SECURITY AND PURCHASE AGREEMENT
LAURUS MASTER FUND, LTD.
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
Dated: March 2, 2006
SECURITY AND PURCHASE AGREEMENT
This Security and Purchase Agreement is made as of March 2, 2006 by and
among Laurus Master Fund, Ltd., a Cayman Islands corporation ("Laurus"), and
Essential Innovations Technology Corp., a corporation incorporated under the
laws of the State of Nevada (the "Company"), as borrower, and Essential
Innovations Corp., a corporation incorporated under the laws of Canada
("Essential"), as guarantor.
BACKGROUND
The Company has authorized the sale to Laurus of a Secured Term Note in
the aggregate principal amount of Two Million Dollars in lawful money of the
United States (US$ 2,000,000) (as amended, modified or supplemented from time to
time, the "Term Note").
The Company has authorized the sale to Laurus of a Secured Revolving
Note in the aggregate principal amount of Four Million Dollars in lawful money
of the United States (US$4,000,000) (as amended, modified or supplemented from
time to time, the "Secured Revolving Note", and together with the Term Note, the
"Notes" or each of them individually, a "Note").
The Company wishes to issue a warrant to Laurus to purchase up to
8,586,754 shares of the Company's Common Stock (subject to adjustment as set
forth therein) (the "Warrant") in connection with the Purchaser's purchase of
the Notes;
The Company desires to issue and sell the Notes and the Warrant.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the parties hereto
agree as follows:
1. General Definitions and Terms; Rules of Construction.
(a) General Definitions. Capitalized terms used in this Agreement
shall have the meanings assigned to them in Annex A.
(b) Accounting Terms. Any accounting terms used in this Agreement
which are not specifically defined shall have the meanings
customarily given them in accordance with U.S. GAAP, and all
financial computations shall be computed, unless specifically
provided herein, in accordance with U.S. GAAP in the case of
the Company and Essential, and Canadian GAAP in the case of
Geotech BC, Geotech AB, Pacific and Earth Source, consistently
applied.
(c) Rules of Construction. All Schedules, Addenda, Annexes and
Exhibits hereto or expressly identified to this Agreement are
incorporated herein by reference and taken together with this
Agreement constitute but a single agreement. The words
"herein", "hereof" and "hereunder" or other words of similar
import refer to this Agreement as a whole, including the
Exhibits, Addenda, Annexes and Schedules thereto, as the same
may be from time to time amended, modified, restated or
supplemented, and not to any particular section, subsection or
clause contained in this Agreement. Wherever from the context
it appears appropriate, each term stated in either the
singular or plural shall include the singular and the plural,
and pronouns stated in the masculine, feminine or neuter
gender shall include the masculine, the feminine and the
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neuter. The term "or" is not exclusive. The term "including"
(or any form thereof) shall not be limiting or exclusive. All
references to statutes and related regulations shall include
any amendments of same and any successor statutes and
regulations. All references in this Agreement or in the
Schedules, Addenda, Annexes and Exhibits to this Agreement to
sections, schedules, disclosure schedules, exhibits, and
attachments shall refer to the corresponding sections,
schedules, disclosure schedules, exhibits, and attachments of
or to this Agreement. All references to any instruments or
agreements, including references to any of this Agreement or
the Ancillary Agreements shall include any and all
modifications or amendments thereto and any and all extensions
or renewals thereof.
(d) Currency. All principal, interest and other amounts owing
under this Agreement and any Ancillary Agreements, that, in
accordance with their terms, are to be paid in cash shall be
paid in US dollars. All amounts denominated in other
currencies shall be converted in the US dollar equivalent
amount in accordance with the Exchange Rate on the date of
calculation. "Exchange Rate" means, in relation to any amount
of currency to be converted into US dollars pursuant to this
Agreement and any Ancillary Agreements, the US dollar exchange
rate as published in the Wall Street Journal on the relevant
date of calculation.
2. Agreement to Sell and Purchase.
(a) Pursuant to the terms and conditions set forth in this
Agreement, on the Closing Date the Company agrees to sell to
Laurus, and Laurus hereby agrees to purchase from the Company,
(i) a note in the aggregate principal amount of US$2,000,000
in accordance with the terms of the Term Note and this
Agreement; (ii) a note in the maximum aggregate principal
amount of US$4,000,000 evidencing a revolving facility in
accordance with the terms of the Secured Revolving Note and
this Agreement. The purchase of the Notes on the Closing Date
shall be known as the "Offering". A form of each of the Notes
is annexed hereto as Exhibit A and B, respectively. The Term
Note and the Secured Revolving Note will mature on the
Maturity Date (as defined in each of the respective Notes).
Collectively, (a) the Warrant, and (b) the Common Stock
issuable and upon exercise of the Warrant are referred to
collectively as the "Securities".
(b) The Company hereby acknowledges and agrees that the advance
and availability of the term loan of US$2,000,000 by Laurus to
the Company pursuant to the Term Note shall be subject to the
conditions precedent set forth in the Term Note having been
met to the satisfaction of Laurus in its sole discretion,
including, without limitation, the completion of the First
Acquisition.
(c) The Company hereby acknowledges and agrees that the advance
and availability of the revolving loan of US$4,000,000 by
Laurus to the Company pursuant to the Secured Revolving Note
shall be subject to the conditions precedent set forth in the
Secured Revolving Note having been met to the satisfaction of
Laurus in its sole discretion, including, without limitation,
the completion of the First Acquisition and the Second
Acquisition.
(d) On the Closing Date the Company will also issue and deliver to
Laurus a warrant to purchase up to 8,586,754 shares of Common
Stock in connection with the Offering (as amended, modified or
supplemented from time to time, the "Warrant") pursuant to
Section 2 hereof. A form of Warrant is annexed hereto as
Exhibit C. All the representations, covenants, warranties,
undertakings, indemnification and other rights made or granted
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to or for the benefit of Laurus by the Company are hereby also
made and granted in respect of the Warrant and shares of the
Company's Common Stock issuable upon exercise of the Warrant
(the "Warrant Shares").
(e) The Company hereby acknowledges and agrees that in the event
that Laurus advances US$2,000,000 pursuant to the Term Note,
but does not make any advances pursuant to the Secured
Revolving Note, in each case on or before March 31, 2006, then
Laurus shall return 66% of the value of the Warrant which, for
greater certainty, shall be the right to purchase from the
Company 5,667,257 nonassessable shares of Common Stock (the
"Pro-Rated Refundable Amount"). Laurus acknowledges and agrees
that in the event that, on or before March 31, 2006, it does
not make any advances pursuant to either the Term Note or the
Secured Revolving Note, then Laurus shall return the Warrant
to the Company.
3. Closing, Delivery and Payment.
(a) Closing. Subject to the terms and conditions herein, the
closing of the transactions contemplated hereby (the
"Closing"), shall take place on the date hereof, at such time
or place as the Company and Laurus may mutually agree (such
date is hereinafter referred to as the "Closing Date").
(b) Delivery. At the Closing on the Closing Date, the Company will
deliver to Laurus, a Term Note in the form attached as Exhibit
A representing the aggregate principal amount of US$2,000,000,
a Secured Revolving Note in the form attached as Exhibit B
representing a maximum aggregate principal amount of
US$4,000,000 and a Warrant in the form attached as Exhibit C
in Laurus' name representing the right to acquire the Warrant
Shares, and all such other documents, agreements, certificates
and opinions as are more fully described in the First Closing
Agenda. Pursuant to the First Escrow Agreement, on the First
Advance Date, Laurus will deliver to the Company the amount
set forth in the First Disbursement Letter by certified funds
or wire transfer (the "First Advance"). Pursuant to the Second
Escrow Agreement, on the Second Advance Date, Laurus will
deliver to the Company the amount set forth in the Second
Disbursement Letter by certified funds or wire transfer (the
"Second Advance").
4. Secured Revolving Loan Facility.
(a) Loans.
(i) In connection with the Secured Revolving Note and
subject to the terms and conditions set forth herein
and in the Ancillary Agreements, Laurus may make
loans (the "Loans") to the Company from time to time
during the period from the Second Advance Date up to
the Maturity Date (as defined in the Secured
Revolving Note)(the "Term") which, in the aggregate
at any time outstanding, will not exceed the lesser
of (x) (I) the Capital Availability Amount minus (II)
such reserves as Laurus may in its commercially
reasonable good faith judgment deem proper and
necessary from time to time (the "Reserves") and (y)
an amount equal to (I) the Accounts Availability
minus (II) the Reserves. The amount derived at any
time from Section 4(a)(i)(y)(I) minus 4(a)(i)(y)(II)
shall be referred to as the "Formula Amount". The
Company shall execute and deliver to Laurus on the
Closing Date the Revolving Note evidencing the Second
Advance to be funded on the Second Advance Date.
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(ii) Notwithstanding the foregoing, the Company
acknowledges that the Loans described above shall not
be made available by Laurus to the Company until such
time as the Company has completed the Second
Acquisition.
(iii) Notwithstanding the limitations set forth above, if
requested by the Company, Laurus retains the right to
lend to the Company from time to time such amounts in
excess of such limitations as Laurus may determine in
its sole discretion.
(iv) The Company acknowledges that the exercise of Laurus'
discretionary rights hereunder may result during the
Term in one or more increases or decreases in the
advance percentages used in determining Accounts
Availability and the Company hereby consent to any
such increases or decreases which may limit or
restrict advances requested by the Company.
(v) Subject to applicable laws, if any interest, fees,
costs or charges payable to Laurus hereunder are not
paid when due, the Company shall thereby be deemed to
have requested, and Laurus is hereby authorized at
its discretion to make and charge to the Company's
account, a Loan as of such date in an amount equal to
such unpaid interest, fees, costs or charges.
(vi) If the Company and/or any of the Eligible
Subsidiaries at any time fails to perform or observe
any of the covenants contained in this Agreement or
any Ancillary Agreement, Laurus may, but need not,
perform or observe such covenant on behalf and in the
name, place and stead of the Company and/or any of
the Eligible Subsidiaries (or, at Laurus' option, in
Laurus' name) and may, but need not, take any and all
other actions which Laurus may deem necessary to cure
or correct such failure (including the payment of
taxes, the satisfaction of Liens, the performance of
obligations owed to Account Debtors, lessors or other
obligors, the procurement and maintenance of
insurance, the execution of assignments, security
agreements and financing statements, and the
endorsement of instruments). The amount of all monies
expended and all costs and expenses (including
attorneys' fees and legal expenses) incurred by
Laurus in connection with or as a result of the
performance or observance of such agreements or the
taking of such action by Laurus shall be charged to
the Company's account as a Loan and added to the
Obligations. Upon an Event of Default which is
continuing, to facilitate Laurus' performance or
observance of such covenants by the Company and/or
any of the Eligible Subsidiaries, the Company and
each Eligible Subsidiary hereby irrevocably appoints
Laurus, or Laurus' delegate, acting alone, as the
Company's and each Eligible Subsidiary's attorney in
fact (which appointment is coupled with an interest)
with the right (but not the duty) from time to time
to create, prepare, complete, execute, deliver,
endorse or file in the name and on behalf of the
Company and/or each Eligible Subsidiary any and all
instruments, documents, assignments, security
agreements, financing statements, applications for
insurance and other agreements and writings required
to be obtained, executed, delivered or endorsed by
the Company and/or each Eligible Subsidiary. Prior to
an Event of Default, to facilitate Laurus'
performance or observance of such covenants by the
Company and/or any of the Eligible Subsidiaries, the
Company and each Eligible Subsidiary hereby
irrevocably appoints Laurus, or Laurus' delegate,
acting alone, as the Company's and each Eligible
Subsidiary's attorney in fact (which appointment is
coupled with an interest) with the right (but not the
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duty) from time to time to create, prepare, complete,
execute, deliver, endorse or file in the name and on
behalf of the Company and/or each Eligible Subsidiary
any and all instruments, documents, assignments,
security agreements, financing statements,
applications for insurance and other agreements and
writings required to be obtained, executed, delivered
or endorsed by the Company and/or each Eligible
Subsidiary, but only to the extent required to
preserve or protect Laurus' security interest in the
Collateral.
(vii) Laurus will account to the Company monthly with a
statement of all Loans and other advances, charges
and payments made pursuant to this Agreement, and
such account rendered by Laurus shall be deemed
final, binding and conclusive unless Laurus is
notified by the Company in writing to the contrary
within thirty (30) days of the date each account was
rendered specifying the item or items to which
objection is made.
(viii) During the Term, the Company may borrow and prepay
Loans in accordance with the terms and conditions
hereof and the Secured Revolving Note.
(ix) If any Eligible Account is not paid by the Account
Debtor within ninety (90) days after the date that
such Eligible Account was invoiced or if any Account
Debtor asserts a deduction, dispute, contingency,
set-off, or counterclaim with respect to any Eligible
Account, (a "Delinquent Account"), the Company and/or
the Eligible Subsidiaries shall (i) reimburse Laurus
for the amount of the Loans made with respect to such
Delinquent Account plus an adjustment fee in an
amount equal to one-half of one percent (0.50%) of
the gross face amount of such Eligible Account or
(ii) immediately replace such Delinquent Account with
an otherwise Eligible Account.
5. Repayment of the Loans.
The Company (a) may prepay the Obligations from time to time in
accordance with the terms and provisions of the Notes (and Section 23 hereof if
such prepayment is due to a termination of this Agreement); (b) shall repay on
the Maturity Date (as defined in each of the Notes) (i) the then aggregate
outstanding principal balance of the Loans together with accrued and unpaid
interest, fees and charges; and (ii) all other amounts owed to Laurus under this
Agreement and the Ancillary Agreements; and (c) subject to Section 4(a)(iii),
shall repay on any day on which the then aggregate outstanding principle balance
of the Loans is in excess of the Formula Amount at such time, Loans in an amount
equal to such excess. Any payments of principal, interest, fees or any other
amounts payable hereunder or under any Ancillary Agreement shall be made prior
to 12:00 noon (New York time) on the due date thereof in immediately available
funds.
6. Procedure for Loans.
The Company may by written notice request a borrowing of Loans prior to
12:00 noon (New York time) on the Business Day of its request to incur, on the
next Business Day, a Loan. Together with each request for a Loan (or at such
other intervals as Laurus may request), Company shall deliver to Laurus a
Borrowing Base Certificate in the form of Exhibit D attached hereto, which shall
be certified as true and correct by the Chief Executive Officer or Chief
Financial Officer of Company together with all supporting documentation relating
thereto. All Loans shall be disbursed from whichever office or other place
Laurus may designate from time to time and shall be charged to the Company's
account on Laurus' books. The proceeds of each Loan made by Laurus shall be made
available to the Company on the Business Day following the Business Day so
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requested in accordance with the terms of this Section 6 by way of credit to the
applicable Company's operating account maintained with such bank as the Company
designated to Laurus. Any and all Obligations due and owing hereunder may be
charged to the Company's account and shall constitute Loans.
7. Interest and Payments.
(a) Interest.
(i) Except as modified by Section 7(a)(iii) below, the
Company shall pay interest at the Contract Rate on
the unpaid principal balance of each Loan until such
time as such Loan is collected in full in good funds
in dollars of the United States of America.
(ii) Interest and payments shall be computed on the basis
of actual days elapsed in a year of 360 days. At
Laurus' option, Laurus may charge the Company's
account for said interest in accordance with the
Notes.
(iii) Effective upon the occurrence of any Event of Default
and for so long as any Event of Default shall be
continuing, the Contract Rate shall automatically be
increased as set forth in the Notes (such increased
rate, the "Default Rate"), and all outstanding
Obligations, including unpaid interest, shall
continue to accrue interest from the date of such
Event of Default at the Default Rate applicable to
such Obligations.
(iv) In no event shall the aggregate interest payable
hereunder exceed the maximum rate permitted under any
applicable law or regulation, as in effect from time
to time (the "Maximum Legal Rate"), and if any
provision of this Agreement or any Ancillary
Agreement is in contravention of any such law or
regulation, interest payable under this Agreement and
each Ancillary Agreement shall be computed on the
basis of the Maximum Legal Rate (so that such
interest will not exceed the Maximum Legal Rate).
(v) The Company shall pay principal, interest and all
other amounts payable hereunder, or under any
Ancillary Agreement, without any deduction
whatsoever, including any deduction for any set-off
or counterclaim.
(b) Taxes
(i) Any and all payments by the Company hereunder,
including any amounts received on redemption of the
Notes and any amounts on account of interest or
deemed interest, shall be made free and clear of and
without deduction for any and all present or future
taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect
thereto, excluding taxes imposed on net income or
franchise taxes of Laurus by the jurisdiction in
which such person is organized or has its principal
office (all such non-excluded taxes, levies, imposts,
deductions, charges withholdings and liabilities,
collectively or individually, "Taxes"). If the
Company shall be required to deduct any Taxes from or
in respect of any sum payable hereunder to Laurus,
(i) the sum payable shall be increased by the amount
(an "additional amount") necessary so that after
making all required deductions (including deductions
applicable to additional sums payable under this
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Section 7) Laurus shall receive an amount equal to
the sum it would have received had no such deductions
been made, (ii) the Company shall make such
deductions and (iii) the Company shall pay the full
amount deducted to the relevant governmental
authority in accordance with applicable law.
(ii) In addition, the Company agrees to pay to the
relevant governmental authority in accordance with
applicable law any present or future stamp or
documentary taxes or any other excise or property
taxes, charges or similar levies that arise from any
payment made hereunder or from the execution,
delivery or registration of, or otherwise with
respect to, this Loan ("Other Taxes"). The Company
shall deliver to Laurus official receipts, if any, in
respect of any Taxes or Other Taxes payable hereunder
promptly after payment of such Taxes or Other Taxes
or other evidence of payment reasonably acceptable to
Laurus.
(iii) The obligations of the Company under this Section
7(b) shall survive the termination of this Agreement
and the payment of the Notes and all other amounts
payable hereunder.
(c) Payments; Certain Closing Conditions.
(i) Closing/Annual Payments. Upon the First Advance Date
the Company shall pay to Laurus Capital Management,
LLC a closing payment in an amount equal to
$US72,000. Upon the Second Advance Date, the Company
shall pay to Laurus Capital Management LLC, a closing
payment in an amount equal to $US144,000. Such
payments shall be deemed fully earned on the First
Advance Date and the Second Advance Date
respectively, and shall not be subject to rebate or
proration for any reason.
(ii) Overadvance Payment. Without affecting Laurus' rights
hereunder in the event the Loans exceed the Formula
Amount (each such event, an "Overadvance"), all such
Overadvances shall bear interest at an annual rate
equal to two percent (2%) of the amount of such
Overadvances for each month or portion thereof such
amounts shall be outstanding and in excess of the
Formula Amount.
(iii) Financial Information Default. Without affecting
Laurus' other rights and remedies, in the event the
Company fails to deliver the financial information
required by Section 15 on or before the date required
by this Agreement, the Company shall pay Laurus an
aggregate fee in the amount of US$500.00 per week (or
portion thereof) for each such failure until such
failure is cured to Laurus' satisfaction or waived in
writing by Laurus. Such fee shall be charged to the
Company's account upon the occurrence of each such
failure.
(iv) Expenses. The Company shall reimburse Laurus for its
expenses (including reasonable legal fees and
expenses) incurred in connection with the preparation
and negotiation of this Agreement and the Ancillary
Agreements, and expenses incurred in connection with
Laurus' due diligence review of the Company and the
Eligible Subsidiaries and all related matters.
Amounts required to be paid under this Section
7(c)(iv) will be paid (i) on the earlier of the First
Advance Date and March 31, 2006, and shall be
US$90,000, plus Laurus' reasonable legal fees
incurred with respect to the First Advance and (ii)
on the earlier of the Second Advance Date and March
31, 2006, and shall be in the amount of Laurus'
reasonable legal fees incurred with respect to the
Second Advance, for such expenses referred to in this
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Section 7(c)(iv) (it being acknowledged and agreed
that a deposit of US$15,000 has, prior to the date
hereof, been made by the Company to Laurus and shall
be credited to the amount required to be paid
hereunder).
8. Security Interest.
(a) To secure the prompt payment to Laurus of the Obligations
relating to the Notes, each of the Company and the Eligible
Subsidiaries promises to assign, pledge, hypothecate and grant
to Laurus a continuing security interest in and Lien upon all
of the Collateral. All of each of the Company's and the
Eligible Subsidiaries' Books and Records relating to the
Collateral shall, until delivered to or removed by Laurus, be
kept by each of the Company and the Eligible Subsidiaries in
trust for Laurus until all Obligations relating to the Notes
have been paid in full. Each confirmatory assignment schedule
or other form of assignment hereafter executed by the Company
and the Eligible Subsidiaries, or any one of them, shall be
deemed to include the foregoing grant, whether or not the same
appears therein.
(b) Each of the Company and the Eligible Subsidiaries hereby (i)
authorizes Laurus to file any financing statements,
continuation statements or amendments thereto and any other
documents necessary to perfect the security.
(c) Each of the Company and the Eligible Subsidiaries hereby
grants to Laurus an irrevocable, non-exclusive license
(exercisable upon the termination of this Agreement due to an
occurrence and during the continuance of an Event of Default
without payment of royalty or other compensation to the
Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter
acquired by the Company or by an Eligible Subsidiary (save and
except for computer software licensed by the Company or by an
Eligible Subsidiary), as the case may be, and wherever the
same may be located, and including in such license access to
all media in which any of the licensed items may be recorded
or stored and to all computer and automatic machinery software
and programs used for the compilation or printout thereof, and
represents, promises and agrees that any such license or
sublicense is not and will not be in conflict with the
contractual or commercial rights of any third Person;
provided, that such license will terminate on the termination
of this Agreement and the payment in full of all Obligations
under the Notes.
9. Conditions Precedent to First Advance.
The following conditions precedent shall be satisfied by the Company
prior to the First Advance Date:
(a) The Company shall obtain Laurus' prior consent to the First
Advance;
(b) The Company shall obtain the Laurus' prior consent to the
First Acquisition;
(c) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that the Company has completed the
First Acquisition;
(d) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that the Company has a first priority
security interest over all of the personal property and assets
of the Company, Essential, Pacific and Earth Source in respect
of which Laurus shall take a security interest pursuant to the
Master Security Agreement in favour of the Laurus Holder dated
as of the date hereof granted by the Company and Essential and
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supplemented by the Joinder and Confirmation of Security
Agreement granted by Pacific and Earth Source dated as of the
date hereof (the "First Joinder and Confirmation of Security
Agreement");
(e) All Ancillary Agreements shall have been executed and
delivered by the Company and Essential to Laurus dated as of
the date hereof;
(f) The First Joinder and Confirmation of Security Agreement shall
have been executed and delivered by Pacific and Earth Source
to Laurus whereby Pacific and Earth Source are added as
parties to the Ancillary Agreements including, without
limitation, (i) the Subsidiary Guaranty (ii) the Security and
Purchase Agreement, (iii) the Master Security Agreement, and
(iv) the Share Pledge Agreement;
(g) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that there has been no Material
Adverse Effect in respect of the Company, Essential, Pacific
and Earth Source as of March 2, 2006; and
(h) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that any other conditions of advance
set forth herein have been satisfied by the Company,
Essential, Pacific and Earth Source,
and upon delivery or confirmation thereof, as the case may be, Laurus shall make
the First Advance available to the Company and shall instruct the Escrow Agent
to advance the First Advance to the Company.
10. Conditions Precedent to Second Advance.
The following conditions precedent shall be satisfied by the Company
prior to the Second Advance Date:
(a) The Company shall obtain Laurus' prior consent to the Second
Advance;
(b) The Company shall obtain Laurus' prior consent to the First
Acquisition;
(c) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that the Company has completed the
First Acquisition;
(d) The Company shall obtain the Laurus' prior consent to the
Second Acquisition;
(e) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that the Company has completed the
Second Acquisition;
(f) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that the Laurus has a first priority
security interest over all of the personal property and assets
of the Company, Essential, Pacific, Earth Source, Geotech BC
and Geotech AB in respect of which Laurus shall take a
security interest pursuant to the Master Security Agreement in
favour of Laurus dated as of the date hereof and granted by
the Company and Essential and supplemented by (i) the First
Joinder and Confirmation of Security Agreement, and (ii) the
Joinder and Confirmation of Security Agreement granted by
Geotech BC and Geotech AB in favour of Laurus dated as of the
Second Advance Date (the "Second Joinder and Confirmation of
Security Agreement");
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(g) All Ancillary Agreements shall have been executed and
delivered by the Company and Essential to Laurus dated as of
the date hereof, and executed and delivered by Pacific and
Earth Source dated as of the First Advance Date;
(h) The First Joinder and Confirmation of Security Agreement shall
have been executed and delivered by Pacific and Earth Source
to Laurus whereby Pacific and Earth Source are added as
parties to the Ancillary Agreements including, without
limitation, (i) the Subsidiary Guaranty (ii) the Security and
Purchase Agreement, (iii) the Master Security Agreement, and
(iv) the Share Pledge Agreement;
(i) The Second Joinder and Confirmation of Security Agreement
shall have been executed and delivered by Geotech BC and
Geotech BC to Laurus whereby Geotech BC and Geotech AB are
added as parties to the Ancillary Agreements including,
without limitation, (i) the Subsidiary Guaranty (ii) the
Security and Purchase Agreement, (iii) the Master Security
Agreement, and (iv) the Share Pledge Agreement;
(j) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that there has been no Material
Adverse in respect of the Company, Essential, Pacific, Earth
Source, Geotech BC, and Geotech AB as of March 2, 2006; and
(k) Laurus shall have received in form and substance satisfactory
to Laurus, confirmation that any other conditions of advance
set forth herein have been satisfied by the Company,
Essential, Pacific, Earth Source, Geotech BC and Geotech AB,
and upon delivery or confirmation thereof, as the case may be, Laurus shall make
the Second Advance available to the Company and shall instruct the Escrow Agent
to make the Second Advance available to the Company.
11. Representations, Warranties and Covenants Concerning the Collateral.
Each of the Company and each of the Eligible Subsidiaries represents,
warrants (each of which such representations and warranties shall be deemed
repeated upon the making of each request for a Loan and made as of the time of
each and every Loan hereunder) and covenants as follows:
(a) all of the Collateral (i) is owned by it free and clear of all
Liens (including any claims of infringement) except those in
Laurus' favour and Permitted Liens and (ii) is not subject to
any agreement prohibiting the granting of a Lien or requiring
notice of or consent to the granting of a Lien.
(b) it shall not encumber, mortgage, pledge, assign or grant any
Lien in any Collateral or any other assets to anyone other
than Laurus and except for Permitted Liens.
(c) the Liens granted pursuant to this Agreement, upon completion
of the filings and other actions listed on Schedule 11(c)
(which, in the case of all filings and other documents
referred to in said Schedule, have been delivered to Laurus in
duly executed form) constitute valid perfected security
interests in all of the Collateral in favour of Laurus as
security for the prompt and complete payment and performance
of the Obligations, enforceable in accordance with the terms
hereof against any and all of its creditors and purchasers and
such security interest is prior to all other Liens in
existence on the date hereof, except to the extent that the
enforceability thereof may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization and other
-11-
similar laws of general application limiting the enforcement
of creditors' rights generally and the fact that the courts
may deny the granting or enforcement of equitable remedies.
(d) no effective security agreement, mortgage, deed of trust,
financing statement, hypothec, prior claim, equivalent
security or Lien instrument or continuation statement covering
all or any part of the Collateral is or will be on file or of
record in any public office, except those relating to
Permitted Liens.
(e) it shall not dispose of any of the Collateral whether by sale,
lease or otherwise except for the sale of Inventory in the
ordinary course of business and for the disposition or
transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment having an aggregate
fair market value of not more than US$25,000 and only to the
extent that (i) the proceeds of any such disposition are used
to acquire replacement Equipment which is subject to Laurus'
first priority security interest or are used to repay Loans or
to pay general corporate expenses, or (ii) following the
occurrence of an Event of Default which continues to exist the
proceeds of which are remitted to Laurus to be held as cash
collateral for the Obligations.
(f) it shall place notations upon its Books and Records and any of
its financial statements to disclose Laurus' Lien in the
Collateral.
(g) if it retains possession of any Chattel Paper or Instrument
with Laurus' consent, upon Laurus' request such Chattel Paper
and Instruments shall be marked with the following legend:
"This writing and obligations evidenced or secured hereby are
subject to the security interest of Laurus Master Fund, Ltd.".
Notwithstanding the foregoing, upon the reasonable request of
Laurus, such Chattel Paper and Instruments shall be delivered
to Laurus.
(h) it shall perform in a reasonable time all other steps
requested by Laurus to create and maintain in Laurus' favour a
valid perfected first Lien in all Collateral subject only to
Permitted Liens.
(i) it shall notify Laurus promptly and in any event within three
(3) Business Days after obtaining knowledge thereof (i) of any
event or circumstance that, to its knowledge, would cause
Laurus to consider any then existing Account and/or Inventory
as no longer constituting an Eligible Account; (ii) of any
material delay in its performance of any of its obligations to
any Account Debtor; (iii) of any assertion by any Account
Debtor of any material claims, offsets or counterclaims; (iv)
of any allowances, credits and/or monies granted by it to any
Account Debtor; (v) of all material adverse information
relating to the financial condition of an Account Debtor; (vi)
of any material return of goods; and (vii) of any material
loss, damage or destruction of any of the Collateral.
(j) all Eligible Accounts (i) represent complete bona fide
transactions which require no further act under any
circumstances on its part to make such Accounts payable by the
Account Debtors, (ii) are not subject to any present, future
contingent offsets or counterclaims, and (iii) do not
represent ▇▇▇▇ and hold sales, consignment sales, guaranteed
sales, sale or return or other similar understandings or
obligations of any Affiliate or Subsidiary of the Company or
of the Eligible Subsidiaries, as the case may be. If the then
aggregate outstanding principle balance of the Loans is in
excess of the Formula Amount it will not make, any agreement
with any Account Debtor for any extension of time for the
payment of any Account, any compromise or settlement for less
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than the full amount thereof, any release of any Account
Debtor from liability therefor, or any deduction therefrom
except a discount or allowance for prompt or early payment
allowed by it in the ordinary course of its business
consistent with historical practice and as previously
disclosed to Laurus in writing.
(k) it shall keep and maintain its Equipment in good operating
condition, except for ordinary wear and tear, and shall make
all necessary repairs and replacements thereof so that the
value and operating efficiency shall at all times be
maintained and preserved. It shall, using commercially
reasonable efforts, not permit any such items to become a
Fixture to real estate or accessions to other personal.
(l) it shall maintain and keep all of its Books and Records
concerning the Collateral at its executive offices listed in
Schedule 11(l).
(m) it shall maintain and keep the tangible Collateral at the
addresses listed in Schedule 11(m), provided, that it may
change such locations or open a new location, provided that it
provides Laurus at least thirty (30) days prior written notice
of such changes or new location and (ii) prior to such change
or opening of a new location where Collateral having a value
of more than US$50,000 will be located, it executes and
delivers to Laurus such agreements deemed reasonably necessary
or prudent by Laurus, including mortgagee agreements and
warehouse agreements, each in form and substance satisfactory
to Laurus, to adequately protect and maintain Laurus' security
interest in such Collateral.
(n) Schedule 11(n) lists all banks and other financial
institutions at which it maintains deposits and/or other
accounts, and such Schedule correctly identifies the name,
address and telephone number of each such depository, the name
in which the account is held, a description of the purpose of
the account, and the complete account number. It shall not
establish any depository or other bank account with any
financial institution (other than the accounts set forth on
Schedule 11(n)) without Laurus' prior written consent.
12. Payment of Accounts.
(a) The Company and each Eligible Subsidiary will irrevocably
direct all of its present and future Account Debtors and other
Persons obligated to make payments constituting Collateral to
make such payments directly to the lockboxes maintained by the
Company and the Eligible Subsidiaries (the "Lockboxes") with
Royal Bank of Canada or such other financial institution
accepted by Laurus in writing as may be selected by the
Company (the "Lockbox Bank") pursuant to the terms of the
certain agreements among one or more of the Company, the
Eligible Subsidiaries, Laurus and/or the Lockbox Bank dated as
of March 2, 2006 (or on such later date as may be determined
by Laurus in its sole discretion). On or prior to the Closing
Date, the Company shall and shall cause the Lockbox Bank to
enter into all such documentation acceptable to Laurus
pursuant to which, among other things, the Lockbox Bank agrees
to: (a) sweep the Lockbox on a daily basis and deposit all
checks received therein to an account designated by Laurus in
writing and (b) comply only with the instructions or other
directions of Laurus concerning the Lockbox. All of the
Company's and the Eligible Subsidiaries' invoices, account
statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account of
the Company or an Eligible Subsidiary or any other amount
constituting Collateral shall conspicuously direct that all
payments be made to the Lockbox or such other address as
Laurus may direct in writing. If, notwithstanding the
instructions to Account Debtors, the Company or an Eligible
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Subsidiary receives any payments, the Company or an Eligible
Subsidiary shall immediately remit such payments to Laurus in
their original form with all necessary endorsements. Until so
remitted, the Company or an Eligible Subsidiary shall hold all
such payments in trust for and as the property of Laurus and
shall not commingle such payments with any of its other funds
or property.
(b) At Laurus' election, following the occurrence of an Event of
Default which is continuing, Laurus may notify the Company's
and/or the Eligible Subsidiaries' Account Debtors of Laurus'
security interest in the Accounts, collect them directly and
charge the collection costs and expenses thereof to Company's
account.
13. Collection and Maintenance of Collateral.
(a) Laurus may verify the Company's and the Eligible Subsidiaries'
Accounts from time to time, but not more often than once every
three (3) months, unless an Event of Default has occurred and
is continuing, utilizing an audit control company or any other
agent of Laurus.
(b) Proceeds of Accounts received by Laurus will be deemed
received on the Business Day after Laurus' receipt of such
proceeds in good funds in dollars of the United States of
America to an account designated by Laurus. Any amount
received by Laurus after 12:00 noon (New York time) on any
Business Day shall be deemed received on the next Business
Day.
(c) As Laurus receives the proceeds of Accounts of the Company and
the Eligible Subsidiaries, it shall (i) apply such proceeds,
as required, to amounts outstanding under the Secured
Revolving Note, and (ii) remit all such remaining proceeds
(net of interest, fees and other amounts then due and owing to
Laurus hereunder) to the Company (for the benefit of the
Company) upon request (but no more often than twice a week).
Notwithstanding the foregoing, following the occurrence and
during the continuance of an Event of Default, Laurus, may
apply such proceeds to the Obligations in such order as Laurus
shall elect.
14. Inspections and Appraisals.
At all times during normal business hours, Laurus, and/or any agent of
Laurus shall have the right at the Company's expense and accompanied by a
representative of the Company to (a) have access to, visit, inspect, review,
evaluate and make physical verification and appraisals of the Company's and the
Eligible Subsidiaries' properties and the Collateral, (b) inspect, audit and
copy (or take originals if necessary) and make extracts from the Company's and
the Eligible Subsidiaries' Books and Records, including management letters
prepared by the Accountants, and (c) discuss with the Company's and the Eligible
Subsidiaries' directors, principal officers, and independent accountants, the
Company's business, assets, liabilities, financial condition, results of
operations and business prospects. The Company and the Eligible Subsidiaries
will deliver to Laurus any instrument necessary for Laurus to obtain records
from any service bureau maintaining records for the Company and the Eligible
Subsidiaries. If any internally prepared financial information, including that
required under this Section is unsatisfactory in any manner to Laurus, Laurus
may request that the Accountants review the same.
15. Financial Reporting.
The Company will deliver, or cause to be delivered, to Laurus each of
the following, which shall be in form and detail acceptable to Laurus:
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(a) As soon as available, and in any event within ninety (90) days
after the end of each fiscal year of the Company, the
Company's audited financial statements with a report of its
auditors, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ PLLC or such other independent
certified public accountants of recognized standing selected
by the Company and acceptable to Laurus (the "Accountants"),
which annual financial statements shall be without
qualification, except as set out in Schedule 15(a), and shall
include the Company's balance sheet as at the end of such
fiscal year and the related statements of the Company's
income, retained earnings and cash flows for the fiscal year
then ended, prepared, on a consolidating and consolidated
basis to include all Affiliates and Subsidiaries of the
Company including, without limitation, the Eligible
Subsidiaries, all in reasonable detail and prepared in
accordance with GAAP, together with (i) if and when available,
copies of any management letters prepared by the Accountants;
and (ii) a certificate of the Company's President, Chief
Executive Officer or Chief Financial Officer stating that such
financial statements have been prepared in accordance with
GAAP and whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder and,
if so, stating in reasonable detail the facts with respect
thereto;
(b) As soon as available and in any event within forty five (45)
days after the end of each quarter, an unaudited/internal
balance sheet and statements of income, retained earnings and
cash flows of the Company as at the end of and for such
quarter and for the year to date period then ended, prepared,
on a consolidating and consolidated basis to include all
Affiliates and Subsidiaries of the Company, including without
limitation, the Eligible Subsidiaries, in reasonable detail
and stating in comparative form the figures for the
corresponding date and periods in the previous year, all
prepared in accordance with GAAP, subject to year-end
adjustments and accompanied by a certificate of the Company's
President, Chief Executive Officer or Chief Financial Officer,
stating (i) that such financial statements have been prepared
in accordance with GAAP, subject to year-end audit
adjustments, and (ii) whether or not such officer has
knowledge of the occurrence of any Default or Event of Default
hereunder not theretofore reported and remedied and, if so,
stating in reasonable detail the facts with respect thereto;
(c) Within thirty (30) days after the end of each month (or more
frequently if Laurus so requests), agings of the Company's and
the Eligible Subsidiaries' Accounts, unaudited trial balances
and their accounts payable and a calculation of the Company's
and the Eligible Subsidiaries' Accounts, Eligible Accounts
and/or Inventory, provided, however, that if Laurus shall
request the foregoing information more often than as set forth
in the immediately preceding clause, the Company shall have
thirty (30) days from each such request to comply with Laurus'
demand; and
(d) Promptly after (i) the filing thereof, copies of the Company's
quarterly and annual filings with the SEC, and (ii) the
issuance thereof, copies of such financial statements, reports
and proxy statements as the Company shall send to its
stockholders.
16. Additional Representations and Warranties.
Each of the Company and the Eligible Subsidiaries hereby represents and
warrants to Laurus as follows:
(a) Organization, Good Standing and Qualification. It and each of
its Subsidiaries is a corporation, partnership or limited
liability company, as the case may be, duly organized, validly
existing and in good standing under the laws of its
jurisdiction of organization. It and each of its Subsidiaries
has the corporate, limited liability company or partnership,
-15-
as the case may be, power and authority to own and operate its
properties and assets and, insofar as it is or shall be a
party thereto, to (i) execute and deliver this Agreement and
the Ancillary Agreements, (ii) to issue the Notes (with
respect to the Company only), (iii) to issue the Warrant and
the Warrant Shares (with respect to the Company only), and to
(iv) carry out the provisions of this Agreement and the
Ancillary Agreements and to carry on its business as presently
conducted. It and each of its Subsidiaries is duly qualified
and is authorized to do business and is in good standing as a
foreign corporation, partnership or limited liability company,
as the case may be, in all jurisdictions in which the nature
or location of its activities and of its properties (both
owned and leased) makes such qualification necessary, except
for those jurisdictions in which failure to do so has not had,
or could not reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect.
(b) Subsidiaries. Each of its direct and indirect Subsidiaries,
the direct owner of such Subsidiary and its percentage
ownership thereof, is set forth in Schedule 16(b).
(c) Capitalization; Voting Rights.
(i) The authorized capital of the Company, as of the date
hereof, consists of 100,000,000 Common Shares, of
which 20,757,513 are issued and outstanding, and
10,000,000 Series A Preferred Shares, in respect of
which none are issued and outstanding. The authorized
capital of Essential, as of the date hereof, consists
of 100,000,000 common voting shares, of which
1,000,000 are issued and outstanding.
(ii) Except as disclosed on Schedule 16(c), other than:
(i) the shares reserved for issuance under its stock
option plans; and (ii) shares which may be issued
pursuant to this Agreement and the Ancillary
Agreements, there are no outstanding options,
warrants, rights (including conversion or pre-emptive
rights and rights of first refusal), proxy or
stockholder agreements, or arrangements or agreements
of any kind for the purchase or acquisition from it
of any of its securities. Except as disclosed on
Schedule 16(c), the offer or issuance of the Warrant,
or the issuance of any of the Warrant Shares, nor the
consummation of any transaction contemplated hereby
will result in a change in the price or number of any
securities of the Company outstanding, under
anti-dilution or other similar provisions contained
in or affecting any such securities.
(iii) All of its issued and outstanding shares: (i) have
been duly authorized and validly issued and are fully
paid and non-assessable; and (ii) were issued in
compliance with all applicable state and federal laws
concerning the issuance of securities.
(iv) The rights, preferences, privileges and restrictions
of its shares are as stated in its Articles of
Incorporation (the "Articles"). The Warrant Shares
have been duly and validly reserved for issuance.
When issued in compliance with the provisions of this
Agreement and the Company's Articles, the Securities
will be validly issued, fully paid and
non-assessable, and will be free of any liens or
encumbrances; provided, however, that the Securities
may be subject to restrictions on transfer under
applicable securities laws as set forth herein or as
otherwise required by such laws at the time a
transfer is proposed.
-16-
(d) Authorization; Binding Obligations. All corporate, action part
(including their respective officers and directors) necessary
for the authorization of this Agreement and the Ancillary
Agreements, the performance of all of its obligations
hereunder and under the Ancillary Agreements on the Closing
Date and, the authorization, issuance and delivery of the
Notes and the Warrant has been taken or will be taken prior to
the Closing Date. This Agreement and the Ancillary Agreements,
when executed and delivered and to the extent it is a party
thereto, will be its valid and binding obligations enforceable
against each such Person in accordance with their terms,
except:
(i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general
application affecting enforcement of creditors'
rights; and
(ii) general principles of equity that restrict the
availability of equitable or legal remedies.
The issuance of the Notes is not and will not be subject to
any pre-emptive rights or rights of first refusal that have
not been properly waived or complied with. The issuance of the
Warrant and the subsequent exercise of the Warrant for Warrant
Shares are not and will not be subject to any pre-emptive
rights or rights of first refusal that have not been properly
waived or complied with.
(e) Liabilities. Except as set forth on Schedule 16(e), it does
not have any liabilities, except current liabilities incurred
in the ordinary course of business and liabilities disclosed
in any Exchange Act Filings.
(f) Agreements; Action. Except as set forth on Schedule 16(f), or
as disclosed in any Exchange Act Filings:
(i) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders,
writs or decrees to which it is a party or to its
knowledge by which it is bound which may involve: (i)
obligations (contingent or otherwise) of, or payments
to, it or any in excess of US$50,000 (other than
obligations of, or payments to, it arising from
purchase or sale agreements entered into in the
ordinary course of business, or payments by it to its
employees, lawyers, officers, and accountants); or
(ii) the transfer or license of any patent,
copyright, trade secret or other proprietary right to
or from it (other than licenses arising from the
purchase of "off the shelf" or other standard
products); or (iii) provisions restricting the
development, manufacture or distribution of its
products or services; or (iv) indemnification by it
with respect to infringements of proprietary rights.
(ii) Since October 31, 2005 (the "Balance Sheet Date"), it
has not: (i) declared or paid any dividends, or
authorized or made any distribution upon or with
respect to any class or series of its capital stock;
(ii) incurred any indebtedness for money borrowed or
any other liabilities (other than ordinary course
obligations) individually in excess of US$50,000 or,
in the case of indebtedness and/or liabilities
individually less than US$50,000, in excess of
US$100,000 in the aggregate; (iii) made any loans or
advances to any Person not in excess, individually or
in the aggregate, of US$100,000, other than ordinary
advances for travel expenses; or (iv) sold, exchanged
or otherwise disposed of any of its assets or rights,
other than the sale of its Inventory in the ordinary
course of business.
-17-
(iii) For the purposes of subsections (i) and (ii) of this
Section 16(f), all indebtedness, liabilities,
agreements, understandings, instruments, contracts
and proposed transactions involving the same Person
(including Persons it has reason to believe are
affiliated therewith thereof) shall be aggregated for
the purpose of meeting the individual minimum dollar
amounts of such subsections.
(iv) It makes and keeps books, records, and accounts,
that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of its
assets. It maintains internal control over financial
reporting ("Financial Reporting Controls") designed
by, or under the supervision of, its principal
executive and principal financial officers, and
effected by its board of directors, management, and
other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with GAAP, including that:
(1) transactions are executed in accordance with
management's general or specific
authorization;
(2) unauthorized acquisition, use, or
disposition of the its assets that could
have a material effect on the financial
statements are prevented or timely detected;
(3) transactions are recorded as necessary to
permit preparation of financial statements
in accordance with GAAP, and that its
receipts and expenditures are being made
only in accordance with authorizations of
the its management and board of directors;
(4) transactions are recorded as necessary to
maintain accountability for assets; and
(5) the recorded accountability for assets is
compared with the existing assets at
reasonable intervals, and appropriate action
is taken with respect to any differences.
(g) Obligations to Related Parties. Except as set forth on
Schedule 16(g), it has no obligations to its officers,
directors, stockholders or employees other than:
(i) for payment of salary for services rendered and for
bonus payments;
(ii) reimbursement for reasonable expenses incurred on its
behalf;
(iii) for other standard employee benefits made generally
available to all employees (including stock option
agreements outstanding under any stock option plan
approved by its Board of Directors); and
(iv) obligations listed in its financial statements or
disclosed in any of its Exchange Act Filings.
Except as described above or set forth on Schedule 16(g), none of its
officers, directors or, to the best of its knowledge, key employees or
stockholders or any members of their immediate families, are indebted
to it, individually or in the aggregate, in excess of US$50,000 or have
any direct or indirect ownership interest in any Person with which it
-18-
is affiliated or with which it or any has a business relationship, or
any Person which competes with it, other than passive investments in
publicly traded companies (representing less than one percent (1%) of
such company) which may compete with it. Except as described above,
none of its officers, directors or stockholders, or any member of their
immediate families, is, directly or indirectly, interested in any
material contract with it and no agreements, understandings or proposed
transactions are contemplated between it and any such Person. Except as
set forth on Schedule 16(g), it is not a guarantor or indemnitor of any
indebtedness of any other Person.
(h) Changes. Since the Balance Sheet Date, except as disclosed in
any Schedule to this Agreement or to any of the Ancillary
Agreements, there has not been:
(i) any change in its business, assets, liabilities,
condition (financial or otherwise), properties,
operations or prospects, which, individually or in
the aggregate, has had, or could reasonably be
expected to have, a Material Adverse Effect;
(ii) any resignation or termination of any of its
officers, key employees or groups of employees;
(iii) any material change, except in the ordinary course of
business, in its contingent obligations by way of
guaranty, endorsement, indemnity, warranty or
otherwise;
(iv) any damage, destruction or loss, whether or not
covered by insurance, which has had, or could
reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect;
(v) any waiver by it of a valuable right or of a material
debt owed to it;
(vi) any direct or indirect material loans made by it to
any of its stockholders, employees, officers or
directors, other than advances made in the ordinary
course of business;
(vii) any material change in any compensation arrangement
or agreement with any employee, officer, director or
stockholder;
(viii) any declaration or payment of any dividend or other
distribution of its assets;
(ix) any labour organization activity related to it;
(x) any debt, obligation or liability incurred, assumed
or guaranteed by it, except those for immaterial
amounts and for current liabilities incurred in the
ordinary course of business;
(xi) any sale, assignment or transfer of any Intellectual
Property or other intangible assets;
(xii) any change in any material agreement to which it is a
party or by which either it is bound which, either
individually or in the aggregate, has had, or could
reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect;
(xiii) any other event or condition of any character that,
either individually or in the aggregate, has had, or
could reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect; or
-19-
(xiv) any arrangement or commitment by it to do any of the
acts described in subsection (i) through (xiii) of
this Section 16(h).
Notwithstanding the foregoing, Laurus acknowledges and is
aware that the Company intends to complete the First
Acquisition and the Second Acquisition (together, herein
referred to as the "Acquisitions"), and therefore waives, on a
one-time basis, the application of the foregoing provisions of
this Section 16(h) but only to the limited extent that
completion of the Acquisitions may constitute a breach
thereof. For greater certainty, the Company hereby
acknowledges and agrees that Laurus shall not be deemed to
have approved either the First Acquisition or the Second
Acquisition by virtue of this limited waiver.
(i) Title to Properties and Assets; Liens, Etc. Except as set
forth on Schedule 16(i), it has good and marketable title to
its respective properties and assets, and good title to its
leasehold interests, in each case subject to no Lien, other
than Permitted Liens. All facilities, Equipment, vehicles and
other properties owned, leased or used by it are in good
operating condition and repair and are reasonably fit and
usable for the purposes for which they are being used. Except
as set forth on Schedule 16(i), it is in compliance with all
material terms of each lease to which it is a party or is
otherwise bound.
(j) Intellectual Property.
(i) It owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective
businesses as now conducted and, to its knowledge as
presently proposed to be conducted, without any known
infringement of the rights of others. There are no
outstanding options, licenses or agreements of any
kind relating to its Intellectual Property, nor is it
bound by or a party to any options, licenses or
agreements of any kind with respect to the
Intellectual Property of any other Person other than
such licenses or agreements arising from the purchase
of "off the shelf" or standard products.
(ii) It has not received any communications alleging that
it has violated any of the Intellectual Property or
other proprietary rights of any other Person, nor is
it aware of any basis therefor.
(iii) It does not believe it is or will be necessary to
utilize any inventions, trade secrets or proprietary
information of any of its employees made prior to
their employment by it, except for inventions, trade
secrets or proprietary information that have been
rightfully assigned to it.
(k) Compliance with Other Instruments. It is not in violation or
default of (x) any term of its Articles or Bylaws, or (y) any
provision of any indebtedness, mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is
bound or of any judgment, decree, order or writ, which
violation or default, in the case of this clause (y), has had,
or could reasonably be expected to have, either individually
or in the aggregate, a Material Adverse Effect. The execution,
delivery and performance of and compliance with this Agreement
and the Ancillary Agreements to which it is a party, and the
issuance of the Notes and the other Securities each pursuant
hereto and thereto (with respect to the Company only), will
not, with or without the passage of time or giving of notice,
result in any such material violation, or be in conflict with
or constitute a default under any such term or provision, or
result in the creation of any Lien upon any of its properties
or assets or the suspension, revocation, impairment,
-20-
forfeiture or non-renewal of any permit, license,
authorization or approval applicable to it, its businesses or
operations or any of their assets or properties.
(l) Litigation. Except as set forth on Schedule 16(l), there is no
action, suit, proceeding or investigation pending or, to its
knowledge, currently threatened against it that prevents it
from entering into this Agreement or the Ancillary Agreements,
or from consummating the transactions contemplated hereby or
thereby, or which has had, or could reasonably be expected to
have, either individually or in the aggregate, a Material
Adverse Effect, or could result in any change in its current
equity ownership, nor is it aware that there is any basis to
assert any of the foregoing. It is not a party to or subject
to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality.
There is no action, suit, proceeding or investigation by it
currently pending or which it intends to initiate.
(m) Tax Returns and Payments. It has timely filed all tax returns
(federal, provincial, state and local) required to be filed by
it. All taxes shown to be due and payable on such returns, any
assessments imposed, and all other taxes due and payable by it
on or before the Closing Date, have been paid or will be paid
prior to the time they become delinquent. Except as set forth
on Schedule 16(m), it has not been advised:
(i) that any of its returns, federal, provincial, state,
provincial or other, have been or are being audited
as of the date hereof; or
(ii) of any adjustment, deficiency, assessment or court
decision in respect of its federal, provincial, state
or other taxes.
It has no knowledge of any liability of any tax to be imposed
upon its properties or assets as of the date of this Agreement
that is not adequately provided for.
(n) Employees. Except as set forth on Schedule 16(n), it has not
any collective bargaining agreements with any of its
employees. There is no labour union organizing activity
pending or, to its knowledge, threatened with respect to it.
Except as disclosed on Schedule 16(n), it is a not party to or
bound by any currently effective employment contract, deferred
compensation arrangement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee
compensation plan or agreement. To its knowledge, none of its
employees, nor any consultant with whom it has contracted, is
in violation of any term of any employment contract,
proprietary information agreement or any other agreement
relating to the right of any such individual to be employed
by, or to contract with, it because of the nature of the
business to be conducted by it; and to its knowledge the
continued employment by it of its present employees, and the
performance of its contracts with its independent contractors,
will not result in any such violation. It is not aware that
any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature)
or other agreement, or subject to any judgment, decree or
order of any court or administrative agency that would
interfere with their duties to it. It has not received any
notice alleging that any such violation has occurred. Except
for employees who have a current effective employment
agreement with it, none of its employees has been granted the
right to continued employment by it or to any material
compensation following termination of employment with it.
Except as set forth on Schedule 16(n), it is not aware that
any officer, key employee or group of employees intends to
terminate his, her or their employment with it, nor does it
have a present intention to terminate the employment of any
officer, key employee or group of employees.
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(o) Compliance with Laws; Permits. It is not in violation of any
applicable corporate governance law or any other regulatory
guidance of the SEC or any by-law or rule of the Principal
Market or any other applicable statute, rule, regulation,
order or restriction of any domestic or foreign government or
any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties
which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.
No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no
registrations or declarations are required to be filed in
connection with the execution and delivery of this Agreement
or any Ancillary Agreement and the issuance of any of the
Securities, except such as have been duly and validly obtained
or filed, or with respect to any filings that must be made
after the Closing Date, as will be filed in a timely manner.
It has all material franchises, permits, licenses and any
similar authority necessary for the conduct of its business as
now being conducted by it, the lack of which could, either
individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
(p) Environmental and Safety Laws. It is not in violation of any
applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its
knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law or
regulation. Except as set forth on Schedule 16(q), no
Hazardous Materials (as defined below) are used or have been
used, stored, or disposed of by it or, to its knowledge, by
any other Person on any property owned, leased or used by it.
For the purposes of the preceding sentence, "Hazardous
Materials" shall mean:
(i) materials which are listed or otherwise defined as
"hazardous" or "toxic" under any applicable local,
provincial, state, federal and/or foreign laws and
regulations that govern the existence and/or remedy
of contamination on property, the protection of the
environment from contamination, the control of
hazardous wastes, or other activities involving
hazardous substances, including building materials;
and
(ii) any petroleum products (other than in the ordinary
course of business) or nuclear materials.
(q) Full Disclosure. It has provided Laurus with all information
requested by Laurus in connection with Laurus' decision to
enter into this Agreement. Neither this Agreement, the
Ancillary Agreements nor the exhibits and schedules hereto and
thereto nor any other document delivered by it to Laurus or
its attorneys or agents in connection herewith or therewith or
with the transactions contemplated hereby or thereby, contain
any untrue statement of a material fact nor omit to state a
material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances in
which they are made, not misleading. Any financial projections
and other estimates provided to Laurus by it were based on its
experience in the industry and on assumptions of fact and
opinion as to future events which it, at the date of the
issuance of such projections or estimates, believed to be
reasonable.
(r) Insurance. It has general commercial, product liability, fire
and casualty insurance policies with coverages which it
believes are customary for companies similarly situated to it
in the same or similar business.
(s) Patriot Act. It certifies that, to the best of its knowledge,
it has not been designated, nor is or shall be owned or
controlled, by a "suspected terrorist" as defined in Executive
Order 13224. It hereby acknowledges that Laurus seeks to
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comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, it
hereby represents, warrants and covenants that: (i) none of
the cash or property that it will pay or will contribute to
Laurus has been or shall be derived from, or related to, any
activity that is deemed criminal under United States law; and
(ii) no contribution or payment by it to Laurus, to the extent
that they are within its control shall cause Laurus to be in
violation of the United States Bank Secrecy Act, the United
States International Money Laundering Control Act of 1986 or
the United States International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001, or the Canadian Proceeds
of Crime (Money Laundering) and Terrorist Financing Act. It
shall promptly notify Laurus if any of these representations,
warranties and covenants ceases to be true and accurate
regarding it. It shall provide Laurus with any additional
information regarding it thereof that Laurus deems necessary
or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. It
understands and agrees that if at any time it is discovered
that any of the foregoing representations, warranties and
covenants are incorrect, or if otherwise required by
applicable law or regulation related to money laundering or
similar activities, Laurus may undertake appropriate actions
to ensure compliance with applicable law or regulation,
including but not limited to segregation and/or redemption of
Laurus' investment in it. It further understands that Laurus
may release confidential information about it and, if
applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that
it is in the best interests of Laurus in light of relevant
rules and regulations under the laws set forth in subsection
(ii) above.
(t) Company Name; Locations of Offices, Records and Collateral.
Schedule 16(t) sets forth its complete name as it appears in
official filings in the state or province of its organization,
as the case may be, the type of entity it is, the
organizational identification number issued by its state or
province of organization, as the case may be, or a statement
that no such number has been issued, its state or province of
organization, and the location of its chief executive office,
corporate offices, warehouses, other locations of Collateral
and locations where records with respect to Collateral are
kept (including in each case the county of such locations)
and, except as set forth in such Schedule 16(t), such
locations have not changed during the preceding twelve months.
As of the Closing Date, during the prior five years, except as
set forth in Schedule 16(t), it has not been known as or
conducted business in any other name (including trade names).
It has only one province or state of organization, as
applicable.
(u) It does not maintain or contribute to any Canadian Pension
Plan.
17. Company's Representations and Warranties
The Company hereby represents and warrants to Laurus as follows:
(a) Registration Rights and Voting Rights. Except as set forth on
Schedule 17(a) and as disclosed in any Exchange Act Filing, it
is not presently under any obligation, and it has not granted
any rights, to register or otherwise qualify for distribution
to the public any of its presently outstanding securities or
any of its securities that may hereafter be issued. Except as
set forth on Schedule 17(a) and except as disclosed in
Exchange Act Filings, to its knowledge, none of its
stockholders has entered into any agreement with respect to
its voting of equity securities.
-23-
(b) Valid Offering. Assuming the accuracy of the representations
and warranties of Laurus contained in this Agreement, the
offer and issuance of the Securities will be exempt from the
prospectus and registration requirements of the Securities Act
of 1933, as amended (the "U.S. Securities Act"), and will have
been registered or qualified (or are exempt from registration
and qualification) under the registration, permit or
qualification requirements of all applicable state securities
laws.
(c) SEC Reports and Financial Statements. Except as set forth on
Schedule 16(u), it has filed all proxy statements, reports and
other documents required to be filed by it under the Exchange
Act. The Company has furnished Laurus with copies of: (i) its
annual report for its fiscal years ended October 31, 2003,
October 31, 2004, and October 31, 2005, (ii) its interim
financial statements for the quarters ended January 31, 2005,
April 30, 2005, and July 31, 2005, and (iii) the material
change reports which it has filed during its 2004 and 2005
fiscal years to date (collectively, the "SEC Reports"). Except
as set forth on Schedule 16(u), each SEC Report was, at the
time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC
Reports , nor the financial statements (and the notes thereto)
included in the SEC Reports, as of their respective filing
dates, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such
financial statements have been prepared in accordance with
GAAP applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of
unaudited interim statements, to the extent they may not
include footnotes or may be condensed) and fairly present in
all material respects the financial condition, the results of
operations and cash flows of the Company, on a consolidated
basis, as of, and for, the periods presented in each such SEC
Report.
(d) Quotation. The Company's Common Stock is quoted on the
Principal Market.
(e) Stop Transfer. The Securities are subject to restrictions on
transfer as of the date of this Agreement. It will not issue
any stop transfer order or other order impeding the sale and
delivery of any of the Securities at such time as the
Securities become freely tradeable or an exemption from the
prospectus registration or equivalent requirements of
applicable securities laws in respect of such sale or delivery
is available, except as required by applicable securities
laws.
(f) Dilution. Subject to any maximum conversion or restrictions
contained in this Agreement or in any Ancillary Agreement
specifically acknowledges that the Company's obligation to
issue the shares of Common Stock upon exercise of the Warrant
is binding upon the Company and enforceable regardless of the
dilution such issuance may have on the ownership interests of
other shareholders of the Company.
18. Covenants.
The Company and each Eligible Subsidiary (where applicable) covenants
and agrees with Laurus as follows:
(a) Use of Funds. It shall use the proceeds of the Loans solely
for the following purposes: (i) the acquisition of Pacific
(and the indirect acquisition of Earth Source, a wholly-owned
subsidiary of Pacific)(the "First Acquisition"); (ii) the
-24-
acquisition of Geotech BC (and the indirect acquisition of
Geotech AB, a wholly-owned subsidiary of Geotech BC)(the
"Second Acquisition"); and (iii) for general working capital
purposes.
(b) Taxes. It shall promptly pay and discharge, or cause to be
paid and discharged, when due and payable, all lawful taxes,
assessments and governmental charges or levies imposed upon it
income, profits, property or business, as the case may be;
provided, however, that any such tax, assessment, charge or
levy need not be paid currently if (i) the validity thereof
shall currently and diligently be contested in good faith by
appropriate proceedings, (ii) such tax, assessment, charge or
levy shall have no effect on the Lien priority of Laurus in
the Collateral, and (iii) if it shall have set aside on its
books adequate reserves with respect thereto in accordance
with GAAP; and provided, further, that it shall pay all such
taxes, assessments, charges or levies forthwith upon the
commencement of proceedings to foreclose any lien which may
have attached as security therefor.
(c) Insurance. It shall bear the full risk of loss from any loss
of any nature whatsoever with respect to the Collateral. It
shall keep its assets which are of an insurable character
insured by financially sound and reputable insurers against
loss or damage by fire, explosion and other risks customarily
insured against by companies in similar business similarly
situated as it; it shall maintain, with financially sound and
reputable insurers, insurance against other hazards and risks
and liability to persons and property to the extent and in the
manner which it thereof reasonably believes is customary for
companies in similar business similarly situated as it and to
the extent available on commercially reasonable terms. The
Company and the Eligible Subsidiaries will cause Laurus to be
named as first loss payee or additional insured on all of the
policies of insurance relating to the assets pledged to Laurus
as security for its obligations hereunder and under the
Related Agreements, other than policies of insurance directly
related to real property. At its own cost and expense in
amounts and with carriers reasonably acceptable to Laurus, it
shall (i) keep all their insurable properties and properties
in which they have an interest insured against the hazards of
fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for
such amounts, as is customary in the case of companies engaged
in businesses similar to it including business interruption
insurance; (ii) maintain a bond in such amounts as is
customary in the case of companies engaged in businesses
similar to it insuring against larceny, embezzlement or other
criminal misappropriation of insured's officers and employees
who may either singly or jointly with others at any time have
access to its assets or funds either directly or through
governmental authority to draw upon such funds or to direct
generally the disposition of such assets; (iii) maintain
public and product liability insurance against claims for
personal injury, death or property damage suffered by others;
(iv) maintain all such worker's compensation or similar
insurance as may be required under the laws of any province or
jurisdiction in which it is engaged in business; and (v)
furnish Laurus with (x) copies of all policies and evidence of
the maintenance of such policies at least thirty (30) days
before any expiration date, (y) excepting its workers'
compensation policy, endorsements to such policies naming
Laurus as "co-insured" or "additional insured" and appropriate
loss payable endorsements in form and substance satisfactory
to Laurus, naming Laurus as lenders loss payee, and (z)
evidence that as to Laurus the insurance coverage shall not be
impaired or invalidated by any act or neglect of the Company
and/or any Eligible Subsidiary and the insurer will provide
Laurus with at least thirty (30) days notice prior to
cancellation. It shall instruct the insurance carriers that in
the event of any loss thereunder, the carriers shall make
-25-
payment for such loss to Laurus and not to the Company and/or
the Eligible Subsidiaries, as applicable, and Laurus jointly.
If any insurance losses are paid by check, draft or other
instrument payable to the Company and/and Laurus jointly,
Laurus may endorse, as applicable, the Company's and/or the
Eligible Subsidiaries' name thereon and do such other things
as Laurus may deem advisable to reduce the same to cash.
Laurus is hereby authorized to adjust and compromise claims.
All loss recoveries received by Laurus upon any such insurance
may be applied to the Obligations, in such order as Laurus in
its sole discretion shall determine or shall otherwise be
delivered to Company and/or the Eligible Subsidiaries, as
applicable, for the benefit of the Company and/or the Eligible
Subsidiaries, as applicable. Any surplus shall be paid by
Laurus to Company and/or the Eligible Subsidiaries, as
applicable, for the benefit of the Company and/or the Eligible
Subsidiaries, as applicable, or applied as may be otherwise
required by law. Any deficiency thereon shall be paid by
Company and to Laurus, on demand.
(d) Intellectual Property. It shall maintain in full force and
effect its corporate existence, rights and franchises and all
licenses and other rights to use Intellectual Property owned
or possessed by it and reasonably deemed to be necessary to
the conduct of its business.
(e) Properties. It shall keep its properties in good repair,
working order and condition, reasonable wear and tear
excepted, and from time to time make all needful and proper
repairs, renewals, replacements, additions and improvements
thereto; and it shall at all times comply with each provision
of all leases to which it is a party or under which it
occupies property if the breach of such provision could
reasonably be expected to have a Material Adverse Effect.
(f) Prohibited Transfers to Essential Innovations Asia Limited. It
shall not transfer or make any loans to or investment in
Essential Innovations Asia Limited, a Hong Kong company, any
of its property and assets, whether now owned or hereafter
acquired, including, without limitation, the Collateral or any
right, title or interest related thereto.
(g) Confidentiality. It shall not disclose, and will not include
in any public announcement, the name of Laurus, unless
expressly agreed to by Laurus or unless and until such
disclosure is required by law or applicable regulation, and
then only to the extent of such requirement. Notwithstanding
the foregoing, the Company may disclose Laurus' identity and
the terms of this Agreement to its current and prospective
debt and equity financing sources.
(h) Required Approvals. It shall not without the prior written
consent of Laurus, (i) create, incur, assume or suffer to
exist any indebtedness (exclusive of trade debt) whether
secured or unsecured other than the Company's indebtedness to
Laurus and as set forth on Schedule 14(k)(i) attached hereto
and made a part hereof; (ii) cancel any debt owing to it in
excess of US$50,000 in the aggregate during any 12 month
period; (iii) assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any
obligations of any other Person, except the endorsement of
negotiable instruments by it for deposit or collection or
similar transactions in the ordinary course of business; (iv)
directly or indirectly declare, pay or make any dividend or
distribution on any class of its Stock or apply any of its
funds, property or assets to the purchase, redemption or other
retirement of any of its or its Stock outstanding on the date
hereof, or issue any preferred stock; (v) purchase or hold
beneficially any Stock or other securities or evidences of
-26-
indebtedness of, make or permit to exist any loans or advances
to, or make any investment or acquire any interest whatsoever
in, any other Person, including any partnership or joint
venture, except (x) travel advances, and (y) loans to its
officers and employees not exceeding at any one time an
aggregate of US$10,000; (vi) create or permit to exist any
Subsidiary, unless such new Subsidiary is a wholly-owned
Subsidiary and is designated by Laurus as either a co-borrower
or guarantor hereunder and such Subsidiary shall have entered
into all such documentation required by Laurus, including,
without limitation, to grant to Laurus a first priority
perfected security interest in substantially all of such
Subsidiary's assets to secure the Obligations; (vii) directly
or indirectly, prepay any indebtedness (other than to Laurus
and in the ordinary course of business), or repurchase,
redeem, retire or otherwise acquire any indebtedness (other
than to Laurus and in the ordinary course of business) except
to make scheduled payments of principal and interest thereof;
(vii) enter into any merger, consolidation or other
reorganization with or into any other Person or acquire all or
a portion of the assets or Stock of any Person or permit any
other Person to consolidate with or merge with it, unless (1)
the Company or any of the Eligible Subsidiaries is the
surviving entity of such merger or consolidation, (2) no Event
of Default shall exist immediately prior to and after giving
effect to such merger or consolidation, (3) the Company and/or
the Eligible Subsidiaries shall have provided Laurus copies of
all documentation relating to such merger or consolidation and
(4) the Company and/or the Eligible Subsidiaries shall have
provided Laurus with at least thirty (30) days' prior written
notice of such merger or consolidation; (x) materially change
the nature of the business in which it is presently engaged;
(xi) become subject to (including, without limitation, by way
of amendment to or modification of) any agreement or
instrument which by its terms would (under any circumstances)
restrict its right to perform the provisions of this Agreement
or any of the Ancillary Agreements; (xii) change its fiscal
year or make any changes in accounting treatment and reporting
practices without prior written notice to Laurus except as
required by GAAP or in the tax reporting treatment or except
as required by law; (xiii) enter into any transaction with any
employee, director or Affiliate, except in the ordinary course
on arms-length terms; or (xiv) ▇▇▇▇ Accounts under any name
except the present name of the Company and the Eligible
Subsidiaries;, except for (1) the sale of Inventory in the
ordinary course of business and (2) the disposition or
transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment and only to the extent
that (xv) the proceeds of any such disposition are used to
acquire replacement Equipment which is subject to Laurus'
first priority security interest or are used to repay Loans or
to pay general corporate expenses, or (y) following the
occurrence of an Event of Default which continues to exist,
the proceeds of which are remitted to Laurus to be held as
cash collateral for the Obligations.
(i) Opinion. On the Closing Date, it shall deliver to Laurus an
opinion acceptable to Laurus from the Company's legal counsel.
The Company will provide, at the Company's expense, such other
legal opinions in the future as are reasonably necessary for
the exercise of the Warrant.
(j) Legal Name, etc. It shall not, without providing Laurus with
30 days prior written notice, change (i) its name as it
appears in the official filings in the jurisdiction of its
organization, (ii) the type of legal entity it is, (iii) its
organization identification number, if any, issued by its
province of organization, (iv) its jurisdiction of
organization or (v) amend its certificate of incorporation,
by-laws or other organizational document.
(k) Compliance with Laws. The operation of its business is and
shall continue to be in compliance in all material respects
with all applicable federal, provincial, state and local laws,
rules and ordinances, including to all laws, rules,
regulations and orders relating to taxes, payment and
withholding of payroll taxes, employer and employee
contributions and similar items, securities, employee
retirement and welfare benefits, employee health and safety
and environmental matters.
-27-
(l) Notices. It shall promptly inform Laurus in writing of: (i)
the commencement of all proceedings and investigations by or
before and/or the receipt of any notices from, any
governmental or nongovernmental body and all actions and
proceedings in any court or before any arbitrator against or
in any way concerning any event which could reasonably be
expected to have singly or in the aggregate, a Material
Adverse Effect; (ii) any change which has had, or could
reasonably be expected to have, a Material Adverse Effect;
(iii) any Event of Default which is continuing, or any
Default; and (iv) any default or any event which with the
passage of time or giving of notice or both would constitute a
default under any agreement for the payment of money to which
it is a party or by which it or any of its properties may be
bound the breach of which would have a Material Adverse
Effect.
19. Company's Covenants
The Company hereby covenants to Laurus as follows:
(a) Cease Trade Orders. It shall advise Laurus promptly after it
receives notice of issuance by the SEC or any other regulatory
authority of any cease trade order or of any order preventing
or suspending any offering of any securities of the Company,
or of the suspension of the qualification of the Common Stock
of the Company for offering or sale in any jurisdiction, or
the initiation of any proceeding for any such purpose.
(b) Quotation. The Company shall maintain the quotation of its
Common Stock on the Principal Market, and will comply in all
material respects with the Company's reporting, filing and
other obligations under the bylaws or rules of such exchange,
as applicable.
(c) Market Regulations. It shall notify the SEC, the Principal
Market and applicable state authorities, in accordance with
their requirements, of the transactions contemplated by this
Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable
law, rule and regulation, for the legal and valid issuance of
the Securities to Laurus and promptly provide copies thereof
to Laurus.
(d) Reporting Requirements. It shall timely file with the SEC all
reports required to be filed pursuant to the US Securities Act
and refrain from terminating its status as an issuer required
by the US Securities Act to file reports thereunder even if
the US Securities Act or the rules or regulations thereunder
would permit such termination.
(e) Reissuance of Securities. The Company shall reissue
certificates representing the Securities without the legends
set forth in Section 46 below at such time as the holder
thereof is permitted to dispose of such Securities pursuant to
Rule 144(d) or 144(k) of the U.S. Securities Act, as
applicable. The Company agrees to cooperate with Laurus in
connection with all resales pursuant to Rule 144(d) or Rule
144(k) and provide legal opinions necessary to allow such
resales provided, the Company and its counsel receive
reasonably requested representations from Laurus and broker,
if any.
(f) Offering Restrictions. Except as previously disclosed in the
SEC Reports or in the Exchange Act Filings or pursuant to
stock or stock options granted to employees or directors of
the Company, neither the Company nor any of its Subsidiaries
will, prior to the full repayment of the Notes (together with
all accrued and unpaid interest thereon and other amounts
accrued, deemed payable or owing thereunder), (i) issue or
enter into any agreement to issue any freely tradeable
securities with exercise or conversion rates or pricing terms
subject to downward adjustment from time to time following
-28-
issuance upon a decline in the market price of the Company's
Common Shares; and (ii) issue or enter into any agreement to
issue any freely tradeable securities with exercise or
conversion rates or pricing terms corresponding or otherwise
determined with reference to the market price of the Company's
Common Shares from time to time following issuance, (it being
understood and agreed that a security which could, by exercise
or conversion, by prospectus qualification or otherwise,
become freely tradeable will be considered a freely tradeable
security for the purposes hereof).
(g) Authorization and Reservation of Shares. The Company shall at
all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the exercise of the
Warrant in full.
(h) Financing Right of First Refusal.
(i) It hereby grants to Laurus a right of first refusal
to provide any Additional Financing (as defined
below) to be issued by the Company (the "Additional
Financing Parties"), subject to the following terms
and conditions. From and after the date hereof, prior
to the incurrence of any additional indebtedness
and/or the sale or issuance of any equity interests
of the Additional Financing Parties (an "Additional
Financing"), Company shall notify Laurus of such
Additional Financing. In connection therewith,
Company shall submit a fully executed term sheet (a
"Proposed Term Sheet") to Laurus setting forth the
terms, conditions and pricing of any such Additional
Financing (such financing to be negotiated on "arm's
length" terms and the terms thereof to be negotiated
in good faith) proposed to be entered into by the
Additional Financing Parties. Laurus shall have the
right, but not the obligation, to deliver to Company
its own proposed term sheet (the "Laurus Term Sheet")
setting forth the terms and conditions upon which
Laurus would be willing to provide such Additional
Financing to the Additional Financing Parties. The
Laurus Term Sheet shall contain terms no less
favourable to the Additional Financing Parties than
those outlined in Proposed Term Sheet. Laurus shall
deliver to Company the Laurus Term Sheet within ten
Business Days of receipt of each such Proposed Term
Sheet. If the provisions of the Laurus Term Sheet are
at least as favourable to the Additional Financing
Parties as the provisions of the Proposed Term Sheet,
the Additional Financing Parties shall enter into and
consummate the Additional Financing transaction
outlined in the Laurus Term Sheet.
(ii) It shall not agree, directly or indirectly, to any
restriction with any Person which limits the ability
of Laurus to consummate an Additional Financing with
it.
20. Further Assurances.
At any time and from time to time, upon the written request of Laurus
and at the sole expense of Company, each of the Company and the Eligible
Subsidiaries shall promptly and duly execute and deliver any and all such
further instruments and documents and take such further action as Laurus may
request (a) to obtain the full benefits of this Agreement and the Ancillary
Agreements, (b) to protect, preserve and maintain Laurus' rights in the
Collateral and under this Agreement or any Ancillary Agreement, and/or (c) to
enable Laurus to exercise all or any of the rights and powers herein granted or
any Ancillary Agreement.
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21. Representations, Warranties and Covenants of Laurus.
Laurus hereby represents, warrants and covenants to the Company as
follows:
(a) Requisite Power and Authority. Laurus has all necessary power
and authority under all applicable provisions of law to
execute and deliver this Agreement and the Ancillary
Agreements and to carry out their provisions. All corporate
action on Laurus' part required for the lawful execution and
delivery of this Agreement and the Ancillary Agreements have
been or will be effectively taken prior to the Closing Date.
Upon their execution and delivery, this Agreement and the
Ancillary Agreements shall be valid and binding obligations of
Laurus, enforceable in accordance with their terms, except (a)
as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, and
(b) as limited by general principles of equity that restrict
the availability of equitable and legal remedies.
(b) Investment Representations and Covenants.
(i) Laurus is resident in the jurisdiction of the Cayman
Islands.
(ii) Laurus is acquiring the Securities for investment
only and not with a view to resale or distribution in
violation of any securities laws.
(iii) Laurus is not a party to, and is not acting in
concert with a person who is party to: (A) an
agreement to transfer Laurus' legal or beneficial
interest in the Securities; or (B) an agreement to
grant a participating interest in the Securities.
(iv) As the Securities purchased hereunder are subject to
resale restrictions under the US Securities Act,
Laurus shall comply with all securities laws
concerning any resale of the Securities purchased
hereunder and shall consult with his, her or its own
legal advisors with respect to such compliance.
(v) If required by applicable securities laws, Laurus
will execute, deliver, file and otherwise assist the
Company in filing such reports, undertakings and
other documents with respect to the issuance of the
Securities as may be required.
(vi) Laurus is purchasing the Securities as principal for
its own account and not as a nominee or agent.
(vii) Laurus is an accredited investor within the meaning
of Regulation D under the US Securities Act.
(viii) Laurus understands that the Securities are being
offered and sold pursuant to an exemption from
registration contained in the US Securities Act based
in part upon Laurus' representations contained in
this Agreement, including, without limitation, that
Laurus is an "accredited investor" within the meaning
of Regulation D under the US Securities Act.
(ix) Laurus confirms that it has received or has had full
access to all the information it considers necessary
or appropriate to make an informed investment
decision with respect to the Notes and the Warrant to
be purchased by it under this Agreement and the
Warrant Shares acquired by it upon the exercise of
the Warrant. Laurus further confirms that it has had
an opportunity to ask questions and receive answers
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from the Company regarding the Company's and its
Subsidiaries' business, management and financial
affairs and the terms and conditions of this
Agreement, the Notes, the Warrant and the Securities
and to obtain additional information (to the extent
the Company possessed such information or could
acquire it without unreasonable effort or expense)
necessary to verify any information furnished to
Laurus or to which Laurus had access.
(x) Laurus understands that the Securities have not been
and will not be registered under the US Securities
Act or any applicable state securities laws and that
the sale contemplated hereby is being made in
reliance on an exemption from registration therefrom.
(xi) Laurus acknowledges that Laurus has not purchased the
Securities as a result of any general solicitation or
general advertising (as those terms are used in
Regulation D), including advertisements, articles,
notices or other communications published in any
newspaper, magazine or similar media, or broadcast
over radio, television or other forms of
telecommunication, including electronic display (such
as the Internet), or any seminar or meeting whose
attendees have been invited by general solicitation
or general advertising.
(xii) Laurus has substantial experience in evaluating and
investing in private placement transactions of
securities in companies similar to the Company so
that it is capable of evaluating the merits and risks
of its investment in the Company and has the capacity
to protect its own interests. Laurus must bear the
economic risk of this investment until the Securities
are sold.
(xiii) By reason of its, or of its management's business and
financial experience, Laurus has the capacity to
evaluate the merits and risks of its investment in
the Notes, the Warrant, and the Securities and to
protect its own interests in connection with the
transactions contemplated in this Agreement and the
Related Agreements.
(xiv) In the event that Laurus becomes an "insider" or
"control person" of the Company (within the meaning
of applicable securities laws) or in the event that a
nominee of Laurus becomes a director or officer of
the Company or any of its Subsidiaries, Laurus shall
notify the Principal Market thereof and shall file
with the Principal Market any personal information
forms required by reason thereof.
(c) Shorting. Neither Laurus nor any of its Affiliates or
investment partners has, will, or will cause any Person, to
directly engage in "short sales" of the Company's Common Stock
as long as the Notes shall be outstanding.
(d) Patriot Act. Laurus certifies that, to the best of Laurus'
knowledge, Laurus has not been designated, and is not owned or
controlled, by a "suspected terrorist" as defined in Executive
Order 13224. Laurus seeks to comply with all applicable laws
concerning money laundering and related activities. In
furtherance of those efforts, Laurus hereby represents,
warrants and covenants that: (i) none of the cash or property
that Laurus will use to make the Loans has been or shall be
derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no disbursement by
Laurus to the Company to the extent within Laurus' control,
shall cause Laurus to be in violation of the United States
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Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001 or the Canadian Proceeds of Crime (Money
Laundering and Terrorist Financing Act. Laurus shall promptly
notify the Company if any of these representations ceases to
be true and accurate regarding Laurus. Laurus agrees to
provide the Company any additional information regarding
Laurus that the Company deems necessary or convenient to
ensure compliance with all applicable laws concerning money
laundering and similar activities. Laurus understands and
agrees that if at any time it is discovered that any of the
foregoing representations are incorrect, or if otherwise
required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake
appropriate actions to ensure compliance with applicable law
or regulation, including but not limited to segregation and/or
redemption of Laurus' investment in the Company. Laurus
further understands that the Company may release information
about Laurus and, if applicable, any underlying beneficial
owners, to proper authorities if the Company, in its sole
discretion, determines that it is in the best interests of the
Company in light of relevant rules and regulations under the
laws set forth in subsection (ii) above.
22. Power of Attorney.
In the event of an Event of Default which is continuing, each of the
Company and the Eligible Subsidiaries hereby appoints Laurus, or any other
Person whom Laurus may designate as the Company's and the Eligible Subsidiary's
attorney, with power to: (i) endorse the Company's and/or the Eligible
Subsidiary's name on any checks, notes, acceptances, money orders, drafts or
other forms of payment or security that may come into Laurus' possession; (ii)
sign the Company's and/or the Eligible Subsidiary's name on any invoice or ▇▇▇▇
of lading relating to any Accounts, drafts against Account Debtors, schedules
and assignments of Accounts, notices of assignment, financing statements and
other public records, verifications of Account and notices to or from Account
Debtors; (iii) verify the validity, amount or any other matter relating to any
Account by mail, telephone, telegraph or otherwise with Account Debtors; (iv) do
all things necessary to carry out this Agreement, any Ancillary Agreement and
all related documents; and (v) on or after the occurrence and during the
continuation of an Event of Default, notify the post office authorities to
change the address for delivery of the Company's and/or the Eligible
Subsidiary's mail to an address designated by Laurus, and to receive, open and
dispose of all mail addressed to the Company and/or the Eligible Subsidiary. The
Company and the Eligible Subsidiary hereby ratifies and approves all acts of the
attorney. Neither Laurus, nor the attorney will be liable for any acts or
omissions or for any error of judgment or mistake of fact or law, except for
gross negligence or wilful misconduct. This power, being coupled with an
interest, is irrevocable so long as Laurus has a security interest and until the
Obligations have been fully satisfied.
23. Term of Agreement.
Laurus' agreement to make Loans and extend financial accommodations as
promptly as practicable but no longer than 15 days, under and in accordance with
the terms of this Agreement or any Ancillary Agreement shall continue in full
force and effect until the expiration of the Term. At Laurus' election following
the occurrence of an Event of Default which is continuing, Laurus may terminate
this Agreement. The termination of the Agreement shall not affect any of Laurus'
rights hereunder or any Ancillary Agreement and the provisions hereof and
thereof shall continue to be fully operative until all transactions entered
into, rights or interests created and the Obligations have been irrevocably
disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus
shall release its security interests at any time after thirty (30) days notice
upon irrevocable payment to it of all Obligations if the Company shall have
provided Laurus with an executed release of any and all claims which the Company
may have or thereafter have under this Agreement and all Ancillary Agreements.
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24. Termination of Lien.
The Liens and rights granted to Laurus hereunder and any Ancillary
Agreements and the financing statements filed in connection herewith or
therewith shall continue in full force and effect, notwithstanding the
termination of this Agreement or the fact that the Company's account may from
time to time be temporarily in a zero or credit position, until all of the
Obligations have been indefeasibly paid or performed in full after the
termination of this Agreement. Laurus shall not be required to send termination
statements to the Company, or to file them with any filing office, unless and
until this Agreement and the Ancillary Agreements shall have been terminated in
accordance with their terms and all Obligations indefeasibly paid in full in
immediately available funds.
25. Events of Default.
The occurrence of any of the following shall constitute an "Event of
Default":
(a) failure to make payment of any of the Obligations when
required hereunder, and, in any such case, such failure shall
continue for a period of three (3) days following the date
upon which any such payment was due;
(b) failure by the Company or any of the Eligible Subsidiaries to
pay any Material Taxes when due unless such Material Taxes are
being contested in good faith by appropriate proceedings and
with respect to which adequate reserves have been provided on
the Company's or the Eligible Subsidiaries' books;
(c) failure to perform under, and/or committing any breach of, in
any material respect, this Agreement, which failure or breach
shall continue without remedy for a period of fifteen (15)
days after the occurrence thereof;
(d) any representation, warranty or statement made by the Company
and/or the Eligible Subsidiary hereunder, in any Ancillary
Agreement, any certificate, statement or document delivered
pursuant to the terms hereof, or in connection with the
transactions contemplated by this Agreement should prove to be
false or misleading in any material respect on the date as of
which made or deemed made;
(e) the occurrence of any default (or similar term) under any
indebtedness in the aggregate of US$50,000 beyond the period
of grace, if any, provided in any instrument or agreement
under which such indebtedness was created of the Company;
(f) attachments or levies in excess of US$100,000 in the aggregate
are made upon the Company's and/or the Eligible Subsidiaries'
assets or a judgment is rendered against the Company's and/or
the Eligible Subsidiaries' property involving a liability of
more than US$100,000 which shall not have been vacated,
discharged, stayed or bonded within thirty (30) days from the
entry thereof;
(g) any change in the Company's and/or the Eligible Subsidiaries'
condition or affairs (financial or otherwise) which in Laurus'
reasonable, good faith opinion, could reasonably be expected
to have a Material Adverse Effect;
(h) any Lien created hereunder or under any Ancillary Agreement
for any reason ceases to be or is not a valid and perfected
Lien having a first priority interest, as long as such
invalidity or imperfection has not been caused by Laurus;
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(i) the Company or any of its Subsidiaries shall (i) apply for,
consent to or suffer to exist the appointment of, or the
taking of possession by, a receiver, custodian, trustee or
liquidator of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of
creditors, (iii) commence a voluntary case under the Canadian
federal bankruptcy laws (as now or hereafter in effect) or the
US federal bankruptcy laws, (as now or hereafter in effect)
(iv) be adjudicated a bankrupt or insolvent, (v) file a
petition seeking to take advantage of any other law providing
for the relief of debtors, (vi) acquiesce to without challenge
within ten (10) days of the filing thereof, or failure to have
dismissed within thirty (30) days, any petition filed against
it in any involuntary case under such bankruptcy laws, or
(vii) take any action for the purpose of effecting any of the
foregoing;
(j) the Company and/or any of the Eligible Subsidiaries shall
admit in writing its inability, or be generally unable, to pay
its debts as they become due or cease operations of its
present business;
(k) the Company and/or any of the Eligible Subsidiaries directly
or indirectly sells, assigns, transfers, conveys, or suffers
or permits to occur any sale, assignment, transfer or
conveyance of any assets of the Company and/or the Eligible
Subsidiary or any interest therein, except as permitted
herein;
(l) the occurrence of a Change of Control with respect to the
Company, unless Laurus has expressly consented to such Change
of Control in writing.
(m) the indictment or threatened indictment of the Company and/or
the Eligible Subsidiary or any executive officer of the
Company and/or the Eligible Subsidiary under any criminal
statute, or commencement or threatened commencement of
criminal or civil proceeding against the Company and/or the
Eligible Subsidiary or any executive officer of the Company
and/or the Eligible Subsidiary pursuant to which statute or
proceeding penalties or remedies sought or available include
forfeiture of any of the property of the Company;
(n) an Event of Default shall occur under and as defined in any
Note or in any other Ancillary Agreement;
(o) the Company and/or the Eligible Subsidiary shall breach any
term or provision of any Ancillary Agreement to which it is a
party, in any material respect which is not cured within any
applicable cure or grace period provided in respect thereof
(if any);
(p) the Company and/or the Eligible Subsidiary attempts to
terminate or challenge the validity of this Agreement or any
Ancillary Agreement, or any proceeding shall be brought to
challenge the validity, binding effect of any Ancillary
Agreement or any Ancillary Agreement ceases to be a valid,
binding and enforceable obligation of the Company and/or the
Eligible Subsidiary (to the extent such Persons are a party
thereto);
(q) an SEC cease trade order or Principal Market trading
suspension of the Common Stock shall be in effect for five (5)
consecutive days or five (5) days during a period of ten (10)
consecutive days, excluding in all cases a suspension of all
trading on a Principal Market, provided that the Company shall
not have been able to cure such trading suspension within
thirty (30) days of the notice thereof or list the Common
Stock on another Principal Market within sixty (60) days of
such notice; or
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26. Remedies.
(a) Following the occurrence of an Event of Default which is
continuing, Laurus shall have the right to demand repayment in
full of all Obligations, whether or not otherwise due. Until
all Obligations have been fully and indefeasibly satisfied,
Laurus shall retain its Lien in all Collateral. Laurus shall
have, in addition to all other rights provided herein and in
each Ancillary Agreement, all of the rights and remedies of a
secured creditor under the PPSA, and any remedies as a secured
creditor under any other applicable law, and all other legal
and equitable rights to which Laurus may be entitled.
27. Waivers.
To the full extent permitted by applicable law, the Company and each
Eligible Subsidiary hereby waives (a) presentment, demand and protest, and
notice of presentment, dishonour, intent to accelerate, acceleration, protest,
default, non-payment, maturity, release, compromise, settlement, extension or
renewal of any or all of this Agreement and the Ancillary Agreements or any
other notes, commercial paper, Accounts, contracts, Documents and guaranties at
any time held by Laurus on which the Company and/or the Eligible Subsidiary may
in any way be liable, and hereby ratifies and confirms whatever Laurus may do in
this regard; (b) all rights to notice and a hearing prior to Laurus' taking
possession or control of, or to Laurus' replevy, attachment or levy upon, any
Collateral or any bond or security that might be required by any court prior to
allowing Laurus to exercise any of its remedies; and (c) the benefit of all
valuation, appraisal and exemption laws. The Company and the Eligible Subsidiary
acknowledge that it has been advised by counsel of its choices and decisions
with respect to this Agreement, the Ancillary Agreements and the transactions
evidenced hereby and thereby.
28. Expenses.
The Company shall pay all of Laurus' out-of-pocket costs and expenses,
including reasonable fees and disbursements of in-house or outside counsel and
appraisers, in connection with the preparation, execution and delivery of this
Agreement and the Ancillary Agreements, and in connection with the prosecution
or defense of any action, contest, dispute, suit or proceeding concerning any
matter in any way arising out of, related to or connected with this Agreement or
any Ancillary Agreement. The Company shall also pay all of Laurus' reasonable
fees, charges, out-of-pocket costs and expenses, including fees and
disbursements of counsel and appraisers, in connection with (a) the preparation,
execution and delivery of any waiver, any amendment thereto or consent proposed
or executed in connection with the transactions contemplated by this Agreement
or the Ancillary Agreements, (b) Laurus' obtaining performance of the
Obligations under this Agreement and any Ancillary Agreements, including, but
not limited to, the enforcement or defense of Laurus' security interests,
assignments of rights and Liens hereunder as valid perfected security interests,
(c) any attempt to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral, (d) any appraisals or reappraisals of any
property (real or personal) pledged to Laurus by the Company as Collateral for,
or any other Person as security for, the Obligations hereunder and (e) any
consultations in connection with any of the foregoing. The Company shall also
pay Laurus' customary bank charges for all bank services (including wire
transfers) performed or caused to be performed by Laurus for the Company at the
Company's request or in connection with the Company's loan account with Laurus.
All such costs and expenses together with all filing, recording and search fees,
taxes and interest payable by the Company to Laurus shall be payable on demand
and shall be secured by the Collateral. If any tax by any Governmental Authority
is or may be imposed on or as a result of any transaction between the Company
and Laurus on the other hand, which Laurus is or may be required to withhold or
pay, the Company indemnifies and holds Laurus harmless in respect of such taxes,
and the Company will repay to Laurus the amount of any such taxes which shall be
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charged to the Company's account; and until the Company shall furnish Laurus
with indemnity therefor (or supply Laurus with evidence satisfactory to it that
due provision for the payment thereof has been made), Laurus may hold without
interest any balance standing to the Company's credit and Laurus shall retain
its Liens in any and all Collateral.
29. Assignment By Laurus.
Prior to an Event of Default, Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person
which is not a competitor of the Company and any such transferee shall succeed
to all of Laurus' rights with respect thereto.
Upon the occurrence of an Event of Default, Laurus may assign any or
all of the Obligations together with any or all of the security therefor to any
Person, without restriction, and any such transferee shall succeed to all of
Laurus' rights with respect thereto.
Upon such transfer, either prior to or upon the occurrence of the Event
of Default, as the case may be, Laurus shall be released from all responsibility
for the Collateral to the extent same is assigned to any transferee. Laurus may
from time to time sell or otherwise grant participations in any of the
Obligations and the holder of any such participation shall, subject to the terms
of any agreement between Laurus and such holder, be entitled to the same
benefits as Laurus with respect to any security for the Obligations in which
such holder is a participant. The Company agrees that each such holder may
exercise any and all rights of banker's lien, set-off and counterclaim with
respect to its participation in the Obligations as fully as though the Company
were directly indebted to such holder in the amount of such participation.
30. No Waiver; Cumulative Remedies.
Failure by Laurus to exercise any right, remedy or option under this
Agreement, any Ancillary Agreement or any supplement hereto or thereto or any
other agreement between or among the Company and Laurus or delay by Laurus in
exercising the same, will not operate as a waiver; no waiver by Laurus will be
effective unless it is in writing and then only to the extent specifically
stated. Laurus' rights and remedies under this Agreement and the Ancillary
Agreements will be cumulative and not exclusive of any other right or remedy
which Laurus may have.
31. Application of Payments.
The Company irrevocably waive the right to direct the application of
any and all payments at any time or times hereafter received by Laurus from or
on the Company's behalf and the Company hereby irrevocably agrees that Laurus
shall have the continuing exclusive right to apply and reapply any and all
payments received at any time or times hereafter against the Obligations
hereunder in such manner as Laurus may deem advisable notwithstanding any entry
by Laurus upon any of Laurus' books and records.
32. Indemnity.
The Company hereby indemnifies and holds Laurus, and its respective
affiliates, employees, attorneys and agents (each, an "Indemnified Person"),
harmless from and against any and all suits, actions, proceedings, claims,
damages, losses, liabilities and expenses of any kind or nature whatsoever
(including legal fees and disbursements and other costs of investigation or
defense, including those incurred upon any appeal) which may be instituted or
asserted against or incurred by any such Indemnified Person as the result of
credit having been extended, suspended or terminated under this Agreement or any
of the Ancillary Agreements or with respect to the execution, delivery,
enforcement, performance and administration of, or in any other way arising out
of or relating to, this Agreement, the Ancillary Agreements or any other
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documents or transactions contemplated by or referred to herein or therein and
any actions or failures to act with respect to any of the foregoing, except to
the extent that any such indemnified liability is finally determined by a court
of competent jurisdiction to have resulted solely from such Indemnified Person's
gross negligence or wilful misconduct. NO INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR,
ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS
DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN
EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY
AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR
THEREUNDER.
33. Revival.
The Company further agree that to the extent the Company makes a
payment or payments to Laurus, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy act, state, provincial or federal law, common law or equitable cause,
then, to the extent of such payment or repayment, the obligation or part thereof
intended to be satisfied shall be revived and continued in full force and effect
as if said payment had not been made.
34. Notices.
Any notice or request hereunder may be given to the Company or Laurus
at the respective addresses set forth below or as may hereafter be specified in
a notice designated as a change of address under this Section. Any notice or
request hereunder shall be given by registered or certified mail, return receipt
requested, hand delivery, overnight mail or telecopy (confirmed by mail).
Notices and requests shall be, in the case of those by hand delivery, deemed to
have been given when delivered to any officer of the party to whom it is
addressed, in the case of those by mail or overnight mail, deemed to have been
given three (3) Business Days after the date when deposited in the mail or with
the overnight mail carrier, and, in the case of a telecopy, when confirmed.
Notices shall be provided as follows:
If to Laurus: Laurus Master Fund, Ltd.
c/o Laurus Capital Management, LLC
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇.
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Telecopier:(▇▇▇) ▇▇▇-▇▇▇▇
With a copy to: ▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
If to the Company: Essential Innovations Technology Corp.
#142 - ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
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With a copy to: ▇▇▇▇▇▇ & Company
Suite 1880, Oceanic Plaza
▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇ ▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
Telephone: (▇▇▇) ▇▇▇-▇▇▇▇
Facsimile: (▇▇▇) ▇▇▇-▇▇▇▇
or such other address as may be designated in writing hereafter in accordance
with this Section 34 by such Person.
35. Governing Law, Jurisdiction and Waiver of Jury Trial.
(a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED
BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND
PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.
(b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR
FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW
YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE
ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND,
AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR
ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT
OF OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY
AGREEMENTS; PROVIDED, THAT LAURUS AND EACH COMPANY ACKNOWLEDGE
THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A
COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW
YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT
SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM BRINGING
SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO
COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY
OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT
OR OTHER COURT ORDER IN FAVOUR OF LAURUS. EACH COMPANY
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION
IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH
COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED
UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS. EACH COMPANY HEREBY WAIVES PERSONAL SERVICE OF
THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS,
COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR
CERTIFIED MAIL ADDRESSED TO COMPANY AT THE ADDRESS SET FORTH
IN SECTION 34 AND THAT SERVICE SO MADE SHALL BE DEEMED
COMPLETED UPON THE EARLIER OF COMPANY'S ACTUAL RECEIPT THEREOF
OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID.
(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE
APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST
COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
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ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY
JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE
BETWEEN LAURUS, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED
WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY
AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
36. Judgment Currency.
If, for the purpose of obtaining or enforcing judgment against the
Company in any court in any jurisdiction, it becomes necessary to convert into
any other currency (such other currency being hereinafter in this section
referred to as the "Judgment Currency") an amount due under this Security
Agreement in any currency (the "Obligation Currency") other than the Judgment
Currency, the conversion shall be made at the rate of exchange prevailing on the
business day immediately preceding (a) the date of actual payment of the amount
due, in the case of any proceeding in the courts of New York or in the courts of
any other jurisdiction that will give effect to such conversion being made on
such date, or (b) the date on which the foreign court determines, in the case of
any proceeding in the courts of any other jurisdiction (the applicable date as
of which such conversion is made pursuant to this section being hereinafter in
this section referred to as the "Judgment Conversion Date").
If, in the case of any proceeding in the court of any jurisdiction
referred to in the preceding paragraph, there is a change in the rate of
exchange prevailing between the Judgment Conversion Date and the date of actual
receipt of the amount due in immediately available funds, the Company shall pay
such additional amount (if any, but in any event not a lesser amount) as may be
necessary to ensure that the amount actually received in the Judgment Currency,
when converted at the rate of exchange prevailing on the date of payment, will
produce the amount of the Obligation Currency which could have been purchased
with the amount of the Judgment Currency stipulated in the judgment or judicial
order at the rate of exchange prevailing on the Judgment Conversion Date. Any
amount due from the Company under this section shall be due as a separate debt
and shall not be affected by judgment being obtained for any other amounts due
under or in respect of this Security Agreement.
37. Limitation of Liability.
The Company acknowledges and understands that in order to assure
repayment of the Obligations hereunder Laurus may be required to exercise any
and all of Laurus' rights and remedies hereunder and agrees that, except as
limited by applicable law, neither Laurus nor any of Laurus' agents shall be
liable for acts taken or omissions made in connection herewith or therewith
except for actual bad faith.
38. Entire Understanding; Maximum Interest.
This Agreement and the Ancillary Agreements contain the entire
understanding among the Company and Laurus as to the subject matter hereof and
thereof and any promises, representations, warranties or guarantees not herein
contained shall have no force and effect unless in writing, signed by the
Company's and Laurus' respective officers. Neither this Agreement, the Ancillary
Agreements, nor any portion or provisions thereof may be changed, modified,
amended, waived, supplemented, discharged, cancelled or terminated orally or by
any course of dealing, or in any manner other than by an agreement in writing,
signed by the party to be charged. Nothing contained in this Agreement, any
Ancillary Agreement or in any document referred to herein or delivered in
connection herewith shall be deemed to establish or require the payment of a
-39-
rate of interest or other charges in excess of the maximum rate permitted by
applicable law. In the event that the rate of interest or dividends required to
be paid or other charges hereunder exceed the maximum rate permitted by such
law, any payments in excess of such maximum shall be credited against amounts
owed by the Company to Laurus and thus refunded to the Company.
39. Severability.
Wherever possible each provision of this Agreement or the Ancillary
Agreements shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement or the Ancillary
Agreements shall be prohibited by or invalid under applicable law such provision
shall be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions
thereof.
40. Survival.
The representations, warranties, covenants and agreements made herein
shall survive any investigation made by Laurus and the closing of the
transactions contemplated hereby to the extent provided therein. All statements
as to factual matters contained in any certificate or other instrument delivered
by or on behalf of the Company pursuant hereto in connection with the
transactions contemplated hereby shall be deemed to be representations and
warranties by the Company hereunder solely as of the date of such certificate or
instrument. All indemnities set forth herein shall survive the execution,
delivery and termination of this Agreement and the Ancillary Agreements and the
making and repaying of the Obligations.
41. Captions.
All captions are and shall be without substantive meaning or content of
any kind whatsoever.
42. Counterparts; Telecopier Signatures.
This Agreement may be executed in one or more counterparts, each of
which shall constitute an original and all of which taken together shall
constitute one and the same agreement. Any signature delivered by a party via
telecopier transmission shall be deemed to be any original signature hereto.
43. Construction.
The parties acknowledge that each party and its counsel have reviewed
this Agreement and that the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Agreement or any amendments, schedules or exhibits
thereto.
44. Publicity.
The Company hereby authorizes Laurus to make appropriate announcements
of the financial arrangement entered into by and among the Company and Laurus,
including, without limitation, announcements which are commonly known as
tombstones, in such publications and to such selected parties as Laurus shall in
its sole and absolute discretion deem appropriate, or as required by applicable
law.
45. Joinder.
It is understood and agreed that any Person that desires to become a
party hereunder, or is required to execute a counterpart of this Agreement after
the date hereof pursuant to the requirements of this Agreement or any Ancillary
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Agreement, shall become a party hereunder by (a) executing a Joinder Agreement
in form and substance satisfactory to Laurus, (b) delivering supplements to such
exhibits and annexes to this Agreement and the Ancillary Agreements as Laurus
shall reasonably request and (c) taking all actions as specified in this
Agreement as would have been taken by the Company and the Eligible Subsidiaries
had it been an original party to this Agreement, in each case with all documents
required above to be delivered to Laurus and with all documents and actions
required above to be taken to the reasonable satisfaction of Laurus.
46. Legends.
(a) The Notes shall bear substantially the following legend:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE MAY
NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE
UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO ESSENTIAL
INNOVATIONS TECHNOLOGY CORP.
(b) The Warrants shall bear substantially the following legend:
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO ESSENTIAL INNOVATIONS TECHNOLOGY CORP. THAT
SUCH REGISTRATION IS NOT REQUIRED.
IN WITNESS WHEREOF, the parties have executed this Security and
Purchase Agreement as of the date first written above.
ESSENTIAL INNOVATIONS TECHNOLOGY CORP.
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
Title: President
ESSENTIAL INNOVATIONS CORP.
By: /s/ ▇▇▇▇▇ ▇▇▇▇▇▇▇
Name: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: President
LAURUS MASTER FUND, LTD.
By: /s/ ▇▇▇▇▇ Grin
Name: ▇▇▇▇▇ Grin
Title: Director
-41-
Annex A
Definitions
"Account Debtor" means any Person who is or may be obligated with respect to, or
on account of, an Account.
"Accountants" has the meaning given to such term in Section 15(a).
"Accounts" means (a) all present and future accounts receivable, book accounts,
book debts, claims, debts, monies, rentals, revenues, incomes, loans
receivables, choses in action, rebates, refunds, amounts owing by or claimable
from the crown, state or government (or any departments, agents or agencies
thereof) and any other amounts which now are or which may at any time in the
future be due or owing to or owned by such which now are or which may at any
time in the future be due or owing to or owned by such Person, and other forms
of obligations; (b) all of such Person's rights in, to and under all purchase
orders or receipts for goods or services; (c) all of such Person's rights to any
goods represented by any of the foregoing (including unpaid sellers' rights of
repossession, resiliation, rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods); (d) all rights
to payment due to such Person for property sold, leased, licensed, assigned or
otherwise disposed of, for a policy of insurance issued or to be issued, for a
secondary obligation incurred or to be incurred, for energy provided or to be
provided, for the use or hire of a vessel under a charter or other contract,
arising out of the use of a credit card or charge card, or for services rendered
or to be rendered by such Person or in connection with any other transaction
(whether or not yet earned by performance on the part of such Person); and (e)
all collateral security of any kind given by any Account Debtor or any other
Person with respect to any of the foregoing.
"Accounts Availability" means the amount of Loans against Eligible Accounts that
Laurus may from time to time make available to the Company to a maximum of
ninety percent (90%) of the net face amount of Eligible Accounts.
"Affiliate" means, with respect to any Person, (a) any other Person (other than
a Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with such Person or (b) any other Person who is a
director or officer (i) of such Person, (ii) of any Subsidiary of such Person or
(iii) of any Person described in clause (a) above. For the purposes of this
definition, control of a Person shall mean the power (direct or indirect) to
direct or cause the direction of the management and policies of such Person
whether by contract or otherwise.
"Ancillary Agreements" means the Notes, the Warrant, the Subsidiary Guarantee,
each Security Document, the First Escrow Agreement, the Second Escrow Agreement,
and all other agreements, instruments, documents, mortgages, pledges, powers of
attorney, consents, assignments, contracts, notices, security agreements, trust
agreements and guarantees whether heretofore, concurrently, or hereafter
executed by or on behalf of the Company and/or the Eligible Subsidiary or any
other Person or delivered to Laurus, relating to this Agreement or to the
transactions contemplated by this Agreement or otherwise relating to the
relationship between or among the Company and Laurus, as each of the same may be
amended, supplemented, restated or otherwise modified from time to time.
"Articles" has the meaning given such term in Section 16(c)(iv).
"Balance Sheet Date" has the meaning given such term in Section 16(f)(ii).
"Books and Records" means all books, records, board minutes, contracts,
licenses, insurance policies, environmental audits, business plans, files,
computer files, computer discs and other data and software storage and media
devices, accounting books and records, financial statements (actual and pro
forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
"Business Day" means a day on which Laurus is open for business and that is not
a Saturday, a Sunday or other day on which banks are required or permitted to be
closed in the State of New York.
"Canadian Pension Plan" means any plan, program or arrangement (other than the
Canada Pension Plan or the Quebec Pension Plan) that is a pension plan for the
purposes of any applicable pension benefits legislation or any tax laws of
Canada or a province thereof, whether or not registered under any such laws,
which is maintained or contributed to by, or to which there is or may be an
obligation to contribute by, the Company in respect of any Person's employment
in Canada with the Company.
"Capital Availability Amount" means US$4,000,000.
"Closing Date" means the date on which the Company shall first receive proceeds
of the initial Loans or the date hereof, if no Loan is made under the facility
on the date hereof.
"Change of Control" means any event or circumstance as a result of which (i) any
"Person" or "group" (as such terms are defined in Sections 13(d) and 14(d) of
the Exchange Act, as in effect on the date hereof), other than Laurus, is or
becomes the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5 under
the Exchange Act), directly or indirectly, of 35% or more on a fully diluted
basis of the then outstanding voting equity interest of the Company (other than
a "Person" or "group" that beneficially owns 35% or more of such outstanding
voting equity interests of the Company on the date hereof), (ii) the board of
directors of the Company shall cease to consist of a majority of the Company's
board of directors on the date hereof (or directors appointed by a majority of
the board of directors in effect immediately prior to such appointment), or
(iii) the Company or any of its Subsidiaries merges or consolidates with, or
sells all or substantially all of its assets to, any other Person or entity;
"Collateral" means all of the Company's and each of its Subsidiaries' property
and assets, whether real or personal, tangible or intangible, and whether now
owned or hereafter acquired, or in which it now has or at any time in the future
may acquire any right, title or interests including all of the following
property in which it now has or at any time in the future may acquire any right,
title or interest:
(a) all Inventory;
(b) all Equipment;
(c) all General Intangibles;
(d) all Accounts;
(e) all Deposit Accounts, other bank accounts and all funds on
deposit therein;
(f) all Stock;
(g) all Letter-of-Credit Rights;
(h) all Books and Records;
(i) all Intellectual Property;
(j) (i) all money, cash and cash equivalents and (ii) all cash
held as cash collateral to the extent not otherwise
constituting Collateral, all other cash or property at any
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time on deposit with or held by Laurus for the account of the
Company (whether for safekeeping, custody, pledge,
transmission or otherwise); and
(k) all products and Proceeds of all or any of the foregoing, tort
claims and all claims, rights of action, and other rights to
payment including (i) insurance claims against third parties
for loss of, damage to, or destruction of, the foregoing
Collateral and (ii) payments due or to become due under
leases, rentals and hires of any or all of the foregoing and
Proceeds payable under, or unearned premiums with respect to
policies of insurance in whatever form.
"Common Stock" means the shares of stock representing the Company common equity
interests.
"Contract Rate" has the meaning given such term in the respective Note.
"Default" means any act or event which, with the giving of notice or passage of
time or both, would constitute an Event of Default.
"Deposit Accounts" means all deposit accounts now or hereafter held in the name
of any Person, including, without limitation, the Lockboxes.
"Documents" means all documents of title, whether negotiable or non-negotiable,
including, without limitation, all promissory notes, bills of exchange, drafts,
cheques, warehouse receipts and bills of lading which now are or which may at
any time in the future be owned by the Company and each of its Subsidiaries and
all of the right, title and interest in any of the foregoing which the Company
now or at any time in the future has or may have.
"Earth Source" means Earth Source Energy Inc., a corporation incorporated under
the laws of the Province of British Columbia.
"Eligible Accounts" means each Account of the Company or an Eligible Subsidiary
which conforms to the following criteria: (a) shipment of the merchandise or the
rendition of services has been completed; (b) no return, rejection or
repossession of the merchandise has occurred; (c) merchandise or services shall
not have been rejected or disputed by the Account Debtor and there shall not
have been asserted any offset, defense or counterclaim; (d) continues to be in
full conformity with the representations and warranties made by the Company
and/or the Eligible Subsidiary, as applicable, to Laurus with respect thereto;
(e) Laurus is, and continues to be, satisfied with the credit standing of the
Account Debtor in relation to the amount of credit extended; (f) there are no
facts existing or threatened which are likely to result in any adverse change in
an Account Debtor's financial condition; (g) is documented by an invoice in a
form approved by Laurus and shall not be unpaid more than ninety (90) days from
invoice date; (h) not more than twenty-five percent (25%) of the unpaid amount
of invoices due from such Account Debtor remains unpaid more than ninety (90)
days from invoice date; (i) is not evidenced by chattel paper or an instrument
of any kind with respect to or in payment of the Account unless such instrument
is duly endorsed to and in possession of Laurus or represents a check in payment
of an Account; (j) the Account Debtor is located in the United States or Canada;
provided, however, Laurus may, from time to time, in the exercise of its sole
discretion and based upon satisfaction of certain conditions to be determined at
such time by Laurus, deem certain Accounts as Eligible Accounts notwithstanding
that such Account is due from an Account Debtor located outside of the United
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States or Canada; (k) Laurus has a first priority perfected Lien in such Account
and such Account is not subject to any Lien other than Permitted Liens; (l) does
not arise out of transactions with any employee, officer, director, stockholder
or Affiliate of the Company or the Eligible Subsidiaries; (m) is payable to the
Company or the Eligible Subsidiary; (n) does not arise out of a ▇▇▇▇ and hold
sale prior to shipment and does not arise out of a sale to any Person to which
the Company or the Eligible Subsidiary is indebted; (o) is net of any returns,
discounts, claims, credits and allowances; (p) if the Account arises out of
contracts between the Company or the Eligible Subsidiary, on the one hand, and
the United States, on the other hand, any state, or any department, agency or
instrumentality of any of them, the Company or the Eligible Subsidiary has so
notified Laurus, in writing, prior to the creation of such Account, and there
has been compliance with any governmental notice or approval requirements,
including compliance with the Federal Assignment of Claims Act; (q) is a good
and valid account representing an undisputed bona fide indebtedness incurred by
the Account Debtor therein named, for a fixed sum as set forth in the invoice
relating thereto with respect to an unconditional sale and delivery upon the
stated terms of goods sold by the Company or the Eligible Subsidiary or work,
labour and/or services rendered by the Company or the Eligible Subsidiary; (r)
does not arise out of progress ▇▇▇▇▇▇▇▇ prior to completion of the order; (s)
the total unpaid Accounts from such Account Debtor does not exceed twenty-five
percent (25%) of all Eligible Accounts; (t) the Company's or the Eligible
Subsidiary's right to payment is absolute and not contingent upon the
fulfillment of any condition whatsoever; (u) the Company or the Eligible
Subsidiary is able to bring suit and enforce its remedies against the Account
Debtor through judicial process; (v) does not represent interest payments, late
or finance charges owing to the Company or the Eligible Subsidiary, and (w) is
otherwise satisfactory to Laurus as determined by Laurus in the exercise of its
sole discretion. In the event the Company requests that Laurus include within
Eligible Accounts certain Accounts of one or more of the Company's acquisition
targets, Laurus shall at the time of such request consider such inclusion, but
any such inclusion shall be at the sole option of Laurus and shall at all times
be subject to the execution and delivery to Laurus of all such documentation
(including, without limitation, guaranty and security documentation) as Laurus
may require in its sole discretion. Notwithstanding the foregoing, in the event
that only a portion of an Account of the Company or an Eligible Subsidiary is
the subject of a Lien which is a builder's lien holdback or other similar
statutory lien (herein referred to as a "Holdback"), and the balance of such
Account otherwise satisfies the criteria set forth above, then that portion of
the Account which is not the subject of the Holdback shall be deemed to be an
Eligible Account.
"Eligible Subsidiaries" means Essential and, upon approval by Laurus and the
acquisition thereof by the Company, any Target Company, and any one them an
"Eligible Subsidiary".
"Equipment" means all corporeal movable property now owned or hereafter acquired
by any Person, wherever located, including any and all machinery, apparatus,
equipment, fittings, furniture, leasehold improvements, motor vehicles, fixed
assets and other tangible movable property (other than Inventory) of every kind
and description that may be now or hereafter used in such Person's operations or
that are owned by such Person or in which such Person may have an interest, and
all parts, accessories and accessions thereto and substitutions and replacements
therefor.
"Escrow Agent" means Loeb & Loeb LLP;
"Event of Default" means the occurrence of any of the events set forth in
Section 25.
"Exchange Act" means the Securities Exchange Act of 1934, as amended;
"Exchange Act Filings" means the Company filings under the Securities Exchange
Act of 1934;
"Financial Reporting Controls" has the meaning given such term in Section
16(f)(iv).
"First Acquisition" has the meaning given such term in Section 18(a).
"First Advance" has the meaning given such term in Section 3(b).
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"First Advance Date" means the date upon which all conditions precedent in
Section 9 hereof and in the Term Note have been satisfied by the Company and the
loans pursuant to the Term Note have been advanced by Laurus to the Company.
"First Closing Agenda" means the closing agenda dated as of the date hereof
specifying, among other things, the documents, agreements, certificates and
opinions which must be delivered, registered, or confirmed, as the case may be,
by the parties to this Agreement on or by the Closing Date.
"First Disbursement Letter" means the disbursement letter dated as of the First
Advance Date among the Company and Laurus
"First Escrow Agreement" means the escrow agreement dated as of the First
Advance Date among the Company, Laurus and the escrow agent referred to therein.
"First Joinder and Confirmation of Security Agreement" has the meaning given
such term in Section 9(d);
"Fixtures" means all "fixtures" as such term is defined in the UCC, now owned or
hereafter acquired by any Person.
"Formula Amount" has the meaning given such term in Section 4(a)(i).
"GAAP" means generally accepted accounting principles, practices and procedures
in effect from time to time in the GAAP.
"General Intangibles" means all incorporeal movable property now owned or
hereafter acquired by any Person including all right, title and interest that
such Person may now or hereafter have therein (other than Accounts), including
customer lists, Licenses, Intellectual Property, interests in partnerships,
joint ventures and other business associations, permits, proprietary or
confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, Software, data
bases, data, skill, expertise, experience, processes, models, drawings,
materials, Books and Records, Goodwill (including the Goodwill associated with
any Intellectual Property), all rights and claims in or under insurance policies
(including insurance for fire, damage, loss, and casualty, whether covering
personal property, real property, tangible rights or intangible rights, all
liability, life, key-person, and business interruption insurance, and all
unearned premiums), uncertificated securities, choses in action, deposit
accounts, rights to receive tax refunds and other payments, rights to received
dividends, distributions, cash, Instruments and other property in respect of or
in exchange for pledged Stock and rights of indemnification.
"Geotech AB" means Geotech Drilling Alberta Ltd., a corporation incorporated
under the laws of the Province of Alberta.
"Geotech BC" means Geotech Drilling Services Ltd., a corporation incorporated
under the laws of the Province of British Columbia.
"Goodwill" means all goodwill, trade secrets, proprietary or confidential
information, technical information, procedures, formulae, quality control
standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
"Governmental Authority" means any nation or government, any state, provincial
or other political subdivision thereof, and any agency, department or other
entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
-5-
"Intellectual Property" means any and all patents, trademarks, service marks,
trade names, copyrights, trade secrets, industrial designs, Licenses,
information and other proprietary rights and processes.
"Inventory" means all goods, wares and merchandise, property in stock and
inventory now owned or hereafter acquired by any Person, wherever located,
including all inventory, merchandise, goods and other movable property that are
held by or on behalf of such Person for sale or lease or are furnished or are to
be furnished under a contract of service or that constitute raw materials, work
in process, finished goods, returned goods, or materials or supplies of any
kind, nature or description used or consumed or to be used or consumed in such
Person's business or in the processing, production, packaging, promotion,
delivery or shipping of the same, including all supplies and embedded software.
"Letter-of-Credit Rights" means letter-of-credit rights now owned or hereafter
acquired by any Person, including rights to payment or performance under a
letter of credit, whether or not such Person, as beneficiary, has demanded or is
entitled to demand payment or performance.
"License" means any rights under any written agreement now or hereafter acquired
by any Person to use any trademark, trademark registration, copyright, copyright
registration or invention for which a patent is in existence or other license of
rights or interests now held or hereafter acquired by any Person.
"Lien" means any mortgage, security deed, deed of trust, pledge, hypothec,
assignment, security interest, lien (whether statutory or otherwise), charge,
claim or encumbrance, or preference, priority or other security agreement or
preferential arrangement held or asserted in respect of any asset of any kind or
nature whatsoever including any conditional sale or other title retention
agreement, any lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
under the law of any jurisdiction in which the Collateral is located.
"Loans" has the meaning given such term in Section 4(a)(i) and shall include all
other extensions of credit hereunder and under any Ancillary Agreement.
"Lockboxes" has the meaning given such term in Section 12(a).
"Master Security Agreement" means that certain Master Security Agreement dated
as of the Closing Date made by the Company and the Eligible Subsidiary in favour
of Laurus, as the same may be amended, restated, modified and/or supplemented
from time to time;
"Material Adverse Effect" means a material adverse effect on (a) the business,
assets, liabilities, condition (financial or otherwise), properties, operations
or prospects of the Company and the Eligible Subsidiary (taken individually and
as a whole), (b) the Company's ability to pay or perform the Obligations in
accordance with the terms hereof or any Ancillary Agreement, (c) the value of
the Collateral, the Liens on the Collateral or the priority of any such Lien or
(d) the practical realization of the benefits of Laurus' rights and remedies
under this Agreement and the Ancillary Agreements.
"Material Taxes" means taxes in excess of US$25,000 unless such amount is being
bone fide disputed and a reserve is being held in regard to that amount.
"Notes" means the Term Note and the Secured Revolving Note made by Company in
favour of Laurus in connection with the transactions contemplated hereby, as
each of the same may be amended, supplemented, restated and/or otherwise
modified from time to time.
"Obligations" means all Loans, all advances, debts, liabilities, obligations,
covenants and duties owing by the Company to Laurus (or any corporation that
directly or indirectly controls or is controlled by or is under common control
with Laurus) of every kind and description (whether or not evidenced by any note
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or other instrument and whether or not for the payment of money or the
performance or non-performance of any act), direct or indirect, absolute or
contingent, due or to become due, contractual or tortious, liquidated or
unliquidated, whether existing by operation of law or otherwise now existing or
hereafter arising including any debt, liability or obligation owing from the
Company to others which Laurus may have obtained by assignment or otherwise and
further including all interest (including interest accruing at the then
applicable rate provided in this Agreement after the maturity of the Loans and
interest accruing at the then applicable rate provided in this Agreement after
the filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, whether or not a claim for post-filing or
post-petition interest is allowed or allowable in such proceeding), charges or
any other payments the Company is required to make by law or otherwise arising
under or as a result of this Agreement, the Ancillary Agreements or otherwise,
together with all reasonable expenses and reasonable attorneys' fees chargeable
to the Company's accounts or incurred by Laurus in connection therewith.
"Pacific" means Pacific Geo Exchange Inc., a corporation incorporated under the
laws of the Province of British Columbia ("Pacific").
"Permitted Liens" means (a) Liens of carriers, warehousemen, artisans, bailees,
mechanics and materialmen incurred in the ordinary course of business securing
sums not overdue; (b) Liens incurred in the ordinary course of business in
connection with worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums (i) not
overdue or (ii) being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of the Company in
conformity with GAAP; (c) Liens in favour of Laurus; (d) Liens for taxes (i) not
yet due or (ii) being diligently contested in good faith by appropriate
proceedings, provided that adequate reserves with respect thereto are maintained
on the books of the Company in conformity with GAAP; and which have no effect on
the priority of Liens in favour of Laurus or the value of the assets in which
Laurus has a Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness
to the extent permitted in this Agreement; and (f) Liens on any research and
development tax credits;
"Person" means any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public benefit
corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body or
department thereof), and shall include such Person's successors and assigns.
"Principal Market" means the NASD Over The Counter Bulletin Board, NASDAQ
Capital Market, the NASDAQ National Market, the American Stock Exchange or the
New York Stock Exchange;
"Proceeds" means the proceeds of sale, lease or disposition of any of the
Collateral, including, without limitation: (a) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to the Company or to an
Eligible Subsidiary from time to time with respect to any Collateral; (b) any
and all payments (in any form whatsoever) made or due and payable to the Company
or to an Eligible Subsidiary from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of any Collateral
by any governmental body, governmental authority, bureau or agency (or any
person acting under color of governmental authority); (c) any claim of the
Company or an Eligible Subsidiary against third parties (i) for past, present or
future infringement of any Intellectual Property or (ii) for past, present or
future infringement or dilution of any trademark or trademark license or for
injury to the goodwill associated with any trademark, trademark registration or
trademark licensed under any trademark License; (d) any recoveries by the
Company or by an Eligible Subsidiary against third parties with respect to any
litigation or dispute concerning any Collateral, including claims arising out of
the loss or nonconformity of, interference with the use of, defects in, or
infringement of rights in, or damage to, Collateral; (e) all amounts collected
on, or distributed on account of, other Collateral, including dividends,
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interest, distributions; and (f) any and all other amounts, rights to payment or
other property acquired upon the sale, lease, license, exchange or other
disposition of Collateral and all rights arising out of Collateral.
"Purchase Money Indebtedness" means (a) any indebtedness incurred for the
payment of all or any part of the purchase price of any fixed asset, including
indebtedness under capitalized leases, (b) any indebtedness incurred for the
sole purpose of financing or refinancing all or any part of the purchase price
of any fixed asset, and (c) any renewals, extensions or refinancings thereof
(but not any increases in the principal amounts thereof outstanding at that
time).
"Purchase Money Lien" means any Lien upon any fixed assets that secures the
Purchase Money Indebtedness related thereto but only if such Lien shall at all
times be confined solely to the asset the purchase price of which was financed
or refinanced through the incurrence of the Purchase Money Indebtedness secured
by such Lien and only if such Lien secures only such Purchase Money
Indebtedness.
"SEC" means the Securities and Exchange Commission.
"Second Acquisition" has the meaning given to such term in Section 18(a).
"Second Advance" has the meaning given to such term in Section 3(b).
"Second Advance Date" means the date upon which all conditions precedent in
Section 10 hereof and in the Secured Revolving Note have been satisfied by the
Company and the Loans pursuant to the Secured Revolving Note have been advanced
by Laurus to the Company.
"Second Disbursement Letter" means the disbursement letter dated as of the
Second Advance Date among the Company and Laurus.
"Second Escrow Agreement" means the escrow agreement dated as of the Second
Advance Date among the Company, Laurus and the escrow agent referred to therein.
"Second Joinder and Confirmation of Security Agreement" has the meaning given
such term in Section 10(f);
"Secured Revolving Note" means that certain Secured Revolving Note dated as of
the Closing Date made by the Company in favour of Laurus in the original
principal amount of US$4,000,000, as the same may be amended, supplemented,
restated and/or otherwise modified from time to time.
"Securities" means the Warrant and the shares of Common Stock which may be
issued upon exercise of such Warrant.
"Security Documents" means all security agreements, mortgages, cash collateral
deposit letters, pledges and other agreements which are executed by the Company
and/or its Subsidiaries in favour of Laurus including, without limitation, the
Master Security Agreement and the Share Pledge Agreement.
"Share Pledge Agreement" means that certain Share Pledge Agreement dated as of
the Closing Date made by the Company in favour of Laurus, as the same may be
amended, restated, modified and/or supplemented from time to time;
"Software" means all software now owned or hereafter acquired by any Person,
including all computer programs and all supporting information provided in
connection with a transaction related to any program.
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"Stock" means all certificated and uncertificated shares, options, warrants,
membership interests, general or limited partnership interests, participation or
other equivalents (regardless of how designated) of or in a corporation,
partnership, limited liability company or equivalent entity whether voting or
nonvoting, including common stock, preferred stock, or any other "equity
security" (as such term is defined in Rule 3a11-1 of the General Rules and
Regulations promulgated by the OSC under the Securities Exchange Act of 1934)."
"Subsidiary" means, with respect to any Person, (i) any other Person whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors or other
governing body of such other Person, are owned, directly or indirectly, by such
Person or (ii) any other Person in which such Person owns, directly or
indirectly, more than 50% of the equity interests at such time.
"Subsidiary Guaranty" means that certain Subsidiary Guaranty dated as of the
Closing Date made by the Eligible Subsidiary in favour of Laurus, as the same
may be amended, restated, modified and/or supplemented from time to time.
"Target Companies" means Geotech BC, Geotech AB, Pacific, and Earth Source, and
any one of them a "Target Company".
"Warrant" means that certain Common Stock Purchase Warrant dated as of the
Closing Date made by the Company in favour of Laurus and each other warrant made
by the Company in favour Laurus, as each of the same may be amended, restated,
modified and/or supplemented from time to time.
"Warrant Shares" has the meaning given such term in Section 2(d).
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EXHIBIT A
Form of
Term Note
EXHIBIT B
Form of Secured Revolving Note
EXHIBIT C
Form of
Warrant
EXHIBIT D
Form of Borrowing Base Certificate