BRIDGE LOAN AGREEMENT

EXHIBIT10.6

 

BRIDGE LOAN AGREEMENT

 

 

     This Bridge Loan Agreement is made as of  February 19, 2008 (the “ Effective Date ”) among S3 Investment Company, Inc., a California corporation (the “ Company ” or “ SIVC” ), and the investors listed on the SCHEDULE OF INVESTORS attached hereto (the “ Investors” ).

 

     The Company is currently in need of funds to help finance the operations of its Redwood Capital, Inc. subsidiary until the closing of the next round of RTO financings for its Chinese clients, but these clients will not be able to complete any such transaction without monthly infusions of short-term working capital.  In order to provide for this need, the Investors and the Company are now entering into a bridge loan in the aggregate amount of up to $800,000 (the “ Commitment Amount ”), and related transactions, on the terms of this Agreement.

 

     In consideration of the mutual covenants contained in this Agreement,

it is agreed as follows:

 

1.    Initial Bridge Transaction .  

 

Concurrently with execution of this Agreement, each Investor will deliver to the Company funds equal to the "Initial Loan Amount" listed on the Schedule of Investors.  Upon receipt of the funds, the Company will issue to each Investor a Class B Senior Promissory Note in the form attached as Exhibit A (which, with any notes on substantially the same terms that may be issued to any or all of the Investors, are herein called the “ Class B Notes” ), in a principal amount equal to the "Initial Loan Amount" listed on the Schedule of Investors.  The Investors may invest additional amounts during each Additional Closing (as defined below) and pursuant to Section 2.2 below.

 

2.   Closing(s) .

  

2.1  

The Closing . The purchase and sale of the Class B Notes will take place at the offices of Crone Rozynko, LLP, 101 Montgomery Street, Suite 1950, San Francisco California 94104, at 11:00 a.m. Pacific time, on February 19, 2008, or at such other time and place as the Company and the Investors who have agreed to purchase a majority of the aggregate principal amount of the Class B Notes listed on the Schedule of Investors, mutually agree upon (which time and place are referred to as the “ Closing ”). At the Closing, each Investor will deliver to the Company payment in full for the Class B Note in the amount set forth opposite such Investor’s name listed on the Schedule of Investors, which such Investor agrees to purchase at the Closing by (i) a check payable to the Company’s order, (ii) wire transfer of funds to the Company, or (iii) any combination of the foregoing.  At the Closing, the Company will deliver to each Investor a duly executed Class B Note in the principal amount set forth opposite such Investor’s name on the Schedule of Investors.

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  2.2

  Additional Closing(s) .

  

(a)

Conditions of Additional Closing(s) .  On each date on which the Company documents to the Investor’s satisfaction the completion of the milestone event set forth below, which dates shall be no less than one month from the previous funding, the Company may, at one or more additional closings (each an “Additional Closing” ), issue and sell to the Investors additional Class B Notes in proportion to each Investor to the Class B Notes sold at the Closing, and such Class B Notes having an aggregate principal amount of up to $720,000, provided, however, that achievement of the milestone event at each such Additional Closing shall have been previously approved by a majority of the aggregate principal amount of the Class B Notes:

 

Funded	Funding Amount	Milestone Event
YES	$115,000	Establishment of the BVI entities to facilitate the Chinese reverse takeover (“RTO”) public listing of Haijie, WITU or other client acceptable to Investors.
	$130,000	Execution of a WOFE Joint Venture Agreement between Redwood Capital, Inc. and Haijie, WITU, Boyuan or other client acceptable to Investors.
	$125,000	Completion of the Business Plan for Haijie, Boyuan (Est. 7/20), WITU or other client acceptable to Investors.
	$150,000	Completion of a PCAOB-approved audit for a Redwood Capital client such as Haijie, Wuhan International Trade University (“WITU”), Boyuan or other client acceptable to Investors.
	$100,000	Another (i) Execution of a WOFE Joint Venture Agreement between Redwood Capital, Inc. and Haijie, WITU or other client acceptable to Investors or (ii) Haijie, WITU, Boyuan or other client acceptable to Investors obtaining a term sheet from a lead investor for its RTO funding.
	$100,000	Haijie, WITU, Boyuan or other client acceptable to Investors obtaining a term sheet from a lead investor for its RTO funding.

 

 

 

(b)

Pre-Closing Delivery of Funds . The Company and the Investors acknowledge that certain Investors may deliver checks or wire transfers to the Company in anticipation of Closing or any Additional Closing hereunder, and the Company agrees that it will hold such funds in escrow on behalf of the Investors until the Closing conditions in Section 7 of this Agreement have been satisfied with regard to such Closing. If such Closing does not occur within five (5) business days of delivery of such funds, the Company will return on the next business day to any Investor the entire payment.

3.    Subordination.

 

 

     (a)  All indebtedness (other than Senior Indebtedness (as defined below)) of the Company is hereby made subordinate and junior to the Indebtedness (as defined below).  Upon

 

         (1)  any distribution of all or substantially all of the assets of the Company, or

 

(2)  any payment or distribution of assets of the Company of any kind or character, whether in cash, property, or securities, to creditors in connection with any dissolution, winding-up, total or partial liquidation or reorganization of the Company, excluding the contemplated stock dividend of ENHD shares which the Company intends to distribute to SIVC shareholders and as allowed for in the milestone events of the Senior Indebtedness, all principal and interest due or to become due upon all Senior Indebtedness and Indebtedness will first be paid in full before any person will be entitled to receive any payments or retain any assets so paid or distributed; the Investors irrevocably authorize and direct the Company to effect all payments required by this sentence.

 

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     (b)  For purposes of this Agreement, “ Senior Indebtedness” means all principal, premium, interest, costs and other amounts due in respect of the Senior Notes due January 28, 2009 (and all renewals, extensions, refundings, refinancings and replacements of such obligations) (the “ Senior Notes ”) issued pursuant to the Bridge Loan Agreement dated January 28, 2009 among the Company and the investors listed therein; and “ Indebtedness” means all principal, premium, interest, costs and other amounts due in respect of the Class B Notes (and all renewals, extensions, refundings, refinancings and replacements of such obligations).

 

4.   Representations and Warranties of The Company .

 

The Company hereby represents and warrants to each Investor that, except as set forth in the Schedule of Exceptions (the “ Schedule of Exceptions ”) attached to this Agreement as Exhibit B (which Schedule of Exceptions shall be deemed to be representations and warranties to the Investors by the Company under this Section 4), the statements in the following paragraphs of this Section 4 are all true and complete as of immediately prior to the Closing and Additional Closing:

 

4.1

Organization, Good Standing, and Qualification . The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on its business or properties. The Company has all requisite corporate power and authority to own its properties, to carry on its business as now conducted, and to enter into and perform its obligations under this Agreement and the agreements and instruments contemplated by it.

 

 

 

4.2

Capitalization . The authorized capitalization of the Company immediately prior to the Closing is as follows:

(a)

Common Stock .

5,000,000,000  shares of Common Stock
(the “ Common Stock ”), 1,300,000,000 of which were issued and outstanding. The Company has reserved 12,000,000 shares of Common Stock for issuance upon conversion of the Preferred Stock and 1,100,000,000 shares of Common Stock for issuance upon conversion of, and payments of interest on, the Senior Notes.

 

(b)

Preferred Stock .  

100,000,000 shares of Preferred Stock (the
“ Preferred Stock ”), 12,000,000 of which have been as designated Series A Preferred, all of which are issued and outstanding.
   

 

(c)  

Other Rights to Acquire Stock . Except for (i) the conversion privileges of the Senior Notes, (ii) the Common Stock issuable on conversion of the Senior Notes or in payment of interest on the Senior Notes and Class B Notes, and (iii) the conversion privileges of the Preferred Stock; there are no options, warrants, conversion privileges or other rights (or agreements for any such rights) outstanding to purchase or otherwise obtain from the Company any of the Company’s securities.

 

 

4.3

Authorization .

All corporate action on the part of the Company necessary for the authorization, execution and delivery of this Purchase Agreement, the Put Agreement attached hereto as Exhibit C (the “ Put Agreement ”) and the performance of all obligations of the Company hereunder, and the authorization, issuance and delivery of each Class B Note has been taken or will be taken prior to the relevant Closing. This Purchase Agreement, the Put Agreement and the Class B Notes, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies

 

4.4

Valid Issuance .        The Class B Notes and the shares of  the Common Stock issuable in payment of interest on the Class B Notes (the “ Shares”, and collectively with the Class B Notes, the “ Securities ”), when issued, sold, and delivered in accordance with the terms of the this Agreement and Class B Note, will be duly and validly issued, fully paid and non-assessable and, based in part upon the representations of the Investors in this Purchase Agreement, will be issued in compliance with all applicable federal and state securities laws.

  

4 .5   

Compliance with Other Instruments . The Company is not in violation or default of any provisions of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound. The execution, delivery and performance of the Purchase Agreement and the Put Agreement, the consummation of the transactions contemplated hereby and the authorization, issuance and delivery of the Securities will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract, or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company.  The Company:  (a) has entered into the bridge transaction after careful consideration of all alternatives; (b) is aware of the potential return to the Investors pursuant to the bridge transaction; (c) acknowledges that the amount of the potential return to the Investors appropriately reflects the risk inherent in the bridge transaction; and (d) hereby covenants not to assert a defense of usury to any action by an Investor to collect any amount due under a Class B Note.

 

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5.    Investors' Representations .  

 

Each Investor represents and warrants to the Company as follows:

 

     (a)  the Investor is an "accredited investor" within the meaning of

Regulation D under the Securities Act of 1933, as amended (the “ Securities

Act ”);

 

     (b)  the Investor is acquiring the Securities for its own account for

purposes of investment, and not with a view toward the sale or other

distribution thereof,

 

     (c)  the Investor has received or had access to all information it

deems necessary to make a judgment with respect to the acquisition of the

Securities, including the opportunity to ask questions of and discuss the

Company's business with management of the Company;

 

     (d)  the Investor understands that the Securities must be held

indefinitely unless registered under the Securities Act or unless an

exemption from registration exists, that no public market now exists for

the Securities, and that there may never exist a public market for the Securities;

and

 

     (e)  the Investor understands that the Securities have not been

registered under the Securities Act (on the ground that the sale of the

Securities is exempt from registration as not involving a public offering),

and that the reliance of the Company on such exemption is based upon the

representations made in this section.

 

6.    Restricted Securities .  

 

The Securities have not been registered under the Securities Act or any state securities law, and are not transferable except pursuant to

 

     (a)  a public offering registered under the Securities Act, or

 

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     (b)  subject to the conditions specified in the following subsection, Rule 144 of the Securities and Exchange Commission (if available), or any other legally available means of transfer.

 

7.    Closing Conditions .

 

7.1  

Conditions to Investors’ Obligations .  The obligations of each Investor under Section 2 of this Agreement are subject to the fulfillment or waiver, on or before the Closing and each Additional Closing, of each of the following conditions, the waiver of which shall not be effective against any Investor who does not consent to such waiver, which consent may be given by written or email communication to the Company or its counsel:
 

 

(a)

Each of the representations and warranties of the Company contained in Section 4 shall be true and correct on and as of the Closing or Additional Closing, as the case may be, with the same effect as though such representations and warranties had been made on and as of the date of the Closing or Additional Closing, as the case may be.

  

(b)

The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing or Additional Closing, as the case may be, and shall have obtained all approvals, consents and qualifications necessary to complete the purchase and sale described herein.

 

(c)

The Company and each of the Investors shall have executed this Agreement and the Put Agreement.

  

(d)  

The Company shall have received payment of the Total Purchase Price from all Investors participating in the Closing or Additional Closing, as the case may be, and shall have issued and delivered to each Investor a Class B Note in the principal amount of the Purchase Price.

 

(e)

The Company shall have entered into an escrow agreement acceptable to investors and deposited shares of Energroup Holdings Corp. (“ ENHD ”) owned by the Company’s Redwood Capital, Inc. subsidiary in an amount equal to 75% of the Commitment Amount, based on a $4.40 price per share of ENHD, with said shares being delivered to escrow free and clear of all encumbrances, including those created by the Senior Notes.

 

(f)

The Investors shall have completed to their satisfaction all due diligence review; among other data, the Company shall have provided (i) a projection of cash flows for the life of the Class B Notes, excluding the Interest payments in kind, and (ii) full disclosure of any and all current or pending litigation matters involving the Company, its subsidiaries, officers and directors, including lawsuits and judgments currently in force, pending or threatened.

 

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(g)

The Company shall have entered into lock-up agreements acceptable to Investors with the Company’s and Redwood Capital, Inc.’s  insiders (SIVC and Redwood Capital, Inc. Directors, Chairman, President, Managing Director, CEO, CFO and COO) who will be restricted from selling shares in the Company, ENHD, Haijie, WITU or other client shares before December 31, 2008 unless their sale is above 200% of such company’s reverse takeover financing price per share or unless the Notes have been fully redeemed.

 

(h)

The Company shall have paid the fees and expenses for counsel for the Investors; provided, however, that the Company’s obligation to pay such fees and expenses shall not exceed $10,000.00 in the aggregate.

 

(i)

The Company shall have provided counsel for the Investors copies of its board resolutions approving the sale of the Senior Notes and the Class B Notes and the shares of common stock issuable thereunder.

 

(j)

James S. Bickel, Sr. shall have entered into a personal guaranty with the Investors for the amount of the difference between the security shares and 100% of the Commitment Amount, which guaranty will be secured by his personally-owned holdings of SIVC shares.  

 

  7.2

Condition to Company’s Obligation s . The obligations of the Company to each Investor under this Agreement are subject to the fulfillment or waiver on or before the Closing of the following condition by each Investor:

 

(a)

Each of the representations and warranties of such Investor contained in Section 5 shall be true and correct on the date of the Closing or Additional Closing, as the case may be, with the same effect as though such representations and warranties had been made on and as of the Closing or Additional Closing, as the case may be.

 

(b)

Each Investor shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing or Additional Closing, as the case may be, and shall have obtained all approvals, consents and qualifications necessary to complete the purchase and sale described herein.

 

 

(c)

 The Company and each of the Investors shall have executed this Agreement and the Put Agreement.

 

8.

  Covenants .

 

  8.1

Additional Authorized Shares .

If necessary, the Company shall take all actions reasonably necessary to amend the Company’s Certificate of Incorporation to authorize the additional shares of common stock necessary to accommodate the payment of interest on the Class B Notes.  

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8.2

Additional Escrow Shares .  As necessary to maintain an increased security deposit, 90 days following Closing, the Company shall deposit further shares required into escrow, if any, such that the value of the total amount of ENHD shares on deposit shall be equal to or greater than 100% of the Commitment Amount, based on the closing bid price per share of ENHD 90 days following the Closing Date.  If all of the ENHD shares held by the Company and available for deposit are deposited into escrow and a shortfall nevertheless exists under th