NOTE AND WARRANT PURCHASE AGREEMENT Dated as of September 30, 2005 by and among QUEST OIL CORPORATION and THE PURCHASERS LISTED ON EXHIBIT A
Exhibit
10.3
NOTE
AND WARRANT PURCHASE
AGREEMENT
Dated
as of September 30, 2005
by
and among
QUEST
OIL CORPORATION
and
THE
PURCHASERS LISTED ON EXHIBIT A
KL2:2407594.9
ARTICLE
I Purchase
and Sale of Notes and Warrants Page
|
Section
1.1
|
Purchase
and Sale of Notes and Warrants.
|
2 |
|
Section
1.2
|
Purchase
Price and Closing
|
2 |
|
Section
1.3
|
Conversion
Shares / Warrant Shares
|
2
|
|
Section
1.4
|
Additional
Investment Right
|
2
|
ARTICLE
II Representations
and Warranties
|
Section
2.1
|
Representations
and Warranties of the Company
|
3-6 |
|
Section
2.2
|
Representations
and Warranties of the
Purchasers
|
6-7 |
ARTICLE
III Covenants
|
Section
3.1
|
Securities
Compliance
|
7
|
|
Section
3.2
|
Registration
and
Listing
|
7 |
|
Section
3.3
|
Inspection
Rights
|
7 |
|
Section
3.4
|
Compliance
with
Laws
|
8
|
|
Section
3.5
|
Keeping
of Records and Books of
Account
|
8 |
|
Section
3.6
|
Reporting
Requirements
|
8 |
|
Section
3.7
|
Other
Agreements
|
8 |
|
Section
3.8
|
Use
of
Proceeds
|
8
|
|
Section
3.9
|
Reporting
Status
|
8
|
|
Section
3.10
|
Disclosure
of
Transaction
|
8
|
|
Section
3.11
|
Disclosure
of Material
Information
|
8
|
|
Section
3.12
|
Pledge
of
Securities
|
8
|
|
Section
3.13
|
Amendments
|
8
|
|
Section
3.14
|
Distributions
|
8
|
|
Section
3.15
|
Reservation
of
Shares
|
8
|
|
Section
3.16
|
Transfer
Agent
Instructions
|
8
|
|
Section
3.17
|
Disposition
of
Assets
|
9
|
|
Section
3.18
|
Form
SB-2
Eligibility
|
9
|
|
Section
3.19
|
Restrictions
on Certain Issuances of
Securities
|
9
|
|
Section
3.20
|
Increase
in Authorized Shares of Common
Stock
|
9
|
|
Section
3.21
|
Acquisition
of
Assets
|
9
|
|
Section
3.22
|
Subsequent
Financings
|
9
|
ARTICLE
IV Conditions
|
Section
4.1
|
Conditions
Precedent to the Obligation of the Company to Close and to Sell the
Securities
|
9 |
|
Section
4.2
|
Conditions
Precedent to the Obligation of the Purchasers to Close and to Purchase
the
Securities
|
10 |
|
Section
4.3
|
Conditions
Precedent to the Obligation of the Purchasers to Close and to Purchase
the
Option Notes
|
10
|
ARTICLE
V Certificate
Legend
|
Section
5.1
|
Legend
|
11
|
ARTICLE
VI Indemnification
|
Section
6.1
|
General
Indemnity.
|
12 |
|
Section
6.2
|
Indemnification
Procedure
|
12 |
ARTICLE
VII Miscellaneous
|
Section
7.1
|
Fees
and
Expenses
|
12 |
|
Section
7.2
|
Specific
Performance; Consent to Jurisdiction;
Venue.
|
12 |
|
Section
7.3
|
Entire
Agreement;
Amendment
|
12 |
|
Section
7.4
|
Notices
|
13 |
|
Section
7.5
|
Waivers
|
13 |
|
Section
7.6
|
Headings
|
13 |
|
Section
7.7
|
Successors
and
Assigns
|
13 |
|
Section
7.8
|
No
Third Party Beneficiaries
|
13 |
|
Section
7.9
|
Governing
Law
|
13 |
|
Section
7.10
|
Survival
|
13 |
|
Section
7.11
|
Counterparts
|
13 |
|
Section
7.12
|
Publicity
|
13 |
|
Section
7.13
|
Severability
|
13 |
|
Section
7.14
|
Further
Assurances
|
13 |
KL2:2407594.9
1
This
NOTE
AND WARRANT PURCHASE AGREEMENT dated as of September 30, 2005 (this
“Agreement”)
by and
among Quest Oil Corporation, a Nevada corporation (the "Company"),
and
each of the purchasers of the senior secured convertible promissory notes of
the
Company whose names are set forth on Exhibit
A
attached
hereto (each a "Purchaser"
and
collectively, the "Purchasers").
The
parties hereto agree as follows:
ARTICLE
I
PURCHASE
AND SALE OF NOTES AND WARRANTS
Section
1.1 Purchase
and Sale of Notes and Warrants.
(a) Upon
the
following terms and conditions, the Company shall issue and sell to the
Purchasers, and the Purchasers shall purchase from the Company, (i) 10% senior
secured convertible promissory notes in the aggregate principal amount of up
to
Eight Million Dollars ($8,000,000), convertible into shares of the Company's
common stock, par value $0.001 per share (the “Common
Stock”),
in
substantially the form attached hereto as Exhibit
B-1
(the
"10%
Notes"),
and
(ii) zero coupon senior secured convertible promissory notes in the aggregate
principal amount of up to Four Hundred Thousand Dollars ($400,000), convertible
into shares of the company’s Common Stock, in substantially the form attached
hereto as Exhibit
B-2
(the
“Zero
Coupon Note”,
together with the 10% Notes, the “Notes”).
The
Company and the Purchasers are executing and delivering this Agreement in
accordance with and in reliance upon the exemption from securities registration
afforded by Section 4(2) of the U.S. Securities Act of 1933, as amended, and
the
rules and regulations promulgated thereunder (the "Securities
Act"),
including Regulation D ("Regulation
D"),
and/or upon such other exemption from the registration requirements of the
Securities Act as may be available with respect to any or all of the investments
to be made hereunder.
(b) Upon
the
following terms and conditions, the Purchasers shall be issued (i) Series A
Warrants, in substantially the form attached hereto as Exhibit
C
(the
"Series
A Warrants"),
to
purchase a number of shares of Common Stock equal to one hundred percent (100%)
of the number of Conversion Shares issuable upon conversion of such Purchaser’s
10% Note at an exercise price per share equal to the Warrant Price (as defined
in the Series A Warrants) and a term of three (3) years following the Closing
Date; (ii) Series B Warrants, in substantially the form attached hereto as
Exhibit
D
(the
"Series
B Warrants"),
to
purchase a number of shares of Common Stock equal to fifty percent (50%) of
the
number of Conversion Shares issuable upon conversion of such Purchaser’s 10%
Note at an exercise price per share equal to the Warrant Price (as defined
in
the Series B Warrants) and a term of two (2) years following the Effective
Date
(as defined in Section 1.4 hereof); and (iii) Series C Warrants, in
substantially the form attached hereto as Exhibit
E
(the
“Series
C Warrants”
and,
together with the Series A Warrants and the Series B Warrants, the “Warrants”),
to
purchase a number of shares of Common Stock equal to fifty percent (50%) of
the
number of Conversion Shares issuable upon conversion of such Purchaser’s 10%
Note at an exercise price per share equal to the Warrant Price (as defined
in
the Series C Warrants) and a term of seven (7) years following the Closing
Date.
The Series C Warrants may only be exercised for a number of shares of Common
Stock that is equal to the number of shares of Common Stock that are exercised
pursuant to the Series B Warrants. The number of shares of Common Stock issuable
upon exercise of the Warrants issuable to each Purchaser is set forth opposite
such Purchaser’s name on Exhibit
A
attached
hereto.
Section
1.2 Purchase
Price and Closing.
Subject
to the terms and conditions hereof, the Company agrees to issue and sell to
the
Purchasers and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
the Purchasers, severally but not jointly, agree to purchase the Notes and
Warrants for an aggregate purchase price of up to Eight Million Dollars
($8,000,000) (the “Purchase
Price”).
The
Notes and Warrants shall be sold and funded in two separate closings (each,
a
“Closing”).
The
initial closing under this Agreement (the “Initial
Closing”)
shall
take place on or before October 7, 2005 (the “Initial
Closing Date”)
and
shall be funded in the amount of up to $6,000,000.00. The second closing under
this Agreement (the “Second
Closing”)
shall
take place no later than five (5) business days (the “Second
Closing Date”,
and
together with the Initial Closing Date, each a “Closing
Date”)
after
the Securities and Exchange Commission (the “Commission”)
declares the Registration Statement (as defined in the Registration Rights
Agreement) effective (the “Effectiveness
Date”)
and
shall be funded in the amount of up to $2,000,000.00. Each closing of the
purchase and sale of the Notes and Warrants to be acquired by the Purchasers
from the Company under this Agreement shall take place at the offices of ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP, ▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇ ▇▇▇▇▇ at 10:00 a.m., New York time; provided,
that
all of the conditions set forth in Article IV hereof and applicable to each
Closing shall have been fulfilled or waived in accordance herewith. Subject
to
the terms and conditions of this Agreement, at each Closing the Company shall
deliver or cause to be delivered to each Purchaser (x) its Notes for the
principal amount set forth opposite the name of such Purchaser on Exhibit
A
hereto
and (y) the Warrants to purchase such number of shares of Common Stock as is
set
forth opposite the name of such Purchaser on Exhibit
A
attached
hereto. At each Closing, each Purchaser shall deliver its Purchase Price by
wire
transfer of immediately available funds to an account
designated by the Company.
Section
1.3 Conversion
Shares / Warrant Shares.
The
Company has authorized and has reserved and covenants to continue to reserve,
free of preemptive rights and other similar contractual rights of stockholders,
a number of its authorized but unissued shares of Common Stock equal to one
hundred twenty percent (120%) of (a) the aggregate number of shares of Common
Stock to effect the conversion of the Notes and any interest accrued and
outstanding thereon and exercise of the Warrants as of the Second Closing Date
and (b) upon exercise of the Purchaser Option (as defined in Section 1.4
hereof), the aggregate number of shares of Common Stock to effect the conversion
of the Option Notes (as defined in Section 1.4 hereof) and any interest accrued
and outstanding thereon and exercise of the Additional Warrants (as defined
in
Section 1.4 hereof) as of the Second Closing Date. Any shares of Common Stock
issuable upon conversion of the Notes and the Option Notes and any interest
accrued and outstanding on the Notes and the Option Notes are herein referred
to
as the “Conversion
Shares”.
Any
shares of Common Stock issuable upon exercise of the Warrants (and such shares
when issued) are herein referred to as the "Warrant
Shares".
The
Notes, the Option Notes, the Warrants, the Additional Warrants (as defined
in
Section 1.4 hereof), the Conversion Shares and the Warrant Shares are sometimes
collectively referred to herein as the "Securities".
Section
1.4 Additional
Investment Right.
Commencing on the Effective Date (as defined below) of the Registration
Statement (as defined in the Registration Rights Agreement), each Purchaser
shall have the option to purchase from the Company, and the Company shall issue
and sell to each such Purchaser who exercises such option, a 10% Note for the
principal amount of up to twenty-five percent (25%) of such Purchaser’s pro rata
portion of the Purchase Price pursuant to the terms hereof (the “Purchaser
Option”).
For
purposes of this Agreement, “Effective
Date”
means
the date that the Commission declares the Registration Statement effective.
If
any
Purchaser elects not to exercise its Purchase Option, each other Purchaser
may
exercise its Purchaser Option on a pro-rata basis so long as such participation
in the aggregate does not exceed the aggregate Purchase Price hereunder.
For
purposes of this Section 1.4, all references to “pro rata” means, for any
Purchaser electing to exercise its Purchaser Option, the percentage obtained
by
dividing (x) the principal amount of the Notes purchased by such Purchaser
at
each Closing by (y) the total principal amount of all of the Notes purchased
by
each Purchaser exercising its Purchaser Option. Upon the Purchaser Option being
exercised, each Purchaser exercising its Purchase Option shall receive
additional Series A Warrants, Series B Warrants and Series C Warrants
(collectively, the “Additional
Warrants”)
to
purchase a number of shares of Common Stock in accordance with the terms and
provisions of Section 1.1(b) hereof. The Purchaser Option shall expire sixty
(60) days following the Effective Date. Each Purchaser exercising the Purchaser
Option shall deliver to the Company an Exercise Form in the form attached hereto
as Exhibit
F.
Within
five (5) days of receipt of such Exercise Form, the Company shall deliver to
the
Purchaser exercising such Purchaser Option a 10% Note representing the principal
amount purchased pursuant to the Purchaser Option (the “Option
Notes”)
and
the Purchaser’s Additional Warrants.
2
ARTICLE
II
REPRESENTATIONS
AND WARRANTIES
Section
2.1 Representations
and Warranties of the Company.
The
Company hereby represents and warrants to the Purchasers, as of the date hereof
and each Closing Date (except as set forth on the Schedule of Exceptions
attached hereto with each numbered Schedule corresponding to the section number
herein), as follows:
(a) Organization,
Good Standing and Power.
The
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Nevada and has the requisite corporate
power to own, lease and operate its properties and assets and to conduct its
business as it is now being conducted. The Company does not have any
Subsidiaries (as defined in Section 2.1(g)) or own securities of any kind in
any
other entity except as set forth on Schedule
2.1(g)
hereto.
The Company and each such Subsidiary (as defined in Section 2.1(g)) is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary except for any jurisdiction(s)
(alone or in the aggregate) in which the failure to be so qualified will not
have a Material Adverse Effect. For the purposes of this Agreement,
"Material
Adverse Effect"
means
any material adverse effect on the business, operations, properties, prospects,
or financial condition of the Company and its Subsidiaries and/or any condition,
circumstance, or situation that would prohibit or otherwise materially interfere
with the ability of the Company to perform any of its obligations under this
Agreement in any material respect.
(b) Authorization;
Enforcement.
The
Company has the requisite corporate power and authority to enter into and
perform this Agreement, the Notes, the Warrants, the Registration Rights
Agreement by and among the Company and the Purchasers, dated as of the date
hereof, substantially in the form of Exhibit
G
attached
hereto (the “Registration
Rights Agreement”),
the
Security Agreement by and among the Company and its wholly owned subsidiaries,
on the one hand, and the Purchasers, on the other hand, dated as of the date
hereof, substantially in the form of Exhibit
H
attached
hereto (the “Security
Agreement”),
the
Debenture by and among Quest Canada Corp. and the Purchasers, dated as of the
date hereof, substantially in the form of Exhibit
I
attached
hereto (the “Debenture”),
the
Guarantee and Indemnity to be delivered by Quest Canada Corp., dated as of
the
date hereof, substantially in the form of Exhibit
J
attached
hereto (the “Guarantee”),
the
Pledge to be delivered by Quest Canada Corp., dated as of the date hereof,
substantially in the form of Exhibit
K
attached
hereto (the “Pledge”),
the
Officer’s Certificate to be delivered by Quest Canada Corp., dated as of the
Closing Date, substantially in the form of Exhibit
L
attached
hereto (the “Canadian
Officer’s Certificate”),
the
Deed of Trust, Security Agreement, Financing Statement, and Assignment of Rents
and Leases to be delivered by the Company and Wallstin Petroleum, LLC, dated
as
of the date hereof, substantially in the form of Exhibit
M
attached
hereto (the “Deed
of Trust”),
and
the Irrevocable Transfer Agent Instructions (as defined in Section 3.16 hereof)
(collectively, the "Transaction
Documents")
and to
issue and sell the Securities in accordance with the terms hereof. The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by it of the transactions contemplated thereby have been
duly and validly authorized by all necessary corporate action, and, except
as
set forth on Schedule
2.1(b),
no
further consent or authorization of the Company, its Board of Directors or
stockholders is required. When executed and delivered by the Company, each
of
the Transaction Documents shall constitute a valid and binding obligation of
the
Company enforceable against the Company in accordance with its terms, except
as
such enforceability may be limited by applicable bankruptcy, reorganization,
moratorium, liquidation, conservatorship, receivership or similar laws relating
to, or affecting generally the enforcement of, creditor's rights and remedies
or
by other equitable principles of general application.
(c) Capitalization.
The
authorized capital stock and the issued and outstanding shares of capital stock
of the Company as of the Initial Closing Date is set forth on Schedule
2.1(c)
hereto.
All of the outstanding shares of the Common Stock and any other outstanding
security of the Company have been duly and validly authorized. Except as set
forth in this Agreement, the Commission Documents (as defined in Section 2.1(f))
or as set forth on Schedule
2.1(c)
hereto,
no shares of Common Stock or any other security of the Company are entitled
to
preemptive rights or registration rights and there are no outstanding options,
warrants, scrip, rights to subscribe to, call or commitments of any character
whatsoever relating to, or securities or rights convertible into, any shares
of
capital stock of the Company. Furthermore, except as set forth in this Agreement
and as set forth on Schedule
2.1(c)
hereto,
there are no contracts, commitments, understandings, or arrangements by which
the Company is or may become bound to issue additional shares of the capital
stock of the Company or options, securities or rights convertible into shares
of
capital stock of the Company. Except for customary transfer restrictions
contained in agreements entered into by the Company in order to sell restricted
securities or as provided on Schedule
2.1(c)
hereto,
the Company is not a party to or bound by any agreement or understanding
granting registration or anti-dilution rights to any person with respect to
any
of its equity or debt securities. Except as set forth on Schedule
2.1(c),
the
Company is not a party to, and it has no knowledge of, any agreement or
understanding restricting the voting or transfer of any shares of the capital
stock of the Company.
(d) Issuance
of Securities.
The
Notes and the Warrants to be issued at each Closing have been duly authorized
by
all necessary corporate action and, when paid for or issued in accordance with
the terms hereof, the Notes shall be validly issued and outstanding, free and
clear of all liens, encumbrances and rights of refusal of any kind. When the
Conversion Shares and Warrant Shares are issued and paid for in accordance
with
the terms of this Agreement and as set forth in the Notes and Warrants, such
shares will be duly authorized by all necessary corporate action and validly
issued and outstanding, fully paid and nonassessable, free and clear of all
liens, encumbrances and rights of refusal of any kind and the holders shall
be
entitled to all rights accorded to a holder of Common Stock. When the Option
Notes are issued in accordance with the terms of this Agreement, such Option
Notes will be duly authorized by all necessary corporate action and validly
issued and outstanding, free and clear of all liens, encumbrances and rights
of
refusal of any kind.
(e) No
Conflicts.
The
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Notes and the
consummation by the Company of the transactions contemplated hereby and thereby,
and the issuance of the Securities as contemplated hereby, do not and will
not
(i) violate or conflict with any provision of the Company's Articles of
Incorporation (the “Articles”)
or
Bylaws (the “Bylaws”),
each
as amended to date, or any Subsidiary's comparable charter documents, (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights
of
termination, amendment, acceleration or cancellation of, any agreement,
mortgage, deed of trust, indenture, note, bond, license, lease agreement,
instrument or obligation to which the Company or any of its Subsidiaries is
a
party or by which the Company or any of its Subsidiaries' respective properties
or assets are bound, or (iii) result in a violation of any federal, state,
local
or foreign statute, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the Company
or
any of its Subsidiaries or by which any property or asset of the Company or
any
of its Subsidiaries are bound or affected, except, in all cases, for such
conflicts, defaults, terminations, amendments, acceleration, cancellations
and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect (other than violations pursuant to clauses (i) or (iii) (with
respect to federal and state securities laws)). Neither
the Company nor any of its Subsidiaries is required under federal, state,
foreign or local law, rule or regulation to obtain any consent, authorization
or
order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under the Transaction Documents or issue and sell the Securities in accordance
with the terms hereof (other than any filings, consents and approvals which
may
be required to be made by the Company under applicable state and federal
securities laws, rules or regulations or any registration provisions provided
in
the Registration Rights Agreement).
(f) Commission
Documents, Financial Statements.
The
Common
Stock of the Company is registered pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"),
and
the Company
has timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the Commission pursuant to the reporting
requirements of the Exchange Act (all of the foregoing including filings
incorporated by reference therein being referred to herein as the "Commission
Documents").
At
the times of their respective filings, the Form 10-QSB for the fiscal quarters
ended June 30, 2005, December 31, 2004 and September 30, 2004 (collectively,
the
"Form
10-QSB")
and
the Form 10-KSB for the fiscal year ended March 31, 2005 (the “Form
10-KSB”)
complied in all material respects with the requirements of the Exchange Act
and
the rules and regulations of the Commission promulgated thereunder and other
federal, state and local laws, rules and regulations applicable to such
documents, and the Form 10-QSB and Form 10-KSB did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the
Commission Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations
of
the Commission or other applicable rules and regulations with respect thereto.
Such financial statements have been prepared in accordance with generally
accepted accounting principles ("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 or summary statements), and fairly present in
all
material respects the financial position of the Company and its Subsidiaries
as
of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
3
(g) Subsidiaries.
Schedule
2.1(g)
hereto
sets forth each Subsidiary of the Company, showing the jurisdiction of its
incorporation or organization and showing the percentage of each person's
ownership of the outstanding stock or other interests of such Subsidiary. For
the purposes of this Agreement, "Subsidiary"
shall
mean any corporation or other entity of which at least a majority of the
securities or other ownership interest having ordinary voting power (absolutely
or contingently) for the election of directors or other persons performing
similar functions are at the time owned directly or indirectly by the Company
and/or any of its other Subsidiaries. All of the outstanding shares of capital
stock of each Subsidiary have been duly authorized and validly issued, and
are
fully paid and nonassessable. Except as set forth on Schedule
2.1(g)
hereto,
there are no outstanding preemptive, conversion or other rights, options,
warrants or agreements granted or issued by or binding upon any Subsidiary
for
the purchase or acquisition of any shares of capital stock of any Subsidiary
or
any other securities convertible into, exchangeable for or evidencing the rights
to subscribe for any shares of such capital stock. Neither the Company nor
any
Subsidiary is subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any Subsidiary
or any convertible securities, rights, warrants or options of the type described
in the preceding sentence except as set forth on Schedule
2.1(g)
hereto.
Neither the Company nor any Subsidiary is party to, nor has any knowledge of,
any agreement restricting the voting or transfer of any shares of the capital
stock of any Subsidiary.
(h) No
Material Adverse Change.
Since
June 30, 2005, the Company has not experienced or suffered any Material Adverse
Effect, except as disclosed on Schedule
2.1(h)
hereto.
(i) No
Undisclosed Liabilities.
Except
as disclosed on Schedule
2.1(i)
hereto,
neither the Company nor any of its Subsidiaries has incurred any liabilities,
obligations, claims or losses (whether liquidated or unliquidated, secured
or
unsecured, absolute, accrued, contingent or otherwise) other than those incurred
in the ordinary course of the Company's or its Subsidiaries respective
businesses or which, individually or in the aggregate, are not reasonably likely
to have a Material Adverse Effect.
(j) No
Undisclosed Events or Circumstances.
Since
June 30, 2005, except as disclosed on Schedule
2.1(j)
hereto,
no event or circumstance has occurred or exists with respect to the Company
or
its Subsidiaries or their respective businesses, properties, prospects,
operations or financial condition, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.
(k) Indebtedness.
Schedule
2.1(k)
hereto
sets forth as of the date hereof all outstanding secured and unsecured
Indebtedness of the Company or any Subsidiary, or for which the Company or
any
Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess
of
$100,000 (other than trade accounts payable incurred in the ordinary course
of
business), (b) all guaranties, endorsements and other contingent obligations
in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or
similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $25,000 due under leases required
to be
capitalized in accordance with GAAP. Neither the Company nor any Subsidiary
is
in default with respect to any Indebtedness.
(l) Title
to Assets.
Each of
the Company and the Subsidiaries has good and valid title to all of its real
and
personal property reflected in the Commission Documents, free and clear of
any
mortgages, pledges, charges, liens, security interests or other encumbrances,
except for those indicated on Schedule
2.1(l)
hereto
or such that, individually or in the aggregate, do not cause a Material Adverse
Effect. Any leases of the Company and each of its Subsidiaries are valid and
subsisting and in full force and effect.
(m) Actions
Pending.
There
is no action, suit, claim, investigation, arbitration, alternate dispute
resolution proceeding or other proceeding pending or, to the knowledge of the
Company, threatened against the Company or any Subsidiary which questions the
validity of this Agreement or any of the other Transaction Documents or any
of
the transactions contemplated hereby or thereby or any action taken or to be
taken pursuant hereto or thereto. Except as set forth in the Commission
Documents or on Schedule
2.1(m)
hereto,
there is no action, suit, claim, investigation, arbitration, alternate dispute
resolution proceeding or other proceeding pending or, to the knowledge of the
Company, threatened against or involving the Company, any Subsidiary or any
of
their respective properties or assets, which individually or in the aggregate,
would reasonably be expected, if adversely determined, to have a Material
Adverse Effect. There are no outstanding orders, judgments, injunctions, awards
or decrees of any court, arbitrator or governmental or regulatory body against
the Company or any Subsidiary or any officers or directors of the Company or
Subsidiary in their capacities as such, which individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.
(n) Compliance
with Law.
The
business of the Company and the Subsidiaries has been and is presently being
conducted in accordance with all applicable federal, state and local
governmental laws, rules, regulations and ordinances, except as set forth in
the
Commission Documents or on Schedule
2.1(n)
hereto
or such that, individually or in the aggregate, the noncompliance therewith
could not reasonably be expected to have a Material Adverse Effect. The Company
and each of its Subsidiaries have all franchises, permits, licenses, consents
and other governmental or regulatory authorizations and approvals necessary
for
the conduct of its business as now being conducted by it unless the failure
to
possess such franchises, permits, licenses, consents and other governmental
or
regulatory authorizations and approvals, individually or in the aggregate,
could
not reasonably be expected to have a Material Adverse Effect.
(o) Taxes.
The
Company and each of the Subsidiaries has accurately prepared and filed all
federal, state and other tax returns required by law to be filed by it, has
paid
or made provisions for the payment of all taxes shown to be due and all
additional assessments, and adequate provisions have been and are reflected
in
the financial statements of the Company and the Subsidiaries for all current
taxes and other charges to which the Company or any Subsidiary is subject and
which are not currently due and payable. Except as disclosed on Schedule
2.1(o)
hereto
or in the Commission Documents, none of the federal income tax returns of the
Company or any Subsidiary have been audited by the Internal Revenue Service.
The
Company has no knowledge of any additional assessments, adjustments or
contingent tax liability (whether federal or state) of any nature whatsoever,
whether pending or threatened against the Company or any Subsidiary for any
period, nor of any basis for any such assessment, adjustment or
contingency.
(p) Certain
Fees.
Except
as set forth on Schedule
2.1(p)
hereto,
the Company has not employed any broker or finder or incurred any liability
for
any brokerage or investment banking fees, commissions, finders' structuring
fees, financial advisory fees or other similar fees in connection with the
Transaction Documents.
(q) Disclosure.
Except
for the transactions contemplated by this Agreement, the Company confirms that
neither it nor any other person acting on its behalf has provided any of the
Purchasers or their agents or counsel with any information that constitutes
or
might constitute material, nonpublic information. To the best of the Company's
knowledge, neither this Agreement or the Schedules hereto nor any other
documents, certificates or instruments furnished to the Purchasers by or on
behalf of the Company or any Subsidiary in connection with the transactions
contemplated by this Agreement contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
made
herein or therein, in the light of the circumstances under which they were
made
herein or therein, not misleading.
(r) Operation
of Business.
Except
as set forth on Schedule
2.1(r)
hereto,
the Company and each of the Subsidiaries owns or possesses the rights to all
patents, trademarks, domain names (whether or not registered) and any patentable
improvements or copyrightable derivative works thereof, websites and
intellectual property rights relating thereto, service marks, trade names,
copyrights, licenses and authorizations which are necessary for the conduct
of
its business as now conducted without any conflict with the rights of
others.
(s) Environmental
Compliance.
To the
best knowledge of the Company, except as set forth on Schedule
2.1(s)
hereto
or in the Commission Documents, the Company and each of its Subsidiaries have
obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. “Environmental Laws” shall mean all applicable laws relating to the
protection of the environment including, without limitation, all requirements
pertaining to reporting, licensing, permitting, controlling, investigating
or
remediating emissions, discharges, releases or threatened releases of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
materials or wastes, whether solid, liquid or gaseous in nature, into the air,
surface water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
hazardous substances, chemical substances, pollutants, contaminants or toxic
substances, material or wastes, whether solid, liquid or gaseous in nature.
To
the best of the Company’s knowledge, the Company has all necessary governmental
approvals required under all Environmental Laws as necessary for the Company’s
business or the business of any of its subsidiaries. To the best of the
Company’s knowledge, the Company and each of its subsidiaries are also in
compliance with all other limitations, restrictions, conditions, standards,
requirements, schedules and timetables required or imposed under all
Environmental Laws. Except for such instances as would not individually or
in
the aggregate have a Material Adverse Effect, there are no past or present
events, conditions, circumstances, incidents, actions or omissions relating
to
or in any way affecting the Company or its Subsidiaries that violate or may
violate any Environmental Law after the Initial Closing Date or that may give
rise to any environmental liability, or otherwise form the basis of any claim,
action, demand, suit, proceeding, hearing, study or investigation (i) under
any
Environmental Law, or (ii) based on or related to the manufacture, processing,
distribution, use, treatment, storage (including without limitation underground
storage tanks), disposal, transport or handling, or the emission, discharge,
release or threatened release of any hazardous substance.
(t) Books
and Records; Internal Accounting Controls.
The
records and documents of the Company and its Subsidiaries accurately reflect
in
all material respects the information relating to the business of the Company
and the Subsidiaries, the location and collection of their assets, and the
nature of all transactions giving rise to the obligations or accounts receivable
of the Company or any Subsidiary. The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient, in the judgment
of
the Company's board of directors, to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate actions are taken
with respect to any differences.
4
(u) Material
Agreements.
Except
for the Transaction Documents (with respect to clause (i) only), as disclosed
in
the Commission Documents or as set forth on Schedule
2.1(u)
hereto,
or as would not be reasonably likely to have a Material Adverse Effect, (i)
the
Company and each of its Subsidiaries have performed all obligations required
to
be performed by them to date under any written or oral contract, instrument,
agreement, commitment, obligation, plan or arrangement, filed or required to
be
filed with the Commission (the "Material
Agreements"),
(ii)
neither the Company nor any of its Subsidiaries has received any notice of
default under any Material Agreement and, (iii) to the best of the Company's
knowledge, neither the Company nor any of its Subsidiaries is in default under
any Material Agreement now in effect.
(v) Transactions
with Affiliates.
Except
as set forth on Schedule
2.1(v)
hereto
and in the Commission Documents, there are no loans, leases, agreements,
contracts, royalty agreements, management contracts or arrangements or other
continuing transactions between (a) the Company, any Subsidiary or any of their
respective customers or suppliers on the one hand, and (b) on the other hand,
any officer, employee, consultant or director of the Company, or any of its
Subsidiaries, or any person owning at least 5% of the outstanding capital stock
of the Company or any Subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any corporation or
other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder which, in each case, is required to be
disclosed in the Commission Documents or in the Company’s most recently filed
definitive proxy statement on Schedule 14A, that is not so disclosed in the
Commission Documents or in such proxy statement.
(w) Securities
Act of 1933.
Based
in material part upon the representations herein of the Purchasers, the Company
has complied and will comply with all applicable federal and state securities
laws in connection with the offer, issuance and sale of the Securities
hereunder. Neither the Company nor anyone acting on its behalf, directly or
indirectly, has or will sell, offer to sell or solicit offers to buy any of
the
Securities or similar securities to, or solicit offers with respect thereto
from, or enter into any negotiations relating thereto with, any person, or
has
taken or will take any action so as to bring the issuance and sale of any of
the
Securities under the registration provisions of the Securities Act and
applicable state securities laws, and neither the Company nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale
of
any of the Securities.
(x) Employees.
Neither
the Company nor any Subsidiary has any collective bargaining arrangements or
agreements covering any of its employees, except as set forth on Schedule
2.1(x)
hereto.
Except as set forth on Schedule
2.1(x)
hereto,
neither the Company nor any Subsidiary has any employment contract, agreement
regarding proprietary information, non-competition agreement, non-solicitation
agreement, confidentiality agreement, or any other similar contract or
restrictive covenant, relating to the right of any officer, employee or
consultant to be employed or engaged by the Company or such Subsidiary required
to be disclosed in the Commission Documents that is not so disclosed. No
officer, consultant or key employee of the Company or any Subsidiary whose
termination, either individually or in the aggregate, would be reasonably likely
to have a Material Adverse Effect, has terminated or, to the knowledge of the
Company, has any present intention of terminating his or her employment or
engagement with the Company or any Subsidiary.
(y) Absence
of Certain Developments.
Except
as set forth in the Commission Documents or provided on Schedule
2.1(y)
hereto,
since June 30, 2005, neither the Company nor any Subsidiary has:
(i) issued
any stock, bonds or other corporate securities or any right, options or warrants
with respect thereto;
(ii) borrowed
any amount in excess of $100,000 or incurred or become subject to any other
liabilities in excess of $100,000 (absolute or contingent) except current
liabilities incurred in the ordinary course of business which are comparable
in
nature and amount to the current liabilities incurred in the ordinary course
of
business during the comparable portion of its prior fiscal year, as adjusted
to
reflect the current nature and volume of the business of the Company and its
Subsidiaries;
(iii) discharged
or satisfied any lien or encumbrance in excess of $100,000 or paid any
obligation or liability (absolute or contingent) in excess of $100,000, other
than current liabilities paid in the ordinary course of business;
(iv) declared
or made any payment or distribution of cash or other property to stockholders
with respect to its stock, or purchased or redeemed, or made any agreements
so
to purchase or redeem, any shares of its capital stock, in each case in excess
of $50,000 individually or $100,000 in the aggregate;
(v) sold,
assigned or transferred any other tangible assets, or canceled any debts or
claims, in each case in excess of $100,000, except in the ordinary course of
business;
(vi) sold,
assigned or transferred any patent rights, trademarks, trade names, copyrights,
trade secrets or other intangible assets or intellectual property rights in
excess of $100,000, or disclosed any proprietary confidential information to
any
person except to customers in the ordinary course of business or to the
Purchasers or their representatives;
(vii) suffered
any material losses or waived any rights of material value, whether or not
in
the ordinary course of business, or suffered the loss of any material amount
of
prospective business;
(viii) made
any
changes in employee compensation except in the ordinary course of business
and
consistent with past practices;
(ix) made
capital expenditures or commitments therefor that aggregate in excess of
$100,000;
(x) entered
into any material transaction, whether or not in the ordinary course of
business;
(xi) made
charitable contributions or pledges in excess of $10,000;
(xii) suffered
any material damage, destruction or casualty loss, whether or not covered by
insurance;
(xiii) experienced
any material problems with labor or management in connection with the terms
and
conditions of their employment; or
(xiv) entered
into an agreement, written or otherwise, to take any of the foregoing
actions.
5
(z) Public
Utility Holding Company Act and Investment Company Act Status.
The
Company is not a “holding company” or a “public utility company” as such terms
are defined in the Public Utility Holding Company Act of 1935, as amended.
The
Company is not, and as a result of and immediately upon the Closing will not
be,
an “investment company” or a company “controlled” by an “investment company,”
within the meaning of the Investment Company Act of 1940, as
amended.
(aa) ERISA.
No
liability to the Pension Benefit Guaranty Corporation has been incurred with
respect to any Plan by the Company or any of its Subsidiaries which is or would
be materially adverse to the Company and its Subsidiaries. The execution and
delivery of this Agreement and the issuance and sale of the Securities will
not
involve any transaction which is subject to the prohibitions of Section 406
of
the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or in
connection with which a tax could be imposed pursuant to Section 4975 of the
Internal Revenue Code of 1986, as amended, provided that, if any of the
Purchasers, or any person or entity that owns a beneficial interest in any
of
the Purchasers, is an “employee pension benefit plan” (within the meaning of
Section 3(2) of ERISA) with respect to which the Company is a “party in
interest” (within the meaning of Section 3(14) of ERISA), the requirements of
Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in
this
Section 2.1(aa), the term “Plan” shall mean an “employee pension benefit plan”
(as defined in Section 3 of ERISA) which is or has been established or
maintained, or to which contributions are or have been made, by the Company
or
any Subsidiary or by any trade or business, whether or not incorporated, which,
together with the Company or any Subsidiary, is under common control, as
described in Section 414(b) or (c) of the Code.
(bb) Independent
Nature of Purchasers.
The
Company acknowledges that the obligations of each Purchaser under the
Transaction Documents are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the
performance of the obligations of any other Purchaser under the Transaction
Documents. The Company acknowledges that the decision of each Purchaser to
purchase Securities pursuant to this Agreement has been made by such Purchaser
independently of any other purchase and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial
or
otherwise) or prospects of the Company or of its Subsidiaries which may have
made or given by any other Purchaser or by any agent or employee of any other
Purchaser, and no Purchaser or any of its agents or employees shall have any
liability to any Purchaser (or any other person) relating to or arising from
any
such information, materials, statements or opinions. The Company acknowledges
that nothing contained herein, or in any Transaction Document, and no action
taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute
the Purchasers as a partnership, an association, a joint venture or any other
kind of entity, or create a presumption that the Purchasers are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. The Company acknowledges
that for reasons of administrative convenience only, the Transaction Documents
have been prepared by counsel for one of the Purchasers and such counsel does
not represent all of the Purchasers but only such Purchaser and the other
Purchasers have retained their own individual counsel with respect to the
transactions contemplated hereby. The Company acknowledges that it
has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers. The Company acknowledges that such procedure with
respect to the Transaction Documents in no way creates a presumption that the
Purchasers are in any way acting in concert or as a group with respect to the
Transaction Documents or the transactions contemplated hereby or
thereby.
(cc) No
Integrated Offering.
Neither
the Company, nor any of its affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security
or
solicited any offers to buy any security under circumstances that would cause
the offering of the Securities pursuant to this Agreement to be integrated
with
prior offerings by the Company for purposes of the Securities Act which would
prevent the Company from selling the Securities pursuant to Regulation D and
Rule 506 thereof under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will the Company or any of its affiliates
or subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.
The
Company does not have any registration statement pending before the Commission
or currently under the Commission’s review and except as set forth on
Schedule
2.1(cc)
hereto,
since February 1, 2005, the Company has not offered or sold any of its equity
securities or debt securities convertible into shares of Common
Stock.
(dd) ▇▇▇▇▇▇▇▇-▇▇▇▇▇
Act
.
The Company is in compliance with the applicable provisions of the
▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act of 2002 (the “▇▇▇▇▇▇▇▇-▇▇▇▇▇
Act”),
and
the rules and regulations promulgated thereunder, that are effective and intends
to comply with other applicable provisions of the ▇▇▇▇▇▇▇▇-▇▇▇▇▇ Act, and the
rules and regulations promulgated thereunder, upon the effectiveness of such
provisions.
(ee) Dilutive
Effect.
The
Company understands and acknowledges that its obligation to issue Conversion
Shares upon conversion of the Notes in accordance with this Agreement and the
Notes and its obligations to issue the Warrant Shares upon the exercise of
the
Warrants in accordance with this Agreement and the Warrants, is, in each case,
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interest of other stockholders of the
Company.
(ff) DTC
Status.
Except
as set forth on Schedule
2.1(ff)
hereto,
the Company’s transfer agent is a participant in and the Common Stock is
eligible for transfer pursuant to the Depository Trust Company Automated
Securities Transfer Program. The name, address, telephone number, fax number,
contact person and email of the Company transfer agent is set forth on
Schedule
2.1(ff)
hereto.
(gg) Acknowledgement
Regarding Purchasers’ Trading Activity.
The
Company understands and acknowledges that, one or more Purchasers may engage
in
hedging activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods that the value
of
the Conversion Shares and the Warrant Shares deliverable with respect to
Securities are being determined.
Section
2.2 Representations
and Warranties of the Purchasers.
Each of
the Purchasers hereby represents and warrants to the Company with respect solely
to itself and not with respect to any other Purchaser as follows as of the
date
hereof and as of each Closing Date:
(a) Organization
and Standing of the Purchasers.
If the
Purchaser is an entity, such Purchaser is a corporation, limited liability
company or partnership duly incorporated or organized, validly existing and
in
good standing under the laws of the jurisdiction of its incorporation or
organization.
(b) Authorization
and Power.
Each
Purchaser has the requisite power and authority to enter into and perform the
Transaction Documents and to purchase the Securities being sold to it hereunder.
The execution, delivery and performance of the Transaction Documents by each
Purchaser and the consummation by it of the transactions contemplated hereby
have been duly authorized by all necessary corporate or partnership action,
and
no further consent or authorization of such Purchaser or its Board of Directors,
stockholders, or partners, as the case may be, is required. When executed and
delivered by the Purchasers, the other Transaction Documents shall constitute
valid and binding obligations of each Purchaser enforceable against such
Purchaser in accordance with their terms, except as such enforceability may
be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation, conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditor's rights and remedies or by
other equitable principles of general application.
(c) No
Conflict.
The
execution, delivery and performance of the Transaction Documents by the
Purchaser and the consummation by the Purchaser of the transactions contemplated
thereby and hereby do not and will not (i) violate any provision of the
Purchaser’s charter or organizational documents, (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Purchaser is a party or by which the Purchaser’s respective
properties or assets are bound, or (iii) result in a violation of any federal,
state, local or foreign statute, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to
the
Purchaser or by which any property or asset of the Purchaser are bound or
affected, except, in all cases, other than violations pursuant to clauses (i)
or
(iii) (with respect to federal and state securities laws) above, except, for
such conflicts, defaults, terminations, amendments, acceleration, cancellations
and violations as would not, individually or in the aggregate, materially and
adversely affect the Purchaser’s ability to perform its obligations under the
Transaction Documents.
(d) Acquisition
for Investment.
Each
Purchaser is purchasing the Securities solely for its own account and not with
a
view to or for sale in connection with distribution. Each Purchaser does not
have a present intention to sell any of the Securities, nor a present
arrangement (whether or not legally binding) or intention to effect any
distribution of any of the Securities to or through any person or entity;
provided,
however,
that by
making the representations herein, such Purchaser does not agree to hold the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with Federal and state
securities laws applicable to such disposition. Each Purchaser acknowledges
that
it (i) has such knowledge and experience in financial and business matters
such
that Purchaser is capable of evaluating the merits and risks of Purchaser's
investment in the Company, (ii) is able to bear the financial risks associated
with an investment in the Securities and (iii) has been given full access to
such records of the Company and the Subsidiaries and to the officers of the
Company and the Subsidiaries as it has deemed necessary or appropriate to
conduct its due diligence investigation.
6
(e) Rule
144.
Each
Purchaser understands that the Securities must be held indefinitely unless
such
Securities are registered under the Securities Act or an exemption from
registration is available. Each Purchaser acknowledges that such person is
familiar with Rule 144 of the rules and regulations of the Commission, as
amended, promulgated pursuant to the Securities Act ("Rule
144"),
and
that such Purchaser has been advised that Rule 144 permits resales only under
certain circumstances. Each Purchaser understands that to the extent that Rule
144 is not available, such Purchaser will be unable to sell any Securities
without either registration under the Securities Act or the existence of another
exemption from such registration requirement.
(f) General.
Each
Purchaser understands that the Securities are being offered and sold in reliance
on a transactional exemption from the registration requirements of federal
and
state securities laws and the Company is relying upon the truth and accuracy
of
the representations, warranties, agreements, acknowledgments and understandings
of such Purchaser set forth herein in order to determine the applicability
of
such exemptions and the suitability of such Purchaser to acquire the Securities.
Each Purchaser understands that no United States federal or state agency or
any
government or governmental agency has passed upon or made any recommendation
or
endorsement of the Securities. Commencing on the date that the Purchasers were
initially contacted regarding an investment in the Securities, none of the
Purchasers has engaged in any short sale of the Common Stock and will not engage
in any short sale of the Common Stock prior to the consummation of the
transactions contemplated by this Agreement.
(g) No
General Solicitation.
Each
Purchaser acknowledges that the Securities were not offered to such Purchaser
by
means of any form of general or public solicitation or general advertising,
or
publicly disseminated advertisements or sales literature, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media, or broadcast over television or radio,
or
(ii) any seminar or meeting to which such Purchaser was invited by any of the
foregoing means of communications. Each Purchaser, in making the decision to
purchase the Securities, has relied upon independent investigation made by
it
and has not relied on any information or representations made by third
parties.
(h) Accredited
Investor.
Each
Purchaser is an “accredited investor” (as defined in Rule 501 of Regulation D),
and such Purchaser has such experience in business and financial matters that
it
is capable of evaluating the merits and risks of an investment in the
Securities. Such Purchaser is not required to be registered as a broker-dealer
under Section 15 of the Exchange Act and such Purchaser is not a broker-dealer.
Each Purchaser acknowledges that an investment in the Securities is speculative
and involves a high degree of risk.
(i) Certain
Fees.
The
Purchasers have not employed any broker or finder or incurred any liability
for
any brokerage or investment banking fees, commissions, finders' structuring
fees, financial advisory fees or other similar fees in connection with the
Transaction Documents.
(j) Independent
Investment.
No
Purchaser has agreed to act with any other Purchaser for the purpose of
acquiring, holding, voting or disposing of the Securities purchased hereunder
for purposes of Section 13(d) under the Exchange Act, and each Purchaser is
acting independently with respect to its investment in the Securities.
(k) Regulation
M.
Each Purchaser has complied and will comply with Regulation M promulgated under
the Exchange Act with respect to the transactions contemplated by this
Agreement.
ARTICLE
III
COVENANTS
The
Company covenants with each Purchaser as follows, which covenants are for the
benefit of each Purchaser and their respective permitted assignees.
Section
3.1 Securities
Compliance.
The
Company shall notify the Commission in accordance with its rules and
regulations, of the transactions contemplated by any of the Transaction
Documents 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 the Purchasers, or their respective
subsequent holders.
Section
3.2 Registration
and Listing.
The
Company shall cause its Common Stock to continue to be registered under Sections
12(b) or 12(g) of the Exchange Act, to comply in all respects with its reporting
and filing obligations under the Exchange Act, to comply with all requirements
related to any registration statement filed pursuant to this Agreement, and
to
not take any action or file any document (whether or not permitted by the
Securities Act or the rules promulgated thereunder) to terminate or suspend
such
registration or to terminate or suspend its reporting and filing obligations
under the Exchange Act or Securities Act, except as permitted herein. The
Company will take all action necessary to continue the listing or trading of
its
Common Stock on the OTC Bulletin Board or other exchange or market on which
the
Common Stock is trading. If required, the Company will promptly file the
“Listing Application” for, or in connection with, the issuance and delivery of
the Shares and the Warrant Shares. Subject to the terms of the Transaction
Documents, the Company further covenants that it will take such further action
as the Purchasers may reasonably request, all to the extent required from time
to time to enable the Purchasers to sell the Securities without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144 promulgated under the Securities Act. Upon the request of the
Purchasers, the Company shall deliver to the Purchasers a written certification
of a duly authorized officer as to whether it has complied with such
requirements.
Section
3.3 Inspection
Rights.
Provided
same would not be in violation of Regulation FD, the Company shall permit,
during normal business hours and upon reasonable request and reasonable notice,
each Purchaser or any employees, agents or representatives thereof, so long
as
such Purchaser shall be obligated hereunder to purchase the Notes or shall
beneficially own any Conversion Shares or Warrant Shares, for purposes
reasonably related to such Purchaser's interests as a stockholder, to examine
the publicly available, non-confidential records and books of account of, and
visit and inspect the properties, assets, operations and business of the Company
and any Subsidiary, and to discuss the publicly available, non-confidential
affairs, finances and accounts of the Company and any Subsidiary with any of
its
officers, consultants, directors, and key employees.
7
Section
3.4 Compliance
with Laws.
The
Company shall comply, and cause each Subsidiary to comply, with all applicable
laws, rules, regulations and orders, noncompliance with which would be
reasonably likely to have a Material Adverse Effect.
Section
3.5 Keeping
of Records and Books of Account.
The
Company shall keep and cause each Subsidiary to keep adequate records and books
of account, in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all financial transactions of the Company
and
its Subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
Section
3.6 Reporting
Requirements.
If the
Company ceases to file its periodic reports with the Commission, or if the
Commission ceases making these periodic reports available via the Internet
without charge, then the Company shall furnish the following to each Purchaser
so long as such Purchaser shall be obligated hereunder to purchase the
Securities or shall beneficially own Securities:
(a) Quarterly
Reports filed with the Commission on Form 10-QSB as soon as practical after
the
document is filed with the Commission, and in any event within five (5) days
after the document is filed with the Commission;
(b) Annual
Reports filed with the Commission on Form 10-KSB as soon as practical after
the
document is filed with the Commission, and in any event within five (5) days
after the document is filed with the Commission; and
(c) Copies
of
all notices, information and proxy statements in connection with any meetings,
that are, in each case, provided to holders of shares of Common Stock,
contemporaneously with the delivery of such notices or information to such
holders of Common Stock.
Section
3.7 Other
Agreements.
The
Company shall not enter into any agreement in which the terms of such agreement
would restrict or impair the right or ability to perform of the Company or
any
Subsidiary under any Transaction Document.
Section
3.8 Use
of
Proceeds.
The net
proceeds from the sale of the Securities hereunder shall be used by the Company
for working capital and general corporate purposes, including, but not limited
to, growth and capital initiatives, investor and public relations, acquisitions
and drilling activities, and not to redeem any Common Stock or securities
convertible, exercisable or exchangeable into Common Stock or to settle any
outstanding litigation.
Section
3.9 Reporting
Status. So
long
as a Purchaser beneficially owns any of the Securities, the Company shall timely
file all reports required to be filed with the Commission pursuant to the
Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or
the
rules and regulations thereunder would permit such termination.
Section
3.10 Disclosure
of Transaction.
The
Company shall issue a press release describing the material terms of the
transactions contemplated hereby (the “Press
Release”)
on the
day of the Initial Closing but in no event later than one hour after the
Closing; provided,
however,
that if
such Closing occurs after 4:00 P.M. Eastern Time on any Trading Day, the Company
shall issue the Press Release no later than 9:00 A.M. Eastern Time on the first
Trading Day following the Initial Closing Date. The Company shall also file
with
the Commission a Current Report on Form 8-K (the “Form
8-K”)
describing the material terms of the transactions contemplated hereby (and
attaching as exhibits thereto this Agreement, each form of Note, the
Registration Rights Agreement, the Security Agreement, each series of Warrant
and the Press Release) as soon as practicable following the Initial Closing
Date
but in no event more than two (2) Trading Days following the Initial Closing
Date, which Press Release and Form 8-K shall be subject to prior review and
comment by the Purchasers. "Trading
Day"
means
any day during which the principal exchange on which the Common Stock is traded
shall be open for trading.
Section
3.11 Disclosure
of Material Information.
The
Company covenants and agrees that neither it nor any other person acting on
its
behalf has provided or will provide any Purchaser or its agents or counsel
with
any information that the Company believes constitutes material non-public
information, unless prior thereto such Purchaser shall have executed a written
agreement regarding the confidentiality and use of such information.
The
Company understands and confirms that each Purchaser shall be relying on the
foregoing representations in effecting transactions in securities of the
Company.
Section
3.12 Pledge
of Securities.
The
Company acknowledges that the Securities may be pledged by a Purchaser in
connection with a bona fide
margin
agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer,
sale
or assignment of the Securities hereunder, and no Purchaser effecting a pledge
of the Securities shall be required to provide the Company with any notice
thereof or otherwise make any delivery to the Company pursuant to this Agreement
or any other Transaction Document; provided that a Purchaser and its pledgee
shall be required to comply with the provisions of Article V hereof in order
to
effect a sale, transfer or assignment of Securities to such pledgee. At the
Purchasers' expense, the Company hereby agrees to execute and deliver such
documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by a
Purchaser.
Section
3.13 Amendments.
The
Company shall not amend or waive any provision of the Articles or Bylaws of
the
Company in any way that would adversely affect exercise rights, voting rights,
conversion rights, prepayment rights or redemption rights of the holder of
the
Notes.
Section
3.14 Distributions.
So long
as any Notes or Warrants remain outstanding, the Company agrees that it shall
not (i) declare
or pay any dividends or make any distributions to any holder(s) of Common Stock
or (ii) purchase or otherwise acquire for value, directly or indirectly, any
Common Stock or other equity security of the Company.
Section
3.15 Reservation
of Shares.
So long
as any of the Notes or Warrants remain outstanding, the Company shall take
all
action necessary to at all times have authorized and reserved for the purpose
of
issuance, one hundred twenty percent (120%) of the aggregate number of shares
of
Common Stock needed to provide for the issuance of the Conversion Shares and
the
Warrant Shares.
Section
3.16 Transfer
Agent Instructions.
The
Company shall issue irrevocable instructions to its transfer agent, and any
subsequent transfer agent, to issue certificates, registered in the name of
each
Purchaser or its respective nominee(s), for the Conversion Shares and the
Warrant Shares in such amounts as specified from time to time by each Purchaser
to the Company upon conversion of the Notes or exercise of the Warrants in
the
form of Exhibit
N
attached
hereto (the “Irrevocable
Transfer Agent Instructions”).
Prior
to registration of the Conversion Shares and the Warrant Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in Section 5.1 of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred
to
in this Section 3.16 will be given by the Company to its transfer agent and
that
the Conversion Shares and Warrant Shares shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. Nothing in this Section 3.16
shall affect in any way each Purchaser’s obligations and agreements set forth in
Section 5.1 to comply with all applicable prospectus delivery requirements,
if
any, upon resale of the Conversion Shares and the Warrant Shares. If a Purchaser
provides the Company with an opinion of counsel, in a generally acceptable
form,
to the effect that a public sale, assignment or transfer of the Conversion
Shares or Warrant Shares may be made without registration
under the Securities Act or the Purchaser provides the Company with reasonable
assurances that the Conversion Shares or Warrant Shares can be sold pursuant
to
Rule 144 without any restriction as to the number of securities acquired as
of a
particular date that can then be immediately sold, the Company shall permit
the
transfer, and, in the case of the Conversion Shares and the Warrant Shares,
promptly instruct its transfer agent to issue one or more certificates in such
name and in such denominations as specified by such Purchaser and without any
restrictive legend. The Company acknowledges that a breach by it of its
obligations under this Section 3.16 will cause irreparable harm to the
Purchasers by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 3.16 will be inadequate
and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 3.16, that the Purchasers shall be entitled, in
addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
8
Section
3.17 Disposition
of Assets.
So long
as the Notes remain outstanding, neither the Company nor any subsidiary shall
sell, transfer or otherwise dispose of any of its properties, assets and rights
including, without limitation, its software and intellectual property, to any
person except for sales of obsolete assets and sales to customers in the
ordinary course of business or with the prior written consent of the holders
of
a majority of the principal amount of the Notes then outstanding.
Section
3.18 Form
SB-2 Eligibility. The
Company currently meets, and will take all necessary action to continue to
meet,
the "registrant eligibility" and transaction requirements set forth in the
general instructions to Form SB-2 applicable to "resale" registrations on
Form SB-2 during the Effectiveness Period (as defined in the Registration
Rights Agreement) and the
Company shall file all reports required to be filed by the Company with the
Commission in a timely manner so as to maintain such eligibility for the use
of
Form SB-2.
Section
3.19 Restrictions
on Certain Issuances of Securities.
So long
as at least fifty percent (50%) of the aggregate principal amount of the Notes
purchased pursuant to this Agreement remains outstanding, the Company shall
not
issue any securities that rank pari passu or senior to the Notes without the
prior written consent of at least seventy-five percent (75%) of the principal
amount of the Notes outstanding at such time.
Section
3.20 Increase
in Authorized Shares.
The
Company shall increase the number of its authorized shares of Common Stock
from
95,000,000 to 450,000,000 within forty-five (45) days of the Initial Closing
Date.
Section
3.21 Acquisition
of Assets.
In the
event the Company or any Subsidiary acquires any assets or other properties,
such assets or properties shall constitute a part of the Collateral (as defined
in the Security Agreement) and the Company shall take all action necessary
to
perfect the Purchasers’ security interest in such assets or properties pursuant
to the Security Agreement.
Section
3.22 Subsequent
Financings.
(a) Subject
to
the right of first refusal of the existing investors of the Company who
participated in the financing that closed in May 2005, for a period of one
(1)
year following the Second Closing Date so
long as
the Notes remain outstanding,
the
Company covenants and agrees to promptly notify (in no event later than five
(5)
days after making or receiving an applicable offer) in writing (a "Rights
Notice")
the
Purchasers of the terms and conditions of any proposed offer or sale to, or
exchange with (or other type of distribution to) any third party (a
“Subsequent
Financing”),
of
Common Stock or any securities convertible, exercisable or exchangeable into
Common Stock, including convertible debt securities (collectively, the
"Financing
Securities").
The
Rights Notice shall describe, in reasonable detail, the proposed Subsequent
Financing, the names and investment amounts of all investors participating
in
the Subsequent Financing, the proposed closing date of the Subsequent Financing,
which shall be within twenty (20) calendar days from the date of the Rights
Notice, and all of the terms and conditions thereof
and
proposed definitive documentation to be entered into in connection
therewith.
The
Rights Notice shall provide each Purchaser an option (the “Rights
Option”)
during
the ten (10) Trading Days following delivery of the Rights Notice (the
“Option
Period”)
to
inform the Company whether such Purchaser will purchase up
to its
pro rata portion of the securities being
offered in such Subsequent Financing on the same, absolute terms and conditions
as contemplated by such Subsequent Financing. If
any
Purchaser elects not to participate in such Subsequent Financing, the other
Purchasers may participate on a pro-rata basis so long as such participation
in
the aggregate does not exceed the total Purchase Price hereunder. For
purposes of this Section, all references to “pro rata” means, for any Purchaser
electing to participate in such Subsequent Financing, the percentage obtained
by
dividing (x) the principal amount of the Notes purchased by such Purchaser
at
each Closing by (y) the total principal amount of all of the Notes purchased
by
all of the participating Purchasers at each Closing. Delivery
of any Rights Notice constitutes a representation and warranty by the Company
that there are no other material terms and conditions, arrangements, agreements
or otherwise except for those disclosed in the Rights Notice, to provide
additional compensation to any party participating in any proposed Subsequent
Financing, including, but not limited to, additional compensation based on
changes in the Purchase Price or any type of reset or adjustment of a purchase
or conversion price or to issue additional securities at any time after the
closing date of a Subsequent Financing. If the Company does not receive notice
of exercise of the Rights Option from the Purchasers within the Option Period,
the Company shall have the right to close the Subsequent Financing on the
scheduled closing date with a third party; provided
that all
of the material terms and conditions of the closing are substantially the same
as those provided to the Purchasers in the Rights Notice. If the closing of
the
proposed Subsequent Financing does not occur on that date, any closing of the
contemplated Subsequent Financing or any other Subsequent Financing shall be
subject to all of the provisions of this Section 3.22(a), including, without
limitation, the delivery of a new Rights Notice. The provisions of this Section
3.22(a) shall not apply to issuances of securities in a Permitted
Financing.
(b) For
purposes
of this Agreement, a Permitted Financing (as defined hereinafter) shall not
be
considered a Subsequent Financing. A "Permitted
Financing"
shall
mean (i) securities issued (other than for cash) in connection with a merger,
acquisition, or consolidation, (ii) securities issued pursuant to a bona fide
firm underwritten public offering of the Company’s securities, (iii) securities
issued pursuant to the conversion or exercise of convertible or exercisable
securities issued or outstanding on or prior to the date hereof or issued
pursuant to this Agreement and the Notes, (iv) the Warrant Shares, (v)
securities issued in connection with bona fide strategic license agreements
or
other partnering arrangements so long as such issuances are not for the purpose
of raising capital, (vi) Common Stock issued or options to purchase Common
Stock
granted or issued pursuant to the Company’s employee stock purchase plans as
they now exist and stock incentive plans as they now exist or as may be amended
so long as the aggregate number of shares of Common Stock issued pursuant to
such stock incentive plans does not exceed 8,000,000, and (vii) any warrants
issued to the placement agent and its designees for the transactions
contemplated by this Agreement, and (viii) the
payment of any principal and accrued interest in shares of Common Stock pursuant
to the Notes.
(c) So
long
as the Notes are outstanding, if the Company enters into any Subsequent
Financing on terms more favorable than the terms governing the Notes, then
the
Purchasers in their sole discretion may exchange the Notes, valued at their
stated value, together with accrued but unpaid interest (which interest payments
shall be payable, at the sole option of the Purchasers, in cash or in the form
of the new securities to be issued in the Subsequent Financing), for the
securities issued or to be issued in the Subsequent Financing. The Company
covenants and agrees to promptly notify in writing the Purchasers of the terms
and conditions of any such proposed Subsequent Financing.
ARTICLE
IV
CONDITIONS
Section
4.1 Conditions
Precedent to the Obligation of the Company to Close and to Sell the
Securities.
The
obligation hereunder of the Company to close and issue and sell the Securities
to the Purchasers at each Closing is subject to the satisfaction or waiver,
at
or before each Closing of the conditions set forth below. These conditions
are
for the Company's sole benefit and may be waived by the Company at any time
in
its sole discretion.
(a) Accuracy
of the Purchasers’ Representations and Warranties.
The
representations and warranties of each Purchaser shall be true and correct
in
all material respects as of the date when made and as of each Closing Date
as
though made at that time, except for representations and warranties that are
expressly made as of a particular date, which shall be true and correct in
all
material respects as of such date.
(b) Performance
by the Purchasers.
Each
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by this Agreement to
be
performed, satisfied or complied with by the Purchasers at or prior to each
Closing Date.
(c) No
Injunction.
No
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits the consummation of any
of
the transactions contemplated by this Agreement.
(d) Delivery
of Purchase Price.
The
Purchase Price for the Securities shall have been delivered to the Company
on
each Closing Date.
(e) Delivery
of Transaction Documents.
The
Transaction Documents shall have been duly executed and delivered by the
Purchasers to the Company.
9
Section
4.2 Conditions
Precedent to the Obligation of the Purchasers to Close and to Purchase the
Securities.
The
obligation hereunder of the Purchasers to purchase the Securities and consummate
the transactions contemplated by this Agreement is subject to the satisfaction
or waiver, at or before each Closing, of each of the conditions set forth below.
These conditions are for the Purchasers’ sole benefit and may be waived by the
Purchasers at any time in their sole discretion.
(a) Accuracy
of the Company's Representations and Warranties.
Each of
the representations and warranties of the Company in this Agreement and the
other Transaction Documents shall be true and correct in all material respects
as of each Closing Date, except for representations and warranties that speak
as
of a particular date, which shall be true and correct in all material respects
as of such date.
(b) Performance
by the Company.
The
Company shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by this Agreement to
be
performed, satisfied or complied with by the Company at or prior to each Closing
Date.
(c) No
Suspension, Etc.
Trading
in the Common Stock shall not have been suspended by the Commission or the
OTC
Bulletin Board (except for any suspension of trading of limited duration agreed
to by the Company, which suspension shall be terminated prior to the Initial
Closing), and, at any time prior to each Closing Date, trading in securities
generally as reported by Bloomberg Financial Markets ("Bloomberg")
shall
not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by Bloomberg, or on the
New
York Stock Exchange, nor shall a banking moratorium have been declared either
by
the United States or New York State authorities,
nor
shall there have occurred any material outbreak or escalation of hostilities
or
other national or international calamity or crisis of such magnitude in its
effect on, or any material adverse change in any financial market which, in
each
case, in the judgment of such Purchaser, makes it impracticable or inadvisable
to purchase the Securities.
(d) No
Injunction.
No
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits the consummation of any
of
the transactions contemplated by this Agreement.
(e) No
Proceedings or Litigation.
No
action, suit or proceeding before any arbitrator or any governmental authority
shall have been commenced, and no investigation by any governmental authority
shall have been threatened, against the Company or any Subsidiary, or any of
the
officers, directors or affiliates of the Company or any Subsidiary seeking
to
restrain, prevent or change the transactions contemplated by this Agreement,
or
seeking damages in connection with such transactions.
(f) Opinion
of Counsel.
The
Purchasers shall have received an opinion of counsel to the Company, dated
the
date of each Closing, substantially in the form of Exhibit
O
hereto,
with such exceptions and limitations as shall be reasonably acceptable to
counsel to the Purchasers. The Purchasers shall also have received an opinion
of
Texas counsel to the Company relating to the Collateral (as defined in the
Security Agreement) located in the State of Texas, dated the Initial Closing
Date, substantially in the form of Exhibit
P
hereto,
with such exceptions and limitations as shall be reasonably acceptable to
counsel to the Purchasers.
(g) Notes
and Warrants.
At or
prior to each Closing, the Company shall have delivered to the Purchasers the
Notes (in such denominations as each Purchaser may request) and the Warrants
(in
such denominations as each Purchaser may request).
(h) Secretary's
Certificate.
The
Company shall have delivered to the Purchasers a secretary's certificate, dated
as of the Initial Closing Date, as to (i) the resolutions adopted by the Board
of Directors approving the transactions contemplated hereby, (ii) the Articles,
(iii) the Bylaws, each as in effect at the Closing, and (iv) the authority
and
incumbency of the officers of the Company executing the Transaction Documents
and any other documents required to be executed or delivered in connection
therewith.
(i) Officer's
Certificate.
On each
Closing Date, the Company shall have delivered to the Purchasers a certificate
signed by an executive officer on behalf of the Company, dated as of each
Closing Date, confirming the accuracy of the Company's representations,
warranties and covenants as of such Closing Date and confirming the compliance
by the Company with the conditions precedent set forth in paragraphs (b)-(e)
and
(l) of this Section 4.2 as of each Closing Date (provided that, with respect
to
the matters in paragraphs (d) and (e) of this Section 4.2, such confirmation
shall be based on the knowledge of the executive officer after due
inquiry).
(j) Registration
Rights Agreement.
As of
the Initial Closing Date, the Company shall have executed and delivered the
Registration Rights Agreement to each Purchaser.
(k) Material
Adverse Effect.
No
Material Adverse Effect shall have occurred.
(l) Transfer
Agent Instructions.
The
Irrevocable Transfer Agent Instructions, in the form of Exhibit
N
attached
hereto, shall have been delivered to the Company’s transfer agent.
(m) Security
Agreement.
At the
Initial Closing, the Company shall have executed and delivered the Security
Agreement to each Purchaser.
(n) UCC
Financing Statements.
The
Company shall have filed all UCC financing statements in form and substance
satisfactory to the Purchasers at the appropriate offices to create a valid
and
perfected security interest in the Collateral (as defined in the Security
Agreement).
Section
4.3 Conditions
Precedent to the Obligation of the Purchasers to Purchase the Option
Notes.
The
obligation hereunder of each Purchaser to acquire and pay for the Option Notes
is subject to the satisfaction or waiver, at or before the closing and sale
of
such Option Notes (the “Subsequent
Closing Date”),
of
each of the conditions set forth below. These conditions are for each
Purchaser’s sole benefit and may be waived by such Purchaser at any time in its
sole discretion.
(a) Accuracy
of the Company’s Representations and Warranties.
Each of
the representations and warranties of the Company in this Agreement and the
other Transaction Documents shall be true and correct in all material respects
as of the Subsequent Closing Date, except for representations and warranties
that speak as of a particular date, which shall be true and correct in all
material respects as of such date.
(b) Performance
by the Company.
The
Company shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by this Agreement to
be
performed, satisfied or complied with by the Company at or prior to the
Subsequent Closing Date.
(c) No
Suspension, Etc.
Trading
in the Common Stock shall not have been suspended by the Commission or the
OTC
Bulletin Board (except for any suspension of trading of limited duration agreed
to by the Company, which suspension shall be terminated prior to the Closing),
and, at any time prior to the Subsequent
Closing
Date, trading in securities generally as reported by Bloomberg Financial Markets
("Bloomberg")
shall
not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by Bloomberg, or on the
New
York Stock Exchange, nor shall a banking moratorium have been declared either
by
the United States or New York State authorities,
nor
shall a banking moratorium have been declared either by the United States or
New
York State authorities, nor shall there have occurred any material outbreak
or
escalation of hostilities or other national or international calamity or crisis
of such magnitude in its effect on, or any material adverse change in any
financial market which, in each case, in the judgment of such Purchaser, makes
it impracticable or inadvisable to purchase the Option Notes.
10
(d) No
Injunction.
No
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits the consummation of any
of
the transactions contemplated by this Agreement.
(e) No
Proceedings or Litigation.
No
action, suit or proceeding before any arbitrator or any governmental authority
shall have been commenced, and no investigation by any governmental authority
shall have been threatened, against the Company or any Subsidiary, or any of
the
officers, directors or affiliates of the Company or any Subsidiary seeking
to
restrain, prevent or change the transactions contemplated by this Agreement,
or
seeking damages in connection with such transactions.
(f) Opinion
of Counsel, Etc.
At the
Subsequent Closing Date, the Purchasers shall have received an opinion of
counsel to the Company, dated the date of the Subsequent Closing Date, in the
form of Exhibit
O
hereto,
and such other certificates and documents as the Purchasers or its counsel
shall
reasonably require incident to the Subsequent Closing.
(g) Option
Notes and Warrants.
At or
prior to the Subsequent Closing Date, the Company shall have delivered to the
Purchasers the Option Notes (in such denominations as each Purchaser may
request) and the Warrants, in each case, being acquired by the Purchasers at
the
Subsequent Closing Date.
(h) Officer’s
Certificate.
The
Company shall have delivered to the Purchasers a certificate of an executive
officer of the Company, dated as of the Subsequent Closing Date, confirming
the
accuracy of the Company’s representations, warranties and covenants as of such
Closing Date and confirming the compliance by the Company with the conditions
precedent set forth in this Section 4.3 as of the Subsequent Closing
Date.
(i) Material
Adverse Effect.
No
Material Adverse Effect shall have occurred at or before the Subsequent Closing
Date.
(j) Effective
Registration Statement.
The
Registration Statement shall have been declared effective by the
Commission.
ARTICLE
V
CERTIFICATE
LEGEND
Section
5.1 Legend.
Each
certificate representing the Securities shall be stamped or otherwise imprinted
with a legend substantially in the following form (in addition to any legend
required by applicable state securities or "blue sky" laws):
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR QUEST OIL CORPORATION SHALL HAVE RECEIVED AN OPINION
OF
COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER
THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
The
Company agrees to issue or reissue certificates representing any of the
Conversion Shares and the Warrant Shares, without the legend set forth above
if
at such time, prior to making any transfer of any such Conversion Shares or
Warrant Shares, such holder thereof shall give written notice to the Company
describing the manner and terms of such transfer and removal as the Company
may
reasonably request. Such proposed transfer and removal will not be effected
until: (a) either (i) the Company has received an opinion of counsel reasonably
satisfactory to the Company, to the effect that the registration of the
Conversion Shares or Warrant Shares under the Securities Act is not required
in
connection with such proposed transfer, (ii) a registration statement under
the
Securities Act covering such proposed disposition has been filed by the Company
with the Commission and has become effective under the Securities Act, (iii)
the
Company has received other evidence reasonably satisfactory to the Company
that
such registration and qualification under the Securities Act and state
securities laws are not required, or (iv) the holder provides the Company with
reasonable assurances that such security can be sold pursuant to Rule 144 under
the Securities Act; and (b) either (i) the Company has received an opinion
of
counsel reasonably satisfactory to the Company, to the effect that registration
or qualification under the securities or "blue sky" laws of any state is not
required in connection with such proposed disposition, (ii) compliance with
applicable state securities or "blue sky" laws has been effected, or (iii)
the
holder provides the Company with reasonable assurances that a valid exemption
exists with respect thereto. The Company will respond to any such notice from
a
holder within three (3) business days. In the case of any proposed transfer
under this Section 5.1, the Company will use reasonable efforts to comply with
any such applicable state securities or "blue sky" laws, but shall in no event
be required, (x) to qualify to do business in any state where it is not then
qualified, (y) to take any action that would subject it to tax or to the general
service of process in any state where it is not then subject, or (z) to comply
with state securities or “blue sky” laws of any state for which registration by
coordination is unavailable to the Company. The restrictions on transfer
contained in this Section 5.1 shall be in addition to, and not by way of
limitation of, any other restrictions on transfer contained in any other section
of this Agreement. Whenever
a
certificate representing the Conversion Shares or Warrant Shares is required
to
be issued to a Purchaser without a legend, in lieu of delivering physical
certificates representing the Conversion Shares or Warrant Shares, provided
the
Company's transfer agent is participating in the Depository Trust Company
("DTC")
Fast
Automated Securities Transfer program, the Company shall use its reasonable
best
efforts to cause its transfer agent to electronically transmit the Conversion
Shares or Warrant Shares to a Purchaser by crediting the account of such
Purchaser's Prime Broker with DTC through its Deposit Withdrawal Agent
Commission ("DWAC")
system
(to the extent not inconsistent with any provisions of this
Agreement).
11
ARTICLE
VI
INDEMNIFICATION
Section
6.1 General
Indemnity.
The
Company agrees to indemnify and hold harmless the Purchasers (and their
respective directors, officers, affiliates, agents, successors and assigns)
from
and against any and all losses, liabilities, deficiencies, costs, damages and
expenses (including, without limitation, reasonable attorneys’ fees, charges and
disbursements) incurred by the Purchasers as a result of any inaccuracy in
or
breach of the representations, warranties or covenants made by the Company
herein. Each Purchaser severally but not jointly agrees to indemnify and hold
harmless the Company and its directors, officers, affiliates, agents, successors
and assigns from and against any and all losses, liabilities, deficiencies,
costs, damages and expenses (including, without limitation, reasonable
attorneys’ fees, charges and disbursements) incurred by the Company as result of
any inaccuracy in or breach of the representations, warranties or covenants
made
by such Purchaser herein. The maximum aggregate liability of each Purchaser
pursuant to its indemnification obligations under this Article VI shall not
exceed the portion of the Purchase Price paid by such Purchaser hereunder.
Section
6.2 Indemnification
Procedure.
Any
party entitled to indemnification under this Article VI (an "indemnified party")
will give written notice to the indemnifying party of any matter giving rise
to
a claim for indemnification; provided, that the failure of any party entitled
to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VI except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any such action, proceeding or claim is brought against
an
indemnified party in respect of which indemnification is sought hereunder,
the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnifying party a conflict of interest between
it
and the indemnified party exists with respect to such action, proceeding or
claim (in which case the indemnifying party shall be responsible for the
reasonable fees and expenses of one separate counsel for the indemnified
parties), to assume the defense thereof with counsel reasonably satisfactory
to
the indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle
or
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then
the
indemnified party may, at its option, defend, settle or otherwise compromise
or
pay such action or claim. In any event, unless and until the indemnifying party
elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party's costs and expenses arising out
of
the defense, settlement or compromise of any such action, claim or proceeding
shall be losses subject to indemnification hereunder. The indemnified party
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party
and
shall furnish to the indemnifying party all information reasonably available
to
the indemnified party which relates to such action or claim. The indemnifying
party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto.
If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense. The indemnifying party shall not
be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent. Notwithstanding anything in this Article VI to the
contrary, the indemnifying party shall not, without the indemnified party's
prior written consent, settle or compromise any claim or consent to entry of
any
judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the indemnified party of a
release from all liability in respect of such claim. The indemnification
obligations to defend the indemnified party required by this Article VI shall
be
made by periodic payments of the amount thereof during the course of
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred, so long as the indemnified party shall refund
such moneys if it is ultimately determined by a court of competent jurisdiction
that such party was not entitled to indemnification. The
indemnity agreements contained herein shall be in addition to (a) any cause
of
action or similar rights of the indemnified party against the indemnifying
party
or others, and (b) any liabilities the indemnifying party may be subject to
pursuant to the law.
No
indemnifying party will be liable to the indemnified party under this Agreement
to the extent, but only to the extent that a loss, claim, damage or liability
is
attributable to the indemnified party’s breach of any of the representations,
warranties or covenants made by such party in this Agreement or in the other
Transaction Documents.
ARTICLE
VII
MISCELLANEOUS
Section
7.1 Fees
and Expenses.
Each
party shall pay the fees and expenses of its advisors, counsel, accountants
and
other experts, if any, and all other expenses, incurred by such party incident
to the negotiation, preparation, execution, delivery and performance of this
Agreement; provided,
however,
that
the Company shall pay all actual attorneys' fees and expenses (including
disbursements and out-of-pocket expenses) incurred by the Purchasers in
connection with (i) the preparation, negotiation, execution and delivery of
the
Transaction Documents and the transactions contemplated thereunder, which
payment shall be made at Closing and shall not exceed $45,000, including
attorneys’ fees for local Canadian counsel (plus disbursements and out-of-pocket
expenses), and (ii) any amendments, modifications or waivers of this Agreement
or any of the other Transaction Documents. In addition, the Company shall pay
all reasonable fees and expenses incurred by the Purchasers in connection with
the enforcement of this Agreement or any of the other Transaction Documents,
including, without limitation, all reasonable attorneys' fees and expenses.
Section
7.2 Specific
Performance; Consent to Jurisdiction; Venue.
(a) The
Company and the Purchasers acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement or the other
Transaction Documents were not performed in accordance with their specific
terms
or were otherwise breached. It is accordingly agreed that the parties shall
be
entitled to an injunction or injunctions to prevent or cure breaches of the
provisions of this Agreement or the other Transaction Documents and to enforce
specifically the terms and provisions hereof or thereof, this being in addition
to any other remedy to which any of them may be entitled by law or
equity.
(b) The
parties agree that venue for any dispute arising under this Agreement will
lie
exclusively in the state or federal courts located in New York County, New
York,
and the parties irrevocably waive any right to raise forum
non conveniens
or any
other argument that New York is not the proper venue. The parties irrevocably
consent to personal jurisdiction in the state and federal courts of the state
of
New York. The Company and each Purchaser consent to process being served in
any
such suit, action or proceeding by mailing a copy thereof to such party at
the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing in this Section 7.2 shall affect or limit any right to serve
process in any other manner permitted by law. The Company and the Purchasers
hereby agree that the prevailing party in any suit, action or proceeding arising
out of or relating to the Securities, this Agreement or the other Transaction
Documents, shall be entitled to reimbursement for reasonable legal fees from
the
non-prevailing party. The parties hereby waive all rights to a trial by jury.
Section
7.3 Entire
Agreement; Amendment.
This
Agreement and the Transaction Documents contain the entire understanding and
agreement of the parties with respect to the matters covered hereby and, except
as specifically set forth herein or in the other Transaction Documents, neither
the Company nor any Purchaser make any representation, warranty, covenant or
undertaking with respect to such matters, and they supersede all prior
understandings and agreements with respect to said subject matter, all of which
are merged herein. No provision of this Agreement may be waived or amended
other
than by a written instrument signed by the Company and the Purchasers holding
at
least a majority of the principal amount of the Notes then held by the
Purchasers. Any amendment or waiver effected in accordance with this Section
7.3
shall be binding upon each Purchaser (and their permitted assigns) and the
Company.
12
Section
7.4 Notices.
Any
notice, demand, request, waiver or other communication required or permitted
to
be given hereunder shall be in writing and shall be effective (a) upon hand
delivery by telecopy or facsimile at the address or number designated below
(if
delivered on a business day during normal business hours where such notice
is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice
is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses
for
such communications shall be:
If
to the
Company: Quest
Oil
Corporation
▇▇▇▇
▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇,
▇▇, ▇▇▇▇▇▇ ▇▇▇ ▇▇▇
Attention:
Chief Executive Officer
Tel.
No.:
(▇▇▇) ▇▇▇-▇▇▇▇
Fax
No.:
(▇▇▇) ▇▇▇-▇▇▇▇
with
copies (which copies
shall
not
constitute notice
to
the
Company) to: The
▇▇▇▇
Law Firm
▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention:
▇▇▇▇ ▇. ▇▇▇▇
Tel.
No.: (▇▇▇) ▇▇▇-▇▇▇▇, ext. 205
Fax
No.: (▇▇▇) ▇▇▇-▇▇▇▇
If
to any
Purchaser: At
the
address of such Purchaser set forth on Exhibit
A
to this
Agreement, with copies to Purchaser’s counsel as set forth on Exhibit
A
or as
specified in writing by such Purchaser with copies to:
▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP
▇▇▇▇
▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇
▇▇▇▇,
▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention:
▇▇▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Tel.
No.:
(▇▇▇) ▇▇▇-▇▇▇▇
Fax
No.:
(▇▇▇) ▇▇▇-▇▇▇▇
Any
party
hereto may from time to time change its address for notices by giving written
notice of such changed address to the other party hereto.
Section
7.5 Waivers.
No
waiver by either party of any default with respect to any provision, condition
or requirement of this Agreement shall be deemed to be a continuing waiver
in
the future or a waiver of any other provision, condition or requirement hereof,
nor shall any delay or omission of any party to exercise any right hereunder
in
any manner impair the exercise of any such right accruing to it thereafter.
No
consideration shall be offered or paid to any Purchaser to amend or consent
to a
waiver or modification of any provision of any of the Transaction Documents
unless the same consideration is also offered to all of the parties to the
Transaction Documents. This provision constitutes a separate right granted
to
each Purchaser by the Company and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.
Section
7.6 Headings.
The
article, section and subsection headings in this Agreement are for convenience
only and shall not constitute a part of this Agreement for any other purpose
and
shall not be deemed to limit or affect any of the provisions
hereof.
Section
7.7 Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns. After the Initial Closing, the assignment by
a
party to this Agreement of any rights hereunder shall not affect the obligations
of such party under this Agreement. Subject to Section 5.1 hereof, the
Purchasers may assign the Securities and its rights under this Agreement and
the
other Transaction Documents and any other rights hereto and thereto without
the
consent of the Company.
Section
7.8 No
Third Party Beneficiaries.
This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns and is not for the benefit of, nor may any
provision hereof be enforced by, any other person.
Section
7.9 Governing
Law.
This
Agreement shall be governed by and construed in accordance with the internal
laws of the State of New York, without giving effect to any of the conflicts
of
law principles which would result in the application of the substantive law
of
another jurisdiction. This
Agreement shall not be interpreted or construed with any presumption against
the
party causing this Agreement to be drafted.
Section
7.10 Survival.
The
representations and warranties of the Company and the Purchasers shall survive
the execution and delivery hereof and the Initial Closing until the second
anniversary of the Closing Date, except the agreements and covenants set forth
in Articles I, III, V, VI and VII of this Agreement shall survive the execution
and delivery hereof and such Closing hereunder.
Section
7.11 Counterparts.
This
Agreement may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument and shall become effective
when counterparts have been signed by each party and delivered to the other
parties hereto, it being understood that all parties need not sign the same
counterpart.
Section
7.12 Publicity.
The
Company agrees that it will not disclose, and will not include in any public
announcement, the names of the Purchasers without the consent of the Purchasers,
which consent shall not be unreasonably withheld or delayed, or unless and
until
such disclosure is required by law, rule or applicable regulation, including
without limitation any disclosure pursuant to the Registration Statement, and
then only to the extent of such requirement.
Section
7.13 Severability.
The
provisions of this Agreement are severable and, in the event that any court
of
competent jurisdiction shall determine that any one or more of the provisions
or
part of the provisions contained in this Agreement shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision or part
of a
provision of this Agreement and this Agreement shall be reformed and construed
as if such invalid or illegal or unenforceable provision, or part of such
provision, had never been contained herein, so that such provisions would be
valid, legal and enforceable to the maximum extent possible.
Section
7.14 Further
Assurances.
From
and after the date of this Agreement, upon the request of the Purchasers or
the
Company, the Company and each Purchaser shall execute and deliver such
instruments, documents and other writings as may be reasonably necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement and the other Transaction Documents.
[REMAINDER
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KL2:2407594.9
13
IN
WITNESS WHEREOF, the parties hereto have caused this Note and Warrant Purchase
Agreement to be duly executed by their respective authorized officers as of
the
date first above written.
QUEST
OIL CORPORATION
By:_____________________________________
Name:
Title:
PURCHASER:
By:_____________________________________
Name:
Title:
14