DEBENTURE AGREEMENT
Exhibit
10.3
THE
SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN
RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY
NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED
OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED
THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
|
FACE
AMOUNT
|
$1,000,000
|
|
PRICE
|
$1,000,000
|
|
DEBENTURE
NUMBER
|
June
- 0000-000
|
|
XXXXXXXX
DATE
|
June
28, 2006
|
|
MATURITY
DATE
|
June
28, 2011
|
FOR
VALUE
RECEIVED, Enigma Software, Inc., a Delaware corporation (the “Company”), hereby
promises to pay DUTCHESS PRIVATE EQUITIES FUND, LP & DUTCHESS PRIVATE
EQUITIES FUND, II, LP (collectively, the “Holder”) by June 28, 2011 (the
“Maturity Date”), the principal amount of One Million Dollars ($1,000,000) U.S.,
and to pay interest and the redemption premium on the principal amount hereof,
and any accrued penalties, in such amounts, at such times and on such terms
and
conditions as are specified herein.
The
Debenture set forth in this Agreement is subject to automatic conversion at
the
end of five (5) years from the date of issuance at which time the Debenture
outstanding will be automatically converted based upon the formula set forth
in
Section 3.2(c).
Article
1
Interest
The
Company shall pay a twelve percent (12%) annual coupon on the unpaid Face Amount
of this Debenture. Such payments will be made to the Holder, an "Interest
Payment," or collectively, the "Interest Payments", on a monthly basis on the
first day of each business day of each month, commencing August 1, 2006 and
continuing while there is an outstanding balance on the Debenture, in an amount
equal to the interest on the balance on the Debenture ("Interest Payment Amount"
or collectively, the "Interest Payment Amounts") that has accrued since the
past
Interest Payment until such time as the Interest Payment is due and
collected.
The
Holder shall have the right, but not the obligation, to receive Interest
Payments through the issuance of common stock, priced at the Conversion Price,
provided however, that the Company's Common Stock has been trading above a
minimum price of twenty-five cents ($.25) for the last twenty (20) consecutive
trading days.
1
Any
monies paid to the Holder in excess of the interest due when paid shall be
credited toward the Redemption of the Face Amount of the Debenture.
Article
2 Method
of Principal Payment
Section
2.1 Prior
to
Registration with the SEC
In
the
event that the Effective Date has not occured on or before January 1, 2007
then,
the Company will make amortizing cash payments to the Holder (a "Payment,"
or
collectively, the "Payments") on a monthly basis on the first day of each
business day of each month while there is an outstanding balance on the
Debenture, in the following amounts ("Payment Amount" or collectively, the
"Payment Amounts") until the earlier of (i) the declaration of an Effective
Date; or (ii) the Company has paid the Face Amount in full:
|
Payment
for January 1, 2007 and each month thereafter
|
$
|
104,166.67
|
Notwithstanding
any provision to the contrary in this Debenture, the Company may pay in full
to
the Holder the Face Amount, or any balance remaining thereon, in readily
available funds, at any time and from time to time without penalty.
All
Payments made under Article 2, shall be applied toward the total Redemption
Amount as outlined in Article 14, herein.
Section
2.2 Subsequent
to the Effective Date
After
the
date upon which the U.S. Securities and Exchange Commission ("SEC") has declared
the registration statement for the shares underlying the Debenture
("Registration Statement") effective (the "Effective Date the Holder shall
be
entitled to convert a portion of the Debenture pursuant to Article 3, below.
Nothing
contained in this Article 2 shall limit the amount the Holder can elect to
convert during a calendar month except as defined in Section 3.2 (i), below.
Section
2.3 No Penalty for Prepayment.
The
Company may make additional payments toward Redemption (“Prepayment”) without
any penalties, which the Holder has the right to refuse in lieu of
converting.
Section
2.4 Accelerated Repayment in the Event of a Subsequent Financing by a Third
Party.
If,
at
any time after Closing, the Company receives financing from a third party
(excluding the Holder), the Company is required to pay to the Holder 100% of
the
proceeds raised from the third party in excess of an aggregate amount of
$1,000,000 (the “Threshold Amount”). The Threshold Amount shall also pertain to
any assets sold, transferred or disposed of by the Company. The Company agrees
to pay one hundred percent (100%) of any proceeds raised by the Company over
the
Threshold Amount toward the Accelerated Repayment of the Debenture with Interest
until such time as the Face Amount of the Debenture, including accrued interest
and penalties, has been paid in full. The accelerated Repayment shall be made
to
the Holder upon the Company’s receipt of the financing. Failure to do so will
result in an Event of Default as defined herein.
2
Article
3 Conversion
Section
3.1 Conversion
Privilege
(a) The
Holder of this Debenture shall have the right to convert any and all amounts
owing under this Debenture into shares of Common Stock at any time following
the
Closing Date and which is before the close of business on the Maturity Date,
except as set forth in Section 3.2(c)
below. The number of shares of Common Stock issuable upon the conversion of
this
Debenture is
determined pursuant to Section 3.2
and
rounding the result up to the nearest whole share.
(b) This
Debenture may not be converted, whether in whole or in part, except in
accordance with this Article 3.
(c) In
the
event all or any portion of this Debenture remains outstanding on the Maturity
Date, the unconverted
portion
of such Debenture will automatically be converted into shares of Common Stock
on
such date in the manner set forth in Section 3.2.
Section
3.2 Conversion
Procedure
(a) Conversion
Procedures. The
Holder may elect to convert the unpaid Face Amount of and accrued interest
on
this Debenture, in whole or in part, at
any
time
following the Closing Date (a “Conversion”). Such Conversion shall be
effectuated by the Holder sending to the Company a facsimile or electronic
mail
version of the signed Notice of Conversion, attached as Exhibit A hereto, which
evidences the Holder’s intention to convert the Debenture as indicated. The date
on which the Notice of Conversion is delivered (“Conversion Date”) shall be
deemed to be the date on which the Holder has delivered to the Company a
facsimile or electronic mail of the signed Notice of Conversion. Notwithstanding
the above, any Notice of Conversion received after 5:00 P.M. EST, shall be
deemed to have been received the next business day,
with
receipt being via a confirmation of time of facsimile of the Holder.
(b) Common
Stock to be Issued. Upon
the
Holder's conversion of any Debenture, the Company shall issue the number of
shares of Common Stock equal to the Conversion. If, at the time of conversion,
the Registration Statement has been declared effective, the Company shall
instruct its transfer agent to issue stock certificates without restrictive
legend (other than a legend referring to the registration statement and
prospectus delivery requirements) or stop transfer instructions. If, at the
time
of the Holder's conversion, the Registration Statement has not been declared
effective, the Company shall instruct the transfer agent to issue the
certificates with an appropriate legend. The
Company shall act as Registrar and shall maintain an appropriate ledger
containing the necessary information with respect to each Debenture. The
Company warrants that no instructions, other than these instructions, have
been
given or will be given to the transfer agent and that the Common Stock shall
otherwise be freely resold, except as may be otherwise set forth
herein.
3
(c) Conversion
Price. The
Holder is entitled to convert the
unpaid Face Amount of this Debenture, plus accrued interest, any time following
the Closing Date, at the lesser of the following prices (the "Conversion
Price"): (1) the Maximum Conversion Price of seven cents ($.07); or (2) at
a
"Conversion Price" of seventy-five percent (75%) of the lowest closing bid
price
of the Common Stock during the twenty (20) trading days immediately preceding
a
Conversion Notice. No fractional shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall
be
rounded up, in the event of a partial share, to the nearest whole share. The
Holder shall retain all rights of conversions during any partial trading
days.
(d) Maximum
Interest.
Nothing
contained in this Debenture shall be deemed to establish or require the Company
to pay interest to the Holder at a rate in excess of the maximum rate permitted
by governing law. In the event that the rate of interest required to be paid
exceeds the maximum rate permitted by governing law, the rate of interest
required to be paid thereunder shall be automatically reduced to the maximum
rate permitted under the governing law. In
the
event this Section 3.2 (d) applies, the Parties agree that the terms of this
Debenture remain in full force and effect except as is necessary to make the
interest rate comply with applicable law.
(e) Opinion
Letter.
It shall
be the Company’s
responsibility to take all necessary actions and to bear all such costs to
issue
the Common Stock as provided herein, including the responsibility and cost
for
delivery of an opinion letter to the transfer agent, if so required. The person
or entity in whose name the certificate of Common Stock is to be registered
shall be treated as a shareholder of record on and after the conversion date.
Upon surrender of any Debentures that are to be converted in part, the Company
shall issue to the Holder a new Debenture equal to the unconverted amount,
if so
requested in writing by Holder.
(f) Delivery
of Shares.
Within
three (3) business days after receipt of the documentation referred to above
in
Section 3.2(a),
the
Company shall deliver a certificate, in accordance with Section 3.2(c)
for
the number of shares of Common Stock issuable upon the conversion. In the event
the Company does not make delivery of the Common Stock, as instructed by Holder,
within five (5) business days after the Conversion Date, the Company shall
pay
to Holder in cash, as liquidated damages, an additional three
percent (3%) per day of the dollar value of the Debentures being converted.
If
the
failure of the Company to issue the Common Stock pursuant to this Article 3.2
(f) is due to the unavailability of authorized shares of Common Stock, the
provisions of this Article 3.2 (f) shall not apply, but instead the provisions
of Article 3.2 (k) shall apply.
4
The
Company shall make any payments required under this Article
3.2(f)
in
immediately available funds within three (3) business days from the date the
Common Stock is fully delivered. Nothing herein shall limit the Holder’s right,
at the Holder's sole discretion, to pursue actual damages or cancel the
conversion for the Company’s failure to issue and deliver Common Stock to the
Holder within three (3) business days after the Conversion Date.
The
Company shall at all times reserve (or make alternative written arrangements
for
reservation or contribution of shares) and
have
available all Common Stock necessary to meet conversion of the full amount
of
the Debentures then outstanding and due to the Holder. If, at any time, the
Holder
submits
a Notice of Conversion and the Company does not have sufficient authorized
but
unissued shares of Common Stock (or alternative shares of Common Stock as may
be
contributed by Stockholders) available to effect, in full, a conversion of
the
Debentures (a “Conversion Default”, the date of such default being referred to
herein as the “Conversion Default Date”), the Company shall issue to the Holder
all of the shares of Common Stock which are then available. Any Convertible
Debentures or any portion thereof, which cannot be converted due to the
Company's lack of sufficient authorized common stock (the “Unconverted
Debentures”), may be deemed null and void upon written notice sent by the Holder
to the Company. The Company shall provide notice of such Conversion Default
(“Notice of Conversion Default”) to the Holder, by facsimile, within one (1)
business days of such default.
The
Company acknowledges that its failure to maintain a sufficient number of
authorized but unissued shares of Common Stock to effect in full a conversion
of
the Debenture will cause the Holder to suffer irreparable harm, and that damages
will be difficult to ascertain. Accordingly, the parties agree that it is
appropriate to include in this Agreement a provision for liquidated damages.
The
parties acknowledge and agree that the liquidated damages provision set forth
in
this section represents the parties’ good faith effort to quantify such damages
and, as such, agree that the form and amount of such liquidated damages are
reasonable and will not constitute a penalty. The payment of liquidated damages
shall not relieve the Company from its obligations to deliver the Common Stock
pursuant to the terms of this Debenture. Nothing herein shall limit the Holder’s
right to pursue actual damages for the Company’s failure to maintain a
sufficient number of authorized shares of Common Stock.
If,
by
the third (3rd) business day after the Conversion Date, any portion of the
shares of the Convertible Debentures have not been delivered to the Holder
and
the Holder purchases, in an open market transaction or otherwise, shares of
Common Stock necessary to make delivery of shares which would have been
delivered if the full amount of the shares to be converted and delivered to
the
Holder by the Company (the "Covering Shares") , then the Company shall pay
to
the Holder, in addition to any other amounts due to the Holder pursuant to
this
Convertible Debenture, and not in lieu thereof, the Buy-In Adjustment Amount
(as
defined below). The "Buy In Adjustment Amount" is the amount equal to the
excess, if any, of (x) the Holder's total purchase price (including brokerage
commissions, if any) for the Covering Shares minus (y) the net proceeds (after
brokerage commissions, if any) received by the Holder from the sale of the
Sold
Shares. The Company shall pay the Buy-In Adjustment Amount to the Holder in
immediately available funds within five (5) business days of written demand
by
the Holder. By way of illustration and not in limitation of the foregoing,
if
the Holder purchases shares of Common Stock having a total purchase price
(including brokerage commissions) of $11,000 to cover a Buy-In with respect
to
shares of Common Stock it sold for net proceeds of $10,000, the Buy-In
Adjustment Amount which the Company will be required to pay to the Holder will
be $1,000.
5
(g) Prospectus
and Other Documents. The
Company shall furnish to Holder one (1) prospectus and any other documents
incidental to the registration of the shares of Common Stock underlying the
Debentures, including any amendment of or supplements thereto. Any filings
submitted via XXXXX will constitute fulfillment of the Company's obligation
under this Section.
(h) Limitation
on Issuance of Shares.
If the
Company’s Common Stock becomes listed on the Nasdaq SmallCap Market after the
issuance of the Debenture, the Company may be limited in the number of shares
of
Common Stock it may issue by virtue of (A) the number of authorized shares
or
(B) the applicable rules and regulations of the principal securities market
on
which the Common Stock is listed or traded, including, but not necessarily
limited to, NASDAQ Rule 4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be
applicable (collectively, the “Cap Regulations”). Without limiting the other
provisions thereof:
(i) the
Company will take all steps necessary to issue shares of Common Stock on
conversion of the Debentures without violating the Cap Regulations, and (ii)
if,
despite taking such steps, the Company cannot issue such shares of Common Stock
without violating the Cap Regulations or the Holder cannot convert as a result
of the Cap Regulations (each such Debenture, an “Unconverted Debenture”) the
Holder shall have the right to elect either of the following options:
(x)
if
permitted by the Cap Regulations, require the Company to issue shares of Common
Stock in accordance with the Holder's Notice of Conversion at a conversion
purchase price equal to the average of the closing bid price per share of Common
Stock for any five (5) consecutive Trading Days (subject to certain equitable
adjustments for certain events occurring during such period) during the sixty
(60) Trading Days immediately preceding the Conversion Date; or
(y)
require the Company to redeem each Unconverted Debenture for an amount (the
“Redemption Amount”), payable in cash, equal to the sum of (i) one hundred
twenty-five percent (125%) of the principal of an Unconverted Debenture, plus
(ii) any accrued but unpaid interest thereon through and including the date
on
which the Redemption Amount is paid to the holder (the “Redemption
Date”).
The
Holder may elect, without limitation, one of the above remedies with respect
to
a portion of such Unconverted Debenture and the other remedy with respect to
other portions of the Unconverted Debenture. The Debenture shall contain
provisions substantially consistent with the above terms, with such additional
provisions as may be consented to by the Holder. The provisions of this section
are not intended to limit the scope of the provisions otherwise included in
the
Debenture.
6
(i) Limitation
on Amount of Conversion and Ownership.
Notwithstanding anything to the contrary in this Debenture, in no event shall
the Holder be entitled to convert that amount of Debenture, and in no event
shall the Company permit that amount of conversion, into that number of shares,
which when added to the sum of the number of shares of Common Stock beneficially
owned, (as such term is defined under Section 13(d) and Rule 13d-3 of the
Securities Exchange Act of 1934, as may be amended, (the “1934 Act”)), by the
Holder, would exceed 4.99% of the number of shares of Common Stock outstanding
on the Conversion Date, as determined in accordance with Rule 13d-1(j) of the
1934 Act. In the event that the number of shares of Common Stock outstanding
as
determined in accordance with Section 13(d) of the 1934 Act is different on
any
Conversion Date than it was on the Closing Date, then the number of shares
of
Common Stock outstanding on such Conversion Date shall govern for purposes
of
determining whether the Holder would be acquiring beneficial ownership of more
than 4.99% of the number of shares of Common Stock outstanding on such
Conversion Date. However, nothing in this Article 3.2(i) shall be read to reduce
the amount of principal, interest or penalties, if any, due to the
Holder.
(j) Legend.
The
Holder acknowledges that each certificate representing the Debentures, and
the
Common Stock unless registered pursuant to the Registration Rights Agreement,
shall be stamped or otherwise imprinted with a legend substantially in the
following form:
THE
SECURITIES EVIDENCED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT (i) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER THE ACT
(OR
ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES),
OR
(iii) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER SUCH
ACT.
(k)
Prior
to conversion of the Debenture, if at any
time
the
conversion of all the Debentures and exercise of all the Warrants outstanding
would result in an insufficient number of authorized shares of Common Stock
being available to cover all the conversions, then in such event, the Company
will move to call and hold a shareholder’s meeting or have shareholder action
with written consent of the proper number of shareholders within thirty (30)
days of such event, or such greater period of time if statutorily required
or
reasonably necessary as regards standard brokerage house and/or SEC requirements
and/or procedures, for the purpose of authorizing additional shares of Common
Stock such as necessary to facilitate the Holder's conversions. In such an
event
management of the Company shall recommend to all shareholders to vote their
shares in favor of increasing the authorized number of shares of Common Stock.
Management of the Company shall vote all of its shares of Common Stock in favor
of increasing the number of shares of authorized Common Stock to an amount
equal
to three hundred percent (300%) of the remaining balance of shares of Common
Stock underlying the Debenture. The Company represents and warrants that under
no circumstances will it deny or prevent the Holder’s right to convert the
Debentures as permitted under the terms of this Subscription Agreement or the
Registration Rights Agreement. Nothing in this Section shall limit the
obligation of the Company to make the
payments set forth in this Article 3.
The
Holder, at its sole option, may request the company to authorize and issue
additional shares if the Holder feels it is necessary for conversions in the
future. In
the
event the Company’s shareholder’s meeting does not result in the necessary
authorization, the Company shall redeem the outstanding Debentures for an amount
equal to the sum of the principal of the outstanding Debentures plus accrued
interest thereon multiplied by 125%.
7
Section
3.3 Fractional
Shares.
The
Company shall not issue fractional shares of Common Stock, or scrip representing
fractions of such shares, upon the conversion of this Debenture. Instead, the
Company shall round up, to the nearest whole share.
Section
3.4 Taxes
on Conversion. The
Company shall pay any documentary, stamp or similar issue or transfer tax due
on
the issue of shares of Common Stock upon a Conversion. However, the Holder
shall
pay any such tax which is due because the shares are issued in a name other
than
its name.
Section
3.5 Company
to Reserve Stock. The
Company shall reserve and maintain the number of shares of Common Stock required
pursuant to and upon the terms set forth in the Subscription Agreement to permit
the conversion of this Debenture.
All
shares of Common Stock which may be issued upon a Conversion hereof shall upon
issuance by the Company be validly issued, fully paid and nonassessable and
free
from all taxes, liens and charges with respect to the issuance
thereof.
Section
3.6 Restrictions
on Sale. This
Debenture has not been registered under the Securities Act of 1933, as amended
(the “Act”) and is being issued under Section 4(2) of the Act and Rule 506 of
Regulation D promulgated under the Act. This Debenture and the Common Stock
issuable upon a Conversion may
only be
sold
pursuant to registration under or an exemption from the Act.
Section
3.7 Stock
Splits, Combinations and Dividends.
If the
shares of Common Stock are subdivided or combined into a greater or smaller
number of shares of Common Stock, or if a dividend is paid on the Common Stock
in shares of Common Stock, the Conversion Price shall be proportionately reduced
in the case of a subdivision of shares or stock dividend, or proportionately
increased in the case of combination of shares, in each such case, by the ratio
that the total number of shares of Common Stock outstanding immediately after
such event bears to the total number of shares of Common Stock outstanding
immediately prior to such event.
Article
4 Mergers
The
Company shall not consolidate or merge into, or transfer any or all of its
assets to, any person, unless such person assumes in writing the obligations
of
the Company under this Debenture and immediately after such transaction no
Event
of Default exists. Any reference herein to the Company shall refer to such
surviving or transferee corporation and the obligations of the Company shall
terminate only upon such written assumption of the Company's
obligation.
In the
event of a merger, or other consolidation, the Company shall give notice to
the
Holder simultaneously with the announcement to the public markets.
8
Article
5
Security
This
Debenture is secured pursuant to Security Agreement (the "Security Agreement")
of this date between the Company and the Holder.
Article
6 Defaults
and Remedies
Section
6.1 Events
of
Default. An
“Event
of Default” occurs if any one of the following occur:
(a)
the
Company does not make timely Payment or Conversion, in whole or in part,
necessary to cover as applicable the principal, interest or other sum due on
the
Maturity Date, Conversion Date, upon redemption, or otherwise described herein;
or,
(b)
the
Company does not make a Payment in cash for a period of three (3) business
days
when due as described in this Agreement; or,
(c)
any
of the Company’s representations or warranties contained in the Transaction
Documents, as defined herein, or this Debenture were false when made or the
Company fails to comply with any of its other agreements in the Transaction
Documents (as defined in Article 16 below) and such failure continues for a
period of five (5) business days; or,
(d)
the
Company pursuant to or within the meaning of any Bankruptcy Law: (i) commences
a
voluntary case; (ii) consents to the entry of an order for relief against it
in
an involuntary case; (iii) consents to the appointment of a Custodian (as
hereinafter defined) of it or for all or substantially all of its property
or
(iv) makes a general assignment for the benefit of its creditors or (v) a court
of competent jurisdiction enters an order or decree under any Bankruptcy Law
that (A) is for relief against the Company in an involuntary case; (B) appoints
a Custodian of the Company or for all or substantially all of its property
or
(C) orders the liquidation of the Company, and the order or decree remains
unstayed and in effect for sixty (60) calendar days; or,
(e)
the
Company’s Common Stock is suspended or no longer listed on any recognized
exchange including electronic over-the-counter bulletin board ("Principal
Market") for in excess of three (3) consecutive Trading Days.
Failure
to comply with the requirements for continued listing on a Principal Market
for
a period of five (5) trading days; or notification from a Principal Market
that
the Company is not in compliance with the conditions for such continued listing
on such Principal Market; or,
(f)
the
Company breaches any covenant or condition of the Transaction Documents, and
such breach, if subject to cure, continues for a period of five (5) business
days; or,
(g)
the
Registration Statement underlying the Debenture is not declared effective by
the
SEC within twelve (12) months of the Issuance Date.
9
Section
6.2 Remedies.
In the
Event of Default, the Holder may elect to secure a portion of the Company's
assets in Pledged Collateral (as defined in the Security Agreement). The Holder
may also elect to garnish revenue from the Company in an amount that will repay
the Holder on the schedules outlined in this Agreement.
In
the
Event of Default, as outlined in this Agreement, the
Holder
can exercise its right to increase the Face
Amount of the Debenture by ten percent (10%) as an initial penalty, and by
ten
percent (10%) for each subsequent Event of Default. In addition, the Holder
may
elect to increase the
Face
Amount by two and one-half percent (2.5%) per month (pro-rata for partial
periods) paid as liquated damages ("Liquidated Damages"), compounded daily.
It
is the intention and acknowledgement of both parties that the Liquidated Damages
not be deemed as interest or a penalty under the terms of this
Agreement.
In
the
event of Default, under 6.1 (b), the Holder may elect to lower the Conversion
Price of the stock, as outlined in Section 3.2 (c) (i) (1) to five cents ($.05)
per share. The Holder shall also have the right to adjust the Warrant of the
same date, signed between the Company and the Holder, to the new Conversion
Price as outlined herein and therein.
In
the
event of Default, under Article 6.1(g), the Holder may elect to switch the
Conversion Price of the Debenture as outlined in Article 3.2(c) above ("Default
Conversion Price"). The Default Conversion Price shall be equal to the lesser
of
a) the Conversion Price or b) seventy percent (70%) of the lowest closing bid
price of the Common Stock during the fifteen (15) trading days prior to
conversion. The Company agrees that the date of consideration for the Debenture
shall remain the Issuance Date stated herein. The Company shall provide an
opinion letter from counsel within two (2) business days of written request
by
the Holder stating that the date of consideration for the Debenture is the
Issuance Date and submission of proper Rule 144, promulgated under the
Securities Act of 1933, support documentation consisting of Form 144, a broker's
representation letter and a seller's representation letter. In the event the
Company does not deliver the opinion letter within two business days, the
Default Conversion Price shall immediately decrease by one percent (1%) for
each
business day an opinion letter fails to be delivered. In the event that counsel
to the Company fails or refuses to render an opinion as required to issue the
Shares in accordance with this paragraph (either with or without restrictive
legends, as applicable), then the Company irrevocably and expressly authorizes
counsel to the Holder to render such opinion and shall authorize the Transfer
Agent to accept and to rely on such opinion for the purposes of issuing the
Shares. Any costs incurred by Holder for such opinion letter shall be added
to
the Face Amount of the Debenture.
Section
6.3 Acceleration.
If
an
Event of Default occurs, the Holder by notice to
the
Company may declare the remaining principal amount of this Debenture, together
with all accrued interest and any liquidated damages, to be immediately due
and
payable in full.
Section
6.4 Seniority. The
Company warrants that no indebtedness of the Company is senior to this Debenture
in right of payment, whether with respect to interest, damages or upon
liquidation or dissolution or otherwise. And, the Company warrants that it
has
taken all necessary steps to subordinate its other obligations to the rights
of
the Holder hereunder.
10
Section
6.5 Cost
of Collections. If
an
Event of Default occurs, the Company shall pay the Holder's reasonable costs
of
collection, including reasonable attorney's fees and costs of
arbitration.
Article
7 Registered
Debentures
Section
7.1 Record
Ownership. The
Company, or the Company's attorney, shall maintain a register of the Holder
of
the Debentures (the “Register”) showing their names and addresses and the serial
numbers and principal amounts of Debentures issued to them. The Register may
be
maintained in electronic, magnetic or other computerized form. The Company
may
treat the person named as the Holder of this Debenture in the Register as the
sole owner of this Debenture. The Holder of this Debenture is exclusively
entitled to receive payments of interest on this Debenture, receive
notifications with respect to this Debenture, convert it into Common Stock
and
otherwise exercise all of the rights and powers as the absolute owner
hereof.
Worn
or Lost Debentures. If
this
Debenture becomes worn, defaced or mutilated but is still substantially intact
and recognizable, the Company or its agent may issue a new Debenture in lieu
hereof upon its surrender. Where
the
Holder of this Debenture claims that the Debenture has been lost, destroyed
or
wrongfully taken, the Company shall issue a new Debenture in place of the
Debenture if the Holder so requests by written notice to the Company.
Article
8 Notice.
Any
notices, consents, waivers or other communications required or permitted to
be
given under the terms of this Debenture must be in writing and will be deemed
to
have been delivered (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided a confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) 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:
If
to the
Company:
Colorado
Xxxxx
0
Xxxxxxxx Xxxxxxx, Xxxxx 000
Xxxxxxxx,
XX 00000
Telephone:
(000) 000-0000
Facsimile:
(000) 000-0000
11
If
to the
Investor:
Xxxxxxx
Xxxxxxxx
Dutchess
Capital Management
00
Xxxxxxxxxxxx Xxx, Xxxxx 0
Xxxxxx,
XX 00000
Telephone:
000-000-0000
Facsimile:
000-000-0000
Each
party shall provide five (5) business days prior notice to the other party
of
any change in address, phone number or facsimile number.
Article
9 Time
Where
this Note authorizes or requires the payment of money or the performance of
a
condition or obligation on a Saturday or Sunday or a holiday on which the United
States Stock Markets (“US Markets”) are closed (“Holiday”), such payment shall
be made or condition or obligation performed on the next business day following
such Saturday, Sunday or Holiday. A “business day” shall mean a day on which the
US Markets are open for a full day or half day of trading.
Article
10 No
Assignment
This
Debenture and the obligation hereunder shall not be assignable
by the Company or the Holder.
Article
11 Rules
of
Construction.
In
this
Debenture, unless the context otherwise requires, words in the singular number
include the plural, and in the plural include the singular, and words of the
masculine gender include the feminine and the neuter, and when the tense so
indicates, words of the neuter gender may refer to any gender. The numbers
and
titles of sections contained in the Debenture are inserted for convenience
of
reference only, and they neither form a part of this Debenture nor are they
to
be used in the construction or interpretation hereof. Wherever, in this
Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding
upon
the Company and the Holder of this Debenture.
Article
12 Governing
Law
The
validity, terms, performance and enforcement of this Debenture shall be governed
and construed by the provisions hereof and in accordance with the laws of the
Commonwealth of Massachusetts applicable to agreements that are negotiated,
executed, delivered and performed solely in the Commonwealth of Massachusetts.
Article
13 Disputes
Under Agreement
All
disputes arising under this agreement shall be governed by and interpreted
in
accordance with the laws of the Commonwealth of Massachusetts, without regard
to
principles of conflict of laws. The parties to this agreement will submit all
disputes arising under this agreement to arbitration in Boston, Massachusetts
before a single arbitrator of the American Arbitration Association (“AAA”). The
arbitrator shall be selected by application of the rules of the AAA, or by
mutual agreement of the parties, except that such arbitrator shall be an
attorney admitted to practice law in the Commonwealth of Massachusetts. No
party
to this agreement will challenge the jurisdiction or venue provisions as
provided in this section. Nothing
in this section shall limit the Holder's right to obtain an injunction for
a
breach of this Agreement from a court of law.
12
Article
14 Redemption
The
Holder shall have the right to be redeemed, in cash, from the Debenture, in
whole or in part, at a price equal to one hundred and twenty-five percent (125%)
of the outstanding principal amount of the Debenture, including accrued interest
(and penalties if applicable). Any Payments, as defined in Article 2 above,
shall apply to the reduction of the Face Amount and Redemption.
Article
15 Holder
Warrants
As
an
additional inducement to the Holder, the Company shall issue to the Holder
a
warrant to purchase fifteen million (15,000,000) shares of its common stock
exercisable at the strike prices outlined in the Warrant Agreement, attached
hereto and incorporated by reference.
Article
16 Transaction
Documents
The
Company agrees that contemporaneously with the execution and delivery of this
Debenture, the parties hereto are executing and delivering a Debenture
Registration Rights Agreement, Subscription Agreement, Warrant Agreement,
Security Agreement and the Irrevocable Transfer Agent Agreement between the
Company and Dutchess Capital Management, LLC (collectively, the "Transaction
Documents") pursuant to which the Company has agreed to provide certain rights
and obligations as defined in the Transaction Documents.
Article
17 Waiver
The
Holder's delay or failure at any time or times hereafter to require strict
performance by the Company of any undertakings, agreements or covenants shall
not waive, affect, or diminish any right of the Holder under this Agreement
to
demand strict compliance and performance herewith. Any waiver by the Holder
of
any Event of Default shall not waive or affect any other Event of Default,
whether such Event of Default is prior or subsequent thereto and whether of
the
same or a different type. None of the undertakings, agreements and covenants
of
the Company contained in this Agreement, and no Event of Default, shall be
deemed to have been waived by the Holder, nor may this Agreement be amended,
changed or modified, unless such waiver, amendment, change or modification
is
evidenced by an instrument in writing specifying such waiver, amendment, change
or modification and signed by the Holder.
13
Article
18 Integration
This
Note
is the FINAL AGREEMENT between the Company and the Holder with respect to the
terms and conditions set forth herein, and, the terms of this Debenture may
not
be contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the Parties. The execution and delivery of this Debenture is
done
in conjunction with the execution of the Transaction Documents, as defined
in
Article 16.
Article
19 Failure
To Meet Obligations by the Company
The
Company acknowledges that its failure to timely meet any of its obligations
hereunder, including, but without limitation, its obligations to make Payments,
deliver shares and, as necessary, to register and maintain sufficient number
of
Shares, will cause the Holder to suffer irreparable harm and that the actual
damage to the Holder will be difficult to ascertain. Accordingly, the parties
agree that it is appropriate to include in this Debenture a provision for
liquidated damages. The parties acknowledge and agree that the liquidated
damages provision set forth in this section represents the parties’ good faith
effort to quantify such damages and, as such, agree that the form and amount
of
such liquidated damages are reasonable and do not constitute a penalty. The
payment of liquidated damages shall not relieve the Company from its obligations
to deliver the Common Stock pursuant to the terms of this
Debenture.
*.*.*
14
IN
WITNESS WHEREOF, the Company has duly executed this Debenture as of the date
first written above and duly authorized to sign on behalf of:
| ENIGMA SOFTWARE GROUP, INC. | ||
| |
|
|
| By: | /s/ Colorado Xxxxx | |
|
Name: Colorado Xxxxx |
||
| Title: Executive Chairman | ||
| |
|
|
| By: | /s/ Xxxxx Xxxxxxx | |
|
Name: Xxxxx Xxxxxxx |
||
| Title: President and Chief Executive Officer | ||
| |
|
|
| By: | /s/ Xxxxxxx X. Xxxxxxxx | |
|
Name: Xxxxxxx X. Xxxxxxxx |
||
| Title: Chief Financial Officer | ||
| DUTCHESS PRIVATE EQUITIES FUND, LP | ||
| DUTCHESS PRIVATE EQUITIES FUND, II, L.P. | ||
| BY ITS GENERAL PARTNER DUTCHESS | ||
| CAPITAL MANAGEMENT, LLC | ||
| |
|
|
| By: | /s/ Xxxxxxx X. Xxxxxxxx | |
|
Name: Xxxxxxx X. Xxxxxxxx |
||
| Title: A Managing Member | ||
15
