WHERIFY WIRELESS, INC. SECURITIES PURCHASE AND OPTION AGREEMENT As of February _, 2007
WHERIFY
WIRELESS, INC.
As
of
February _, 2007
1
THIS
SECURITIES PURCHASE AND OPTION AGREEMENT,
dated
as of this ______ day of February, 2007 (this “Agreement”),
is
between Wherify Wireless, Inc., a Delaware corporation (the “Company”),
and
GPS Associates, LLC, a Delaware limited liability company (the “Purchaser”).
WITNESSETH:
WHEREAS,
the
Company desires to issue to the Purchaser, and the Purchaser desire to purchase
from the Company, the Securities (as such term is defined below) as set forth
below (the “Offering”);
WHEREAS,
in
addition to purchasing the Securities, the Company desires to provide to the
Purchaser and the Purchaser desires to acquire the Option; and
WHEREAS,
certain
capitalized terms used in this Agreement are defined in Section
9.1
hereof.
NOW,
THEREFORE,
in
consideration of the promises and mutual covenants and agreements hereinafter
contained, and for good and valuable consideration the receipt and adequacy
of
which are hereby acknowledged, the parties hereto hereby agree as
follows:
| 1. |
Sale
and Purchase of Securities; the
Option.
|
1.1 Sale
and Purchase of Securities.
Subject
to the terms and conditions of this Agreement, on the Closing Date (as defined
in Section
3.1
hereof),
the Company shall issue, sell and deliver to the Purchasers, and the Purchasers
shall purchase from the Company for the Purchase Price (as defined in
Section
2.1
hereof)
(i) a 10% Senior Convertible Promissory Note in the aggregate principal amount
of $1,200,000 (the “Note”)
and
(ii) a five year warrant (the “Warrant”)
to
purchase Three Million (3,000,000) shares at an exercise price of $0.10 per
share (subject to adjustment as described therein), of the Company’s common
stock, par value $0.01 per share. (the “Common
Stock”).
The
Note and Warrant shall hereinafter sometimes be collectively referred to as
the
“Securities.”
The
principal amount of Note purchased and Warrant received by the Purchaser shall
be set forth on Schedule
1.1
hereto.
1.2 Option
to Purchase Series A Convertible Preferred Stock.
By
execution of this Agreement, the Company hereby grants to the Purchaser the
right to purchase (the “Option”)
an
aggregate of up to $7.5 million stated value of the Company’s Series A
Convertible Preferred Stock (the “A
Shares”),
which
A Shares shall have the terms set forth on Schedule
1.2
hereto.
The Option may be exercised at a 20% discount price to the face amount of A
Shares purchased by either:
| ◦ |
Exercise
in Full:
GPS may exercise the Option in full by electing to: (1) exchange
some, all
or none of the Note for the Preferred Stock and (2) delivering to
Wherify
before expiry of the Option that amount of gross cash proceeds which,
when
added to the face amount of the Note which is exchanged, equals
$6,000,000; or
|
| ◦ |
Partial
Option Exercise:
GPS may partially exercise the Option by delivering to Wherify before
expiry of the Option (1) a minimum amount of $4,500,000 in gross
cash
proceeds plus (2) some, all or none of the Note in an exchange ratio
of
$1.25 principal amount of Preferred for every $1.00 of Notes
exchanged.
|
2
The
Option may be exercised at any time or from time to time commencing on the
Closing Date until and including the later to occur of ninety (90) days
following the Closing Date Or June 2, 2007.
| 2. |
Purchase
Price.
|
2.1 Purchase
Price.
The
aggregate gross purchase price of the Securities to be purchased pursuant to
Section
1.1
shall be
$1,200,000 (the “Purchase
Price”).
2.2 Payment
of the Purchase Price.
At the
Closing (as defined in Section
3.1
hereof),
the Purchaser shall pay the Purchase Price from the Escrow Account, as defined
in Section
4.2
hereof
(less all fees and expenses owed to Xxxxxxx & Company (UK) Ltd.
(“Xxxxxxx”),
the
placement agent of the Offering and its counsel), by wire transfer of
immediately available funds to such account of the Company as shall have been
designated in advance to the Purchaser by the Company.
| 3. |
Closing.
|
3.1 Closing
Date.
The
closing of the sale and purchase of the Securities (the “Closing”)
shall
take place on or before February 28, 2007, at such other time, date or place
as
the parties hereto may mutually agree; provided,
that
all conditions to the Closing set forth in this Agreement have been satisfied
or
waived by such date. The date on which the Closing is held is referred to in
this Agreement as the “Closing
Date.”
At
the
Closing (i) the Company shall deliver, or cause to be delivered, the Note and
Warrant, each executed by the Company and (ii) the documents referred to in
Section
8
hereof.
| 4. |
Representations
and Warranties of the
Company
|
.
The
Company hereby represents, covenants and warrants as of the date hereof and
as
of the Closing Date to the Purchasers, acknowledging that the Purchasers are
relying upon the accuracy and completeness of the representations and warranties
set forth herein to, among other things, ensure that registration under Section
5 of the Securities Act is not required in connection with the sale of the
Securities hereby, as follows:
4.1 Organization
and Good Standing; Capitalization.
(a) The
Company and each Subsidiary is duly organized, validly existing and in good
standing under the laws of the state of Delaware and has the corporate power
and
authority to own, lease and operate its properties and assets and to carry
on
its business as now conducted and as it is proposed to be conducted. The Company
is duly qualified or authorized to do business as a foreign corporation and
is
in good standing under the laws of each jurisdiction in which the conduct of
its
business or the ownership of its properties or assets requires such
qualification or authorization.
(b) All
the
outstanding shares of capital stock of the Company have been duly authorized,
and are validly issued, fully paid and non-assessable. Except for the Option
and
as disclosed in the SEC Reports (as defined in Section
4.9
hereof)
or on Schedule
4.1(b)
(i)
there is no option, warrant, call, right, commitment or other agreement of
any
character to which the Company is a party, (ii) there are no securities of
the
Company outstanding which upon conversion or exchange, and (iii) there are
no
share appreciation rights, or other similar rights based on securities of the
Company which, in the case of clause (i), (ii) or (iii), would require the
issuance, sale or transfer of any additional shares of capital stock or other
equity securities of the Company or other securities convertible into,
exchangeable for or evidencing the right to subscribe for or purchase share
capital or other equity securities of the Company. Other than as disclosed
in
the SEC Reports and contemplated by this Agreement or Transaction Documents
(as
defined in Section
4.2),
the
Company is not a party to, nor is it aware of, any voting trust or other voting,
stockholders or similar agreement with respect to any of the securities of
the
Company or of any agreement relating to the issuance, sale, redemption, transfer
or other disposition of the shares of capital stock on other securities of
the
Company.
3
4.2 Authorization
of Agreement; Enforceability.
The
Company has all requisite corporate power and authority to execute and deliver
this Agreement and each other agreement, document, instrument and certificate,
including, but not limited to, the Note, the Warrant, the Xxxxxxx Warrant,
the
Escrow Agreement by and among Signature Bank, the Purchaser and the Company,
dated February 8, 2007 (the “Escrow
Agreement”),
and
the Registration Rights Agreement, to be executed by the Company in connection
with the consummation of the transactions contemplated by this Agreement
(collectively, the “Transaction
Documents”),
and
to perform fully its obligations hereunder and thereunder (including, but not
limited to, granting the Option). The execution, delivery and performance by
the
Company of this Agreement (including, but not limited to, granting the Option)
and the Transaction Documents have been duly authorized by all necessary
corporate action on the part of the Company and its stockholders. This Agreement
and each of the Transaction Documents have been duly and validly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery thereof by the Purchaser, this Agreement and each of the Transaction
Documents constitutes the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with its respective terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting creditors’ rights and remedies generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity).
4.3 No
Conflicts.
The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated thereby
(including, but not limited to, granting the Option), do not and will not (i)
conflict with or violate any provision of the Company’s and/or any Subsidiary’s
Articles of Incorporation or by-laws and any and all amendments thereto
(collectively, the “Internal
Documents”),
(ii)
conflict with, or constitute a default (or an event that with notice or lapse
of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise), or other
understanding to which the Company or any Subsidiary is a party or by which
any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or governmental authority
to which the Company or a Subsidiary is subject (including federal and state
securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected.
4.4 Subsidiaries,
Joint Ventures, Partnerships, Etc.
(a) As
of the
Closing Date, (i) Wherify California, Inc., a California corporation (ii) IQ
Biometrix Operations, Inc., a Delaware corporation and (iii) Wherify Wireless,
Inc., a Canadian corporation (collectively the “Subsidiaries”)
are
the only subsidiaries of the Company. Each Subsidiary is wholly owned by the
Company, is duly organized, validly existing and in good standing under the
laws
of the jurisdiction of its incorporation with corporate power and corporate
authority under such laws to own, lease and operate its properties and conduct
its business as currently conducted; and is duly qualified to transact business
as a foreign corporation and is in good standing (if applicable) in each other
jurisdiction in which it owns or leases property of a nature, or transacts
business of a type, that would make such qualification necessary other than
such
qualifications which the failure to have would not reasonably be expected to
have a Material Adverse Effect.
4
(b) Neither
the Company nor its Subsidiaries is a party to any joint venture, partnership
or
similar arrangement or agreement.
4.5 Consents
of Third Parties.
None of
the execution and delivery by the Company of this Agreement and the Transaction
Documents, the consummation of the transactions contemplated hereby or thereby,
or compliance by the Company with any of the provisions hereof or thereof will
(a) conflict with, or result in the breach of, any provision of the Certificate
of Incorporation or Bylaws of the Company (or any Subsidiary), (b) conflict
with, violate, result in the breach or termination of, or constitute a default
or give rise to any right of termination or acceleration or right to increase
the obligations or otherwise modify the terms thereof under any Permit or Order
to which the Company (or any Subsidiary) is a party or any Contract to which
the
Company or its Subsidiaries is bound or by which the Company or any of its
properties or assets is bound, other than such conflicts, violations, breaches,
defaults, termination or accelerations that would not reasonably be expected
to
have a Material Adverse Effect, (c) constitute a violation of any Law applicable
to the Company (or any Subsidiary) or (d) result in the creation of any Lien
upon the properties or assets of the Company (or any Subsidiary). No consent,
waiver, approval, Order, Permit or authorization of, or declaration or filing
with, or notification to, any Person or Governmental Body is required on the
part of the Company and/or its Subsidiaries in connection with the execution
and
delivery of this Agreement (including, but not limited to, the granting of
the
Option) and/or the Transaction Documents, or the compliance by the Company
with
any of the provisions hereof or thereof.
4.6 Authorization
of Securities.
(a) On
the
Closing Date, the issuance, sale, and delivery of the Option and the Securities
to be purchased pursuant to Section
1.1
will
have been duly authorized by all requisite action of the Company, and, when
issued, sold, delivered and paid for in accordance with this Agreement, the
Securities will be validly issued and outstanding, with no personal liability
attaching to the ownership thereof.
(b) On
the
Closing Date, the issuance and delivery of the shares of Common Stock to be
delivered upon conversion of the Notes (the “Conversion
Shares”)
and
upon exercise of the Warrants (the “Warrant
Shares”)
in
accordance with the terms thereof (collectively, the Conversion Shares and
the
Warrants Shares, the “Underlying
Shares”)
will
have been duly authorized by all requisite action of the Company and, when
issued and delivered in accordance with the terms of the Securities, the
Underlying Shares will be validly issued and outstanding, fully paid and
non-assessable, with no personal liability attaching to the ownership thereof,
and not subject to preemptive or any other similar rights of the stockholders
of
the Company or others.
4.7 Capitalization.
Other
than the Option and as disclosed in the SEC Reports, (i) there are no
outstanding securities of the Company or any of its Subsidiaries which contain
any preemptive, redemption or similar provisions, nor is any holder of
securities of the Company or any Subsidiary entitled to preemptive or similar
rights arising out of any agreement or understanding with the Company or any
Subsidiary by virtue of any of the Transaction Documents, and there are no
contracts, commitments, understandings or arrangements by which the Company
or
any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries; (ii) the Company does not have any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan
or agreement; and (iii) there are no outstanding options, warrants, script
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, except as a result of the purchase and sale of
the
Transaction Securities, or rights or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings, or
arrangements by which the Company or any Subsidiary is or may become bound
to
issue additional shares of Common Stock, or securities or rights convertible
or
exchangeable into shares of Common Stock.
5
4.8 SEC
Reports; Financial Statements.
The
Company has filed all reports required to be filed by it under the Securities
Act and the Exchange Act, including pursuant to Section 13(a) or Section 15(d)
of the Exchange Act, for the one (1) year preceding the date hereof (or such
shorter period as the Company was required by law to file such material) (the
foregoing materials, including the exhibits thereto, being collectively referred
to herein as the “SEC
Reports”).
As of
their respective dates, the SEC Reports complied in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission promulgated thereunder, as applicable, and none
of
the SEC Reports, when filed, 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 light of the circumstances under
which they were made, not misleading. All material agreements to which the
Company is a party or to which the property or assets of the Company are subject
have been filed as exhibits to the SEC Reports to the extent required. The
financial statements of the Company included in the SEC Reports comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time
of
filing. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (“GAAP”),
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments. Additionally, since the adoption of
the
Xxxxxxxx-Xxxxx Act of 2002 (the “New
Act”)
and to
the extent that the Company is subject to the New Act, the Company has complied
in all material respects with the laws, rules and regulation under the New
Act.
4.9 Material
Changes.
Since
September 30, 2006 and other than as disclosed in the SEC Reports (i) there
has
been no event, occurrence or development that has had or that could reasonably
be expected to result in a Material Adverse Effect, (ii) the Company has not
incurred any material liabilities (contingent or otherwise) other than (A)
trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected
in the Company’s financial statements pursuant to GAAP or required to be
disclosed in filings made with the Commission, (iii) the Company has not altered
its method of accounting or the identity of its auditors, (iv) the Company
has
not declared or made payment or distribution of any dividend or distribution
of
cash or other property to its holders of Common Stock or purchased, redeemed
or
made any agreements to purchase or redeem any shares of its capital stock and
(v) the Company has not issued any equity securities to any officer, director
or
Affiliate, except pursuant to existing Company stock option plans.
4.10 Intentionally
not used.
4.11 No
Undisclosed Liabilities.
Other
than as disclosed in the SEC Reports, neither the Company nor its Subsidiaries
has any liabilities (whether accrued, absolute, contingent or otherwise, and
whether due or to become due or asserted or unasserted), except (a) liabilities
provided for in the Financial Statements (other than liabilities which, in
accordance with GAAP, need not be disclosed), (b) liabilities disclosed on
Schedule
4.11
hereto
and (c) liabilities incurred in the ordinary course of business which do not
materially exceed historic levels.
6
4.12 Absence
of Certain Developments.
Since
September 30, 2006, other than as disclosed in the SEC Reports, in the ordinary
course of business or in the context of the Transactions contemplated in this
Agreement and the Transaction Documents:
(a) there
has
not been any Material Adverse Change nor has any event occurred which could
result in any Material Adverse Change other than those matters as disclosed
in
the SEC Reports;
(b) there
has
not been any declaration, setting a record date, setting aside or authorizing
the payment of, any dividend or other distribution in respect of any shares
of
capital stock of the Company or its Subsidiaries or any repurchase, redemption
or other acquisition by the Company or its Subsidiaries, of any of the
outstanding shares of capital stock or other securities of, or other ownership
interest in, the Company or its Subsidiaries;
(c) there
has
not been any transfer, issue, sale or other disposition by the Company of any
shares of capital stock or other securities of the Company or its Subsidiaries
or any grant of options, warrants, calls or other rights to purchase or
otherwise acquire shares of such capital stock or such other securities other
than those matters as disclosed in the SEC Reports;
(d) neither
the Company nor its Subsidiaries has (i) awarded or paid any bonuses to
employees or representatives of the Company, (ii) entered into any employment,
deferred compensation, severance or similar agreements (nor amended any such
agreement), other than in the ordinary course of business other than those
matters as disclosed in the SEC Reports;
(e) neither
the Company nor its Subsidiaries has made any loans, advances (other than
advances to officers and employees of the Company or its Subsidiaries which
advances are made in the ordinary course of business), or capital contributions
to, or investments in, any Person or paid any fees or expenses to any Affiliate
of the Company other than its Subsidiaries;
(f) neither
the Company nor its Subsidiaries has transferred or granted any rights under
any
Contracts or licenses, used by the Company in its business other than those
matters as disclosed in the SEC Reports;
(g) there
has
not been any damage, destruction or loss, whether or not covered by insurance,
with respect to the property or assets of the Company or its Subsidiaries having
a replacement cost of more than $10,000 for any single loss or $20,000 for
all
such losses;
(h) neither
the Company nor its Subsidiaries has mortgaged, pledged or subjected to any
Lien
any of its assets, or acquired any assets for a purchase price in excess of
$50,000 in the aggregate or sold, assigned, transferred, conveyed, leased or
otherwise disposed of any assets of the Company or its Subsidiaries for a sale
price in excess of $50,000 in the aggregate except for assets acquired or sold,
assigned, transferred, conveyed, leased or otherwise disposed of in the ordinary
course of business other than those matters as disclosed in the SEC
Reports;
(i) neither
the Company nor its Subsidiaries has canceled or compromised any debt or claim,
or amended, canceled, terminated, relinquished, waived or released any Contract
or right, except in the ordinary course of business consistent with past
practice and which, individually or in the aggregate, would not be material
to
the Company or its Subsidiaries other than those matters as disclosed in the
SEC
Reports;
7
(j) neither
the Company nor its Subsidiaries has made any binding commitment to make any
capital expenditures or capital additions or betterments in excess of $20,000
individually or $50,000 in the aggregate;
(k) neither
the Company nor its Subsidiaries has incurred any debts, obligations or
liabilities, whether due or to become due, except current liabilities incurred
in the ordinary course of business, none of which current liabilities
(individually or in the aggregate) could result in a Material Adverse Change
other than those matters as disclosed in the SEC Reports;
(l) neither
the Company nor its Subsidiaries has entered into any transaction other than
in
the ordinary course of business except for (in the case of the Company) this
Agreement other than those matters as disclosed in the SEC Reports;
(m) neither
the Company nor its Subsidiaries has encountered any labor difficulties or
labor
union organizing activities;
(n) neither
the Company nor its Subsidiaries has made any change in the accounting
principles, methods or practices followed by it or depreciation or amortization
policies or rates theretofore adopted;
(o) neither
the Company nor its Subsidiaries has disclosed to any Person any material trade
secrets except for disclosures made to Persons subject to valid and enforceable
confidentiality agreements;
(p) neither
the Company nor its Subsidiaries has suffered or experienced any change in
the
relationship or course of dealings between the Company and/or its Subsidiaries
and any of their suppliers or customers which supply goods or services to the
Company or its Subsidiaries or purchase goods or services from the Company
and
or its Subsidiaries other than those matters as disclosed in the SEC Reports;
and
(q) neither
the Company nor its Subsidiaries has made any payment to, or received any
payment from, or made or received any investment in, or entered into any
transaction or series of related transactions (including without limitation,
the
purchase, sale, exchange or lease of assets, property or services, or the making
of a loan or guarantee) with any Affiliate in each case, in excess of $50,000
or
its equivalent (other than any transactions between or among the Company and
its
Subsidiaries) (each, an “Affiliate
Transaction”)
other
than those matters as disclosed in the SEC Reports.
8
4.13 Tax
Status.
The
Company and its Subsidiaries have 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. To the best of the Company’s knowledge, 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.
4.14 Real
Property.
The
Company currently has leased certain locations for office space and all material
leases, all of which leases are disclosed (including the terms of such leases)
in the SEC Reports.
4.15 Tangible
Personal Property; Assets.
All
material items of personal property and assets owned or leased by the Company
and its Subsidiaries are in good operating condition, normal wear and tear
excepted.
9
4.16 Intangible
Property.
The
Company and its Subsidiaries own, or possess adequate rights or licenses to
use
all trademarks, trade names, service marks, service xxxx registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct
their
respective businesses as now conducted, the lack of which could reasonably
be
expected to have a Material Adverse Effect. The Company and its Subsidiaries
do
not have any knowledge of any infringement by the Company or its Subsidiaries
of
trademarks, trade name rights, patents, patent rights, copyrights, inventions,
licenses, service names, service marks, service xxxx registrations, trade
secrets or other similar rights of others, or of any such development of similar
or identical trade secrets or technical information by others and no claim,
action or proceeding has been made or brought against, or to the Company’s
knowledge, has been threatened against, the Company or its Subsidiaries
regarding trademarks, trade name rights, patents, patent rights, inventions,
copyrights, licenses, service names, service marks, service xxxx registrations,
trade secrets or other infringement, except where such infringement, claim,
action or proceeding would not reasonably be expected to have either
individually or in the aggregate a Material Adverse Effect. None of the
Company’s employees, officers, or consultants are obligated under any contract
(including licenses, covenants, or commitments of any nature) or other
agreement, or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the use of such employee’s,
officer’s, or consultant’s commercially reasonable efforts to promote the
interests of the Company or that would conflict with the Company’s business as
conducted. Neither the execution nor delivery of the Transaction Documents,
nor
the carrying on of the Company’s business by the employees of the Company, nor
the conduct of the Company’s business, will, to the Company’s knowledge,
conflict with or result in a breach of the terms, conditions, or provisions
of,
or constitute a default under, any contract, covenant, or instrument under
which
any of such employees, officers or consultants are now obligated.
4.17 Material
Contracts.
Other
than as disclosed in the SEC Reports or set forth on Schedule
4.17,
(a)
neither
the Company nor its Subsidiaries nor any of their respective properties or
assets is a party to or bound by any (i) Contract not made in the ordinary
course of business, or involving a commitment or payment by the Company or
any
Subsidiary in excess of $50,000 or, in the Company’s belief, otherwise material
to the business of the Company or its Subsidiaries, (ii) Contract among members
or granting a right of first refusal or for a partnership or a joint venture
or
for the acquisition, sale or lease of any assets or share capital of the Company
or any other Person or involving a sharing of profits, (iii) mortgage, pledge,
conditional sales contract, security agreement, factoring agreement or other
similar Contract with respect to any real or tangible personal property of
the
Company or its Subsidiaries, (iv) loan agreement, credit agreement, promissory
note, guarantee, subordination agreement, letter of credit or any other similar
type of Contract, (v) Contract with any Governmental Body outside the ordinary
course of business, (vi) Contract with respect to the discharge, storage or
removal of hazardous materials or (vii) binding commitment or agreement to
enter
into any of the foregoing.
(b) (i)
Each
of the Contracts disclosed in the SEC Reports and listed on Schedule
4.17
is valid
and enforceable against the Company or its Subsidiaries in accordance with
its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors’ rights and remedies generally and subject,
as to enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding at law or in equity), and, except as
disclosed in the SEC Reports or on Schedule
4.17,
there
is no default under any Contract disclosed in the SEC Reports and listed on
Schedule
4.17
by the
Company or any of its Subsidiaries or, to the knowledge of the Company, by
any
other party thereto, which is likely to have a Material Adverse Effect, and
no
event has occurred that with the lapse of time or the giving of notice or both
would constitute a default by the Company thereunder which is likely to have
a
Material Adverse Effect.
(ii) No
previous or current party to any Contract has given written notice to the
Company or any Subsidiary of, or made a claim, verbal or written, with respect
to any breach or default thereunder and the Company has no knowledge of any
notice of or claim with respect to any such breach or default other than such
notices or claims with respect to any such breaches or defaults that would
not,
either individually or in the aggregate, be reasonably expected to have a
Material Adverse Effect other than those matters as disclosed in the SEC
Reports.
(c) With
respect to the Contracts disclosed in the SEC Reports and listed on Schedule
4.17
that
were assigned to the Company or any Subsidiary by a third party, all necessary
consents to such assignment have been obtained other than such contents which
the failure to obtain would not be reasonably expected to have a Material
Adverse Effect.
4.18 Employee
Benefits.
Except
as disclosed in the SEC Reports or set forth on Schedule
4.18,
neither
the Company nor any of its Subsidiaries has in effect any employment agreements,
consulting agreements, deferred compensation, pension or retirement agreements
or arrangements, bonus, incentive or profit-sharing plans or arrangements,
or
labor or collective bargaining agreements, written or oral. The Company and
its
Subsidiaries are in compliance in all material respects with all applicable
Laws
relating to labor, employment, fair employment practices, terms and conditions
of employment, and wages and hours.
4.19 Employees.
(a) No
key
executive Employee, group of Employees nor independent contractors of the
Company or its Subsidiaries has announced or in any other manner communicated
to
the Company any plans to terminate his or her employment or relationship as
an
Employee or independent contractor with the Company or its
Subsidiaries.
(b) To
the
best of the Company’s knowledge, no key executive Employee or any other Employee
of the Company or its Subsidiaries is a party to or is otherwise bound by any
agreement or arrangement (including, without limitation, confidentiality
agreements, non- competition agreements, licenses, covenants, or commitments
of
any nature), or subject to any judgment, decree, or Order of any court or
Governmental Body, (i) that would conflict with such employee’s obligation
diligently to promote and further the interest of the Company or its
Subsidiaries or (ii) that would conflict with the Company’s (or its
Subsidiaries) business as now conducted or as proposed to be
conducted.
(c) Schedule
4.19(c)
sets
forth a list of each of the key executive Employees of the Company who have
entered into an employment and/or confidentiality agreement with the Company.
It
is understood that all employees of the Company are covered by employment
agreements or employment contracts, as appropriate, which contain signed
confidentiality agreements with the Company.
10
4.20 Litigation.
Other
than is disclosed in the SEC Reports or is set forth on Schedule
4.20,
there
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, currently threatened against
or
affecting the Company, any Subsidiary or any of their respective properties
before or by any court, arbitrator, governmental or administrative agency
and/or
regulatory authority (federal, state, county, local or foreign), (collectively,
an “Action”)
which
does and/or could (i) adversely affects or challenges the legality, validity
or
enforceability of any of the Transaction Documents and/or the Transaction
Securities or to consummate the transactions contemplated hereby or thereby
or
(ii) could, if there were an unfavorable decision, have or reasonably be
expected to result in, either individually or in the aggregate, a Material
Adverse Effect. The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the Company
or any Subsidiary under the Exchange Act or the Securities Act. The foregoing
includes, without limitation, actions, pending or threatened (or any basis
therefor known to the Company), involving the prior employment of any of
the
Company’s employees, their use in connection with the Company’s business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers.
The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment, or decree of any court or government agency or
instrumentality.
4.21 Compliance
with Laws; Permits.
Other
than as disclosed in the SEC Reports, neither the Company nor any Subsidiary
(i)
is in default under or in violation of (and no event has occurred that has
not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it
is
in violation of, any indenture, mortgage, decree, lease, license, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its
business, except in the case of clauses (i), (ii) and (iii) as would not result
in a Material Adverse Effect. Neither the Company nor any of the Subsidiaries
has received any written notice of any violation of or noncompliance with,
any
federal, state, local or foreign laws, ordinances, regulations and orders
(including, without limitation, those relating to environmental protection,
occupational safety and health, federal securities laws, equal employment
opportunity, consumer protection, credit reporting, “truth-in-lending”, and
warranties and trade practices) applicable to its business or to the business
of
any Subsidiary, the violation of, or noncompliance with, which would have a
materially adverse effect on either the Company’s business or operations, or
that of any Subsidiary, and the Company knows of no facts or set of
circumstances which would give rise to such a notice. The execution, delivery,
and performance of the Transaction Documents and the consummation of the
transactions contemplated thereby will not result in any such violation or
be in
conflict with or constitute, with or without the passage of time and giving
of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree or contract, or an event which results in the creation of any
lien,
charge, or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business
or
operations, or any of its assets or properties, except as would not reasonably
be expected to have a Material Adverse Effect.
4.22 Environmental
and Safety Laws.
Neither
the Company nor its Subsidiaries are in violation of any applicable Laws
relating to the environment or occupational health and safety where the failure
to so comply could have a Material Adverse Effect and no material expenditures
are or will be required in order to comply with any such existing
Laws.
4.23 Investment
Company Act.
The
Company is not, nor is it directly or indirectly controlled by or acting on
behalf of, any Person that is an investment company within the meaning of the
Investment Company Act of 1940, as amended.
4.24 Financial
Advisors.
Except
for Xxxxxxx, no agent, broker, investment banker, finder, financial advisor
or
other Person is or will be entitled to any broker’s or finder’s fee or any other
commission or similar fee from the Company, directly or indirectly, in
connection with the transactions contemplated by this Agreement or any
Transaction Document and no Person is entitled to any fee or commission or
like
payment from the Company in respect thereof based in any way on agreements,
arrangements or understandings made by or on behalf of the Company.
11
4.25 Condition
of Properties.
All
facilities, machinery, equipment, fixtures, vehicles and other properties owned,
leased or used by the Company and its Subsidiaries are in good operating
condition and repair, are reasonably fit and usable for the purposes for which
they are being used, are adequate and sufficient for the Company and its
Subsidiaries respective businesses and conform in all material respects with
all
applicable Laws.
4.26 Pending
Changes.
The
Company has no knowledge of any development which might reasonably be expected
to result in a Material Adverse Affect on the operations or financial condition
of the Company or its Subsidiaries.
4.27 Securities
Laws.
The
Company has complied in all material respects with all applicable U.S. federal
and state securities laws in connection with (i) all offers, issuances and
sales
of its securities prior to the date hereof and (ii) the offer, issuance and
sale
of the Securities. All sales and issuances of currently outstanding securities
by the Company have been to accredited investors within the meaning of Rule
501
of Regulation D under the Securities Act. Prior to the Closing, neither the
Company nor anyone acting on its behalf has sold, offered to sell or solicited
offers to buy the Securities or similar securities to, or solicit offers with
respect thereto from, or entered into any preliminary conversations or
negotiations relating thereto with, any Person, so as to bring the issuance
and
sale of the Securities under the registration provisions of the Securities
Act,
and applicable state securities laws. Neither the Company nor any Person acting
on its behalf has offered the Securities to any Person by means of general
or
public solicitation or general or public advertising, such as by newspaper
or
magazine advertisements, by broadcast media, or at any seminar or meeting whose
attendees were solicited by such means.
4.28 Registration
Rights.
Except
for any rights granted under the Transaction Documents, no Person has demand
or
other rights to cause the Company to file any registration statement under
the
Securities Act relating to any securities of the Company or any right to
participate in any such registration statement other than those matters as
disclosed in the SEC Reports.
4.29 Disclosure;
Survival.
There
is no fact which has not been disclosed in the SEC Reports or otherwise
disclosed to the Purchasers of which the Company has knowledge and which has
had
or could reasonably be anticipated to result in a Material Adverse Change.
All
representations and warranties set forth in this Agreement or in any of the
Transaction Documents or in any writing or certificate delivered in connection
with this Agreement shall survive the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby for a period of
one
(1) year (the “Survival
Period”)
and
shall not be affected by any examination made for or on behalf of the Purchaser,
the knowledge of the Purchaser, or the acceptance by the Purchaser of any
certificate or opinion.
4.30 No
General Solicitation.
Neither
the Company, its Subsidiaries, any of their affiliates nor any person acting
on
their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in
connection with the offer or sale of the Notes and the Warrants.
4.31 Insurance.
The
Company has in full force and effect fire and casualty insurance policies,
with
extended coverage, sufficient in amount (subject to reasonable deductibles)
to
allow it to replace any of its properties that might be damaged or destroyed,
and the Company has insurance against other hazards, risks, and liabilities
to
persons and property to the extent and in the manner customary for companies
in
similar businesses similarly situated. To the extent that any premium payments
are not currently paid-up, the Company will endeavor to remedy such past due
instances promptly following the Closing Date.
12
4.32 Regulatory
Permits.
The
Company and the Subsidiaries possess all licenses, certificates, authorizations
and permits issued by the appropriate federal, state, local or foreign
regulatory authorities necessary to conduct their respective businesses, except
where the failure to possess such permits would not have or reasonably be
expected to result in a Material Adverse Effect (“Material
Permits”),
and
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of its business as planned to be conducted, and neither the
Company nor any Subsidiary has received any notice of proceedings relating
to
the revocation or modification of any Material Permit.
4.33 Title
to Property and Assets.
The
Company (and each Subsidiary) owns its property and assets free and clear of
all
mortgages, liens, loans, pledges, security interests, claims, equitable
interests, charges, and encumbrances, except (1) such encumbrances and liens
which arise in the ordinary course of business and do not materially impair
the
Company’s (and each Subsidiary’s) ownership or use of such property or assets
and (2) the security pledge to Cornell Capital Partners under the convertible
debenture agreements of March 2006, and any other matters as disclosed in the
SEC Reports. With respect to the property and assets it leases, the Company
(and
each Subsidiary) is in compliance with such leases and, to its knowledge, holds
a valid leasehold interest free of any material liens, claims, or
encumbrances.
4.34 Foreign
Assets Control Legislation.
Neither
the sale of the Notes nor the Warrants by the Company hereunder nor its use
of
the proceeds thereof will violate the Trading with the Enemy Act, as amended,
or
any of the foreign assets control regulations of the United States Treasury
Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
legislation or executive order relating thereto. Without limiting the foregoing,
neither the Company nor any of its Subsidiaries (a) is a person whose property
or interests in property are blocked pursuant to Section 1 of Executive Order
13224 of September 23, 2001 Blocking Property and Prohibiting Transactions
With
Persons Who Commit, Threaten to Commit, or Support Terrorism (66 Fed. Reg.
49079
(2001)) or (b) engages in any dealings or transactions, or be otherwise
associated, with any such person. The Company and its Subsidiaries, to their
full knowledge, are in compliance with the USA Patriot Act of 2001 (signed
into
law October 26, 2001).
| 5. |
Representations
and Warranties of the Purchaser.
The Purchaser hereby represents and warrants as of the date hereof
and as
of the Closing Date to the Company, acknowledging that the Company
is
relying upon the accuracy and completeness of the representations
and
warranties set forth herein to, among other things, ensure that
registration under Section 5 of the Securities Act is not required
in
connection with the sale of the Securities and the granting of the
Option
hereby, as follows
|
5.1 Organization;
Authority.
The
Purchaser is an entity duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization with full right,
corporate or limited liability company power and authority to enter into and
to
consummate the transactions contemplated by the Transaction Documents and
otherwise to carry out its obligations thereunder. The execution, delivery
and
performance by such Purchaser of the transactions contemplated by this Agreement
has been duly authorized by all necessary corporate or similar action on the
part of such Purchaser. Each Transaction Document to which it is a party has
been duly executed by such Purchaser, and when delivered by such Purchaser
in
accordance with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors’ rights generally and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies.
13
5.2 Investment
Intent.
The
Purchaser represents and warrants to the Company that it is (a) an “accredited
investor” as defined in Rule 501 of Regulation D of the Securities Act; and (b)
acquiring the Securities and the Option to be purchased by it pursuant to this
Agreement for investment and not with a view to the distribution
thereof.
5.3 Investment
Purposes.
(a) The
Purchaser is acquiring the Securities and the Option for investment purposes
only, for its own account, and not as nominee or agent for any other Person,
and
not with a view to, or for resale in connection with, any distribution thereof
within the meaning of the Securities Act, (b) it understands and acknowledges
that the Securities have not been registered under the Securities Act or any
other securities laws, (c) it is not an “affiliate” (as defined in Rule 144
under the Securities Act) of the Company, (d) it has such knowledge and
experience in financial and business matters as to be capable of evaluating
the
merits and risks of its investment, (e) each is an “accredited investor” within
the meaning of Rule 501 of Regulation D under the Securities Act, (f) the
Company has made available to it the opportunity to ask questions and to receive
answers, and to obtain information necessary to evaluate the merits and risks
of
this investment, and (g) the Purchaser understands, acknowledges and agrees
that
the Securities have not been registered under (and that the Company has no
present intention to register the Securities under) the Securities Act or
applicable state securities laws, and may not be sold or otherwise transferred
by the Purchaser to a United States person unless the Securities have been
registered under the Securities Act and applicable U.S. state securities laws
or
are sold or transferred in a transaction exempt therefrom.
5.4 Class
A Members
of
Purchaser. Each Class A Member of the Purchaser (the “Member”) is an “accredited
investor” as defined in Rule 501 of Regulation D of the Securities Act and each
member has represented and warranted to the Purchaser those certain
Representations and Warranties set forth in Section 5 of that certain
Subscription Agreement entered into between the Purchaser and the Class A
Members in connection with the Offering.
| 6. |
Further
Agreements of the Parties.
|
6.1 Reserved
Shares.
For so
long as the Securities are outstanding, the Company shall reserve that number
of
shares of Common Stock issuable upon conversion of the Notes and exercise of
the
Warrants, which shares shall not be subject to any preemptive or other similar
rights.
6.2 Access
to Information.
The
Purchaser and its representatives shall be entitled, upon reasonable notice,
to
make such investigation of the properties, business and operations of the
Company and such examination of the books, records and financial condition
of
the Company as it reasonably requests to make extracts and copies of such books
and records, upon reasonable notice during regular business hours. Any such
investigation and examination shall be conducted during regular business hours
and under reasonable circumstances without material interference with the
Company’s normal business operations, and the Company and its representatives
shall cooperate fully therein. No investigation by a Purchaser or its
Representatives prior to or after the date of this Agreement shall diminish
or
obviate any of the representations, warranties, covenants or agreements of
the
Company contained in this Agreement or the Transaction Documents. In order
for
Purchaser to have full opportunity to make such physical, business, accounting
and legal review, examination of the affairs of the Company and investigation
as
may be reasonably requested, the Company shall cause its Representatives to
cooperate fully with the Representatives of the Purchaser in connection with
such review and examination.
6.3 Confidentiality.
Except
as may be required by applicable Law or as otherwise agreed among the parties
hereto, neither the Company, the Purchaser nor any of its Affiliates shall
at
any time divulge, disclose, disseminate, announce or release any information
to
any Person concerning this Agreement, the Transaction Documents, the
transactions contemplated hereby or thereby, any trade secrets or other
confidential information of the Company or the Purchaser, without first
obtaining the prior written consent of the other parties hereto.
14
6.4 Other
Actions.
The
Company and the Purchaser agree to execute and deliver such other documents
and
take such other actions as the other parties may reasonably request for the
purpose of carrying out the intent of this Agreement and the Transaction
Documents.
6.5 Indemnification.
The
Company shall indemnify and hold harmless each Purchaser, the officers,
directors, agents and employees of each of them, each Person who controls any
such Purchaser (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted
by
applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, reasonable attorneys’ fees)
and expenses (including the cost [including without limitation, reasonable
attorneys’ fees] and expenses relating to an Indemnified Party’s (as defined
below) actions to enforce the provisions of this Section
6.5)
(collectively, “Losses”),
as
incurred, to the extent arising out of or relating to (i) any material
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents, or, (ii) any material breach of any
covenant, agreement or obligation of the Company contained in the Transaction
Documents, or (iii) any cause of action, suit or claim brought or made against
such Indemnified Party and arising out of or resulting from the execution,
delivery, performance or enforcement of the Transaction Documents executed
pursuant hereto by any of the Indemnified Parties. The Company will not be
liable to any Person entitled to indemnity hereunder (an “Indemnified
Party”)
under
this Agreement to the extent that any loses, claims, damages, liabilities,
costs
and expenses are attributable to any Indemnified Party’s breach of any of the
representations, warranties, covenants and agreements made in this Agreement
or
in the other Transaction Documents. If the indemnification provided for in
this
Section
6.5
is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any Losses, then the Indemnifying Party (as defined below),
in
lieu of indemnifying such Indemnified Party hereunder, shall contribute to
the
amount paid or payable by such Indemnified Party as a result of Losses in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the actions or omissions that resulted in such Losses as well as any other
relevant equitable considerations. The Company shall notify the Purchaser
promptly of the institution, threat or assertion of any proceeding of which
the
Company is aware in connection with the transactions contemplated by this
Agreement.
(b) Conduct
of Indemnification Proceedings.
If any
proceeding shall be brought or asserted against an Indemnified Party, such
Indemnified Party shall promptly notify the other party (the “Indemnifying
Party”)
in
writing, and the Indemnifying Party shall have the right to assume the defense
thereof, including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided,
however,
that
the failure of any Indemnified Party to give such notice shall not relieve
the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that such failure shall have materially and
adversely prejudiced the Indemnifying Party.
15
An
Indemnified Party shall have the right to employ separate counsel in any such
proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such proceeding and to employ counsel reasonably satisfactory to
such
Indemnified Party in any such proceeding; or (3) the named parties to any such
proceeding (including any impleaded parties) include both such Indemnified
Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing
that
it elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense thereof
and the reasonable fees and expenses of one separate counsel for all Indemnified
Parties in any matters related on a factual basis shall be at the expense of
the
Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such proceeding affected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of
any
pending proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party
from
all liability on claims that are the subject matter of such
proceeding.
The
indemnification obligations under this Section
6.5
are in
addition to any indemnification or similar obligations under any other
Transaction Document.
(d) The
provisions of this Section
6.5
shall
survive the termination of this Agreement for a period of three (3)
years.
(e) All
payments to be made to Purchaser pursuant to this Section
6.5,
shall
be paid no later than five (5) business days after request for payment is sent
to the Company.
6.6 Financial
Advisor.
In
connection with the sale of the Securities, Xxxxxxx & Company (UK) Ltd.
(“Xxxxxxx”)
shall
receive from the Company the fees and commissions provided for in that certain
Engagement Agreement dated February 6, 2007, including in connection therewith
a
5-year warrant (the “Xxxxxxx
Warrant”)
to
purchase 3,000,000 shares of Common Stock at an exercise price of $0.10 per
share, which may be exercised on a cashless basis, and shall have such other
terms and provisions, including registration rights as the parties have
agreed
| 7. |
Other
Obligations of the
Parties.
|
7.1 Public
Announcements.
The
Company hereby agrees not to, and not to permit its Subsidiaries to, issue
any
press release, or otherwise make any public statements (collectively,
“Press
Releases”)
with
respect to the transactions contemplated hereby without the prior written
consent of the Purchaser, except as may be required by law. Furthermore, where
the Company desires to issue any such Press Release, the parties agree to
cooperate in good faith in order to prepare such Press Release in such form
and
substance as is agreeable to both parties.
7.2 Furnishing
Information.
Each of
the parties hereto will, as soon as practicable after reasonable request
therefor, furnish all the information concerning it required for inclusion
in
any statement or application made by any of them to any governmental or
regulatory body in connection with the transactions contemplated by this
Agreement.
7.3 Transfer
Restrictions.
(a) The
Underlying Shares may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of the Underlying Shares other
than pursuant to an effective registration statement, the Company may require
the transferor thereof to provide to the Company an opinion of counsel selected
by the transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration of such transferred Underlying Shares under the Securities Act.
As
a condition of transfer, any such transferee shall agree in writing to be bound
by the terms of this Agreement and shall have the rights of a Purchaser under
this Agreement and the Registration Rights Agreement.
16
(b) The
Purchasers agree to the imprinting, so long as is required by this Section
7.3(b),
of a
legend on any of the Underlying Shares in the following form:
THESE
SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE AND ARE BEING OFFERED AND SOLD IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “SECURITIES
ACT”),
AND,
ACCORDINGLY, MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED OR OTHERWISE DISPOSED
OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL
TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY.
(c) Certificates
evidencing the Underlying Shares shall not contain any legend (including the
legend set forth in Section
7.3(b)
(i)
following any sale of the Underlying Shares pursuant to Rule 144, or (ii) if
such Underlying Shares are eligible for sale under Rule 144(k). The Company
agrees that at such time as such legend is no longer required under and pursuant
to this Section
7.3(c),
it
will, no later than three (3) Trading Days following the delivery by a Purchaser
to the Company (the “Delivery
Date”)
or the
Company’s transfer agent of a Note for conversion, a Warrant for exercise, a
restricted stock certificate or a lost securities affidavit if any of such
securities are lost, as the case may be, deliver to such Purchaser a certificate
representing Underlying Shares that is free from all restrictive and other
legends (the “Deadline”).
The
Company may not make any notation on its records or give instructions to any
transfer agent of the Company that enlarge the restrictions on transfer set
forth in this Section.
7.4 Underlying
Share Delivery Damages.
In the
event that a non-legended certificate for Underlying Shares is not received
by a
Purchaser by the Deadline, as partial compensation to the Purchaser for such
loss as a result of such delivery delay, the Company shall pay (as liquidated
damages and not a penalty) to the Purchaser for late issuance of the Underlying
Shares an amount of $100 per business day after the Deadline for each $100,000
of principal amount of the Note being converted, and/or or $100,000 of market
value (based upon the closing stock price of the Company on the Delivery Date)
of Underlying Shares of the Warrant being exercised for as the case may be,
which are not timely delivered. The liquidated damages in this Section 7.4
are
in addition to any shall not limit any other penalty provisions in the
Transaction Documents and shall not limit a Purchasers right to collect other
damages and/or remedies.
7.5 Integration.
The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of any of the Securities
in
a manner that would require the registration under the Securities Act of the
sale of the Securities to the Purchasers.
17
7.6 Use
of
Proceeds.
The
Company covenants and agrees that all of the net proceeds that it receives
from
the sale of the Notes and Warrants pursuant to this Agreement, shall be used
as
provided in Schedule
7.6
hereof.
7.7 Form
D
and Blue Sky.
The
Company shall file a Form D with respect to the Securities as required under
Regulation D under the Securities Act and, upon written request, provide a
copy
thereof to each Purchaser promptly after such filing. The Company shall, on
or
before the Closing, take such action as the Company shall reasonably determine
is necessary in order to obtain an exemption for or to qualify any Securities
for sale to the Purchasers pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States, and shall
provide evidence of any such action so taken to the Purchaser on or prior to
the
Closing. 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.
7.8 Reservation
of Common Stock.
As of
the date hereof, the Company has reserved and the Company shall continue to
reserve and keep available at all times, free of preemptive rights, a sufficient
number of shares of Common Stock for the purpose of enabling the Company to
issue the Conversion Shares and the Warrant Shares.
7.9 Securities
Laws Disclosure.
The
Company shall, by the end of the business on the fourth (4th)
Business Day following the Closing, issue a press release or file a Current
Report on Form 8-K, disclosing the transactions contemplated hereby and make
such other filings and notices in the manner and time required by the
Commission.
| 8. |
Conditions
to Closing.
|
8.1 Conditions
of Obligations of the Purchaser.
The
obligation of the Purchaser to purchase and pay for the Securities is subject
to
the fulfillment prior to or on the Closing Date of the following conditions,
any
of which may be waived in whole or in part by the Purchasers:
(a) Representations,
Warranties and Covenants.
The
representations and warranties of the Company under this Agreement shall be
deemed to have been made again on the Closing Date (other than those
representations and warranties made expressly as of a date prior to the Closing
Date) and shall then be true and correct. The Company shall represent to the
Purchaser that all of the information contained herein does not contain any
untrue statement of a material fact, or contain any omission of a material
fact
relating to such information that is necessary in order to make the information,
in light of the circumstances under which the information is provided, not
misleading.
(b) Compliance
with Agreement.
The
Company shall have performed and complied with all covenants, agreements and
conditions required by this Agreement to be performed or complied with by the
Company on or before the Closing Date.
(c) Approvals.
The
Company shall have obtained any and all consents, waivers, approvals or
authorizations, with or by any Governmental Body or any other Person required
for the valid execution of this Agreement and the transactions contemplated
hereby.
(d) No
Injunction.
No
Governmental Body or any other Person shall have issued an Order which shall
then be in effect restraining or prohibiting the completion of the transactions
contemplated hereby, nor shall any such Order be threatened or
pending.
18
(e) No
Material Adverse Change.
Since
September 30, 2006, there shall not have been a Material Adverse Change except
as disclosed in the SEC Reports.
(f) Certificate
of Officer.
The
Company shall have delivered to the Purchaser a certificate dated the Closing
Date, executed by its Chief Executive Officer and Chief Financial Officer,
certifying the satisfaction of the conditions specified in paragraphs (a),
(b),
(c), (d) and (e) of this Section
8.1.
(g) Opinion
of the Company’s Counsel.
The
Purchasers shall have received from Company counsel, in a form satisfactory
to
Purchasers and their counsel, an opinion dated the Closing Date (the
“Legal
Opinion”).
(h) Certificate
of Incorporation and By-Laws.
The
Certificate of Incorporation, as amended, and the By-Laws, shall be in full
force and effect as of the Closing under the laws of the State of Delaware
and
shall not have been further amended or modified. A certified copy of the
Certificate of Incorporation, as so amended, shall have been delivered to
counsel for the Purchasers.
(i) Closing
Documents Provided By Company.
The
Purchaser shall have received the following:
(i) a
Note in
favor of the Purchaser, duly executed by the Company, in the form and on the
terms contained in Schedule
1.1
herein;
(ii) a
Warrant
in the name of the Purchaser, duly executed by the Company, in the form and
on
the terms contained in Schedule
1.1
herein;
(iii) the
Registration Rights Agreement duly executed by the Company;
(iv) this
Agreement duly executed by the Company;
(v) Secretary’s
Certificate in a form reasonably acceptable to Purchaser, with good standing
certificates of the Company and each Subsidiary as of a recent
date;
(vi) Legal
Opinion;
(vii) Executed
10b-5 Letters from each executive Officer and Director of the
Company;
(viii) Such
other documents as Purchasers and/or its legal counsel may request and/or deem
necessary (including, but not limited to, a Good Standing Certificate of recent
date from the Secretary of State of the State of incorporation).
8.2 Conditions
of Company’s Obligations.
The
Company’s obligation to issue and sell the Securities to the Purchasers on the
Closing Date is subject to the fulfillment prior to or on the Closing Date
of
the following conditions, any of which may be waived in whole or in part by
the
Company:
(a) Representations
and Warranties.
The
representations and warranties of the Purchaser under this Agreement shall
be
deemed to have been made again on the Closing Date and shall then be true and
correct in all material respects.
19
(b) Compliance
with Agreement.
The
Purchasers shall have performed and complied with all agreements and conditions
required by this Agreement to be performed or complied with by such Purchaser
on
or before the Closing.
(c) Approvals.
The
Purchaser shall have obtained any and all consents, waivers, approvals, Permits
or authorizations, with or by any Governmental Body or any other Person required
for the valid execution of this Agreement and the transactions contemplated
hereby including, but not limited to the approval by.
(d) Payment
of Purchase Price.
The
Purchaser shall have delivered to the Company the Purchase Price specified
in
Section
2.1
hereof
(less commissions and all fees and expenses of Purchaser counsel).
(e) No
Injunction.
No
Governmental Body or any other Person shall have issued an Order which shall
then be in effect restraining or prohibiting the completion of the transactions
contemplated hereby including, but not limited to, the, Acquisition nor shall
any such Order be threatened or pending.
(f) Closing
Documents Provided By Purchaser.
The
Company shall have received the following:
(i) this
Agreement duly executed by the Purchaser; and
(ii) the
Registration Rights Agreement duly executed by the Purchaser; and
(iii) the
Subscription Agreement executed by the Members.
8.3 Post
Closing Obligations.
Following the Closing Date:
(i) the
Company shall file all necessary documents in accordance with their obligations
under the Security Agreement;
(ii) Purchaser
Counsel shall file all post closing Blue Sky filings in the necessary
jurisdictions.
| 9. |
Miscellaneous.
|
9.1 Certain
Definitions.
“Action”
shall
have the meaning ascribed to such term in Section
4.20.
“Affiliate”
of
any
Person means any Person that directly or indirectly controls, or is under
control with, or is controlled by, such Person. As used in this definition,
“control”
(including with its correlative meanings, “controlled
by”
and
“under
control with”)
shall
mean the possession, directly or indirectly, of the power to direct or cause
the
direction of the management or policies of a Person (whether through ownership
of securities or partnership or other ownership interests, by contract or
otherwise).
“A
Shares”
shall
have the meaning ascribed to such term in Section
1.2
of this
Agreement.
20
“Business
Day”
means
any day except Saturday, Sunday and any day which shall be a federal legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other governmental action to
close.
“Closing”
means
the closing of the purchase and sale of the Notes and the Warrants pursuant
to
Section
3.1
on
February __, 2007, or such other date as mutually agreed to by the
parties.
“Closing
Date”
means
the date of the Closing.
“Code”
means
the Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder.
“Commission”
means
the Securities and Exchange Commission.
“Common
Stock”
means
the shares of common stock, par value $0.01 per share, of the
Company.
“Company
Counsel”
means
Xxxx Xxxxx LLP.
“Contract”
means
any contract, agreement, indenture, note, bond, loan, instrument, lease,
conditional sales contract, mortgage, license, franchise, insurance policy,
commitment or other arrangement or agreement, whether written or
oral.
“Conversion
Shares”
means
all shares of Common Stock issuable upon conversion of the Notes.
“Employee”
means
any current employee, office consultant, agent, officer or director of the
Company.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
“Exhibits”
shall
mean the following exhibits attached hereto and made a part of this
Agreement:
Exhibit
A—
Registration Rights Agreement
Exhibit
B—
Form
of
Warrant
Exhibit
C—
Form
of
Note
“Governmental
Body”
means
any government or governmental or regulatory body thereof, or political
subdivision thereof, whether federal, state, local or foreign, or any agency,
instrumentality or authority thereof, or any court or arbitrator (public or
private).
“Xxxxxxx”
shall
have the meaning ascribed to such term in Section
6.6
of this
Agreement.
“Xxxxxxx
Warrant”
shall
have the meaning ascribed to such term in Section
6.6
of this
Agreement.
“Law”
means
any federal, state, local or foreign law (including law), statute, code,
ordinance, rule, regulation or other requirement or guideline.
“Legal
Proceeding”
means
any judicial, administrative or arbitral actions, suits, proceedings (public
or
private), claims or governmental proceedings.
21
“Lien”
means
any mortgage, pledge, security interest, encumbrance, lien or charge of any
kind, including, without limitation, any conditional sale or other title
retention agreement, any lease in the nature thereof and the filing of or
agreement to give any financing statement under the Uniform Commercial Code
(or
similar laws) of any jurisdiction and including any lien or charge arising
by
statute or other law.
“Material
Adverse Change”
means
any material adverse change in the business, assets, liabilities, prospects,
properties, results of operations or condition (financial or otherwise) of
the
Company and its Subsidiaries, taken as a whole.
“Material
Adverse Effect”
means
any event, circumstance, condition, fact, effect, or other matter which has
had
or could reasonably be expected to have a material adverse effect (i) on the
business, assets, liabilities, prospects, properties, results of operations
or
condition (financial or otherwise) of the Company and its Subsidiaries taken
as
a whole or (ii) on the ability of the Company or its Subsidiaries to perform
on
a timely basis any material obligation under this Agreement or to consummate
the
transactions contemplated hereby.
“Notes”
shall
have the meaning ascribed to such term in Section
1.1.
“Option”
shall
have the meaning ascribed to such term in Section
1.2
of this
Agreement.
“Order”
means
any order, injunction, judgment, decree, ruling, writ, assessment or arbitration
award.
“Permits”
means
any approvals, authorizations, consents, licenses, permits or certificates
by or
of any Governmental Body.
“Person”
means
any individual, corporation, partnership, firm, joint venture, association,
joint-stock company, trust, unincorporated organization, Governmental Body
or
other entity.
“Registration Statement”
means
a
registration statement meeting the requirements set forth in the Registration
Rights Agreement and covering, among other items, the resale by the Purchaser
of
the Underlying Shares.
“Registration
Rights Agreement”
means
the Registration Rights Agreement, dated as of the date of this Agreement,
among
the Company and the Purchasers, in the form of Exhibit
A
hereto.
“Rule
144”
means
Rule 144 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as
such
Rule.
“SEC
Reports”
shall
have the meaning ascribed to such term in Section
4.9.
“Securities
Act”
means
the Securities Act of 1933, as amended, or any similar federal statute, and
the
rules and regulations of the Securities and Exchange Commission thereunder,
all
as the same shall be in effect at the time.
“Subsidiary”
shall
have the meaning ascribed to such term in Section
4.4.
22
“Taxes”
means
any federal, state, local or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental (including taxes under Section 59A of the Code), customs duties,
share capital, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value-added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
“Trading
Day”
means
(a) a day on which the Common Stock is traded on a Trading Market, or (b) if
the
Common Stock is not quoted on a Trading Market, a day on which the Common Stock
is quoted in the over-the-counter market as reported by the National Quotation
Bureau Incorporated (or any similar organization or agency succeeding to its
functions of reporting price); provided, that in the event that the Common
Stock
is not listed or quoted as set forth in (a), and (b) hereof, then Trading Day
shall mean a Business Day;
“Trading
Market”
means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the OTC Bulletin Board, the American Stock
Exchange, the New York Stock Exchange, the Nasdaq National Market or the Nasdaq
SmallCap Market.
“Warrant
Shares”
means
all shares of Common Stock issuable upon exercise of the Warrants.
“Warrants”
shall
have the meaning ascribed to such term in Section
1.1.
9.2 Further
Assurances.
The
Company and the Purchasers agree to execute and deliver such other documents
or
agreements as may be necessary or desirable for the implementation of this
Agreement and the consummation of the transactions contemplated
hereby.
9.3 Entire
Agreement; Amendments and Waivers.
This
Agreement (including the schedules and exhibits hereto) represents the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof and can be amended, supplemented or changed, and any provision
hereof can be waived, only by written instrument making specific reference
to
this Agreement signed by the parties hereto. No action taken pursuant to this
Agreement, including without limitation, any investigation by or on behalf
of
any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representation, warranty, covenant or agreement
contained herein. The waiver by any party hereto of a breach of any provision
of
this Agreement shall not operate or be construed as a further or continuing
waiver of such breach or as a waiver of any other or subsequent breach. No
failure on the part of any party to exercise, and no delay in exercising, any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of such right, power or remedy by such party
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy. All remedies hereunder are cumulative and are not
exclusive of any other remedies provided by law.
9.4 Construction.
The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof. 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
9.5 Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of each Purchaser. Any Purchaser, however, may assign any or all of
its
Securities and/or rights under any of the Transaction Documents to any Person,
provided (i) such transferee agrees in writing to be bound, with respect to
the
transferred Securities and otherwise, by the provisions hereof that apply to
the
“Purchasers” and (ii) the transfer or assignment does not violate federal
securities laws.
9.6 No
Third-Party Beneficiaries.
This
Agreement is intended for the benefit of the parties hereto and their respective
successors and permitted assigns and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person.
9.7 Governing
Law.
This
Agreement shall be governed by and construed exclusively in accordance with
the
internal laws of the State of New York without regard to the conflicts of laws
principles thereof. The parties hereto hereby irrevocably agree that any suit
or
proceeding arising directly and/or indirectly pursuant to or under this
Agreement, shall be brought solely in a federal or state court located in the
City, County and State of New York. By its execution hereof, the parties hereby
covenant and irrevocably submit to the in personam
jurisdiction of the federal and state courts located in the City, County and
State of New York and agree that any process in any such action may be served
upon any of them personally, or by certified mail or registered mail upon them
or their agent, return receipt requested, with the same full force and effect
as
if personally served upon them in New York City. The parties hereto waive any
claim that any such jurisdiction is not a convenient forum for any such suit
or
proceeding and any defense or lack of in personam
jurisdiction with respect thereto. In the event of any such action or
proceeding, the party prevailing therein shall be entitled to payment from
the
other party hereto of all of its reasonable legal fees and
expenses.
9.8 Headings;
Interpretive Matters.
The
section headings of this Agreement are for reference purposes only and are
to be
given no effect in the construction or interpretation of this Agreement. No
provision of this Agreement will be interpreted in favor of, or against, any
of
the parties hereto by reason of the extent to which any such party or its
counsel participated in the drafting thereof or by reason of the extent to
which
any such provision is inconsistent with any prior draft hereof or
thereof.
9.9 Confidentiality.
Each
party hereto covenants and agrees to treat any non-public information provided
to it by the Company concerning the business and finances of the Company
(“Corporate
Information”)
as
confidential and agrees further that it will not use, exploit, reproduce,
disclose or provide Corporate Information to any third-party (other than any
agents of the parties who are bound by substantially similar obligations of
confidentiality) on its own behalf or otherwise, except with the consent of
the
Company or as required by law, legal process or any federal or state regulatory
body having jurisdiction over such party. The provisions of this Section
9.9
shall
not apply to any information which:
(a) was
within the public domain prior to the time of disclosure of Corporate
Information to the receiving party or which comes into the public domain other
than as a result of a breach by the party of this Section
9.9;
(b) was
rightfully acquired by the receiving party from a third party without, to the
knowledge of the receiving party, any restriction or any obligation of
confidentiality; or
(c) was
independently developed by the receiving party without any use or reference
to
the Corporate Information.
The
provisions of this Section
9.9
shall
survive the termination of this Agreement, either in whole or as to any party,
for a period of two (2) years.
24
9.10 Notices.
Any and
all notices or other communications or deliveries required or permitted to
be
provided hereunder shall be in writing and shall be deemed given and effective
on (a) the next Business Day, if sent by U.S. nationally recognized overnight
courier service, or (b) upon actual receipt by the party to whom such notice
is
required to be given. The address for such notices and communications to the
Company shall be as set forth below and for each Purchaser shall be as set
forth
on the signature pages attached hereto.
If
to the
Company:
Wherify
Wireless, Inc.
0000
Xxxxxx Xxxxxxx (Xxxxx 000)
Xxxxxxx
Xxxxxx, Xxxxxxxxxx 00000
Attention:
Xxxxxxx X. Xxxxx, CEO
Telephone:
000-000-0000
If
to the
Purchaser:
GPS
Associates, LLC
00
Xxxx
Xxxxxx, 00xx Xxxxx
Xxx
Xxxx,
XX 00000
Attention:
Xxx Xxxxxx
Telephone:
000-000-0000
All
notices are effective upon receipt or upon refusal if properly
delivered.
9.11 Severability.
If any
provision of this Agreement is invalid or unenforceable, the balance of this
Agreement shall remain in effect.
9.12 Binding
Effect; Assignment.
This
Agreement shall be binding upon and insure to the benefit of the parties and
their respective successors and permitted assigns. No assignment of this
Agreement or of any rights or obligations hereunder may be made by the Company
or the Purchasers (by operation of law or otherwise) without the prior written
consent of the other parties hereto and any attempted assignment without the
required consents shall be void.
9.13 Counterparts.
This
Agreement may be executed simultaneously in two or more counterparts, each
of
which shall be deemed an original but all of which together shall constitute
one
and the same instrument.
[The
remainder of this page has been intentionally left blank]
25
IN
WITNESS WHEREOF,
the
parties hereto have executed or have caused this Agreement to be executed by
their respective officers thereunto duly authorized, as of the date first
written above.
WHERIFY
WIRELESS, INC.
By:
____________________________________
Name:
Xxxxxxx
X. Xxxxx
Title:
Chief
Executive Officer
26
PURCHASER’S
SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT
By:
Name:
Title:
Address
Facsimile
Number
27
Schedule
1.1
Purchaser
|
NAME
AND ADDRESS
OF
EACH PURCHASER
|
PRINCIPAL
NOTE AMOUNT
PURCHASED
|
WARRANTS
TO
BE RECEIVED
|
|
GPS
Associates LLC
|
$1,200,000
|
3,000,000
|
28
Schedule
1.2
Terms
of the
Series A Convertible Preferred Stock
|
Issuer:
|
Wherify
Wireless, Inc. (the “Company”)
|
|
Designation:
|
Series
A Convertible Preferred Stock (the “Preferred
Stock”).
|
|
Stated
Value per Share:
|
$1000
|
|
Dividend
Rate:
|
10%
per annum, payable quarterly in arrears, at the option of the Company
either in cash, the issuance of additional Preferred Stock or a
combination of cash and additional Preferred Stock.
|
|
Maturity:
|
None.
|
|
Conversion:
|
Optional
Conversion.
Subject to the several adjustment and other provisions set forth
herein,
the Preferred Stock is convertible at any time in whole or in part
at the
option of GPS into the Common Stock of the Company (the “Conversion
Shares”)
at a conversion price (the “Optional
Conversion Price”)
equal to $0.125 per share.
Mandatory
Conversion.
Holders of the Preferred Stock must convert the Preferred Stock in
the
case of the following events:
i. An
underwritten secondary public offering resulting in proceeds to Wherify
of
no less than $20 million (a “Qualifying
Secondary”)
and the Conversion Shares are registered for resale and free to trade
not
later than 180 days following the Qualifying Secondary closing
date.
ii. the
common stock of the Company has for 20 consecutive trading days (i)
closed
at a price equal to not less than 250% of the applicable Optional
Conversion Price, (ii) averaged (a) not less than 300,000 shares
per day
in volume or (b) a market value of not less than $500,000 in trading
per
day and (iii) there is an effective resale registration statement
in
respect of the underlying conversion shares relating thereto.
iii. Upon
a Change of Control (defined below). Adjustment of the
Optional
|
29
|
Conversion
Price:
|
The
Optional Conversion Price is subject to adjustment in the following
circumstances:
1. Ratably
for all stock splits, stock dividends, reclassifications, or similar
events.
2. If,
prior to an event triggering Mandatory Conversion, the Company
shall issue
Common Stock (or securities exchangeable, exercisable or convertible
into
Common Stock), other than in connection with acquisitions or employee
stock options approved by the Board of Directors of the Company
at a price
below the applicable Optional Conversion Price (a “Dilutive
Issuance”),
the Optional Conversion Price shall be adjusted on a weighted average
dilution calculation basis.
|
|
Liquidation
Preference:
|
In
the event that the Company shall file for bankruptcy, cease or
unwind its
business or otherwise be liquidated for the benefit of its creditors
or
otherwise, holders of the Preferred Stock shall, before holders
of the
Common Stock (or any other securities of the Company junior in
right of
payment to the Preferred Stock) receive any consideration from
such
liquidation, be entitled to receive an amount equal to 125% of
the sum of
(i) the principal amount of all the Preferred Stock then outstanding
and
(ii) all accrued and unpaid dividends thereon (the “Liquidation
Preference Amount”).
|
|
Change
of Control:
|
In
the event that, prior to a Qualifying Secondary, there shall be
a change
in control transaction (which shall for the purposes hereof include
a sale
of substantially all the assets of the Company), holders of the
Preferred
Stock shall be entitled to receive:
1. before
holders of the Common Stock receive any consideration from the
consideration resulting therefrom, the Liquidation Preference Amount;
plus
2. that
amount owed on the Conversion Shares as a result of the Preferred
Stock
being converted into Common
Stock.
|
30
|
Covenants
and Rights:
|
The
Preferred Stock shall have the following covenants and
rights:
1. Voting
Rights:
On an as converted basis, one vote per Conversion Share.
2. Covenants:
For so long as at least 25% of the Preferred Stock shall remain
outstanding, unless GPS delivers its express written consent, the
Company
will not:
a. Pay
dividends to the holders of its common stock without paying, in
addition
to the Preferred Stock Dividend, the amount which the Preferred
Stock
holders would have received had the subject Preferred Stock been
converted
at the Optional Conversion Price.
b. Issue
any additional preferred stock which ranks senior to the Preferred
Stock.
|
31
Schedule
4.1(b)
Outstanding
Options/Warrants/Etc.
Employee
Stock Option Plans
2004
Stock Plan
Wherify’s
Board administers the 2004 Stock Plan (“2004
Plan”),
which
was adopted by the Stockholders effective July 21, 2005, as amended. The company
has registered 10 million shares under the 2004 Plan, the maximum aggregate
number of shares allowed for issuance under the plan. The 2004 Plan provides
for
the grant of incentive stock options, non-statutory stock options, restricted
stock, and other stock based awards as determined by the administrator to be
appropriate to employees, directors (including employee directors) and
consultants. The administrator is authorized to determine the terms of each
option granted under the plan, including the number of shares, exercise price,
term and exercisability. The exercise price of incentive stock options may
not
be less than 100% of the fair market value of the Common Stock as of the date
of
grant (110% of the fair market value in the case of an optionee who owns more
than 10% of the total combined voting power of all classes of the Company’s
capital stock). Options may not be exercised more than ten years after the
date
of grant (five years in the case of 10% Stockholders). Upon termination of
employment for any reason other than death or disability, each option may be
exercised for a period of 90 days, to the extent it is exercisable on the date
of termination unless otherwise provided in the award agreement. In the case
of
a termination due to death or disability, an option will remain exercisable
for
a period of one year, to the extent it is exercisable on the date of
termination. Up to an aggregate of approximately 8 million shares of Common
Stock are currently authorized for issuance under the 2004 Plan. As of September
18, 2006, there were 2,060,095 options granted and outstanding under the 2004
Plan of which 345,976 are vested.
32
2001
Stock Plan
Wherify’s
Board administers the 2001 Stock Plan (“2001 Plan”), which was adopted by the
Stockholders effective July 26, 2001. The 2001 Plan provides for the grant
of
incentive stock options, non-statutory stock options and restricted stock to
employees, directors (including employee directors) and consultants. The
administrator is authorized to determine the terms of each option granted under
the plan, including the number of shares, exercise price, term and
exercisability. The Board has authorized up to an aggregate of 2,000,000 shares
of Common Stock for issuance under the 2001 Plan. As of September 18, 2006,
there were 325,000 options granted and outstanding under the 2001 Plan of which
318,403 are vested. No additional options may be granted under this
plan.
1999
Stock Option Plan
Wherify’s
Board administers the 1999 Stock Option Plan, as amended and restated (“1999
Plan”), which was originally approved on June 1, 1999 by Wherify California,
Inc. (a California corporation) and subsequently amended and restated and
assumed by Wherify pursuant to an Agreement and Plan of Merger dated April
14,
2004. The 1999 Plan provides for the grant of incentive stock options and
non-statutory stock options to employees, directors (including employee
directors) and consultants. The administrator is authorized to determine the
terms of each option granted under the plan, including the number of shares,
exercise price, term and exercisability. On July 21, 2005, the date that Wherify
completed the merger of Wherify Acquisition, Inc. (a wholly-owned subsidiary
of
Wherify) and Wherify California, Inc. (a California corporation), the number
of
shares underlying options granted under Wherify California, Inc.’s (a California
corporation) amended and restated 1999 Plan were assumed by Wherify and
multiplied by the 4.8021 merger exchange ratio and existing vesting schedules
were maintained. As a result on July 25, 2005, upon application of the merger
exchange ratio, there was a total of 3,977,731 options outstanding under the
1999 Plan. As of September 18, 2006, there were 3,279,845 options granted and
outstanding under the 1999 Plan of which 2,543,402 are vested. No additional
options may be granted under this plan.
Common
Stock Purchase Warrants
As
of
January 12, 2007, Wherify had warrants outstanding exercisable for approximately
22.6 million shares of Wherify common stock. A summary of the warrants is as
follows:
*
A
warrant to purchase 14,843 shares at $.80 per share. This warrant carries a
cashless exercise provision and expires on December 30, 2008;
*
Warrants to purchase 27,379 shares at $2.00 per share. These warrants carry
a
cashless exercise provision and expire on various dates between July 2008 and
August, 2009;
warrants
to purchase 163,750 shares at $2.00 per share expiring January 11, 2010. These
warrants carry a cashless exercise provision. In addition, in the event that
the
per share closing bid price of Wherify common stock equals or exceeds 200%
of
the warrant exercise price for a period of 20 consecutive trading days,
following the effectiveness of this registration statement, Wherify may elect
to
redeem the warrants at a redemption price of $0.01 per share on 30 days written
notice (the “Notice Period”); provided, however, that (i) Wherify simultaneously
calls all warrants issued in on January 11, 2005 on the same terms, and (ii)
all
of the Wherify common stock issuable under the warrants are either registered
pursuant to an effective registration statement, which has not been suspended
and for which no stop order is in effect, and pursuant to which the warrant
holder is able to sell the warrant shares at all times during the Notice Period;
and
33
*
Warrants to purchase 757,053 shares at $2.60 per share (post-adjustment)
expiring January 11, 2010. These warrants carry a cashless exercise provision.
In addition, in the event that the per share closing bid price of Wherify common
stock equals or exceeds 200% of the warrant exercise price for a period of
20
consecutive trading days, following the effectiveness of this registration
statement, Wherify may elect to redeem the warrants at a redemption price of
$0.01 per share on 30 days written notice (the “Notice Period”); provided,
however, that (i) Wherify simultaneously calls all warrants issued in on January
11, 2005 on the same terms, and (ii) all of the Wherify common stock issuable
under the warrants are either registered pursuant to an effective registration
statement, which has not been suspended and for which no stop order is in
effect, and pursuant to which the warrant holder is able to sell the warrant
shares at all times during the Notice Period. The exercise price and the number
of shares of common stock issuable upon exercise of the foregoing warrants
are
subject to adjustment in certain circumstances, including stock splits, stock
dividends, or subdivisions, combinations or recapitalizations of Wherify’s
common stock. In addition, the warrant price and the number of shares covered
by
the warrants exercisable at $2.70 per share (as originally issued) are subject
to adjustment on a weighted-average basis in the event that Wherify issues
or is
deemed to issue shares of its common stock at a price per share which is less
than the then-current warrant exercise price. Such exercise price was adjusted
as a result of pricing our direct offering on August 8, 2006, to $0.25 per
share, (see Note 19—Subsequent Event);
*
Warrants to purchase 16,294 shares at $3.00 per share. These warrants carry
a
cashless exercise provision and expire January 31, 2010;
*
A
warrant to purchase 12,800 shares at $5.00 per share. This warrant carries
a
cashless exercise provision and expires on September 13, 2008;
*
Warrants to purchase 11,250,000 shares at an exercise price of $0.25 per share
expiring March 10, 2011. The exercise price is subject to adjustment as the
result of any subdivision, stock split and combination of shares or
recapitalization or if Wherify sells any common stock or rights to acquire
common stock at a purchase price less than the exercise price of the warrants.
Such exercise price and number of warrants was adjusted as a result of pricing
our direct offering on August 8, 2006. These warrants carry a cashless exercise
option; and
*
Warrants to purchase 10,000,000 shares at an exercise price of $0.25 per share
expiring March 14, 2011. The exercise price is subject to adjustment as the
result of any subdivision, stock split and combination of shares or
recapitalization or if Wherify sells any common stock or rights to acquire
common stock at a purchase price less than the exercise price of the warrants.
Such exercise price and number of warrants was adjusted as a result of pricing
our direct offering on August 8, 2006, (see Note 19—Subsequent Event). These
warrants carry a cashless exercise option.
Upon
exercise, the warrant holders shall participate on the same basis as the holders
of common stock in connection with the transaction. The warrants do not confer
upon the holder any voting or any other rights of a stockholder of
Wherify.
34
Schedule
4.7
Capitalization
of the Company
Capital
Stock
Wherify’s
authorized capital stock consists of 200,000,000 shares of common stock, $.01
par value per share and 10,000,000 shares of undesignated preferred stock,
$.01
par value per share.
Common
Stock
The
authorized common stock of Wherify consists of 200,000,000 shares, par value
$0.01 per share. Approximately 72.4 million shares of common stock are issued
and outstanding as of January 12, 2007.
All
of
the shares of common stock are validly issued, fully paid and non-assessable.
Holders of record of common stock will be entitled to receive dividends when
and
if declared by the board of directors out of funds of Wherify legally available
therefore. In the event of any liquidation, dissolution or winding up of the
affairs of Wherify, whether voluntary or otherwise, after payment of provision
for payment of the debts and other liabilities of Wherify, including the
liquidation preference of all classes of preferred stock of Wherify, each holder
of common stock will be entitled to receive his pro rata portion of the
remaining net assets of Wherify, if any. Each share of common stock has one
vote, and there are no preemptive, subscription, conversion or redemption
rights. Shares of common stock do not have a cumulative voting right, which
means that the holders of a majority of the shares voting for the election
of
directors can elect all of the directors.
Preferred
Stock
Wherify’s
certificate of incorporation authorizes the issuance of up to 10,000,000 shares
of Wherify’s $0.01 par value preferred stock. As of January 12, 2007 no shares
of preferred stock were outstanding. The preferred stock constitutes what is
commonly referred to as “blank check” preferred stock. “Blank check” preferred
stock allows the board of directors, from time to time, to divide the preferred
stock into series, to designate each series, to issue shares of any series,
and
to fix and determine separately for each series any one or more of the following
relative rights and preferences: i) the rate of dividends; (ii) the price at
and
the terms and conditions on which shares may be redeemed; (iii) the amount
payable upon shares in the event of involuntary liquidation; (iv) the amount
payable upon shares in the event of voluntary liquidation; (v) sinking fund
provisions for the redemption or purchase of shares; (vi) the terms and
conditions pursuant to which shares may be converted if the shares of any series
are issued with the privilege of conversion; and (vii) voting rights. Holders
of
preferred stock are entitled to receive dividends when and as declared by the
board of directors out of any funds legally available therefore, may be
cumulative and may have a preference over common stock as to the payment of
such
dividends. The provisions of a particular series, as designated by the board
of
directors, may include restrictions on the ability of Wherify to purchase shares
of common stock or to redeem a particular series of preferred stock. Depending
upon the voting rights granted to any series of preferred stock, issuance
thereof could result in a reduction in the power of the holders of common stock.
In the event of any dissolution, liquidation or winding up of Wherify, whether
voluntary or involuntary, the holders of each series of the then outstanding
preferred stock may be entitled to receive, prior to the distribution of any
assets or funds to the holders of the common stock, a liquidation preference
established by the board of directors, together with all accumulated and unpaid
dividends. Depending upon the consideration paid for preferred stock, the
liquidation preference of preferred stock and other matters, the issuance of
preferred stock could result in a reduction in the assets available for
distribution to the holders of the common stock in the event of liquidation
of
Wherify. Holders of preferred stock will not have preemptive rights to acquire
any additional securities issued by Wherify. Once a series has been designated
and shares of the series are outstanding, the rights of holders of that series
may not be modified adversely except by a vote of at least a majority of the
outstanding shares constituting such series. One of the effects of the existence
of authorized but unissued shares of common stock or preferred stock may be
to
enable the board of directors of Wherify to render it more difficult or to
discourage an attempt to obtain control of Wherify by means of a merger, tender
offer at a control premium price, proxy contest or otherwise and thereby protect
the continuity of or entrench Wherify’s management, which concomitantly may have
a potentially adverse effect on the market price of the common stock. If in
the
due exercise of its fiduciary obligations, for example, the board of directors
were to determine that a takeover proposal were not in the best interests of
Wherify, such shares could be issued by the board of directors without
stockholder approval in one or more private placements or other transactions
that might prevent or render more difficult or make more costly the completion
of any attempted takeover transaction by diluting voting or other rights of
the
proposed acquirer or insurgent stockholder group, by creating a substantial
voting block in institutional or other hands that might support the position
of
the incumbent board of directors, by effecting an acquisition that might
complicate or preclude the takeover, or otherwise.
35
|
Wherify
Wireless, Inc
Capitalization
Table
|
As
of January 12, 2007
|
|||
|
Authorized
Number of Shares
|
Outstanding
Number of Shares
|
Percent
of
Total
Common Shares
|
||
|
Outstanding
|
Authorized
|
|||
|
PREFERRED
SHARES AUTHORIZED
|
10,000,000
|
|||
|
PREFERRED
SHARES ISSUED AND OUTSTANDING
|
-
|
|||
|
COMMON
SHARES AUTHORIZED
|
200,000,000
|
|||
|
COMMON
SHARES ISSUED AND OUTSTANDING
|
72,365,599
|
56%
|
36%
|
|
|
DILUTIVE
COMMON SHARES:
|
||||
|
For
exercise of warrants
|
22,619,436
|
17%
|
11%
|
|
|
For
Cornell convertible debentures, including shares currently held in
escrow
|
19,460,000
|
15%
|
10%
|
|
|
For
exercise of stock options (issued and outstanding)
|
5,664,940
|
4%
|
3%
|
|
|
Subtotal
for Shares Contractually Committed to Issue
|
47,744,376
|
37%
|
24%
|
|
|
For
issuance under Standby Equity Distribution Agreement (Registration
Statement withdrawn)
|
2,200,000
|
2%
|
1%
|
|
|
For
issuance of stock options (registered and authorized but not
issued)
|
8,000,000
|
6%
|
4%
|
|
|
Subtotal
for Shares NOT Contractually Committed to Issue
|
10,200,000
|
8%
|
5%
|
|
|
TOTAL
SHARES RESERVED FOR ISSUANCE
|
57,944,376
|
44%
|
29%
|
|
|
TOTAL
SHARES ISSUED AND RESERVED FOR ISSUANCE
|
130,309,975
|
100%
|
65%
|
|
36
Schedule
4.11
Liabilities
Wherify
Wireless, Inc
Consolidated
Balance Sheet Extract
Unaudited
|
Sept.
30, 2006
|
Dec.
31, 2006
|
||||||
|
($
millions)
|
|||||||
|
CURRENT
LIABILITIES, Accounts Payable:
|
(1
|
)
|
|||||
|
Wherify
Wireless Inc (Delaware)
|
|||||||
|
Xxxxx
Xxxxxxx
|
$
|
1.6
|
$
|
1.7
|
|||
|
Jabil
|
1.1
|
0.9
|
|||||
|
Luczo
Note Payable
|
2.0
|
2.0
|
|||||
|
All
Other
|
2.2
|
3.1
|
|||||
|
6.9
|
7.7
|
||||||
|
Wherify
California Inc (California)
|
|||||||
|
Westport
Joint Venture (Arillaga)
|
3.1
|
3.1
|
|||||
|
Venture
Corporation
|
1.6
|
1.6
|
|||||
|
Westport
Office Park (Harvest properties)
|
0.8
|
1.0
|
|||||
|
All
Other
|
1.0
|
1.0
|
|||||
|
6.5
|
6.7
|
||||||
|
Total
Accounts Payable Liabilities
|
$
|
13.4
|
$
|
14.4
|
|||
(1)
Dec
31, 2006 liability amounts may differ slightly in the final Q2 Form 10-QSB
which
is still in process towards completion.
37
Schedule
4.14
Property
The
Company does not own any property, plants or facilities.
Equipment,
including equipment used at its remote location services centers around the
world, is stated at cost less accumulated depreciation. Depreciation is computed
using the straight-line method over the estimated useful lives of the respective
assets, 3 years for office and computer equipment, 3 to 5 years for test
equipment, 7 years for furniture and fixtures, and 10 years for leasehold
improvements. When assets are disposed of, the cost and related accumulated
depreciation are removed from the accounts and the resulting gains and losses
are included in other income or loss. Maintenance and repairs are charged to
expense as incurred.
As
of
December 31, 2006 the Company recorded gross equipment of approximately
$1,964,000 against which accumulated depreciation has been charged of
approximately $1,436,000, resulting in net equipment of approximately
$528,000.
38
Schedule
4.17
Material
Contracts
|
Wherify
Wireless, Inc.
Leases
and Agreements:
|
Purpose:
|
Date
signed:
|
|
American
Business Equipment
|
Toshiba
lease and maintenance agreement
|
28-Mar-2006
|
|
American
Network Computadores LTDA
|
Master
service agreement
|
1-Jun-2006
|
|
D&H
Distributing
|
Vendor
purchase agreement (NOT SIGNED)
|
14-Jun-2006
|
|
Delphi
Automotive Systems Do Brasil LTDA
|
Distribution
agreement
|
23-Jan-2006
|
|
Elabs
|
Payment
agreement
|
22-Dec-2006
|
|
Elabs
|
Service
agreement
|
12-Oct-2005
|
|
Entel
PCS Telecomunicaciones S.A.
|
International
supply and distribution agreement
|
1-Apr-2006
|
|
Enter
|
Letter
agreement
|
4-Oct-2005
|
|
Interlinc
|
Service
agreement
|
15-Nov-2005
|
|
Jabil
Circuit, Inc.
|
Manufacturing
services agreement
|
3-Mar-2006
|
|
Kore
Wireless Canada Inc
|
Telecommunications
services agreement
|
11-Oct-2005
|
|
Xxxxxxx
& Company (UK) LTD
|
Engagement
agreement
|
2-Nov-2006
|
|
Xxxxx
Xxxxxxxxx
|
Engagement
letter - Resold wireless & foreign corporation filings
|
5-Jul-2006
|
|
MapCity
|
Web
service agreement
|
2-May-2006
|
|
Nucomm
International
|
Managed
services agreement
|
31-Oct-2005
|
|
Oriant
Australia Pty Ltd
|
Letter
agreement
|
28-Sep-2005
|
|
PetroCom
LLC
|
Service
agreement
|
26-Jan-2006
|
|
SED
International, Inc.
|
Distributor
agreement
|
14-Jul-2006
|
|
Siemens
AG
|
Master
purchase/reseller agreement
|
13-Mar-2006
|
|
Tax
Partners
|
Tax
compliance service agreement
|
5-Jul-2006
|
|
Walmart
Stores Inc
|
Supplier
agreement
|
29-Nov-2004
|
|
Westport
Joint Venture
|
Lease
agreement
|
3-Sep-1999
|
|
Westport
Office Park LLC
|
Notification
change of ownership Westport Business Park
|
18-Aug-2005
|
|
Xxxxxx
Xxxxxxx
|
Engagement
letter
|
3-Feb-2005
|
39
Schedule
4.18
Employment
Related Agreements/Benefits
Employment
contracts for the Company’s following named executives have been filed as
Exhibits with the Company’s Forms 10-KSB and Forms 8-K, as
appropriate:
Xxxxxxx
Xxxxx, CEO and Director
Xxxxxx
Xxxxxxx, President
Xxxxxxx
Xxxxxx, Consultant and Co-Chairman of the Board
Xxxx
X. Xxxxxx, CFO and Treasurer
Xxxxxxx
Xxxxxxxxx, President Government Services Division, Co-Chairman ,
Secretary
All
other
employees are hired under standard Company at will employment offers, and
include a standard package of benefits and other compensation as defined in
those employment offers, as appropriate to the position.
Schedule
4.19(c)
Key
Employee Agreements
Employment
contracts for the Company’s following named executives have been filed as
Exhibits with the Company’s Forms 10-KSB and Forms 8-K, as appropriate, and are
summarized below:
Employment
Agreement with Xxxxxxx Xxxxx, CEO and Director
In
November 2002, Wherify California, Inc., a California corporation (“Wherify
California”) entered into an employment agreement with Xxxxxxx Xxxxx pursuant to
which Xx. Xxxxx agreed to serve as the President and Chief Executive Officer
of
Wherify California until November 2007 at an annual base salary of $200,000
(as
adjusted pursuant to the agreement). In addition, in November 2002, Wherify
California granted Xx. Xxxxx an option to purchase 1,200,525 shares of its
common stock at an exercise price of $0.34 per share. In addition to the
compensation described above, Wherify California also agreed to award Xx. Xxxxx
additional cash bonuses, in the event Wherify California achieved certain
milestones as described in the employment agreement. Xx. Xxxxx is also entitled
to participate in any and all employee benefit plan hereafter established for
Wherify California employees and is entitled to an automobile allowance of
$2,000 per month. Wherify has agreed to assume this agreement from Wherify
California.
Under
the
terms of the employment agreement, Xx. Xxxxx is entitled to the following
severance benefits:
If
Xx.
Xxxxx’x employment is terminated other than for “Cause” (as defined in the
agreement), or if he resigns as a result of a “Constructive Termination” then
Xx. Xxxxx is entitled, in exchange for a release of all claims, a lump sum
severance payment equal to 12 months base salary, as then determined, plus
50%
of his prior year’s bonus, if any. Additionally, Xx. Xxxxx will receive
accelerated vesting with respect to 240,105 shares purchasable upon exercise
of
the option granted to him by Wherify California.
40
Employment
Agreement with Xxxxxx Xxxxxxx, President
In
December 2004, Wherify California entered into an employment agreement with
Xx.
Xxxxxxx. Under this agreement, Xx. Xxxxxxx agreed to serve as President and
acting VP of Sales and Marketing of Wherify California, at an annual salary
of
$185,000. In addition, in December 2004, Wherify California granted Xx. Xxxxxxx
an option to purchase 480,210 shares, at an exercise price of $0.31 per share.
One sixteenth of the shares vest after 3 months of employment, and the remainder
vest at 1/48th per month over the following four-year period. Under the
employment agreement, Xx. Xxxxxxx is entitled to a lump sum severance payment
equal to four months base salary in the event he is terminated other than for
cause, or if he terminates his employment as a result of a constructive
termination (as defined in the agreement). Wherify has agreed to assume this
agreement from Wherify California.
Consulting
Agreement with Xxxxxxx Xxxxxx, Consultant and Co-Chairman of the
Board
Effective
January 1, 2004, Wherify California entered into a Consulting Agreement (the
“Initial Consulting Agreement”) with Xxxxxxx Xxxxxx, which was subsequently
assumed by Wherify in connection with the merger of Wherify with Wherify
California on July 21, 2005. Under the terms of the Initial Consulting
Agreement, Xx. Xxxxxx acted as a financial advisor to the Company and the
Company paid Xx. Xxxxxx a consulting fee of $10,000 per month.
In
accordance with the terms of the Initial Consulting Agreement, in 2004 Wherify
California issued to Xx. Xxxxxx an option to purchase 100,000 shares of Wherify
California common stock (equivalent to approximately 481,000 shares of Wherify
common stock) at the then fair market value. The options vest ratably on a
monthly basis over a 36 month period commencing on the date of the agreement,
but cease to vest upon termination of the agreement. All options granted
pursuant to the Initial Consulting Agreement vest immediately upon a Change
in
Control.
The
Initial Consulting Agreement also provided that upon a Change of Control during
the term of the agreement, or within six months thereafter, in which the
acquiring person or entity is introduced to the company by Xx. Xxxxxx, the
company would pay Xx. Xxxxxx an acquisition fee equal to 2% of the aggregate
consideration paid to the company’s stockholders in such
transaction.
On
January 13, 2006, Wherify and Xx. Xxxxxx entered into a new Consulting Agreement
which supersedes and replaces the Initial Consulting Agreement entered into
effective January 1, 2004. Under the new Consulting Agreement, Xx. Xxxxxx
continues to be paid a fee of $10,000 per month for his assistance as a
financial adviser to the Company and is entitled to reimbursement for
out-of-pocket costs and indemnification for damages arising out of his services.
However, he is no longer entitled to a fee in connection with a Change in
Control transaction. The agreement is terminable by either party on 30 days’
notice.
Also
on
January 13, 2006, Wherify entered into a letter agreement with Xx. Xxxxxx
setting forth certain terms of his services as a Director and Co-Chairman.
Under
this agreement, Xx. Xxxxxx agreed to direct and coordinate the Board’s oversight
of the business and operations of the Company and the activities and performance
of senior management, and to assist senior management in developing strategic
plans for the Company and with fund raising and financing activities. Pursuant
to the agreement, on January 13, 2006 the Company granted to Xx. Xxxxxx an
option to purchase 125,000 shares of common stock at an exercise price equal
to
the closing sales price on that date. The option vests in equal monthly
increments over four years so long as Xx. Xxxxxx remains on the Board. The
agreement further provides that for each additional year Xx. Xxxxxx serves
on
the Board he will receive an additional option for 12,500 shares of common
stock
with an exercise price equal to the closing sales price on the grant date and
which vests ratably monthly over 12 months. Xx. Xxxxxx is also entitled under
this agreement to a cash payment of $5,000 per month during which he serves
on
the Board.
41
Employment
Agreement with Xxxx X. Xxxxxx, CFO and Treasurer
In
February 2006, Wherify entered into an employment agreement with Xx. Xxxxxx.
Under this agreement, Xx. Xxxxxx agreed to serve as Chief Financial Officer
of
Wherify at an annual salary of $175,000 per year, subject to periodic review
and
adjustment. In addition, senior management will recommend that the Board of
Directors grant Xx. Xxxxxx an option to purchase up to 260,000 shares of the
Company’s Common Stock. The option will be exercisable for a period of 10 years
and will vest in accordance with the following schedule: (a) 25% of the total
number of shares purchasable upon exercise of the option will vest after 12
months of continuous employment and (b) an additional 1/48 of the option shares
will vest at the close of each month during the remaining term of the option.
In
the event that Xx. Xxxxxx is terminated by the Company without Cause or resigns
as a result of a Constructive Termination, he is entitled to a severance payment
equal to three months of his base salary, but only if such termination occurs
subsequent to Xx. Xxxxxx having received a satisfactory performance review,
and
health care coverage during the severance period.
42
Schedule
4.20
Litigation
Legal
Proceedings
Venture
Corporation Limited, a Singapore Corporation v. Wherify Wireless, Inc, a
California Corporation
On
October 15, 2004, Venture Corporation Limited, a Singapore corporation
(“Venture”), filed suit against Wherify California, in the United States
District Court, Central District of California. The complaint sought
approximately $5 million in damages for breach of contract, fraud and common
counts alleging that Wherify California failed to pay certain amounts owed
for
the manufacture of the children’s model personal locater (“CM1”). Wherify
California answered Venture’s complaint on November 16, 2004 and filed a
cross-complaint alleging that Venture failed to timely deliver conforming goods.
A mediation between the parties ended without a resolution. A court trial
concluded on November 4, 2005, and on December 27, 2005 the District Court’s
judgment awarding Venture approximately $1.7 million in damages (including
costs) was entered. On January 26, 2006, a Notice of Appeal was filed with
the
United States Court of Appeals for the Ninth Circuit which Wherify intends
to
vigorously pursue. Venture has commenced collection procedures, including
attempts to levy upon assets and accounts of not only Wherify California, but
also its parent, Wherify. On September 25, 2006 a hearing occurred regarding
Venture Corporation’s motion to amend its judgment to add Wherify to its
judgment against Wherify California. Wherify believes that there are no legal
grounds or basis for any claim or attempt to levy against Wherify or any of
its
assets, and intends to vigorously defend against any such claims or attempts
to
levy. On November 2, 2006 the court denied Venture’s motion to amend the
judgment against Wherify California to extend the levy to include Wherify.
It is
management’s assessment that a potential liability against Wherify California of
an amount up to one million seven hundred thousand dollars exists. Therefore,
the Company has accrued an amount of one million seven hundred thousand
dollars.
Xxxxxxxxx,
et al. v. I.Q. Biometrix, Inc., a Delaware Corporation, et al.
On
August
5, 2005, plaintiffs Xxxxxx Xxxxxxxxx, Xxxxxx Xxxx, Xxxx Xxxxx, Xxxxxxx Xxxxxx,
Xxxxxxxx Xxxxx and Xxxxxx Vroye, filed their first amended complaint against
I.Q. Biometrix, Inc., a Delaware corporation, in Fresno County Superior Court,
State of California. Plaintiffs’ complaint alleges causes of action for breach
of contract and fraud for a failure to issue stock options pursuant to an
alleged oral and/or written agreement. The complaint seeks to recover damages,
including punitive damages, and/or an award of stock options. On October 25,
2005, Wherify demurred on behalf of itself, Xxxx Xxxxx and Xxxxxxx Xxxxxxxxx
and
on January 4, 2005, the demurrer was sustained on several grounds. This matter
has been set for trial on January 18, 2007. The Company’s management feels that
a reasonable estimate for potential liability for the company is somewhere
within a range of $0 to $500,000. Management of the Company has also determined
that no amount within that range is a better estimate of a potential liability
than any other amount. Therefore, no amount has been set aside for this
contingent liability.
Westport
Office Xxxx LLC v. Where Wireless, Inc, a California
Corporation
43
On
January 5, 2007, Westport Office Park, LLC (“Westport”), filed an Entry of
Stipulation and Agreement against Wherify Wireless, Inc, a California
Corporation (“Wherify California”), in the Superior Court of California—San
Mateo County. The complaint sought a judgment for possession of certain leased
premises occupied by Wherify California as its principal offices in favor of
Westport, approximately one million one hundred thousand dollars in then
outstanding amounts due and owing under the terms of the lease, and certain
other amounts deemed owed. Wherify California answered Westport’s complaint on
January 17, 2007 by vacating from the leased premises. The Company has accrued
an amount of approximately one million one hundred thousand dollars pending
resolution of this matter.
Management
is not aware of any other threatened or actual legal proceedings currently
in
process against the Company or its subsidiaries that would have a material
effect on the financial position of the Company.
44
Schedule
7.6
Use
of Proceeds
|
Use
of Proceeds:
|
The
following table summarizes the net proceeds contemplated to be raised
in
connection with the Offering:
|
||||||
|
Offering
Amount
|
|||||||
|
Gross
Offering Proceeds
|
$ |
1,200,000
|
|
|
|||
|
Less:
Offering Fee
|
(120,000
|
)
|
|||||
|
Agent
Offering Expenses
|
(60,000
|
)
|
|||||
|
Company
Expenses
|
(20,000
|
)
|
|||||
|
GPS
Net Proceeds to Wherify
|
$ |
1,000,000
|
|
|
|||
|
GPS
intends to use the $1.2 million in Gross Offering Proceeds to purchase
from Wherify the securities described in Appendix
A,
from which Wherify will pay the above summarized Offering Fees and
Expenses and apply the remaining estimated $1.0 million in net proceeds
maintain its operations at a modest level until the Step II Offering
can
be completed.
|
|||||||
45
EXHIBIT
A
FORM
OF REGISTRATION RIGHTS AGREEMENT
46
EXHIBIT
B
FORM
OF WARRANT
47
EXHIBIT
C
FORM
OF NOTE
48
