LOAN AND SECURITIES PURCHASE AGREEMENT

LOAN AND SECURITIES PURCHASE AGREEMENT

by and between

GLOBAL DIVERSIFIED INDUSTRIES, INC.

and

DEBT OPPORTUNITY FUND, LLLP

DATED DECEMBER 19, 2008

LOAN AND SECURITIES PURCHASE AGREEMENT

This LOAN AND SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated this 19th day of December, 2008, is made by and between GLOBAL DIVERSIFIED INDUSTRIES, INC., a Nevada corporation (the “Borrower”), and DEBT OPPORTUNITY FUND, LLLP, a limited liability limited partnership organized under the laws of the State of Florida (the “Lender”).

RECITALS

 

WHEREAS, pursuant to the terms and conditions of this Agreement, the Borrower wishes to borrow up to $6,000,000 from the Lender (the “Loan”) to be evidenced by the issuance of a Senior Secured Promissory Note in the form attached hereto as Exhibit A (the “Note”);

 

WHEREAS, as part of the agreement to make the Loan, the Lender has requested that Borrower sell and issue to the Lender a Series 4 Warrant to purchase an aggregate of  68,168,164 shares of common stock, par value $.001 per share (the “Common Stock”), of Borrower initially at an exercise price of $.05 per share in the form attached hereto as Exhibit B (the “Series __ 4 Warrant” or the “Warrant”); and

 

           WHEREAS, the Lender desires to provide the Loan to the Borrower and purchase the Warrant from Borrower according to the terms hereinafter set forth.

 

NOW, THEREFORE , the Borrower and the Lender hereby agree as follows:

 

ARTICLE I

THE LOAN AND PURCHASE AND SALE OF THE WARRANT

1.1   The Loan and Purchase and Sale of the Warrant .  Subject to the terms and conditions hereof and in reliance on the representations and warranties contained herein, or made pursuant hereto, (a) the Borrower will borrow, and the Lender will lend to the Borrower, at the closing of the transactions contemplated hereby (the “Closing”), the aggregate amount of up to $6,000,000 under the Note, subject to a deduction for an original issue discount of 2%, less the fee owed pursuant to Section 12.9 hereof, and (b) Borrower will issue and sell to the Lender, and the Lender will purchase from Borrower at the Closing, the Warrant for making the Loan to the Borrower.

 

1.2   Closing .  The Closing shall be deemed to occur at the offices of Bush Ross, P.A., 1801 N. Highland Avenue, Tampa, Florida 33602, at 5:00 p.m. EST on December 19, 2008, or at such other place, date or time as mutually agreeable to the parties (the “Closing Date”).

 

1.3   Closing Matters .  Subject to the terms and conditions hereof, the following actions shall be taken:

 

(a)   On the Closing Date, (i) the Borrower will deliver to the Lender the documents set forth in Section 5.1 hereof, (ii) the Lender shall advance $1,500,000 under the Note by, after applying the 2% original issue discount of $30,000, delivering the sum of $1,470,000, less fees owed pursuant to Section 12.9 below, by wire transfer of immediately available funds in accordance with instructions of the Borrower.

 

(b)   After the Closing Date, subject to satisfaction of the conditions set forth in Article V below, the Lender shall advance an additional $4,500,000 under the Note by, after applying the 2% original issue discount, delivering $4,410,000 by wire transfers to the Borrower, consisting of no more than three (3) separate financings (each such subsequent payment referred to herein as a “Subsequent Funding” with all such payments referred to herein as the “Funded Amount”), with the first Subsequent Funding occurring on January 9, 2009, the second Subsequent Funding occurring on January 13, 2009, and the third Subsequent Funding occurring on January 15, 2009.

ARTICLE II

SECURITY DOCUMENTS

(a)   Security Agreement and Collateral Assignment .  All of the obligations of the Borrower under the Note shall be secured by a lien on all the personal property and assets of the Borrower now existing or hereinafter acquired granted pursuant to (i) a security agreement from each Borrower dated of even date herewith between the Borrower and the Lender in the form attached hereto as Exhibit C (“Security Agreements), and (ii) such other documents as the Lender may reasonably require from Borrower to secure its interests under this Agreement.

 

(b)   Guaranty .  All of the obligations of the Borrower under the Note shall be guaranteed pursuant to a guaranty agreement in the form attached hereto as Exhibit D (“Guaranty Agreement”) by each of the following subsidiaries of the Borrower (each a “Subsidiary” and collectively, the “Subsidiaries”): Lutrex Enterprises, Inc., a corporation, organized under the laws of the State of California (“Lutrex”), and Global Modular, Inc., a corporation organized under the laws of the State of Nevada (“GMI”).

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE BORROWER

 

3.1   Organization and Qualification . Borrower is a corporation duly organized and validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, and has all requisite corporate power and authority to carry on its business as now conducted. Borrower is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse effect on the business, properties, assets, operations, results of operations, or condition (financial or otherwise) of the Borrower and the Subsidiaries, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith, or on the authority or ability of Borrower or any Subsidary to perform its obligations in all material respects under the Transaction Documents.

 

3.2     Subsidiaries . Boorrower has no other subsidiaries other than the Subsidiaries. The Borrower owns, directly or indirectly, all of the capital stock of each Subsidiary, free and clear of any and all Liens, except Permitted Liens (as defined in Section 8.3), and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights. Each Subsidiary is a corporation duly organized and validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, and has all requisite corporate power and authority to carry on its business as now conducted. Each Subsidiary is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect.

 

3.3   Compliance .

 

(a)   Neither Borrower nor any Subsidiary (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by Borrower or any Subsidiary under), nor has Borrower or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, except such that, individually or in the aggregate, such default(s) and violations(s) would not have a Material Adverse Effect, (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is in violation of any of the provisions of its certificate or articles of incorporation, bylaws or other organizational or charter documents.

 

(b)   The business of Borrower and each Subsidiary is presently being conducted in accordance with all applicable foreign, federal, state and local governmental laws, rules, regulations and ordinances (including, without limitation, rules and regulations of each governmental and regulatory agency, self regulatory organization and Trading Market applicable to any Borrower or any Subsidiary), except such that, individually or in the aggregate, the noncompliance therewith would not have a Material Adverse Effect. Borrower and each Subsidiary has all franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of its business as now being conducted by it unless the failure to possess such franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals, individually or in the aggregate, would not have a Material Adverse Effect, and no Borrower or Subsidiary has received any written notice of proceedings relating to the revocation or modification of any of the foregoing. For purposes of this Agreement, “Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE Arca, OTC Bulletin Board, the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the Nasdaq Capital Market.

 

3.4   Capitalization .

 

(a)   As of the date hereof and without giving effect to the sale of the Warrant at Closing as contemplated hereby, the Borrower’s authorized capital stock consists of (1) 2,750,000,000 shares of Common Stock, par value $.001 per share, of which 15,369,885 shares are outstanding and (2) 150,000,000 shares of preferred stock, par value $.001 per share, of which (x)  0 shares have been designated as Series A Convertible Preferred Stock, par value $0.001 per share, of which 0 shares are outstanding, (y) 3,500,000 shares have been designated as Series B Preferred Stock, par value $0.001, of which 3,484,294 shares are outstanding, and (z) 2,750,000 shares have been designated as Series C Preferred Stock, par value $0.001, of which 1,750,000 shares are outstanding. All of such outstanding shares have been, or upon issuance will be, validly issued, are fully paid and nonassessable. 211,857,329 shares of Common Stock are reserved for issuance upon the exercise or conversion of all outstanding warrants, convertible notes, options, or other securities exchangeable, convertible or exercisable into shares of Common Stock.

 

(i)   no holder of shares of the Borrower’s capital stock has any preemptive rights or any other similar rights or has been granted or holds any Liens or encumbrances suffered or permitted by the Borrower;

 

(ii)   there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of any Borrower or any Subsidiary, or contracts, commitments, understandings or arrangements by which any Borrower or any Subsidiary is or may become bound to issue additional shares of capital stock of any Borrower or any Subsidiary or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any shares of capital stock of any Borrower or any Subsidiary;

 

(iii)   there are no agreements or arrangements under which any Borrower or any Subsidiary is obligated to register the sale of any of their securities under the Securities Act of 1933, as amended (the “Securities Act”);

 

(iv)   there are no outstanding securities or instruments of any Borrower or any Subsidiary that contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which any Borrower or any Subsidiary is or may become bound to redeem a security of a Borrower or a Subsidiary;

 

(v)   there are no securities or instruments containing antidilution or similar provisions that will be triggered by the issuance of the Warrant; and

 

(vi)   the Borrower has no stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement.

 

3.5   Issuance of the Warrant .

 

(a)   The Warrant to be issued hereunder is duly authorized and, upon issuance in accordance with the terms hereof, shall be free from all taxes, Liens and charges with respect to the issuance thereof. As of the Closing Date, the Borrower has authorized and has reserved free of preemptive rights and other similar contractual rights of stockholders, a number of its authorized but unissued shares of Common Stock equal to one hundred twenty percent (120%) of the aggregate number of shares of Common Stock to effect the exercise of the Warrant (the “Warrant Shares”).

 

(b)   The Warrant Shares, when issued and paid for upon exercise of the Warrant will be validly issued, fully paid and nonassessable and free from all taxes, Liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of the Common Stock.

 

(c)   Assuming the accuracy of each of the representations and warranties made by the Lender and set forth in Article IV hereof (and assuming no change in applicable law and no unlawful distribution of the Warrant by the Lender or other Persons), the issuance by the Borrower to the Lender of the Warrant is exempt from registration under the Securities Act.

 

3.6   Authorization; Enforcement; Validity . Borrower has the respective requisite corporate power and authority to enter into and perform, as applicable, its obligations under this Agreement, the Security Agreement, the Note, the Warrant, and each of the other agreements or instruments entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to issue the Note and the Warrant (including without limitation, the Warrant Shares) in accordance with the terms hereof and thereof. The execution and delivery of the Transaction Documents by Borrower and the consummation by each Borrower of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Note and the Warrant, have been duly authorized by its Board, and no further consent or authorization is required by the Borrower, it Board or stockholders. This Agreement, the Note and the other Transaction Documents have been duly executed and delivered by Borrower and constitutes the legal, valid and binding obligations of Borrower enforceable against the Borrower in accordance with their respective terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other laws of general application affecting enforcement of creditors’ rights and remedies generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law or by principles of public policy thereunder.

3.7   Dilutive Effect . Borrower understands and acknowledges that the Borrower’s obligation to issue the Warrant Shares upon exercise of the Warrant is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Borrower.

 

3.8   No Conflicts . The execution, delivery and performance of the Transaction Documents by Borrower and the consummation by Borrower of the transactions contemplated hereby and thereby (including, without limitation, the reservation for issuance of the Warrant Shares) will not (i) result in a violation of any articles or certificate of incorporation, any certificate of designations, preferences and rights of any outstanding series of preferred stock or bylaws of Borrower or any Subsidiary or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture or instrument to which Borrower or any Subsidiary is a party (except where such defaults, conflicts, rights of termination, amendment, acceleration or cancellation have been waived or postponed until the fulfillment of the Borrower’s obligations under the Transaction Documents), or (iii) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and rules and regulations of any governmental or any regulatory agency, self-regulatory organization, or Trading Market applicable to the Borrower) or by which any property or asset of the Borrower is bound or affected, except in the case of clauses (ii) and (iii), for such breaches, violations or defaults as would not be reasonably expected to have a Material Adverse Effect.

 

3.9   Governmental Consents . Except for (i) filings required under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) to disclose the existence of the transactions contemplated by this Agreement, (ii) application(s) to each Trading Market for the listing of the Warrant Shares for trading thereon in the time and manner required thereby, and (iii) the filing of Form D with the Commission and such filings as are required to be made under applicable state securities laws, Borrower is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental or any regulatory agency, self-regulatory organization or any other Person in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents, in each case, in accordance with the terms hereof or thereof. Borrower is unaware of any facts or circumstances relating to Borrower or any Subsidiary that might prevent Borrower from obtaining or effecting any of the foregoing.

 

3.10   Registration and Approval of Sale of Securities . Based in material part upon the representations and warranties herein (and in the other Transaction Documents) of the Lender, Borrower has complied and will comply with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Warrant hereunder (except in the case of state securities laws, for any failures to comply that, individually or in the aggregate, will not have a Material Adverse Effect). Assuming the accuracy of the representations and warranties in Article IV hereof (and assuming no change in applicable law and no unlawful distribution of the Warrant by the Lender or other Persons), no registration under the Securities Act is required for the offer and sale of the Warrant by the Borrower to the Lender as is contemplated hereby. Neither the Borrower nor any Person acting on its behalf, directly or indirectly, has or will sell, offer to sell or solicit offers to buy the Warrant or similar securities to, or solicit offers with respect thereto from, or enter into any negotiations relating thereto with, any Person, or has taken or will take any action so as to either (a) bring the issuance and sale of the Warrant under the registration provisions of the Securities Act or applicable state securities laws, or (b) trigger shareholder approval provisions under the rules or regulations of any Trading Market. Neither the Borrower nor any of its affiliates that it controls, nor any Person acting on its or their behalf, has: (x) engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of any of the Warrant; or (y) directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Warrant pursuant to this Agreement to be integrated with prior offerings by the Borrower for purposes of the Securities Act in a manner that would prevent the Borrower from selling the Warrant pursuant to Regulation D and Rule 506 thereof under the Securities Act, nor will the Borrower or any of its affiliates that it controls or Persons acting on its or their behalf engage in any form of general solicitation or take any action or steps that would cause the offering of the Warrant to be integrated with other offerings.

 

3.11   Placement Agent’s Fees . Except as set forth in Section 12.9 below, no brokerage or finder’s fee or commission are or will be payable to any Person with respect to the transactions contemplated by this Agreement based upon arrangements made by Borrower or any Subsidiary. The Borrower agrees that it shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or brokers’ commissions (other than for Persons engaged by the Lender or any of its affiliates) relating to or arising out of the transactions contemplated hereby. The Borrower shall pay, and hold the Lender harmless against, any liability, loss or expense (including, without limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in connection with any claim for any such fees or commissions.

 

3.12   Litigation . Except as disclosed in Schedule 3.12 , there is no action, suit, written notice of violation, or written notice of any proceeding pending or, to the knowledge of the Borrower, threatened against or affecting the Common Stock, Borrower, or any Subsidiary or any of their respective executive officers, directors or properties before or by any court, arbitrator, governmental or administrative agency, regulatory authority (federal, state, county, local or foreign), self regulatory authority or Trading Market (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Warrant or (ii) would, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. To the Borrower’s knowledge, neither the Borrower nor any Subsidiary, nor any director or executive officer thereof (in his/her capacity as such), is or, within the last five years, has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. To the knowledge of the Borrower, there has not been, and there is not pending or threatened in writing, any investigation by the United States Securities and Commission (the “Commission” or “SEC”) involving the Borrower or any current director or executive officer of the Borrower. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Borrower under the Exchange Act or the Securities Act. There is no action, suit, claim, investigation, arbitration, alternate dispute resolution proceeding or other proceeding pending or, to the knowledge of the Borrower, threatened in writing against or involving the Borrower or any of their respective properties or assets, which individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or regulatory body against the Borrower or any executive officers or directors of the Borrower in their capacities as such, which individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.

3.13   Indebtedness and Other Contracts . Except as disclosed in the SEC Documents (as defined in Section 3.14 below), neither any Borrower nor any Subsidiary (a) has any outstanding Indebtedness (as defined below in this Section 3.13), (b) is a party to any contract, agreement or instrument, the violation of which, or default under, by any other party to such contract, agreement or instrument would result in a Material Adverse Effect, (c) is in violation of any term of or in default under any contract, agreement or instrument relating to any Indebtedness, except where such violations and defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (d) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Borrowers’ officers, has or is expected to have a Material Adverse Effect. For purposes of this Agreement: (x) “Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (v) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (vi) all monetary obligations under any leasing or similar arrangement which, in connection with generally accepted accounting principles, consistently applied for the periods covered thereby, is classified as a capital lease, (vii) all indebtedness referred to in clauses (i) through (vi) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, Lien, pledge, change, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (viii) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (i) through (vii) above; (y) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; and (z) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.  All Indebtedness of the Company, or any Subsidiary, in excess of $100,000 is set forth on Schedule 3.13 attached hereto.

 

3.14   Financial Information; SEC Documents . The Borrower has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Borrower was required by law to file such material) (the foregoing materials, including the exhibits thereto, being collectively referred to herein as the “SEC Documents”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Each registration statement and any amendment thereto filed by the Borrower during the two years preceding the date hereof pursuant to the Securities Act and the rules and regulations thereunder, as of the date such statement or amendment became effective, complied as to form in all material respects with the Securities Act and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein not misleading; and each prospectus filed pursuant to Rule 424(b) under the Securities Act, as of its issue date and as of the closing of any sale of securities pursuant thereto did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The financial statements of the Borrower included in the SEC Documents comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP and remain subject to year end adjustments, and fairly present in all material respects the financial position of the Borrower and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal year-end audit adjustments.

 

3.15   Absence of Certain Changes or Developments . Except as disclosed in Schedule 3.15 attached hereto or as disclosed in the SEC Documents or as contemplated herein and in the Transaction Documents, since December 31, 2007:

 

(a)   there has been no Material Adverse Effect, and no event or circumstance has occurred or exists with respect to the Borrower or its businesses, properties, operations or financial condition, which, under Exchange Act, Securities Act, or rules or regulations of any Trading Market, requires public disclosure or announcement by the Borrower but which has not been so publicly announced or disclosed;

 

(b)   Borrower has not:

 

(i)   issued any stock, bonds or other corporate securities or any right, options or warrants with respect thereto, except pursuant to the exercise or conversion of securities outstanding as of such date;

 

(ii)   borrowed any amount in excess of $100,000 or incurred or become subject to any other liabilities in excess of $100,000 (absolute or contingent) except current liabilities incurred in the ordinary course of business which are comparable in nature and amount to the current liabilities incurred in the ordinary course of business during the comparable portion of its prior fiscal year, as adjusted to reflect the current nature and volume of the business of the Borrower;

 

(iii)   discharged or satisfied any Lien or encumbrance in excess of $100,000 or paid any obligation or liability (absolute or contingent) in excess of $100,000;

 

(iv)   declared or made any payment or distribution of cash or other property to stockholders with respect to its stock, or purchased or redeemed, or made any agreements so to purchase or redeem, any shares of its capital stock, in each case in excess of $50,000 individually or $100,000 in the aggregate;

(v)   sold, assigned or transferred any other tangible assets, or canceled any debts or claims, in each case in excess of $100,000, except in the ordinary course of business;

 

(vi)   sold, assigned or transferred any patent rights, trademarks, trade names, copyrights, trade secrets or other intangible assets or intellectual property rights in excess of $100,000, or disclosed any proprietary confidential information to any person except to customers in the ordinary course of business;

 

(vii)   suffered any material losses or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of prospective business;

 

(viii)   made any changes in employee compensation except in the ordinary course of business and consistent with past practices;

 

(ix)   made capital expenditures or commitments therefor that aggregate in excess of $250,000;

 

(x)   entered into any material transaction, whether or not in the ordinary course of business that has not been disclosed in the SEC Documents;

 

(xi)   made charitable contributions or pledges in excess of $10,000;

 

(xii)   suffered any material damage, destruction or casualty loss, whether or not covered by insurance;

 

(xiii)   experienced any material problems with labor or management in connection with the terms and conditions of their employment;

 

(xiv)   altered its method of accounting, except to the extent required by GAAP;

 

(xv)   issued any equity securities to any officer, director or affiliate (as such term is defined in Rule 144 of the Securities Act), except pursuant to existing stock option, equity incentive or similar incentive plans; or

 

(xvi)   entered into an agreement, written or otherwise, to take any of the foregoing actions.

 

3.16   Solvency . Borrower has not taken, nor does it have any intention to take, any steps to seek protection pursuant to any bankruptcy or similar law. Borrower has no actual knowledge nor has it received any written notice that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact that, as of the date hereof, would reasonably lead a creditor to do so. After giving effect to the transactions contemplated hereby to occur at the Closing, Borrower will not be Insolvent (as hereinafter defined). For purposes of this Agreement, “Insolvent” means (i) Borrower is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (ii) Borrower intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature or (iii) Borrower has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted.

 

3.17   Off-Balance Sheet Arrangements . There is no transaction, arrangement, or other relationship between Borrower and an unconsolidated or other off balance sheet entity that is required to be disclosed by the Borrower in its Exchange Act filings and is not so disclosed or that if made or not made would be reasonably likely to have a Material Adverse Effect.

 

3.18   Foreign Corrupt Practices . Neither Borrower, nor any Subsidiary, nor any of its respective directors, officers, agents, employees or other Persons acting on behalf of such subsidiaries has, in the course of their respective actions for or on behalf of Borrower or any of its subsidiaries (a) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity, (b) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (c) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended or (d) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

 

3.19   Transactions With Affiliates . Except as set forth on Schedule 3.19 , none of the officers, directors or employees of Borrower is presently a party to any transaction with Borrower or any Subsidiary (other than for ordinary course services as employees, officers or directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director or employee or, to the knowledge of the Borrower, any corporation, partnership, trust or other entity in which any such officer, director, or employee has a substantial interest or is an officer, director, trustee or partner.

 

3.20   Insurance . Borrower and each Subsidiary are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of Borrower believes to be prudent and customary in the businesses in which Borrower and each Subsidiary are engaged. Neither Borrower nor any Subsidiary has been refused any insurance coverage sought or applied for and neither Borrower nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.

 

3.21   Employee Relations . Neither Borrower nor any Subsidiary is a party to any collective bargaining agreement or employs any member of a union. No Executive Officer of Borrower (as defined in Rule 501(f) of the Securities Act) has notified Borrower that such officer intends to leave the Borrower or otherwise terminate such officer’s employment with the Borrower. No Executive Officer of Borrower, to the knowledge of the Borrower, is, or is now, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and, to the actual knowledge of the Borrower, the continued employment of each such executive officer does not subject Borrower or any Subsidiary to any liability with respect to any of the foregoing matters.  Borrower and each Subsidiary are in compliance with all federal, state, local and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours, except where failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

 

3.22   Title . Except as set forth on Schedule 3.22 , Borrower and each Subsidiary have good and marketable title to all personal property owned by them which is material to their respective business, in each case free and clear of all Liens (except for Permitted Liens). Any real property and facilities held under lease by Borrower or any Subsidiary are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by Borrower or any Subsidiary.

 

3.23   Intellectual Property Rights . The Borrower and the Subsidiaries own or possess the rights to use all patents, trademarks, domain names (whether or not registered) and any patentable improvements or copyrightable derivative works thereof, websites and intellectual property rights relating thereto, service marks, trade names, copyrights, licenses and authorizations which are necessary for the conduct of its business as now conducted (collectively, the “Intellectual Property Rights”) without any conflict with the rights of others, except any failures as, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect. Neither Borrower nor any Subsidiary has received a written notice that the Intellectual Property Rights used by Borrower or any Subsidiary violates or infringes upon the rights of any Person. To the knowledge of the Borrower, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. The Borrower and the Subsidiaries have taken reasonable measures to protect the value of the Intellectual Property Rights.

 

3.24   Environmental Laws . Borrower and each of the Subsidiaries (a) are in compliance with any and all Environmental Laws (as hereinafter defined), (b) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (c) are in compliance with all terms and conditions of any such permit, license or approval where, in each of the foregoing clauses (a), (b) and (c), the failure to so comply could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

 

3.25   Tax Matters . Borrower and each of the Subsidiaries (a) have made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (b) have paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (c) have set aside on its books reasonably adequate provision for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply, except where such failure would not have a Material Adverse Effect. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of Borrower know of no basis for any such claim.

 

3.26   Sarbanes-Oxley Act ; Internal Accounting and Disclosure Controls . The Borrower is in compliance in all material respects with the requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof and applicable to it, and any and all rules and regulations promulgated by the SEC thereunder that are effective and applicable to it as of the date hereof. The Borrower maintains a system of internal accounting controls sufficient, in the judgment of the Borrower’s board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate actions are taken with respect to any differences. The Borrower has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Borrower and designed such disclosure controls and procedures to ensure that material information relating to the Borrower, including its Subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Borrower’s most recently filed periodic report under the Exchange Act, as the case may be, is being prepared. The Borrower’s certifying officers have evaluated the effectiveness of the Borrower’s controls and procedures as of the date prior to the filing date of the most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”). The Borrower presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no significant changes in the Borrower’s internal controls (as such term is defined in Item 307(c) of Regulation S-B under the Exchange Act) or, to the Borrower’s knowledge, in other factors that could significantly affect the Borrower’s internal controls. The Borrower maintains and will continue to maintain a standard system of accounting established and administered in accordance with United States GAAP and the applicable requirements of the Exchange Act.

 

3.27   Investment Company Status . The Borrower is not, and immediately after receipt of payment for the Warrant will not be, an “investment company,” an “affiliated person” of, “promoter” for or “principal underwriter” for, or an entity “controlled” by an “investment company,” within the meaning of the Investment Company Act.

 

 

3.28   Material Contracts . Each contract of a Borrower that involves expenditures or receipts in excess of $250,000 (each, a “Material Contract”) is in full force and effect and is valid and enforceable in accordance with its terms. Each Borrower is and has been in full compliance with all applicable terms and requirements of each its Material Contract and no event has occurred or circumstance exists that (with or without notice or lapse of time) may contravene, conflict with or result in a violation or breach of, or give a Borrower or any other entity the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to cancel, terminate or modify any Material Contract. Each Borrower has not given or received from any other Person any notice or other communication (whether oral or written) regarding any actual, alleged, possible or potential violation or breach of, or default under, any Material Contract.

 

3.29   [Intentionally Omitted].

 

3.30   No Disagreements with Accountants . There are no disagreements of any kind presently existing, or reasonably anticipated by the Borrower to arise, between the Borrower and the accountants formerly or presently employed by the Borrower.

 

3.31   Senior Debt .  Except as disclosed on Schedule 3.31 , there is no Indebtedness of a Borrower that is senior to or ranks pari passu with the Note in right of payment, whether with respect of payment of redemptions, interest, damages or upon liquidation or dissolution.

 

3.32   Manipulation of Price . Borrower has not, and to its knowledge no one acting on its behalf has, taken, directly or indirectly, any action designed to cause or to result or that could reasonably be expected to cause or result, in the stabilization or manipulation of the price of any security of the Borrower to facilitate the sale or resale of the Warrant.

 

3.33   Listing and Maintenance Requirements . The Borrower has not, in the 12 months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Borrower is not in compliance with the listing or maintenance requirements of such Trading Market. The Borrower is in compliance with all such maintenance requirements.

 

3.34   Application of Takeover Protections . Borrower and its Board of Directors have taken all necessary action, if any, in order 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 respective Certificates of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Lender as a result of the Lender and the Borrower fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation the Borrower’s issuance of the Warrant and the Lender’s ownership of the Warrant.

 

3.35   Disclosure . All written disclosure provided to the Lender regarding each Borrower, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Borrower are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

4.1   Organization; Authority . The Lender is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations thereunder. The execution, delivery and performance by the Lender of the transactions contemplated by this Agreement have been duly authorized by all necessary partnership or similar action on the part of the Lender. Each Transaction Document to which it is a party has been duly executed by the Lender, and when delivered by the Lender in accordance with the terms hereof, will constitute the valid and legally binding obligation of the Lender, enforceable against it in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

4.2   Own Account . The Lender understands that the Warrant is a “restricted security” and has not been registered under the Securities Act or any applicable state securities law and is acquiring the Warrant as principal for its own account and not with a view to or for distributing or reselling su