CONVERTIBLE SECURED SUBORDINATED NOTE PURCHASE AGREEMENT
Exhibit
4.1
This
Convertible Secured Subordinated Note Purchase Agreement, dated as of November
14, 2007, (this “Agreement”)
is
entered into by and among Smart Online, Inc., a Delaware corporation (the
“Company”),
and
the persons and entities listed on the schedule of investors attached hereto
as
Schedule I
(each an
“Investor”
and,
collectively, the “Investors”).
RECITALS
A. On
the
terms and subject to the conditions set forth herein, each Investor is willing
to purchase from the Company, and the Company is willing to sell to such
Investor, a secured subordinated convertible promissory note in the principal
amount set forth opposite such Investor’s name on Schedule I
hereto.
B. Capitalized
terms not otherwise defined herein shall have the meaning set forth in the
form
of Note (as defined below) attached hereto as Exhibit A.
AGREEMENT
NOW
THEREFORE, in consideration of the foregoing, and the representations,
warranties, and conditions set forth below, the parties hereto, intending to
be
legally bound, hereby agree as follows:
1. The
Notes.
(a) Issuance
of Notes.
At the
Initial Closing (as defined below), the Company agrees to issue and sell to
each
of the Investors, and, subject to all of the terms and conditions hereof, each
of the Investors severally agrees to purchase a convertible secured subordinated
promissory note in the form of Exhibit A
hereto
(each, a “Note”
and,
collectively, the “Notes”)
in the
principal amount set forth opposite the respective Investor’s name on
Schedule I
hereto,
(which amount shall not be less than $250,000.00). The obligations of the
Investors to purchase Notes are several and not joint.
(b) Initial
Closing; Delivery.
The
sale and purchase of the Notes shall take place at one or more closings with
the
initial closing (the “Initial
Closing”)
to be
held on the date hereof at such place as the Company and the Investors may
determine. At the Initial Closing, the Company will deliver to each of the
Investors the respective Note to be purchased by such Investor, against receipt
by the Company of the corresponding purchase price set forth on Schedule
I hereto
(the “Purchase
Price”).
Each
of the Notes will be registered in such Investor’s name in the Company’s
records. In addition, to secure the full payment of all obligations under the
Notes, the Company and Xxxxx Xxxxxxxx, as agent for the Investors (the
“Agent”),
shall
execute the Security Agreement (as defined below).
(c) Subsequent
Closing; Delivery.
Subject
to
compliance with federal and applicable state securities laws, at any time after
the date of this Agreement but on or prior to the third anniversary hereof,
the
Company may elect to sell and issue to the Investors, and, upon such election,
the Investors shall purchase from the Company in one or more subsequent closings
(each, a “Subsequent
Closing”),
additional Notes (the “Additional
Notes”);
provided that the aggregate principal amount of all Additional Notes issued
in
all Subsequent Closings pursuant to this Agreement does not exceed
$5,200,000.
Each
time the Company elects to sell Additional Notes in a Subsequent Closing, the
Company shall provide to each Investor written notice of such election (the
“Subsequent
Closing Notice”),
which
notice shall include the aggregate principal amount of the Additional Notes
the
Company proposes to sell in such Subsequent Closing (which amount shall not
be
less than $500,000) (the “Subsequent
Closing Amount”),
the
anticipated date upon which such Subsequent Closing will occur (which date
shall
not be more than fifteen (15) days after the Company provides such notice to
the
Investors) and the Investor’s pro rata share of the Subsequent Closing Amount
(which shall be calculated by dividing the principal amount of the Note
purchased by such Investor in the Initial Closing by the aggregate principal
amount of all Notes purchased in the Initial Closing). At each Subsequent
Closing, each Investor shall purchase an Additional Note equal to such
Investor’s pro rata share of the Subsequent Closing Amount. All such sales of
Additional Notes shall be made on the terms and conditions set forth in this
Agreement and the exhibits attached hereto. Any Additional Notes sold and issued
pursuant to this Section 1(d) shall be deemed to be “Notes”
for
all
purposes under this Agreement. Should any such sales be made, the Company shall
prepare a revised Schedule
I
to this
Agreement reflecting such sales. At each Subsequent Closing, the Company will
deliver to each of the Investors participating in such Subsequent Closing the
respective Note to be purchased by such Investor, against receipt by the Company
of the corresponding Purchase Price set forth on Schedule
I
hereto.
Each of the Notes will be registered in such Investor’s name in the Company’s
records. The Initial Closing and each Subsequent Closing, if any, shall each
be
considered a “Closing”
for
the
purposes of this Agreement and the date of each such Closing shall be a
“Closing
Date.”
(d) Use
of Proceeds.
The
proceeds of the sale and issuance of the Notes shall be used for ongoing working
capital and capital spending requirements.
2. Representations
and Warranties of the Company.
Except
as otherwise described in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006 (and any amendments thereto filed at least two (2)
Business Days prior to the Closing Date), the Company’s Quarterly Reports on
Form 10-Q for the quarters ended June 30, 2007 and March 31, 2007 (and any
amendments thereto filed at least two (2) Business Days prior to the Closing
Date), the Company’s Proxy Statement for its 2007 Annual Meeting of
Shareholders, and any of the Company’s Current Reports on Form 8-K filed since
August 14, 2007 (and any amendments thereto filed at least two (2) Business
Days
prior to the Closing Date) (all collectively, the “SEC
Reports”),
the
Company hereby represents and warrants to, and covenants with, the Investor
as
of the date hereof and the applicable Closing Date, as follows:
(a) Organization.
The
Company is duly incorporated and validly existing in good standing under the
laws of the State of Delaware. The Company has full power and authority to
own,
operate and occupy its properties and to conduct its business as presently
conducted and is registered or qualified to do business and in good standing
in
each jurisdiction in which it owns property or transacts business and where
the
failure to be so qualified would have a material adverse effect upon the Company
and its subsidiaries as a whole or the business, financial condition,
properties, operations or assets of the Company and its subsidiaries as a whole
or the Company’s ability to perform its obligations under the this Agreement,
the Notes, the Security Agreement (as defined below), the Registration Rights
Agreement (as defined below) (collectively, the “Transaction
Agreements”)
in all
material respects (“Material
Adverse Effect”),
and
no proceeding has been instituted in any such jurisdiction revoking, limiting
or
curtailing, or seeking to revoke, limit or curtail, such power and authority
or
qualification.
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(b) Due
Authorization. The
Company has all requisite power and authority to execute, deliver and perform
its obligations under the Transaction Agreements. The execution and delivery
of
the Transaction Agreements, and the consummation by the Company of the
transactions contemplated hereby, have been duly authorized by all necessary
corporate action and no further action on the part of the Company or its Board
of Directors or stockholders is required. The Transaction Agreements have been
validly executed and delivered by the Company and constitute legal, valid and
binding agreements of the Company enforceable against the Company in accordance
with their terms, except to the extent (i) rights to indemnity and contribution
may be limited by state or federal securities laws or the public policy
underlying such laws, (ii) such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors’ and contracting parties’ rights generally and (iii) such
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at
law).
(c) No
Conflict or Default. The
execution and delivery of the Transaction Agreements, the sale and issuance
of
the Notes to be sold by the Company pursuant to this Agreement, the issuance
of
the shares of the Company’s Common Stock (the “Common
Stock”)
issuable upon conversion of the Notes (the “Conversion
Shares”)
in
accordance with the terms of the Notes, the fulfillment of the terms of the
Transaction Agreements and the consummation of the transactions contemplated
thereby will not: (A) result in a conflict with or constitute a material
violation of, or material default (with the passage of time or otherwise) under,
(i) any bond, debenture, note, loan agreement or other evidence of
indebtedness, or any material lease,
or
contract to which the Company is a party or by which the Company or their
respective properties are bound, (ii) the Certificate of Incorporation,
by-laws or other organizational documents of the Company, as amended, or
(iii) any law, administrative regulation, or existing order of any court or
governmental agency, or other authority binding upon the Company or the
Company’s respective properties; or, (B) result in the creation or
imposition of any lien, encumbrance, claim, or security interest upon any of
the
material assets of the Company or an acceleration of indebtedness pursuant
to
any obligation, agreement or condition contained in any material bond,
debenture, note or any other evidence of indebtedness or any material indenture,
mortgage, deed of trust or any other agreement or instrument to which the
Company is a party or by which it is bound or to which any of the property
or
assets of the Company is subject, except as contemplated by the Transaction
Agreements. No consent, approval, authorization or other order of, or
registration, qualification or filing with, any regulatory body, administrative
agency, or other governmental body is required for the execution and delivery
of
the Transaction Agreements by the Company and the valid issuance or sale of
the
Securities by the Company pursuant to the Transaction Agreements, other than
such as have been made or obtained, and except for any filings required to
be
made under federal or state securities laws
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(d) Capitalization.
The
outstanding capital stock of the Company is as described in the Company’s
Quarterly Report on Form 10-Q for the three month period ending June 30,
2007.
The
Company has not made any material issuances of capital stock since June 30,
2007, other than pursuant to the purchase
of shares under the Company’s employee stock equity plans and the exercise
of outstanding warrants or stock options, in each case as disclosed in the
SEC
Reports, as well as the issuance of restricted shares to certain of its
directors as part of its director compensation program and the issuance of
restricted shares to certain of its employees under our 2004 Equity Compensation
Plan. The Conversion Shares to be issued upon conversion of the Notes have
been
duly authorized, and when issued and paid for in accordance with the terms
of
the Transaction Agreements, will be duly and validly issued, fully paid and
nonassessable, subject to no lien, claim or encumbrance (except
for any such lien, claim or encumbrance created,
directly or indirectly, by the Investor). The outstanding shares of capital
stock of the Company have been duly and validly issued and are fully paid and
nonassessable, have been issued in compliance with the registration requirements
of federal and state securities laws, and were not issued in violation of any
preemptive rights or similar rights to subscribe for or purchase securities.
The
Company owns one hundred percent of all of the outstanding capital stock of
each
of its subsidiaries, free and clear of all liens, claims and encumbrances except
as disclosed in the SEC Reports. There are not (i) any outstanding preemptive
rights, or (ii) any rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, any unissued shares of capital stock
or
other equity interest in the Company not disclosed in the SEC Reports, or (iii)
any contract, commitment, agreement, understanding or arrangement of any kind
to
which the Company is a party that would provide for the issuance or sale of
any
capital stock of the Company, any such convertible or exchangeable securities
or
any such rights, warrants or options not disclosed in the SEC Reports. There
are
no shareholders agreements, voting agreements or other similar agreements with
respect to the Common Stock to which the Company is a party
(e) Legal
Proceedings. There
is
no material legal or governmental proceeding pending, or to the knowledge of
the
Company, threatened, to which the Company is a party or of which the business
or
property of the Company is subject that is required to be disclosed and that
is
not so disclosed in the SEC Reports or in the supplemental written disclosure
on
material legal proceedings provided to the Investors. Other than the information
disclosed in the SEC Reports, the Company is not subject to any injunction,
judgment, decree or order of any court, regulatory body, administrative agency
or other government body.
(f) No
Violations. To
the
knowledge of the Company, it is
not in
violation of its Certificate of Incorporation, bylaws or other organizational
documents, as amended. To the knowledge of the Company, it is not in violation
of any law, administrative regulation, ordinance or order of any court or
governmental agency, arbitration panel or authority applicable to the Company,
which violation, individually or in the aggregate, is reasonably likely to
have
a Material Adverse Effect. The Company is not in default (and there exists
no
condition which, with the passage of time or otherwise, would constitute a
default) in the performance of any bond, debenture, note or any other evidence
of indebtedness or any indenture, mortgage, deed of trust or any other material
agreement or instrument to which the Company is a party or by which the Company
is bound, which such default would have a Material Adverse Effect upon the
Company.
(g) Governmental
Permits, Etc. The
Company has all necessary franchises, licenses, certificates and other
authorizations from any foreign, federal, state or local government or
governmental agency, department or body that are currently necessary for the
operation of the business of the Company as currently conducted, except where
the failure to currently possess such franchises, licenses, certificates and
other authorizations is not reasonably likely to have a Material Adverse
Effect.
4
(h) Intellectual
Property.
(i) Except
for matters which are not reasonably likely to have a Material Adverse Effect,
(i) each of the Company has ownership of, or a license or other legal right
to
use, all patents, copyrights, trade secrets, trademarks, customer lists,
designs, manufacturing or other processes, computer software, systems, data
compilation, research results or other proprietary rights used in the business
of the Company (collectively, “Intellectual
Property”)
and
(ii) all of the Intellectual Property owned by the Company consisting of
patents, registered trademarks and registered copyrights have been duly
registered in, filed in or issued by the United States Patent and Trademark
Office, the United States Register of Copyrights or the corresponding offices
of
other jurisdictions and have been maintained and renewed in accordance with
all
applicable provisions of law and administrative regulations in the United States
and/or such other jurisdictions.
(ii) Except
for matters which are not reasonably likely to have a Material Adverse Effect,
all material licenses or other material agreements under which (i) the Company
employs rights in Intellectual Property, or (ii) the Company has granted rights
to others in Intellectual Property owned or licensed by the Company are in
full
force and effect, and there is no default by the Company with respect
thereto.
(iii) The
Company believes that it has taken all steps reasonably required in accordance
with sound business practice and business judgment to establish and preserve
the
ownership of the Company’s material Intellectual Property.
(iv) Except
for matters which are not reasonably likely to have a Material Adverse Effect,
to the knowledge of the Company, (i) the present business, activities and
products of the Company do not infringe any intellectual property of any other
person; (ii) neither the Company is making unauthorized use of any confidential
information or trade secrets of any person; and (iii) the activities of any
of
the employees of the Company, acting on behalf of the Company, do not materially
violate any agreements or arrangements related to confidential information
or
trade secrets of third parties.
(v) Except
for matters which are not reasonably likely to have a Material Adverse Effect,
and except as disclosed in the SEC Reports, no proceedings are pending, or
to
the knowledge of the Company, threatened, which challenge the rights of the
Company to the use the Company’s Intellectual Property.
(i) Financial
Statements.
The
financial statements of the Company and the related notes contained in the
SEC
Reports present fairly and accurately in all material respects the financial
position of the Company as of the dates therein indicated, and the results
of
its operations, cash flows and the changes in shareholders’ equity for the
periods therein specified, subject, in the case of unaudited financial
statements for interim periods, to normal year-end audit adjustments. Such
financial statements (including the related notes) have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis at the times and throughout the periods therein specified, except that
unaudited financial statements may not contain all footnotes required by
generally accepted accounting principles.
5
(j) No
Material Adverse Change. Except
as
disclosed in the SEC Reports or
in any
press releases issued by the Company
at least two (2) Business Days prior to the Closing Date,
there
has not been (i) an event, circumstance or change that has had or is
reasonably likely to have a Material Adverse Effect upon the Company, (ii)
any
obligation incurred by the Company that is material to the Company,
(iii) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company, or (iv) any loss or damage (whether or not
insured) to the physical property of the Company which has had a Material
Adverse Effect.
(k) Trading. The
principal United States market in which the Common Stock is quoted for trading
is the Over-the-Counter Bulletin Board. The shares of Common Stock issuable
upon
conversion of the Notes must be registered with the SEC before trading can
commence on the Over-the-Counter Bulletin Board with respect to such
shares.
(l) Contracts.
Except
for matters which are not reasonably likely to have a Material Adverse Effect
and those contracts that are substantially or fully performed or expired by
their terms, the contracts listed as exhibits to or described in the SEC Reports
that are material to the Company and all amendments thereto, are in full force
and effect on the date hereof, and neither the Company nor, to the Company’s
knowledge, any other party to such contracts is in breach of or default under
any of such contracts.
(m) Taxes.
Except
for tax matters which are not reasonably likely to have a Material Adverse
Effect, each of the Company and each of its subsidiaries has filed all necessary
federal, state and foreign income and franchise tax returns and has paid or
accrued all taxes shown as due thereon.
(n) Investment
Company.
The
Company is not an “investment company” or an “affiliated person” of, or
“promoter” or “principal underwriter” for an investment company, within the
meaning of the Investment Company Act of 1940, as amended, and will not be
deemed an “investment company” as a result of the transactions contemplated by
this Agreement.
(o) Insurance.
The
Company maintains insurance of the types and in the amounts that the Company
reasonably believes is adequate for its businesses, including, but not limited
to, insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against by similarly situated companies, all of which
insurance is in full force and effect.
(p) Offering
Prohibitions.
Neither
the Company nor any person acting on its behalf or at its direction has in
the
past or will in the future take any action to sell, offer for sale or solicit
offers to buy any securities of the Company which would bring the offer or
sale
of the Notes as contemplated by this Agreement or the issuance of the Conversion
Shares as contemplated by the Notes within the provisions of Section 5 of the
Securities Act.
6
(q) Related
Party Transactions. Other
than described in the SEC Reports, to the knowledge of the Company,
no
transaction has occurred between or among the Company or any of its affiliates,
officers or directors or any affiliate or affiliates of any such officer or
director that with the passage of time are reasonably likely be required to
be
disclosed pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act
of
1934, as amended (the “Exchange Act”).
(r) Books
and Records.
The
books, records and accounts of the Company accurately and fairly reflect, in
reasonable detail, the transactions in, and dispositions of, the assets of,
and
the operations of, the Company. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with
respect to any differences.
3. Representations
and Warranties of Investors.
Each
Investor, for that Investor alone, represents and warrants to the Company upon
the acquisition of the Note as follows:
(a) Investor
Knowledge and Status.
The
Investor represents and warrants to, and covenants with, the Company that:
(i)
the Investor is an “accredited investor” as defined in Regulation D under the
Securities Act, is knowledgeable, sophisticated and experienced in making,
and
is qualified to make decisions with respect to, investments in securities
presenting an investment decision similar to that involved in the purchase
of
the Notes, and has requested, received, reviewed and considered all information
it deemed relevant in making an informed decision to purchase the Notes; (ii)
the Investor understands that the Notes and the Conversion Shares are
“restricted securities” and have not been registered under the Securities Act
and is acquiring the Notes and the Conversion Shares in the ordinary course
of
its business and for its own account for investment only, has no present
intention of distributing any of such Notes or Conversion Shares and has no
arrangement or understanding with any other persons regarding the distribution
of such Notes or Conversion Shares (this representation and warranty not
limiting the Investor’s right to sell Conversion Shares pursuant to a
registration statement filed under the Registration Rights Agreement (a
“Registration
Statement”)
or
otherwise, or other than with respect to any claim arising out of a breach
of
this representation and warranty, the Investor’s right to indemnification under
Section 3 of the Registration Rights Agreement); (iii) the Investor will not,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose
of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) the Note acquired by the Investor or any of the Conversion Shares except
in
compliance with the Securities Act, applicable state securities laws and the
respective rules and regulations promulgated thereunder; and (iv) the Investor
has, in connection with its decision to purchase the Notes, relied upon the
representations and warranties of the Company contained herein and the
information contained in the SEC Reports. The Investor understands that neither
the issuance of the Notes to the Investor nor the issuance of the Conversion
Shares upon conversion of the Notes has been registered under the Securities
Act, or registered or qualified under any state securities law, in reliance
on
specific exemptions therefrom, which exemptions may depend upon, among other
things, the representations made by the Investor in this Agreement. To the
best
of the Investor’s knowledge, no person has been authorized by the Company to
provide any representation that is inconsistent with or in addition to those
contained herein or in the SEC Reports, and the Investor acknowledges that
it
has not received or relied on any such representations. The state in which
Investor’s principal office is located, and from which the Investor is acquiring
the Notes, is set forth on Schedule 1 hereto.
7
(b) Transfer
of Securities.
The
Investor agrees that it will not make any sale, transfer or other disposition
of
the Notes or the Conversion Shares (a “Disposition”)
other
than Dispositions that are made pursuant to the Registration Statement in
compliance with any applicable prospectus delivery requirements or that are
exempt from registration under the Securities Act. Investor has not taken and
will not take any action designed to or that might reasonably be expected to
cause or result in manipulation of the price of the Common Stock to facilitate
the subscription to, or the sale or resale of the Notes or the Conversion
Shares.
(c) Power
and Authority.
The
Investor represents and warrants to the Company that (i) the Investor has full
right, power, authority and capacity to enter into this Agreement and each
other
Transaction Agreement to which Investor is a party and to consummate the
transactions contemplated hereby and thereby and has taken all necessary action
to authorize the execution, delivery and performance of this Agreement and
each
other Transaction Agreement to which Investor is a party, and (ii) this
Agreement and each other Transaction Agreement to which Investor is a party
constitutes a valid and binding obligation of the Investor enforceable against
the Investor in accordance with its terms, except to the extent (i) rights
to
indemnity and contribution may be limited by state or federal securities laws
or
the public policy underlying such laws, (ii) such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws
affecting creditors’ and contracting parties’ rights generally and (iii) such
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
(d) Prohibited
Transactions.
During
the thirty (30) days prior to the date hereof, no Investor nor any affiliate
of
any Investor, foreign or domestic, has, directly or indirectly, effected or
agreed to effect any “short sale” (as defined in Rule 200 under Regulation SHO),
whether or not against the box, established any “put equivalent position” (as
defined in Rule 16a-1(h) under the Exchange Act) with respect to the Common
Stock, borrowed or pre-borrowed any shares of the Common Stock, or granted
any
other right (including, without limitation, any put or call option) with respect
to the Common Stock or with respect to any security that includes, relates
to or
derived any significant part of its value from the Common Stock or otherwise
sought to hedge its position in the Notes or the Conversion Shares (each, a
“Prohibited
Transaction”).
(e) No
Investment, Tax or Legal Advice.
The
Investor understands that nothing in the SEC Reports, the Transaction
Agreements, or any other materials presented to the Investor in connection
with
the purchase and sale of the Notes constitutes legal, tax or investment advice.
The Investor has consulted such legal, tax and investment advisors as it, in
its
sole discretion, has deemed necessary or appropriate in connection with its
purchase of Notes.
8
(f) Confidential
Information.
The
parties acknowledge and agree that as of the date hereof and as of the
applicable Closing Date, the Company has not disclosed any material non-public
information to the Investor.
(g) Additional
Acknowledgement.
Investor has thoroughly reviewed and the SEC Reports prior to making this
investment. Investor has been granted a reasonable time prior to the date hereof
during which we have had the opportunity to obtain such additional information
as Investor deems necessary to permit Investor to make an informed decision
with
respect to the purchase of the Notes. After examination of the SEC Reports
and
other information available, Investor is fully aware of the business prospects,
financial condition, risks associated with investment and the operating history
relating to the Company, and therefore in subscribing for the purchase of the
Notes, Investor is not relying upon any information other than information
contained in the SEC Reports. The Investor acknowledges that it has
independently evaluated the merits of the transactions contemplated by this
Agreement, that it has independently determined to enter into the transactions
contemplated hereby, that it is not relying on any advice from or evaluation
by
any other Investor, and that it is not acting in concert with any other Investor
in making its purchase of the Notes hereunder. The Investor and, to its
knowledge, the Company acknowledge that the Investors have not taken any actions
that would deem the Investors to be members of a “group” for purposes of Section
13(d) of the Exchange Act.
(h) Survival
of Representations, Warranties and Agreements.
Notwithstanding any investigation made by any party to this Agreement, all
covenants, agreements, representations and warranties made by the Company and
the Investor herein shall survive the execution of this Agreement, the delivery
to the Investor of the Notes being purchased and the payment therefor, and
a
party’s reliance on such representations and warranties shall not be affected by
any investigation made by such party or any information developed thereby.
(i) Legends
and Restrictions on Transfer.
Each of
the Notes and the certificate or certificates for the Conversion Shares (and
any
securities issued in respect of or exchange for the Notes or the Conversion
Shares) shall be subject to a legend or legends restricting transfer under
the
Securities Act of 1933, as amended (the “Securities
Act”)
and
referring to restrictions on transfer herein, such legend to be substantially
as
follows:
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE BEEN ISSUED
AND SOLD IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES
ACT
OF 1933, AS AMENDED (THE “1933 ACT”), AND APPROPRIATE EXEMPTIONS FROM
REGISTRATION UNDER THE SECURITIES LAWS OF OTHER APPLICABLE JURISDICTIONS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM UNDER THE
1933
ACT AND THE APPLICABLE SECURITIES LAWS OF ANY OTHER JURISDICTION. THE ISSUER
SHALL BE ENTITLED TO REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO IT
WITH RESPECT TO COMPLIANCE OF THE PROPOSED SALE OR TRANSFER WITH THE
REGISTRATION REQUIREMENTS OF THE 1933 ACT OR EXEMPTION THEREFROM.
9
4. Conditions
to Closing of the Investors.
Each
Investor’s obligations at the applicable Closing are subject to the fulfillment,
on or prior to the applicable Closing Date, of all of the following conditions,
any of which may be waived in whole or in part by all of the
Investors:
(a) Representations
and Warranties.
The
representations and warranties made by the Company in Section 2
hereof
shall have been true and correct when made, and shall be true and correct on
the
applicable Closing Date.
(b) Proceedings
and Documents.
All
corporate and other proceedings in connection with the transactions contemplated
at the Closing and all documents and instruments incident to such transactions
shall be reasonably satisfactory in substance and form to the
Investors.
(c) Transaction
Agreements.
The
Company shall have duly executed and delivered to the Investors the following
documents:
(i) This
Agreement;
(ii) Each
Note
issued hereunder;
(iii) The
Security Agreement in the form of Exhibit B
hereto
(the “Security
Agreement”);
and
(iv) The
Registration Rights Agreement in the form of Exhibit
C
hereto
(the “Registration
Rights Agreement”).
(d) Consents,
Permits, and Waivers.
The
Company shall have obtained any and all consents, permits and waivers necessary
or appropriate for consummation of the transactions contemplated by the
Transaction Agreements (except for such as may be properly obtained subsequent
to each Closing).
(e) Absence
of Material Changes.
No
event has occurred or condition exists which could reasonably be expected to
have a Material Adverse Effect on the ability of the Company to perform its
obligations hereunder or under the Transaction Agreements.
(f) Covenants.
All
covenants, agreements and conditions contained in this Agreement to be performed
by the Company on or prior to the applicable Closing shall have been performed
or complied with in all material respects.
5. Conditions
to Obligations of the Company.
The
Company’s obligation to issue and sell the Notes at each Closing is subject to
the fulfillment, on or prior to the applicable Closing Date, of the following
conditions, any of which may be waived in whole or in part by the
Company:
10
(a) Representations
and Warranties.
The
representations and warranties made by the Investors in Section 3
hereof
shall be true and correct when made, and shall be true and correct on such
Closing Date.
(b) Purchase
Price.
Each
Investor shall have delivered to the Company the Purchase Price in respect
of
the Note being purchased by such Investor.
(c) Security
Agreement.
The
Agent shall have executed and delivered the Security Agreement.
(d) Registration
Rights Agreement.
Each
Investor shall have executed and delivered the Registration Rights
Agreement.
6. Covenants
in Favor
of Investors.
The
Company covenants and agrees with the Investors that, so long as the Notes
shall
be outstanding, unless waived by the Agent it will perform the obligations
set
forth in this Section
6:
(a) Taxes
and Levies.
The
Company will promptly pay and discharge all taxes, assessments, and governmental
charges or levies imposed upon the Company or upon its income and profits,
or
upon any of its property, before the same shall become delinquent, as well
as
all claims for labor, materials and supplies which, if unpaid, might become
a
lien or charge upon such properties or any part thereof; provided, however,
that
the Company shall not be required to pay and discharge any such tax, assessment,
charge, levy or claim so long as the validity thereof shall be contested in
good
faith by appropriate proceedings and the Company shall set aside on its books
adequate reserves in accordance with generally accepted accounting principles
(“GAAP”)
with
respect to any such tax, assessment, charge, levy or claim so
contested.
(b) Maintenance
of Existence.
The
Company will do or cause to be done all things reasonably necessary to preserve
and keep in full force and effect its corporate existence, rights and franchises
and comply with all laws applicable to the Company, except where the failure
to
comply would not have a Material Adverse Effect.
(c) Maintenance
of Property.
The
Company will at all times maintain, preserve, protect and keep its property
used
or useful in the conduct of its business in good repair, working order and
condition, and from time to time make all needful and proper repairs, renewals,
replacements and improvements thereto as shall be reasonably required in the
conduct of its business.
(d) Insurance.
The
Company will, to the extent necessary for the operation of its business, keep
adequately insured by financially sound reputable insurers, all property of
a
character usually insured by similarly situated corporations and carry such
other insurance as is usually carried by similar corporations.
(e) Books
and Records.
The
Company will maintain a system of accounting sufficient to enable the Company
to
prepare financial statements in accordance with GAAP and will furnish to the
Investors such books, records and accounts reflecting all of the business
affairs and transactions of the Company as the Investors may reasonably
request.
11
(f) Notice
of Certain Events.
The
Company will give prompt written notice (with a description in reasonable
detail) to the Investors upon becoming aware of the occurrence of any Event
of
Default (as hereinafter defined) or any event which, with the giving of notice
or the lapse of time, would constitute an Event of Default.
(g) Matters
Requiring Agent Approval.
So long
as any of the Notes remain outstanding, the Company will not, without the
approval of the Agent:
(i) make
any
loan or advance to, or own any stock or other securities of, any subsidiary
or
other corporation, partnership, or other entity unless it is wholly owned by
the
Company (except that the Company may acquire and own securities of 1-800
Pharmacy, Inc., a Delaware corporation, pursuant to the Services Agreement
dated
as of June 19, 2007 between the Company and 1-800 Pharmacy, Inc. without the
approval of the Agent);
(ii) make
any
loan or advance to any person, except advances and similar expenditures in
the
ordinary course of business or under the terms of a employee stock or option
plan approved by the Company’s Board of Directors;
(iii) guarantee
any indebtedness except for trade accounts of the Company or any subsidiary
arising in the ordinary course of business;
(iv) make
any
investment other than investments in prime commercial paper, money market funds,
certificates of deposit in any United States bank having a net worth in excess
of $100,000,000 or obligations issued or guaranteed by the United States of
America, in each case having a maturity not in excess of two years;
(v) incur
any
indebtedness in excess of $25,000 individually or in the aggregate, other than
trade credit incurred in the ordinary course of business;
(vi) increase
or approve the compensation of the named executive officers, including benefits,
bonuses and issuances of equity compensation; provided, however, that approval
by the Agent of a pool of compensation benefits to be allocated by the Company
will constitute approval of each specific allocation of such benefits by the
Company;
(vii) change
the principal business of the Company, enter new lines of business, or exit
the
current line of business;
(viii) sell,
transfer, exclusively license, pledge or encumber any material Intellectual
Property of the Company, except in the ordinary course of business;
(ix) create
or
authorize the creation of or issue any other security convertible into or
exercisable for any equity security of the Company, other than issuances to
officers, directors, employees, consultants or advisors pursuant to equity
compensation plans approved by the Company’s Board of Directors;
12
(x) purchase
or redeem or pay any dividend on any capital stock, other than stock repurchased
from former employees or consultants in connection with the cessation of their
employment or consulting services, at the lower of fair market value or cost;
or
(xi) increase
the number of shares authorized for issuance to officers, directors, employees,
consultants and advisors pursuant to equity incentive plans or other similar
compensatory agreements or arrangements.
7. Board
Observation Right; Inspection Rights.
(a) Board
Observation Right.
So long
as any Notes are outstanding, the Company shall invite a representative of
the
Agent to attend all meetings of its Board of Directors and any committee thereof
in a nonvoting observer capacity and, in this respect, shall give the
representative of the Agent copies of all notices, minutes, consents, and other
materials that it provides to its directors at the same time and in the same
manner as provided to such directors; provided,
however,
that
such representative shall agree to hold in confidence and trust and to act
in a
fiduciary manner with respect to all information so provided; and provided
further,
that
the Company reserves the right to withhold any information and to exclude such
representative from any meeting or portion thereof if access to such information
or attendance at such meeting could adversely affect the attorney-client
privilege between the Company and its counsel or result in disclosure of trade
secrets or a conflict of interest, or if such Investor or its representative
is
a competitor of the Company. The Company shall reimburse the representative
of
the Agent with board observation rights pursuant hereto for all reasonable
out-of-pocket travel expenses incurred (consistent with the Company’s travel
policy) in connection with attending meetings of the Board of Directors.
(b) Inspection.
The
Company shall permit the Agent and its representatives to visit and inspect
the
Company’s properties; examine its books of account and records; and discuss the
Company’s affairs, finances, and accounts with its officers, during normal
business hours of the Company as may be reasonably requested by the Agent;
provided, however, that the Company shall not be obligated pursuant to this
Section 7(b) to provide access to any information that it reasonably considers
to be a trade secret or confidential information (unless covered by an
enforceable confidentiality agreement, in form acceptable to the Company) or
the
disclosure of which would adversely affect the attorney-client privilege between
the Company and its counsel. The Company shall reimburse the Agent for all
reasonable out-of-pocket travel expenses incurred (consistent with the Company’s
travel policy) in connection with the exercise of its inspection rights under
this Section 7(b).
8. Appointment
of Agent.
The
Investors hereby appoint Xxxxx Xxxxxxxx, to act as agent (the “Agent”)
for
the Investors in accordance with the provisions of this Agreement and the Agent
hereby accepts such appointment. The Company may look solely to the Agent with
respect to any matters relating to the giving or receipt of notices, consents
or
waivers from the Investors under this Agreement, except that the Company shall
provide all Investors with prompt written notice of an Event of
Default.
(a) Rights
and Duties of Agent.
13
(i) In
acting
under this Agreement and in connection with the Notes, the Agent is acting
solely as agent of the Investors and does not assume any obligation or
relationship of agency or trust for or with the Company or any stockholder
of
the Company.
(ii) The
Agent
may consult with counsel satisfactory to it, and the advice of such counsel
shall be full and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in accordance
with
the advice of such counsel.
(iii) The
Agent
shall be protected and shall incur no liability for or in respect of any action
taken or thing suffered by it in reliance upon any notice, direction, consent,
certificate, affidavit, statement or other paper or document reasonably believed
by it to be genuine and to have been presented or signed by the Investors,
or
any of them. The Agent will not have any liability to any Investor or other
person as a result of its inability to perform any of its obligations under
this
Agreement by reason of any preliminary or permanent injunction or other order,
decree or ruling issued by a court of competent jurisdiction or by a
governmental, regulatory or administrative agency or commission, or any statute,
rule, regulation or executive order promulgated or enacted by any governmental
authority, prohibiting or otherwise restraining performance of such
obligation.
(iv) The
Agent
shall be obligated to perform only such duties as are herein or in the Security
Agreement specifically set forth and no implied duties or obligations shall
be
read into this Agreement or in the Security Agreement against the Agent. The
Agent shall not be under any obligation to take any action hereunder or
thereunder which may tend to involve it in any expense or liability for which
it
does not receive indemnity. The Agent shall have no duty or responsibility
in
case of any default by the Company in the performance of its covenants or
agreements contained herein except as directed by the Requisite Percentage,
including any duty or responsibility to initiate or attempt to initiate any
proceedings at law or otherwise.
(v) The
Agent
shall not at any time be under any duty or responsibility to any Investor to
determine whether any facts exist that may constitute an Event of Default absent
receipt of notice thereof from the Company or any Investor. The Agent shall
not
be accountable with respect to the validity or value of any Conversion Shares
or
of any securities or property which may at any time be issued or delivered
upon
conversion of the Conversion Shares and it makes no representation with respect
thereto. The Agent shall not be responsible for any failure of the Company
to
comply with any of the covenants of the Company contained in this
Agreement.
(vi) The
Agent
shall be entitled to use its discretion with respect to exercising or refraining
from exercising any rights which may be vested in it by, and with respect to
taking or refraining from taking any action or actions which it may be able
to
take under or in respect of, this Agreement or the Security Agreement, unless
the Agent shall have been instructed by the Requisite Percentage to refrain
from
exercising such rights or to take or refrain from taking such action. The Agent
is hereby authorized and directed to accept instructions with respect to the
performance of its duties hereunder from any officer, director, or manager
of
any Investor, and to apply to such officers, directors or managers for advice
or
instructions in connection with its duties, and shall not be liable to such
Investor for any action taken or suffered to be taken by it in good faith in
accordance with instructions of any such officer, director or manager or in
good
faith reliance upon any statement signed by any one of such officers, directors
or managers of the Investors with respect to any fact or matter (unless other
evidence in respect thereof is herein specifically prescribed) which may be
deemed to be conclusively proved and established by such signed
statement.
14
(b) Individual
Rights of Agent.
Nothing
herein shall preclude the Agent from acting in any other capacity for any
Investor or for any other legal entity.
(c) Agent’s
Disclaimer.
The
Agent shall not be responsible for and makes no representation as to the
validity or adequacy of this Agreement or the Notes and it shall not be
responsible for any statement in this Agreement or the Notes other than its
signature thereon as an Investor and with respect to representations made in
such capacity.
(d) Compensation
and Indemnity.
The
Company agrees to reimburse the Agent upon request for all reasonable out of
pocket expenses incurred by it, including the reasonable expenses of the Agent’s
agents and counsel. Each of the Investors shall indemnify (to the extent not
reimbursed by the Company) pro rata according to their respective aggregate
principal amount of Notes and hold harmless the Agent against any loss,
liability or reasonable expense (including reasonable agents’ and attorneys’
fees and expenses) incurred by it without willful misconduct, gross negligence
or bad faith on its part arising out of or in connection with the acceptance
or
performance of its duties under this Agreement or the Security Agreement. The
Agent shall notify the Investors promptly of any claim for which it may seek
indemnity and the failure to provide such notice shall not prejudice the Agent’s
right to indemnity hereunder unless and to the extent that the Investors’
ability to defend any such claim shall have been compromised as a result of
such
failure to notify. The Company need not reimburse any expense and the Investors
shall not be obligated to indemnify against any loss or liability incurred
by
the Agent through willful misconduct, gross negligence or bad faith. The
obligations pursuant to this Section
8(d)
shall
survive the termination of this Agreement.
(e) Successor
Agent.
The
Agent may at any time resign by giving written notice to the Investors of such
intention on its part, specifying the date on which its desired resignation
shall become effective; provided,
however,
that
such date shall not be less than 30 days after the date on which such notice
is
given, unless the Investors otherwise agree. Such resignation under this
Section
8(e)
shall
take effect upon the appointment by the (remaining) Investors as hereinafter
provided of a successor Agent and the acceptance of such appointment by such
successor Agent. Any successor Agent appointed hereunder shall execute,
acknowledge and deliver to its predecessor and to the Investors an instrument
accepting such appointment hereunder, and thereupon such successor Agent,
without any further act, deed or conveyance, shall become vested with all the
rights and obligations of such predecessor with like effect as if originally
named as Agent hereunder. As soon as practicable after appointment of the
successor Agent, the Investors shall cause written notice of the change in
the
Agent to be given to the Company. Failure to give any notice provided for in
this Section
8(e)
or any
defect therein, shall not affect the legality or validity of the appointment
of
a successor Agent, as the case may be.
9. Miscellaneous.
15
(a) Waivers
and Amendments.
Any
provision of this Agreement may be amended, waived or modified only upon the
written consent of the Company and Investors holding at least a majority of
the
aggregate outstanding principal amount of the Notes (“Requisite
Percentage”).
(b) Governing
Law.
This
Agreement and all actions arising out of or in connection with this Agreement
shall be governed by and construed in accordance with the laws of the State
of
Delaware, without regard to the conflicts of law provisions of the State of
Delaware or of any other state.
(c) Survival.
The
representations, warranties, covenants and agreements made herein shall survive
the execution and delivery of this Agreement.
(d) Successors
and Assigns.
Subject
to the restrictions on transfer described in Sections 9(e)
and 9(f) below,
the rights and obligations of the Company and the Investors shall be binding
upon and benefit the successors, assigns, heirs, administrators and transferees
of the parties.
(e) Registration,
Transfer and Replacement of the Notes.
The
Company will keep, at its principal executive office, books for the registration
and registration of transfer of the Notes. Prior to presentation of any Note
for
registration of transfer, the Company shall treat the Person in whose name
such
Note is registered as the owner and holder of such Note for all purposes
whatsoever, whether or not such Note shall be overdue, and the Company shall
not
be affected by notice to the contrary. Subject to any restrictions on or
conditions to transfer set forth in any Note, the holder of any Note, at its
option, may in person or by duly authorized attorney surrender the same for
exchange at the Company’s chief executive office, and promptly thereafter and at
the Company’s expense, except as provided below, receive in exchange therefor
one or more new Note(s), each in the principal requested by such holder, dated
the date to which interest shall have been paid on the Note so surrendered
or,
if no interest shall have yet been so paid, dated the date of the Note so
surrendered and registered in the name of such Person or Persons as shall have
been designated in writing by such holder or its attorney for the same principal
amount as the then unpaid principal amount of the Note so surrendered. Upon
receipt by the Company of evidence reasonably satisfactory to it of the
ownership of and the loss, theft, destruction or mutilation of any Note and
(a) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to it; or (b) in the case of mutilation, upon surrender
thereof, the Company, at its expense, will execute and deliver in lieu thereof
a
new Note executed in the same manner as the Note being replaced, in the same
principal amount as the unpaid principal amount of such Note and dated the
date
to which interest shall have been paid on such Note or, if no interest shall
have yet been so paid, dated the date of such Note.
(f) Assignment
by the Company.
The
rights, interests or obligations hereunder may not be assigned, by operation
of
law or otherwise, in whole or in part, by the Company without the prior written
consent of Investors holding a Requisite Percentage.
(g) Entire
Agreement.
This
Agreement together with the other Transaction Agreements constitute and contain
the entire agreement among the Company and Investors and supersede any and
all
prior agreements, negotiations, correspondence, understandings and
communications among the parties, whether written or oral, respecting the
subject matter hereof.
16
(h) Notices.
Except
as set forth in Section 1(c), all notices, requests, demands, consents,
instructions or other communications required or permitted hereunder shall
in
writing and faxed, mailed or delivered to each party as follows: (i) if to
a Investor, at such Investor’s address or facsimile number set forth in the
Schedule of Investors attached as Schedule I,
or at
such other address as such Investor shall have furnished the Company in writing,
or (ii) if to the Company, at 0000 Xxxxxxxx Xxxxxxx, 0xx
Xxxxx
Xxxxxx, XX 00000, Attention: Xxxxx Xxxxxx, Corporate Counsel, (000) 000-0000
(facsimile), with a copy to Smith, Anderson, Blount, Dorsett, Xxxxxxxx &
Xxxxxxxx, LLP, 0000 Xxxxxxxx Xxxxxxx Xxxxxx, Xxxxxxx, Xxxxx Xxxxxxxx 00000-0000,
Attention: Xxxxxxxx X. Xxxxxxxxx, (000) 000-0000 (facsimile) or at such other
address or facsimile number as the Company shall have furnished to the Investors
in writing. All such notices and communications will be deemed effectively
given
the earlier of (i) when received, (ii) when delivered personally,
(iii) one Business Day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one Business Day after being deposited with
an overnight courier service of recognized standing or (v) two days after
being deposited in the U.S. mail, first class with postage prepaid.
(i) Expenses.
Each of
the parties hereto shall bear its own expenses in connection with the
preparation, execution and delivery of this Agreement and the other Transaction
Agreements.
(j) Separability
of Agreements; Severability of this Agreement.
The
Company’s agreement with each of the Investors is a separate agreement and the
sale of the Notes to each of the Investors is a separate sale. Unless otherwise
expressly provided herein, the rights of each Investor hereunder are several
rights, not rights jointly held with any of the other Investors. Any invalidity,
illegality or limitation on the enforceability of the Agreement or any part
thereof, by any Investor whether arising by reason of the law of the respective
Investor’s domicile or otherwise, shall in no way affect or impair the validity,
legality or enforceability of this Agreement with respect to other Investors.
If
any provision of this Agreement shall be judicially determined to be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired
thereby.
(k) Counterparts.
This
Agreement may be executed in one or more counterparts, each of which will be
deemed an original, but all of which together will constitute one and the same
agreement. Facsimile copies of signed signature pages will be deemed binding
originals.
(Signature
Page Follows)
17
The
parties have caused this Agreement to be duly executed and delivered by their
proper and duly authorized officers as of the date and year first written
above.
COMPANY:
SMART
ONLINE, INC.
a
Delaware corporation
By: /s/
Xxxxx X.
Xxxxxxx
Name:
Xxxxx X.
Xxxxxxx
Title:
President and
CEO
INVESTORS:
|
CRYSTAL
MANAGEMENT LTD.
|
By:
/s/ Xxxxx
Xxxxxxxx
Name:
Xxxxx
Xxxxxxxx
Title:
ATLAS
CAPITAL S.A.
By:
/s/ X.
Xxxxxx
/s/ X.
Xxxx
Name:
X.
Xxxxxx X.
Xxxx
Title:
Management General
Management
XXXXXXX
XXXX
/s/ Xxxxxxx X. Xxxx
[Signature
page for Convertible Secured Subordinated
Note Purchase Agreement]
18
THE
BLUELINE FUND
By:
/s/ P.
Pouponnot
Name:
Pouponnot,
Philippe
Title:
[Signature
page for Convertible Secured Subordinated
Note Purchase Agreement]
19
AGENT:
|
XXXXX
XXXXXXXX
|
By:
/s/ Xxxxx
Xxxxxxxx
Name: Xxxxx
Xxxxxxxx
Title:
________________________________
[Signature
page for Convertible Secured Subordinated
Note Purchase Agreement]
20
SCHEDULE
I
SCHEDULE
OF INVESTORS
|
INVESTOR’S
NAME AND ADDRESS
|
Initial
Closing
Note
Principal Amount
|
|
Crystal
Management Ltd.
Xxxxxx
Xxxxx, Adv.
Gibor
Sport House (28th floor)
7,
Menahem Begin (Betzalel) St.
Ramat
Gan 52521
Israel
Fax.:
x000 (0) 000-0000
|
US$500,000.00
|
|
Xxxxxxx
Xxxx
0000
Xxxx Xxxxxxxxxx Xxxx
Xxxx
Xxxxx, XX 00000
Fax:
|
US$250,000.00
|
|
Atlas
Capital, X.X.
Xxx
xx Xxxxx 000, XX - 0000
Xxxxxx
Xxxxxxxxxxx
Fax:
|
US$2,050,000.00
|
|
The
Blueline Fund
Xxxx
Xxxxxx
Xxxxxx
Xxxxx
X.X.
Xxx 000 XX
Xxxxxx
Town, Grand Cayman
Cayman
Islands
Fax:
|
US$500,000.00
|
|
Total:
|
US$3,300,000.00
|
21
Exhibit
A
FORM
OF NOTE
22
Exhibit
B
FORM
OF SECURITY AGREEMENT
23
Exhibit
C
FORM
OF REGISTRATION RIGHTS AGREEMENT
24
