CONVERTIBLE NOTE MODIFICATION AGREEMENT
THIS
CONVERTIBLE NOTE MODIFICATION AGREEMENT (the “Modification Agreement”) is made
as of this ___ day of January , 2006 by and among Aero Grow International,
Inc.,
a Nevada corporation (the “Company”) and each of the investors identified on the
signature page to this Agreement (the
“Investors” and individually an “Investor”).
RECITALS
WHEREAS,
the Company completed the sale of 300 units (“Units”) to the Investors during
the period beginning July 12, 2005 and ending September 13, 2005 (“Closing
Date”) in a private placement offering (“Offering”) in accordance with the terms
set forth in the Confidential Private Placement Memorandum dated June 6, 2005,
as amended and supplemented (“Memorandum”);
WHEREAS,
each Unit consisted of a 10% unsecured convertible promissory note in the
principal amount of $10,000 due June 30, 2006 (“Note”) and 2,000 five-year
warrants, each warrant providing for the purchase of one share of the Company’s
common stock (“Common Stock”) at the exercise price equal to the lesser of: (i)
$5.01 per share, or (ii) if a registered public offering of securities by the
Company is declared effective under the Securities Act of 1933, as amended
(“Securities Act”) prior to the payment or conversion of the Note (“Registered
Offering”), 100% of the per share offering price of the Company’s common stock
in the Registered Offering (“Public Offering Price”) (“Warrants”);
WHEREAS,
the principal amount of the Notes are convertible at any time, at the Investor’s
election, into the shares of Common Stock at a conversion price (“Conversion
Price”) equal to the lesser of: (i) $4.00 per share, or (ii) if a Registered
Offering is declared effective under the Securities Act prior to the payment
or
conversion of the Notes, 80% of the Public Offering Price;
WHEREAS,
upon conversion of the Notes, the Investor was entitled to receive additional
five-year warrants to purchase 2,000 shares of Common Stock for each $10,000
of
principal amount so converted (“Conversion Warrants”), with each Conversion
Warrant being exercisable at any time at an exercise price equal to the lesser
of: (i) $6.00 per share, or (ii) 120% of the Public Offering Price in the
Registered Offering;
WHEREAS,
during the 15 day period following the date upon which the Registered Offering
was declared effective and the Company had received its funds from the
Registered Offering, each Investor had the right, on one occasion only, to
demand full and complete payment in cash of the outstanding principal amount
of
all Notes held by such Investor, together with all accrued interest thereon;
WHEREAS,
the Company agreed to register: (i) the Common Stock into which the Notes may
be
converted (“Conversion Shares”), and (ii) the Common Stock underlying the
Warrants and the Conversion Warrants (“Underlying Common Stock”), on the
registration statement to be filed by the Company with respect to the securities
being offered in the Registered Offering (“Registration Statement”);
WHEREAS,
the Registration Statement was required to be filed within 60 days following
the
Closing Date and to be declared effective within 150 days from the Closing
Date;
WHEREAS,
the Company is required to pay Investors an amount equal to 1% of the purchase
price of each Unit held by Investors for every 30 day period (or part) after
the
relevant date, in each case until the Registration Statement is filed or
declared effective, as the case may be (“Registration Penalty”), if the
Registration Statement is not filed or does not become effective on a timely
basis, for any reason, other than adverse market conditions as determined by
the
Placement Agent in its sole discretion;
WHEREAS,
each Investor is contractually prohibited from selling or transferring any
Conversion Shares or Underlying Common Stock until the 180th
day
following the closing of the Registered Offering;
WHEREAS,
the Company filed the Registration Statement with the U.S. Securities and
Exchange Commission (“SEC”) on November 4, 2005;
WHEREAS,
the Company received a comment letter from the SEC on December 22, 2005 with
respect to the Registration Statement filed on November 4, 2005;
WHEREAS,
during December 2005, the Company had been notified by several of its warrant
holders from prior offerings that they desired to exercise certain warrants
held
by them before such warrants expired on December 31, 2005 and, to comply with
its contractual requirements under the said warrants, and to comply with the
policies of federal securities laws, and in accordance with the advice of its
attorneys, the Company’s board of directors approved the withdrawal of the
Registration Statement and the abandonment of the Registered Offering on
December 30, 2005;
WHEREAS,
the Company filed the withdrawal of the Registration Statement with the SEC
on
January 4, 2006;
WHEREAS,
the Company and Wentworth I, Inc. (“Wentworth”) entered into a certain Agreement
and Plan of Merger (the “Merger Agreement”) on January 12, 2006 by which
Wentworth will merge with and into the Company, with the Company being the
surviving corporation (“Merger”);
WHEREAS,
the Merger has been approved by the directors and stockholders of Wentworth,
and
Wentworth has filed a Schedule 14C information statement with the SEC on January
13, 2006, a copy of which has been made available to the Investor on the SEC
website at xxx.xxx.xxx;
WHEREAS,
the consummation of the Merger is contingent on the closing of a “best efforts”
$5,000,000 minimum, $12,000,000 maximum private placement offering for units
(“Equity Units”) to investors (“Equity Investors”), at $5.00 per Equity Unit,
consisting of one share of Common Stock (“New Common Stock”) and one warrant
(“New Warrant”) exercisable for a period of five years after the closing, for
one share of Common Stock, at $6.25 per share (“Equity Offering”);
WHEREAS,
the Equity Offering will be commenced by the Company on or after February 6,
2006;
WHEREAS,
the Company desires to complete the Merger and the Equity Offering on or about
February 24, 2006;
WHEREAS,
upon completion of the Merger, the Company will become a
Section
12(g) reporting company under the Exchange Act with its shares
of
Common Stock becoming registered securities under Section 12(g) of the Exchange
Act;
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WHEREAS,
depending
on the number of Equity Units sold in the Equity Offering, the Company intends
to use its commercially reasonable best efforts to have its shares of Common
Stock commence quotation on either (i) Nasdaq Capital Markets (“Nasdaq”); or
(ii) the Over-the-Counter Bulletin Board (“OTC BB”);
WHEREAS,
there can be no assurance as to when and if the shares of Common Stock will
become quoted on either Nasdaq or the OTC BB and, even if the shares of Common
Stock are quoted on either venue, there can be no assurance that an active
trading market will develop for such shares;
WHEREAS,
as part of the Equity Offering, the Company has agreed to register for resale
the shares of New Common Stock issued in the Equity Offering (together with
the
shares of Common Stock underlying the New Warrants) on a registration statement
to be filed with the SEC;
WHEREAS,
the Company and the Investor hereby desire to modify the terms and conditions
of
that certain subscription agreement executed by and between the Company and
the
Investor with respect to the Offering (“Subscription Agreement”) and the Note
issued by the Company to the Investor in the Offering as set forth
herein;
NOW,
THEREFORE, for and in consideration of the mutual premises contained herein
and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Amendments
to Note.
A.
Except
as otherwise defined herein, the capitalized terms set forth in Section 1 of
this Modification Agreement shall have the meaning set forth in the
Note.
B.
The
introductory paragraph of the Note shall be amended to change the maturity
date
from “June 30, 2006” to “December 31, 2006.”
C.
The
first paragraph of Section 5 of the Note is hereby amended in its entirety
to
read as follows:
“5. Conversion;
Registration.
The
principal amount of this Note will be convertible, at the holder’s election,
into shares of the Company’s common stock, par value $0.001 per share (“Common
Stock”) at a conversion price (“Conversion Price”) equal to $3.50 per share;
provided, however, the Conversion Price shall be $3.00 per share for any portion
of the principal amount of this Note converted on or before January 31, 2006.
Upon conversion of this Note, the holder shall receive additional five-year
warrants to purchase 2,000 shares of Common Stock for each $10,000 of principal
amount so converted (“Conversion Warrants”). The Conversion Warrants may not be
redeemed by the Company and may be exercised at any time prior to expiration
at
an exercise price equal $6.00 per share. The
Company has agreed to file and to use its best efforts to have declared
effective a registration statement with the U.S. Securities and Exchange
Commission (“Commission”) to register for resale the Common
Stock into which the Note may be converted and the Common Stock underlying
the
Conversion Warrants (“Conversion Securities”), in
accordance with and subject to the terms and conditions of the registration
rights discussed in Section 8 of the Subscription Agreement signed by the
original holder of this Note and accepted by the Company in connection with
the
offering to which this Note relates, as amended by this Modification Agreement.
These registration rights shall inure to the benefit of the transferees of
this
Note and the Conversion Shares. The
principal amount of this Note may be converted, in whole or in part (as limited
herein), by the holder at any time until this Note is paid in full by the
Company. The Company may not redeem this Note and will have no right to pre-pay
this Note without the prior written consent of the holder.”
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D.
Except
as amended by this Modification Agreement, the terms and conditions contained
in
the Note shall remain in full force and effect.
2. Amendment
to Subscription Agreement.
A.
Except
as otherwise defined herein, the capitalized terms set forth in Section 2 of
this Modification Agreement shall have the meaning set forth in the Subscription
Agreement.
B.
Section 8.1 of the Subscription Agreement is hereby amended in its entirety
to
read as follows:
“8.1 Filing
of Registration Statement.
The
Company will file, on one occasion only, a registration statement under the
Securities Act filed with the Securities and Exchange Commission (“Commission”)
to register for re-offer and re-sale, the Common Stock into which the Notes
may
be converted, the Common Stock underlying the Warrants included in the Units
and
the Common Stock underlying the warrants received upon conversion of the Notes
(collectively, “Registrable Securities”) on behalf of the Investors (or
subsequent holders, referred to together as the “Holders”).
The
registration statement will be filed within forty-five (45) days after the
final
closing of the Equity Offering (as defined in the Modification Agreement),
but
not later than June 1, 2006. The Company will use its commercially reasonable
efforts to have the registration statement declared effective within one hundred
fifty (150) days after the final closing of the Equity Offering, but not later
than October 1, 2006. Each Holder will provide upon request, such information
as
the Company may require for inclusion in the registration statement. All costs
associated with the registration of the Registrable Securities, other than
brokerage commissions incurred by the Holders in connection with resales of
the
Registrable Securities, shall be borne by the Company. The registration
statement to be filed by the Company under this Section 8.1 shall include:
(i)
the Registrable Securities and the Common Stock underlying the warrants to
be
issued to Placement Agent under this offering; (ii) the shares
of
New Common Stock (as defined in the Modification Agreement) issued in the Equity
Offering (as defined in the Modification Agreement); (iii) the shares of Common
Stock underlying the New Warrants (as defined in the Modification Agreement)
issued in the Equity Offering); (iv) the Common Stock underlying the warrants
to
be issued to the placement agent under the Equity Offering; and (iv) the shares
of Common Stock issued to the stockholders of Wentworth (as defined in the
Modification Agreement) issued in connection with the Merger (as defined in
the
Modification Agreement). Upon
effectiveness of any new or continued registration statement, the Company shall
promptly file a Form 8-A to register its common stock under section 12(g) of
the
Exchange Act of 1934, as amended (“Exchange Act”) to the extent that such shares
of Common Stock are not already registered. As long as the Notes remain
outstanding, the Company shall provide to each purchaser: (i) quarterly
financial statements prepared in accordance with GAAP within 45 days after
the
end of each quarter, and (ii) annual audited financial statements prepared
in
accordance with 90 days after the end of each fiscal year end, unless such
financial statements are included in periodic reports under the Exchange Act,
which are timely filed.”
C.
Section 8.8 of the Subscription Agreement is hereby amended in its entirety
to
read as follows:
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“8.8 Penalties.
The Company and Holder agree that Holder will suffer damages if the Company
fails to fulfill certain of its filing date and other obligations pursuant
to
Sections 8.1 and 8.5 hereof and that it would not be possible to ascertain
the
extent of such damages with precision. Accordingly, the Company hereby agrees
to
pay liquidated damages (“Liquidated Damages”) to the Holder under the following
circumstances: (a) if the registration statement is not filed by the Company
on
or prior to 45 days after the final closing of the Equity Offering (but not
later than June 1, 2006) (such an event, a “Filing Default”); (b) if the
registration statement is not declared effective by the SEC on or prior to
150
days after the final closing of the Equity Offering (but not later than
September 15, 2006) (such an event, an “Effectiveness Default”); or (c) if,
pursuant to the Company’s obligations under Section 8.5 hereof, the Company does
not file its required periodic reports under the Exchange Act when due (such
an
event, a “Reporting Default” and together with a Filing Default and an
Effectiveness Default, a “SEC Default”). In the event of an SEC Default, the
Company shall as Liquidated Damages pay to Holder, for each 30-day period of
an
SEC Default, an amount equal to 1% of the aggregate purchase price paid for
the
Units purchased in the offering pursuant to this Agreement up to a maximum
aggregate of 24 months of SEC Defaults. The Company shall pay the Liquidated
Damages in shares of Common Stock, priced at $2.00 per share as follows: (i)
in
connection with a Filing Default, on the 46th day after the final closing (but
not later than June 1, 2006), and each 30th day thereafter until the
registration statement is filed with the SEC; (ii) in connection with an
Effectiveness Default, on the 151st
day
after the final closing of the Equity Offering (but not later than September
15,
2006), and each 30th day thereafter until the registration statement is declared
effective by the SEC; or (iii) in connection with a Reporting Default, on the
31st
consecutive day of after a Reporting Default has occurred, provided that if
the
Reporting Default has been cured, then such days during which a Reporting
Default were accruing will be added to any future Reporting Default period
for
the purposes of calculating the payment of the liquidated damages provided
for
in this provision.”
D.
Section 8.9 of the Subscription Agreement (Lock Up Provisions) is hereby deleted
in its entirety and shall have no further force or effect.
E.
The
Investor hereby waives any and all Liquidated Damages that have accrued or
may
be otherwise payable under Section 8.8 of the Subscription Agreement as in
effect prior to amendment thereof by this Modification Agreement. Investor
agrees not to make any claims for Liquidated Damages for or on account of any
SEC Default, except to the extent that such claim arises due to an SEC Default
pursuant to Section 8.8 of the Subscription Agreement as amended by this
Modification Agreement.
F.
Except
as amended by this Modification Agreement, the terms and conditions contained
in
the Subscription Agreement shall remain in full force and effect.
3. Amendment
to Warrant.
A.
Except
as otherwise defined herein, the capitalized terms set forth in Section 3 of
this Modification Agreement shall have the meaning set forth in the Warrant.
B.
Section 1.2 of the Warrant is hereby amended in its entirety to read as follows:
“1.2 The
purchase price payable upon exercise of each Warrant (“Exercise Price”) shall be
$5.00 per share. The Exercise Price and number of Warrant Shares purchasable
pursuant to each Warrant are subject to adjustment as provided in Section 8.”
C.
Section 2.7 of the Warrant (Redemption Provisions) is hereby deleted in its
entirety and shall have no further force or effect.
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D.
Section 7 of the Warrant is hereby amended in its entirety to read as
follows:
“7. REGISTRATION
RIGHTS OF WARRANT HOLDER.
The
Company has agreed to file and to use its best efforts to have declared
effective a registration statement with the Commission to register for resale
the Warrant Shares purchasable under this Warrant on a registration statement
(the “Registration Statement”), in accordance with and subject to the terms and
conditions of the registration rights discussed in Section 8 of the Subscription
Agreement signed by the original Holder of this Warrant and accepted by the
Company in connection with the offering to which these Warrants relate, as
amended by this Modification Agreement. These registration rights shall inure
to
the benefit of the transferees of this Warrant and the Warrant
Shares.”
E.
Except
as amended by this Modification Agreement, the terms and conditions contained
in
the Warrant shall remain in full force and effect.
4. Effectiveness.
This
Modification Agreement shall become effective and binding on the parties hereto
only upon: (i) the delivery to the Company of this Modification Agreement signed
by the Investor on or before January 31, 2006, or such later date as determined
by the Company in its sole discretion, and (ii) the closing of the Merger and
the Equity Offering.
[Signature
on following page]
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IN
WITNESS WHEREOF, the parties hereto have executed this Modification Agreement
as
of the date first written above.
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AERO
GROW
INTERNATIONAL, INC.
a
Nevada corporation
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| By: | ||
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W. Xxxxxxx Xxxxxxxxxxx, CEO |
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[INVESTOR
SIGNATURE PAGE FOLLOWS]
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[INVESTOR
SIGNATURE PAGE TO MODIFICATION AGREEMENT]
| INVESTOR (for Entities, Trusts and IRAs): | INVESTOR (for Individuals): | ||
|
Print Name of Entity (full legal name) |
Print Name of Individual (full legal name) |
||
| By: | |||
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Signature of Authorized Person |
Signature |
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