SECURITIES PURCHASE AGREEMENT
Exhibit
10.1
This
Securities Purchase Agreement dated as of April 18, 2008 (this “Agreement”)
is
made by and between TraceGuard Technologies, Inc., a Nevada corporation, with
principal executive offices located at 000 Xxxxxxx Xxxxxx, 0xx
Xxxxx,
Xxx Xxxx, Xxx Xxxx 00000 (the “Company”),
and
Golden Gate Investors, Inc. (“Holder”).
WHEREAS,
Holder desires to purchase from the Company, and the Company desires to issue
and sell to Holder, upon the terms and subject to the conditions of this
Agreement, a Convertible Debenture of the Company in the aggregate principal
amount of $1,500,000 (the “Debenture”);
and
WHEREAS,
upon the terms and subject to the conditions set forth in the Debenture the
Debenture is convertible into shares of the Company’s common stock, $.001 par
value (the “Common
Stock”).
NOW,
THEREFORE, in consideration of the premises and the mutual covenants contained
herein, the parties hereto, intending to be legally bound, hereby agree as
follows:
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I.
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PURCHASE
AND SALE OF DEBENTURE
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A. Transaction.
Holder
hereby agrees to purchase from the Company, and the Company has offered and
hereby agrees to issue and sell to Holder in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act of
1933,
as amended (the “Securities
Act”),
the
Debenture.
B. Purchase
Price; Form of Payment.
The
purchase price for the Debenture to be purchased by Holder hereunder shall
be
$1,500,000 (the “Purchase
Price”).
Simultaneously with the execution of this Agreement, Holder shall pay the
Purchase Price by wire transfer of $225,000 in immediately available funds
to
the Company and delivery to the Company of a Secured Promissory Note in the
principal amount of $1,275,000, in the form attached hereto as Exhibit
A
(the
“Promissory
Note”).
Simultaneously with the execution of this Agreement, the Company shall deliver
the Debenture (which shall have been duly authorized, issued and executed I/N/O
Holder or, if the Company otherwise has been notified, I/N/O Holder’s nominee)
to the Holder.
Notwithstanding
the foregoing, only with respect to the Promissory Note issued by the Holder
on
the date hereof, the Holder shall make the following prepayments under the
Promissory Note if the following conditions are satisfied: (i) $200,000 shall
be
prepaid from the outstanding principal balance of the Promissory Note on the
date that is the three month anniversary of the date hereof, if (a) no Event
of
Default (as defined in the Debenture) has occurred under the Debenture through
such date, (b) the Volume Weighted Average Price (as defined in the Debenture)
per share of the Common Stock of the Company for the 10 consecutive Trading
Days
(as defined in the Debenture) immediately preceding such anniversary date is
not
less than $0.20 per share (as
adjusted for any stock splits, stock dividends, combinations, subdivisions,
recapitalizations or the like), and (c) the
Company has received not less than $250,000 in the aggregate of additional
equity funding from one or more third party investors after the date
hereof;
and
(ii) $225,000
shall be prepaid from the outstanding principal balance of the Promissory Note
on the date that is the five month anniversary of the date hereof, if (x) no
Event of Default (as defined in the Debenture) has occurred under the Debenture
through such date; and (y) the Volume Weighted Average Price per share of the
Common Stock of the Company for the 10 consecutive Trading Days immediately
preceding such anniversary date is not less than $0.20 per share (as
adjusted for any stock splits, stock dividends, combinations, subdivisions,
recapitalizations or the like). Any amounts so prepaid by the Holder under
the
terms of this section (i) may be applied, in the sole and absolute discretion
of
Holder, to any other amounts that Holder may otherwise be obligated or required
to prepay under the terms of the Promissory Note; and
(ii)
shall not impact the funding obligations or prepayment obligations of the Holder
under this Agreement, the Debenture or any Additional Debenture, if any, or
the
Second Promissory Note, the Third Promissory Note, or the Fourth Promissory
Note, if any, as otherwise set forth in this Agreement. For sake of clarity,
the
preceding sentence shall not be construed to permit the Holder to offset any
prepayment made pursuant to this Article I.B. against any other prepayment
that
may be required to be made pursuant to this Article I.B.
C. Second
Debenture.
Provided that no Event of Default (as defined in the Debenture) has occurred
under the Debenture (provided that Holder may, in its sole and absolute
discretion waive the occurrence of such Event of Default with respect to this
Section), Holder shall, in Holder’s sole and absolute discretion, select a date
during the Second Debenture Period (as defined below) (with such date as
selected by Holder referred to herein as the “Second
Debenture Date”)
at
which the Company shall sell and the Holder shall purchase a debenture in the
principal amount of $1,500,000 in exchange for a purchase price of $1,500,000
(the “Second
Debenture”),
with
such purchase price paid via a cash payment of $250,000 and the issuance of
a
promissory note in the principal amount of $1,250,000 (the “Second
Promissory Note”),
with
the form of and terms of the Second Debenture and the Second Promissory Note
and
payment of the purchase price subject to the same terms and conditions of this
Agreement, the Debenture and the Promissory Note, as applicable, including
the
entry into a Stock Pledge Agreement on the same terms as set forth in the Stock
Pledge Agreement (as defined herein) entered into in connection with this
Agreement and the Debenture, and when the Second Debenture is issued, the term
“Debenture” as used in this Agreement shall be deemed to include the Second
Debenture in all respects and when the Second Promissory Note is issued, the
term “Promissory Note” as used in this Agreement shall be deemed to include the
Second Promissory Note in all respects. The closing of the purchase and sale
of
the Second Debenture and the issuance of the Second Promissory Note shall occur
within thirty days of the Second Debenture Date. For the purposes of this
Agreement, the “Second Debenture Period” shall mean the period that commences on
the date hereof and terminates upon the date that the remaining Principal Amount
of the Debenture is equal to an amount not greater than $250,000.
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D. Third
Debenture.
Provided that no Event of Default (as defined in the Debenture) has occurred
under the Debenture (provided that Holder may, in its sole and absolute
discretion waive the occurrence of such Event of Default with respect to this
Section), Holder shall, in Holder’s sole and absolute discretion, select a date
during the Third Debenture Period (as defined below) (with such date as selected
by Holder referred to herein as the “Third
Debenture Date”)
at
which the Company shall sell and the Holder shall purchase a debenture in the
principal amount of $1,500,000 in exchange for a purchase price of $1,500,000
(the “Third
Debenture”),
with
such purchase price paid via a cash payment of $250,000 and the issuance of
a
promissory note in the principal amount of $1,250,000 (the “Third
Promissory Note”),
with
the form of and terms of the Third Debenture and the Third Promissory Note
and
payment of the purchase price subject to the same terms and conditions of this
Agreement, the Debenture and the Promissory Note, as applicable, including
the
entry into a Stock Pledge Agreement on the same terms as set forth in the Stock
Pledge Agreement (as defined herein) entered into in connection with this
Agreement and the Debenture, and when the Third Debenture is issued, the term
“Debenture” as used in this Agreement shall be deemed to include the Third
Debenture in all respects and when the Third Promissory Note is issued, the
term
“Promissory Note” as used in this Agreement shall be deemed to include the Third
Promissory Note in all respects. The closing of the purchase and sale of the
Third Debenture and the issuance of the Third Promissory Note shall occur within
thirty days of the Third Debenture Date. For the purposes of this Agreement,
the
“Third Debenture Period” shall mean the period that commences on the date of the
issuance of the Second Debenture to Holder and terminates upon the date that
the
remaining Principal Amount of the Second Debenture is equal to an amount not
greater than $250,000.
E. Fourth
Debenture.
Provided that no Event of Default (as defined in the Debenture) has occurred
under the Debenture (provided that Holder may, in its sole and absolute
discretion waive the occurrence of such Event of Default with respect to this
Section), Holder shall, in Holder’s sole and absolute discretion, select a date
during the Fourth Debenture Period (as defined below) (with such date as
selected by Holder referred to herein as the “Fourth
Debenture Date”)
at
which the Company shall sell and the Holder shall purchase a debenture in the
principal amount of $1,500,000 in exchange for a purchase price of $1,500,000
(the “Fourth
Debenture”),
with
such purchase price paid via a cash payment of $250,000 and the issuance of
a
promissory note in the principal amount of $1,250,000 (the “Fourth
Promissory Note”),
with
the form of and terms of the Fourth Debenture and the Fourth Promissory Note
and
payment of the purchase price subject to the same terms and conditions of this
Agreement, the Debenture and the Promissory Note, as applicable, including
the
entry into a Stock Pledge Agreement on the same terms as set forth in the Stock
Pledge Agreement (as defined herein) entered into in connection with this
Agreement and the Debenture, and when the Fourth Debenture is issued, the term
“Debenture” as used in this Agreement shall be deemed to include the Fourth
Debenture in all respects and when the Fourth Promissory Note is issued, the
term “Promissory Note” as used in this Agreement shall be deemed to include the
Fourth Promissory Note in all respects. The closing of the purchase and sale
of
the Fourth Debenture and the issuance of the Fourth Promissory Note shall occur
within thirty days of the Fourth Debenture Date. For the purposes of this
Agreement, the “Fourth Debenture Period” shall mean the period that commences on
the date of the issuance of the Third Debenture to Holder and terminates upon
the date that the remaining Principal Amount of the Third Debenture is equal
to
an amount not greater than $250,000.
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F. Non-Funding
Penalty.
Notwithstanding the foregoing requirements of Holder to purchase each of the
Second Debenture, Third Debenture and Fourth Debenture (each, an “Additional
Debenture”
and
collectively, the “Additional
Debentures”),
in
the event that Holder does not purchase any or all of the Additional Debentures
within 10 business days of the date that the delivery of funds associated with
such purchase would otherwise be due, upon 20 days’ prior written notice from
the Company of such failure to so purchase any or all of the Additional
Debentures, Holder shall pay an amount equal to $25,000 (the “Non-Funding
Penalty”)
to the
Company, provided however that in the event that the Common Stock shall trade
on
the Trading Market (as defined in the Debenture) at a price per share that
is
$0.065 per share or lower at any time during the six month period commencing
on
the date hereof and ending on the six month anniversary of the date hereof
(as
adjusted for any stock splits, stock dividends, combinations, subdivisions,
recapitalizations or the like),
for a
period of ten consecutive Trading Days (as defined in the Debenture), then
the
Non-Funding Penalty shall be reduced to equal $5,000. The amount payable by
the
Holder to the Company in connection with any damages, losses, claims or other
amounts in connection with the failure of the Holder to purchase any or all
of
the Additional Debentures shall not exceed $25,000 (or $5,000, subject to the
terms of this Section) in the aggregate. Upon the payment of the Non-Funding
Penalty to the Company, the Holder shall have no further obligations or duties
under this Agreement, the Debenture or any agreements or debentures entered
into
in connection with any of the Additional Debentures, if any, with respect to
the
purchase of any Additional Debenture or other duties to deliver any additional
funds to the Company, provided however, that other than with respect to the
removal of the requirement to enter into any Additional Debenture, the Company
and the Holder shall remain obligated and bound by the remaining terms and
conditions of this Agreement, the Debenture, the Promissory Note and any
agreements or debentures previously entered into in connection with any
Additional Debenture. The Company’s sole and exclusive remedy in the event that
the Holder fails to purchase any or all of the Additional Debentures shall
be
the right of the Company to receive the Non-Funding Penalty from the Holder.
G. Non-Funding
Election.
In the
event that the Common Stock shall trade on the Trading Market (as defined in
the
Debenture) at a price per share that is $0.056 per share or lower at any time
during the six month period commencing on the date hereof and ending on the
six
month anniversary of the date hereof (as
adjusted for any stock splits, stock dividends, combinations, subdivisions,
recapitalizations or the like),
for a
period of ten consecutive Trading Days, the Holder shall have the right, in
the
Holder’s sole and absolute discretion, during the time period commencing on the
date hereof and ending on the six month anniversary of the date hereof, to
terminate the right and obligation of the Holder to purchase any or all of
the
Additional Debentures through the delivery of written notice to the Holder
of
such termination in the manner provided in Section XVII hereof. In the event
that Holder so terminates Holder’s right and obligation to purchase any of all
of the Additional Debentures under the terms of this Section I.H., the Holder
shall have no obligation to pay any of the Non-Funding Penalty and shall have
no
further obligations or duties under this Agreement, the Debenture or any
agreements or debentures entered into in connection with any of the Additional
Debentures, if any, with respect to the purchase of any Additional Debenture
or
other duties to deliver any additional funds to the Company, provided however,
that other than with respect to the removal of the requirement to enter into
any
Additional Debenture and pay any of the Non-Funding Penalty, the Company and
the
Holder shall remain obligated and bound by the remaining terms and conditions
of
this Agreement, the Debenture, the Promissory Note and any agreements or
debentures previously entered into in connection with any Additional Debenture.
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H. Company
Redemption of Debenture and Termination of Additional Debenture
Purchases.
Provided that no Event of Default has occurred under the Debenture, the Company
shall have the right, in the Company’s sole and absolute discretion, during the
time period commencing on the date hereof and terminating on the 120th
day
following the date hereof, to (i) redeem the Debenture for a redemption price
equal to 99% of the outstanding principal amount of the Debenture, plus any
accrued and unpaid interest thereon (such aggregate amount referred to herein
as
the “Redemption Amount”), and (ii) terminate the right and obligation of the
Holder to purchase all Additional Debentures through (x) the delivery of written
notice to the Holder of such termination in the manner provided in Section
XVII
hereof and (y) the delivery to the Holder of a payment in cash equal to the
Redemption Amount within 3 business days of the delivery of such notice.
Notwithstanding the foregoing, the payment of the Redemption Amount shall first
be satisfied by and offset against any amounts due to the Company under the
Promissory Note and such amounts of the Promissory Note so applied against
the
Redemption Amount that the Company is required or permitted to redeem shall
reduce the amount outstanding under the Promissory Note by a like amount. After
the application of the amount owed under the Promissory Note, if any, to the
Redemption Amount, the Company shall immediately pay in cash to the Holder
any
remaining amount owed by the Company to the Holder in connection with the
payment of the Redemption Amount.
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II.
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HOLDER’S
REPRESENTATIONS AND
WARRANTIES
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Holder
represents and warrants to and covenants and agrees with the Company as
follows:
1. Holder
is
purchasing the Debenture and the Common Stock issuable upon conversion or
redemption of the Debenture (the “Conversion
Shares”
and,
collectively with the Debenture, the “Securities”)
for
its own account, for investment purposes only and not with a view towards or
in
connection with the public sale or distribution thereof in violation of the
Securities Act.
2. Holder
is
(i) an “accredited investor” within the meaning of Rule 501 of Regulation D
under the Securities Act, (ii) experienced in making investments of the kind
contemplated by this Agreement, (iii) capable, by reason of its business and
financial experience, of evaluating the relative merits and risks of an
investment in the Securities, and (iv) able to afford the loss of its investment
in the Securities.
3. Holder
understands that the Securities are being offered and sold by the Company in
reliance on an exemption from the registration requirements of the Securities
Act and equivalent state securities and “blue sky” laws, and that the Company is
relying upon the accuracy of, and Holder’s compliance with, Holder’s
representations, warranties and covenants set forth in this Agreement to
determine the availability of such exemption and the eligibility of Holder
to
purchase the Securities;
4. Holder
understands that the Securities have not been approved or disapproved by the
Securities and Exchange Commission (the “Commission”)
or any
state or provincial securities commission.
5. This
Agreement has been duly and validly authorized, executed and delivered by Holder
and is a valid and binding agreement of Holder enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors’ rights and remedies generally and except as rights to indemnity and
contribution may be limited by federal or state securities laws or the public
policy underlying such laws.
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III.
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THE
COMPANY’S REPRESENTATIONS
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The
Company represents and warrants as of the date hereof to the Holder that, except
as set forth on Schedule III attached hereto, the statements contained in this
Section 3 are complete and accurate as of the date of this Agreement. As used
in
this Section 3, the term “Knowledge” shall mean the knowledge of the members of
the board of directors of the Company and/or the officers or employees of the
Company after reasonable investigation.
A. Capitalization.
1. The
authorized capital stock of the Company consists of 150,000,000 shares of Common
Stock, of which 38,308,542 shares are issued and outstanding as of the date
hereof and are fully paid and nonassessable. The amount, exercise, conversion
or
subscription price and expiration date for each outstanding option and other
security or agreement to purchase shares of Common Stock is accurately set
forth
on Schedule
III.A.1.
2. The
Conversion Shares have been duly and validly authorized and reserved for
issuance by the Company, and, when issued by the Company upon conversion of
the
Debenture, will be duly and validly issued, fully paid and nonassessable and
will not subject the holder thereof to personal liability by reason of being
such holder.
3. Except
as
disclosed on Schedule III.A.3.,
there
are no preemptive, subscription, “call,” right of first refusal or other similar
rights to acquire any capital stock of the Company or other voting securities
of
the Company that have been issued or granted to any person and no other
obligations of the Company to issue, grant, extend or enter into any security,
option, warrant, “call,” right, commitment, agreement, arrangement or
undertaking with respect to any of their respective capital stock.
B. Organization;
Reporting Company Status.
1. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the state or jurisdiction in which it is incorporated and
is
duly qualified as a foreign corporation in all jurisdictions in which the
failure so to qualify would reasonably be expected to have a material adverse
effect on the business, properties, prospects, condition (financial or
otherwise) or results of operations of the Company or on the consummation of
any
of the transactions contemplated by this Agreement (a “Material
Adverse Effect”).
2. The
Company is subject to the reporting requirements of the Securities Exchange
Act
of 1934, as amended (the “Exchange
Act”).
The
Common Stock is traded on the OTC Bulletin Board service of the National
Association of Securities Dealers, Inc. (“OTCBB”)
and
the Company has not received any notice regarding, and to its Knowledge there
is
no threat of, the termination or discontinuance of the eligibility of the Common
Stock for such trading.
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C. Authorization.
The
Company (i) has duly and validly authorized and reserved for issuance shares
of
Common Stock, which is a number sufficient for the conversion of the Debenture
in full and (ii) at all times from and after the date hereof shall have a
sufficient number of shares of Common Stock duly and validly authorized and
reserved for issuance to satisfy the conversion of the Debenture in full. The
Company understands and acknowledges the potentially dilutive effect on the
Common Stock of the issuance of the Conversion Shares. The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion
of
the Debenture in accordance with this Agreement is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company and notwithstanding the
commencement of any case under 11 U.S.C. § 101 et
seq.
(the
“Bankruptcy
Code”).
In
the event the Company is a debtor under the Bankruptcy Code, the Company hereby
waives to the fullest extent permitted any rights to relief it may have under
11 U.S.C. § 362 in respect of the conversion of the Debenture. The
Company agrees, without cost or expense to Holder, to take or consent to any
and
all action necessary to effectuate relief under 11 U.S.C.
§ 362.
D. Authority;
Validity and Enforceability.
The
Company has the requisite corporate power and authority to enter into the
Documents (as such term is hereinafter defined) and to perform all of its
obligations hereunder and thereunder (including the issuance, sale and delivery
to Holder of the Securities). The execution, delivery and performance by the
Company of the Documents and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance
of
the Debenture and the issuance and reservation for issuance of the Conversion
Shares) have been duly and validly authorized by all necessary corporate action
on the part of the Company and no further filing, consent, or authorization
is
required by the Company, its board of directors, or its stockholders. Each
of
the Documents has been duly and validly executed and delivered by the Company
and each Document constitutes a valid and binding obligation of the Company
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors’ rights and remedies generally and except as
rights to indemnity and contribution may be limited by federal or state
securities laws or the public policy underlying such laws. The Securities have
been duly and validly authorized for issuance by the Company and, when executed
and delivered by the Company, will be valid and binding obligations of the
Company enforceable against it in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors’ rights and
remedies generally. For purposes of this Agreement, the term “Documents”
means
(i) this Agreement; (ii) the Debenture; (iii) the Promissory Note; and (iv)
the
Stock Pledge Agreement dated as of the date hereof between the Holder and the
parties listed on the signature pages thereto (the “Stock
Pledge Agreement”).
E. Validity
of Issuance of the Securities.
The
Debenture and the Conversion Shares upon their issuance in accordance with
the
Debenture, will be validly issued and outstanding, fully paid and nonassessable,
and not subject to any preemptive rights, rights of first refusal, tag-along
rights, drag-along rights or other similar rights.
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F. Non-contravention.
The
execution and delivery by the Company of the Documents, the issuance of the
Securities, and the consummation by the Company of the other transactions
contemplated hereby and thereby do not, and compliance with the provisions
of
this Agreement and other Documents will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration
of
any obligation or loss of a material benefit under, or result in the creation
of
any Lien (as such term is hereinafter defined) upon any of the properties or
assets of the Company or any of its Subsidiaries under, or result in the
termination of, or require that any consent be obtained or any notice be given
with respect to (i) the Articles or Certificate of Incorporation or By-Laws
of
the Company or the comparable charter or organizational documents of any of
its
Subsidiaries, in each case as amended to the date of this Agreement, (ii) any
loan or credit agreement, debenture, bond, mortgage, indenture, lease, contract
or other agreement, instrument or permit applicable to the Company or any of
its
Subsidiaries or their respective properties or assets or (iii) any statute,
law,
rule or regulation applicable to, or any judgment, decree or order of any court
or government body having jurisdiction over, the Company or any of its
Subsidiaries or any of their respective properties or assets. A “Lien”
means
any assignment, transfer, pledge, mortgage, security interest or other
encumbrance of any nature, or an agreement to do so, or the ownership or
acquisition or agreement to acquire any asset or property of any character
subject to any of the foregoing encumbrances (including any conditional sale
contract or other title retention agreement).
G. Approvals.
No
authorization, approval or consent of any court or public or governmental
authority is required to be obtained by the Company for the issuance and sale
of
the Securities to Holder as contemplated by this Agreement, except such
authorizations, approvals and consents as have been obtained by the Company
prior to the date hereof.
H. Commission
Filings.
The
Company is subject to the reporting requirements of Section 13 or 15(d) of
the
Exchange Act. The Company has properly and timely filed with the Commission
all
reports, proxy statements, forms and other documents required to be filed with
the Commission under the Securities Act and the Exchange Act since becoming
subject to such Acts (the “Commission
Filings”),
including without limitation the timely filing of all required reports under
Section 13 or 15(d) of the Exchange Act during the 12 months prior to the date
hereof (or for such shorter period that the Company was required to file such
reports). As of their respective dates, (i) the Commission Filings complied
in
all material respects with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the
Commission promulgated thereunder applicable to such Commission Filings and
(ii)
none of the Commission Filings contained at the time of its filing any untrue
statement of a material fact or omitted to state a material fact required to
be
stated therein or necessary in order to make the statements therein, in light
of
the circumstances under which they were made, not misleading. The financial
statements of the Company included in the Commission Filings, as of the dates
of
such documents, were true and complete in all material respects and complied
with applicable accounting requirements and the published rules and regulations
of the Commission with respect thereto, were prepared in accordance with
generally accepted accounting principles in the United States (“GAAP”)
(except in the case of unaudited statements permitted by Form 10-QSB under
the
Exchange Act) applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto) and fairly presented the consolidated
financial position of the Company and its Subsidiaries as of the dates thereof
and the consolidated results of their operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments that in the aggregate are not material and to any other
adjustment described therein).
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I. Full
Disclosure.
There is
no fact known to the Company (other than general economic or industry conditions
known to the public generally) that has not been fully disclosed in the
Commission Filings that (i) reasonably could be expected to have a Material
Adverse Effect or (ii) reasonably could be expected to materially and
adversely affect the ability of the Company to perform its obligations pursuant
to the Documents.
J. Absence
of Events of Default.
No
“Event
of Default”
(as
defined in any agreement or instrument to which the Company is a party) and
no
event which, with notice, lapse of time or both, would constitute an Event
of
Default (as so defined), has occurred and is continuing.
K. Securities
Law Matters.
Assuming
the accuracy of the representations and warranties of Holder set forth in
Article II, the offer and sale by the Company of the Securities is exempt from
(i) the registration and prospectus delivery requirements of the Securities
Act
and the rules and regulations of the Commission thereunder and (ii) the
registration and/or qualification provisions of all applicable state and
provincial securities and “blue sky” laws. The Company shall not directly or
indirectly take, and shall not permit any of its directors, officers or
Affiliates directly or indirectly to take, any action (including, without
limitation, any offering or sale to any person or entity of any security similar
to the Debenture) which will make unavailable the exemption from Securities
Act
registration being relied upon by the Company for the offer and sale to Holder
of the Debenture and the Conversion Shares, as contemplated by this Agreement.
No form of general solicitation or advertising has been used or authorized
by
the Company or any of its officers, directors or Affiliates in connection with
the offer or sale of the Debenture (and the Conversion Shares), as contemplated
by this Agreement or any other agreement to which the Company is a party. As
used in the Documents, “Affiliate”
has the
meaning ascribed to such term in Rule 12b-2 under the Exchange Act.
L. Registration
Rights.
Except
as set forth on Schedule III.L.,
no
Person has, and as of the Closing (as such term is hereinafter defined), no
Person shall have, any demand, “piggy-back” or other rights to cause the Company
to file any registration statement under the Securities Act relating to any
of
its securities or to participate in any such registration
statement.
M. Interest.
The
timely payment of interest on the Debenture is not prohibited by the Articles
or
Certificate of Incorporation or By-Laws of the Company, in each case as amended
to the date of this Agreement, or any agreement, contract, document or other
undertaking to which the Company is a party.
N. No
Misrepresentation.
No
representation or warranty of the Company contained in this Agreement or any
of
the other Documents, any schedule, annex or exhibit hereto or thereto or any
agreement, instrument or certificate furnished by the Company to Holder pursuant
to this Agreement contains any 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.
O. Finder’s
Fee.
There is
no finder’s fee, brokerage commission or like payment in connection with the
transactions contemplated by this Agreement for which Holder is liable or
responsible.
P. Subsidiaries.
Other
than the Subsidiaries, the Company does not presently own or control, directly
or indirectly, any interest in any other corporation, association, or other
business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
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Q. Litigation.
Other
than as disclosed in the Commission Filings, there is no action, suit,
proceeding or investigation pending or, to the Company’s knowledge, currently
threatened against the Company or its Subsidiaries that questions the validity
of this Agreement, the Documents, or the right of the Company to enter into
such
agreements, or to consummate the transactions contemplated hereby or thereby,
or
that might result, either individually or in the aggregate, in any material
adverse changes in the business, assets or condition of the Company and its
Subsidiaries, taken as a whole, financially or otherwise, or any change in
the
current equity ownership of the Company or its Subsidiaries. Neither the Company
nor its Subsidiaries are parties or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company or its Subsidiaries currently pending or that the Company or its
Subsidiaries intends to initiate.
R. Agreements.
Except
for agreements explicitly contemplated hereby, or disclosed in the Commission
Filings, there are no agreements, understandings or proposed transactions
between the Company and any of its officers, directors, Affiliates, or any
affiliate thereof.
S. Tax
Returns.
The
Company and each of its Subsidiaries has made and filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject and (unless and only to the extent that
the
Company and each of its Subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) has
paid
all taxes and other governmental assessments and charges that are material
in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
T. Acknowledgment
Regarding Holder’s Purchase of Securities.
The
Company acknowledges and agrees that the Holder is acting solely in the capacity
of an arm's length purchaser with respect to this Agreement and the transactions
contemplated hereby. The Company further acknowledges that Holder is not acting
as a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to this Agreement and the transactions contemplated hereby and
any
statement made by Holder or any of its representatives or agents in connection
with this Agreement and the transactions contemplated hereby is not advice
or a
recommendation and is merely incidental to the Holder’s purchase of the
Securities. The Company further represents to Holder that the Company's decision
to enter into this Agreement has been based solely on the independent evaluation
of the Company and its representatives.
U. 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 in any security
or
solicited any offers to buy any security under circumstances that would require
registration under the Securities Act of the issuance of the Securities to
the
Holder. The issuance of the Securities to the Holder will not be integrated
with
any other issuance of the Company's securities (past, current or future) for
purposes of any shareholder approval provisions applicable to the Company or
its
securities.
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V. Internal
Accounting Controls.
The
Company and each of its Subsidiaries maintain a system of internal accounting
controls sufficient, in the judgment of the Company's board of directors, to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
W. Foreign
Corrupt Practices.
Neither
the Company, nor any of its Subsidiaries, nor any director, officer, agent,
employee or other person acting on behalf of the Company or any Subsidiary
has,
in the course of his actions for, or on behalf of, the Company, used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee
from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign
or
domestic government official or employee.
X. Solvency.
The
Company (after giving effect to the transactions contemplated by this Agreement)
is solvent (i.e., its assets have a fair market value in excess of the amount
required to pay its probable liabilities on its existing debts as they become
absolute and matured) and currently the Company has no information that would
lead it to reasonably conclude that the Company would not, after giving effect
to the transaction contemplated by this Agreement, have the ability to, nor
does
it intend to take any action that would impair its ability to, pay its debts
from time to time incurred in connection therewith as such debts mature. The
Company did not receive a qualified opinion from its auditors with respect
to
its most recent fiscal year end and, after giving effect to the transactions
contemplated by this Agreement, does not anticipate or know of any basis upon
which its auditors might issue a qualified opinion in respect of its current
fiscal year.
Y. No
Shell Company.
The
Company is not, nor at any time during the twelve month period immediately
preceding the date hereof has the Company been a “shell company,” as such term
is defined in Rule 405 promulgated under the Securities Act.
Z. No
Investment Company.
The
Company is not, and upon the issuance and sale of the Securities as contemplated
by this Agreement will not be an "investment company" required to be registered
under the Investment Company Act of 1940 (an "Investment Company"). The Company
is not controlled by an Investment Company.
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IV.
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CERTAIN
COVENANTS AND
ACKNOWLEDGMENTS
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A. Filings.
The
Company shall take all actions and make all necessary Commission Filings and
“blue sky” filings required to be made by the Company in connection with the
sale of the Securities to Holder as required by all applicable laws, including
without limitation such action as the Company shall reasonably determine is
necessary to qualify the Securities, or obtain an exemption for the Securities
for sale to the Holder at the Closing pursuant to this Agreement under all
applicable laws, and shall provide a copy thereof to Holder promptly after
such
filing.
B. Reporting
Status.
With a
view to making available to the Holder the benefits of Rule 144 promulgated
under the Securities Act or any similar rule or regulation of the Commission
that may at any time permit Holder to sell securities of the Company to the
public without registration (“Rule 144”), and as a material inducement to the
Holder’s purchase of the Securities, the Company represents, warrants, and
covenants to the following:
1. The
Company's Common Stock is registered under Section 12(g) of the Exchange Act.
2. The
Company is not and for at least the last 12 months prior to the date hereof
has
not been a "shell company," as defined in paragraph (i)(1)(i) of Rule 144 or
Rule 12b-2 of the Exchange Act.
3. The
Company is subject to the reporting requirements of section 13 or 15(d) of
the
Exchange Act and has filed all required reports under section 13 or 15(d) of
the
Exchange Act during the 12 months prior to the date hereof (or for such shorter
period that the issuer was required to file such reports), other than Form
8-K
reports;
4. from
the
date hereof until all the Securities either have been sold by the Holder, or
may
permanently be sold by the Holder without any restrictions pursuant to Rule
144,
(the "Registration
Period")
the
Company shall file with the SEC in a timely manner all required reports under
section 13 or 15(d) of the Exchange Act and such reports shall conform to the
requirements of the Exchange Act and the SEC for filing thereunder;
5. The
Company shall furnish to the Holder so long as the Holder owns Securities,
promptly upon request, (i) a written statement by the Company that it has
complied with the reporting requirements of Rule 144, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may
be
reasonably requested to permit the Holders to sell such securities pursuant
to
Rule 144 without registration; and
6. During
the Registration Period the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or
the
rules and regulations thereunder would otherwise permit such
termination.
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C. 8-K
Filing.
On or
before the fourth Business Day following the date hereof, the Company shall
file
a Current Report on Form 8-K describing the terms of the transactions
contemplated by the Documents in the form required by the Exchange Act and
attaching the material Documents (including, without limitation, this Agreement
and the Debenture) as exhibits to such filing (the “8-K
Filing”).
In
the alternative, the Company may include the information that would have been
required in the 8-K Filing in the Company’s Form 10-KSB filing (the
“10-KSB
Filing”),
if
such form is filed within four Business Days following the date hereof. In
the
event that the Company does not file the 8-K Filing or the 10-KSB Filing within
four Business Days following the date hereof, the Discount Multiplier (as
defined in the Debenture) under the Debenture shall decrease by one percentage
point (1%) for each period of five Business Days that the 8-K Filing or the
10-KSB Filing is not filed by the Company following the date hereof for all
conversions of the Debenture thereafter.
D. Listing.
Except
to the extent the Company lists its Common Stock on The New York Stock Exchange,
The American Stock Exchange or The Nasdaq Stock Market, the Company shall use
its best efforts to maintain its listing of the Common Stock on OTCBB. If the
Common Stock is delisted from OTCBB, the Company will use its best efforts
to
list the Common Stock on the most liquid national securities exchange or
quotation system that the Common Stock is qualified to be listed
on.
E. Reserved
Conversion Common Stock.
The
Company at all times from and after the date hereof shall have such number
of
shares of Common Stock duly and validly authorized and reserved for issuance
as
shall be sufficient for the conversion in full of the Debenture. The Company
shall take all action reasonably necessary to at all times have authorized,
and
reserved for the purpose of issuance, such number of shares of Common Stock
as
shall be necessary to effect the full conversion of the Debenture and the
Additional Debentures outstanding, if any. If at any time the number of
authorized shares of Common Stock of the Company is insufficient to effect
the
full conversion of the Debenture and the Additional Debentures outstanding,
if
any, the Company shall call and hold a special meeting of the shareholders
of
the Company within thirty (30) days of such occurrence, for the sole purpose
of
increasing the number of authorized shares of the Common Stock. The Company's
management shall recommend to the shareholders to vote in favor of increasing
the number of shares of authorized Common Stock. Management shall also vote
all
of its shares in favor of increasing the number of authorized shares of Common
Stock.
F. Information.
Each of
the parties hereto acknowledges and agrees that Holder shall not be provided
with, nor be given access to, any material non-public information relating
to
the Company.
G. Accounting
and Reserves.
The
Company shall maintain a standard and uniform system of accounting and shall
keep proper books and records and accounts in which full, true, and correct
entries shall be made of its transactions, all in accordance with GAAP applied
on consistent basis through all periods, and shall set aside on such books
for
each fiscal year all such reserves for depreciation, obsolescence, amortization,
bad debts and other purposes in connection with its operations as are required
by such principles so applied.
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H. Transactions
with Affiliates.
So long
as the Debenture is outstanding, neither the Company nor any of its Subsidiaries
shall, directly or indirectly, enter into any material transaction or agreement
with any stockholder, officer, director or Affiliate of the Company or family
member of any officer, director or Affiliate of the Company, unless the
transaction or agreement is (i) reviewed and approved by a majority of
Disinterested Directors (as such term is hereinafter defined) and (ii) on
terms no less favorable to the Company or the applicable Subsidiary than those
obtainable from a nonaffiliated person. A “Subsidiary”
means
any entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are owned directly or indirectly by the Company.
A
“Disinterested
Director”
shall
mean a director of the Company who is not and has not been an officer or
employee of the Company and who is not a member of the family of, controlled
by
or under common control with, any such officer or employee.
I. Certain
Restrictions.
So long
as the Debenture is outstanding, no dividends shall be declared or paid or
set
apart for payment nor shall any other distribution be declared or made upon
any
capital stock of the Company, nor shall any capital stock of the Company be
redeemed, purchased or otherwise acquired (other than a redemption, purchase
or
other acquisition of shares of Common Stock made for purposes of an employee
incentive or benefit plan (including a stock option plan) of the Company or
pursuant to any of the security agreements listed on Schedule
IV.I)
for any
consideration by the Company, directly or indirectly, nor shall any moneys
be
paid to or made available for a sinking fund for the redemption of any Common
Stock.
J. Short
Selling.
So long
as the Debenture is outstanding, Holder agrees and covenants on its behalf
and
on behalf of its affiliates that neither Holder nor its affiliates shall at
any
time engage in any short sales with respect to the Company’s Common Stock, or
sell put options or similar instruments with respect to the Company’s Common
Stock. The parties acknowledge that Holder shall be entitled to sell the Common
Stock from each Debenture conversion immediately upon submission of the
applicable Debenture Conversion Notice, and payment of the purchase price,
to
the Company for such Common Stock.
K. Right
of First Refusal on Other Financing.
In the
event that the Company obtains a commitment for any other third-party financing
(either debt, equity, or a combination thereof) in the aggregate amount in
cash
of greater than $1,000,000 (with such amounts to be invested within a single
period of no more than 30 days) which is to close (i) during the period
commencing on the date hereof and terminating on the date that is 18 months
from
the date hereof; and (ii) after the date upon which the Holder has purchased
the
Second Debenture, if any, the Holder shall be entitled to a right of first
refusal to enable it to, at Holder’s option, match the terms of the other
financing, including all terms and conditions of such financing, as well as
the
timing of such other financing. The Company shall deliver to Holder, at least
10
days prior to the proposed closing date of such transaction, written notice
describing the proposed transaction, including the terms and conditions thereof,
and providing Holder an option during the 10-day period following delivery
of
such notice to provide the financing being offered in such transaction on the
same terms as contemplated by such transaction. Notwithstanding the foregoing,
if the Company seeks to consummate such financing on terms less favorable to
the
Company than those terms that were provided to Holder, such financing shall
be
subject to Holder’s right of first refusal set forth in this Section
IV.K.
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L. Use
of Proceeds.
The
Company shall not use any portion of the cash portion of the Purchase Price
received by the Company on the date hereof to satisfy or otherwise deliver
any
payment in connection with any outstanding or accrued compensation obligations
or liabilities of the Company that exist as of the date hereof, provided however
that the Company may use up to $50,000 of such cash portion of the Purchase
Price to satisfy outstanding obligations incurred in connection with legal
services.
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V.
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ISSUANCE
OF COMMON STOCK
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A. The
Company undertakes and agrees that no instruction other than the instructions
referred to in this Article V shall be given to its transfer agent for the
Conversion Shares and that the Conversion Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and applicable law. Nothing contained in this Section
V.A. shall affect in any way Holder’s obligations and agreement to comply with
all applicable securities laws upon resale of such Common Stock.
X. Xxxxxx
shall have the right to convert the Debenture by telecopying an executed and
completed Conversion Notice (as such term is defined in the Debenture) to the
Company. Each date on which a Conversion Notice is telecopied to and received
by
the Company in accordance with the provisions hereof shall be deemed a
Conversion Date (as such term is defined in the Debenture). The Company shall
cause the transfer agent to transmit the certificates evidencing the Common
Stock issuable upon conversion of the Debenture (together with a new debenture,
if any, representing the principal amount of the Debenture not being so
converted) to Holder via express courier, or if a Registration Statement
covering the Common Stock has been declared effective by the SEC by electronic
transfer, within three (3) business days after receipt by the Company of the
Conversion Notice, as applicable (the “Delivery
Date”).
C. Upon
the
conversion of the Debenture or respective part thereof, the Company shall,
at
its own cost and expense, take all necessary action (including the issuance
of
an opinion of counsel) to assure that the Company's transfer agent shall issue
stock certificates in the name of Holder (or its nominee) or such other persons
as designated by Holder and in such denominations to be specified at conversion
or exercise representing the number of shares of common stock issuable upon
such
conversion or exercise. The Company warrants that the Conversion Shares will
be
unlegended, free-trading, and freely transferable, and will not contain a legend
restricting the resale or transferability of the Company Common Stock provided
the Conversion Shares, as applicable, are being sold pursuant to an effective
registration statement covering the Common Stock to be sold or is otherwise
exempt from registration when sold, including without limitation pursuant to
the
exemption provided by Rule 144, without regard to its volume, holding period,
manner of sale, public information requirements, or other restrictions.
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D. The
Company understands that a delay in the delivery of the Common Stock in the
form
required pursuant to this section, or the Mandatory Redemption Amount described
in Section E hereof, beyond the Delivery Date or Mandatory Redemption Payment
Date (as hereinafter defined) could result in economic loss to the Holder.
As
compensation to the Holder for such loss, the Company agrees to pay late
payments to the Holder for late issuance of Common Stock in the form required
pursuant to Section E hereof upon Conversion of the Debenture or late payment
of
the Mandatory Redemption Amount, in the amount of $100 per business day after
the Delivery Date or Mandatory Redemption Payment Date, as the case may be,
for
each $10,000 of Debenture principal amount being converted or redeemed. 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 Holder, in the event that the Company fails for
any reason to effect delivery of the Common Stock by the Delivery Date or make
payment by the Mandatory Redemption Payment Date, the Holder 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 the Holder shall each be restored to
their
respective positions immediately prior to the delivery of such notice, except
that late payment charges described above shall be payable through the date
notice of revocation or rescission is given to the Company.
E. Mandatory
Redemption.
In the
event the Company is prohibited from issuing Common Stock, or fails to timely
deliver Common Stock on a Delivery Date, or upon the occurrence of an Event
of
Default (as defined in the Debenture) or for any reason other than pursuant
to
the limitations set forth herein, then at the Holder's election, the Company
must pay to the Holder ten (10) business days after request by the Holder or
on
the Delivery Date (if requested by the Holder) a sum of money determined by
multiplying up to the outstanding Principal Amount (as defined in the Debenture)
of the Debenture designated by the Holder by 150%, together with accrued but
unpaid interest thereon ("Mandatory
Redemption Payment").
The
Mandatory Redemption Payment must be received by the Holder on the same date
as
the Company Common Stock 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 Debenture
principal and interest will be deemed paid and no longer outstanding.
F. Buy-In.
In
addition to any other rights available to the Holder, if the Company fails
to
deliver to the Holder such Common Stock issuable upon conversion of a Debenture
by the Delivery Date and if ten (10) days after the Delivery Date the Holder
purchases (in an open market transaction or otherwise) shares of Common Stock
to
deliver in satisfaction of a sale by the Holder of the Common Stock which the
Holder anticipated receiving upon such conversion (a "Buy-In"),
then
the Company shall pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (A) the Holder'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 Debenture 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 the Holder
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 Debenture
principal, the Company shall be required to pay the Holder $1,000, plus
interest. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In.
G. The
Securities shall be deemed delivered by the Company to the Holder upon the
Holder’s delivery of the Purchase Price (including the Promissory Note) at the
Closing.
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H. Notwithstanding
anything to the contrary herein, any requirement or right on the part of the
Company to redeem or prepay the Debenture, whether arising under the Debenture
or pursuant to the terms of this Agreement, shall first be satisfied by and
offset against any amounts due to the Company under the Promissory Note and
that
such amounts of the Promissory Note so applied against the amounts of the
Debenture that the Company is required or permitted to redeem or prepay shall
reduce the amount outstanding under the Promissory Note by a like amount. If,
after the application of the amount owed under the Promissory Note, if any,
to
any amounts of the Debenture that the Company is required or permitted to redeem
or prepay, the Company shall immediately pay in cash to the Holder any remaining
amount owed by the Company to the Holder in connection with such acceleration
of
the maturity or other redemption or prepayment of the Debenture.
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VI.
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CLOSING
DATE
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The
“Closing”
shall
occur by the delivery: (i) to the Holder of the documents evidencing the
Debenture and all other Documents, and (ii) to the Company the Purchase Price,
including the Promissory Note, and the date on which the Closing occurs shall
be
referred to herein as the “Closing
Date”.
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VII.
|
CONDITIONS
TO THE COMPANY’S
OBLIGATIONS
|
Holder
understands that the Company’s obligation to sell the Debenture on the Closing
Date to Holder pursuant to this Agreement is conditioned upon:
A. Delivery
by Holder to the Company of the Purchase Price, including the Promissory Note
evidencing such applicable portion of the Purchase Price;
B. The
accuracy on the Closing Date of the representations and warranties of Holder
contained in this Agreement as if made on the Closing Date (except for
representations and warranties which, by their express terms, speak as of and
relate to a specified date, in which case such accuracy shall be measured as
of
such specified date) and the performance by Holder in all material respects
on
or before the Closing Date of all covenants and agreements of Holder required
to
be performed by it pursuant to this Agreement on or before the Closing Date;
and
C. There
shall not be in effect any law or order, ruling, judgment or writ of any court
or public or governmental authority restraining, enjoining or otherwise
prohibiting any of the transactions contemplated by this Agreement.
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VIII.
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CONDITIONS
TO HOLDER’S OBLIGATIONS
|
The
Company understands that Holder’s obligation to purchase the Securities on the
Closing Date pursuant to this Agreement is conditioned upon:
A. Delivery
by the Company of the Debenture (I/N/O Holder or I/N/O Holder’s nominee) to
Holder;
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B. The
accuracy on the Closing Date of the representations and warranties of the
Company contained in this Agreement as if made on the Closing Date (except
for
representations and warranties which, by their express terms, speak as of and
relate to a specified date, in which case such accuracy shall be measured as
of
such specified date) and the performance by the Company in all respects on
or
before the Closing Date of all covenants and agreements of the Company required
to be performed by it pursuant to this Agreement on or before the Closing Date,
all of which shall be confirmed to Holder by delivery of the certificate of
the
chief executive officer of the Company to that effect;
C. The
Company shall have delivered to the Holder a certificate of the Company executed
by an officer of the Company, dated as of the Closing, certifying
the resolutions adopted by the Company’s board of directors authorizing the
execution of the Documents, the issuance of the Securities, and the transactions
contemplated hereby, and copies of any required third party consents, approvals
and filings required in connection with the consummation of the transactions
contemplated by this Agreement;
D. There
not
having occurred (i) any general suspension of trading in, or limitation on
prices listed for, the Common Stock on the OTCBB/Pink Sheet, (ii) the
declaration of a banking moratorium or any suspension of payments in respect
of
banks in the United States, (iii) the commencement of a war, armed hostilities
or other international or national calamity directly or indirectly involving
the
United States or any of its territories, protectorates or possessions or
(iv) in the case of the foregoing existing at the date of this Agreement, a
material acceleration or worsening thereof;
E. There
not
having occurred any event or development, and there being in existence no
condition, having or which reasonably and foreseeably could have a Material
Adverse Effect;
F. There
shall not be in effect any law, order, ruling, judgment or writ of any court
or
public or governmental authority restraining, enjoining or otherwise prohibiting
any of the transactions contemplated by this Agreement;
G. The
Company shall have obtained all consents, approvals or waivers from governmental
authorities and third persons necessary for the execution, delivery and
performance of the Documents and the transactions contemplated thereby, all
without material cost to the Company;
X. Xxxxxx
shall have received such additional documents, certificates, payment,
assignments, transfers and other deliveries as it or its legal counsel may
reasonably request and as are customary to effect a closing of the matters
herein contemplated;
I. Delivery
by the Company of an enforceability opinion with respect to this Agreement
and
the transactions contemplated hereunder from its outside counsel in form and
substance satisfactory to Holder;
J. Delivery
to the Holder of the fully executed Stock Pledge Agreement and the delivery
of
the Pledged Shares (as defined in the Stock Pledge Agreement) to the Holder
in
connection therewith; and
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K. Delivery
by the Company of a valid waiver of any preemptive rights held by the
individuals and/or parties listed on Schedule III.A.3 hereto in form and
substance satisfactory to Holder.
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IX.
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SURVIVAL;
INDEMNIFICATION
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A. The
representations, warranties and covenants made by each of the Company and Holder
in this Agreement, the annexes, schedules and exhibits hereto and in each
instrument, agreement and certificate entered into and delivered by them
pursuant to this Agreement shall survive the Closing and the consummation of
the
transactions contemplated hereby. In the event of a breach or violation of
any
of such representations, warranties or covenants, the party to whom such
representations, warranties or covenants have been made shall have all rights
and remedies for such breach or violation available to it under the provisions
of this Agreement or otherwise, whether at law or in equity, irrespective of
any
investigation made by or on behalf of such party on or prior to the Closing
Date.
B. The
Company hereby agrees to indemnify and hold harmless Holder, its affiliates
and
their respective officers, directors, employees, consultants, partners, members
and attorneys (collectively, the “Holder
Indemnitees”)
from
and against any and all losses, claims, damages, judgments, penalties,
liabilities and deficiencies (collectively, “Losses”)
and
agrees to reimburse Holder Indemnitees for all reasonable out-of-pocket expenses
(including the reasonable fees and expenses of legal counsel), in each case
promptly as incurred by Holder Indemnitees and to the extent arising out of
or
in connection with:
1. any
misrepresentation, omission of fact or breach of any of the Company’s
representations or warranties contained in this Agreement or the other
Documents, or the annexes, schedules or exhibits hereto or thereto or any
instrument, agreement or certificate entered into or delivered by the Company
pursuant to this Agreement or the other Documents;
2. any
failure by the Company to perform any of its covenants, agreements, undertakings
or obligations set forth in this Agreement or the other Documents or any
instrument, certificate or agreement entered into or delivered by the Company
pursuant to this Agreement or the other Documents; and
3. any
claims by third parties in connection with the purchase of the Debenture, the
conversion of the Debenture, the payment of interest on the Debenture, the
consummation of the transactions contemplated by this Agreement and the other
Documents, the use of any of the proceeds of the Purchase Price by the Company,
the purchase or ownership of any or all of the Securities, the performance
by
the parties hereto of their respective obligations hereunder and under the
Documents or any claim, litigation, investigation, proceedings or governmental
action relating to any of the foregoing, whether or not Holder is a party
thereto.
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C. Promptly
after receipt by a party seeking indemnification pursuant to this
Article VIII (an “Indemnified
Party”)
of
written notice of any investigation, claim, proceeding or other action in
respect of which indemnification is being sought (each, a “Claim”),
the
Indemnified Party promptly shall notify the Company against whom indemnification
pursuant to this Article VIII is being sought (the “Indemnifying
Party”)
of the
commencement thereof, but the omission so to notify the Indemnifying Party
shall
not relieve it from any liability that it otherwise may have to the Indemnified
Party except to the extent that the Indemnifying Party is materially prejudiced
and forfeits substantive rights or defenses by reason of such failure. In
connection with any Claim as to which both the Indemnifying Party and the
Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of
any
Claim by the Indemnifying Party, the Indemnified Party shall have the right
to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees,
out-of-pocket costs and expenses, (y) the Indemnified Party and the
Indemnifying Party reasonably shall have concluded that representation of the
Indemnified Party and the Indemnifying Party by the same legal counsel would
not
be appropriate due to actual or, as reasonably determined by legal counsel
to
the Indemnified Party, potentially differing interests between such parties
in
the conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Indemnifying Party or (z) the Indemnifying Party
shall have failed to employ legal counsel reasonably satisfactory to the
Indemnified Party within a reasonable period of time after notice of the
commencement of such Claim. If the Indemnified Party employs separate legal
counsel in circumstances other than as described in clauses (x), (y) or (z)
above, the fees, costs and expenses of such legal counsel shall be borne
exclusively by the Indemnified Party. Except as provided above, the Indemnifying
Party shall not, in connection with any Claim in the same jurisdiction, be
liable for the fees and expenses of more than one firm of legal counsel for
the
Indemnified Party (together with appropriate local counsel). The Indemnifying
Party shall not, without the prior written consent of the Indemnified Party
(which consent shall not unreasonably be withheld), settle or compromise any
Claim or consent to the entry of any judgment that does not include an
unconditional release of the Indemnified Party from all liabilities with respect
to such Claim or judgment.
D. In
the
event one party hereunder should have a claim for indemnification that does
not
involve a claim or demand being asserted by a third party, the Indemnified
Party
promptly shall deliver notice of such claim to the Indemnifying Party. If the
Indemnified Party disputes the claim, such dispute shall be resolved by mutual
agreement of the Indemnified Party and the Indemnifying Party or by binding
arbitration conducted in accordance with the procedures and rules of the
American Arbitration Association. Judgment upon any award rendered by any
arbitrators may be entered in any court having competent jurisdiction
thereof.
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X.
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GOVERNING
LAW
|
This
Agreement shall be governed by and interpreted in accordance with the laws
of
the State of California, without regard to the conflicts of law principles
of
such state.
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XI.
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SUBMISSION
TO JURISDICTION
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Each
of
the parties hereto consents to the exclusive jurisdiction of the federal courts
whose districts encompass any part of the City of San Diego or the state courts
of the State of California sitting in the City of San Diego in connection with
any dispute arising under this Agreement and the other Documents. Each party
hereto hereby irrevocably and unconditionally waives, to the fullest extent
it
may effectively do so, any defense of an inconvenient forum or improper venue
to
the maintenance of such action or proceeding in any such court and any right
of
jurisdiction on account of its place of residence or domicile. Each party hereto
irrevocably and unconditionally consents to the service of any and all process
in any such action or proceeding in such courts by the mailing of copies of
such
process by registered or certified mail (return receipt requested), postage
prepaid, at its address specified in Article XVII. Each party hereto agrees
that
a final judgment in any such action or proceeding shall be conclusive and may
be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.
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XII.
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WAIVER
OF JURY TRIAL
|
TO
THE FULLEST EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ITS RESPECTIVE RIGHTS TO A
JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE
SUBJECT MATTER OF THIS AGREEMENT AND OTHER DOCUMENTS. EACH PARTY HERETO (i)
CERTIFIES THAT NEITHER OF THEIR RESPECTIVE REPRESENTATIVES, AGENTS OR ATTORNEYS
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE
EVENT
OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (ii) ACKNOWLEDGES
THAT
IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS HEREIN.
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XIII.
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COUNTERPARTS;
EXECUTION
|
This
Agreement may be executed in counterparts, each of which when so executed and
delivered shall be an original, but both of which counterparts shall together
constitute one and the same instrument. A facsimile transmission of this signed
Agreement shall be legal and binding on both parties hereto.
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XIV.
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HEADINGS
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The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.
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XV.
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SEVERABILITY
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In
the
event any one or more of the provisions contained in this Agreement or in the
other Documents should be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein or therein shall not in any way be affected or impaired thereby. The
parties shall endeavor in good-faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions, the economic effect
of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
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XVI.
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ENTIRE
AGREEMENT; REMEDIES, AMENDMENTS AND
WAIVERS
|
This
Agreement and the Documents constitute the entire agreement between the parties
hereto pertaining to the subject matter hereof and supersede all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of such parties. No supplement, modification or waiver of this
Agreement shall be binding unless executed in writing by both parties. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute
a
waiver of any other provision hereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly
provided.
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XVII.
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NOTICES
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Any
notices, consents, waivers, or other communications required or permitted to
be
given under the terms of this Agreement must be in writing and will be deemed
to
have been delivered (i) upon receipt, when delivered personally; (ii) upon
confirmation of receipt, when sent by facsimile; (iii) three (3) days after
being sent by U.S. certified mail, return receipt requested, or (iv) one (1)
day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
| A. |
If
to the Company, to:
|
000
Xxxxxxx Xxxxxx, 0xx
Xxxxx
Xxx
Xxxx,
Xxx Xxxx 00000
Telephone: 000-000-0000
Facsimile: 011-972-57-797-5364
| B. |
With
a copy to:
|
Moses
& Singer LLP.
000
Xxxxxxxxx Xxxxxx, 00xx
Xxxxx
Xxx
Xxxx,
Xxx Xxxx 00000-0000
Attention:
Xxxxx Xxxxxxxx
Telephone: 000-000-0000
Facsimile: 000-000-0000
| C. |
If
to Holder, to:
|
Golden
Gate Investors, Inc.
0000
Xxxxxxxxx Xxxxxx, Xxxxx 000
Xx
Xxxxx,
Xxxxxxxxxx 00000
Telephone: 000-000-0000
Facsimile: 000-000-0000
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The
Company or Holder may change the foregoing address by notice given pursuant
to
this Article XVII.
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XVIII.
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CONFIDENTIALITY
|
Each
of
the Company and Holder agrees to keep confidential and not to disclose to or
use
for the benefit of any third party the terms of this Agreement or any other
information which at any time is communicated by the other party as being
confidential without the prior written approval of the other party; provided,
however, that this provision shall not apply to information which, at the time
of disclosure, is already part of the public domain (except by breach of this
Agreement) and information which is required to be disclosed by law (including,
without limitation, pursuant to Item 601(b)(10) of Regulation S-K under the
Securities Act and the Exchange Act).
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XIX.
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MAXIMUM
INTEREST RATE
|
Notwithstanding
anything herein to the contrary, if at any time the applicable interest rate
as
provided for herein shall exceed the maximum lawful rate which may be contracted
for, charged, taken or received by the Holder in accordance with any applicable
law (the “Maximum
Rate”),
the
rate of interest applicable to this Agreement shall be limited to the Maximum
Rate. To the greatest extent permitted under applicable law, the Company hereby
waives and agrees not to allege or claim that any provisions of this Agreement
could give rise to or result in any actual or potential violation of any
applicable usury laws.
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XX.
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ASSIGNMENT
|
This
Agreement shall not be assignable by the Company without the prior written
consent of the Holder. The Holder may assign this Agreement upon 10 days prior
written notice to the Company.
IN
WITNESS WHEREOF, the parties hereto have duly caused this Agreement to be
executed and delivered on the date first above written.
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Golden
Gate Investors, Inc.
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By:
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By:
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Name:
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Name:
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Title:
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Title:
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SCHEDULE
III.A.1
(a) The
Company’s former Chief Executive Officer, Xxxx Xxxxxx, holds 412,500 Restricted
Stock Units (“RSUs”) and 290,000 options to purchase Common Stock with an
exercise price of $0.35 and an expiration date of July 29, 2014.
(b) Pursuant
to a term sheet between the Company and the Company’s former Chief Executive
Officer, Xxxx Xxxxxx, which term sheet contemplates the execution of a
definitive agreement for services between the Company and Ganani, the Company
may issue options and RSUs that will vest on the achievement of performance
milestones (rather than vesting on a time schedule) as follows: (i) 137,500
RSUs; (ii) 1,707,500 options with an exercise price of $0.63; and (iii)
1,160,000 options with an exercise price of $0.35.
(c) The
Company’s current Chief Executive Officer, Avi Kostelitz, holds 80,000 options
to purchase Common Stock with an exercise price of $0.70 and an expiration
date
of July 12, 2010. These options are directly owned by Akis Ltd. and, as the
sole
owner of Akis Ltd., indirectly by Xx. Xxxxxxxxx.
(d) Pursuant
to the terms of a grant by the Company, and contingent on the Company’s
achievement of certain performance milestones and the occurrence of certain
Company-related events, as more fully described in the Commission Filings,
Xx.
Xxxxx Ornath is entitled to receive options to purchase up to 3,900,000 shares
of Common Stock. Of such 3,900,000 options, (i) 1,200,000 have an exercise
price
of $1.00 and expire 3 years after such options are earned, (ii) 1,200,000 have
an exercise price of $1.50 and expire 3 years after such options are earned
and
(iii) 1,500,000 have an exercise price of $1.75 and expire 3 years after such
options are earned. In addition, pursuant to an award on July 6, 2006 that
calls
for vesting of such options on a quarterly basis over a three year period
commencing February 15, 2006, Dr. Ornath holds 720,000 options with an exercise
price of $0.70 and an expiration date of 5 years following the vesting date
and
has 360,000 options that will vest on May 15, 2008 (90,000 options), August
15,
2008 (90,000 options), November 15, 2008 (90,000 options), and February 15,
2009
(90,000 options) with an exercise price of $0.70 and an expiration date of
5
years following the vesting date.
(e) Director
Efi Oshaya holds 72,000 warrants to purchase Common Stock with an exercise
price
of $2.50 and an expiration date of March 26, 2010.
(f) Director
Xxxxx Xxxxx holds 180,000 options to purchase Common Stock with an exercise
price of $0.70 and an expiration date of November 15, 2013, of which 75,000
are
vested as of February 15, 2008 and, going forward, 15,000 options will vest
per
quarter, and holds 36,000 warrants to purchase Common Stock with an exercise
price of $2.50 and an expiration date of January 23, 2009.
(g) Director
Xxxx Xxxxxxxxx holds 180,000 options to purchase Common Stock with an exercise
price of $0.70 and an expiration date of September 1, 2011, of which 150,000
are
vested as of March 1, 2008 and, going forward, the remainder of the options
will
vest on June 1, 2008 (15,000 options) and September 1, 2008 (15,000
options).
(h) Pursuant
to the terms of employment agreements, and contingent on the Company’s
achievement of certain performance milestones and the occurrence of certain
Company-related events, Xxxxx Xxx-Xxxx is entitled to receive up to 170,000
RSUs, of which 127,500 RSUs are fully vested as of the date hereof and the
remainder of which will vest on May 10, 2008 (14,167 RSUs), August 10, 2008
(14,167 RSUs) and November 10, 2008 (14,167 RSUs). In addition, in July 2007
Mr.
Xxx-Xxxx was granted 180,000 RSUs that vest on June 1, 2008 and that can be
settled in stock only.
(i) Xxx
Xxxxxxxx is entitled to receive up to 170,000 RSUs of which 127,500 RSUs are
fully vested as of the date hereof and the remainder of which will vest on
June
1, 2008 (14,167 RSUs), September 1, 2008 (14,167 RSUs) and December 1, 2008
(14,167 RSUs). In addition, pursuant to a grant on July 29, 2008 and contingent
on the achievement of certain performance milestones, Xx. Xxxxxxxx holds 50,000
RSUs. In addition, in July 2007, Xx. Xxxxxxxx was granted 180,000 RSUs that
vest
on June 1, 2008 and that can be settled in stock only.
(j) Pursuant
to the terms of various agreements, and contingent on the Company’s achievement
of certain performance milestones and the occurrence of certain Company-related
events, several consultants and advisors of Subsidiary are entitled to receive
options to purchase up to an aggregate of 672,500 shares of Common Stock with
an
exercise price of $0.70 and an expiration date that is 3 years following the
date that such options are earned.
(k) Pursuant
to an agreement between the Company and a United Kingdom investment bank, which
agreement involves the investment bank’s search for strategic partners for the
Company, the Company may be obligated to issue to the investment bank a Common
Stock purchase warrant equal to 2% of the Company’s outstanding shares of Common
Stock, if the investment bank introduces the Company to a party which makes
a
strategic investment in the Company that results in a funding of $5,000,000
or
more.
(l) There
are
359,000 options to purchase Common Stock with an exercise price of $0.70 and
an
expiration date of August 8, 2011 that were issued to Xxxx Xxxxxx, a former
Chief Executive Officer of the Company.
The
following warrants were issued pursuant to various private
placements:
(m) There
are
776,571 warrants to purchase Common Stock with an exercise price of $1.50 and
an
expiration date of May 29, 2008.
(n) There
are
214,286 warrants to purchase Common Stock with an exercise price of $2.50 and
an
expiration date of November 5, 2008.
(o) There
are
428,571 warrants to purchase Common Stock with an exercise price of $2.50 and
an
expiration date of December 5, 2008
(p) There
are
1,607,836 warrants to purchase Common Stock with an exercise price of $2.50
and
an expiration date of January 19, 2009.
(q) There
are
2,108,662 warrants to purchase Common Stock with an exercise price of $2.50
and
an expiration date of May 7, 2009.
(r) There
are
1,993,278 warrants to purchase Common Stock with an exercise price of $2.50
and
an expiration date of August 31, 2009.
(s) There
are
1,428,571 warrants to purchase Common Stock with an exercise price of $2.50
and
an expiration date of December 11, 2009.
(t) There
are
5,257,400 warrants to purchase Common Stock with an exercise price of $2.50
and
an expiration date of March 26, 2010.
(u) There
are
776,571 warrants to purchase Common Stock with an exercise price of $2.50 and
an
expiration date of May 29, 2010.
(v) Pursuant
to a subscription agreement dated as of December 16, 2007, the Company is
obligated to issue 1,275,000 warrants to purchase Common Stock with an exercise
price of $0.70 and an expiration date of December 16, 2010.
(w) The
Company is in the process of finalizing documentation for the following private
placements pursuant to Reg S in March 2008: (i) the sale of 255,000 units for
an
aggregate purchase price of $102,000, each unit comprised of one share of common
stock at a per share purchase price of $0.40 and one warrant with an exercise
price of $0.80 and a term of exercise of three years; (ii) the sale of 166,667
shares of common stock for an aggregate purchase price of $50,000 or a per
share
purchase price of $0.30, which also includes the issuance of 190,501 shares
of
common stock as an anti-dilution adjustment in connection with the purchaser’s
March 2007 investment of $100,013; and (iii) the sale of 166,667 shares of
common stock for an aggregate purchase price of $50,000 or a per share purchase
price of $0.30, which also includes the issuance of 571,429 shares of common
stock as an anti-dilution adjustment in connection with the purchaser’s May 2007
investment of $300,000.
SCHEDULE
III.A.3
PREEMPTIVE
RIGHTS
As
reported on the Company’s Form 8-K that was filed with the SEC on December 17,
2007, in connection with the sale of Common Stock and warrants to purchase
Common Stock in a private placement pursuant to Regulation S on December 16,
2007, the Company granted weighted average anti-dilution rights through December
16, 2008. These rights have been waived in connection with this
transaction.
SCHEDULE
III.H.
COMMISSION
FILINGS
In
connection with the Company’s Form 10-KSB for the fiscal year ended December 31,
2007, the Company has filed a Form 12b-25 with the Commission which extends
the
deadline for the filing of such Form 10-KSB until April 15, 2008.
SCHEDULE
III.L.
REGISTRATION
RIGHTS
In
August
2006, in connection with the grant of options to the members of advisory board
of the Company’s subsidiary, TraceGuard Technology Ltd., the Company has granted
piggyback registration rights for the shares underlying the granted options
in
favor of such persons pursuant to Section 8 of the Grant Letter. In connection
with such grant of options, the Company has no obligation to file a registration
statement and has no plans to file a registration statement.
SCHEDULE
III.R.
AGREEMENTS
As
described in Note 12 (Subsequent Events) to the Financial Statements and
Supplementary Date included in the Form 10-KSB for the fiscal year ended
December 31, 2007, the Company entered into a term sheet in contemplation of
a
new definitive agreement on compensation for services with Xxxx Xxxxxx, the
former Chief Executive Officer and the current Chairman of the Board of
Directors of the Company.
SCHEDULE
IV.I.
SECURITY
AGREEMENTS
None.
EXHIBIT
A
SECURED
PROMISSORY NOTE
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