This Royalty Agreement (this “ Agreement ”) is entered into as of July 10, 2007 (the “ Effective Date ”), by and between Perfect Circle Projectiles, LLC, an Illinois limited liability company (“ Seller ”), and PCP Acquisition, Inc., a Colorado corporation (“ Buyer ”). Each of Seller and Buyer shall be referred to herein individually as a “ Party ,” and collectively as the “ Parties .”
WHEREAS, pursuant to Section 7.1(e) of the Asset Purchase Agreement dated as of the Effective Date by and among Seller, Gary E. Gibson, Buyer and Security With Advanced Technology, Inc. (the “ Purchase Agreement ”), Buyer and Seller agreed to enter into this Agreement as a condition to the closing of the transactions contemplated by the Purchase Agreement;
WHEREAS, pursuant to the terms and conditions contained herein, Buyer agrees to pay royalties to Seller for all Spherical Projectile (as defined in the Purchase Agreement) rounds of Products (as defined in the Purchase Agreement) that contain an irritant or other inhibiting substance (“ Live Rounds ”) and all other Spherical Projectile rounds (“ Inert Rounds ”) of Products acquired by Buyer pursuant to the Purchase Agreement and produced during the Term (as defined below); and
WHEREAS, unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Purchase Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
(a) Subject to Section 2 below and the limitations set forth in Section 6.10 of the Purchase Agreement, Buyer shall pay to Seller (i) $0.12 per Live Round and (ii) $0.06 per Inert Round of Products produced by Buyer during the Term (the “ Royalty ”). The Royalty shall be payable quarterly within 45 days after the end of each calendar quarter (or portion thereof) during the Term for the period commencing on the Effective Date and ending on the sixth anniversary of the Effective Date (the “ Term ”).
(b) With each Royalty payment, Buyer shall deliver to Seller a written certificate of a qualified officer of Buyer certifying the number of Live Rounds and Inert Rounds of Products produced by Buyer during the immediately preceding quarter.
(a) Notwithstanding Section 1, Buyer shall pay an annual minimum Royalty (the “ Annual Minimum Royalty ”) to Seller during the Term as follows: (a) the Annual Minimum
Royalty for the first year during the Term shall be $105,000; (b) the Annual Minimum Royalty for the second year during the Term shall be $157,000; and (c) Annual Minimum Royalty for the third, fourth, fifth and sixth years during the Term shall be $210,000; for a cumulative amount of total Annual Minimum Royalty of $1,102,000. If in any year during the Term the aggregate amount of the Royalty payments made during such year is less than the applicable Annual Minimum Royalty for such year (a “ %Shortfall ”), then Buyer shall make an additional payment to Seller in the amount of the Shortfall together with the fourth quarter Royalty payment for such year.
(b) Buyer shall have the right to pre-pay any or all of the Annual Minimum Royalty without premium or penalty.
3. Security Interest . Buyer hereby grants to Seller a first priority security interest in all of the Product Rights and Patents as defined in the Purchase Agreement (the “ Assets ”) to secure Buyer’s payment of the Annual Minimum Royalties. Seller is authorized to file financing statements, amendments, termination statements, continuation statements and any other filing it may deem reasonably necessary in connection with its security interest in the Assets without Buyer’s signature. The security interest shall automatically terminate upon the payment in full of all Annual Minimum Royalties. Upon any such termination of the security interest, (i) all security interests arising under this Agreement shall automatically be released, discharged and terminated and (ii) Seller will promptly execute and deliver such UCC termination statements and other documentation and instruments (all in form and substance reasonably acceptable to Buyer and all without any representation, warranty or recourse of any kind whatsoever) as may be reasonably requested and provided to Seller to effect such release and termination.
4. Audit Rights . Seller may, upon reasonable notice to Buyer, during Buyer’s business hours, but in no event more than once each calendar year during the Term, inspect or ha