Better Choice Co Inc. (Form: 10-Q, Received: 01/31/2020 17:20:58)

The Company has granted the Lender a security interest in all assets of the Company owned or later acquired. The revolving credit agreement also contains certain events of default, representations, warranties and covenants of the Company and its subsidiaries. For example, the revolving credit agreement contains representations and covenants that, subject to exceptions, restrict the Company’s ability to do the following, among things: incur additional indebtedness, engage in certain asset sales, or undergo a change in ownership. As of September 30, 2019, the Company was in compliance with its covenants.

Interest expense of approximately $0.2 million was recorded in the consolidated statements of operations and comprehensive loss related to the lines of credit and the director note for the nine months ended September 30, 2019, and $0.1 million and less than $0.1 million for three and nine months ended September 30, 2018, respectively. Interest expense of approximately $0.1 million was recorded in the consolidated statements of operations and comprehensive loss related to the lines of credit for the three months ended September 30, 2019.

Note 11 – Warrant Derivative Liability

On December 12, 2018, the Company closed a private placement offering (the “December Offering”) of 1,425,641 units (the “Units”), each unit consisting of (i) one share of the Company’s Common Stock and (ii) a warrant to purchase one half of a share of Common Stock. The Units were offered at a fixed price of $1.95 per Unit for gross proceeds of $2.8 million. Costs associated with the December Offering were $0.1 million, and net proceeds were $2.7 million. The December Offering generated $2.6 million of net proceeds that were received by the Company during the period ended December 31, 2018 for the sale of 1,400,000 Units, and $0.1 million of the net proceeds were received on January 8, 2019 for the sale of 25,641 Units. The warrants are exercisable over a two-year period at the initial exercise price of $3.90 per share.

The warrants include an option to settle in cash in the event of a change of control of the Company and a reset feature if the Company issues shares of common stock with a strike price below $3.90 per share, which requires the Company to record the warrants as a derivative liability. The Company calculates the fair value of the derivative liability through a Monte Carlo Model that values the warrants based upon a probability weighted discounted cash flow model.

At May 6, 2019, the derivative liability was recorded at fair value as part of the purchase price of Better Choice Company by TruPet. The following schedule shows the change in fair value of the derivative liabilities for the period from May 6, 2019 through September 30, 2019.

Dollars in thousands	Warrant Liability
Assumption of warrants pursuant to May 6, 2019 acquisition of Better Choice Company	$	2,130
Change in fair value of derivative liability		(886	)
Balance as of September 30, 2019	$	1,244

	May 6, 2019			September 30, 2019
Warrant Liability
Stock Price	$	6.00		$	4.36
Exercise Price	$	3.90		$	3.90
Expected remaining term (in years)		1.60 – 1.68			1.20 – 1.28
Volatility		64	%		64% – 69	%
Risk-free interest rate		2.39	%		1.72	%

The valuation of the warrants is subject to uncertainty as a result of the unobservable inputs. If the volatility rate or risk-free interest rate were to change, the value of the warrants would be impacted.

At September 30, 2019, the Company would be required to pay $0.3 million if all warrants were settled in cash or issue 712,823 shares if all warrants were settled in shares.

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Note 12 – Other Liabilities

Other liabilities consist of the following:

Dollars in thousands	September 30, 2019		December 31, 2018
Cash Advance	$	-	$	1,898
Deferred Rent		-		16
Total Other Liabilities	$	-	$	1,914

During the fourth quarter of 2018, the Company received cash advances totaling $2.4 million from a third party lender, plus fees of $0.3 million, that were secured by customer payments on future sales and receivables. $0.8 million of the cash advance was paid back to the lender in the fourth quarter of 2018 and the remaining $1.9 million was paid during the nine month period ended September 30, 2019.

Note 13 – Commitments and Contingencies

We have entered into lease, royalty and line of credit agreements for which we are committed to pay certain amounts over a period of time. See Notes 8, 9, and 10.

In the normal course of business, the Company is subject to certain claims or lawsuits. Management is not aware of any claims or lawsuits that may have a material adverse effect on the consolidated financial position or results of operations of the Company.

The Company has historically collected and remitted sales tax based on the locations of its significant physical operations. On June 21, 2018, the U.S. Supreme Court rendered a 5-4 majority decision in South Dakota v. Wayfair Inc., 17-494. Among other things, the Court held that a state may require an out-of-state seller with no physical presence in the state to collect and remit sales taxes on goods the seller ships to consumers in the state, overturning existing court precedent. Additionally, the Company discovered that TruPet had not collected and paid sales tax related to all sales in some states where it had a physical presence. The Company has estimated and recorded $1.2 million of sales tax liability as of September 30, 2019. While additional assessments are not anticipated, additional states may assert that the Company has nexus and must pay sales tax for prior sales. We do not believe that additional assessments, if any, will have a material impact on our financial position or results of operations.

Note 14 – Redeemable Series E Convertible Preferred Stock

On October 22, 2018, the Board approved a resolution to designate a series of 2,900,000 shares of its Redeemable Series E Convertible Preferred Stock pursuant to its articles of incorporation of which 2,846,356 were issued. The Redeemable Series E Convertible Preferred Stock has a stated value of $0.99 per share; is convertible to Common Stock at a price of $0.78 per share.

On May 6, 2019, 2,633,678 outstanding shares of Redeemable Series E Convertible Preferred Stock, represented an element of the purchase price were acquired and recorded at fair value (on an as converted into common stock basis) based on the $6.00 per share closing price of Better Choice Company’s shares of Common Stock as they remained outstanding after the reverse acquisitions discussed in Note 2 above.

On May 10, 2019 and May 13, 2019, holders of the Company’s Redeemable Series E Convertible Preferred Stock converted 689,394 and 236,364 preferred shares into 875,000 and 300,000 shares of the Company’s Common Stock, respectively.

The below table summarizes changes in the balance of Redeemable Series E Convertible Preferred Stock since inception through September 30, 2019 including its value prior to acquisition by the Company.

	Number			Amount
Dollars in thousands
Issued on October 18, 2018		2,846,356		$	2,023
Converted to Common Stock		(212,678	)		(152	)
Balance on May 6, 2019		2,633,678			1,871
Purchase price adjustment					18,188
Outstanding at May 6, 2019		2,633,678			20,059
Converted to Common Stock		(925,758	)		(7,052	)
Balance at September 30, 2019		1,707,920		$	13,007

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The rights preferences and privileges of Redeemable Series E Convertible Preferred stock are as follows:

Voting

The Redeemable Series E Convertible Preferred Stock has voting rights equal to those of the underlying Common Stock and ranks senior in respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company.

Dividends

The holders of the Redeemable Series E Convertible Preferred stock are entitled to receive cumulative dividends at a rate of 10% per annum on the stated value. Each Holder of Redeemable Series E Convertible Preferred stock will be entitled to receive dividends or distributions on each share of Redeemable Series E Convertible Preferred stock on an as converted into common stock basis. Pursuant to waiver letters executed by each investor, the holders of the Company’s Redeemable Series E Convertible Preferred Stock agreed to waive their right to the distribution of dividends until October 22, 2019. Dividends accrued are $0.2 million as of September 30, 2019.

Liquidation

In the event of a Liquidation Event, the holders of Redeemable Series E Convertible Preferred stock will be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders, before any amount shall be paid to the holders of any of shares of Common Stock, an amount per share of Series E Preferred equal to the greater of (A) the sum of (1) the Stated Value thereof plus (2) the Additional Amount thereon and any accrued and unpaid Late Charges with respect to such Stated Value and Additional Amount as of such date of determination (the “Conversion Amount”) and (B) the amount per share such holder of Redeemable Series E Convertible Preferred would receive if such holder converted such Series E into Common Stock immediately prior to the date of such payment. Liquidation Event means, whether in a single transaction or series of transactions, the voluntary or involuntary liquidation, dissolution or winding up of the Corporation or such Subsidiaries the assets of which constitute all or substantially all of the assets of the business of the Corporation and its Subsidiaries, taken as a whole.

Conversion

Each holder of Redeemable Series E Convertible Preferred stock will be entitled to convert any portion of the outstanding Redeemable Series E Convertible Preferred held by such holder into validly issued, fully paid and non-assessable shares of common stock at the Conversion Rate. The number of shares of common stock issuable upon conversion of any share of Redeemable Series E Convertible Preferred would be determined by dividing (x) the Conversion Amount of such share of Series E Preferred by (y) the Conversion Price. The Redeemable Series E Convertible Preferred Stock has a stated value of $0.99 per share; is convertible to Common Stock at a price of $0.78 per share.

Redemption

Under certain default conditions, the Redeemable Series E Convertible Preferred Stock is subject to mandatory redemption in cash equal to 125% of the greater of $0.99 per share ($1.23 per share) or 75% of the market price of the Common Stock. The Redeemable Series E Convertible Preferred Stock has a stated value of $0.99 per share; is convertible to Common Stock at a price of $0.78 per share.Redemption of the Redeemable Series E Convertible Preferred stock also occurs upon Triggering Events, which are not all entirely within the control of the Company. Due to this redemption option, the Redeemable Series E Convertible Preferred stock is recorded in the mezzanine equity and subject to subsequent measurement under the guidance provided under FASB ASC 480-10-S99-3A, Accounting for Redeemable Equity Investments.

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Note 15 - Stockholders’ Deficit

As noted above, on May 6, 2019, Better Choice Company completed the Acquisition of TruPet pursuant to a Stock Exchange Agreement dated February 2, 2019 and amended May 6, 2019. At the closing of the transaction, Better Choice Company issued 14,229,041 shares of its Common Stock in exchange for 93% of the outstanding ownership units of TruPet. Additionally, on May 6, 2019, Better Choice Company also completed the Acquisition of Bona Vida pursuant to an Agreement and Plan of Merger dated February 28, 2019 and amended May 3, 2019. At the closing of the transaction, Better Choice Company issued 18,103,273 shares of its Common Stock in exchange for all outstanding shares of Bona Vida. The operations of Better Choice Company subsequent to the Acquisitions are those of TruPet and Bona Vida. For accounting purposes, the transaction is considered a reverse merger whereby TruPet is considered the accounting acquirer of Better Choice Company.

As a result of the transaction, the historical TruPet members’ equity (units and incentive units) has been re-cast to reflect the equivalent Better Choice Common Stock for all periods presented after the transaction. Prior to the transaction, TruPet was a Limited Liability Company and as such, the concept of authorized shares was not relevant.

Capital Contributions and Distributions of Capital

During the nine months ended September 30, 2018, a Company Director contributed $0.4 million and received $0.4 million as distributions. There was no equity issued for the contribution.

Series A Preferred Units

In December 2018, the Company completed a private placement and issued 2,162,536 Series A Preferred Units to unrelated parties for $2.40 per unit. The proceeds were approximately $4.7 million, net of $0.5 million of issuance costs. Additionally, on February 12, 2019, an additional private placement of 62,500 Series A Preferred Units at $2.40 per unit was completed. The proceeds were approximately $0.2 million, net of share issuance costs.

On May 6, 2019, all Series A Preferred Units were converted to 2,460,517 shares of Common Stock.

Common Stock

The Company was authorized to issue 580,000,000 shares of Common Stock as of December 31, 2018. On March 14, 2019, the Company filed a certificate of amendment of Certificate of Incorporation with the Delaware Secretary of State to effect a one-for-26 reverse split of Common Stock effective March 15, 2019. All of the Common and Preferred Stock amounts and per share amounts in these financial statements and footnotes have been retroactively adjusted to reflect the effect of this reverse split. On April 22, 2019, the Company filed a certificate of amendment of certificate of incorporation with the State of Delaware which reduced the number of authorized shares of Common Stock to 88,000,000. The Company has 45,427,659 and 11,661,485 shares of Common Stock issued and outstanding as of September 30, 2019 and December 31, 2018, respectively.

On December 12, 2018, Better Choice Company closed a private placement offering (the “December Offering”) of 1,425,641 units (the “Units”), each unit consisting of (i) one share of the Company’s Common Stock and (ii) a warrant to purchase one half of a share of Common Stock. The Units were offered at a fixed price of $1.95 per Unit for gross proceeds of $2.8 million. Costs associated with the December Offering were $0.1 million, and net proceeds were $2.7 million. The December Offering generated $2.6 million of the net proceeds were received by the Company during the period ended December 31, 2018 for the sale of 1,400,000 Units, and $0.1 million of the net proceeds were received on January 8, 2019 for the sale of 25,641 Units. The Warrants are exercisable over a two-year period at the initial exercise price of $3.90 per share. (See Note 11 – Warrant Derivative Liability). A portion of the proceeds from this private placement was used to acquire the initial 7% of TruPet.

In connection with the December Offering, Better Choice Company also entered into a registration rights agreement (the “Registration Rights Agreement”) with each investor in the Offering. Pursuant to the Registration Rights Agreement, the Company agreed to use commercially reasonable efforts to file with the Securities and Exchange Commission a registration statement on Form S-1 (or other applicable form) within 60 days following the closing date to register the resale of the shares of Common Stock sold in the Offering and shares of Common Stock issuable upon exercise of the Warrants.

On May 6, 2019, the Company acquired 1,011,748 shares of Common Stock (equivalent to 914,919 member units) valued at $6.1 million representing its initial 7% investment in TruPet. These shares are recorded as an acquisition of treasury shares.

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The Company issued 5,744,991 million units for gross proceeds of $3.00 per unit, also closing on May 6, 2019 with the PIPE transaction. Each unit included one share of Common Stock of Better Choice Company stock and a warrant to purchase an additional share. The shares issued in the PIPE are subject to the Securities and Exchange Commission’s Rule 144 restrictions which require the purchasers of the PIPE units to hold the shares for at least 6 months from the date of issuance. The funds raised from the PIPE will be used to fund the operations of the combined company. Net proceeds of $15.7 million were received in the private placement, allocable between shares of Common Stock and warrants.

Pursuant to the employment agreement of an officer with Bona Vida dated October 29, 2018, the officer was entitled to a $500,000 Change of Control payment. The officer later agreed to receive 100,000 shares of Better Choice Company Common Stock. The 100,000 shares of Common Stock were valued at $6.00 per share, which was the market value as of the date of Acquisition.

As of September 30, 2019, the Company has reserved approximately 18 million shares of Common Stock for future issuance as follows:

	September 30, 2019
Conversion of Redeemable Series E Convertible Preferred Stock		2,167,744
Exercise of options to purchase Common Stock		6,031,462
Warrants to purchase Common Stock		9,533,354
Total shares of Common Stock reserved for future issuance		17,732,560

The Company did not reserve any units for future issuances during the period ended September 30, 2018.

Stock Awards

During the period from November 1, 2018 through May 5, 2019, incentive equity awards for the equivalent of 1.1 million shares were awarded to employees and consultants. The incentive equity awards were valued at the date of award with a weighted average value per share of $2.26. The awards were to vest over a period of three or four years.

On May 6, 2019, all outstanding equity incentive awards issued prior to May 6, 2019 immediately vested. As a result of the immediate vesting of these awards, share-based compensation expense equal to $2.2 million was recorded in the Consolidated Statements of Operations and Comprehensive Loss on May 6, 2019. There were no other incentive equity awards issued or outstanding during the nine months ended September 30, 2018. As of December 31, 2018, incentive equity awards for the equivalent of 164,356 shares were awarded to a consultant.

Stock Options

Options which had been granted in December 2018 to purchase an aggregate of 38,462 shares of Common Stock at an exercise price of $6.76 per share were outstanding prior to the merger. As a result of the merger, those options immediately vested. The estimated fair value associated with the vesting options with a value of $0.1 million is part of the purchase price of Better Choice Company. The options have not been exercised, remain outstanding at September 30, 2019, have a remaining life of 4.2 years and no intrinsic value.

On May 6, 2019, the Company acquired the Better Choice Company, Inc. 2019 Incentive Award Plan (“2019 Incentive Award Plan”) which became effective as of April 29, 2019. The 2019 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, other stock or cash-based awards or a dividend equivalent award (each an “Award”). Non-employee directors of the Company and employees and consultants of the Company or any of its subsidiaries are eligible to receive awards under the 2019 Plan. The 2019 Plan authorizes the issuance of (i) 6,000,000 shares of common stock plus (ii) an annual increase on the first day of each calendar year beginning on January 1, 2020 and ending on and including January 1, 2029, equal to the lesser of (A) 10% of the shares of common stock outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares of common stock as determined by the Board.

Options to purchase an aggregate of 5,250,000 shares of the Company’s Common Stock at an exercise price of $5.00 per share were granted to management and non-employee directors of Better Choice Company on May 2, 2019. Subject to the holder’s continued service to the Company, 1/24^th of the options vest on each monthly anniversary of the grant date such that the options are fully vested on the second anniversary of the grant date.

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After the Acquisitions, an additional 743,000 stock option awards were granted under the 2019 Incentive Award Plan. During the three and nine months ended September 30, 2019, 912,917 stock option awards vested due to severance agreements.

All vested options are exercisable and may be exercised through the ten-year anniversary of the grant date (or such earlier date described in the applicable award agreement following a holder’s termination of service).

The following table provides detail of the options granted and outstanding under the 2019 Incentive Award Plan. The table excludes any options awarded before the Plan was implemented.

					Vested Options		Non-vested options
	Total Number of Options		Weighted Average Exercise Price		Number		Number			Weighted average grant date fair value
Acquired on May 6, 2019		5,250,000	$	5.00		-		5,250,000		$	2.75
Granted		743,000		5.95		-		743,000			2.56
Vested during period				5.05		2,080,829		(2,080,829	)		2.75
Options outstanding at September 30, 2019		5, 993,000	$	5.12		2,080,829		3,912,171		$	2.73
Options expected to vest								3,907,571
Weighted average exercise price						5.05	$	5.15
Weighted average remaining contractual term (years)						9.6		9.6
Aggregate intrinsic value at September 30, 2019 (in thousands)					$	2	$	74

Pursuant to ASC 718-10-35-8, the Company recognizes compensation cost for stock awards with only service conditions that have a graded vesting schedule on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. During the three and nine months ended September 30, 2019, $2.5 million and $6.7 million, respectively, of share-based compensation expense was recognized related to stock options issued. The options were valued using the Black-Scholes method assuming the following:

•

Term: Equal to the mid-point between the fully vested date and the contractual expiration of the option.

•

Dividend yield: 0%

•

Exercise Price: $3.70 to $7.50

•

Risk-free rate: 1.41% to 2.39%

•

Volatility: 55-60%

The number of options expected to vest are estimated based on expected attrition rates for non-executives.

Aggregate intrinsic value represents the fair value of the Company’s Common Stock at the end of the period in excess of the exercise price multiplied by the number of options.

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Warrants

On May 6, 2019, the Company acquired 712,823 warrants to purchase Common Stock with a weighted average exercise price of $3.90 with the Acquisition of Better Choice Company. The Company also issued 5,744,991 warrants with an exercise price of $4.25 on May 6, 2019 as part of the PIPE. Additionally, in connection with the PIPE transaction, the Company issued 220,539 warrants to brokers with an exercise price of $3.00. During the three months ended September 30, 2019, a company advisor was issued 2,500,000 warrants with a strike price of $0.10 and 1,500,000 warrants with a strike price of $10.00.

	Warrants			Exercise Price
Warrants Acquired on May 6, 2019		712,823		$	3.90
Issued		9,965,530			4.05
Exercised		(1,144,999	)		3.50
Warrants outstanding at September 30, 2019		9,533,354		$	4.01

The intrinsic value of outstanding warrants is $11.8 million as of September 30, 2019. No warrants were issued or outstanding at September 30, 2018.

Note 16 - Employee Benefit Plans

The Company maintains a qualified defined contribution 401(k) plan, which covers substantially all of our employees. Under the plan, participants are entitled to make pre-tax and/or Roth post-tax contributions up to the annual maximums established by the Internal Revenue Service. The Company matches 4% of participant contributions pursuant to the terms of the plan, which contributions are limited to a percentage of the participant’s eligible compensation. The Company made contributions related to the plan of less than $0.1 million during both the three and nine months ended September 30, 2019, respectively and zero during the three and nine months ended September 30, 2018.

Note 17 - Related Party Transactions

Management Services

A related party provided management services during 2018. Payments related to this arrangement were less than $0.1 million for the three and nine months ended September 30, 2018. No payments were made to the related party during 2019. There were no outstanding balances at September 30, 2019 or December 31, 2018.

Marketing Services

A related party provides online traffic acquisition marketing services for the Company. The Company paid a total of $0.1 million for their services during the three and nine months ended September 30, 2019 and September 30, 2018. The service contract has a 30-day termination clause. Outstanding balances were less than $0.1 million at September 30, 2019 and December 31, 2018.

Financial and Accounting Personnel

The Company entered into an agreement with a related party in December 2018 for assistance and support regarding its financial operation and capital raise efforts and can be terminated at any time by either party with a 60-day notice with an affiliate of the managing member. Payments related to this agreement were less than $0.1 million and $0.2 million for the three and nine-month periods ended September 30, 2019, respectively. As of September 30, 2019, the agreement was terminated and there is no outstanding balance due.

Finder’s Fee and Other Services

The Company paid a finders’ fee of $0.3 million during the year ended December 31, 2018 to an entity owned by one of its officers. Additionally, the Company paid approximately $0.4 million to this entity for other professional services rendered. No amounts have been paid in 2019.

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Note 18 - Income Taxes

For the three and nine months ended September 30, 2019 we recorded income tax expense of zero.

Our effective tax rate differs from the United States federal statutory rate of 21% primarily because our losses have been offset by a valuation allowance due to uncertainty as to the realization of the tax benefit of net operating losses (“NOLs”).

The following is a reconciliation of the total amounts of unrecognized tax benefits (in thousands):

	Nine months ended September 30,
	2019
Unrecognized tax benefit beginning of year	$	--
Decreases-tax positions in prior year		--
Increases-tax positions in current year		--
Unrecognized tax benefit end of year	$	--

As of September 30, 2019, we had no accrued interest and penalties related to uncertain income tax positions. We do not anticipate that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

As of September 30, 2019, and 2018, the Company does not have any significant uncertain tax positions. If incurred, the Company would classify interest and penalties on uncertain tax positions as income tax expense.

On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the existing tax law by, among other things, lowering the United States corporate income tax rate from 35% to 21% beginning in 2018.

Although the accounting related to the income tax effects of the TCJA is complete pursuant to available guidance, certain technical aspects of the TCJA remain subject to varying degrees of uncertainty as additional technical guidance and clarification from the U.S. government continues to be issued. Receipt of additional guidance and clarification from the U.S. government, as well as changes to the Company’s operations, may result in material changes to the provision for income taxes. To the extent applicable, the Company would recognize such adjustments in the provision for income taxes in the period that additional guidance and clarification is received.

Note 19 - Major Suppliers

The Company purchased approximately 85% and 60% of its inventories from one vendor for the nine months ended September 30, 2019 and 2018, respectively and approximately 90% and 51% for the three months ended September 30, 2019 and 2018, respectively.

Note 20 - Concentration of Credit Risk and Off-Balance Sheet Risk

Cash and cash equivalents and accounts receivable potentially subject the Company to concentrations of credit risk. At September 30, 2019 and December 31, 2018, all the Company’s cash and cash equivalents were deposited in accounts at several financial institutions. The Company maintains its cash and cash equivalents with high-quality, accredited financial institutions and, accordingly, such funds are subject to minimal credit risk. The Company may maintain balances with financial institutions in excess of federally insured limits. The Company has not experienced any losses historically in these accounts and believes it is not exposed to significant credit risk in its cash and cash equivalents. The Company has no significant off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts, or other hedging arrangements.

The largest customer of the Company had purchases that represented approximately 4% and 6% of total gross sales for the nine months ended September 30, 2019 and 2018, respectively and approximately 4% and 6% for the three months ending September 30, 2019 and 2018. Accounts receivable from the largest customer represented 38% and 54% of accounts receivable at September 30, 2019 and December 31, 2018, respectively.

Note 21 - Net Loss per Share

Basic and diluted net loss per share attributable to Common Stockholders is presented using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future service that has not yet recognized are collectively assumed to be used to repurchase shares.

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Basic and diluted net loss per share is calculated by dividing net loss attributable to Common Stockholders by the weighted-average shares outstanding during the period. For the three and nine month periods ended September 30, 2019 and 2018, the Company’s basic and diluted net loss per share attributable to Common Stockholders are the same, because the Company has generated a net loss to Common Stockholders and Common Stock equivalents are excluded from diluted net loss per share as they have an antidilutive impact.

The following table sets forth basic and diluted net loss per share attributable to Common Stockholders for the three and nine months ended September 30, 2019 and 2018:

Dollars in thousands except per share amounts	Nine Months Ended September 30,						Three Months Ended September 30,
	2019			2018			2019			2018
Common Stockholders
Numerator:
Net loss	$	(170,311	)	$	(3,836	)	$	(6,025	)	$	(1,437	)
Less: Preferred Stock Dividends		70			-			43			-
Net loss attributable to Common Stockholders	$	(170,381	)	$	(3,836	)	$	(6,068	)	$	(1,437	)
Denominator:
Weighted average shares used in computing net loss per share attributable to Common Stockholders, basic and diluted		28,624,230			11,497,128			43,575,010			11,497,128
Net loss per share attributable to Common Stockholders, basic and diluted	$	(5.95	)	$	(0.33	)	$	(0.14	)	$	(0.12	)

Note 22 - Going Concern

The Company has incurred losses over the last three years and has an accumulated deficit. These operating losses create substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date these consolidated financial statements are issued.

The consolidated financial statements have been prepared on a going concern basis. In making this assessment, management conducted a comprehensive review of the Company’s affairs. We reviewed sales and profitability forecasts for the Company for the next fiscal year including the impact of the acquisition of Halo, Purely for Pets, Inc. (“Halo”) on December 20, 2019.

The Company believes its available cash together with future capital raises and available borrowings, are sufficient to fund planned operations and operate its business for the next 12 months. The Company continues to have access to the public markets for additional funds for operations as well as refinancing of existing loans.

If the Company is unable to raise the necessary funds when needed or achieve planned cost savings, or other strategic objectives are not achieved, the Company may not be able to continue its operations or the Company could be required to modify its operations that could slow future growth. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 23 - Subsequent Events

Management has evaluated subsequent events through the date on which the consolidated financial statements were issued.

Lease Operations

In October 2019, the Company moved its distribution center to its new facility. The lease on its new distribution facility was signed in May 2019.

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In November 2019, the Company terminated its month-to-month office lease at its Milford, Ohio location and started a new month-to-month lease in Blue Ash, Ohio.

Subordinated Convertible Notes

On November 6, 2019, the Company issued 2,750 subordinated convertible notes (each, a “Convertible Note” and collectively, the “Convertible Notes”) for total proceeds of $2.75 million to existing shareholders. In connection with the Convertible Notes, the purchasers will be issued warrants (each, a “Warrant” and collectively, the “Warrants”) to purchase shares of common stock par value $0.001 of the Company (the “Common Stock”) equal to 62.5 Warrants for each Note. Each Warrant will entitle the holder thereof to purchase one share of Common Stock of the Company for a period of 24 months from the date of the consummation of a future initial public offering (“IPO”) at an exercise price equal to the greater of (i) $5.00 per share or (ii) the price at which the Common Stock of the Company was sold in the IPO. The issue price per Convertible Note is $1,000 and the maturity date is two years from the issue date. The Convertible Notes include interest at a rate of 10.0% per annum from the date of issue, payable quarterly. Fifty percent of the interest shall be payable in kind and the remainder shall be payable in cash. The Company intends to use the net proceeds from the offering for general working capital needs.

Halo Acquisition

On October 15, 2019, the Company entered into a Stock Purchase Agreement (“the Agreement”) with Halo, a Delaware corporation, Thriving Paws, LLC, a Delaware limited liability company (“Thriving Paws”), HH-Halo LP, a Delaware limited partnership (“HH-Halo” and, together with Thriving Paws, the “Sellers”) with HH-Halo, in the capacity of the representative of the Sellers. Pursuant to the terms and subject to the conditions of the Agreement, the Company agreed to purchase one hundred percent (100%) of the issued and outstanding capital stock of Halo. Halo is an ultra-premium, natural pet food brand.

On December 18, 2019, Better Choice Company Inc. entered into an Amended and Restated Stock Purchase Agreement by and among the Company, Halo and the Sellers to acquire one hundred percent (100%) of the issued and outstanding capital stock of Halo, Purely For Pets, Inc (the “Acquisition”). Pursuant to the Amended Agreement, a portion of the consideration for the Acquisition as described below was paid to Werner von Pein, the chief executive officer of Halo.

Under the terms of the Amended Agreement, the Company completed the Acquisition on December 19, 2019, for approximately $45 million pending final valuation of non-cash components issued to the sellers in the acquisition. The consideration was subject to customary adjustments for Halo’s net working capital, cash, and indebtedness, and consisted of a combination of (i) cash consideration, (ii) a total of 2,134,390 shares of the Company’s common stock, par value $0.001 per share, and (iii) transaction costs. The Company also (i) entered into a Subscription Agreement with the Sellers relating to the issuance of the Common Stock Consideration, (ii) issued convertible subordinated seller notes (“Seller Notes”), and (iii) issued Seller Warrants on December 19, 2019.

Seller Notes

The Seller Notes are scheduled to mature on June 30, 2023 and accrue interest at 10.00% per annum from December 19, 2019 until the Maturity Date, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The interest shall be payable by increasing the aggregate principal amount of the Seller Notes. The Seller Notes may be converted into shares of Common Stock at any time prior to the last Business Day immediately preceding the Maturity Date and shall be automatically converted into Common Stock upon an IPO. The conversion price shall be equal to the lower of $4.00 per share or the price at which the Common Stock was sold in an IPO. In the event of a change of control, each holder of the Seller Notes shall have the option to (i) convert all of the Seller Notes held by such holder into a replacement note issued by the new issuer in an aggregate principal amount equal to 104% of the outstanding principal amount of, and all accrued interest on, the Seller Notes held by such holder or (ii) require the Company to repay all of the outstanding principal amount of the Seller Notes held by such holder at a redemption price of 4% of the sum of all outstanding principal amount of the Seller Notes held by such holder plus all accrued interest thereon. If any such holder of Seller Notes fails to make an election above within thirty days of receipt of written notice of the change of control, all principal and accrued interest under the Seller Notes held by such holder shall automatically convert into Common Stock at the conversion price.

Loan Agreement

On December 19, 2019, the Company entered into a Loan Facilities Agreement (the “Facilities Agreement”) by and among the Company, as the borrower, the several lenders from time to time parties thereto (collectively, the “Lenders”) and a private debt lender, as agent (the “Agent”) that provides for a term loan facility not to exceed $20.5 million (the “Term Facility”) and a revolving demand loan facility not to exceed $7.5 million (the “Revolving Facility” and, together with the Term Facility, the “Facilities”). The Facilities are scheduled to mature on December 19, 2020 or such earlier date on which a demand is made by the Agent or any Lender. The obligations of the Company under the Facilities Agreement are guaranteed by each of the Company’s domestic subsidiaries and secured by a first-priority security interest in substantially all of the assets of the Company and the assets of its domestic subsidiaries. Borrowings under the Facilities bear interest at a rate per annum equal to the floating annual rate of interest established from time to time by the Bank of Montreal plus 8.05% calculated on the daily outstanding balance of the Facilities and compounded monthly. The revolving line of credit was satisfied in full on the same date. Three directors of the Company entered into a Continuing Personal Guaranty agreement as a condition to the Facilities Agreement.

Amended Subordinated Convertible Notes

The Subordinated Convertible Notes were amended on January 6th, 2020. Pursuant to Section 7(c) of the Subordinated Convertible Promissory Note (the “Notes”) issued on November 11, 2019, the Purchasers have the right to amend and restate the Note and related documents to incorporate the preferable terms of any convertible promissory notes issued after November 11, 2019, so long as the Note is outstanding. As disclosed in the Company’s 8-K issued on December 26, 2019, the Company issued convertible subordinated notes to the Sellers and Werner von Pein. The Amended Agreement was entered into in order to incorporate only the preferable terms of the convertible subordinated notes issued to the Sellers and all other terms and provisions of the Note shall remain in full force and effect. Pursuant to the Amended Notes, the interest shall be payable by increasing the aggregate principal amount of the Notes (such increase being referred to therein as “PIK Interest”). As amended, for so long as any Event of Default (as defined in the Note) exists, interest shall accrue on the Note principal at the default interest rate of 12.0% per annum, and such accrued interest shall be immediately due and payable. As amended, the provisions of the Note that provided for an additional number of shares of Common Stock to the Investor if the IPO (as defined in the Note) had not been completed by June 30, 2020, have been removed.

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2019 Incentive Award Plan

On November 11, 2019, the Company received shareholder approval for the Amended and Restated 2019 Incentive Award Plan. Under the Amended and Restated 2019 Incentive Award Plan, the number of awards available for issuance increased from 6,000,000 to 9,000,000 with the closing of the Halo Acquisition on December 20, 2019

Effective as of December 19, 2019, the Board repriced all outstanding options to purchase Common Stock issued pursuant to the 2019 Better Choice Amended and Restated Incentive Award Plan, including options held by executive officers. As a result, the exercise price of all Options was lowered to $1.82 per share, the closing price of the Company’s Common Stock on December 19, 2019. No other terms of the Options were changed. Damian Dalla-Longa, Chief Executive Officer of the Company, Andreas Schulmeyer, Chief Financial Officer of the Company, and Anthony Santarsiero, President of the Company, are the executive officers who hold Options subject to the repricing.

The Board effectuated the repricing to realign the value of the Options with their intended purpose, which is to retain and motivate the holders of the Options to continue to work in the best interests of the Company. Prior to the repricing, many of the Options had exercise prices well above the recent market prices of the Common Stock. The Options were repriced unilaterally, and the consent of holders was neither necessary nor obtained.

Stock and Warrant Issuance

On December 31, 2019, the Company issued 20,371 stock options at a strike price of $2.70 to Mr. Schulmeyer as a sign on bonus as per the employment agreement

On January 3, 2020, the Company issued 308,642 shares of Common Stock to an investor for net proceeds of $0.5 million, net of issuance costs of less than $0.1 million.

During January 2020, the Company issued shares below the exercise price of warrants acquired on May 6, 2019. Pursuant to the warrant agreement, the Company is required to issue an additional 1,003,232 warrants to its warrant holders at a $1.62 exercise price and revise the existing warrants to an exercise price of $1.62.

The stock issued in conjunction with the Halo acquisition triggered an anti-dilution clause as part of an agreement with a third party. The Company will settle the required issuance of an additional 250,000 shares in the first quarter of 2020.

ABG Termination

On January 16, 2020, the Company terminated the Houndog licensing agreement (“Agreement”) with Associated Brands Group and Elvis Pressley Enterprises due to business judgment. As part of the termination, the Company agreed to the following: (1) to pay ABG One Hundred Thousand Dollars ($0.1 million) in cash upon the signing of this Agreement, (2) to issue to ABG Seventy Two Thousand Seven Hundred Twenty (72,720) shares of BTTR’s common stock, (3) to pay to ABG One Hundred Thousand Dollars ($0.1 million) in cash in four equal installments, (4) to issue to ABG Six Hundred Thousand Dollars ($0.6 million) in Subordinated Promissory Notes (the “Notes”), with the condition being that if the Company sells existing inventory in excess of One Hundred Thousand Dollars ($0.1 million), the Six Hundred Thousand Dollar ($0.6 million) Subordinated Promissory Note will be reduced on a dollar for dollar basis and (5) to issue to ABG a common stock purchase warrant (the “Warrants”) equating to a value of $150,000.

The Notes are scheduled to mature on June 30, 2023 (the “Maturity Date”) and accrue interest at 10.00% per annum from January 13, 2020, until the Maturity Date, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The interest shall be payable by increasing the aggregate principal amount of the Notes (such increase being referred to herein as “PIK Interest”). The Notes may be converted into shares of Common Stock at any time prior to the last Business Day immediately preceding the Maturity Date and shall be automatically converted into Common Stock upon an IPO (as defined in the Notes). The conversion price shall be equal to the lower of $4.00 per share or the price at which the Common Stock was sold in an IPO. In the event of a change of control, each holder of the Notes shall have the option to (i) convert all of the Notes held by such holder into a replacement note issued by the new issuer in an aggregate principal amount equal to 104% of the outstanding principal amount of, and all accrued interest on, of the Notes, held by such holder or (ii) require the Company to repay all of the outstanding principal amount of the Notes held by such holder at a redemption price of 4% of the sum of all outstanding principal amount of the Notes held by such holder plus all accrued interest thereon. If any such holder of Notes fails to make an election above within thirty days of receipt of written notice of the change of control, all principal and accrued interest under the Notes held by such holder shall automatically convert into Common Stock at the conversion price.

The Warrants are exercisable for 24 months from the date of the consummation of an IPO (as defined in the Warrants) at an exercise price equal to the greater of (i) $5.00 per share or (ii) the price at which the Common Stock was sold in the IPO.

No other recognized or non-recognized subsequent events were identified for recognition or disclosure in the financial statements.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview and Outlook

Better Choice Company is a holistic pet wellness company providing high quality raw Cannabidiol (“CBD”) infused and non-CBD infused food, treats, and supplements in addition to dental care products and accessories for pets and their human parents. Our products are formulated and manufactured using only high-quality ingredients manufactured, tested and packaged to our specifications.

On February 2, 2019 and February 28, 2019, respectively, Better Choice Company entered into definitive agreements to acquire through stock exchange agreements, approximately 93% of the outstanding limited liability company interest of TruPet LLC and all of the outstanding shares of Bona Vida, Inc., an emerging hemp-based CBD platform focused on developing a portfolio of brand and product verticals within the animal health and wellness space. On May 6, 2019, Better Choice Company consummated the stock exchange transactions whereby TruPet LLC and Bona Vida, Inc. became wholly owned subsidiaries of Better Choice Company. For accounting and financial reporting purposes, the transaction has been treated as a reverse acquisition whereby TruPet is considered the acquiror of Better Choice Company and Bona Vida, Inc. Thus, the historical financial information of the registrant is that of TruPet even though the legal registrant remains Better Choice Company.

TruPet was founded in 2013 and has a track record of increasing its sales and customer base since that time. TruPet has contributed to and has benefited from the positive trend toward feeding pets a healthy, natural diet. We pride ourselves on our customer service and ability to communicate and educate our customers. During 2017 and 2018, we increased marketing investments to acquire new customers while also maintaining our relationship with our current customers. During 2017, we launched the TruDog Love Club (“TLC”), a loyalty program that provides our customers with unique benefits including discounted prices, subscription shipments of replenishable products, free or reduced shipping, and other benefits not available to non-TLC members. The program has expanded and now has two tiers of loyalty club members. Tier 1 awards customers with six points per dollar spent and tier 2, TLC, awards customers with twelve points per dollar spent and provides opportunities to earn points at a higher rate. The number of loyalty members has grown to approximately 28,000 club members since its inception. Approximately 76% of DTC sales during the nine-month period ended September 30, 2019 and approximately 81% of DTC sales during the three-month period ended September 30, 2019 were from returning customers including TLC club members.

In order to obtain customers, we invest in advertising on social media sites and offer products to first time buyers at significant discounts. Our goal is to blend different acquisition channels as efficiently as possible in our advertising so that we obtain the most customers for the least amount of spend while maintaining our target growth rates. We are currently evaluating various long-term metrics for customer acquisition to determine the optimum mix of customer acquisition spend.

During 2018, we experienced two separate recalls of our products as a result of the detection of salmonella. Since that time, we and our third-party manufacturing partners have increased testing of each product batch to avoid any additional recalls. While we do not believe we lost customers because of the recalls, we did incur additional shipping and customer service expenses to alleviate and avoid additional backlogs in product shipments caused by the recalls. We allowed products to be shipped from the manufacturing plants to the warehouse using truckloads not at full capacity, or LTL, which is more expensive than limiting our shipments to full-capacity truckloads. We also shipped customer orders in several shipments, rather than waiting to fulfill entire orders as certain products were backlogged due to the recall. To address the additional strain on our customer service function, we also expanded the number and hours of our customer service representatives to help guide our customers through the recall process, resulting in an increase to our customer service costs.

Fiscal Year End

On May 21, 2019, the Board approved a change fiscal year from August 31 to December 31 to align with TruPet fiscal year end. The fiscal year change for the Company is effective with our 2019 fiscal year, which begins January 1, 2019 and ends December 31, 2019.

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Components of Our Results of Operations

Net Sales

We sell non-CBD and CBD infused product for pets, including private branded freeze dried and dehydrated raw foods, supplements, dental care products for dogs, and treats and accessories for dogs, cats, and pet parents. We sell our products through our online portal directly to our consumers and through online retailers and pet specialty retail stores. Our products are sold under the TruDog, RawGo, TruCat, OraPup and Bona Vida brands.

Net sales include revenue derived from the sale of our products and related shipping fees offset by promotional discounts, refunds and loyalty points earned. We offer a variety of promotions and incentives to our customers including daily discounts, multi-bag purchase discounts and coupon codes for initial purchases. Historically, our net sales have been driven by our distribution of our products through our direct to consumer channel. However, sales through the wholesale channel have become a more important component of our growth in net sales and gross profit.

Key factors that affect our future sales growth include: our new product introduction in both the non-CBD and CBD markets, our expansion into wholesale and other specialty channels, entry into the market of competitors in the CBD industry and international expansion. We recognize revenue to depict the transfer of promised goods to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. Revenue is recognized at the time the order is shipped to the DTC customers and the majority of wholesale customers, as this is when control transfers, with the exception of the Company’s largest customer due to specific FOB designation shipping terms We record a revenue reserve based on past return rates to account for customer returns.

Cost of Goods Sold and Gross Profit

Our products are manufactured to our specifications by contracted manufacturing plants. We design our packaging in-house for manufacture by third parties. Packaging is shipped directly to contracted manufacturing plants. We directly source the hemp derived CBD oils used in our products from select suppliers to ensure product quality and traceability of the ingredient. CBD oils are shipped to our warehouse and forwarded to our contracted manufacturing partners as needed for production. Our contract manufacturers procure the raw food ingredients, manufacture, test and package our products. Cost of goods sold consists primarily of the cost of product obtained from the contract manufacturing plants, packaging materials and CBD oils directly sourced by the Company, and freight for shipping product from our contract manufacturing plants to our warehouse. We review inventory on hand periodically to identify damages, slow moving inventory, and/or aged inventory. Based on the analysis, we record inventories on the lower of cost and net realizable value, with any reduction in value expensed as cost of goods sold.

We calculate gross profit as net sales, including any shipping revenue collected from our customers, less cost of goods sold. Our gross profit has been and, we expect, will continue to be affected by a variety of factors, primarily product sales mix, volumes sold, discounts offered to our club members, discounts offered to newly acquired and recurring customers, the cost of our manufactured products, and the cost of freight from the manufacturer to our warehouse. Changes in cost of goods sold and gross profit may be driven by the volume and price of our sales, including the extent of discounts offered, variations in the cost of CBD and the price we pay for our manufactured products and variations in our freight costs.

Operating Expenses

General and administrative expenses include management and office personnel compensation and bonuses, share-based compensation, corporate level information technology related costs, rent, travel, professional service fees, costs related to merchant credit card fees, shipping costs, insurance, product development costs and general corporate expenses. We expect general and administrative expenses to continue to increase in absolute dollars as we expand our commercial infrastructure to both drive and support our planned growth in revenue and support the additional costs associated with being a public company.

Sales and marketing expenses include costs related to compensation for sales personnel, other costs related to the selling platform, as well as marketing, including paid media and content creation expenses. Marketing expenses consist primarily of Facebook and other media ads, other advertising and marketing costs, all geared towards acquiring new customers and building brand awareness. We expect selling expense to continue to grow as we actively acquire new online customers and begin to build our wholesales channel.

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Customer service and warehousing costs include the cost of our customer service department, including our in-house call center, and costs associated with warehouse operations, including but not limited to payroll, rent, and warehouse management systems.

Interest Expense

Interest expense originates from debt incurred under a under a revolving credit agreement entered into in May 2019, and under our note payable to a prior TruPet LLC member, corporate credit cards, our line of credit agreement and other debt in place prior to the Acquisitions.

Income Taxes

Our income tax provision consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions and uncertain tax positions. During the three and nine-month periods ended September 30, 2019 and September 30, 2018, we did not record income tax expense. TruPet was a limited liability company until the May 6, 2019 acquisitions. Subsequent to the consummation of the Acquisitions, the Company, as a corporation, is required to provide for income taxes.

Results of Operations

Three and Nine Months Ended September 30, 2019 Compared to Three and Nine Months Ended September 30, 2018

	Nine Months Ended									Three Months Ended
$ in 000’s	2019			2018			% Change			2019			2018			% Change
Net Sales	$	11,567		$	11,045			5	%	$	3,932		$	3,981			(1	)%
Cost of Goods Sold		7,178			5,786			24	%		3,096			2,457			26	%
Gross Profit		4,389			5,259			(17	)%		836			1,524			(45	)%
General & Administrative		12,031			4,013			200	%		4,856			1,341			262	%
Share-Based Compensation		6,708			-			-			2,496			-			-
Sales & Marketing		8,452			4,061			108	%		2,856			1,242			130	%
Customer Service and Warehousing		854			927			(8	)%		303			350			(13	)%
Loss from Operations	$	(23,656	)	$	(3,742	)		532	%	$	(9,675	)	$	(1,409	)		587	%

Net Sales

Net sales increased $0.5 million, or 5%, to $11.6 million for the nine months ended September 30, 2019 compared to $11.0 million for the nine months ended September 30, 2018.

Net sales decreased less than $0.1 million, or 1%, to $3.9 million for the three months ended September 30, 2019 compared to $4.0 million for the three months ended September 30, 2018.

Net sales increased in the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 as a result of increased media and acquisition spend and a shift to higher unit priced products. Our TruDog brand shifted away from dental products during the first half of 2019 towards consumable food and topper sales. Dental products were effective for initial customer acquisition but return and retention rates were relatively low. Although food and topper products are not as effective in initial customer conversion as the dental products, food and topper products yield a better lifetime value as retention and repeat rates are higher. Over the nine-month period ended on September 30, 2019, 76% of our products sold were to repeat customers.

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The decrease in net sales in the three months ended September 30, 2019 as compared to the three months ended September 30, 2018 were the result of a more competitive customer acquisition environment where we had to spend more on acquisition costs to achieve the same level of sales. We continue to see high retention rates of returning customers either through our subscription offers or from repeat purchases. During the three-month period ended September 2019, 81% of sales were to repeat customers. Repeat customers earned and redeemed TLC loyalty points at a higher rate in the period ended September 30, 2019 than in any prior period. By focusing on repeat customers, we can reduce the initial discounting we offer first time customers, effectively raising our average unit revenue. We expect the share of returning sales to continue to grow as we focus our acquisition spend on high value, repeat buyers. Online retail partners sales dropped slightly as we continued to focus on driving traffic to our own sites.

Cost of Goods Sold and Gross Profit

Cost of goods sold increased $1.4 million, or 24%, to $7.2 million for the nine months ended September 30, 2019 compared to $5.8 million for the nine months ended September 30, 2018. The increase in cost of goods sold was primarily due to a mix shift to food and topper products, which have higher costs than dental products offset by improved conversion costs from our manufacturing partners as we continue to negotiate and expect to see further cost reductions as we rationalize the product offering and gain scale in the remaining products. We also expensed $0.6 million in royalty expenses in the nine-month period ended in September 30, 2019 related to our licensing contract for the Houndog brand from Elvis Presley Enterprises. The cost of hemp derived CBD oils has declined in the market, thus, reducing our ingredient costs. In the nine-month periods ended on September 30, 2019 and 2018, the inventory reserve taken was $0.4 million and $0.1 million, respectively, for slow moving and discontinued items. As a percentage of revenue, cost of goods sold increased to 62% during the nine months ended September 30, 2019 compared to 52% during the nine months ended September 30, 2018.

Cost of goods sold increased $0.6 million, or 26%, to $3.1 million for the three months ended September 30, 2019 compared to $2.5 million for the three months ended September 30, 2018. During the three-months ended on September 30, 2019, we continued to negotiate for improved conversion costs from our manufacturing partners and saw the initial benefits of our reduction efforts. We also expensed $0.6 million in royalty expenses in the nine-month period ended in September 30, 2019 related to our licensing contract for the Houndog brand from Elvis Presley Enterprises. The inventory review at the end of the three-month period ended on September 30, 2019 led to an inventory reserve charge of $0.2 million for the quarter as compared to a reserve of less than $0.1 million for the three months ended September 30, 2018. As a percentage of revenue, cost of goods sold increased to 79% during the three months ended September 30, 2019 compared to 62% during the three months ended September 30, 2018.

During the nine months ended September 30, 2019, gross profit decreased $0.9 million, or 17%, to $4.4 million compared to $5.3 million during the nine months ended September 30, 2018. Gross profit margin decreased to 38% from 48% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The ongoing shift into food and topper products from the dental products sold in 2018 and through the first half of 2019, the discounting of discontinued products and the Houndog royalty expense reduced the gross profit margin for the nine-month period ended September 30, 2019.

During the three months ended September 30, 2019, gross profit decreased $0.7 million, or 45%, to $0.8 million compared to $1.5 million for the three months ended September 30, 2018. Gross profit margin also decreased to 21% from 38% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. During the three-months ended on September 30, 2019, we incurred the Houndog royalty expense of $0.6 million.

Operating Expenses

During the nine months ended September 30, 2019, general and administrative expenses increased approximately $8.0 million, or 200% to $12.0 million compared to $4.0 million in the nine months ended September 30, 2018. The increase resulted from the expansion of our corporate staff and the incurrence of professional fees post-acquisitions as we began building the infrastructure to support our status as a public company. We saw higher than normal shipping costs during the nine months ended September 30, 2018 due to a product recall. During this period, we shipped partial orders and replacement product, increasing our shipping expenses.

During the three months ended September 30, 2019, general and administrative expenses increased approximately $3.5 million, or 262%, to $4.9 million compared to $1.3 million in the three months ended September 30, 2018. The increase resulted from the expansion of our corporate staff and the incurrence of professional fees post-acquisition as we began building the infrastructure to support our status as a public company. In the three months ended September 30, 2019, we achieved lower unit shipping costs as we gain scale and shipping efficiency.

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During the nine months ended September 30, 2019, we incurred share-based compensation of $6.7 million, as compared to share based compensation of $0 during the nine months ended in September 30, 2018. The increase in equity-based compensation was driven by awards issued as part of the Incentive Plan.

During the three months ended September 30, 2019, we incurred share-based compensation of $2.5 million, as compared to share based compensation of $0 during the three months ended in September 30, 2018. The increase in equity-based compensation was driven by awards issued as part of the 2019 Incentive Plan.

During the nine months ended September 30, 2019, sales and marketing expenses, including paid media, increased approximately $4.4 million, or 108%, to $8.5 million from $4.1 million during the nine months ended in September 30, 2018 as a result of increased new customer acquisition efforts. TruPet traditionally invested in Facebook advertisement to drive traffic to the site. We increased spending on Facebook and Google and began to invest in other media outlets to build brand awareness. In August 2019, we tested radio advertisement for our CBD infused pet treats to drive incremental demand for the products. We paused the radio advertising at the end of September 2019, as we did not see the expected pickup in CBD sales.

During the three months ended September 30, 2019, sales and marketing expenses, including paid media, increased approximately $1.6 million, or 130%, to $2.9 million from $1.2 million during the three months ended in September 30, 2018 primarily due to a shift in media spending towards Facebook and Google advertisements as well as retargeting lapsed customers. In August 2019, we tested radio advertisement for our CBD infused pet treats to drive incremental demand for the products. We paused the advertising at the end of September 2019, as we did not see the expected pickup in CBD sales.

During the nine months ended September 30, 2019, other customer service and warehousing costs decreased $0.1 million, or 8%, to $0.8 million compared to $0.9 million for the nine months ended September 30, 2018. We rationalized the operations in our warehouse at the end of 2018, reducing the staff and operating costs. The reductions in customer service and warehousing costs during the nine months ended September 30, 2019 were offset by increased costs when we began renovating a new facility near Tampa, Florida to house our warehouse, fulfillment and administrative departments. Rent and associated utilities for this period are reflecting both the rent for the new facility as well as the existing facility.

During the three months ended September 30, 2019, customer service and warehousing costs decreased $0.1 million, or 13%, to $0.3 million compared to $0.4 million for the three months ended September 30, 2018. We rationalized the operations in our warehouse at the end of 2018, reducing staff and operating costs. The reductions in customer service and warehousing costs during the three months ended September 30, 2019 were offset by increased costs when we began renovating a new facility in Tampa, Florida to house our warehouse, fulfillment and administrative departments. Rent and associated utilities for this period are reflecting both the rent for the new facility as well as the existing facility.

Research and Development

We do not invest in non-CBD pet food research, but we do continually review sales of our existing products as well as those of non-CBD competitors to identify possible product extensions. We acquired two CBD related research agreements as part of the acquisition of Bona Vida Inc. We will invest resources into the effectiveness of CBD infused canine pet food to determine if specific strains of CBD are more effective than others in addressing canine health issues. We are also conducting trials with existing products to determine optimal product formulations., We incurred less than $0.1 million of research and development expenses during the three and nine-month periods ended September 30, 2019 and $0 during the three-month and nine month periods ended September 30, 2018. We expect to continue incur research and development expenses during the remainder of 2019 and in future periods. Research and development costs are included in general and administrative costs.

Interest Expense, Net

During the nine months ended September 30, 2019, interest expense increased $0.1 million, or 76% to $0.2 million compared to $0.1 million for the nine months ended September 30, 2018. Interest expense increased primarily due to the refinancing of the Company’s line of credit agreement of $6.2 million on May 6, 2019 versus an interest free shareholder loan for the nine month period ended September 30, 2018.

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During the three months ended September 30, 2019 and 2018, interest expense was less than $0.1 million.

Income Taxes

No provision has been made for federal and state income taxes prior to the date of the acquisitions since the proportionate share of TruPet’s income or loss was included in the personal tax returns of its members because TruPet was a limited liability company. Subsequent to the acquisitions, the Company, as a corporation is required to provide for income taxes.

The effective tax rate subsequent to the acquisitions 0%. The effective tax rate differs from the U.S. Federal statutory rate of 21% primarily because our previously reported losses have been offset by a valuation allowance due to uncertainty as to the realization of those losses.

Loss from Acquisition

Note 2 in the Notes to the Unaudited Consolidated Financial Statements details the impact of the transaction on May 6, 2019.

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Liquidity and Capital Resources

Since our founding, we have financed our operations primarily through sales of member units as a limited liability company, sales of shares of Common Stock and warrants, as a corporation, preferred stock, loans and cash flows generated by operations. At September 30, 2019, we had cash and cash equivalents of $9.0 million (including restricted cash of $6.2 million) which represented an increase of $5.1 million from December 31, 2018.

The following table presents a summary of our cash flow for the nine-month periods ended:

$ in thousands	September 30, 2019			September 30, 2018
Cash flows from (used in):
Operating activities	$	(13,224	)	$	(3,057	)
Investing activities		364			(31	)
Financing activities		17,915			3,165
Net increase (decrease) in cash and cash equivalents	$	5,055		$	77

Cash flows from Operating Activities

Cash provided by (used in) operating activities consisted of net loss adjusted for non-cash items, including the loss on acquisitions, stock-based compensation expense, change fair value of in derivative liability, depreciation and amortization, changes in working capital and other activities.

Cash used in operating activities increased $10.2 million, or over 100%, during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. Cash used in operating activities was $13.2 million for the nine months ended September 30, 2019, which consisted of the net loss from operations of $170.3 million, offset by $147.0 million from the loss on acquisitions, $6.7 million in share-based compensation expense and a combined $3.6 million of net cash generated via changes in operating assets and current liabilities. Cash used in operating activities was $3.1 million for the nine months ended September 30, 2018, which consisted of net loss of $3.8 million, offset by a combined $0.8 million net cash generated via changes in operating assets and current liabilities.

The decrease in working capital (deficit) during the nine months ended September 30, 2019 was primarily due to an increase of accrued liabilities of $3.3 million offset by an increase in inventories of $0.7 million.

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The decrease in working capital (deficit) during the nine months ended September 30, 2018 was primarily due to an increase in accounts payable of $1.2 million offset by an increase in inventories of $0.5 million

Cash flows from Investing Activities

Cash from investing activities decreased by $0.4 million, during the nine months ended September 30, 2019 from less than $0.1 million during the nine months ended September 30, 2018. The change in cash from investing activities is the result of $0.4 million cash acquired in the acquisitions offset by acquisition costs and a small increase in cash spent for the acquisition of fixed assets.

Cash flows from Financing Activities

Cash from financing activities increased by $14.8 million, to $17.9 million, during the nine months ended September 30, 2019 from $3.2 million during the nine months ended September 30, 2018. The primary drivers of the overall cash from financing activities were net proceeds from a private placement of $15.8 million offset by payments to eliminate the balance due under the Business Cash Advance Agreement of $1.9 million. The Company refinanced debt acquired in the merger of $6.2 million with the proceeds from the issuance of new debt of $6.2 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Significant Accounting Policies

Our discussion and analysis of our results of operations and liquidity and capital resources are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to basis of presentation, use of estimates, cash and cash equivalents, inventory, revenue recognition, income taxes, fair value of financial instruments, fair value measurements, derivative financial instruments, basic and diluted loss per share, related parties, discontinued operations, and investments (see Note 1 to the Company’s consolidated financial statements). We base our estimates on historical and anticipated results and trends and on various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results that differ from our estimates could have a significant adverse effect on our operating results and financial position. We believe that the significant accounting policies and assumptions as detailed in Note 1 to the financial statements contained herein may involve a higher degree of judgment and complexity than others.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this Item.

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ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the quarter ended September 30, 2019. Based upon that evaluation, the Company’s Chief Executive and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2019 due to the material weakness described below.

A material weakness in internal control over financial reporting is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (United States) Auditing Standard No. 2), or a combination of control deficiencies, that result in there being more than a remote likelihood of material misstatement in the annual or interim financial statements would not be prevented or detected.

The matters involving internal controls and procedures that our management considered to be material weaknesses were: (1) The Company has not designed or implemented a system of internal controls. As a result, the Company does not have (i) segregation of duties and evidence of fiduciary oversight related to the financial statement close process, cash disbursements process, contract approval process and time and expense reimbursement process; (ii) formally documented accounting policies and procedures that are effective and consistently applied in accordance with GAAP; and (iii) effective controls and resources to address the accounting requirements for new accounting pronouncements. (2) The Company’s financial statement close process and disclosure controls and procedures, including the secondary review and approval of financial information generated to prepare the consolidated financial statements, and the functionality of underlying IT systems used to consolidate the Company’s subsidiaries, are ineffective. As a result, the Company has been unable to close its books or fulfill its SEC reporting requirements in a timely manner. (3) The Company has ineffective controls for assessing its sales tax obligations, including timely payment and accrual recognition. The aforementioned material weaknesses were identified by our Chief Executive Officer and Chief Financial Officer in connection with the review of our consolidated financial statements as of September 30, 2019.

Management believes that the material weaknesses set forth above did impact our ability to report our financial results in a timely manner.

Management is in the process of determining how best to change our current system and implement a more effective system to ensure that information required to be disclosed in reports that must be filed with the Securities and Exchange Commission has been recorded, processed, summarized and reported accurately. Our management acknowledges the existence of this problem and intends to develop procedures to address this problem to the extent possible given limitations in financial and manpower resources. While management is working on a plan, no assurance can be made at this point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate once implemented.

Changes in Internal Control over Financial Reporting

In September 2019, the Company hired a Controller as part of its efforts to address internal accounting personnel deficiencies. In November 2019, the Company integrated a sales tax solution into the direct to consumer platform to ensure accurate sales tax accruals. In December 2019, the Company acquired Halo, Purely for Pets, Inc. The existing Halo finance team will support the process of bringing current outsourced processes in house. There were no other significant changes in internal control over financial reporting during the three month period ended September 30, 2019.

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PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

ITEM 1A.

RISK FACTORS

The Company qualifies as a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and is not required to provide information under this Item.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We have previously disclosed all sales of securities without registration under the Securities Act of 1933, as amended.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Listed and indexed below are all Exhibits filed as part of this Quarterly Report.

Exhibit Number	Description	Form	File No.	Exhibit	Filing Date	Filed/Furnished Herewith
2.1*	Stock Purchase Agreement, dated October 15, 2019, by and among Better Choice Company Inc., Halo, Purely For Pets, Inc., Thriving Paws, LLC and HH-Halo LP.	8-K	333-161943	2.1	10/18/19
2.2*	Amendment No. 1 to Stock Purchase Agreement, dated November 22, 2019, by and among Better Choice Company Inc., Halo, Purely For Pets, Inc., Thriving Paws, LLC and HH-Halo LP.	8-K	333-161943	2.2	11/27/19
2.3*	Amended and Restated Stock Purchase Agreement, dated December 18, 2019, by and among Better Choice Company Inc., Halo, Purely For Pets, Inc., Thriving Paws, LLC and HH-Halo LP.	8-K	333-161943	2.1	12/26/19

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Exhibit Number	Description	Form	File No.	Exhibit	Filing Date	Filed/Furnished Herewith
3.1	Certificate of Incorporation.	10-Q	333-161943	3.1	4/14/2019
3.2	Certificate of amendment to Certificate of Incorporation.	10-Q	333-161943	3.2	7/14/17
3.3	Certificate of amendment to Certificate of Incorporation.	8-K	333-161943	3.1	3/22/18
3.4	Certificate of amendment to Certificate of Incorporation.	10-KT	333-161943	3.5	7/24/19
3.5	Bylaws.	10-Q	333-161943	3.5	4/15/19
4.1	Tranche 1 Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton.	8-K	333-161943	4.1	9/23/19
4.2	Tranche 2 Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton.	8-K	333-161943	4.2	9/23/19
4.3	Additional Warrant, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton.	8-K	333-161943	4.3	9/23/19
4.4	Form of Subordinated Convertible Promissory Note, dated November 11, 2019, by and among Better Choice Company Inc. and John M. Word and Edward Brown.	8-K	333-161943	4.1	11/15/2019
4.5	Form of Common Stock Purchase Warrant, dated November 11, 2019, by and among Better Choice Company Inc. and John M. Word and Edward Brown.	8-K	333-161943	4.2	11/15/2019
4.6	Form of Registration Rights Agreement, dated November 11, 2019, by and among Better Choice Company Inc. and John M. Word and Edward Brown.	8-K	333-161943	4.3	11/15/2019
4.7	Form of Subordinated Convertible Promissory Note, dated December 19, 2019, by and among Better Choice Company Inc. and the Halo Sellers listed on the signature pages thereto.					*
4.8	Form of Common Stock Purchase Warrant, dated December 19, 2019, by and among Better Choice Company Inc. and the Halo Sellers.					*
4.9	Form of Registration Rights Agreement, dated December 19, 2019, by and among Better Choice Company Inc. and the Halo Sellers.					*
4.10	Form of Common Stock Purchase Warrant, dated December 19, 2019, by and among Better Choice Company Inc. and the Shareholder Personal Guarantors.					*
10.1***	Loan Facilities Credit Letter Agreement, dated December 19, 2019, by and among the Better Choice Company Inc., Halo, Purely for Pets, Inc., Bona Vida Inc., TruPet LLC and Bridging Finance Inc., as agent.					*
10.2*	Pledge and Security Agreement, dated December 19, 2019, by and among Better Choice Company, Inc., Halo, Purely or Pets, Inc., Bona Vida, Inc., TruPet LLC and Bridging Finance Inc., as Administrative Agent.					*
10.3	Continuing Guaranty of Halo, Purely for Pets, Inc., Bona Vida Inc., TruPet LLC, dated December 19, 2019,					*
10.4	Continuing Personal Guaranty of John Word, Lori Taylor and Michael Young, dated December 19, 2019.					*
10.5	Form of Subscription Agreement, dated November 11, 2019, by and among Better Choice Company Inc. and the John M. Word and Edward Brown.	8-K	333-161943	10.1	11/15/2019

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Exhibit Number	Description	Form	File No.	Exhibit	Filing Date	Filed/Furnished Herewith
10.6	Form of Subscription Agreement, dated December 19, 2019, by and among Better Choice Company Inc. and the Halo Sellers.					*
10.7	Independent Contractor Agreement, dated September 17, 2019, by and between Better Choice Company Inc. and Bruce Linton.	8-K	333-161943	10.1	9/23/19
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					*
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.					*
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					*
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.					*
101.INS	XBRL Instance Document					*
101.SCH	XBRL Taxonomy Extension Schema Document					*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document					*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document					*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document					*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document					*

* Certain schedules and similar attachments to this agreement have been omitted in accordance with item 601(a)(5) of Regulation S-K. The company will furnish copies of any schedules or similar attachments to the SEC upon request.

*** Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such excluded information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BETTER CHOICE COMPANY INC.

Date: January 31, 2020	By:	/s/ Damian Dalla-Longa

	Damian Dalla-Longa Chief Executive Officer

Date: January 31, 2020	By:	/s/ Andreas Schulmeyer

	Andreas Schulmeyer Chief Financial Officer

Exhibit 10.2

Execution Version

PLEDGE AND SECURITY AGREEMENT

DATED AS OF December 19, 2019

AMONG

BETTER CHOICE COMPANY INC.,
as Borrower

CERTAIN SUBSIDIARIES OF BETTER CHOICE COMPANY INC.
FROM TIME TO TIME PARTY HERETO
as Grantors

and

BRIDGING FINANCE INC.,
as Administrative Agent

TABLE OF CONTENTS			Page

SECTION 1		DEFINITIONS	1

	1.1	General Definitions	1

	1.2	Definitions; Interpretation	8

SECTION 2		GRANT OF SECURITY	8

	2.1	Grant of Security	8

	2.2	Certain Limited Exclusions	10

SECTION 3		SECURITY FOR OBLIGATIONS; GRANTORS REMAIN LIABLE	10

	3.1	Security for Obligations	10

	3.2	Continuing Liability Under Collateral	11

SECTION 4		REPRESENTATIONS AND WARRANTIES AND COVENANTS	11

	4.1	Generally	11

	4.2	Equipment and Inventory	15

	4.3	Accounts	17

	4.4	Investment Related Property	19

	4.5	Material Contracts	27

	4.6	Letter of Credit Rights	28

	4.7	Intellectual Property	28

	4.8	Commercial Tort Claims	33

SECTION 5		ACCESS; RIGHT OF INSPECTION AND FURTHER ASSURANCES; ADDITIONAL GRANTORS	33

	5.1	Access; Right of Inspection	33

	5.2	Further Assurances	34

	5.3	Additional Grantors	35

SECTION 6		ADMINISTRATIVE AGENT APPOINTED ATTORNEY-IN-FACT	35

	6.1	Power of Attorney	35

	6.2	No Duty on the Part of Administrative Agent or Secured Parties	36

SECTION 7		REMEDIES	37

	7.1	Generally	37

	7.2	Application of Proceeds	38

	7.3	Sales on Credit	39

	7.4	Deposit Accounts	39

	7.5	Investment Related Property	39

	7.6	Intellectual Property	39

	7.7	Cash Proceeds	42

TABLE OF CONTENTS (continues)		Page

SECTION 8	ADMINISTRATIVE AGENT	42

SECTION 9	CONTINUING SECURITY INTEREST; TRANSFER OF LOANS	43

SECTION 10	STANDARD OF CARE; ADMINISTRATIVE AGENT MAY PERFORM	43

SECTION 11	MISCELLANEOUS	44

SCHEDULE 4.1	— INFORMATION

SCHEDULE 4.2	— LOCATION OF EQUIPMENT AND INVENTORY

SCHEDULE 4.4	— INVESTMENT RELATED PROPERTY

SCHEDULE 4.6	— DESCRIPTION OF LETTERS OF CREDIT

SCHEDULE 4.7	— INTELLECTUAL PROPERTY - EXCEPTIONS

SCHEDULE 4.8	— COMMERCIAL TORT CLAIMS

EXHIBIT A	— PLEDGE SUPPLEMENT

This PLEDGE AND SECURITY AGREEMENT, dated as of December 19, 2019 (this “Agreement”), among BETTER CHOICE COMPANY INC., a Delaware corporation (“Borrower”), CERTAIN SUBSIDIARIES OF BORROWER from time to time party hereto as grantors (such Subsidiaries, together with Borrower, the “Grantors”), the Lenders from time to time a party hereto, and BRIDGING FINANCE INC., as administrative agent for the Secured Parties (as herein defined) (in such capacity as administrative agent, “Administrative Agent”).

RECITALS:

WHEREAS, reference is made to that certain Loan Facilities Letter Agreement, dated as of the date hereof (as it may be amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Facilities Agreement”), by and between Borrower, Holdings, certain Subsidiaries of Borrower from to time to time party thereto as Guarantors, the Lenders from time to time party thereto, and Bridging Finance Inc. in its capacity as Administrative Agent;

WHEREAS, in consideration of the extensions of credit and other accommodations of Lenders as set forth in the Facilities Agreement, each Grantor has agreed to secure such Grantor’s obligations under the Credit Documents as set forth herein; and

NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, each Grantor and the Administrative Agent agree as follows:

SECTION 1 DEFINITIONS.

1.1 General Definitions. In this Agreement, the following terms have the following meanings:

“Account Debtor” means each Person who is obligated on an Account.

“Accounts” means all “accounts” as defined in Article 9 of the UCC.

“Additional Grantors” has the meaning assigned in Section 5.3.

“Administrative Agent” has the meaning set forth in the preamble.

“Agreement” has the meaning set forth in the preamble.

“Borrower” has the meaning set forth in the recitals.

“Cash Proceeds” has the meaning assigned in Section 7.7.

“Chattel Paper” means all “chattel paper” as defined in Article 9 of the UCC, including, without limitation, “electronic chattel paper” or “tangible chattel paper”, as each term is defined in Article 9 of the UCC.

“Collateral” has the meaning assigned in Section 2.1.

“Collateral Account” means any account established by the Administrative Agent and designated as the Collateral Account for purposes hereof.

“Collateral Records” means books, records, ledger cards, files, correspondence, customer lists, blueprints, technical specifications, manuals, computer software, computer files, computer printouts, drives, disks and related data processing software and similar items that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon.

“Collateral Support” means all property (real or personal) assigned, hypothecated or otherwise securing any Collateral and shall include any security agreement or other agreement granting a lien or security interest in such real or personal property.

“Commercial Tort Claims” means all “commercial tort claims” as defined in Article 9 of the UCC, including, without limitation, all commercial tort claims listed on Schedule 4.8 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement).

“Commodities Accounts” means all “commodity accounts” as defined in Article 9 of the UCC and includes, without limitation, all of the accounts listed on Schedule 4.4 under the heading “Commodities Accounts” (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement).

“Copyright Licenses” means any and all agreements providing for the granting of any right in or to Copyrights (whether such Grantor is licensee or licensor thereunder) including, without limitation, each agreement referred to in Schedule 4.7(B) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement).

“Copyrights” means all United States copyrights (including community designs), including but not limited to copyrights in software and databases, and all Mask Works (as defined under 17 U.S.C. 901 of the U.S. Copyright Act), whether registered or unregistered, and, with respect to any and all of the foregoing: (i) all registrations and applications therefor including, without limitation, the registrations and applications referred to in Schedule 4.7(A) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement), (ii) all extensions and renewals thereof, (iii) all rights corresponding thereto throughout the world, (iv) all rights to sue for past, present and future infringements thereof, and (v) all Proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages and proceeds of suit.

“Credit Date” means any date on which any amount is borrowed under either of the Facilities.

“Deposit Accounts” means all “deposit accounts” as defined in Article 9 of the UCC and includes, without limitation, all of the accounts listed on Schedule 4.4 under the heading “Deposit Accounts” (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement).

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“Documents” means all “documents” as defined in Article 9 of the UCC.

“Equipment” means all “equipment” as defined in Article 9 of the UCC, including but not limited to (i) all machinery, manufacturing equipment, data processing equipment, computers, office equipment, furnishings, furniture, appliances, fixtures and tools (in each case, regardless of whether characterized as equipment under the UCC) and (ii) all accessions or additions thereto, all parts thereof, whether or not at any time of determination incorporated or installed therein or attached thereto, and all replacements therefor, wherever located, now or hereafter existing, including any fixtures.

“Excluded Account” means, with respect to each Credit Party each (i) payroll account of such Person so long as the funds on deposit therein at any time do not exceed the then aggregate accrued payroll obligations of such Person, (ii) Deposit Account maintained in connection with an employee benefit plan provided to such Person’s employees to the extent the funds on deposit therein are held for the benefit of such Person’s employees and are not the assets of such Person, (iii) tax withholding or fiduciary account not otherwise described in this definition, (iv) client custodial accounts, (v) zero balance accounts, (vi) other Deposit Accounts with balances which shall not at any time exceed $100,000 in the aggregate for all such accounts at any one time, and (vii) any other Deposit Account that the Administrative Agent, in its sole discretion, may designate.

“Excluded Deposit Account” means any Deposit Account that is an Excluded Account.

“Excluded Property” has the meaning set forth in Section 2.2 hereof.

“Excluded Securities Account” means any Securities Account that is an Excluded Account.

“Facilities Agreement” has the meaning set forth in the recitals.

“General Intangibles” means all “general intangibles” as defined in Article 9 of the UCC, including “payment intangibles” also as defined in Article 9 of the UCC and includes, without limitation, all interest rate or currency protection or hedging arrangements, all tax refunds, all licenses, permits, concessions and authorizations, and all Intellectual Property (in each case, regardless of whether characterized as general intangibles under the UCC).

“Goods” means all “goods” as defined in Article 9 of the UCC.

“Grantors” has the meaning set forth in the preamble.

“Grantor Software” means all Software that is owned by any Grantor and used in the conduct of the business of any Grantor, including without limitation, all (i) programs used in any Grantor’s provision of any products, Software or service offerings to customers and/or end users, including any programs incorporated in, or integrated or bundled with, any such products, Software or service offerings, (ii) programs intended for license to customers and/or end users, and (iii) programs, libraries, modules and other materials used by any Grantor in the development, design, construction and testing of any of the programs described in (i) or (ii) above.

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“Instruments” means all “instruments” as defined in Article 9 of the UCC.

“Intellectual Property” means, collectively, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks, the Trademark Licenses, the Trade Secrets, and the Trade Secret Licenses.

“Insurance” means all insurance policies covering any or all of the Collateral (regardless of whether the Administrative Agent is the loss payee thereof) and any key man life insurance policies.

“Inventory” mans all “inventory” as defined in Article 9 of the UCC, including but not limited to all goods held for sale or lease or to be furnished under contracts of service or so leased or furnished, all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in any Grantor’s business; all goods in which any Grantor has an interest in mass or a joint or other interest or right of any kind; and all goods which are returned to or repossessed by any Grantor, all computer programs embedded in any goods and all accessions thereto and products thereof (in each case, regardless of whether characterized as inventory under the UCC).

“Investment Accounts” means the Collateral Account, and all Securities Accounts, Commodities Accounts, and Deposit Accounts with any bank, financial institution, securities intermediary, or any other Person.

“Investment Related Property” means: (i) all “investment property” (as such term is defined in Article 9 of the UCC) and (ii) all of the following (regardless of whether classified as investment property under the UCC): all Pledged Equity Interests, Pledged Debt, the Investment Accounts and certificates of deposit.

“Lender” has the meaning set forth in the Facilities Agreement.

“Letter of Credit Right” means “letter-of-credit right” as defined in Article 9 of the UCC.

“Money” means “money” as defined in the UCC.

“Non-Assignable Contract” means any agreement, contract or license to which any Grantor is a party that by its terms purports to restrict or prevent the assignment or granting of a security interest therein (either by its terms or by any federal or state statutory prohibition or otherwise irrespective of whether such prohibition or restriction is enforceable under Section 9-406 through 409 of the UCC).

“OS License” means a license listed or described at http://www.opensource.org (Open Source Initiative) or other similar type of license agreement, freeware agreement or distribution model agreement.

“OS Software” means any Software licensed under, or subject to the terms of, an OS License.

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“Patent Licenses” means all agreements providing for the granting of any right in or to Patents (whether such Grantor is licensee or licensor thereunder) including, without limitation, each agreement referred to in Schedule 4.7(D) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement).

“Patents” means all United States and certificates of invention, or similar industrial property rights, and applications for any of the foregoing, including, but not limited to: (i) each patent and patent application referred to in Schedule 4.7(C) hereto (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement), (ii) all reissues, divisions, continuations, continuations-in-part, extensions, renewals, and reexaminations thereof, (iii) all rights corresponding thereto throughout the world, (iv) all inventions and improvements described therein, (v) all rights to sue for past, present and future infringements thereof, (vi) all licenses, claims, damages, and proceeds of suit arising therefrom, and (vii) all Proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages, and proceeds of suit.

“Pledge Supplement” means any supplement to this agreement in substantially the form of Exhibit A.

“Pledged Debt” means all Indebtedness owed to such Grantor, including, without limitation, all Indebtedness described on Schedule 4.4(A) under the heading “Pledged Debt” (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement), issued by the obligors named therein, the instruments evidencing such Indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such Indebtedness.

“Pledged Equity Interests” means all Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests and Pledged Trust Interests.

“Pledged LLC Interests” means all interests in any limited liability company that is a Subsidiary owned by a Grantor including, without limitation, all limited liability company interests listed on Schedule 4.4(A) under the heading “Pledged LLC Interests” (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) and the certificates, if any, representing such limited liability company interests and any interest of such Grantor on the books and records of such limited liability company or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such limited liability company interests. For the avoidance of doubt, Pledged LLC Interests shall not include any Excluded Property.

“Pledged Partnership Interests” means all interests in any general partnership, limited partnership, limited liability partnership or other partnership that, in each case, is a Subsidiary owned by a Grantor, including, without limitation, all partnership interests listed on Schedule 4.4(A) under the heading “Pledged Partnership Interests” (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) and the certificates, if any, representing such partnership interests and any interest of such Grantor on the books and records of such partnership or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such partnership interests. For the avoidance of doubt, Pledged Partnership Interests shall not include any Excluded Property.

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“Pledged Stock” means all shares of Capital Stock of any Subsidiary owned by a Grantor, including, without limitation, all shares of Capital Stock described on Schedule 4.4(A) under the heading “Pledged Stock” (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement), and the certificates, if any, representing such shares and any interest of such Grantor in the entries on the books of the issuer of such shares or on the books of any securities intermediary pertaining to such shares, and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares. For the avoidance of doubt, Pledged Stock shall not include any Excluded Property.

“Pledged Trust Interests” means all interests in a Delaware business trust or other trust that is a Subsidiary owned by a Grantor including, without limitation, all trust interests listed on Schedule 4.4(A) under the heading “Pledged Trust Interests” (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) and the certificates, if any, representing such trust interests and any interest of such Grantor on the books and records of such trust or on the books and records of any securities intermediary pertaining to such interest and all dividends, distributions, cash, warrants, rights, options, instruments, securities and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such trust interests.

“Proceeds” means: (i) all “proceeds” as defined in Article 9 of the UCC, (ii) payments or distributions made with respect to any Investment Related Property and (iii) whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary.

“Record” has the meaning specified in Article 9 of the UCC.

“Secured Obligations” has the meaning assigned in Section 3.1.

“Secured Parties” means the Administrative Agent and Lenders and shall include, without limitation, any former Administrative Agent and all former Lenders to the extent that any Secured Obligations outstanding and owing to such Persons were incurred while such Persons were Administrative Agent or a Lender, as applicable, and such Secured Obligations have not been paid or satisfied in full.

“Securities” means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as “securities” or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing.

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“Securities Accounts” means all “securities accounts” as defined in Article 8 of the UCC and includes, without limitation, all of the accounts listed on Schedule 4.4(A) under the heading “Securities Accounts” (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement).

“Software” means any computer software program, source code, machine- readable instructions, associated data and documentation, backup tape and related technology.

“Supporting Obligation” means all “supporting obligations” as defined in Article 9 of the UCC.

“Trademark Licenses” means any and all agreements providing for the granting of any right in or to Trademarks (whether such Grantor is licensee or licensor thereunder) including, without limitation, each agreement referred to in Schedule 4.7(F) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement).

“Trademarks” means all United States, state, and territorial trademarks, trade names, corporate names, company names, business names, fictitious business names, Internet domain names, service marks, certification marks, collective marks, logos, other source or business identifiers, designs and general intangibles of a like nature, all registrations and applications for any of the foregoing including, but not limited to: (i) the registrations and applications referred to in Schedule 4.7(E) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement), (ii) all extensions or renewals of any of the foregoing, (iii) all of the goodwill of the business connected with the use of and symbolized by the foregoing, (iv) the right to sue for past, present and future infringement or dilution of any of the foregoing or for any injury to goodwill, and (v) all Proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages, and proceeds of suit.

“Trade Secret Licenses” means any and all agreements providing for the granting of any right in or to Trade Secrets (whether such Grantor is licensee or licensor thereunder) including, without limitation, each agreement referred to in Schedule 4.7(G) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement).

“Trade Secrets” means all trade secrets and all other confidential or proprietary information and know-how whether or not such Trade Secret has been reduced to a writing or other tangible form, including all documents and things embodying, incorporating, or referring in any way to such Trade Secret, including but not limited to: (i) the right to sue for past, present and future misappropriation or other violation of any Trade Secret, and (ii) all Proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages, and proceeds of suit.

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“UCC” means the Uniform Commercial Code as in effect from time to time in the State of New York or, when the context implies, the Uniform Commercial Code as in effect from time to time in any other applicable jurisdiction.

“United States” means the United States of America.

1.2 Definitions; Interpretation. All capitalized terms used herein (including the preamble and recitals hereto) and not otherwise defined herein shall have the meanings ascribed thereto in the Facilities Agreement or, if not defined therein, in the UCC. References to “Sections,” “Exhibits” and “Schedules” shall be to Sections, Exhibits and Schedules, as the case may be, of this Agreement unless otherwise specifically provided. References to Schedules shall include any updates or supplements to such Schedules delivered to the Administrative Agent from time to time to the extent such Schedules are permitted and/or required to be updated by the terms of this Agreement. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. The use herein of the word “include” or “including”, when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as “without limitation” or “but not limited to” or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. If any conflict or inconsistency exists between this Agreement and the Facilities Agreement, the Facilities Agreement shall govern. All references herein to provisions of the UCC shall include all successor provisions under any subsequent version or amendment to any Article of the UCC.

SECTION 2 GRANT OF SECURITY.

2.1 Grant of Security. Each Grantor hereby grants to the Administrative Agent, for the benefit of the Secured Parties, a security interest in and continuing lien on all of such Grantor’s right, title and interest in, to and under all personal property and other assets, whether now owned by or owing to, or hereafter acquired by or arising in favor of, such Grantor (including under any trade name or derivations thereof), and whether owned or consigned by or to, or leased from or to, such Grantor, and regardless of where located (all of which being hereinafter collectively referred to as the “Collateral”):

(a)

all Accounts;

(b)

all Chattel Paper;

(c)

all Commercial Tort Claims;

(d)

all Documents;

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(e)

all Equipment;

(f)

all Fixtures;

(g)

all General Intangibles;

(h)

all Goods;

(i)

all Instruments;

(j)

all Insurance;

(k)

all Intellectual Property;

(l)

all Inventory;

(m)

all Investment Related Property;

(n)

all Letter of Credit Rights;

(o)

all Money;

(p)

to the extent not otherwise included above, all Collateral Records, Collateral Support and Supporting Obligations relating to any of the foregoing;

(q)

to the extent not otherwise included above, all Proceeds, products, accessions, insurance proceeds and products, rents, and profits of or in respect of any of the foregoing.

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2.2 Certain Limited Exclusions. Notwithstanding anything in this Agreement to the contrary, in no event shall the Collateral include nor shall the security interest granted under Section 2.1 hereof attach to (a) any lease, instrument, license, contract, property rights or agreement to which any Grantor is a party or any of its rights or interests thereunder if and for so long as the grant of such security interest shall constitute or result in (i) the abandonment, invalidation or unenforceability of any right, title or interest of any Grantor therein or (ii) a breach, violation or right of termination in favor of any other party thereto (other than another Grantor or any wholly-owned Subsidiary of a Grantor) pursuant to the terms of, or a default under, any such lease, instrument, license, contract (including any Non-Assignable Contract), property rights (or agreements governing such property rights) or agreement (other than to the extent that any such term would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity), provided however that the Collateral shall include and such security interest shall attach immediately at such time as the condition causing such abandonment, invalidation, unenforceability, breach, termination or default shall be remedied and to the extent severable, shall attach immediately to any portion of such lease, instrument, license, contract, property rights or agreement that does not result in any of the consequences specified in clauses (i) or (ii) above; (b) any assets as to which the Administrative Agent reasonably determines that the costs (including tax costs to the Borrower and its Subsidiaries) of obtaining or perfecting a security interest in such assets (whether borne by Administrative Agent or the Credit Parties) exceed the practical benefit to the Secured Parties afforded thereby; (c) any “intent to use” trademark applications prior to the filing of a “Statement of Use” or “Amendment to Allege Use” with respect thereto, to the extent, if any, that, and solely during the period, if any, in which, the grant of a security interest therein would impair the validity or enforceability of such intent-to-use trademark application under applicable law, (d) property owned by a Grantor that is subject to a Permitted Encumbrance securing purchase money indebtedness or Capital Lease obligations permitted under the Facilities Agreement if the contractual obligation pursuant to which such Permitted Encumbrance is granted (or in the document providing for such Capital Lease obligation or purchase money indebtedness) prohibits the creation of any other Encumbrance on such item of property; (e) any Capital Stock or other assets the granting of security interests in which would breach, violate or be prohibited by any applicable law; (f) any Excluded Deposit Accounts or Excluded Securities Accounts; (g) governmental licenses and state or local franchises, charters and authorizations to the extent that the granting of security interests in such assets pursuant to the Collateral Documents would be prohibited or restricted by applicable law or by the terms of such governmental licenses and state or local franchises, charters and authorizations (other than to the extent that any such prohibition or restriction would be rendered ineffective pursuant to the UCC or any other applicable law); (h) motor vehicles or other assets the attachment or perfection of an Encumbrance thereon is subject to such Encumbrance being evidenced on a certificate of title pursuant to a certificate of title statute (other than to the extent an Encumbrance thereon can be perfected by the filing of a financing statement under the UCC); (i) any Real Estate Asset to the extent not required to be pledged to secure the Obligations pursuant to Section 5.11 of the Facilities Agreement; (j) margin stock (within the meaning of Regulation U issued by the FRB); and (k) Capital Stock or assets of a Person to the extent that, and for so long as (i) Borrower and its Subsidiaries own less than 100% of Capital Stock of such Person (excluding directors’ qualifying shares), (ii) any Investment in such Person by Borrower and its Subsidiaries was permitted by Section 6.7 of the Facilities Agreement, and (iii) the granting of a security interest in such Capital Stock in favor of the Administrative Agent are not permitted by the terms of such issuing Person’s Organizational Documents or otherwise require any consent not obtained of a Person or Persons who are not Borrower or Subsidiaries of Borrower (it being understood and agreed that the Grantors shall use commercially reasonable efforts to obtain any such consent), other than to the extent that any prohibition, restriction or consent requirement would be rendered ineffective pursuant to the UCC or any other applicable law (collectively, the “Excluded Property”); provided, however, the “Excluded Property” shall not include any Proceeds, products, substitutions or replacements of any Excluded Property (unless such Proceeds, products, substitutions or replacements would themselves otherwise constitute Excluded Property); provided, further, if any Excluded Property that would have otherwise constituted Collateral ceases to be Excluded Property, such property shall automatically be deemed Collateral at all times from and after such time.

SECTION 3 SECURITY FOR OBLIGATIONS; GRANTORS REMAIN LIABLE.

3.1 Security for Obligations. This Agreement secures, and the Collateral is collateral security for, the prompt and complete payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. §362(a) (and any successor provision thereof)), of all Obligations with respect to every Grantor (collectively, the “Secured Obligations”).

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3.2 Continuing Liability Under Collateral. Notwithstanding anything herein to the contrary, (a) each Grantor shall remain liable for all obligations with respect to the Collateral and nothing contained herein is intended or shall be a delegation of duties to the Administrative Agent or any Secured Party, (b) each Grantor shall remain liable under each of the agreements included in the Collateral, including, without limitation, any agreements relating to Pledged Equity Interests, to perform all of the obligations undertaken by it thereunder all in accordance with and pursuant to the terms and provisions thereof and neither the Administrative Agent nor any Secured Party shall have any obligation or liability under any of such agreements by reason of or arising out of this Agreement or any other document related thereto nor shall the Administrative Agent nor any Secured Party have any obligation to make any inquiry as to the nature or sufficiency of any payment received by it or have any obligation to take any action to collect or enforce any rights under any agreement included in the Collateral, including, without limitation, any agreements relating to Pledged Equity Interests, and (c) the exercise by the Administrative Agent of any of its rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral.

SECTION 4 REPRESENTATIONS AND WARRANTIES AND COVENANTS.

4.1 Generally.

(a) Representations and Warranties. Each Grantor hereby represents and warrants, on the Closing Date and on each Credit Date, that:

(i) it owns the Collateral purported to be owned by it or otherwise has the rights it purports to have in each item of Collateral and, as to all Collateral whether now existing or hereafter acquired, will continue to own (except for any sales or dispositions permitted by the Facilities Agreement) or have such rights in each item of the Collateral, in each case free and clear of any and all Encumbrances, including, without limitation, Encumbrances arising as a result of such Grantor becoming bound (as a result of merger or otherwise) as debtor under a security agreement entered into by another Person, other than Permitted Encumbrances;

(ii) it has indicated on Schedule 4.1(A) (as such schedule may be amended or supplemented from time to time): (w) the type of organization of such Grantor, (x) the jurisdiction of organization of such Grantor, (y) its organizational number, and (z) the jurisdiction where the chief executive office or its sole place of business is (or the principal residence if such Grantor is a natural person), and for the one-year period preceding the date hereof has been, located.

(iii) the full legal name of such Grantor is as set forth on Schedule 4.1(A) (as such schedule may be amended or supplemented from time to time) and it has not done in the last five (5) years, and does not do, business under any other name (including any trade-name or fictitious business name) except for those names set forth on Schedule 4.1(B) (as such schedule may be amended or supplemented from time to time);

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(iv) except as provided on Schedule 4.1(C) (as such schedule may be amended or supplemented from time to time), it has not changed its name, jurisdiction of organization, chief executive office or sole place of business (or principal residence if such Grantor is a natural person) or its corporate structure in any way (e.g., by merger, consolidation, change in corporate form or otherwise) within the past five (5) years;

(v) it has not within the last five (5) years become bound (whether as a result of merger or otherwise) as debtor under a security agreement entered into by another Person (other than another Grantor with respect to a security agreement which creates a Permitted Encumbrance), which has not heretofore been terminated other than the agreements identified on Schedule 4.1(D) hereof (as such schedule may be amended or supplemented from time to time);

(vi) with respect to each agreement identified on Schedule 4.1(D) it has indicated on Schedule 4.1(A) and Schedule 4.1(B) the information required pursuant to Section 4.1(a)(ii), (iii) and (iv) with respect to the debtor under each such agreement;

(vii) (u) upon the filing of all UCC financing statements naming each Grantor as “debtor” and the Administrative Agent as “secured party” and describing the Collateral in the filing offices set forth opposite such Grantor’s name on Schedule 4.1(E) hereof (as such schedule may be amended or supplemented from time to time) and other filings delivered by each Grantor, (v) upon delivery of all Instruments, Chattel Paper and certificated Pledged Equity Interests and Pledged Debt, (w) upon sufficient identification of Commercial Tort Claims, (x) upon execution of a control agreement establishing the Administrative Agent’s “control” (within the meaning of Section 8-106, 9-106 or 9-104 of the UCC, as applicable) with respect to any Investment Account and Deposit Accounts (other than Excluded Securities Accounts and/or Excluded Deposit Accounts), (y) upon consent of the issuer with respect to Letter of Credit Rights, and (z) to the extent not subject to Article 9 of the UCC, upon recordation of the security interests granted hereunder in Patents, Trademarks and Copyrights in the applicable intellectual property registries, including but not limited to the United States Patent and Trademark Office and the United States Copyright Office, the security interests granted to the Administrative Agent hereunder constitute valid and perfected first priority Encumbrances (subject in the case of priority only to Permitted Encumbrances) on all of the Collateral that may be perfected under Article 9 of the UCC, provided that no representation is made with respect to the laws of any foreign jurisdiction;

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(viii) except as covered in clause (x) below, all actions and consents, including all filings, notices, registrations and recordings, necessary for the exercise by the Administrative Agent of the voting or other rights provided for in this Agreement have been made or obtained (other than (a) any filings or registrations necessary to perfect (or maintain the perfection of) the security interest granted hereunder (as described in Section 4.1(a)(vii)), (b) any consents, approvals, filings or registrations required to be obtained or made in connection with the exercise by the Administrative Agent of certain rights or remedies under the Credit Documents to the extent required pursuant to the terms thereof or applicable law and (c) as may be required, in connection with the disposition of any Investment Related Property, by laws generally affecting the offering and sale of Securities); provided, in each case, that no representation is made with respect to the laws of any foreign jurisdiction;

(ix) other than the financing statements filed in favor of the Administrative Agent, no effective UCC financing statement, fixture filing or other instrument similar in effect under any applicable law covering all or any part of the Collateral is on file in any filing or recording office except for (x) financing statements for which proper termination statements have been delivered to the Administrative Agent for filing or will be filed by the lender under any Indebtedness being paid off on or within one (1) Business Day of the Closing Date and (y) financing statements filed in connection with Permitted Encumbrances;

(x) no authorization, approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for either (i) the pledge or grant by any Grantor of the Encumbrances purported to be created in favor of the Administrative Agent hereunder or (ii) the exercise by the Administrative Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created hereunder or created or provided for by applicable law), except (A) for the filings contemplated by clause (vii) above or covered by clause (viii) above, (B) as may be required, in connection with the disposition of any Investment Related Property, by laws generally affecting the offering and sale of Securities and (C) notices or filings required under the Federal Assignment of Claims Act of 1940 or like federal, state or local statute; provided, in each case, that no representation is made with respect to the laws of any foreign jurisdiction;

(xi) all information supplied by any Grantor with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects;

(xii) none of the Collateral constitutes, or is the Proceeds of, “farm products” (as defined in the UCC);

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(xiii) it does not own any “as extracted collateral” (as defined in the UCC) or any timber to be cut; and

(xiv) such Grantor has been duly organized as an entity of the type as set forth opposite such Grantor’s name on Schedule 4.1(A) (as such schedule may be amended or supplemented from time to time) solely under the laws of the jurisdiction as set forth opposite such Grantor’s name on Schedule 4.1(A) (as such schedule may be amended or supplemented from time to time) and remains duly existing as such. Such Grantor has not organized in any other jurisdiction.

(b) Covenants and Agreements. Each Grantor hereby covenants and agrees that:

(i) except for the security interest created by this Agreement, it shall not create or suffer to exist any Encumbrance upon or with respect to any of the Collateral, except Permitted Encumbrances, and such Grantor shall defend the Collateral against all Persons at any time claiming any interest therein (other than the holders of Permitted Encumbrances);

(ii) except as would not reasonably be expected to result in a Material Adverse Effect, it shall not produce, use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral;

(iii) it shall not change such Grantor’s name, identity, corporate structure (e g., by merger, consolidation, change in corporate form or otherwise) (except as permitted by Section 18(dd) of the Facilities Agreement), principal place of business (or principal residence if such Grantor is a natural person), chief executive office, type of organization or jurisdiction of organization or establish any trade names unless it shall (1) have notified the Administrative Agent in writing prior to such change or establishment and (2) promptly following such change or establishment, but in any event not to exceed 30 days following such change, (a) execute and deliver to the Administrative Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, identifying such new name, identity, corporate structure, principal place of business (or principal residence if such Grantor is a natural person), chief executive office or jurisdiction of organization or trade name and providing such other information in connection therewith as the Administrative Agent may reasonably request and (b) take all actions necessary or reasonably requested by Administrative Agent to maintain the continuous validity, perfection and the same or better priority of the Administrative Agent’s security interest in the Collateral intended to be granted and agreed to hereby;

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(iv) it shall pay promptly when due all material taxes imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent the validity thereof is being contested in good faith;

(v) upon such Grantor or any officer of such Grantor obtaining knowledge thereof, it shall promptly notify the Administrative Agent in writing of any event that could reasonably be expected to have a Material Adverse Effect on the value of the Collateral or the rights and remedies of the Administrative Agent in relation thereto, including, without limitation, the levy of any legal process against the Collateral or any material portion thereof that could reasonably be expected to have a Material Adverse Effect;

(vi) it shall not take or permit any action which could reasonably be expected to impair the Administrative Agent’s rights in the Collateral, except for any such actions which are otherwise permitted by the Facilities Agreement;

(vii) it shall not sell, transfer or assign (by operation of law or otherwise) any Collateral except as otherwise in accordance with the Facilities Agreement; and

(viii) if during any Fiscal Year, any information contained in Schedule 4.1. 4.2, 4.4, 4.5. 4.6. 4.7 or 4.8 changes in a manner that would require an update in any material respect under this Agreement, then concurrently with the delivery of the financial statements for such Fiscal Year delivered pursuant to Section 18(s)(i) of the Facilities Agreement, or such earlier time as otherwise required herein, the Grantors shall deliver a Pledge Supplement, which provides an update of the information contained in such schedules, provided that such supplement shall in no event waive or otherwise affect the continuance of any Event of Default.

4.2 Equipment and Inventory.

(a) Representations and Warranties. Each Grantor represents and warrants, on the Closing Date and on each Credit Date, that:

(i) all of the Equipment and Inventory included in the Collateral is kept only at the locations specified in Schedule 4.2 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) other than Equipment and Inventory that is (A) in transit in the ordinary course of business, (B) removed from any such locations for repair or upkeep in the ordinary course of business or (C) kept at any location or locations where, combined with all other Equipment and Inventory at such location(s), the value of such Equipment and Inventory does not exceed $150,000 in value in the aggregate; and

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(ii) none of the Inventory or Equipment is in the possession of an issuer of a negotiable document (as defined in Section 7-104 of the UCC) therefor or otherwise in the possession of a bailee or a warehouseman, other than (A) for repair, service or similar action, (B) Inventory or Equipment which is in transit to another location of Grantor or to a place of repair, service or similar action, (C) to the extent the aggregate value of such Inventory or Equipment does not exceed $100,000, or (D) Inventory or Equipment in which the Administrative Agent shall have received bailee or warehouseman letters or Landlord Personal Property Collateral Access Agreements reasonably requested by it or required pursuant to the terms of the Facilities Agreement or this Agreement to evidence its security interests in the Collateral.

(b) Covenants and Agreements. Each Grantor covenants and agrees that:

(i) it shall keep the Equipment, Inventory and any Documents evidencing any Equipment and Inventory in the locations specified on Schedule 4.2 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) other than Equipment and Inventory that is (A) in transit in the ordinary course of business, (B) removed from any such locations for repair or upkeep in the ordinary course of business or (C) kept at any location or locations where, combined with all other Equipment and Inventory at such location(s), the value of such Equipment and Inventory does not exceed $150,000 in value in the aggregate, unless it shall have (a) notified the Administrative Agent in writing, by executing and delivering to the Administrative Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, at least 15 days (or such shorter period acceptable to Administrative Agent) prior to any change in locations, identifying such new locations and providing such other information in connection therewith as the Administrative Agent may reasonably request and (b) taken all actions necessary or advisable to maintain the continuous validity, perfection and the same or better priority of the Administrative Agent’s security interest in the Collateral intended to be granted and agreed to hereby, or to enable the Administrative Agent to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory;

(ii) it shall keep correct and accurate records of the Inventory, as is customarily maintained under similar circumstances by Persons of established reputation engaged in similar business, and in any event in conformity with GAAP;

(iii) it shall not deliver any Document evidencing any Equipment and Inventory to any Person other than the issuer of such Document to claim the Equipment or Inventory, as applicable, evidenced therefor or the Administrative Agent; and

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(iv) if any Equipment or Inventory is in possession or control of any third party, other than Equipment and Inventory that is (A) in transit in the ordinary course of business, (B) removed from any such locations for repair or upkeep in the ordinary course of business or (C) kept at any location or locations where, combined with all other Equipment and Inventory at such location(s), the value of such Equipment and Inventory does not exceed $150,000 in value in the aggregate, each Grantor shall join with the Administrative Agent in notifying the third party of the Administrative Agent’s security interest and use its commercially reasonable efforts in obtaining an acknowledgment from the third party that it is holding the Equipment and Inventory for the benefit of the Administrative Agent.

4.3 Accounts.

(a) Representations and Warranties. Each Grantor represents and warrants, on the Closing Date and on each Credit Date, that:

(i) to its knowledge, each Account in excess of $25,000 individually (a) is and will be the legal, valid and binding obligation of the Account Debtor in respect thereof, representing an unsatisfied obligation of such Account Debtor, (b) is and will be enforceable in accordance with its terms (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors’ rights generally or by equitable principles relating to enforceability or by principles of good faith and fair dealing (regardless of whether enforcement is sought in equity or at law)), (c) is not and will not be subject to any setoffs, defenses, counterclaims (except with respect to refunds, warranties, discounts returns and allowances and disputes in the ordinary course of business) and (d) is and will be in compliance in all material respects with all applicable laws, whether federal, state, local or foreign; and

(ii) no Account Debtor in respect of any Account included in the Collateral in excess of $25,000 individually or $100,000 in the aggregate is the government of the United States, any agency or instrumentality thereof, any state or municipality or any foreign sovereign (excluding any international non-governmental organization). No Account in excess of $25,000 individually or $100,000 in the aggregate requires the consent of the Account Debtor in respect thereof in connection with the pledge hereunder, except any consent which has been obtained.

(b) Covenants and Agreements. Each Grantor hereby covenants and agrees that

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(i) it shall keep and maintain at its own cost and expense substantially complete records of any material portion of the Accounts included in the Collateral, including, but not limited to, the originals, if applicable, of all documentation with respect to all Accounts and records of all payments received and all credits granted on any material portion of the Accounts, all merchandise returned and all other dealings therewith;

(ii) it shall perform in all material respects all of its material obligations with respect to its Accounts, to the extent deemed prudent business conduct as determined by such Grantor in its reasonable business discretion;

(iii) other than in the ordinary course of business as generally conducted by it, and except as otherwise provided in subsection (v) below, following an Event of Default that has occurred and is continuing and after written notice from Administrative Agent or if Administrative Agent has otherwise exercised any rights or remedies pursuant to Section 4.3(b)(v) below or Section 7 of this Agreement, such Grantor shall not (w) grant any extension or renewal of the time of payment of any Account with a value in excess of $25,000, (x) compromise or settle any dispute, claim or legal proceeding with respect to any Account with a value in excess of $25,000 for less than the total unpaid balance thereof, (y) release, wholly or partially, any Person liable for the payment thereof, or (z) allow any credit or discount thereon (other than in the ordinary course), in each case, without the consent of the Administrative Agent;

(iv) except as otherwise provided in this subsection, each Grantor shall continue to collect all material amounts due or to become due to such Grantor under its Accounts and any Supporting Obligation in a manner consistent with the ordinary course of business as generally conducted by it, and diligently exercise, in such Grantor’s reasonable business judgment, each material right it may have under any Account, any Supporting Obligation or Collateral Support, in each case, at its own expense, and in connection with such collections and exercise, such Grantor shall take such action as such Grantor or, after the occurrence and during the continuance of an Event of Default, the Administrative Agent may deem reasonably necessary or advisable. Notwithstanding the foregoing, after the occurrence and during the continuance of an Event of Default, the Administrative Agent shall have the right at any time to notify, or require any Grantor to notify, any Account Debtor of the Administrative Agent’s security interest in Grantor’s Accounts and, in addition, after the occurrence and during the continuation of an Event of Default, the Administrative Agent may, following written notice to Grantors,: (1) direct the Account Debtors under any Account to make payment of all amounts due or to become due to such Grantor thereunder directly to the Administrative Agent; (2) notify, or require any Grantor to notify, each Person maintaining a lockbox or similar arrangement to which Account Debtors under any Account have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to the Administrative Agent; and (3) enforce, at the reasonable expense of such Grantor, collection of any such Account and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. If the Administrative Agent notifies any Grantor that it has elected to collect any Account in accordance with the preceding sentence, any payments of Accounts received by such Grantor shall be forthwith (and in any event within two (2) Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Administrative Agent if required, in the Collateral Account maintained under the sole dominion and control of the Administrative Agent, and until so turned over, all amounts and proceeds (including checks and other instruments) received by such Grantor in respect of such Accounts, any Supporting Obligation or Collateral Support shall be received in trust for the benefit of the Administrative Agent hereunder and such Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any Account Debtor or obligor thereof, or allow any credit or discount thereon (other than in the ordinary course); and

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(v) it shall use its commercially reasonable efforts to keep in full force and effect any Supporting Obligation or Collateral Support relating to any Account, to the extent deemed prudent business conduct as determined by such Grantor in its reasonable business judgment.

4.4 Investment Related Property.

4.4.1 Investment Related Property Generally

(a) Covenants and Agreements. Each Grantor hereby covenants and agrees that:

(i) in the event it acquires rights in any Investment Related Property that is required to be Collateral with a value in excess of $100,000 individually or $300,000 in the aggregate (except with respect to any Investment Related Property issued by a Grantor or any Subsidiary of a Grantor, as to which such threshold shall not apply) after the date hereof (other than Cash Equivalents), it shall promptly deliver to the Administrative Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, reflecting such new Investment Related Property and all other Investment Related Property. Notwithstanding the foregoing, it is understood and agreed that the security interest of the Administrative Agent shall attach to all Investment Related Property that is required to be Collateral immediately upon any Grantor’s acquisition of rights therein and shall not be affected by the failure of any Grantor to deliver a supplement to Schedule 4.4 as required hereby;

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(ii) except as provided in the next sentence, in the event such Grantor receives any non-cash dividends, interest or distributions on any Investment Related Property included in the Collateral, or any securities or other property constituting Collateral upon the merger, consolidation, liquidation or dissolution of any issuer of any Investment Related Property, then (a) such dividends, interest or distributions and securities or other property shall be included in the definition of Collateral without further action and (b) such Grantor shall promptly take all steps, if any, required hereunder to ensure the validity, perfection, priority and, if applicable, control of the Administrative Agent over such Investment Related Property (including, without limitation, delivery thereof to the Administrative Agent to the extent required by Section 4.4.1(b)) and pending any such action such Grantor shall be deemed to hold such non-cash dividends, interest, distributions, securities or other property for the benefit of the Administrative Agent and shall segregate such non-cash dividends, distributions, Securities or other property from all other property of such Grantor. Notwithstanding the foregoing, so long as no Event of Default shall have occurred and be continuing, the Administrative Agent authorizes each Grantor to retain all such dividends and distributions and all payments of interest or principal;

(iii) each Grantor consents to the grant by each other Grantor of a Security Interest in all Investment Related Property that is required to be Collateral (or which would be Collateral with the consent of such Grantor) to the Administrative Agent.

(b) Delivery and Control.

(i) Each Grantor agrees that with respect to any Investment Related Property that is included in the Collateral with a value in excess of $100,000 individually or $300,000 in the aggregate (except with respect to any Investment Related Property issued by a Grantor or any Subsidiary of a Grantor, as to which such threshold shall not apply, and excluding Cash Equivalents) in which it currently has rights it shall comply with the provisions of this Section 4.4.1(b) no later than 60 days following the Closing Date and with respect to any Investment Related Property hereafter acquired by such Grantor that is included in the Collateral it shall comply with the provisions of this Section 4.4.1(b) no later than 30 days after acquiring rights therein, in each case in form and substance satisfactory to the Administrative Agent. With respect to any Investment Related Property that is included in the Collateral and that is represented by a certificate or that is an “instrument” (other than any Investment Related Property credited to a Securities Account) it shall cause such certificate or instrument to be delivered to the Administrative Agent, indorsed in blank by an “effective indorsement” (as defined in Section 8-107 of the UCC), regardless of whether such certificate constitutes a “certificated security” for purposes of the UCC. With respect to any Investment Related Property that is an “uncertificated security” for purposes of the UCC (other than any “uncertificated securities” credited to a Securities Account), it shall use commercially reasonable efforts to cause the issuer of such uncertificated security to either (i) register the Administrative Agent as the registered owner thereof on the books and records of the issuer or (ii) execute an agreement in form and substance reasonably acceptable to the Administrative Agent, pursuant to which such issuer agrees to comply with the Administrative Agent’s instructions with respect to such uncertificated security without further consent by such Grantor; provided, however, that to the extent each interest in any limited liability company or limited partnership controlled now or in the future by such Grantor and pledged hereunder is a “security” within the meaning of Article 8 of the UCC and is governed by Article 8 of the UCC, such interest shall be certificated.

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(i) So long as no Event of Default shall have occurred and be continuing:

(1) except as otherwise provided under the covenants and agreements relating to Investment Related Property in this Agreement or elsewhere herein or in the Facilities Agreement, each Grantor shall be entitled to exercise or refrain from exercising any and all voting and other consensual rights pertaining to the Investment Related Property or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Facilities Agreement; provided, upon written notice by the Administrative Agent to any Grantor thereof, no Grantor shall exercise or refrain from exercising any such right if such action would reasonably be expected to have a material adverse effect on the value of the Investment Related Property; it being understood, however, that neither the voting by such Grantor of any Pledged Stock for, or such Grantor’s consent to, the election of directors (or similar governing body) at a regularly scheduled annual or other meeting of stockholders or with respect to incidental matters at any such meeting, nor such Grantor’s consent to or approval of any action otherwise permitted under this Agreement and the Facilities Agreement, shall be deemed inconsistent with the terms of this Agreement or the Facilities Agreement within the meaning of this Section 4.4.1(c)(i)(1) and no notice of any such voting or consent need be given to the Administrative Agent; and

(2) the Administrative Agent shall promptly execute and deliver (or cause to be executed and delivered) to each Grantor all proxies, and other instruments as such Grantor may from time to time reasonably request for the purpose of enabling such Grantor to exercise the voting and other consensual rights when and to the extent which it is entitled to exercise pursuant to clause (1) above;

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(3) upon the occurrence and during the continuation of an Event of Default:

(A) all rights of each Grantor to exercise or refrain from exercising the voting and other consensual rights which it would otherwise be entitled to exercise pursuant hereto shall cease and all such rights shall thereupon become vested in the Administrative Agent who shall thereupon have the sole right to exercise such voting and other consensual rights; and

(B) in order to permit the Administrative Agent to exercise the voting and other consensual rights which it may be entitled to exercise pursuant hereto and to receive all dividends and other distributions which it may be entitled to receive hereunder: (1) each Grantor shall promptly execute and deliver (or cause to be executed and delivered) to the Administrative Agent all proxies, dividend payment orders and other instruments as the Administrative Agent may from time to time reasonably request and (2) each Grantor acknowledges that the Administrative Agent may utilize the power of attorney set forth in Section 6.1.

4.4.2 Pledged Equity Interests.

(a) Representations and Warranties. Each Grantor hereby represents and warrants, on the Closing Date and on each Credit Date, that:

(i) Schedule 4.4(A) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) sets forth under the headings “Pledged Stock,” “Pledged LLC Interests,” “Pledged Partnership Interests” and “Pledged Trust Interests,” respectively, all of the Pledged Stock, Pledged LLC Interests, Pledged Partnership Interests and Pledged Trust Interests owned by any Grantor and such Pledged Equity Interests constitute the percentage of issued and outstanding shares of stock, percentage of membership interests, percentage of partnership interests or percentage of beneficial interest of the respective issuers thereof indicated on such Schedule;

(ii) except as set forth on Schedule 4.4(B), it is the record and beneficial owner of the Pledged Equity Interests free of all Encumbrances, rights or claims of other Persons other than Permitted Encumbrances and there are no outstanding warrants, options or other rights to purchase, or shareholder, voting trust or similar agreements outstanding with respect to, or property that is convertible into, or that requires the issuance or sale of, any Pledged Equity Interests;

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(iii) without limiting the generality of Section 4.1(a)(v), other than consents obtained on or before the Closing Date (or, with respect to a Grantor formed after the Closing Date and before such Credit Date, on or before such Credit Date), no consent of any Person including any other general or limited partner, any other member of a limited liability company, any other shareholder or any other trust beneficiary is necessary in connection with the creation, perfection or first priority status of the security interest of the Administrative Agent in any material portion of the Pledged Equity Interests or the exercise by the Administrative Agent of the voting or other rights provided for in this Agreement or the exercise of remedies in respect thereof;

(iv) none of the Pledged LLC Interests nor Pledged Partnership Interests are or represent interests in issuers that: (a) are registered as investment companies or (b) are dealt in or traded on securities exchanges or markets; and

(v) except as otherwise set forth on Schedule 4.4(C) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement), none of the Pledged LLC Interests and Pledged Partnership Interests are or represent interests in issuers that have opted to be treated as securities under the uniform commercial code of any jurisdiction.

(b) Covenants and Agreements. Each Grantor hereby covenants and agrees that, except as otherwise not prohibited by the Facilities Agreement:

(i) without the prior written consent of the Administrative Agent, it shall not vote to enable or take any other action to: (a) amend or terminate any partnership agreement, limited liability company agreement, certificate of incorporation, by-laws or other organizational documents in any way that materially and adversely changes the rights of such Grantor with respect to any Investment Related Property or adversely affects the validity, perfection or priority of the Administrative Agent’s security interest (except for transactions permitted by the Facilities Agreement), (b) other than as permitted under the Facilities Agreement, permit any issuer, which such Grantor controls, of any Pledged Equity Interest to dispose of all or a material portion of their assets, (c) waive any default under or breach of any terms of organizational document relating to the issuer of any Pledged Equity Interest or the terms of any Pledged Debt that could reasonably be expected to materially and adversely affect the value of such Collateral or the validity, perfection or priority of the Administrative Agent’s security interest, or (d) cause any issuer of any Pledged Partnership Interests or Pledged LLC Interests which are not securities (for purposes of the UCC) on the date hereof to elect or otherwise take any action to cause such Pledged Partnership Interests or Pledged LLC Interests to be treated as securities for purposes of the UCC unless such Grantor shall promptly notify the Administrative Agent in writing of any such election or action takes all steps required by Section 4.4.1(b) with respect thereto;

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(ii) it shall comply in all material respects with all of its obligations under any partnership agreement or limited liability company agreement relating to Pledged Partnership Interests or Pledged LLC Interests and shall enforce all of its rights with respect to any Investment Related Property to the extent it deems it to be in such Grantor’s best interest to do so;

(iii) without the prior written consent of the Administrative Agent, it shall not permit any issuer, that such Grantor controls, of any Pledged Equity Interest to merge or consolidate unless, to the extent required under Section 2.2 (i) such issuer creates a security interest that is perfected by a filed financing statement (that is not effective solely under section 9-508 of the UCC) in collateral in which such new debtor has or acquires rights, and (ii) all the outstanding Capital Stock or other equity interests of the surviving or resulting corporation, limited liability company, partnership or other entity is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding equity interests of any other constituent Grantor, in each case, except as permitted by the Facilities Agreement; and

(iv) each Grantor consents to the grant by each other Grantor of a security interest in all Pledged Equity Interests to the Administrative Agent and, without limiting the foregoing, consents to the transfer of any Pledged Partnership Interest and any Pledged LLC Interest to the Administrative Agent or its nominee following an Event of Default and to the substitution of the Administrative Agent or its nominee as a partner in any partnership or as a member in any limited liability company with all the rights and powers related thereto.

4.4.3 Pledged Debt

(a) Representations and Warranties. Each Grantor hereby represents and warrants, on the Closing Date and on each Credit Date, that:

(i) Schedule 4.4 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) sets forth under the heading “Pledged Debt” all of the Pledged Debt owned by any Grantor (other than with respect to any Pledged Debt issued by a Grantor or a Subsidiary with a face value in excess of $100,000) and, to Grantor’s knowledge, all of such Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default;

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(b) Covenants and Agreements. Each Grantor hereby covenants and agrees that:

(i) it shall notify the Administrative Agent of any default under any Pledged Debt that has caused, either in any individual case or in the aggregate, a Material Adverse Effect.

4.4.4 Investment Accounts

(a) Covenant and Agreement. Each Grantor hereby covenants and agrees that:

(i) On each Credit Date, it will deliver a schedule (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) in the form set out in Schedule 4.4 hereto, setting forth under the headings “Securities Accounts” and “Commodities Accounts,” respectively, all of the Securities Accounts and Commodities Accounts in which it has an interest. It is the sole entitlement holder of each such Securities Account and Commodity Account, and it has not consented to, and is not otherwise aware of, any Person (other than the Administrative Agent pursuant hereto) having “control” (within the meanings of Sections 8-106 and 9-106 of the UCC) over, or any other interest in, any such Securities Account or Commodity Account or securities or other property credited thereto;

(ii) On each Credit Date, it will deliver a schedule (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) in the form set out in Schedule 4.4 hereto, setting forth under the headings “Deposit Accounts” all of the Deposit Accounts (excluding any Excluded Deposit Accounts) in which it has an interest. It is the sole account holder of each such Deposit Account and it has not consented to, and is not otherwise aware of, any Person (other than the Administrative Agent pursuant hereto) having either sole dominion and control (within the meaning of common law) or “control” (within the meanings of Section-104 of the UCC) over, or any other interest in, any such Deposit Account or any money or other property deposited therein;

(iii) On each Credit Date, it shall take all actions necessary or desirable, including those specified in Section 4.4.4(a)(iv) to: (a) establish Administrative Agent’s “control” (within the meanings of Sections 8-106 and 9-106 of the UCC) over any portion of the Investment Related Property included in the Collateral constituting Certificated Securities with a value in excess of $100,000 individually or $300,000 in the aggregate (except with respect to any Investment Related Property issued by it or any of its Subsidiaries, as to which such threshold shall not apply), Uncertificated Securities, Securities Accounts, Securities Entitlements or Commodities Accounts (each as defined in the UCC) (other than Excluded Securities Accounts); (b) establish the Administrative Agent’s “control” (within the meaning of Section 9-104 of the UCC) over all Deposit Accounts (other than Excluded Deposit Accounts); and (c) deliver all Instruments with a value in excess of $100,000 individually or $300,000 in the aggregate (except with respect to any Investment Related Property issued by it or any of its Subsidiaries, as to which such threshold shall not apply) to the Administrative Agent; and

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(iv) Is in agreement with the Administrative Agent and each other Secured Party that it shall not close or terminate any Investment Account (other than Excluded Securities Accounts and/or Excluded Deposit Accounts) holding funds in excess of $100,000 without the prior consent of the Administrative Agent and unless a successor or replacement account has been established and with respect to which successor or replacement account a control agreement has been entered into by the appropriate Grantor, Administrative Agent and securities intermediary or depository institution at which such successor or replacement account is to be maintained in accordance with the provisions of Section 4.4.4(b).

(b) Delivery and Control.

(i) With respect to any Investment Related Property included in the Collateral consisting of Securities Accounts or Securities Entitlements (other than Excluded Securities Accounts), it shall cause the securities intermediary maintaining such Securities Account or Securities Entitlement to enter into an agreement in form and substance reasonably acceptable to the Administrative Agent, pursuant to which it shall agree to comply with the Administrative Agent’s “entitlement orders” without further consent by such Grantor. With respect to any Investment Related Property that is a “Deposit Account” (other than Excluded Deposit Accounts), it shall cause the depositary institution maintaining such account to enter into an agreement in form and substance reasonably acceptable to the Administrative Agent, pursuant to which the Administrative Agent shall have both sole dominion and control over such Deposit Account (within the meaning of the common law) and “control” (within the meaning of Section 9-104 of the UCC) over such Deposit Account. Each Grantor shall have entered into such control agreement or agreements with respect to any Securities Accounts, Securities Entitlements or Deposit Accounts (other than Excluded Securities Accounts and/or Excluded Deposit Accounts) that exist on the Closing Date within 60 days after the Closing Date, and

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(ii) any Securities Accounts, Securities Entitlements or Deposit Accounts (other than Excluded Securities Accounts and/or Excluded Deposit Accounts) that are created or acquired after the Closing Date, within 30 days of the deposit or transfer of any such Securities Entitlements or funds, whether constituting moneys or investments, into such Securities Accounts or Deposit Accounts, or such later date as the Administrative Agent may agree in its sole discretion.

Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent shall have the right, subject to Section 7 of this Agreement, to transfer all or any portion of the Investment Related Property to its name or the name of its nominee or agent and to exchange any certificates or instruments representing any Investment Related Property for certificates or instruments of smaller or larger denominations.

4.5 Material Contracts.

(a) Covenants and Agreements. Each Grantor hereby covenants and agrees that:

(i) in addition to any rights under the Section of this Agreement relating to Accounts, after the occurrence and during the continuation of an Event of Default, the Administrative Agent may at any time notify, or require any Grantor to so notify, the counterparty on any Material Contract included in the Collateral of the security interest of the Administrative Agent therein. In addition, after the occurrence and during the continuance of an Event of Default, the Administrative Agent may upon written notice to the applicable Grantor, notify, or require any Grantor to notify, the counterparty to make all payments under the Material Contracts included in the Collateral directly to the Administrative Agent;

(ii) it shall perform all of its obligations with respect to the Material Contracts except where the failure to so perform could not reasonably be expected to have a Material Adverse Effect;

(iii) it shall promptly and diligently exercise each material right (except the right of termination) it may have under any Material Contract, any Supporting Obligation or Collateral Support, in each case, at its own expense and to the extent it determines it is in such Grantor’s best interest to do so, and in connection with such exercise, such Grantor shall take such action as such Grantor or, after the occurrence and during the continuance of an Event of Default, the Administrative Agent may deem necessary or advisable; and

(iv) it shall use its commercially reasonable efforts to keep in full force and effect any Supporting Obligation or Collateral Support relating to any Material Contract to the extent it determines it is in such Grantor’s best interest to do so.

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4.6 Letter of Credit Rights.

(a) Representations and Warranties. Each Grantor hereby represents and warrants, on the Closing Date and on each Credit Date, that:

(i) all letters of credit with a value in excess of $100,000 to which such Grantor has rights as the named beneficiary is listed on Schedule 4.6 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) hereto; and

(ii) it has obtained the consent of each issuer of any such letter of credit as to which such Grantor is a beneficiary to the assignment of the proceeds of the letter of credit to the Administrative Agent.

(b) Covenants and Agreements. Each Grantor hereby covenants and agrees that with respect to any letter of credit with a value in excess of $100,000 as to which such Grantor is a beneficiary hereafter arising it shall use its commercially reasonable efforts to obtain the consent of the issuer thereof to the assignment of the proceeds of the letter of credit to the Administrative Agent and shall deliver to the Administrative Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto.

4.7 Intellectual Property.

(a) Representations and Warranties. Except as disclosed in Schedule 4.7(H) (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement), each Grantor hereby represents and warrants, on the Closing Date and on each Credit Date, that:

(i) Schedule 4.7 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) sets forth a true and complete list of (A) all United States registrations of and applications for Patents, Trademarks, and Copyrights owned by each Grantor and (B) all Patent Licenses, Trademark Licenses, Trade Secret Licenses and Copyright Licenses (where such Grantor is a licensee, including Software licenses and OS Licenses) material to the business of such Grantor and as to which such Grantor is the licensee, other than such Patent Licenses, Trademark Licenses, Trade Secret Licenses and Copyright Licenses that are commercially available;

(ii) it is the sole and exclusive owner of the entire right, title, and interest in and to all Intellectual Property (excluding (A) any Grantor Software that is owned by a third party and licensed to any Grantor and (B) any OS Software) listed on Schedule 4.7 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement), and owns or has the valid right to use all other Intellectual Property material to its business, free and clear of all Encumbrances, claims, encumbrances and licenses, except for Permitted Encumbrances and the licenses set forth on Schedule 4.7(B), (D), (F) and (G) (as each may be amended or supplemented from time to time);

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(iii) all Intellectual Property material to any Grantor’s business (excluding (A) any Grantor Software that is owned by a third party and licensed to any Grantor and (B) any OS Software) listed on Schedule 4.7 is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and each Grantor has performed all acts and has paid all renewal, maintenance, and other fees and taxes required to maintain each and every registration or application for Intellectual Property which is material to the business of any Grantor in full force and effect, which, in each case, could reasonably be expected to result in a Material Adverse Effect;

(iv) all Intellectual Property material to any Grantor’s business (excluding (A) any Grantor Software that is owned by a third party and licensed to any Grantor and (B) any OS Software) listed on Schedule 4.7 is, to the best of each Grantor’s knowledge, valid and enforceable; no holding, decision, or judgment has been rendered in any action or proceeding before any court or administrative authority challenging the validity of, such Grantor’s right to register, or such Grantor’s rights to own or use, any such Intellectual Property and no such action or proceeding is pending or, to the best of such Grantor’s knowledge, threatened in writing, which, in each case, could reasonably be expected to result in a Material Adverse Effect;

(v) all registrations and applications for Copyrights, Patents and Trademarks owned by any Grantor and material to its business are standing in the name of the Grantor listed as the owner thereof, and none of the Trademarks, Patents, Copyrights or Trade Secrets has been licensed by any Grantor to any Affiliate or third party, except as disclosed in Schedule 4.7(B), (D), (F) or (G) (as each may be amended or supplemented from time to time);

(vi) each Grantor has been using appropriate statutory notice of registration in connection with its use of registered Trademarks, proper marking practices in connection with the use of Patents, and appropriate notice of copyright in connection with the publication of Copyrights material to the business of such Grantor, to the extent necessary to maintain such Intellectual Property;

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(vii) each Grantor uses adequate standards of quality in the manufacture, distribution, and sale of all products sold and in the provision of all services rendered under or in connection with all material Trademark Collateral and has taken all action necessary to insure that all licensees of the material Trademark Collateral owned by such Grantor use such adequate standards of quality;

(viii) to the best of each Grantor’s knowledge, the conduct of such Grantor’s business does not infringe upon or otherwise violate any trademark, patent, copyright, trade secret or other intellectual property right owned or controlled by a third party the effect of which could reasonably be expected to have a Material Adverse Effect; no written claim has been made that the use of any Intellectual Property owned or used by Grantor (or any of its respective licensees) violates the asserted rights of any third party which could reasonably be expected to result in a Material Adverse Effect;

(ix) to the best of each Grantor’s knowledge, no third party is (i) infringing in any material respect upon or otherwise violating any rights in any material Intellectual Property owned or used by such Grantor, or any of its respective licensees or (ii) breaching or violating in any material respect any contract with any Grantor relating to any material Intellectual Property owned or used by such Grantor;

(x) no settlement or consents, covenants not to sue, nonassertion assurances, or releases have been entered into by Grantor or to which Grantor is bound that adversely affect Grantor’s rights to own or use any Intellectual Property material to such Grantor’s business; and

(xi) there is no effective financing statement or other document or instrument now executed, or on file or recorded in any public office, granting a security interest in or otherwise encumbering any material part of the Intellectual Property, other than (i) with respect to any Permitted Encumbrances, (ii) in favor of the Administrative Agent or (iii) that has not been terminated or released or that will not be released pursuant to payoff letters or other applicable termination agreements, in each case, to be executed and delivered in connection with the closing of the credit facilities contemplated by the Facilities Agreement.

(b) Covenants and Agreements. Except to the extent not prohibited by the Facilities Agreement, each Grantor hereby covenants and agrees as follows:

(i) it shall not do any act or omit to do any act whereby any of the Intellectual Property material to the business of Grantor may lapse, or become abandoned, dedicated to the public, or unenforceable, or which would adversely affect the validity, grant, or enforceability of the Encumbrance granted therein, except as permitted under the Facilities Agreement or through the expiration of registered Intellectual Property at the end of its maximum statutory term (including renewal terms, where applicable);

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(ii) except to the extent commercially reasonable to do so, it shall not, with respect to any Trademarks which are material to the business of any Grantor, cease the use of any of such Trademarks or fail to maintain the level of the quality of products sold and services rendered under any of such Trademark at a level at least substantially consistent in all material respects with the quality of such products and services as of the date hereof, and each Grantor shall take all steps necessary to insure that licensees of such Trademarks use such consistent standards of quality;

(iii) it shall promptly notify the Administrative Agent if it knows or has reason to know that any item of the Intellectual Property material to the business of any Grantor may become (a) abandoned or dedicated to the public or placed in the public domain, other than through the expiration of registered Intellectual Property at the end of its maximum statutory term having no applicable renewal periods, (b) invalid or unenforceable, or (c) subject to any adverse determination or development (including the institution of proceedings) in any action or proceeding in the United States Patent and Trademark Office, the United States Copyright Office, or any court (other than office actions issued as part of the examination process by any patent, trademark or copyright office);

(iv) it shall take all reasonable steps in the United States Patent and Trademark Office and the United States Copyright Office to pursue any filed application and maintain any registration of each Trademark, Patent, and Copyright owned by any Grantor and material to its business which is now or shall become included in the Intellectual Property including, but not limited to, those items on Schedule 4.7(A) (C) and (E) (as each may be amended or supplemented from time to time), but in each case subject to such Grantor’s reasonable business judgment;

(v) in the event that any Intellectual Property (A) which is material to the business of any Grantor, and (B) owned by or exclusively licensed to any Grantor is infringed, misappropriated, or diluted by a third party, such Grantor shall promptly take all reasonable actions to stop such infringement, misappropriation, or dilution and protect its rights in such Intellectual Property including, but not limited to, the initiation of a suit for injunctive relief and to recover damages, but in each case subject to such Grantor’s reasonable business judgment;

(vi) except to the extent otherwise required by clause (xii) below, concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement, it shall report to the Administrative Agent (i) the filing of any application to register any Intellectual Property material to its business with the United States Patent and Trademark Office or the United States Copyright Office (whether such application is filed by such Grantor or through any agent, employee, licensee, or designee thereof) and (ii) the registration of any Intellectual Property material to its business by any such office, in each case by executing and delivering to the Administrative Agent a completed Pledge Supplement, together with all Supplements to Schedules thereto;

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(vii) it shall, promptly upon the reasonable request of the Administrative Agent, execute and deliver to the Administrative Agent any document reasonably required to acknowledge, confirm, register, record, or perfect the Administrative Agent’s interest in any part of the Intellectual Property, whether now owned or hereafter acquired;

(viii) except with the prior consent of the Administrative Agent or as permitted under the Facilities Agreement, no Grantor shall execute, and there will not be on file in any public office, any financing statement or other document or instruments with respect to the Intellectual Property of any Grantor included in the Collateral, except financing statements or other documents or instruments filed or to be filed in favor of the Administrative Agent or filed in connection with a Permitted Encumbrance or as otherwise permitted by the Facilities Agreement, and no Grantor shall sell, assign, transfer, license, grant any option, or create or suffer to exist any Encumbrance upon or with respect to the Intellectual Property included in the Collateral, except for the Encumbrance created by and under this Agreement and the other Credit Documents or Permitted Encumbrances or as otherwise permitted by the Facilities Agreement;

(ix) it shall hereafter use commercially reasonable efforts so as not to permit the inclusion in any contract to which it hereafter becomes a party of any provision that would materially impair or prevent the creation of a security interest in, or the assignment of, such Grantor’s rights and interests in any property acquired under such contracts which would be included within the definitions of any Intellectual Property and the Collateral, and which would be material to such Grantor’s business; provided, that it is agreed that commercially reasonable efforts shall not require such Grantor to agree to a term solely in order to comply with this provision if such term would have a financially negative impact on such Grantor;

(x) it shall take all steps reasonably necessary to protect the secrecy of all Trade Secrets, including, without limitation, entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents;

(xi) it shall use proper statutory notice in connection with its use of any of the Intellectual Property material to its business to the extent necessary to maintain such Intellectual Property;

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(xii) it shall continue to collect, at its own expense, all material amounts due or to become due to such Grantor in respect of the Intellectual Property or any portion thereof, consistent with past practices and to the extent deemed prudent business conduct by such Grantor in good faith. In connection with such collections, each Grantor may take (and, at the Administrative Agent’s reasonable direction during the occurrence and continuance of an Event of Default, shall take) such action as such Grantor or, during the occurrence and continuance of an Event of Default, the Administrative Agent may deem reasonably necessary or advisable to enforce collection of such amounts. Notwithstanding the foregoing, the Administrative Agent shall have the right at any time during the occurrence and continuance of an Event of Default, to notify, or require any Grantor to notify, any obligors with respect to any such amounts of the existence of the Encumbrance created hereby.

4.8 Commercial Tort Claims.

(a) Representations and Warranties. Each Grantor hereby represents and warrants, on the Closing Date and on each Credit Date, that Schedule 4.8 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) sets forth all Commercial Tort Claims of each Grantor in excess of $100,000 individually or $200,000 in the aggregate; and

(b) Covenants and Agreements. Each Grantor hereby covenants and agrees that with respect to any Commercial Tort Claim in excess of $100,000 individually or $200,000 in the aggregate hereafter arising it shall deliver to the Administrative Agent a completed Pledge Supplement, substantially in the form of Exhibit A attached hereto, together with all Supplements to Schedules thereto, identifying such new Commercial Tort Claims.

SECTION 5 ACCESS; RIGHT OF INSPECTION AND FURTHER ASSURANCES; ADDITIONAL GRANTORS.

5.1 Access; Right of Inspection. Upon reasonable prior notice to the applicable Grantor, the Administrative Agent shall have access during normal business hours to all the books, correspondence and records of each Grantor, and the Administrative Agent and its representatives may examine the same, take extracts therefrom and make photocopies thereof, in each case in accordance with Section 24 of the Facilities Agreement. The Administrative Agent and its representatives shall also have the right, upon reasonable prior notice to the applicable Grantor, to enter any premises of each Grantor and inspect any property of each Grantor where any of the Collateral of such Grantor granted pursuant to this Agreement is located for the purpose of inspecting the same, observing its use or otherwise protecting its interests therein, in each case in accordance with Section 24 of the Facilities Agreement. Notwithstanding the foregoing, Administrative Agent shall not exercise the foregoing rights more than once per year unless an Event of Default has occurred and is continuing.

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5.2 Further Assurances.

(a) Each Grantor agrees that from time to time, at the expense of such Grantor, that it shall promptly execute and deliver all further instruments and documents, and take all further action, that the Administrative Agent may reasonably request consistent with the terms of this Agreement, in order to create and/or maintain the validity, perfection or priority of and protect any security interest granted hereby or to enable the Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, each Grantor shall:

(i) file such financing or continuation statements, or amendments thereto, and execute and deliver such other agreements, instruments, endorsements, powers of attorney or notices, as the Administrative Agent may reasonably request consistent with the terms of this Agreement, in order to perfect and preserve the security interests granted or purported to be granted hereby;

(ii) take all actions necessary to ensure the recordation of appropriate evidence of the Encumbrances and security interest granted hereunder in the Intellectual Property with any intellectual property registry in which such Intellectual Property is registered or in which an application for registration is pending including, without limitation, the United States Patent and Trademark Office, and the United States Copyright Office; and

(iii) at the Administrative Agent’s reasonable request, appear in and defend any action or proceeding that may affect such Grantor’s title to or the Administrative Agent’s security interest in all or any material part of the Collateral.

(b) Each Grantor hereby authorizes the Administrative Agent to file a Record or Records, including, without limitation, financing or continuation statements, and amendments thereto, in any jurisdictions and with any filing offices as the Administrative Agent may determine, in its reasonable discretion, are necessary or advisable to perfect the security interest granted to the Administrative Agent herein. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as the Administrative Agent may determine, in its reasonable discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the Collateral granted to the Administrative Agent herein, including, without limitation, describing such property as “all assets” or “all personal property, whether now owned or hereafter acquired”, but excluding Excluded Property; provided that upon the reasonable request of any Grantor, the Administrative Agent agrees to authorize the filing of termination statements and or partial releases with respect to any such financing statements covering any such Excluded Property. Each Grantor shall furnish to the Administrative Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Administrative Agent may reasonably request, all in reasonable detail as required pursuant to terms of this Agreement.

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(c) Each Grantor hereby authorizes the Administrative Agent to modify this Agreement after obtaining such Grantor’s approval of and signature to such modification by amending Schedule 4.7 (as such schedule may be amended or supplemented concurrently with delivering quarterly financials pursuant to Section 18(s)(ii) of the Facilities Agreement) to include reference to any right, title or interest in any existing Intellectual Property or any Intellectual Property acquired or developed by any Grantor after the execution hereof or to delete any reference to any right, title or interest in any Intellectual Property in which any Grantor no longer has or claims any right, title or interest.

5.3 Additional Grantors. From time to time subsequent to the date hereof, additional Persons may become parties hereto as additional Grantors (each, an “Additional Grantor”), by executing a Counterpart Agreement. Upon delivery of any such Counterpart Agreement to the Administrative Agent, notice of which is hereby waived by Grantors, and delivery to Administrative Agent a completed Pledge Supplement, together with all Supplements to Schedules thereto, each Additional Grantor shall be a Grantor and shall be as fully a party hereto as if Additional Grantor were an original signatory hereto. Each Grantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Grantor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary of Borrower to become an Additional Grantor hereunder. This Agreement shall be fully effective as to any Grantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Grantor hereunder.

SECTION 6 ADMINISTRATIVE AGENT APPOINTED ATTORNEY-IN-FACT.

6.1 Power of Attorney. Each Grantor hereby irrevocably appoints the Administrative Agent (such appointment being coupled with an interest) as such Grantor’s attorney- in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor, the Administrative Agent or otherwise, from time to time in the Administrative Agent’s reasonable discretion to do the following:

(a) upon the occurrence and during the continuance of any Event of Default, to obtain and adjust insurance required to be maintained by such Grantor or paid to the Administrative Agent pursuant to the Facilities Agreement;

(b) upon the occurrence and during the continuance of any Event of Default, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral;

(c) upon the occurrence and during the continuance of any Event of Default, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above;

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(d) upon the occurrence and during the continuance of any Event of Default, to file any claims or take any action or institute any proceedings that the Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Administrative Agent with respect to any of the Collateral;

(e) to prepare and file any UCC financing statements against such Grantor as debtor to the extent not inconsistent with this Agreement;

(f) to prepare, sign, and file for recordation in any intellectual property registry, appropriate evidence of the lien and security interest granted herein in the Intellectual Property included in the Collateral in the name of such Grantor as debtor;

(g) upon the occurrence or during the continuance of an Event of Default, to take or cause to be taken all actions necessary to perform or comply or cause performance or compliance with the terms of this Agreement, including, without limitation, access to pay or discharge taxes (other than to the extent being contested in good faith) or Encumbrances (other than Permitted Encumbrances) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by the Administrative Agent in its sole discretion, any such payments made by the Administrative Agent to become obligations of such Grantor to the Administrative Agent, due and payable immediately without demand; and

(h) upon the occurrence and during the continuance of any Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and to do, at the Administrative Agent’s option and such Grantor’s expense, at any time or from time to time, all acts and things that the Administrative Agent deems reasonably necessary to protect, preserve or realize upon the Collateral and the Administrative Agent’s security interest therein in order to effect the intent of this Agreement, all as fully and effectively as such Grantor might do, but in each case subject to Section 7 of this Agreement.

6.2 No Duty on the Part of Administrative Agent or Secured Parties. The powers conferred on the Administrative Agent hereunder are solely to protect the interests of the Secured Parties in the Collateral and shall not impose any duty upon the Administrative Agent or any Secured Party to exercise any such powers. The Administrative Agent and the Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct or a material breach of this Agreement. The foregoing powers of attorney under this Section 6, being coupled with an interest, are irrevocable until the security interest granted to the Administrative Agent hereby shall have terminated in accordance with the terms hereof.

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SECTION 7 REMEDIES.

7.1 Generally.

(a) If any Event of Default shall have occurred and be continuing, the Administrative Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it at law or in equity, all the rights and remedies of the Administrative Agent on default under the UCC (whether or not the UCC applies to the affected Collateral) to collect, enforce or satisfy any Secured Obligations then owing, whether by acceleration or otherwise, and also may pursue any of the following separately, successively or simultaneously:

(i) require any Grantor to, and each Grantor hereby agrees that it shall at its expense and promptly upon request of the Administrative Agent forthwith, assemble all or part of the Collateral as directed by the Administrative Agent and make it available to the Administrative Agent at a place to be designated by the Administrative Agent that is reasonably convenient to both parties;

(ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process;

(iii) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent the Administrative Agent deems appropriate; and

(iv) without notice except as specified below or under the UCC, sell, assign, lease, license (on an exclusive or nonexclusive basis) or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Administrative Agent’s offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as the Administrative Agent may deem commercially reasonable.

(b) The Administrative Agent or any Secured Party may be the purchaser of any or all of the Collateral at any public or private (to the extent to the portion of the Collateral being privately sold is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations) sale in accordance with the UCC and the Administrative Agent, as Administrative Agent for and representative of the Secured Parties, shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such sale made in accordance with the UCC, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by the Administrative Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten (10) days’ notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Grantor agrees that it would not be commercially unreasonable for the Administrative Agent to dispose of the Collateral or any portion thereof by using Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets. To the extent permitted by law, each Grantor hereby waives any claims against the Administrative Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if the Administrative Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantors shall be liable for the deficiency and the fees of any attorneys employed by the Administrative Agent to collect such deficiency. Each Grantor further agrees that a breach of any of the covenants contained in this Section 7 will cause irreparable injury to the Administrative Agent, that the Administrative Agent has no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no default has occurred giving rise to the Secured Obligations becoming due and payable prior to their stated maturities. Nothing in this Section shall in any way alter the rights of the Administrative Agent hereunder.

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(c) The Administrative Agent may sell the Collateral without giving any warranties as to the Collateral. The Administrative Agent may specifically disclaim or modify any warranties of title or the like. This procedure will not be considered to adversely affect the commercial reasonableness of any sale of the Collateral.

(d) The Administrative Agent shall have no obligation to marshal any of the Collateral.

7.2 Application of Proceeds. Except as expressly provided elsewhere in this Agreement, all proceeds received by the Administrative Agent in respect of any sale, any collection from, or other realization upon all or any part of the Collateral shall be applied in full or in part by the Administrative Agent against the Secured Obligations as set forth in Section 16 of the Facilities Agreement.

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7.3 Sales on Credit. If Administrative Agent sells any of the Collateral upon credit, each applicable Grantor will be credited only with payments actually made by purchaser and received by Administrative Agent and applied to indebtedness of the purchaser. In the event the purchaser fails to pay for the Collateral, Administrative Agent may resell the Collateral and each applicable Grantor shall be credited with proceeds of the sale.

7.4 Deposit Accounts. If any Event of Default shall have occurred and be continuing, the Administrative Agent may apply the balance from any Deposit Account (other than an Excluded Deposit Account) or instruct the bank at which any Deposit Account (other than an Excluded Deposit Account) is maintained to pay the balance of any Deposit Account (other than an Excluded Deposit Account) to or for the benefit of the Administrative Agent.

7.5 Investment Related Property. Each Grantor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, the Administrative Agent may be compelled, with respect to any sale of all or any part of the Investment Related Property conducted without prior registration or qualification of such Investment Related Property under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Investment Related Property for their own account, for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges that any such private sale may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, each Grantor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Administrative Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Investment Related Property for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. If the Administrative Agent determines to exercise its right to sell any or all of the Investment Related Property, upon written request, each Grantor shall and shall cause each issuer of any Pledged Stock to be sold hereunder, each partnership and each limited liability company from time to time to furnish to the Administrative Agent all such information as the Administrative Agent may request in order to determine the number and nature of interest, shares or other instruments included in the Investment Related Property which may be sold by the Administrative Agent in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect.

7.6 Intellectual Property.

(a) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default:

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(i) the Administrative Agent shall have the right (but not the obligation) to bring suit or otherwise commence any action or proceeding in the name of any Grantor, the Administrative Agent or otherwise, in the Administrative Agent’s sole discretion, to enforce any Intellectual Property, in which event such Grantor shall, at the request of the Administrative Agent, do any and all lawful acts and execute any and all documents required by the Administrative Agent in aid of such enforcement and such Grantor shall promptly, upon demand, reimburse and indemnify the Administrative Agent as provided in Section 10 hereof in connection with the exercise of its rights under this Section, and, to the extent that the Administrative Agent shall elect not to bring suit to enforce any Intellectual Property as provided in this Section, each Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement or other violation of any of such Grantor’s rights in the Intellectual Property by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing as shall be necessary to prevent such infringement or violation;

(ii) upon written demand from the Administrative Agent, each Grantor shall grant, assign, convey or otherwise transfer to the Administrative Agent or such Administrative Agent’s designee all of such Grantor’s right, title and interest in and to the Intellectual Property and shall execute and deliver to the Administrative Agent such documents as are necessary or appropriate to carry out the intent and purposes of this Agreement;

(iii) each Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that the Administrative Agent (or any Secured Party) receives cash proceeds in respect of the sale of, or other realization upon, the Intellectual Property;

(iv) within five (5) Business Days after written notice from the Administrative Agent, each Grantor shall make available to the Administrative Agent, to the extent within such Grantor’s power and authority, such personnel in such Grantor’s employ on the date of such Event of Default as the Administrative Agent may reasonably designate, by name, title or job responsibility, to permit such Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by such Grantor under or in connection with the Trademarks, Trademark Licenses, such persons to be available to perform their prior functions on the Administrative Agent’s behalf and to be compensated by the Administrative Agent at such Grantor’s expense on a per diem, pro rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default; and

(v) the Administrative Agent shall have the right to notify, or require each Grantor to notify, any obligors with respect to amounts due or to become due to such Grantor in respect of the Intellectual Property, of the existence of the security interest created herein, to direct such obligors to make payment of all such amounts directly to the Administrative Agent, and, upon such notification and at the expense of such Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done;

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(1) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of amounts due to such Grantor in respect of the Collateral or any portion thereof, subject to Permitted Encumbrances, shall be received in trust for the benefit of the Administrative Agent hereunder and shall be forthwith paid over or delivered to the Administrative Agent in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 7.7 hereof; and

(2) Grantor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon.

(b) If (i) an Event of Default shall have occurred and, by reason of cure, waiver, modification, amendment or otherwise, no longer be continuing, (ii) no other Event of Default shall have occurred and be continuing, (iii) an assignment or other transfer to the Administrative Agent of any rights, title and interests in and to the Intellectual Property shall have been previously made and shall have become absolute and effective, and (iv) the Secured Obligations shall not have become immediately due and payable, upon the written request of any Grantor, the Administrative Agent shall promptly execute and deliver to such Grantor, at such Grantor’s sole cost and expense, such assignments or other transfer as may be necessary to reassign to such Grantor any such rights, title and interests as may have been assigned to the Administrative Agent as aforesaid, subject to any disposition thereof that may have been made by the Administrative Agent; provided, after giving effect to such reassignment, the Administrative Agent’s security interest granted pursuant hereto, as well as all other rights and remedies of the Administrative Agent granted hereunder, shall continue to be in full force and effect; and provided further, the rights, title and interests so reassigned shall be free and clear of any other Encumbrances (other than Permitted Encumbrances) granted by or on behalf of the Administrative Agent and the Secured Parties.

(c) Solely for the purpose of enabling the Administrative Agent to exercise rights and remedies under this Section 7 and at such time as the Administrative Agent shall be lawfully entitled to exercise such rights and remedies, each Grantor hereby grants to the Administrative Agent, to the extent it has the right to do so and effective only during the continuance of an Event of Default, an irrevocable, nonexclusive license (exercisable without payment of royalty or other compensation to such Grantor), subject, in the case of Trademarks, to sufficient rights to quality control and inspection in favor of such Grantor to avoid the risk of invalidation of said Trademarks, to use, operate under, license, or sublicense any Intellectual Property now owned or hereafter acquired by such Grantor, and wherever the same may be located.

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7.7 Cash Proceeds. In addition to the rights of the Administrative Agent specified in Section 4.3 with respect to payments of Accounts, if an Event of Default shall have occurred and be continuing, all proceeds of any Collateral received by any Grantor consisting of cash, checks and other non-cash items (collectively, “Cash Proceeds”) shall, subject to Permitted Encumbrances, be held by such Grantor in trust for the Administrative Agent, and shall, forthwith upon receipt by such Grantor, unless otherwise provided pursuant to Section 4.4.1(a)(ii) or the Facilities Agreement, be turned over to the Administrative Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Administrative Agent, if required) and held by the Administrative Agent in the Collateral Account. If an Event of Default shall have occurred and be continuing, any Cash Proceeds received by the Administrative Agent (whether from a Grantor or otherwise) may, in the sole discretion of the Administrative Agent, (A) be held by the Administrative Agent for the ratable benefit of the Secured Parties, as collateral security for the Secured Obligations (whether matured or unmatured) and/or (B) then or at any time thereafter may be applied by the Administrative Agent against the Secured Obligations then due and owing in the manner provided in the Facilities Agreement.

SECTION 8 ADMINISTRATIVE AGENT.

The Administrative Agent has been appointed to act as Administrative Agent hereunder by the Lenders and, by their acceptance of the benefits hereof, any and all other Secured Parties. The Administrative Agent shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Facilities Agreement. In furtherance of the foregoing provisions of this Section 8 each Secured Party, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Secured Party that all rights and remedies hereunder may be exercised solely by the Administrative Agent for the benefit of Secured Parties in accordance with the terms of this Section 8. Administrative Agent may resign at any time by giving thirty (30) days’ prior written notice thereof to Lenders and the Grantors, and Administrative Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to the Grantors and Administrative Agent signed by the Lenders. Upon any such notice of resignation or any such removal, Lenders shall have the right, upon five (5) Business Days’ notice to the Administrative Agent and upon prior written consent of Borrower (such consent not to be (a) unreasonably withheld, conditioned or delayed or (b) required if an Event of Default has occurred and is continuing), to appoint a successor Administrative Agent. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Administrative Agent under this Agreement, and the retiring or removed Administrative Agent under this Agreement shall promptly (i) transfer to such successor Administrative Agent all sums, Securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Administrative Agent under this Agreement, and (ii) execute and deliver to such successor Administrative Agent or otherwise authorize the filing of such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Administrative Agent of the security interests created hereunder, whereupon such retiring or removed Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent’s resignation or removal hereunder as the Administrative Agent, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was the Administrative Agent hereunder.

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SECTION 9 CONTINUING SECURITY INTEREST; TRANSFER OF LOANS.

This Agreement shall create a continuing security interest in the Collateral and shall remain in full force and effect until the payment in full of all Secured Obligations (other than unasserted contingent indemnity obligations) and the end of the Term, be binding upon each Grantor, its successors and permitted assigns, and inure, together with the rights and remedies of the Administrative Agent hereunder, to the benefit of the Administrative Agent and its successors, transferees and permitted assigns. Without limiting the generality of the foregoing, but subject to the terms of the Facilities Agreement, any Lender may assign or otherwise transfer any outstanding amounts under any Facility held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations (other than unasserted contingent indemnity obligations) and the end of the Term, the security interest granted hereby shall automatically terminate hereunder and of record and all rights to the Collateral shall revert to Grantors. Upon any such termination the Administrative Agent shall, at Grantors’ expense, execute and deliver to Grantors or otherwise authorize the filing of such documents as Grantors shall reasonably request, including financing statement amendments to evidence such termination. Upon any disposition of property permitted by the Facilities Agreement, the Encumbrances granted herein shall be deemed to be automatically released and such property shall automatically revert to the applicable Grantor with no further action on the part of any Person. The Administrative Agent shall, at Grantor’s expense, execute and deliver or otherwise authorize the filing of such documents as Grantors shall reasonably request, in form and substance reasonably satisfactory to the Administrative Agent, including financing statement amendments to evidence such release. In the event that all the Capital Stock of any Grantor that is a Subsidiary of Borrower shall be sold, transferred or otherwise disposed of in a transaction permitted by the Facilities Agreement, then, at the request of Borrower and at the expense of the Grantors, such Grantor shall be released from its obligations hereunder.

SECTION 10 STANDARD OF CARE; ADMINISTRATIVE AGENT MAY PERFORM. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property. Neither the Administrative Agent nor any of its 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 any Grantor or otherwise. If any Grantor fails to perform any agreement contained herein (except where the same is being contested in good faith by Borrower at a time when no Event of Default has occurred and is continuing), the Administrative Agent may (but shall not be obligated to) itself perform, or cause performance of, such agreement, and the expenses of the Administrative Agent incurred in connection therewith shall be payable by each Grantor under Section 10(d) of the Facilities Agreement.

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SECTION 11 MISCELLANEOUS. Any notice required or permitted to be given under this Agreement shall be given in accordance with Section 26 of the Facilities Agreement. No failure or delay on the part of the Administrative Agent in the exercise of any power, right or privilege hereunder or under any other Credit Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Credit Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. In case any provision in or obligation under this Agreement 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. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of a Default or an Event of Default if such action is taken or condition exists. This Agreement shall be binding upon and inure to the benefit of the Administrative Agent and Grantors and their respective successors and permitted assigns. No Grantor shall, without the prior written consent of the Administrative Agent given in accordance with the Facilities Agreement, assign any right, duty or obligation hereunder. This Agreement and the other Credit Documents embody the entire agreement and understanding between Grantors and the Administrative Agent and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Credit Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or other electronic transmission shall be effective as delivery of an original manually executed counterpart of this Agreement.

THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO ITS CONFLICTS OF LAW PROVISIONS (OTHER THAN SECTION 5-1401 AND SECTION 5-1402 OF THE NEW YORK GENERAL OBLIGATION LAWS).

[Signature pages follow]

- 44 -

IN WITNESS WHEREOF, each Grantor and the Administrative Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above.

BETTER CHOICE COMPANY INC.

By:

/s/ Damian Dalla-Longa

	Name:	Damian Dalla-Longa
	Title:	CEO

	TRUPET, LLC
	By:

	By:	/s/ Damian Dalla-Longa

	Name:	Damian Dalla-Longa
	Title:	CEO

HALO, PURELY FOR PETS INC.

By:

/s/ Werner von Pein

	Name:	Werner von Pein
	Title:	President & CEO

BONA VIDA, INC.

By:

/s/ Damian Dalla-Longa

	Name:	Damian Dalla-Longa
	Title:	CEO

[Signature Page to Pledge and Security Agreement]

	BRIDGING FINANCE INC.,
	as the Administrative Agent

By:

/s/ Lekan Temidire

	Name:	Lekan Temidire
	Title:	Managing Director

[Signature Page to Pledge and Security Agreement]

DELAWARE		83-4284557
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

164 DOUGLAS RD EAST, OLDSMAR, FL 34677
Oldsmar, Florida		34677
(Address of principal executive offices)		(Zip Code)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒

Emerging growth company	☐

	9/30/2019 (Unaudited)			12/31/2018 (Audited)
Assets
Current Assets
Cash and cash equivalents	$	2,776		$	3,946
Restricted cash		6,225			-
Accounts receivable, net		269			276
Inventories, net		2,358			1,557
Prepaid expenses and other current assets		1,931			269
Total Current Assets		13,559			6,048
Noncurrent Assets
Property and equipment, net		115			71
Right-of-use asset, operating lease		879			-
Intangible assets, net		926			-
Other assets		1,716			28
Total Assets	$	17,195		$	6,147
Liabilities & Stockholders’ Deficit
Current Liabilities
Line of credit	$	6,191		$	4,600
Other liabilities		-			1,914
Accounts payable		1,972			765
Due to related parties		34			1,600
Accrued liabilities		3,874			244
Deferred revenue		238			66
Operating lease liability, current portion		293			-
Warrant derivative liability		1,244			-
Total Current Liabilities		13,846			9,189
Noncurrent Liabilities
Operating lease liability		619			-
Total Liabilities		14,465			9,189
Redeemable Series E Convertible Preferred Stock
Redeemable Series E Convertible Preferred Stock, $0.001 par value, 2,900,000 and 0 shares authorized, 1,707,920 and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.		13,007			-
Stockholders’ Deficit
Common Stock, $0.001 par value, 88,000,000 shares and 580,000,000 shares authorized as of September 30, 2019 and December 31, 2018, respectively, 45,427,659 and 11,661,485 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively.		45			12
Convertible Series A Preferred Units, no par value, units equivalent to 0 and 2,391,403 Common Stock issued and outstanding at September 30, 2019 and December 31, 2018, respectively		-			2
Additional paid-in capital		176,757			13,642
Accumulated deficit		(187,079	)		(16,698	)
Total Stockholders’ Deficit		(10,277	)		(3,042	)
Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit	$	17,195		$	6,147

	Page No.

PART I. FINANCIAL INFORMATION	4

ITEM 1. FINANCIAL STATEMENTS:	4

Unaudited Consolidated Balance Sheets as of September 30, 2019 and December 31 2018	4

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018	5

Unaudited Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2019 and 2018	6

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018	9

Notes to the Unaudited Consolidated Financial Statements	11

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42

ITEM 4. CONTROLS AND PROCEDURES	43

PART II. OTHER INFORMATION	44

ITEM 1. LEGAL PROCEEDINGS	44

ITEM 1A. RISK FACTORS	44

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	44

ITEM 4. MINE SAFETY DISCLOSURES	44

ITEM 5. OTHER INFORMATION	44

ITEM 6. EXHIBITS	44

SIGNATURES	47

	For the Nine Months ended September 30,						For the Three Months ended September 30,
	2019			2018			2019			2018

Net sales	$	11,567		$	11,045		$	3,932		$	3,981
Cost of goods sold		7,178			5,786			3,096			2,457
Gross profit		4,389			5,259			836			1,524
Operating expenses:
General and administrative		12,031			4,013			4,856			1,341
Share-based compensation		6,708			-			2,496			-
Sales and marketing		8,452			4,061			2,856			1,242
Customer service and warehousing		854			927			303			350
Total operating expenses		28,045			9,001			10,511			2,933
Loss from operations		(23,656	)		(3,742	)		(9,675	)		(1,409	)
Other (expense) income:
Interest expense		(165	)		(94	)		(41	)		(28	)
Loss on acquisitions		(147,376	)		-			2,612			-
Change in fair value of warrant derivative liability		886			-			1,079			-
Total other (expense) income		(146,655	)		(94	)		3,650			(28	)

Net and comprehensive loss		(170,311	)		(3,836	)		(6,025	)		(1,437	)
Preferred dividends		70			-			43			-
Net and comprehensive loss available to common stockholders	$	(170,381	)	$	(3,836	)	$	(6,068	)	$	(1,437	)
Weighted average number of shares outstanding		28,624,230			11,497,128			43,575,010			11,497,128
Loss per share, basic and diluted	$	(5.95	)	$	(0.33	)	$	(0.14	)	$	(0.12	)

	Common Stock													Redeemable Series E Convertible Preferred Stock
	Number		Amount		Additional paid-in capital			Accumulated deficit			Total Stockholders’ Deficit			Number		Amount
Balance at June 30, 2019		43,168	$	43	$	170,017		$	(181,023	)	$	(10,963	)		1,708	$	13,007
Impact of adoption of ASC 842 - See Note 8		-		-		-			12			12
Share-based compensation						2,496			-			2,496
Stock issued to third parties for services		1,000		1		3,439			-			3,440
Acquisition of treasury shares		-				(3,870	)		-			(3,870	)
Acquisition of Better Choice						69			-			69
Acquisition of Bona Vida						600			-			600
Private issuance of public equity (“PIPE”) warrant exercise		1,260		1		4,006			-			4,007
Net and comprehensive loss available to common stockholders		-				-			(6,068	)		(6,068	)
Balance at September 30, 2019		45,428	$	45	$	176,757		$	(187,079	)	$	(10,277	)		1,708	$	13,007

Balance at June 30, 2018		11,497	$	11	$	8,545		$	(13,072	)	$	(4,516	)
Net and comprehensive loss available to common stockholders		-		-		-			(1,437	)		(1,437	)
Balance at September 30, 2018		11,497	$	11	$	8,545		$	(14,509	)	$	(5,953	)

	Common Stock						Convertible Series A Preferred Units															Redeemable Series E Convertible Preferred Stock
	Number			Amount			Number			Amount			Additional paid-in capital			Accumulated deficit			Total Stockholders’ Deficit			Number		Amount
Balance at January 1, 2019		11,662		$	12			2,391		$	2		$	13,642		$	(16,698	)	$	(3,042	)
Initial impact of adoption of ASC 842		-			-			-			-			-			(12	)		(12	)
Impact of adoption of ASC 842 - See Note 8		-			-			-			-			-			12			12
Shares issued pursuant to private issuance of public equity- net proceeds		5,745			6			70			-			15,820			-			15,826
Share-based compensation		1,119			1			-			-			6,708			-			6,709
Stock issued to third parties for services		1,000			1			-			-			3,439			-			3,440
Conversion of Series A shares to common stock		2,461			2			(2,461	)		(2	)		-			-			-
Acquisition of treasury shares		(1,012	)		(1	)		-			-			(6,070	)		-			(6,071	)
Acquisition of Better Choice		3,915			4			-			-			23,560			-			23,564		2,634			$	20,059
Acquisition of Bona Vida		18,103			18			-			-			108,602			-			108,620
Conversion of Series E Preferred Stock		1,175			1			-			-			7,050			-			7,051		(926	)			(7,052	)
PIPE warrant exercise		1,260			1			-			-			4,006			-			4,007		-				-
Net and comprehensive loss available to common stockholders		-			-			-			-						(170,381	)		(170,381	)	-				-
Balance at September 30, 2019		45,428		$	45			-		$	-		$	176,757		$	(187,079	)	$	(10,277	)	1,708			$	13,007

				Common Stock
	Units			Number		Amount		Additional paid-in capital		Accumulated deficit			Total Stockholders’ Deficit
Reported balance at January 1, 2018		10,397			-	$	-	$	8,545	$	(10,673	)	$	(2,128	)
Recapitalization adjustment (1)		(10,397	)		11,497		11		-		-			11
Recast balance at January 1, 2018		-			11,497		11		8,545		(10,673	)		(2,117	)
Net and comprehensive loss available to common stockholders		-			-		-		-		(3,836	)		(3,836	)
Balance at September 30, 2018		-			11,497	$	11	$	8,545	$	(14,509	)	$	(5,953	)

Cash Flow from Operating Activities	September 30, 2019			September 30, 2018

Net and comprehensive loss	$	(170,311	)	$	(3,836	)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash expenses		572			-
Depreciation and amortization		76			11
Share-based compensation expenses		6,708			-
Non-cash lease expenses		39			-
Change in fair value of warrant derivative liability		(886	)		-
Non-cash loss on acquisitions		146,980			-
(Increase) decrease in operating assets
Accounts receivable, net		76			(161	)
Inventories, net		(705	)		(476	)
Prepaid expenses and other current assets		(135	)		58
Other assets		31			-
(Decrease) increase in current liabilities
Accounts payable		889			1,220
Accrued liabilities		3,287			18
Deferred revenue		172			119
Deferred rent		-			(9	)
Other		(17	)		(1	)
Cash Used in Operating Activities	$	(13,224	)	$	(3,057	)

Cash Flow from Investing Activities
Acquisition of property and equipment, net	$	(52	)	$	(31	)
Cash acquired in merger		416			-
Cash Provided by (Used in) Investing Activities	$	364		$	(31	)

Cash Flow from Financing Activities
Repayment of cash advance	$	(1,898	)	$	-
Proceeds from private issuance of public equity, net		15,826			-
Payments on line of credit		(4,600	)		-
Payment of related party note payable		(1,600	)		(53	)
Proceeds from related party note payable		-			1,248
Capital contributions by owners		-			356
Distribution to the owners		-			(356	)
Proceeds from the issuance of debt		6,200			1,970
PIPE warrant exercise		4,007			-
Debt issuance costs		(20	)		-

Cash Provided by Financing Activities	$	17,915		$	3,165

Net Increase in Cash, Cash Equivalents and Restricted Cash	$	5,055		$	77
Total Cash and Cash Equivalents, Beginning of Period		3,946			157
Total Cash, Cash Equivalents and Restricted Cash, End of Period	$	9,001		$	234

Right-of-use asset and operating lease liability acquired under operating leases
Right-of-use asset recorded upon adoption of ASC 842	$	421
Operating lease liability recorded upon adoption of ASC 842		(429	)
Noncash acquisition of right-of-use asset for leases entered into during period	$	607
Noncash acquisition of operating lease liability for leases entered into during the period	$	(594	)

	September 30, 2019
Dollars in thousands	Level 1		Level 2		Level 3		Total

Liabilities
Warrant derivative liability	$	-	$	-	$	1,244	$	1,244

	Better Choice Company			Bona Vida			Total
Total Purchase Price	$	37,949		$	108,620		$	146,569
Net Assets (Liabilities) Acquired:
Assets
Cash and cash equivalents		7			384			391
Restricted cash		-			25			25
Accounts receivable		-			69			69
Inventories		-			95			95
Prepaid expenses and other current assets		32			348			380
Intangible assets		986			-			986
Other assets		-			74			74
Total Assets		1,025			995			2,020
Liabilities
Warrant derivative liability		(2,130	)		-			(2,130	)
Accounts payable & accrued liabilities		(544	)		(153	)		(697	)
Debt		-			-			-
Total Liabilities		(2,674	)		(153	)		(2,827	)
Net Assets (Liabilities) Acquired		(1,649	)		842			(807	)
Loss on Acquisitions	$	(39,598	)	$	(107,778	)	$	(147,376	)

Dollars in thousands	Classification on the Balance Sheet 2019	January 1, 2019
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets		421

Liabilities
Current - Operating	Operating lease liability short term		87
Noncurrent - Operating	Operating lease liability long term		342
Total operating lease liabilities		$	429

	Three months ended September 30, 2019		Nine months ended September 30, 2019
Dollars in thousands
Operating lease costs		95		219
Variable lease costs		8		24
Total Operating Lease costs	$	103		243

Dollars in thousands	Operating Leases
Remainder of 2019		$	95
2020			381
2021			381
2022			182
Total Minimum Lease Payments			1,039
Less: amount of lease payments representing interest			127
Present value of future minimum lease payments		$	912
Less: current obligations under leases			293
Long-term lease obligations		$	619

COMPANY:

BETTER CHOICE COMPANY INC.
a Delaware corporation

By:
Name:
Title:
Address:	164 Douglas Rd E Oldsmar, Florida 34677

	HH-HALO LP

	By:	HH-Halo GP LP, its general partner
		By: HH-Halo GP LLC, its general partner

	By:
		Name:
		Title:

FOR VALUE RECEIVED, all of or shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

	whose address is

	1. Borrower:		Better Choice Company Inc., a Delaware corporation (the “Borrower”).
	2. Guarantors:		(a) Each of John M. Word III, Lori Taylor and Mike Young (collectively, the “Personal Guarantors”); and (b) each of Halo, Purely for Pets Inc., a Delaware corporation (“Halo”), Trupet LLC, a Delaware limited liability company (“Trupet”), and Bona Vida, Inc., a Delaware corporation (“Bona Vida” and together with Halo, Trupet, and the Borrower, each an “Obligor” and collectively, the “Obligors”).
	3. Lenders:		The entities listed on Schedule B attached hereto, which are funds managed or co-managed by the Agent (each a “Lender” and collectively, the “Lenders”).
	4. Agent:		Bridging Finance Inc. (the “Agent”).
	5. Facilities:		(a) Term demand loan in an amount of up to $20,500,000 (the “Term Facility”); and (b) a revolving demand loan facility up to a maximum amount of $7,500,000 (the “Revolving Facility” and together with the Term Facility, the “Facilities”).

	6. Use of Proceeds:		The proceeds of the Term Facility are to be used to provide funds to the Borrower for the acquisition of Halo and to refinance existing Indebtedness. The proceeds of the Revolving Facility are to be used for working capital and general corporate purposes.
	7. Term:		The earlier of (i) demand by the Agent or any Lender, and (ii) December 19, 2020 (the “Term”).
	8. Facility Availability:		(a) Subject to the terms and conditions of this Agreement, the amount available under the Term Facility may be drawn only in a single advance on the Closing Date. Amounts borrowed under the Term Facility may not be reborrowed. (b) Subject to the terms and conditions of this Agreement, each Lender severally agrees to make Revolving Loans to the Borrower from time to time on any Business Day during the Term in an aggregate principal amount that will not result in (a) such Lender’s Revolving Credit Exposure exceeding such Lender’s Revolving Facility Commitment, or (b) the total Revolving Credit Exposure exceeding either (i) the total Revolving Facility Commitments or (ii) the Borrowing Base then in effect. Amounts borrowed under the Revolving Facility may be prepaid and reborrowed.
	9. Revolving Loans:		Each Revolving Loan shall be made upon the Borrower’s irrevocable notice to the Agent. Each such notice shall be in the form of a written Borrowing Request, appropriately completed and signed by an officer of the Borrower, and must be received by the Agent on or before Thursday of any week for a Revolving Loan to be made the following day.
	10. Interest Rate and Fees:		(a) Interest: Interest on the outstanding principal balance of the Facilities shall accrue at an annual rate equal to the Bank of Montreal Prime plus 8.05% calculated on the daily outstanding balance of the Facilities and compounded monthly, not in advance and with no deemed reinvestment of monthly payments (collectively, the “Applicable Rate”). On the occurrence of an Event of Default, interest shall be calculated at an annual rate of the lesser of (i) twenty‑one percent (21%), or (ii) the highest lawful rate per annum calculated and compounded as aforesaid. Bank of Montreal Prime shall mean the floating annual rate of interest established from time to time by the Bank of Montreal as the base rate it will use to determine rates of interest on Canadian Dollar loans to customers in Canada and designated as its Prime Rate.
			(b) Work Fee: A work fee equal to $[*] (representing [*]% of the aggregate Facilities amounts made available to the Borrower), plus any applicable taxes due thereon, shall be due and payable by the Borrower to the Agent on the Closing Date and shall be deducted from the advance of the Term Facility.

			(c) Administration Fee: If the Borrower fails to pay any amounts on the day such amounts are due or if the Borrower fails to deliver the required reports set out herein, the Borrower shall pay to the Agent a late administration fee of $100.00 per day, plus any applicable taxes due thereon, until such date that such payment has been made or the Borrower has delivered such report, as the case may be.
			(d) Expenses: The Borrower shall pay all fees and expenses (including, but not limited to, all due diligence, consultant, field examination and appraisal costs, all reasonable and documented fees and expenses for outside legal counsel and other outside professional advisors and the time spent by the Agent and its representatives in retaking, holding, repairing, processing and preparing for disposition and disposing of the Security calculated at the Agent’s standard per diem rate in effect at such applicable time and established by the Agent in its sole discretion for internal personnel of the Agent) reasonably incurred by the Agent or the Lenders in connection with the preparation, registration and ongoing administration of this Agreement and the Security and with the enforcement of the Agent’s or the Lenders’ rights and remedies under this Agreement or the Security, whether or not any amounts are advanced under this Agreement. If the Agent or any Lender has paid any expense for which the Agent or such Lender is entitled to reimbursement from the Borrower and such expense has not been deducted from the advance of the Term Facility, such expense shall be payable by the Borrower upon demand therefor from the Agent or such Lender and such expense shall bear interest at the same rate as the Term Facility as stipulated herein. All such fees and expenses and interest thereon shall be secured by the Security regardless of if any amounts are currently outstanding under the Facilities.
	11. Payments:		Interest-Only Payments: Without limiting the right of the Agent or the Lenders to at any time demand repayment and subject to and in addition to the requirement for repayment in full of the Term Facility and the Revolving Facility pursuant to this Agreement at the end of the Term, interest only at the Applicable Rate, calculated daily and compounded and payable monthly, not in advance on the outstanding amount of the Term Facility and the Revolving Facility, shall be due and payable on the last Business Day of each and every month during the Term.
	12. Mandatory Prepayments:		(a) In the event and within 10 Business Days of each occasion that the Borrower receives proceeds (minus the sum of all reasonable fees and out-of-pocket expenses paid to third parties (other than Affiliates) in connection with such event) from any issuance of any Equity Interests or Indebtedness (other than the Facilities), the Borrower shall apply such proceeds to prepay the amounts outstanding under the Facilities; provided, that (i) the proceeds from Permitted Unsecured Debt shall not be subject to this sentence, and (ii) the Agent, in its sole discretion, may choose to (x) allow the Borrower to keep such proceeds, taking into consideration the contemplated use of such proceeds by the Borrower, or (y) apply the proceeds to the amounts outstanding under either the Term Facility, the Revolving Facility, or both.

			(b) In the event and within 5 Business Days of each occasion that the Revolving Credit Exposure exceeds the Borrowing Base, the Borrower shall prepay the outstanding Revolving Loans in an amount equal to such excess.
	13. Principal:		Subject to demand by the Agent or any Lender or the occurrence and continuance of a Default or an Event of Default, the Borrower acknowledges that all principal and interest outstanding under the Facilities is payable in full at the end of the Term.
	14. Prepayment:		The Term Facility may be prepaid in full or partially at any time or from time to time without any fee or penalty provided that the Borrower shall deliver an irrevocable prepayment notice to the Agent (the “Prepayment Notice”) thirty (30) days prior to the proposed prepayment date (the “Prepayment Date”) setting forth the amount being prepaid (the “Prepayment Amount”) and provided that the Borrower pays the full Prepayment Amount on the Prepayment Date. Should the Borrower wish to prepay the Term Facility in full or partially without having to provide the Agent with the required thirty (30) days prior notice, the Borrower shall pay to the Agent an amount calculated in accordance with the formula set out below and which shall be due and payable as of the date the prepayment is made: I/365 x (30 – N) x M Where: I = the annual interest rate on the Term Facility on the date the Prepayment Notice was given or, if no Prepayment Notice was given, on the date the prepayment is made; N = where a Prepayment Notice was given, the number of days between the date the Prepayment Notice is given and the date of prepayment, provided that if no Prepayment Notice was given, N shall equal 0; and M = the Prepayment Amount, including any proportionate interest and other fees owing, on the date the Prepayment Notice was given or, if no Prepayment Notice was given, on the date the prepayment is made. The Borrower may, upon notice to the Agent, at any time and from time to time prepay any Revolving Loan in whole or in part without premium or penalty.
			In the event that the Prepayment Amount is not paid in full on the Prepayment Date, then the Agent shall have the option, in its discretion, to declare and consider the Prepayment Notice to be null and void such that any prepayment shall thereafter only be permitted by the delivery of a new Prepayment Notice in compliance with this section.

	15. Deposit:		The Agent acknowledges that it has been paid a deposit of C$50,000 by the Borrower which will be credited against the Borrower’s obligation to pay the reasonable and documented legal fees and expenses incurred by the Agent.
	16. Application of Payments:		Notwithstanding anything else contained herein, all payments received by the Agent or the Lenders shall be credited (i) first, as payment of interest and fees in respect of the Revolving Facility, (ii) second, as payment of interest and fees in respect of the Term Facility, (iii) as repayment of the principal amount outstanding under the Revolving Facility and the Term Facility, as determined by the Agent.
	17. Conditions Precedent:		The availability of the Facilities on the Closing Date are subject to and conditional upon the following conditions:
			(a) approval of the transaction by the Agent’s credit committee;
			(b) satisfactory completion of the Agent’s due diligence, including the Agent’s review of the corporate structure of the Borrower and the Obligors and operations of the Borrower and the Obligors, and their business and financial plans;
			(c) receipt by the Agent of a duly executed copy of this Agreement, the Security and other Credit Documents, in form and substance satisfactory to the Agent and its legal counsel, registered as required to perfect and maintain the security created thereby and such certificates, authorizations, resolutions of the board of directors of the Borrower and legal opinions as the Agent may reasonably require including an opinion from counsel to the Obligors with respect to status and the due authorization, execution, delivery, validity and enforceability against the Obligors of this Agreement, the Security and other Credit Documents;
			(d) receipt by the Agent of a duly executed copy of an agreement or agreements providing for a guarantee of the Obligations by each Obligor (other than the Borrower) and each Personal Guarantor (the “Guarantees”);
			(e) receipt by the Agent of a certificate in form and substance reasonably acceptable to the Agent and properly executed by an officer of Borrower and dated as of the Closing Date certifying, among other things, (i) as to a true, accurate and complete copy of the Halo Acquisition Agreement, (ii) that concurrently with the Term Facility borrowing hereunder, the Borrower is consummating the Halo Acquisition, substantially in accordance with the terms and conditions of the Halo Acquisition Agreement (without waiver or amendment of any material term or condition thereof not otherwise acceptable to the Agent) and that the Borrower is, concurrently with the Term Facility borrowing hereunder, acquiring all of the Equity Interests in Halo as contemplated by the Halo Acquisition Agreement, (iii) as to the purchase price determined by the Estimated Closing Statement (as defined in the Halo Acquisition Agreement) for the Equity Interests in Halo after giving effect to all adjustments as of the closing date contemplated by the Halo Acquisition Agreement;

			(f) on or immediately following the Closing Date, the discharge or subordination of any and all existing security against the Collateral, other than the Statutory Encumbrances and Permitted Encumbrances, as may be required by the Agent;
			(g) concurrent with the Closing Date advance, payment of all fees owing to the Agent or the Lenders hereunder, including reasonable and documented fees, charges, and disbursements of counsel to Agent;
			(h) delivery to the Agent by the Borrower of such financial and other information, certificates or documents relating to the Borrower and other Obligors as the Agent may reasonably require;
			(i) receipt by the Agent of a Borrowing Base Certificate, dated as of the Closing Date.
			(j) the Agent being satisfied that there has been no material deterioration in the financial condition of any Obligor;
			(k) no event shall have occurred and be continuing and no circumstance shall exist which has not been waived, which constitutes a default in respect of any material commitment, agreement or any other instrument to which the Borrower is a party or is otherwise bound, entitling any other party thereto to accelerate the maturity of amounts of principal owing thereunder or terminate any such material commitment, agreement or instrument which would have a Material Adverse Effect upon the financial condition, property, assets, operation or business of the Borrower and its subsidiaries, taken as a whole;
			(l) no event that constitutes, or with notice or loss of time or both, would constitute an Event of Default shall have occurred;
			(m) satisfactory completion of a site visit of the main office location of Halo by Agent or an agent of Agent; and
			(n) delivery of an audit completed by a third party reasonably satisfactory to the Agent of the Borrower’s Accounts and Inventory.
	18. Post-Closing Covenants:		The Borrower hereby covenants and agrees with the Agent as follows:
			(a) Within 60 days of the Closing Date, the Borrower will provide to the Agent executed copies of landlord lien waivers or collateral access agreements for all locations leased by any Obligor at which Collateral is located.

			(b) By January 6, 2020, the Borrower shall have caused each holder of Permitted Unsecured Debt to have subordinated such Permitted Unsecured Debt to the Agent, on terms and conditions reasonably acceptable to the Agent.
	19. Covenants:		The Borrower hereby covenants and agrees with the Agent and the Lenders, while this Agreement is in effect, to:
			(a) pay all sums of money when due hereunder or arising therefrom;
			(b) provide the Agent with prompt written notice of any event which constitutes, or which, with notice, lapse of time, or both, would constitute an Event of Default, a breach of any covenant or other term or condition of this Agreement or of any other Credit Document;
			(c) use the proceeds of the Facilities solely for the purposes provided for herein;
			(d) continue to carry on business in the nature of or ancillary to or reasonably related to the business transacted by the Borrower prior to the date hereof in the name and for the account of the Borrower;
			(e) keep and maintain books of account and other accounting records in accordance with generally accepted accounting principles;
			(f) fully and effectually maintain and keep maintained all security interests granted to the Agent under the Security as a valid and effective first priority Lien at all times, free of all Encumbrances other than Statutory Encumbrances and Permitted Encumbrances;
			(g) cause all material properties used or useful in the conduct of the business of the Borrower to be maintained and kept in good condition, repair and working order (ordinary wear and tear excepted) and supplied with all necessary equipment and cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in its reasonable judgment may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times;
			(h) permit the Agent or its representatives, at any time and from time to time, with such frequency as the Agent, in its reasonable sole discretion, may require, to visit and inspect the Borrower’s premises, properties and assets and to examine and obtain copies of the Borrower’s records or other information and discuss the Borrower’s affairs with the auditors, counsel and other professional advisors of the Borrower all at the reasonable expense of the Borrower;

			(i) keep the Agent informed on any changes to the strategy of the Borrower;
			(j) forthwith notify the Agent of the particulars of any action, suit or proceeding, pending, arbitration or mediation requests which, if determined adversely, would result in a judgement or award against an Obligor that could reasonably be expected to have a Material Adverse Effect;
			(k) in a form and manner prescribed by the Agent (which may include by fax and/or e-mail), deliver to the Agent any financial information, certified by a senior officer of the Borrower, with respect to the Borrower as and when reasonably requested by the Agent;
			(l) file all tax returns which the Borrower must file from time to time, to pay or make provision for payment of all taxes (including interest and penalties) and other potential preferred claims which are or will become due and payable and to provide adequate reserves for the payment of any tax, the payment of which is being contested;
			(m) maintain its corporate existence in good standing;
			(n) provide 15 days prior written notice to the Agent of any change in the Borrower’s places of business or name;
			(o) keep its assets fully insured against such perils and in such manner as would be customarily insured by companies carrying on a similar business or owning similar assets;
			(p) comply in all material respects at all times with all Applicable Laws (including Applicable Securities Laws) and to advise the Agent promptly of any action, requests or violation notices received from any government or regulatory authority concerning the Borrower’s operations which could have a Material Adverse Effect; and to indemnify and hold the Agent and the Lenders harmless from all liability of loss as a result of any non‑compliance by the Borrower with any such Applicable Laws;
			(q) promptly provide the Agent with notice if any license of the Borrower required by the Borrower to conduct its business, as then conducted, is terminated, materially restricted or is threatened to be terminated or materially restricted;
			(r) not sell, transfer, convey, lease or otherwise dispose of any of its properties or assets, other than in the ordinary course of its business;
			(s) to provide to the Agent the following regular reports:

			(i) as soon as available, and in any event within 120 days after the end of each fiscal year of the Borrower (or, if earlier, five (5) days after the date actually filed with the SEC), a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, audited and accompanied by a report and opinion of independent public accountants of nationally recognized standing, which report and opinion shall be prepared in accordance with generally accepted auditing standards to the effect that such consolidated financial statements present fairly in all material respects the financial condition, results of operations, shareholders’ equity and cash flows of the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; (ii) as soon as available, but in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year (beginning with the fiscal quarter ended March 31, 2020) of the Borrower (or, if earlier, five (5) days after the date actually filed with the SEC), a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal quarter, the related consolidated statements of income or operations, shareholders’ equity and cash flows for such fiscal quarter and for the portion of the Borrower’s fiscal year then ended, in each case setting forth in comparative form, as applicable, the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, certified by a Financial Officer of the Borrower as fairly presenting in all material respects the financial condition, results of operations, shareholders’ equity and cash flows of the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject only to normal year-end audit adjustments and the absence of notes; and (iii) at least every Thursday, and at such other times as may be necessary to re-determine the Borrowing Base or as requested by the Agent or the Lenders, as of the period then ended, a Borrowing Base Certificate and supporting information in connection therewith, together with any additional reports with respect to the Borrowing Base as the Agent or any Lender may reasonably request.
			Nothing contained in the above provisions shall limit, restrict or prevent the Agent or Lenders from requesting such other information from the Borrower from time to time, at its discretion, as set out in other provisions of this Agreement.

			(t) not move any of the Collateral outside of the locations set forth on Schedule C attached hereto;
			(u) not permit any reorganization or change of control of the Borrower;
			(v) not purchase or redeem its shares or units or otherwise reduce the capital of the Borrower without the Agent’s consent;
			(w) not sell, transfer, convey, encumber or otherwise dispose of any of its capital stock (other than sales of capital stock that are used to repay the Facilities or sales or issuances of capital stock permitted by the Borrower’s current 2019 Incentive Plan) or permit any reorganization or change of control of the Borrower;
			(x) not declare or pay any dividends, or distributions to shareholders, or repay any shareholders’ loans, interest thereon or share capital of the Borrower without the Agent’s consent;
			(y) not make loans or advances (excluding for greater certainty, salaries and bonuses (which shall not be funded from the sale of assets) payable in the ordinary course of business and in accordance with past practice) to shareholders, directors, officers or any other affiliate;
			(z) not grant, create, assume or suffer to exist any mortgage, charge, Lien, pledge, security interest, including a purchase money security interest, or other encumbrance affecting the Collateral except for Statutory Encumbrances and Permitted Encumbrances;
			(aa) not cancel any Indebtedness for borrowed money owing to it;
			(bb) not create, incur, assume or permit to exist any Indebtedness, except Permitted Unsecured Debt and other Indebtedness consented to in writing by the Agent.
			(cc) not grant a loan or make an investment in or provide financial assistance to a third party by way of a suretyship, guarantee or otherwise except for (i) financial assistance existing as of the date of this Agreement, and (ii) financial assistance delivered in connection with Indebtedness secured by Permitted Encumbrances;
			(dd) not change its name, merge, amalgamate, amend its organizational documents or amend or enact new by-laws or otherwise enter into any other form of business combination with any other entity without the prior written consent of the Agent; and
			(ee) not change the Core Business of the Borrower.

	20. Security and other Requirements:		As general and continuing security for the performance by the Borrower of all of its Obligations, present and future, to the Agent for and on behalf of the Lenders, including, without limitation, the repayment of advances granted hereunder and the payment of interest, fees and any other amounts provided for hereunder and under the security documents, each Obligor undertakes to grant, as applicable, or cause to be granted, to the Agent for and on behalf of the Lenders and to maintain at all times the following security in form satisfactory to the Agent (the “Security”), in accordance with the forms in use by the Agent or as prepared by its counsel:
			(a) a first priority security agreement over all assets, on the Agent’s form with such changes to be agreed, signed by the Obligors constituting a first priority security interest in all of each Obligor’s interest in the Collateral subject to Statutory Encumbrances and Permitted Encumbrances; and
			(b) use commercially reasonable efforts to cause the Agent to be loss payee of all risk, business interruption, commercial general liability and property insurance (including the equipment of the Borrower and the Obligors in an amount not less than its Appraised Value) within 30 days of the Closing Date.
			The Borrower undertakes and agrees to grant, or cause to be granted, to the Agent for and on behalf of the Lenders, such other security and supporting documents, certificates, insurance deliveries or instruments in respect of the Obligors (including such other third party postponement and subordinations, waivers and estoppels) as may be reasonably requested by the Agent from time to time.
	21. Further Assurances:		(a) Subject to Applicable Law, each Obligor will cause each Subsidiary formed or acquired after the date of this Agreement to become an Obligor by executing a joinder agreement in form and substance satisfactory to the Agent. In connection therewith, the Agent shall have received all documentation and other information regarding such newly formed or acquired Subsidiaries as may be required to comply with any applicable “know your customer” rules and regulations, including the USA Patriot Act. Upon execution and delivery thereof, each such Person (i) shall automatically become an Obligor hereunder and thereupon shall have all of the rights, benefits, duties, and obligations in such capacity under the Credit Documents and (ii) will grant Liens to the Agent, for the benefit of the Lenders, in any property of such Obligor which constitutes Collateral. (b) Without limiting the foregoing, each Obligor will, and will cause each Subsidiary to, execute and deliver, or cause to be executed and delivered, to the Agent such documents, agreements and instruments, and will take or cause to be taken such further actions (including the filing and recording of financing statements and other documents and such other actions or deliveries of the type required by Section 20, as applicable), which may be required by any Applicable Law or which the Agent may, from time to time, reasonably request to carry out the terms and conditions of this Agreement and the other Credit Documents and to ensure perfection and priority of the Liens (subject to Statutory Encumbrances and Permitted Encumbrances) created or intended to be created by the security documents, all in form and substance reasonably satisfactory to the Agent and all at the expense of the Borrower.

	22. Events of Default:		Without limiting any other rights of the Agent or any Lender under this Agreement, including the right of the Agent or any Lender to demand repayment at any time irrespective of the occurrence or continuance of an Event of Default, if any one or more of the following events (an “Event of Default”) has occurred and is continuing:
			(a) the Borrower fails to pay within three (3) days of when due any principal, interest, fees or other amounts due under this Agreement or under any of the Security;
			(b) the Borrower fails to pay the Prepayment Amount in full within five (5) days of the Prepayment Date set forth in the Prepayment Notice issued by the Borrower;
			(c) the Borrower breaches any provision of this Agreement (other than those contained in Section 18 of this Agreement) or any of the Security or other agreement with the Agent and such breach is not cured within five (5) days;
			(d) the Borrower breaches any provision of Section 18 of this Agreement;
			(e) any Obligor is in default under the terms of any other contracts, instruments or agreements with any other creditor;
			(f) any representation or warranty made or deemed to have been made in this Agreement or any other Credit Document, or in any written statement pursuant hereto or thereto, including any information certificate delivered in association with the entering into this Agreement, or in any report, financial statement or certificate made or delivered to the Agent by the Borrower, shall be untrue or incorrect as of the date when made or deemed made;
			(g) any Obligor ceases or threatens to cease to carry on business in the ordinary course;
			(h) any default or failure by the Borrower to keep current all amounts owing to parties other than the Agent or the Lenders who, in the Agent’s sole opinion, have or could have a security interest, trust or deemed trust in the property, assets or undertaking of the Borrower which, in the Agent’s sole opinion could rank pari passu or in priority to the security held by the Agent upon the Collateral;
			(i) if, in the reasonable opinion of the Agent, there is a Material Adverse Change in the financial condition, ownership or operation of an Obligor;

			(j) an Obligor is unable to pay its debts as such debts become due, or is adjudged or declared to be or admit to being bankrupt or insolvent;
			(k) any judgment or award is made against an Obligor, in respect of which (i) in the opinion of the Agent, acting reasonably, is likely to cause a Material Adverse Effect with respect to the Obligor, (ii) there is not an appeal or proceeding for review being diligently pursued in good faith or (iii) adequate provision has not been made on the books of the Obligor, as applicable; or
			(l) any notice of intention is filed or any voluntary or involuntary case or proceeding filed or commenced for:
			(i) the bankruptcy, liquidation, winding-up, dissolution or suspension of general operations of an Obligor, or the approval of a plan or a proposal for liquidation by any of the shareholders of an Obligor;
			(ii) the composition, rescheduling, reorganization, arrangement or readjustment of, or other relief from, or stay of proceedings to enforce, some or all of the debts of an Obligor;
			(iii) the appointment of a trustee, receiver, receiver and manager, liquidator, administrator, custodian or other official for, all or any significant part of the assets of an Obligor;
			(iv) the possession, foreclosure, retention, sale or other disposition of, or other proceedings to enforce security over, all or any significant part of the assets of an Obligor; or
			(v) any secured creditor, encumbrancer or lienor, or any trustee, receiver, receiver and manager, agent, bailiff or other similar official appointed by or acting for any secured creditor, encumbrancer or lienor, takes possession of or forecloses or retains, or sells or otherwise disposes of, or otherwise proceeds to enforce security over all or any significant part of the assets of an Obligor or gives notice of its intention to do any of the foregoing,
			then, in such event, the Agent may, by written notice to the Borrower declare all monies outstanding under the Facilities to be immediately due and payable. Upon receipt of such written notice, the Obligors shall immediately pay to the Agent all monies outstanding under the Facilities and all other obligations of the Borrower to the Agent in connection with the Facilities under this Agreement. The Agent may enforce its rights to realize upon its Security and retain an amount sufficient to secure the Agent for the Obligations to the Agent and the Lenders.

			Nothing contained in this section shall limit any right of the Agent or the Lenders under this Agreement to demand payment of the Facilities at any time.
	23. Evidence of Indebtedness:		The Agent shall maintain records evidencing the Facilities. The Agent shall record the principal amount of the Facilities, the payment of principal and interest on account of the Facilities, and all other amounts becoming due to the Agent or the Lenders under this Agreement.
			The Agent’s accounts and records constitute, in the absence of manifest error, conclusive evidence of the Indebtedness of the Borrower to the Agent and the Lenders pursuant to this Agreement.
	24. Representations and Warranties:		The Borrower represents and warrants to the Agent and the Lenders that:
			(a) each Obligor has been incorporated or formed, as applicable, under the laws of its jurisdiction of incorporation or formation, as applicable, and has not been terminated;
			(b) each Obligor is duly registered and licensed to carry on business in the jurisdictions in which it carries on business or owns property where so required by the laws of that jurisdiction and it is not otherwise precluded from carrying on business or owning property in such jurisdictions by any other commitment, agreement or document except for any such failure that would not reasonably be expected to have a Material Adverse Effect;
			(c) each Obligor has full corporate or limited liability company, as appropriate, power and authority to carry on its business as now carried on by it;
			(d) each Obligor has complied in all material respects with the requirements of all Applicable Laws;
			(e) no Obligor has received a notice of non-compliance, nor knows of, nor has reasonable grounds to know of, any facts that could give rise to a notice of non-compliance with any Applicable Laws (including Applicable Securities Laws), and is not aware of any pending change or contemplated change to any Applicable Law that would materially affect its business or the legal environment under which it operates;
			(f) each Obligor has or will have when required, all material licenses, permits, approvals, consents, certificates, registrations and other authorizations (collectively the “Permits”) under all Applicable Laws and regulations necessary for the operation of the businesses currently carried on, or proposed to be carried on, by it and each Permit is valid, subsisting and in good standing and it is not in default or breach of any Permit, and to the best of its knowledge, no material proceeding is pending or threatened to revoke or limit any Permit except for any such failure that would not reasonably be expected to have a Material Adverse Effect;

			(g) the execution, delivery and performance by the Obligors of this Agreement and all documents delivered in connection with this Agreement have been duly authorized by all necessary corporate action and do not violate the organizational documents or any Applicable Laws or material agreements to which it is subject or by which it is bound, in each case as applicable to each Obligor;
			(h) the Borrower’s financial statements most recently provided to the Agent fairly present in all material respects its financial positions as of the date thereof and its results of operations and cash flows for the fiscal period covered thereby, and since the date of such financial statements, there has occurred no Material Adverse Change in the Borrower’s business or financial condition;
			(i) there is no claim, action, prosecution or other proceeding of any kind pending or threatened against any Obligor or any of its assets or properties (including any of its intellectual property) before any court or administrative agency which relates to any non-compliance with any law which, if adversely determined, would reasonably be expected to have a Material Adverse Effect upon its financial condition or operations or its ability to perform its obligations under this Agreement or any of the Security, and there are no circumstances of which it is aware which might give rise to any such proceeding which has not been fully disclosed to the Agent;
			(j) there is no litigation or governmental proceeding pending against any Obligor or, to the best of its knowledge, threatened against it which, if adversely determined, would materially adversely affect its financial condition;
			(k) no Obligor is a party to any agreement or instrument, or subject to any corporate restriction or any judgment, order, writ, injunction, decree, award, rule or regulation, which has had a Material Adverse Effect or, to the best of its knowledge, in the future is likely to have a Material Adverse Effect, its ability to enter this Agreement or any other Credit Document or to perform its obligations under this Agreement or any other Credit Document;
			(l) no Obligor has contingent liabilities which are not disclosed on or referred to in the financial statements most recently delivered to the Agent which would have a Material Adverse Effect on its business or prospects;
			(m) each Obligor has good and marketable title to the Collateral pledged by it pursuant to the Security free and clear of any Encumbrances, other than Statutory Encumbrances, Permitted Encumbrances or as may otherwise be provided for herein;