NEPHROS, INC. SUBSCRIPTION AGREEMENT
EXHIBIT
10.1
Name
of
Subscriber:_______________
NEPHROS,
INC.
Nephros,
Inc.
0000
Xxxxxxxx
Xxx
Xxxx,
Xxx Xxxx, 00000
Ladies
and Gentlemen:
1.
Subscription.
(a) The
undersigned, intending to be legally bound, hereby irrevocably subscribes to
purchase from Nephros, Inc., a Delaware corporation (the “Company”),
the
principal amount of 6% Secured Convertible Notes due 2012 (the “6%
Notes”),
of
the Company, set forth on the signature page hereof, for a purchase price equal
to the principal amount thereof. This subscription is made in accordance with
and subject to the terms and conditions described in this Subscription Agreement
(this “Agreement”).
The
terms of the 6% Notes shall be substantially as set forth in the form of 6%
Secured Convertible Note due 2012 attached hereto as Exhibit
A
(the
“Form
of Note”).
The
6%
Notes that are the subject of this Agreement are part of an offering by the
Company (the “Offering”)
of up
to two hundred thousand dollars ($200,000) aggregate principal amount of 6%
Notes (the “Maximum
Amount”).
The
Company is offering 6% Notes until June 15, 2006, although the Company reserves
the right, in its sole discretion, to extend the Offering period until some
later date (such date, as the same may be extended, the “Expiration
Date”).
Each
subscriber in the Offering shall enter into a registration rights agreement
among the Company and the Investors (as defined therein), in substantially
the
form attached hereto as Exhibit
B
(the
“Registration
Rights Agreement”).
The
Company may hold the first closing of the Offering (the “First
Closing”)
at any
time on or prior to the Expiration Date. Following the First Closing, the
Company may continue to sell 6% Notes up to the Maximum Amount and may conduct
closings from time to time for additional shares sold. A final closing will
be
held promptly after the earlier to occur of (i) the Expiration Date and (ii)
acceptance of subscriptions for sale of the Maximum Amount. The Company may
terminate the Offering at any time without prior notice. Also, the Company
may
reject any subscription for 6% Notes in whole or in part for any reason in
its
sole discretion.
The
undersigned understands that the 6% Notes are being offered and issued pursuant
to an exemption from the registration requirements of the Securities Act,
provided by Section 4(2) of such Act. As such, the 6% Notes are being offered
and sold
only
to
investors who qualify as “Accredited Investors” (as defined in Rule 501
promulgated under the Securities Act), and the Company is relying on the
representations made by the undersigned in this Agreement in determining the
availability of such exemption. The 6% Notes are, and any shares of common
stock, par value $0.001 per share, of the Company (the “Common Stock”) issued
upon conversion thereof will be, “restricted securities” for purposes of the
United States securities laws and cannot be transferred except as permitted
under those laws.
(b) The
undersigned is delivering (i) an executed copy of the signature page of and
Exhibit
C
to this
Agreement, (ii) an executed copy of the signature page, or counterpart signature
page, to the Registration Rights Agreement, and (iii) the subscription payment,
in immediately available funds, which may be made by wire transfer to the
Company pursuant to the following instructions:
Bank: Bank
of
America
ABA
No.: 000000000
Account
Name: Nephros,
Inc.
Account
No.:
94293
070902
Apply
To: Nephros,
Inc.
Attention: Client
Manager
If
the
Offering is oversubscribed, or for any other reason determined by the Company
in
its discretion, the Company may determine to reject a subscription or to accept
a subscription for only a portion of the 6% Notes for which the undersigned
has
subscribed in this Agreement. If this subscription is accepted by the Company,
in whole or in part, then the Company will deliver to the undersigned 6% Notes
in the aggregate principal amount for which the undersigned’s subscription is
accepted. If this subscription is rejected in whole or in part, then the Company
shall promptly refund to the undersigned, without interest, any funds that
the
undersigned had delivered to the Company in excess of the aggregate principal
amount (and purchase price) of any 6% Notes for which the undersigned’s
subscription is accepted.
(c) The
undersigned may not withdraw this subscription or any amount paid pursuant
thereto except as otherwise provided below.
2.
Conditions.
It is
understood and agreed that this subscription is made subject to the Company’s
execution and delivery of the Registration Rights Agreement and acceptance
of
the undersigned as a Holder thereunder.
3. Representations
and Warranties of the Company.
The
Company represents and warrants to the undersigned as follows, in each case
as
of the date hereof and in all material respects as of the date of any closing,
except for any changes resulting solely from the Offering:
2
4. (a)
The
Company is duly organized, validly existing and in good standing under the
laws
of the jurisdiction of its organization with full power and authority to own,
lease, license and use its properties and assets and to carry out the business
in which it proposes to engage.
(b)
The
Company has all requisite corporate power and authority to execute, deliver
and
perform its obligations under this Agreement and to issue and sell the 6%
Notes subscribed for hereunder, the shares of Common Stock issuable upon
conversion thereof, the Warrants (as defined below) issuable thereunder and
the
shares of Common Stock issuable upon exercise thereof (collectively, the
“Subject
Securities”).
All
necessary proceedings of the Company have been duly taken to authorize the
execution, delivery, and performance of this Agreement, the 6% Notes and the
Registration Rights Agreement (collectively, the “Transaction
Documents”).
The
Transaction Documents and the Warrants have been duly authorized by the Company
and, when and, in the case of the Warrants, if, executed and delivered by the
Company will constitute the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with their terms. The Common
Stock
issuable upon conversion of the 6% Notes and the Common Stock issuable upon
exercise of the Warrants, when issued in compliance with the provisions of
the
Transaction Documents, will be validly issued, fully paid and nonassessable
and
free of any liens or encumbrances other than any liens or encumbrances that
result from such 6% Common Stock being held by any person other than the
Company. The 6% Notes are duly authorized, and when issued pursuant to the
Transaction Documents, will be validly issued. The Warrants are duly authorized,
and when issued, pursuant to the Transaction Documents, will be validly
issued.
(c)
Except
for the consent of the Secured Party, no consent of any party to any contract,
agreement, instrument, lease or license to which the Company is a party or
to
which any of its properties or assets are subject is required for the execution,
delivery or performance by the Company of any of the Transaction Documents
or
the issuance and sale of the Subject Securities.
(d)
The
execution, delivery and performance of Transaction Documents and the Warrants
and the issuance and sale of the Subject
Securities will
not
violate or result in a breach of, or entitle any party (with or without the
giving of notice or the passage of time or both) to terminate or call a default
under any contract or agreement to which the Company is a party or violate
or
result in a breach of any term of the certificate of incorporation or by-laws
of
the Company, or, assuming compliance with applicable state securities or “blue
sky” laws, violate any law, rule, regulation, order, judgment or decree binding
upon, the Company, or to which any of their respective operations, businesses,
properties or assets are subject, the breach, termination or violation of which,
or default under which, would have a material adverse effect on the operations,
business, properties or assets of the Company.
(e)
The
Company’s capitalization is disclosed in the Nephros SEC Filings available to
the undersigned on the Securities and Exchange Commission’s website at
xxxx://xxx.xxx.xxx.
3
(f)
Except
as
set forth on Schedule
3(f),
there
are no brokerage commissions, finder’s fees or similar fees or commissions
payable by the Company in connection with the transactions contemplated hereby
based on any agreement, arrangement or understanding with or known to the
Company.
(g)
Except
as
would not reasonably be expected to have a Material Adverse Effect, the Company
is not in violation or default of any provisions of its certificate of
incorporation or bylaws, as may be amended, as applicable, any instrument,
judgment, order, writ or decree, or any material provision of any contract
or
agreement, to which it is a party or by which it is bound or of any provision
of
federal, state or local statute, rule or regulation applicable to the Company
or
its business. Except as would not reasonably be expected to have a Material
Adverse Effect, the execution, delivery and performance of the Transaction
Documents and the consummation of the transactions contemplated thereby will
not
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree, contract or
agreement, or require any consent, waiver or approval thereunder, or constitute
an event which results in the creation of any lien, charge or encumbrance upon
any assets of the Company (solely except as provided in this
Agreement).
(h)
Except
as
disclosed in the Nephros SEC filings, the Company is not a party to any
litigation, action, suit, proceeding or investigation, nor, to the knowledge
of
the Company, has any litigation, action, suit, proceeding or investigation
been
threatened against the Company where such litigation, action, suit, proceeding
or investigation would, if adversely determined, reasonably be expected to
(i)
have a material adverse affect on the financial condition of the Company or
(ii)
have a material adverse effect on the ability of the Company to perform its
obligations under this Agreement or any of the other Transaction Documents
(either (i) or (ii), a “Material Adverse Effect”).
(i)
The
Company has good and marketable title to its properties and assets (including
without limitation those
assets pledged as collateral pursuant to this Agreement) held in each case
free
and clear of all liens, pledges, security interests, encumbrances, attachments
or charges of any kind (each a “Lien”),
except for (i) Liens for taxes that are not yet due and payable, (ii) Liens
that
do not or are not reasonably likely to result in a Material Adverse Effect
or
(iii) Liens arising under this Agreement (Liens described in clauses (i), (ii)
and (iii) are referred to as “Permitted
Liens”).
With
respect to the property and assets it leases, the Company is in compliance
with
such leases and, to the best of the Company’s knowledge, the Company holds valid
leasehold interests in such property and assets free and clear of any Liens
of
any other party other than the lessors of such property and assets, except
for
Permitted Liens.
(j)
Except
as
disclosed in the Financial Statements (as defined below) or incurred in the
ordinary course of business, the Company has no obligations or liabilities
of
any kind (absolute or contingent, direct or indirect) pursuant to any agreement
of any kind related to any indebtedness of any kind.
4
(k)
Except
for
this Agreement, the Company has not heretofore assigned or granted a security
interest in any of the assets pledged as collateral pursuant to this
Agreement.
(l)
The
Company owns, free and clear of all Liens, or is licensed or otherwise possesses
legally enforceable rights to use, all patents, trademarks, trade names, service
marks and copyrights material to the operation of the Company’s business, and
any applications related to any of the foregoing (collectively, “Intellectual
Property”).
(m)
All
reports required to be filed by the Company since and including the Company’s
Annual Report on Form 10-KSB for the year ended December 31, 2004, to and
including the relevant Closing (collectively, the “Nephros
SEC Filings”)
have
been duly filed with the Securities and Exchange Commission, complied at the
time of filing in all material respects with the requirements of their
respective forms and were complete and correct in all material respects as
of
the dates at which the information was furnished, and contained (as of such
dates) no untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements contained therein, in light
of
the circumstances under which they were made, not misleading. The parties agree
that it shall not be a breach of this Section
3(m)
if the
Company did not timely file any report.
(n)
The
financial statements and supporting schedules (the “Financial
Statements”)
included in the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2005 (the “Balance
Sheet Date”)
are
complete and correct in all material respects and present fairly the financial
position of the Company as of the dates specified and the results of operations
for the periods specified, in each case, in conformity with generally accepted
accounting principles applied on a consistent basis during the periods involved,
except as indicated therein or in the notes thereto. Except as disclosed in
the
Company’s 10-QSB available to the undersigned pursuant to Section
3(e)
hereof,
since the Balance Sheet Date there has not been, except where it would not
reasonably be expected to have a Material Adverse Effect, (a) any payment of
dividends on, or other distribution with respect to, or any direct or indirect
redemption, purchase or acquisition of, any shares of the capital stock or
other
securities of the Company, (b) any disposition of any tangible or intangible
material asset of the Company, (c) any damage, destruction or loss (whether
or
not covered by insurance) of any material asset of the Company, or (d) any
change in the accounting methods, practices or policies followed by the Company
or any change in depreciation or amortization policies or rates theretofore
adopted, which has not been adequately provided for or disclosed in the
Financial Statements.
4.
Representations,
Warranties and Covenants of the Subscriber.
The
undersigned hereby represents and warrants to, and agrees with, the Company
as
follows:
(a)
The
undersigned is an Accredited Investor, as specifically indicated in Exhibit
C
to this
Agreement, which is being delivered to the Company herewith.
5
(b)
If a natural person, the undersigned is: a bona fide resident of the state
or
non-United States jurisdiction contained in the address set forth on the
signature page of this Agreement as the undersigned’s home address; at least
twenty-one (21) years of age; and legally competent to execute the Transaction
Documents. If an entity, the undersigned has its principal offices or principal
place of business in the state or non-United States jurisdiction contained
in
the address set forth on the signature page of this Agreement, the individual
signing on behalf of the undersigned is duly authorized to execute the
Transaction Documents.
(c)
Each
of
the Transaction Documents has been duly executed and delivered by the
undersigned and constitutes the legal, valid and binding obligation of the
undersigned, enforceable against the undersigned in accordance with its
terms.
(d)
Neither
the execution, delivery nor performance of the Transaction Documents by the
undersigned violates or conflicts with, creates (with or without the giving
of
notice or the lapse of time, or both) a default under or a lien or encumbrance
upon any of the undersigned’s assets or properties pursuant to, or requires the
consent, approval or order of any government or governmental agency or other
person or entity under (i) any note, indenture, lease, license or other
agreement to which the undersigned is a party or by which it or any of its
assets or properties is bound or (ii) any statute, law, rule, regulation or
court decree binding upon or applicable to the undersigned or its assets or
properties. If the undersigned is not a natural person, the execution, delivery
and performance by the undersigned of the Transaction Documents, have been
duly
authorized by all necessary corporate or other action on behalf of the
undersigned and such execution, delivery and performance does not and will
not
constitute a breach or violation of, or default under, the charter or by-laws
or
equivalent governing documents of the undersigned.
(e)
The
undersigned has received, read carefully and is familiar with the Transaction
Documents and the Nephros SEC Filings.
(f)
The
undersigned is familiar with the business, plans and financial condition of
the
Company, the terms of the Offering and any other matters relating to the
Offering; the undersigned has received all materials which have been requested
by the undersigned; the undersigned has had a reasonable opportunity to ask
questions of the Company and its representatives, and the Company has answered
to the satisfaction of the undersigned all inquiries that the undersigned or
the
undersigned’s representatives have put to it. The undersigned has had access to
all additional information that the undersigned has deemed necessary to verify
the accuracy of the information set forth in this Agreement and the Nephros
SEC
Filings, and has taken all the steps necessary to evaluate the merits and risks
of an investment as proposed under this Agreement.
(g)
The
undersigned acknowledges that this subscription is and shall be irrevocable
and
this subscription and the agreements contained herein shall survive the
insolvency, death or disability of the undersigned (as applicable), except
that
the undersigned shall have no obligation hereunder in the event that its
subscription is for
6
any
reason rejected or the Offering is cancelled or terminated by the Company,
which
the Company reserves the right to do in its sole and absolute discretion and
for
any reason.
(h)
The
undersigned or the undersigned’s purchaser representative has such knowledge and
experience in finance, securities, taxation, investments and other business
matters so as to be able to protect the interests of the undersigned in
connection with this transaction, and the undersigned’s investment in the
Company hereunder is not material when compared to the undersigned’s total
financial capacity.
(i)
The
undersigned hereby acknowledges and represents that: (i) the undersigned has
prior investment experience, including investment in securities which are
non-listed, unregistered and/or not traded on an automated quotation system;
(ii) the undersigned recognizes the highly speculative nature of this
investment; and (iii) the undersigned is able to bear the economic risk which
the undersigned hereby assumes.
(j)
The
undersigned understands the various risks of an investment in the Company as
proposed herein and can afford to bear such risks, including, without
limitation, the risks of losing the entire investment.
(k)
The
undersigned acknowledges that no liquid market for the Subject Securities
presently exists and none may develop in the future and that the undersigned
may
find it impossible to liquidate the investment at a time when it may be
desirable to do so, or at any other time.
(l)
The
undersigned has been advised by the Company and understands that none of the
Subject Securities have been registered under the Securities Act, that the
Subject Securities are being offered and issued on the basis of the statutory
exemption provided by Section 4(2) of the Securities Act, Regulation D
promulgated thereunder or both, relating to transactions by an issuer not
involving any public offering and under similar exemptions under certain state
securities laws; that this transaction has not been reviewed by, passed on
or
submitted to any United States Federal or state agency or self-regulatory
organization where an exemption is being relied upon; and that the Company’s
reliance thereon is based in part upon the representations made by the
undersigned in this Agreement.
(m)
The
undersigned acknowledges that the undersigned has been informed by the Company
of, or is otherwise familiar with, the nature of the limitations imposed by
the
Securities Act and the rules and regulations thereunder on the transfer of
the
Subject Securities. In particular, the undersigned agrees that no sale,
assignment or transfer of any of the Subject Securities acquired by the
undersigned shall be valid or effective, and the Company shall not be required
to give any effect to such a sale, assignment or transfer, unless (i) the sale,
assignment or transfer of such Subject Securities is registered under the
Securities Act, it being understood that the Subject Securities are not
currently registered for sale and that the Company has no obligation or
intention to so register the Interests, except as contemplated by the terms
of
the Registration
Rights Agreement; (ii) the Subject Securities are sold, assigned or
7
transferred
in accordance with all the requirements and limitations of an exemption from
registration under the Securities Act. The undersigned further understands
that
an opinion of counsel satisfactory to the Company and other documents may be
required to transfer the Subject Securities.
(n)
The
undersigned acknowledges that the Subject Securities to be acquired will be
subject to a stop transfer order and any certificate or certificates evidencing
any Subject Securities shall bear the following or a substantially similar
legend and such other legends as may be required by state blue sky
laws:
“THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR
HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER THE SECURITIES ACT OR AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
ANY SUCH TRANSFER MAY ALSO BE SUBJECT TO COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS.”
(o)
The
undersigned will acquire the Subject Securities for the undersigned’s own
account (or, if such individual is married, for the joint account of the
undersigned and the undersigned’s spouse either in joint tenancy, tenancy by the
entirety or tenancy in common) for investment and not with a view to the sale
or
distribution thereof or the granting of any participation therein in violation
of the securities laws, and has no present intention of distributing or selling
to others any of such interest or granting any participation therein in
violation of the securities laws.
(p)
In
subscribing for 6% Notes, the undersigned is not relying on any representations
and warranties of the Company other than those in this Agreement.
(q)
The
undersigned is not subscribing for 6% Notes as a result of or subsequent to
any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio,
or
presented at any seminar or meeting, or any solicitation of a subscription
by a
person other than a representative of the Company with which the undersigned
had
a pre-existing relationship in connection with investments in securities
generally.
(r)
The
undersigned is not relying on the Company with respect to the tax and other
economic considerations of an investment.
(s)
The
undersigned understands that the net proceeds from all subscriptions paid and
accepted pursuant to the Offering (after deduction for any commissions,
discounts, consulting fees and other expenses of the Offering) may be used
for
such purposes as the Company determines from time to time.
8
(t)
The
undersigned acknowledges that the representations, warranties and agreements
made by the undersigned herein shall survive the execution and delivery of
this
Agreement and the purchase of the 6% Notes.
(u)
The
undersigned has consulted the undersigned’s own financial, legal and tax
advisors with respect to the economic, legal and tax consequences of an
investment in the Subject Securities and has not relied on the Company, its
officers, directors or professional advisors for advice as to such
consequences.
(v)
Except
as
set forth on the signature page hereto, the undersigned has not engaged any
broker or other person or entity that is entitled to a commission, fee or other
remuneration as a result of the execution, delivery or performance of this
Agreement.
(w)
The
undersigned is not now nor shall it be at any time prior to or at the closing
with respect to the undersigned’s subscription (the “Closing”)
a
person or entity (a “Person”)
with
whom a United States citizen, entity organized under the laws of the United
States or its territories or entity having its principal place of business
within the United States or any of its territories (collectively, a
“U.S.
Person”),
is
prohibited from transacting business of the type contemplated by this Agreement,
whether such prohibition arises under United States law, regulation, executive
orders and lists published by the Office of Foreign Assets Control, Department
of the Treasury (“OFAC”)
(including those executive orders and lists published by OFAC with respect
to
Persons that have been designated by executive order or by the sanction
regulations of OFAC as Persons with whom U.S. Persons may not transact business
or must limit their interactions to types approved by OFAC “Specially
Designated Nationals and Blocked Persons”)
or
otherwise. Neither the undersigned nor any Person who owns an interest in the
undersigned (collectively, a “Purchaser
Party”)
is now
nor shall be at any time prior to or at the Closing a Person with whom a U.S.
Person, including a United States Financial Institution as defined in 31 U.S.C.
Section 5312, as amended (“Financial
Institution”),
is
prohibited from transacting business of the type contemplated by this Agreement,
whether such prohibition arises under United States law, regulation, executive
orders and lists published by the OFAC (including those executive orders and
lists published by OFAC with respect to Specially Designated Nationals and
Blocked Persons) or otherwise.
(x)
The
undersigned has taken, and shall continue to take until the Closing, such
measures as are required by law to assure that the funds used to pay to the
Company the purchase price for the Subject Securities are derived: (i) from
transactions that do not violate United States law nor, to the extent such
funds
originate outside the United States, do not violate the laws of the jurisdiction
in which they originated; and (ii) from permissible sources under United States
law and to the extent such funds originate outside the United States, under
the
laws of the jurisdiction in which they originated.
(y)
To
the
best of the undersigned’s knowledge, neither the undersigned nor any Purchaser
Party, nor any Person providing funds to the undersigned:
9
(i)
is
under investigation by any governmental authority for, or has been charged
with,
or convicted of, money laundering, drug trafficking, terrorist related
activities, any crimes which in the United States would be predicate crimes
to
money laundering, or any violation of any Anti-Money Laundering Laws (as
hereinafter defined in this Section
4(y));
(ii)
has been assessed civil or criminal penalties under any Anti-Money Laundering
Laws; or (iii) has had any of its funds seized or forfeited in any action under
any Anti-Money Laundering Laws. For purposes of this Section
4(y),
the
term “Anti-Money
Laundering Laws”
shall
mean laws, regulations and sanctions, state and federal, criminal and civil,
that: (i) limit the use of and/or seek the forfeiture of proceeds from illegal
transactions; (ii) limit commercial transactions with designated countries
or
individuals believed to be terrorists, narcotics dealers or otherwise engaged
in
activities contrary to the interests of the United States; (iii) require
identification and documentation of the parties with whom a Financial
Institution conducts business; or (iv) are designed to disrupt the flow of
funds
to terrorist organizations. Such laws, regulations and sanctions shall be deemed
to include the USA PATRIOT Act of 2001, Pub. L. No. 107-56 (the “Patriot
Act”),
the
Bank Secrecy Act, 31 U.S.C. Section 5311 et. seq. (the “Bank
Secrecy Act”),
the
Trading with the Enemy Act, 50 U.S.C. Appendix, the International Emergency
Economic Powers Act, 50 U.S.C. Section 1701 et. seq., and the sanction
regulations promulgated pursuant thereto by the OFAC, as well as laws relating
to prevention and detection of money laundering in 18 U.S.C. Sections 1956
and
1957.
(z)
The
undersigned is in compliance with any and all applicable provisions of the
Patriot Act, including, without limitation, amendments to the Bank Secrecy
Act.
If the undersigned is a Financial Institution, it has established and is in
compliance with all procedures required by the Patriot Act and the Bank Secrecy
Act.
(aa)
After
the
Closing, the undersigned shall cooperate with the Company, and shall cause
each
Purchaser Party to cooperate with the Company, in providing such additional
information and documentation on the undersigned’s and each Purchaser Party’s
legal or beneficial ownership, policies, procedures and sources of funds as
the
Company deems necessary or prudent to enable the Company to comply with
Anti-Money Laundering Laws now in existence or hereafter enacted or amended.
(bb)
If
any of
the foregoing representations, warranties or covenants in Sections
4(w)-(aa)
hereof
ceases to be true or if the Company no longer reasonably believes that it has
satisfactory evidence as to their truth, notwithstanding any other agreement
to
the contrary, the Company may, in accordance with applicable regulations, and
after giving the undersigned reasonable opportunity to provide such satisfactory
evidence, freeze the undersigned’s investment, including without limitation,
withholding any dividends or distributions otherwise payable to the undersigned,
suspending the undersigned’s voting rights and rescinding the undersigned’s
investment in Subject Securities, and the Company may also be required to report
such action and to disclose the undersigned’s identity to OFAC or other
authority. In the event that the Company is required to take any of the
foregoing actions, the undersigned understands and agrees that it shall have
no
claim against the Company, the Escrow Agent and/or their respective affiliates,
directors, members, partners, interest holders, officers,
10
employees
and agents for any form of damages as a result of any of the aforementioned
actions.
(cc)
The
undersigned understands and agrees that any dividend, distribution, or
rescission proceeds or other payments made to it will be paid to the same
account from which the undersigned’s investment in the Company was originally
remitted, unless the Company, in its sole discretion, agrees
otherwise.
(dd)
the
undersigned represents and warrants that the undersigned has not during the
last
thirty (30) days, and hereby agrees that from the date hereof and continuing
until the undersigned no longer holds any Subject Securities the undersigned
shall not, without the prior written consent of the Company, directly or
indirectly, through related parties, affiliates or otherwise, (i) sell “short”
or “short against the box” (as those terms are generally understood) any equity
security of the Company or (ii) otherwise engage in any transaction which
involves hedging of the undersigned’s position in any equity security of the
Company, provided, however, that it shall not be a violation of this
Section
4(dd),
if the
undersigned places a sell order for shares of Common Stock underlying the 6%
Notes at or following the time conversion of such 6% Notes is requested or
a
sell order for shares of Common Stock issuable upon exercise of the Warrants
at
or following the time exercise of such Warrants has been requested and all
conditions to exercise of such Warrants have been satisfied, relies on the
Company to deliver such Common Stock in accordance with the Form of Note or
Warrants as the case may be, and completes the sale of such Common Stock before
the Company delivers the Common Stock to the undersigned.
5.
Covenants
of the Company.
The
Company hereby covenants with the undersigned as follows:
(a)
Except
for the 6% Notes, without
the prior written consent of the
Secured Party, the Company shall not create, issue, incur (by conversion,
exchange or otherwise), assume, guarantee or otherwise become or remain directly
or indirectly liable for Senior Debt (as defined below). “Senior
Debt”
shall
mean (without duplication) whether recourse to all or a portion of the assets
of
the Company and whether or not contingent, (i) every obligation of the Company
for money borrowed and (ii) every obligation of the Company evidenced by bonds,
debentures, notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or businesses, in each
case, that is senior or pari passu in right of payment to the 6% Notes. In
no
event shall “Indebtedness for Borrowed Money” include any trade payable or
accrued expenses arising in the ordinary course of business which are not more
than 180 days past due or which are being contested in good faith and by
appropriate proceedings.
(b)
For
each
of the first, second and third fiscal quarters of each fiscal year, the Company
shall furnish to the undersigned (which may be satisfied by filing the same
with
the Securities and Exchange Commission) no later than such time as the Company
is required to file quarterly reports pursuant to the Exchange Act, financial
statements consisting of a balance sheet of the Company as of the end of such
fiscal
11
quarter,
together with the statements of income, stockholders’ equity and changes in
financial condition for such fiscal quarter, and for the portion of the
Company’s fiscal year ending with the last day of such quarter, setting forth in
comparative form the figures for such period and figures for the corresponding
periods of the previous fiscal year, all in reasonable detail, and prepared
and
certified by the chief executive officer or the chief financial officer of
the
Company as fairly presenting in all material respects the financial condition
and results of operations as of the balance sheet date for the period then
ended
in accordance with generally accepted accounting principles consistently
applied, excluding footnotes, subject to normal year-end adjustments which
in
the aggregate shall not be material.
(c)
For
each
fiscal year, the Company shall furnish to the undersigned (which may be
satisfied by filing the same with the Securities and Exchange Commission) no
later than such time as the Company is required to file its annual report
pursuant to the Exchange Act, financial statements consisting of a balance
sheet
of the Company as of the end of such fiscal year, together with the statements
of income, stockholders’ equity and changes in financial condition for such
fiscal year, setting forth in comparative form the figures for such fiscal
year
and for the previous fiscal year, all in reasonable detail and duly certified
by
an opinion of its firm of independent certified public accountants, and prepared
and certified by the chief executive officer or the chief financial officer
of
the Company as fairly presenting in all material respects the financial
condition and results of operations as of the balance sheet date for the year
then ended in accordance with generally accepted accounting principles
consistently applied.
6.
Indemnification.
(a)
General.
The
undersigned understands the meaning and legal consequences of the
representations, warranties and agreements contained in this Agreement and
the
other Transaction Documents, including without limitation Section
4
hereof,
and agrees to indemnify and hold harmless the Company and each officer,
director, partner, employee, agent and controlling person of the Company, past,
present or future, from and against any and all loss, damage or liability
(collectively, “Losses”)
due to
or arising out of a breach of any such representation, warranty or agreement.
The Company shall indemnify and hold harmless the undersigned and each officer,
director, partner, employee, agent and controlling person of the undersigned,
past, present or future, from and against any and all Losses due to or arising
out of a breach of any representation, warranty or agreement by the Company
in
this Agreement or any other Transaction Document.
(b)
Limitation
on Indemnification.
The
maximum amount payable by the undersigned, on the one hand, or the Company,
on
the other hand, to all indemnified parties in respect of claims made for
indemnification under Section 6(a) shall not exceed, in the aggregate, the
aggregate purchase price of 6% Notes paid by the undersigned in the
Offering.
(c)
Sole
Remedy.
The
parties hereto agree and acknowledge that subsequent to the Closing, the
indemnification rights provided in this Section
6
shall
12
be
the
exclusive remedy of the each party hereto against each other party hereto for
breaches of the representations and warranties contained in this Agreement
except with respect to (i) claims involving fraud or (ii) any injunctive relief
to which any party may be entitled.
(d)
Notice.
(a) A
party
which is entitled to indemnification under Section
6
(in such
capacity, individually and collectively, an “Indemnified
Party”)
with
respect to any Loss shall give written notice thereof to the party required
to
provide such indemnification hereunder (in such capacity, individually and
collectively, an “Indemnifying
Party”)
promptly after receipt of any written claim by any third party and in any event
not later than twenty (20) business days after receipt of any such written
claim
(or not later than ten (10) business days after the receipt of any such written
claim in the event such written claim is in the form of a formal complaint
filed
with a court of competent jurisdiction and served on the Indemnified Party),
specifying in reasonable detail the amount, nature and source of the claim,
and
including therewith copies of any notices or other documents received from
third
parties with respect to such claim; provided,
however,
that
failure to give such notice shall not limit the right of an Indemnified Party
to
recover indemnity or reimbursement except to the extent that the Indemnifying
Party suffers any prejudice or harm with respect to such claim as a result
of
such failure. The Indemnified Party shall also provide the Indemnifying Party
with such further information concerning any such claims as the Indemnifying
Party may reasonably request by written notice.
(e)
Payment
of Losses.
Within
thirty (30) calendar days after receiving notice of a claim for indemnification
or reimbursement, the Indemnifying Party shall, by written notice to the
Indemnified Party, either (i) concede or deny liability for the claim in whole
or in part, or (ii) in the case of a claim asserted by a third party, advise
that the matters set forth in the notice are, or will be, subject to contest
or
legal proceedings not yet finally resolved. If the Indemnifying Party concedes
liability in whole or in part, it shall, within twenty (20) business days of
such concession, pay the amount of the claim to the Indemnified Party to the
extent of the liability conceded. Any such payment shall be made in immediately
available funds equal to the amount of such claim so payable. If the
Indemnifying Party denies liability in whole or in part or advises that the
matters set forth in the notice are, or will be, subject to contest or legal
proceedings not yet finally resolved, then the Indemnifying Party shall make
no
payment (except for the amount of any conceded liability payable as set forth
above) until the matter is resolved in accordance with this
Agreement.
(f)
Defense
of Claims.
In the
case of any third party claim, if within 20 days after receiving the notice
described in the preceding Section
6(d),
the
Indemnifying Party or Parties (i) gives written notice to the Indemnified Party
stating that the Indemnifying Party would be liable under the provisions hereof
for indemnity in the amount of such claim if such claim were valid and that
the
Indemnifying Party disputes and intends to defend against such claim, liability
or expense at the Indemnifying Party’s own cost and expense and (ii) provides
assurance reasonably acceptable to such Indemnified Party that such
indemnification will be paid fully and promptly if required and such Indemnified
Party will not incur cost or expense during the proceeding, then
the
13
Indemnifying
Party shall be entitled to assume the defense of such claim and to choose
counsel for the defense (subject to the consent of such Indemnified Party which
consent shall not be unreasonably withheld) and such Indemnified Party shall
not
be required to make any payment with respect to such claim, liability or expense
as long as the Indemnifying Party is conducting a good faith and diligent
defense at its own expense; provided, however, that the assumption of the
defense of any such matters by the Indemnifying Party shall relate solely to
the
claim, liability or expense that is subject or potentially subject to
indemnification. If the Indemnifying Party assumes such defense in accordance
with the preceding sentence, it shall have the right to settle (provided that
any such settlement which results in any adverse consequences to the Indemnified
Party shall require the consent of such Indemnified Party, which consent shall
not be unreasonably withheld) all indemnifiable matters related to claims by
third parties which are susceptible to being settled provided the Indemnifying
Party’s obligation to indemnify such Indemnified Party therefor will be fully
satisfied by payment of money by the Indemnifying Party pursuant to a settlement
which includes a complete release of such Indemnified Party. The Indemnified
Party shall not settle any claim with respect to which the Indemnifying Party
has assumed the defense, without the prior written consent of the Indemnifying
Party. The Indemnifying Party shall keep such Indemnified Party apprised of
the
status of the claim, liability or expense and any resulting suit, proceeding
or
enforcement action, shall furnish such Indemnified Party with all documents
and
information that such Indemnified Party shall reasonably request and shall
consult with such Indemnified Party prior to acting on major matters, including
settlement discussions. Notwithstanding anything herein stated, such Indemnified
Party shall at all times have the right to participate in, but not control,
such
defense at its own expense directly or through counsel; provided,
however,
if the
named parties to the action or proceeding include both the Indemnifying Party
and the Indemnified Party and representation of both parties by the same counsel
would be inappropriate under applicable standards of professional conduct,
the
reasonable expense of separate counsel for such Indemnified Party shall be
paid
by the Indemnifying Party provided that such Indemnifying Party shall be
obligated to pay for only one such counsel. If no such notice of intent to
dispute and defend is given by the Indemnifying Party, or if such diligent
good
faith defense is not being or ceases to be conducted, such Indemnified Party
may
undertake the defense of (with counsel selected by such Indemnified Party and
paid by the Indemnifying Party), and shall have the right to compromise or
settle, such claim, liability or expense (exercising reasonable business
judgment) with the consent of the Indemnifying Party, which consent shall not
be
unreasonably withheld. Such Indemnified Party shall make available all
information and assistance that the Indemnifying Party may reasonably request
and shall cooperate with the Indemnifying Party in such defense.
7.
Creation
of Security Interest.
(a)
Grant
of Security Interest.
The
Company hereby grants and pledges to Southpaw Credit Opportunity Master Fund
LP
(the “Secured Party”) a continuing security interest in the Collateral (as
defined in the Form of Note) in order to secure prompt payment of the principal
sum and interest evidenced by the 6% Notes. Such security interest shall
automatically terminate upon the (i) earlier of the payment of
14
principal
and interest on the 6% Notes and (ii) such time as notice of prepayment of
the
6% Notes pursuant to Section 2 of the 6% Notes is made and the Company
designates sufficient funds (which may be proceeds from the sale of Collateral)
for the prepayment thereof (the “Security Interest Termination Date”).
(b)
Designation
of Secured Party as Agent.
Each
purchaser of 6% Notes, by its acceptance of the benefits of this Agreement
and
the Subject Securities, hereby irrevocably designates the Secured Party to
act
as Secured Party such purchaser’s behalf. The undersigned hereby irrevocably
authorizes, and each holder of any Subject Securities, by such holder’s
acceptance of such Subject Securities, shall be deemed irrevocably to authorize,
the Secured Party to take such action on its behalf under the provisions of
this
Agreement and any other instruments and agreements referred to herein or therein
and to exercise such powers and to perform such duties hereunder and thereunder
as are specifically delegated to, or required of, the Secured Party by the
terms
hereof or thereof and such other powers as are reasonably incidental thereto.
The undersigned, on behalf of itself and future holders of the Subject
Securities issued to the undersigned, hereby authorizes and directs the Secured
Party, from time to time in the Secured Party’s discretion, to take any action
and promptly to execute and deliver on the undersigned’s behalf any document or
instrument that the Company may reasonably request to effect, confirm or
evidence the provisions of this Section
7,
the
occurrence of the Security Interest Termination Date, any subordination
agreement, or otherwise. Pursuant to Section 9-509(d) of the Uniform Commercial
Code as in effect on the date hereof in the State of New York, the Secured
Party
hereby authorizes the Company to file a termination statement upon the
occurrence of the Security Interest Termination Date; the Secured Party agrees
to provide any further authorizations of such filing if requested by the
Company.
(c)
Delivery
of Additional Documentation Required.
The
Company shall from time to time execute and deliver to Secured Party, at the
request of Secured Party, all financing statements and other documents that
Secured Party may reasonably request and take any action that Secured Party
may
reasonably request to perfect and continue perfected Secured Party’s security
interests in the Collateral, it being understood and agreed by the Purchasers
and the Secured Party that the Company need not deliver possession or control
of
any Collateral to the Secured Party or take any action to perfect the security
interest granted hereby other than the filing of financing statements under
the
Uniform Commercial Code. The
Secured Party may, at any time and from time to time, file financing statements,
continuation statements and amendments thereto that describe the
Collateral
as all
assets of the Company or words of similar effect.
8.
Transferability.
Neither
this Agreement, nor any interest of the undersigned herein, shall be assignable
or transferable by the undersigned in whole or in part except by operation
of
law. Any attempt to assign or transfer this agreement or any interest therein
other than by operation of law shall be void.
9.
Confidentiality.
The
undersigned acknowledges and agrees that all information, written and oral,
concerning the Company furnished from time to time to the undersigned,
including, without limitation, the Memorandum, has been and is
provided
15
on
a
confidential basis pursuant to a confidentiality agreement between the
undersigned and the Company.
10.
Expenses.
The
Company shall pay, in connection with the preparation, execution and delivery
of
this Agreement, the other Transaction Documents and the consummation of the
transactions contemplated hereby and thereby, all reasonable fees and out of
pocket expenses of the undersigned up to an aggregate maximum of $2,000, whether
or not the transactions contemplated by the Transaction Documents are
consummated.
11.
Miscellaneous.
(a)
This
Agreement, including the exhibits hereto, sets forth the entire understanding
of
the parties with respect to the undersigned’s purchase of 6% Notes from the
Company, supersedes all existing agreements among them concerning such subject
matter, and may be modified only by a written instrument duly executed by the
party to be charged.
(b) Except
as
otherwise specifically provided herein, any notice or other communication
required or permitted to be given hereunder shall be in writing and shall be
mailed by certified mail, return receipt requested, or by Federal Express,
Express Mail or similar guaranteed overnight delivery or courier service or
delivered in person against receipt to the party to whom it is to be
given,
| (i) |
if
to the Company,
|
Nephros,
Inc.
0000
Xxxxxxxx
Xxx
Xxxx,
Xxx Xxxx 00000
Attn:
President
(ii)
with
a copy to,
Xxxxxx
Xxxxx Xxxxxxxx & Xxxxxxx LLP
0000
Xxxxxx xx xxx Xxxxxxxx
Xxx
Xxxx,
Xxx Xxxx 00000
Attention:
Xxxxxx X. Xxxxxxxx, Esq.
(ii)
if
to the undersigned, at the address set forth on the signature page
hereof,
or
in
either case, to such other address as the party shall have furnished in writing
in accordance with the provisions of this Section
11(b).
Any
notice given by means permitted by this Section
11(b)
shall be
deemed given at the time of receipt thereof at the address specified in this
Section
11(b).
16
(c)
This
Agreement shall be binding upon and inure to the benefit of the parties hereto,
the successors and assigns of the Company, and the permitted successors,
assigns, heirs and personal representatives of the undersigned, not including,
however, any transferees of the Subject Securities.
(d)
The
headings in this Agreement are solely for convenience of reference and shall
be
given no effect in the construction or interpretation of this
Agreement.
(e)
This
Agreement may be executed in any number of counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
instrument.
(f)
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York, without giving effect to principles governing conflicts
of
law that would defer to the substantive law of another
jurisdiction.
(g)
In
the
event that any provision of this Agreement shall be determined to be illegal
or
unenforceable, that provision will be limited or eliminated to the minimum
extent necessary so that this Agreement shall otherwise remain in full force
and
effect and enforceable.
(h)
This
Agreement does not create, and shall not be construed as creating, any rights
enforceable by any person not a party to this Agreement.
(i)
The
parties hereto irrevocably consent to the jurisdiction of the courts of the
State of New York and of any federal court located in such State in connection
with any action or proceeding arising out of or relating to this Agreement,
any
document or instrument delivered pursuant to, in connection with or
simultaneously with this Agreement, or a breach of this Agreement or any such
document or instrument.
[Signature
page follows immediately]
17
SIGNATURE
PAGE
IN
WITNESS WHEREOF,
the
parties hereto have executed this Agreement as of the day and year this
subscription has been accepted by the Company as set forth below.
|
Aggregate
principal amount of 6% Notes subscribed for (and purchase
price):
$_______________
|
Print
Name of Subscriber:
_________________________________
_________________________________
Social
Security Number or other Taxpayer ID Number
By:
______________________________
(Signature
of Subscriber or Authorized Signatory)
Name:
Title:
Address:
__________________________
__________________________
Telephone:_________________________
Fax:_______________________________
|
If
the 6%
Notes will be held as joint tenants, tenants in common, or community property,
please complete the following:
______________________________
Print
name of spouse or other co-subscriber
______________________________
Signature
of spouse or other co-subscriber
__________________________________
Social
Security Number or other Taxpayer ID Number
__________________________________
Print
manner in which shares will be held
If
the 6%
Notes have been purchased through a broker or other intermediary, please
identify such entity:________________________________________
[Please
complete Signature Page for each
subscriber.]
18
ACCEPTANCE
OF SUBSCRIPTION
_____________________________
Name
of
Subscriber
ACCEPTED
BY:
NEPHROS,
INC.
By:
____________________________
Name:
Title:
Date:
_______________________, 2006
Accepted
for $__________ principal
amount of 6% Notes
19
Schedule
3(f)
In
connection with the offering, the Company has entered into an agreement with
Xxxxxx Associates (“Consultant”)
pursuant to which Consultant will provide the Company with consulting services
for the three month period beginning on June 1, 2006, which period shall be
renewed for additional terms unless canceled in writing by either party on
30
days notice prior to the end of such term. In exchange for such consulting
services, the Company shall pay Consultant $260,000 as follows: (i) an initial
retainer fee of $100,000; and (ii) a consulting fee of $50,000 per month except
for the last month which shall be $60,000, payable on the first of each
month.
EXHIBIT
A
(Form
of
Note)
A-1
EXHIBIT
B
(Form
of
Registration Rights Agreement)
B-1
EXHIBIT
C
ACCREDITED
INVESTOR STATUS
The
subscriber represents that it is an Accredited Investor on the basis that it
is
(check all that apply):
_____(i)
A bank as defined in Section 3(a)(2) of the Act, or a savings and loan
association or other institution as defined in Section 3(a)(5)(A) of the Act,
whether acting in its individual or fiduciary capacity; a broker dealer
registered pursuant to Section 15 of the Securities Exchange Act of 1934; an
insurance company as defined in Section 2(13) of the Act; an investment company
registered under the Investment Company Act of 1940 (the “Investment
Company Act”)
or a
business development company as defined in Section 2(a)(48) of the Investment
Company Act; a Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958; a plan established and maintained by a state, its
political subdivisions or any agency or instrumentality of a state or its
political subdivisions for the benefit of its employees, if such plan has total
assets in excess of $5,000,000; an employee benefit plan within the meaning
of
the Employee Retirement Income Security Act of 1974 (“ERISA”),
if
the investment decision is made by a plan fiduciary, as defined in Section
3(21)
of ERISA, which is either a bank, savings and loan association, insurance
company, or registered investment advisor, or if the employee benefit plan
has
total assets in excess of $5,000,000 or, if a self-directed plan, with
investment decisions made solely by persons that are accredited
investors.
_____(ii)
A private business development company as defined in Section 202(a)(22) of
the
Investment Advisers Act of 1940.
_____(iii)
An organization described in Section 501(c)(3) of the Internal Revenue Code,
corporation, Massachusetts or similar business trust, or partnership, not formed
for the specific purpose of acquiring the securities offered, with total assets
in excess of $5,000,000.
_____(iv)
A director or executive officer of the Company.
_____(v)
A natural person whose individual net worth, or joint net worth with that
person’s spouse, at the time of his or her purchase exceeds
$1,000,000.
_____(vi)
A natural person who had an individual income in excess of $200,000 in each
of
the two most recent years or joint income with that person’s spouse in excess of
$300,000 in each of those years and has a reasonable expectation of reaching
the
same income level in the current year.
_____(vii)
A trust, with total assets in excess of $5,000,000, not formed for the specific
purpose of acquiring the securities offered, whose purchase is directed by
a
sophisticated person as described in Rule 506(b)(2)(ii) (i.e., a person who
has
such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the prospective
investment).
_____(viii)
An entity in which all of the equity owners are accredited investors. (If this
alternative is checked, the undersigned must identify each equity owner and
provide statements signed by each demonstrating how each is qualified as an
accredited investor. Further, the undersigned represents that it has made such
investigation as is reasonably necessary in order to verify the accuracy of
this
alternative.)
C-1
