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EXHIBIT
10.3
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN
OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
KENTUCKY USA ENERGY, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant
No.: 001
Number
of Shares of Common Stock: 2,500,000
Date
of Issuance: May 29, 2008 (“
Issuance Date ”)
Kentucky
USA Energy, Inc., a Delaware corporation (the “
Company ”),
hereby certifies that, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged,
________________, the registered holder hereof or its permitted
assigns (the “
Holder ”),
is entitled, subject to the terms set forth below, to purchase from
the Company, at the Exercise Price (as defined below) then in
effect, upon surrender of this Warrant to purchase Common Stock
(including any Warrants to purchase Common Stock issued in
exchange, transfer or replacement hereof, the “
Warrant ”),
at any time or times on or after the date hereof, but not after
11:59 p.m., New York Time, on the Expiration Date (as defined
below), Two Million Five Hundred (2,500,000) fully paid
nonassessable shares of Common Stock (as defined below) (the
“
Warrant Shares ”).
Except as otherwise defined herein, capitalized terms in this
Warrant shall have the meanings set forth in Section 15. This
Warrant is one of the Warrants to purchase Common Stock (the
“
SPA Warrants ”)
issued pursuant to that certain Securities Purchase Agreement,
dated as of May 29, 2008 (the “
Subscription Date ”),
by and among the Company and the investors (the “
Buyers ”)
referred to therein (the “
Securities Purchase Agreement ”).
(a)
Mechanics of Exercise .
Subject to the terms and conditions hereof (including,
without limitation, the limitations set forth in Section 1(f)),
this Warrant may be exercised by the Holder on any day on or after
the date hereof, in whole or in part, by (i) delivery of a
written notice, in the form attached hereto as
Exhibit A (the
“
Exercise Notice ”),
of the Holder’s election to exercise this Warrant and
(ii) (A) payment to the Company of an amount equal to the
applicable Exercise Price multiplied by the number of Warrant
Shares as to which this Warrant is being exercised (the
“
Aggregate Exercise Price ”)
in cash or by wire transfer of immediately available funds or (B)
by notifying the Company that this Warrant is being exercised
pursuant to a Cashless Exercise (as defined in Section 1(d)).
The Holder shall not be required to deliver the original
Warrant in order to affect an exercise hereunder. Execution
and delivery of the Exercise Notice with respect to less than all
of the Warrant Shares shall have the same effect as cancellation of
the original Warrant and issuance of a new Warrant evidencing the
right to purchase the remaining number of Warrant Shares. On
or before the first (1
st )
Business Day following the date on which the Company has received
each of the Exercise Notice and the Aggregate Exercise Price (or
notice of a Cashless Exercise) (the “
Exercise Delivery Documents ”),
the Company shall transmit by facsimile an acknowledgment of
confirmation of receipt of the Exercise Delivery Documents to the
Holder and the Company’s transfer agent (the “
Transfer Agent ”).
On or before the second (2
nd )
Business Day following the date on which the Company has received
all of the Exercise Delivery Documents (the “
Share Delivery Date ”),
the Company shall (X) provided that the Transfer Agent is
participating in The Depository Trust Company (“
DTC ”)
Fast Automated Securities Transfer Program, credit such aggregate
number of shares of Common Stock to which the Holder is entitled
pursuant to such exercise to the Holder’s or its
designee’s balance account with DTC through its Deposit
Withdrawal Agent Commission system, or (Y) if the Transfer Agent is
not participating in the DTC Fast Automated Securities Transfer
Program, issue and dispatch by overnight courier to the address as
specified in the Exercise Notice, a certificate, registered in the
Company’s share register in the name of the Holder or its
designee, for the number of shares of Common Stock to which the
Holder is entitled pursuant to such exercise. Upon delivery
of the Exercise Delivery Documents, the Holder shall be deemed for
all corporate purposes to have become the holder of record of the
Warrant Shares with respect to which this Warrant has been
exercised, irrespective of the date such Warrant Shares are
credited to the Holder’s DTC account or the date of delivery
of the certificates evidencing such Warrant Shares as the case may
be. If this Warrant is submitted in connection with any
exercise pursuant to this Section 1(a) and the number of Warrant
Shares represented by this Warrant submitted for exercise is
greater than the number of Warrant Shares being acquired upon an
exercise, then the Company shall as soon as practicable and in no
event later than three Business Days after any exercise and at its
own expense, issue, a new Warrant (in accordance with Section 7(d))
representing the right to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under this Warrant,
less the number of Warrant Shares with respect to which this
Warrant is exercised. No fractional shares of Common Stock
are to be issued upon the exercise of this Warrant, but rather the
number of shares of Common Stock to be issued shall be rounded up
to the nearest whole number. The Company shall pay any and
all taxes which may be payable with respect to the issuance and
delivery of Warrant Shares upon exercise of this
Warrant.
(c)
Company’s Failure to Timely Deliver Securities
.
If within three (3) Trading Days after the Company’s
receipt of a copy (whether delivered by facsimile or any other
method) of an Exercise Delivery Documents the Company shall fail to
issue and deliver a certificate to the Holder and register such
shares of Common Stock on the Company’s share register or
credit the Holder’s balance account with DTC for the number
of shares of Common Stock to which the Holder is entitled upon the
Holder’s exercise of this Warrant, and if on or after such
Trading Day the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a
sale by the Holder of shares of Common Stock issuable upon such
exercise that the Holder anticipated receiving from the Company,
then the Company shall, within three (3) Business Days after the
Holder’s request and in the Holder’s sole discretion,
either (i) pay cash to the Holder in an amount equal to the
Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased
(the
“
Buy-In Price ”),
at which point the Company’s obligation to deliver such
certificate (and to issue such shares of Common Stock) shall
terminate, or (ii) promptly honor its obligation to deliver to the
Holder a certificate or certificates representing such Warrant
Shares and pay cash to the Holder in an amount equal to the excess
(if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Bid Price on the date
of exercise. Nothing herein shall limit the holder’s right to
pursue actual damages for the Company’s failure to maintain a
sufficient number of authorized shares of Common Stock or to
otherwise issue shares of Common Stock upon exercise of this
Warrant in accordance with the terms hereof, and the Holder shall
have the right to pursue all remedies available at law or in equity
(including a decree of specific performance and/or injunctive
relief).
(d)
Cashless Exercise .
Notwithstanding
anything contained herein to the contrary, if, at the time of
exercise of this Warrant, a Registration Statement (as defined in
the Registration Rights Agreement) covering the Warrant Shares that
are the subject of the Exercise Notice (the “
Unavailable Warrant Shares ”)
is not available for the resale of such Unavailable Warrant Shares,
the Holder may, in its sole discretion, exercise this Warrant in
whole or in part and, in lieu of making the cash payment otherwise
contemplated to be made to the Company upon such exercise in
payment of the Aggregate Exercise Price, elect instead to receive
upon such exercise the “Net Number” of shares of Common
Stock determined according to the following formula (a
“
Cashless Exercise ”):
Net
Number =
(A x B) - (A x C)
B
For
purposes of the foregoing formula:
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A
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=
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the
total number of shares with respect to which this Warrant is then
being exercised.
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B
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=
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the
Closing Sale Price of the shares of Common Stock (as reported by
Bloomberg) on the date immediately preceding the date of the
Exercise Notice.
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C
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=
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the
Exercise Price then in effect for the applicable Warrant Shares at
the time of such exercise.
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(f)
Limitations on Exercises.
(1)
Beneficial Ownership .
The Company shall not effect the exercise of this Warrant,
and the Holder shall not have the right to exercise this Warrant,
to the extent that after giving effect to such exercise, the Holder
(together with the Holder’s affiliates) would beneficially
own (directly or indirectly through Warrant Shares or otherwise) in
excess of 4.99% of the number of shares of Common Stock outstanding
immediately after giving effect to such exercise;
provided ,
however ,
the percentage limitation may be increase to 9.99% at the
Holder’s written request to the Company. For purposes
of the foregoing sentence, the aggregate number of shares of Common
Stock beneficially owned (directly or indirectly through Warrant
Shares or otherwise) by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon exercise of this
Warrant with respect to which the determination of such sentence is
being made, but shall exclude shares of Common Stock which would be
issuable upon (i) exercise of the remaining, unexercised portion of
this Warrant beneficially owned by the Holder and its affiliates
and (ii) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Company beneficially owned
by the Holder and its affiliates (including, without limitation,
any convertible notes or warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the Holder or any of its affiliates. Except
as set forth in the preceding sentence, for purposes of this
paragraph, beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as
amended (the “
1934 Act ”).
For purposes of this Warrant, in determining the number of
outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as reflected in (x)
the Company’s most recent Form 10-K, Form 10-Q, Form 8-K or
any other public filing with the Securities and Exchange
Commission, as the case may be, (y) a more recent public
announcement by the Company or (z) any other notice by the Company
or the Transfer Agent setting forth the number of shares of Common
Stock outstanding. For any reason at any time, upon the
written request of the Holder, the Company shall within two
Business Days confirm in writing to the Holder the number of shares
of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company,
including the SPA Securities and the SPA Warrants, by the Holder
and its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported.
(2)
Principal Market Regulation .
The Company shall not be obligated to issue any shares of
Common Stock upon exercise of this Warrant, and the Holder shall
not have the right to receive upon exercise of this Warrant any
shares of Common Stock, if the issuance of such shares of Common
Stock would exceed the aggregate number of shares of Common Stock
which the Company may issue upon exercise, redemption or
conversion, as applicable, of the SPA Warrants and SPA Securities
or otherwise without breaching the Company’s obligations
under the rules or regulations of the Principal Market (the
“
Exchange Cap ”),
except that such limitation shall not apply in the event that the
Company (A) obtains the approval of its stockholders as required by
the applicable rules of the Principal Market for issuances of
shares of Common Stock in excess of such amount or (B) obtains a
written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably
satisfactory to the Required Holders. Until such approval or
written opinion is obtained, no Buyer shall be issued in the
aggregate, upon exercise or conversion, as applicable, of any SPA
Warrants or SPA Securities, shares of Common Stock in an amount
greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the total number of shares of
Common Stock underlying the SPA Warrants issued to such Buyer
pursuant to the Securities Purchase Agreement on the Issuance Date
and the denominator of which is the aggregate number of shares of
Common Stock underlying the SPA Warrants issued to the Buyers
pursuant to the Securities Purchase Agreement on the Issuance Date
(with respect to each Buyer, the “
Exchange Cap Allocation ”).
In the event that any Buyer shall sell or otherwise transfer
any of such Buyer’s SPA Warrants, the transferee shall be
allocated a pro rata portion of such Buyer’s Exchange Cap
Allocation, and the restrictions of the prior sentence shall apply
to such transferee with respect to the portion of the Exchange Cap
Allocation allocated to such transferee. In the event that
any holder of SPA Warrants shall exercise all of such
holder’s SPA Warrants into a number of shares of Common Stock
which, in the aggregate, is less than such holder’s Exchange
Cap Allocation, then the difference between such holder’s
Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such holder shall be allocated to the respective
Exchange Cap Allocations of the remaining holders of SPA Warrants
on a pro rata basis in proportion to the number of shares of Common
Stock underlying the SPA Warrants then held by each such holder.
To
the extent required by the Principal Market, the provisions of the
Exchange Cap shall be modified to comply with the applicable rules
and regulations of the Principal Market, provided that any such
changes shall not, in the Holder’s reasonable discretion,
materially change the terms of the transaction contemplated
hereby.
2.
ADJUSTMENT
OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.
The
Exercise Price and the number of Warrant Shares shall be
adjusted from time to time as follows:
(a)
Adjustment upon Issuance of Common Stock .
In the event the Company shall at any time prior to the
Expiration Date issue Additional Shares of Common Stock (as defined
below) without consideration or for a consideration per share less
than the Exercise Price in effect immediately prior to such issue,
then the Exercise Price shall be reduced, concurrently with such
issue, to a price (calculated to the nearest cent) determined by
multiplying such Exercise Price by a fraction, (A) the numerator of
which shall be (1) the number of shares of Common Stock outstanding
immediately prior to such issue plus (2) the number of shares of
Common Stock which the aggregate consideration received or to be
received by the Company for the total number of Additional Shares
of Common Stock so issued would purchase at such Exercise Price;
and (B) the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued;
provided that, (i) for the purpose of this Section 2(a), all shares
of Common Stock issuable upon conversion or exchange of convertible
securities outstanding immediately prior to such issue shall be
deemed to be outstanding, and (ii) the number of shares of Common
Stock deemed issuable upon conversion or exchange of such
outstanding convertible securities shall be determined without
giving effect to any adjustments to the conversion or exchange
price or conversion or exchange rate of such convertible securities
resulting from the issuance of Additional Shares of Common Stock
that is the subject of this calculation. For purposes of this
Warrant, “
Additional Shares of Common Stock ”
shall mean all s
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