PREFERRED STOCK PURCHASE AGREEMENT

Exhibit 10.1

PREFERRED STOCK PURCHASE AGREEMENT

This Preferred Stock Purchase Agreement (“ Agreement ”) is entered into and effective as of July 29, 2009 (“ Effective Date ”), by and among Sparta Commercial Services, Inc., a Nevada corporation (“ Company ”), and Optimus Capital Partners, LLC, a Delaware limited liability company, dba Optimus Special Situations Capital Partners, LLC (including its designees, successors and assigns, “ Investor ”).

RECITALS

A.  The parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue to Investor, and Investor shall purchase from the Company, from time to time as provided herein, up to $5,000,000.00 of shares of Series B Preferred Stock; and

B.  The offer and sale of the Securities provided for herein are being made without registration under the Act, in reliance upon the provisions of Section 4(2) of the Act, Regulation D promulgated under the Act, and such other exemptions from the registration requirements of the Act as may be available with respect to any or all of the purchases of Securities to be made hereunder.

AGREEMENT

In consideration of the premises, the mutual provisions of this Agreement, and other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, Company and Investor agree as follows:

ARTICLE 1

DEFINITIONS

1.1   Definitions . In addition to the terms defined elsewhere in this Agreement:  (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Certificate of Designations, and (b) the following terms have the meanings indicated in this Section 1.1 :

“ Act ” means the Securities Act of 1933, as amended.

“ Affiliate ” means any Person that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Act.  With respect to Investor, without limitation, any Person owning, owned by, or under common ownership with Investor, and any investment fund or managed account that is managed on a discretionary basis by the same investment manager as Investor will  be deemed to be an Affiliate.

“ Agreement ” means this Preferred Stock Purchase Agreement.

“ Automatic Termination ” has the meaning set forth in Section 3.1 .

 

“ Change in Control ” has the meaning set forth within the definition of Fundamental Transaction, below.

“ Certificate of Designations ” means the certificate to be filed with the Secretary of State of the State of Nevada, in the form attached hereto as Exhibit B .

“ Closing ” means any one of (i) the Commitment Closing and (ii) each Tranche Closing.

“ Commitment Closing ” has the meaning set forth in Section 2.2(a) .

“ Commitment Fee ” means a non-refundable fee of $250,000.00, payable by Company to Investor on the first Tranche Closing Date in cash or by wire transfer of immediately available funds to an account designated by the Investor.  Notwithstanding any other provision, the Commitment Fee shall be delivered within 6 months from the Effective Date even if the first Tranche Closing Date has not occurred, and is non-refundable.

“ Common Stock ” means the common stock, par value $0.001 per share, of the Company, and any replacement or substitute thereof, or any share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such Common Stock.

“ Company Termination ” has the meaning set forth in Section 3.2 .

“ Delisting Event ” means any time during the term of this Agreement, that the Common Stock is not listed for and actively trading on a Trading Market, or is suspended or delisted with respect to the trading of shares of Common Stock on a Trading Market.

“ DTC ” means The Depository Trust Company, or any successor performing substantially the same function for Company.

“ DWAC Shares ” means all Warrant Shares issued or issuable to Investor or any Affiliate, successor or assign of Investor, pursuant to the Transaction Documents, for which a registration statement registering for resale such Warrant Shares has become effective or which are Rule 144 Eligible, all of which shall be issued in electronic form, without restriction on resale, and delivered by the transferor thereof to any specified Deposit/Withdrawal At Custodian (DWAC) account with DTC under its Fast Automated Securities Transfer (FAST) Program or any similar program hereafter adopted by DTC performing substantially the same function, in accordance with irrevocable instructions issued to and countersigned by the Transfer Agent, in the form attached hereto as Exhibit C .

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

 

“ Fundamental Transaction ” means and shall be deemed to have occurred at such time upon any of the following events:

(i)  a consolidation, merger or other business combination or event or transaction following which the holders of Common Stock immediately preceding such consolidation, merger, combination or event either (a) no longer hold a majority of the shares of Common Stock or (b) no longer have the ability to elect a majority of the board of directors of the Company (a “ Change in Control ”);

(ii)  the sale or transfer (other than to a majority or wholly owned subsidiary of the Company) of all or substantially all of the Company’s assets, other than in the ordinary course of business; or

(iii)  a purchase, tender or exchange offer made to the holders of the outstanding shares of Common Stock (other than pursuant to an “option repricing” or similar event for compensation purposes).

“ GAAP ” means United States generally accepted accounting principles applied on a consistent basis during the periods involved.

“ Indebtedness ” means (a) any liabilities for borrowed money or amounts owed in excess of $250,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations in respect of Indebtedness of others, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (c) the present value of any lease payments in excess of $250,000 due under leases required to be capitalized in accordance with GAAP.

“ Liens ” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

“ Lock-Up Agreements ” means an agreement in the form attached as Exhibit D , executed by each of the Company’s executive officers, directors and beneficial owners of 10% or more of the Common Stock, precluding each such Person from participating in any sale of the Common Stock from the Tranche Notice Date through the Tranche Closing Date.

“ Material Adverse Effect ” includes any material adverse effect on (i) the legality, validity or enforceability of any Transaction Document, (ii) the results of operations, assets, business, prospects or financial condition of the Company and its Subsidiary, taken as a whole, or (iii) a the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document.

“ Material Agreement ” includes any material loan agreement, financing agreement, equity investment agreement or securities instrument to which Company is a party, any material agreement or instrument to which Company and Investor or any Affiliate of Investor is a party, and any other material agreement listed, or required to be listed, on any of Company’s reports filed or required to be filed with the SEC, including without limitation Forms 10-K, 10-Q or 8-K.

“ Maximum Placement ” means $5,000,000.00.

 

“ Maximum Tranche Amount ” means, subject to any other applicable limitations set forth in this Agreement, the Maximum Placement less the amount of any previously noticed and funded Tranches.

 “ Officer’s Closing Certificate ” means a certificate in customary form reasonably acceptable to the Investor, executed by an authorized officer of the Company.

“ Opinion ” means an opinion from Company’s independent legal counsel, in the form attached as Exhibit E , to be delivered in connection with the Commitment Closing and any Tranche Closing.

“ Person ” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

“ Preferred Shares ” means shares of Series B Preferred Stock of the Company provided for in the Certificate of Designations, to be issued to Investor pursuant to this Agreement.

“ Pricing Period ” means the 5 Trading Days immediately prior to a Tranche Notice Date.

“ Prospectus ” includes each prospectus (within the meaning of the Act) related to the sale or offering of any Warrant Shares, including without limitation any prospectus contained within the Registration Statement.

“ Registration Statement ” means a valid, current and effective registration statement registering for sale the Warrant Shares, and except where the context otherwise requires, means the registration statement, as amended, including (i) all documents filed as a part thereof or incorporated by reference therein, and (ii) any information contained or incorporated by reference in a prospectus filed with the SEC in connection with such registration statement, to the extent such information is deemed under the Act to be part of the registration statement.

“ Regulation D ” means Regulation D promulgated under the Act.

“ Required Approval ” means any approval of the Trading Market or the Company’s stockholders required to be obtained by Company prior to issuing the Securities pursuant to any applicable rules of the Trading Market.

“ Required Tranche Documents ” has the meaning set forth in Section 2.3(e) .

“ Rule 144 ” means Rule 144 promulgated by the SEC pursuant to the Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same effect.

“ Rule 144 Eligible ” means eligible for immediate resale under Rule 144 without limitation on the amount of securities sold under Rule 144(e) and without  requiring discharge by payment in full of any promissory notes given to Company prior to the sale of the securities under Rule 144(d)(2)(iii).

 

“ SEC ” means the United States Securities and Exchange Commission.

“ SEC Reports ” includes all reports required to be filed by the Company under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the Effective Date (or such shorter period as the Company was required by law to file such material).

“ Securities ” includes the Warrants and Preferred Shares issuable pursuant to this Agreement and the Warrant Shares issuable pursuant to the Warrants.

“ Series A Redeemable Preferred Stock ” means the shares of Series A Redeemable Preferred Stock of the Company outstanding as of the Effective Date.

“ Series B Preferred Stock ” means shares of Series B Preferred Stock of the Company provided for in the Certificate of Designations, to be issued to Investor pursuant to this Agreement.

“ Subsidiary ” means any Person the Company owns or controls, or in which the Company, directly or indirectly, owns a majority of the capital stock or similar interest that would be disclosable pursuant to Regulation S-K, Item 601(b)(21).

“ Termination Date ” means the earlier of (i) the date that is one year after the Effective Date, or (ii) the Tranche Closing Date on which the sum of the aggregate Tranche Purchase Price for all Tranche Shares equals the Maximum Placement.

“ Termination Notice ” has the meaning as set forth in Section 3.2 .

“ Trading Day ” means any day on which the Common Stock is traded on the Trading Market; provided that it shall not include any day on which the Common Stock is (a) scheduled to trade for less than 5 hours, or (b) suspended from trading.

“ Trading Market ” means the OTC Bulletin Board, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market, the NYSE Amex, or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock, but does not include the Pink Sheets inter-dealer electronic quotation and trading system.

“ Tranche ” has the meaning set forth in Section 2.3 .

“ Tranche Amount ” means the amount of any individual put purchase, as specified by the Company, and shall not exceed the Maximum Tranche Amount.

“ Tranche Closing ” has the meaning set forth in Section 2.3(f) .

“ Tranche Closing Date ” has the meaning set forth in Section 2.3(f) .

“ Tranche Notice ” has the meaning set forth in Section 2.3(b) .

 

“ Tranche Notice Date ” has the meaning set forth in Section 2.3(b) .

“ Tranche Purchase Price ” has the meaning set forth in Section 2.3(b) , and shall be specified in writing by the Company.

“ Tranche Share Price ” means $10,000.00 per Preferred Share.  Company may not put fractional Preferred Shares.

“ Tranche Shares ” means the Preferred Shares that are purchased by Investor pursuant to a Tranche.

“ Transaction Documents ” include this Agreement and the Exhibits hereto and thereto.

“ Transfer Agent ” means Jersey Transfer & Trust Co., or any successor transfer agent for the Common Stock.

“ Warrant Shares ” means the shares of Common Stock issuable upon exercise of the Warrants.

“ Warrants ” means the warrants issuable under this Agreement, in the form attached hereto as Exhibit A , to purchase shares of Common Stock.

ARTICLE 2

PURCHASE AND SALE

2.1   Agreement to Purchase .  Subject to the terms and conditions herein and the satisfaction of the conditions to closing set forth in this ARTICLE 2:

(b)   The Company agrees to issue the Commitment Fee and the Warrants to Investor as provided below.

2.2   Investment Commitment

(b)   Conditions to Investment Commitment . As a condition precedent to the Commitment Closing, all of the following (the “ Conditions to Commitment Closing ”) shall have been satisfied prior to or concurrently with the Company’s execution and delivery of this Agreement:

(i)   the following documents shall have been delivered to Investor:  (A) this Agreement, executed by the Company; (B) a Secretary’s Certificate as to (x) the resolutions of the Company’s board of directors authorizing this Agreement and the Transaction Documents, and the transactions contemplated hereby and thereby, (y) a copy of the Company’s current Certificate of Incorporation, and (z) a copy of the Company’s current Bylaws; (C) the Certificate of Designations executed by the Company and accepted by the Secretary of State of Nevada; (D) the Opinion; and (E) a copy of the press release announcing the transactions contemplated by this Agreement and Current Report on Form 8-K describing the transaction contemplated by this Agreement;

(ii)   other than for losses incurred in the ordinary course of business, there have been no material adverse changes in the Company’s business prospects or financial condition since the date of the last SEC Report filed by the Company, including but not limited to incurring material liabilities;

(iii)   the representations and warranties of the Company in this Agreement shall be true and correct in all material respects and the Company shall have delivered an Officer’s Closing Certificate to such effect to Investor, signed by an officer of the Company;

(iv)   Investor shall have entered into Stock Loan Agreements with lending stockholders of the Company who are parties thereto (each, a “Lending Stockholder,” and, collectively, the “Lending Stockholders”) in the form attached hereto as Exhibit G (each, a “Stock Loan Agreement”), and received the Borrowed Shares (as defined in the Stock Loan Agreement) pursuant thereto; and

(v)   any Required Approval has been obtained.

(c)   Investor’s Obligation to Purchase . Subject to the prior satisfaction of all conditions set forth in this Agreement, following the Investor’s receipt of a validly delivered Tranche Notice, the Investor shall be required to purchase from the Company a number of Tranche Shares equal to the permitted Tranche Share Amount, in the manner described below.

2.3   Tranches to Investor

(a)   Procedure to Elect a Tranche . Subject to the Maximum Tranche Amount, the Maximum Placement and the other conditions and limitations set forth in this Agreement, at any time beginning on the Effective Date, the Company may, in its sole and absolute discretion, elect to exercise one or more tranches of puts (each a “ Tranche ”) according to the following procedure, provided that each subsequent Tranche Notice Date after the first Tranche Notice Date shall be no sooner than 5 Trading Days following the preceding Tranche Notice Date.

(b)   Delivery of Tranche Notice . The Company shall deliver an irrevocable written notice (the “ Tranche Notice ”) the form of which is attached hereto as Exhibit F (the date of such Tranche Notice being the “ Tranche Notice Date ”), to Investor stating that the Company shall exercise a Tranche and stating the number of Preferred Shares which the Company will sell to Investor at the Tranche Share Price, and the aggregate purchase price for such Tranche (the “ Tranche Purchase Price ”).  A Tranche Notice may be delivered by the Company to Investor before 9:30 a.m. Eastern time on any Trading Day via facsimile or electronic mail, with confirming copy by overnight carrier.  A Tranche Notice delivered after such time or on a non-Trading Day shall be deemed delivered on the following Trading Day.

 

(c)   Issuance of Warrants .  On each Tranche Notice Date, the Company shall issue a Warrant, in the form attached hereto as Exhibit A , to acquire that portion of Warrant Shares equal in value to 135.0% of the Tranche Purchase Price, at an exercise price equal to the closing bid price for the Common Stock on the Trading Day immediately preceding the Tranche Notice Date.  Each Warrant shall have a term of 5 years from issuance.

(d)   Conditions Precedent to Right to Deliver a Tranche Notice .  The right of the Company to deliver a Tranche Notice is subject to the satisfaction, on the date of delivery of such Tranche Notice, of each of the following conditions:

(i)   the Common Stock shall be listed for and currently trading on the Trading Market, and to the Company’s knowledge there is no notice of any suspension or delisting with respect the trading of the shares of Common Stock on such market or exchange;

(ii)   the representations and warranties of the Company set forth in this Agreement are true and correct in all material respects as if made on such date (provided, however, that any information disclosed by the Company in a filing with the SEC after the Effective Date but prior to the date of the Tranche Notice shall be deemed to update the Disclosure Schedules), and no material default shall have occurred under this Agreement, or any other agreement with Investor, any Affiliate of Investor, or any other Material Agreement (excluding the Company’s promissory notes of up to and including $250,000 total with any parties other than Investor or any Affiliate of Investor), and the Company shall deliver an Officer’s Closing Certificate to such effect to Investor, signed by an officer of the Company;

(iii)   other than losses incurred in the ordinary course of business, there have been no material adverse changes in the Company’s business prospects or financial condition since the Commitment Closing, including but not limited to incurring material liabilities;

(iv)   the Company is not, and will not be as a result of the applicable Tranche, in default of any Material Agreement;

(v)   there is not then in effect any law, rule or regulation prohibiting or restricting the transactions contemplated by any of the Transaction Documents, or requiring any consent or approval which shall not have been obtained, nor is there any pending or threatened proceeding or investigation which may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement; no statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or adopted by any court or governmental authority of competent jurisdiction that prohibits the transactions contemplated by this Agreement, and no actions, suits or proceedings shall be in progress, pending or, to the Company’s knowledge threatened, by any person (other than Investor or any Affiliate of Investor), that seek to enjoin or prohibit the transactions contemplated by this Agreement;

 

(vi)   all Warrant Shares that were the subject of an Exercise Notice (as defined in the Warrant) that was previously delivered to the Company shall have been timely delivered in accordance with such Exercise Notice;

(vii)   all previously-issued Warrant Shares are DWAC Shares, are DTC eligible, and can be immediately converted into electronic form without restriction on resale;

(viii)   Company is in material compliance with all reporting requirements to maintain listing on the Trading Market;

(ix)   Company shall have a current, valid, and effective Registration Statement permitting the lawful resale of all issuable Warrant Shares, or all such shares are, or within one year of the Effective Date will become, Rule 144 Eligible;

(x)   Company has provided notice of its delivery of the Tranche Notice to all signatories of a Lock-Up Agreement as required under the Lock-Up Agreement;

(xi)   the aggregate number of Warrant Shares issuable upon exercise of the Warrant issued at that Tranche Notice Date, aggregated with all other shares of Common Stock deemed beneficially owned by the Investor and its Affiliates would not result in the Investor owning more than 9.99% of all Common Stock outstanding on the Tranche Notice Date, as determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder; and

(xii)   pursuant to the terms of the Stock Loan Agreements, Investor shall have Borrowed Shares, all of which will be issued in original certificated form, bearing no restrictive legend and will be accompanied by stock powers executed in blank with a medallion signature guarantee, and an amount of Borrowed Shares equal to at least 150% of the Tranche Purchase Price shall have been converted into electronic form into a DTC account designated by Investor by such Tranche Notice Date.

(e)   Documents to be Delivered at Tranche Closing . The Closing of any Tranche and Investor’s obligations hereunder shall additionally be conditioned upon the delivery to Investor of each of the following (the “ Required Tranche Documents ”) on or before the applicable Tranche Closing Date:

(i)   a number of Preferred Shares equal to the Tranche Purchase Price divided by the Tranche Share Price shall have been delivered to Investor or an account specified by Investor for the Tranche Shares;

(ii)   the following executed documents:  Opinion, Officer’s Certificate and Lock-Up Agreements;

(iii)   a “Use of Proceeds” certificate, signed by an officer of the Company, and setting forth how the Tranche Purchase Price will be applied by the Company;

(iv)   all Warrant Shares shall have been timely delivered in accordance with any Exercise Notice delivered to Company prior to the Tranche Closing Date;

 

(v)   all documents, instruments and other writings required to be delivered by the Company to Investor on or before the Tranche Closing Date pursuant to any provision of this Agreement or in order to implement and effect the transactions contemplated herein; and

(vi)   payment of a $5,000.00 non-refundable administrative fee to Investor’s counsel, by offset against the Tranche Amount, or wire transfer of immediately available funds.

(f)   Mechanics of Tranche Closing .  Each of the Company and Investor shall deliver all documents, instruments and writings required to be delivered by either of them pursuant to Section 2.3(e) of this Agreement at or prior to each Tranche Closing. Subject to such delivery and the satisfaction of the conditions set forth in Section 2.3(d) as of the Tranche Closing Date, the closing of the purchase by Investor of Preferred Shares shall occur by 5:00 p.m. Eastern time, on the date which is 10 Trading Days following the Tranche Notice Date (each a “ Tranche Closing Date ”) at the offices of Investor.  On or before each Tranche Closing Date, Investor shall deliver to the Company, in cash or immediately available funds, the Tranche Purchase Price to be paid for such Tranche Shares.  The closing (each a “ Tranche Closing ”) for each Tranche shall occur on the date that both (i) the Company has delivered to Investor all Required Tranche Documents, and (ii) Investor has delivered to the Company the Tranche Purchase Price.

(g)   Limitation on Obligations to Purchase and Sell .  Notwithstanding anything herein to the contrary, in the event the closing price of the Common Stock during the 9 Trading Days following the Tranche Notice Date falls below 75.0% of the closing bid price on the day prior to the Tranche Notice Date:  (i) Investor may, at its option, and without penalty, decline to purchase the applicable Tranche Shares on the Tranche Closing Date, and return to the Company all Warrants issued in connection with such Tranche Notice that remain unexercised; or (ii) Company may, at its option, and without penalty, terminate the Tranche Notice and decline to sell the applicable Tranche Shares on the Tranche Closing Date.

2.4   Maximum Placement .  Investor shall not be obligated to purchase any additional Tranche Shares once the aggregate Tranche Purchase Price paid by Investor equals the Maximum Placement.

2.5   Share Sufficiency .  On or before the date on which the Warrants become exercisable, the Company shall have a sufficient number of duly authorized shares of Common Stock for issuance in such amount as may be required to fulfill its obligations pursuant to the Transaction Documents and any outstanding agreements with Investor and any Affiliate of Investor.

 

ARTICLE 3

TERMINATION

3.1   Automatic Termination. .  This Agreement and the Company’s right to initiate subsequent Tranches to Investor under this Agreement shall terminate permanently (each, an “ Automatic Termination ”) upon the occurrence of any of the following:

(a)   if, at any time, either the Company or any director or executive officer of the Company has engaged in a transaction or conduct related to the Company that has resulted in (i) a SEC enforcement action, or (ii) a civil judgment or criminal conviction for fraud or misrepresentation, or for any other offense that, if prosecuted criminally, would constitute a felony under applicable law;

(b)   on any date after a Delisting Event that lasts for an aggregate of 20   Trading Days during any calendar year;

(c)   if at any time the Company has filed for and/or is subject to any bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors instituted by or against the Company or any subsidiary of the Company;

(d)   the Company is in breach or default of any Material Agreement, which default could have a Material Adverse Effect;

(e)   the Company is in breach or default of any material provision of this Agreement, any Transaction Document, or any agreement with Investor or any Affiliate of Investor;

(f)   upon the occurrence of a Fundamental Transaction;

(g)   so long as any Preferred Shares are outstanding, the Company effects or publicly announces its intention to create a security senior to the Series B Preferred Stock, or substantially altering the capital structure of the Company in a manner that materially adversely affects the rights or preferences of the Series B Preferred Stock; and

(h)   on the Termination Date.

3.2   Company Termination .  The Company may at any time in its sole discretion terminate (a “ Company Termination ”) this Agreement and its right to initiate future Tranches by providing 30 days advanced written notice (“ Termination Notice ”) to Investor.

3.3   Effect of Termination .  The termination of this Agreement will have no effect on any Warrant Shares, Preferred Shares, Warrants or DWAC Shares previously issued, delivered or credited, or on any rights of any holder thereof.  Notwithstanding any other provision, all fees paid to Investor or its counsel are non-refundable.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

4.1   Representations and Warranties of the Company .  .  The Company hereby represents and warrants to, and as applicable covenants with, Investor as of each Closing:

(a)   Subsidiaries .  As of the date hereof, the Company’s only Subsidiary is Sparta Funding LLC, a Delaware limited liability company.  The Company owns, directly or indirectly, all of the capital stock or other equity interests of its Subsidiary, and all of such directly or indirectly owned capital tock or other equity interests are owned free and clear of any Liens.  All the issued and outstanding shares of capital stock of its Subsidiary are duly authorized, validly issued, fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.  

 

(b)   Organization and Qualification .  Each of the Company and its Subsidiary is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as applicable, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.  Neither the Company nor any Subsidiary is in violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents, except where such violation could not, individually or in the aggregate, constitute a Material Adverse Effect.  Each of the Company and its Subsidiary is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in a Material Adverse Effect and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

(c)   Authorization; Enforcement .  The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder or thereunder.  The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby or thereby have been duly authorized by all necessary action on the part of the Company and no further consent or action is required by the Company other than the filing of the Certificate of Designations.  Each of the Transaction Documents has been, or upon delivery will be, duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights and remedies.  

(d)   No Conflicts .  The execution, delivery and performance of the Transaction Documents by the Company, the issuance and sale of the Securities and the consummation by the Company of the other transactions contemplated thereby do not and will not (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected, or (iv) conflict with or violate the terms of any agreement by which the Company or any Subsidiary is bound or to which any property or asset of the Company or any Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.

 

(e)   Filings, Consents and Approvals .  Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than the filing of the Certificate of Designations, appropriate filings under the Exchange Act, and filings with the State of Nevada regarding the issuance of new shares of stock, each of which has been (or if not yet required to be filed shall be) timely filed.

(f)   Issuance of the Securities .  The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens.  The Company has reserved from its duly authorized capital stock an amount of shares of preferred stock at least equal to the amount of Preferred Shares that could be issued pursuant to the terms of the Transaction Documents.  The Company has obtained written consent from a majority of the stockholders of its issued and outstanding Common Stock to increase the number of authorized shares of Common Stock in sufficient number such that the Company will, twenty days following the circulation of its Schedule 14C (as that term is defined in the regulations promulgated under the Exchange Act) disclosing such written consent, have reserved from its duly authorized capital stock an amount of shares of Common Stock sufficient for the issuance of the Common Stock that could be issued pursuant to the terms of the Transaction Documents.

(g)   Capitalization .

(i)   Except as set forth in Section 4.1(g)(ii) , the capitalization of the Company is as described in the Company’s most recently filed SEC Report and the Company has not issued any capital stock since such filing.  Except as set forth in Section 4.1(g)(ii) , no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and sale of the Securities or as set forth in Section 4.1(g)(ii) , there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or securities convertible into or exercisable for shares of Common Stock.  The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than Investor) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange, or reset price under such securities. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities.  No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the shares of the Securities.  There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

 

(ii)   The Company last filed an SEC Report on Form 10-Q for the quarterly period ended January 31, 2009 (the “ Last Report Filing Date ”).  Since the Last Report Filing Date, the Company has issued 6,817,165 of Common Stock.  Furthermore, as of the Effective Date: (i) there are 16,635,453 shares of Common Stock to be issued pursuant to the terms and conditions of the Series A Redeemable Preferred Stock; (ii) the holders of the Company’s 8%, 10% and 12% convertible notes have the right to convert the principal thereof and accrued interest thereon into 8,906,719 shares of Common Stock; (iii) there are 13,981,484 options and warrants outstanding; and (iv) there are certain convertible notes with outstanding principal and accrued interest thereon that the Company intends to convert, prior to the first Tranche Notice Date, into approximately 95,027,696 shares of Common Stock.

(h)   SEC Reports; Financial Statements .  The Company has filed all required SEC Reports for the two years preceding the Effective Date (or such shorter period as the Company was required by law to file such SEC Reports) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder, as applicable, and none of the SEC Reports, 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.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with 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 fairly present in all material respects the financial position of the Company 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, immaterial, year-end audit adjustments.

(i)   Material Changes .

(i)   Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in the SEC Reports or as set forth in Section 4.1(g)(ii) or Section 4.1(i)(ii) , (A) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (B) the Company has not incurred any liabilities (contingent or otherwise) other than (x) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (y) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC, (C) the Company has not altered its method of accounting, (D) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (E) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company equity incentive plans.  The Company does not have pending before the SEC any request for confidential treatment of information.

 

(ii)   Since the Last Report Filing Date, the Company has issued $556,000.00 of notes payable, of which $516,000.00 are 8% convertible notes described in Section 4.1(g)(ii), and $40,000.00. are 10% bridge notes.

(j)   Litigation .  There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “ Action ”), which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities, or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect.  Neither the Company nor any Subsidiary, nor to the knowledge of the Company any director or officer thereof, is or 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.  There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the SEC involving the Company or any current or former director or officer of the Company.  The SEC has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Act.

(k)   Labor Relations .  No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company, which could reasonably be expected to result in a Material Adverse Effect.

(l)   Compliance .  Neither the Company 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 the Company or any Subsidiary under), nor has the Company 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 similar agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business except in each case as could not have a Material Adverse Effect.

(m)   Regulatory Permits .  The Company and its Subsidiary possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect (“ Material Permits ”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

 

(n)   Title to Assets .  Except for all property, real or personal that is subject to any of the agreements between the Company and any of New World Lease Funding, DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, Glenn Little, and JMM Foundation, Inc., the Company and its Subsidiary have good and marketable title in fee simple to all real property owned by them that is material to the business of the Company and its Subsidiary and good and marketable title in all personal property owned by them that is material to the business of the Company and its Subsidiary, in each case free and clear of all Liens, except for Liens that do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its Subsidiary and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties.  Any real property and facilities held under lease by the Company and its Subsidiary are held by them under valid, subsisting and enforceable leases of which the Company and its Subsidiary are in compliance.

(o)   Patents and Trademarks .  The Company and its Subsidiary have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”).  Neither the Company nor any Subsidiary has received a written notice that the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes upon the rights of any Person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights of the Company or its Subsidiary.

(p)   Insurance .  The Company and its Subsidiary are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and its Subsidiary are engaged, including but not limited to directors and officers insurance coverage at least equal to the Maximum Placement.  To the best of Company’s knowledge, such insurance contracts and policies are accurate and complete.  Neither the Company 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 without a significant increase in cost.

(q)   Transactions With Affiliates and Employees .  Except as set forth in the SEC Reports, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and 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 officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $120,000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) for other employee benefits, including stock option agreements under any equity incentive plan of the Company.

 

(r)   Sarbanes-Oxley; Internal Accounting Controls .  The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002, which are applicable to it as of the date of the Commitment Closing.  The Company and its Subsidiary maintain a system of internal accounting controls sufficient 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 action is taken with respect to any differences.  The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that material information relating to the Company, including its Subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Company’s most recently filed periodic report under the Exchange Act, as the case may be, is being prepared.  The Company’s certifying officers have evaluated the effectiveness of the Company’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 Company 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 Company’s internal controls or, to the Company’s knowledge, in other factors that could materially affect the Company’s internal controls.

(s)   Certain Fees .  Except for the payment of the Commitment Fee, no brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement.  Investor shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section 4.1(s) that may be due in connection with the transactions contemplated by this Agreement.

(t)   Private Placement . Assuming the accuracy of Investor representations and warranties set forth in Section 4.2, no registration under the Act is required for the offer and sale of the Securities by the Company to Investor as contemplated hereby. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of any Trading Market.

(u)   Investment Company . The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.  The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act.

 

(v)   Registration Rights .  No Person has any right to cause the Company to effect the registration under the Act of any securities of the Company, except for the holders of the Series A Redeemable Preferred Stock and as otherwise set forth in the Transaction Documents.

(w)   Listing and Maintenance Requirements .  The Common Stock is registered pursuant to Section 12 of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the SEC is contemplating terminating such registration.  The Company has not, in the 12 months preceding the Effective Date, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

(x)   Application of Takeover Protections .  The Company 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 Company’s Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to Investor as a result of Investor and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation the Company’s issuance of the Securities and Investor’s ownership of the Securities.

(y)   Disclosure .  Except with respect to the information that will be, and to the extent that it actually is timely publicly disclosed by the Company pursuant to Section 2.2(b)(i)E , the Company confirms that, neither the Company nor any other Person acting on its behalf has provided Investor or its agents or counsel with any information that constitutes or might constitute material, non-public information, including without limitation this Agreement and the Exhibits and Schedules hereto.  The Company understands and confirms that Investor will rely on the foregoing representations and covenants in effecting transactions in securities of the Company.  All disclosure provided to Investor regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, furnished by or on behalf of the Company with respect to the representations and warranties made herein are true and correct in all material respects 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. 

(z)   No Integrated Offering . Neither the Company, nor any of its Affiliates, nor any Person acting on its or 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 cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Act or which could violate any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of the Trading Market.

 

(aa)   Financial Condition .  In connection with the transactions contemplated by the Transaction Documents, the Company (i) was solvent at all relevant times prior to the Effective Date and was not rendered insolvent by such transactions, (ii) after giving effect to such transactions, is able to pay its debts as they mature, (iii) was not left with unreasonably small capital for the business in which it is engaged and proposes to be engaged, (iv) did not and does not have any intent to hinder, delay, or defraud any of its creditors, (v) had a valid business reason for such transactions, and (vi) received new value therefor and consideration therefor constituting reasonably equivalent value and fair market value consideration.

(bb)   Tax Status .  The Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has 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 has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply.  There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.  The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, statue or local tax.  None of the Company’s tax returns is presently being audited by any taxing authority.

(cc)   No General Solicitation or Advertising .  Neither the Company nor, to the knowledge of the Company, any of its directors or officers (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to the sale of the Securities, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Securities under the Act or made any “directed selling efforts” as defined in Rule 902 of Regulation S.

(dd)   Foreign Corrupt Practices .  Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any corrupt funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is  in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

(ee)   Acknowledgment Regarding Investor’s Purchase of Securities .  The Company acknowledges and agrees that Investor is acting solely in the capacity of arm’s length purchaser with respect to this Agreement and the transactions contemplated hereby.  The Company further acknowledges that Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by Investor or any of its representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to Investor’s purchase of the Securities.  The Company further represents to Investor that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.

 

(ff)   Accountants .  The Company’s accountants are set forth in the SEC Reports.  To the Company’s knowledge, such accountants are an independent registered public accounting firm as required by the Act.

(gg)   No Disagreements with Accountants and Lawyers .  There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the accountants and lawyers formerly or presently employed by the Company, and the Company is current with respect to any fees owed to its accountants and lawyers.

(hh)   Registration Statements and Prospectuses .

(i)   Company will use commercially reasonable efforts to file within 45 calendar days after each Tranche Closing Date (or as soon as possible thereafter), cause to become effective as soon as possible thereafter, and remain effective until all Warrant Shares have been sold or are Rule 144 Eligible, a Registration Statement for the sale of the Warrant Shares underlying the Warrants issued to Investor on such Tranche Closing Date.  Each Registration Statement shall comply when it becomes effective, and, as amended or supplemented, at the time of any Tranche Notice Date, Tranche Closing Date, or issuance of any Warrant Shares, and at all times during which a prospectus is required by the Act to be delivered in connection with any sale of Warrant Shares, will comply, in all material respects, with the requirements of the Act.  

(ii)   Each Registration Statement, as of its respective effective time, will not, as applicable, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

(iii)   Each Prospectus will comply, as of its date and the date it  will be filed with the SEC,  and, at the time of any Tranche Notice Date, Tranche Closing Date, or issuance of any Warrant Shares, and at all times during which a prospectus is required by the Act to be delivered in connection with any sale of Warrant Shares, will comply, in all material respects, with the requirements of the Act.

(iv)   At no time during the period that begins on the date a Prospectus is filed with the SEC and ends at the time a prospectus is no longer required by the Act to be delivered in connection with any sale of Warrant Shares did or will any such Prospectus, as then amended or supplemented, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and at no time during such period will such Prospectus, as then amended or supplemented, include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

(v)   Each Registration Statement will meet, and the offering and sale of the Warrant Shares as contemplated hereby complies with, and will comply with, the requirements of Rule 415(a)(1)(i) under the Act.

(vi)   The Company has not, directly or indirectly, used or referred to any “free writing prospectus” (as defined in Rule 405 under the Act) except in compliance with Rules 164 and 433 under the Act.

(vii)   The Company is not an “ineligible issuer” (as defined in Rule 405 under the Act) as of the eligibility determination date for purposes of Rules 164 and 433 under the Act with respect to the offering of the Warrant Shares contemplated by any Registration Statement, without taking into account any determination by the SEC pursuant to Rule 405 under the Act that it is not necessary under the circumstances that the Company be considered an “ineligible issuer.”

(ii)   Stock Loan Agreements .  None of the Lending Stockholders are, or within 90 days of the Effective Date have been, Affiliates of the Company.  No Lending Stockholder or any Affiliate of any Lending Stockholder has been, or will be, compensated by the Company, or to the Company’s knowledge any Person, in any manner, directly or indirectly, for entering into a Stock Loan Agreement except as expressly set forth therein.  The execution, delivery and performance of the Stock Loan Agreements, the consummation the transactions contemplated by the Stock Loan Agreements, the borrowing and receipt of the Borrowed Shares, and any subsequent sale of any Borrowed Shares as permitted by the Stock Loan Agreements do not and will not conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company, or to the Company’s knowledge any Lending Stockholder or other Person, is subject, including without limitation Section 5 of the Act and other federal and state securities laws and regulations.

4.2   Representations and Warranties of Investor . Investor hereby represents and warrants as of the Effective Date as follows:

(a)   Organization; Authority .  Investor is an entity validly existing and in good standing under the laws of the jurisdiction of its organization with full right, company 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 Investor of the transactions contemplated by this Agreement have been duly authorized by all necessary company or similar action on the part of Investor.  Each Transaction Document to which it is a party has been (or will be) duly executed by Investor, and when delivered by Investor in accordance with the terms hereof, will constitute the valid and legally binding obligation of Investor, 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.

 

(b)   Investor Status .  At the time Investor was offered the Securities, it was, and at the Effective Date it is:  (i) an “accredited investor” as defined in Rule 501(a) under the Act.

(c)   Experience of Investor .  Investor, either alone or together with its representatives, 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, and has so evaluated the merits and risks of such investment.  Investor is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.

(d)   General Solicitation .  Investor is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

(e)   Acquisition for Investment Purposes .  Investor is acquiring its interest in the Securities for its own account, and not as a nominee for any Person other than Investor and its Affiliates.  Investor is not acquiring the Preferred Shares or the Warrants with a view to or for sale or transfer in connection with any distribution of the Preferred Shares or the Warrants under the Act; provided , however , that the disposition of its property shall at all times be within its control.

(f)   Use of Borrowed Shares .  Investor will not sell, short sell, or short sell against the box the Borrowed Shares until after the time the Company is required to disclose the terms of the transactions contemplated hereby pursuant to Section 5.4 hereof.

The Company acknowledges and agrees that Investor does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 4.2 .

ARTICLE 5

OTHER AGREEMENTS OF THE PARTIES

5.1   Transfer Restrictions

(a)   The Securities may only be disposed of in compliance with state and federal securities laws.  In connection with any transfer of Securities other than (i) pursuant to an effective Registration Statement or Rule 144, (ii) to the Company, (iii) to an Affiliate of Investor, or (iv) in connection with a pledge as contemplated in Section 5.1(b) , the Company may require the transferor thereof to provide to the Company an opinion of Luce Forward Hamilton & Scripps LLP (“ Luce Forward ”), or other counsel selected by the transferor and reasonably acceptable to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Act.

 

(b)   Investor agrees to the imprinting, so long as is required by this Section 5.1 , of the following legend, or substantially similar legend, on any certificate evidencing Securities other than DWC Shares:

The Company agrees to cause such legend to be removed immediately upon effectiveness of a Registration Statement, or when any Warrant Shares are eligible for sale under Rule 144.  Company further acknowledges and agrees that Investor may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, Investor may transfer pledged or secured Securities to the pledgees or secured parties.  Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith.  Further, no notice shall be required of such pledge.  At Investor’s reasonable expense, the Company will execute and deliver such documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities.

5.2   Furnishing of Information .  As long as Investor owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the Effective Date pursuant to the Exchange Act.  Upon the request of Investor, the Company shall deliver to Investor a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as Investor owns Securities, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to Investor and make publicly available in accordance with Rule 144(c) such information as is required for Investor to sell the Securities under Rule 144.  The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such Securities without registration under the Act within the limitation of the exemptions provided by Rule 144.

5.3   Integration .  The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Act of the sale of the Securities to Investor or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market such that it would require stockholder approval prior to the closing of such other transaction unless stockholder approval is obtained before the closing of such subsequent transaction.

 

5.4   Securities Laws Disclosure; Publicity .  The Company shall, by 8:30 a.m. Eastern time on the Trading Day following the Effective Date, issue a press release or if required file a Current Report on Form 8-K, in each case reasonably acceptable to Investor, disclosing the material terms of the transactions contemplated hereby.  The Company and Investor shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby, and neither the Company nor Investor shall issue any such press release or otherwise make any such public statement without the prior consent of the Company, with respect to any such press release of Investor, or without the prior consent of Investor, with respect to any such press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law or Trading Market regulations, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication.  Notwithstanding the foregoing, the Company shall not publicly disclose the name of Investor, or include the name of Investor in any filing with the SEC or any regulatory agency or Trading Market, without the prior written consent of Investor, except (i) as required by federal securities law in connection with any registration statement under which the Warrant Shares are registered, and (ii) to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide Investor with prior notice of such disclosure permitted under subclause (i) or (ii).

5.5   Shareholders Rights Plan .  No claim will be made or enforced by the Company or, to the knowledge of the Company, any other Person that Investor is an “Acquiring Person” under any shareholders rights plan or similar plan or arrangement in effect or hereafter adopted by the Company, or that Investor could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the Company and Investor. The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act of 1940, as amended.

5.6   Non-Public Information .  The Company represents and warrants that neither it nor any Person acting on its behalf has, and covenants and agrees that neither it nor any other Person acting on its behalf will, provide Investor or its agents or counsel with any information that the Company believes or reasonably should believe constitutes material non-public information, unless prior thereto Investor shall have executed a written agreement regarding the confidentiality and use of such information.  On and after the Effective Date, neither Investor nor any Affiliate Investor shall have any duty of trust or confidence that is owed directly, indirectly, or derivatively, to the Company or the shareholders of the Company, or to any other Person who is the source of material nonpublic information regarding the Company, including without limitation the Transaction Documents.  The Company understands and confirms that Investor shall be relying on the foregoing representations in effecting transactions in securities of the Company.

 

5.7   Reimbursement .  If Investor becomes involved in any capacity in any proceeding by or against any Person who is a stockholder of the Company (except as a result of sales, pledges, margin sales and similar transactions by Investor to or with any current stockholder), solely as a result of Investor’s acquisition of the Securities under this Agreement, the Company will reimburse Investor for its reasonable legal and other expenses (including the cost of any investigation preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred, or will assume the defense of Investor in such matter.  The reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of Investor who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of Investor and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, Investor and any such Affiliate and any such Person.  The Company also agrees that neither Investor nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on behalf of or in right of the Company solely as a result of acquiring the Securities under this Agreement, except with respect to information provided to the Company in writing by Investor or its representatives for use in preparing the Registration Statement.

5.8   Indemnification of Investor .  Subject to the provisions of this section, the Company will indemnify and hold Investor and any Warrant holder, their Affiliates and attorneys, and each of their directors, officers, shareholders, partners, employees, agents, and any person who controls Investor within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (collectively, the “ Investor Parties ” and each an “ Investor Party ”), harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation (collectively, “Losses”) that any Investor Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents, (b) any action instituted against any Investor Party, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of an Investor Party, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of Investor’s representation, warranties or covenants under the Transaction Documents or any agreements or understandings Investor may have with any such stockholder or any violations by Investor of state or federal securities laws or any conduct by Investor which constitutes fraud, gross negligence, willful misconduct or malfeasance), (c)  any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement (or in a Registration Statement as amended by any post-effective amendment thereof by the Company) or arising out of or based upon any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and/or (d) any untrue statement or alleged untrue statement of a material fact included in any Prospectus ( or any amendments or supplements to any Prospectus ), in any free writing prospectus, in any “issuer information” (as defined in Rule 433 under the Act) of the Company, or in any Prospectus together with any combination of one or more of the  free writing prospectuses, if any, or arising out of or based upon any omission or alleged omission to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that Company shall not be obligated to indemnify any Investor Party for any Losses finally adjudicated to be caused solely by a false statement of material fact contained within written information provided by such Investor Party expressly for the purpose of including it in the Registration Statement.

 

If any action shall be brought against an Investor Party in respect of which indemnity may be sought pursuant to this Agreement, such Investor Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing.  The Investor Parties shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Investor Parties except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict with respect to the dispute in question on any material issue between the position of the Company and the position of the Investor Parties such that it would be inappropriate for one counsel to represent the Company and the Investor Parties.  The Company will not be liable to the Investor Parties under this Agreement (i) for any settlement by an Investor Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is either attributable to Investor’s breach of any of the representations, warranties, covenants or agreements made by Investor in this Agreement or in the other Transaction Documents or is a result of any information provided by Investor or its representatives to Company in writing for inclusion in the Registration Statement.

5.9   Indemnification of Company .  Subject to the provisions of this Section 5.9 , the Investor will indemnify and hold the Company and its officers, directors and Affiliates (collectively, the “ Company Parties ” and each a “ Company Party ”), harmless from any and all Losses that any Company Party may suffer or incur, solely to the extent relating to written information furnished by Investor expressly for use in connection with a Registration Statement, where such written information is finally adjudicated by an award from a court of competent jurisdiction or a binding arbitration award to contain (a) a knowingly untrue statement of a material fact contained in such information, or (b) an intentional omission from such information or information necessary to make the information provided not misleading.

If any action described in the foregoing paragraph shall be brought against a Company Party in respect of which indemnity may be sought pursuant to this Agreement, such Company Party shall promptly notify the Investor in writing, and the Investor shall have the right to assume the defense thereof with counsel of its own choosing.  The Company Parties shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Company Parties except to the extent that (i) the employment thereof has been specifically authorized by the Investor in writing in advance, or (ii) the Investor has failed after a reasonable period of time to assume such defense and to employ counsel.  The Investor will not be liable to the Company Parties under this Agreement (i) for any settlement by a Company Party effected without the Investor’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent, that a loss, claim, damage or liability is attributable to Company’s breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents.

 

5.10   Reservation of Securities .  The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents.

5.11   Limited Standstill .  The Company will deliver to Investor on or before each Tranche Closing Date, and will honor and enforce the provisions of, the Lock-Up Agreements with the Company’s executive officers, directors and beneficial owners of 10% or more of the Common Stock.

5.12   Issuance of Additional Securities .  The Company shall not issue additional Common Stock or securities convertible into Common Stock to any Person other than: (i)