This Royalty Agreement involves
Title: ROYALTY AGREEMENT
Governing Law: Florida Date: 1/21/2014
Industry: Oil Well Services and Equipment Sector: Energy
THIS ROYALTY AGREEMENT (“Agreement”) is made and entered as of the 1 st day of January, 2013 (“Effective Date”) by and between Dennis McGuire, and having an address of 3231 SE St. Lucie Blvd., Stuart, FL 34997 ("Inventor") and Ecosphere Technologies, Inc., a Delaware corporation, and having an address of 3515 SE Lionel Terrace, Stuart, FL 34996 ("Company", which term shall include all Affiliates, as hereinafter defined).
Inventor is the founder of Company.
Inventor is the inventor of all or substantially all of the technology and devices utilized by Company, some of which is not patented (each an “Invention” and collectively, the “Inventions”) and some of which are the subject of those certain United States Letters Patent and Applications, as more particularly described on Exhibit “A” attached hereto and made a part hereof and any patents that may issue from the foregoing or which may be based thereon, together with any division, continuation, extension, reissue, renewal or re-examination thereof (“Patents”). During the term of his Employment Agreement, as hereinafter defined, Inventor may invent additional technology and devices utilized by Company. As long as there is no then existing Company Event of Default, Inventor will assign its rights to such technology and devices, including patents arising therefrom, together with any division, continuation, extension, reissue, renewal or re-examination thereof, subject to the provisions of this Agreement.
On or before the Effective Date, Inventor, based upon an understanding with Company that he would be compensated by the payment of royalties on account thereof, assigned the Patents to Company, with the understanding that Inventor and Company would fully document the agreements of the parties pertaining to the payment of royalties for the Patents, as more particularly set forth herein.
NOW, THEREFORE, in consideration of the premises, and the mutual undertakings and rights granted herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
In addition to the definitions set forth above or as more particularly defined in this Agreement, the following terms shall have the following meanings:
“Affiliates” shall mean any Person which is an affiliate or subsidiary of Company as such term is defined in the applicable regulations of the Securities and Exchange Commission (“SEC”).
“Books and Records” shall mean all books of account and other records reflecting the results of the operations of Company prepared and maintained in accordance with generally accepted accounting principles applied on a consistent basis.
“Change of Control” shall mean the occurrence of any of the events defined in the Employment Agreement.
“Company” shall mean Company and its Affiliates and/or Subsidiaries.
“Default Rate” shall mean the lesser of: (i) 18% per annum; or (ii) the maximum interest rate allowed by Laws, from the date due until the date of collection, including post judgment.
"Device" shall mean any equipment or component manufactured which embodies an invention claimed in any Patent or which has been made by, or with the use of, any method embodying an invention claimed in any Patent, provided, that, at the time and place of the manufacture, use or sale of such Device, a Patent is pending or is in force claiming such portion of such Device or the method by which it has been made.
“Employment Agreement” shall mean that certain Employment Agreement between Company and Dennis McGuire dated as of January 1, 2013.
“Event of Default” shall mean those events more particularly described in Article V hereof.
“Governmental Authorities” shall mean shall mean any court, board, agency, commission, office or other authority of any nature whatsoever for any governmental unit (federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence.
“Hostile Takeover” shall mean an event occurs which triggers the issuance of rights pursuant to the terms and conditions of any Rights Agreement adopted by Company.
“Inventor” shall mean Dennis McGuire, his legal representatives and his heirs, successors and assigns, whether by assignment or operation of law, unless the context provides to the contrary.
“IP Committee” shall mean the Committee established pursuant to Section IV H of this Agreement.
“Laws” shall mean all statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting the use and manufacturer of any Device or product utilizing the Inventions or Patents, and all permits, licenses, authorizations, rules and regulations relating thereto.
“Person” shall mean any person, firm, partnership, company, or other legal entity of any nature whatsoever.
“Revenues”, for the purposes of this Agreement, shall mean (i) revenues generated from the Inventions and Patents in accordance with Generally Accepted Accounting Principles (“GAAP”) consistently applied, or if the Securities and Exchange Commission (the “SEC”) adopts
International Financial Reporting Standards (“IFRS”) to replace GAAP, then in accordance with IFRS regardless of whether Company is obligated to file reports with the SEC, (ii) all other consideration (as it is actually received) of any nature received by Company from the Inventions and Patents, including, but not limited to, (a) the sale of assets, (b) sales of equity (of any nature and in any form) by the Company or any other similar capital transaction, (c) conversions of debt to equity in lieu of repayment (for purposes of any debt conversion, the closing price of the equity as of the date of conversion times the number of shares issued upon conversion will be the equivalent of a new equity financing), (iii) all other consideration of any kind received by Company and/or its shareholders including, but not limited to, any investment, merger, consolidation, exchange offer, or tender offer, and (iv) any dividend to the Company’s shareholders of any interest in any subsidiary, whether through a dividend or spin-off, the dividend or spin-off.
Notwithstanding the foregoing, no Royalty will be paid upon an Exempt Issuance. "Exempt Issuance” means the issuance of:
Shares of Common Stock or options to employees, officers, consultants, advisors or directors of the Company pursuant to any stock or option plan duly adopted for such purpose by a majority of the existing members of the Board of Directors or a majority of the members of a committee of directors established for such purpose, and any non plan options issued to such persons.
Shares of Common Stock upon the exercise of any options or warrants which options or warrants or are specifically permitted by this clause provided that such securities are not amended to increase the number of such securities or to decrease the exercise price of such securities, except as specifically provided under clause (f) below.
Warrants issued to registered broker-dealers as commission or fees in connection with any financing transactions.
Securities issued in connection with debt financings (except upon conversion in repayment as set forth above.
Securities issued pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided that any such issuance shall only be to a person which is, itself or through its subsidiaries, an operating company in a business synergistic with the business of the Company and in which the Company receives benefits in addition to the investment of funds.
Shares issued upon stock splits, stock dividends or other internal recapitalizations.
Provided, however, the conversion of debt securities is not an Exempt Issuance as provided above and a transaction in subsection (e) in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities is not an Exempt Issuance.
For clarity purposes, it is the intent of the parties hereto that Inventor shall receive Royalties in
connection with all consideration of any kind and nature whatsoever received by the Company on account of, or relating to, the Inventions and Patents, including, but not limited to, all revenue related and/or equity transactions of any nature, unless specifically excluded in (a) - (f) above.
Provided, however, that if for clauses (ii), (iii) and (iv) the consideration received by Company or its shareholders can reasonably be allocated between that attributable to the Inventions and Patents and other businesses and operations, an appropriate adjustment shall be made to pay the Inventor Royalties attributable to the Inventions and Patents. By way of example, assume that in a merger, Company is sold for $750 million and the investment bankers hired by Company to provide financial advice to its Board provide written advice that the value of the Inventions and Patents is $535 million and the value of another subsidiary is $215 million. In that event Royalties will be paid on $535 million.
In the event of a dispute between Company and Inventor regarding whether or not any revenues are received from, or on account of the Inventions and Patents, such dispute shall be resolved by a majority vote of the IP Committee, which shall be binding upon Company and Inventor.
“Royalties” shall mean the payments due to Inventor pursuant to the provisions hereof.
"Subsidiaries" shall mean all Persons controlled by, or under common control with, Company on or after the Effective Date.
“Term” shall mean the Term of this Agreement as provided in Article II hereof, unless this Agreement is terminated in accordance with its provisions.
The Term of this Agreement shall commence on the Effective Date and expire on the last date upon which a Patent, which is the subject of this Agreement, including any future Inventions or Patents, remains in force, including extensions, if any, unless otherwise terminated pursuant to the provisions of this Agreement.
This Agreement and payments hereunder are not dependent upon the continued employment of Dennis McGuire pursuant to the Employment Agreement, any extensions or replacements thereof.
Company agrees to pay Inventor, Royalties in the amount of: (i) four percent (4%) of the Revenues of Company, derived anywhere in the world by, for, through, or under Company; (ii) less any Base Salary (and/or any salary or severance payments on account of the termination of the Employment Agreement for Good Cause) paid to Dennis McGuire, as Employee, pursuant to the Employment Agreement.
As of the termination of the Employment Agreement, Company agrees to pay to Inventor, Royalties in the amount of four percent (4%) of the Revenues of Company, derived anywhere in the world by, for, through, or under Company for the balance of the Term, provided, however, Company’s obligation to pay Royalties on Revenues based on clause (i) of the definition shall be deferred until collected by Company. In the event that Revenues under this Agreement consist of illiquid property, Inventor shall be entitled to four percent (4%) of such illiquid property, in kind. Company shall use commercially reasonable efforts to sell the illiquid property (including that owned by Inventor) unless Inventor otherwise agrees. If the Company pays a dividend within the meaning of clause (iv) of the definition of Revenues, it shall be considered illiquid property.
In the event Company desires to enter into an agreement to sell the illiquid property to an unrelated Person, Company shall, not less than ten (10) business days prior to entering into such agreement, notify Inventor (which notice shall include a copy of the proposed agreement. Within five (5) business days after receipt of the proposed agreement, Inventor shall have the right to elect to “tag along”, in which event a pro rata percentage of the illiquid property owned by Inventor (“Pro Rata Percentage”) shall be included in the transaction on the same terms and conditions as set forth in the proposed agreement.
For example, if Company owns 96% of the illiquid property and Inventor owns 4% of the illiquid property and a buyer agrees to buy 50% of the illiquid property, then Company shall sell 48% of the illiquid property and Inventor shall sell 2% of the illiquid property and the purchase price shall be allocated accordingly.
All Royalties due hereunder shall be paid in United States Dollars. All Royalties paid or computed in other currencies shall be converted into United States Dollars at the buying rate for the transfer of such other currencies to United States Dollars as quoted by the Chase Manhattan Bank (or if Chase Manhattan Bank ceases to provide such information, any of the five (5) largest banking institutions regulated by the United States Government selected by Inventor) on the last day of such accounting period.
All payments of Royalties shall be made commencing on January 1, 2013: (i) on a monthly basis and be due within three business days of the end of each month (based upon Revenues deposited during said monthly period) and adjusted for the respective periods ending on March 31, June 30, September 30 and December 31 of each year; and (ii) within 40 days of the end of each quarter, except 75 days after the last day of the Company’s fiscal year (or such earlier date that the SEC requires quarterly and annual reports to be filed). At the time of making any such payment, Company shall furnish Inventor with a written statement of Revenues for the preceding month and quarter attested under oath by the President or Chief Financial Officer of Company.
In the event of an adjustment of Royalties based upon estimated/actual Revenues: (i) in the event that any estimated Royalties paid exceeds the sum due to Inventor based upon actual Revenues received, Company may offset such amount against the next ensuing payment of estimated Royalties until the excess is fully applied; and (ii) in the event that any estimated Royalties paid is less than the sum due to Inventor based upon actual Revenues received, Company shall pay the shortfall to Inventor within fifteen (15) business days.
Following a Change of Control, any amounts payable to Inventor that are not paid when due shall be subject to a late payment charge equal to ten percent (10%) of the amount payable as liquidated and agreed damages but only if the variance exceeds five (5%) of the sums due for the period in question.
Company agrees to provide Inventor, within forty (40) days after the end of each calendar quarter except seventy five (75) days after the last day of the Company’s fiscal year (or such earlier date that the SEC requires quarterly and annual reports to be filed), and within ten (10) days after the expiration or termination of this Agreement, a report of the Revenues of Company, by country (if applicable) (“Quarterly Royalty Reports”) subject to the Company receiving customary confidentiality agreements from any party within the definition of Inventor. Company shall commence providing Inventor such Quarterly Royalty Reports within forty (40) days following the end of the first calendar quarter of the Term. The Quarterly Royalty Reports will quantify the gross Revenues of Company accrued during the previous quarter explaining the basis for such calculations.
Company shall keep, at its main office, a permanent, accurate set of Books and Records in which Revenues shall be recorded. The Books and Records shall also include any non-consolidated, federal, state and local tax returns and all pertinent original sales records relating to Company’s operations/sales. All books and records reflecting Revenues and/or the calculation of Royalties shall be retained and preserved for a period of five (5) years.
The Books and Records shall be open to inspection and audit by Inventor and/or its duly authorized representatives, at all reasonable times during business hours upon not less than ten (10) days prior written notice. If Inventor conducts an audit of the Books and Records, and if the audit determines that Company has understated Revenues or calculation of Royalties by more than three (3%) percent, in addition to such other rights and remedies available to the Inventor at law or equity, Company shall, within ten (10) business days thereafter, pay any deficiency in the Royalties due on account of such understatement and the reasonable cost of such audit. If Company fails to submit the required statement of Revenues or calculation of Royalties, as required, Company shall pay the cost thereof, irrespective of the results of such audit.
The cost of such audit shall be determined on a time and expense basis at the rate per hour which shall not exceed that charged for similar personnel by a national firm of independent certified public accountants.
The Books and Records shall include: (i) accounts receivable aging within twenty (20) days after the end of each month; (ii) as soon as available, and in any event within thirty (30) calendar days after the close of each quarter, reviewed quarterly financial statements, all in reasonable detail and prepared in accordance with generally accepted accounting principles applied on a consistent basis; (iii) as soon as available, and in any event within seventy five (75) calendar days after the close of each year, annual audited financial statements, all in reasonable detail and prepared in accordance with generally accepted accounting principles applied on a consistent basis; (d) as soon as available, and in any event within ninety (90) calendar days after the close of each year, annual tax returns.
In the event any Government Authorities imposes any taxes on any part of the payments required hereunder and Company’s auditors or tax advisors advise Company that it is required to withhold taxes from such payment, Company may withhold such taxes from such payments or pay same as required. Tax receipts indicating such payments or withholding of taxes shall be promptly submitted to Inventor. Company shall cooperate with Inventor in a determination of the propriety of, or imposition of, any such tax and shall permit Inventor to challenge such tax by all lawful means.
In the event any national government imposes any exchange restriction prohibiting payments as required under this Agreement, an account in the name of Inventor shall be established in a financial institution of Inventor’s choice in such country (or permitted place of payment) and all monies due Inventor shall be paid into such account, or at Inventor’s election, payment shall be made to any account designated by Inventor that complies with such restriction(s)/prohibition.
In the event that Company fails to pay any payment hereunder when due, Company shall pay interest to Inventor on any and all amounts overdue and payable under this Agreement at the Default Rate from the date of default until payment, including post judgment.
All of Company’s obligations and covenants to provide reports under this Agreement are subject to Inventor delivering a customary confidentiality agreement and if Inventor ceases to be employed by Company further subject to redaction of pricing and other information which would be protected from disclosure under the Freedom of Information Act.
Diligence . Company shall use commercially reasonable diligence in the operation of its business in the ordinary course.
Compliance with Laws . Company shall conform to, and comply with, all applicable Laws, including all environmental laws.
Compliance with Requirements . Company shall obtain and comply with all leases, licenses, contractual arrangements, approvals, consents, licenses and permits of any Governmental Authority, as may be required from time to time.
Contracts . Upon request, Company shall deliver to Inventor true, correct and complete lists of all Revenue generating contracts of Company. Each list shall show the name, address, and telephone number of each contracting Person, a general statement of the nature of the work to be done or equipment to be sold or labor and materials to be supplied, the names of the contact parties for each contracting Person and the estimated dollar value of such contract and the status of such contract.
Protection against Liens and Claims . Except with the prior written consent of Inventor, which may be granted or withheld in its sole and absolute discretion, Company shall: (i) promptly (within five (5) business days) notify Inventor of the assertion of any claims of any nature whatsoever against the Patent(s) or Invention(s); and (ii) protect the Patent(s) or Invention(s) against the assertion of any such claims.
The decision not to protect the Patent(s) or Invention(s) against the assertion of any such claims, shall be in the sole discretion of the Board, exercised reasonably, provided, however, that: (i) the Board shall notify the Inventor at least ten (10) business days in advance that the issue will be considered at the next Board meeting; and (ii) the Board must convene a meeting and specifically decide not to protect the Patent(s) or Invention(s) within thirty (30) days after written notice from the Inventor. The failure of the Board to convene a meeting or affirmatively decide to protect a Patent(s) or Invention(s) within said thirty (30) days shall be deemed to be a decision by the Board not to do so, in which event, Company shall immed