FUNDING AGREEMENT among KRONOS ADVANCED TECHNOLOGIES, INC., AIRWORKS FUNDING LLLP, SANDS BROTHERS VENTURE CAPITAL LLC, SANDS BROTHERS VENTURE CAPITAL II LLC, SANDS BROTHERS VENTURE CAPITAL III LLC, SANDS BROTHERS VENTURE CAPITAL IV LLC, CRITICAL...
Exhibit
1
among
KRONOS
ADVANCED TECHNOLOGIES, INC.,
AIRWORKS
FUNDING LLLP,
SANDS
BROTHERS VENTURE CAPITAL LLC,
SANDS
BROTHERS VENTURE CAPITAL II LLC,
SANDS
BROTHERS VENTURE CAPITAL III LLC,
SANDS
BROTHERS VENTURE CAPITAL IV LLC,
CRITICAL
CAPITAL GROWTH FUND, L.P.,
and
DATED
JUNE 19, 2007
THIS
FUNDING AGREEMENT (this
“Agreement”)
is
made as of June 19, 2007 by and among Kronos Advanced Technologies, Inc., a
Nevada corporation (“Borrower”),
AirWorks Funding LLLP, a Georgia limited liability limited partnership
(“AirWorks”),
Sands
Brothers Venture Capital LLC, a New York limited liability company
(“Sands
I”),
Sands
Brothers Venture Capital II LLC, a New York limited liability company
(“Sands
II”),
Sands
Brothers Venture Capital III LLC, a New York limited liability company
(“Sands
III”),
Sands
Brothers Venture Capital IV LLC, a New York limited liability company
(“Sands
IV”),
Critical Capital Growth Fund, L.P., a Delaware limited partnership and a
debenture licensed U.S. Small Business Investment Company (“CCGF”)
and RS
Properties I LLC, a Delaware limited liability company (“RS
Properties”)
(AirWorks, Sands I, Sands II, Sands III, Sands IV, CCGF and RS Properties are
individually referred to herein as, a “Lender”
and
collectively as, the “Lenders”).
RECITALS:
A.
|
Borrower
has authorized the issuance of (i) a secured convertible promissory
note
in the principal amount of $859,000 to Sands I, Sands II, Sands III,
Sands
IV and CCGF (the
“Sands
Entity Note”),
(ii) a secured convertible promissory note in the principal amount
of up
to $6,480,000 to RS Properties (the
“RS
Properties Note”),
and (iii) a secured convertible promissory note in the principal
amount of
up to $10,820,000 to AirWorks (the “AirWorks
Note”)
(each of the Sands Entity Note, the RS Properties Note and the AirWorks
Note are referred to herein individually as, a “Note”
and collectively as, the “Notes”)
evidencing loans in the aggregate principal amount of up to $18,159,000
made available by Lenders to Borrower, convertible into shares of
Borrower’s Common Stock, par value $0.001 per share (the “Common
Stock”)
(as converted, the “Conversion
Shares”)
at a conversion price per share of $0.0028, as adjusted in accordance
with
the terms hereof and of the Notes.
|
B.
|
Lenders
desire to loan up to $18,159,000 in the aggregate to Borrower, and
Borrower desires to borrow up to $18,159,000 in the aggregate from
Lenders, pursuant to the terms and conditions set forth in the Transaction
Documents.
|
NOW,
THEREFORE,
in
consideration of the premises and mutual covenants contained in this Agreement,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE
I
DEFINITIONS
1.1 Certain
Definitions.
Capitalized terms used and not otherwise defined in this Agreement shall have
the meanings ascribed to them below.
“Act”
means
the Securities Act of 1933, as amended.
-1-
“Affiliate”
means,
with respect to a specified Person, a Person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, the Person specified.
“Benefit
Plan”
means
with respect to Borrower each written or oral plan, fund, program, Contract
or
scheme, in each case, that is currently or in the past was, sponsored or
maintained or required to be sponsored or maintained by Borrower or to which
Borrower makes or has in the past made, or has or has had in the past an
obligation to make, contributions providing for employee benefits or for the
remuneration, direct or indirect, of the employees, former employees, officers,
contingent workers or leased employees of Borrower or the dependents of any
of
them, including each written or oral deferred compensation, bonus, incentive
compensation, pension, retirement, stock purchase, stock option and other equity
compensation plan, “welfare” plan (within the meaning of Section 3(1) of ERISA,
determined without regard to whether such plan is subject to ERISA); each
“pension” plan (within the meaning of Section 3(2) of ERISA, determined without
regard to whether such plan is subject to ERISA); each severance plan or
Contract; and each health, vacation, summer hours, supplemental unemployment
benefit, hospitalization insurance, medical, dental, legal program, agreement
or
arrangement.
“CERCLA”
means
the Comprehensive Environmental Response Compensation and Liability Act, as
amended, 42 U.S.C. §9601 et seq.
“Closing”
means
the First Closing and any Subsequent Closing.
“Code”
means
the Internal Revenue Code of 1986, as amended from time to time, or any
successor statute.
“Contract”
means
any agreement, lease (including all real and personal property leases), policy,
plan, instrument, contract, note, power of attorney, insurance policy covenant,
guaranty, arrangement, escrow account, commitment or other
instrument.
“Environmental
Claim”
means
any and all actions, suits, demands, demand letters, claims, Liens, notices
of
potential responsibility, noncompliance or violation, investigations or
proceedings brought by any Person relating in any way to any Environmental
Law
or any environmental permit, including, without limitation (a) for enforcement,
cleanup, removal, response, remedial or other actions or damages pursuant to
any
applicable Environmental Law, and (b) seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief in relation
to
the presence of Hazardous Substances.
“Environmental
Laws”
means
all Laws relating to pollution or protection of human health or the environment
(including ambient air, surface water, ground water, drinking supply water,
land
or soil, surface or subsurface strata or medium, or any other environmental
medium), including all Laws which are administered, interpreted, or enforced
by
the United States Environmental Protection Agency or state or local agencies
with jurisdiction over and including common law in respect of, pollution or
protection of human health or the environment, including CERCLA, the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq., and other
Laws relating to emissions, discharges, releases, or threatened releases of
any
Hazardous Substances, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
any
Hazardous Substances.
-2-
“ERISA”
means
the Employee Retirement Income Security Act of 1974, as amended.
“ERISA
Affiliate”
means
any Person (whether incorporated or unincorporated), that together with
Borrower, would be deemed a “single employer” within the meaning of Section 414
of the Code.
“ERISA
Affiliate Plan”
means
each Benefit Plan sponsored or maintained or required to be sponsored or
maintained at any time by any ERISA Affiliate, or to which such ERISA Affiliate
makes or has made, or has or has had an obligation to make, contributions at
any
time.
“Exchange
Act”
means
the Securities Exchange Act of 1934, together with the rules and regulations
thereunder.
“GAAP”
shall
mean accounting principles generally accepted in the United States of
America.
“Governmental
Entity”
means
any federal, state or local or foreign government or any court, administrative
or arbitrative agency or commission or other governmental authority or agency,
domestic or foreign.
“Hazardous
Substances”
means
(a) any substance or material identified in CERCLA; (b) any substance or
material that may be toxic, a pollutant or a contaminant under any applicable
Law, including but not limited to petroleum products; (c) asbestos, radon,
urea
formaldehyde, poly-chlorinated biphenyls, lead or electromagnetic waves; (d)
mold, mildew or other fungal growth; and (e) any other waste, pollutant,
hazardous substance, toxic, flammable, explosive, reactive, corrosive,
infectious, radioactive, carcinogenic or mutagenic substance, hazardous waste,
special waste, industrial substance, by-product, process intermediate product
or
waste, chemical liquids or solids, liquid or gaseous products, or any
constituent of any such substance or waste, the generation, use, handling,
storage, treatment, transport or disposal of which is any way governed by or
subject to any Laws.
“Intellectual
Property”
means
all United States and non-United States (a) patents and patent applications,
whether or not patents are issued on such patent applications and whether or
not
such patents or applications are modified, withdrawn or resubmitted, (b)
registered and unregistered trade names, trade dress, trademarks, service marks
and service names (and all applications for registration of the same) and all
goodwill associated therewith, (c) designs and design rights, whether or not
such designs or design rights are the subject of any patents or patent or other
applications for registration, (d) copyrights and copyright registrations (and
all applications for registration of the same) and works of authorship (whether
or not copyrighted or copyrightable), (e) trade secrets, know-how, formulae,
patterns, compilations, devices, methods, techniques or processes, and
confidential or proprietary information, (f) inventions, processes and designs
(whether or not patentable or reduced to practice), (g) any Software, (h) domain
names or uniform resource locators used in connection with any global computer
or electronic network (including, without limitation, the Internet and the
World
Wide Web), together with all translations, adaptations, derivations and
combinations thereof, and including all goodwill associated therewith, all
applications, registrations and renewals in connection therewith, and all source
code, object code, data and documentation relating thereto, and (i) all other
intellectual property rights and assets.
-3-
“Laws”
means
all laws, codes, statutes, ordinances, orders, judgments, decrees,
administrative or judicial promulgations, injunctions, determinations,
approvals, rules, regulations, permits, certificates, licenses and
authorizations of all Governmental Entities with jurisdiction over Borrower
or
its assets or business.
“Leased
Real Property”
means
all parcels of real property used or held for use in connection with Borrower’s
business and leased by Borrower (together with all fixtures and improvements
thereon).
“Licenses”
means
all notifications, licenses, permits (including environmental, construction
and
operation permits), franchises, registrations, certificates, approvals,
exemptions, classifications, registrations and other similar documents, rights
and authorizations issued by any Governmental Entity.
“Liens”
means
all mortgages, liens, pledges, security interests, charges, claims, restrictions
and encumbrances of any nature whatsoever.
“Loan”
means
collectively the loans made available by Lenders to Borrower, evidenced by
the
Notes, in the aggregate principal amount of up to Eighteen Million One Hundred
Fifty-Nine Thousand Dollars ($18,159,000).
“Material
Adverse Effect”
means,
when taken together with all other states of fact, changes, events, effects,
developments or occurrences, any material adverse effect on the condition
(financial or otherwise), prospects, operations, properties, business or assets
of Borrower.
“Maturity
Date”
means
June 19, 2010
“NCL”
means
the Nevada Corporation Law, as amended.
“Option
Plan”
means
Borrower’s 2007
Incentive Stock Option Plan, as amended.
“Permitted
Liens”
means
(a) Liens for taxes not yet due and payable, (b) statutory Liens of landlords
and (c) Liens of carriers, warehousemen, mechanics, materialmen and repairmen
incurred in the ordinary course of business consistent with past practice and
not yet delinquent.
“Person”
means
an individual, sole proprietorship, partnership, corporation, association,
institution, joint stock company, limited liability company, trust, joint
venture, unincorporated organization, or Governmental Entity or any other legal
entity.
“SBA”
means
the U.S. Small Business Administration.
“SEC”
shall
mean the Securities and Exchange Commission, or any successor
organization.
-4-
“Securities
Act”
means
the Securities Act of 1933, together with the rules and regulations
thereunder.
“Software”
means
any and all (a) computer programs, including any and all software
implementations of algorithms, models and methodologies, whether in source
code
or object code, (b) databases and compilations, including any and all data
and
collections of data, whether machine readable or otherwise, (c) descriptions,
flow-charts and other work product used to design, plan, organize and develop
any of the foregoing, (d) the technology supporting and content contained on
any
owned or operated Internet site(s), and (e) all documentation, including user
manuals and training materials, relating to any of the foregoing.
“Subsequent
Closing”
means
the closing of any Subsequent Tranche.
“Subsequent
Closing Date”
means
the date on which any Subsequent Closing occurs.
“Taxes”
means
all federal, state, local or foreign income, gross receipts, windfall profits,
severance, property, production, sales, use, license, excise, franchise,
employment, premium, recording, documentary, documentary stamps, real estate
transfer, transfer, back-up withholding or similar taxes imposed on the income,
properties or operations of Borrower, together with any interest, additions,
or
penalties with respect thereto and with respect to any information reporting
requirements imposed by the Code or any similar provision of foreign, state
or
local law, together with any interest in respect of such additions or
penalties.
“Tax
Returns”
means
all reports and returns with respect to Taxes that are required to be filed
with
any taxing authority or retained by or with respect to Borrower, including
without limitation consolidated federal income tax returns of Borrower that
are
includible therein.
“Transaction
Documents”
means,
collectively, this Agreement, the Notes, the Security Agreement, the
Registration Rights Agreement and all other documents or instruments executed
in
connection with the transactions contemplated by this Agreement.
1.2 Other
Definitions.
In
addition to the terms defined in Section
1.1,
certain
other terms are defined elsewhere in this Agreement, and, whenever such terms
are used in this Agreement, they shall have their respective defined meanings,
unless the context expressly or by necessary implication otherwise requires.
The
definitions of such terms are set forth in the sections listed
below.
Term
|
Section
|
Agreement
|
Preamble
|
AirWorks
Note
|
Recitals
|
Borrower
|
Preamble
|
Borrower
Counsel Opinion
|
6.2(b)
|
Borrower
Financial Statements
|
3.7
|
Borrower
Officer’s Certificate
|
6.2(d)
|
Borrower
Reports
|
3.6
|
CCGF
|
Preamble
|
-5-
Closing
Date(s)
|
3.3
|
Common
Stock
|
Recitals
|
Conversion
Shares
|
Recitals
|
Fairness
Opinion
|
6.2(f)
|
First
Closing
|
2.3
|
First
Closing Date
|
2.3
|
First
Tranche
|
2.1(a)
|
Lender(s)
|
Preamble
|
Lender
Officer’s Certificate
|
6.3(a)
|
Letter
Agreements
|
2.4(a)(iii)
|
Litigation
|
3.15(a)
|
Material
Contracts
|
3.12(a)
|
Nevada
Opinion
|
6.2(c)
|
Note(s)
|
Recitals
|
Registration
Rights Agreement
|
2.4(a)(iv)
|
RS
Properties Note
|
Recitals
|
Sands
I
|
Preamble
|
Sands
II
|
Preamble
|
Sands
III
|
Preamble
|
Sands
IV
|
Preamble
|
Sands
Entity Note
|
Recitals
|
SBIA
|
3.30(a)
|
Security
Agreement
|
2.4(a)(v)
|
Subsequent
Tranche(s)
|
2.1(b)
|
Voting
Agreement
|
2.4(a)(ii)
|
Work-for-Hire
Agreement
|
3.16(d)
|
ARTICLE
II
AUTHORIZATION;
PURCHASE AND SALE; CLOSING
2.1 Term
Loan.
Lenders
agree, subject to the terms and conditions of this Agreement and in reliance
upon the representations and warranties of Borrower contained herein, to make
the Loan as follows:
(a) The
first
installment of the Loan, totaling Four Million Two Hundred Fifty-Nine Thousand
Dollars ($4,259,000) (the “First
Tranche”),
shall
be advanced by Lenders on the First Closing Date and each Lender shall advance
on the First Closing Date the following amounts: Sands I, Sands II, Sands III,
Sands IV and CCGF shall collectively advance Eight Hundred Fifty-Nine Thousand
Dollars ($859,000), RS Properties shall advance Nine Hundred Twenty Thousand
Dollars ($920,000) and AirWorks shall advance Two Million Four Hundred Eighty
Thousand Dollars ($2,480,000).
-6-
(b) Any
other
installments of the Loan, totaling in the aggregate up to Thirteen Million
Nine
Hundred Thousand Dollars ($13,900,000.00) (each, a “Subsequent
Tranche”
and
collectively, the “Subsequent
Tranches”),
may
be advanced by AirWorks up to Eight Million Three Hundred Forty Thousand Dollars
($8,340,000) and by RS Properties up to Five Million Five Hundred Sixty Thousand
Dollars ($5,560,000), in whole or in part, at any time prior to the Maturity
Date in the sole discretion of AirWorks and RS Properties, respectively, even
if
not requested by Borrower, and if so advanced, Borrower shall be obligated
to
accept such amount. Each of AirWorks and RS Properties shall maintain a record
of all advances of the Loan made to Borrower by it, and such record shall be
conclusive evidence of the advances of the Loan made to Borrower.
2.2 Notes.
The Loan
shall be evidenced by the Notes.
2.3 Closing.
The
closing of the First Tranche of the Loan (the “First
Closing”)
shall
take place at the offices of Paul, Hastings, Xxxxxxxx & Xxxxxx LLP, 000
Xxxxxxxxx Xxxxxx, X.X., Xxxxx 0000, Xxxxxxx, Xxxxxxx 00000, simultaneously
with
the execution hereof (the “First
Closing Date”).
2.4 First
Closing Deliveries.
(a)
|
At
the First Closing, Borrower shall deliver to
Lenders:
|
(i)
|
the
Sands Entity Note, the RS Properties Note and the AirWorks Note,
each duly
executed by Borrower;
|
|
(ii)
|
the
Voting Agreement, in substantially the form attached hereto as
Exhibit
A,
duly executed by each of Xxxxxx Xxxxxx, Xxxxx XxXxxxxxx, Xxxxxx Xxxxx,
Xxxxxxx Xxxxxx, Xxxx Krichtafovitch, Xxxxxxx Xxxxxx, Xxxxxxx Xxx
and
Xxxxxxxx Xxxxxxxxx (the “Voting
Agreement”);
|
|
(iii)
|
the
Letter Agreements, in substantially the form attached hereto as
Exhibit
B,
duly executed by each of Eagle Rock Group LLC, The Wall Street Group,
Xxxxxx Xxxxxx, Xxxxxxx Xxxxxx, Xxxx Krichtafovitch, Xxxx Xxxxxxx,
Xxxxxxxx
Xxxxxxxx, Xxxxx Xxxxxx, Xxxxxx Xxxxxx, Xxxxxxxx Xxxxxxx, Xxxxxxx
Xxx,
Xxxxxx Xxxxxxxxxx, Vladislov Korlov, Xxxxx XxXxxxxxx, Xxxxxx Xxxxx,
Xxxxxxx Xxxxxx, J. Xxxxxxxxx Xxxxxx, Xxxxxxx Xxx and Xxxxxxxx Xxxxxxxxx
(collectively, the “Letter
Agreements”)
|
|
(iv)
|
the
Registration Rights Agreement, in
the form attached hereto as Exhibit
C,
duly
executed by Borrower (the “Registration
Rights Agreement”);
|
-7-
(v)
|
the
Security Agreement, in the form attached hereto as Exhibit
D,
duly executed by Borrower (the “Security
Agreement”);
|
|
(vi)
|
the
Patent Security Agreement, in the form attached hereto as Exhibit
E,
duly executed by Borrower (the “Patent
Security Agreement”);
|
|
(vii)
|
Borrower
Counsel Opinion and Nevada Opinion;
|
|
(viii)
|
the
Fairness Opinion;
|
|
(ix)
|
Borrower
Officer’s Certificate;
|
|
(x)
|
a
certificate by the Secretary of Borrower, dated as of the First Closing
Date, as to (A) the good standing of Borrower in its jurisdiction
of
incorporation, (B) no amendments to Borrower’s charter documents between
the date hereof and the First Closing Date that would adversely affect
Borrower’s obligations under this Agreement were approved by the Board of
Directors or shareholders or filed with the Secretary of State of
the
State of Nevada, (C) the effectiveness of resolutions of Borrower’s board
of directors authorizing the execution, delivery and performance
of this
Agreement by Borrower passed in connection with this Agreement and
the
transactions contemplated hereby, and (D) the incumbency of such
officer
of Borrower executing this Agreement or any other document on behalf
of
Borrower;
|
|
(xi)
|
confidentiality
agreements, in such form as is acceptable to Lenders in their reasonable
discretion, from each employee of Borrower;
|
|
(xii)
|
such
other documents as may be required under this Agreement or as a Lender
or
its counsel may reasonably request.
|
(b) |
At
the First Closing, each of the Lenders, severally and not jointly,
shall
deliver to Borrower:
|
(i)
|
such
Lender’s portion of the aggregate amount of the First Tranche by wire
transfer of immediately available funds, subject to Section
5.12;
|
|
(ii)
|
the
Registration Rights Agreement;
|
|
(iii)
|
the
Security Agreement;
|
|
(iv)
|
the
Patent Security Agreement;
|
-8-
(v)
|
Lender
Officer’s Certificate executed by an officer of such Lender, dated as of
the First Closing Date; and
|
|
(vi)
|
such
other documents as may be required by this
Agreement.
|
2.5 Subsequent
Closing Deliveries.
(a) | At each Subsequent Closing, Borrower shall deliver to AirWorks, RS Properties or their respective designees: |
(i)
|
Borrower
Officer’s Certificate, dated as of such Subsequent Closing
Date;
|
|
(ii)
|
a
certificate by the Secretary of Borrower, dated as of the Second
Closing
Date, as to (A) the good standing of Borrower in its jurisdiction
of
incorporation, (B) no amendments to Borrower’s charter documents between
the date hereof and such Subsequent Closing Date that would adversely
affect Borrower’s obligations under this Agreement were approved by the
Board of Directors or shareholders or filed with the Secretary
of State of
the State of Nevada, (C) the effectiveness of resolutions of
Borrower’s
board of directors authorizing the execution, delivery and performance
of
this Agreement by Borrower passed in connection with this Agreement
and
the transactions contemplated hereby, (D) the incumbency of such
officer
of Borrower executing this Agreement or any other document on
behalf of
Borrower, (E) no defaults have occurred or are occurring with
respect to
the Notes and (F) setting forth all adjustments to the Conversion
Price
(as defined in the Notes) required to be made by Borrower pursuant
to the
terms of the Notes since the preceding Closing Date;
and
|
|
(iii)
|
such
other documents as may be required under this Agreement, the
AirWorks
Note, the RS Properties Note or as AirWorks or RS Properties
or their
respective designees or counsel may reasonably
request.
|
(b) | At each Subsequent Closing, AirWorks, RS Properties or their respective designees, severally and not jointly, shall deliver to Borrower: |
(i)
|
the
amount of the Subsequent Tranche to be delivered at such
Subsequent
Closing, as determined in the sole discretion of AirWorks
and RS
Properties;
|
|
(ii)
|
a
Lender Officer’s Certificate executed by an officer of AirWorks, RS
Properties or their respective designees, as the case may
be, dated as of
such Subsequent Closing Date; and
|
|
(iii)
|
such
other documents as may be required by this Agreement or the
Notes.
|
-9-
ARTICLE
III
REPRESENTATIONS
AND WARRANTIES
OF
BORROWER
Borrower
hereby represents and warrants to each of the Lenders as of the First Closing
Date and to AirWorks or RS Properties, as the case may be, as of each Subsequent
Closing Date as follows:
3.1 Organization;
Power; Standing.
Borrower
is a corporation duly organized, validly existing in good standing under the
laws of the State of Nevada, with its principal executive offices located in
Belmont, Massachusetts. Borrower has full corporate power and authority to
own
or lease all of its properties and assets, and to carry on its business as
it is
now being conducted. Borrower is duly qualified to do business and is in good
standing in the jurisdictions described on Schedule
3.1,
except
where failure to qualify would not have, or would not reasonably be expected
to
have, a Material Adverse Effect on Borrower, which constitute all the
jurisdictions in which the ownership of its property or the conduct of its
business requires such qualification. Except as set forth on Schedule
3.1,
Borrower does not have any subsidiaries, does not exercise voting control,
directly or indirectly, over any other corporation or business entity, does
not
own or control any material portion of the shares of stock, partnership
interests, membership interests or other securities of any corporation or other
business entity, and does not have any investment in any other
Person.
3.2 Capitalization.
(a) As
of the
date hereof, the capital stock of Borrower consists of 500,000,000 authorized
shares of Common Stock, of which 242,342,803 shares are issued and outstanding.
All of the outstanding shares of capital stock of Borrower have been duly
authorized and validly issued, are fully paid and nonassessable and were issued
in compliance with all applicable federal and state securities laws and not
in
violation of any preemptive or similar rights. Schedule
3.2(a)
hereto
sets forth the number of shares of capital stock held by each of Xxxxxx Xxxxxx,
Xxxxx XxXxxxxxx, Xxxxxx Xxxxx, Xxxxxxx Xxxxxx, Xxxx Krichtafovitch, and Xxxxxxx
Xxxxxx.
(b) Schedule
3.2(b)
hereto
sets forth a complete list of all holders of options, warrants and other similar
rights to acquire capital stock of Borrower as of the date of this Agreement,
indicating the number of shares of capital stock underlying such options,
warrants or similar rights, vesting schedule, exercise price and expiration
date, if applicable, for each such option, warrant or similar right. Except
for
(i) the rights created under this Agreement, (ii) the options issued and
reserved for issuance under the Option Plan, and (iii) all other options,
warrants and other similar rights set forth on Schedule
3.2(b),
there
are no outstanding rights of first refusal, preemptive rights or other rights,
options, warrants, conversion rights or other agreements, either directly or
indirectly, for the purchase or acquisition from Borrower of any shares of
its
capital stock.
-10-
3.3 Authority;
Due Execution.
Borrower
has the right, power and capacity to execute and deliver this Agreement and
the
other agreements entered into in connection with this Agreement and to perform
its obligations under this Agreement and the other agreements entered into
in
connection with this Agreement to which it is a party to and to consummate
the
transactions contemplated hereby and thereby. The execution and delivery of
this
Agreement and the other agreements entered into in connection with this
Agreement by Borrower and the performance by Borrower of its obligations
hereunder and thereunder and the consummation of the transactions provided
for
herein and therein have been duly and validly authorized and approved by
Borrower’s board of directors and no further consent or authorization is
required by the Borrower, its board of directors or its shareholders. This
Agreement has been, and the other agreements entered into in connection with
this Agreement will be as of the First Closing Date and each Subsequent Closing
Date (each individually, a “Closing
Date”
and
collectively, the “Closing
Dates”),
duly
executed and delivered by Borrower and do or will, as the case may be,
constitute the valid and binding agreement of Borrower, enforceable against
it
in accordance with their respective terms, subject to applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium and other similar
laws affecting the enforceability of creditors’ rights generally, general
equitable principles and the discretion of courts in granting equitable
remedies.
3.4 Validity
of the Notes and the Conversion Shares.
The
issuance of the Notes and the Conversion Shares upon conversion of the Notes
are
not and will not be subject to any preemptive rights, rights of first refusal
or
other preferential rights that have not been waived, and the Notes when issued,
sold and delivered in accordance with the terms of this Agreement and the
Conversion Shares when issued upon conversion of the Notes will be validly
issued, fully paid and nonassessable and will be free of any Liens, other than
Liens arising as a result of actions taken by Lenders in their capacity
independent of Borrower; provided,
however,
that
the Notes and the Conversion Shares will be subject to applicable restrictions
on transfer under state and federal securities laws.
3.5 Non-Contravention.
Except
as set forth on Schedule
3.5,
neither
the execution and delivery of this Agreement by Borrower nor the consummation
of
the transactions contemplated hereby (including, without limitation, the
conversion of any Note to Common Stock) does or would, after the giving of
notice or the lapse of time or both, (a) conflict with, result in a breach
of,
constitute a default under, or violate the Certificate of Incorporation or
the
bylaws of Borrower, (b) conflict with, result in a breach of, constitute a
default under, or violate any Law applicable to Borrower, (c) conflict with,
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, amend, modify,
cancel or refuse to perform under, or require any notice under any, Contract,
commitment, License or other arrangement, including any express or implied
warranty, to which Borrower is a party or by which it is bound or to which
any
of its assets is subject, or (d) result in the creation of, or give any party
other than the Lenders the right to create, any Lien, other than Permitted
Liens, or other rights upon any right, property or asset of
Borrower.
3.6 Borrower
Reports. Except
as
set forth on Schedule
3.6,
Borrower has timely filed (after giving effect to any extensions timely filed
for) all material reports, registrations, statements and other filings, together
with any amendments required to be made with respect thereto, that were required
to be filed since December 31, 2004, with the SEC (all such reports being
collectively referred to herein as the “Borrower
Reports”).
As of
their respective dates (and without giving effect to any amendments or
modifications filed after the date of this Agreement with respect to Borrower
Reports filed before the date of this Agreement), each of Borrower Reports
and
the contents thereof complied in all material respects with the statutes, rules,
regulations and orders enforced or promulgated by the SEC (including Regulation
FD), and, as of the respective date any such Borrower Report was filed, did
not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
Borrower has filed all contracts, agreements and other documents or instruments
required to be filed as exhibits to Borrower Reports. Borrower has furnished
or
made available to Lenders true and complete copies of any comments, notices
or
other correspondence it has received from the staff of the SEC.
-11-
3.7 Borrower
Financial Statements.
The
balance sheets of Borrower contained in Borrower Reports, and the related
statements of earnings, stockholders’ equity and cash flows contained in
Borrower Reports (including all notes and schedules related thereto) (such
financial statements, notes and any schedules thereto, being referred to herein
as the “Borrower
Financial Statements”),
present fairly, in all material respects, the financial position and the results
of operations and cash flows of Borrower as of the dates, or for the periods,
presented therein in conformity with GAAP applied on a consistent basis during
the periods involved, except as otherwise noted therein, including all
requirements of applicable Law (including applicable provisions of the
Xxxxxxxx-Xxxxx Act of 2002 and all regulations of the SEC with respect
thereto).
3.8 Absence
of Undisclosed Liabilities.
Except
as set forth on Schedule
3.8,
as of
the date hereof, Borrower does not have any liability or financial obligation,
whether accrued, absolute, contingent or otherwise, that was not fully reflected
or reserved against in the Borrower Financial Statements, or disclosed in the
accompanying notes thereto, except for liabilities incurred in the ordinary
course of business since December 31, 2006.
3.9 Minute
Books and Organizational Documents.
Borrower
has furnished or made available to Lenders true and complete copies of its
Certificate of Incorporation and bylaws, each as amended to date. Such
organizational documents are in full force and effect, and Borrower is not
in
violation of any provision of its Certificate of Incorporation or bylaws. The
minute books of Borrower contain records that are accurate in all material
respects of all meetings and other corporate actions of its stockholders and
board of directors (including committees of the board of directors) through
the
date hereof and
the
signatures contained therein are the true signatures of the Persons whose
signatures they purport to be.
3.10 Absence
of Certain Changes.
Since
December 31, 2006, except as set forth in Borrower’s annual report on Form
10-KSB dated June 30, 2006 and quarterly reports on Form 10-QSB as filed with
the SEC for the quarters ended December 31, 2006 and March 31, 2007, the
business of Borrower has been conducted in the ordinary and usual course,
consistent with past practice and there has not been: (a) any event, occurrence,
development or state of circumstances or facts which has had or could reasonably
be expected to constitute or result in a Material Adverse Effect on Borrower;
or
(b) any event, occurrence, development or state of circumstances or facts which
would result in a violation of the covenants set forth in Article
V
of this
Agreement, had such event, occurrence, development or state of circumstances
or
facts occurred after the date hereof.
-12-
3.11 Properties;
Securities.
(a) Except
as
set forth on Schedule
3.11
and
except for those properties and assets that have been sold or otherwise disposed
of in the ordinary course of business, Borrower has good and marketable title,
free and clear of all Liens, other than Permitted Liens, to all of the
properties and assets, tangible and intangible, reflected in the Borrower
Financial Statements as being owned by Borrower as of the dates thereof, other
than those Liens that, individually or in the aggregate, are not reasonably
likely to have a Material Adverse Effect on Borrower.
(b) All
buildings and all fixtures, equipment, and other property and assets which
are
held under leases or subleases by Borrower are held under valid leases or
subleases enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other similar laws affecting the enforceability of creditors’
rights generally, general equitable principles and the discretion of courts
in
granting equitable remedies.
(c) Borrower
has good and marketable title to all securities held by it (except securities
sold under repurchase agreements or held in any fiduciary or agency capacity),
free and clear of any Lien, except to the extent such securities are pledged
in
the ordinary course of business consistent with commercially reasonable business
practices to secure obligations of Borrower. Such securities are valued on
the
books of Borrower in accordance with GAAP.
3.12 Material
Contracts.
(a) Schedule
3.12(a)
hereto
sets forth a complete list of all of the following agreements, commitments,
arrangements, understandings or instruments (whether written or oral) to which
Borrower is a party, other than those which are contemplated by this Agreement
(collectively, the “Material
Contracts”),
true,
correct and complete copies of which have been provided or made available to
Lender:
(i)
|
Contracts
providing for annual payments in excess of Twenty-Five Thousand Dollars
($25,000) or aggregate payments in excess of Fifty Thousand Dollars
($50,000);
|
|
(ii)
|
leases
or subleases of real property;
|
|
(iii)
|
partnership,
joint venture or similar Contracts, or any rights to acquire from
any
person any capital stock, voting securities or securities convertible
into
or exchangeable for capital stock or voting securities of such
person;
|
|
(iv)
|
executory
Contracts relating to the acquisition or disposition of any business
(whether by merger, sale of stock, sale of assets or
otherwise);
|
-13-
(v)
|
outstanding
indentures, mortgages, promissory notes, loan agreements, guarantees
or
other Contracts or commitments for the borrowing of money by Borrower
(in
any case, whether incurred, assumed, guaranteed or secured by any
asset);
|
|
(vi)
|
licenses,
franchises or similar Contracts material to Borrower, or any agreement
relating to any trade name or Intellectual Property that is material
to
Borrower;
|
|
(vii)
|
exclusive
dealing arrangements or other Contracts or arrangements containing
covenants which limit the ability of Borrower to compete in any line
of
business or with any person or which involve any restriction of
geographical area in which, or method by which, Borrower may carry
on its
business (other than as may be required by law or any applicable
Governmental Entity);
|
|
(viii)
|
Contracts
between any Affiliate of Borrower, on the one hand, and Borrower,
on the
other hand;
|
|
(ix)
|
Contracts,
which will survive any Closing, with any director, officer or employee
of
Borrower, other than those agreements being executed and delivered
in
connection with this Agreement;
|
|
(x)
|
collective
bargaining agreements;
|
|
(xi)
|
Contracts
which will survive any Closing for the employment or other engagement
of
any individual on a full time, part time, consulting or other
basis;
|
|
(xii)
|
Contracts
under which Borrower has advanced or loaned any amount to any of
the
directors, officers, employees or independent contractors of Borrower;
and
|
|
(xiii)
|
any
other Contract that is material to
Borrower.
|
(b) Except
as
set forth on Schedule
3.12(b)
hereto,
and in the case of subparagraphs (ii), (iii) and (iv), in the Borrower
Reports:
(i)
|
each
of the Material Contracts is valid, binding and enforceable and
in full
force and effect, subject to applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and other similar
laws
affecting the enforceability of creditors’ rights generally, general
equitable principles and the discretion of courts in granting equitable
remedies, and subject to the rights of other parties thereto to
terminate,
will continue to be valid, binding, enforceable and in full force
and
effect on substantially identical terms following consummation
of the
transactions contemplated hereby;
|
-14-
(ii)
|
Borrower
is not in breach or default and no event has occurred which with
notice or
lapse of time would constitute a breach or default, or permit termination,
modification or acceleration by any other party under any Material
Contract and no other party is in breach or default and no event
has
occurred which with notice or lapse of time would constitute a
breach or
default, or permit termination, modification or acceleration by
Borrower
under any Material Contract;
|
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(iii)
|
Borrower
has not and no other party has, repudiated any provision of any
Material
Contract; and
|
|
(iv)
|
Borrower
has not received any written notice that the other party to any
Material
Contract intends to exercise any termination rights with respect
to any
Material Contract.
|
3.13 No
Consents.
Except
as otherwise set forth on Schedule
3.13,
no
permit, consent, approval, novation, authorization or other order of or filing
with any Governmental Entity or any other Person is required in connection
with
the execution, delivery and consummation of this Agreement by Borrower and
the
actions of Borrower contemplated hereby, or to permit Borrower to continue
to
conduct its business as currently conducted in all material respects following
the consummation of the transactions contemplated hereby other than as a result
of any facts or circumstances relating solely to Lender.
3.14 Related
Party Transactions. Schedule
3.14
sets
forth all existing transactions, investments and loans, including loan
guarantees existing as of the date hereof, to which Borrower is a party with
any
director, executive officer or 5% or greater stockholder of Borrower (or holder
of securities that would represent 5% or more of the shares of Borrower on
an
as-converted basis, including, without limitation, Cornell Capital Partners,
LP
and Homedics, Inc.), or any Affiliate of Borrower. All such transactions,
investments and loans are on terms no less favorable to Borrower than could
be
obtained from unrelated parties.
3.15 Litigation;
Regulatory Action.
Except
as set forth on Schedule
3.15
hereto:
(a) no
litigation, proceeding (administrative or otherwise) or controversy
(“Litigation”)
before
any court, arbitrator, mediator or Governmental Entity is pending against
Borrower, any director or officer of Borrower, or, to Borrower’s knowledge, any
employee of Borrower, which relates to Borrower’s activities, business or
assets, and, to Borrower’s knowledge, no such Litigation has been threatened;
and
(b) Borrower
is not party or subject to, and none of the properties or assets of Borrower
is
subject to, any order, decree, agreement, memorandum of understanding or similar
arrangement with, or a commitment letter or similar submission to, any
Governmental Entity, and Borrower has not been advised in writing by any
Governmental Entity that such Governmental Entity is contemplating issuing
or
requesting (or is considering the appropriateness of issuing or requesting)
any
such order, decree, agreement, memorandum or understanding, commitment letter
or
similar submission.
-15-
3.16 Intellectual
Property.
(a) Schedule
3.16(a)
sets
forth a complete list of all Intellectual Property which is owned or used by
Borrower, all of which, to Borrower’s knowledge, is valid and is enforceable and
in full force and effect. Borrower owns, or has the valid and exclusive right
to
use and to transfer, in each case free and clear of all Liens, other than
licenses granted by Borrower which are listed on Schedule
3.16(a),
all
Intellectual Property used in its business as it currently is conducted or
held
for use in such business. Except as set forth on Schedule
3.16(a),
the
validity and enforceability of such Intellectual Property or Borrower’s title
thereto (i) have not been questioned in any prior Litigation, (ii) are not
being
questioned in any pending Litigation, and (iii) are not the subject of any
threatened or proposed Litigation. Except as set forth on Schedule
3.16(a),
Borrower is not aware of any information that would, or that another Person
has
asserted that would, cause any of the Intellectual Property identified on
Schedule
3.16(a)
to be
invalid or unenforceable. The consummation of the transactions contemplated
hereby (including, without limitation, the conversion of the Note to Common
Stock) will not result in any loss or impairment of or to any such Intellectual
Property of Borrower.
(b) Borrower
is not party to, whether as licensor or licensee, and is not bound by or subject
to, any license agreement for any Intellectual Property or process, except
as
described on Schedule
3.16(b).
With
respect to all licenses identified on Schedule
3.16(b)
under
which Borrower is the licensor, no claim, request or demand for indemnity for
infringement has been made by any licensee. Except as set forth on Schedule
3.16(b),
Borrower is not aware of any breach or anticipated breach of any license
identified on Schedule
3.16(b),
nor has
it received notice of termination of any such license. Borrower has provided
to
Lender true, correct and complete copies of each license agreement listed on
Schedule
3.16(b).
(c) All
maintenance fees, annuities, affidavits and renewals due from Borrower or
required to be paid by Borrower through the date of this Agreement with respect
to the Intellectual Property identified on Schedule
3.16(a)
have
been paid or filed.
(d) Schedule
3.16(d)
sets
forth a list of each of Borrower’s officers, directors, employees, consultants
and independent contractors who are contractually obligated to disclose and
assign all rights with respect to their work for Borrower to Borrower, and
to
cooperate with Borrower in obtaining and perfecting ownership of patents,
copyrights and other statutory or related rights with respect to such work
(any
such contract being referred to herein as a “Work-for-Hire
Agreement”).
Borrower has provided true, correct and complete copies of any such agreement
to
Lender. Schedule
3.16(d)
also
sets forth a list of each of Borrower’s officers, directors, employees,
consultants and independent contractors who provided material assistance to
Borrower in connection with, or who otherwise may have a claim to ownership
of,
any of Borrower’s patents, copyrights or other related rights, and who are not
party to a Work-for-Hire Agreement with Borrower.
(e) Except
as
set forth on Schedule
3.16(e),
the
conduct of Borrower’s business as currently conducted does not, in any material
respect, infringe upon (either directly or indirectly such as through
contributory infringement or inducement to infringe), dilute, misappropriate
or
otherwise violate any Intellectual Property owned and controlled by any third
party.
-16-
(f) Except
as
set forth on Schedule
3.16(f),
(i) to
Borrower’s knowledge, no third party is misappropriating, infringing, diluting,
or violating any Intellectual Property owned by or licensed to or by Borrower,
and (ii) no claims alleging a third party is misappropriating, infringing,
diluting or violating any Intellectual Property owned by or licensed to or
by
Borrower have been made against a third party by Borrower or, to Borrower’s
knowledge, the licensor of any Intellectual Property licensed by
Borrower.
3.17 Taxes.
(a) Except
as
otherwise disclosed on Schedule
3.17(a):
(i)
|
all
Tax Returns due to have been filed through the date hereof in accordance
with any applicable Law have been duly filed and are correct and
complete;
|
|
(ii)
|
all
Taxes, deposits or other payments for which Borrower may have any
liability through the date hereof (whether or not shown on any
Tax Return)
have been paid in full or are accrued as liabilities for Taxes
on the
books and records of Borrower;
|
|
(iii)
|
the
amounts so paid on or before the date hereof, together with any
amounts
accrued as liabilities for Taxes (including Taxes accrued as currently
payable) on the books of Borrower, will be adequate based on the
tax
rates, applicable laws and regulations in effect on the date hereof
to
satisfy all material liabilities for Taxes of Borrower in any jurisdiction
through June 19, 2007 including Taxes accruable upon income earned
through
each Closing;
|
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(iv)
|
there
are not now any extensions of time in effect with respect to the
dates on
which any Tax Returns were or are due to be filed;
|
|
(v)
|
all
deficiencies asserted as a result of any examination of Tax Return
have
been paid in full, accrued on the books of Borrower, or finally
settled,
and no issue has been raised in any such examination which, by
application
of the same or similar principles, reasonably could be expected
to result
in a proposed deficiency for any other period not so
examined;
|
|
(vi)
|
no
claims have been asserted and no proposals or deficiencies for
any Taxes
are being asserted, proposed or threatened, and no audit or investigation
of any Tax Return is currently underway, pending or
threatened;
|
|
(vii)
|
no
claim has ever been made by any Governmental Entity in a jurisdiction
where Borrower does not file Tax Returns and where it is or may
be subject
to taxation;
|
-17-
(viii)
|
in
all material respects, Borrower has withheld and paid all Taxes
required
to have been paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other
third
party;
|
|
(ix)
|
there
are no outstanding waivers or agreements by Borrower for the extension
of
time for the assessment of any Taxes or deficiency thereof, nor
are there
any requests for rulings, outstanding subpoenas or requests for
information, notice of proposed reassessment of any property owned
or
leased by Borrower or any other matter pending between Borrower
and any
taxing authority;
|
|
(x)
|
there
are no Liens for Taxes other than Liens for Taxes which are not
yet due
and payable, nor are there any Liens which are pending or
threatened;
|
|
(xi)
|
Borrower
has not been a member of an affiliated group filing a consolidated
federal
income tax return;
|
|
(xii)
|
neither
Borrower nor Lender, as a consequence of Borrower’s actions prior to any
Closing Date, will be obligated to make a payment to an individual
that
would be a “parachute payment” as such term is defined in Section 280G of
the Code without regard to whether such payment is to be paid in
the
future; and
|
|
(xiii)
|
Borrower
does not have any liability for the Taxes of any Person (other
than for
itself) under Treasury Regulation Section 1.1502-6 (or any similar
provision of state, local or foreign law), as a transferee or successor,
by contract or otherwise.
|
(b) Borrower
has delivered to Lenders true and complete copies of all income Tax Returns
(together with any agent’s reports and any accountants’ work papers) relating to
its operations for the years for which Tax Returns are due to have been
filed.
3.18 Insurance.
(a) Schedule
3.18(a)
sets
forth a list of all insurance policies maintained by or for the benefit of
Borrower or its directors, officers, employees, agents or independent
contractors.
(b) Except
as
set forth on Schedule
3.18(b),
with
respect to each insurance policy maintained by Borrower: (i) such policy is
in
full force and effect, and is legal, valid, binding and enforceable as to
Borrower and the other party or parties thereto; (ii) subject to the rights
of
other parties thereto to terminate, such policy will continue to be legal,
valid, binding, enforceable and in full force and effect on substantially
identical terms on each Closing Date (iii) neither Borrower nor, to Borrower’s
knowledge, any other party to the policy, is in breach or default (including
with respect to the payment of premiums or the giving of notices) and no event
has occurred which, with notice or the lapse of time or both, would constitute
such a breach or default by Borrower, or to Borrower’s knowledge, a breach or
default by the other party to the policy or permit termination, modification
or
acceleration under the policy; (iv) no party to the policy has repudiated any
provision thereof in writing, and (v) Borrower has not received any written
notice that any insurer under the policy intends to exercise any termination
right or fail to renew such policy.
-18-
(c) Except
as
set forth on Schedule
3.18(c),
Borrower has been covered during the three (3) year period preceding the date
hereof by insurance in type, scope and amount which (i) meets the minimum
requirements of any Contract to which Borrower is a party and (ii) is customary
and commercially reasonable for the business(es) in which Borrower has engaged
during such period.
3.19 Financial
Controls.
(a) Borrower
has maintained a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America, and
to
maintain accountability for assets, (iii) access to assets is permitted only
in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(b) No
employee of Borrower who serves in an accountancy or a financial management
capacity with Borrower has been convicted of theft, embezzlement, fraud, or
any
other crime which is considered to be a felony.
(c) Borrower
has made available to Lenders any written reports that Borrower has received
from its public accounting firm since January 1, 2002, regarding critical
accounting policies and practices, or alternative treatments of financial
information within GAAP that have been discussed with management of Borrower,
ramifications of the use of such alternative disclosures and treatments, and
the
treatment preferred by such public accounting firm.
3.20 Compliance
with Laws.
Except
as set forth on Schedule
3.20,
Borrower is in compliance with all Laws, and has obtained and maintained all
permits, licenses and registrations applicable to the conduct of its business,
and Borrower has not received written notification that has not lapsed, been
withdrawn or abandoned by any Governmental Entity (i) asserting a material
violation or possible violation of any such Law, (ii) threatening to revoke
any
permit, license, registration, or other government authorization, or (iii)
materially restricting or in any material way limiting its operations. Borrower
is not subject to any regulatory or supervisory cease and desist order,
agreement, directive, memorandum of understanding or commitment, and has not
received any written communication requesting that it enter into any of the
foregoing.
3.21 Real
Property.
Borrower
does not own, of record or beneficially, any right, title or interest in any
real property (including any easement, license or right-of-way) or any asset
consisting of realty, including appurtenances, improvements or fixtures, nor
has
it previously owned, any right, title or interest in any real property, other
than leasehold interests with respect to the Leased Real Property pursuant
to
those leases set forth on Schedule
3.21.
Borrower is not a fiduciary as to any real property and no purchase of real
property has been effected by or through Borrower by any separate account or
commingled fund.
-19-
3.22 Accounts
Receivable.
All of
the accounts receivable of Borrower shown on the balance sheets included in
the
Borrower Financial Statements, or arising thereafter, arose in the ordinary
course of business. The values at which accounts receivable are carried reflect
the accounts receivable valuation policy of Borrower which is consistent with
past practice and in accordance with GAAP (applied on a consistent basis
throughout the period involved).
3.23 Employees;
Employment Agreements.
(a) Schedule
3.23(a)
sets
forth a true and complete list of (i) all of the employees (whether full-time
or
part-time), (ii) independent contractors, (iii) consultants, and (iv)
other service providers of Borrower as of the date hereof, specifying their
position, annual salary or hourly wage or other service fee, date of hire or
other service commencement date.
(b) Except
as
set forth on Schedule
3.23(b),
Borrower is not a party to or bound by any employment agreement or other
arrangement for services, including with respect to a Person acting as a
consultant, independent contractor or otherwise. Borrower has provided to Lender
true, correct and complete copies of each such agreement or arrangement that
is
written, and, other than with respect to common law employment-at-will
arrangements, no such agreement or arrangement exists which is not
written.
(c) Except
as
set forth on Schedule
3.23(c),
Borrower does not have any agreement providing for severance payments to
terminated employees and Borrower has not made any verbal commitments to any
officer, employee, former employee, consultant, independent contractor or other
service provider of Borrower with respect to compensation, promotion, retention,
termination, severance or similar matters in connection with the transactions
contemplated hereby or otherwise.
(d) Except
as
set forth on Schedule
3.23(d)
and any
Contracts being executed in connection with this Agreement, Borrower does not
have any Contract obligating it with respect to payments or other rights upon
any change in control of Borrower or the transactions contemplated
hereby.
3.24 Labor
Relations.
Borrower
is in compliance in all material respects with all currently applicable laws
respecting employment and employment practices, terms and conditions of
employment and wages and hours, including, without limitation, the Immigration
Reform and Control Act, the Worker Adjustment and Retraining Notification Act,
any such laws respecting employment discrimination, disability rights or
benefits, equal opportunity, plant closure issues, affirmative action, workers’
compensation, employee benefits, severance payments, labor relations, employee
leave issues, wage and hour standards, occupational safety and health
requirements and unemployment insurance and related matters, and except as
set
forth on Schedule
3.24
there
are no internal complaints by or on behalf of employees in regard to any of
the
foregoing. Except as set forth on Schedule
3.24,
Borrower is not currently, and has not in the past been, a party to an
arrangement for services from a professional employer organization. Borrower
is
not engaged in any unfair labor practice and there is no unfair labor practice
complaint pending or, to Borrower’s knowledge, threatened against Borrower
before the National Labor Relations Board. Borrower is not a party to, and
is
not bound by, any collective bargaining agreement, Contract or other agreement
or understanding with a labor union or labor organization, nor is it the subject
of a proceeding asserting that it has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or other labor dispute involving Borrower pending or,
to
its knowledge, threatened, nor is Borrower aware of any activity involving
its
employees seeking to certify a collective bargaining unit or engaging in any
other organization activity.
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3.25 Benefit
Plans.
(a) Schedule
3.25(a)
sets
forth a true and complete list of each Benefit Plan currently sponsored,
maintained or contributed to by Borrower. Any special tax status enjoyed by
such
plan is noted on such schedule.
(b) Except
as
set forth on Schedule
3.25(b):
(i)
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with
respect to each Benefit Plan identified on Schedule
3.25(a),
Borrower has heretofore delivered or made available to Lenders
true and
complete copies of the plan documents, any amendments thereto,
the summary
plan description and any amendments thereto (or, if the plan is
not
written, a written description thereof), as reasonably requested
by a
Lender;
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(ii)
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Borrower’s
records accurately reflect its employees’ employment histories, including
their hours of service and all such data is maintained in a usable
form;
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(iii)
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no
Benefit Plan or ERISA Affiliate Plan is or was at any time subject
to
Title IV of ERISA, Section 302 of ERISA or Section 412 of the
Code;
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(iv)
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no
Benefit Plan or ERISA Affiliate Plan is or was at any time a
“multiemployer plan” as defined in Section 3(37) of ERISA or a “multiple
employer welfare arrangement” as defined in Section 3(40) of
ERISA;
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(v)
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Borrower
has not incurred, and, to Borrower’s knowledge, no facts exist which
reasonably could be expected to result in, liability to Borrower
as a
result of a termination with respect to a Benefit Plan or an ERISA
Affiliate Plan;
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(vi)
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no
insurance policy or contract maintained in connection with a Benefit
Plan
provides for a termination fee or penalty upon termination of the
policy
or contract;
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(vii)
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each
Benefit Plan has been established, registered, qualified, invested,
operated and administered in all material respects in accordance
with its
terms and in compliance with ERISA, the Code and all applicable
Laws;
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(viii)
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Borrower
has not incurred, and no facts exist which reasonably could be
expected to
result in any liability to Borrower with respect to any Benefit
Plan or
any ERISA Affiliate Plan, including any liability, tax, penalty
or fee
under ERISA, the Code or any applicable Law (other than to pay
premiums,
contributions or benefits in the ordinary course);
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(ix)
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each
Benefit Plan intended to be “qualified” within the meaning of Section
401(a) of the Code is the subject of a favorable Internal Revenue
Service
determination, opinion or notification letter indicating that it
is so
qualified, and each trust maintained under such a Benefit Plan
intended to
be exempt from taxation under Section 501(a) of the Code has received
a
favorable Internal Revenue Service determination, opinion or notification
letter indicating that it is so tax-exempt, and no fact or circumstance
exists that could adversely affect the qualified status of such
a Benefit
Plan or the tax-exempt status of such a trust;
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(x)
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there
is no pending or threatened complaint, claim (other than routine
claims
for benefits), proceeding, examination, audit, investigation or
other
proceeding or action of any kind in or before any court, tribunal
or
governmental agency with respect to any Benefit Plan and there
exists no
state of facts which after notice or lapse of time or both reasonably
could be expected to give rise to any such claim, investigation,
examination, audit or other proceeding or to affect the registration
of
any Benefit Plan required to be registered;
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(xi)
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no
assets of any Benefit Plan are or at any time have been invested
in common
stock of Borrower; and
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(xii)
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Schedule
3.25(b)
contains the name of each individual currently receiving or entitled
to
receive continuation coverage under any Benefit Plan pursuant to
the
Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended.
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3.26 Environmental.
(a) Borrower
is and at all times has been in compliance with all Environmental Laws. Borrower
has not received any written communication alleging that it is not in such
compliance, and there are no circumstances that would prevent or interfere
with
the continuation of such compliance.
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(b) There
are
no pending Environmental Claims, Borrower has not received notice of any pending
Environmental Claims, and there are no conditions or facts existing which might
reasonably be expected to result in legal, administrative, arbitral or other
proceedings asserting Environmental Claims or other claims, causes of action
or
governmental investigations of any nature seeking to impose, or that could
result in the imposition of, any liability arising under any Environmental
Laws
upon (i) Borrower, (ii) any Person whose liability for any Environmental Claim
that Borrower has or may have retained or assumed, either contractually or
by
operation of law, or (iii) any real or personal property owned or leased by
Borrower, or any real or personal property which Borrower has or is judged
to
have managed or supervised. Borrower is not subject to any agreement, order,
judgment, decree or memorandum by or with any court, regulatory agency, other
Governmental Entity or third party imposing any liability under any
Environmental Laws.
(c) Borrower
is in compliance with all recommendations contained in any environmental audits,
analyses and surveys received by Borrower relating to all real and personal
property owned, operated or leased by Borrower.
(d) There
are
no past or present actions, activities, circumstances, conditions, events or
incidents that could reasonably form the basis of any Environmental Claim,
or
other claim or action or governmental investigation that could result in the
imposition of liability arising under any Environmental Laws, against Borrower
or against any Person whose liability for any Environmental Claim Borrower
has
or may have retained or assumed, either contractually or by operation of
Law.
(e) No
remediation, removal or cleanup of any Hazardous Substances is being conducted
or has been conducted at any time in the past, in connection with or associated
with, the operations or activities of Borrower or any real or personal property
at any time owned, operated or leased by Borrower; provided,
however,
that,
with respect to any time period other than when Borrower owned, operated or
leased such real or personal property, the representations and warranties of
this Section
3.26(e)
are made
to the knowledge of Borrower.
(f) Hazardous
Substances are not and have not been at any time in the past, generated, used,
stored, treated, or disposed of in connection with or associated with the
operations or activities of Borrower or any real or personal property at any
time owned, operated or leased by Borrower in any case that could reasonably
be
expected to require remediation under applicable Environmental Laws or otherwise
result in liability to Borrower; provided,
however,
that,
with respect to any time period other than when Borrower owned, operated or
leased such real or personal property, the representations and warranties of
this Section
3.26(f)
are made
to the knowledge of Borrower.
(g) No
underground or aboveground storage tanks, solid waste management units,
landfills or other waste disposal areas, dikes or impoundments of any kind
are
located at, on or under any real or personal property at any time owned,
operated or leased by Borrower.
(h) There
are
no (i) friable asbestos-containing materials, (ii) lead-based paint,
(iii) polychlorinated biphenyls or (iv) mold or fungi in quantities and of
a character (A) for which investigation or remedial actions would be reasonably
required, (B) for which investigation or remedial action has been recommended
or
undertaken by environmental professionals on behalf of Borrower or (C) that
have
been the subject of written, or to the knowledge of Borrower, any other, claim,
complaint, allegation, or inquiry made to Borrower present on, in or at any
real
or personal property at any time owned, operated or leased by
Borrower.
-23-
3.27 State
Takeover Laws; Certificate of Incorporation.
Borrower
has taken all necessary action to exempt this Agreement and the transactions
contemplated hereby (including, without limitation, the issuance of the
Conversion Shares upon conversion of the Notes) from, and this Agreement and
the
transactions contemplated hereby (including, without limitation, the issuance
of
the Conversion Shares upon conversion of the Notes) are exempt from, (a) any
applicable state takeover laws, including, without limitation, the provisions
of
the NCL, (b) any applicable takeover provisions in Borrower’s Certificate of
Incorporation or bylaws, and (c) except as set forth on Schedule
3.27,
any
change of control or other takeover provisions set forth in any Contract to
which Borrower is a party or may be bound.
3.28 Offering
Exemption.
Subject
in part to the truth and accuracy of each Lender’s representations set forth in
Section
4.2
hereof,
the offer, sale and issuance of the Notes is exempt from the registration
requirements of the Securities Act and under applicable state securities and
“blue sky” laws, as currently in effect and, neither Borrower nor any authorized
agent acting on its behalf will take any action hereafter that would cause
the
loss of such exemption.
3.29 Certain
Business Practices.
Neither
Borrower nor any director, officer, agent or employee of Borrower has (a) used
any funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity, (b) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns or violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended, or (c) made any other unlawful
payment.
3.30 U.S.
Small Business Administration.
(a) Borrower,
together with its affiliates (as that term is defined in Title 13, Code of
Federal Regulations, 121,103), is a “small business concern” within the meaning
of the Small Business Investment Act of 1958, as amended (the “SBIA”),
and
the regulations thereunder, including title 13, Code of Federal Regulations,
121.301(c). The information set forth in SBA Forms 480, 652 and 1031 regarding
Borrower and its affiliates, when delivered to Lenders will be accurate and
complete. Copies of such forms have been completed and executed by Borrower
and
delivered to Lenders on or before the date hereof.
(b) No
portion of the proceeds from the Loan will be used by Borrower (i) to provide
capital to a corporation licensed under the SBIA, (ii) outside the United States
(except (A) to acquire abroad materials and industrial property rights for
a
United States domestic operation or (B) for transfer to a controlled foreign
subsidiary of Borrower, so long as at least fifty-one percent (51%) of
Borrower’s assets and activities will remain within the United States) or (iii)
for any purpose contrary to the public interest (including, but not limited
to,
activities which are in violation of law) or inconsistent with free competitive
enterprise, in each case within the meaning of 13 C.F.R. 107.720.
-24-
(c) Borrower’s
primary business activity does not involve, directly or indirectly, providing
funds to others, the purchase of or discounting of debt obligations, factoring
or long-term leasing of equipment with no provision for maintenance or
repair.
(d) If
Borrower breaches the representations in subsections 3.30(b) or (c) above in
any
material respect, then in addition to all other remedies available to Lenders,
Lenders may demand that Borrower immediately repurchase all of the Notes
acquired by Lenders hereunder. The purchase price of the Notes shall be the
outstanding principal and all accrued interest then remaining unpaid.
(e) On
or
before the date of this Agreement, and, in any event, prior to the First
Closing, Borrower shall have delivered to Lenders duplicate originals of (i)
an
executed copy of SBA Forms 480 Size
Status Declaration,
(ii) an
executed copy of SBA Form 652 Assurance
of Compliance for Nondiscrimination,
and
(iii) the information needed to complete Part A and Part B of SBA Form 1031
Portfolio
Financing Report.
3.31 Full
Disclosure.
None of
the representations and warranties furnished by or on behalf of Borrower to
Lender in writing pursuant to this Agreement or any information contained in
the
Schedules thereto referred to in this Agreement, contains any untrue statement
of a material fact and, does not omit to state any material fact required or
necessary to make any statement, in light of the circumstances under which
such
statement is made, not misleading.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF LENDERS
Each
of
the Lenders hereby represents and warrants to Borrower, severally but not
jointly, as follows as of the First Closing Date and AirWorks or RS Properties,
as the case may be, represents and warrants to Borrower, severally but not
jointly, as follows as of each Subsequent Closing Date:
4.1 Power;
Authority; Due Execution.
Such
Lender has the right, power and capacity to execute and deliver this Agreement
and any other agreement entered into in connection with this Agreement and
to
perform its obligations under this Agreement and any other agreement entered
into in connection with this Agreement to which it is a party to and to
consummate the transactions contemplated hereby and thereby. The execution
and
delivery of this Agreement and any other agreement entered into in connection
with this Agreement by such Lender and the performance by such Lender of its
obligations hereunder and thereunder and the consummation of the transactions
provided for herein and therein have been duly and validly authorized and
approved by such Lender. This Agreement has been, and any other agreement
entered into in connection with this Agreement will be as of the applicable
Closing Date, duly executed and delivered by such Lender and do or will, as
the
case may be, constitute the valid and binding agreement of such Lender,
enforceable against it in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and other similar
laws affecting the enforceability of creditors’ rights generally, general
equitable principles and the discretion of courts in granting equitable
remedies.
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4.2 Investment
Representations.
(a) Such
Lender represents and warrants that the Note issued to it is being acquired
for
investment only for its own account and not with a view to the sale or
distribution of any part thereof, except to the extent that it serves as a
nominee for a limited number of “accredited investors,” as that term is defined
in Rule 501 of Regulation D as promulgated by the SEC pursuant to the Securities
Act.
(b) Such
Lender understands that the Note issued to it has not been registered under
the
Securities Act or any state securities laws on the grounds that the sale
provided for in this Agreement and the issuance of securities hereunder are
exempt from registration under the Securities Act and applicable state
securities laws, and that Borrower’s reliance on such exemption is predicated in
part on such Lender’s representations set forth herein.
(c) Such
Lender recognizes that the investment in the Note issued to it involves a
special risk, and represents that it has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment in the Note issued to it, and has the ability to bear
the economic risks of its investment. Prior to making a decision to enter into
this Agreement, such Lender was provided the opportunity to ask questions of,
and receive answers from, the executive officers of Borrower concerning
Borrower, and to obtain from Borrower information requested from Borrower.
Based
on the materials provided by Borrower in response to due diligence requests,
such Lender has conducted an investigation to its satisfaction of the investment
in the Note issued to it and has received all information requested from
Borrower it considers necessary or appropriate for deciding whether to purchase
the Note issued to it; provided,
however,
that no
investigation conducted by such Lender shall be deemed to release Borrower
in
any manner whatsoever from any breach of a representation or warranty contained
in this Agreement. On the basis of the foregoing, and on the basis of the
representations, warranties and covenants of Borrower contained in this
Agreement and the other documents and instruments delivered in connection
herewith, such Lender acknowledges that it has, individually or through
advisers, such knowledge or experience in financial, tax and business matters
to
enable it to understand and evaluate the merits and risks associated with an
investment in the Note issued to it.
(d) Such
Lender understands that each certificate representing the Note or the shares
into which the Note is convertible will be endorsed with the following
legend:
“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER
THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW
TO
DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, ANY
APPLICABLE STATE SECURITIES LAWS, OR THE AVAILABILITY OF AN EXEMPTION
FROM
THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933 AND APPLICABLE
STATE SECURITIES LAWS.”
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(e) Such
Lender and the persons for which it acts as nominee are “accredited investors”
within the meaning of Rule 501(a) of Regulation D of the SEC.
(f) Such
Lender is financially able to hold the Note issued to it for long-term
investment, believes that the nature and amount of the Note issued to it are
consistent with its overall investment program and financial position, and
recognizes that there are substantial risks associated with the acquisition
of
the Note issued to it.
4.3 No
Public Market.
Each
Lender understands that no public market exists for the Notes and there is
no
assurance that a public market will ever exist for the Notes.
4.4 Non-Contravention.
Neither
the execution and delivery of this Agreement by Lenders nor the consummation
of
the transactions contemplated hereby does or would, after the giving of notice
or the lapse of time or both, (a) conflict with, result in a breach of,
constitute a default under, or violate the organic documents of such Lender,
or
(b) conflict with, result in a breach of, constitute a default under, or violate
any Law applicable to such Lender, except as would not otherwise have a Material
Adverse Effect on such Lender.
4.5 No
Consents.
No
permit, consent, approval, novation, authorization or other order of or filing
with any Governmental Entity or any other Person is required in connection
with
the execution, delivery and consummation of this Agreement by such Lender and
the actions of such Lender contemplated hereby, other than what may be required
as a result of any facts or circumstances relating solely to
Borrower.
ARTICLE
V
CERTAIN
COVENANTS AND AGREEMENTS
5.1 Review
of Operations.
Each
Lender may, so long as any amount is outstanding under the Note issued to it,
directly or through its representatives, review, during normal business hours
and upon reasonable notice to Borrower, the premises and books and records
of
Borrower to the extent it deems necessary or advisable to familiarize itself
with such premises and other matters; such review, and the reviews made by
such
Lender or its representatives prior to the date of this Agreement, shall not,
however, affect the representations and warranties made by Borrower in this
Agreement or the remedies of such Lender for breaches of those representations
and warranties.
5.2 Confidentiality.
(a) Between
the date hereof and the Maturity Date, Lenders and Borrower will maintain in
confidence, and will cause the directors, officers, employees, agents, and
advisors of Lenders and Borrower to maintain in confidence, all information
provided in connection herewith, whether written or oral, unless (i) such
information is already known to such party or to others not bound by a duty
of
confidentiality or such information becomes publicly available through no fault
of such party, (ii) the use of such information is necessary or appropriate
in
making any filing or obtaining any consent or approval required for the
consummation of the transactions contemplated hereby, or (iii) the furnishing
or
use of such information is otherwise required by Law.
-27-
(b) Notwithstanding
anything set forth in this Agreement to the contrary (including the
confidentiality obligations set forth in this Section
5.2),
or in
any other agreement executed in connection herewith, Borrower and Lenders (and
any directors, officers, employees, agents or advisors of either of Borrower
or
Lenders), are hereby expressly authorized to disclose the “tax treatment” and
“tax structure” (as those terms are defined in Treasury Regulation
§§1.6011-4(c)(8) and (9), respectively) of the transactions contemplated hereby
and all materials of any kind (including opinions or other tax analyses) that
are provided to such Persons relating to such “tax treatment” or “tax structure”
of the transactions contemplated hereby; provided,
however,
that
(i) such disclosure shall not be made until the earliest of (A) the date of
the
public announcement of discussions relating to such transactions, (B) the date
of the public announcement of such transactions, or (C) the date of the
execution of this Agreement, and (ii) this provision shall not permit disclosure
to the extent that nondisclosure is required to comply with any applicable
federal or state securities laws.
5.3 Conduct
of Business.
Except
with the prior written consent of AirWorks, Borrower shall not:
(a) conduct
its business other than in the ordinary and usual course, or fail to use
reasonable efforts to preserve intact its business organizations and assets
and
maintain its rights, franchises and existing relations with clients, customers,
suppliers, employees, business associates and any independent contractors
associated with it, or take any action reasonably likely to have an adverse
affect upon the its ability to perform any of its obligations under this
Agreement, or engage in any new lines of business;
(b) issue,
sell or otherwise permit to become outstanding, or authorize the creation of,
any (i) additional shares of capital stock, other than upon exercise of
outstanding options and warrants or other outstanding convertible securities,
or
(ii) securities or obligations convertible into or exchangeable for, or giving
any Person any right to subscribe for or acquire, or any options, calls or
commitments relating to, shares of capital stock (including stock appreciation
rights and all similar derivative rights), or enter into any agreement with
respect to the foregoing;
(c) except
as
permitted by Section
5.3(g),
permit
any additional shares of its capital stock to become subject to new grants
of
employee or director stock options, options, calls or commitments, or similar
rights;
(d) make,
declare, pay or set aside for payment any dividend on or in respect of, or
declare or make any distribution on, any shares of its capital
stock;
(e) directly
or indirectly adjust, split, combine, redeem, reclassify, purchase or otherwise
acquire, any shares of its capital stock;
(f) enter
into, amend, modify or renew any employment, consulting, severance or similar
agreements or arrangements with any of its directors, officers or employees,
or
grant any salary, pay or wage increase or increase any employee benefit
(including incentive or bonus payments), except (i) for normal individual
increases in compensation to employees in the ordinary course of business
consistent with past practice, (ii) for other changes that are required by
applicable law, or (iii) for employment or other arrangements for, or grants
of
awards to, newly hired employees in the ordinary course of business consistent
with past practice and after prior consultation with AirWorks;
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(g) enter
into, establish, adopt or amend (except as may be required by applicable law
or
for employment or other arrangements for, or grants of awards to, newly hired
employees in the ordinary course of business consistent with past practice
and
after prior consultation with AirWorks) any pension, retirement, stock option,
stock purchase, savings, profit sharing, deferred compensation, consulting,
bonus, group insurance or other employee benefit, incentive or welfare contract,
plan or arrangement, or any trust agreement (or similar arrangement) related
thereto, in respect of any of its directors, officers or employees, or take
any
action to accelerate the vesting or exercisability of stock options, restricted
stock or other compensation or benefits payable thereunder;
(h) sell,
transfer, mortgage, encumber or otherwise dispose of or discontinue any of
its
material assets, business or properties other than in the ordinary course of
business;
(i) acquire
any assets, business, securities or properties of any other entity other than
in
the ordinary course of business;
(j) amend
its
Certificate of Incorporation or bylaws;
(k) implement
or adopt any change in its accounting principles, practices or methods, other
than as may be required by GAAP and after notifying AirWorks of any such
required change;
(l) enter
into or terminate any Material Contract or amend or modify any of its existing
Material Contracts, other than in the ordinary course of business consistent
with past practice, with the exception of any bulk orders for Borrower’s
products upon AirWorks’ consent, such consent not to be unreasonably
withheld;
(m) settle
any claim, action or proceeding, except for any claim, action or proceeding
involving solely money damages to be paid by Borrower in an amount, individually
and in the aggregate for all such settlements, not more than Ten Thousand
Dollars ($10,000.00) and which is not reasonably likely to establish an adverse
precedent or basis for subsequent settlements;
(n) take
any
action that is intended or reasonably likely to (i) result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect (excluding any materiality provision relating
thereto) at any time at or prior to the last Closing Date, (ii) result in any
of
the conditions to the transaction set forth in Article
VI
not
being satisfied, or (iii) result in a violation of any provision of this
Agreement, except, in each case, as may be required by applicable law or
regulation;
(o) incur
any
indebtedness (including indebtedness relating to acquisitions of its Common
Stock) other than as contemplated hereby or in the ordinary course of business
in excess of Ten Thousand Dollars ($10,000.00) in the aggregate;
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(p) settle,
modify or forgive any indebtedness for borrowed money owed to it (including
indebtedness relating to acquisitions of its Common Stock);
(q) enter
into any sale/lease back, synthetic lease, receivables financing or other
transaction however entitled which would or could be excluded from its balance
sheet prepared in accordance with GAAP;
(r) solicit
or encourage inquires or proposals with respect to, or furnish any nonpublic
information relating to or participate in any negotiations or discussion
concerning, any acquisition or purchase of all or a substantial portion of
the
assets of, or a substantial equity interest in, Borrower, or any merger or
other
business combination with Borrower, other than as contemplated by this
Agreement;
(s) issue
or
authorize the issuance of stock options under the Option Plan; or
(t) agree,
commit to or enter into any agreement to take any of the actions referred to
in
this Section
5.3.
In
connection with Borrower’s continued operation of its business between the date
hereof and the date on which no amounts due under the Notes are outstanding,
Borrower will confer in good faith on a regular basis with one (1) or more
representatives of AirWorks designated to Borrower regarding operational matters
and the general status of ongoing operations. Borrower acknowledges that Lenders
do not and will not waive any rights it may have under this Agreement as a
result of such consultations.
5.4 Supplements
to Schedules.
From
time to time, but in no event less than every ninety (90) days, until the date
on which no amounts due under the Notes are outstanding, Borrower shall
supplement or amend the Schedules that it has delivered with respect to any
matter first existing or occurring following the date hereof that (a) if
existing or occurring at or prior to the date hereof, would have been required
to be set forth or described in the Schedules, or (b) is necessary to correct
any information in the Schedules that has been rendered inaccurate thereby.
No
supplement or amendment to any Schedule shall have any effect for the purpose
of
determining satisfaction of the conditions to closing set forth in Section
6.2
or
otherwise.
5.5 Authorization
and Reservation of Common Stock. It
is the
intent of Lenders and Borrower that, upon issuance, the shares of Common Stock
issuable to AirWorks and RS Properties upon conversion of the AirWorks Note
and
the RS Properties Note in full, assuming the entire $17,300,000 amount is
advanced by AirWorks and RS Properties, (the “AirWorks
and RS Properties Notes Shares”)
will
represent, on an as-converted, fully-diluted basis (taking into account, without
limitation, all potentially dilutive securities which are outstanding,
authorized by Borrower, or otherwise required to be issued, as of the First
Closing Date, and assuming that all outstanding options, warrants and other
rights for the purchase of capital stock of Borrower shall have been exercised,
and all outstanding shares of all series of Borrower’s preferred stock, if any,
have been converted into Common Stock), no less than 93.3% of the outstanding
capital stock of Borrower. As
soon
as reasonably practicable following the First Closing Date, Borrower shall
take
such action as is necessary to authorize and reserve a number of shares
of
Common Stock sufficient to permit Lenders to convert the Notes in whole.
Accordingly,
without limiting the generality of the foregoing, Lenders and Borrower agree
that if at any time after the First Closing Date it is determined that the
AirWorks and RS Properties Notes Shares will not, or did not represent, on
an
as-converted, fully-diluted basis at least 93.3% of the outstanding capital
stock of Borrower, Lenders and Borrower will take all such action as is
necessary for Borrower to authorize and reserve, and Borrower shall authorize
and reserve for Lenders, such additional shares of its Common Stock as are
necessary for AirWorks and RS Properties to hold, beneficially and of record,
at
least 93.3% of the outstanding capital stock of Borrower on an as-converted,
fully-diluted basis upon conversion of their respective Notes in whole.
-30-
5.6 Expansion
of Board of Directors; Observer.
(a) From
and
after the First Closing Date, Borrower shall take all such actions as are
necessary to ensure that AirWorks and RS Properties have the right to designate
a majority of the members of the board of directors of Borrower, including
increasing the number of members of Borrower’s board of directors and electing
AirWorks’ and RS Properties’ designees to fill all such vacancies, if
necessary.
(b) For
so
long as a Lender owns any portion of the Notes or any Conversion Shares, such
Lender shall have the right to have one representative present at all meetings
of the Borrower’s board of directors and committees of the Borrower’s board of
directors as an observer.
5.7 Publicity.
Except
as otherwise required by Law as advised by counsel, neither Lenders nor Borrower
shall issue any press release or make any other public statement, in each case
relating to or connected with or arising out of this Agreement or the matters
contained herein, without obtaining the prior written approval of the other
party to the contents and the manner of presentation and publication thereof,
which approval shall not be unreasonably withheld.
5.8 Expenses.
(a) Except
as
set forth in Section
5.8(b),
Borrower and each of the Lenders shall be responsible for all of its respective
costs and expenses incurred in connection with this Agreement and the
consummation of the transactions contemplated hereby.
(b) Borrower
shall pay all reasonable out-of-pocket expenses of Lenders relating to the
negotiation and execution of the Transaction Documents and the closing of the
transactions contemplated thereby, including, without limitation, the fees,
charges, expenses and disbursements of Paul, Hastings, Xxxxxxxx & Xxxxxx LLP
and Xxxxxxxxxx Xxxxxxxx LLP, legal counsel to AirWorks, upon the First Closing.
5.9 Cooperation.
Lenders
and Borrower shall cooperate and use their respective commercially reasonable
efforts to take, or cause to be taken, all appropriate action, and to make,
or
cause to be made, all filings necessary, proper or advisable under applicable
Laws to consummate and make effective the transactions contemplated by this
Agreement, including, their respective commercially reasonable efforts to
obtain, prior to each Closing Date, all consents and approvals of Persons,
including Governmental Entities, as are necessary for consummation of the
transactions contemplated by this Agreement with respect to such Closing Date
and to fulfill the applicable conditions to closing.
-31-
5.10 Notification
of Certain Matters.
Borrower
shall give prompt notice to Lenders, and each Lender shall give prompt notice
to
Borrower, of (a) the occurrence, or nonoccurrence, of any event which would
be
likely to cause any representation or warranty on its part contained in this
Agreement to be untrue or inaccurate and (b) any failure by such party to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided,
however,
that
the delivery of any notice pursuant to this Section
5.10
shall
not limit or otherwise affect the remedies available hereunder to the party
receiving such notice (including, any condition to closing).
5.11 SBIA
Regulatory Compliance.
(a) Within
seventy-five (75) days after the date hereof, Borrower shall provide to Lenders
a certificate of Borrower’s chief financial office and chief executive officer
(a) verifying (and describing in reasonable detail) the use of the proceeds
of
the Lenders’ financing hereunder to such date and (b) certifying compliance by
Borrower with the provisions of this Section 5.11. In addition to any other
rights granted hereunder, Borrower shall at all times provide Lenders and the
SBA access to Borrower’s books and records for the purposes of, without
limitation, verifying the use of the proceeds of Lenders’ financing and for all
other purposes required by the SBA.
(b) Promptly
after the end of each of Borrower’s fiscal years (but
in any
event prior to February 28 of each calendar year) during which any amounts
under
the Loan are outstanding, Borrower shall provide to Lenders a written
assessment, in form and substance reasonably satisfactory to Lenders of the
economic impact of Lenders’ financing hereunder, specifying the full-time
equivalent jobs created or retained, the impact of the financing on Borrower’s
business in terms of expanded revenue and taxes and other appropriate economic
benefits, including, but not limited to, technology development or
commercialization, minority business development, urban or rural business
development, expansion of exports and assistance to manufacturing
firms.
(c) Upon
the
request of Lenders for so long as any amounts under the Notes are outstanding,
Borrower will (i) provide to Lenders such financial statements and other
information as Lenders may from time to time reasonably request for the purpose
of assessing Borrower’s financial condition and (ii) furnish to Lenders all
information reasonable requested by them in order for them to prepare and file
SBA Form 468 and any other documents, forms or information reasonably requested
or required by any Governmental Entity asserting jurisdiction over
Lenders.
(d) For
a
period of one year following the date of this Agreement, neither Borrower nor
any of its subsidiaries will change its business activity if such change would
render Borrower ineligible to receive financial assistance from a Small Business
Investment Company under the SBIA and the regulations thereunder (within the
meanings of 13 C.F.R. 107.720). If Borrower breaches this covenant, then, in
addition to all other remedies available to Lenders, Lenders may demand that
Borrower immediately repurchase all Notes acquired by Lenders. The purchase
price of the Notes shall be the outstanding principal and all accrued interest
then remaining unpaid.
-32-
5.12 Use
of Proceeds.
Borrower
shall use the proceeds of the First Tranche as follows:
(a) to
repay
in full all debt owed by Borrower to FKA Distributing Co.;
(b) to
repay
in full all debt owed by Borrower to Cornell Capital Partners, L.P.;
(c) to
pay
all legal fees, charges, expenses and disbursements of Paul, Hastings, Xxxxxxxx
& Xxxxxx LLP and Xxxxxxxxxx Xxxxxxxx LLP that were incurred as a result of
their legal representation of AirWorks;
(d) to
pay
all legal fees, charges, expenses and disbursements of Xxxxxxxxxxx &
Xxxxxxxx Xxxxxxx Xxxxx Xxxxx LLP;
(e) to
pay
all fees, charges, expenses and disbursements of the Maxim Group LLC related
to
the preparation and delivery of the Fairness Opinion;
(f) to
reimburse Xxxxxxx X. Xxxxxxx for expenses of the Borrower that were paid by
Xxxxxxx X. Xxxxxxx on the Borrower’s behalf;
(g) to
pay
that portion of the broker’s fees due to The Wall Street Group upon the First
Closing; and
(h) for
working capital of the Borrower’s business.
5.13 Key-Man
Life Insurance.
Upon
receipt of written request from Lenders, Borrower shall acquire a term life
insurance policy with a reasonable coverage amount for key employees identified
by Lenders. Each such insurance policy shall be issued by an insurance carrier
that maintains an A.M. Best Rating of “B++” or better and shall name Borrower as
the beneficiary of such policy.
5.14 Further
Assurances.
From and
after each Closing Date, Lenders and Borrower agree to execute, acknowledge,
deliver and file, or cause to be executed, acknowledged, delivered and filed,
all further instruments, agreement or documents as may be necessary to
consummate the transactions provided for in this Agreement and to do all further
things necessary to carry out the purpose and intent of this
Agreement.
ARTICLE
VI
CONDITIONS
TO CLOSING
6.1 Conditions
to Lenders’ and Borrower’s Obligations.
The
obligations of each Lender and Borrower to effect the transactions contemplated
hereby shall be subject to the satisfaction on or prior to (i) the First Closing
Date of the following conditions unless waived by such Lender and by Borrower
and (ii) each Subsequent Closing Date of the following conditions unless waived
by AirWorks or RS Properties, as the case may be, and by Borrower.
-33-
(a) All
approvals of, or declarations or filings with, or expiration of waiting periods
imposed by, any Governmental Entity necessary for the consummation of the
transactions contemplated by this Agreement shall have been filed, occurred
or
been obtained.
(b) No
Governmental Entity of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, judgment,
decree, injunction or other order (whether temporary, preliminary or permanent)
which is in effect and prohibits consummation of the transactions contemplated
by this Agreement.
6.2 Conditions
to Obligations of Lenders.
The
obligations of each Lender to effect the transactions contemplated hereby are
subject to the satisfaction on or prior to (i) the First Closing Date (unless
otherwise specified below) of the following conditions, unless waived by such
Lender and (ii) each Subsequent Closing Date (unless otherwise specified below)
of the following conditions, unless waived by AirWorks or RS Properties, as
the
case may be.
(a) Borrower
shall have taken all action necessary to authorize the issuance and sale to
Lenders of the Notes.
(b) Lenders
shall have received an opinion, dated the First Closing Date, of Xxxxxxxxxxx
& Xxxxxxxx Xxxxxxx Xxxxx Xxxxx LLP, counsel to Borrower, in substantially
the form attached hereto as Exhibit
F
(the
“Borrower
Counsel Opinion”).
(c) Lenders
shall have received an opinion, dated the First Closing Date, of Xxxxxx,
Xxxxxxxx & Xxxxxxxx, Nevada counsel to Borrower, in substantially the form
attached hereto as Exhibit
G
(the
“Nevada
Opinion”).
(d) (i)
The
representations and warranties of Borrower set forth in this Agreement shall
be
true and correct in all material respects (except that those representations
and
warranties that are limited by materiality shall be true and correct in all
respects) as of the date of this Agreement and as if made at and as of each
Closing Date (except where such representations and warranties are made
expressly as of a specific date), (ii) Borrower shall have performed in all
material respects all obligations required to be performed by it under this
Agreement prior to each Closing Date, (iii) since the date of this Agreement,
there shall have been no changes in the condition (financial or otherwise),
business, employees, operations, obligations or liabilities of Borrower which,
in the aggregate, have had or may be reasonably expected to have a Material
Adverse Effect on Borrower, and (iv) Lenders shall have received a certificate
signed an authorized officer of Borrower as of each Closing Date to such effect
(each such certificate being a “Borrower
Officer’s Certificate”).
(e) All
consents and approvals of third parties required to consummate the transactions
contemplated hereby and for Lenders to operate the business of Borrower as
contemplated herein after the each Closing, shall have been
obtained.
(f) Prior
to
the First Closing Date, Borrower shall have received an opinion of an
independent financial advisor, reasonably acceptable to Lenders, to the effect
that, as of the date of such opinion, the terms of the transactions contemplated
by this Agreement, including, without limitation, the terms of the Notes and
the
conversion of the Notes into the number shares of Common Stock into which the
Notes would be convertible if the entire $18,159,000 amount is advanced by
the
Lenders, are fair to Borrower and its stockholders from a financial point of
view, and a copy of such opinion shall have been delivered to Lenders (the
“Fairness
Opinion”).
-34-
(g) Borrower
shall have entered into confidentiality agreements, in such form as is
acceptable to Lenders in their reasonable discretion, with each employee of
Borrower.
(h) Borrower
shall have delivered, or caused to be delivered, to Lenders each of the
documents set forth in Sections 2.4(a) and 2.5(a), as applicable.
(i) With
respect to the First Closing only, each Lender shall have funded the amounts
designated to be delivered by such Lender pursuant to Section 2.1(a), in
accordance with the terms hereof.
6.3 Conditions
to Obligations of Borrower.
The
obligations of Borrower to effect the transactions contemplated hereby are
subject to the satisfaction on or prior to the First Closing Date of the
following additional conditions unless waived by Borrower.
(a) (i) The
representations and warranties of Lenders set forth in this Agreement shall
be
true and correct in all material respects as of the date of this Agreement
and
as if made at and as of the First Closing Date (except where such
representations or warranties are made expressly as of a specific date), (ii)
Lenders shall have performed in all material respects all obligations required
to be performed by it under this Agreement prior to the First Closing Date,
and
(iii) Borrower shall have received a certificate signed by each Lender to such
effect (each, a “Lender
Officer’s Certificate”).
(b) Lenders
shall have delivered, or caused to be delivered, to Borrower each of the
documents set forth in Sections 2.4(b) and 2.5(b), as applicable.
ARTICLE
VII
MISCELLANEOUS
7.1 Survival.
This
Section
7.1
shall
survive the last Closing Date. All other representations, warranties, covenants
and agreements in the Agreement will survive until the earlier of conversion
or
payment of the Note in whole, provided that no such termination will relieve
any
party of any liability or damages resulting from any willful or intentional
breach of the Agreement or any willful or intentional material misstatement
or
failure to state any item required to be stated therein.
7.2 Entire
Agreement; Binding Effect.
This
Agreement and the documents referred to herein constitute the entire agreement
between the parties with respect to the subject matter hereof, and no party
shall be liable or bound to any other party in any manner by any warranties,
representations or covenants with respect to such subject matter, except as
specifically set forth herein or therein. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Borrower may not terminate this Agreement
prior to the Maturity Date without first obtaining the express written consent
of Lender.
-35-
7.3 Third
Party Beneficiaries.
Nothing
in this Agreement, express or implied, is intended to confer upon any third
party any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement; provided,
however,
that
Borrower and AirWorks hereby agree that each individual or entity owning a
partnership interest in AirWorks shall be considered a third party beneficiary
under this Agreement.
7.4 Governing
Law.
This
Agreement shall be governed by and construed under the laws of the State of
New
York as
applied to agreements among residents of New York made
and
to be performed entirely within the State of New York, and without regard to
the
conflicts of law principles as may otherwise be applicable.
7.5 Jurisdiction
and Venue; Waiver of Jury Trial.
Each
party to this Agreement hereby irrevocably agrees that any legal suit, action
or
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereunder may be brought in the courts of New York County in the
State of New York or of the United States of America for the Southern District
of New York, and hereby expressly submits to the personal jurisdiction and
venue
of such courts for the purposes thereof and expressly waives any claim of
improper venue and any claim that such courts are an inconvenient forum. Each
party hereby irrevocably consents to the service of process of any of the
aforementioned courts in any such suit, action or proceeding, by the mailing
of
copies thereof by registered or certified mail, postage prepaid, to its address
set forth in this Agreement, such service to become effective ten (10) days
after such mailing. IF LITIGATION IS BROUGHT TO ENFORCE THIS AGREEMENT, EACH
PARTY KNOWINGLY AND INTENTIONALLY WAIVES THE RIGHT IT HAS TO A TRIAL BY JURY.
THE PARTIES AGREE THIS PROVISION IS A MATERIAL INDUCEMENT TO THE PARTIES’
ENTERING INTO THIS AGREEMENT.
7.6 Counterparts
and Signature by Facsimile.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
instrument. The facsimile signature of any party to this Agreement for purposes
of execution or otherwise, is to be considered as an original signature, and
the
document transmitted is to be considered to have the same binding effect as
an
original signature on an original document. At the request of any party, any
facsimile or telecopy document is to be re-executed in original form by the
parties who executed the facsimile or telecopy document. No party may raise
the
use of a facsimile machine or telecopier or the fact that any signature was
transmitted through the use of a facsimile or telecopier machine as a defense
to
the enforcement of this Agreement or any notice required thereof.
7.7 Headings.
The
headings used in this Agreement are used for convenience only and are not to
be
considered in construing or interpreting this Agreement.
7.8 Notices.
All
notices and other communications required or permitted hereunder shall be in
writing and shall be deemed effectively given upon personal delivery, delivery
by recognized overnight courier (such as FedEx) or upon receipt of confirmation
of delivery by facsimile, telecopy, or registered or certified mail, return
receipt requested, postage prepaid, addressed:
-36-
to
Lenders:
AirWorks
Funding LLLP
000
Xxxxxxx Xxxxxx
00xx
Xxxxx
Xxx
Xxxx,
Xxx Xxxx 00000
Attn:
Xxxxxxx X. Xxxxxxx
Telephone:
(000) 000-0000
Facsimile:
(000) 000-0000
with
a
copy to:
Paul,
Hastings, Xxxxxxxx & Xxxxxx LLP
000
Xxxxxxxxx Xxxxxx
Xxxxx
0000
Xxxxxxx,
Xxxxxxx 00000
Attn:
Xxxxxxxx Xxxxxxx
Telephone:
(000) 000-0000
Facsimile:
(000) 000-0000
with
a
copy to:
000
Xxxxxxxx
0xx
Xxxxx
Xxx
Xxxx,
Xxx Xxxx 00000
Attn:
Xxxx Xxxx
Telephone:
(000) 000-0000
Facsimile:
(000) 000-0000
to
Borrower:
Kronos
Advanced Technologies, Inc.
000
Xxxxxx Xxxxxx, Xxxxx 000
Xxxxxxx,
XX 00000
Attn:
Xxxxxx X. Xxxxxx
Telephone:
(000) 000-0000
Facsimile:
(000) 000-0000
-37-
with
a
copy to:
Xxxxxxxxxxx
& Xxxxxxxx Xxxxxxx Xxxxx Xxxxx LLP
Miami
Center, 20th Floor
000
Xxxxx
Xxxxxxxx Xxxx.
Xxxxx,
XX
00000-0000
Attn:
Xxxxxxx X. Xxxxxx
Telephone:
(000)
000-0000
Facsimile:
(000) 000-0000
7.9 Attorneys’
Fees.
Should
any litigation or arbitration be commenced between the parties hereto concerning
this Agreement, the party prevailing in such litigation or arbitration shall
be
entitled, upon final judgment and expiration of all appeals, in addition to
such
other relief as may be granted, to a reasonable sum for attorneys’ fees and
costs in such litigation or arbitration, which shall be determined by the court
or arbitrator, as the case may be.
7.10 Severability.
In case
any provision of this Agreement shall be invalid, illegal or unenforceable,
it
shall to the extent practicable be modified so as to make it valid, legal and
enforceable and to retain as nearly as practicable the intent of the parties,
and the validity, legality, and enforceability of the remaining provisions
shall
not in any way be affected or impaired thereby.
7.11 Amendments;
Waivers; Delays or Omissions.
No
waiver, amendment, modification or change of any provision of this Agreement
shall be effective unless and until made in writing and signed by AirWorks
and
Borrower. No delay or omission to exercise any right, power or remedy accruing
to Borrower or a Lender upon any breach, default or noncompliance of Lenders
or
Borrower under this Agreement, the Notes or the other Transaction Documents,
shall impair any such right, power or remedy, nor shall it be construed to
be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent or approval
of
any kind or character on the part of Borrower or Lenders of any breach, default
or noncompliance under this Agreement, the Notes or the other Transaction
Documents or any waiver on Borrower’s or Lenders’ part of any provisions or
conditions of this Agreement must be in writing and shall be effective only
to
the extent specifically set forth in such writing and that all remedies, either
under this Agreement, the Notes, the other Transaction Documents, the
Certificate of Incorporation or bylaws of Borrower, or otherwise afforded to
Borrower and Lenders, shall be cumulative and not alternative. Notwithstanding
anything to the contrary contained herein, AirWorks and RS Properties shall
have
the right, in their sole discretion, to change the respective amounts that
may
be advanced by them pursuant to the terms of Section 2.1(b); provided, however,
that in no event shall AirWorks and RS Properties have the right to contribute
in excess of $14,200,000 in the aggregate at all Subsequent
Closings.
7.12 Finder’s
Fees.
(a) Except
for The Wall Street Group, which is entitled to receive a fee equal to three
percent (3%) of the first Sixteen Million Five Hundred Thousand Dollars
($16,500,000) of the Loan that is actually advanced to the Borrower by the
Lenders, Borrower (i) represents and warrants that it has not retained any
finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold Lenders harmless
of and from any liability for any commission or compensation in the nature
of a
finder’s fee to any broker or other Person (and the costs and expenses of
defending against such liability or asserted liability) for which Borrower
is
responsible. Notwithstanding anything to the contrary contained herein, under
no
circumstance will the amount paid to The Wall Street Group exceed Four Hundred
Ninety-Five Thousand Dollars ($495,000)
-38-
(b) Each
Lender, severally but not jointly, hereby agrees to indemnify and to hold
Borrower harmless of and from any liability for any commission or compensation
in the nature of a finder’s fee to any broker or other Person (and the costs and
expenses of defending against such liability or asserted liability) for which
such Lender is responsible.
7.13 Assignment.
No party
hereto may assign any of its rights, duties or obligations hereunder or any
part
thereof to any other person or entity; provided, however, that AirWorks shall
be
permitted to freely assign any of its rights, duties or obligations hereunder.
7.14 Independent
Nature of Lenders’ Obligations.
The
obligations of each Lender under any Transaction Document are several and not
joint with the obligations of any other Lender, and no Lender shall be
responsible in any way for the performance of the obligations of any other
Lender under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Lender pursuant hereto or
thereto, shall be deemed to constitute the Lenders as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Lenders are in any way acting in concert or as a group
with
respect to such obligations or the transactions contemplated by this Agreement
or the Transaction Documents. The Company hereby confirms that it understands
and agrees that the Lenders are not acting as a “group” as that term is used in
Section 13(d) of the Exchange Act.
7.15 Construction.
Borrower
and each of the Lenders have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent
or
interpretation arises, this Agreement shall be construed as if drafted jointly
by Borrower and Lender and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement.
[signatures
on following page]
-39-
IN
WITNESS WHEREOF,
Borrower
and Lenders have each executed and delivered this Agreement as of the day and
year first above written.
LENDERS:
AirWorks Funding LLLP |
Sands
Brothers Venture Capital LLC
|
|
By:
Compass Partners, LLC, its general partner
|
||
By:
/s/
Xxxxxxx X. Xxxxxxx
|
By:
/s/
Xxxxx X Xxxxx
|
|
Name:
Xxxxxxx X. Xxxxxxx
|
Name:
Xxxxx X. Xxxxx
|
|
Title:
President
|
Title:
COO
|
|
Sands
Brothers Venture Capital II LLC
|
Sands
Brothers Venture Capital III LLC
|
|
By:
/s/
Xxxxx X Xxxxx
|
By:
/s/
Xxxxx X Xxxxx
|
|
Name:
Xxxxx X. Xxxxx
|
Name:
Xxxxx X. Xxxxx
|
|
Title:
COO
|
Title:
COO
|
|
Sands
Brothers Venture Capital IV LLC
|
Critical
Capital Growth Fund, L.P.
|
|
By:
/s/
Xxxxx X Xxxxx
|
By:
Critical Capital, L.P., its general partner
|
|
Name:
Xxxxx X. Xxxxx
|
||
Title:
COO
|
By:
Critical Capital Corporation, its general partner
|
|
By:
/s/
Xxxxxx X. Xxxxx
|
||
Name:
Xxxxxx X. Xxxxx
|
||
Title:
Chairman
|
||
By:
/s/
Xxxxxxx X. Xxxxxxxx
|
||
Name:
Xxxxxxx X. Xxxxxxxx
|
||
Title:
President
|
||
By:
/s/
Xxxx Xxxx
|
||
Name:
Xxxx Xxxx
|
||
Title:
Manager
|
||
BORROWER:
|
||
Kronos
Advanced Technologies, Inc.
|
||
By:
/s/
Xxxxxxx X. Xxxxxx
|
||
Name:
Xxxxxxx X. Xxxxxx
|
||
Title:
COO
|
EXHIBITS
Exhibit
A
|
Form
of Voting Agreement
|
Exhibit
B
|
Form
of Registration Rights Agreement
|
Exhibit
C
|
Form
of Letter Agreements
|
Exhibit
D
|
Form
of Security Agreement
|
Exhibit
E
|
Form
of Patent Security Agreement
|
Exhibit
F
|
Form
of Borrower Counsel Opinion
|
Exhibit
G
|
Form
of Nevada Opinion
|
SCHEDULES
Schedule
3.1
|
Foreign
Qualification
|
Schedule
3.2(a)
|
Capital
Stock
|
Schedule
3.2(b)
|
Options,
Warrants and Rights to Acquire Capital Stock
|
Schedule
3.5
|
Non-Contravention
|
Schedule
3.6
|
Borrower
Reports
|
Schedule
3.8
|
Undisclosed
Liabilities
|
Schedule
3.11
|
Liens
|
Schedule
3.12(a)
|
List
of Material Contracts
|
Schedule
3.12(b)
|
Exceptions
to Material Contracts
|
Schedule
3.13
|
Consents
|
Schedule
3.14
|
Related
Party Transactions
|
Schedule
3.15
|
Litigation
|
Schedule
3.16(a)
|
List
of Intellectual Property
|
Schedule
3.16(b)
|
Intellectual
Property Licenses
|
Schedule
3.16(d)
|
Confidentiality
Agreements
|
Schedule
3.16(e)
|
Intellectual
Property Infringement
|
Schedule
3.16(f)
|
Third
Party Intellectual Property Infringement
|
Schedule
3.17(a)
|
Taxes
|
Schedule
3.18(a)
|
Insurance
Policies
|
Schedule
3.18(b)
|
Exceptions
to Insurance Policies
|
Schedule
3.18(c)
|
Insurance
Policy Coverage Exceptions
|
Schedule
3.20
|
Compliance
with Laws
|
Schedule
3.21
|
Leased
Real Property
|
Schedule
3.23(a)
|
Employees
|
Schedule
3.23(b)
|
Employment
Agreements
|
Schedule
3.23(c)
|
Severance
Agreements
|
Schedule
3.23(d)
|
Change
of Control Agreements
|
Schedule
3.24
|
Labor
Relations
|
Schedule
3.25(a)
|
List
of Benefit Plans
|
Schedule
3.25(b)
|
Exceptions
to Benefit Plans
|
Schedule
3.27
|
Change
of Control or Takeover Provisions
|
ARTICLE I |
DEFINITIONS
|
1
|
|
1.1
|
Certain
Definitions
|
1
|
|
1.2
|
Other
Definitions
|
5
|
|
ARTICLE II |
AUTHORIZATION;
PURCHASE AND SALE; CLOSING
|
6
|
|
2.1
|
Term
Loan
|
6
|
|
2.2
|
Notes
|
7
|
|
2.3
|
Closing
|
7
|
|
2.4
|
First
Closing Deliveries
|
7
|
|
2.5
|
Subsequent
Closing Deliveries
|
9
|
|
ARTICLE III |
REPRESENTATIONS
AND WARRANTIES OF BORROWER
|
10
|
|
3.1
|
Organization;
Power; Standing
|
10
|
|
3.2
|
Capitalization
|
10
|
|
3.3
|
Authority;
Due Execution
|
11
|
|
3.4
|
Validity
of the Notes and the Conversion Shares
|
11
|
|
3.5
|
Non-Contravention
|
11
|
|
3.6
|
Borrower
Reports
|
11
|
|
3.7
|
Borrower
Financial Statements
|
12
|
|
3.8
|
Absence
of Undisclosed Liabilities
|
12
|
|
3.9
|
Minute
Books and Organizational Documents
|
12
|
|
3.10
|
Absence
of Certain Changes
|
12
|
|
3.11
|
Properties;
Securities
|
13
|
|
3.12
|
Material
Contracts
|
13
|
|
3.13
|
No
Consents
|
15
|
|
3.14
|
Related
Party Transactions
|
15
|
|
3.15
|
Litigation;
Regulatory Action
|
15
|
|
3.16
|
Intellectual
Property
|
16
|
|
3.17
|
Taxes
|
17
|
|
3.18
|
Insurance
|
18
|
|
3.19
|
Financial
Controls
|
19
|
|
3.20
|
Compliance
with Laws
|
19
|
|
3.21
|
Real
Property
|
19
|
|
3.22
|
Accounts
Receivable
|
20
|
|
3.23
|
Employees;
Employment Agreements
|
20
|
3.24
|
Labor
Relations
|
20
|
|
3.25
|
Benefit
Plans
|
21
|
|
3.26
|
Environmental
|
22
|
|
3.27
|
State
Takeover Laws; Certificate of Incorporation
|
24
|
|
3.28
|
Offering
Exemption
|
24
|
|
3.29
|
Certain
Business Practices
|
24
|
|
3.30
|
U.S.
Small Business Administration
|
24
|
|
3.31
|
Full
Disclosure
|
25
|
|
ARTICLE IV |
REPRESENTATIONS
AND WARRANTIES OF LENDERS
|
25
|
|
|
25
|
||
4.1
|
Power;
Authority; Due Execution
|
25
|
|
4.2
|
Investment
Representations
|
26
|
|
4.3
|
No
Public Market
|
27
|
|
4.4
|
Non-Contravention
|
27
|
|
4.5
|
No
Consents
|
27
|
|
ARTICLE V |
CERTAIN
COVENANTS AND AGREEMENTS
|
27
|
|
5.1
|
Review
of Operations
|
27
|
|
5.2
|
Confidentiality
|
27
|
|
5.3
|
Conduct
of Business
|
28
|
|
5.4
|
Supplements
to Schedules
|
30
|
|
5.5
|
Authorization
and Reservation of Common Stock
|
30
|
|
5.6
|
Expansion
of Board of Directors; Observer
|
31
|
|
5.7
|
Publicity
|
31
|
|
5.8
|
Expenses
|
31
|
|
5.9
|
Cooperation
|
31
|
|
5.10
|
Notification
of Certain Matters
|
32
|
|
5.11
|
SBIA
Regulatory Compliance
|
32
|
|
5.12
|
Use
of Proceeds
|
33
|
|
5.13
|
Key-Man
Life Insurance
|
33
|
|
5.14
|
Further
Assurances
|
33
|
|
ARTICLE VI |
CONDITIONS
TO CLOSING
|
33
|
|
6.1
|
Conditions
to Lenders’ and Borrower’s Obligations
|
33
|
|
6.2
|
Conditions
to Obligations of Lenders
|
34
|
|
6.3
|
Conditions
to Obligations of Borrower
|
35
|
ARTICLE VII |
MISCELLANEOUS
|
35
|
|
7.1
|
Survival
|
35
|
|
7.2
|
Entire
Agreement; Binding Effect
|
35
|
|
7.3
|
Third
Party Beneficiaries
|
36
|
|
7.4
|
Governing
Law
|
36
|
|
7.5
|
Jurisdiction
and Venue; Waiver of Jury Trial
|
36
|
|
7.6
|
Counterparts
and Signature by Facsimile
|
36
|
|
7.7
|
Headings
|
36
|
|
7.8
|
Notices
|
36
|
|
7.9
|
Attorneys’
Fees
|
38
|
|
7.10
|
Severability
|
38
|
|
7.11
|
Amendments;
Waivers; Delays or Omissions
|
38
|
|
7.12
|
Finder’s
Fees
|
38
|
|
7.13
|
Assignment
|
39
|
|
7.14
|
Independent
Nature of Lenders’ Obligations
|
39
|
|
7.15
|
Construction
|
39
|