GVI SECURITY SOLUTIONS, INC.
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT made as of this 29th day of October, 2004 between
GVI Security Solutions, Inc., a Delaware corporation (the "Company"), and
___________________ (the "Subscriber").
WHEREAS, the Company desires to issue up to 40 units (the "Bridge Units")
in a private placement (this "Offering"), each Unit consisting of $50,000
principal amount of 12% Subordinated Secured Promissory Notes (the "Notes") in
the form attached as Exhibit A hereto, and the right to be issued warrants (the
"Warrants"), as provided in Section 1.2 below, to purchase shares of the common
stock, par value $.001 per share of the Company, substantially in the form
attached as Exhibit B hereto, on the terms and conditions hereinafter set forth,
and the Subscriber desires to acquire the number of Bridge Units set forth on
the signature page hereof; and
WHEREAS, the Notes will be (i) secured by the assets of the Company
pursuant to a Security Agreement in the form of Exhibit C (the "Security
Agreement"), between the Company and W-net, Inc. as collateral agent (the
"Agent") for the subscribers in the Offering, and (ii) subordinated to the
Company's obligations to Laurus Master Fund Ltd. ("Laurus") pursuant to a
Subordination Agreement in the form of Exhibit D hereto, between Laurus, the
Company and the subscribers in the Offering; and
WHEREAS, the subscribers in the offering will appoint the Agent to act as
collateral agent for such subscribers under the Security Agreement pursuant to
the Agency Appointment Agreement in form of Exhibit E hereto.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto do hereby agree as follows:
I. SUBSCRIPTION FOR BRIDGE UNITS AND REPRESENTATIONS BY AND COVENANTS
OF SUBSCRIBER
1.1 Subject to the terms and conditions hereinafter set forth, the
Subscriber hereby subscribes for and agrees to purchase from the Company such
number of Bridge Units as is set forth upon the signature page hereof at a price
equal to $50,000 per Bridge Unit, and the Company agrees to sell such Bridge
Units to the Subscriber for said purchase price. The Company will pay the
Subscriber a closing fee equal to one percent (1%) of the purchase price
hereunder (the "Closing Fee"). The purchase price for the Bridge Units (less the
Closing Fee) is payable by delivery of a certified or bank check made payable to
the Company, or by wire transfer to an account designated by the Company,
contemporaneously with the execution and delivery of this Subscription
Agreement. The Notes will be delivered by the Company within five days following
the consummation of this Offering.
1.2 On the earlier of (i) the closing of one or more private
placements of the Company's equity securities resulting in aggregate gross
proceeds to the Company of at least $1,500,000 (a "Qualified Offering") and (ii)
April 1, 2005 (such earlier date, the "Warrant Issuance Date"), the Company
shall issue to Subscriber a Warrant to purchase that number of shares of Common
Stock equal to Subscriber's aggregate purchase price for the Units hereunder,
divided by the "Exercise Price" of the Warrant (as determined pursuant to this
Section 1.2). The Exercise Price of the Warrant shall be the price per share of
Common Stock paid by investors in the Qualified Offering; provided, that if the
Warrants are issued on April 1, 2005 because a Qualified Offering has not been
consummated by such date, the Exercise Price shall (x) initially be $1.50 and
(y) be subject to downward adjustment (if applicable) on July 1, 2005, if the
Note issued to Subscriber hereunder has not been repaid as of such date, to
equal 75% of the average of the closing bid price of the Common Stock for the 10
trading days immediately preceding July 1, 2005, as reported by the Nasdaq Stock
Market, the NASD OTC Bulletin Board, the Pink Sheets LLC, or such other
principal market on which the Common Stock is then traded or quoted (the
"Applicable Market"), and be subject to further downward adjustment (if
applicable) on October 1, 2005, if the Note issued to Subscriber hereunder has
not been repaid as of such date, to equal 75% of the average of the closing bid
price of the Common Stock for the 10 trading days immediately preceding October
1, 2005, as reported by the Applicable Market. In determining the price per
share of Common Stock paid by investors in a Qualified Offering, in the event
such investors purchase units consisting of Common Stock and warrants to
purchase Common Stock, for the purposes hereof, the entire amount of the
purchase price for such units shall be allocated to the shares of Common Stock
included in such units.
1.3 The Subscriber recognizes that the purchase of Bridge Units
involves a high degree of risk in that (i) an investment in the Company is
highly speculative and only investors who can afford the loss of their entire
investment should consider investing in the Company and the Bridge Units; (ii)
he may not be able to liquidate his investment; (iii) transferability of the
securities comprising the Bridge Units is extremely limited; and (iv) the
Company will be unable to repay the Notes without obtaining additional
financing.
1.4 The Subscriber represents and warrants that it is an
"accredited investor" as such term in defined in Rule 501 of Regulation D
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
and that it is able to bear the economic risk of an investment in the Bridge
Units.
1.5 The Subscriber acknowledges that it has prior investment
experience, and that Subscriber recognizes the highly speculative nature of this
investment.
1.6 The Subscriber acknowledges that it has been furnished by the
Company during the course of this transaction with all information regarding the
Company that it has requested and; that it has been afforded the opportunity to
meet with, ask questions of and receive answers from duly authorized officers or
other representatives of the Company concerning the terms and conditions of this
Offering.
1.7 The Subscriber acknowledges that this Offering may involve tax
consequences, including, but not limited to, the possible need to recognize
interest income relating to the Warrants and that the Company has not provided
tax advice or information to the Subscriber. The Subscriber acknowledges that it
must retain his own professional advisors to evaluate the tax and other
consequences of an investment in the Bridge Units.
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1.8 The Subscriber acknowledges that this Offering has not been
reviewed by the United States Securities and Exchange Commission ("SEC") because
of the Company's representations that this is intended to be a nonpublic
offering pursuant to Sections 4(2) and/or 3(b) of the Securities Act. The
Subscriber represents that the Notes and Warrants comprising his Bridge Units
are being purchased for its own account, for investment and not for distribution
or resale to others. The Subscriber agrees that it will not sell or otherwise
transfer the Notes or the Warrants unless they are registered under the
Securities Act or unless an exemption from such registration is available.
1.9 The Subscriber understands that there is no public market for
the Notes or the Warrants. The Subscriber understands that Rule 144 (the "Rule")
promulgated under the Securities Act requires, among other conditions, a one
year holding period prior to the resale (in limited amounts) of securities
acquired in a non-public offering without having to satisfy the registration
requirements under the Securities Act. The Subscriber understands that the
Company is currently a reporting company but makes no representation or warranty
regarding its fulfillment in the future of any reporting requirements under the
Securities Exchange Act of 1934, as amended, or its dissemination to the public
of any current financial or other information concerning the Company, as is
required by the Rule as one of the conditions of its availability. The
Subscriber agrees that the Company may, if it desires, permit the transfer of
the Notes, the shares of Common Stock issuable upon conversion of the Notes, if
any (the "Conversion Shares"), the Warrants or the shares of Common Stock
issuable upon exercise of the Warrants (the "Warrant Shares" and, together with
the Notes, Conversion Shares and Warrants, the "Securities") out of his name
only when his request for transfer is accompanied by an opinion of counsel
reasonably satisfactory to the Company that neither the sale nor the proposed
transfer results in a violation of the Securities Act or any applicable state
"blue sky" laws.
1.10 The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Securities stating that they have
not been registered under the Securities Act and setting forth or referring to
the restrictions on transferability and sale thereof.
II. REPRESENTATIONS BY THE COMPANY
2.1 The Company represents and warrants to the Subscriber that
prior to the consummation of this Offering and on the Closing Date:
(a) The Company is a corporation duly organized, existing
and in good standing under the laws of the State of Delaware and has the
corporate power to conduct the business which it conducts and proposes to
conduct.
(b) The execution, delivery and performance of this
Subscription Agreement by the Company will have been duly approved by the Board
of Directors of the Company and all other actions required to authorize and
effect the offer and sale of the Bridge Units and the securities contained
therein will have been duly taken and approved.
(c) The Notes and Warrants have been duly and validly
authorized, and when issued and paid for in accordance with the terms hereof,
will be valid and binding obligations of the Company enforceable in accordance
with its terms.
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III. REGISTRATION RIGHTS
3.1 (a) If the Company shall determine to proceed with the actual
preparation and filing of a registration statement under the Securities Act
during the two-year period commencing on Warrant Issuance Date in connection
with the proposed offer and sale of any of its securities by it or any of its
security holders (other than a registration statement on Form X-0, X-0 or other
limited purpose form), then the Company will give 20 days prior written notice
of its determination to all holders of the Securities (the "Holders"). Upon the
written request from any Holder, the Company will, except as herein provided,
cause all Conversion Shares (if the Note has not then been repaid) and Warrant
Shares (collectively, "Registrable Securities") to be included in such
registration statement, all to the extent requisite to permit the sale or other
disposition by the prospective seller or sellers of the Registrable Securities
to be so registered; provided, further, that nothing herein shall prevent the
Company from, at any time, abandoning, delaying, suspending or withdrawing any
registration. If any registration pursuant to this Section 3.1(a) shall be
underwritten in whole or in part, the Company may require that the Registrable
Securities requested for inclusion by the Holders be included in the
underwriting on the same terms and conditions as the securities otherwise being
sold through the underwriters. The obligation of the Company under this Section
3.1(a) is limited to two registration statements. If in the good faith judgment
of the managing underwriter of such public offering the inclusion of all of the
Registrable Securities originally covered by a request for registration (the
"Requested Stock") would reduce the number of shares to be offered by the
Company or interfere with the successful marketing of the shares of stock
offered by the Company, the number of shares of Requested Stock otherwise to be
included in the underwritten public offering may be reduced pro rata (by number
of shares) among the holders thereof requesting such registration or excluded in
their entirety if so required by the underwriter. To the extent only a portion
of the Requested Stock is included in the underwritten public offering, those
shares of Requested Stock which are thus excluded from the underwritten public
offering shall be withheld from the market by the holders thereof for a period
which the managing underwriter reasonably determines is necessary in order to
effect the underwritten public offering. The Holder may, at its option, request
the registration of the Registrable Securities in a registration statement made
by the Company as contemplated by 3.1(a) prior to the acquisition of the
Registrable Securities upon conversion of the Note (if applicable) and exercise
of the Warrant even though the Holder has not given notice of exercise of the
Warrant.
(b) Upon written request (the "Demand Notice"), delivered
any time after 180 days following the Warrant Issuance Date, from Holders
representing beneficial ownership of an aggregate of more than 50% of the
Registrable Securities, the Company shall no later than 30 days after receipt of
the Demand Notice (the "Filing Deadline"), prepare and file with the SEC a
registration statement under the Securities Act covering the resale of all of
the Registrable Securities which are the subject of such request and shall use
its best efforts to cause such registration statement to be declared effective
by the SEC within ninety days after the Filing Deadline (the "Required Effective
Date"). In addition, upon receipt of the Demand Notice, the Company shall
promptly give written notice to the other Holders not a party to the Demand
Notice that such registration is to be effected. The Company shall include in
such registration statement the Registrable Securities for which it has received
written requests to register by such other Holders within 15 days after the
delivery of the Company's written notice to such other Holders.
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(c) In the event that (A) the registration statement under
Section 3.1(b) is not filed by the Filing Deadline or (B) a registration
statement filed under either Section 3.1(a) or (b) is not declared effective by
the Required Effective Date, the Company shall pay to each Holder (except for
any Holder whose failure to provide information as required hereunder causes a
delay in filing or obtaining effectiveness) liquidated damages at a rate equal
to one percent (1%) per month (pro rata on a 30-day basis) of the total purchase
price of the Bridge Units purchased by such Holder for the period that the
registration statement is not (A) filed with the SEC on or before the Filing
Deadline or (B) declared effective by the SEC following Required Effective Date.
Such liquidated damages shall be payable in cash within ten (10) days of the end
of each one (1) month anniversary of the Required Filing Date or Required
Effective Date, as the case may be.
3.2 The Company will, until such time as the Registrable
Securities may be sold under Rule 144 without volume limitation:
(i) furnish to the Holders participating in such
registration and to the underwriters of the securities being
registered such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectus and such other
documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(ii) use its best efforts to register or qualify the
securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as the Holders may
reasonably request in writing within 20 days following the original
filing of such registration statement, except that the Company shall
not for any purpose be required to execute a general consent to
service of process or to qualify to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified or
subject itself to taxation in any such jurisdiction;
(iii) notify the Holders, promptly after it shall receive
notice thereof, of the time when such registration statement has
become effective or a supplement to any prospectus forming a part of
such registration statement has been filed;
(iv) notify the Holders promptly of any request by the SEC
for the amending or supplementing of such registration statement or
prospectus or for additional information; and
(v) advise the Holders, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop
order by the SEC suspending the effectiveness of such registration
statement or the initiation or threatening of any proceeding for
that purpose and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop
order should be issued.
The Company may require each Holder of Registrable Securities as to which
any registration is being effected to furnish to the Company such information
regarding the distribution of such Registrable Securities as the Company may
from time to time reasonably request in writing.
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3.3 All fees, costs and expenses of and incidental to the
registrations pursuant to Sections 3.1 shall be borne by the Company, provided,
however, that the Holders shall bear their pro rata share of the underwriting
discount and commissions and transfer taxes. The fees, costs and expenses of
registration to be borne by the Company as provided above shall include, without
limitation, all registration, filing, and NASD fees, printing expenses, fees and
disbursements of counsel and accountants for the Company, and all legal fees and
disbursements and other expenses of complying with state securities or blue sky
laws of any jurisdictions in which the securities to be offered are to be
registered and qualified (except as provided above). Fees and disbursements of
counsel and accountants for the Holders and any other expenses incurred by the
Holders not expressly included above shall be borne by the Holders.
3.4 The Company will indemnify and hold harmless each Holder of
Registrable Securities which are included in a registration statement pursuant
to the provisions of Section 3.1 hereof, its directors and officers, and any
underwriter (as defined in the Securities Act) for such Holder and each person,
if any, who controls such Holder or such underwriter within the meaning of the
Securities Act, from and against, and will reimburse such Holder and each such
underwriter and controlling person with respect to, any and all loss, damage,
liability, cost and expense to which such Holder or any such underwriter or
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused by
any untrue statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expenses arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by such Holder, such underwriter
or such controlling person in writing specifically for use in the preparation
thereof.
3.5 Each Holder of Registrable Securities included in a
registration pursuant to the provisions of Section 3.1 hereof will indemnify and
hold harmless the Company, its directors and officers, any controlling person
and any underwriter from and against, and will reimburse the Company, its
directors and officers, any controlling person and any underwriter with respect
to, any and all loss, damage, liability, cost or expense to which the Company or
any controlling person and/or any underwriter may become subject under the
Securities Act or otherwise, insofar as such losses, damages, liabilities, costs
or expenses are caused by any untrue statement or alleged untrue statement of
any material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance upon
and in strict conformity with written information furnished by or on behalf of
such Holder specifically for use in the preparation thereof.
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3.6 Promptly after receipt by an indemnified party pursuant to the
provisions of Sections 3.4 or 3.5 of notice of the commencement of any action
involving the subject matter of the foregoing indemnity provisions such
indemnified party will, if a claim thereof is to be made against the
indemnifying party pursuant to the provisions of said Sections 3.4 or 3.5,
promptly notify the indemnifying party of the commencement thereof; but the
omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than hereunder.
In case such action is brought against any indemnified party and it notifies the
indemnifying party of the commencement thereof, the indemnifying party shall
have the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party, provided, however,
if counsel for the indemnifying party concludes that a single counsel cannot
under applicable legal and ethical considerations, represent both the
indemnifying party and the indemnified party, the indemnified party or parties
have the right to select separate counsel to participate in the defense of such
action on behalf of such indemnified party or parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party pursuant to the provisions of said Sections 3.4 or 3.5 for any legal or
other expense subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation, unless (i) the
indemnified party shall have employed counsel in accordance with the provisions
of the preceding sentence, (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after the notice of the commencement of the action or
(iii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
IV. MISCELLANEOUS
4.1 Any notice or other communication given hereunder shall be
deemed sufficient if in writing and sent by registered or certified mail, return
receipt requested, addressed to the Company, at 0000 Xxxxx Xxxxxx Xxxxx, Xxxxx
000, Xxxxxxxxx, Xxxxx 00000, Attn: Xxxxxxxxx X. Xxxxxxxx, and to Subscriber at
his address indicated on the signature page of this Subscription Agreement.
Notices shall be deemed to have been given on the date of mailing, except
notices of change of address, which shall be deemed to have been given when
received.
4.2 This Subscription Agreement shall not be changed, modified or
amended except by a writing signed by the parties to be charged, and this
Subscription Agreement may not be discharged except by performance in accordance
with its terms or by a writing signed by the party to be charged.
4.3 This Subscription Agreement shall be binding upon and inure to
the benefit of the parties hereto and to their respective heirs, legal
representatives, successors and assigns. This Subscription Agreement sets forth
the entire agreement and understanding between the parties as to the subject
matter thereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
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4.4 Notwithstanding the place where this Subscription Agreement
may be executed by any of the parties hereto, the parties expressly agree that
all the terms and provisions hereof shall be construed in accordance with and
governed by the laws of the State of New York. The parties hereby agree that any
dispute which may arise between them arising out of or in connection with this
Subscription Agreement shall be adjudicated before a court located in New York
City and they hereby submit to the exclusive jurisdiction of the courts of the
State of New York located in New York, New York and of the federal courts in the
Southern District of New York with respect to any action or legal proceeding
commenced by any party, and irrevocably waive any objection they now or
hereafter may have respecting the venue of any such action or proceeding brought
in such a court or respecting the fact that such court is an inconvenient forum,
relating to or arising out of this Subscription Agreement or any acts or
omissions relating to the sale of the securities hereunder, and consent to the
service of process in any such action or legal proceeding by means of registered
or certified mail, return receipt requested, in care of the address set forth
below or such other address as the undersigned shall furnish in writing to the
other.
4.5 This Subscription Agreement may be executed in counterparts.
Upon the execution and delivery of this Subscription Agreement by each
Subscriber, this Subscription Agreement shall become a binding obligation of
each Subscriber with respect to the purchase of the Bridge Units as herein
provided; subject, however, to the right hereby reserved to the Company to enter
into the same agreements with other subscribers and to add and/or to delete
other persons as subscribers.
4.6 The holding of any provision of this Subscription Agreement to
be invalid or unenforceable by a court of competent jurisdiction shall not
affect any other provision of this Subscription Agreement, which shall remain in
full force and effect.
4.7 The parties agree to execute and deliver all such further
documents, agreements and instruments and take such other and further action as
may be necessary or appropriate to carry out the purposes and intent of this
Subscription Agreement.
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IN WITNESS WHEREOF, the parties have executed this Subscription Agreement
as of the day and year first written above.
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Signature of Subscriber Signature of Co-Subscriber
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Name of Subscriber Name of Co-Subscriber
[please print] [please print]
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Address of Subscriber Address of Co-Subscriber
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Social Security or Taxpayer Social Security or Taxpayer Identification
Identification Number of Subscriber Number of Co-Subscriber
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Purchase Price of Units Subscribed
For
Subscription Accepted:
GVI SECURITY SOLUTIONS, INC.
By:___________________________________
Name: Xxxxxxxxx X. Xxxxxxxx
Title: Chief Executive Officer and
Chief Financial Officer
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EXHIBIT A
FORM OF NOTES
EXHIBIT B
FORM OF WARRANTS
EXHIBIT C
FORM OF SECURITY AGREEMENT
EXHIBIT D
FORM OF SUBORDINATION AGREEMENT
EXHIBIT E
FORM OF AGENCY APPOINTMENT AGREEMENT
