EXHIBIT 10.01
PROELITE, INC.
and
STRATUS MEDIA GROUP, INC.
STRATEGIC INVESTMENT AGREEMENT
October 9, 2009
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TABLE OF
CONTENTS
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Page
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ARTICLE
1
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INTERPRETATION
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1
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Section
1.1
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Defined
Terms.
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7
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Section
1.2
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Headings,
etc.
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7
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Section
1.3
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Fully Diluted
Basis.
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7
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Section
1.4
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Certain Phrases,
etc.
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7
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Section
1.5
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Knowledge.
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7
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Section
1.6
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Accounting
Terms.
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8
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Section
1.7
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Incorporation of
Schedules.
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8
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ARTICLE
2
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PURCHASED SHARES
AND PURCHASE PRICE
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8
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Section
2.1
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Preferred
Shares.
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8
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Section
2.2
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Payment of
Transfer Taxes.
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8
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ARTICLE
3
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REPRESENTATIONS AND WARRANTIES OF THE
COMPANY
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9
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Section
3.1
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Corporate
Matters
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9
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Section
3.2
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General Matters
Relating to the Business
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12
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Section
3.3
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Matters Relating
to the Assets
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13
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Section
3.4
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Financial
Matters
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16
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Section
3.5
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Particular
Matters Relating to the Business
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17
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ARTICLE
4
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REPRESENTATIONS AND WARRANTIES OF SMGI
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20
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Section
4.1
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Representations
and Warranties of SMGI.
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20
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ARTICLE
5
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PRE-CLOSING
COVENANTS OF THE PARTIES
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22
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Section
5.1
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Conduct of
Business Prior to the Closing.
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22
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Section
5.2
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Access for Due
Diligence.
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24
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Section
5.3
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Actions to
Satisfy Closing Conditions.
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24
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Section
5.4
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Notice of Untrue
Representation or Warranty.
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24
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Section
5.5
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Use of
Proceeds
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25
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Section
5.6
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Closing Uses of
Purchase Price
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25
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Section
5.7
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Proof of
Funds
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25
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Section
5.8
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Use of Loan
Proceeds
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25
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ARTICLE
6
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CONDITIONS OF
CLOSING
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25
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Section
6.1
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Conditions for
the Benefit of SMGI.
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25
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Section
6.2
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Conditions for
the Benefit of the Company.
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27
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ARTICLE
7
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CLOSING
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29
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Section
7.1
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Date, Time and
Place of Closing.
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29
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ARTICLE 8
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POST CLOSING COVENANTS
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29
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Section 8.1
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Further Assurances
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29
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Section 8.2
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Announcements
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29
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Section 8.3
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Conduct of the Company
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29
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ARTICLE 9
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TERMINATION
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30
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Section 9.1
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Termination Rights.
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30
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Section 9.2
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Effect of Termination
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31
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ARTICLE 10
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INDEMNIFICATION
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31
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Section 10.1
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Survival.
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31
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Section 10.2
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Indemnification in Favor of SMGI
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31
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Section 10.3
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Indemnification in Favor of the
Company
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31
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Section 10.4
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Notification; SMGI Indemnity Claims.
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32
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Section 10.5
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Procedure for Third Party Claims.
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32
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Section 10.6
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Alternative Remedies.
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34
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Section 10.7
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Exclusive Remedies
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35
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ARTICLE 11
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MISCELLANEOUS
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35
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Section 11.1
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Notices.
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35
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Section 11.2
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Time of the Essence.
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35
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Section 11.3
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Brokers.
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36
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Section 11.4
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Third Party Beneficiaries.
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36
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Section 11.5
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Expenses.
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36
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Section 11.6
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Independent Counsel.
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36
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Section 11.7
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Amendments.
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36
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Section 11.8
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Waiver.
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37
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Section 11.9
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Entire Agreement.
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37
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Section 11.10
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Successors and Assigns.
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37
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Section 11.11
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Severability.
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38
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Section 11.12
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Informal Dispute Resolution.
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38
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Section 11.13
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Governing Law.
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38
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Section 11.14
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Waiver of Jury Trial.
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38
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Section 11.15
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No Commitment for Additional
Financing.
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39
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Section 11.16
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Counterparts.
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39
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Exhibit “A”
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Form of Certificate of Designation, Voting Powers
and Preferences of Series A Convertible Preferred Stock
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Exhibit “B”
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Form of Release
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STRATEGIC INVESTMENT AGREEMENT
This
STRATEGIC INVESTMENT AGREEMENT (“ Agreement ”),
dated as of October 9, 2009, is made by and between ProElite, Inc.,
a New Jersey corporation (the “ Company ”), on
the one hand, and Stratus Media Group, Inc., a Nevada corporation
(“ SMGI ”) on the other hand. The Company and
SMGI are collectively referred to herein as the “
Parties ” or “ parties
.” This Agreement is entered into with reference
to the following:
A. The
Company is and has been engaged in the business of organizing and
promoting mixed martial arts (“ MMA ”) events
and has developed certain Intellectual Property relating
thereto.
B. SMGI
is engaged, inter alia, in developing and operating sports and
entertainment properties and intends to use the Company and/or its
Affiliates as the vehicle to conduct MMA events.
C. The
Company desires to sell to SMGI and SMGI desires to purchase from
the Company shares of the preferred stock of the Company on the
terms and conditions set forth herein.
D. Concurrently
with the execution of this Agreement, SMGI is loaning the Company
$100,000 (the “Loan”) pursuant to a demand promissory
note (the “ Note ”).
ARTICLE 1
INTERPRETATION
Section
1.1 Defined Terms .
As used
in this Agreement, the following terms have the following
meanings:
“
Affiliate ” means, with respect to any specified
Person, (i) any other Person who, directly or indirectly, owns
or controls, is under common ownership or control with, or is owned
or controlled by, such specified Person, (ii) any other Person
who is a director, officer, partner or trustee of the specified
Person or a Person described in clause (i) of this definition
or any spouse of the specified Person or any such other Person,
(iii) any relative of the specified Person or any other Person
described in clause (ii) of this definition, or (iv) any
Person of which the specified Person and/or any one or more of the
Persons specified in clause (i), (ii) or (iii) of this
definition, individually or in the aggregate, beneficially own 10%
or more of any class of voting securities.
“
Agreement ” means this Strategic Investment Agreement,
all exhibits thereto, and the Disclosure Schedules; and the
expressions “ Article ” and “
Section ” followed by a number mean and refer to the
specified Article or Section of this Agreement.
“
Ancillary Agreements ” means the Note, Series A
Certificate of Designation, Voting Powers and Preferences of Series
A Convertible Preferred Stock and any other agreements referred to
in this Agreement.
“
Assets ” means all of the assets, rights, intellectual
property, interests and other properties, real, personal and mixed,
tangible and intangible, owned by the Company Group.
“
Authorization ” means, with respect to any Person, the
Business or any matter, any order, permit, approval, waiver,
license or similar authorization of any Governmental Entity having
jurisdiction over the Person, Business or matter.
“
Balance Sheet Date ” means July 31, 2009.
“
Books and Records ” means all books of account, tax
records, sales and purchase records, customer and supplier lists,
computer software, formulae, business reports, plans and
projections and all other documents, files, correspondence and
other information of the applicable Party (whether in written,
printed, electronic or computer printout form).
“
Business ” means the business of organizing and
promoting MMA events.
“
Business Day ” means any day of the year, other than a
Saturday, Sunday or any day on which banks are required or
authorized to close in Los Angeles, California.
“
Closing ” has the meaning set forth in Section
7.1.
“
Closing Date ” means the date of Closing.
“
Code ” means the U.S. Internal Revenue Code of 1986,
as amended from time to time, together with all rules and
regulations promulgated thereunder.
“
Company ” means ProElite, Inc.
“
Common Stock ” means the common stock of the
Company.
“
Company Group ” means, collectively, the Company and
its Subsidiaries.
“
Company Intellectual Property ” shall mean any and all
Intellectual Property and Intellectual Property Rights that are
owned by any member of the Company Group in any
jurisdiction.
“
Consent ” means the consent of a contracting party to
the transactions contemplated herein, if required by the terms of
any Contract.
“
Contracts ” means all agreements to which any member
of the Company Group is a party including all contracts, leases,
mortgages, leases of personal property, employment agreements,
understandings, options, warrants, indentures, notes or other
obligations or commitments of any nature, written or oral,
including the Material Contracts.
“
Conversion Shares ” has the meaning set forth in
Section 3.1(c).
“
Corporate Records ” means the corporate records of all
members of the Company Group, including (i) all charter documents
and by-laws, (ii) all minutes of meetings and resolutions of
stockholders and directors (and any committees), (iii) the stock
certificate books, securities register, register of transfers and
register of directors, and (iv) any other documents required to be
kept by applicable Law.
“
Damages ” means any loss, liability, claim, damage
(including incidental but excluding consequential damages and lost
profits (except to the extent arising from third party claims)) or
expense (including legal expenses) whether resulting from any
action, suit, proceeding, arbitration, claim or demand that is
instituted or asserted by a third party or any cause, matter,
thing, act, omission or state of facts not involving a third
party.
“
Derivative Securities ” has the meaning set forth in
Section 3.1(i).
“
Direct Claim ” means any cause, matter, thing, act,
omission or state of facts not involving a Third Party Claim which
entitles an Indemnified Person to make a claim for indemnification
under this Agreement.
“
Disclosure Schedules ” means those schedules attached
hereto and delivered by the Company to SMGI, which shall be divided
into sections containing the disclosure information required in
each such section by the terms of this Agreement.
“
Employee Plans ” means all the employee benefit,
fringe benefit, supplemental employment benefit, bonus, incentive,
deferred compensation, profit sharing, savings sharing,
termination, change of control, pension, retirement, stock option,
stock purchase, phantom stock, severance, stock appreciation,
health, welfare, medical, dental, disability, life insurance and
similar plans, programs, arrangements or practices relating to the
current or former employees, officers or directors of the Company
Group maintained, sponsored or funded by any member of the Company
Group, whether written or oral, funded or unfunded, insured or
self-insured, registered or unregistered other than
government-sponsored employment insurance, workers compensation,
health insurance and pension plans, including, without limitation,
all “employee benefit plans” as defined in Section 3(3)
of the ERISA.
“
ERISA ” means the U.S. Employee Retirement Income
Security Act of 1974, as amended from time to time, the rules and
regulations promulgated thereunder and any successor
statute.
“
ERISA Affiliate ” has the meaning set forth in Section
3.1.
“
Financial Statements ” means the audited and unaudited
consolidated financial statements of the Company for the fiscal
years ended December 31, 2006, 2007 and 2008, and the period(s)
ended July 31, 2009.
“
GAAP ” means, at any time, accounting principles
generally accepted in the United States of America, at the relevant
time applied on a consistent basis.
“
Governmental Entity ” means any (i) multinational,
federal, state, provincial, municipal, local or other governmental
or public department, central bank, court, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) any
subdivision or authority of any of the foregoing, or (iii) any
quasi-governmental or private body exercising any regulatory,
expropriation or taxing authority under or for the account of any
of the above and includes a stock exchange or self-regulatory
body.
“
Indemnified Person ” means a Person with
indemnification rights or benefits under Section 10.3 or 10.4 of
this Agreement.
“
Independent Director ” has the meaning set forth in
Section 6.1(e) as modified by Section 10.4(5).
“
Indemnifying Party ” means a party against which a
claim may be made for indemnification under this
Agreement.
“
Intellectual Property ” means any and all of the
following: (i) proprietary and non-public business information,
including inventions (whether patentable or not), invention
disclosures, improvements, trade secrets, know-how, processes,
designs, technology, technical data, schematics and formulae, and
documentation relating to any of the foregoing; (ii) works of
authorship, including computer programs, source code, and
executable code, whether embodied in software, firmware or
otherwise, documentation, files, and records; (iii) copyrights,
copyright registrations and applications for copyright
registration; (iv) trade names, business names, corporate names,
domain names, website names and world wide web addresses,
registered and unregistered trade-marks, trade-mark applications,
trade dress and logos, service marks, certification marks and the
goodwill associated with any of the foregoing; and (v)
proprietary and confidential business information including
know-how, inventions, discoveries, improvements, concepts, ideas,
methods, processes, designs, formulae, technical data, drawings,
specifications, research and development information and other
proprietary and confidential information, including customer lists,
business plans and marketing plans, in each case to the extent not
included in the foregoing subparagraphs, but excluding any of the
foregoing that is generally known or available to the public
(collectively, “ Trade Secrets ”).
“
Interim Period ” means the period between the date of
this Agreement and the Closing Date.
“
Laws ” means any and all applicable laws including all
domestic or foreign, federal, state, provincial or local statutes,
codes, ordinances, decrees, rules, regulations, municipal by-laws,
judicial or arbitral or administrative or ministerial or
departmental or regulatory judgments, orders, decisions, rulings or
awards, policies, notices, guidelines, including, without
limitation, any and all by-laws, rules, regulations, policies,
guidelines, orders, decisions, rulings or awards, of any applicable
stock exchanges and self-regulatory organizations and general
principles of common and civil law and equity, binding on or
affecting the Person referred to in the context in which the word
is used.
“
Liabilities ” means with respect to any Person, any
liability or obligation of such Person of any kind, character or
description, whether known or unknown, absolute or contingent,
accrued or unaccrued, disputed or undisputed, liquidated or
unliquidated, secured or unsecured, joint or several, due or to
become due, vested or unvested, executory, determined, determinable
or otherwise, and whether or not the same is required to be set
forth in the financial statements of such Person.
“
Lien ” means any mortgage, charge, pledge,
hypothecation, security interest, assignment, lien (statutory or
otherwise), charge, title retention agreement or arrangement,
restrictive covenant or other encumbrance of any nature or any
other arrangement, deemed or statutory trust, or condition which,
in substance, secures payment or performance of an
obligation. Lien does not include securities law
restrictions.
“
Loan ” has the meaning set forth in the
Recitals.
“
Material Adverse Effect ” means a material adverse
effect on the business, assets (including intangible assets),
liabilities, financial condition, property, or results of
operations of the Company Group, taken as a whole.
“
Material Contracts ” has the meaning set forth in
Section 3.3(c).
“
MMA ” means mixed martial arts.
“
Note ” has the meaning set forth in the
Recitals
“
Order ” means any order, ruling, decree, directive,
consent, approval, injunction or other similar determination or
finding by, before, or under the supervision of any Governmental
Authority, arbitrator or mediator and, in the case of a Regulatory
Authority, a memorandum of understanding or agreement entered into
in the exercise of its supervisory authority.
“
Ordinary Course ” means, with respect to an action
taken by a Person, that such action is taken in the ordinary course
of the normal day-to-day operations of the Person.
“
Outstanding Debts ” means all obligations of the
Company for borrowed money and all obligations of the Company
evidenced by bonds, debentures, notes, loan agreements or other
similar instruments.
“
Parties ” or “ parties ” means the
Company and SMGI and any other Person who may become a party to
this Agreement.
“
Pension Plan ” has the meaning set forth in Section
3.5(c).
“
Person ” means a natural person, partnership, limited
partnership, limited liability company or partnership, corporation,
syndicate, sole proprietorship, company, joint stock company,
trust, trustee, executor, administrator or other legal
representative, unincorporated association, joint venture or other
entity or Governmental Entity, and pronouns have a similarly
extended meaning.
“
Preferred Shares ” has the meaning set forth in
Section 2.1.
“
Public Statement ” means any press release, public
statement or announcement with respect to the transactions
contemplated by this Agreement.
“
Purchase Price ” has the meaning set forth in Section
2.1.
“
Related Party ” means in respect of any member of the
Company Group: (i) a Person which alone or in combination with
others controlled by such Person holds a sufficient number of
securities of the Company Group or has contractual rights binding
on the Company sufficient to control any member of the Company
Group, (ii) a Person in respect of which a Person referred to in
clause (i) above alone or in combination with others controlled by
the Person holds a sufficient number of securities or has
contractual rights sufficient to control the Person referred to in
clause (i) above (but only if the Company knows of the control
relationship between the two Persons), (iii) a Person (other than
employees of the Company Group) in respect of which any member of
the Company Group alone or in combination with others such member
controls holds a sufficient number of securities or has contractual
rights sufficient to control such Person, (iv) a Person who
beneficially owns, directly or indirectly, voting securities of any
member of the Company Group or who is known by the Company to
exercise control or direction over voting securities of any member
of the Company Group or a combination of both carrying more than
10% of the voting rights attached to all voting securities of any
member of the Company Group for the time being outstanding, or (v)
a director or officer of any member of the Company Group or any
Person known to be an immediate relative of such director or
officers.
“Series A Certificate of
Designation ” means
the Certificate of Designation, Voting Powers and Preferences of
the Series A Convertible Preferred Stock of the Company, which
Certificate shall be in the form of Exhibit A or such other
form that may be agreed to between the Company and SMGI.
“
Series A Preferred Stock ” means the preferred stock
of the Company designated as Series A Convertible Preferred Stock,
which series of preferred stock will be created prior to the
Closing by the filing of the Series A Certificate of
Designation.
“
SMGI ” means Stratus Media Group, Inc.
“
Stock Option ” means any option to acquire shares in
the capital of any member of the Company
Group.
“
Subsidiary ” means any corporation, partnership, joint
venture or other legal entity of which a Person (either alone or
through or together with any other subsidiary), owns, directly or
indirectly, more than 50% of the stock or other equity interests
the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such
corporation or other legal entity or has, directly or indirectly,
the right to appoint a majority of the board of directors or other
governing body of such corporation or other legal
entity.
“
Suppliers ” means the suppliers of the Company
Group.
“
Tax ” or “ Taxes ” means (i) any
federal, provincial, state, local or foreign tax, duty, fee,
excise, premium, assessment, impost, levy and all taxes, duties,
fees, excises, premiums, assessments, imposts, levies and other
charges or assessments of any kind whatsoever imposed by any
Governmental Entity, whether computed on a separate, consolidated,
unitary, combined or other basis, including those levied on, or
measured by, or described with respect to, federal, state, local or
foreign income, gross receipts, profits, gains, windfalls, capital,
capital stock, production, recapture, transfer, land transfer,
license, gift, occupation, wealth, environment, net worth,
indebtedness, surplus, sales, goods and services, harmonized sales,
use, value-added, excise, special assessment, stamp, withholding,
business, franchising, real or personal property, health, employee
health, payroll, workers’ compensation, employment or
unemployment, severance, social services, social security,
education, utility, surtaxes, customs, import or export, and
including all license and registration fees and all employment
insurance, health insurance and government pension plan premiums or
contributions; (ii) all interest, penalties, fines additions to tax
or other additional amounts imposed by any Governmental Entity on
or in respect of amounts of the type described in clause (i) above
or this clause (ii); (iii) any liability for the payment of any
amounts of the type described in clauses (i) or (ii) as a result of
being a member of an affiliated, consolidated, combined or unitary
group for any period; and (iv) any liability for the payment of any
amounts of the type described in clauses (i) or (ii) as a result of
any express or implied obligation to indemnify any other Person or
as a result of being a transferee or successor in interest to any
party.
“
Tax Return ” means any return, declaration, report,
election, notice, designation, filing, claim for refund, or
information return or statement relating to any Tax, including any
schedule or attachment thereto, and any amendment
thereof.
“
Third Party Claim ” means any action, suit,
proceeding, arbitration, claim or demand that is instituted or
asserted by a third party against an Indemnified Person which
entitles the Indemnified Person to make a claim for indemnification
under this Agreement.
Section
1.2 Headings, etc.
The
provision of a Table of Contents, the division of this Agreement
into Articles and Sections and the insertion of headings are for
convenient reference only and are not to affect its
interpretation.
Section
1.3 Fully Diluted Basis
.
Whenever ownership or holding of a number of
shares of Common Stock is determined under this Agreement, subject
to the last sentence of Section 2.1, such determination will be
made on a fully diluted basis taking into account the issued and
outstanding shares of Common Stock and assuming conversion to or
exercise for shares of all preferred shares, debentures, options,
warrants, convertible securities or other rights exercisable or
convertible for shares of Common Stock, including Stock Options
whether vested or not.
Section
1.4 Certain Phrases,
etc.
In this
Agreement and any Ancillary Agreement (i) (a) the words “
including ” and “ includes ” mean
“ including (or includes) without limitation ”,
and (b) the phrase “ the aggregate of ”, “
the total of ”, “ the sum of ”, or
a phrase of similar meaning means “ the aggregate (or
total or sum), without duplication, of ”, and (ii) in the
computation of periods of time from a specified date to a later
specified date, unless otherwise expressly stated, the word “
from ” means “ from and including ”
and the words “ to ” and “ until
” each mean “ to but excluding
”.
Section
1.5 Knowledge .
Where
any representation or warranty contained in this Agreement or any
Ancillary Agreement or in any other document delivered pursuant to
this Agreement is expressly qualified by reference to the knowledge
of the Company or SMGI, it shall be deemed to refer to the actual
knowledge of any and all of the directors and officers of the
Company Group or SMGI, as applicable.
Section
1.6 Accounting Terms
.
All
accounting terms not specifically defined in this Agreement shall
be interpreted in accordance with GAAP.
Section
1.7 Incorporation of Schedules
.
The
schedules attached to this Agreement shall, for all purposes of
this Agreement, form an integral part of it.
ARTICLE 2
PREFERRED SHARES AND PURCHASE PRICE
Section
2.1 Preferred Shares
.
Subject
to the terms and conditions of this Agreement, the Company agrees
to issue and sell to SMGI and SMGI agrees to subscribe for and
purchase from the Company at the Closing that number of shares of
Series A Preferred Stock (the “ Preferred Shares
”) necessary for SMGI to hold on an as-converted basis, 95%
of the issued and outstanding shares of Common Stock of the Company
as of the Closing Date, on a fully diluted basis, after giving
effect to shares issuable upon conversion of the Preferred
Shares. The parties shall determine the exact number of
shares of Series A Preferred Stock to be issued pursuant to this
Agreement prior to Closing. The purchase price payable
by SMGI for the Preferred Shares shall be $2.0 million (the “
Purchase Price ”) payable in cash on the Closing Date
less any amount owing pursuant to the Note as provided in Section
5.5. For avoidance of doubt, the Series A Certificate of
Designation shall provide that the amount of shares of Common Stock
issuable upon conversion on a cumulative basis shall equal 95% of
the sum of (a) the issued and outstanding shares as of the Closing,
plus (b) any shares of Common Stock issued after the Closing Date
upon exercise or conversion of any Derivative Securities
outstanding as of the Closing Date, subject to any adjustment for
stock splits, stock dividends, recapitalizations, etc. and in all
cases, after giving effect to shares issuable upon conversion of
the Preferred Shares.
Section
2.2 Payment of Transfer Taxes
.
Other
than as set forth in this Agreement, all transfer, documentary,
sales, use, stamp, registration and other similar Taxes and fees
(including any penalties, and interest) incurred in connection with
the issuance by the Company of the Preferred Shares under this
Agreement, shall be paid by the Company when due and the Company,
will, at its own expense, prepare all necessary Tax Returns and
other documentation with respect to all such transfer, documentary,
sales, use, stamp, registration and other similar Taxes and fees,
and, if required by applicable Law, SMGI will, and will cause its
Affiliates to, join in the execution of any such Tax Returns and
other documentation.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The
Company represents and warrants as follows to SMGI as of the date
hereof and as of the Closing Date and acknowledges and confirms
that SMGI is relying on such representations and warranties in
connection with the purchase by SMGI of the Preferred Shares and
the other transactions contemplated hereby (it being understood
that no investigations made by or on behalf of SMGI shall have the
effect of waiving, diminishing the scope of, or otherwise affecting
any such representations and warranties):
Section
3.1 Corporate Matters
(a)
Incorporation and Qualification . The Disclosure
Schedules set forth all of the Subsidiaries of the Company and such
other entities in which any member of the Company Group has an
equity interest. Each member of the Company Group is a corporation
incorporated, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has the corporate power to
own or lease and operate its property, carry on its business and
enter into and perform its obligations under this Agreement and
each of the Ancillary Agreements to which it is a
party. The members of the Company Group are duly
qualified, licensed or registered to carry on business in all
jurisdictions in which the failure to so qualify would have a
Material Adverse Effect. All such jurisdictions are disclosed on
the Disclosure Schedules.
(b)
Validity of Agreement . The execution, delivery
and performance by the Company of this Agreement and each of the
Ancillary Agreements to which the Company is a party:
(i) have
been duly authorized by all necessary corporate action on the part
of the Company;
(ii) do
not and will not (or would not with the giving of notice, the lapse
of time or the happening of any other event or condition)
constitute or result in a violation or breach of, or conflict with,
or allow any other Person to exercise any rights under, any of the
terms or provisions of the Company’s charter documents,
by-laws or any stockholders agreement relating to the
Company;
(iii) do
not and will not (or would not with the giving of notice, the lapse
of time or the happening or any other event or condition)
constitute or result in a breach or violation of, or conflict with
or allow any other Person to exercise any rights under, any of the
terms or provisions of any Contracts, leases or instruments to
which the Company is a party or pursuant to which any of its assets
or property may be affected, in each case except as would not have
a Material Adverse Effect;
(iv) will
not result in a breach of, or cause the termination or revocation
of, any Authorization held by the Company or necessary to the
ownership of the Preferred Shares or the operation of the Business,
in each case except as would not have a Material Adverse Effect;
and
(v) will
not result in the violation of any Law, except as would not have a
Material Adverse Effect.
(c)
Securities Authorization . The authorization, issuance (or
reservation for issuance), sale and delivery of the Preferred
Shares and the shares of Common Stock issuable upon conversion
thereof (the “ Conversion Shares ”), has been
authorized by all requisite action of both the Company’s
Board of Directors and shareholders, as applicable. The
Preferred Shares and the Conversion Shares, when issued in
accordance with this Agreement and the Ancillary Agreements, will
be validly issued and outstanding, fully paid and nonassessable,
with no personal liability attaching to the ownership thereof, free
and clear of any Liens whatsoever, other than pursuant to the
Agreement and the Ancillary Agreements.
(d)
Required Authorizations . Except for the filing
of a Form D and a report on Form 8-K, there is no requirement to
make any filing with, give any notice to, or to obtain any consent
or approval of any Governmental Entity or any other Person, or to
obtain any Authorization of, any Governmental Entity as a condition
to the lawful completion of the transactions contemplated by this
Agreement or any Ancillary Agreement.
(e)
Required Consents . There is no requirement to
obtain any Consent, approval or waiver of a third party under any
Contract as a condition to the completion of the transactions
contemplated by this Agreement or the Ancillary Agreements or to
avoid potential cancellation or default thereunder.
(f)
Execution and Binding Obligation . This Agreement
and each of the Ancillary Agreements to which the Company is a
party have been or will by the Closing Date have been duly executed
and delivered by the Company and constitute or will constitute
legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their respective terms
subject only to any limitation under applicable Laws relating to
(i) bankruptcy, winding-up, insolvency, arrangement and other laws
of general application affecting the enforcement of
creditors’ rights, and (ii) the discretion that a court may
exercise in the granting of equitable remedies.
(g)
Authorized and Issued Capital .
(i) The
Disclosure Schedules sets forth, as of the date of this Agreement
and as of immediately prior to Closing, (i) the authorized capital
of the Company, (ii) the number of shares of Common Stock that have
been duly issued and are outstanding as fully paid and
non-assessable, and (iii) the number of shares of
preferred stock that have been duly issued and are outstanding as
fully paid and non-assessable. On the Closing Date, the
Conversion Shares shall represent 95% of the issued and outstanding
shares of Common Stock, on a fully diluted basis.
(ii) On
the Closing Date all of the Purchased Shares shall have been issued
in material compliance with all applicable Laws including, without
limitation, applicable securities Laws (based in part on the
accuracy of the representations in Section 4.1(d) and (e)), and
shall have been fully paid and non-assessable.
(iii) A
true and complete list of the registered holders of the issued and
outstanding securities of the Company as of the date hereof (which
list consists of the Company’s transfer agent’s list)
is set forth in the Disclosure Schedules.
(iv) All
of the equity interests owned by the Company of each of its
Subsidiaries are free and clear of all Liens. All of the issued and
outstanding shares of capital stock of each member of the Company
Group have been duly authorized and are validly issued, fully paid,
and non-assessable.
(h)
Other Rights . Except as provided in the
Company’s articles of incorporation and bylaws or as
contemplated by this Agreement or as set forth in the Disclosure
Schedules, there are no outstanding contractual obligations of any
member of the Company Group (i) restricting the transfer of; (ii)
affecting the voting rights of; (iii) requiring the repurchase,
redemption or disposition of, or containing any right of first
refusal with respect to; (iv) requiring the registration or sale
of; or (v) granting any pre-emptive or anti-dilutive right with
respect to, any shares in the capital of any member of the Company
Group. No debt securities of any member the Company
Group are issued and outstanding.
(i)
Derivative Securities . Except with the respect
to the issuance of the Preferred Shares under this Agreement or as
set forth on the Disclosure Schedules, there are no outstanding
options, Stock Options, warrants, privileges, convertible
debentures, agreements or rights to subscribe for or to purchase or
which would require the Company to issue, now or in the future, any
shares of capital stock or any other securities of the Company
(collectively, “ Derivative Securities
”).
(j)
No Other Agreements to Purchase . Except for the
rights of SMGI under this Agreement and the Ancillary Agreements,
no Person has any written or oral agreement, option or warrant or
any right or privilege (whether by Law, pre-emptive or contractual)
capable of becoming such for (i) the purchase or acquisition from
the Company of any of the Preferred Shares, or (ii) the purchase,
subscription, allotment or issuance of any of the unissued shares
or other securities of any member of the Company Group.
(k)
Registration Rights . The Company is under no
obligation to register any of its presently outstanding securities
or any of its securities that may be hereafter issued pursuant to
this or any other existing agreement, except as provided for in
SMGI Rights Agreement.
(l)
409A . The Company does not have any “nonqualified
deferred compensation plan” (as such term is defined under
Section 409A(d)(1) of the Code and the Treasury Regulations
thereunder) under which the Company Group makes, is obligated to
make or promises to make, payments.
(m)
Corporate Records . The Corporate Records are
complete and accurate in all material respects and all corporate
proceedings and actions reflected in the Corporate Records have
been conducted or taken in material compliance with all applicable
Laws and with the articles of incorporation and by-laws of the
applicable member of the Company Group, in all material respects.
Without limiting the generality of the foregoing, in respect of
each member of the Company Group, in all material respects, (i) the
minute books contain complete and accurate minutes of all meetings
of the directors and stockholders held since incorporation and all
such meetings were properly called and held, (ii) the minute books
contain all resolutions passed by the directors and stockholders
(and committees, if any) and all such resolutions were properly
passed, (iii) the share certificate books, register of stockholders
and register of transfers are complete and accurate, all transfers
have been properly completed and approved and any tax payable in
connection with the transfer of any securities has been paid, and
(iv) all former and present directors and officers were properly
elected or appointed, as the case may be.
Section
3.2 General Matters Relating to
the Business
(a)
Conduct of Business in Ordinary Course . Since
the Balance Sheet Date, except as described in the Disclosure
Schedules, since the Balance Sheet Date each member of the Company
Group has not:
(i) sold,
transferred or otherwise disposed of any Assets except for Assets
which are obsolete and which individually or in the aggregate do
not exceed $25,000 and except for licenses entered into in the
Ordinary Course;
(ii) incurred
any material liability or obligation (including the borrowing of
funds under existing lines of credit or otherwise), or assumed,
guaranteed or otherwise became liable with respect to the
liabilities of any Person, except in the Ordinary
Course;
(iii) declared,
made, paid or committed to any form of distribution or reduction of
the profits of any member of the Company Group or of its respective
capital, including any (i) dividend (including stock dividends) or
other distribution on any present or future shares of capital
stock, (ii) purchase, redemption or retirement or acquisition of
any of its shares of capital stock, or any option, warrant or other
right to acquire any such shares, or apply or set apart any of its
assets therefor, (iii) bonuses to stockholders, (iv) payment on
account of loans made to any stockholders of any member of the
Company Group , or (v) payment of any bonuses or management
fees;
(iv) created,
allotted or issued any shares of capital stock, or entered into any
agreement, or grant any option, right or privilege, whether
pre-emptive, contractual or otherwise for the purchase or other
acquisition of shares of capital stock or securities convertible
into such shares of any member of the Company Group, nor amended
its charter documents, changed its capital structure or entered
into any agreement or make any offer to do so;
(v) discharged
any secured or unsecured obligation or liability (whether accrued,
absolute, contingent or otherwise) which individually or in the
aggregate exceeded $50,000;
(vi) made
any payment to any employee, officer, manager or director other
than salary, commission, bonus or expense reimbursement other than
in the Ordinary Course;
(vii) made
any bonus or profit sharing distribution or similar payment of any
kind, or incurred the obligation for the same;
(viii) granted
any general increase in the rate of wages, salaries, bonuses or
other remuneration of any employees of the Company;
(ix) made
any change to the rate or form of compensation or remuneration
payable or to become payable to any of its shareholders, directors,
officers, managers, employees, consultants, agents or contractors
which is outside of Ordinary Course;
(x) entered
into any termination, notice, severance, or change of control
agreement with any of its shareholders, directors, managers,
employees, or consultants or agents;
(xi) instituted,
adopted or amended (or committed to do so) any Employee
Plan;
(xii) written
off as uncollectible any material amount of accounts receivable not
otherwise reserved for;
(xiii) made
any material Tax election or changed any existing material Tax
election or settled or compromised any material Tax
liability;
(xiv) made,
or agreed to make, any material change in any method of accounting
or auditing practice;
(xv) amended
or changed its articles of incorporation or by-laws;
(xvi) issued
or authorized for issuance any shares of its capital
stock;
(xvii) entered
into any “ related party transaction ” as such
term is defined under GAAP; or
(xviii) authorized,
agreed or otherwise committed, whether or not in writing, to do any
of the foregoing.
(b)
Compliance with Laws . The Company Group is
conducting and, over the past four years has conducted the Business
in compliance with all applicable Laws other than acts of
non-compliance which, individually or in the aggregate, are not
material to the Company Group.
Section
3.3 Matters Relating to the
Assets
(a)
Title to the Assets . The Company Group owns
(with good title) all of the properties and Assets (whether real,
personal or mixed and whether tangible or intangible) that it
purports to own, including all the properties and assets reflected
as being owned by the Company Group in its Books and
Records.
(b)
No Options, etc. No Person has any written or
oral agreement, option, understanding or commitment, or any right
or privilege capable of becoming such, for the purchase or other
acquisition from any member of the Company Group of any of the
Assets.
(c)
No Breach of Material Contracts . Except as set
forth on the Disclosure Schedules, neither the Company nor any
other member of the Company Group is a party to any Material
Contract. Except as set forth in the Disclosure
Schedules, the Company has performed all of the obligations
required to be performed by it and is entitled to all benefits
under, and is not alleged to be in default of, any Material
Contract, in each case as would not have a Material Adverse
Effect. Except as disclosed on the Disclosure Schedules,
each of the Material Contracts is in full force and effect,
unamended, and there exists no default or event of default or
event, occurrence, condition or act (including the purchase of the
Purchased Shares) which, with the giving of notice, the lapse of
time or the happening of any other event or condition, would become
a default or event of default under any Material Contract, in each
case as would not have a Material Adverse
Effect. “Material Contracts”
means:
(i) any
leases;
(ii) any
continuing Contracts with any Customers or Suppliers which are
material to the operation of the Company Group’s
Business;
(iii) any
promissory note, loan agreement or other Contract for the borrowing
of money, any currency exchange, commodities or other hedging
arrangement or any leasing transaction of the type required to be
capitalized in accordance with GAAP;
(iv) any
Contract for capital expenditures in excess of $25,000 in the
aggregate;
(v) any
confidentiality, secrecy or non-disclosure Contract or any Contract
limiting the freedom of any member of the Company Group to engage
in any line of business, compete with any other Person, operate its
assets at maximum production capacity or otherwise conduct its
business or to solicit or hire employees;
(vi) any
Contract with any Related Party;
(vii) any
agreement of guarantee, support, indemnification, assumption or
endorsement of, or any similar commitment with respect to, the
obligations, liabilities (whether accrued, absolute, contingent or
otherwise) or indebtedness of any other Person;
(viii) any
Contract in respect of Intellectual Property Rights owned by,
licensed to or used by the Company;
(ix) any
employment, service, union, agency, consulting, contractor,
termination and severance contract and agreement, bonus, incentive,
deferred compensation, pension, profit sharing, share savings,
notice, change of control, stock option, phantom stock plan,
employee stock purchase, stock appreciation, health, welfare,
medical, dental, disability, life, insurance, retirement or other
benefit plan, program, arrangement or practice relating to former
and current employees, shareholders, directors, officers, managers,
consultants, agents or contractors, or any agreement (oral or
written) providing for compensation to be paid subsequent upon the
sale of any substantial portion of outstanding shares in
the capital of any member of the Company Group or upon a change of
control of any member of the Company Group; and
(x) any
Contract made out of the Ordinary Course or that is otherwise
material to the Company Group.
(d)
Intellectual Property Rights . The Intellectual Property
rights used in whole or in part in, or required for the carrying on
of, the Business in the manner heretofore carried on are owned by,
or validly licensed to, a member of the Company
Group. All of the Intellectual Property rights owned by
the Company Group are in full force and effect and have not been
used or enforced or failed to be used or enforced in a manner that
would reasonably be expected to result in the abandonment,
cancellation or unenforceability thereof. No member of
the Company Group is bound by any agreement or other obligation
whatsoever that limits or impairs its ability to sell, transfer,
assign, convey or license, or that otherwise affects the
Company’s Intellectual Property rights. The
Company has taken commercially reasonable steps to require current
or former employees, consultants, and contractors of the Company
Group that have created or contributed to Company Intellectual
Property to assign to the Company Group all of their right, title,
and interest in such Company Intellectual Property, and to the
Company’s knowledge, no party to any
