E S S E T H:

     

    WHEREAS,
      the Company is engaged in an offering (the “Offering”) of up to $750,000
      aggregate principal amount of its senior secured notes (collectively, the
“Notes”); and

     

    WHEREAS,
      the Secured Party has agreed to purchase Notes; and

     

    WHEREAS,
      it is a condition precedent to the obligations of each Secured Party to acquire
      Notes that, interalia, the Debtor execute and deliver this
      Security Agreement to the Secured Party.

     

    NOW,
      THEREFORE, the parties hereto hereby agree as follows:

     

    ARTICLE
      I                                

     

    

     

    DEFINITIONS

     

    1.1  Defined
      Terms. As used herein, capitalized terms defined in this Agreement and not
      otherwise defined herein are used herein as so defined.

     

    “Account
      Debtor” shall mean the person who is obligated on a Receivable.

     

    “Accounts”
      shall mean “accounts” as such term is defined in the UCC.

     

    “Chattel
      Paper” shall mean “chattel paper” as such term is defined in the
      UCC.

     

    “Collateral”
      shall have the meaning assigned to it in Article II hereof.

     

    “Collateral
      Records” shall mean books, records, computer software, computer printouts,
      customer lists, blueprints, technical specifications, manuals, and similar
      items
      which relate to any Collateral other than such items obtained under license
      or
      franchise security agreements which prohibit assignment or disclosure of such
      items.

     

    “Commercial
      Tort Claims” shall mean “commercial tort claims” as defined in the
      UCC.

     

    “Deposit
      Account” shall mean a “deposit account” as defined in the UCC.

     

    “Documents”
      shall mean “documents” as defined as in the UCC.

     

    “Equipment”
      shall mean “equipment” as defined in the UCC.

     

    “Event
      of Default” shall have the meaning assigned to it in the Notes.

     

    “Financial
      Assets” shall mean “financial assets” as defined in the UCC.

     

    “General
      Intangibles” shall mean “general intangibles” as such term is defined in the
      UCC.

     

    “Goods”
      shall mean “goods” as defined in the UCC.

     

    “Instruments”
      shall mean instruments as defined in the UCC.

     

    “Inventory”
      shall mean “inventory” as such term is defined in the UCC, including without
      limitation, all goods (whether such goods are in the possession of the Debtor
      or
      of a bailee or other Person for sale, lease, storage, transit, processing,
      use
      or otherwise and whether consisting of whole goods, spare parts, components,
      supplies, materials or consigned or returned or repossessed goods), including
      without limitation, all such goods which are held for sale or lease or are
      to be
      furnished (or which have been furnished) under any contract of service or which
      are raw materials or work in progress or materials used or consumed in the
      Debtor’s business.

     

    “Investment
      Property” shall mean “investment property” as such term is defined in the
      UCC.

     

    “Lien”
      shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement,
      encumbrance, lien (statutory or other), or preference, priority or other
      security agreement of any kind or nature whatsoever, including, without
      limitation, the filing of any financing statement or similar instrument under
      the UCC or comparable law of any jurisdiction, domestic or foreign.

     

    “Permitted
      Liens” shall mean any of the following (1) Liens for taxes, fees,
      assessments or other governmental charges which are not yet due and payable
      or
      which are being contested in good faith with a reserve or other appropriate
      provision having been made therefor; (2)  Liens incurred or deposits made
      in the ordinary course of business in connection with workers’ compensation,
      unemployment insurance and other types of social security; (3) easements,
      reservations, rights of way, restrictions, minor defects or irregularities
      in
      title and other similar Liens not interfering in any material respect with
      the
      ordinary conduct of the business of the Debtor and not adversely affecting
      the
      Lien of the Secured Party in the Collateral; (4) Liens in favor of the
      Secured Party; and (5) Liens in favor of a maker of a asset based line of
      credit or credit facility after the date hereof and not to exceed $1.5 million
      in the aggregate or a term loan(s) after the date hereof and not to exceed
      $1.0
      million in the aggregate.

     

    “Person”
      shall mean and include any individual, partnership, joint venture, firm,
      corporation, association, trust or other enterprise or any government or
      political subdivision or agency, department or instrumentality
      thereof.

     

    “Proceeds”
      shall mean “proceeds” as such term is defined in the UCC.

     

    “Receivables”
      shall mean all rights to payment for goods sold or leased or services rendered,
      whether or not earned by performance and all rights in respect of the Account
      Debtor, including without limitation, all such rights in which the Debtor has
      any right, title or interest by reason of the purchase thereof by the
      Debtor.

     

    “Receivables
      Records” shall mean (a) all original copies of all documents,
      instruments or other writings evidencing the Receivables, (b) all books,
      correspondence, credit or other files, records, ledger sheets or cards,
      invoices, and other papers relating to Receivables, including without limitation
      all tapes, cards, computer tapes, computer discs, computer runs, record keeping
      systems and other papers and documents relating to the Receivables, whether
      in
      the possession or under the control of the Debtor or any computer bureau or
      agent from time to time acting for the Debtor or otherwise, (c) all
      evidences of the filing of financing statements and the registration of other
      instruments in connection therewith and amendments, supplements or other
      modifications thereto, notices to other creditors or secured parties, and
      certificates, acknowledgments, or other writings, including without limitation
      lien search reports, from filing or other registration officers, (d) all
      credit information, reports and memoranda relating thereto, and (e) all
      other written or non-written forms of information related in any way to the
      foregoing or any Receivable.

     

    “Secured
      Obligations” shall mean all obligations, liabilities and indebtedness of
      every nature of the Debtor to the Secured Party, now existing or hereafter
      incurred, arising under or in connection with the Notes and this Security
      Agreement, as they may be amended, restated, supplemented or otherwise modified
      from time to time.

     

    “UCC”
      shall mean the Uniform Commercial Code as the same may, from time to time,
      be in
      effect in the State of California; provided, however, in the event that any
      or
      all of the attachment, perfection or priority of the Secured Party’s security
      interest in any Collateral is governed by the Uniform Commercial Code as in
      effect in a jurisdiction other than the state of incorporation of the Debtor,
      the term “UCC” shall mean the Uniform Commercial Code as in effect in such other
      jurisdiction for purposes of the provisions hereof relating to such attachment,
      perfection of priority and for purposes of definitions related to such
      provisions.

     

    ARTICLE
      II                                

     

    

     

    GRANT
      OF
      SECURITY INTERESTS

     

    As
      security for the timely and complete payment and performance in full of all
      the
      Secured Obligations, the Debtor hereby unconditionally and irrevocably assigns,
      conveys, mortgages, pledges, hypothecates and transfers to the Secured Party
      and
      hereby grants to the Secured Party a continuing and perfected first priority
      senior security interest in and to, a lien on and a right of set-off against
      all
      of the Debtor’s right, title and interest in, to and under the following, in
      each case, whether now owned or existing or hereafter acquired or arising,
      and
      wherever located (all of which being hereinafter collectively called the
“Collateral”):

     

    All
      Goods
      (including, without limitation, Inventory and Equipment, Accounts, Receivables
      Records, Collateral Records, Investment Property, Financial Assets, Deposit
      Accounts, money, General Intangibles, Chattel Paper, Commercial Tort Claims
      and
      Proceeds of any and all of the foregoing).

     

    ARTICLE
      III                                

     

    

     

    RIGHTS
      OF
      THE SECURED PARTY; COLLECTION OF ACCOUNTS.

     

    
 

     

    (a)  The
      Secured Party may, at any time following the occurrence and during the
      continuance of any Event of Default which remains uncured for thirty (30) days
      after its occurrence, without notice to Debtor, notify Account Debtors of Debtor
      that the Accounts and the right, title and interest of the Debtor in and under
      such Accounts have been assigned to the Secured Party and that payments shall
      be
      made directly to the Secured Party.  Upon the request of the Secured
      Party, the Debtor shall so notify such Account Debtors.  Following the
      occurrence and during the continuance of any Event of Default, the Secured
      Party
      may, in its name or in the name of others, communicate with such Account Debtors
      to verify with such parties, to the Secured Party’s reasonable satisfaction, the
      existence, amount and terms of any such Accounts.

     

    ARTICLE
      IV                                

     

    

     

    REPRESENTATIONS
      AND WARRANTIES

     

    The
      Debtor hereby represents and warrants to the Secured Party, which
      representations and warranties shall survive execution and delivery of this
      Security Agreement, as follows:

     

    4.1  Validity,
      Perfection and Priority.

     

    (a)  The
      security interests in the Collateral granted to the Secured Party hereunder
      constitute valid and continuing security interests in the Collateral;
      and

     

    (b)  upon
      (i) filing financing statements (on Form UCC-1) naming the Debtor as
“debtor” and the Secured Party as “Secured Party” in the filing offices of the
      Secretary of State of the State of California, the security interests in the
      Collateral (other than money, registered copyrights, deposit accounts or
      letter-of-credit rights) granted to the Secured Party hereunder will constitute
      perfected security interests superior and prior to all Liens, rights or claims
      with respect to the Collateral of all other Persons, except for Permitted
      Liens.

     

    4.2  No
      Liens; Other Financing Statements.

     

    (a)  The
      Debtor is the sole legal and equitable owner of each item of Collateral in
      which
      it purports to grant a security interest hereunder, and, as to all Collateral
      whether now existing or hereafter acquired, will continue to own each item
      of
      the Collateral free and clear of any and all Liens, rights or claims of all
      other Persons, except for Permitted Liens, and the Debtor shall defend the
      Collateral against all claims and demands of all Persons at any time claiming
      the same or any interest therein materially adverse to the Secured
      Party.

     

    (b)  No
      financing statement or other evidence of Lien covering or purporting to cover
      any of the Collateral is on file in any public office other than
      (i) financing statements filed in connection with the security interests
      granted to the Secured Party hereunder, (ii) financing statements for which
      proper termination statements have been delivered to the Debtor for filing
      and
      (iii) financing statements evidencing Permitted Liens set forth on
      Schedule A.

     

    (c)  This
      Security Agreement creates a legal, valid and continuing security interest
      on
      and in all of the Collateral in which Debtor now has rights and, except with
      respect to money, registered copyrights, deposit accounts and letter-of-credit
      rights, all filings and other actions necessary or desirable to perfect and
      protect such security interest have been duly taken.  Accordingly,
      except for Permitted Liens, the Secured Party have a fully perfected first
      priority security interest in all of the Collateral in which Debtor now has
      rights.  Except for Permitted Liens, this Security Agreement will
      create a legal, valid, continuing and fully perfected first priority security
      interest in the Collateral in which Debtor later acquires rights, when Debtor
      acquires those rights.

     

    4.3  Representations
      and Covenants Related to Perfection.  The Debtor represents and
      warrants to the Secured Party as follows:  (a) the Debtor’s exact
      legal name is as indicated on page 1 of this Security Agreement and on the
      signature page hereof;  (b) the Debtor is an organization of the
      type and is organized in the jurisdiction set forth on page 1 of this Security
      Agreement; and (c) each of the Subsidiaries’ exact legal name is indicated the
      signature page hereof.

     

    ARTICLE
      V                                

     

    

     

    COVENANTS

     

    The
      Debtor covenants and agrees with the Secured Party that from and after the
      date
      of this Security Agreement:

     

    5.1  Further
      Assurances.  The Debtor will from time to time at the expense of
      the Debtor, promptly execute, deliver, file and record all further instruments,
      endorsements and other documents, and take such further action as the Secured
      Party may deem reasonably desirable in obtaining the full benefits of this
      Security Agreement and of the rights, remedies and powers herein granted,
      including, without limitation, the following:

     

    (i)  Cooperate
      with the filing of any financing statements (on Form UCC-1_, in a form
      reasonably acceptable to the Secured Party under the Uniform Commercial Code
      in
      effect in any jurisdiction with respect to the Liens and security interests
      granted hereby.  The Debtor also hereby authorizes the Secured Party
      to file any such financing statements, including without limitation continuation
      statements, and amendments thereto, in all jurisdictions and with all filing
      offices as the Secured Party may determine, in its reasonable discretion, are
      necessary or advisable to perfect the security interests granted to the Secured
      Party in connection herewith, without the signature of the Debtor to the extent
      permitted by applicable law.  Such financing statements may describe
      the Collateral in the same manner as described in this Agreement or may contain
      an indication or description of Collateral that describes such property in
      any
      other manner as the Secured Party may determine, in its reasonable discretion,
      is necessary, advisable or prudent to ensure the perfection of the security
      interests in the Collateral granted to the Secured Party in connection
      herewith.  A photocopy or other reproduction of this Security
      Agreement shall be sufficient as a financing statement and may be filed in
      lieu
      of the original to the extent permitted by applicable law.  The Debtor
      will pay or reimburse the Secured Party for all filing fees and related expenses
      reasonably incurred in connection therewith; and

     

    (ii)  furnishing
      to the Secured Party from time to time of statements and schedules further
      identifying and describing the Collateral and such other reports in connection
      with the Collateral as the Secured Party may reasonably request, all in
      reasonable detail and in form reasonably satisfactory to the Secured
      Party.

     

    5.2  Change
      of Name; Identity; Corporate Structure; Chief Executive Office; or Location
      of
      Inventory.  The Debtor will not change its name, identity,
      corporate structure or the location of its chief executive office or location
      of
      its Inventory (other than sales of Inventory in the ordinary course of business)
      without (i) giving the Secured Party at least thirty (30) days’ prior
      written notice clearly describing such new name, identity, corporate structure
      or new location and providing such other information in connection therewith
      as
      the Secured Party may reasonably request, and (ii) taking all action
      satisfactory to the Secured Party as the Secured Party may reasonably request
      to
      maintain the security interest of the Secured Party in the Collateral intended
      to be granted hereby at all times fully perfected with the same or better
      priority and in full force and effect.

     

    (a)  Maintain
      Records.  The Debtor will keep and maintain at its own cost and
      expense reasonably satisfactory and complete records of the
      Collateral.

     

    5.3  Insurance.
      The Debtor will maintain, with financially sound and reputable insurers
      insurance with respect to the Collateral and its use, against loss or damage
      of
      the kinds customarily insured against by reputable companies in the same or
      similar businesses, similarly situated, such insurance to be of such types
      and
      in such amounts (with such deductible amounts) as is customary for such
      companies under the same or similar circumstances

     

    5.4   Payment
      Obligations. The Debtor will pay promptly when due all taxes, assessments
      and governmental charges or levies imposed upon the Collateral, as well as
      all
      claims of any kind (including, without limitation, claims for labor, materials,
      supplies and services) against or with respect to the Collateral, except that
      no
      such charge need be paid if (i) the validity thereof is being contested in
      good faith by appropriate proceedings, (ii) the Debtor has promptly
      notified the Secured Party of the existence of such proceedings and such
      proceedings do not involve, in the good faith and reasonable opinion of the
      Secured Party, any material danger for the sale, forfeiture or loss of any
      material portion of the Collateral or any material interest therein and
      (iii) such charge is adequately reserved against on the Debtor’s books in
      accordance with generally accepted accounting principles.

     

    5.5  Negative
      Pledge.  Without the consent of the Secured Party, the Debtor will
      not create, incur or permit to exist, will defend the Collateral against, and
      will take such other action as is necessary to remove, any Lien or claim on
      or
      to the Collateral, other than the Liens created hereby and other than Permitted
      Liens.

     

    5.6  Limitations
      on Dispositions of Collateral.  Without the consent of the Secured
      Party, the Debtor will not sell, transfer, lease or otherwise dispose of any
      of
      the Collateral, or attempt, offer or contract to do so, except for sales of
      Inventory in the ordinary course of its business.

     

    ARTICLE
      VI                                

     

    

     

    REMEDIES;
      RIGHTS UPON DEFAULT

     

    6.1  Rights
      and Remedies Generally.  If an Event of Default shall occur and be
      continuing, then and in every such case, the Secured Party shall have all the
      rights of a secured party under the UCC, shall have all rights now or hereafter
      existing under all other applicable laws, and, subject to any mandatory
      requirements of applicable law then in effect, shall have all the rights set
      forth in this Security Agreement and the Notes.

     

    6.2  Assembly
      of Collateral.  If an Event of Default shall occur and be
      continuing, upon five days’ notice to the Debtor, the Debtor shall, at its own
      expense, assemble the Collateral (or from time to time any portion thereof)
      and
      make it available to the Secured Party at any place or places designated by
      the
      Secured Party which is reasonably convenient to both parties.

     

    6.3  Disposition
      of Collateral.  The Secured Party will give the Debtor reasonable
      notice of the time and place of any public sale of the Collateral or any part
      thereof or the time after which any private sale or any other intended
      disposition thereof is to be made. The Debtor agrees that the requirements
      of
      reasonable notice to it shall be met if such notice is mailed, postage prepaid
      to its address specified in Section 7.4 of this Security Agreement (or such
      other address that the Debtor may provide to the Secured Party in writing)
      at
      least ten (10) days before the time of any public sale or after which any
      private sale may be made.  The proceeds of any sale, disposition or
      other realization upon all or any part of the Collateral shall be distributed
      by
      the Secured Party in the following order of priorities: First, to the Secured
      Party in an amount sufficient to pay in full the reasonable costs of the Secured
      Party in connection with such sale, disposition or other realization, including
      all fees, costs, expenses, liabilities and advances reasonably incurred or
      made
      by the Secured Party in connection therewith, including, without limitation,
      reasonable attorneys’ fees; Second, to the Secured Party in an amount equal to
      the then unpaid Secured Obligations (with each Secured Party receiving its
      pro
      rata share based upon such Secured Party’s principal amount of Notes acquired
      pursuant to the Offering; and finally, upon payment in full of the Secured
      Obligations, to the Debtor or its representatives, in accordance with the UCC
      or
      as a court of competent jurisdiction may direct.

     

    6.4  Recourse.  The
      Debtor shall remain liable for any deficiency if the proceeds of any sale or
      other disposition of the Collateral are insufficient to satisfy the Secured
      Obligations.  The Debtor shall also be liable for all expenses of the
      Secured Party reasonably incurred in connection with collecting such deficiency,
      including, without limitation, the reasonable fees and disbursements of one
      firm
      of attorneys employed by the Secured Party to collect such
      deficiency.

     

    6.5  Expenses;
      Attorneys’ Fees.  The Debtor shall reimburse the Secured Party for
      all their reasonable expenses in connection with the exercise of their rights
      hereunder, including, without limitation, all reasonable attorneys’ fees and
      legal expenses of one firm of attorneys incurred by the Secured
      Party.  Expenses of retaking, holding, preparing for sale, selling or
      the like shall include the reasonable attorneys’ fees and legal expenses of one
      firm of attorneys of the Secured Party.  All such expenses shall be
      secured hereby.

     

    6.6  Limitation
      on Duties Regarding Preservation of Collateral.  The Secured
      Party’ sole duty with respect to the custody, safekeeping and physical
      preservation of the Collateral in their possession, under Section 9-207 of
      the UCC or otherwise, shall be to deal with it in the same manner as the Secured
      Party deal with similar property for their own account.

     

    (a)  The
      Secured Party shall have no obligation to take any steps to preserve rights
      against prior parties to any Collateral.

     

    (b)  None
      of
      the Secured Party nor any of their directors, officers, employees or agents
      shall be liable for failure to demand, collect or realize upon all or any part
      of the Collateral or for any delay in doing so or shall be under any obligation
      to sell or otherwise dispose of any Collateral upon the request of the Debtor
      or
      otherwise.

     

    ARTICLE
      VII                                

     

    

     

    MISCELLANEOUS

     

    7.1  Limitation
      on the Secured Party’s Duty in Respect of Collateral.  The Secured
      Parties shall be deemed to have acted reasonably in the custody, preservation
      and disposition of any of the Collateral if they take such action as the Debtor
      requests in writing, but failure of the Secured Party to comply with any such
      request shall not in itself be deemed a failure to act reasonably, and no
      failure of the Secured Party to do any act not so requested shall be deemed
      a
      failure to act reasonably.

     

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

     

    7.3  Governing
      Law.  THIS SECURITY AGREEMENT AND THE RIGHTS AND
      OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH
      AND
      BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF TEXAS.

     

    7.4  Notices.  All
      notices shall be given in accordance with the provisions of the Subscription
      Agreements.

     

    7.5  Successors
      and Assigns.  This Security Agreement shall be binding upon and
      inure to the benefit of the Debtor, the Secured Party, all future holders of
      the
      Secured Obligations and their respective successors and assigns, except that
      the
      Debtor may not assign or transfer any of its rights or obligations under this
      Security Agreement without the prior written consent of the Secured
      Party.

     

    7.6  Waivers
      and Amendments.  Any provisions in this Security Agreement may be
      waived, amended, supplemented or otherwise modified with the written consent
      of
      the Company and the Secured Party holding at least 51% in aggregate principal
      amount of the Notes issued in the Offering.

     

    7.7  No
      Waiver; Remedies Cumulative.  No failure or delay on the part of
      the Secured Party in exercising any right, power or privilege hereunder and
      no
      course of dealing between the Debtor shall operate as a waiver thereof; nor
      shall any single or partial exercise of any right, power or privilege hereunder
      preclude any other or further exercise thereof or the exercise of any other
      right, power or privilege.  A waiver by the Secured Party of any right
      or remedy hereunder on any one occasion shall not be construed as a bar to
      any
      right or remedy which the Secured Party would otherwise have on any future
      occasion.  The rights and remedies herein expressly provided are
      cumulative and may be exercised singly or concurrently and as often and in
      such
      order as the Secured Party deem expedient and are not exclusive of any rights
      or
      remedies which the Secured Party would otherwise have whether by security
      agreement or now or hereafter existing under applicable law.  No
      notice to or demand on the Debtor in any case shall entitle the Debtor to any
      other or further notice or demand in similar or other circumstances or
      constitute a waiver of the rights of the Secured Party to any other or future
      action in any circumstances without notice or demand.

     

    7.8  Termination;
      Release.  When the Secured Obligations have been indefeasibly paid
      and performed in full this Security Agreement shall terminate, and the Secured
      Party, at the request and sole expense of the Debtor, will execute and deliver
      to the Debtor the proper instruments (including UCC termination statements)
      acknowledging the termination of this Security Agreement, and will duly assign,
      transfer and deliver to the Debtor, without recourse, representation or warranty
      of any kind whatsoever, such of the Collateral as may be in the possession
      of
      the Secured Party and has not theretofore been disposed of, applied or
      released.

     

    7.9  Headings
      Descriptive.  The headings of the several Sections and subsections
      of this Security Agreement are inserted for convenience only and shall not
      in
      any way affect the meaning or construction of any provision of this Security
      Agreement.

     

    7.10  Additional
      Secured Party. Additional parties acquiring Notes pursuant to the Offering
      after the date hereof may become parties to this Agreement by executing the
      signature page hereto, whereupon such parties shall be included in the
      definition of “Secured Party” for all purposes under this Agreement

     

    7.11  Action
      by Secured Party. Any action required or permitted to be taken under this
      Agreement or with respect to the Collateral by the Secured Party, including
      but
      not limited to the granting of consents, amending or waiving any provision
      of
      this Agreement or declaring an Event of Default, may only be taken if consented
      to each of the Secured Party.

     

    7.12  Severability.  In
      case any provision in or obligation under this Security Agreement or the Secured
      Obligations shall be invalid, illegal or unenforceable in any jurisdiction,
      the
      validity, legality and enforceability of the remaining provisions or
      obligations, or of such provision or obligation in any other jurisdiction,
      shall
      not in any way be affected or impaired thereby.

     

    [Signature
      Page Follows]

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF, the Debtor and the Secured Party have caused this Security
      Agreement to be duly executed and delivered as of the date first above
      written.

     

    
      	 	
              AURIGA
                LABORATORIES, INC.

               

               

              By:
                __________________________________

              Name:
                ________________________________

              Title:
                _________________________________

               

              Address: 5284
                Adolfo Road

              Camarillo,
                CA
                93012

              Fax:                (805)
                299-4932

               

               

               

            
	 	
               

              SECURED
                PARTY

              PROSPECTOR
                CAPITAL PARTNERS, LLC

               

               

              ________________________________________

              By:
                Hudson & Co., LLC

              Its:
                Manager

              Title:
                Authorized Person

               

              Address:

              3112
                Windsor Road, Suite A-137

              Austin,
                TX 78703

              Fax:
                866-477-2971warrant.htm

    
      THE
        SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
        THE
        SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
        A
        VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.  NO
        SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
        STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY
        TO THE
        COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
        1933.

    

     

    Number
      of
      Shares:                                           500,000
      shares of Common Stock (subject to adjustment)

    Date
      of
      Issuance:                                           February
      13, 2008

    Warrant
      Number:                                           W-___

     

    AURIGA
      LABORATORIES, INC.

     

    Common
      Stock Warrant

     

    Auriga
      Laboratories, Inc., a Delaware corporation (the “Company”), for value
      received, hereby certifies that Prospector Capital Partners,
      LLC, or its registered assigns (the “Registered Holder”), is
      entitled, subject to the terms set forth below, to purchase from the Company,
      at
      any time after the date hereof and on or before the Expiration Date (as defined
      in Section 6 below), up to 500,000 shares (subject to adjusted
      from time to time pursuant to the provisions of this Warrant) of common stock,
      par value $0.001, of the Company (“Common Stock”), at the purchase price
      set  forth in Section 1 below.  The shares purchasable upon
      exercise of this Warrant and the purchase price per share, as adjusted from
      time
      to time pursuant to the provisions of this Warrant, are sometimes hereinafter
      referred to as the “Warrant Shares” and the “Purchase Price,”
respectively.

     

    1.           Purchase
      Price.  The Purchase Price shall be $
      $0.039 per share, subject to adjustment as provided in this
      Warrant.

     

    2.           Exercise.

     

    (a)           Manner
      of Exercise.  This Warrant may be
      exercised by the Registered Holder in whole or in part, by surrendering this
      Warrant, with the purchase/exercise form appended hereto as
Exhibit A duly executed by such Registered Holder or by such
      Registered Holder’s duly authorized attorney, at the principal office of the
      Company, or at such other office or agency as the Company may designate,
      accompanied by payment in full of the Purchase Price payable in respect of
      the
      number of Warrant Shares purchased upon such exercise.  Except as set
      forth in Section 2(c) below, the Purchase Price may only be paid by cash, check,
      wire transfer or by the surrender of promissory notes or other instruments
      representing indebtedness of the Company to the Registered Holder.

     

    (b)           Net
      Issue Exercise.

     

    (i)           In
      lieu of exercising this Warrant in the manner provided above in
      Section 2(b), the Registered Holder may elect to receive shares equal to
      the value of this Warrant (or the portion thereof being canceled) by surrender
      of this Warrant at the principal office of the Company together with notice
      of
      such election on the purchase/exercise form appended hereto as Exhibit A
      duly executed by such Registered Holder or such Registered Holder’s duly
      authorized attorney, in which event the Company shall issue to the Registered
      Holder a number of shares of Common Stock computed using the following
      formula:

     

    
      	
               

            	
              X
                =

            	
              Y
                (A - B)

            

    

    A

     

    X
      = The
      number of shares of Common Stock to be issued to the Registered
      Holder.

     

    Y
      = The
      number of shares of Common Stock purchasable under this Warrant (at the date
      of
      such calculation).

     

    A
      = The
      fair market value of one share of Common Stock (at the date of such
      calculation).

     

    B
      = The
      Purchase Price (as adjusted to the date of such calculation).

     

    (ii)           For
      purposes of this Section 2(b), the fair market value of one share of Common
      Stock on the date of calculation shall be determined as
      follows:  (i) if traded on a securities exchange or through the
      Nasdaq National Market, the value shall be deemed to be the average of the
      closing prices of the securities on such exchange over the five (5) day period
      ending three (3) days prior to the net exercise election; (ii) if traded
      over-the-counter, the value shall be deemed to be the average of the closing
      bid
      or sale prices (whichever is applicable) over the five (5) day period ending
      three (3) days prior to the net exercise; and (iii) if there is no active
      public market, the value shall be the fair market value thereof, as determined
      in good faith by the Board of Directors of the
      Company.  Notwithstanding any other provision hereof, the maximum
      number of shares of Common Stock to be issued to the Registered Holder pursuant
      to this net exercise shall not exceed the total number of shares of Common
      Stock
      issuable upon exercise of this Warrant.

     

    (c)           Effective
      Time of Exercise.  Each exercise of this
      Warrant shall be deemed to have been effected immediately prior to the close
      of
      business on the day on which this Warrant shall have been surrendered to the
      Company as provided in Section 2(a) above.  At such time, the person
      or persons in whose name or names any certificates for Warrant Shares shall
      be
      issuable upon such exercise as provided in Section 2(e) below shall be deemed
      to
      have become the holder or holders of record of the Warrant Shares represented
      by
      such certificates.

     

    (d)           Delivery
      to Holder.  As soon as practicable after
      the exercise of this Warrant in whole or in part, and in any event within ten
      (10) days thereafter, the Company at its expense will cause to be issued in
      the
      name of, and delivered to, the Registered Holder, or as such Holder (upon
      payment by such Holder of any applicable transfer taxes) may
      direct:

     

    (i)           a
      certificate or certificates for the number of Warrant Shares to which such
      Registered Holder shall be entitled; and

     

    (ii)           in
      case such exercise is in part only, a new warrant or warrants (dated the date
      hereof) of like tenor, calling in the aggregate on the face or faces thereof
      for
      the number of Warrant Shares equal (without giving effect to any adjustment
      therein) to the number of such shares called for on the face of this Warrant
      minus the number of such shares purchased by the Registered Holder upon such
      exercise as provided in Section 2(a) above.

     

    3.           Adjustments.

     

    (a)           Stock
      Splits and Dividends.  If outstanding
      shares of the Company’s Common Stock shall be subdivided into a greater number
      of shares or a dividend in Common Stock shall be paid in respect of Common
      Stock, the Purchase Price in effect immediately prior to such subdivision or
      at
      the record date of such dividend shall simultaneously with the effectiveness
      of
      such subdivision or immediately after the record date of such dividend be
      proportionately reduced.  If outstanding shares of Common Stock shall
      be combined into a smaller number of shares, the Purchase Price in effect
      immediately prior to such combination shall, simultaneously with the
      effectiveness of such combination, be proportionately increased.  When
      any adjustment is required to be made in the Purchase Price, the number of
      Warrant Shares purchasable upon the exercise of this Warrant shall be changed
      to
      the number determined by dividing:  (i) an amount equal to the
      number of shares issuable upon the exercise of this Warrant immediately prior
      to
      such adjustment, multiplied by the Purchase Price in effect immediately prior
      to
      such adjustment; by (ii) the Purchase Price in effect immediately after
      such adjustment.

     

    (b)           Reclassification,
      Etc.  In case of any reclassification or
      change of the outstanding securities of the Company or of any reorganization
      of
      the Company (or any other corporation the stock or securities of which are
      at
      the time receivable upon the exercise of this Warrant) or any similar corporate
      reorganization on or after the date hereof, then and in each such case the
      holder of this Warrant, upon the exercise hereof at any time after the
      consummation of such reclassification, change, reorganization, merger or
      conveyance, shall be entitled to receive, in lieu of the stock or other
      securities and property receivable upon the exercise hereof prior to such
      consummation, the stock or other securities or property to which such holder
      would have been entitled upon such consummation if such holder had exercised
      this Warrant immediately prior thereto, all subject to further adjustment as
      provided in Section 3(a); and in each such case, the terms of this
      Section 3 shall be applicable to the shares of stock or other securities
      properly receivable upon the exercise of this Warrant after such
      consummation.

     

    (c)           Adjustment
      Certificate.  When any adjustment is
      required to be made in the number of Warrant Shares or the Purchase Price
      pursuant to this Section 3, the Company shall promptly mail to the Registered
      Holder a certificate setting forth:  (i) a brief statement of the
      facts requiring such adjustment; (ii) the Purchase Price after such adjustment;
      and (iii) the kind and amount of stock or other securities or property into
      which this Warrant shall be exercisable after such adjustment.

     

    4.           Transfers.

     

    (a)           Unregistered
      Security.  Each holder of this Warrant
      acknowledges that this Warrant and the Warrant Shares have not been registered
      under the Securities Act of 1933, as amended (the “Securities Act”), and
      agrees not to sell, pledge, distribute, offer for sale, transfer or otherwise
      dispose of this Warrant or any Warrant Shares issued upon its exercise in the
      absence of:  (i) an effective registration statement under the
      Securities Act as to this Warrant or such Warrant Shares and registration or
      qualification of this Warrant or such Warrant Shares under any applicable U.S.
      federal or state securities law then in effect; or (ii) an opinion of counsel,
      satisfactory to the Company, that such registration and qualification are not
      required.  Each certificate or other instrument for Warrant Shares
      issued upon the exercise of this Warrant shall bear a legend substantially
      to
      the foregoing effect.

     

    (b)           Transferability.  Subject
      to the provisions of Section 4(a) hereof, this Warrant and all rights hereunder
      are transferable, in whole or in part, upon surrender of the Warrant with a
      properly executed assignment (in the form of Exhibit B hereto) at the
      principal office of the Company.

     

    (c)           Warrant
      Register.   The Company will maintain a
      register containing the names and addresses of the Registered Holders of this
      Warrant.  Until any transfer of this Warrant is made in the warrant
      register, the Company may treat the Registered Holder of this Warrant as the
      absolute owner hereof for all purposes; provided, however, that if
      this Warrant is properly assigned in blank, the Company may (but shall not
      be
      required to) treat the bearer hereof as the absolute owner hereof for all
      purposes, notwithstanding any notice to the contrary.  Any Registered
      Holder may change such Registered Holder’s address as shown on the warrant
      register by written notice to the Company requesting such change.

     

    5.           Representations
      of Registered Holder.  The Registered
      Holder hereby represents and warrants to the Company that:

     

    (a)           Purchase
      Entirely for Own Account.  The Warrant and Warrant Shares
      (collectively, the “Securities”) will be acquired for investment for the
      Registered Holder’s own account, not as a nominee or agent, and not with a view
      to the resale or distribution of any part thereof in violation of the Securities
      Act, and that the Registered Holder has no present intention of selling,
      granting any participation in, or otherwise distributing the
      same.  The Registered Holder further represents that the Registered
      Holder does not presently have any contract, undertaking, agreement or
      arrangement with any person to sell, transfer or grant participations to such
      person or to any third person, with respect to any of the
      Securities.  The Registered Holder has not been formed for the
      specific purpose of acquiring any of the Securities.

     

    (b)           Knowledge.  The
      Registered Holder is aware of the Company’s business affairs and financial
      condition and has acquired sufficient information about the Company to reach
      an
      informed and knowledgeable decision to acquire the Securities.

     

    (c)           Restricted
      Securities.  The Registered Holder understands that the
      Securities have not been registered under the Securities Act by reason of a
      specific exemption from the registration provisions of the Securities Act which
      depends upon, among other things, the bona fide nature of the investment intent
      and the accuracy of the Registered Holder’s representations as expressed
      herein.  The Registered Holder understands that the Securities are
“restricted securities” under applicable U.S. federal and state securities laws
      and that, pursuant to these laws, the Registered Holder must hold
      the Securities indefinitely unless
      they are registered with the Securities and Exchange Commission and qualified
      by
      state authorities, or an exemption from such registration and qualification
      requirements is available.  The Registered Holder acknowledges that if
      an exemption from registration or qualification is available, it may be
      conditioned on various requirements including, but not limited to, the time
      and
      manner of sale, the holding period for the Securities, and on requirements
      relating to the Company which are outside of the Registered Holder’s
      control.

     

    (d)           Legends.  The
      Registered Holder understands that the Securities, and any securities issued
      in
      respect thereof or exchange therefor, may bear one or all of the following
      legends:

     

    (i)           “THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND
      NOT WITH A VIEW TO, OR IN CONNEC­TION WITH, THE SALE OR DISTRIBUTION
      THEREOF.  NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
      EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN
      A
      FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED.”

     

    (ii)           Any
      legend required by the Blue Sky laws of any state to the extent such laws are
      applicable to the shares represented by the certificate so
      legended.

     

    (f)           Accredited
      Investor.  The Registered Holder is an “accredited
      investor” as such term is defined in Rule 501(a) of Regulation D promulgated
      under the Securities Act.

     

    6.           Term
      of Warrant.Subject to the other terms and
      conditions set forth herein, this Warrant shall be exercisable, in whole or
      in
      part, at any time on or after the date hereof and at or prior to 11:59 p.m.,
      local time in Los Angeles, California, U.S.A., 900 days from the Date of
      Issuance (the “Expiration Date”). Notwithstanding the above, if the
      closing sales price of the Common Stock on the Expiration Date is greater than
      110% of the Exercise Price on the Expiration Date, then this Warrant shall
      be
      deemed to have been exercised in full (to the extent not previously exercised)
      on a “cashless exercise” basis at 11:59 p.m. local time in Los Angeles,
      California on the Expiration Date. The Company may not call or redeem all or
      any
      portion of this Warrant without the prior written consent of the Registered
      Holder.

     

    7.           Notices
      of Certain Transactions.  In
      case:

     

    (a)           the
      Company shall take a record of the holders of its Common Stock (or other stock
      or securities at the time deliverable upon the exercise of this Warrant) for
      the
      purpose of entitling or enabling them to receive any dividend or other
      distribution, or to receive any right to subscribe for or purchase any shares
      of
      stock of any class or any other securities, or to receive any other right,
      to
      subscribe for or purchase any shares of stock of any class or any other
      securities, or to receive any other right;

     

    (b)           of
      any capital reorganization of the Company, any reclassification of the capital
      stock of the Company, any consolidation or merger of the Company, any
      consolidation or merger of the Company with or into another corporation (other
      than a consolidation or merger in which the Company is the surviving entity),
      or
      any transfer of all or substantially all of the assets of the Company;
      or

     

    (c)           of
      the voluntary or involuntary dissolution, liquidation or winding-up of the
      Company,

     

    then,
      and
      in each such case, the Company will mail or cause to be mailed to the Registered
      Holder a notice specifying, as the case may be:  (i) the date on which
      a record is to be taken for the purpose of such dividend, distribution or right,
      and stating the amount and character of such dividend, distribution or right;
      or
      (ii) the effective date on which such reorganization, reclassification,
      consolidation, merger, transfer, dissolution, liquidation or winding-up is
      to
      take place, and the time, if any is to be fixed, as of which the holders of
      record of Common Stock (or such other stock or securities at the time
      deliverable upon such reorganization, reclassification, consolidation, merger,
      transfer, dissolution, liquidation or winding-up) are to be
      determined.  Such notice shall be mailed at least ten (10) days prior
      to the record date or effective date for the event specified in such
      notice.

     

    8.           Reservation
      of Stock.  The Company will at all times
      reserve and keep available, solely for the issuance and delivery upon the
      exercise of this Warrant, such Warrant Shares and other stock, securities and
      property, as from time to time shall be issuable upon the exercise of this
      Warrant.

     

    9.           Exchange
      of Warrants.  Upon the surrender by the
      Registered Holder of any Warrant or Warrants, properly endorsed, to the Company
      at the principal office of the Company, the Company will, subject to the
      provisions of Section 4 hereof, issue and deliver to or upon the order of such
      holder, at the Company’s expense, a new Warrant or Warrants of like tenor, in
      the name of such Registered Holder or as such Registered Holder (upon payment
      by
      such Registered Holder of any applicable transfer taxes) may direct, calling
      in
      the aggregate on the face or faces thereof for the number of shares of Common
      Stock called for on the face or faces of the Warrant or Warrants so
      surrendered.

     

    10.           Replacement
      of Warrants.  Upon receipt of evidence
      reasonably satisfactory to the Company of the loss, theft, destruction or
      mutilation of this Warrant and (in the case of loss, theft or destruction)
      upon
      delivery of an indemnity agreement (with surety if reasonably required) in
      an
      amount reasonably satisfactory to the Company, or (in the case of mutilation)
      upon surrender and cancellation of this Warrant, the Company will issue, in
      lieu
      thereof, a new Warrant of like tenor.

     

    11.           Notices.  Any
      notice required or permitted by this Warrant shall be in writing and shall
      be
      deemed sufficient upon receipt, when delivered personally or by courier,
      overnight delivery service or confirmed facsimile, or forty-eight (48) hours
      after being deposited in the regular mail as certified or registered mail
      (airmail if sent internationally) with postage prepaid,
      addressed:  (a) if to the Registered Holder, to the address of the
      Registered Holder most recently furnished in writing to the Company; and (b)
      if
      to the Company, to the address set forth below or subsequently modified by
      written notice to the Registered Holder.

     

    12.           No
      Rights as Stockholder.  Until the
      exercise of this Warrant, the Registered Holder of this Warrant shall not have
      or exercise any rights by virtue hereof as a stockholder of the
      Company.

     

    13.           No
      Fractional Shares.  No fractional shares
      of Common Stock will be issued in connection with any exercise
      hereunder.  In lieu of any fractional shares which would otherwise be
      issuable, the Company shall pay cash equal to the product of such fraction
      multiplied by the fair market value of one share of Common Stock on the date
      of
      exercise, as determined in good faith by the Company’s Board of
      Directors.

     

    14.           Amendment
      or Waiver.  Any term of this Warrant may
      be amended or waived only by an instrument in writing signed by the party
      against which enforcement of the amendment or waiver is sought.

     

    15.           Headings.  The
      headings in this Warrant are for purposes of reference only and shall not limit
      or otherwise affect the meaning of any provision of this Warrant.

     

    16.           Governing
      Law. This Warrant shall be governed, construed and
      interpreted in accordance with the laws of the State of California, without
      giving effect to principles of conflicts of law.

     

    AURIGA
      LABORATORIES, INC.

     

    By:                                                      

    Its:                                                      

    

    Address:
      5284 Adolfo Road

    Camarillo,
      CA  93012

    Fax:
      (805) 299-4932

     

    AGREED
      AND ACCEPTED:

     

    REGISTERED
      HOLDER

     

    PROSPECTOR
      CAPITAL PARTNERS, LLC

     

    By:  Hudson
      & Co., LLC, its manager

     

    

     

    By:  ____________________________

    Name:
      Christopher S. Walton

    Title:
      Authorized Person

    

    Address:
      3112 Windsor Road

    Suite
      A-137

    Austin,
      TX 78703

    Fax:  (866)
      477-2971

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
      A

     

    PURCHASE/EXERCISE
      FORM

     

     

    To:           Auriga
      Laboratories,
      Inc.                                                                Dated:________________________

     

    The
      undersigned, pursuant to the provisions set forth in the attached Warrant No.
      ___, hereby irrevocably elects to (a) purchase _____ shares of the Common
      Stock covered by such Warrant and herewith makes payment of $ _________,
      representing the full purchase price for such shares at the price per share
      provided for in such Warrant, or (b) exercise such Warrant for _______
      shares purchasable under the Warrant pursuant to the Net Issue Exercise
      provisions of Section 2(c) of such Warrant.

     

    The
      undersigned acknowledges that it has reviewed the representations and warranties
      contained in Section 5 of the Warrant and by its signature below hereby makes
      such representations and warranties to the Company.

     

    Signature:                                                                

    Name
      (print):

    Title
      (if applic.)

    Company
      (if applic.):

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
      B

     

    ASSIGNMENT
      FORM

     

    FOR
      VALUE
      RECEIVED, _________________________________________ hereby sells, assigns and
      transfers all of the rights of the undersigned under the attached Warrant with
      respect to the number of shares of Common Stock covered thereby set forth below,
      to:

     

    
      	
              Name
                of Assignee

            	
              Address/Fax
                Number

            	
              No.
                of Shares

            
	 	 	 
	 	 	 
	 	 	 
	 	 	 

    

    

     

    Dated:_________________                                                                                     Signature:

     

    
 

     

    Witness:

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