CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT

Exhibit 10.1

ECO2 PLASTICS, INC.

CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT

December 17, 2008

This Convertible Note and Warrant Purchase Agreement (this “ Agreement ”) is made as of December 17, 2008 by and among ECO2 PLASTICS, INC., a Delaware corporation (the “ Company ”), PENINSULA PACKAGING, LLC, a California limited liability company (“ Peninsula ”), TRIDENT CAPITAL FUND-VI, L.P. (“ Trident Capital I ”), TRIDENT CAPITAL FUND-VI PRINCIPALS FUND, L.L.C. (“ Trident Capital II ” and, collectively with Trident Capital I, the “ Trident Lenders ”), HUTTON LIVING TRUST DATED 12/10/1996 (“ Hutton Trust ”) and the other parties set forth on Schedule I (each, an “ Additional Lender ” and collectively, the “ Additional Lenders ”).  Each of Trident Capital I, Trident Capital II, the Hutton Trust and Peninsula, and each Additional Lender, is sometimes referred to herein as a “ Purchaser ” and collectively as the “ Purchasers . ”

WHEREAS on November 21, 2008, J. Charles Buff loaned Six Hundred Thousand Dollars ($600,000) to the Company pursuant to a certain promissory note dated as of the date thereof (the “ Buff Note ”); and

WHEREAS, on November 17 and November 21, 2008, the Trident Lenders   loaned an aggregate of Five Hundred Fifty Thousand Dollars ($550,000) to the Company pursuant to certain promissory notes dated as of November 17 or November 21, 2008 (collectively, the “ Trident Notes ”); and

WHEREAS, on November 17, 2008, the Hutton Trust loaned Fifty Thousand Dollars ($50,000) to the Company pursuant to a certain promissory note dated as of such date (the “ Hutton Note ” and, collectively with the Trident Notes and the Buff Note, the “ Nov08 Notes ”); and

WHEREAS, on the date hereof, Buff assigned all of his right, title and interest in, under and to the Buff Note and certain documents related thereto to Peninsula; and

WHEREAS, Peninsula, on the one hand, and the Trident Lenders and Additional Lenders, on the other hand, each desire to lend at least an additional Nine Hundred Thousand Dollars ($900,000) to the Company, totaling at least One Million Eight Hundred Thousand Dollars ($1,800,000) in the aggregate; and

WHEREAS, in connection with such additional loans, the Company and Peninsula desire to amend and restate the Buff Note in order to evidence the entire approximately One Million Five Hundred Thousand Dollar ($1,500,000) loan which shall be owed to Peninsula; and

 

WHEREAS, in connection with such additional loans, the Company and the Trident Lenders desire to amend and restate the Trident Notes in order to evidence the new amounts which shall be owed to the Trident Lenders; and

WHEREAS, in connection with such additional loans, the Hutton Trust has agreed to amend and restate the Hutton Note in order to conform such note to the terms of the new Peninsula and Trident Notes; and

WHEREAS, in connection with such additional loans, the Company desires to issue certain promissory notes to the Additional Lenders; and

WHEREAS, the Company desires to issue certain warrants to the Purchasers.

AGREEMENT

In consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company and each Purchaser (severally and not jointly), intending to be legally bound, hereby agree as follows:

1.            The Loans; Closing; Delivery .

(a)            The Notes .  Subject to the terms and conditions hereof, each Purchaser shall loan to the Company the amount set forth opposite such Purchaser’s name under the column heading, “Delivery Amount” on Schedule I attached hereto.  Each Purchaser shall surrender its respective Nov08 Note(s) to the Company, if any, and shall receive from the Company a promissory note in the form relating to such Purchaser attached hereto as Exhibit A (a “ Note ” and, collectively with all other promissory notes issued to the Purchasers hereunder, the “ Notes ”), in the amount set forth opposite such Purchaser’s name under the column heading “Aggregate Loan Amount” on Schedule I attached hereto.  The loans evidenced by the Notes shall be referred to herein as the “ Loans .”

(b)            The Warrants .  Subject to the terms and conditions hereof, the Company agrees to issue to each Purchaser a warrant, in the form relating to such Purchaser attached hereto as Exhibit B (collectively, the “ Warrants ”), to purchase, at an exercise price of $0.015 per share, that number of shares of common stock of the Company, par value $0.001 per share (the “ Common Stock ”), equal to 33.3333333 multiplied by the principal amount of such Purchaser’s Loan, as more specifically set forth opposite each Purchaser’s name under the column heading, “Warrant Shares” on Schedule I attached hereto.

(c)            Place and Date of Closing .  The closing of the transactions provided for herein shall take place at the offices of Stradley Ronon Stevens & Young, LLP, 200 Lake Drive East, Suite 100, Cherry Hill, NJ 08002, at not later than 5:00 p.m. (EST) on December 17, 2008 (the “ Initial Closing ”), or at such date as the Purchasers and the Company may agree upon, such time and date of delivery against payment being herein referred to as the “ Initial Closing Date . ”  References herein to the “ Closing Date ” shall mean the Initial Closing Date or the date of any Additional Closing (as defined below), as applicable.

 

(d)            Delivery .  At each Closing, the Notes and Warrants in definitive form evidencing the Loans and Warrants that the Purchasers have agreed to purchase pursuant to this Agreement shall be delivered by or on behalf of the Company, against delivery by or on behalf of each of the Purchasers of (i) the amount set forth opposite such Purchaser’s name under the column heading, “Delivery Amount” on Schedule I by check or wire transfer of immediately available funds to the account of the Company previously designated by it in writing, and (ii) the original Nov08 Notes issued to such Purchaser, if any.

(e)            Subsequent Closings .  The Purchasers understand and agree that at any time and from time to time during the period following the Initial Closing Date but not later than January 9, 2009, the Company may, at one or more additional closings (each, an “ Additional Closing ”), without obtaining the signature, consent or permission of any of the Purchasers, offer and sell any authorized but unsold Notes and Warrants to such persons as shall be acceptable to the Board of Directors of the Company on the terms and conditions set forth herein.  The term “ Closing ” as used herein shall refer to the “ Initial Closing ” and/or each “ Additional Closing ,” as appropriate.  Notwithstanding the foregoing, in no event shall the Company offer and sell any Notes such that the principal amount of all such Notes shall exceed $4,900,000 in the aggregate.

(f)            No Usury .  This Agreement and each Note issued pursuant to the terms of this Agreement are hereby expressly limited so that in no event whatsoever, whether by reason of deferment or advancement of loan proceeds, acceleration of maturity of the loan evidenced hereby, or otherwise, shall the amount paid or agreed to be paid to the Purchasers hereunder for the loan, use, forbearance or detention of money exceed the maximum interest rate permitted by the laws of the State of California.  If at any time the performance of any provision hereof or any Note involves a payment exceeding the limit of the price that may be validly charged for the loan, use, forbearance or detention of money under applicable law, then automatically and retroactively, ipso facto, the obligation to be performed shall be reduced to such limit, it being the specific intent of the Company and the Purchasers hereof that all payments under this Agreement or any Note are to be credited first to interest as permitted by law, but not in excess of (i) the agreed rate of interest set forth in the Note, or (ii) that permitted by law, whichever is the lesser, and the balance toward the reduction of principal.  The provisions of this Section 1(f) shall never be superseded or waived and shall control every other provision of this Agreement and any Note.

(g)            Security Agreement .  The Company and the Purchasers agree to execute the Amended and Restated Security Agreements, dated as of the date hereof, in the forms attached hereto as Exhibit E-1 and Exhibit E-2 (the “ Security Agreements ”), whereby the Purchasers will receive security interests in the collateral of the Company described in the Security Agreements, pursuant to the terms of the Security Agreements.  It is agreed that all of the Company’s indebtedness, whether outstanding on the date hereof or subsequently incurred or assumed, except all indebtedness secured by perfected security interests granted by the Company in connection with the Senior Debt (as such term is defined in the Security Agreements), shall be junior in right of payment to the indebtedness and other obligations of the Company pursuant to the Notes.

 

(h)            Subordination and Intercreditor Agreement .  The Company and the Purchasers agree to execute the Amended and Restated Subordination and Intercreditor Agreement, dated as of the date hereof, in the form attached hereto as Exhibit F (the “ Subordination Agreement ”).

(i)            Securities and Disclosure .  The Notes and Warrants are referred to herein as the “ Securities .”  The Securities will be offered and sold to the Purchasers without such offers and sales being registered under the Securities Act of 1933, as amended (together with the rules and regulations of the Securities and Exchange Commission (the “ SEC ”) promulgated thereunder, the “ Securities Act ”), in reliance on exemptions therefrom.

In connection with the sale of the Securities, the Company has made available (including electronically via the SEC's EDGAR system) to Purchasers its periodic and current reports, forms, schedules, proxy statements and other documents (including exhibits and all other information incorporated by reference) filed with the SEC under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”).  These reports, forms, schedules, statements, documents, filings and amendments, are collectively referred to as the “ SEC Documents . ”  All references in this Agreement to financial statements and schedules and other information which is “contained,” “included” or “stated” in the SEC Documents (or other references of like import) shall be deemed to mean and include all such financial statements and schedules, documents, exhibits and other information which is incorporated by reference in the SEC Documents.

This Agreement, the Notes, the Warrants, the Security Agreements and the Subordination Agreement are sometimes herein collectively referred to as the “ Transaction Documents .”  The shares of Common Stock issuable upon exercise of the Warrants are referred to herein as the “ Warrant Conversion Shares .” The Warrant Conversion Shares and the shares of Common Stock issuable upon conversion of the Series C Convertible Preferred Stock are herein collectively referred to as the “ Conversion Shares .”

2.            Representations and Warranties of the Company .  Except as set forth in the SEC Documents and on the Disclosure Schedule attached hereto and made a part hereof (the   “ Disclosure Schedule ”), the Company represents and warrants to and agrees with Purchasers as follows:

(a)           Except as set forth in Section 2(a) of the Disclosure Schedule, the Company has filed in a timely manner all documents that the Company was required to file with the SEC under the Exchange Act since becoming subject to the requirements of the Exchange Act.  The SEC Documents as of their respective dates did not and will not as of the Closing Date (after giving effect to any updated disclosures therein), contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The SEC Documents and the documents incorporated or deemed to be incorporated by reference therein, at the time they were filed or hereafter are filed with the SEC, complied and will comply, at the time of filing, in all material respects with the requirements of the Securities Act and/or the Exchange Act, as the case may be, as applicable.

 

(b)           The Company has no subsidiaries.  The Company has been duly incorporated   and is validly existing in good standing as a corporation under the laws of its jurisdiction of incorporation, with the requisite corporate power and authority to own its properties and conduct its business as now conducted as described in the SEC Documents and is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the business, condition (financial or other), earnings, management, properties, prospects or results of operations of the Company (any such event, a “ Material Adverse Effect ”); the Company does not own directly or indirectly any of the capital stock or other equity or long-term debt securities of or have any equity interest in any other individual, corporation, partnership, limited liability company, joint venture, trust or unincorporated organization or a government or agency or political subdivision thereof (a “ Person ”); all of the outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and non-assessable, have been issued in compliance with all federal and state securities laws, and were not issued in violation of or subject to any preemptive or other rights to subscribe for or purchase securities, and are owned free and clear of all liens, encumbrances, equities, and restrictions on transferability (other than those imposed by the Securities Act and the state securities or “Blue Sky” laws); except as set forth in Section 2(b) of the Disclosure Schedule, no options, warrants or other rights to purchase from the Company, agreements or other obligations of the Company to issue or other rights to convert any obligation into, or exchange any securities for, shares of capital stock of or ownership interests in the Company are outstanding; and there is no agreement, understanding or arrangement between the Company and any of its stockholders or any other Person relating to the ownership or disposition of any capital stock of the Company or the election of directors of the Company or the governance of the Company’s affairs, and, if any, such agreements, understandings and arrangements will not be breached or violated as a result of the execution and delivery of, or the consummation of the transactions contemplated by, the Transaction Documents; there are no bonds, debentures, notes or other indebtedness having general voting rights (or convertible into securities having such rights) (“ Voting Debt ”) of the Company issued and outstanding; except as set forth in Section 2(b) of the Disclosure Schedule, there are no existing options, warrants, calls, subscriptions or other rights, agreements, arrangements or commitments of any character, relating to the issued or unissued capital stock of the Company, obligating the Company to issue, transfer, sell, redeem, purchase, repurchase or otherwise acquire or cause to be issued, transferred, sold, redeemed, purchased, repurchased or otherwise acquired any capital stock or Voting Debt of, or other equity interest in, the Company or securities or rights convertible into or exchangeable for such shares or equity interests or obligations of the Company to grant, extend or enter into any such option, warrant, call, subscription or other right, agreement, arrangement or commitment; the issuance of the Notes, the Warrants or the Conversion Shares will not give rise to any preemptive rights or rights of first refusal on behalf of any Person or result in the triggering of any anti-dilution or other similar right; except as set forth in Section 2(b) of the Disclosure Schedule, there are no agreements or arrangements under which the Company is obligated to register the sale of any of their securities under the Securities Act; there are no securities, agreements, documents or instruments containing anti-dilution provisions that will be triggered by the issuance of the Notes, the Warrants and the Conversion Shares; the Company has made available to Purchasers a true, correct and complete copy of its certificate of incorporation and bylaws, each as amended and as in effect on the date hereof.

 

(c)           The authorized capital stock of the Company (immediately prior to the Closing Date) consists of 1,500,000,000 shares of Common Stock and 700,000,000 shares of preferred stock, par value $0.001 per share (the “ Preferred Stock ”), and 152,843,414 shares of Preferred Stock have been designated as the Series A Convertible Preferred Stock (the “ Series A Preferred Stock ”), 336,240,039 shares of Preferred Stock have been designated as Series B-1 Stock, and 10,916,547 shares of Preferred Stock have been designated as Series B-2 Stock.  The issued and outstanding capital stock of the Company, as of immediately prior to the Closing Date and as of the Closing Date, is as set forth in Section 2(c) of the Disclosure Schedule attached hereto (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the SEC Documents or upon exercise of outstanding options, warrants and other convertible securities described in the SEC Documents).  Each share of Preferred Stock is convertible into one share of Common Stock.  Except for preemptive rights or rights of first refusal which have been waived or complied with, the issuance of the Securities will not give rise to any preemptive rights, rights of first refusal, or similar rights on behalf of any person.  There are no securities, agreements, documents or instruments containing anti-dilution provisions that will be triggered by the issuance of the Securities.  The Company has obtained the approval and consent of a majority of the outstanding shares of its Series B Convertible Preferred Stock, as well as any other approvals required, in order to authorize and designate a newly created series of the Company’s preferred stock designated as “Series C Convertible Preferred Stock.”  Subject to Section 3(d) hereof, the Series C Convertible Preferred Stock shall initially have the rights, preferences and privileges as are set forth in the Form of Certificate of Designations attached hereto as Exhibit C (the “ Series C Certificate of Designations ”).  Not later than January 9, 2009, the authorized capital stock of the Company shall, pursuant to a duly authorized and filed amendment to the Certificate of Incorporation of the Company, consist of 2,500,000,000 shares of Common Stock and 1,700,000,000 shares of Preferred Stock, and 152,843,414 shares of Preferred Stock shall have been designated as the Series A Preferred Stock, 336,240,039 shares of Preferred Stock shall have been designated as Series B-1 Stock, approximately 140,000,000 shares of Preferred Stock shall have been designated as Series B-2 Stock and 700,000,000 shares of Preferred Stock shall have been designated as Series C Stock.

(d)           The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under the Transaction Documents.  Each of the Transaction Documents has been duly and validly authorized by the Company and, when executed and delivered by the Company, will constitute a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity).

 

 

(e)           The Warrant Conversion Shares have been duly authorized and validly reserved for issuance, and when issued upon exercise of the Warrants in accordance with the terms of the Warrant, will have been validly issued, fully paid and non-assessable.  Not later than January 9, 2009, the shares of Series C Convertible Preferred Stock (and the shares of Common Stock issuable upon conversion thereof) issuable upon conversion of the Notes shall have been duly authorized and validly reserved for issuance, and when issued upon conversion of the Notes in accordance with the terms thereof, will have been validly issued, fully paid and non-assessable.  The Common Stock of the Company conforms to the description thereof contained in the SEC Documents.  No stockholder of the Company or other Person has any preemptive, co-sale rights, rights of first refusal or any other similar rights with respect to the Warrants, the Notes or the Common Stock, except for rights which have been waived or fully complied with.

(f)           No consent, approval, order or authorization of, license, registration, qualification, exemption or filing with any court or governmental agency or body or third party is required for the performance of the Transaction Documents by the Company or for the consummation by the Company of the transactions contemplated thereby, or the application of the proceeds of the issuance of the Securities as described in this Agreement, except for such consents, approvals, authorizations, licenses, qualifications, exemptions or orders (i) as have been obtained on or prior to the Closing Date, or (ii) as are not required to be obtained on or prior to the Closing Date that will be obtained when required.

(g)           The Company is not (i) in violation of its certificate of incorporation, certificates of designations or bylaws (or similar organizational document), (ii) in breach or violation of any statute, judgment, decree, order, rule or regulation applicable to it or any of its properties or assets, or (iii) in default (nor has any event occurred which with notice or passage of time, or both, would constitute a default) in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or agreement or instrument to which it is a party or to which it is subject.

(h)           The execution, delivery and performance by the Company of the Transaction Documents and the consummation by the Company of the transactions contemplated thereby and the fulfillment of the terms thereof will not (a) violate, conflict with or constitute or result in a breach of or a default under (or an event that, with notice or lapse of time, or both, would constitute a breach of or a default under) any of (i) the terms or provisions of any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or agreement or instrument to which the Company is a party or to which any of its properties or assets are subject, (ii) its certificate of incorporation, certificates of designations or bylaws (or similar organizational document) or (iii) any statute, judgment, decree, order, rule or regulation of any court or governmental agency or other body applicable to the Company or any of its properties or assets or (b) result in the imposition of any lien upon or with respect to any of the properties or assets now owned or hereafter acquired by the Company; with respect to (a)(i), (a)(iii) and (b) only, which violation, conflict, breach, default or lien would, individually or in the aggregate, have a Material Adverse Effect.

 

 

(i)           The audited financial statements included in the SEC Documents present fairly the financial position, results of operations, cash flows and changes in shareholders’ equity of the Company, at the dates and for the periods to which they relate and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis; the interim un-audited financial statements included in the SEC Documents present fairly the financial position, results of operations and cash flows of the Company, at the dates and for the periods to which they relate subject to year-end audit adjustments and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis with the audited financial statements included therein; the selected financial and statistical data included in the SEC Documents present fairly the information shown therein and have been prepared and compiled on a basis consistent with the audited financial statements included therein, except as otherwise stated therein; and each of the auditors previously engaged by the Company or to be engaged in the future by the Company is an independent certified public accountant as required by the Securities Act.  Except as set forth in the SEC Documents, since the date of the latest interim un-audited balance sheet of the Company included in the SEC Documents, (i) there has been no material change in total liabilities of the Company and (ii) there have been no liabilities incurred outside of the ordinary course of business.  Except as set forth in the SEC Documents, immediately after the Closing Date, the Company will not have any indebtedness, except the Loans and indebtedness incurred in the ordinary course of business and consistent with past practices.  The Company is not a guarantor or indemnitor of any indebtedness of any third party.

(j)           There is not pending or, to the knowledge of the Company, threatened, any action, suit, proceeding, inquiry or investigation, governmental or otherwise, to which the Company is a party, or to which its properties or assets are subject, before or brought by any court, arbitrator or governmental agency or body, that, if determined adversely to the Company, would, individually or in the aggregate, have a Material Adverse Effect or that seeks to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Securities to be sold hereunder or the application of the proceeds therefrom or the other transactions described in the SEC Documents. The Company is not a party to or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental agency or body.

(k)           Intellectual Property.

(i)             General.  Section 2(k)(i) of the Disclosure Schedule sets forth with respect to the Company Intellectual Property Rights: (A) for each patent and patent application, the patent number or application serial number for each jurisdiction in which the patent or application has been filed, the date filed or issued and the present status thereof; (B) for each registered trademark, trade name or service mark, the application serial number or registration number for each applicable country, province and/or state and the class of goods covered; (C) for each URL or domain name, the registration date, any renewal date and name of registry; and (D) for each registered copyrighted work, the number and date of registration for each by country, province and/or state in which a copyright application has been registered.  In addition, true and correct copies of all applications filed and registrations (including all pending applications and application related documents) related to the Intellectual Property Rights listed on Section 2(k)(i) of the Disclosure Schedule have been provided or made available to Purchasers.

 

(ii)           Sufficiency.  The Intellectual Property Rights and Technology owned or licensed by the Company constitute all Intellectual Property Rights and Technology necessary for the conduct of the Company’s business as presently conducted, including the design, manufacture, license and sale of all products currently under development or in production.

(iii)           Royalties and Licenses.  Except pursuant to the licenses listed in Section 2(k)(iii) of the Disclosure Schedule, the Company has no obligation to compensate or account to any person for the use of any of the Intellectual Property Rights or Technology used by the Company in the conduct of the business.  Section 2(k)(iii) of the Disclosure Schedule sets forth all third party components, whether hardware, firmware or software, that are incorporated in or provided by the Company with its products, or that are otherwise necessary for the manufacture of the Company’s products.   Section 2(k)(iii) of the Disclosure Schedule lists all in-licenses of the Intellectual Property Rights and Technology applicable to the Company’s products, other than standard, off-the-shelf software commercially available on standard terms from third-party vendors.

(iv)           Ownership.  The Company (A) owns all right, title and interest in and to the Company Intellectual Property Rights and Company Technology, including the Intellectual Property Rights and Technology listed in Section 2(k)(iv) of the Disclosure Schedule, free and clear of any liens, claims or encumbrances and (B) has a valid and enforceable right or license to use all other Intellectual Property Rights and Technology used in the conduct of the business, and all such licensed Intellectual Property Rights and rights to use Technology will not cease to be valid and enforceable rights of the Company by reason of the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby.  Without limiting the foregoing, the Company Intellectual Property Rights and Company Technology have been: (1) developed by employees of the Company within the scope of their employment and who have assigned their rights to the Company pursuant to enforceable written agreements; (2) developed by independent contractors or agents who have assigned their rights to the Company pursuant to enforceable written agreements or (3) otherwise acquired by the Company from a third party who has assigned all the Intellectual Property Rights and ownership of all Technology it has developed on the Company’s behalf to the Company.

(v)           Absence of Claims; Non-infringement.  No claim or legal proceeding has been instituted or is pending against the Company, or, to the knowledge of the Company, is threatened, that challenges the right of the Company with respect to the use or ownership of the Company Intellectual Property Rights or Company Technology.  Without limiting the foregoing, no interference, opposition, reissue, reexamination, legal proceeding or other proceeding is or has been pending or, to the best of the Company’s knowledge, threatened, in which the scope, validity or enforceability of any of the Company Intellectual Property Rights is being, has been or could reasonably be expected to be contested or challenged.  The Company’s past and present use of the Company Intellectual Property Rights or Company Technology does not infringe upon, misappropriate, breach or otherwise conflict with the rights of any other Person anywhere in the world.  The Company has not received any notice alleging, and otherwise has no knowledge of (A) the invalidity of, or any limitation on the Company’s right to use, any of the Company Intellectual Property Rights or Company Technology or of (B) the alleged infringement, misappropriation or breach of any Intellectual Property Rights of others by the Company.  The Company Intellectual Property Rights and Company Technology are not subject to any judgment, decree, order, writ, award, injunction or determination of an arbitrator, court or other governmental authority affecting the rights of the Company with respect thereto.  To the knowledge of the Company, no person has interfered with, infringed upon or misappropriated any of the Company Intellectual Property Rights, or is currently doing so.

 

(vi)           Licenses to Third Parties.  Section 2(k)(vi) of the Disclosure Schedule lists all of the contracts pursuant to which any person has been granted any license under, or otherwise has received or acquired any right (whether or not currently exercisable) or interest in, any Company Intellectual Property Rights or Company Technology.  The Company is not bound by, and no Company Intellectual Property Rights are subject to, any contract containing any covenant or other provision that in any way limits or restricts the ability of the Company to use, exploit, assert or enforce any of its Intellectual Property Rights anywhere in the world.  Without limiting the foregoing, the Company has not granted any exclusive licenses to the Company Intellectual Property Rights or Company Technology.

(vii)          Protection of Intellectual Property Rights.  All of the registrations and pending applications to governmental or regulatory bodies with respect to the Company Intellectual Property Rights have been timely and duly filed, prosecution for such applications has been attended to, all maintenance and related fees have been paid and the Company has taken all other actions required to maintain their validity and effectiveness.  The Company has taken all steps reasonably necessary or appropriate (including, entering into written confidentiality and nondisclosure agreements with officers, directors, subcontractors, employees, licensees and customers) to safeguard the Company Intellectual Property Rights and maintain the secrecy and confidentiality of trade secrets that are material to the Company.  Without limiting the foregoing, (A) there has been no misappropriation of any trade secrets or other confidential Intellectual Property Rights or Technology used in connection with the business by any person; (B) no employee, independent contractor or agent of the Company has misappropriated any trade secrets of any other person in the course of performance as an employee, independent contractor or agent of the business and (C) no employee, independent contractor or agent of the Company is in default or breach of any term of any employment agreement, nondisclosure agreement, assignment of invention agreement or similar agreement or contract relating in any way to the protection, ownership, development, use or transfer of the Company Intellectual Property Rights and Company Technology.

(viii)         Funding; Certification with Standards Bodies. Except as set forth in Section 2(k)(viii) of the Disclosure Schedule, no funding, facilities or personnel of any governmental entity or educational institution were used, directly or indirectly, to develop or create, in whole or in part, any of the Company Intellectual Property Rights or Company Technology.   The Company has not made any submission or suggestion to, or otherwise participated in, and is not subject to any agreement with, government, any standards bodies or other entities that could obligate the Company to grant licenses to or otherwise impair its control of Company Intellectual Property Rights.

 

(ix)           “ Intellectual Property Rights ” means all (A) United States and foreign patents and patent applications and disclosures relating thereto (and any patents that issue as a result of those patent applications), and any renewals, reissues, reexaminations, extensions, continuations, continuations-in-part, divisions and substitutions relating to any of the patents and patent applications; (B) United States and foreign trademarks, service marks, trade dress, logos, 800 numbers, trade names and corporate names, whether registered or unregistered, and the goodwill associated therewith, together with any registrations and applications for registration thereof; (C) United States and foreign copyrights and rights under copyrights, whether registered or unregistered, including moral rights, and any registrations and applications for registration thereof; (D) rights in databases and data collections (including knowledge databases, customer lists and customer databases) under the laws of the United States or any other jurisdiction, whether registered or unregistered, and any applications for registration therefor; (E) trade secrets and other rights in know-how and confidential or proprietary information (including any business plans, designs, technical data, customer data, financial information, pricing and cost information, bills of material or other similar information); (F) URL and domain name registrations; (G) inventions (whether or not patentable) and improvements thereto; (H) all claims and causes of action arising out of or related to infringement or misappropriation of any of the foregoing and (I) other proprietary or intellectual property rights now known or hereafter recognized in any jurisdiction.

(x)           “ Technology ” means tangible embodiments of the Intellectual Property Rights, whether in electronic, written or other media, including software, technical documentation, specifications, designs, bills of material, build instructions, test reports, schematics, algorithms, application programming interfaces, user interfaces, routines, formulae, databases, lab notebooks, processes, prototypes, samples, studies or other know-how and other works of authorship.

(l)           The Company possesses all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities (including, but not limited to, those that may be required by the U.S. Food and Drug Administration (the “ FDA ”)), all self-regulatory organizations and all courts and other tribunals presently required or necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as now or proposed to be conducted as set forth in the SEC Documents (“ Permits ”), except where the failure to obtain such Permits would not, individually or in the aggregate, have a Material Adverse Effect.   Each of such Permits is in full force and effect, and the Company has not received any notice of any proceeding relating to revocation or modification of any such Permit, except where such revocation or modification would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect.

(m)           The Company holds and is operating in compliance with such exceptions, permits, licenses, franchises, authorizations and clearances of the FDA and/or any committee thereof required, for the conduct of its business as currently conducted (collectively, the “ FDA Permits ”), and all such FDA Permits are in full force and effect.  The Company has fulfilled and performed all of its obligations with respect to the FDA Permits, and, no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other impairment of the rights of the holder of any FDA Permit.

 

(n)           The Company: (i) is and at all times has been in material compliance with all statutes, rules, regulations, or guidance applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product under development, manufactured or distributed by the Company (“ Applicable Laws ”); (ii) has not received any FDA Form 483, notice of adverse finding, warning letter, untitled letter or other correspondence or notice from the FDA or any other federal, state, local or foreign governmental or regulatory authority alleging or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws (“ Authorizations ”); (iii) has not received notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from the FDA or any other federal, state, local or foreign governmental or regulatory authority or third party alleging that any product operation or activity is in violation of any Applicable Laws or Authorizations and has no knowledge that the FDA or any other federal, state, local or foreign governmental or regulatory authority or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding; (iv) has not received notice that the FDA or any other federal, state, local or foreign governmental or regulatory authority has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that the FDA or any other federal, state, local or foreign governmental or regulatory authority is considering such action; (v) has filed, obtained, maintained or submitted all reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct on the date filed (or were corrected or supplemented by a subsequent submission); and (vi) has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market withdrawal or replacement, safety alert, post sale warning, “dear doctor” letter, or other notice or action relating to the alleged lack of safety or efficacy of any product or any alleged product defect or violation and, to the Company’s knowledge, no third party has initiated, conducted or intends to initiate any such notice or action.

 

(o)           (i) The Company is not in material violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), natural resources or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum, petroleum products or by-products, asbestos-containing materials or mold (collectively, “ Hazardous Materials ”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of, or exposure to, Hazardous Materials (collectively, “ Environmental Laws ”), including, without limitation, to the best of the Company’s knowledge, the handling, transport, and disposal of the by-product generated by the Company’s recycling operations, (ii) the Company has all permits, authorizations and approvals required under any applicable Environmental Laws for the operation of its business and facilities (“ Environmental Permits ”) and is in material compliance with their requirements, (iii) no material expenditures will be required to maintain compliance with applicable Environmental Laws or Environmental Permits; (iv) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company and (v) there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company relating to Hazardous Materials or Environmental Laws, including, without limitation, the Company’s leasing of facilities located at the Riverbank Army Ammunition Plant Superfund site (EPA ID# CA7210020759).

(p)           Subsequent to the respective dates as of which information is given in the SEC Documents, (i) the Company has not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions not in the ordinary course of business or (ii) the Company has not purchased any of its outstanding capital stock, or declared, paid or otherwise made any dividend or distribution of any kind on any of its capital stock or otherwise, (iii) there has not been any material increase in the indebtedness of the Company, (iv) there has not occurred any event or condition, individually or in the aggregate, that has had a Material Adverse Effect, (v) the Company has not sustained any material loss or interference with respect to its business or properties from fire, flood, hurricane, earthquake, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding; (vi) the Company has not received any notice from the SEC in connection with any investigation or action by the SEC that seeks to, or could reasonably be expected to result in, the restatement by the Company of any of its current or previously disclosed financial statements; (vii) there has not been any material change in compensation agreement or arrangement with any executive officer or director of the Company; (viii) there has not been any loan or guarantees made by the Company to or for the benefit of its employees, officer or directors or any members of their immediate families, other than travel advances and other advances made in the ordinary course of business and consistent with past practice; and (ix) the Company has not altered its method of accounting or changed its auditors.  The Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact, which would reasonably lead a creditor to do so.  Based on the financial condition of the Company as of the Closing Date, after giving effect to transactions contemplated hereby to occur on the Closing Date, the Company reasonably expects to have sufficient cash on hand to pay all of its currently foreseeable expenses for at least the next four months.

(q)           There are no material legal or governmental proceedings nor are there any material contracts or other documents required by the Securities Act to be described in a prospectus that are not described in the SEC Documents.  The Company is not in default under any of the contracts described in the SEC Documents, has not received a notice or claim of any such default and does not have knowledge of any breach of such contracts by the other party or parties thereto, except for such defaults or breaches as would not, individually or in the aggregate, have a Material Adverse Effect.

 

(r)           The Company has good and marketable title to all real property described in the SEC Documents as being owned by it and good and marketable title to the leasehold estate in the real property described therein as being leased by it, free and clear of all liens, charges, encumbrances or restrictions, except, in each case, as would not, individually or in the aggregate, have a Material Adverse Effect.  All material leases, contracts and agreements to which the Company is a party or by which it is bound are valid and enforceable against the Company, are, to the knowledge of the Company, valid and enforceable against the other party or parties thereto and are in full force and effect.

(s)           The Company has filed all necessary federal, state and foreign income and franchise tax returns, except where the failure to so file such returns would not, individually or in the aggregate, have a Material Adverse Effect, and has paid all taxes shown as due thereon; and other than tax deficiencies which the Company is contesting in good faith and for which adequate reserves have been provided in accordance with generally accepted accounting  principles, there is no material tax deficiency that has been asserted against the Company.

(t)           The Company is not, and immediately after the Closing Date will not be, required to register as an “investment company” or a company “controlled by” an “investment company” within the meaning of the Investment Company Act of 1940, as amended (the “ Investment Company Act ”).

(u)           None of the Company or, to the knowledge of the Company, any of its directors, officers, employees, agents or controlling persons, has taken, directly or indirectly, any action designed, or that might reasonably be expected, to cause or result in the stabilization or manipulation of the price of the Common Stock.

(v)           None of the Company or any of its affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act) directly, or through any agent, engaged in any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) in connection with the offering of the Securities or engaged in any other conduct that would cause such offering to be constitute a public offering within the meaning of Section 4(2) of the Securities Act.  Assuming the accuracy of the representations and warranties of the Purchasers in Section 5 hereof, it is not necessary in connection with the offer, sale and delivery of the Securities to the Purchasers in the manner contemplated by this Agreement to register any of the Securities under the Securities Act.

(w)           There is no strike, labor dispute, slowdown or work stoppage with the employees of the Company which is pending or, to the knowledge of the Company, threatened.

 

 

(x)           The Company maintains insurance underwritten by insurers of recognized financial responsibility covering its properties, operations, personnel and businesses comparable to other companies of its size and similar business, including, without limitation, appropriate general business, environmental and directors’ and officers’ liability insurance.  All such insurance is in full force and effect.

(y)           The Company maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management’s authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its material assets is permitted only in accordance with management’s authorization and (D) the values and amounts reported for its material assets are compared with its existing assets at reasonable intervals.

(z)           Except as disclosed in the SEC Documents, the Company maintains disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Exchange Act) that comply with the requirements of the Exchange Act; such disclosure controls and procedures have been designed to ensure that material information relating to the Company is made known to the Company’s principal executive officer and principal financial officer by others within those entities; and such disclosure controls and procedures are effective.

(aa)           No Person has or will have a claim for services, either in the nature of a finder’s fee or financial advisory fee, with respect to the offering of the Securities and the transactions contemplated by the Transaction Documents.

(bb)           The Common Stock is traded on the National Association of Securities Dealers OTC Bulletin Board (the “ OTC Bulletin Board ”).  The Company currently is not in violation of, and the consummation of the transactions contemplated by the Transaction Documents will not violate, any rule of the OTC Bulletin Board.

(cc)           The Company is eligible to use Form S-1 for the resale of the Conversion Shares   by Purchasers or their transferees.  The Company has no reason to believe that it is not capable of satisfying the registration or qualification requirements (or an exemption therefrom) necessary to permit the resale of the Conversion Shares   under the securities or “blue sky” laws of any jurisdiction within the United States.

(dd)           None of the Company, any of its affiliates, or any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the Securities Act or cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable stockholder approval provisions, including without limitation, under the rules and regulations of the OTC Bulletin Board.

(ee)           The Company and its Board of Directors have taken all necessary action, if any, to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s charter documents or the laws of its state of incorporation that is applicable to any of the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including, without limitation, as a result of the Company’s issuance of the Securities and the Purchasers’ ownership of the Securities.

 

 

(ff)           The Company has described in, or filed as an exhibit to, the SEC Documents filed prior to the date of this Agreement all of the following types of documents, agreements, plans or arrangements that are required by federal securities laws to be described in, or filed as an exhibit to, the SEC Documents:  employment agreements, consulting agreements, deferred compensation, pension or retirement agreements or arrangements (including all “employee pension benefit plans” as defined in Section 3(2) of ERISA, bonus, incentive or profit-sharing plans or arrangements, or labor or collective bargaining agreements in effect by the Company) (the “ ERISA Documents ”).  Except for any compliance failures that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect, (a) the Company is in compliance in all material respects with all applicable laws and regulations relating to labor, employment, fair employment practices, terms and conditions of employment, and wages and hours, and with the terms of the ERISA Documents; and (b) each such ERISA Document is in compliance in all material respects with all applicable requirements of ERISA.  To the Company’s knowledge, none of the Company’s employees are obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her employment obligations to the Company or that would conflict with the Company’s business as now conducted or proposed to be conducted, except for such contracts and other agreements, judgments, decrees and orders that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(gg)           Except as disclosed in the SEC Documents, no transaction has occurred: (A) between or among the Company and any of its officers or directors, stockholders or any affiliate of any such officer or director or stockholder; and (B) to the Company’s knowledge, between or among any stockholders of the Company.

3.            Certain Covenants of the Company .  The Company covenants and agrees with each Purchaser as follows:

(a)            Use of Proceeds .  The proceeds of the issuance of the Securities as described in this Agreement shall be used to fund the ordinary course working capital needs of the Company.  None of the proceeds of the Loans will be used to reduce or retire any existing debt of the Company (other than for trade payables), except to the extent any such notes or debt are being cancelled as consideration for purchase of Securities by a Purchaser hereunder and as specifically set forth on Schedule I hereto.

(b)            No Integrated Offering .  None of the Company or any of its affiliates will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any “security” (as defined in the Securities Act) that could be integrated with the sale of the Securities in a manner which would require the registration under the Securities Act of the Securities.

 

(c)            Investment Company Act Status .  The Company will not become, at any time prior to the expiration of three years after the Closing Date, an open-end investment company, unit investment trust, closed-end investment company or face-amount certificate company that is or is required to be registered under the Investment Company Act.

(d)            Voting Rights .  The Company shall file the Series C Certificate of Designations with the Delaware Secretary of State no later than January 9, 2009; provided, however, that upon the request of Peninsula prior to such date, the Company shall negotiate in good faith with Peninsula to revise the Series C Certificate of Designations as Peninsula may request, shall thereafter promptly obtain all necessary board and stockholder approvals necessary in order to file the Series C Certificate of Designations as so revised, and shall thereafter promptly file the same with the Delaware Secretary of State. The Company shall file the amendment to the Certificate of Incorporation of the Company referenced in Section 2(c) hereof no later than January 9, 2009.  Until such time that the Loans have been paid in full, the Company shall not, without the prior written consent of the holders of at least 70% of the aggregate principal amount of the Notes then outstanding, and notwithstanding the absence of any issuances of Series C Preferred Stock to the Purchasers, amend the Series C Certificate of Designations as initially filed by the Company, nor engage in any action that would, pursuant to the terms of the Series C Certificate of Designations, require the affirmative vote of a majority or more of the then outstanding shares of Series C Preferred Stock.  For so long as the Notes to Peninsula are outstanding, or Peninsula is still the holder of at least fifty percent (50%) of any shares of Series C Preferred Stock originally issued to Peninsula, Peninsula shall have the right to elect one (1) director to the Company’s Board of Directors.  The individual elected to such seat shall not be removed absent gross misconduct.  In the case of any vacancy in the office of a director elected by Peninsula to the Board of Directors, Peninsula may elect a successor to hold office for the unexpired term of the director whose place shall be vacant.  Additionally, for so long as the Notes to Peninsula are outstanding, or Peninsula is still the holder of at least fifty percent (50%) of any shares of Series C Preferred Stock originally issued to Peninsula, the Company shall establish an Operations Committee of the Board of Directors, and Peninsula shall have the right to elect its one (1) director to such Operations Committee.    The individual elected to such seat shall not be removed absent gross misconduct.  In the case of any vacancy in the office of a director elected by Peninsula to the Operations Committee, Peninsula may elect a successor to hold office for the unexpired term of the director whose place shall be vacant.

(e)            Further Action .  The Company will use its best efforts to do and perform all things required to be done and performed by it under this Agreement and the other Transaction Documents and to satisfy all conditions precedent on its part to the obligations of the Purchasers to purchase and accept delivery of the Securities.

(f)            Investor Rights Agreement .  The Purchasers shall be entitled, with respect to any shares of the Company’s capital stock issued upon exercise of the Warrants and upon conversion of the Notes, as the case may be, to all of the registration and other rights set forth in the Company’s Investor Rights Agreement dated as of June 4, 2008, as amended September 15, 2008 (the “ Rights Agreement ”), to the same extent and on the same terms and conditions as possessed by the investors thereunder and as if such were included in the definition of “Registrable Securities” in the Rights Agreement.  Peninsula shall also be entitled to all of the rights of a “Major Holder” under the Rights Agreement as if its Note had been converted into equity in the Company (and notwithstanding the absence of such conversion). No later than January 9, 2009, the Company shall take such action as may be reasonably necessary to assure that the granting of such rights to the Purchasers does not violate the provisions of the Rights Agreement or any of the Company’s charter documents or rights of prior grantees of registration rights.

 

(g)            Further Indebtedness .  The Company hereby covenants and agrees that so long as any principal amount and accrued interest remains outstanding under the Notes issued pursuant to the terms of this Agreement, that it shall not, without the written consent of Purchasers holding Notes representing at least 70% of the principal amount of all Notes then outstanding, incur, guaranty, assume or otherwise become obligated to pay indebtedness, other than amounts under equipment leases existing as of the Initial Closing Date, accounts payable and other obligations incurred in the ordinary course of business, other than pursuant to this Agreement.

4.            Conditions of the Purchasers’ Obligations .  The obligation of each Purchaser to purchase and pay for the Securities at each Closing Date is subject to the following conditions unless waived by the Purchaser:

(a)           The representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the Closing Date. The Company shall have complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date.

(b)           None of the issuance and sale of the Securities pursuant to this Agreement or any of the transactions contemplated by any of the other Transaction Documents shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued in respect thereof; and there shall not have been any legal action, order, decree or other administrative proceeding instituted or, to the Company’s knowledge, threatened against the Company or against any Purchaser relating to the issuance of the Securities or any Purchaser’s activities in connection therewith or any other transactions contemplated by this Agreement, the other Transaction Documents or the SEC Documents.

(c)           The Purchasers shall have received certificates, dated the Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer of the Company, to the effect of Sections 4(a) and 4(b).

(d)           The Purchasers shall have received the Notes in the forms attached hereto as Exhibit A .

(e)           The Purchasers shall have received the Warrants in the forms attached hereto as Exhibit B .

(f)           The Purchasers shall have received an opinion of legal counsel to the Company, with respect to the Securities and other customary matters in the form attached hereto as Exhibit D .

 

(g)           The Purchasers shall have received the Security Agreements in the forms attached hereto as Exhibit E-1 and Exhibit E-2 .

(h)           The Purchasers shall have received the Subordination Agreement in the form attached hereto as Exhibit F .

(i)            The Purchasers shall be satisfied, in their sole discretion, with the results of their due diligence investigation with respect to the Company.

(j)           The Company shall have received all necessary governmental and third party waivers, consents and approvals.

(k)           The Company shall have complied with all applicable securities laws.

(l)           As soon as reasonably practicable following the Initial Closing, the Company shall receive a fairness opinion with regard to valuation matters.

(m)           On or prior to the date of the Initial Closing, the Company shall have filed (or authorized the filing of) all UCC and similar financing statements in form and substance satisfactory to the Purchasers at the appropriate offices to create a valid and perfected security interest in the Collateral (as defined in the Security Agreements).

(n)           On or prior to the Closing Date, the Company shall have furnished to the Purchasers such additional information, certificates and documents as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as contemplated herein, or to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained, or otherwise in connection with the transaction contemplated hereby; and all opinions and certificates mentioned above or elsewhere in this Agreement shall be reasonably satisfactory in form and substance to the Purchasers.

5.            Representations and Warranties of the Purchasers .

(a)           Each Purchaser represents and warrants to the Company that the Securities to be acquired by it hereunder (including the Conversion Shares that it may acquire upon conversion thereof) are being acquired for its own account for investment and with no present intention of distributing or reselling such Securities (including the Conversion Shares that it may acquire upon conversion thereof) or any part thereof or interest therein in any transaction which would be in violation of the securities laws of the United States of America or any State.  Nothing in this Agreement, however, shall prejudice or otherwise limit a Purchaser’s right to sell or otherwise dispose of all or any part of such Conversion Shares under an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration.

 

 

(b)           Each Purchaser understands that the Securities and Conversion Shares have not been registered under the Securities Act and may not be offered, resold, pledged or otherwise transferred except (a) pursuant to an exemption from registration under the Securities Act (and, if requested by the Company, based upon an opinion of counsel acceptable to the Company) or pursuant to an effective registration statement under the Securities Act and (b) in accordance with all applicable securities laws of the states of the United States and other jurisdictions.

Each Purchaser agrees to the imprinting, so long as appropriate, of the following legend on the Securities (including the Conversion Shares that it may acquire upon conversion thereof):

The legend set forth above may be removed if and when the Securities or Conversion Shares are disposed of pursuant to an effective registration statement under the Securities Act or, in the opinion of counsel to the Company experienced in the area of United States Federal securities laws, such legends are no longer required under applicable requirements of the Securities Act.  The Company agrees that it will provide each Purchaser, upon request, with a substitute certificate, not bearing such legend at such time as such legend is no longer applicable.

(c)           Each Purchaser is an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the Securities Act.  None of the Purchasers learned of the opportunity to acquire Securities or any other security issuable by the Company through any form of general advertising or public solicitation.

(d)           Each Purchaser represents and warrants to the Company that it has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, having been represented by counsel, and has so evaluated the merits and risks of such investment and is able to bear the economic risk of such investment and, at the present time, is able to afford a complete loss of such investment.

(e)           Each Purchaser represents and warrants to the Company that the purchase of the Securities to be purchased by it has been duly and properly authorized and this Agreement has been duly executed and delivered by it or on its behalf and constitutes the valid and legally binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity.

 

(f)           Each Purchaser represents and warrants to the Company that neither it nor any of its directors, officers, employees, agents, partners, members, or controlling persons has taken, or will take, directly or indirectly, any actions designed, or that might reasonably be expected to cause or result in, the destabilization or manipulation of the price of the Common Stock.

(g)           Each Purchaser acknowledges it or its representatives have reviewed the SEC Documents and further acknowledges that it or its representatives have been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; and (ii) access to information about the Company and the Company’s financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in the Securities.

(h)           Each Purchaser represents and warrants to the Company that it has based its investment decision solely upon the information contained in the SEC Documents and such other information as may have been provided to it or its representatives by the Company in response to its inquiries, and has not based its investment decision on any research or other report regarding the Company prepared by any third party (“ Third Party Reports ”).  Each Purchaser understands and acknowledges that (i) the Company does not endorse any Third Party Reports and (ii) its actual results may differ materially from those projected in any Third Party Report.

(i)           Each Purchaser understands and acknowledges that (i) any forward-looking information included in the SEC Documents is subject to risks and uncertainties, including those risks and uncertainties set forth in the SEC Documents; and (ii) the Company’s actual results may differ materially from those projected by the Company or its management in such forward-looking information.

(j)           Each Purchaser understands and acknowledges that (i) the Securities are offered and sold without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption depends in part on, and that the Company and its counsel will rely upon, the accuracy and truthfulness of the foregoing representations and Purchaser hereby consents to such reliance.  Each Purchaser also understands that there is no assurance that any exemption from registration under the Securities Act will be available and that, even if available, such exemption may not allow Purchaser to transfer all or any portion of the Securities or Conversion Shares under the circumstances, in the amounts or at the times Purchaser might propose.

 

(k)           None of the Purchasers is a broker or dealer registered pursuant to Section 15 of the Exchange Act (a “ registered broker-dealer ”) or is affiliated with a registered broker-dealer.

6.            Covenants of Purchasers .

(a)            No Short Sale .  Purchasers, on behalf of themselves and their affiliates and the permitted assignee of any Conversion Shares, hereby covenant and agree not to, directly or indirectly, offer to “short sell”, contract to “short sell” or otherwise “short sell” any securities of the Company prior to the Closing Date.

(b)            Agreement to Convert or Subordinate Notes .  All Notes may be converted or subordinated at any time upon approval of the same by holders of at least 70% of the principal amount of the Notes then outstanding.  In the event of such conversion of the Notes pursuant to this Section 6(b), the Notes shall immediately accrue the full amount of interest that would otherwise be payable as of the Maturity Date (as defined in such Notes), as if such Notes were outstanding on such date, notwithstanding the fact such Notes would have been converted prior to that date.

7.            No Original Issue Discount .  The Company and the Purchasers hereby acknowledge and agree that each Warrant is part of an investment unit within the meaning of Section 1273(c)(2) of the Internal Revenue Code, which includes the Note issued to each respective Purchaser. The Company and the Purchasers further agree as between the Company and each Purchaser, that the fair market value of the Warrant issued to such Purchaser is equal to 0.1% of the principal amount of the Notes purchased by such Purchaser, as more specifically set forth opposite such Purchaser’s name under the column heading, “Warrant Shares Purchase Price” on Schedule I attached hereto.  The Company and the Purchaser agree to prepare their federal income tax returns in a manner consistent with the foregoing agreement and, pursuant to Treas. Reg. §1.1273, the original issue discount on the Notes shall be considered to be zero.

8.            Indemnification .  The Company agrees to indemnify and hold harmless each of the Purchasers, any affiliates of the Purchasers, and each Person, if any, who controls, is controlled by or under common control with any Purchaser within the meaning of the Securities Act (each, an “ Indemnified Party ”), against any losses, claims, actions, damages, liabilities or expenses (collectively, “ Losses ”), joint or several, to which such Indemnified Party may become subject under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such Losses (or actions in respect thereof as contemplated below) arise out of or are based in whole or in part on any inaccuracy in the representations and warranties of the Company contained in this Agreement or any failure of the Company to perform its obligations hereunder, and will reimburse each Indemnified Party for any legal and other expenses reasonably incurred as such expenses are incurred by such Indemnified Party in connection with investigating, defending, settling, compromising or paying any such Loss; provided , however , that the Company will not be liable in any such case to the extent that any such Loss arises out of or is based upon the inaccuracy of any representations made by such Indemnified Party herein.

 

9.            Termination .

(a)           This Agreement may be terminated by Peninsula or the Trident Lenders by notice to the Company given in the event that (i) the Company shall have failed, refused or been unable to satisfy all material conditions on its part to be performed or satisfied hereunder on or prior to the Closing Date or (ii) if after the date of this Agreement but prior to the Closing Date, trading in securities of the Company on the OTC Bulletin Board shall have been suspended and the Company ceases to be publicly traded.

(b)           This Agreement may be terminated by mutual written consent of the Company and the Purchasers.

10.            Notices .  All communications hereunder shall be in writing and shall be hand delivered, mailed by first-class mail, couriered by next-day air courier or by facsimile and confirmed in writing (i) if to the Company, at the addresses set forth below, or (ii) if to a Purchaser, to the address set forth for such party on the signature pages hereto.

All such notices and communications shall be deemed to have been duly given:  (i) when delivered by hand, if personally delivered; (ii) five business days after being deposited in the mail, postage prepaid, if mailed certified mail, return receipt requested; (iii) one business day after being timely delivered to a next-day air courier guaranteeing overnight delivery; (iv) the date of transmission if sent via facsimile to the facsimile number as set forth in this Section or the signature page hereof prior to 5:00 pm in the time zone of the recipient on a business day, with confirmation of successful transmission or (v) the business day following the date of transmission if sent via facsimile at a facsimile number set forth in this Section or on the signature page hereof after 5:00 p.m. in the time zone of the recipient or on a date that is not a business day.  Change of a party’s address or facsimile number may be designated hereunder by giving notice to all of the other parties hereto in accordance with this Section.

 

11.            Survival Clause .  The respective representations, warranties, agreements and covenants of the Company and the Purchasers set forth in this Agreement shall survive until the first anniversary of the Closing.

12.            Enforcement .  If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or the Certificates of Designations, the prevailing party or parties shall be entitled to receive from the other party or parties reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which the prevailing party or parties may be entitled.

13.            Successors and Assigns .  This Agreement shall inure to the benefit of and be binding upon Purchasers and the Company and their respective successors and legal representatives.  Neither the Company nor any Purchaser may assign this Agreement or any rights or obligation hereunder without the prior written consent of the other parties; provided , that Peninsula may assign this Agreement to an Affiliate without such consent.  For purposes of this Agreement, “ Affiliate ” means any other party that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under control with, such party.

14.            Amendment and Waiver .   Except as otherwise expressly provided herein, this Agreement may be amended or modified, and any obligations of the Company and rights of the Purchasers hereunder may waived, in each case only upon the written consent of (i) the Company and (ii) the holders of at least 70% of the principal amount of then outstanding Notes; provided , however , that no amendment of this Agreement shall materially and adversely affect the rights of a Purchaser in a manner that materially and disproportionately discriminates against such Purchaser by its express terms in relation to the other Purchasers without such Purchaser's written consent.  Notwithstanding anything to the contrary herein, Schedule I hereto may be amended and revised by the Company in connection with Additional Closings (as defined in Section 1(e) above) without requiring the consent of any of the other parties hereto.  Any amendment or waiver effected in accordance with this Section 14 shall be binding upon each Purchaser, each future Purchaser, and the Company.  The Purchasers and their respective successors and assigns acknowledge that by the operation of this Section 14, the holders of at least 70% of the Notes then outstanding, acting in conjunction with the Company, will have the right and power to diminish or eliminate any or all rights pursuant to this Agreement.

15.            Entire Agreement; No Third Party Beneficiary .  This Agreement, together with the other Transaction Documents, constitutes the entire agreement among the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, among the parties hereto with respect to the subject matter hereof and thereof.  Disclosure by the Company in any Schedule to this Agreement shall be deemed applicable to all applicable provisions hereof.  This Agreement is not intended to confer upon any Person not a party hereto (or their successors and permitted assigns) any rights or remedies hereunder, except as provided in Section 8 hereof.

 

16.            Severability .  If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby.

17.            APPLICABLE LAW .  THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO PROVISIONS RELATING TO CONFLICTS OF LAW TO THE EXTENT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.  THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT ONLY IN STATE OR FEDERAL COURTS LOCATED IN THE STATE OF CALIFORNIA AND HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS FOR SUCH PURPOSE.

18.            Waiver of Participation Rights .  By execution of this Agreement, each Purchaser expressly waives any right of first refusal, pre-emptive right, right of first offer or other participation right (and any related document delivery and notice rights) with respect to the issuance of the Notes, the Warrants and any shares of the Company’s capital stock issuable upon conversion or exercise thereof, including without limitation, all rights under Section 7 of the Rights Agreement to the extent the Purchaser is a party thereto and qualifies as a “Major Holder” thereunder.

19.            Default .  Notwithstanding anything to the contrary contained in this Agreement or the Notes, upon a default by the Company of Section 3(d) or 3(f) hereof, which default, if curable, is not cured within ten (10) days following written notice from Peninsula to the Company specifying the default in reasonable detail, Peninsula shall have the right, without the affirmative vote of 70% of the holders of the aggregate principal amount of the Notes then outstanding, to call an Event of Default under its Note and exercise all remedies provided therein.

20.            No Novation .  The Nov08 Notes shall be amended and restated pursuant to this Agreement, but nothing herein shall discharge the obligations of, nor constitute a novation with respect to, the indebtedness of the Company pursuant to the Nov08 Notes.

21.            Subordination Agreement .  Each Purchaser obtaining Notes or Warrants in connection with an Additional Closing and executing a counterpart signature to this Agreement hereby agrees to be bound by the Subordination Agreement as a “Senior Lender” thereunder without further action required on the part of such Purchaser or any other party.

22.            Counterparts .  This Agreement may be executed in two or more counterparts and may be delivered by facsimile transmission, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

[signature pages follow]

 

 

IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first above written.

 

Signature Pages to Purchase Agreement

Signature Pages to Purchase Agreement

 

Signature Pages to Purchase Agreement

 

ADDITIONAL LENDERS:

Signature Pages to Purchase Agreement

 

Schedule I

Schedule of Purchasers

December 17, 2008

Schedule I

 

 

Disclosure Schedule

This Disclosure Schedule is being furnished by ECO2 Plastics, Inc., a Delaware corporation, (the “ Company ”), to the Purchasers listed on Schedule I to that certain Convertible Note and Warrant Purchase Agreement of even date herewith by and among the Company and such Purchasers (the “ Agreement ”) in connection with the execution and delivery of the Agreement, pursuant to Section 2 of the Agreement.  Unless the context otherwise requires, all capitalized terms used in this Disclosure Schedule shall have the respective meanings ascribed to such terms in the Agreement.

This Disclosure Schedule and the information, descriptions and disclosures included herein is intended to set forth exceptions to the representations and warranties of the Company contained in the Agreement.  The contents of all agreements and other documents referred to in a particular section of this Disclosure Schedule is incorporated by reference into such particular section as though fully set forth in such section.

[ Attached separately ]

Disclosure Schedule

 

 

Exhibit A

Forms of Notes

 

 

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE PROVISIONS OF ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED BY THE REGISTERED HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE ON STATUTORY EXEMPTIONS UNDER THE 1933 ACT, AND UNDER ANY APPLICABLE STATE SECURITIES LAWS.  THESE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER THE PROVISIONS OF THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT.

AMENDED AND RESTATED PROMISSORY NOTE

San Francisco, California

Date of Issuance: December 17, 2008

 

 

 

 

2600 One Commerce Square

Philadelphia, PA 19103

Fax:         (215) 564-8120

San Francisco, CA  94107

Attn:        Rodney S. Rougelot

Fax:         (415) 829-6001 

The Otto Law Group, PLLC

601 Union Street, Suite 4500

Seattle, WA 98101

Fax:         (206) 262-9513

 

8.8            Severability .  If any provision hereof is found by a court of competent jurisdiction to be prohibited or unenforceable, it shall be ineffective only to the extent of such prohibition or unenforceability, and such prohibition or unenforceability shall not invalidate the balance of such provision to the extent it is not prohibited or unenforceable, nor invalidate the other provisions hereof, all of which shall be liberally construed in favor of the Promisee in order to effect the provisions of this Note.

8.9            Setoff .  Notwithstanding the absence of an Event of Default, the Promisee shall have the right to set-off any amounts owed by the Promisee or any Affiliate of the Promisee (each of which is an intended third party beneficiary hereunder) to the Promisor whatsoever against any amounts owed by the Promisor to the Promisee hereunder.

8.10          Amendment and Restatement .  This Note amends, restates and supersedes, but does not discharge the obligations of, nor constitute a novation with respect to, the indebtedness of the Promisor to J. Charles Buff pursuant to that certain Promissory Note in the principal amount of $600,000 dated November 21, 2008, which such document was assigned by J. Charles Buff to the Promisee on the date hereof.

 

IN WITNESS WHEREOF, the Promisor has caused this Note to be signed on the Effective Date.

STATE OF _______________________                                :

 

 

THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR UNDER THE PROVISIONS OF ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE BEEN ACQUIRED BY THE REGISTERED HOLDER HEREOF FOR PURPOSES OF INVESTMENT AND IN RELIANCE ON STATUTORY EXEMPTIONS UNDER THE 1933 ACT, AND UNDER ANY APPLICABLE STATE SECURITIES LAWS.  THESE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER THE PROVISIONS OF THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT.

AMENDED AND RESTATED PROMISSORY NOTE

San Francisco, California

Date of Issuance: December 17, 2008