SUBSCRIPTION AGREEMENT
(10)(1)
Subscription Agreement for Securities
THIS
SUBSCRIPTION AGREEMENT
(this
“Agreement”),
is
dated as of October 23, 2007, by and among Attitude Drinks Inc., a Delaware
corporation
(the
“Company”),
and
the subscribers identified on the signature page hereto (each a “Subscriber”
and
collectively “Subscribers”).
WHEREAS,
the
Company and the Subscribers are executing and delivering this Agreement in
reliance upon an exemption from securities registration afforded by the
provisions of Section 4(2), Section 4(6) and/or Regulation D (“Regulation
D”)
as
promulgated by the United States Securities and Exchange Commission (the
“Commission”)
under
the Securities Act of 1933, as amended (the “1933
Act”).
WHEREAS,
the
parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Subscribers, as provided herein,
and the Subscribers, in the aggregate, shall purchase for up to $1,200,000
(the
"Purchase
Price")
of
principal amount of promissory notes of the Company (“Note”
or
“Notes”),
a
form of which is annexed hereto as Exhibit
A,
convertible into shares of the Company's Common Stock, $0.001 par value (the
"Common
Stock")
at a
per share conversion price set forth in the Note (“Conversion
Price”);
and
share purchase warrants (the “Warrants”),
in
the form annexed hereto as Exhibit
B,
to
purchase shares of Common Stock (the “Warrant
Shares”).
The
Notes, shares of Common Stock issuable upon conversion of the Notes (the
“Shares”),
the
Warrants and the Warrant Shares are collectively referred to herein as the
"Securities";
and
WHEREAS,
the
aggregate proceeds of the sale of the Notes and the Warrants contemplated hereby
shall be held in escrow pursuant to the terms of a Funds Escrow Agreement to
be
executed by the parties substantially in the form attached hereto as
Exhibit
C
(the
“Escrow
Agreement”).
NOW,
THEREFORE,
in
consideration of the mutual covenants and other agreements contained in this
Agreement the Company and the Subscribers hereby agree as follows:
1. (a) Closing
Dates.
The
“Initial
Closing Date”
shall
be the date that the Initial Closing Purchase Price is transmitted by wire
transfer or otherwise credited to or for the benefit of the Company. The
consummation of the transactions contemplated herein shall take place at the
offices of Grushko & Xxxxxxx, P.C., 000 Xxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx,
Xxx Xxxx 00000, upon the satisfaction or waiver of all conditions to closing
set
forth in this Agreement. Not later than ten (10) calendar days after the Initial
Closing Date, the Company will file a Form 10-SB or Form 8-K containing the
consolidated financial statements of Attitude Drinks Inc., and its wholly owned
subsidiary Attitude Drink Company, Inc., a Delaware corporation. Each of the
Initial Closing Date and Second Closing Date (as defined in Section 1(c) below)
is referred to herein as a “Closing
Date.”
(b) Initial
Closing.
Subject
to the satisfaction or waiver of the terms and conditions of this Agreement,
on
the Initial Closing Date, each Subscriber shall purchase and the Company shall
sell to each Subscriber a Note in the principal amount set forth on the
signature page hereto (“Initial
Closing Notes”),
and
Warrants as described in Section 2 of this Agreement (“Initial
Closing Warrants”).
The
principal amount of the Notes to be purchased by the Subscribers on the Initial
Closing Date shall be Six Hundred Thousand Dollars ($600,000) (the “Initial
Closing Purchase Price”).
(c) Second
Closing.
The
“Second
Closing Date”
shall
be on or before the fifth business day after the compliance with the Second
Closing Condition as defined in Section 1(d) of this Agreement (the
“Second
Closing Date”).
Subject to the satisfaction or waiver of the conditions to Closing,
on
the
Second Closing Date, each Subscriber shall purchase and the Company shall sell
to each Subscriber a Note in the principal amount set forth on the signature
page hereto (“Second
Closing Notes”)
and
Warrants as described in Section 2 of this Agreement (“Second
Closing Warrants”).
The
Second Closing Notes shall be of the same tenor as the Notes issuable on the
Initial Closing Date and have the same maturity date as the Initial Closing
Notes. The principal amount of the Notes to be purchased by the Subscribers
on
the Second Closing Date shall be Six Hundred Thousand Dollars ($600,000) (the
“Second
Closing Purchase Price”).
(d) Conditions
to Second Closing.
The
occurrence of the Second Closing is expressly contingent on (i) compliance
with
the Second Closing Condition, (ii) the truth and accuracy, on the Second Closing
Date of the representations and warranties of the Company and Subscriber
contained in this Agreement except for changes that do not constitute a Material
Adverse Effect (as defined in Section 5(a)), (iii) continued compliance with
the
covenants of the Company set forth in this Agreement, and (iv) the
non-occurrence of any Event of Default (as defined in the Note and this
Agreement) or an event that with the passage of time or the giving of notice
could become an Event of Default. “Second
Closing Condition”
shall
mean the actual effectiveness of the Registration Statement as defined in
Section 11.1 hereunder. A Second Closing will not take place in connection
with
any amount of Second Closing Notes for which sufficient Shares have not been
registered in an effective Registration Statement as of the Second Closing
Date.
(e) Second
Closing Deliveries.
On the
Second Closing Date, the Company will deliver a certificate (“Second
Closing Certificate”)
signed
by its chief executive officer and chief financial officer (i) representing
the
truth and accuracy of all the representations and warranties made by the Company
contained in this Agreement, as of the Initial Closing Date, and the Second
Closing Date as if such representations and warranties were made and given
on
all such dates, except for changes that do not constitute a Material Adverse
Effect, (ii) certifying that the information contained in the schedules and
exhibits hereto is substantially accurate as of the Second Closing Date, except
for changes that do not constitute a Material Adverse Effect, (iii) adopting
and
renewing the covenants and representations set forth in Sections 5, 8, 9, 10,
11, and 12 of this Agreement in relation to the Second Closing Date, Second
Closing Notes, and Second Closing Warrants, (iv) representing timely compliance
by the Company with the Second Closing Condition, (v) representing the timely
compliance by the Company with the Company’s applicable registration
requirements set forth in Section 11 of this Agreement except as described
in
Section 1(c) above, and (vi) certifying that an Event of Default or an event
that with the passage of time or the giving of notice could become an Event
of
Default except as described in Section 1(c) above, has not occurred. A legal
opinion nearly identical to the legal opinion referred to in Section 6 of this
Agreement shall be delivered to each Subscriber at the Second Closing in
relation to the Company, Second Closing Notes and Second Closing Warrants
(“Second
Closing Legal Opinion”).
2. Warrants.
On
the
Closing Date, the Company will issue and deliver Class A Warrants to the
Subscribers. One Class A Warrant will be issued for each Share which would
be
issued on the Closing Date assuming the complete conversion of the Note on
the
Closing Date at the Conversion Price. The exercise price to acquire a Warrant
Share upon exercise of a Class A Warrant shall be equal to $0.50, subject to
reduction as described in the Class A Warrant. Upon exercise of a Class A
Warrant, the holder of the Warrant shall receive one Warrant Share and Class
B
Warrant. The exercise price of such Class B Warrant shall be equal to 150%
of
the exercise price of the Class A Warrant in effect at the time of such
exercise, subject to reduction as described in the Class B Warrant. The Warrants
shall be exercisable until five years after the issue date of the Warrants.
Each
holder of the Warrants is granted the registration rights set forth in this
Agreement. The Warrant exercise price and number of Warrant Shares issuable
upon
exercise of the Warrants shall be equitably adjusted to offset the effect of
stock splits, stock dividends, and similar events, and as otherwise described
in
this Agreement and the Warrant.
3. Security
Interest.
The
Subscribers will be granted a security interest in the assets of the Company,
including ownership of the Subsidiaries (as defined in Section 5(a) of this
Agreement) and in the assets of the Subsidiaries, which security interest will
be memorialized in a “Security
Agreement,”
a
form
of which is annexed hereto as Exhibit
D.
The
Subsidiaries will guarantee the Company’s obligations under the Transaction
Documents [as defined in Section 5(c)]. Such guaranties will be memorialized
in
a “Subsidiary
Guaranty”,
the
form of which is annexed hereto as Exhibit
E.
The
Company will execute such other agreements, documents and financing statements
reasonably requested by the Subscribers to memorialize and further protect
the
security interest described herein, which will be filed at the Company’s expense
with the jurisdictions, states and counties designated by the Subscribers.
The
Subscribers will appoint a Collateral Agent to represent them collectively
in
connection with the security interests to be granted to the Subscribers. The
appointment of the Collateral Agent in connection with the Security Agreement
will be pursuant to a “Collateral
Agent Agreement,”
a
form
of which is annexed hereto as Exhibit
F.
4. Subscriber
Representations and Warranties.
Each
Subscriber hereby represents and warrants to and agrees with the Company only
as
to such Subscriber that:
(a) Organization
and Standing of the Subscribers.
If such
Subscriber is an entity, such Subscriber is a corporation, partnership or other
entity duly incorporated or organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or
organization.
(b) Authorization
and Power.
Such
Subscriber has the requisite power and authority to enter into and perform
this
Agreement and the other Transaction Documents and to purchase the Notes and
Warrants being sold to it hereunder. The execution, delivery and performance
of
this Agreement and the other Transaction Documents by such Subscriber and the
consummation by it of the transactions contemplated hereby and thereby have
been
duly authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Subscriber or its Board of Directors,
stockholders, partners, members, as the case may be, is required. This Agreement
and the other Transaction Documents have been duly authorized, executed and
delivered by such Subscriber and constitutes, or shall constitute when executed
and delivered, a valid and binding obligation of such Subscriber enforceable
against such Subscriber in accordance with the terms thereof.
(c) No
Conflicts.
The
execution, delivery and performance of this Agreement and the other Transaction
Documents and the consummation by such Subscriber of the transactions
contemplated hereby and thereby or relating hereto do not and will not (i)
result in a violation of such Subscriber’s charter documents or bylaws or other
organizational documents or (ii) conflict with, or constitute a default (or
an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument or obligation to which
such Subscriber is a party or by which its properties or assets are bound,
or
result in a violation of any law, rule, or regulation, or any order, judgment
or
decree of any court or governmental agency applicable to such Subscriber or
its
properties (except for such conflicts, defaults and violations as would not,
individually or in the aggregate, have a material adverse effect on such
Subscriber). Such Subscriber is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement and the other Transaction Documents or to
purchase the Securities in accordance with the terms hereof, provided that
for
purposes of the representation made in this sentence, such Subscriber is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Company herein.
(d) Information
on Company.
Such
Subscriber has been furnished with or has had access at the XXXXX Website of
the
Commission to the Company's audited financial statements for the period ended
March 31, 2007 (hereinafter referred to collectively as the "Reports").
Such
financial statements were prepared pursuant to Generally Accepted Accounting
Principles in the United States and fairly present in all material respects
the
financial position of the Company and its consolidated subsidiaries, if any,
as
of and for the dates thereof and the results of operations and cash flows for
the periods then ended, subject to normal, immaterial adjustments. In addition,
such
Subscriber may have received in writing from the Company such other information
concerning its operations, financial condition and other matters as such
Subscriber has requested in writing, identified thereon as OTHER WRITTEN
INFORMATION (such other information is collectively, the "Other
Written Information"),
and
considered all factors such
Subscriber deems material in deciding on the advisability of investing in the
Securities.
(e) Information
on Subscriber.
Such
Subscriber is, and will be at the time of the conversion of the Notes and
exercise of the Warrants, an "accredited
investor",
as
such term is defined in Regulation D promulgated by the Commission under the
1933 Act, is experienced in investments and business matters, has made
investments of a speculative nature and has purchased securities of United
States publicly-owned companies in private placements in the past and, with
its
representatives, has such knowledge and experience in financial, tax and other
business matters as to enable such
Subscriber to utilize the information made available by the Company to evaluate
the merits and risks of and to make an informed investment decision with respect
to the proposed purchase, which represents a speculative investment.
Such
Subscriber has the authority and is duly and legally qualified to purchase
and
own the Securities. Such
Subscriber is able to bear the risk of such investment for an indefinite period
and to afford a complete loss thereof. The information set forth on the
signature page hereto regarding such
Subscriber is accurate.
(f) Purchase
of Notes and Warrants.
On each
Closing Date, such
Subscriber will purchase the Notes and Warrants as principal for its own account
for investment only and not with a view toward, or for resale in connection
with, the public sale or any distribution thereof.
(g) Compliance
with Securities Act.
Such
Subscriber understands and agrees that the Securities have not been registered
under the 1933 Act or any applicable state securities laws, by reason of their
issuance in a transaction that does not require registration under the 1933
Act
(based in part on the accuracy of the representations and warranties of
such
Subscriber contained herein), and that such Securities must be held indefinitely
unless a subsequent disposition is registered under the 1933 Act or any
applicable state securities laws or is exempt from such registration.
Such
Subscriber will comply with all applicable rules and regulations in connection
with the sales of the Securities including laws relating to short
sales.
(h) Shares
Legend.
The
Shares, and the Warrant Shares shall bear the following or similar
legend:
"THE
ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAS NOT
BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES."
(i) Warrants
Legend.
The
Warrants shall bear the following or
similar legend:
"NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL
(WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE
FORM,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT
TO
RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER
LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES."
(j) Note
Legend.
The
Note shall bear the following legend:
"NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL
(WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE
FORM,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT
TO
RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER
LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
"
(k) Communication
of Offer.
The
offer to sell the Securities was directly communicated to such Subscriber by
the
Company. At no time was such Subscriber presented with or solicited by any
leaflet, newspaper or magazine article, radio or television advertisement,
or
any other form of general advertising or solicited or invited to attend a
promotional meeting otherwise than in connection and concurrently with such
communicated offer.
(l) Authority;
Enforceability.
This
Agreement and other agreements delivered together with this Agreement or in
connection herewith have been duly authorized, executed and delivered by such
Subscriber and are valid and binding agreements enforceable in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating
to
or affecting creditors’ rights generally and to general principles of equity;
and such Subscriber has full power and authority necessary to enter into this
Agreement and such other agreements and to perform its obligations hereunder
and
under all other agreements entered into by such Subscriber relating
hereto.
(m) Restricted
Securities.
Such
Subscriber understands that the Securities have not been registered under the
1933 Act and such Subscriber will not sell, offer to sell, assign, pledge,
hypothecate or otherwise transfer any of the Securities unless pursuant to
an
effective registration statement under the 1933 Act, or unless an exemption
from
registration is available. Notwithstanding anything to the contrary contained
in
this Agreement, such Subscriber may transfer (without restriction and without
the need for an opinion of counsel) the Securities to its Affiliates (as defined
below) provided that each such Affiliate is an “accredited investor” under
Regulation D and such Affiliate agrees to be bound by the terms and conditions
of this Agreement. For the purposes of this Agreement, an “Affiliate”
of
any
person or entity means any other person or entity directly or indirectly
controlling, controlled by or under direct or indirect common control with
such
person or entity. Affiliate includes each Subsidiary of the Company. For
purposes of this definition, “control”
means
the power to direct the management and policies of such person or firm, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise.
(n) No
Governmental Review.
Such
Subscriber understands that no United States federal or state agency or any
other governmental or state agency has passed on or made recommendations or
endorsement of the Securities or the suitability of the investment in the
Securities nor have such authorities passed upon or endorsed the merits of
the
offering of the Securities.
(o) Correctness
of Representations.
Each
Subscriber represents only as to such Subscriber that the foregoing
representations and warranties are true and correct as of the date hereof and,
unless such Subscriber otherwise notifies the Company prior to a Closing Date
shall be true and correct as of such Closing Date.
(p) Survival.
The
foregoing representations and warranties shall survive the Closing
Date.
5. Company
Representations and Warranties.
The
Company represents and warrants to and agrees with each Subscriber
that:
(a) Due
Incorporation.
The
Company is a corporation or other entity duly incorporated or organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has the requisite corporate power to own
its
properties and to carry on its business as presently
conducted. The Company is duly qualified as a foreign corporation to do business
and is in good standing in each jurisdiction where the nature of the business
conducted or property owned by it makes such qualification necessary, other
than
those jurisdictions in which the failure to so qualify would not have a Material
Adverse Effect. For purposes of this Agreement, a “Material
Adverse Effect”
shall
mean a material adverse effect on the financial condition, results of
operations, prospects, properties or business of the Company and its
Subsidiaries taken as a whole. For purposes of this Agreement, “Subsidiary”
means,
with respect to any entity at any date, any corporation, limited or general
partnership, limited liability company, trust, estate, association, joint
venture or other business entity of which more than 30% of (i) the
outstanding capital stock having (in the absence of contingencies) ordinary
voting power to elect a majority of the board of directors or other managing
body of such entity, (ii) in the case of a partnership or limited liability
company, the interest in the capital or profits of such partnership or limited
liability company or (iii) in the case of a trust, estate, association,
joint venture or other entity, the beneficial interest in such trust, estate,
association or other entity business is, at the time of determination, owned
or
controlled directly or indirectly through one or more intermediaries, by such
entity. The Company’s Subsidiaries as of the Closing Date are set forth on
Schedule
5(a).
(b) Outstanding
Stock.
All
issued and outstanding shares of capital stock of the Company and each
Subsidiary have been duly authorized and validly issued and are fully paid
and
non-assessable.
(c) Authority;
Enforceability.
This
Agreement, the Note, the Warrants, the Security Agreement, Subsidiary Guaranty,
Escrow Agreement, and any other agreements delivered together with this
Agreement or in connection herewith (collectively “Transaction
Documents”)
have
been duly authorized, executed and delivered by the Company, and Subsidiaries
(as applicable) and are valid and binding agreements of the Company and
Subsidiaries, and are enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity. The Company has full corporate
power and authority necessary to enter into and deliver the Transaction
Documents and to perform its obligations thereunder.
(d) Additional
Issuances.
There
are
no outstanding agreements or preemptive or similar rights affecting the
Company's Common Stock or equity and no outstanding rights, warrants or options
to acquire, or instruments convertible into or exchangeable for, or agreements
or understandings with respect to the sale or issuance of any shares of Common
Stock or equity of the Company or Subsidiaries or other equity interest in
the
Company except as described on Schedule
5(d).
The
Common Stock of the Company on a fully diluted basis outstanding as of the
last
Business Day preceding the Closing Date is set forth on Schedule
5(d).
(e) Consents.
No
consent, approval, authorization or order of any court, governmental agency
or
body or arbitrator having jurisdiction over the Company, or any of its
Affiliates, or the Company's shareholders is required for the execution by
the
Company of the Transaction Documents and compliance and performance by the
Company of its obligations under the Transaction Documents, including, without
limitation, the issuance and sale of the Securities. The Transaction Documents
and the Company’s performance of its obligations thereunder has been unanimously
approved by the Company’s Board of Directors.
(f) No
Violation or Conflict.
Assuming the representations and warranties of the Subscribers in Section 4
are
true and correct, neither the issuance and sale of the Securities nor the
performance of the Company’s obligations under this Agreement and all other
agreements entered into by the Company relating thereto by the Company
will:
(i) violate,
conflict with, result in a breach of, or constitute a default (or an event
which
with the giving of notice or the lapse of time or both would be reasonably
likely to constitute a default) under (A) the articles or certificate of
incorporation, charter or bylaws of the Company, (B) to the Company's knowledge,
any decree, judgment, order, law, treaty, rule, regulation or determination
applicable to the Company of any court, governmental agency or body, or
arbitrator having jurisdiction over the Company or over the properties or assets
of the Company or any of its Affiliates, (C) the terms of any bond, debenture,
note or any other evidence of indebtedness, or any agreement, stock option
or
other similar plan, indenture, lease, mortgage, deed of trust or other
instrument to which the Company or any of its Affiliates is a party, by which
the Company or any of its Affiliates is bound, or to which any of the properties
of the Company or any of its Affiliates is subject, or (D) the terms of any
"lock-up" or similar provision of any underwriting or similar agreement to
which
the Company, or any of its Affiliates is a party except the violation, conflict,
breach, or default of which would not have a Material Adverse Effect;
or
(ii) result
in
the creation or imposition of any lien, charge or encumbrance upon the
Securities or any of the assets of the Company or any of its Affiliates except
as described herein; or
(iii) except
as
described in Schedule
5(d),
result
in the activation of any anti-dilution rights or a reset or repricing of any
debt or security instrument of any other creditor or equity holder of the
Company, nor result in the acceleration of the due date of any obligation of
the
Company; or
(iv) will
result in the triggering of any piggy-back registration rights of any person
or
entity holding securities of the Company or having the right to receive
securities of the Company.
(g) The
Securities.
The
Securities upon issuance:
(i) are,
or
will be, free and clear of any security interests, liens, claims or other
encumbrances, subject to restrictions upon transfer under the 1933 Act and
any
applicable state securities laws;
(ii) have
been, or will be, duly and validly authorized, fully paid and non-assessable
and
on the date of issuance of the Purchase Shares, the Shares upon conversion
of
the Notes and the Warrant Shares and upon exercise of the Warrants, the Purchase
Shares, Shares and Warrant Shares will be duly and validly issued, fully paid
and non-assessable and if registered pursuant to the 1933 Act and resold
pursuant to an effective registration statement will be free trading and
unrestricted;
(iii) will
not
have been issued or sold in violation of any preemptive or other similar rights
of the holders of any securities of the Company;
(iv) will
not
subject the holders thereof to personal liability by reason of being such
holders; and
(v) assuming
the representations warranties of the Subscribers as set forth in Section 4
hereof are true and correct, will not result in a violation of Section 5 under
the 1933 Act.
(h) Litigation.
There
is no pending or, to the best knowledge of the Company, threatened action,
suit,
proceeding or investigation before any court, governmental agency or body,
or
arbitrator having jurisdiction over the Company, or any of its Affiliates that
would affect the execution by the Company or the performance by the Company
of
its obligations under the Transaction Documents. Except as disclosed in the
Reports, there is no pending or, to the best knowledge of the Company, basis
for
or threatened action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over the Company,
or any of its Affiliates which litigation if adversely determined would have
a
Material Adverse Effect.
(i) No
Market Manipulation.
The
Company and its Affiliates have not taken, and will not take, directly or
indirectly, any action designed to, or that might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to
facilitate the sale or resale of the Securities or affect the price at which
the
Securities may be issued or resold.
(j) Information
Concerning Company.
The
Reports and Other Written Information contain all material information relating
to the Company and its operations and financial condition as of their respective
dates which information is required to be disclosed therein. Since the date
of
the financial statements included in the Reports, and except as modified in
the
Other Written Information or in the Schedules hereto, there has been no Material
Adverse Event relating to the Company's business, financial condition or affairs
not disclosed in the Reports. The Reports and Other Written Information do
not
contain any untrue statement of a material fact or omit to state a material
fact
required to be stated therein or necessary to make the statements therein,
taken
as a whole, not misleading in light of the circumstances when made.
(k) Stop
Transfer.
The
Company will not issue any stop transfer order or other order impeding the
sale,
resale or delivery of any of the Securities, except as may be required by any
applicable federal or state securities laws and if so required only if
contemporaneous notice of such instruction is given to the
Subscriber.
(l) Defaults.
The
Company is not in violation of its articles of incorporation or bylaws. The
Company is (i) not in default under or in violation of any other material
agreement or instrument to which it is a party or by which it or any of its
properties are bound or affected, which default or violation would have a
Material Adverse Effect,
(ii)
not in default with respect to any order of any court, arbitrator or
governmental body or subject to or party to any order of any court or
governmental authority arising out of any action, suit or proceeding under
any
statute or other law respecting antitrust, monopoly, restraint of trade, unfair
competition or similar matters, or (iii) not in violation of any statute, rule
or regulation of any governmental authority which violation would have a
Material Adverse Effect.
(m) No
Integrated Offering.
Neither
the Company, nor any of its Affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security
or
solicited any offers to buy any security under circumstances that would cause
the offer of the Securities pursuant to this Agreement to be integrated with
prior offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions, including, without limitation, under the rules
and regulations of the OTC Bulletin Board (“Bulletin
Board”)
which
would impair the exemptions relied upon in this Offering or the Company’s
ability to timely comply with its obligations hereunder. Neither the Company
nor
any of its Affiliates will take any action or steps that would cause the offer
or issuance of the Securities to be integrated with other offerings or issuances
which would impair the exemptions relied upon in this Offering or the Company’s
ability to timely comply with its obligations hereunder. The Company will not
conduct any offering other than the transactions contemplated hereby that will
be integrated with the offer or issuance of the Securities that would impair
the
exemptions relied upon in this Offering or the Company’s ability to timely
comply with its obligations hereunder.
(n) No
General Solicitation.
Neither
the Company, nor any of its Affiliates, nor to its knowledge, any person acting
on its or their behalf, has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D under the 0000 Xxx)
in
connection with the offer or sale of the Securities.
(o) No
Undisclosed Liabilities.
The
Company has no liabilities or obligations which are material, individually
or in
the aggregate, other than those incurred in the ordinary course of the Company
businesses since September 30, 2007 and which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect,
except
as disclosed in the Reports or on Schedule
5(o).
(p) No
Undisclosed Events or Circumstances.
Since
September 30, 2007, no event or circumstance has occurred or exists with respect
to the Company or its businesses, properties, operations or financial condition,
that, under applicable law, rule or regulation, requires public disclosure
or
announcement prior to the date hereof by the Company but which has not been
so
publicly announced or disclosed in the Reports.
(q) Capitalization.
The
authorized and outstanding capital stock of the Company and Subsidiaries as
of
the date of this Agreement and the Closing Date (not including the Securities)
are set forth in the Reports or on Schedule
5(d).
Except
as set forth on Schedule
5(d),
there
are no options, warrants, or rights to subscribe to, securities, rights or
obligations convertible into or exchangeable for or giving any right to
subscribe for any shares of capital stock of the Company or any of its
Subsidiaries.
(r) Dilution.
The
Company's executive officers and directors understand the nature of the
Securities being sold hereby and recognize that the issuance of the Securities
will have a potential dilutive effect on the equity holdings of other holders
of
the Company’s equity or rights to receive equity of the Company. The board of
directors of the Company has concluded, in its good faith business judgment
that
the issuance of the Securities is in the best interests of the Company. The
Company specifically acknowledges that its obligation to issue the Shares upon
conversion of the Notes, and the Warrant Shares upon exercise of the Warrants,
is binding upon the Company and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Company or parties entitled to receive equity of the Company.
(s) No
Disagreements with Accountants and Lawyers.
There
are no material disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise between the Company and the accountants
and
lawyers presently employed by the Company, including but not limited to disputes
or conflicts over payment owed to such accountants and lawyers, nor have there
been any such disagreements during the two years prior to the Closing
Date.
(t) Investment
Company.
Neither
the Company nor any Affiliate of the Company is an “investment company” within
the meaning of the Investment Company Act of 1940, as amended.
(u) Foreign
Corrupt Practices.
Neither
the Company, nor to the knowledge of the Company, any agent or other person
acting on behalf of the Company, has (i) directly or indirectly, used any funds
for unlawful contributions, gifts, entertainment or other unlawful expenses
related to foreign or domestic political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to any
foreign or domestic political parties or campaigns from corporate funds, (iii)
failed to disclose fully any contribution made by the Company (or made by any
person acting on its behalf of which the Company is aware) which is in violation
of law, or (iv) violated in any material respect any provision of the Foreign
Corrupt Practices Act of 1977, as amended.
(v) DTC
Status.
The
Company’s transfer agent is a participant in, and the Common Stock is eligible
for transfer pursuant to, the Depository Trust Company Automated Securities
Transfer Program. The name, address, telephone number, fax number, contact
person and email address of the Company transfer agent is set forth on
Schedule
5(v)
hereto.
(w) Solvency.
Based
on the financial condition of the Company as of the Closing Date after giving
effect to the receipt by the Company of the proceeds from the sale of the Notes
hereunder, (i) the Company’s fair saleable value of its assets exceeds the
amount that will be required to be paid on or in respect of the Company’s
existing debts and other liabilities (including known contingent liabilities)
as
they mature; (ii) the Company’s assets do not constitute unreasonably small
capital to carry on its business for the current fiscal year as now conducted
and as proposed to be conducted including its capital needs taking into account
the particular capital requirements of the business conducted by the Company,
and projected capital requirements and capital availability thereof; and (iii)
the current cash flow of the Company, together with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into account
all anticipated uses of the cash, would be sufficient to pay all amounts on
or
in respect of its debt when such amounts are required to be paid. The Company
does not intend to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be payable on
or
in respect of its debt).
(x) Company
Predecessor and Subsidiaries.
The
Company makes each of the representations contained in Sections 5(a), (b),
(c),
(d), (e), (f), (h), (j), (l), (o), (p), (q), (s), (t), and (u) of this
Agreement, as same relate to the Subsidiary of the Company. All representations
made by or relating to the Company of a historical or prospective nature and
all
undertakings described in Sections 9(g) through 9(l) shall relate, apply and
refer to the Company and its predecessors. The Company represents that it owns
100% of the outstanding equity of the Subsidiaries and rights to receive equity
of the Subsidiaries free and clear of all liens, encumbrances and claims, except
as set forth on Schedule
5(d).
No
person or entity other than the Company has the right to receive any equity
interest in the Subsidiaries.
(y) Correctness
of Representations.
The
Company represents that the foregoing representations and warranties are true
and correct as of the date hereof in all material respects, and, unless the
Company otherwise notifies the Subscribers prior to each Closing Date, shall
be
true and correct in all material respects as of each Closing Date.
(z) Survival.
The
foregoing representations and warranties shall survive the Closing
Date.
6. Regulation
D Offering/Legal Opinion.
The
offer and issuance of the Securities to the Subscribers is being made pursuant
to the exemption from the registration provisions of the 1933 Act afforded
by
Section 4(2) or Section 4(6) of the 1933 Act and/or Rule 506 of Regulation
D
promulgated thereunder. On the Closing Date, the Company will provide an opinion
reasonably acceptable to the Subscribers from the Company's legal counsel
opining on the availability of an exemption from registration under the 1933
Act
as it relates to the offer and issuance of the Securities and other matters
reasonably requested by Subscribers. A form of the legal opinion is annexed
hereto as Exhibit
G.
The
Company will provide, at the Company's expense, such other legal opinions,
if
any, as are reasonably necessary in each Subscriber’s opinion for the issuance
and resale of the Common Stock issuable upon conversion of the Notes and
exercise of the Warrants pursuant to an effective registration statement, Rule
144 under the 1933 Act or an exemption from registration.
7.1. Conversion
of Note.
(a) Upon
the
conversion of a Note or part thereof, the Company shall, at its own cost and
expense, take all necessary action, including obtaining and delivering, an
opinion of counsel to assure that the Company's transfer agent shall issue
stock
certificates in the name of Subscriber (or its permitted nominee) or such other
persons as designated by Subscriber and in such denominations to be specified
at
conversion representing the number of shares of Common Stock issuable upon
such
conversion. The Company warrants that no instructions other than these
instructions have been or will be given to the transfer agent of the Company's
Common Stock and that the certificates representing such shares shall contain
no
legend other than the usual 1933 Act restriction from transfer legend. If and
when a Subscriber sells the Shares, assuming (i) the Registration Statement
(as
defined below) is effective and the prospectus, as supplemented or amended,
contained therein is current and (ii) such Subscriber or its agent confirms
in
writing to the transfer agent that such Subscriber has complied with the
prospectus delivery requirements, the Company will reissue the Shares without
restrictive legend and the Shares will be free-trading, and freely transferable.
In the event that the Shares are sold in a manner that complies with an
exemption from registration, the Company will promptly instruct its counsel
to
issue to the transfer agent an opinion permitting removal of the legend
(indefinitely, if pursuant to Rule 144(k) of the 1933 Act, or for 90 days if
pursuant to the other provisions of Rule 144 of the 1933 Act, provided that
Subscriber delivers all reasonably requested representations in support of
such
opinion).
(b) A
Subscriber will give notice of its decision to exercise its right to convert
the
Note, interest, or part thereof by telecopying, or otherwise delivering a
completed Notice of Conversion (a form of which is annexed as Exhibit
A
to the
Note) to the Company via confirmed telecopier transmission or otherwise pursuant
to Section 13(a) of this Agreement. Such Subscriber will not be
required to surrender the Note
until
the Note has been fully converted or satisfied. Each date on which a Notice
of
Conversion is telecopied to the Company in accordance with the provisions hereof
by 6 PM Eastern Time (“ET”) (or if received by the Company after 6 PM ET then
the next business day) shall be deemed a “Conversion
Date.”
The
Company will itself or cause the Company’s transfer agent to transmit the
Company's Common Stock certificates representing the Shares issuable upon
conversion of the Note to such Subscriber via express courier for receipt by
such Subscriber within three (3) business days after receipt by the Company
of
the Notice of Conversion (such third day being the "Delivery
Date").
In
the event the Shares are electronically transferable, then delivery of the
Shares must
be made
by electronic transfer provided request for such electronic transfer has been
made by the Subscriber.
A Note representing the balance of the Note not so converted will be provided
by
the Company to such Subscriber if requested by Subscriber, provided such
Subscriber delivers the
original Note to the Company. In the event that a Subscriber elects not to
surrender a Note for reissuance upon partial payment or conversion of a Note,
such Subscriber hereby indemnifies the Company against any and all loss or
damage attributable to a third-party claim in an amount in excess of the actual
amount then due under the Note.
(c) The
Company understands that a delay in the delivery of the Shares in the form
required pursuant to Section 7.1 hereof, or the Mandatory Redemption Amount
described in Section 7.2 hereof, respectively later than the Delivery Date
or
the Mandatory Redemption Payment Date (as hereinafter defined) could result
in
economic loss to the Subscriber. As compensation to a Subscriber for such loss,
the Company agrees to pay (as liquidated damages and not as a penalty) to such
Subscriber for late issuance of Shares in the form required pursuant to Section
7.1 hereof upon Conversion of the Note in the amount of $100 per business day
after the Delivery Date for each $10,000 of Note principal amount (and
proportionately for other amounts) being converted of the corresponding Shares
which are not timely delivered. The Company shall pay any payments incurred
under this Section in immediately available funds upon demand. Furthermore,
in
addition to any other remedies which may be available to the Subscriber, in
the
event that the Company fails for any reason to effect delivery of the Shares
within seven (7) business days after the Delivery Date or make payment within
seven (7) business days after the Mandatory Redemption Payment Date (as defined
in Section 7.2 below), such Subscriber will be entitled to revoke all or part
of
the relevant Notice of Conversion or rescind all or part of the notice of
Mandatory Redemption by delivery of a notice to such effect to the Company
whereupon the Company and such Subscriber shall each be restored to their
respective positions immediately prior to the delivery of such notice, except
that the liquidated damages described above shall be payable through the date
notice of revocation or rescission is given to the Company.
(d) The
Company agrees and acknowledges that despite the pendency of a not yet effective
Registration Statement which includes for registration the Registrable
Securities (as defined in Section 11.1(iv)), a Subscriber is permitted to and
the Company will issue to such Subscriber Shares upon conversion of the Note
and
Warrant Shares upon exercise of the Warrants. Such Shares will, if required
by
law, bear the legends described in Section 4 above and if the requirements
of
Rule 144 under the 1933 Act are satisfied, be resalable thereunder.
7.2. Mandatory
Redemption at Subscriber’s Election.
In the
event (i) the Company is prohibited from issuing Shares, (ii) upon the
occurrence of any other Event of Default (as defined in the Note or in this
Agreement), that continues for more than twenty (20) business days, (iii) a
Change in Control (as defined below), or (iv) of the liquidation, dissolution
or
winding up of the Company, then at the Subscriber's election, the Company must
pay to each Subscriber ten (10) business days after request by each Subscriber
(“Calculation
Period”),
a sum
of money determined by multiplying up to the outstanding principal amount of
the
Note designated by each such Subscriber by 120%, plus accrued but unpaid
interest ("Mandatory
Redemption Payment").
The
Mandatory Redemption Payment must be received by each Subscriber on the same
date as the Shares otherwise deliverable or within ten (10) business days after
request, whichever is sooner ("Mandatory
Redemption Payment Date").
Upon
receipt of the Mandatory Redemption Payment, the corresponding Note principal
and interest will be deemed paid and no longer outstanding. Liquidated damages
calculated pursuant to Section 7.1(c) hereof, that have been paid or accrued
for
the ten day period prior to the actual receipt of the Mandatory Redemption
Payment by a Subscriber shall be credited against the Mandatory Redemption
Payment. For purposes of this Section 7.2, “Change
in Control”
shall
mean (i) the Company no longer having a class of shares publicly traded or
listed on a Principal Market, (ii) the Company becoming a Subsidiary of another
entity (other than a corporation formed by the Company for purposes of
reincorporation in another U.S. jurisdiction), (iii) a majority of the board
of
directors of the Company as of the Closing Date, no longer serving as directors
of the Company, except due to natural causes (which shall include, termination
of such directors by the holders of more than 50% of the equity outstanding
as
of the Closing Date), and (iv) the sale, lease or transfer of substantially
all
the assets of the Company or its Subsidiaries.
7.3. Maximum
Conversion.
No
Subscriber shall be entitled to convert on a Conversion Date that amount of
the
Note in connection with that number of shares of Common Stock which would be
in
excess of the sum of (i) the number of shares of Common Stock beneficially
owned
by such Subscriber and its Affiliates on a Conversion Date, and (ii) the number
of shares of Common Stock issuable upon the conversion of the Note with respect
to which the determination of this provision is being made on a Conversion
Date,
which would result in beneficial ownership by such Subscriber and its Affiliates
of more than 4.99% of the outstanding shares of Common Stock of the Company
on
such Conversion Date. For the purposes of the provision to the immediately
preceding sentence, beneficial ownership shall be determined in accordance
with
Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule
13d-3
thereunder. Subject to the foregoing, the Subscriber shall not be limited to
aggregate conversions of only 4.99% and aggregate conversions by the Subscriber
may exceed 4.99%. The Subscriber may increase the permitted beneficial ownership
amount up to 9.99% upon and effective after 61 days’ prior written notice to the
Company. Such Subscriber may allocate which of the equity of the Company deemed
beneficially owned by such Subscriber shall be included in the 4.99% amount
described above and which shall be allocated to the excess above
4.99%.
7.4. Injunction
Posting of Bond.
In the
event a Subscriber shall elect to convert a Note or part thereof, the Company
may not refuse conversion or exercise based on any claim that such Subscriber
or
any one associated or affiliated with such Subscriber has been engaged in any
violation of law, or for any other reason, unless, an injunction from a court,
on notice, restraining and or enjoining conversion of all or part of such Note
shall have been sought and obtained by the Company or at the Company’s request
or with the Company’s assistance, and
the
Company has posted a surety bond for the benefit of such Subscriber in the
amount of 120% of the outstanding principal and interest of the Note, or
aggregate purchase price of the Shares which are sought to be subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Subscriber to the extent Subscriber obtains judgment in Subscriber’s
favor.
7.5. Buy-In.
In
addition to any other rights available to a Subscriber, if the Company fails
to
deliver to a Subscriber such shares issuable upon conversion of a Note by the
Delivery Date and if after seven (7) business days after the Delivery Date
such
Subscriber or a broker on such Subscriber’s behalf purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction
of a
sale by such Subscriber of the Common Stock which such Subscriber was entitled
to receive upon such conversion (a "Buy-In"),
then
the Company shall pay in cash to such Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) such
Subscriber's total purchase price (including brokerage commissions, if any)
for
the shares of Common Stock so purchased exceeds (B) the aggregate principal
and/or interest amount of the Note for which such conversion was not timely
honored together
with interest thereon at a rate of 15% per annum, accruing until such amount
and
any accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty. For
example, if a Subscriber purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 of note principal and/or interest, the Company shall
be
required to pay such Subscriber $1,000 plus interest. Such Subscriber shall
provide the Company written notice and evidence indicating the amounts payable
to such Subscriber in respect of the Buy-In.
7.6 Adjustments.
The
Conversion Price, Warrant exercise price and amount of Shares issuable upon
conversion of the Notes and exercise of the Warrants shall be equitably adjusted
and as otherwise described in this Agreement, the Notes and
Warrants.
7.7. Redemption.
The
Notes shall not be redeemable or callable by the Company except as described
in
the Note and Warrants.
8. Commissions/Due
Diligence Fee/Legal Fees.
(a) Commissions.
The
Company on the one hand, and each Subscriber (for himself only) on the other
hand, agrees to indemnify the other against and hold the other harmless from
any
and all liabilities to any persons claiming brokerage commissions or similar
fees except as described on Schedule
8(a)
on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby and arising out of such party’s actions. Anything in this
Agreement to the contrary notwithstanding, each Subscriber is providing
indemnification only for such Subscriber’s own actions and not for any action of
any other Subscriber. The Company represents that there are no parties entitled
to receive fees, commissions, or similar payments in connection with the
offering described in this Agreement except as described on Schedule
8(a)
hereto.
(b) Due
Diligence Fee.
The
Company will pay a due diligence fee (“Due
Diligence Fee”)
to the
lead investor or its designees (each a “Due
Diligence Fee Recipient”)
as
described on Schedule
8(b).
The
aggregate Due Diligence Fee shall be equal to eight percent (8%) of the Purchase
Price and Warrants (“Due
Diligence Warrants”)
as
more fully described on Schedule
8(b)
hereto.
The cash portion of the Due Diligence Fee will be payable on each Closing Date
out of funds held pursuant to the Escrow Agreement.
(c) Subscriber’s
Legal Fees.
The
Company shall pay to Grushko & Xxxxxxx, P.C., a cash fee of $20,000
(“Cash
Legal Fees”)
and
60,600 Shares of the Company’s Common Stock (“Legal
Fee Shares”)
as
reimbursement for services rendered to the Subscribers in connection with this
Agreement and the purchase and sale of the Notes, and Warrants (the
“Offering”).
The
Legal Fee Shares are granted the same registration rights granted to the
Subscribers in this Offering. The Subscribers’ Legal Fees will be paid on the
Initial Closing Date. The Subscribers’ Legal Fees and expenses will be payable
out of funds held pursuant to the Escrow Agreement. Grushko & Xxxxxxx, P.C.
will be reimbursed on each Closing Date for all lien searches, filing fees,
and
printing and shipping costs for the closing statements to be delivered to
Subscribers.
9. Covenants
of the Company.
The
Company covenants and agrees with the Subscribers as follows:
(a) Stop
Orders.
The
Company will advise the Subscribers, within twenty-four hours after it receives
notice of issuance by the Commission, any state securities commission or any
other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of the Company, or of the suspension
of the qualification of the Common Stock of the Company for offering or sale
in
any jurisdiction, or the initiation of any proceeding for any such
purpose.
(b) Listing.
Not
later
than 170 days after the Initial Closing Date [as defined in Section 1(a), the
Company shall secure the listing of the Common Stock, Shares and Warrants Shares
upon the Bulletin Board, American Stock Exchange or a NASDAQ domestic market
or
exchange, any of which is a “Principal
Market”
(c) Market
Regulations.
The
Company shall notify the Commission, the Principal Market and applicable state
authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to the
Subscribers and promptly provide copies thereof to the Subscribers.
(d) Filing
Requirements.
From
the
sooner of the Actual Effective Date, or ninety (90) days after the Initial
Closing Date and until the later to occur of (i) two (2) years after the Second
Closing Date, (ii) until all the Shares are resalable or transferable by all
the
Subscribers pursuant to Rule 144, without regard to volume limitations or (iii)
the Notes are no longer outstanding (the date of occurrence of the first such
event being the “End Date”), the Company will (A) cause its Common Stock to be
registered under Section 12(b) or 12(g) of the 1934 Act, (B) comply in all
respects with its reporting and filing obligations under the 1934 Act, (C)
voluntarily comply with all reporting requirements that are applicable to an
issuer with a class of shares registered pursuant to Section 12(g) of the 1934
Act, if Company is not subject to such reporting requirements, and (D) comply
with all requirements related to any registration statement filed pursuant
to
this Agreement. The Company will use its best efforts not to take any action
or
file any document (whether or not permitted by the 1933 Act or the 1934 Act
or
the rules thereunder) to terminate or suspend such registration or to terminate
or suspend its reporting and filing obligations under said acts until the End
Date. Until the End Date, the Company will continue the listing or quotation
of
the Common Stock on a Principal Market and will comply in all respects with
the
Company's reporting, filing and other obligations under the bylaws or rules
of
the Principal Market. The Company agrees to timely file a Form D with respect
to
the Securities if required under Regulation D and to provide a copy thereof
to
each Subscriber promptly after such filing.
(e) Reporting
Requirements.
Until
the time the Company becomes subject to the reporting provisions of the Exchange
Act, the Company shall furnish to each Subscriber that holds Notes and/or
underlying Shares, the following:
(i) As
soon
as available and in any event within ninety (90) days after the end of each
fiscal year of the Company, audited financial statements of the Company as
at
the end of such fiscal year and related statements of income and expenses for
such fiscal year, all in reasonable detail and in scope to the Subscriber,
prepared in accordance with GAAP, with the opinion of an independent certified
public accountant reasonably acceptable to the Subscriber as evidenced by the
prior written consent of the Subscriber;
(ii) As
soon
as available and in any event within forth-five (45) days after the end of
the
sixth (6th) month of the Company’s fiscal year, reviewed financial statements of
the Company as at the end of such six month period and related statements of
income and expenses for such period, all in reasonable detail and scope to
Subscriber, prepared in accordance with GAAP, and prepared by an independent
certified public accountant reasonably acceptable to the Subscriber as evidenced
by the prior written consent of the Subscriber;
(iii) As
soon
as available and in any event within thirty (30) days after the end of each
fiscal quarter, quarterly financial statements prepared by the Company and
other
information reasonably requested by the Subscriber;
(iv) As
soon
as available and in any event within fifteen (15) days after the end of each
month, monthly reports containing information on the Company's sales and other
information reasonably requested by the Subscriber;
(v) As
soon
as available and in any event not less than thirty (30) days prior to the
commencement of each fiscal year, a detailed annual budget and strategic plan
for the Company's business for such fiscal year, which shall have been approved
by the Company's Board of Directors;
(vi) As
soon
as possible and in any event within five (5) days after the Subscribers notify
the Company of the occurrence of each Event of Default, a statement of an
authorized officer of the Company setting forth the nature and period of
existence of such Event of Default and the action which the Company has taken
and proposes to take with respect thereto;
(vii) Promptly
after the sending or filing thereof, copies of all reports, if any, which the
Company sends to any of its shareholders, and copies of all reports and
registration statements, if any, which the Company files with the Commission
or
any Trading Market;
(viii) Promptly
after the filing or receiving thereof, copies of all reports and notices, if
any, which the Company files under ERISA, with the Internal Revenue Service
or
the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or
which the Company receives from any of such Persons;
(ix) Promptly
upon determination by the Company’s Chief Executive Officer of the need for the
Company or Board of Directors to obtain additional financing, all information
concerning such determination if, as and when available;
(x) Information
concerning offers or solicitations, and the terms and conditions thereof, for
additional equity financing, given to the Subscriber not less than 30 days
prior
to the entering into of such financial arrangement; and
(xi) Such
other information respecting the condition or operations, financial or
otherwise, of the Company as the Subscribers may from time to time reasonably
request.
(f) Use
of
Proceeds.
The
proceeds of the Offering will be employed by the Company as described on
Schedule
9(f).
Except
as described on Schedule
9(f),
the
Purchase Price may not and will not be used for accrued and unpaid officer
and
director salaries, payment of financing related debt, redemption of outstanding
notes or equity instruments of the Company nor non-trade obligations outstanding
on a Closing Date. For so long as any Notes are outstanding, the Company will
not prepay any financing related debt obligations nor redeem any equity
instruments of the Company.
(g) Reservation.
Prior
to Initial Closing Date, and at all times thereafter, the Company shall have
reserved, pro rata,
on
behalf of each holder of a Note or Warrant, from its authorized but unissued
Common Stock, a number of common shares equal to 175%
of
the amount of Common Stock necessary to allow each holder of a Note to be able
to convert all such outstanding Notes and interest (if any) and reserve the
amount of Warrant Shares issuable upon exercise of the Warrants.
(h)
DTC
Program.
Within
60 days of the Initial Closing and thereafter at all times that Notes or
Warrants are outstanding, the Company will employ as the transfer agent for
the
Common Stock, Shares and Warrant Shares a participant in the Depository Trust
Company Automated Securities Transfer Program.
(i) Taxes.
From
the date of this Agreement and until the End Date, the Company will promptly
pay
and discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon the
income, profits, property or business of the Company; provided, however, that
any such tax, assessment, charge or levy need not be paid if the validity
thereof shall currently be contested in good faith by appropriate proceedings
and if the Company shall have set aside on its books adequate reserves with
respect thereto, and provided, further, that the Company will pay all such
taxes, assessments, charges or levies forthwith upon the commencement of
proceedings to foreclose any lien which may have attached as security
therefore.
(j) Insurance.
From
the date of this Agreement and until the End Date, the Company will keep its
assets which are of an insurable character insured by financially sound and
reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in the Company’s line of business, in
amounts sufficient to prevent the Company from becoming a co-insurer and not
in
any event less than one hundred percent (100%) of the insurable value of the
property insured less reasonable deductible amounts; and the Company will
maintain, with financially sound and reputable insurers, insurance against
other
hazards and risks and liability to persons and property to the extent and in
the
manner customary for companies in similar businesses similarly situated and
to
the extent available on commercially reasonable terms.
(k) Books
and Records.
From the
date of this Agreement and until the End Date, the Company will keep true
records and books of account in which full, true and correct entries will be
made of all dealings or transactions in relation to its business and affairs
in
accordance with generally accepted accounting principles applied on a consistent
basis.
(l) Governmental
Authorities.
From the
date of this Agreement and until the End Date, the Company shall duly observe
and conform in all material respects to all valid requirements of governmental
authorities relating to the conduct of its business or to its properties or
assets.
(m) Intellectual
Property.
From
the date of this Agreement and until the End Date, the Company shall maintain
in
full force and effect its corporate existence, rights and franchises and all
licenses and other rights to use intellectual property owned or possessed by
it
and reasonably deemed to be necessary to the conduct of its business, unless
it
is sold for value.
(n) Properties.
From the
date of this Agreement and until the End Date, the Company will keep its
properties in good repair, working order and condition, reasonable wear and
tear
excepted, and from time to time make all necessary and proper repairs, renewals,
replacements, additions and improvements thereto; and the Company will at all
times comply with each provision of all leases to which it is a party or under
which it occupies property if the breach of such provision could reasonably
be
expected to have a Material Adverse Effect.
(o) Confidentiality/Public
Announcement.
From the
date of this Agreement and until the End Date, the Company agrees that except
in
connection with a Form 8-K and the registration statement or statements
regarding the Subscribers’ securities or in correspondence with the SEC
regarding same, it will not disclose publicly or privately the identity of
the
Subscribers unless expressly agreed to in writing by a Subscriber or only to
the
extent required by law and then only upon five days prior notice to Subscriber.
In any event and subject to the foregoing, the Company undertakes to file a
Form
10-SB, Form 8-K or make a public announcement describing the Offering not later
than the business day after the Closing Date. Prior to filing or announcement,
such Form 10-SB, Form 8-K or public announcement will be provided to Subscribers
for their review and approval. In the Form 10-SB, Form 8-K or public
announcement, the Company will specifically disclose the amount of Common Stock
outstanding immediately after the Closing. Upon delivery by the
Company to the Subscribers after the Closing Date of any notice or information,
in writing, electronically or otherwise, and while a Note, Shares, Warrants,
or
Warrant Shares are held by such Subscribers, unless the Company has
in good faith determined that the matters relating to such notice do not
constitute material, nonpublic information relating to
the Company or Subsidiaries, the Company shall within one
business day after any such delivery publicly disclose such
material, nonpublic information on a Report on Form
10-SB, Form 8-K or otherwise. In
the event that the Company believes that a
notice or communication to a Subscriber contains material, nonpublic
information, relating to the Company or Subsidiaries, the Company shall so
indicate to such Subscriber contemporaneously with delivery of such notice
or
information. In the absence of any such indication, such Subscriber shall
be allowed to presume that all matters relating to such notice and information
do not constitute material, nonpublic information relating to the Company
or its Subsidiaries.
(p) Non-Public
Information.
The
Company covenants and agrees that except for the Reports, Other Written
Information and schedules and exhibits to this Agreement, neither it nor any
other person acting on its behalf will at any time provide any Subscriber or
its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Subscriber shall
have
agreed in writing to keep such information in confidence. The Company
understands and confirms that each Subscriber shall be relying on the foregoing
representations in effecting transactions in securities of the
Company.
(q) Negative
Covenants.
So long
as a Note is outstanding, without the consent of the Subscribers, the Company
will not and will not permit any of its Subsidiaries to directly or
indirectly:
(i) create,
incur, assume or suffer to exist any pledge, hypothecation, assignment, deposit
arrangement, lien, charge, claim, security interest, security title, mortgage,
security deed or deed of trust, easement or encumbrance, or preference, priority
or other security agreement or preferential arrangement of any kind or nature
whatsoever (including any lease or title retention agreement, any financing
lease having substantially the same economic effect as any of the foregoing,
and
the filing of, or agreement to give, any financing statement perfecting a
security interest under the Uniform Commercial Code or comparable law of any
jurisdiction) (each, a “Lien”)
upon
any of its property, whether now owned or hereafter acquired except for: (A)
the
Excepted Issuances (as defined in Section 12 hereof), and (B) (a) Liens imposed
by law for taxes that are not yet due or are being contested in good faith
and
for which adequate reserves have been established in accordance with generally
accepted accounting principles; (b) carriers’, warehousemen’s, mechanics’,
material men’s, repairmen’s and other like Liens imposed by law, arising in the
ordinary course of business and securing obligations that are not overdue by
more than 30 days or that are being contested in good faith and by appropriate
proceedings; (c) pledges and deposits made in the ordinary course of business
in
compliance with workers’ compensation, unemployment insurance and other social
security laws or regulations; (d) deposits to secure the performance of bids,
trade contracts, leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature, in each case in the
ordinary course of business; (e) Liens created with respect to the financing
of
the purchase of new property in the ordinary course of the Company’s business up
to the amount of the purchase price of such property; and (f) easements, zoning
restrictions, rights-of-way and similar encumbrances on real property imposed
by
law or arising in the ordinary course of business that do not secure any
monetary obligations and do not materially detract from the value of the
affected property (each of (a) through (f), a “Permitted
Lien”);
(ii) amend
its
certificate of incorporation, bylaws or its charter documents so as to
materially and adversely affect any rights of the Subscriber;
(iii) repay,
repurchase or offer to repay, repurchase or otherwise acquire or make any
dividend or distribution in respect of any of its Common Stock, preferred stock,
or other equity securities other than to the extent permitted or required under
the Transaction Documents.
(iv) engage
in
any transactions with any officer, director, employee or any Affiliate of the
Company, including any contract, agreement or other arrangement providing for
the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest
or
is an officer, director, trustee or partner, in each case in excess of $100,000
other than (i) for payment of salary or consulting fees for services rendered,
(ii) reimbursement for expenses incurred on behalf of the Company, and (iii)
for
other employee benefits, including stock option agreements under any stock
option plan of the Company; or
(v) prepay
or
redeem any financing related debt or past due obligations outstanding as of
the
Closing Date.
(r) Further
Registration Statements.
Except
for a registration statement filed on behalf of the Subscribers pursuant to
Section 11 of this Agreement, and as set forth on Schedule
11.1
hereto,
the Company will not, without the consent of the Subscribers, file with the
Commission or with state regulatory authorities any registration statements
or
amend any already filed registration statement to increase the amount of Common
Stock registered therein, or reduce the price of which such Common Stock is
registered therein, (including but not limited to Forms S-8), until the
expiration of the “Exclusion
Period,”
which
shall be defined as the sooner of (i) the Registration Statement having been
current and available for use in connection with the resale of all of the
Registrable Securities [as defined in Section 11.1(i)] for a period of 180
days,
or (ii) until the Notes are no longer outstanding. The Exclusion Period will
be
tolled or reinstated, as the case may be, during the pendency of an Event of
Default as defined in the Note.
(s) Blackout.
The
Company undertakes and covenants that, until the end of the Exclusion Period,
the Company will not enter into any acquisition, merger, exchange or sale or
other transaction or fail to take any action that could have the effect of
delaying the effectiveness of any pending Registration Statement or causing
an
already effective Registration Statement to no longer be effective or current
for a period of forty-five or more days in the aggregate during any three
hundred and sixty-five day period.
(t) Offering
Restrictions.
Until
the expiration of the Exclusion Period and during the pendency of an Event
of
Default, except for the Excepted Issuances, the Company will not enter into
an
agreement to issue nor issue any equity, convertible debt or other securities
convertible into Common Stock or equity of the Company nor modify any of the
foregoing which may be outstanding at anytime, without the prior written consent
of a majority of the holders of outstanding Notes, which consent may be withheld
for any reason. For so long as the Notes are outstanding, the Company will
not
enter into any Equity Line of Credit or similar agreement, nor issue nor agree
to issue any floating or Variable Priced Equity Linked Instruments nor any
of
the foregoing or equity with price reset rights (collectively, the “Variable
Rate Restrictions”).
For
purposes hereof, “Equity
Line of Credit”
shall
include any transaction involving a written agreement between the Company and
an
investor or underwriter whereby the Company has the right to “put” its
securities to the investor or underwriter over an agreed period of time and
at
an agreed price or price formula, and “Variable
Priced Equity Linked Instruments”
shall
include: (A) any debt or equity securities which are convertible into,
exercisable or exchangeable for, or carry the right to receive additional shares
of Common Stock either (1) at any conversion, exercise or exchange rate or
other
price that is based upon and/or varies with the trading prices of or quotations
for Common Stock at any time after the initial issuance of such debt or equity
security, or (2) with a fixed conversion, exercise or exchange price that is
subject to being reset at some future date at any time after the initial
issuance of such debt or equity security due to a change in the market price
of
the Company’s Common Stock since date of initial issuance, and (B) any
amortizing convertible security which amortizes prior to its maturity date,
where the Company is required or has the option to (or any investor in such
transaction has the option to require the Company to) make such amortization
payments in shares of Common Stock which are valued at a price that is based
upon and/or varies with the trading prices of or quotations for Common Stock
at
any time after the initial issuance of such debt or equity security (whether
or
not such payments in stock are subject to certain equity conditions). The only
officer, director, employee and consultant stock option or stock incentive
plan
currently in effect or contemplated by the Company is described on Schedule
5(d).
(u) Seniority.
Except
for Permitted Liens and as otherwise provided for herein, until the Notes are
fully satisfied or converted, the Company shall not grant nor allow any security
interest to be taken in the assets of the Company or any Subsidiary; nor issue
any debt, equity or other instrument which would give the holder thereof
directly or indirectly, a right in any assets of the Company or any Subsidiary,
superior to any right of the holder of a Note in or to such assets.
(v) Notices.
For so
long as the Subscribers hold any Securities, the Company will maintain as United
States address and United States fax number for notices purposes under the
Transaction Documents.
(w) Attendance
by Observer.
Alpha
Capital Anstalt, a Subscriber herein, has the right to designate an observer,
who shall be entitled to attend and participate (but not vote) at all meetings
of the Board of Directors of the Company and to receive all notices, reports,
information, correspondence and communications sent by the Company to members
of
the Board of Directors. All reasonable costs and expenses incurred in connection
therewith by any such designated observer shall be reimbursed by the Company
to
the extent that the Company reimburses such expenses incurred by any directors
of the Company. It
is
provided and agreed that the actions and advice of any person while serving
pursuant to this section as an observer at meetings of the Board of Directors
shall be construed to be the actions and advice of that person alone and not
be
construed as actions of any Subscriber as to any notice, requirements or rights
of any Subscriber under the Transaction Documents, nor as the action of any
Subscriber to approve modifications, consents, amendments or waivers thereof;
and all such actions or notices shall be deemed actions or notices to the
Subscribers only when duly provided in writing and given in accordance with
the
provisions of the Transaction Documents.
The
relationship between the Company and the Subscribers is, and shall at all times
remain, solely that of the Company with a purchaser of its securities and
creditor. The Subscribers neither undertake nor assume any responsibility or
duty to the Company to review, inspect, supervise, pass judgment upon, or inform
the Company of any matter in connection with any phase of the Company’s
business, operations, or condition, financial or otherwise. The Company shall
rely entirely upon its own judgment with respect to such matters, and any
review, inspection, supervision, exercise of judgment, or information supplied
to the Company by the Subscribers, or any representative or agent of the
Subscribers, in connection with any such matter is for the protection of the
Subscribers, and neither the Company nor any third party is entitled to rely
thereon. It shall be deemed a default of a material obligation under the Notes
if Company does not comply with the requirements of this section.
10. Covenants
of the Company Regarding Indemnification.
(a) The
Company agrees to indemnify, hold harmless, reimburse and defend the
Subscribers, the Subscribers' officers, directors, agents, Affiliates, members,
managers, control persons, and principal shareholders, against any claim, cost,
expense, liability, obligation, loss or damage (including reasonable legal
fees)
of any nature, incurred by or imposed upon the Subscriber or any such person
which results, arises out of or is based upon (i) any material misrepresentation
by Company or breach of any representation or warranty by Company in this
Agreement or in any Exhibits or Schedules attached hereto, or other agreement
delivered pursuant hereto; or (ii) after any applicable notice and/or cure
periods, any breach or default in performance by the Company of any covenant
or
undertaking to be performed by the Company hereunder, or any other agreement
entered into by the Company and Subscriber relating hereto.
(b) The
procedures set forth in Section 11.6 shall apply to the indemnification set
forth in Section 10(a).
11.1. Registration
Rights.
The
Company hereby grants the following registration rights to holders of the
Securities.
(i) On
one
occasion, for a period commencing one hundred and eighty (180) days after the
Initial Closing Date, but not later than two years after the Initial Closing
Date, upon a written request therefor from any record holder or holders of
more
than 50% of the Shares issued and issuable upon conversion of the outstanding
Notes and outstanding Warrant Shares, the Company shall prepare and file with
the Commission a registration statement under the 1933 Act registering the
Registrable Securities, as defined in Section 11.1(iv) hereof, which are the
subject of such request for unrestricted public resale by the holder thereof.
For purposes of Sections 11.1(i) and 11.1(ii), Registrable Securities shall
not
include Securities which are (A) registered for resale in an effective
registration statement, (B) included for registration in a pending registration
statement, (C) which have been issued without further transfer restrictions
after a sale or transfer pursuant to Rule 144 under the 1933 Act or (D) which
may be resold under Rule 144(k) or Rule 144 without volume limitations. Upon
the
receipt of such request, the Company shall promptly give written notice to
all
other record holders of the Registrable Securities that such registration
statement is to be filed and shall include in such registration statement
Registrable Securities for which it has received written requests within ten
days after the Company gives such written notice. Such other requesting record
holders shall be deemed to have exercised their demand registration right under
this Section 11.1(i).
(ii) If
the
Company at any time proposes to register any of its securities under the 1933
Act for sale to the public, whether for its own account or for the account
of
other security holders or both, except with respect to registration statements
on Forms X-0, X-0 or another form not available for registering the Registrable
Securities for sale to the public, provided the Registrable Securities are
not
otherwise registered for resale by the Subscribers or Holder pursuant to an
effective registration statement, each such time it will give at least ten
(10)
days' prior written notice to the record holder of the Registrable Securities
of
its intention so to do. Upon the written request of the holder, received by
the
Company within ten (10) days after the giving of any such notice by the Company,
to register any of the Registrable Securities not previously registered, the
Company will cause such Registrable Securities as to which registration shall
have been so requested to be included with the securities to be covered by
the
registration statement proposed to be filed by the Company, all to the extent
required to permit the sale or other disposition of the Registrable Securities
so registered by the holder of such Registrable Securities (the “Seller”
or
“Sellers”).
In
the event that any registration pursuant to this Section 11.1(ii) shall be,
in
whole or in part, an underwritten public offering of common stock of the
Company, the number of shares of Registrable Securities to be included in such
an underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities to be
sold
by the Company therein; provided, however, that the Company shall notify the
Seller in writing of any such reduction. Notwithstanding the foregoing
provisions, or Section 11.4 hereof, the Company may withdraw or delay or suffer
a delay of any registration statement referred to in this Section 11.1(ii)
without thereby incurring any liability to the Seller.
(iii) If,
at
the time any written request for registration is received by the Company
pursuant to Section 11.1(i), the Company has determined to proceed with the
actual preparation and filing of a registration statement under the 1933 Act
in
connection with the proposed offer and sale for cash of any of its securities
for the Company's own account and the Company actually does file such other
registration statement, such written request shall be deemed to have been given
pursuant to Section 11.1(ii) rather than Section 11.1(i), and the rights of
the
holders of Registrable Securities covered by such written request shall be
governed by Section 11.1(ii).
(iv) The
Company shall file with the Commission a Form SB-2 registration statement (the
“Registration
Statement”)
(or
such other form that it is eligible to use) in order to register the Registrable
Securities for resale and distribution under the 1933 Act within sixty (60)
calendar days after the Initial Closing Date (the
“Filing
Date”),
and
cause the Registration Statement to be declared effective not
later
than one hundred and eighty (180) calendar days after the Initial Closing Date
(the
“Effective
Date”).
The
Company will register not less than a number of shares of common stock in the
aforedescribed registration statement that is equal to 175%
of
the Shares issued and issuable upon conversion of the Notes, and 100% of the
Warrant Shares issuable upon exercise of the Warrants issued and issuable on
the
Initial Closing Date, Second Closing Date, Purchase Shares, Legal Fee Shares,
and Due Diligence Warrant Shares (collectively the “Registrable
Securities”).
The
Registrable Securities shall be reserved and set aside exclusively for the
benefit of each Subscriber and Warrant holder, pro rata,
and not
issued, employed or reserved for anyone other than each such Subscriber and
Warrant holder. The Registration Statement will immediately be amended or
additional registration statements will be immediately filed by the Company
as
necessary to register additional shares of Common Stock to allow the public
resale of all Common Stock included in and issuable by virtue of the Registrable
Securities. Except with the written consent of the Subscribers, no securities
of
the Company other than the Registrable Securities or the securities described
on
Schedule
11.1,
will be
included in the Registration Statement. It shall be deemed a Non-Registration
Event if at any time after the date the Registration Statement is declared
effective by the Commission (“Actual
Effective Date”)
the
Company has registered for unrestricted resale on behalf of the Subscribers
less
than all of the Registrable Securities required to be registered as described
in
this Agreement (“Shortfall”).
The
Company shall cause to be registered a sufficient amount of shares of Common
stock in order to eliminate the Shortfall within 60 days after the date the
Shortfall occurs. Failure to eliminate the Shortfall within such 60 day period
shall be a Non-Registration Event. Except for Common Stock described on
Schedule
11.1,
no
other securities of the Company will be included in the Registration Statement
other than the Registrable Securities.
(v) The
amount of Registrable Securities required to be included in the Registration
Statement as described in Section 11.1(iv) (“Initial
Registrable Securities”)
shall
be limited to not less than 100% of the maximum amount (“Rule
415 Amount”)
of
Common Stock which may be included in a single Registration Statement without
exceeding registration limitations imposed by the Commission pursuant to Rule
415 of the 1933 Act but in any event not less than 1,000,000 shares of Common
Stock. In the event that less than all of the Initial Registrable Securities
are
included in the Registration Statement as a result of the limitation described
in this Section 11.1(v), then the Company will file additional Registration
Statements each registering the Rule 415 Amount (each such Registration
Statement a “Subsequent
Registration Statement”),
seriatim,
until
all of the Initial Registrable Securities have been registered. The Filing
Date
and Effective Date of each such additional Registration Statement shall be,
respectively, fourteen (14) and forty-five (45) days after the first day such
Subsequent Registration Statement may be filed without objection by the
Commission based on Rule 415 of the 1933 Act. The Subscribers agree and
acknowledge that notwithstanding anything contained herein to the contrary,
the
Registration Statement will include for registration on behalf of the
Subscribers not fewer than 8,610,600 shares of Common Stock for the Shares
issuable upon conversion of the Notes and thereafter may include, at the
Company’s discretion, up to 1,000,000 shares of Common Stock on behalf of the
holders thereof (“Other
Holders”)
described on Schedule
11.1.
In the
event for any reason the amount of Common Stock to be registered must be
reduced, then such reduction must come entirely from the Common Stock being
registered on behalf of the Other Holders and not the Subscribers.
(vi) Unless
otherwise instructed in writing by a holder of Registrable Securities and only
if the initial Registration Statement does not include all of the Registrable
Securities, the Registrable Securities will be registered on behalf of each
such
holder in the Registration Statements based in the following order and
priority:
(A) Purchase
Shares and Legal Fee Shares.
(B) Conversion
Shares issued and issuable upon conversion of the Notes (based on the multiple
set forth above).
(C) Warrants
Shares and Due Diligence Warrant Shares issued and issuable to the Subscribers
with lower exercise priced Warrant Shares being registered first and then the
higher exercise priced Warrant Shares. In the case of Warrants with the same
exercise prices but different Issue Dates, the Warrants issuable upon later
issued Warrants will be registered first.
(vii) The
foregoing notwithstanding, Registrable Securities shall be allocated and
registered pro rata among the Subscribers based upon their initial investments
in the Offering.
11.2. Registration
Procedures.
If and
whenever the Company is required by the provisions of Sections 11.1(i), 11.1(ii)
or 11.1(iv) to effect the registration of any Registrable Securities under
the
1933 Act, the Company will, as expeditiously as possible:
(a) subject
to the timelines provided in this Agreement, prepare and file with the
Commission a registration statement required by Section 11, with respect to
such
securities and use its best efforts to cause such registration statement to
become and remain effective for the period of the distribution contemplated
thereby (determined as herein provided), promptly provide to the holders of
the
Registrable Securities copies of all filings and Commission letters of comment
and notify the Subscribers (by telecopier and by e-mail addresses provided
by
the Subscribers) and Grushko & Xxxxxxx, P.C. (by telecopier and by email to
Xxxxxxxxx@xxx.xxx)
on or
before the second business day thereafter that the Company receives notice
that
(i) the Commission has no comments or no further comments on the Registration
Statement, and (ii) the registration statement has been declared effective
(failure to timely provide notice as required by this Section 11.2(a) shall
be a
material breach of the Company’s obligation and an Event of Default as defined
in the Notes
and
a Non-Registration Event as defined in Section 11.4 of this Agreement);
(b) prepare
and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may
be
necessary to keep such registration statement effective until such registration
statement has been effective for a period of two (2) years, and comply with
the
provisions of the 1933 Act with respect to the disposition of all of the
Registrable Securities covered by such registration statement in accordance
with
the Sellers’ intended method of disposition set forth in such registration
statement for such period;
(c) furnish
to the Sellers, at the Company’s expense, such number of copies of the
registration statement and the prospectus included therein (including each
preliminary prospectus) as such persons reasonably may request in order to
facilitate the public sale or their disposition of the securities covered by
such registration statement or make them electronically available;
(d) use
its
reasonable
best efforts to register or qualify the Registrable Securities covered by such
registration statement under the securities or “blue sky” laws of New York and
such jurisdictions as the Sellers shall request in writing, provided, however,
that the Company shall not for any such purpose be required to qualify generally
to transact business as a foreign corporation in any jurisdiction where it
is
not so qualified or to consent to general service of process in any such
jurisdiction;
(e) if
applicable, list the Registrable Securities covered by such registration
statement with any securities exchange on which the Common Stock of the Company
is then listed;
(f) notify
the Subscribers within twenty-four hours of the Company’s becoming aware that a
prospectus relating thereto is required to be delivered under the 1933 Act,
of
the happening of any event of which the Company has knowledge as a result of
which the prospectus contained in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing or which
becomes subject to a Commission, state or other governmental order suspending
the effectiveness of the registration statement covering any of the Registrable
Securities;
(g) provided
same would not be in violation of the provision of Regulation FD under the
1934
Act, make available for inspection by the Sellers during reasonable business
hours, and any attorney, accountant or other agent retained by the Seller or
underwriter, all publicly available, non-confidential financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
attorney, accountant or agent in connection with such registration
statement
at such
requesting Seller’s expense;
and
(h) provide
to the Sellers copies of the Registration Statement and amendments thereto
five
business days prior to the filing thereof with the Commission. Any Subscriber’s
failure to comment on any Registration Statement or other document provided
to a
Subscriber or its counsel shall not be construed to constitute approval thereof
nor the accuracy thereof.
11.3. Provision
of Documents.
In
connection with each registration described in this Section 11, each Seller
will
furnish to the Company in writing such information and representation letters
with respect to itself and the proposed distribution by it as reasonably shall
be necessary in order to assure compliance with federal and applicable state
securities laws.
11.4. Non-Registration
Events.
The
Company agrees that the Sellers will suffer damages if the Registration
Statement is not filed by the Filing Date and not declared effective by the
Commission by the Effective Date, and any registration statement required under
Section 11.1(i) or 11.1(ii) is not filed within 60 days after written request
and declared effective by the Commission within 90 days after such request,
and
maintained in the manner and within the time periods contemplated by Section
11
hereof, and it would not be feasible to ascertain the extent of such damages
with precision. Accordingly, if (A) the Registration Statement is not filed
on
or before the Filing Date, (B) the Registration Statement is not declared
effective on or before the required Effective Date, (C) due to the action or
inaction of the Company the Registration Statement is not declared effective
within three (3) business days after receipt by the Company or its attorneys
of
a written or oral communication from the Commission that the Registration
Statement will not be reviewed or that the Commission has no further comments,
(D) if the registration statement described in Sections 11.1(i) or 11.1(ii)
is
not filed within 60 days after such written request, or is not declared
effective within 90 days after such written request, or (E) any registration
statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv) is filed and
declared effective but shall thereafter cease to be effective without being
succeeded within twenty-five (25) business days by an effective replacement
or
amended registration statement or for a period of time which shall exceed forty
(45) days in the aggregate per year (defined as every rolling period of 365
consecutive days commencing on the Actual Effective Date (each such event
referred to in clauses (A) through (E) of this Section 11.4 is referred to
herein as a "Non-Registration
Event"),
then
the Company shall deliver to the holder of Registrable Securities, as
Liquidated
Damages,
an
amount equal to one and one-half percent (1.5%) for each thirty (30) days (or
such lesser pro-rata amount for any period of less than thirty (30) days) of
the
principal amount of the outstanding Notes and
purchase price of Purchase Shares, Legal Fee Shares, Shares, Due Diligence
Warrant Shares, and Warrant Shares issued upon conversion of Notes and exercise
of Warrants held by Subscriber which are subject to such Non-Registration
Event.
The
Company must pay the Liquidated Damages in cash. The Liquidated Damages must
be
paid within ten (10) days after the end of each thirty (30) day period or
shorter part thereof for which Liquidated Damages are payable. In the event
a
Registration Statement is filed by the Filing Date but is withdrawn prior to
being declared effective by the Commission, then such Registration Statement
will be deemed to have not been filed and Liquidated Damages will be calculated
accordingly. All
oral
or written comments received from the Commission relating to the Registration
Statement must be satisfactorily responded to within
ten (10) business days after receipt of comments from the Commission.
Failure
to
timely respond to Commission comments is a Non-Registration Event for which
Liquidated Damages shall accrue and be payable by the Company to the holders
of
Registrable Securities at the same rate and amounts set forth above calculated
from the date the response was required to have been made.
11.5. Expenses.
All
expenses incurred by the Company in complying with Section 11, including,
without limitation, all registration and filing fees, printing expenses (if
required), fees and disbursements of counsel and independent public accountants
for the Company, fees and expenses (including reasonable counsel fees) incurred
in connection with complying with state securities or “blue sky” laws, fees of
the NASD, transfer taxes, and fees of transfer agents and registrars, are called
“Registration
Expenses.”
All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities are called "Selling
Expenses."
The
Company will pay all Registration Expenses in connection with the registration
statement under Section 11. Selling Expenses in connection with each
registration statement under Section 11 shall be borne by the Seller and may
be
apportioned among the Sellers in proportion to the number of shares sold by
the
Seller relative to the number of shares sold under such registration statement
or as all Sellers thereunder may agree.
11.6. Indemnification
and Contribution.
(a) In
the
event of a registration of any Registrable Securities under the 1933 Act
pursuant to Section 11, the Company will, to the extent permitted by law,
indemnify and hold harmless the Seller, each officers, directors, agents,
Affiliates, members, managers, control persons, and principal shareholders
of
the Seller, each underwriter of such Registrable Securities thereunder and
each
other person, if any, who controls such Seller or underwriter within the meaning
of the 1933 Act, against any losses, claims, damages or liabilities, joint
or
several, to which the Seller, or such underwriter or controlling person may
become subject under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such Registrable Securities
was registered under the 1933 Act pursuant to Section 11, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof, or arise out of or are based upon the omission or alleged omission
to
state therein a material fact required to be stated therein or necessary to
make
the statements therein not misleading in light of the circumstances when made,
and will subject to the provisions of Section 11.6(c) reimburse the Seller,
each
such underwriter and each such controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable to the Seller to the extent that any such
damages arise out of or are based upon an untrue statement or omission made
in
any preliminary prospectus if (i) the Seller failed to send or deliver a copy
of
the final prospectus delivered by the Company to the Seller with or prior to
the
delivery of written confirmation of the sale by the Seller to the person
asserting the claim from which such damages arise, (ii) the final prospectus
would have corrected such untrue statement or alleged untrue statement or such
omission or alleged omission, or (iii) to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity
with information furnished by any such Seller in writing specifically for use
in
such registration statement or prospectus.
(b) In
the
event of a registration of any of the Registrable Securities under the 1933
Act
pursuant to Section 11, each Seller severally but not jointly will, to the
extent permitted by law, indemnify and hold harmless the Company, and each
person, if any, who controls the Company within the meaning of the 1933 Act,
each officer of the Company who signs the registration statement, each director
of the Company, each underwriter and each person who controls any underwriter
within the meaning of the 1933 Act, against all losses, claims, damages or
liabilities, joint or several, to which the Company or such officer, director,
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the registration statement
under which such Registrable Securities were registered under the 1933 Act
pursuant to Section 11, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse the Company and each such officer, director, underwriter
and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that the Seller will be liable hereunder
in any such case if and only to the extent that any such loss, claim, damage
or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with information pertaining to such Seller, as such, furnished in
writing to the Company by such Seller specifically for use in such registration
statement or prospectus, and provided, further, however, that the liability
of
the Seller hereunder shall be limited to the net proceeds actually received
by
the Seller from the sale of Registrable Securities pursuant to such registration
statement.
(c) Promptly
after receipt by an indemnified party hereunder of notice of the commencement
of
any action, such indemnified party shall, if a claim in respect thereof is
to be
made against the indemnifying party hereunder, notify the indemnifying party
in
writing thereof, but the omission so to notify the indemnifying party shall
not
relieve it from any liability which it may have to such indemnified party other
than under this Section 11.6(c) and shall only relieve it from any liability
which it may have to such indemnified party under this Section 11.6(c), except
and only if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified
party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such indemnified party of its election so to assume and undertake
the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under this Section 11.6(c) for any legal expenses subsequently incurred
by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both
the
indemnified party and the indemnifying party and the indemnifying party shall
have reasonably concluded that there may be reasonable defenses available to
indemnified party which are different from or additional to those available
to
the indemnifying party or if the interests of the indemnified party reasonably
may be deemed to conflict with the interests of the indemnifying party, the
indemnified parties, as a group, shall have the right to select one separate
counsel, reasonably satisfactory to the indemnified and indemnifying party,
and
to assume such legal defenses and otherwise to participate in the defense of
such action, with the reasonable expenses and fees of such separate counsel
and
other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
(d) In
order
to provide for just and equitable contribution in the event of joint liability
under the 1933 Act in any case in which either (i) a Seller, or any controlling
person of a Seller, makes a claim for indemnification pursuant to this Section
11.6 but it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to appeal or
the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 11.6 provides
for indemnification in such case, or (ii) contribution under the 1933 Act may
be
required on the part of the Seller or controlling person of the Seller in
circumstances for which indemnification is not provided under this Section
11.6;
then, and in each such case, the Company and the Seller will contribute to
the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Seller is
responsible only for the portion represented by the percentage that the public
offering price of its securities offered by the registration statement bears
to
the public offering price of all securities offered by such registration
statement, provided, however, that, in any such case, (y) the Seller will not
be
required to contribute any amount in excess of the public offering price of
all
such securities sold by it pursuant to such registration statement; and (z)
no
person or entity guilty of fraudulent misrepresentation (within the meaning
of
Section 11(f) of the 0000 Xxx) will be entitled to contribution from any person
or entity who was not guilty of such fraudulent misrepresentation and
provided, further, however, that the liability of the Seller hereunder shall
be
limited to the net proceeds actually received by the Seller from the sale of
Registrable Securities pursuant to such Registration Statement..
11.7. Delivery
of Unlegended Shares.
(a) Within
three (3) business days (such third business day being the “Unlegended
Shares Delivery Date”)
after
the business day on which the Company has received (i) a notice that Shares
or
Warrant Shares or any other Common Stock held by a Subscriber have been sold
pursuant to the Registration Statement or Rule 144 under the 1933 Act, (ii)
a
representation that the prospectus delivery requirements, or the requirements
of
Rule 144, as applicable and if required, have been satisfied, and (iii) the
original share certificates representing the shares of Common Stock that have
been sold, and (iv) in the case of sales under Rule 144, customary
representation letters of the Subscriber and/or a Subscriber’s broker regarding
compliance with the requirements of Rule 144, the Company at its expense, (y)
shall deliver, and shall cause legal counsel selected by the Company to deliver
to its transfer agent (with copies to Subscriber) an appropriate instruction
and
opinion of such counsel, directing the delivery of shares of Common Stock
without any legends including the legend set forth in Section 4(i)
above
(the “Unlegended
Shares”);
and
(z) cause the transmission of the certificates representing the Unlegended
Shares together with a legended certificate representing the balance of the
submitted certificate, if any, to the Subscriber at the address specified in
the
notice of sale, via express courier, by electronic transfer or otherwise on
or
before the Unlegended Shares Delivery Date.
(b) In
lieu
of delivering physical certificates representing the Unlegended Shares, upon
request of a Subscriber, so long as the certificates therefor do not bear a
legend and the Subscriber is not obligated to return such certificate for the
placement of a legend thereon, the Company shall cause its transfer agent to
electronically transmit the Unlegended Shares by crediting the account of
Subscriber’s prime broker with the Depository Trust Company through its Deposit
Withdrawal Agent Commission system, if such transfer agent participates in
such
DWAC system. Such delivery must be made on or before the Unlegended Shares
Delivery Date.
(c) The
Company understands that a delay in the delivery of the Unlegended Shares
pursuant to Section 11 hereof later than the Unlegended Shares Delivery Date
could result in economic loss to a Subscriber. As compensation to a Subscriber
for such loss, the Company agrees to pay late payment fees (as liquidated
damages and not as a penalty) to the Subscriber for late delivery of Unlegended
Shares in the amount of $100 per business day after the Delivery Date for each
$10,000 of purchase price of the Unlegended Shares subject to the delivery
default. If during any 360 day period, the Company fails to deliver Unlegended
Shares as required by this Section 11.7 for an aggregate of thirty (30) days,
then each Subscriber or assignee holding Securities subject to such default
may,
at its option, require the Company to redeem all or any portion of the Shares
and Warrant Shares subject to such default at a price per share equal to the
greater of (i) 120%, or (ii) a fraction in which the numerator is the highest
closing price of the Common Stock during the aforedescribed thirty day period
and the denominator of which is the lowest conversion price during such thirty
day period, multiplied by the Purchase Price of such Common Stock and exercise
price of such Warrant Shares (“Unlegended
Redemption Amount”).
The
Company shall pay any payments incurred under this Section in immediately
available funds upon demand.
(d)
In
addition to any other rights available to a Subscriber, if the Company fails
to
deliver to a Subscriber Unlegended Shares as required pursuant to this
Agreement, within seven (7) business days after the Unlegended Shares Delivery
Date and the Subscriber or a broker on the Subscriber’s behalf, purchases (in an
open market transaction or otherwise) shares of common stock to deliver in
satisfaction of a sale by such Subscriber of the shares of Common Stock which
the Subscriber was entitled to receive from the Company (a "Buy-In"),
then
the Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber's total purchase price (including brokerage commissions, if any)
for
the shares of Common Stock so purchased exceeds (B) the aggregate purchase
price
of the shares of Common Stock delivered to the Company for reissuance as
Unlegended Shares together
with interest thereon at a rate of 15% per annum accruing until such amount
and
any accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For
example, if a Subscriber purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to $10,000 of purchase
price of shares of Common Stock delivered to the Company for reissuance as
Unlegended Shares, the Company shall be required to pay the Subscriber
$1,000,
plus interest. The
Subscriber shall provide the Company written notice indicating the amounts
payable to the Subscriber in respect of the Buy-In.
(e) In
the
event a Subscriber shall request delivery of Unlegended Shares as described
in
Section 11.7 or Warrant Shares upon exercise of Warrants and the Company is
required to deliver such Unlegended Shares pursuant to Section 11.7 or the
Warrant Shares pursuant to the Warrants, the Company may not refuse to deliver
Unlegended Shares or Warrant Shares based on any claim that such Subscriber
or
any one associated or affiliated with such Subscriber has been engaged in any
violation of law, or for any other reason, unless, an injunction or temporary
restraining order from a court, on notice, restraining and or enjoining delivery
of such Unlegended Shares or exercise of all or part of said Warrant shall
have
been sought and obtained by the Company or at the Company’s request or with the
Company’s assistance,
and the
Company has posted a surety bond for the benefit of such Subscriber in the
amount of 120% of the amount of the aggregate purchase price of the Common
Stock
and Warrant Shares which are subject to the injunction or temporary restraining
order, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Subscriber to the extent Subscriber obtains judgment in Subscriber’s
favor.
12. (a) Right
of First Refusal.
Until
one year after the Second Closing Date, the Subscribers shall be given not
less
than ten business days prior written notice of any proposed sale by the Company
of its common stock or other securities or equity linked debt obligations,
except in connection with (i) full or partial consideration in connection with
a
strategic merger, acquisition, consolidation or purchase of substantially all
of
the securities
or assets of corporation or other entity which holders of such securities or
debt are not at any time granted registration rights, (ii)
the
Company’s issuance of securities in connection with strategic license agreements
and other partnering arrangements so long as such issuances are not for the
purpose of raising capital and which holders of such securities or debt are
not
at any time granted registration rights, (iii) the Company’s issuance of Common
Stock or the issuances or grants of options to purchase Common Stock pursuant
to
stock option plans and employee stock purchase plans described on Schedule
5(d)
hereto at prices equal to or higher than the closing price of the Common Stock
on the issue date of any of the foregoing, (iv) as a result of the exercise
of
Warrants or conversion of Notes which are granted or issued pursuant to this
Agreement, or that have been issued prior to the Closing Date, the issuance
of
which has been disclosed in a Registration Statement filed not less than five
days prior to the Closing Date, (v) the issuance of up to 1,000,000 Shares
of
the Company’s Common Stock until March 31, 2008 to attract key employees at
valuation not less than the Conversion Price and which holders of such
securities are not at any time granted registration rights, (vi) the Company’s
issuance of securities as described in NHRA Sponsorship Agreement annexed hereto
as Exhibit
H,
(vii)
securities issued in payment of outstanding indebtednesses (for non-financing
purposes) or to a vendor for professional services, and (vi) the payment of
any
interest on the Notes and Liquidated Damages pursuant to the Transaction
Documents (collectively the foregoing are “Excepted
Issuances”).
The
Subscribers who exercise their rights pursuant to this
Section
12(a) shall have the right during the ten business days following receipt of
the
notice to purchase in the aggregate up to one-half such offered common stock,
debt or other securities in accordance with the terms and conditions set forth
in the notice of sale in the same proportion to each other as their purchase
of
Notes in the Offering. In the event such terms and conditions are modified
during the notice period, the Subscribers shall be given prompt notice of such
modification and shall have the right during the ten business days following
the
notice of modification to exercise such right.
(b) Favored
Nations Provision.
Other
than in connection with the Excepted Issuances, if at any time the Notes or
Warrants are outstanding, the Company shall agree to or issue (the “Lower
Price Issuance”)
any
Common Stock or securities convertible into or exercisable for shares of Common
Stock (or modify any of the foregoing which may be outstanding) to any person
or
entity at a price per share or conversion or exercise price per share which
shall be less than the price in respect of the the Conversion Price in respect
of the Shares, or if less than the Warrant exercise price in respect of the
Warrant Shares, without the consent of each Subscriber, then the Company shall
issue, for each such occasion, additional shares of Common Stock to each
Subscriber respecting those Notes, Warrants, and Shares that remain outstanding
at the time of the Lower Price Issuance so that the average per share purchase
price of the shares of Common Stock issued to each Subscriber (of only the
Common Stock or Warrant Shares still owned by a Subscriber) is equal to such
other lower price per share and the Conversion Price and Warrant exercise price
shall automatically be reduced to such other lower price. The average Purchase
Price of the Shares and average exercise price in relation to the Warrant Shares
shall be calculated separately for the Shares and Warrant Shares. The foregoing
calculation and issuance shall be made separately for Shares received upon
conversion of the Notes and separately for Warrant Shares. The delivery to
a
Subscriber of the additional shares of Common Stock shall be not later than
the
closing date of the transaction giving rise to the requirement to issue
additional shares of Common Stock. Each Subscriber is granted the registration
rights described in Section 11 hereof in relation to such additional shares
of
Common Stock. For purposes of the issuance and adjustment described in this
paragraph, the issuance of any security of the Company carrying the right to
convert such security into shares of Common Stock or of any warrant, right
or
option to purchase Common Stock shall result in the issuance of the additional
shares of Common Stock upon the sooner of the agreement to or actual issuance
of
such convertible security, warrant, right or option and again at any time upon
any subsequent issuances of shares of Common Stock upon exercise of such
conversion or purchase rights if such issuance is at a price lower than the
Conversion Price or Warrant exercise price in effect upon such issuance. The
rights of each Subscriber set forth in this Section 12 are in addition to any
other rights the Subscriber has pursuant to this Agreement, the Note, any
Transaction Document, and any other agreement referred to or entered into in
connection herewith or to which such Subscriber and Company are parties. Each
Subscriber is also given the right to elect to substitute any term or terms
of
any other offering in connection with which such Subscriber has rights as
described in Section 12(a), or any outstanding price protection, anti-dilution
or reset rights granted to any holder of any of the Company’s equity or right to
receive such equity, or any such rights which are granted after the Initial
Closing Date for any term or terms of the Offering in connection with Securities
owned by such Subscriber as of the date the notice described in Section 12(a)
is
required to be given to such Subscriber.
(c) Maximum
Exercise of Rights.
In the
event the exercise of the rights described in Sections 12(a) and 12(b)
would
or
could result in the issuance of an amount of Common Stock of the Company that
would exceed the maximum amount that may be issued to a Subscriber calculated
in
the manner described in Section 7.3 of this Agreement, then the issuance of
such
additional shares of Common Stock of the Company to such Subscriber will be
deferred in whole or in part until such time as such Subscriber is able to
beneficially own such Common Stock without exceeding the applicable maximum
amount set forth calculated in the manner described in Section 7.3 of this
Agreement. The determination of when such Common Stock may be issued shall
be
made by each Subscriber as to only such Subscriber.
13. Purchase
Shares.
Concurrently with the Initial Closing, the Company shall issue to the investors
described on Schedule
13
hereto
in the amounts described on Schedule
13
hereto
an aggregate of 1,700,000 restricted shares of the Company’s Common Stock
(“Purchase
Shares”).
In
connection with the issuance of such Purchase Shares to the investors, the
investors make all of the representations and warranties contained in Section
4
of this Agreement and the Company makes all of the representations and
warranties and undertakes all of the covenants contained in Sections 5, 9 and
10
of this Agreement. Furthermore, in connection with such Purchase Shares, the
investors are granted all of the registration rights contained in Section 11
of
this Agreement.
14. Miscellaneous.
(a) Notices.
All
notices, demands, requests, consents, approvals, and other communications
required or permitted hereunder shall be in writing and, unless otherwise
specified herein, shall be (i) personally served, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice. Any notice or other communication required or permitted
to be
given hereunder shall be deemed effective (a) upon hand delivery or delivery
by
facsimile, with accurate confirmation generated by the transmitting facsimile
machine, at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be: (i) if to the Company, to: Attitude Drinks Inc., 00000
X.X. Xxxxxxx
0, Xxxxx 000, Xxxxx Xxxx Xxxxx, Xxxxxxx 00000, Attn: Xxx Xxxxxx, CEO and
President, telecopier: (000) 000-0000, with a copy by telecopier only to: Weed
& Co., LLP, 0000 XxxXxxxxx Xxxxx, Xxxxx 0000, Xxxxxxx Xxxxx, XX 00000, Attn:
Xxxx Xxxx, Esq., telecopier number: (000) 000-0000, and (ii) if to the
Subscriber, to: the one or more addresses and telecopier numbers indicated
on
the signature pages hereto, with an additional copy by telecopier only to:
Grushko & Xxxxxxx, P.C., 000 Xxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx
00000, telecopier: (000) 000-0000.
(b) Entire
Agreement; Assignment.
This
Agreement and other documents delivered in connection herewith represent the
entire agreement between the parties hereto with respect to the subject matter
hereof and may be amended only by a writing executed by both parties. Neither
the Company nor the Subscribers have relied on any representations not contained
or referred to in this Agreement and the documents delivered herewith. No right
or obligation of the Company shall be assigned without prior notice to and
the
written consent of the Subscribers.
(c) Counterparts/Execution.
This
Agreement may be executed in any number of counterparts and by the different
signatories hereto on separate counterparts, each of which, when so executed,
shall be deemed an original, but all such counterparts shall constitute but
one
and the same instrument. This Agreement may be executed by facsimile signature
and delivered by facsimile transmission.
(d) Law
Governing this Agreement.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York without regard to principles of conflicts of laws. Any action
brought by either party against the other concerning the transactions
contemplated by this Agreement shall be brought only in the state courts of
New
York or in the federal courts located in the state and county of New York.
The
parties to this Agreement hereby irrevocably waive any objection to jurisdiction
and venue of any action instituted hereunder and shall not assert any defense
based on lack of jurisdiction or venue or based upon forum
non conveniens.
The
parties executing this Agreement and other agreements referred to herein or
delivered in connection herewith on behalf of the Company agree to submit to
the
in personam jurisdiction of such courts and hereby irrevocably waive trial
by
jury. The
prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision of this
Agreement or any other agreement delivered in connection herewith is invalid
or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.
Each party hereby irrevocably waives personal service of process and consents
to
process being served in any suit, action or proceeding in connection with this
Agreement or any other Transaction Document by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit
in
any way any right to serve process in any other manner permitted by
law.
(e) Specific
Enforcement, Consent to Jurisdiction.
The
Company and Subscriber acknowledge and agree that irreparable damage would
occur
in the event that any of the provisions of this Agreement were not performed
in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to seek an injunction
or
injunctions to prevent or cure breaches of the provisions of this Agreement
and
to enforce specifically the terms and provisions hereof, this being in addition
to any other remedy to which any of them may be entitled by law or equity.
Subject to Section 13(d) hereof, the Company hereby irrevocably waives, and
agrees not to assert in any such suit, action or proceeding, any claim that
it
is not personally subject to the jurisdiction in New York of such court, that
the suit, action or proceeding is brought in an inconvenient forum or that
the
venue of the suit, action or proceeding is improper. Nothing in this Section
shall affect or limit any right to serve process in any other manner permitted
by law.
(f) Independent
Nature of Subscribers.
The
Company acknowledges that the obligations of each Subscriber under the
Transaction Documents are several and not joint with the obligations of any
other Subscriber, and no Subscriber shall be responsible in any way for the
performance of the obligations of any other Subscriber under the Transaction
Documents. The
Company acknowledges that each Subscriber has represented that the decision
of
each Subscriber to purchase Securities has been made by such Subscriber
independently of any other Subscriber and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial
or
otherwise) or prospects of the Company which may have been made or given by
any
other Subscriber or by any agent or employee of any other Subscriber, and no
Subscriber or any of its agents or employees shall have any liability to any
Subscriber (or any other person) relating to or arising from any such
information, materials, statements or opinions. The
Company acknowledges that nothing contained in any Transaction Document, and
no
action taken by any Subscriber pursuant hereto or thereto (including, but not
limited to, the (i) inclusion of a Subscriber in the Registration Statement
and
(ii) review by, and consent to, such Registration Statement by a Subscriber)
shall be deemed to constitute the Subscribers as a partnership, an association,
a joint venture or any other kind of entity, or create a presumption that the
Subscribers are in any way acting in concert or as a group with respect to
such
obligations or the transactions contemplated by the Transaction Documents.
The Company acknowledges that each Subscriber shall be entitled to independently
protect and enforce its rights, including without limitation, the rights arising
out of the Transaction Documents, and it shall not be necessary for
any other Subscriber to be joined as an additional party in any proceeding
for
such purpose. The Company acknowledges that it has elected to provide all
Subscribers with the same terms and Transaction Documents for the convenience
of
the Company and not because Company was required or requested to do so by the
Subscribers. The Company acknowledges that such procedure with respect to
the Transaction Documents in no way creates a presumption that the Subscribers
are in any way acting in concert or as a group with respect to the Transaction
Documents or the transactions contemplated thereby.
(g) Damages.
In the
event the Subscriber is entitled to receive any liquidated damages pursuant
to
the Transactions, the Subscriber may elect to receive the greater of actual
damages or such liquidated damages.
(h) Consent.
As used
in the Agreement, “consent of the Subscribers” or similar language means the
consent of holders of not less than 75% of the total of the Shares issued and
issuable upon conversion of outstanding Notes owned by Subscribers on the date
consent is requested.
(i) Limit
on Liability.
In
no
event shall the liability of any Subscriber or permitted successor hereunder
or
under any Transaction Document or other agreement delivered in connection
herewith be greater in amount than the dollar amount of the net proceeds
actually received by such Subscriber upon the sale of Shares.
(j) Equal
Treatment.
No
consideration shall be offered or paid to any person to amend or consent to
a
waiver or modification of any provision of the Transaction Documents unless
the
same consideration is also offered and paid to all the Subscribers and their
permitted successors and assigns.
(k) Maximum
Payments.
Nothing
contained herein or in any document referred to herein or delivered in
connection herewith shall be deemed to establish or require the payment of
a
rate of interest or other charges in excess of the maximum permitted by
applicable law. In the event that the rate of interest or dividends required
to
be paid or other charges hereunder exceed the maximum permitted by such law,
any
payments in excess of such maximum shall be credited against amounts owed by
the
Company to the Subscriber and thus refunded to the Company.
(l) Calendar
Days.
All
references to “days” in the Transaction Documents shall mean calendar days
unless otherwise stated. The terms “business days” and “trading days” shall mean
days that the New York Stock Exchange is open for trading for three or more
hours. Time periods shall be determined as if the relevant action, calculation
or time period were occurring in New York City. Any deadline that falls on
a
non-business day in any of the Transaction Documents shall be automatically
extended to the next business day and interest, if any, shall be calculated
and
payable through such extended period.
[THIS
SPACE INTENTIONALLY LEFT BLANK]
SIGNATURE
PAGE TO SUBSCRIPTION AGREEMENT (A)
Please
acknowledge your acceptance of the foregoing Subscription Agreement by signing
and returning a copy to the undersigned whereupon it shall become a binding
agreement between us.
|
a
Delaware corporation
|
||
| |
|
|
| By: | /s/ Xxx Xxxxxx | |
|
Name: Xxx Xxxxxx |
||
| Title: President | ||
| Dated: October 23, 2007 | ||
|
SUBSCRIBER
|
INITIAL
CLOSING PURCHASE PRICE
AND
PRINCIPAL
AMOUNT
OF NOTE
|
SECOND
CLOSING PURCHASE PRICE
AND
PRINCIPAL
AMOUNT
OF NOTE
|
|||||
|
XXX
XXXXXX
00000
Xxxxxxx 0, Xxxxx 000
Xxxxx
Xxxx Xxxxx, Xxxxxxx 00000
Fax:
(000) 000-0000
|
$
|
50,000.00
|
$
|
50,000.00
|
|||
|
By:
/s/ Xxx Xxxxxx
Name:
Xxx Xxxxxx
|
|||||||
SIGNATURE
PAGE TO SUBSCRIPTION AGREEMENT (B)
Please
acknowledge your acceptance of the foregoing Subscription Agreement by signing
and returning a copy to the undersigned whereupon it shall become a binding
agreement between us.
|
a
Delaware corporation
|
||
| |
|
|
| By: | /s/ Xxx Xxxxxx | |
|
Name: Xxx Xxxxxx |
||
| Title: President | ||
| Dated: October 23, 2007 | ||
|
SUBSCRIBER
|
INITIAL
CLOSING
PURCHASE
PRICE
AND
PRINCIPAL
AMOUNT
OF NOTE
|
SECOND
CLOSING
PURCHASE
PRICE
AND
PRINCIPAL
AMOUNT
OF NOTE
|
|||||
|
ALPHA
CAPITAL ANSTALT
Pradafant
7
9490
Furstentums
Vaduz,
Lichtenstein
Fax:
000-00-00000000
|
$
|
300,000.00
|
$
|
300,000.00
|
|||
|
s/
|
|||||||
SIGNATURE
PAGE TO SUBSCRIPTION AGREEMENT (C)
Please
acknowledge your acceptance of the foregoing Subscription Agreement by signing
and returning a copy to the undersigned whereupon it shall become a binding
agreement between us.
|
a
Delaware corporation
|
||
| |
|
|
| By: | /s/ Xxx Xxxxxx | |
|
Name: Xxx Xxxxxx |
||
| Title: President | ||
| Dated: October 23, 2007 | ||
|
SUBSCRIBER
|
INITIAL
CLOSING
PURCHASE
PRICE
AND
PRINCIPAL
AMOUNT
OF NOTE
|
SECOND
CLOSING
PURCHASE
PRICE
AND
PRINCIPAL
AMOUNT
OF NOTE
|
|||||
|
WHALEHAVEN
CAPITAL FUND LIMITED
3rd
Fl., 00 Xxx-Xx-Xxxxx Xx.
Xxxxxxxx,
Xxxxxxx XX00
Fax:
(000) 000-0000
|
$
|
150,000.00
|
$
|
150,000.00
|
|||
| /s/ | |||||||
SIGNATURE
PAGE TO SUBSCRIPTION AGREEMENT (D)
Please
acknowledge your acceptance of the foregoing Subscription Agreement by signing
and returning a copy to the undersigned whereupon it shall become a binding
agreement between us.
|
a
Delaware corporation
|
||
| |
|
|
| By: | /s/ Xxx Xxxxxx | |
|
Name: Xxx Xxxxxx |
||
| Title: President | ||
|
Dated:
October 23, 2007
|
||
|
SUBSCRIBER
|
INITIAL
CLOSING
PURCHASE
PRICE
AND
PRINCIPAL
AMOUNT
OF NOTE
|
SECOND
CLOSING
PURCHASE
PRICE
AND
PRINCIPAL
AMOUNT
OF NOTE
|
|||||
|
MONARCH
CAPITAL FUND LTD.
Xxxxxxx
Xxxxx, 0xx
Xxxxx
Xxxxxxxxxx
Xxxxx, Xxxx Xxxx
Xxxxxxx,
BVI
Fax
(000) 000-0000
|
$
|
100,000.00
|
$
|
100,000.00
|
|||
|
/s/
|
|||||||
LIST
OF EXHIBITS AND SCHEDULES
|
Exhibit
A
|
Form
of Note (see Exhibit 4.4 to Registration Statement)
|
|
Exhibit
B
|
Form
of Class A and Class B Warrant (see Exhibit 4.3 to Registration
Statement)
|
|
Exhibit
C
|
Escrow
Agreement (see Exhibit 10.3 to Registration Statement)
|
|
Exhibit
D
|
Form
of Security Agreement (see Exhibit 10.4 to Registration
Statement)
|
|
Exhibit
E
|
Form
of Subsidiary Guaranty (see Exhibit 10.5 to Registration
Statement)
|
|
Exhibit
F
|
Form
of Collateral Agent Agreement (see Exhibit 10.6 to Registration
Statement)
|
|
Exhibit
G
|
Form
of Legal Opinion (omitted)
|
|
Schedule
5(a)
|
Subsidiaries
|
|
Schedule
5(d)
|
Additional
Issuances / Capitalization / Reset Rights
|
|
Schedule
5(o)
|
Undisclosed
Liabilities
|
|
Schedule
5(v)
|
Transfer
Agent
|
|
Schedule
8(a)
|
Placement
Fees
|
|
Schedule
8(b)
|
Due
Diligence Fee
|
|
Schedule
9(f)
|
Use
of Proceeds
|
|
Schedule
11.1
|
Other
Registrable Shares
|
|
Schedule
13
|
Purchase
Shares
|
SCHEDULE
5(a) Subsidiaries
Consistent
with the Agreement and Plan of Merger among the Company, MH 09122007, Inc.
and
Attitude Drink Company, Inc. following completion of the merger that occurred
on
September 19, 2007, Attitude
Drink Company, Inc.,
a
Delaware corporation, is a wholly owned subsidiary and has 50,000,000 shares
of
common stock, $.001 par value, of which 100,000 shares are issued and
outstanding and held of record by the Company
SCHEDULE
5(d) Additional Issuances / Capitalization / Reset Rights
As
of
September 30, 2007, the Company has 120,000,000 shares consisting of 100,000,000
shares of common stock, $.001 par value, of which 5,000,000 shares are issued
and outstanding and 20,000,000 shares of preferred stock, $.001 par value,
of
which 75,000 shares are issued and outstanding.
The
Company has designated 2,000,000 shares of its preferred stock as Series A
Convertible Preferred Stock, $.001 par value, (the “Series A”) of which 75,000
shares of Series A are issued and outstanding. The Series A has 6:1 voting
rights, converts into 6 shares of common stock and is subject to redemption
by
the Company under certain circumstances. [450,000 shares of common stock]
The
Company has created, or will create, the 2007 Stock Compensation and Incentive
Plan and has reserved 1,000,000 shares of its common stock for issuance in
the
form of stock options or shares to employees, consultants and advisors that
perform services for the Company. Further, the Company has entered a NHRA Race
Car Sponsorship Agreement that grants the counterparty, Xxxxx Gas & Energy,
Inc. the right (until March 31, 2008) to exchange the 5% royalties payable
under
the agreement for up to 2,000,000 shares of common stock.
SCHEDULE
5(o) Undisclosed Liabilities
None
SCHEDULE
5(v) Transfer Agent
The
current transfer agent is
Florida
Atlantic Stock Transfer
Attention:
Mr. Xxxx Xxxxxx, President
0000
Xxx
Xxxx Xxxx
Xxxxxxx,
XX 00000
Telephone
000-000-0000
Facsimile
000-000-0000
Within
60
days of the Initial Closing, the Company will employ as the transfer agent
for
the Common Stock, Shares and Warrant Shares a participant in the Depository
Trust Company Automated Securities Transfer Program.
SCHEDULE
8(a) Placement Fees
None
SCHEDULE
8(b) Due Diligence Fees and Warrants
Cash
of
8% of Purchase Price payable on Initial and Second Closing Date.
On
Initial Closing Date, 1,000,000 Class A Warrants identical to the Warrants
issued and issuable to the Due Diligence Fee Recipient, and containing all
of
the rights including but not limited to the registration rights and
anti-dilution protections set forth in this Agreement.
SCHEDULE
8(c) Legal Fees
On
the
Initial Closing Date, $20,000 (“Cash
Legal Fees”)
and
60,600 Shares of the Company’s Common Stock (“Legal
Fee Shares”)
SCHEDULE
9(f) Use of Proceeds
|
Gross
Amount
|
Initial
Closing
|
Second
Closing
|
|
$600,000
|
$600,000
|
|
|
less
Due Diligence Fee
|
$48,000
|
$48,000
|
|
less
Subscriber’s Legal Fees
|
$20,000
|
|
|
Net
to Company
|
$532,000
|
$552,000
|
|
Rent
through July 1, 2008
|
$25,000
|
$0
|
|
Consulting
Fees
|
$100,000
|
$200,000
|
|
Employee
Compensation
|
$150,000
|
$150,000
|
|
Energy
Drink Inventory
|
$75,000
|
$75,000
|
|
Milk
Based Drink Inventory
|
$10,000
|
$50,000
|
|
Marketing
& Distribution
|
$40,000
|
$25,000
|
|
Professional
Services
|
$50,000
|
$30,000
|
|
Other
|
$82,000
|
$22,000
|
SCHEDULE
11.1 Other Registrable Securities
The
Company does not have any obligations to register any of its securities for
resale by the current owners. The Company reserves the right to include up
to
1,000,000 shares of its common stock held by the Company’s pre merger
stockholders based upon comments from the Financial Industry Regulatory
Authority concerning the Company’s Form 211.
SCHEDULE
11.2 Registration Shares & Priority
Based
upon the transaction documents, the Company shall register for resale the
following shares:
|
Shares
|
1,500,000
|
(plus
200,000 shares for SMIVEL LLC)
|
|
Legal
Fee Shares
|
60,600
|
|
|
Conversion
Shares
|
4,200,000
|
(being
175% of the shares issuable upon conversion of the Initial Closing
Notes
and Second Closing Notes)
|
|
Warrant
Shares
|
2,400,000
|
|
|
Due
Diligence Warrant Shares
|
1,000,000
|
SCHEDULE
13
PURCHASE
SHARES
|
PURCHASE
SHARE INVESTOR
|
PURCHASE
SHARES
|
|
MOMONA
CAPITAL
0
Xxxxxx Xxxx
Xxxxxx,
XX 00000-0000
Tax
ID: Omitted
|
1,470,000
|
|
EFCOR
LLC
00
Xxxx Xxxx
Xxxxxxxx,
XX 00000
Tax
ID: Omitted
|
30,000
|
|
TOTAL
|
1,500,000
|
