SECURITIES PURCHASE AGREEMENT
SECURITIES
PURCHASE AGREEMENT
(the
“Agreement”),
dated
as of June 11, 2007, by and among Composite Technology Corporation, a Nevada
corporation (the “Company”),
and
the investors listed on the Schedule of Buyers attached hereto (individually,
a
“Buyer”
and
collectively, the “Buyers”).
RECITALS
A. The
Company and each Buyer is executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of
the
Securities Act of 1933, as amended (the “1933
Act”),
and/or Rule 506 of Regulation D (“Regulation D”)
as
promulgated by the United States Securities and Exchange Commission (the
“SEC”)
under
the 1933 Act.
B. Each
Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, that amount of Units (the “Units”)
of the
Company with each Unit comprised of one share of the Company’s common stock, par
value $0.001 per share (the “Common
Stock”),
and
1/4th
of a
warrant in substantially the form attached hereto as Exhibit
A
(the
“Warrants”)
to
purchase one share of Common Stock with an exercise price of $1.40 for a term
of
36 months (as exercised, collectively, the “Warrant
Shares”),
set
forth opposite such Buyer’s name in column (3) on the Schedule of Buyers (which
aggregate amount for all Buyers shall be up to $35,000,000).
C. Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in
the
form attached hereto as Exhibit
B
(the
“Registration
Rights Agreement”)
pursuant to which the Company will provide certain registration rights with
respect to the Registrable Securities (as defined in the Registration Rights
Agreement) under the 1933 Act and the rules and regulations promulgated
thereunder and applicable state securities laws.
D. The
Common Stock, the Warrants and the Warrant Shares collectively are referred
to
herein as the “Securities”.
E. The
Company has retained CapStone Investments to act as its placement agent in
connection with the sale of the securities pursuant to this Agreement (the
“Placement
Agent”).
NOW,
THEREFORE,
the
Company and each Buyer hereby agree as follows:
1. PURCHASE
AND SALE OF THE UNITS.
(a) Purchase
of the Units.
(i) Subject
to the satisfaction (or waiver) of the conditions set forth in Sections 5 and
6
below, the Company shall hold a closing in which it shall issue and sell and
the
applicable Buyer shall purchase, the Units (the “Closing”).
(ii) After
the
Closing, a prospective Buyer’s execution of the signature page of this Agreement
shall constitute its offer to purchase the Units (the “Subscription”).
The
Company may accept or reject the Subscription from any Buyer, in whole or in
part in its sole discretion. The Company’s written execution of acceptance of
the Subscription shall constitute a binding agreement to sell the Units to
such
Buyer. The Company shall notify each Buyer of the portion, if any, of such
Buyer’s offer which has been accepted and, if any portion of a Buyer’s offer is
rejected, shall cause the Escrow Agent to refund to such Buyer the purchase
price paid by the Buyer for the Units with respect to which such Buyer’s
Subscription was rejected, if any.
(iii) At
the
Closing, each Buyer severally, but not jointly, shall purchase from the Company
on the Closing Date (as defined below), a certain amount in Units as set forth
opposite such Buyer’s name in column 3 on the Schedule of Buyers. Prior to the
Closing, the Company shall deliver to Xxxxxxxxxx & Xxxxx LLP, in trust as
escrow agent, the certificates for the Common Stock and Warrants underlying
the
Units to be purchased by the Buyers at the Closing, each registered in such
name
or names as each Buyer may designate, with instructions that such certificates
for the Common Stock and Warrants are to be held for release to such Buyers
only
upon payment in full of the Purchase Price to the Company by such Buyers as
set
forth in Section 1(b) hereof.
(iv) The
date
and time of the Closing (the “Closing
Date”)
shall
be 10:00 a.m., Pacific Time, on the date hereof (or such later date as is
mutually agreed to by the Company and each Buyer). The Closing shall occur
after
notification of satisfaction (or waiver) of the conditions to the Closing set
forth in Sections 5 and 6 below at the offices of Xxxxxxxxxx & Xxxxx LLP,
00000 Xxxxxxxx Xxxxxxxxx, Xxxxx 000, Xxx Xxxxxxx, Xxxxxxxxxx 00000.
(v) The
aggregate purchase price for the Units to be purchased by each Buyer at the
Closing (the “Purchase
Price”)
shall
be the amount set forth opposite such Buyer’s name in column (4) of the Schedule
of Buyers. Each Buyer shall pay $0.99 for each Unit to be purchased by such
Buyer at the Closing. For purposes of this Agreement, “Initial
Market Price”
means
the volume weighted average price (“VWAP”) of the Company’s common stock over
the ten (10) trading day period prior to close.
(b) Form
of Payment.
On the
Closing Date, each Buyer shall pay its Purchase Price to the Company for the
Units to be issued and sold to such Buyer at the Closing by wire transfer of
immediately available funds for the amount of the Purchase Price to an escrow
account subject to the Escrow Agreement among the Company, Xxxxxxxxxx &
Xxxxx LLP (the “Escrow
Agent”)
and
the Buyers. On the Closing Date and in accordance with the Escrow Agreement,
the
Units shall be released to the Buyers who have paid the Purchase Price. If
the
Closing does not occur within ten (10) business days of a Buyer paying its
Purchase Price to the Escrow Agent, then that Buyer may terminate the Agreement
with respect to such Buyer, subject to Section 7 of this Agreement.
2. BUYER’S
REPRESENTATIONS AND WARRANTIES.
Each
Buyer hereby severally, and not jointly, represents and warrants to the Company
and the Placement Agent that:
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(a) No
Public Sale or Distribution.
Such
Buyer is (i) acquiring the Common Stock and Warrants underlying the Units and
(ii) upon the exercise of the Warrants (other than pursuant to a Cashless
Exercise (as defined in the Warrants)) will acquire the Warrant Shares issuable
upon exercise of the Warrants, for its own account 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 1933 Act; provided,
however,
that by
making the representations herein, such Buyer does not agree to hold any of
the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with, or pursuant to, or
a
registration statement or an exemption under the 1933 Act. Such Buyer is
acquiring the Securities hereunder in the ordinary course of its business.
Such
Buyer does not presently have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.
(b) Accredited
Investor Status; No General Solicitation.
Such
Buyer is an “accredited investor” as that term is defined in Rule 501(a) of
Regulation D. The definition of “accredited investor” is annexed hereto. Such
Buyer is not required to be registered as a broker-dealer under Section 15
of
the Exchange Act. Such Buyer is not purchasing the Securities as a result of
any
advertisement, article, notice or other communication regarding the Securities
published in any newspaper, magazine or similar media or broadcast over
television or radio or presented at any seminar or to such Buyer’s knowledge,
any general solicitation or advertisement.
(c) Reliance
on Exemptions.
Such
Buyer understands that the Securities 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 and the Placement
Agent are 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
the
Securities.
(d) Information.
Such
Buyer and its advisors, if any, have been furnished with all materials relating
to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by such Buyer.
Such Buyer and its advisors, if any, have been afforded the opportunity to
ask
questions of the Company. 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 herein. Such Buyer
understands that its investment in the Securities involves a high degree of
risk. Such 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 Securities.
(e) Investment
Experience.
Such
Buyer acknowledges that it can bear the economic risk and complete loss of
its
investment in the Securities and has such knowledge and experience in financial
or business matters that it is capable of evaluating the merits and risks of
the
investment contemplated hereby.
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(f) No
Governmental Review.
Such
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 Securities or the fairness or suitability of the investment
in the Securities nor have such authorities passed upon or endorsed the merits
of the offering of the Securities.
(g) Transfer
or Resale.
Such
Buyer understands that except as provided in the Registration Rights Agreement:
(i) the Securities have not been and are not being registered under the 1933
Act
or any state securities laws, and may not be offered for sale, sold, assigned
or
transferred unless (A) subsequently registered thereunder, (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, (C) such Buyer provides the Company with reasonable assurance
that
such Securities can be sold, assigned or transferred pursuant to Rule 144 or
Rule 144A promulgated under the 1933 Act, as amended (or a successor rule
thereto) (collectively, “Rule
144”),
or
(D) the sale, assignment, or transfer meets the requirement of Regulation S
under the 1933 Act, as amended; (ii) any sale of the Securities made in reliance
on 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 the Securities under
circumstances in which the seller (or the Person (as defined in Section 3(s))
through whom the sale is made) may be deemed to be an underwriter (as that
term
is defined in the 0000 Xxx) may require compliance with some other exemption
under the 1933 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
the
Securities under the 1933 Act or any state securities laws or to comply with
the
terms and conditions of any exemption thereunder.
(h) Legends.
Such
Buyer understands that the certificates or other instruments representing the
Common Stock and the Warrants and, until such time as the resale of the Common
Stock and the Warrant Shares have been registered under the 1933 Act as
contemplated by the Registration Rights Agreement, the stock certificates
representing the Common Stock and the Warrant Shares, except as set forth below,
shall bear any legend as required by the “blue sky” laws of any state and a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):
THE
ISSUANCE AND SALE OF 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 MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR
(B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.
4
The
legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which
it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection
with
a sale, assignment or other transfer, such holder provides the Company with
an
opinion of counsel, in a generally acceptable form, to the effect that such
sale, assignment or transfer of the Securities may be made without registration
under the applicable requirements of the 1933 Act, or (iii) such holder provides
the Company with reasonable assurance that the Securities can be sold, assigned
or transferred pursuant to Rule 144 or Rule 144A.
(i) Validity;
Enforcement.
This
Agreement and the Registration Rights Agreement to which such Buyer is a party
have been duly and validly authorized, executed and delivered on behalf of
such
Buyer and shall constitute the legal, valid and binding obligations of such
Buyer enforceable against such Buyer in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity
or
to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws relating to, or affecting generally, the enforcement
of
applicable creditors’ rights and remedies.
(j) Residency;
Organization.
If such
Buyer is an entity, (i) such Buyer is a resident of that jurisdiction specified
below its address on the Schedule of Buyers and (ii) such Buyer is a validly
existing corporation, limited partnership or limited liability company and
has
all requisite corporate, partnership or limited liability company power and
authority to invest in the Securities pursuant to this Agreement.
(k) Brokers
and Finders.
No
Person will have, as a result of the transactions contemplated by the
Transaction Documents, any valid right, interest or claim against or upon the
Company, any Subsidiary or any Buyer for any commission, fee or other
compensation pursuant to any agreement, arrangement or understanding entered
into by or on behalf of such Buyer.
(l) Prohibited
Transactions.
During
the last ten (10) Business Days prior to the date hereof, neither such Buyer
nor
any Affiliate (as defined below) of such Buyer nor any Person acting on behalf
of or pursuant to any understanding with such Buyer or Affiliate of such Buyer
has, directly or indirectly, effected or agreed to effect any short sale,
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, 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 Securities (each,
a “Prohibited
Transaction”).
Prior
to the earliest to occur of (i) the termination of this Agreement or (ii) such
time as the transactions contemplated by this Agreement are publicly disclosed
by the Company as described in Section 8(n), such Buyer shall not, and shall
cause any Person acting on behalf of or pursuant to any understanding with
such
Buyer not to, engage, directly or indirectly, in a Prohibited Transaction.
Such
Buyer acknowledges that the representations, warranties and covenants contained
in this Section 2(l) are being made for the benefit of the Buyers as well as
the
Company and that each of the other Buyers shall have an independent right to
assert any claims against such Buyer arising out of any breach or violation
of
the provisions of this Section 2(l). For purposes of this Agreement,
“Affiliate”
means
with respect to any Person, any other Person which directly or indirectly
through one or more intermediaries Controls, is controlled by, or is under
common control with, such Person and “Control”
(including the terms “controlling”, “controlled by” or “under common control
with”) means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
5
3. REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.
Except
as
set forth in the SEC Reports and the Disclosure Schedule hereto, the Company
represents and warrants to each of the Buyers and the Placement Agent
that:
(a) Organization
and Qualification.
The
Company and its “Subsidiaries”
(which
for purposes of this Agreement means any material operating entity in which
the
Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) are entities duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are formed, and have
the requisite power and authority 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 entity to do business and is in good standing in
every jurisdiction in which its ownership of property or 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. As used in this Agreement, “Material
Adverse Effect”
means
any material adverse effect on the business, properties, assets, operations,
results of operations, condition (financial or otherwise) or prospects of the
Company and its Subsidiaries, taken as a whole, or on the transactions
contemplated hereby and the other Transaction Documents or by the agreements
and
instruments to be entered into in connection herewith or therewith, or on the
authority or ability of the Company to perform its obligations under the
Transaction Documents (as defined below). The Company has no Subsidiaries except
as set forth on Schedule
3(a).
(b) Authorization;
Enforcement; Validity.
The
Company has the requisite power and authority to enter into and perform its
obligations under this Agreement, the Registration Rights Agreement, the
Warrants, and each of the other agreements entered into by the parties hereto
in
connection with the transactions contemplated by this Agreement (collectively,
the “Transaction
Documents”)
and to
issue the Securities in accordance with the terms hereof and thereof. The
execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Common Stock, the Warrants
and the Placement Agent Warrants (as defined below), the reservation for
issuance and issuance of 100% of the Warrant Shares upon exercise of the
Warrants, the reservation of the shares of Common Stock issuable upon exercise
of the warrants (the “Placement
Agent Warrant Shares”) issued
to
the Placement Agent (the “Placement
Agent Warrants”)
have
been duly authorized by the Company’s Board of Directors and no further filing,
consent, or authorization is required by the Company, its Board of Directors
or
its stockholders, except for post-closing Securities filings or notifications
required to be made under federal or state securities laws. This Agreement
and
the other Transaction Documents of even date herewith have been duly executed
and delivered by the Company, and shall constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective 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 applicable creditors’ rights and remedies.
6
(c) Issuance
of Securities.
The
issuance of the Common Stock, the Warrants and the Placement Agent Warrants
are
duly authorized and are free from all taxes, liens and charges with respect
to
the issue thereof. As of the Closing, a number of shares of Common Stock shall
have been duly authorized and reserved for issuance which equals at least 100%
of the maximum number of shares Common Stock issuable upon exercise of the
Warrants and the Placement Agent Warrants (without taking into account of any
limitations on the exercise of the Warrants set forth in the Warrants). Upon
exercise, in accordance with the Warrants and the Placement Agent Warrants,
as
the case may be, and payment of the consideration set forth in this Agreement,
the Warrants and the Placement Agent Warrants, the Warrant Shares and the
Placement Agent Warrant Shares, respectively, will be validly issued, fully
paid
and nonassessable and free from all preemptive or similar rights, taxes, liens
and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Stock.
(d) 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
and
thereby (including, without limitation, the issuance of the Common Stock and
the
Warrants, and reservation for issuance and issuance of the Warrant Shares)
will
not (i) result in a violation of the Articles of Incorporation (as defined
in
Section 3(r)) of the Company or any of its Subsidiaries or Bylaws (as defined
in
Section 3(s)) of the Company or any of its Subsidiaries 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 result in termination, amendment, acceleration
or cancellation of, any agreement, indenture or instrument to which the Company
or any of its Subsidiaries is a party, or (iii) 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 NASD’s OTC
Bulletin Board (the “Principal
Market”))
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, except
in
the cases of clauses (ii) and (iii) for any such conflicts, violations or
defaults which can reasonably be expected to have no Material Adverse
Effect.
(e) Consents.
The
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under or contemplated by
the
Transaction Documents, in each case in accordance with the terms hereof or
thereof, except for post-closing securities filings or notifications to be
made
under federal or state securities laws. 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 Closing
Date, except for the filing with the SEC of one or more Registration Statements
in accordance with the requirements of the Registration Rights Agreement. The
Company and its Subsidiaries are unaware of any facts or circumstances which
might prevent the Company from obtaining or effecting any of the registration,
application or filings pursuant to the preceding sentence. The Company is not
in
violation of the applicable listing requirements of the Principal Market and
has
no knowledge of any facts which would reasonably lead to delisting or suspension
of the Common Stock. The issuance by the Company of the Securities shall not
have the effect of delisting or suspending the Common Stock from the Principal
Market.
7
(f) Acknowledgment
Regarding Buyer’s Purchase of Securities.
The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of an arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) an Affiliate of the Company or (iii) to the
knowledge of the Company, a “beneficial owner” of more than 10% of the shares of
Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the “1934
Act”)).
The
Company further acknowledges that no Buyer is acting as a financial advisor
or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby,
and
any advice given by a Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to such Buyer’s purchase of the
Securities. The Company further represents to each Buyer that the Company’s
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.
(g) No
General Solicitation; Placement Agent’s Fees.
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) in connection with the offer or sale of
the
Securities. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than for
persons engaged by any Buyer or its investment advisor) relating to or arising
out of the transactions contemplated hereby, including, without limitation,
placement agent fees payable to the Placement Agent in connection with the
sale
of the Securities. The Company shall pay, and hold each Buyer harmless against,
any liability, loss or expense (including, without limitation, attorney’s fees
and out-of-pocket expenses) arising in connection with any such claim. Other
than the Placement Agent, the Company has not engaged any Placement Agent or
other agents in connection with the sale of the Securities.
(h) Private
Placement; No Integrated Offering.
Subject
to the accuracy of the Buyer’s representations and warranties in Section 2 of
this Agreement, the offer and sale by the Company of the Securities in
conformity with the terms of this Agreement constitute transactions that are
exempt from registration under the 1933 Act. None of the Company, its
Subsidiaries, any of their Affiliates, and any Person acting on 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 any of the Securities under the 1933 Act or cause this offering
of the Securities to be integrated with prior offerings by the Company for
purposes of the 1933 Act or any applicable stockholder approval provisions,
including, without limitation, under the rules and regulations of any exchange
or automated quotation system on which any of the securities of the Company
are
listed or designated. None of the Company, its Subsidiaries, their Affiliates
and any Person acting on their behalf will take any action or steps referred
to
in the preceding sentence that would require registration of any of the
Securities under the 1933 Act or cause the offering of the Securities to be
integrated with other offerings.
8
(i) Dilutive
Effect.
The
Company understands and acknowledges that the number of Warrant Shares issuable
upon exercise of the Warrants and the Placement Agent Warrant Shares issuable
upon exercise of the Placement Agent Warrants will increase in certain
circumstances. The Company further acknowledges that its obligation to issue
the
Warrant Shares upon exercise of the Warrants in accordance with this Agreement
and the Warrants, and its obligation to issue the Placement Agent Warrant Shares
upon exercise of the Placement Agent Warrants in accordance with this Agreement
and the Placement Agent Warrants in each case, is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.
(j) Application
of Takeover Protections; Rights Agreement.
The
Company and its board of directors have taken all necessary action, if any,
in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Articles of Incorporation
or
the laws of the jurisdiction of its formation which is or could become
applicable to any Buyer as a result of the transactions contemplated by this
Agreement, including, without limitation, the Company’s issuance of the
Securities and any Buyer’s ownership of the Securities. The Company has not
adopted a stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control
of
the Company.
(k) SEC
Documents; Financial Statements.
(i)
During the two (2) years prior to the date hereof, the Company has filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the 1934 Act with
respect to such time period (all of the foregoing filed prior to the date hereof
and all exhibits included therein and financial statements, notes and schedules
thereto and documents incorporated by reference therein being hereinafter
referred to as the “SEC
Documents”).
The
Company has delivered to the Buyers or their respective representatives true,
correct and complete copies of the SEC Documents not available on the XXXXX
system. As of their respective filing dates, the SEC Documents complied in
all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. Each registration statement and any amendment thereto filed by
the
Company since January 1, 2005 pursuant to the 1933 Act and the rules and
regulations thereunder, as of the date such statement or amendment became
effective, complied as to form in all material respects with the 1933 Act and
did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein not misleading; and each prospectus filed pursuant
to
Rule 424(b) under the 1933 Act, as of its issue date and as of the closing
of
any sale of securities pursuant thereto did not contain any untrue statement
of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in the light of
the
circumstances under which they were made, not misleading.
9
(ii)
As
of their respective filing dates, the financial statements of the Company
included in the SEC Documents 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 United States 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 Buyers in connection with the transactions contemplated hereby which is
not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement or in any disclosure schedules,
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
circumstance under which they are or were made, not misleading.
(l) Absence
of Certain Changes.
Since
March 31, 2007, there has been no event which has had, or could reasonably
be
expected to result, in a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole. Since March 31, 2007, there has not been:
(i) any
change in the consolidated assets, liabilities, financial condition or operating
results of the Company from that reflected in the financial statements included
in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2007, except for changes in the ordinary course of business which
have
not had and could not reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate;
(ii) any
declaration or payment of any dividend, or any authorization or payment of
any
distribution, on any of the capital stock of the Company, or any redemption
or
repurchase of any securities of the Company;
(iii) any
material damage, destruction or loss, whether or not covered by insurance to
any
assets or properties of the Company or its Subsidiaries;
(iv) any
waiver, not in the ordinary course of business, by the Company or any Subsidiary
of a material right or of a material debt owed to it;
(v) any
satisfaction or discharge of any lien, claim or encumbrance or payment of any
obligation by the Company or a Subsidiary, except in the ordinary course of
business and which is not material to the assets, properties, financial
condition, operating results or business of the Company and its Subsidiaries
taken as a whole (as such business is presently conducted and as it is proposed
to be conducted);
10
(vi) any
change or amendment to the Company's Articles of Incorporation or Bylaws, or
material change to any material contract or arrangement by which the Company
or
any Subsidiary is bound or to which any of their respective assets or properties
is subject;
(vii) any
material transaction entered into by the Company or a Subsidiary other than
in
the ordinary course of business;
(viii) the
loss
of the services of any key employee, or material change in the composition
or
duties of the senior management of the Company or any Subsidiary;
or
(ix) the
loss
or threatened loss of any customer which has had or could reasonably be expected
to have a Material Adverse Effect; or
The
Company and its Subsidiaries, individually and on a consolidated basis, are
not
as of the date hereof, and after giving effect to the transactions contemplated
hereby to occur at the Closing, will not be Insolvent (as defined below). For
purposes of this Section 3(l), “Insolvent”
means,
with respect to any Person (as defined in Section 3(s)), (i) the present fair
saleable value of such Person’s assets is less than the amount required to pay
such Person’s total Indebtedness (as defined in Section 3(s)), (ii) such Person
is unable to pay its debts and liabilities, subordinated, contingent or
otherwise, as such debts and liabilities become absolute and matured, (iii)
such
Person intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature or (iv) such Person has
unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted.
(m) No
Undisclosed Events, Liabilities, Developments or Circumstances.
No
material event, liability, development or circumstance has occurred or exists,
or is contemplated to occur with respect to the Company, its Subsidiaries or
their respective business, properties, prospects, operations or financial
condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement on Form S-1 filed with
the SEC relating to an issuance and sale by the Company of its Common Stock
and
which has not been publicly announced.
(n) Use
of
Proceeds.
The net
proceeds of the sale of the Units hereunder shall be used by the Company for
working capital and general corporate purposes. The Company is not, nor will
the
Company be engaged in, the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations T, U
or X
of the Board of Governors of the Federal Reserve System).
11
(o) Conduct
of Business; Regulatory Permits.
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
articles of incorporation or bylaws, respectively. Neither the Company nor
any
of its Subsidiaries is in violation of any judgment, decree or order or any
statute, ordinance, rule or regulation that are currently necessary or
applicable to the operation of the Company or its Subsidiaries as currently
conducted and neither the Company nor any of its Subsidiaries will conduct
its
business in violation of the foregoing except for possible violations which
would not, individually or in the aggregate, have a Material Adverse Effect.
Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of the Principal
Market or the SEC or other state or federal securities laws and has no knowledge
of any facts or circumstances which would reasonably lead to delisting or
suspension of the Common Stock by the Principal Market in the foreseeable
future. Since March 31, 2007, (i) the Common Stock has been designated for
quotation on the Principal Market, (ii) trading in the Common Stock has not
been
suspended by the SEC or the Principal Market and (iii) the Company has received
no communication, written or oral, from the SEC or the Principal Market
regarding the suspension or delisting of the Common Stock from the Principal
Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure
to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, 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.
(p) Xxxxxxxx-Xxxxx
Act; Internal Controls.
The
Company is in compliance with any and all applicable requirements of the
Xxxxxxxx-Xxxxx Act of 2002 that are effective as of the date hereof, and any
and
all applicable rules and regulations promulgated by the SEC thereunder that
are
effective as of the date hereof, except where such noncompliance would not
have,
individually or in the aggregate, a Material Adverse Effect. The Company and
the
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 GAAP 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. To the extent necessary to comply with applicable
SEC rules, the Company has established disclosure controls and procedures (as
defined in 1934 Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed
such disclosure controls and procedures to ensure that material information
relating to the Company, including the Subsidiaries, is made known to the
certifying officers by others within those entities, particularly during the
period in which the Company’s most recently filed period report under the 1934
Act, as the case may be, is being prepared. The Company's certifying officers
have evaluated the effectiveness of the Company's controls and procedures as
of
the end of the period covered by the most recently filed periodic report under
the 1934 Act (such date, the "Evaluation
Date").
The
Company presented in its most recently filed periodic report under the 1934
Act
the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no significant
changes in the Company's internal controls (as such term is defined in Item
308
of Regulation S-K) or, to the best of the Company's knowledge, in other factors
that could significantly affect the Company's internal controls. The Company
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with United States GAAP and the
applicable requirements of the 1934 Act.
12
(q) Transactions
With Affiliates.
Except
as set forth in the SEC Documents filed at least ten (10) Business Days prior
to
the date hereof, none of the officers, directors or employees of the Company
is
presently a party to any transaction with the Company or any of its Subsidiaries
(other than for ordinary course services as employees, officers or 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 such
officer, director or employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.
(r) Equity
Capitalization.
(i) As
of the date hereof, the authorized capital stock of the Company consists of
(i)
300,000,000 shares of Common Stock, of which as of the date hereof, 179,860,419
are issued and outstanding and (ii) 5,000,000 shares of preferred stock. All
of
such outstanding shares have been validly issued and are fully paid and
nonassessable and were issued in full compliance with applicable state and
federal securities law and any rights of third parties. All of the issued and
outstanding shares of capital stock of each Subsidiary have been duly authorized
and validly issued and are fully paid, nonassessable and free of pre-emptive
rights, and were issued in full compliance with applicable state and federal
securities law and any rights of third parties and are owned by the Company,
beneficially and of record, subject to no lien, encumbrance or other adverse
claim. None of the Company’s or the Subsidiary’s share capital is subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company or any Subsidiary. Except with respect
to
the Warrants and the Placement Agent Warrants, 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, or exercisable
or exchangeable for, any share capital 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 share capital 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, or exercisable
or exchangeable for, any share capital of the Company or any of its
Subsidiaries. Except as set forth in the Disclosure Schedule, there are no
outstanding debt securities, notes, credit agreements, credit facilities or
other agreements, documents or instruments evidencing Indebtedness of the
Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound. There are no financing statements securing
obligations in any material amounts, either singly or in the aggregate, filed
in
connection with the Company or any of its Subsidiaries. Except as set forth
in
the Disclosure Schedule, there are no agreements or arrangements under which
the
Company is obligated to register the sale of any of their securities under
the
1933 Act (except the Registration Rights Agreement).
13
(ii)
The
issuance and sale of the Securities hereunder will not obligate the Company
to
issue or offer to issue shares of Common Stock or other securities to any other
Person (other than the Buyers) and will not result in the adjustment of the
exercise, conversion, exchange or reset price of any outstanding
security.
(iii)
The
Company has furnished to the Buyers true, correct and complete 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 amended and as in effect on the date hereof (the
“Bylaws”),
and
the terms of all securities convertible into, or exercisable or exchangeable
for, shares of Common Stock and the material rights of the holders thereof
in
respect thereto.
(s) Indebtedness
and Other Contracts.
Except
as set forth in the Disclosure Schedule, the Company (i) has no outstanding
Indebtedness (as defined below), (ii) is not a party to any contract, agreement
or instrument, the violation of which, or default under which, by the other
party(ies) to such contract, agreement or instrument would result in a Material
Adverse Effect, (iii) is not in violation of any term of or in default under
any
material contract, agreement or instrument, except where such violations and
defaults would not result, individually or in the aggregate, in a Material
Adverse Effect, and (iv) is not a party to any contract, agreement or
instrument, the performance of which, in the judgment of the Company’s officers,
has or is expected to have a Material Adverse Effect.
For
purposes of this Agreement: (x) “Indebtedness”
of
any
Person means, without duplication (A) all indebtedness for borrowed money,
(B)
all obligations issued, undertaken or assumed as the deferred purchase price
of
property or services (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising
under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under
any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby,
is
classified as a capital lease, (G) all indebtedness referred to in clauses
(A)
through (F) above secured by (or for which the holder of such Indebtedness
has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; (y) “Contingent
Obligation”
means,
as to any Person, any direct or indirect liability, contingent or otherwise,
of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) “Person”
means
an individual, a limited liability company, a partnership, a joint venture,
a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
14
(t) Absence
of Litigation.
There
is no material action, suit, proceeding, inquiry or investigation before or
by
the Principal Market, any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, the Common Stock or any
of
the Company’s Subsidiaries, any of the Company’s or its Subsidiaries’ officers
or directors or the transactions contemplated by the Transaction
Documents.
(u) Employee
Relations.
(i) The
Company is not a party to or bound by any collective bargaining agreements
or
other agreements with labor organizations. The Company has not violated in
any
material respect any laws, regulations, orders or contract terms, affecting
the
collective bargaining rights of employees, labor organizations or any laws,
regulations or orders affecting employment discrimination, equal opportunity
employment, or employees’ health, safety, welfare, wages and hours.
(ii)
(a)
There are no labor disputes existing, or to the Company's knowledge, threatened,
involving strikes, slow-downs, work stoppages, job actions, disputes, lockouts
or any other disruptions of or by the Company's employees, (b) there are no
unfair labor practices or petitions for election pending or, to the Company's
knowledge, threatened before the National Labor Relations Board or any other
foreign, federal, state or local labor commission relating to the Company's
employees, (c) no demand for recognition or certification heretofore made by
any
labor organization or group of employees is pending with respect to the Company
and (d) to the Company's best knowledge, the Company enjoys good labor and
employee relations with its employees and labor organizations.
(iii) The
Company is, and at all times has been, in compliance in all material respects
with all applicable laws respecting employment (including laws relating to
classification of employees and independent contractors) and employment
practices, terms and conditions of employment, wages and hours, and immigration
and naturalization.
(iv) The
Company is not a party to, or bound by, any employment or other contract or
agreement that contains any severance, termination pay or change of control
liability or obligation, including, without limitation, any “excess parachute
payment,” as defined in Section 2806(b) of the Internal Revenue
Code.
(v) No
executive officer or key employee, or any group thereof, intends to terminate
their employment with the Company, nor does the Company have a present intention
to terminate the employment of any of the foregoing.
15
(v) Title.
The
Company and its Subsidiaries have good and marketable title in fee simple to
all
real property and good and marketable title to all personal property owned
by
them which is material to the business of the Company and its Subsidiaries,
in
each case free and clear of all liens, encumbrances and defects except such
as
do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and any
of
its Subsidiaries. Any real property and facilities and personal property held
under lease by the Company and any of 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.
(w) Intellectual
Property.
The
Company and the Subsidiaries have, or have rights to use, all patents,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other intellectual property rights necessary or material for use
in
connection with its business as described in the SEC Reports and which the
failure to so have could have a Material Adverse Effect (collectively, the
“Intellectual
Property Rights”).
Neither the Company nor any Subsidiary has received a written notice that the
use of the Intellectual Property Rights by the Company or any Subsidiary
violates or infringes upon the rights of any Person. To the knowledge of the
Company, (i) use of the Intellectual Property Rights by the Company or any
Subsidiary does not violate or infringe upon the rights of any Person, and
(ii)
no third Party is infringing upon the Intellectual Property Rights of the
Company or any Subsidiary. To the knowledge of the Company, all such
Intellectual Property Rights are enforceable.
(x) Tax
Status.
The
Company and each of its Subsidiaries (i) has made or filed all foreign, federal
and state income and all other tax returns, reports and declarations required
by
any jurisdiction to which it is subject, (ii) 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 (iii) 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. All taxes and other assessments and levies that the Company or any
Subsidiary is required to withhold or to collect for payment have been duly
withheld and collected and paid to the proper governmental entity or third
party
when due. There are no tax liens or claims pending or, to the Company’s
knowledge, threatened against the Company or any Subsidiary or any of their
respective assets or property. There are no outstanding tax sharing agreements
or other such arrangements between the Company and any Subsidiary or other
corporation or entity.
(y) Insurance
Coverage.
The
Company and each Subsidiary maintains in full force and effect insurance
coverage that is customary for comparably situated companies for the business
being conducted and properties owned or leased by the Company and each
Subsidiary, and the Company reasonably believes such insurance coverage to
be
adequate against all liabilities, claims and risks against which it is customary
for comparably situated companies to insure.
16
(z) Off
Balance Sheet Arrangements.
There
is no transaction, arrangement, or other relationship between the Company and
an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in its 1934 Act filings and is not so disclosed or
that
otherwise would be reasonably likely to have a Material Adverse
Effect.
(aa) Manipulation
of Price.
The
Company has not, and to its knowledge no one acting on its behalf has, (i)
taken, directly or indirectly, any action designed to cause or to result or
that
could reasonably be expected to cause or result, in the stabilization or
manipulation of the price of any security of the Company to facilitate the
sale
or resale of any of the Securities or (ii) other than the Placement Agent,
sold,
bid for, purchased, or paid any compensation for soliciting purchases of, any
of
the Securities.
(bb) Company’s
Knowledge.
For
purposes of this Agreement, “knowledge of the Company” or the “Company’s
knowledge” means the actual knowledge of the executive officers (as defined in
Rule 405 under the 0000 Xxx) of the Company.
4. COVENANTS.
(a) Best
Efforts.
Each
party shall use its best efforts timely to satisfy each of the conditions to
be
satisfied by it as provided in Sections 5 and 6 of this Agreement.
(b) Form
D
and Blue Sky.
The
Company agrees to file a Form D with respect to the Securities as required
under
Regulation D and to provide a copy thereof to each Buyer and the Placement
Agent
promptly after such filing. The Company shall, on or before the Closing Date,
take such action as the Company shall reasonably determine is necessary in
order
to obtain an exemption for or to qualify the Securities for sale to the Buyers
at Closing pursuant to this Agreement under applicable securities or “Blue Sky”
laws of the states of the United States (or to obtain an exemption from such
qualification), and shall provide evidence of any such action so taken to the
Buyers and the Placement Agent on or prior to Closing Date. The Company shall
make all filings and reports relating to the offer and sale of the Securities
required under applicable securities or “Blue Sky” laws of the states of the
United States following the Closing Date.
(c) Reporting
Status.
Until
the date on which the Investors (as defined in the Registration Rights
Agreement) shall have sold all the Common Stock and none of the Warrants is
outstanding (the “Reporting
Period”),
the
Company shall file all reports required to be filed with the SEC pursuant to
the
1934 Act, and the Company shall not terminate its status as an issuer required
to file reports under the 1934 Act even if the 1934 Act or the rules and
regulations thereunder would otherwise permit such termination. The Company
will
furnish to the Buyers and/or their assignees such information relating to the
Company and its Subsidiaries as from time to time may reasonably be requested
by
the Buyers and/or their assignees; provided, however, that the Company shall
not
disclose material nonpublic information to the Buyers, or to advisors to or
representatives of the Buyers, unless prior to disclosure of such information
the Company identifies such information as being material nonpublic information
and provides the Buyers, such advisors and representatives with the opportunity
to accept or refuse to accept such material nonpublic information for review
and
any Buyer wishing to obtain such information enters into an appropriate
confidentiality agreement with the Company with respect thereto.
17
(d) Listing.
The
Company shall promptly secure the listing of all of the Registrable Securities
(as defined in the Registration Rights Agreement) upon each national securities
exchange and automated quotation system, if any, upon which the Common Stock
is
then listed (subject to official notice of issuance) and shall maintain such
listing of all Registrable Securities from time to time issuable under the
terms
of the Transaction Documents. The Company shall maintain the Common Stocks’
authorization for quotation on the Principal Market. Neither the Company nor
any
of its Subsidiaries shall take any action which would be reasonably expected
to
result in the delisting or suspension of the Common Stock on the Principal
Market. The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section 4(d).
(e) Fees.
The
Company shall reimburse all (i) reasonable costs and expenses (including
travel-related expenses) of Placement Agent, including without limitation,
fees,
expenses, travel expenses and disbursements of outside counsel, consultants
and
engineers incurred in connection with due diligence and preparation of the
Transaction Documents and the administration of the Units and (ii) reasonable
costs, expenses and travel expenses of Agent (including fees and costs of
Agent’s outside counsel) in connection with the enforcement or protection of
their rights and remedies under the Units. These fees shall not exceed $10,000
unless prior approval has been granted by the Company. Except as otherwise
set
forth in the Transaction Documents, each party to this Agreement shall bear
its
own expenses in connection with the sale of the Securities to the
Buyers.
(f) Conduct
of Business.
The
business of the Company and its Subsidiaries shall not be conducted in violation
of any law, ordinance or regulation of any state or federal governmental entity,
administrative agency or other regulatory agency, except where such violations
would not result, either individually or in the aggregate, in a Material Adverse
Effect.
(g) No
Conflicting Agreements.
The
Company will not take any action, enter into any agreement or make any
commitment that would conflict or interfere in any material respect with the
Company’s obligations to the Buyers under the Transaction
Documents.
(h) Compliance
with Laws.
The
Company will comply in all material respects with all applicable laws, rules,
regulations, orders and decrees of all state or federal governmental entities,
administrative agencies or other regulatory agencies.
(i) Reservation
of Common Stock.
The
Company shall at all times reserve and keep available out of its authorized
but
unissued shares of Common Stock, solely for the purpose of providing for the
exercise of the Warrants and the Placement Agent Warrants, such number of shares
of Common Stock as shall from time to time equal the Warrant Shares and the
Placement Agent Warrant Shares issuable upon the due exercise of the Warrants
and the Placement Agent Warrants, as the case may be, in accordance with their
respective terms.
18
5. CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.
The
obligation of the Company hereunder to issue and sell the Units to each Buyer
at
the Closing is subject to the satisfaction, at or before the Closing Date,
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 by providing such Buyer with prior written notice
thereof:
(i) Such
Buyer shall have executed each of the Transaction Documents to which it is
a
party and delivered the same to the Company.
(ii) Such
Buyer shall have delivered to the Escrow Agent the Purchase Price by wire
transfer of immediately available funds.
(iii) The
Buyers collectively shall have delivered to the Escrow Agent by wire transfer
at
least $15,000,000 of immediately available funds.
(iv) The
representations and warranties of such Buyer shall be true and correct in all
material respects 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 such Buyer 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 such Buyer at
or
prior to the Closing Date.
6. CONDITIONS
TO EACH BUYER’S OBLIGATION TO PURCHASE.
The
obligation of each Buyer hereunder to purchase the Units at the Closing is
subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for each Buyer’s sole
benefit and may be waived by such Buyer at any time in its sole discretion
by
providing the Company with prior written notice thereof:
(i) The
Company shall have executed and delivered to such Buyer (A) each of the
Transaction Documents, and (B) the Units (in such amounts as such Buyer shall
request) being purchased by such Buyer at the Closing pursuant to this
Agreement.
(ii) Such
Buyer shall have received the opinion of Xxxxxxxxxx & Xxxxx LLP, the
Company’s corporate counsel, dated as of the Closing Date, in substantially the
form of Exhibit
C attached
hereto.
(iii) The
Company shall have delivered to such Buyer a certificate evidencing the
formation and good standing of the Company and each of its Subsidiaries in
such
entity’s jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction.
(iv) The
Company shall have delivered to such Buyer a certified copy of the Articles
of
Incorporation as certified by the Secretary of State of the State of
Nevada.
19
(v) The
Company shall have delivered to such Buyer a certificate, executed by the Chief
Executive Officer of the Company and dated as of the Closing Date, as to (i)
resolutions adopted by the Company’s Board of Directors to approve the
transactions contemplated by this Agreement, (ii) the Articles of Incorporation
and (iii) the Bylaws, each as in effect at the Closing.
(vi) The
representations and warranties of the Company shall be true and correct 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 respects with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to the
Closing Date. Such Buyer shall have received a certificate, executed by the
Chief Executive Officer of the Company, dated as of the Closing Date, to the
foregoing effect.
(vii) The
Company shall have obtained all governmental, regulatory or third party consents
and approvals, if any, necessary for the sale of the Securities, except for
post-closing securities filings or notifications required to be made under
federal or state securities laws.
(viii) No
judgment, writ, order, injunction, award or decree of or by any court, or judge,
justice or magistrate, including any bankruptcy court or judge, or any order
of
or by any governmental authority, shall have been issued, and no action or
proceeding shall have been instituted by any governmental authority, enjoining
or preventing the consummation of the transactions contemplated hereby or by
the
other Transaction Documents.
(ix) No
stop
order or suspension of trading shall have been imposed by the Principal Market,
the SEC or any other governmental or regulatory body with respect to public
trading in the Common Stock.
(x) The
Company shall have delivered to such Buyer such other documents relating to
the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.
7. TERMINATION.
In
the
event that the Closing shall not have occurred with respect to a Buyer on or
before ten (10) Business Days from the date Buyer executed such Agreement due
to
the Company’s or such Buyer’s failure to satisfy the conditions set forth in
Sections 5 and 6 above (and the nonbreaching party’s failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party (but in the case
that a Buyer is the breaching party, only with respect to such breaching Buyer)
at the close of business on such date without liability of any party to any
other party.
In
the
event of termination by the Company or any Buyer of its obligations to effect
the Closing pursuant to this Agreement, written notice thereof shall forthwith
be given to the other Buyers and the other Buyers shall have the right to
terminate their obligations to effect the Closing upon written notice to the
Company and the other Buyers. Nothing in this Section 7 shall be deemed to
release any party from any liability for any breach by such party of the terms
and provisions of this Agreement or the other Transaction Documents or to impair
the right of any party to compel specific performance by any other party of
its
obligations under this Agreement or the other Transaction
Documents.
20
8. MISCELLANEOUS.
(a) Governing
Law; Consent to Jurisdiction; Waiver of Jury Trial.
This
Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of New York without regard to the choice of law principles
thereof. Each of the parties hereto irrevocably submits to the exclusive
jurisdiction of the courts of the State of New York located in New York County
and the United States District Court for the Southern District of New York
for
the purpose of any suit, action, proceeding or judgment relating to or arising
out of this Agreement and the transactions contemplated hereby. Service of
process in connection with any such suit, action or proceeding may be served
on
each party hereto anywhere in the world by the same methods as are specified
for
the giving of notices under this Agreement. Each of the parties hereto
irrevocably consents to the jurisdiction of any such court in any such suit,
action or proceeding and to the laying of venue in such court. Each party hereto
irrevocably waives any objection to the laying of venue of any such suit, action
or proceeding brought in such courts and irrevocably waives any claim that
any
such suit, action or proceeding brought in any such court has been brought
in an
inconvenient forum. EACH
OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY
LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN
CONSULTED SPECIFICALLY AS TO THIS WAIVER.
(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;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if
the
signature were an original, not a facsimile signature.
(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.
21
(e) Entire
Agreement; Amendments.
This
Agreement and the other Transaction Documents supersede all other prior oral
or
written agreements between the Buyers, the Company, their Affiliates and Persons
acting on their behalf with respect to the matters discussed herein and therein,
and this Agreement, the other Transaction Documents 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 amended other than by an instrument in writing signed
by
the Company and the holders of a majority of outstanding common stock issued
through this offering and any amendment to this Agreement made in conformity
with the provisions of this Section 9(e) shall be binding on all Buyers and
holders of Securities, as applicable; provided that any amendment of Sections
1(a)(iii), 4(a) through 4(d), and 5 shall require the consent of all Buyers;
provided, further, however, that any amendment that disproportionately affects
a
Buyer in a materially and adversely manner (except as a result of holding a
greater percentage of Common Stock) shall require prior written consent of
such
Buyer; provided further, however, that any Buyer may be added as a party to
this
Agreement in accordance with Section 1 of this Agreement by the Company without
the consent of the prior Buyers. No provision hereof may be waived other than
by
an instrument in writing signed by the party against whom enforcement is sought.
No such amendment shall be effective to the extent that it applies to less
than
all of the holders of the applicable Securities then outstanding. No
consideration shall be offered or paid to any Person to amend or consent to
a
waiver or modification of any provision of any of the Transaction Documents
unless the same consideration also is offered to all of the parties to the
Transaction Documents, holders of Common Stock or holders of the Warrants,
as
the case may be. The Company has not, directly or indirectly, made any
agreements with any Buyers relating to the terms or conditions of the
transactions contemplated by the Transaction Documents except as set forth
in
the Transaction Documents. Without limiting the foregoing, the Company confirms
that, except as set forth in this Agreement, no Buyer has made any commitment
or
promise or has any other obligation to provide any financing to the Company
or
otherwise.
(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
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one Business Day after deposit with an overnight courier service,
in
each case properly addressed to the party to receive the same. The addresses
and
facsimile numbers for such communications shall be:
If
to
the Company:
Composite
Technology Corporation
0000
XxXxx Xxxxxx
Xxxxxx,
Xxxxxxxxxx 00000
Telephone: (000)
000-0000
Facsimile: (000)
000-0000
Attention: Chief
Executive Officer
22
With
a copy to:
Xxxxxxxxxx
& Xxxxx, LLP
00000
Xxxxxxxx Xxxx., Xxxxx 000
Xxx
Xxxxxxx, Xxxxxxxxxx 00000
Telephone: (000)
000-0000
Facsimile: (000)
000-0000
Attention: Xxxxx
Xxxxx, Esq.
If
to
a Buyer or Buyers:
to
its
address and facsimile number set forth on the Schedule of Buyers, with copies
to
such Buyer’s representatives as set forth on the Schedule of Buyers.
or
to
such other address and/or facsimile number and/or to the attention of such
other
Person as the recipient party has specified by written notice given to each
other party five (5) Business Days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above,
respectively.
(g) Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, including any purchasers of the Common
Stock or the Warrants.
(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.
The
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4 and
8
shall survive the Closing. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
(j) 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 any 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.
(k) 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.
23
(l) Independent
Nature of Buyers’ Obligations and Rights.
The
obligations of each Buyer under any Transaction Document are several and not
joint with the obligations of any other Buyer, and no Buyer shall be responsible
in any way for the performance of the obligations of any other Buyer under
any
Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall
be
deemed to constitute the Buyers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers
are
in any way acting in concert or as a group with respect to such obligations
or
the transactions contemplated by the Transaction Documents. Each Buyer confirms
that it has independently participated in the negotiation of the transaction
contemplated hereby with the advice of its own counsel and advisors. Each Buyer
shall be entitled to independently protect and enforce its rights, including,
without limitation, the rights arising out of this Agreement or out of any
other
Transaction Documents, and it shall not be necessary for any other Buyer to
be
joined as an additional party in any proceeding for such purpose. Subject to
the
foregoing, the Company shall not offer or pay any consideration to any Buyer
to
secure such Buyer’s agreement to amend, or consent to a waiver or modification
of, any provision of any of the Transaction Documents unless the Company offers
the same consideration to all of the Buyers for such purpose. The Company
acknowledges that each of the Buyers has been provided with the same Transaction
Documents for the purpose of closing a transaction with multiple Buyers and
not
because it was required or requested to do so by any Buyer.
(m) Further
Assurances.
The
parties shall execute and deliver all such further instruments and documents
and
take all such other actions as may reasonably be required to carry out the
transactions contemplated hereby and to evidence the fulfillment of the
agreements herein contained.
(n) Publicity.
Except
as set forth below, no public release or announcement concerning the
transactions contemplated hereby shall be issued by the Company or the Buyers
without the prior consent of the Company (in the case of a release or
announcement by the Buyers) or the Buyers (in the case of a release or
announcement by the Company) (which consents shall not be unreasonably
withheld), except as such release or announcement may be required by law or
the
applicable rules or regulations of any securities exchange or securities market,
in which case the Company or the Buyers, as the case may be, shall allow the
Buyers or the Company, as applicable, to the extent reasonably practicable
in
the circumstances, reasonable time to comment on such release or announcement
in
advance of such issuance. By 8:30 a.m. (New York City time) on the Trading
Day
(as defined below) immediately following the Closing Date, the Company shall
issue a press release disclosing the consummation of the transactions
contemplated by this Agreement. The Company will file a Current Report on Form
8-K attaching the press release described in the foregoing sentence as well
as
copies of the Transaction Documents (including the Disclosure Schedule), on
the
first Trading Day immediately following the Closing. In addition, the Company
will make such other filings and notices in the manner and time required by
the
SEC or the Principal Market. Notwithstanding the foregoing, the Company shall
not publicly disclose the name of any Buyer, or include the name of any Buyer
in
any filing with the SEC (other than the Registration Statement and any exhibits
to filings made in respect of this transaction in accordance with periodic
filing requirements under the 0000 Xxx) or any regulatory agency or the
Principal Market, without the prior written consent of such Buyer, except to
the
extent such disclosure is required by law or trading market regulations, in
which case the Company shall provide the Buyers with prior notice of such
disclosure. For purposes of this Agreement, “Trading
Day”
means
(i) if the relevant stock or security is listed or admitted for trading on
The
New York Stock Exchange, Inc., the Nasdaq Global Market, the Nasdaq Capital
Market, any other national securities exchange, or the OTC Bulletin Board,
a day
on which such exchange is open for business; or (ii) if the relevant stock
or
security is quoted on a system of automated dissemination of quotations of
securities prices, a day on which trades may be effected through such
system.
24
(o) Material
Non-Public Information.
Following the consummation of the transactions contemplated by this Agreement,
the Company shall not, and shall cause its and its Subsidiaries' officers,
directors, employees and agents, not to, provide any Buyer with any material
non-public information regarding the Company without the express prior consent
of such Buyer.
[Signature
Page Follows]
25
IN
WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as
of
the date first written above.
|
COMPANY:
|
|
|
COMPOSITE
TECHNOLOGY CORPORATION
By:
Xxxxxx
X Xxxxxxxx
Chief
Executive Officer
|
IN
WITNESS WHEREOF, each Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as
of
the date first written above.
|
BUYERS:
|
|
|
Buyer
Signature
Authorized
Representative
Title
|
|
SUBSCRIPTION
ACCEPTANCE
Accepted
as of the ___ day of _________, 2007 as to $_______________ in purchase price
of
Units;
Subscription
price accepted being $______________
COMPOSITE
TECHNOLOGY CORPORATION
By:
Name: Xxxxxx
X
Xxxxxxxx
Title: Chief
Executive Officer
-
2
-
SCHEDULE
OF BUYERS
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
|
Buyer
|
Address
and
Facsimile
Number
|
Number
of Units
|
Purchase
Price
|
Legal
Representative’s Address and Facsimile Number
|
EXHIBITS
Exhibit
A Form
of
Warrants
Exhibit
B Form
of
Registration Rights Agreement
Exhibit
C Form
of
Company Counsel Opinion
Exhibit
D Form
of
Secretary’s Certificate
Exhibit
E Form
of
Officer’s Certificate
SCHEDULES
Schedule
of Buyers
Disclosure
Schedule
SCHEDULE
OF EXCEPTIONS
The
following exceptions are hereby made to the representations and warranties
made
by Composite Technology Corporation (the “Company”) contained in the Section 3
of the Securities Purchase Agreement, dated as of June 11, 2007 (the
“Agreement”) by and among the Company and the investors set forth therein. All
exhibits attached hereto are incorporated by reference where indicated. Any
terms defined in the Agreement shall have the same meaning when used in this
Schedule of Exceptions as when used in the Agreement, unless the content
otherwise requires.
Notwithstanding
any material qualifications in any of the Company’s representations and
warranties in the Agreement, for administrative ease, certain items have been
included which are not considered by the Company to be material to the business,
assets, or results of operations of the Company. The inclusion of any item
is
not an admission by the Company that the item is material to the business,
assets (including intangible assets), financial condition or results of
operations of the Company and is not an admission of any obligation or liability
to any third party.
Schedule
3(a)
Subsidiaries.
The
following are the Subsidiaries of the Company as that term is described in
Section 3a of the Agreement:
|
Correct
Name
|
Principal
Address
|
Jurisdiction
of Incorporation
|
Class
of Shares
|
Percentage
Ownership
|
|
|
1
|
CTC
Cable Corporation
|
0000
XxXxx Xxxxxx,
Xxxxxx
XX 00000
|
Nevada
|
Ordinary
|
100%
|
|
2
|
Transmission
Technology Corporation
|
0000
XxXxx Xxxxxx,
Xxxxxx
XX 00000
|
Nevada
|
Ordinary
|
100%
|
|
3
|
CTC
Towers & Poles Corporation
|
0000
XxXxx Xxxxxx,
Xxxxxx
XX 00000
|
Nevada
|
Ordinary
|
100%
|
|
4
|
XxXxxx
Inc.
|
0000
XxXxx Xxxxxx,
Xxxxxx
XX 00000
|
Nevada
|
Ordinary
|
100%
|
|
5
|
EU
Energy, Inc.
|
0000
XxXxx Xxxxxx,
Xxxxxx
XX 00000
|
Nevada
|
Ordinary
|
100%
|
|
6
|
XxXxxx
Ltd
|
000
Xxxxxxxx Xxxx
Xxxxxx
Xxxxxx, XX0 0XX
Xxxxxx
Xxxxxxx
|
UK
|
Ordinary
|
100%
|
|
0
|
XxXxxx
Xxxxxxxx Ltd
|
000
Xxxxxxxx Xxxx
Xxxxxx
Xxxxxx, XX0 0XX
Xxxxxx
Xxxxxxx
|
UK
|
Ordinary
|
100%
|
|
8
|
DeWind
Holdings Ltd
|
000
Xxxxxxxx Xxxx
Xxxxxx
Xxxxxx, XX0 0XX
Xxxxxx
Xxxxxxx
|
UK
|
Ordinary
|
100%
|
|
9
|
XxXxxx
GmbH
|
Xxxxxxxxxxxxxx
0
D-23569
Lubeck
Germany
|
Germany
|
Ordinary
|
100%
|
|
10
|
EU
Energy Turbines GmbH
|
Xxxxxxxxxxxxxx
0
D-23569
Lubeck
Germany
|
Germany
|
Ordinary
|
100%
|
|
11
|
E
Energy Service GmbH
|
Xxxxxxxxxxxxxx
0
D-23569
Lubeck
Germany
|
Germany
|
Ordinary
|
24.9%
|
Schedule
3(b)
Authorization;
Enforcement: None
Schedule
3 (c) Issuance of Shares: None
(d)
No
Conflicts: None
(e)
Consents: None
Schedule
3(f) Acknowledgement Regarding Buyers Purchase of Securities: None except that
the Company is relying upon the representations made by the buyers that no
buyer
is purchasing the Company securities for its own account and that no buyer
represents a beneficial owner.
(g)
No
General Solicitation: None
(h)
Private Placement: None
(i)
Dilutive effect: The impacts of the antidilution related to this transaction
are
currently limited to the following instruments:
1.
$5,013,200 of Convertible Debt (due 8/07) currently convertible at $1.47 prior
to the issuance of the common stock and related warrants. Antidilution is a
weighted average conversion price reset that is dependent on the total value
of
the common stock and intrinsic value of the warrants issued. Included in the
terms and conditions of the Auguat, 2004 Convertible Debt is a clause that
states, in effect that if the Company uses the proceeds to redeem the entire
remaining outstanding principal balance that there will be no anti-dilution
impact for the debt or for the related warrants as discussed in 2. below. We
are
currently evaluating the impact of this clause on this investment issuance.
If
it is determined that there will be an anti-dilution impact and we complete
the
proposed financing of $15,000,000 at a VWAP price of $1.25 per unit, the
estimated price reset would be approximately $0.02 per share to $1.45. The
additional shares issuable on a $0.02 conversion price change are
47,039.
2.
A
total of 4,307,275 warrants issued in 2004, related to the Convertible Debt,
with a current exercise price of $1.47 per warrant, expiring in 2008 have price
reset provisions that are calculated in the same manner as the price reset
of
the convertible debt listed in 1. above. A $0.02 price reset will result in
a
reduction of cash proceeds upon the exercise of these warrants in the amount
of
$86,146.
As
long
as the price per share and exercise price per warrant is greater than $1.13
per
share or warrant, there are no anti-dilution impacts for any of the remaining
securities with anti-dilution protection.
(j)
Application of Takeover Protections: None
(k)
SEC
Documents; Financial Statements: None
(l)
Absence of Certain Changes:
Operational
update from 3/31/07:
In
May,
2007 we announced the potential settlement of certain litigation with FKI
related to our XxXxxx subsidiaries and as described in our Form 10Q filed May
10, 2007. Under the terms of the settlement we have accrued for and tentatively
agreed to pay 1.5 million Euros to compensate FKI for cash claims made by XxXxxx
customers shortly after the acquisition of XxXxxx from FKI by EU Energy. The
tentative settlement and the payment of these funds are contingent on the
successful resolution of the German capital account issues. Such resolution
requires that Ernst and Young complete and approve their audits of XxXxxx for
the years ending March 31, 2003, 2004, and 2005. Upon the completion of these
audits, expected no earlier than September, 2007, we will then review the
capital account structure and paid in capital balances of the German
subsidiaries to agree to a settlement figure with FKI regarding the capital
accounts with and between FKI. Our maximum exposure on this issue is 1.5 million
Euros or approximately $2.0 million with payment to be in equal installments
28
days after final resolution and 90 days after the payment of the first
installment. We have potential recovery on this figure as follows: 1) in cash
to
the extent that FKI is required to return capital that we claim they improperly
repaid themselves through inter-company loans and which we believe could be
in
excess of the 1.5 million Euros and 2) as a potential misrepresentation of
the
true and accurate value of the assets and liabilities under the “carve-back”
clause of the acquisition documents between EU Energy by Composite Technology
Corporation. Under such a carve-back clause, we are allowed to recover common
shares at $1.55 per share for material misrepresentations made by the owners
and
management of EU Energy. We have not filed a claim to date under this
clause.
On
May
11, 2007 we formally noticed XRG Development Partners, LLC (XRG) that under
their Turbine Supply Agreement (TSA) dated March 27, 2007 that they were in
default of the agreement due to non-payment of scheduled monies due Composite
Technology Corporation. Under the terms of the TSA, XRG has a 30 day cure period
to remedy the payment issue before the contract is considered to be in default
and CTC is released from our obligations, including delivery of the turbines.
We
have received continued representations from XRG that they are working
diligently to secure funding and they have repeatedly represented to CTC that
they intend to remit payment prior to the 30 day cure period ending June 10,
2007.
On
May
14, 2007 we announced additional orders totaling approximately 180 kilometers
of
ACCC cable orders from Jiang-su Far East, our China distributor under their
contract dated January, 2007. The approximate value of these orders was $2.2
million.
On
May
15, 2007 we were served notice under the Supreme Court of the State of New
York,
County of New York by Enable Growth Partners, LP, Enable Opportunity Partners,
LP and Xxxxxx Diversified Strategy Master Fund, LLC (collectively “Enable”) of
legal action against Composite Technology Corporation pertaining to certain
anti-dilution provisions of our March 2006 Bridge Note warrants and our October,
2005 Debtor in Possession warrants. The complaint claims that CTC improperly
calculated the fair value of consideration provided to certain investors who
elected to convert their March, 2006 Bridge Notes in September, 2006. The
series’ of warrants in question carry “full ratchet” anti-dilution provisions.
Enable represents that the effective value of the stock issuance was $0.02
per
share and as such should result in a total of approximately 40,300,000 warrants
at an exercise price of approximately $0.02 per share. CTC records show that
the
Enable group currently has 774,000 warrants subject to anti-dilution protection
with exercise prices ranging from $1.04 to $1.32 per warrant. CTC represents
the
fair value was $1.06 per share issued which is equivalent to the market price
on
the date in question and maintains that that anti-dilution was properly
calculated. CTC believes it has sufficient defenses to this claim and intends
to
vigorously defend its position.
Between
April 14, 2007 and April 24, 2007 a total of $1.3 million of convertible debt
was converted by two investors into approximately 976,000 shares of Common
Stock.
Section
(l) (viii)
On
April
4, 2007 Xxxxxxx Xxxxxx resigned as President of Composite Technology Corporation
and agreed to a consultancy agreement expiring March 31, 2008.
On
April
4, 2007 the Company promoted Xxxxxx Xxxx to the position of Chief Operating
Officer and promoted Domonic (DJ) Xxxxxx to the position of Chief Financial
officer.
(m)
No
undisclosed events, liabilities, developments, or circumstances:
None
(n)
Use
of proceeds: None
(o)
Conduct of Business; Regulatory Permits: None
(p)
Xxxxxxxx-Xxxxx Act; Internal Controls: The Company has not completed its
assessment of the internal operating and disclosure controls relating to its
XxXxxx business and related European operations. The Company expects that
additional significant deficiencies and possibly material control weaknesses
exist in the European operations and the Company expects to continue to
identify, document, assess, and test the internal control structure in Europe
and the U.S. during the remainder of fiscal 2007 and that on-going remediation
of internal control and disclosure control weaknesses for both Europe and the
US
will continue during 2007.
The
Company disclosed the following internal control weaknesses in Form 10-K filed
December 26, 2006:
Fiscal
2006 Assessment.
We
have
excluded the internal control structure of our acquired subsidiary XxXxxx,
Ltd.
from the scope of our fiscal 2006 assessment since the acquisition was made
on
July 3, 2006, less than 90 days prior to our fiscal year end.
During
management's review of our internal control structure under Xxxxxxxx-Xxxxx
section 404, for the fiscal year ending September 30, 2006, we determined the
following to be material weaknesses:
Entity
level Processes and weaknesses. As of September 30, 2006, the following material
weaknesses existed related to general processes and weaknesses for the entity
taken as a whole:
o
Proper
segregation of duties and inadequate training did not exist as well as an
inadequate number of accounting and finance personnel staff at fiscal year
end.
o
The
Company had one member Audit Committee, a one member Compensation Committee,
and
had a designated financial expert on the Board of Directors since January of
2006. Until December, 2005 we only had a two person non-independent Board of
Directors and from January, 2006 through November, 2006 we had one independent
director and two non-independent directors comprising our Board of
Directors.
o
The
Company did not have an independent internal audit function due to the small
size of the organization.
These
material weaknesses related to the entity as a whole affect all of our
significant accounts and could result in a material misstatement to our annual
or interim consolidated financial statements that would not be prevented or
detected.
Information
Technology Controls (ITCs). ITCs are policies and procedures that relate to
many
applications and support the effective functioning of application controls
by
helping to ensure the continued proper operation of information systems. ITGCs
include four basic information technology (IT) areas relevant to internal
control over financial reporting: program development, program changes, computer
operations, and access to programs and data. As of September 30, 2006, a
material weakness existed relating to our information technology general
controls, including ineffective controls relating to:
o
Access
to programs and data including (1) user administration, (2) application and
system configurations, and (3) periodic user access validation
Inventory
Processes. As of September 30, 2006, the following material weaknesses existed
related to ineffective controls over our inventory processes:
o
Perpetual Inventory records: Ineffective controls to (a) accurately record
the
raw materials inventory moved out of inventory stores and into manufacturing
production and later into finished goods and, (b) accurately record
manufacturing variances.
Procure
to Pay process. During our fiscal 2006 assessment of the Company’s procure to
pay (cash payments and disbursements) cycle, we determined that there were
numerous significant control deficiencies relating primarily to inventory
purchasing and related purchasing and payable system control deficiencies.
If
assessed on an individual basis, none of these deficiencies were determined
to
be material weaknesses. However, taken in the aggregate we believe the following
constitute a material weakness:
|
i)
|
An
effective purchasing function did not exist during the entire fiscal
year.
|
||
|
ii)
|
There
were inadequate system driven matching controls over the receiving
function for inventory parts and supplies. Receiving tolerances for
inventory related pricing and quantities received are not established
systematically.
|
||
|
iii)
|
There
was a lack of segregation of duties between the purchasing and payable
processing functions.
|
||
|
iv)
|
There
were inadequate vendor management duties and responsibilities during the
year
|
||
|
v)
|
There
was a lack of sufficient purchasing reports for management
review.
|
||
(q)
Transactions with Affiliates: Refer to footnote 17, page 89 and footnote 19,
page 94 of the 10-K filed December 26, 2006 for explanation of our current
transactions with affiliates and footnote 12, page 27 of the 10-Q filed May
10,
2007. We have ongoing consulting arrangements with firms owned by Xxxx XxXxxxxx
for our Intellectual Property services and strategic advisory
services.
(r)
Equity Capitalization: Current issued and outstanding shares are 179,860,419
as
of May 15, 2007. See also securities convertible or exercisable into common
stock listed below:
As
of May
15, 2007 we have $5,013,200 of convertible debt outstanding that is convertible
at $1.47 (subject to price resets listed in i) above) into 3,410,340
shares.
As
of May
15, 2007 we have $22,525,000 of convertible debt outstanding that is convertible
at $1.04 into 21,658,654 shares.
As
of May
15, 2007 we have 15,029,336 options issued to employees and consultants at
an
average exercise price of $0.82 of which 6,,599,907 are vested with an average
exercise price of $0.52.
As
of May
15, 2007 we have 26,580,275 warrants outstanding at an average strike price
of
$1.28 per warrant.
Refer
to
10-Q Notes 7 and 8 pages 16-21 for a listing of options and warrants outstanding
as at March 31, 2007. Since March 31, 2007, we issued 1,000,000 options to
employees and cancelled 1,500,000 options granted to employees
(s)
Indebtedness and other Contracts:
Our
total
indebtedness as of April 30, 2007 consists of:
|
Convertible
Notes due August, 2007
|
$5,013,200
|
|
|
Convertible
Notes due January, 2010
|
$22,525,000
|
|
|
Capital
Leases - US
|
$
245,000
|
(secured
by certain US
assets)
|
|
Total
|
$27,783,200
|
(t)
Absence of litigation: See litigation footnote disclosure in form 10-Q Note
11,
page 23 and the operational update in (l) above.
(u)
Employee relations: for section iv: We are required to pay statutory minimum
“redundant” (severance) pay for German and UK employees in the event that we
were to terminate their services. In addition, we have employment agreements
for
the following individuals located in Europe which contain the following minimum
notice prior to termination, or payment at existing service rates if terminated
without notice. No payments required for termination with cause.
Xxxxxx
Xxxxxxx - 6 months (VP of Business Development)
Xxxxx
Xxxxxxx - 3 months (XxXxxx General Manager)
Xxxxxx
Xxxxx - 3 months (Chief Technology Officer and VP of Engineering)
Xxxxxx
Xxxxxxx - 3 months (Finance Director)
Xxxxxxxxx
Xxxxx - 3 months (Legal Counsel)
The
following was disclosed in our Form 10-K regarding employee relations and
severance payments related to our executive officers with employment agreements
consisting of Xxxxxxx Majendie and Xxxxxxx Xxxxxx:
Mr.
Xxxxxxx Majendie was originally employed in October 2002 as Director of
Operations, EMEA (Europe, Middle East, and Africa) of CTC. This
arrangement was replaced by an employment agreement dated October 1, 2003,
which
expires on September 30, 2008. He now occupies the position of Vice
President, Legal and Business Development. The essential terms of
his employment agreement are as follows:
o
Mr.
Majendie's annual base compensation, which was initially $120,000, increases
at
a minimum of 10% per year.
o
Mr.
Majendie is eligible for annual bonuses and bonuses based on revenue from
specific projects and sales he brings us.
o
Mr.
Majendie received an initial option to purchase up to 1,000,000 shares of common
stock, vesting with respect to 85,000 shares each quarter, issued as of August
11, 2003.
o
CTC
reimburses Mr. Majendie for all reasonable business expenses, and provides
him
with a $150 per month telephone allowance and a company car or car
allowance.
o
Mr.
Majendie is entitled to 18 months salary in the event that CTC merges, sells
a
controlling interest, or sells a majority of its assets.
o
In the
event that Mr. Majendie's employment is terminated due to his death, his
beneficiaries are entitled to his then current Base Salary through 60 days
after
his death.
o
Mr.
Majendie is required to maintain the confidentiality of CTC proprietary
information.
Mr.
Majendie was paid compensation of $120,000 per year for fiscal 2006.
Mr.
Xxxxxxx Xxxxxx was appointed President of the Company and his relationship
with
the Company is governed by an employment agreement dated July 3, 2006, which
expires on July 2, 2007. The agreement will be automatically renewed unless
the
Company gives Xx Xxxxxx not less than 30 days advance notice of its intention
not to continue the employment. In April, 2007 Xx. Xxxxxx retired from his
position.
The
essential terms of his employment agreement are as follows:
o
Xx.
Xxxxxx’x base salary is $400,000 per year; which may increase at the sole
discretion of the board.
o
Xx.
Xxxxxx is eligible to earn an annual bonus based upon the achievement, as
determined by the Company in its sole discretion.
o
Xx.
Xxxxxx’x term of employment is one year, automatically renewable unless the
Company provides 30 days written notice.
o
Xx.
Xxxxxx is eligible to participate in and shall be covered by any and all
medical, disability, life and other insurance plans, stock option incentive
programs, 401K plans and other benefits generally available to other employees
of the Company in similar employment positions. If medical insurance benefits
cannot be arranged for Xx. Xxxxxx and his wife, the Company agrees to pay his
medical expenses.
o
Xx.
Xxxxxx is eligible for four weeks of vacation per year.
o
In the
event of termination for cause, resignation or termination due to death or
disability, Xx. Xxxxxx is entitled to receive the Base Salary then in effect
and
the benefits set forth above through the effective date of the termination
or
resignation. No other payments or compensation of any kind.
o
In the
event of termination without cause or non-renewal by the company Xx. Xxxxxx
is
entitled to receive the Base Salary then in effect and the benefits set forth
above through the effective date of the termination or resignation, payments
at
the Base Salary for a period of six months and no other payments or compensation
of any kind.
o
Xx.
Xxxxxx is required to maintain the confidentiality of CTC proprietary
information.
o
Xx.
Xxxxxx is required to assign inventions, made or conceived or reduced to
practice during his employment with CTC.
o
For a
period of two years after employment, Xx. Xxxxxx is subject to non-solicitation
of employees, agents or representatives of the company and customers and clients
of the company.
o
Additionally, for a period of two years after employment, Xx. Xxxxxx is required
not to interfere in any way that would have an adverse effect on the business,
assets or financial condition of the Company.
o
During
the term of employment, Xx. Xxxxxx is required not to directly or indirectly
be
involved with any person or entity competitive with the company.
(v)
Title
to Property: The Company has leased certain equipment and other long lived
assets under leases with a cost basis of $1,282,339.40 on which there are
perfected security interests and for which the Company does not hold clear
title.
|
Asset
|
Description
|
Cost
|
|
IFC
Lease 1
|
Five
(5) Laptops; Ten (10) Desktops; Great Plains Software;
Power
Line Systems Software; Dynamic Methods Software;
Network
Servers, Routers, Equip; Desktop Software-various;
HP
DesignJest Plotter
|
$100,000.00
|
|
IFC
Lease 2
|
Office
chairs; Phone; Office Furniture Outlet; House to Office;
Telephone
Equipment; Telephone Equipment-ROI Networks;
Furniture;
House to Office Furniture Warehouse
|
$100,000.00
|
|
|
||
|
IFC
Lease 3
|
Durapul
1204 Pultrusion Machine, parts, attachments, and
accessories
|
$100,000.00
|
|
IFC
Lease 4
|
Durapul
1204 Pultrusion Machine & Frame with all parts,
attachments,
and accessories; Wet Tanks; Pultrusion Tools;
Metal
Dies; Parts and setup
|
$100,000.00
|
|
IFC
Lease 5
|
Torque
Control Conversion Kit; Dies; Epacio Burndy; Dispensing
Unit/Xxxxxx;
Bending Clamp Kit; Air Compressor; Xxxxx Forklift;
Computer
Network Equip; Xxxxxx Lathe; Xxxxxx Welder; Air
Compressor;
Xxxx Tool Room Lathe
|
$100,000.00
|
|
IFC
Lease 6
|
Goldsworthy
Pullmaster Machine with 24 x 8 inch Puller Envelope
with
all parts, attachments, and accessories
|
$60,000.00
|
|
IFC
Lease 7
|
CPE
Machine with 50 x 18 inch Envelope with all parts,
attachments,
and accessories
|
$240,000.00
|
|
IFC
Lease 8
|
Durapul
1204 Pultrusion Machine, parts, attachments, and
accessories
|
$99,750.00
|
|
IFC
Lease 9
|
Electromechanical
Testing Machine & Load Frame Height with
all
parts, attachments, and accessories; Tufting Heads with all parts,
attachments,
and accessories
|
$108,820.00
|
|
IFC
Lease 10
|
Two
(2) Reel-O-Matic Fractional HP Polyspeed Variable Speed
and
Torque Control Drives; Two (2) Reel-O-Matic Extra Guide
Boxes
with rollers and hardware; Integrated Tech, Inc.
Manufacturing
Software
system with all parts, attachments, and accessories
|
$97,390.40
|
|
IFC
Lease 11
|
Durapul
1204 Pultrusion Machines, parts, attachments, and
accessories
|
$150,000.00
|
|
CNC
Lease
|
One
(1) Xxxx CNC Manual Tool Room Lathe with all parts,
attachments,
and accessories
|
$26,379.00
|
Note:
A
total of four (4) Durapul 1204 Pultrusion Machines and related parts,
attachments, and accessories are included in the above-mentioned leases with
a
combined total cost of approximately $559,000.
In
addition, all assets related to the E. Service entity which are consolidated
with the operations and financial statements of the Company as at December
31,
2006 and September 30, 2006 are currently owned 75.1% by Enertrag as a result
of
the activity represented in the 8-K disclosure of January 27, 2007. Total assets
consolidated with and into CTC on December 31, 2006, including amounts
receivable from related parties (XxXxxx) were approximately $8.7 million at
December 31, 2006 and net assets (assets net of all liabilities) of negative
$200,000.
(w)
Intellectural Property: None
(x)
Tax
Status: None
(y)
Insurance: None
(z)
Ranking of Debentures: None
(aa)
Off
Balance Sheet Arrangements: None
(bb)
Manipulation of Price: None
(cc)
Company’s knowledge: None
Definition
of “Accredited Investor”
Category
A The
undersigned is an individual (not a partnership, corporation, etc.) whose
individual net worth, or joint net worth with his or her spouse, presently
exceeds $1,000,000.
Category
B The
undersigned is an individual (not a partnership, corporation, etc.) who had
an
income in excess of $200,000 in each of the two most recent years, or joint
income with his or her spouse in excess of $300,000 in each of those years
(in
each case including foreign income, tax exempt income and full amount of capital
gains and losses but excluding any income of other family members and any
unrealized capital appreciation) and has a reasonable expectation of reaching
the same income level in the current year.
Category
C The
undersigned is a director or executive officer of the Company which is issuing
and selling the securities.
Category
D The
undersigned is a bank; a savings and loan association; insurance company;
registered investment company; registered business development company; licensed
small business investment company (“SBIC”); or employee benefit plan within the
meaning of Title 1 of ERISA and (a) the investment decision is made by a plan
fiduciary which is either a bank, savings and loan association, insurance
company or registered investment advisor, or (b) the plan has total assets
in
excess of $5,000,000 or (c) is a self directed plan with investment decisions
made solely by persons that are accredited investors.
Category
E The
undersigned is a private business development company as defined in section
202(a)(22) of the Investment Advisors Act of 1940.
Category
F The
undersigned is either a corporation, partnership, Massachusetts business trust,
or non-profit organization within the meaning of Section 501(c)(3) of the
Internal Revenue Code, in each case not formed for the specific purpose of
acquiring the Securities and with total assets in excess of
$5,000,000.
Category
G The
undersigned is a trust with total assets in excess of $5,000,000, not formed
for
the specific purpose of acquiring the Securities, where the purchase is directed
by a “sophisticated investor“ as defined in Regulation 506(b)(2)(ii) under the
Act.
Category
H The
undersigned is an entity (other than a trust) in which all of the equity owners
are “accredited investors” within one or more of the above categories. If
relying upon this Category alone, each equity owner must complete a separate
copy of this Agreement.
