LOAN AND SECURITY
AGREEMENT
THIS LOAN AND SECURITY AGREEMENT
(this “Agreement”) made as of September 29, 2008 by and
among the investors listed on Schedule 1 to this Agreement
(collectively, the “ Investors ,” and each,
individually, a “ Investor ”), Platinum Advisors
LLC, a limited liability company, as agent for the Investors (the
“ Agent ”) and NaturalNano, Inc., a Nevada
corporation with its chief executive office, principal place of
business and mailing address at 15 Schoen Place, Pittsford, New
York 14534-2025 (“ NaturalNano ” or the “
Company ”), and NaturalNano Research, Inc., a Delaware
corporation (“ NN Research ” and, jointly and
severally with NaturalNano, the “ Borrower ”).
The obligations of NaturalNano and NN Research shall be joint and
several, notwithstanding which of the Borrowers receives the
proceeds of any Advances (as defined below) hereunder
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Section 1.
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Definitions . As used herein:
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1.1.
Accounting Terms
. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted
accounting principles in the United States and all financial data
submitted pursuant to this Agreement shall be prepared in
accordance with such principles.
1.2.
Additional Definitions . Unless otherwise specifically
defined herein, all terms used in this Agreement and in all
documents referred to herein and which have been defined in
Articles 1, 2 or 9 of the Uniform Commercial Code, shall be
interpreted and construed in light of the sections, the
definitions, the “official comment,” and the
definitional and substantive cross-references of the Uniform
Commercial Code.
1.3.
Advances means,
collectively, the Initial Advance and any Subsequent Advance made
pursuant to Section 2 hereof.
1.4.
Affiliate means, with
respect to any Person (the subject Person), a Person: (a) which
directly or indirectly Controls, or is Controlled by, or is under
common Control with, the subject Person; (2) which directly or
indirectly beneficially owns or holds a majority of the outstanding
shares of any class of voting stock of the subject Person; or (3) a
majority of the outstanding shares of any class of the voting stock
of which is directly or indirectly beneficially owned or held by
the subject Person.
1.5.
Agreement means this
Loan and Security Agreement, as the same may hereafter be
supplemented, modified or amended.
1.6.
Business Day means
with respect to any date that is specified in this Agreement, a day
other than a Saturday or Sunday or other day on which commercial
banks in the City of New York are required or permitted to be
closed during all or part of normal banking hours. Any payment
which is due on a date which is not a Business Day shall be payable
on the next day which is a Business Day.
1.7.
Closing Date means a date
on which the Borrower issues the Notes and receives the proceeds
from the sale thereof pursuant to an Advance
hereunder.
1.8.
Certificates of Designations means the
certificates of designations of rights, preferences, designations,
qualifications and limitations of the Series B Preferred Stock, par
value $0.001 per share, of the Company, and the Series C Preferred
Stock, par value $0.001 per share, of the Company, collectively,
and shall be in substantially the forms attached
hereto.
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1.9.
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The
Commission means the
United States Securities and Exchange Commission.
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1.10. Common
Stock means shares
of the NaturalNano’s common stock, par value $.001 per
share.
1.11.
Control means the
possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract, or
otherwise.
1.12. Disclosure
Schedule shall have
the meaning set forth in the introductory paragraph of Section 4 of
this Agreement.
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1.13.
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The Exchange Act
means the Securities Exchange Act of 1934, as
amended.
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1.14. Exempt
Issuance means the
issuance of (a) shares of Common Stock or options to employees,
officers, directors of and consultants (other than consultants
whose services relate to the raising of funds) the Borrower
pursuant to the Option Plans and meeting the conditions provided in
Section 6.10 of this Agreement, (b) securities upon the exercise or
conversion of the Securities issued hereunder, in payment of
principal or interest on the Notes, (c) any other options, warrants
or convertible securities which are outstanding on the Closing Date
after completion of the Closing and set forth in Schedule 4.3.1 to
the Disclosure Schedule, (d) securities issued pursuant to
acquisition, licensing agreements, or other strategic transactions,
provided any such issuance shall only be to a Person which is,
itself or through its subsidiaries, an operating company
(including, without limitation, a company engaged primarily in
research and development) in a business which NaturalNano’s
board of directors believes is beneficial to the Borrower and in
which the Borrower receives benefits in addition to the investment
of funds, but shall not include a transaction in which NaturalNano
is issuing securities primarily for the purpose of raising capital
or to an entity whose primary business is investing in securities.
For purposes of the parenthetical clause in clause (a), an investor
relations firm that is not involved in fund raising is not deemed
to be consultant whose services are related to the raising of
funds.
1.15. Existing
Notes means the 8%
Senior Secured Promissory Notes issued to the Investors and the
Agent on or about March 6, 2007 and August 4, 2008 in the aggregate
principal amount of $3,517,500.
1.16. Governmental
Entity means a
court, arbitral tribunal, administrative agency or commission or
other governmental or other regulatory authority or
agency.
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1.17.
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Initial Closing Date
means September 29,
2008.
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1.18.
Knowledge means the
actual knowledge of any officer or director of Borrower or such
knowledge which the chief executive officer, chief financial
officer and chief technical officer would have in the diligent
conduct of the Borrower’s business.
1.19. Material
Adverse Change means any
adverse change in the business, operations, properties, including
Patents, Trademarks and other intellectual property rights, or
financial condition or prospects of Borrower.
1.20. Material
Adverse Effect means any
adverse effect on the business, operations, properties, including
Patents, Trademarks and other intellectual property rights, or
financial condition or prospects of Borrower that is material and
adverse to Borrower and its subsidiaries and affiliates, taken as a
whole and/or any condition, circumstance, or situation that would
prohibit or otherwise materially interfere with the ability of
Borrower to perform any of its material obligations under this
Agreement, the Note or the Transaction Documents or to perform its
obligations under any other material agreement to which Borrower is
a party.
1.21.
Notes mean,
collectively, the Borrower’s 8% Senior Secured Convertible
Notes as defined in Section 2 of this Agreement issued pursuant to
each Advance. The Notes shall be in substantially the form
of Exhibit A to this
Agreement, or, in the case of any funding occurring after the
Initial Funding, in such form or forms as may be agreed to by the
Company and the Requisite Investors.
1.22.
Obligations mean all
loans, advances, debts, liabilities, obligations, covenants and
duties owing by the Borrower to the Investors and/or the Agent of
every kind and description (whether or not evidenced by any note or
other instrument and whether or not for the payment of money),
direct or in-direct, absolute or contingent, due or to become due,
now existing or hereafter arising, whether or not such obligations
are related to the transaction described in this Agreement and the
Transaction Documents, by class, or kind, or whether or not
contemplated by the parties at the time of the granting of this
security interest, including without limitation, all interest,
fees, charges, expenses and attorneys’ fees chargeable to the
Borrower or incurred by the Investors or the Agent in connection
with the Notes and the transactions contemplated by the Transaction
Documents or otherwise.
1.23.
Patents mean all of
the Borrower’s right, title and interest, present and future,
in and to (a) all letters patent of the United States or any other
country, all right, title and interest therein and thereto, and all
registrations and recordings thereof, including without limitation
applications, registrations and recordings in the United States
Patent and Trademark Office or in any similar office or agency of
the United States and State thereof or any other country or any
political subdivision thereof, all whether now owned or hereafter
acquired by the Borrower; and (b) all reissues, continuations,
continuations-in-part or extensions thereof and all licenses
thereof; and all proceeds of the foregoing and all proceeds of any
insurance on the foregoing.
1.24.
Person means an
individual, partnership, corporation, business trust, joint stock
Borrower, trust, unincorporated association, joint venture,
governmental authority, limited liability Borrower, or other entity
of whatever nature.
1.25. Pledge
Agreement means the
agreement, dated March 6, 2007, among the Investors, the Agent and
NaturalNano pursuant to which NaturalNano pledged the stock of NN
Research.
1.26. Preferred
Shares means the
shares of Series B Preferred Stock, par value $0.001 per share of
the Company, and the Series C Preferred Stock, par value $0.001 per
share, issued to the Investors pursuant to Section 2.4 hereof, each
of which shall be convertible into 160 shares of Common Stock of
the Company.
1.27. Pro Rata
Portion means, with respect to Platinum Long Term Growth IV,
LLC, 85%, and with respect to Longview Special Financing, Inc.,
15%.
1.28. Requisite
Investors means holders
of Notes representing, in the aggregate, a majority of
then-outstanding principal amount of the Notes.
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1.29.
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The Securities
Act means the
Securities Act of 1933, as amended.
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1.30.
Subsidiary means any
Person which is either (a) controlled by the Borrower or (b) in
which the Borrower and its other Subsidiaries own at least 40% of
the equity or have at least 40% of the voting
power.
1.31. Supplemental
Agreements mean any and
all agreements, instruments, documents, security agreements,
mortgages, financing statements, and supplements thereto granting
or intending to grant to the Investor any lien, security interest,
pledge, assignment or indemnification to secure the Obligations, or
entered into between the Borrower in favor of, or with, and the
Investor, at any time, for any purpose including, without
limitation, this Agreement and the Note.
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1.32.
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Securities
means the Notes and Preferred
Shares.
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1.33.
Trademarks mean all of
the Borrower’s right, title and interest, present and future,
in and to (a) all trademarks, trade names, trade styles, service
marks, prints and labels on which said trademarks, trade names,
trade styles and service marks have appeared or appear, designs and
general intangibles of like nature, now existing or hereafter
adopted or acquired, all right, title and interest therein and
thereto, and all registrations and recordings thereof, including
without limitation applications, registrations and recordings in
the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State thereof, or any
other country or any political subdivision thereof, all whether now
owned or hereafter acquired by the Borrower; (b) all reissues,
ex-tensions or renewals thereof and all licenses thereof; and (c)
the goodwill of the business symbolized by each of the Trademarks,
and all customer lists and other records of the Borrower relating
to the distribution of products bearing
the Trademarks; and all proceeds of the
foregoing and all proceeds of any insurance on the
foregoing.
1.34. Transaction
Documents means this
Agreement, the Securities, the Certificates of Designations, the
Pledge Agreement and the other Supplemental Agreements, the UCC-1
financing statements, the collateral assignment of Patents and
Trademarks or other instrument relating to the perfection of a
security interest in Patents and Trademarks, and all other
instruments, documents, certificates and agreements executed in
connection with the transactions contemplated by this Agreement.
The term “Transaction Documents” means and includes all
Original Transaction Documents (other than the Warrants described
in Section 2.4 hereof and the Registration Rights Agreement (as
defined in the Original Transaction Documents)) and the Existing
Security Documents (each as defined below).
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Section
2.
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Issuance Of
Securities .
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2.1
Initial Advance . Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with
applicable law, the Borrower agrees to sell to the Investors, and
the Investors, severally but not jointly, agree to purchase from
the Borrower, on the Initial Closing Date, Notes in the aggregate
principal amount of $220,000 (the “ Initial Advance
”).
2.2
Committed Subsequent Advances . In addition to any advances
described in Section 2.5 hereto, upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with
applicable law, the Borrower agrees to sell to the Investors, and
the Investors, severally but not jointly, agree to purchase from
the Borrower, additional Notes in the aggregate principal amount of
up to $400,000 (the “ Subsequent Advances ”), as
set forth in more detail below. In connection with, and as a
condition to any Subsequent Advance, the Borrower shall issue to
the Investors Notes in the aggregate principal amount of the
applicable Subsequent Advances, in substantially the form attached
hereto as Exhibit
A .
Notwithstanding the date of any such Subsequent Advance, the
maturity date of the Notes issued in connection therewith shall be
January 31, 2010.
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2.2.1
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On or prior to October 18, 2008, the Company may
request in writing the Subsequent Advance in the aggregate
principal amount of $200,000, which shall be funded, subject to the
terms and conditions set forth herein, on or after October 20, 2008
and on or before October 24, 2008 (the “ Second
Advance ”).
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2.2.2
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On or prior to November 15, 2008, the Company
may request in writing a Subsequent Advance in the aggregate
principal amount of $200,000, which shall be funded, subject to the
terms and conditions set forth herein, on or after November 17,
2008 and on or before November 21, 2008 (the “ Third
Advance ”).
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2.3
Funding of Advances . The Investors shall fund the
applicable purchase price for the Notes issued in connection with
each Advance by the dates set forth above in Section 2.2. Each
Purchaser’s obligation to fund an Advance and purchase Notes
on the Initial Advance or
any Subsequent Advance shall be limited to its
Pro Rata Portion of such Advance; provided , that, Platinum’s Pro Rata portion with respect
to the Initial Advance shall be approximately 86.36% and
Longview’s Pro Rata Portion shall be approximately 13.64%, so
that the Note received by Platinum on the Initial Closing shall be
in the amount of $190,000 and the Note received by Longview of the
Initial Closing shall be $30,000 (it being understood that Platinum
is permitted to withhold $20,000 of the purchase price of such Note
as payment of legal fees incurred in connection with the
preparation of this Agreement as set forth herein). The date of
funding of each Advance is referred to herein as a “
Closing Date ” and the consummation of such Advance is
referred to herein as a “ Closing ”. Each
Advance shall be subject to the conditions to Closing applicable to
such Advance as set forth in Section 9 hereto.
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2.4
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Delivery of
Securities; Exchange of Warrants .
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2.4.1
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On each Closing, Borrower shall cause the
applicable Notes to be issued to the Investors in exchange for the
purchase price therefor.
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2.4.2
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On or prior to October 10, 2008, the Investors
shall surrender to the Borrower for cancellation the Common Stock
purchase warrants identified on Schedule
2.4 hereto if the
Company has complied with its obligations under this Section 2.4.2
and no other Event of Default shall have occurred and be
continuing. In exchange for such cancellation, the Borrower shall
issue to the Investors, on or prior to October 10, 2008, an
aggregate of 5,000,000 Preferred Shares, consisting of 750,000
shares of Series B Preferred Stock, to be issued to Longview, and
4,250,000 shares of Series C Preferred Stock, to be issued to
Platinum. The Company shall, (i) on or prior to October 6, 2008,
withdraw the certificate of designations of rights, preferences,
designations, qualifications and limitations of the Series A
Preferred Stock of the Company (if previously filed by the
Company), (ii) amend its bylaws so as to permit the voting rights
granted to the director subject to appointment by the holders of
the Series C Preferred Stock, which shall be in form and substance
satisfactory Platinum in its sole discretion and (iii) provide such
closing documents, including legal opinions, as Platinum may
require, all of which shall be in form and substance satisfactory
to Platinum in its sole discretion. Notwithstanding anything
contained in the Transaction Documents to the contrary, (i) failure
to comply with any of the provisions of this Section 2.4.2 shall,
absent waiver by the Requisite Investors, be deemed an immediate
Event of Default under the Notes and the Existing Notes, not
subject to any cure period, and permit immediate acceleration of
the Notes and the Existing Notes at the election of the Requisite
Investors and (ii) for purposes of the Borrowers representations
and covenants hereunder, the date of issuance of the Preferred
Shares shall be deemed a “Closing”
hereunder.
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2.5
Additional Advances . In addition to Advances described in
Sections 2.1 and 2.2 hereof, the Investors and the Borrowers agree
to endeavor in good faith to establish terms and conditions for
subsequent fundings on or prior to July 30, 2009 in an additional
aggregate
principal amount not to exceed $1,710,000. Such
funding may be conditioned upon the Borrower’s achieving
certain performance “milestones,” and such funding may
be conditioned upon such other factors as the Investors may in
their reasonable discretion determine, including the financial and
operational performance of the Borrowers, the compliance by the
Borrowers with the terms of the Transaction Documents, the
prospects of the Borrowers and their products and the state of the
Borrower’s industry. Notwithstanding the above, it is
understood and agreed that the Investors are not committed to
extend any such additional advances. The Borrower covenants not to
provide any material non-public information to the Investors
(whether as part of the negotiations of any subsequent advance
pursuant to this Section 2.5 or otherwise) unless prior thereto the
Investors shall have executed a written agreement regarding the
confidentiality and use of such information.
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Section
3.
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Collateral And
Security Interest .
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3.1
Confirmation of Security Interests . The Borrower
acknowledges that it has previously entered into a Loan and
Security Agreement, dated on or about March 7, 2007 (the “
Original Loan Agreement ”), with the Agent and the
Investors, pursuant to which it issued to the Agent and the
Investors the securities identified therein. As security for its
obligations under the Original Loan Agreement and the Transaction
Documents (as defined in the Original Loan Agreement), the Borrower
granted a security interest to the Agent and the Investors in
substantially all of its assets and entered into the Pledge
Agreement, the Patent Security Agreement, dated as of March 6,
2007, among the Borrower, the Agent and the Investors and certain
other agreements (including the Original Loan Agreement, the
“ Existing Security Documents ”). The Borrower
acknowledges and agrees that (i) the Original Loan Agreement
remains and shall remain in full force and effect, (ii) the term
“Obligations,” as defined in the Original Loan
Agreement, shall include all Obligations (as defined herein) and
(iii) the Existing Security Documents (including the Original Loan
Agreement), the collateral pledged, conveyed and assigned
thereunder, and any general intangibles (as defined under the
Uniform Commercial Code of the State of New York) of the Borrower
shall all secure the Borrower’s obligations under the
Original Loan Agreement, the Existing Notes and the Obligations of
the Borrowers hereunder. Without limiting the generality of the
foregoing, each Borrower has granted, and hereby grants, the Agent
and the Investors a security interest in all collateral identified
in the Existing Security Documents. Further, it is understood and
agreed that the Original Loan Agreement and the Transaction
Documents identified therein (including the Existing Security
Documents, the “ Original Transaction Documents
”) shall survive the repayment of the Existing Notes and
remain in full force and effect so long as any Obligations exist
hereunder or the Investors have any obligation, contingent or
otherwise, to fund Advances. The Borrower hereby ratifies and
confirms its obligations under the Original Loan Agreement, the
Existing Notes and the Original Transaction Documents. Without
limiting the generality of the foregoing. except as set forth
on Schedule 3.1 hereto, the
representations and warranties of the Borrower set forth in Article
3 of the Existing Loan Agreement remain true, complete and correct
as of the date hereof.
3.2
Concerning the Agent . The Investors hereby acknowledge and
appoint the Agent to act on their behalf hereunder as provided in
the Original Loan Agreement, and that, in so acting, the Agent is
acting on behalf of the Investors. The Agent shall incur no
liability to the
Investors for any action taken or any omission
to take any action unless such action or failure of action resulted
from the Agent’s gross negligence or willful
conduct.
Section 4.
REPRESENTATIONS, WARRANTIES AND GENERAL COVENANTS
. The Borrower hereby represents and warrants to the Investors
(which representations and warranties will survive the delivery of
the Securities and this Agreement shall be deemed to be continuing
until the Notes and Preferred Shares are fully paid or converted
(as applicable) and the Investors have no obligation to extend
funds hereunder) that, except as set forth in a disclosure schedule
separately provided to the Investors on the Initial Closing Date
(the “ Disclosure Schedule ”) as of the date
hereof and as of each Closing hereunder:
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4.1.
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Organization and
Qualification . Each of
NaturalNano and NN Research:
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4.1.1. Is
and will continue to be duly organized and validly existing and in
good standing under the laws of its state of
organization.
4.1.2. Is
qualified and in good standing to do business in all other
jurisdictions in which the property owned, leased or operated by it
or the nature of the business conducted by it makes such
qualification necessary, except where such failure will not have a
Material Adverse Effect.
4.1.3. Has
the power to execute and deliver this Agreement, the Securities,
the other Supplemental Agreements and to borrow
hereunder.
4.1.4. Has
all requisite permits, authorizations, franchise agreements and
licenses, without unusual restrictions or limitations, to own,
operate and lease its properties and to conduct the business in
which it is presently engaged, all of which are in full force and
effect.
4.2. No
Legal Bar . All corporate and other action necessary for the
Borrower to execute, deliver and perform in accordance with the
terms of this Agreement and the other Transaction Documents has
been taken (or, (i) in the case of the Company’s obligations
to reserve shares of Common Stock pursuant to the Transaction
Documents, will be taken upon the filing of the Third Amended and
Restated Articles of Incorporation and (ii) will be taken by
October 6, 2008, upon filing of the Certificates of Designations),
and this Agreement constitutes, and the other Transaction Documents
to which the Borrower is a party, is or will, when executed and
delivered, constitute the valid and binding obligations of the
Borrower enforceable in accordance with their respective terms. No
shareholder or other consent or approval is required in connection
with the execution and delivery of the Transaction Documents and
the filing of each Certificate of Designations with the Secretary
of State of the State of Nevada. The execution and delivery of this
Agreement and compliance by the Borrower with any of the terms and
provisions hereof or of the Notes or any other Transaction
Documents will not, on each Closing Date and thereafter as long as
the Notes remain unpaid or unconverted and any portion of the
Preferred Shares remains unconverted, violate any provision of any
existing law or regulation or any writ or decree of any court or
governmental instrumentality, or any agreement or instrument to
which the Borrower is a party or which is binding upon it or its
assets, and will
not result in the creation or imposition of any
lien, security interest, charge or encumbrance of any nature
whatsoever upon or in any of its assets, except as contemplated by
this Agreement; and no consent of any other party, and no consent,
license approval or authorization of or registration or declaration
with any governmental bureau or agency, is required in connection
with the execution, delivery, performance, validity and
enforceability of this Agreement, the Note, the Certificates of
Designations or any of the other Transaction
Documents.
4.3.1. The
authorized and outstanding capital stock of NaturalNano as of the
date of this Agreement and as adjusted to reflect issuances
pursuant to or contemplated by this Agreement is set forth in
Schedule 4.3.1 to the Disclosure Schedule. Schedule 4.3.1 contains
all shares and derivatives currently and potentially outstanding.
The Borrower hereby represents that any and all shares and current
potentially dilutive events have been included in Schedule 4.3.1,
including employment agreements, acquisition, consulting
agreements, debts, payments, financing or business relationships
that could be paid in equity, derivatives or resulting in
additional equity issuances.
4.3.2. All
outstanding shares of capital stock have been duly authorized and
are validly issued, and are fully paid and non-assessable and free
from preemptive rights. All shares of capital stock described above
to be issued have been duly authorized and when issued, will be
validly issued, fully paid and non-assessable and free from
preemptive rights.
4.3.3. Except
for the issuance of Common Stock upon conversion of the Notes and
Preferred Shares or as set forth in Schedule 4.3.1 to the
Disclosure Schedule as of the date hereof and as of the Closing
Date, there are not now outstanding options, warrants, rights to
subscribe for, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or
exchangeable for, shares of any class of capital stock of the
Borrower, or agreements, understandings or arrangements to which
the Borrower is a party, or by which the Borrower is or may be
bound, to issue additional shares of its capital stock or options,
warrants, scrip or rights to subscribe for, calls or commitment of
any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of any class of
its capital stock. The Borrower agrees to inform the Investors in
writing of any additional options, warrants, rights or convertible
securities granted prior to the Initial Closing Date or which,
prior to the Initial Closing Date, the Borrower agrees to
issue.
4.3.4. The
Borrower on each Closing Date (i) will have full right, power, and
authority to sell, assign, transfer, and deliver, by reason of
record and beneficial ownership, to the Investors, the Notes and
Preferred Shares, free and clear of all liens, charges, claims,
options, pledges, restrictions, and encumbrances whatsoever; and
(ii) upon conversion of the Notes or conversion of the Preferred
Shares, the Investors will acquire title to such underlying shares
of Common Stock, free and clear of all liens, charges, claims,
options, pledges, restrictions, and encumbrances whatsoever except
for any of the foregoing which results from actions or omissions on
the part of the Investor.
4.3.5. The
capital stock of NN Research consists of 300,000,000 authorized
shares of common stock, par value $.01 per share, of which
10,000,000 shares are issued and outstanding and owned by
NaturalNano, free and clear of any lien, option, security interest,
purchase right or other encumbrance. Except as contemplated by this
Agreement, the Notes, the Preferred Shares and the Supplemental
Agreements and except as set forth in Schedule 4.3.1 to the
Disclosure Schedule, the Borrower does not have any agreements or
understandings pertaining to the purchase or sale of its
equity.
4.3.6. Except
as set forth in Schedule 4.3.6, Borrower does not have any
Subsidiary and there is no Person in which Borrower has an equity
interest or to which Borrower has advanced money, whether or not
represented by a note, or directly or indirectly guaranteed
obligations or provided security for the obligations of such
Person.
4.3.7. The
Borrower’s executive officers and directors understand the
nature of the Securities being sold hereby and recognize that the
issuance of the Securities will have a potential dilutive effect on
the equity holdings of other holders of the Borrower’s equity
or rights to receive equity of the Borrower. The board of directors
of the Borrower has concluded, in its good faith business judgment
that the issuance of the Securities is in the best interests of the
Borrower. The Borrower specifically acknowledges that its
obligation to issue the shares of Common Stock upon conversion of
the Notes and the Preferred Shares is binding upon the Borrower and
enforceable regardless of the dilution such issuance may have on
the ownership interests of other stockholders of the Borrower or
parties entitled to receive equity of the
Borrower.
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4.4.
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Financial Statements;
SEC Documents .
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4.4.1. Borrower
has delivered to the Investors its audited consolidated balance
sheet at December 31, 2007 and its audited consolidated statements
of operations for the year ended December 31, 2007, statement of
stockholders’ equity for the year ended December 31, 2007,
and statements of cash flows for the year ended December 31,
2007, together with notes to the financial statements, and its
unaudited consolidated condensed balance sheet at June 30, 2008,
consolidated statements of operations for the six months ended June
30, 2008, statements of stockholders’ equity for the period
from December 22, 2004 through June 30, 2008, and statements of
cash flows for the six months ended June 30, 2008 and 2007 and the
period from December 22, 2004 through June 30, 2008 together with
notes to financial statements. The audited financial statements
were audited by, and the unaudited financial statements were
reviewed, but not audited, by Goldstein Golub Kessler LLP,
registered independent accounting firm. Goldstein Golub Kessler LLP
is independent within the rules and regulations of the Commission.
The financial statements present and reflect, in accordance with
generally accepted accounting principles, consistently applied, the
Borrower’s financial position on the balance sheet date and
the results of its operations, changes in stockholders’
equity and cash flows for the periods covered in accordance with
generally accepted accounting principles consistently applied;
provided, however, that the financial statements for the interim
period were prepared in accordance with the rules and regulations
of the
Commission applicable to quarterly reports on
Form 10-Q. The books and records of the Borrower have been, and are
being, maintained in all material respects in accordance with
generally accepted accounting principles consistently applied and
any other applicable legal and accounting requirements and reflect
only actual transaction. The Borrower has no liabilities or
obligations which are material, individually or in the aggregate,
which are not disclosed in the financial statements, other than
those incurred in the ordinary course of the Borrower’s
businesses since June 30, 2008, and which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse
Effect.
4.4.2. As
of the date of the financial information submitted, there were no
material unrealized or anticipated losses from any unfavorable
commitments of the Borrower; and there has been no material adverse
change in the business or assets or in the condition, financial or
otherwise, of the Borrower from that set forth in said financial
statements.
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4.4.3.
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The Borrower has provided the Investors with a
copy of:
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(a) Each
letter of comment received from the Commission since December 22,
2004.
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(b)
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Each letter responding to the comments of the
Commission.
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(c) Each
so-called management letter from the Borrower’s independent
registered accounting firm which sets forth any comments on the
Borrower’s financial statement, financial controls or other
financial procedures or the Borrower’s books and records, or,
if no such letter has been issued, a letter from the independent
registered accounting firm to that effect.
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(d)
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Any response to any management
letter.
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4.4.4. The
Common Stock is traded on the OTC Bulletin Board, and is eligible
for transfer pursuant to the Depository Trust Company Automated
Securities Transfer Program (the “DTC Program”). The
name, address, telephone number, fax number, contact person and
e-mail address of the NaturalNano’s transfer agent are set
forth on Schedule 4.4.4 to the Disclosure Schedule. The Borrower
has not taken any action which is likely to cause the Common Stock
to be delisted from trading on the OTC Bulletin Board or to lose
its eligibility for transfer pursuant to the DTC Program, and the
Borrower does not know of any event which is likely to result in
such delisting or ineligibility.
4.4.5. The
Borrower has responded to all comments from the Commission relating
to any filing made by the Borrower pursuant to the Securities Act
or the Exchange Act.
4.4.6. All
of the Borrower’s filings with the Commission pursuant to the
Exchange Act comply as to form with the requirements of the
Exchange Act and the information contained therein does not contain
a material misstatement of fact or the omission of a fact necessary
to make the information presented not misleading.
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4.5.
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Title, Liens and
Encumbrances .
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4.5.1. The
Borrower has good and marketable title, and the right to grant a
security interest in, to all Collateral (as defined in the Original
Loan Agreement), and none of the Collateral is subject to any
pledge, lease, trust, bailment, lien, security interest,
encumbrance, charge or title retention or other security agreement
or arrangement of any character whatsoever other than as permitted
in the Original Loan Agreement and the Transaction
Documents.
4.5.2. The
security interest granted by this Agreement and the Original Loan
Agreement constitutes a valid, binding and enforceable first
priority security interest on the Collateral, except as
enforceability may be affected by bankruptcy, insolvency and other
laws of general applications affecting the enforcement of
creditors’ rights, and secure all Obligations of each
Borrower to the Agent and the Investors.
4.6. No
Material Litigation . There is no litigation or administrative
proceeding of or before any Government Entity is pending or, to the
Knowledge of the Borrower, threatened against the Borrower or any
of its property which, if adversely determined based on the claims
made against the Borrower, would have a Material Adverse
Effect.
4.7. No
Default . The Borrower is not, on the date hereof, in default
with respect to the payment or performance of any of its
obligations or in the performance of any covenants or conditions to
be performed by it pursuant to the terms and provisions of any
indenture, agreement or instrument to which it is a party or by
which it may be bound and the Borrower has received no notice of
default thereunder other than defaults pursuant to the Existing
Notes and Existing Loan Agreement set forth on
Schedule 4.7 hereto.
4.8.
Compliance with Laws . The Borrower has complied in all
material respects with and will continue to comply with all
applicable statutes and regulations of the United States of
America, and all states, counties, municipalities and agencies of
any thereof with respect to (a) any restrictions, specifications or
other requirements pertaining to products or technology which the
Borrower develops, manufactures or sells, or to the services it
performs; (b) the conduct of its business operations; (c) the use,
maintenance and operation of the real and personal properties owned
or leased by it in the operation of its business, including
compliance with all application zoning and environmental laws and
regulations; and (d) the issued and outstanding capital stock of
the Borrower and the disclosure of material facts and information
to its stockholders.
4.9. No
Secondary Liabilities . There are no outstanding contracts or
agreements of guaranty or suretyship made by the Borrower, or to
which it is a party, or to which the Borrower or any of the
Borrower’s assets are subject.
4.10. Taxes . The
Borrower has filed or caused to be filed or obtained extensions for
the filing of, and will continue to file and cause to be filed, all
federal, state and local tax returns required by law to be filed,
and has paid and will continue to pay all taxes shown to be due and
payable on said returns or on any assessment made against it,
except if being contested in good faith and adequate provision has
been made therefor on its books of account. No claims are being
asserted with respect to such taxes which are not reflected in the
financial statements which have been furnished by the Borrower to
the Investors.
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4.11.
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Intellectual Property
Rights .
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4.11.1. Schedule
4.11 to the Disclosure Schedule sets forth a true and complete list
of any existing Patents and patent applications, Trademark
registrations and applications, service mark registrations and
applications, computer software (other than off-the-shelf software
for which the Borrower has the required number of use licenses),
copyright registrations and applications, material unregistered
trademarks, service marks, and copyrights, and internet domain
names used or held for use in connection with the Borrower’s
business, together with all licenses related to the foregoing,
whether the Borrower is the licensee or licensor
thereunder.
4.11.2. The
Borrower is the sole and exclusive owner or valid licensee of all
Patents, Trademarks and other intellectual property which is shown
on said Schedule 4.11 to be owned by it, free and clear of all
encumbrances other than the rights of licensees under license
agreements which are set forth on said Schedule 4.11, and, with
respect to licensed intellectual property, encumbrances incurred by
Persons other than the Borrower. The Borrower is the licensee under
a valid and enforceable license agreement with respect to all
intellectual property shown on Schedule 4.11 as being licensed by
the Borrower. Neither the execution of this Agreement nor the
enforcement of any rights which the Investors or the Agent may have
under this Agreement and the other Transaction Documents breaches
or would result in a breach of the license agreement or would give
the licensor any right to terminate or otherwise modify the terms
of the license agreements. The Borrower shall, within 10 days of
the date hereof, deliver to the Agent a Supplement to Patent
Security Agreement as required pursuant to the Original Security
Documents to evidence and perfect the grant of a security interests
in any Patents and Trademarks not listed on the Schedule A to the
Patent Security Agreement, dated March 6, 2007, between the
Borrower and the Agent.
4.11.3. All
patents, registrations and applications for intellectual property
that are owned by the Borrower and listed in Schedule 4.11 (a) are,
to the Knowledge of the Borrower, valid, subsisting, in proper form
and, to the Knowledge of Borrower, have been duly maintained,
including the submission of all necessary filings and fees in
accordance with the legal and administrative requirements of the
appropriate jurisdictions and (b) except as disclosed on the
Schedule 4.11, have not lapsed, expired or been abandoned, and no
patent, registration or application therefor is the subject of any
opposition, interference, cancellation proceeding or other legal or
governmental proceeding before any Governmental Entity in any
jurisdiction. The Borrower has no
Knowledge of any facts that would make any
intellectual property invalid or unenforceable.
4.11.4. To
the Knowledge of the Borrower, all Patents that are licensed by the
Borrower are valid and subsisting.
4.11.5. To
the Borrower’s Knowledge, the Borrower owns or has the valid
right to use all of the intellectual property used by it or held
for use by it in connection with its business. To the Knowledge of
the Borrower, there are no conflicts with or infringements of any
of the Borrower’s intellectual property by any third party.
To the Knowledge of the Borrower, the conduct of the
Borrower’s businesses the Borrower as currently conducted
does not conflict with or infringe in any way on any proprietary
right of any third party.
4.11.6. Except
as set forth on Schedule 4.11, there is no claim, suit, action or
proceeding pending or, to the Knowledge of the Borrower, threatened
against the Borrower (i) alleging any such conflict or infringement
with any third party’s proprietary rights or (ii) challenging
the ownership, use, validity or enforceability of the intellectual
property used by the Borrower in its business.
4.11.7. All
consents, filings, and authorizations by or with Governmental
Entities or third parties, if any, necessary with respect to the
consummation of the transactions contemplated by this Agreement, as
they may affect the Borrower’s intellectual property, have
been obtained.
4.11.8. The
Borrower has not entered into any consent, indemnification,
forbearance to sue, settlement agreement or cross-licensing
arrangement with any Person relating to the Borrower’s
intellectual property or, to the Knowledge of the Borrower, any
intellectual property licensed by the Borrower, or the intellectual
property of any third party, except as contained in any license
agreements listed in Schedule 4.11.
4.11.9. The
Borrower is not, nor will it be as a result of the execution and
delivery of this Agreement or the performance of its obligations
under this Agreement, the Notes, the Transaction Documents or the
other Supplemental Agreements, in breach of any license, sublicense
or other agreement relating to the Borrower’s Intellectual
Property.
4.12. Absence of
Certain Changes . Since June 30, 2008, except as set forth in
the Schedule 4.12 to the Disclosure Schedule, the Borrower has
conducted its business only in the ordinary and usual course
consistent with past practice, and the Borrower has
not:
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4.12.1.
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Suffered any Material Adverse
Change;
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4.12.2. Incurred
any liability or obligation (absolute, accrued, contingent or
otherwise) except for those incurred in the ordinary course of
business and consistent with past practice (counting obligations or
liabilities arising from one transaction or a
series of similar transactions, and all periodic
installments or payments under any lease or other agreement
providing for periodic installments or payments, as a single
obligation or liability) or increased, or experienced any change in
any assumptions underlying or methods of calculating, any bad debt,
contingency or other reserves;
4.12.3. Paid,
discharged or satisfied any claim, liability or obligation (whether
absolute, accrued, contingent or otherwise) other than the payment,
discharge or satisfaction in the ordinary course of business and
consistent with past practice of liabilities and obligations
reflected or reserved against in the June 30, 2008 balance sheet or
incurred in the ordinary course of business and consistent with
past practice since June 30, 2008;
4.12.4. Permitted
or allowed any of its property or assets (real, personal or mixed,
tangible or intangible) to be subjected to any mortgage, pledge,
lien, security interest, encumbrance, restriction or charge of any
kind;
4.12.5. Cancelled
any debts or waived any claims or rights of substantial
value;
4.12.6. Sold,
transferred, or otherwise disposed of any of its properties or
assets (real, personal or mixed, tangible or intangible), except in
the ordinary course of business and consistent with past
practice;
4.12.7. Disposed
of or permitted to lapse any rights to the use of any intellectual
property, or disposed of or disclosed to any Person any trade
secret, formula, process, know-how or other Intellectual Property
not theretofore a matter of public knowledge;
4.12.8. Granted
any general increase in the compensation of officers or employees
(including any such increase pursuant to any bonus, pension, profit
sharing or other plan or commitment which is disclosed in the
Borrower’s financial statements) or any increase in the
compensation payable or to become payable to any officer or
employee, and no such increase is customary on a periodic basis or
required by agreement or understanding;
4.12.9. Made
any single capital expenditure or commitment in excess of $5,000
for additions to property, plant, equipment or intangible capital
assets or made in the aggregate capital expenditures and
commitments in excess of $10,000 for additions to property, plant,
equipment or intangible capital assets;
4.12.10. Declared,
paid or set aside for payment any dividend or other distribution in
respect of its capital stock or redeemed, purchased or otherwise
acquired, directly or indirectly, any shares of capital stock or
other securities of the Borrower;
4.12.11. Made
any change in any method of accounting or accounting
practice;
4.12.12. Paid,
loaned or advanced any amount to, or sold,
transfe
