CONVERTIBLE PREFERRED SECURITIES AGREEMENT

 

 

 

 

CONVERTIBLE PREFERRED SECURITIES AGREEMENT

 

 

 

DATED AS OF MAY 15, 2009

 

 

between

 

 

ECOLOGY COATINGS, INC.

 

 

and

 

 

EQUITY 11, Ltd.

 

 

 

 

 

CONVERTIBLE PREFERRED SECURITIES AGREEMENT (this “ Agreement ”), dated as of May 15, 2009, between Ecology Coatings, Inc. , a corporation organized  under the laws of the state of Nevada (the “ Company ”), and Equity 11, Ltd. , a corporation organized under the laws of the state of Michigan (the “ Purchaser ”).

 

RECITALS

 

WHEREAS , the Company desires to sell to the Purchaser, and the Purchaser desires to purchase from the Company, 5.0% Cumulative Convertible Preferred Shares, Series B of the Company at a price per share of $1000 (the “ Convertible Preferred Shares, Series B ”) containing the terms set forth in the Certificate of Designation attached as Exhibit A hereto (the “ Certificate of Designation ”).

 

NOW, THEREFORE, in consideration of the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Company and the Purchaser agree as follows:

 

All capitalized terms used and not otherwise defined in this Agreement shall have the definitions set forth on Annex I .

 

ARTICLE I

Sale of the Convertible Preferred Shares, Series B

 

Section 1.1 Authorization of Issuance and Sale and Delivery of the Convertible Preferred Shares, Series B .

 

Subject to the terms and conditions hereof, until December 15, 2009, the Purchaser agrees to purchase and the Company agrees to sell and issue to the Purchaser at the Closings, 5% Convertible Preferred Shares, Series B, at a price per share of $1,000, convertible into common shares at the Conversion Price.

 

Section 1.2 The Closing of the Sale of the Convertible Preferred Shares, Series B .

 

The closings (the “ Closings ”) shall take place at the offices of Purchaser, at 8:00 p.m.,   New York time, on the date hereof, or such other time and date as the parties may agree upon (the date that the Closing occurs, the “ Closing Date ”).  At the Closing, on the terms and subject to the conditions contained herein, the Company shall issue and deliver the Convertible Preferred Shares, Series B against receipt by the Company of the Aggregate Purchase Price by wire transfer of immediately available funds to an account, which the Company shall designate to the Purchaser prior to the Closing in writing.  The Convertible Preferred Shares, Series B shall be evidenced by certificates.

Section 1.3 Termination of Certain Agreements .

ARTICLE II

The Initial Closing

 

Section 2.1 Closing Requirements .

 

 

  

 

(c) an Incumbency Certificate, duly executed by an authorized officer of the Company, certifying with respect to the incumbency of the officers listed thereon and the genuineness of such officers’ respective signatures.

 

(3) At the Initial Closing, the Purchaser shall deliver to the Company a duly executed counterpart signature page to the Cross-Receipt.

Section 2.2 Purchases of Additional Preferred Shares.

 

 

Section 2.3 Restrictive Legend .

 

The certificate representing each of the Convertible Preferred Shares, Series B shall be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required by applicable state securities Laws), upon issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act:

 

THE 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS, AND ECOLOGY COATINGS, INC. (THE “COMPANY”) HAS NOT BEEN REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE “INVESTMENT COMPANY ACT”).  NEITHER SUCH 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.

 

THE HOLDER, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER, RESELL OR OTHERWISE TRANSFER THE 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B REPRESENTED HEREBY, UNLESS SUCH 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B NO LONGER CONSTITUTE “RESTRICTED SECURITIES” WITHIN THE MEANING OF RULE 144 UNDER THE SECURITIES ACT, ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO ONE OR MORE PERSONS, EACH OF WHICH IS AN “ACCREDITED INVESTOR” (AS DEFINED IN RULE 501 UNDER THE SECURITIES ACT) THAT IS ACQUIRING SUCH 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B FOR ITS OWN ACCOUNT FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR OTHER APPLICABLE SECURITIES LAWS OR (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN EACH CASE SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF SUCH ACCREDITED INVESTOR BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL.

 

TO THE FULLEST EXTENT PERMITTED BY LAW, ANY TRANSFER IN VIOLATION OF THE FOREGOING WILL BE OF NO FORCE AND EFFECT, WILL BE VOID AB INITIO, AND WILL NOT OPERATE TO TRANSFER ANY RIGHTS TO THE TRANSFEREE, NOTWITHSTANDING ANY INSTRUCTION TO THE CONTRARY TO THE COMPANY, THE TRANSFER AGENT OR ANY INTERMEDIARY.

 

Furthermore, the Convertible Preferred Share certificate will contain a legend substantially to the following effect:

 

THE COMPANY WILL FURNISH TO ANY SHAREHOLDER ON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OF (1) ANY RESTRICTIONS, LIMITATIONS, PREFERENCES OR REDEMPTION PROVISIONS CONCERNING THE 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B AND (2) THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DISTRIBUTIONS, AND OTHER QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B, THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES OF SUCH CLASS TO THE EXTENT THEY HAVE BEEN SET, AND THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE COMPANY TO SET THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES OF 5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B.  5% CUMULATIVE CONVERTIBLE PREFERRED SHARES, SERIES B WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN WHOLE SHARES.

 

ARTICLE III

Representations and Warranties of the Company

 

As a material inducement to the Purchaser to enter into and perform its obligations under this Agreement, the Company hereby represents and warrants to the Purchaser as follows:

 

Section 3.1  Due Creation, Good Standing and Due Qualification .  The Company has been duly created and is validly existing corporation in good standing under the laws of the state of Nevada, and pursuant to the resolutions of the Board (or a duly authorized committee thereof)  has full power and authority to own, lease and operate its properties and conduct its business as presently being conducted and to enter into and perform its obligations under, or as contemplated under, this Agreement; and the Company is duly qualified to transact business as a foreign entity and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a material adverse change in the business, Assets, liabilities, operations, condition (financial or otherwise) or operating results of the Company and its Subsidiaries (as defined herein), taken as a whole (a “ Material Adverse Effect ”). 

Section 3.2 Authorization; Enforceability; Corporate and Other Proceedings .  

 

 

 

Section 3. Non Contravention .  Notwithstanding anything contained on the schedules attached hereto, the execution, delivery and performance by the Company of the Documents, the consummation of the transactions contemplated hereby and   thereby and compliance with the provisions hereof and   thereof, including the issuance, sale and delivery of the Convertible Preferred Shares, Series B have not, do not and shall not   (whether with or without the giving of notice or passage of time or both) , (a) violate any Law to which the Company or any of its Subsidiaries is subject, (b) violate any provision of the Fundamental Documents of the Company or the Fundamental Documents of the Company’s Subsidiaries, (c) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, require the repurchase, redemption or repayment of, terminate, modify or cancel, or require any notice under any material contract to which the Company or any of its Subsidiaries is a party, or (d) result in the imposition of any Lien upon any of the Assets of the Company or any of its Subsidiaries.

 

Section 3.4 Absence of Defaults .  Except as disclosed in SEC filings, the Company is not in violation of its respective Fundamental Documents and neither the Company nor any of its Subsidiaries are in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them may be bound or to which any of the property or assets of the Company or any of its Subsidiaries is subject, except for such violations or defaults that would not result in a Material Adverse Effect.

 

Section 3.5 Capitalization of the Company .  

 

 

Section 3.6  Offering Exemption .  Based upon and assuming the accuracy of the representations of the Purchaser in Article VI, the offering, sale and issuance of the Convertible Preferred Shares, Series B do not require registration under the Securities Act or applicable state securities and “blue sky” Laws.  The Company has made or shall make all requisite filings and has taken or will take all action necessary to be taken to comply with such federal and state securities or “blue sky” Laws.

 

Section 3.7  SEC Reports. The Company’s Annual Report on Form 10-KSB most recently filed with the SEC (the “ Annual Report ”) and (ii) each subsequent report filed with the SEC pursuant to the Exchange Act (together with the Annual Report, the “ SEC Reports ”), as of their respective dates, did not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.  Such documents, when they were filed with the SEC, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the SEC thereunder.  Since the date of the filing of the Annual Report with the SEC, the Company has made all filings with the SEC required to be made by the Company under the Exchange Act.

 

Section 3.8 Financial Statements .  The consolidated financial statements of the Company contained in the SEC Reports (the “ Financial Statements ”) complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP applied on a consistent basis during the periods involved and fairly present, in all material respects, in conformity with GAAP, the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended (except, in each case, as may be indicated in the notes thereto and subject, in each case, to normal year-end adjustments in the case of any unaudited interim financial statements).

 

Section 3.9 No Material Adverse Change .  Since March 31, 2009 (the date of the most recent financial statements of the Company filed with the SEC), except as otherwise stated therein or in the SEC Reports, there has not been (i) any change resulting in a Material Adverse Effect, (ii) any transaction which is material to the Company or its Subsidiaries, except transactions in the ordinary course of business, (iii) any obligation, direct or contingent, which is material to the Company and its Subsidiaries taken as a whole, incurred by the Company or its Subsidiaries, except obligations incurred in the, ordinary course of business, (iv) any change in the beneficial interests in or outstanding indebtedness of the Company or its Subsidiaries, except changes in the ordinary course of business or (v) except for regular quarterly dividends on the beneficial interests in the Company or its Subsidiaries, in amounts per share that are consistent with past practice, there has been no dividend or distribution of any kind declared, paid or made on the beneficial interests in the Company  or its Subsidiaries.  Neither the Company or its Subsidiaries has any material contingent obligation which is not disclosed in this Agreement or the SEC Reports.

 

Section 3.10 No Consent or Approval Required .  No consent, approval or authorization of, or declaration to or filing with, any Person, including pursuant to the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended, is required by the Company for the valid authorization, execution and delivery by the Company of any Document or for its consummation of the transactions contemplated thereby or for the valid authorization, issuance and delivery of the Convertible Preferred Shares, Series B, other than those consents, approvals, authorizations, declarations or filings which have been obtained or made, as the case may be, and such as may be required under state securities or “blue sky” laws in connection with the purchase and resale of the Convertible Preferred Shares, Series B.

 

Section 3.11 Absence of Proceedings.   Except as disclosed in the SEC Reports, there is no Proceeding   now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its Subsidiaries which, singly or in the aggregate, would result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated herein or the performance by the Company of its obligations hereunder.

 

Section 3.12 Possession of Licenses and Permits .  The Company and its Subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, “ Governmental Licenses ”) issued by the appropriate federal, state, local or foreign, regulatory agencies or bodies necessary to conduct the businesses now operated by them; the Company and its Subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity of Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singly or in the aggregate, result in a Material Adverse Effect; and neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.

 

Section 3.13 Title to Property.   The Company and its Subsidiaries do not own any real property nor do they have any leases or subleases with respect to any real property; the Company and its Subsidiaries have good and marketable title to the investments described in the SEC Reports, in each case, free and clear of all Liens of any kind except such as (i) are described in the SEC Reports or (ii) do not, singly or in the aggregate, materially affect the value of any such investments; and neither the Company nor any of its Subsidiaries has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any of its Subsidiaries under any of such investments, or affecting or questioning the rights of the Company or any Subsidiary thereof to the continued possession of the investments.

 

Section 3.14  Investment Company Act.   The Company is not, and upon the issuance and sale of the Convertible Preferred Shares, Series B as herein contemplated and the application of the net proceeds therefrom will not be, an “investment company” or an entity “controlled” by an “investment company”, as such terms are defined in the Investment Company Act of 1940, as amended.

  

Section 3.15 Limitation of Personal Liability.   The holders of the Convertible Preferred Shares, Series B will be entitled to the same limitation of personal liability as that extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Nevada; provided, however, that pursuant to the terms of this Agreement, the Purchaser will indemnify the Company against any liability resulting from any inaccuracy in or breach of any such investor’s representations and warranties in accordance with the terms hereof; and provided.

 

Section 3.16 Similar Offerings.   None of the Company, its Affiliates, or any Person acting on its or any of their behalf (in each case other than the Purchaser, as to which the Company makes no representation), has, directly or indirectly, solicited any offer to buy, sold or offered to sell or otherwise negotiated in respect of, or will solicit any offer to buy, sell or offer to sell or otherwise negotiate in respect of, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Convertible Preferred Shares, Series B in a manner that would require the Convertible Preferred Shares, Series B to be registered under the Securities Act.

 

Section 3.17 No General Solicitation.   None of the Company, its Affiliates or any person acting on its or any of their behalf (in each case other than the Purchaser, as to whom the Company makes no representation) has engaged or will engage, in connection with the offering of the Convertible Preferred Shares, Series B, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act.

 

Section 3.18 Maintenance of Controls and Procedures.   The Company has established and maintains “disclosure controls and procedures” (as such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act) that (A) are designed to ensure that material information relating to the Company , including its Subsidiaries, is made known to the Company ’s Chief Executive Officer and its Chief Financial Officer by others within those entities, particularly during the periods in which the filings made by the Company with the SEC which it may make under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act are being prepared and (B) have been evaluated for effectiveness as of the end of the Company ’s most recent quarterly report on Form 10-Q filed with the SEC.  The Company’s accountants and the audit committee of the Board have been advised of (x) any significant deficiencies in the design or operation of internal controls that could adversely affect the Company’s ability to record, process, summarize, and report financial data and (y) any fraud, whether or not material, that involves management or other employees who have a role in the Company’s internal controls.

  

Section 3.19 Brokers or Finders .  The Company has not retained any investment banker, broker or finder in connection with this Agreement or the transactions contemplated hereby (including the sale of the Convertible Preferred Shares, Series B) or incurred any liability for any brokerage or finders’ fees, agent commissions or any similar charges in connection with this Agreement or the transactions contemplated hereby.

 

ARTICLE IV

Representations and Warranties of the Purchaser

 

As a material inducement to the Company to enter into and perform its obligations under this Agreement, the Purchaser represents, warrants and covenants to the Company as follows:

 

Section 4.1  Experience . The Purchaser is an “accredited investor” within the meaning of Regulation D promulgated under the Securities Act and, by virtue of its experience in evaluating and investing in private placement transactions of securities in companies similar to the Company, the Purchaser is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests.  The Purchaser has had access to the Company’s senior management and has had the opportunity to conduct such due diligence review as it has deemed appropriate.

 

Section 4.2  Investment .  The Purchaser has not been formed solely for the purpose of making this investment and is not making this investment with the view to, or for resale in connection with, any distribution of any part thereof in violation of, or in a manner that would require registration of the Convertible Preferred Shares, Series B being purchased hereby under, the Securities Act.  The Purchaser understands that the Convertible Preferred Shares, Series B have not been registered under the Securities Act or applicable state securities or “blue sky” Laws by reason of a specific exemption from the registration provisions of the Securities Act and applicable state securities or “blue sky” Laws, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser’s representations as expressed herein and the Purchaser will not take any actions that would have caused the Convertible Preferred Shares, Series B being purchased hereby to be registered under the Securities Act.  Notwithstanding the foregoing, the use of the proceeds thereof shall not be deemed to be a violation of this representation, warranty and covenant.

 

Section 4.3  Transfer Restrictions .  The Purchaser acknowledges and understands that it must bear the economic risk of this investment for an indefinite period of time because the Convertible Preferred Shares, Series B must be held indefinitely unless subsequently registered under the Securities Act and applicable state securities or “blue sky” Laws or unless an exemption from such registration is available.  The Purchaser understands that any transfer agent of the Company will be issued stop transfer instructions with respect to the Convertible Preferred Shares, Series B unless any transfer thereof is subsequently registered under the Securities Act and applicable state securities or “blue sky” Laws or unless an exemption from such registration is available.

 

Section 4.4  Brokers or Finders .  The Purchaser has not retained any investment banker, broker or finder in connection with this Agreement or the transactions contemplated hereby (including the sale of the Convertible Preferred Shares, Series B) or incurred any liability for any brokerage or finders’ fees, agent commissions or any similar charges in connection with this Agreement or the transactions contemplated hereby .

 

Section 4.5  Organization; Good Standing; Qualification and Power .  The Purchaser is duly organized, validly existing and in good standing under the Laws of its jurisdiction of formation, has all requisite p