SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of
March 8, 2006, by and among COMPLIANCE SYSTEMS CORPORATION, a Nevada corporation
(formerly know as GSA Publishing, Inc.) (the "Company"), and the Buyers listed
on Schedule I attached hereto (individually, a "Buyer" or collectively
"Buyers").
RECITALS:
WHEREAS, the Company and the Buyer(s) are executing and delivering this
Agreement in reliance upon an exemption from securities registration pursuant to
Section 4(2) and/or Rule 506 of Regulation D ("Regulation D") as promulgated by
the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "Securities Act").
WHEREAS, the Company has issued to the Buyer and the Buyer has
purchased from the Company a Secured Convertible Debenture on November 30, 2005
(the "November Debenture") for a purchase price of $600,000. The entire purchase
price of $600,000 was paid by the Holder on November 30, 2005. As of the date
hereof, the outstanding principal on the November Debenture equals $600,000 and
all accrued interest has been paid.
WHEREAS, as of the date hereof, the Buyer is the beneficial owner of
the November Debenture. The Buyer desires to surrender the November Debenture
for conversion into the convertible debentures and to purchase additional
convertible debentures as outlined below for the total purchase price of One
Million Dollars ($1,000,000).
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Buyer, as
provided herein, and the Buyer shall purchase up to One Million Dollars
($1,000,000) of secured convertible debentures (the "Convertible Debentures"),
which shall be convertible into shares of the Company's common stock, par value
$0.001 (the "Common Stock") (as converted, the "Conversion Shares") of which
$600,000 shall be purchased for consideration solely consisting of surrendering
the November Debenture, and Four Hundred Thousand Dollars ($400,000) shall be
purchased by additional funding by the Buyer for a total of One Million Dollars
($1,000,000) within five (5) business days following the date hereof (the
"Closing") for a total purchase price of up to One Million Dollars ($1,000,000)
(the "Purchase Price").
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement substantially (the "Investor Registration Rights Agreement") pursuant
to which the Company has agreed to provide certain registration rights under the
Securities Act and the rules and regulations promulgated there under, and
applicable state securities laws.
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Security Agreement
and each wholly owned subsidiary of the Company is entering into a Security
Agreement (collectively the "Security Agreement") pursuant to which the Company
and its subsidiaries have agreed to provide the Buyer a security interest in
Pledged Collateral (as this term is defined in the Security Agreement) to secure
the Company's obligations under the Transaction Documents or any other
obligations of the Company to the Buyer.
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Pledge and Escrow
Agreements (the "Issuer Pledge and Escrow Agreement") pursuant to which the
Company has agreed to provide the Buyer a security interest in the Pledged
Shares (as this term is defined in the Issuer Pledge and Escrow Agreement) to
secure the Company's obligations under the Transaction Documents or any other
obligations of the Company to the Buyer.
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto, Xxxxx Xxxxxxxxxx, and Xxxx Xxxxxxxxx are
executing and delivering a Insider Pledge and Escrow Agreements (collectively
the "Pledge and Escrow Agreement") pursuant to which the Xxxx Xxxxxxxxx and
Xxxxx Xxxxxxxxxx have agreed to provide the Buyer a security interest in the
Pledged Shares (as this term is defined in the Pledge and Escrow Agreement) to
secure the Company's obligations under the Transaction Documents or any other
obligations of the Company to the Buyer.
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering Irrevocable Transfer
Agent Instructions (the "Irrevocable Transfer Agent Instructions").
NOW, THEREFORE, for and in consideration of the mutual covenants and
other agreements contained in this Agreement the Company and the Buyer(s) hereby
agree as follows:
1. PURCHASE AND SALE OF CONVERTIBLE DEBENTURES.
(a) Purchase of Convertible Debentures. Subject to the
satisfaction (or waiver) of the terms and conditions of this Agreement, each
Buyer agrees, severally and not jointly, to purchase at each Closing and the
Company agrees to sell and issue to each Buyer, severally and not jointly, at
the Closing, Convertible Debentures in amounts corresponding with the
Subscription Amount set forth opposite each Buyer's name on Schedule I hereto.
(b) Closing Date. The Closing of the purchase and sale of the
Convertible Debentures shall take place at 10:00 a.m. Eastern Standard Time on
the fifth (5th) business day following the date hereof, subject to notification
of satisfaction of the conditions to the First Closing set forth herein and in
Sections 6 and 7 below (or such later date as is mutually agreed to by the
Company and the Buyer(s)) (the "Closing Date"). The Closing shall occur on the
respective Closing Dates at the offices of Yorkville Advisors, LLC, 0000 Xxxxxx
Xxxxxx, Xxxxx 0000, Xxxxxx Xxxx, Xxx Xxxxxx 00000 (or such other place as is
mutually agreed to by the Company and the Buyer(s)).
(c) Form of Payment. Subject to the satisfaction of the terms
and conditions of this Agreement, on the Closing Date, (i) the Buyer shall
deliver to the Company in such aggregate proceeds for the Convertible Debentures
to be issued and sold to such Buyer(s), and (ii) the Company shall deliver to
each Buyer, Convertible Debentures which such Buyer(s) is purchasing in amounts
indicated opposite such Buyer's name on Schedule I, duly executed on behalf of
the Company.
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2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants, severally and not jointly, that:
(a) Investment Purpose. Each Buyer is acquiring the
Convertible Debentures and, upon conversion of Convertible Debentures, the Buyer
will acquire the Conversion Shares then issuable, for its own account for
investment only and not with a view towards, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales registered or
exempted under the Securities Act; provided, however, that by making the
representations herein, such Buyer reserves the right to dispose of the
Conversion Shares at any time in accordance with or pursuant to an effective
registration statement covering such Conversion Shares or an available exemption
under the Securities Act.
(b) Accredited Investor Status. Each Buyer is an "Accredited
Investor" as that term is defined in Rule 501(a)(3) of Regulation D.
(c) Reliance on Exemptions. Each Buyer understands that the
Convertible Debentures are being offered and sold to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying in part upon the truth and
accuracy of, and such Buyer's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
such Buyer to acquire such securities.
(d) Information. Each Buyer and its advisors (and his or, its
counsel), if any, have been furnished with all materials relating to the
business, finances and operations of the Company and information he deemed
material to making an informed investment decision regarding his purchase of the
Convertible Debentures and the Conversion Shares, which have been requested by
such Buyer. Each Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company and its management. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
in Section 3 below. Each Buyer understands that its investment in the
Convertible Debentures and the Conversion Shares involves a high degree of risk.
Each Buyer is in a position regarding the Company, which, based upon employment,
family relationship or economic bargaining power, enabled and enables such Buyer
to obtain information from the Company in order to evaluate the merits and risks
of this investment. Each Buyer has sought such accounting, legal and tax advice,
as it has considered necessary to make an informed investment decision with
respect to its acquisition of the Convertible Debentures and the Conversion
Shares.
(e) No Governmental Review. Each Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the
Convertible Debentures or the Conversion Shares, or the fairness or suitability
of the investment in the Convertible Debentures or the Conversion Shares, nor
have such authorities passed upon or endorsed the merits of the offering of the
Convertible Debentures or the Conversion Shares.
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(f) Transfer or Resale. Each Buyer understands that except as
provided in the Investor Registration Rights Agreement: (i) the Convertible
Debentures have not been and are not being registered under the Securities Act
or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, or (B) such Buyer
shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that such securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration requirements; (ii) any sale of such securities made in
reliance on Rule 144 under the Securities Act (or a successor rule thereto)
("Rule 144") may be made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such securities
under the Securities Act or any state securities laws or to comply with the
terms and conditions of any exemption thereunder. The Company reserves the right
to place stop transfer instructions against the shares and certificates for the
Conversion Shares.
(g) Legends. Each Buyer understands that the certificates or
other instruments representing the Convertible Debentures and or the Conversion
Shares shall bear a restrictive legend in substantially the following form (and
a stop transfer order may be placed against transfer of such stock
certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE
SECURITIES LAWS.
The legend set forth above shall be removed and the Company within two (2)
business days shall issue a certificate without such legend to the holder of the
Conversion Shares upon which it is stamped, if, unless otherwise required by
state securities laws, (i) in connection with a sale transaction, provided the
Conversion Shares are registered under the Securities Act or (ii) in connection
with a sale transaction, after such holder provides the Company with an opinion
of counsel, which opinion shall be in form, substance and scope customary for
opinions of counsel in comparable transactions, to the effect that a public
sale, assignment or transfer of the Conversion Shares may be made without
registration under the Securities Act.
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(h) Authorization, Enforcement. This Agreement has been duly
and validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable in accordance with its
terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies.
(i) Receipt of Documents. Each Buyer and his or its counsel
has received and read in their entirety: (i) this Agreement and each
representation, warranty and covenant set forth herein, and the Transaction
Documents; (ii) all due diligence and other information necessary to verify the
accuracy and completeness of such representations, warranties and covenants; and
(iii) answers to all questions each Buyer submitted to the Company regarding an
investment in the Company; and each Buyer has relied on the information
contained therein and has not been furnished any other documents, literature,
memorandum or prospectus.
(j) Due Formation of Corporate and Other Buyers. If the
Buyer(s) is a corporation, trust, partnership or other entity that is not an
individual person, it has been formed and validly exists and has not been
organized for the specific purpose of purchasing the Convertible Debentures and
is not prohibited from doing so.
(k) No Legal Advice From the Company. Each Buyer acknowledges,
that it had the opportunity to review this Agreement and the transactions
contemplated by this Agreement with his or its own legal counsel and investment
and tax advisors. Each Buyer is relying solely on such counsel and advisors and
not on any statements or representations of the Company or any of its
representatives or agents for legal, tax or investment advice with respect to
this investment, the transactions contemplated by this Agreement or the
securities laws of any jurisdiction.
(l) No Buyer makes any representation or warranty regarding
the Company's ability to successfully become a public company or to have any
registration statement filed by the Company pursuant to the Registration Rights
Agreement or otherwise declared effective by the SEC. The Company has the sole
obligation to make any and all such filings as may be necessary to become a
public company and to have any registration statement declared effective by the
SEC.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that, except as
set forth in the Disclosure Schedule attached as Exhibit A hereto:
(a) Organization and Qualification. The Company and its
subsidiaries are corporations duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are incorporated, and
have the requisite corporate power to own their properties and to carry on their
business as now being conducted. Each of the Company and its subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries taken as a whole.
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(b) Authorization, Enforcement, Compliance with Other
Instruments. (i) The Company has the requisite corporate power and authority to
enter into and perform this Agreement, the Security Agreement, the Investor
Registration Rights Agreement, the Irrevocable Transfer Agent Agreement, the
Pledge and Escrow Agreements, the Issuer Pledge and Escrow Agreement, and any
related agreements (collectively the "Transaction Documents") and to issue the
Convertible Debentures and the Conversion Shares in accordance with the terms
hereof and thereof, (ii) the execution and delivery of the Transaction Documents
by the Company and the consummation by it of the transactions contemplated
hereby and thereby, including, without limitation, the issuance of the
Convertible Debentures the Conversion Shares and the reservation for issuance
and the issuance of the Conversion Shares issuable upon conversion or exercise
thereof, have been duly authorized by the Company's Board of Directors and no
further consent or authorization is required by the Company, its Board of
Directors or its stockholders, (iii) the Transaction Documents have been duly
executed and delivered by the Company, (iv) the Transaction Documents constitute
the valid and binding obligations of the Company enforceable against the Company
in accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies. The
authorized officer of the Company executing the Transaction Documents knows of
no reason why the Company cannot file the registration statement as required
under the Investor Registration Rights Agreement or perform any of the Company's
other obligations under such documents. (c) Capitalization. As of the date
hereof the authorized capital stock of the Company consists of 500,000,000
shares of Common Stock and no shares of Preferred Stock, of which 50,000,000
shares of Common Stock are issued and outstanding. All of such outstanding
shares have been validly issued and are fully paid and nonassessable. No shares
of Common Stock are subject to preemptive rights or any other similar rights or
any liens or encumbrances suffered or permitted by the Company. As of the date
of this Agreement, (i) there are no outstanding options, warrants, scrip, rights
to subscribe to, calls or commitments of any character whatsoever relating to,
or securities or rights convertible into, any shares of capital stock of the
Company or any of its subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, (ii) except for the November Debenture, there are no outstanding
debt securities and (iii) there are no agreements or arrangements under which
the Company or any of its subsidiaries is obligated to register the sale of any
of their securities under the Securities Act (except pursuant to the
Registration Rights Agreement) and (iv) there are no outstanding registration
statements and there are no outstanding comment letters from the SEC or any
other regulatory agency. There are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Convertible Debentures as described in this Agreement. The Company has
furnished to the Buyer true and correct copies of the Company's Articles of
Incorporation, as amended and as in effect on the date hereof (the "Articles of
Incorporation"), and the Company's Bylaws, as in effect on the date hereof (the
"Bylaws"), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto
other than stock options issued to employees and consultants.
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(d) Issuance of Securities. The Convertible Debentures are
duly authorized and, upon issuance in accordance with the terms hereof, shall be
duly issued, fully paid and nonassessable, are free from all taxes, liens and
charges with respect to the issue thereof. The Conversion Shares issuable upon
conversion of the Convertible Debentures have been duly authorized and reserved
for issuance. Upon conversion or exercise in accordance with the Convertible
Debentures the Conversion Shares will be duly issued, fully paid and
nonassessable.
(e) No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby will not (i) result in a violation of the
Articles of Incorporation, any certificate of designations of any outstanding
series of preferred stock of the Company or the Bylaws or (ii) conflict with or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and the rules and
regulations of The National Association of Securities Dealers Inc.'s OTC
Bulletin Board on which the Common Stock is quoted) applicable to the Company or
any of its subsidiaries or by which any property or asset of the Company or any
of its subsidiaries is bound or affected. Neither the Company nor its
subsidiaries is in violation of any term of or in default under its Articles of
Incorporation or Bylaws or their organizational charter or Bylaws, respectively,
or any material contract, agreement, mortgage, indebtedness, indenture,
instrument, judgment, decree or order or any statute, rule or regulation
applicable to the Company or its subsidiaries. The business of the Company and
its subsidiaries is not being conducted, and shall not be conducted in violation
of any material law, ordinance, or regulation of any governmental entity. Except
as specifically contemplated by this Agreement and as required under the
Securities Act and any applicable state securities laws, the Company is not
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by this
Agreement or the Registration Rights Agreement in accordance with the terms
hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. The
Company and its subsidiaries are unaware of any facts or circumstance, which
might give rise to any of the foregoing.
(f) Financial Statements. As of their respective dates, the
financial statements of the Company (the "Financial Statements") for the two
most recently completed fiscal years and any subsequent interim period complied
as to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto. Such
financial statements have been prepared in accordance with generally accepted
accounting principles, consistently applied, during the periods involved (except
(i) as may be otherwise indicated in such Financial Statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent they
may exclude footnotes or may be condensed or summary statements) and, fairly
present in all material respects the financial position of the Company as of the
dates thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments). No other information provided by or on behalf of the Company
to the Buyer, including, without limitation, information referred to in this
Agreement, contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
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(g) Absence of Litigation. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending against or
affecting the Company, the Common Stock or any of the Company's subsidiaries,
wherein an unfavorable decision, ruling or finding would (i) have a material
adverse effect on the transactions contemplated hereby (ii) adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of the documents
contemplated herein, or (iii) have a material adverse effect on the business,
operations, properties, financial condition or results of operations of the
Company and its subsidiaries taken as a whole.
(h) Acknowledgment Regarding Buyer's Purchase of the
Convertible Debentures. The Company acknowledges and agrees that the Buyer(s) is
acting solely in the capacity of an arm's length purchaser with respect to this
Agreement and the transactions contemplated hereby. The Company further
acknowledges that the Buyer(s) is not acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to this Agreement and
the transactions contemplated hereby and any advice given by the Buyer(s) or any
of their respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is merely incidental to such Buyer's
purchase of the Convertible Debentures or the Conversion Shares. The Company
further represents to the Buyer that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation by the Company and
its representatives.
(i) No General Solicitation. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
the Convertible Debentures or the Conversion Shares.
(j) No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of the
Convertible Debentures or the Conversion Shares under the Securities Act or
cause this offering of the Convertible Debentures or the Conversion Shares to be
integrated with prior offerings by the Company for purposes of the Securities
Act.
(k) Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. None of the
Company's or its subsidiaries' employees is a member of a union and the Company
and its subsidiaries believe that their relations with their employees are good.
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(l) Intellectual Property Rights. The Company and its
subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service xxxx registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. The Company and its subsidiaries do not have any
knowledge of any infringement by the Company or its subsidiaries of trademark,
trade name rights, patents, patent rights, copyrights, inventions, licenses,
service names, service marks, service xxxx registrations, trade secret or other
similar rights of others, and, to the knowledge of the Company there is no
claim, action or proceeding being made or brought against, or to the Company's
knowledge, being threatened against, the Company or its subsidiaries regarding
trademark, trade name, patents, patent rights, invention, copyright, license,
service names, service marks, service xxxx registrations, trade secret or other
infringement; and the Company and its subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
(m) Environmental Laws. The Company and its subsidiaries are
(i) in compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval.
(n) Title. Any real property and facilities held under lease
by the Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries.
(o) Insurance. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged. Neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
(p) Regulatory Permits. The Company and its subsidiaries
possess all material certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, and neither the Company nor any such
subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.
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(q) Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance 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
conformity with generally accepted accounting principles and to maintain asset
accountability, and (iii) the recorded amounts for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(r) No Material Adverse Breaches, etc. Neither the Company nor
any of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
material adverse effect on the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries. Neither the Company nor any of its subsidiaries is in breach of
any contract or agreement which breach, in the judgment of the Company's
officers, has or is expected to have a material adverse effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries.
(s) Tax Status. The Company and each of its subsidiaries has
made and filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject and (unless
and only to the extent that the Company and each of its subsidiaries has set
aside on its books provisions reasonably adequate for the payment of all unpaid
and unreported taxes) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.
(t) Certain Transactions. Except (i) as noted in the Budget,
(ii) arm's-length transactions pursuant to which the Company makes payments in
the ordinary course of business upon terms no less favorable than the Company
could obtain from third parties, or (iii) the grant of stock options disclosed
in the Disclosure Schedule, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.
(u) Fees and Rights of First Refusal. The Company is not
obligated to offer the securities offered hereunder on a right of first refusal
basis or otherwise to any third parties including, but not limited to, current
or former shareholders of the Company, underwriters, brokers, agents or other
third parties.
10
(v) The Company acknowledges that the Buyer is relying on the
representations and warranties made by the Company hereunder and that such
representations and warranties are a material inducement to the Buyer purchasing
the Convertible Debentures. The Company further acknowledges that without such
representations and warranties of the Company made hereunder, the Buyer would
not enter into this Agreement.
4. COVENANTS.
(a) Best Efforts. Each party shall use its best efforts to
timely satisfy each of the conditions to be satisfied by it as provided in
Sections 6 and 7 of this Agreement.
(b) Form D. The Company agrees to file a Form D with respect
to the Conversion Shares as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Conversion Shares, or obtain an exemption
for the Conversion Shares for sale to the Buyers at the Closing pursuant to this
Agreement under applicable securities or "Blue Sky" laws of the states of the
United States, and shall provide evidence of any such action so taken to the
Buyers on or prior to the Closing Date.
(c) Reporting Status. Commencing on the effectiveness of the
Registration Statement and until the earlier of (i) the date as of which the
Buyer(s) may sell all of the Conversion Shares without restriction pursuant to
Rule 144(k) promulgated under the Securities Act (or successor thereto), or (ii)
the date on which (A) the Buyer(s) shall have sold all the Conversion Shares and
(B) none of the Convertible Debentures are outstanding (the "Registration
Period"), the Company shall file in a timely manner all reports required to be
filed with the SEC pursuant to the Exchange Act and the regulations of the SEC
thereunder, and the Company shall not terminate its status as an issuer required
to file reports under the Exchange Act even if the Exchange Act or the rules and
regulations thereunder would otherwise permit such termination.
(d) Use of Proceeds. The Company will use the proceeds from
the sale of the Convertible Debentures for general corporate and working capital
purposes in a manner consistent with the uses described in the budget attached
hereto as Exhibit B (the "Budget"). The Company, in its discretion and without
prior consent of or notice to the Buyers, may deviate up to ten percent (10%)
for any single line item described in the Budget.
(e) Reservation of Shares. The Company shall take all action
reasonably necessary to at all times have authorized, and reserved for the
purpose of issuance, such number of shares of Common Stock as shall be necessary
to effect the issuance of the Conversion Shares. If at any time the Company does
not have available such shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all of the Conversion Shares, the Company
shall call and hold a special meeting of the shareholders within sixty (60) days
of such occurrence, for the sole purpose of increasing the number of shares
authorized. The Company's management shall recommend to the shareholders to vote
in favor of increasing the number of shares of Common Stock authorized.
Management shall also vote all of its shares in favor of increasing the number
of authorized shares of Common Stock.
11
(f) Listings or Quotation. The Company shall, concurrently
with the effectiveness of the registration statement filed with the SEC pursuant
to the Investor Registration Rights Agreement, secure the listing or quotation
of its Common Stock (including, without limitation, the Conversion Shares) upon
a national securities exchange, automated quotation system or the
Over-The-Counter Bulletin Board ("OTCBB") maintained by the National Association
of Securities Dealers, Inc. The Company shall maintain the listing or quotation
of the Common Stock for so long as the Buyer is the beneficial owner of any
Common Stock or Conversion Shares (whether obtained or to be obtained under this
Agreement), the Convertible Debentures or any other agreement between the
Company and the Buyer. The Company shall maintain the Common Stock's
authorization for quotation on the OTCBB. It shall be an event of default
hereunder if the Company fails to strictly comply with its obligations under
this Section 4(f).
(g) Fees and Expenses. Each of the Company and the Buyer(s)
shall pay all costs and expenses incurred by such party in connection with the
negotiation, investigation, preparation, execution and delivery of the
Transaction Documents. The Company shall pay Yorkville Advisors LLC a fee equal
to $40,000 at the Closing.
(h) The Company shall be solely responsible for the contents
of the Registration Statement, prospectus or other filing made with the SEC or
otherwise used in the offering of the Company's securities (except as such
disclosure relates solely to the Buyer and then only to the extent that such
disclosure conforms with information furnished in writing by the Buyer to the
Company), even if the Buyer or its agents as an accommodation to the Company
participate or assist in the preparation of such Registration Statement,
prospectus or other SEC filing. The Company shall retain its own legal counsel
to review, edit, confirm and do all things such counsel deems necessary or
desirable to such Registration Statement, prospectus or other SEC filing to
ensure that it does not contain an untrue statement or alleged untrue statement
of material fact or omit or alleged to omit a material fact necessary to make
the statements made therein, in light of the circumstances under which the
statements were made, not misleading.
(i) Corporate Existence. So long as any of the Convertible
Debentures remain outstanding, the Company shall not directly or indirectly
consummate any merger, reorganization, restructuring, reverse stock split
consolidation, sale of all or substantially all of the Company's assets or any
similar transaction or related transactions (each such transaction, an
"Organizational Change") unless, prior to the consummation an Organizational
Change, the Company obtains the written consent of each Buyer. In any such case,
the Company will make appropriate provision with respect to such holders' rights
and interests to insure that the provisions of this Section 4(h) will thereafter
be applicable to the Convertible Debentures.
(j) Transactions With Affiliates. So long as any Convertible
Debentures are outstanding, the Company shall not, and shall cause each of its
subsidiaries not to, enter into, amend, modify or supplement, or permit any
subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any subsidiary's
officers, directors, person who were officers or directors at any time during
the previous two (2) years, stockholders who beneficially own five percent (5%)
or more of the Common Stock, or Affiliates (as defined below) or with any
individual related by blood, marriage, or adoption to any such individual or
with any entity in which any such entity or individual owns a five percent (5%)
or more beneficial interest (each a "Related Party"), except for (a) customary
employment arrangements and benefit programs on reasonable terms, (b) any
investment in an Affiliate of the Company, (c) any agreement, transaction,
commitment, or arrangement on an arm's-length basis on terms no less favorable
than terms which would have been obtainable from a person other than such
Related Party, (d) any agreement, transaction, commitment, or arrangement which
is approved by a majority of the disinterested directors of the Company; for
purposes hereof, any director who is also an officer of the Company or any
subsidiary of the Company shall not be a disinterested director with respect to
any such agreement, transaction, commitment, or arrangement. "Affiliate" for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
interest in that person or entity, (ii) has ten percent (10%) or more common
ownership with that person or entity, (iii) controls that person or entity, or
(iv) shares common control with that person or entity. "Control" or "controls"
for purposes hereof means that a person or entity has the power, direct or
indirect, to conduct or govern the policies of another person or entity.
12
(k) Transfer Agent. The Company covenants and agrees that, in
the event that the Company's agency relationship with the transfer agent should
be terminated for any reason prior to a date which is two (2) years after the
Closing Date, the Company shall immediately appoint a new transfer agent and
shall require that the new transfer agent execute and agree to be bound by the
terms of the Irrevocable Transfer Agent Instructions (as defined herein).
(l) Restriction on Issuance of the Capital Stock. So long as
any Convertible Debentures are outstanding, the Company shall not, without the
prior written consent of the Buyer(s), (i) issue or sell shares of Common Stock
or Preferred Stock without consideration or for a consideration per share less
than the fair market value of the Common Stock determined immediately prior to
its issuance, (ii) issue any warrant, option, right, contract, call, or other
security instrument granting the holder thereof, the right to acquire Common
Stock without consideration or for a consideration less than such Common Stock's
fair market value determined immediately prior to it's issuance, (iii) enter
into any security instrument granting the holder a security interest in any and
all assets of the Company, except in connection with the Company leasing or
purchasing office equipment, computer and networking equipment, co-location
equipment and other equipment and supplies in the ordinary course of the
Company's business, provided such equipment and supplies do not, in the
aggregate, exceed fifty thousand dollars ($50,000.00) per annum, or (iv) file
any registration statement on Form S-8.
(m) Lock-up Agreement. On the date hereof, the Company shall
obtain from each officer and director of the Company a lock-up agreement. Such
lock-up agreement shall prohibit sales of the Company's Common Stock for so long
as any portion of the Convertible Debenture is outstanding.
(n) No Payment of Management Fees. Except as disclosed in the
Budget, the Company shall not make any payments of (i) salaries, management
fees, commissions or any other remuneration to officers or directors of the
Company or any person or entity that is an "affiliate" of any such person or
entity (the "Management Group") or (ii) on any notes, accounts payable or other
obligations or liabilities owed to any member of Management Group until the
Registration Statement has been effective (as declared by the Securities and
Exchange Commission) for a period of at least 90 days (the "Prohibition
Period").
13
(o) No Indebtedness. For so long as the Convertible Debenture
is outstanding, the Company shall not incur any indebtedness for borrowed money
or become a guarantor or otherwise contingently liable for any such indebtedness
except for (i) trade payables or purchase money obligations incurred in the
ordinary course of business, or (ii) amounts not to exceed one hundred thousand
dollars ($100,000).
(p) No Other Registration Statements. Except for the filing of
the registration statements contemplated in this transaction (the "Permitted
Registration Statements"), for so long as the Convertible Debenture is
outstanding, the Company shall not file any other registration statements on any
form (including but not limited to forms X-0, XX-0, X-0 and S-8) without the
prior written consent of the Buyer. Further, the Company shall not register for
sale or resale of any shares of capital stock in the Permitted Registration
Statements other than the capital stock beneficially owned by the Buyer or to be
issued to the Buyer upon conversion of the Convertible Debentures, exercise of
warrants or issuance under the Standby Equity Distribution Agreement of even
date herewith.
(q) Neither the Buyer(s) nor any of its affiliates have an
open short position in the Common Stock of the Company, and the Buyer(s) agrees
that it shall not, and that it will cause its affiliates not to, engage in any
short sales of or hedging transactions with respect to the Common Stock as long
as any Convertible Debenture or warrants to purchase the Warrant Shares shall
remain outstanding.
5. TRANSFER AGENT INSTRUCTIONS.
(a) The Company shall issue the Irrevocable Transfer Agent
Instructions to its transfer agent irrevocably appointing Xxxxx Xxxxxxxx, Esq.
as the Company's agent for purpose of having certificates issued, registered in
the name of the Buyer(s) or its respective nominee(s), for the Conversion Shares
representing such amounts of Convertible Debentures as specified from time to
time by the Buyer(s) to the Company upon conversion of the Convertible
Debentures, for interest owed pursuant to the Convertible Debenture, and for any
and all Liquidated Damages (as this term is defined in the Investor Registration
Rights Agreement). Xxxxx Xxxxxxxx, Esq. shall be paid a cash fee of Fifty
Dollars ($50) for every occasion they act pursuant to the Irrevocable Transfer
Agent Instructions. The Company shall not change its transfer agent without the
express written consent of the Buyer(s), which may be withheld by the Buyer(s)
in its sole discretion. Prior to registration of the Conversion Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in Section 2(g) of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, and stop transfer instructions to give effect to Section 2(g)
hereof (in the case of the Conversion Shares prior to registration of such
shares under the Securities Act) will be given by the Company to its transfer
agent and that the Conversion Shares shall otherwise be freely transferable on
the books and records of the Company as and to the extent provided in this
Agreement and the Investor Registration Rights Agreement. Nothing in this
Section 5 shall affect in any way the Buyer's obligations and agreement to
comply with all applicable securities laws upon resale of Conversion Shares. If
the Buyer(s) provides the Company with an opinion of counsel, in form, scope and
substance customary for opinions of counsel in comparable transactions to the
effect that registration of a resale by the Buyer(s) of any of the Conversion
Shares is not required under the Securities Act, the Company shall within two
(2) business days instruct its transfer agent to issue one or more certificates
in such name and in such denominations as specified by the Buyer. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyer by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyer(s) shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
14
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Convertible Debentures to the Buyer(s) at the Closings is subject to the
satisfaction, at or before the Closing Dates, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion:
(a) Each Buyer shall have executed the Transaction Documents
and delivered them to the Company.
(b) The Buyer(s) shall have delivered the Purchase Price for
Convertible Debentures in respective amounts as set forth next to each Buyer as
outlined on Schedule I attached hereto by wire transfer of immediately available
U.S. funds pursuant to the wire instructions provided by the Company.
(c) The representations and warranties of the Buyer(s) shall
be true and correct in all material respects as of the date when made and as of
the Closing Dates as though made at that time (except for representations and
warranties that speak as of a specific date), and the Buyer(s) shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer(s) at or prior to the Closing Dates.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
(a) The obligation of the Buyer(s) hereunder to purchase the
Convertible Debentures at the Closing is subject to the satisfaction, at or
before the Closing Date, of each of the following conditions:
(i) The Company shall have executed the Transaction
Documents and delivered the same to the Buyer(s).
(ii) The representations and warranties of the Company
shall be true and correct in all material respects (except to the extent that
any of such representations and warranties is already qualified as to
materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the Closing Date as though made at that time (except
for representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the Closing
Date. If requested by the Buyer, the Buyer shall have received a certificate,
executed by the President of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested by
the Buyer including, without limitation an update as of the Closing Date
regarding the representation contained in Section 3(c) above.
15
(iii) The Company shall have executed and delivered to
the Buyer a Convertible Debentures in the amount of One Million Dollars
($1,000,000).
(iv) The Buyer(s) shall have received an opinion of
counsel from in a form satisfactory to the Buyer(s).
(v) The Company shall have provided to the Buyer(s) a
certificate of good standing from the secretary of state from the state in which
the company is incorporated.
(vi) The Company or the Buyer shall have filed a form
UCC-1 or such other forms as may be required to perfect the Buyer's interest in
the Pledged Property as detailed in the Security Agreement dated the date hereof
and provided proof of such filing to the Buyer(s).
(vii) Xxxxx Xxxxxxxxxx and Xxxx Xxxxxxxxx shall have
delivered to the Escrow Agent the Pledged Shares as well as any transfer
documents as required pursuant to the Pledge and Escrow Agreement.
(viii) The Company shall have provided to the Buyer an
acknowledgement, to the satisfaction of the Buyer, from the Company's
independent certified public accountants as to its ability to provide all
consents required in order to file a registration statement in connection with
this transaction.
(ix) The Company shall have reserved out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Convertible Debentures, shares of Common Stock to effect the
conversion of all of the Conversion Shares then outstanding.
(x) The Irrevocable Transfer Agent Instructions, in form
and substance satisfactory to the Buyer, shall have been delivered to and
acknowledged in writing by the Company's transfer agent.
16
8. INDEMNIFICATION.
(a) In consideration of the Buyer's execution and delivery of
this Agreement and acquiring the Convertible Debentures and the Conversion
Shares hereunder, and in addition to all of the Company's other obligations
under this Agreement, the Company shall defend, protect, indemnify and hold
harmless the Buyer(s) and each other holder of the Convertible Debentures and
the Conversion Shares, and all of their officers, directors, employees and
agents (including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Buyer
Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Buyer Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the "Indemnified
Liabilities"), incurred by the Buyer Indemnitees or any of them as a result of,
or arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in this Agreement, the
Convertible Debentures or the Investor Registration Rights Agreement or any
other certificate, instrument or document contemplated hereby or thereby, (b)
any breach of any covenant, agreement or obligation of the Company contained in
this Agreement, or the Investor Registration Rights Agreement or any other
certificate, instrument or document contemplated hereby or thereby, or (c) any
cause of action, suit or claim brought or made against such Indemnitee and
arising out of or resulting from the execution, delivery, performance or
enforcement of this Agreement or any other instrument, document or agreement
executed pursuant hereto by any of the parties hereto, any transaction financed
or to be financed in whole or in part, directly or indirectly, with the proceeds
of the issuance of the Convertible Debentures or the status of the Buyer or
holder of the Convertible Debentures the Conversion Shares, as a Buyer of
Convertible Debentures in the Company. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities, which is permissible under applicable law.
(b) In consideration of the Company's execution and delivery
of this Agreement, and in addition to all of the Buyer's other obligations under
this Agreement, the Buyer shall defend, protect, indemnify and hold harmless the
Company and all of its officers, directors, employees and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "Company Indemnitees") from
and against any and all Indemnified Liabilities incurred by the Indemnitees or
any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Buyer(s) in this Agreement, instrument or document contemplated hereby or
thereby executed by the Buyer, (b) any breach of any covenant, agreement or
obligation of the Buyer(s) contained in this Agreement, the Investor
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby executed by the Buyer, or (c) any cause of
action, suit or claim brought or made against such Company Indemnitee based on
material misrepresentations or due to a material breach and arising out of or
resulting from the execution, delivery, performance or enforcement of this
Agreement, the Investor Registration Rights Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the parties hereto. To
the extent that the foregoing undertaking by each Buyer may be unenforceable for
any reason, each Buyer shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities, which is permissible under
applicable law.
17
9. GOVERNING LAW: MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New Jersey without
regard to the principles of conflict of laws. The parties further agree that any
action between them shall be heard in Xxxxxx County, New Jersey, and expressly
consent to the jurisdiction and venue of the Superior Court of New Jersey,
sitting in Xxxxxx County and the United States District Court for the District
of New Jersey sitting in Newark, New Jersey for the adjudication of any civil
action asserted pursuant to this Paragraph.
(b) Counterparts. This Agreement may be executed in two or
more identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.
(c) Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
(e) Entire Agreement, Amendments. This Agreement supersedes
all other prior oral or written agreements between the Buyer(s), the Company,
their affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be waived or amended other than by an instrument in writing signed
by the party to be charged with enforcement.
(f) Notices. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon confirmation of receipt, when sent
by facsimile; (iii) three (3) days after being sent by U.S. certified mail,
return receipt requested, or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
18
If to the Company, to: Compliance Systems Corporation
00 Xxxxx Xxxx
Xxxx Xxxx, XX 00000
Attention: Xxxx Xxxxxxxxx
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
With a copy to: Xxxxxxxxxxx & Xxxxxxxx Xxxxxxxxx Xxxxxx, LLP
000 Xxxxx Xxxxxxxx Xxxxxxxxx, Xxxxx 0000
Xxxxx, Xxxxxxx 00000
Attention: Xxxxxxx X. Xxxxxx, Esq.
Telephone: (000) 000-0000
Facsimile: (000) 000-0000
If to the Buyer(s), to its address and facsimile number on Schedule I,
with copies to the Buyer's counsel as set forth on Schedule I. Each party shall
provide five (5) days' prior written notice to the other party of any change in
address or facsimile number.
(g) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns. Neither the Company nor any Buyer shall assign this Agreement or any
rights or obligations hereunder without the prior written consent of the other
party hereto.
(h) No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
(i) Survival. Unless this Agreement is terminated under
Section 9(l), the representations and warranties of the Company and the Buyer(s)
contained in Sections 2 and 3, the agreements and covenants set forth in
Sections 4, 5 and 9, and the indemnification provisions set forth in Section 8,
shall survive the Closing for a period of two (2) years following the date on
which the Convertible Debentures are converted in full. The Buyer(s) shall be
responsible only for its own representations, warranties, agreements and
covenants hereunder.
(j) Publicity. The Company and the Buyer(s) shall have the
right to approve, before issuance any press release or any other public
statement with respect to the transactions contemplated hereby made by any
party; provided, however, that the Company shall be entitled, without the prior
approval of the Buyer(s), to issue any press release or other public disclosure
with respect to such transactions required under applicable securities or other
laws or regulations (the Company shall use its best efforts to consult the
Buyer(s) in connection with any such press release or other public disclosure
prior to its release and Buyer(s) shall be provided with a copy thereof upon
release thereof).
(k) Further Assurances. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
19
(l) Termination. In the event that the Closing shall not have
occurred with respect to the Buyers on or before five (5) business days from the
date hereof due to the Company's or the Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the non-breaching party's
failure to waive such unsatisfied condition(s)), the non-breaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated by the
Company pursuant to this Section 9(l), the Company shall remain obligated to
reimburse the Buyer(s) for the fees and expenses of Yorkville Advisors, LLC
described in Section 4(g) above.
(m) No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party.
[SIGNATURE PAGE FOLLOWS; REMAINDER PAGE INTENTIONALLY BLANK]
20
IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY:
COMPLIANCE SYSTEMS CORPORATION
By: ________________________________
Name: Xxxx Xxxxxxxxx
Title: Chairman
21
EXHIBIT A
DISCLOSURE SCHEDULE
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
(c) Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of 500,000,000 shares of Common Stock and no
shares of Preferred Stock, of which 50,000,000 shares of Common Stock are issued
and outstanding.
In August 2004, the Company entered into a consulting agreement with
Xxxxxxx Xxxxxxx for his services in connection with obtaining suitable financing
for the Company. Under the terms of the consulting agreement, Xx. Xxxxxxx will
receive: (x) a fee equal to 5% of the initial $1 million of gross proceeds
received by the Company or its subsidiaries, with such fee to be paid entirely
in cash; and (y) a fee equal to 5% of any amounts in excess of the $1 million of
gross proceeds received by the Company or its subsidiaries, with such fee to be
paid 50% in cash and 50% in common stock of the Company. All fees shall be paid
at the closing of the transaction to which they relate. The share price for all
fees to be paid to Xx. Xxxxxxx in the form of common stock of the Company will
be equal to the conversion price paid by Xxxxxxxxxx Equity Partners, Ltd. to the
Company in connection with Xxxxxxxxxx'x conversion of any principal amount in
excess of the initial $1 million debenture issued by the Company or any
successor to Xxxxxxxxxx. If there is more than one such conversion, then the
conversion price for purposes of calculating the fee to be paid to Xx. Xxxxxxx
under the cosnulting agreement will be the last one in time. Notwithstanding the
foregoing, in its sole and absolute discretion, the Company may pay Xx. Xxxxxxx'
fee as calculated above entirely in the form of cash. All common stock issued to
Xx. Xxxxxxx as a fee under the consulting agreement in connection with any
transaction with Xxxxxxxxxx will either be registered and freely tradable or be
included and registered for resale pursuant to the Securities Act of 1933, as
amended, in the first registration statement filed by the Company following the
transaction with /Xxxxxxxxxx for which such fees were earned.
As of the date hereof, there are outstanding warrants to purchase
580,000 shares of Common Stock at $1.50 per share. These warrants will expire on
September 30, 2008.
Please refer to Schedule F-1 below for a list of the Company's debt
securities.
(t) Certain Transactions. Xxxx Xxxxxxxxx and Xxxxxx Xxxxxxxxx each
loaned the Company $125,000. Xxxxx X. Xxxxxxxxxx loaned the Company $750,000,
and his wholly-owned company, Spirits Management, Inc., loaned the Company
$125,000. In addition, monies totaling $500,000 were borrowed from Amanuensis,
an independent third-party, with Xxxxx X. Xxxxxxxxxx acting as an intermediary.
Although Xx. Xxxxxxxxxx is President of Tele-Serv Inc., Telemax Co., Inc., and
Phone-Tel New Corp., he is not a shareholder of any of these companies.
4. COVENANTS
(d) Use of Proceeds. Please refer to Exhibit H attached hereto for
the Company's Budget, which details the proposed use of Proceeds by the Company.
2
Schedule F-1
COMPLIANCE SYSTEMS CORPORATION
SCHEDULE OF DEBT SECURITIES
AS OF MARCH 8, 2006
BALANCE
------------
Secured Debt (UCC's Filed):
Notes Payable - Xxxxxx Xxxxx 27,794.00
Capitalized Leases Payable:
Dell Financial Services 7,452.00
Bank of the West 29,898.00
GE Capital 19,518.00
Axis Capital Inc. 12,885.00
M&T Credit Services LLC 13,884.00
Netbank Business Finance (formerly Republic Leasing) 24,392.00
US Bancorp 29,346.00
Total Leases Payable 137,375.00
Secured Lease - Ford Credit 5,850.00
Total Secured Debt 171,019.00
------------
BALANCE
------------
UNSECURED DEBT:
AMGRO 13,420.00
Xxxx Xxxxxxxx 50,000.00
Xxxxx Xxxxxx 237,500.00
HSBC Bank 100,000.00
Phone-Tel New Corp 163,376.00
Spirits Management Inc. 163,376.00
Tele-Serv Inc. 108,917.00
Telmax Co. Inc. 108,917.00
Amanuensis Ltd. 500,000.00
Spirits Management Inc. 11,826.00
Xxxxxx Xxxxxxxxx 125,000.00
Xxxx Xxxxxxxxx 125,000.00
Xxxxx X. Xxxxxxxxxx 750,000.00
Stock Repurchase Payable to Xxxxxx Xxxxxxxxx 82,800.00
Spirits Management Inc. 125,000.00
Total Unsecured Debt 2,665,132.00
------------
Total 2,877,147.00
============
3
EXHIBIT B
BUDGET
[TO BE MANUALLY INSERTED AT CLOSING]
4
SCHEDULE I
SCHEDULE OF BUYERS
ADDRESS/FACSIMILE AMOUNT OF
NAME SIGNATURE NUMBER OF BUYER SUBSCRIPTION
-------------------------------- ---------------------------- ------------------------------ ------------
Xxxxxxxxxx Equity Partners, Ltd. By: Yorkville Advisors, LLC 000 Xxxxxx Xxxxxx - Xxxxx 0000 $1,000,000
Its: General Partner Xxxxxx Xxxx, XX 00000
Facsimile: (000) 000-0000
By:
Name: Xxxx Xxxxxx
Its: Portfolio Manager
With a copy to: Xxxxx Xxxxxxxx, Esq. 000 Xxxxxx Xxxxxx - Xxxxx 0000
Xxxxxx Xxxx, XX 00000
Facsimile: (000) 000-0000
5
