EXHIBIT 10.31
SECOND REVOCABLE WARRANT AGREEMENT
NATURAL GAS SYSTEMS, INC.
THIS SECOND REVOCABLE WARRANT AGREEMENT (this "Agreement") is made and
entered into as of September___, 2005, between Natural Gas Systems, Inc., a
Nevada corporation (the "Company"), and Prospect Energy Corporation, a Maryland
Corporation ("Holder"). Terms not defined herein shall have the meaning defined
in the Loan Agreement (defined below).
R E C I T A L S
WHEREAS, in consideration for entering into the attached Letter Amendment
to the Loan Agreement, attached hereto as EXHIBIT D, the Company proposes to
issue to Holder a maximum of TWO HUNDRED THOUSAND (200,000) revocable warrants
(the "Revocable Warrants"), each such Revocable Warrant entitling the holder
thereof to purchase, under certain conditions, one share of common stock, .001
par value, of the Company (the "Shares" or the "Common Stock"). ; and
WHEREAS, the Revocable Warrants which are the subject of this Agreement
will be issued by the Company to Holder as additional consideration related to a
Secured Loan Agreement, attached hereto as EXHIBIT B, made by the Company to the
Holder (the "Loan Agreement");
WHEREAS, the Revocable Warrants shall be subject to revocation by the
Company without any further consideration if the Company meets certain financial
tests specified in Section 3 below.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
A G R E E M E N T
1. Revocable Warrant Certificates. The warrant certificates to be
delivered pursuant to this Agreement (the "Revocable Warrant Certificates")
shall be in the form set forth in Exhibit A, attached hereto and made a part
hereof, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Revocable Warrant Agreement.
2. Right to Exercise Revocable Warrants. Each Revocable Warrant may be
exercised, in whole or in part, from June 15, 2006 until 11:59 P.M. (Eastern
Standard Time) on the date that is five (5) years after the date of this
Agreement (the "Expiration Date"). Each Revocable Warrant not exercised or
revoked on or before the Expiration Date shall expire.
Other than as specified in Section 3 herein, each Revocable Warrant shall
entitle its holder to purchase from the Company one share of Common Stock (each
an "Exercise Share") at an exercise price of One Dollar and Thirty Six Cents
($1.36) per share, subject to adjustment as set forth below ("Exercise Price").
The Company shall not be required to issue fractional shares of Common
Stock upon the exercise of this Revocable Warrant or to deliver Revocable
Warrant Certificates which evidence fractional shares of capital stock. In the
event that a fraction of an Exercise Share would, except for the provisions of
this paragraph 2, be issuable upon the exercise of this Revocable Warrant, the
Company shall pay to the Holder exercising the Revocable Warrant an amount in
cash equal to such fraction multiplied by the current market value of the
Exercise Share. For purposes of this paragraph 2, the current market value shall
be determined as follows:
(a) if the Shares are traded in the over-the-counter market and
not on any national securities exchange and not in the NASDAQ Reporting System,
the average of the mean between the last bid and asked prices per share, as
reported by the National Quotation Bureau, Inc., or an equivalent generally
accepted reporting service, for the last business day prior to the date on which
the Revocable Warrant is exercised, or, if not so reported, the average of the
closing bid and asked prices for a Share as furnished to the Company by any
member of the National Association of Securities Dealers, Inc., selected by the
Company and Holder for that purpose.
(b) if the Shares are listed or traded on a national securities
exchange or in the NASDAQ Reporting System, the closing price on the principal
national securities exchange on which they are so listed or traded or in the
NASDAQ Reporting System, as the case may be, on the last business day prior to
the date of the exercise of the Revocable Warrant. The closing price referred to
in this Clause (b) shall be the last reported sales price or, in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices on such day, in either case on the national securities exchange
on which the Shares are then listed or in the NASDAQ Reporting System; or
(c) if no such closing price or closing bid and asked prices are
available, as determined by the Holder and the Board of Directors of the
Company.
3. Revocation of the Revocable Warrants. Notwithstanding anything to
the contrary, all Revocable Warrants granted by the Company to the Holder under
this Agreement shall be subject to forfeiture, revocation and cancellation
without any further or additional consideration due or owed to Holder in the
event that the Company and its Subsidiaries, on a consolidated basis, prior to
May 1, 2006 meets the "EBITDA Test," as defined below in this Section 3. The
"EBITDA Test" shall mean that the Company and its Subsidiaries, on a
consolidated basis, generates EBITDA of at least $200,000.00 for any single
calendar month, calculated anytime prior to prior to June 1, 2006. Terms not
defined in this Agreement with regards to this Section 3 are defined in the Loan
Agreement, attached hereto as EXHIBIT B.
4. Mutilated or Missing Revocable Warrant Certificates. In case any of
the Revocable Warrant Certificates shall be mutilated, lost, stolen or destroyed
prior to the Expiration Date, the Company shall issue and deliver, in exchange
and substitution for and upon cancellation of the mutilated Revocable Warrant
Certificate, or in lieu of and in substitution for the Revocable Warrant
Certificate lost, stolen or destroyed, a new Revocable Warrant Certificate of
like tenor and representing an equivalent right or interest.
5. Reservation of Shares. The Company will at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Shares or its authorized and issued Shares held in its
treasury for the purpose of enabling it to satisfy its obligation to issue
Exercise Shares upon exercise of Revocable Warrants, the full number of Exercise
Shares deliverable upon the exercise of all outstanding Revocable Warrants.
The Company covenants that all Exercise Shares which may be issued upon
exercise of Revocable Warrants will be validly issued, fully paid and
non-assessable outstanding Shares of the Company.
6. Rights of Holder. The Holder shall not, by virtue of anything
contained in this Revocable Warrant Agreement or otherwise, prior to exercise of
this Revocable Warrant, be entitled to any right whatsoever, either in law or
equity, of a stockholder of the Company, including without limitation, the right
2
to receive dividends or to vote or to consent or to receive notice as a
stockholder in respect of the meetings of stockholders or the election of
directors of the Company of any other matter.
7. Investment Intent; Accredited Investor. Holder represents and
warrants to the Company that Holder is acquiring the Revocable Warrants for
investment purposes and with no present intention of distributing or reselling
any of the Revocable Warrants. Holder represents that it is an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act of 1933, as amended (the "Act").
8. Certificates to Bear Legend. The Revocable Warrants and the
certificate or certificates therefore shall bear the following legend by which
each holder shall be bound:
"THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS
NOT REQUIRED."
The Exercise Shares and the certificate or certificates evidencing
any such Exercise Shares shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH
ACT IS AVAILABLE."
Certificates for Revocable Warrants or Exercise Shares, as the case may
be, without such legend shall be issued if such Revocable Warrants or Exercise
Shares are sold pursuant to an effective registration statement under the Act or
if the Company has received an opinion from counsel reasonably satisfactory to
counsel for the Company that such legend is no longer required under the Act.
9. Adjustment of Number of Shares and Class of Capital Stock
Purchasable. The number of Exercise Shares and class of capital stock
purchasable under this Revocable Warrant are subject to adjustment from time to
time as set forth in this Section 9.
(a) Adjustment for Change in Capital Stock. If the Company:
(i) pays a dividend or makes a distribution on its Common
Stock, in each case, in shares of its Common Stock;
(ii) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(iii) combines its outstanding shares of Common Stock into a
smaller number of shares; or
(iv) makes a distribution on its Common Stock in shares of
its capital stock other than Common Stock
3
then the number and classes of Exercise Shares purchasable upon exercise of each
Revocable Warrant in effect immediately prior to such action shall be adjusted
so that the holder of any Revocable Warrant thereafter exercised may receive the
number and classes of shares of capital stock of the Company which such holder
would have owned immediately following such action if such holder had exercised
the Revocable Warrant immediately prior to such action.
For a dividend or distribution the adjustment shall become effective
immediately after the record date for the dividend or distribution. For a
subdivision, combination or reclassification, the adjustment shall become
effective immediately after the effective date of the subdivision, combination
or reclassification.
If after an adjustment the holder of a Revocable Warrant upon exercise of
it may receive shares of two or more classes of capital stock of the Company,
the Board of Directors of the Company shall in good faith determine the
allocation of the adjusted Exercise Price between or among the classes of
capital stock. After such allocation, that portion of the Exercise Price
applicable to each share of each such class of capital stock shall thereafter be
subject to adjustment on terms comparable to those applicable to the Exercise
Shares in this Agreement.
(b) Consolidation, Merger or Sale of the Company. If the Company
is a party to a consolidation, merger, transfer of assets or any other business
combination which reclassifies or changes its outstanding Common Stock, the
successor corporation (or corporation controlling the successor corporation or
the Company, as the case may be) shall by operation of law assume the Company's
obligations under this Agreement. Upon consummation of such transaction, the
Revocable Warrants shall automatically become exercisable for the kind and
amount of securities, cash or other assets which the holder of a Revocable
Warrant would have owned immediately after the consolidation, merger, transfer
or business combination if the holder had exercised the Revocable Warrant
immediately before the effective date of such transaction. As a condition to the
consummation of such transaction, the Company shall arrange for the person or
entity obligated to issue securities or deliver cash or other assets upon
exercise of the Revocable Warrant to, concurrently with the consummation of such
transaction, assume the Company's obligations hereunder by executing an
instrument so providing and further providing for adjustments which shall be as
nearly equivalent as may be practical to the adjustments provided for in this
Section 9. The provisions of this Section 9(b) shall similarly apply to
successive reclassifications, reorganizations, consolidations, mergers or other
business combinations.
10. Successors. All the covenants and provisions of this Agreement by or
for the benefit of the Company or Holder shall bind and inure to the benefit of
their respective successor and assigns hereunder.
11. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all proposes be deemed to
be an original, and such counterparts shall together constitute by one and the
same instrument.
12. Notices. All notices or other communications under this Agreement
shall be in writing and shall be deemed to have been given if delivered by hand
or mailed by certified mail, postage prepaid, return receipt requested,
addressed as follows: if to the Company: Natural Gas Systems, Inc., Xxx Xxxxxxxx
Xxxx Xxxxx, 000 Xxxxxxx, Xxxxx 0000. Xxxxxxx, XX 00000 , Attention: Chief
Executive Officer, and to the Holder: at the address of the Holder appearing on
the books of the Company or the Company's transfer agent, if any.
4
Either the Company or the Holder may from time to time change the address
to which notices to it are to be mailed hereunder by notice in accordance with
the provisions of this Paragraph 12.
13. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of any Holders in order
to cure any ambiguity or to be correct or supplement any provision contained
herein which may be defective or inconsistent with any other provision, or to
make any other provisions in regard to matters or questions herein arising
hereunder which the Company may deem necessary or desirable and which shall not
materially adversely affect the interest of the Holder. Except as set forth in
the immediately preceding sentence, this Agreement may not be amended without
the prior written consent of the Holder.
14. Severability. If for any reason any provision, paragraph or term of
this Agreement is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Agreement shall be deemed to be severable.
15. Governing Law. This Agreement shall be deemed to be a contract made
under the laws of the State of Nevada and for all purposes shall be governed and
construed in accordance with the laws of said State.
16. Headings. Paragraphs and subparagraph headings, used herein are
included herein for convenience of reference only and shall not affect the
construction of this Agreement nor constitute a part of this Agreement for any
other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the date and year first above written.
COMPANY HOLDER:
NATURAL GAS SYSTEMS, INC. PROSPECT ENERGY CORPORATION
By:_______________________________ By:______________________________
Name: Xxxxxx X. Xxxxxx, CEO Name:____________________________
5
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT
TO RULE 144 OR AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE CORPORATION
AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
SECOND REVOCABLE WARRANT TO PURCHASE SHARES
OF COMMON STOCK OF NATURAL GAS SYSTEMS, INC
Initial Number of Shares: 200,000
Exercise Price: $1.36 per share
Date of Grant: September ___, 2005
Expiration Date: September ___, 2010
THIS CERTIFIES THAT, Prospect Energy Corporation, a Maryland corporation, or any
person or entity to whom the interest in this Revocable Warrant is lawfully
transferred ("Holder") is entitled to purchase the above number (as adjusted
pursuant to Section 4 hereof) of fully paid and non-assessable shares of the
Common Stock (the "Shares") of Natural Gas Systems, Inc., a Nevada corporation
(the "Company), having an Exercise Price as set forth above, subject to the
provisions and upon the terms and conditions set forth herein and in the
Revocable Warrant Agreement dated September __, 2005 ("Revocable Warrant
Agreement"). The exercise price, as adjusted from time to time as provided
herein, is referred to as the "Exercise Price."
NOTWITHSTANDING ANYTING TO THE CONTRARY, THIS REVOCABLE WARRANT IS SUBJECT TO
REVOCATION WITHOUT CONSIDERATION BY THE COMPANY UNDER CERTAIN CONDITIONS DEFINED
IN THE REVOCABLE WARRANT AGREEMENT.
1. Term. Subject to the revocation provisions of Section 3 of the
Revocable Warrant Agreement, the purchase right represented by this Revocable
Warrant is exercisable, in whole or in part, at any time commencing on the June
15, 2006 and ending on the Expiration Date, after which time the Revocable
Warrant shall be void.
2. Method of Exercise; Payment; Issuance of New Revocable Warrant.
Subject to Section 1 hereof, the right to purchase Shares represented by this
Revocable Warrant may be exercised by Holder, in whole or in part, for the total
number of Shares remaining available for exercise by the surrender of this
Revocable Warrant (with the notice of exercise form attached hereto as Exhibit A
duly executed) at the principal office of the Company and by the payment to the
Company, by check made payable to the Company drawn on a United States bank and
for United States funds, or by delivery to the Company of evidence of
cancellation of indebtedness of the Company to such Holder, of an amount equal
to the then applicable Exercise Price per share multiplied by the number of
Shares then being purchased or by net exercise pursuant to Section 6 hereof. In
the event of any exercise of the purchase right represented by this Revocable
Warrant, certificates for the Shares so purchased shall be promptly delivered to
Holder and, unless this Revocable Warrant has been fully exercised or has
expired, a new Revocable Warrant representing the portion of the Shares, if any,
with respect to which this Revocable Warrant shall not then have been exercised
shall also be promptly delivered to Holder.
3. Exercise Price. The Exercise Price at which this Revocable Warrant
may be exercised shall be the Exercise Price, as adjusted from time to time
pursuant to Section 4 hereof.
4. Adjustment of Number of Shares. The number of shares and/or class of
capital stock purchasable upon exercise of this Revocable Warrant are subject to
adjustment as provided in Section 9 of the Revocable Warrant Agreement.
5. Transferability and Negotiability of Revocable Warrant. This
Revocable Warrant may not be transferred or assigned in whole or in part without
compliance with applicable federal and state securities laws by the transferor
and the transferee (including, without limitation, the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company, if reasonably requested by the Company). Subject to the provisions of
this Section 5, title to this Revocable Warrant may be transferred in the same
manner as a negotiable instrument transferable by endorsement and delivery.
6. Net Exercise. In lieu of exercising this Revocable Warrant for cash,
the Holder may elect to exchange this Revocable Warrant for Shares equal to the
value of this Revocable Warrant by surrender of this Revocable Warrant, together
with notice of such election, at the principal office of the Company, in which
event the Company shall issue to the holder a number of Shares computed using
the following formula:
X = Y (A-B)
-------
A
Where:
X= the number of Shares to be issued to the holder.
Y= the number of Shares to be purchased under this Revocable
Warrant.
A= value per share of one Share determined in accordance with
Section 2 of the Revocable Warrant Agreement.
B= the Exercise Price (as adjusted).
7. Registration Rights. Upon exercise of this Revocable Warrant , the
Holder shall have and be entitled to exercise, together with all other holders
of registrable securities possessing "piggy back" registration rights under that
certain Registration Rights Agreement, of even date herewith and attached hereto
as EXHIBIT C, between the Company and the parties who have executed the
counterpart signature pages thereto or are otherwise bound thereby (the
"Registration Rights Agreement"), the rights of registration granted under the
Registration Rights Agreement (with respect to the Shares of Common Stock
issuable upon exercise of this Revocable Warrant ). By its receipt of this
Revocable Warrant , Holder agrees to be bound by the Registration Rights
Agreement.
8. Miscellaneous. The Company covenants that it will at all times
reserve and keep available, solely for the purpose of issue upon the exercise
hereof, a sufficient number of Shares to permit the exercise hereof in full.
Such Shares, when issued in compliance with the provisions of this Revocable
Warrant and the Company's Certificate of Incorporation, will be duly authorized,
validly issued, fully paid and non-assessable. No Holder of this Revocable
Warrant, as such, shall, prior to the exercise of this Revocable Warrant, be
entitled to vote or receive dividends or be deemed to be a stockholder of the
Company for any purpose, nor shall anything contained in this Revocable Warrant
be construed to confer upon Holder, as such, any rights of a stockholder of the
Company or any right to vote, give or withhold consent to any corporate action,
receive notice of meetings, receive dividends or subscription rights, or
otherwise. Upon receipt of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of this Revocable Warrant and, in the
case of any such loss, theft or destruction, upon delivery of an indemnity
2
agreement reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, upon surrender and cancellation of such Revocable
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Revocable Warrant of like date and tenor. The terms and provisions of this
Revocable Warrant shall inure to the benefit of, and be binding upon, the
Company and the Holder hereof and their respective successors and assigns. This
Revocable Warrant shall be governed by and construed under the laws of the State
of Nevada.
3
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date and year first written above.
Holder: Company:
________________________________ Natural Gas Systems, a Nevada Corporation
By:_____________________________ By:____________________________________
Name:___________________________ Name:__________________________________
4
NOTICE OF EXERCISE
TO: NATURAL GAS SYSTEMS, INC.
1. The undersigned hereby elects to purchase _________ shares of the
Common Stock of NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached
Revocable Warrant, and tenders herewith payment of the purchase price of such
shares in full, together with all applicable transfer taxes, if any.
2. The undersigned hereby elects to purchase __________ shares of the
Common Stock of NATURAL GAS SYSTEMS, INC. pursuant to the terms of the attached
Revocable Warrant on a net exercise basis in accordance with Section 6.
3. Please issue a certificate or certificates representing said shares
of the Common Stock in the name of the undersigned or in such other name as is
specified below:
Name:___________________________________
Tax ID:___________________
Address:________________________________
________________________________
________________________________
________________________________
________________________________
Signed:_________________________________
Date:___________________
5
