SECURITIES PURCHASE
AGREEMENT
SECURITIES
PURCHASE AGREEMENT (the “ Agreement ”),
dated as of July 14, 2009, by and among Stinger Systems, Inc., a
Nevada corporation, with headquarters located at 5505 Johns Road,
Suite 702, Tampa, Florida 33634 (the “ Company
”), and the investors listed on the Schedule of Buyers
attached hereto (individually, a “ Buyer ” and
collectively, the “ Buyers ”).
A. The
Company and each Buyer is executing and delivering this Agreement
in reliance upon the exemption from securities registration
afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “ 1933 Act ”), and Rule 506 of
Regulation D (“ Regulation D ”) as
promulgated by the United States Securities and Exchange Commission
(the “ SEC ”) under the 1933 Act.
B. The
Company has authorized a new series of senior secured convertible
notes of the Company which notes shall be convertible into the
Company’s common stock, par value $0.001 per share (the
“ Common Stock ”), in accordance with the terms
of the New Notes (as defined below).
C. Each Buyer
wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) that aggregate
principal amount of senior secured convertible notes, in
substantially the form attached hereto as Exhibit A
(together with any convertible notes issued in replacement or
exchange thereof in accordance with the terms thereof, the “
New Notes ”, as converted, collectively, the “
New Conversion Shares ”), set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers
attached hereto (which aggregate amount for all Buyers shall be
$650,000), and (ii) warrants, in substantially the form
attached hereto as Exhibit B (the “
Warrants ”), to acquire up to that number of
additional shares of Common Stock set forth opposite such
Buyer’s name in column (4) of the Schedule of Buyers (as
exercised, collectively, the “ Warrant Shares
”).
D. The
Company and Castlerigg Master Investments, Ltd., a company
organized under the laws of the British Virgin Islands (“
Castlerigg ”), entered into (i) that certain
Securities Purchase Agreement, dated as of August 2, 2007 (as
amended from time to time in accordance with its terms, the “
August 2007 Securities Purchase Agreement ”),
whereby the Company, among other things, issued to Castlerigg, at
the Closing (as defined in the August 2007 Securities Purchase
Agreement), senior secured convertible notes (the “
August 2007 Notes ”) and warrants (the “
August 2007 Warrants ”) to acquire shares of
Common Stock and (ii) that certain Securities Purchase
Agreement, dated as of February 29, 2008 (as amended from time
to time in accordance with its terms, the “
February 2008 Securities Purchase Agreement ”),
whereby the Company, among other things, issued to Castlerigg at
the Closing (as defined in the February 2008 Securities
Purchase Agreement), senior secured convertible notes (the “
February 2008 Notes ”) and warrants (as such
warrants have been amended and amended and restated from time to
time, the “ February 2008 Warrants ”) to
acquire shares of Common Stock.
E. The
Company and the Buyers entered into that certain Securities
Purchase Agreement, dated as of September 12, 2008 (as amended
form time to time in accordance with
its terms, the
“ September 2008 Securities Purchase Agreement
”), whereby the Company, among other things, issued Senior
Secured Convertible Notes in the principal amount of $3,000,000
(the “ Vicis Notes ”) and warrants (the “
September 2008 Warrants ”) currently held by
Vicis Capital Master Fund.
F. Contemporaneously
with the consummation of the transactions contemplated by the
August 2007 Securities Purchase Agreement, the Company entered
into a Security Agreement, dated as of August 3, 2007, by the
Company in favor of Castlerigg, in its capacity as collateral agent
for the Buyers (as defined in the August 2007 Securities
Purchase Agreement), and, contemporaneously with the consummation
of the transactions contemplated by the February 2008
Securities Purchase Agreement, the Company amended and restated the
Security Agreement (the “ Castlerigg Amended and Restated
Security Agreement ”).
G. Contemporaneously
with the consummation of the transactions contemplated by the
September 2008 Securities Purchase Agreement, the Company entered
into a Security Agreement, dated as of September 12, 2008, by
the Company in favor of Debt Opportunity Fund, LLLP (“
DOF ”), in its capacity as collateral agent for the
Buyers (as defined in the September 2008 Securities Purchase
Agreement) (the “ DOF Security Agreement
”).
H. The
Company and Castlerigg entered into that certain Amendment and
Exchange Agreement, dated as of September 12, 2008 (as amended
from time to time in accordance with its terms, the “
Exchange Agreement ”), whereby the Company, among
other things, (i) amended and restated the August 2007 Notes
and exchanged them for senior secured convertible notes in the
principal amount of $2,741,200 (the “ Exchanged 2007
Notes ”) and (ii) amended and restated the
February 2008 Notes and exchanged them for senior secured
convertible notes in the principal amount of $2,150,000 (the
“ Exchanged 2008 Notes ”, together with the
Exchanged 2007 Notes and the Vicis Notes, the “ Exchanged
Notes ”).
I. The
Company and the Buyers desire to amend and restate as of the
Closing (as defined below), upon the terms and conditions stated in
this Agreement, (i) the Exchanged 2007 Notes in the principal
amount of $2,799,450.50 (which shall include as principal, the
accrued and unpaid interest as of the Closing Date (as defined
below) on such notes) (the “ Amended and Restated
Exchanged 2007 Notes ”), (ii) the Exchanged 2008
Notes in the principal amount of $2,150,000.00 (which shall include
as principal, the accrued and unpaid interest as of the Closing
Date on such notes) (the “ Amended and Restated Exchanged
2008 Notes ”) and (iii) the Vicis Notes in the
principal amount of $3,075,000.00 (which shall include as
principal, the accrued and unpaid interest as of the Closing Date
on such notes) (the “ Amended and Restated Vicis Notes
”), in the form attached hereto as Exhibit C
(together with any convertible note issued in replacement or
exchange thereof in accordance with the terms thereof, the “
Amended and Restated Exchanged Notes ”, and the
Amended and Restated Exchanged Notes together with the New Notes,
the “ Notes ”) (as converted, collectively, the
“ Amended and Restated Conversion Shares ”, and
the Amended and Restated Conversion Shares together with the New
Conversion Shares, the “ Conversion Shares
”).
J. The Notes
bear interest, which at the option of the Company, subject to
certain conditions, may be paid in shares of Common Stock (the
“ Interest Shares ”).
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K. The
issuance of the Amended and Restated Exchanged Notes pursuant to
this Agreement in exchange for the surrender (and cancellation) of
the Exchanged Notes and the Vicis Notes is being made in reliance
upon the exemption from registration provided by
Section 3(a)(9) of the 1933 Act.
L. The Notes,
the Conversion Shares, the Interest Shares, the Warrants and the
Warrant Shares collectively are referred to herein as the “
Securities ”.
M. The Notes
will rank senior to all outstanding and future indebtedness of the
Company and will be secured by a first priority, perfected security
interest in all of the assets of the Company and the stock and
assets of each of the Company’s subsidiaries and in
connection therewith (i) the Castlerigg Amended and Restated
Security Agreement will be amended and restated in the form
attached hereto as Exhibit D (the “ Second
Amended and Restated Security Agreement ”) and
(ii) the DOF Security Agreement will be amended and restated
in the form attached hereto as Exhibit I (the “
First Amended and Restated Security Agreement ”, and
together with the Second Amended and Restated Security Agreement,
the “ Security Agreements ”). All payments due
under the New Notes and the Amended and Restated Exchanged Notes
shall rank pari passu .
NOW,
THEREFORE , the Company and each Buyer hereby agree as
follows:
1.
AMENDED AND RESTATED EXCHANGED NOTES, PURCHASE AND SALE OF NEW
NOTES AND WARRANTS .
(a)
Amended and Restated Exchanged Notes, Purchase of New Notes and
Warrants . Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6(a) and 7(a) below, (i) the
Company shall issue and sell to each Buyer, and each Buyer
severally, but not jointly, agrees to purchase from the Company on
the Closing Date (as defined below), (A) a principal amount of
New Notes as is set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers, and (B) Warrants to
acquire that number of Warrant Shares as is set forth opposite such
Buyer’s name in column (4) on the Schedule of Buyers,
and (ii) the Company shall issue and deliver to each Buyer a
principal amount of Amended and Restated Exchanged Notes
(A) for the Exchanged 2007 Notes, as is set forth opposite
such Buyer’s name in column (5) on the Schedule of
Buyers, (B) for the Exchanged 2008 Notes, as is set forth
opposite such Buyer’s name in column (6) on the Schedule
of Buyers and (C) for the Vicis Notes, as set forth opposite
such Buyer’s name in Column (7) on the Schedule of
Buyers and each Buyer shall surrender to the Company for
cancellation each such Exchanged Notes (the “ Closing
”).
(b)
Closing . The Closing shall occur on the Closing Date at the
offices of Nixon Peabody LLP, 437 Madison Avenue, New York, New
York 10022.
(c)
[Intentionally left blank.]
(d)
Purchase Price . The Amended and Restated Exchanged Notes
shall be issued to each Buyer and the Exchanged Notes shall be
cancelled without the payment of any additional consideration. The
purchase price for each Buyer of the New Notes and the Warrants to
be purchased by each such Buyer at the Closing shall be the amount
set forth opposite such Buyer’s name in column (7) of
the Schedule of Buyers (the “ Purchase Price ”).
Each Buyer shall
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pay $0.98 for
each $1.00 of principal amount of New Notes and the related
Warrants to be purchased at the Closing. The Buyers and the Company
agree that the New Notes and the Warrants constitute an
“investment unit” for purposes of
Section 1273(c)(2) of the Internal Revenue Code of 1986, as
amended (the “ Code ”). The Buyers and the
Company mutually agree that the allocation of the issue price of
such investment unit between the New Notes and the Warrants in
accordance with Section 1273(c)(2) of the Code and Treasury
Regulation Section 1.1273-2(h) shall be an aggregate
amount of $99,125 allocated to the Warrants and the balance of the
Purchase Price allocated to the New Notes, and neither the Buyers
nor the Company shall take any position inconsistent with such
allocation in any tax return or in any judicial or administrative
proceeding in respect of taxes.
(e)
Closing Date . The date and time of the Closing (the “
Closing Date ”) shall be 10:00 a.m., New York
City Time, on the date hereof after notification of satisfaction
(or waiver) of the conditions to the Closing set forth in Sections
6(a) and 7(a) below (or such later date as is mutually agreed to by
the Company and each Buyer).
(f)
Form of Payment . On the Closing Date, (i) (A) each
Buyer shall deliver, or cause to be delivered, for cancellation, a
principal amount of Exchanged Notes as is set forth opposite such
Buyer’s name in columns (5) and (6) of the Schedule
of Buyers to the Company, and (B) each Buyer shall pay its
Purchase Price to the Company for the New Notes and the Warrants to
be issued and sold to such Buyer at the Closing less, in the case
of Castlerigg, the amounts withheld pursuant to Section 4(f),
by wire transfer of immediately available funds in accordance with
the Company’s written wire instructions, and (ii) the
Company shall deliver to each Buyer (A) the New Notes (in the
principal amounts as such Buyer shall request) which such Buyer is
purchasing, (B) the Warrants (allocated in the amounts as such
Buyer shall request) to acquire up to an aggregate number of
Warrant Shares which such Buyer is purchasing, and (C) a
principal amount of Amended and Restated Exchanged Notes (in the
principal amounts as such Buyer shall request) which such Buyer is
exchanging, in each case duly executed on behalf of the Company and
registered in the name of such Buyer or its designee.
Notwithstanding anything herein to the contrary, the parties hereto
acknowledge and agree that (i) on the date hereof, each of
Castlerigg and DOF shall pay $150,000 to the Company towards the
Purchase Price for the New Notes and the Warrants by wire transfer
of immediately available funds in accordance with the
Company’s written wire instructions and (ii) each of
Castlerigg and DOF shall pay the remainder of its respective
Purchase Price to the Comapany for the New Notes and the Warrants
by wire transfer of immediately available funds in accordance with
the Comapny’s written wire instructions no later than 12:00
p.m., New York City time, on July 15, 2009; provided, however, that
Castlerigg is not obligated to pay the remainder of its respective
Purchase Price pursuant to this clause (ii) unless and until DOF
pays the remainder of its respective Purchase Price pursuant to
this clause (ii).
(g)
Holding Period . For the purposes of Rule 144 (as
defined in Section 2(f)), the Company acknowledges that the
Buyers may tack the holding period of (i) the August 2007
Notes held by the Buyers to the holding period of the Amended and
Restated Exchanged 2007 Notes (such that the holding period for the
Amended and Restated Exchanged 2007 Notes for purposes of
Rule 144 shall commence from the date of issuance of the
August 2007 Notes), (ii) the February 2008 Notes
held by the Buyers to the holding period of the Amended and
Restated Exchanged 2008 Notes (such that the holding period for the
Amended and Restated Exchanged 2008 Notes for purposes of
Rule 144 shall commence from the date of issuance of the
February 2008 Notes) and (iii) the Vicis Notes held by
Vicis Capital Master Fund to the holding period of the Amended and
Restated Vicis Notes (such that the holding period for the Amended
and Restated Vicis Notes for purposes of Rule 144 shall
commence from the date of issuance of the Vicis Notes) and the
Company agrees not to take a position contrary to this
Section 1(g),
4
including,
without limitation, with respect to the application of the terms
and conditions set forth in Section 2(g) below.
(h)
Ratification . The August 2007 Securities Purchase
Agreement, the February 2008 Securities Purchase Agreement,
the September 2008 Securities Purchase Agreement and each
other Transaction Document (as defined therein) in effect in
accordance with its terms as of the Closing Date and not otherwise
amended and restated in accordance with the terms of this
Agreement, is, and shall continue to be, in full force and effect
and effective as of the Closing, the August 2007 Securities
Purchase Agreement, the February 2008 Securities Purchase
Agreement and each other Transaction Document (as therein) in
effect in accordance with its terms as of the Closing Date and not
terminated or amended and restated in accordance with the terms of
this Agreement, is hereby ratified and confirmed in all
respects.
2.
BUYER’S REPRESENTATIONS AND WARRANTIES .
Each
Buyer represents and warrants with respect to only itself
that:
(a)
No Public Sale or Distribution . Such Buyer is
(i) acquiring the Notes and the Warrants and (ii) upon
conversion of the Notes and exercise of the Warrants (other than
pursuant to a Cashless Exercise (as defined in the Warrants)) will
acquire the Conversion Shares issuable upon conversion of the Notes
and the Warrant Shares issuable upon exercise of the Warrants for
its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except
pursuant to sales registered or exempted under the 1933 Act;
provided , however , that by making the
representations herein, such Buyer does not agree to hold any of
the Securities for any minimum or other specific term and reserves
the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption under
the 1933 Act. Such Buyer is acquiring the Securities hereunder in
the ordinary course of its business. Such Buyer does not presently
have any agreement or understanding, directly or indirectly, with
any Person to distribute any of the Securities.
(b)
Accredited Investor Status . Such Buyer is an
“accredited investor” as that term is defined in Rule
501(a) of Regulation D.
(c)
Reliance on Exemptions . Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific
exemptions from the registration requirements of United States
federal and state securities laws and that the Company is relying
in part upon the truth and accuracy of, and such Buyer’s
compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein
in order to determine the availability of such exemptions and the
eligibility of such Buyer to acquire the Securities.
(d)
Information . Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and
sale of the Securities which have been requested by such Buyer.
Such Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries
nor any other due diligence investigations conducted by such Buyer
or its advisors, if any, or its representatives shall modify, amend
or affect such Buyer’s
5
right to rely
on the Company’s representations and warranties contained
herein. Such Buyer understands that its investment in the
Securities involves a high degree of risk. Such Buyer has sought
such accounting, legal and tax advice as it has considered
necessary to make an informed investment decision with respect to
its acquisition of the Securities.
(e)
No Governmental Review . Such Buyer understands that no
United States federal or state agency or any other government or
governmental agency has passed on or made any recommendation or
endorsement of the Securities or the fairness or suitability of the
investment in the Securities nor have such authorities passed upon
or endorsed the merits of the offering of the
Securities.
(f)
Transfer or Resale . Such Buyer understands that except as
provided in Section 4(t) hereof: (i) the Securities have not
been and are not being registered under the 1933 Act or any state
securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder,
(B) such Buyer shall have delivered to the Company an opinion
of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such
registration, or (C) such Buyer provides the Company with
reasonable assurance that such Securities can be sold, assigned or
transferred pursuant to Rule 144 or Rule 144A promulgated
under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, “ Rule 144 ”); (ii) any
sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any resale of the
Securities under circumstances in which the seller (or the Person
(as defined in Section 3(s)) through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the
1933 Act) may require compliance with some other exemption under
the 1933 Act or the rules and regulations of the SEC thereunder;
and (iii) neither the Company nor any other Person is under
any obligation to register the Securities under the 1933 Act or any
state securities laws or to comply with the terms and conditions of
any exemption thereunder. The Securities may be pledged in
connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of
Securities shall not be deemed to be a transfer, sale or assignment
of the Securities hereunder, and no Buyer effecting a pledge of
Securities shall be required to provide the Company with any notice
thereof or otherwise make any delivery to the Company pursuant to
this Agreement or any other Transaction Document (as defined in
Section 3(b)), including, without limitation, this
Section 2(f).
(g)
Legends . Such Buyer understands that the certificates or
other instruments representing the Notes and the Warrants and,
until such time as the resale of the Conversion Shares and the
Warrant Shares have been registered under the 1933 Act as
contemplated by Section 4(t) hereof, the stock certificates
representing the New Conversion Shares and the Warrant Shares,
except as set forth below, shall bear any legend as required by the
“blue sky” laws of any state and a restrictive legend
in substantially the following form (and a stop-transfer order may
be placed against transfer of such stock certificates):
[
NEITHER THE ISSUANCE AND SALE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO
WHICH THESE SECURITIES ARE [ CONVERTIBLE ] [
EXERCISABLE ] HAVE BEEN ][ THE SECURITIES
REPRESENTED
6
BY THIS
CERTIFICATE HAVE NOT BEEN ] REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A
UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
The legend set
forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities
upon which it is stamped or issue to such holder by electronic
delivery at the applicable balance account at DTC (as defined
below), unless otherwise required by state securities laws,
(i) such Securities are registered for resale under the 1933
Act, (ii) in connection with a sale, assignment or other
transfer, such holder provides the Company with an opinion of
counsel, in a generally acceptable form, to the effect that such
sale, assignment or transfer of the Securities may be made without
registration under the applicable requirements of the 1933 Act, or
(iii) such holder provides the Company with reasonable
assurance that the Securities can be sold, assigned or transferred
pursuant to Rule 144 or Rule 144A.
(h)
Validity; Enforcement . This Agreement and the Security
Agreements to which such Buyer is a party have been duly and
validly authorized, executed and delivered on behalf of such Buyer
and shall constitute the legal, valid and binding obligations of
such Buyer enforceable against such Buyer in accordance with their
respective terms, except as such enforceability may be limited by
general principles of equity or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement
of applicable creditors’ rights and remedies.
(i)
No Conflicts . The execution, delivery and performance by
such Buyer of this Agreement and the Security Agreements to which
such Buyer is a party and the consummation by such Buyer of the
transactions contemplated hereby and thereby will not
(i) result in a violation of the organizational documents of
such Buyer 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 agreement,
indenture or instrument to which such Buyer is a party, or
(iii) result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities
laws) applicable to such Buyer, except in the case of clauses
(ii) and (iii) above, for such conflicts, defaults,
rights or violations which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect
on the ability of such Buyer to perform its obligations
hereunder.
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(j)
Residency . Such Buyer is a resident of that jurisdiction
specified below its address on the Schedule of Buyers.
3.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY .
The
Company represents and warrants to each of the Buyers
that:
(a)
Organization and Qualification . Each of the Company and its
“ Subsidiaries ” (which for purposes of this
Agreement means any entity in which the Company, directly or
indirectly, owns any of the capital stock or holds an equity or
similar interest) are entities duly organized and validly existing
in good standing under the laws of the jurisdiction in which they
are formed, and have the requisite power and authorization to own
their properties and to carry on their business as now being
conducted. Each of the Company and its Subsidiaries is duly
qualified as a foreign entity 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,
condition (financial or otherwise) or prospects of the Company and
its Subsidiaries, taken as a whole, or on the transactions
contemplated hereby and the other Transaction Documents or by the
agreements and instruments to be entered into in connection
herewith or therewith, or on the authority or ability of the
Company to perform its obligations under the Transaction Documents
(as defined below). The Company has no Subsidiaries.
(b)
Authorization; Enforcement; Validity . The Company has the
requisite power and authority to enter into and perform its
obligations under this Agreement, the Notes, the Security
Agreements, the Irrevocable Transfer Agent Instructions (as defined
in Section 5(b)), the Warrants, and each of the other
agreements entered into by the parties hereto in connection with
the transactions contemplated by this Agreement (collectively, the
“ Transaction Documents ”) and to issue the
Securities in accordance with the terms hereof and thereof. The
execution and delivery of the Transaction Documents by the Company
and the consummation by the Company of the transactions
contemplated hereby and thereby, including, without limitation, the
issuance of the Notes and the Warrants, the reservation for
issuance and the issuance of the Conversion Shares issuable upon
conversion of the Notes, the reservation for issuance and issuance
of Warrant Shares issuable upon exercise of the Warrants, the
reservation for issuance and issuance of Interest Shares, if any,
and the granting of a security interest in the Collateral (as
defined in the Security Agreements) have been duly authorized by
the Company’s Board of Directors and (other than (i) the
filing of appropriate UCC financing statements with the appropriate
states and other authorities pursuant to the Security Agreements,
and (ii) the filing with the SEC of one or more registration
statements in accordance with the requirements of Section 4(t)
hereof) no further filing, consent, or authorization is required by
the Company, its Board of Directors or its stockholders. This
Agreement and the other Transaction Documents of even date herewith
have been duly executed and delivered by the Company, and
constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective
terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium,
8
liquidation or
similar laws relating to, or affecting generally, the enforcement
of applicable creditors’ rights and remedies.
(c)
Issuance of Securities . The issuance of the Notes and the
Warrants are duly authorized and are free from all taxes, liens and
charges with respect to the issue thereof. As of the applicable
Closing, a number of shares of Common Stock shall have been duly
authorized and reserved for issuance which equals at least 130% of
the sum of the maximum number of shares Common Stock issuable
(i) as Interest Shares pursuant to the terms of the Notes,
(ii) upon conversion of the Notes issued at such Closing and
issued at all prior Closings and (iii) upon exercise of the
Warrants. Upon conversion or payment in accordance with the Notes
or exercise in accordance with the Warrants, as the case may be,
the Conversion Shares, the Interest Shares and the Warrant Shares,
respectively, will be validly issued, fully paid and nonassessable
and free from all preemptive or similar rights, taxes, liens and
charges with respect to the issue thereof, with the holders being
entitled to all rights accorded to a holder of Common Stock. The
offer and issuance by the Company of the Securities is exempt from
registration under the 1933 Act.
(d)
No Conflicts . The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Notes and the
Warrants, the granting of a security interest in the Collateral and
reservation for issuance and issuance of the New Conversion Shares,
the Interest Shares and the Warrant Shares) will not
(i) result in a violation of the Articles of Incorporation (as
defined in Section 3(r)) of the Company or any of its
Subsidiaries, any capital stock of the Company or Bylaws (as
defined in Section 3(r)) of the Company or any of its
Subsidiaries 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
agreement, indenture or instrument to which the Company or any of
its Subsidiaries is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations and the rules and
regulations of the OTC Bulletin Board (the “ Principal
Market ”)) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or
any of its Subsidiaries is bound or affected.
(e)
Consents . Neither the Company nor any of its Subsidiaries
is required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental
agency or any regulatory or self-regulatory agency 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. All
consents, authorizations, orders, filings and registrations which
the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the Closing
Date, and the Company and its Subsidiaries are unaware of any facts
or circumstances which might prevent the Company from obtaining or
effecting any of the registration, application or filings pursuant
to the preceding sentence. The Company is not in violation of the
listing requirements of the Principal Market and has no knowledge
of any facts which would reasonably lead to delisting or suspension
of the Common Stock in the foreseeable future.
9
(f)
Acknowledgment Regarding Buyer’s Purchase of
Securities . The Company acknowledges and agrees that each
Buyer is acting solely in the capacity of arm’s length
purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is
(i) an officer or director of the Company, (ii) an
“affiliate” of the Company (as defined in
Rule 144) or (iii) to the knowledge of the Company, a
“beneficial owner” of more than 10% of the shares of
Common Stock (as defined for purposes of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended (the “ 1934
Act ”)). The Company further acknowledges that no Buyer
is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to the Transaction Documents and
the transactions contemplated hereby and thereby, and any advice
given by a Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions
contemplated hereby and thereby is merely incidental to such
Buyer’s purchase of the Securities. The Company further
represents to each Buyer that the Company’s decision to enter
into the Transaction Documents has been based solely on the
independent evaluation by the Company and its
representatives.
(g)
No General Solicitation; Placement Agent’s Fees .
Neither the Company, nor any of its affiliates, nor any Person
acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the
Securities. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or
brokers’ commissions (other than for persons engaged by any
Buyer or its investment advisor) relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold
each Buyer harmless against, any liability, loss or expense
(including, without limitation, attorney’s fees and
out-of-pocket expenses) arising in connection with any such
claim.
(h)
No Integrated Offering . None of the Company, its
Subsidiaries, any of their affiliates, and any Person acting on
their behalf has, directly or indirectly, made any offers or sales
of any security or solicited any offers to buy any security, under
circumstances that would require registration of any of the
Securities under the 1933 Act or cause this offering of the
Securities to be integrated with prior offerings by the Company for
purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which
any of the securities of the Company are listed or designated. None
of the Company, its Subsidiaries, their affiliates and any Person
acting on their behalf will take any action or steps referred to in
the preceding sentence that would require registration of any of
the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.
(i)
Dilutive Effect . The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of
the Notes and the Warrant Shares issuable upon exercise of the
Warrants will increase in certain circumstances. The Company
further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Notes in accordance with this Agreement and
the Notes and its obligation to issue the Warrant Shares upon
exercise of the Warrants in accordance with this Agreement and the
Warrants, in each case, is absolute and unconditional regardless of
the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.
10
(j)
Application of Takeover Protections; Rights Agreement . 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 Articles of Incorporation or the
laws of the jurisdiction of its formation which is or could become
applicable to any Buyer as a result of the transactions
contemplated by this Agreement, including, without limitation, the
Company’s issuance of the Securities and any Buyer’s
ownership of the Securities. The Company has not adopted a
stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change
in control of the Company.
(k)
SEC Documents; Financial Statements . Except as disclosed in
Schedule 3(k) , during the two (2) years prior to the
date hereof, the Company has filed all reports, schedules, forms,
statements and other documents required to be filed by it with the
SEC pursuant to the reporting requirements of the 1934 Act (all of
the foregoing filed prior to the date hereof and all exhibits
included therein and financial statements, notes and schedules
thereto and documents incorporated by reference therein being
hereinafter referred to as the “ SEC Documents
”). The Company has delivered to the Buyers or their
respective representatives true, correct and complete copies of the
SEC Documents not available on the EDGAR system. As of their
respective dates, the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were
filed with the SEC, 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
the light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements
of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance
with generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements,
to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the
financial position of the Company as of the dates thereof and the
results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end
audit adjustments). No other information provided by or on behalf
of the Company to the Buyers which is not included in the SEC
Documents, including, without limitation, information referred to
in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the
circumstance under which they are or were made, not
misleading.
(l)
Absence of Certain Changes . Except as disclosed in
Schedule 3(l) , since December 31, 2008, there has
been no material adverse change and no material adverse development
in the business, properties, operations, condition (financial or
otherwise), results of operations or prospects of the Company or
its Subsidiaries. Except as disclosed in Schedule 3(l)
, since December 31, 2008, the Company has not
(i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $100,000 outside of
the ordinary course of business or (iii) had capital
expenditures, individually or in the aggregate, in excess of
$100,000. The Company has not taken any steps to seek protection
pursuant to any bankruptcy law nor
11
does the
Company have any knowledge or reason to believe that its creditors
intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact which would reasonably lead a creditor to do
so. The Company is not as of the date hereof, and after giving
effect to the transactions contemplated hereby to occur at the
Closing, will not be Insolvent (as defined below). For purposes of
this Section 3(l), “ Insolvent ” means with
respect to any Person, (i) such Person is unable to pay its
debts and liabilities, subordinated, contingent or otherwise (other
than the Notes), as such debts and liabilities become absolute and
matured, (ii) the Company intends to incur or believes that it
will incur debts (other than the Notes) that would be beyond its
ability to pay as such debts mature or (iii) such Person 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.
(m)
No Undisclosed Events, Liabilities, Developments or
Circumstances . No event, liability, development or
circumstance has occurred or exists, or is contemplated to occur
with respect to the Company, its Subsidiaries or their respective
business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under
applicable securities laws on a registration statement on Form S-1
filed with the SEC relating to an issuance and sale by the Company
of its Common Stock and which has not been publicly
announced.
(n)
Conduct of Business; Regulatory Permits . Neither the
Company nor its Subsidiaries is in violation of any term of or in
default under any certificate of designations of any outstanding
series of preferred stock of the Company, its Articles of
Incorporation or Bylaws or their organizational charter or
certificate of incorporation or bylaws, respectively. Neither the
Company nor any of its Subsidiaries is in violation of any
judgment, decree or order or any statute, ordinance, rule or
regulation applicable to the Company or its Subsidiaries, and
neither the Company nor any of its Subsidiaries will conduct its
business in violation of any of the foregoing, except for possible
violations which would not, individually or in the aggregate, have
a Material Adverse Effect. Without limiting the generality of the
foregoing, the Company is not in violation of any of the rules,
regulations or requirements of the Principal Market and has no
knowledge of any facts or circumstances which would reasonably lead
to delisting or suspension of the Common Stock by the Principal
Market in the foreseeable future. During the two years prior to the
date hereof, the Common Stock has been designated for quotation on
the Principal Market. During the two years prior to the date
hereof, (i) trading in the Common Stock has not been suspended
by the SEC or the Principal Market and (ii) the Company has
received no communication, written or oral, from the SEC or the
Principal Market regarding the suspension or delisting of the
Common Stock from the Principal Market. The Company and its
Subsidiaries possess all certificates, authorizations and permits
issued by the appropriate regulatory authorities necessary to
conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not
have, individually or in the aggregate, a Material Adverse Effect,
and neither the Company nor any such Subsidiary has received any
notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
(o)
Foreign Corrupt Practices . Neither the Company, nor any of
its Subsidiaries, nor any director, officer, agent, employee or
other Person acting on behalf of the Company or any of its
Subsidiaries has, in the course of its actions for, or on behalf
of, the
12
Company or any
of its Subsidiaries (i) used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful
expenses relating to political activity; (ii) made any direct
or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; (iii) violated or
is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or
employee.
(p)
Sarbanes-Oxley Act . The Company is in compliance with any
and all applicable requirements of the Sarbanes-Oxley Act of 2002
that are effective as of the date hereof, and any and all
applicable rules and regulations promulgated by the SEC thereunder
that are effective as of the date hereof.
(q)
Transactions With Affiliates . Except as set on
Schedule 3(q) , none of the officers, directors or
employees of the Company is presently a party to any transaction
with the Company or any of its Subsidiaries (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 Company or any of its Subsidiaries, 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.
(r)
Equity Capitalization . As of the date hereof, the
authorized capital stock of the Company consists of
(i) 150,000,000 shares of Common Stock, of which as of the
date hereof, 4,001,832 are issued and outstanding, 10,000,000
shares are reserved for issuance pursuant to the Company’s
stock option and purchase plans and 10,417,586 shares are reserved
for issuance pursuant to securities (other than the aforementioned
options, the New Notes and the Warrants) exercisable or
exchangeable for, or convertible into, shares of Common Stock. All
of such outstanding shares have been, or upon issuance will be,
validly issued and are fully paid and nonassessable. Except as
disclosed in Schedule 3(r) : (i) none of the
Company’s capital stock is subject to preemptive rights or
any other similar rights or any liens or encumbrances suffered or
permitted by the Company; (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
capital stock of the Company or any of its Subsidiaries, or
contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to issue
additional capital stock of the Company or any of its Subsidiaries
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
capital stock of the Company or any of its Subsidiaries;
(iii) there are no outstanding debt securities, notes, credit
agreements, credit facilities or other agreements, documents or
instruments evidencing Indebtedness of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is
or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in
the aggregate, filed in connection with the Company or any of its
Subsidiaries; (v) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act
(except pursuant to Section 4(t)
13
hereof);
(vi) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or
similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries; (vii) there are no
securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the
Securities; (viii) the Company does not have any stock
appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (ix) the
Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary
course of the Company’s or its Subsidiaries’ respective
businesses and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect. The Company has furnished
to the Buyers true, correct and complete copies of the
Company’s Articles of Incorporation, as amended and as in
effect on the date hereof (the “ Articles of
Incorporation ”), and the Company’s Bylaws, as
amended and as in effect on the date hereof (the “
Bylaws ”), and the terms of all securities convertible
into, or exercisable or exchangeable for, shares of Common Stock
and the material rights of the holders thereof in respect
thereto.
(s)
Indebtedness and Other Contracts . Except as disclosed in
Schedule 3(s) , neither the Company nor any of its
Subsidiaries (i) has any outstanding Indebtedness (as defined
below), (ii) is a party to any contract, agreement or
instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument would
result in a Material Adverse Effect, (iii) 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 (iv) is a party to any
contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s
officers, has or is expected to have a Material Adverse Effect.
Schedule 3(s) provides a detailed description of the
material terms of any such outstanding Indebtedness. For purposes
of this Agreement: (x) “ Indebtedness ” of any
Person means, without duplication (A) all indebtedness for
borrowed money, (B) 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), (C) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar
instruments, (D) 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, (E) 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), (F) 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,
(G) all indebtedness referred to in clauses (A) through
(F) 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, charge, 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 (H) all
Contingent Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses
(A) through
14
(G) 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.
(t)
Absence of Litigation . There is no action, suit,
proceeding, inquiry or investigation before or by the Principal
Market, any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company,
threatened against or affecting the Company or any of its
Subsidiaries, the Common Stock or any of the Company’s
Subsidiaries or any of the Company’s or its
Subsidiaries’ officers or directors in their capacities as
such, except as set forth in Schedule 3(t) .
(u)
Insurance . The Compan
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