Exhibit 4.1
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of October 25,
2006, by and among Wizzard Software Corp., a Colorado corporation (the
"Company"), and the subscribers identified on the signature page hereto (each
a "Subscriber" and collectively "Subscribers").
WHEREAS, the Company and the Subscribers are executing and delivering
this Agreement in reliance upon an exemption from securities registration
afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D
("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "1933 Act").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers, in the aggregate, shall
purchase up to One Million Seven Hundred Fifty Thousand Dollars ($1,750,000)
(the "Purchase Price") of principal amount of promissory notes of the Company
("Note" or "Notes") at a per share conversion price set forth in the Note
("Conversion Price") and common stock purchase warrants (the "Warrants") in
the form attached hereto as Exhibit A1 and Exhibit A2, to purchase shares of
Common Stock (the "Warrant Shares"). The Notes, shares of Common Stock
issuable upon conversion of the Notes (the "Shares"), the Warrants and the
Warrant Shares are collectively referred to herein as the "Securities"; and
WHEREAS, the aggregate proceeds of the sale of the Notes and the
Warrants contemplated hereby shall be held in escrow pending the closing of
the transactions contemplated by this Agreement pursuant to the terms of a
Funds Escrow Agreement to be executed by the parties substantially in the form
attached hereto as Exhibit B (the "Escrow Agreement").
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement the Company and the Subscribers hereby
agree as follows:
1. Closing. Subject to the satisfaction or waiver of the
terms and conditions of this Agreement, on the Closing Date, each Subscriber
shall purchase and the Company shall sell to each Subscriber a Note in the
principal amount designated on the signature page hereto for the purchase
price set forth on the signature page hereto. The consummation of the
transactions contemplated herein shall take place at the offices of Grushko &
▇▇▇▇▇▇▇, P.C., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, as soon
as practicable following the satisfaction or waiver of all conditions to
closing set forth in this Agreement. The closing date shall be October 25,
2006 provided all deliveries required to be made by the Company and
Subscribers are made on or before November 3, 2006 (the "Closing Date").
2. Class A Warrants. On the Closing Date, the Company will
issue and deliver Class A Warrants to the Subscribers. Fifty (50) Class A
Warrants will be issued for each one hundred (100) Shares which would be
issued on the Closing Date assuming the complete conversion of the Notes
issued on the Closing Date at the Conversion Price in effect on the Closing
Date. The per Warrant Share exercise price to acquire a Warrant Share upon
exercise of a Class A Warrant shall be $2.50. The Class A Warrants shall be
exercisable until three (3) years after the Closing Date. The Class A
Warrants shall have a cashless feature.
3. Class B Warrants. On the Closing Date, the Company will
issue and deliver Class B Warrants to the Subscribers. One Hundred (100)
Class B Warrants will be issued for each one hundred (100) Shares which would
be issued on the Closing Date assuming the complete conversion of the Notes
issued on the Closing Date at the Conversion Price in effect on the Closing
Date. The per Warrant Share exercise price to acquire a Warrant Share upon
exercise of a Class B Warrant shall be equal to $2.00. The Class B Warrants
shall be exercisable from the Closing Date until the Registration Statement
described in Section 11.1(iv) of this Agreement has been effective for the
public, unrestricted and registered resale of the Warrant Shares for one
hundred and fifty (150) days. The Class B Warrants shall have a cashless
feature. Collectively, the Class A and Class B Warrants are referred to
herein as "Warrants".
4. Subscriber's Representations and Warranties. Each
Subscriber hereby represents and warrants to and agrees with the Company only
as to such Subscriber that:
(a) Organization and Standing of the Subscribers. If the
Subscriber is an entity, such Subscriber is a corporation, partnership or
other entity duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization and has the requisite corporate power to own its assets and to
carry on its business.
(b) Authorization and Power. Each Subscriber has the
requisite power and authority to enter into and perform this Agreement and to
purchase the Notes and Warrants being sold to it hereunder. The execution,
delivery and performance of this Agreement by such Subscriber and the
consummation by it of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate or partnership action, and no
further consent or authorization of such Subscriber or its Board of Directors,
stockholders, partners, members, as the case may be, is required. This
Agreement has been duly authorized, executed and delivered by such Subscriber
and constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Subscriber enforceable against the Subscriber in
accordance with the terms thereof.
(c) No Conflicts. The execution, delivery and performance
of this Agreement and the consummation by such Subscriber of the transactions
contemplated hereby or relating hereto do not and will not (i) result in a
violation of such Subscriber's charter documents or bylaws or other
organizational documents or (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, indenture or instrument or obligation to which
such Subscriber is a party or by which its properties or assets are bound, or
result in a violation of any law, rule, or regulation, or any order, judgment
or decree of any court or governmental agency applicable to such Subscriber or
its properties (except for such conflicts, defaults and violations as would
not, individually or in the aggregate, have a material adverse effect on such
Subscriber). Such Subscriber is not required 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 this Agreement or to purchase the Notes or acquire the
Warrants in accordance with the terms hereof, provided that for purposes of
the representation made in this sentence, such Subscriber is assuming and
relying upon the accuracy of the relevant representations and agreements of
the Company herein.
(d) Information on Company. The Subscriber has been
furnished with or has had access at the ▇▇▇▇▇ Website of the Commission to the
Company's Form 10-KSB for the year ended December 31, 2005 and all periodic
and current reports filed with the Commission thereafter not later than five
days before the Closing Date (hereinafter referred to as the "Reports"). In
addition, the Subscriber has received in writing from the Company such other
information concerning its operations, financial condition and other matters
as the Subscriber has requested in writing (such other information is
collectively, the "Other Written Information"), and considered all factors the
Subscriber deems material in deciding on the advisability of investing in the
Securities.
(e) Information on Subscriber. The Subscriber is, and
will be at the time of the conversion of the Notes and exercise of the
Warrants, an "accredited investor", as such term is defined in Regulation D
promulgated by the Commission under the 1933 Act, is experienced in
investments and business matters, has made investments of a speculative nature
and has purchased securities of United States publicly-owned companies in
private placements in the past and, with its representatives, has such
knowledge and experience in financial, tax and other business matters as to
enable the Subscriber to utilize the information made available by the Company
to evaluate the merits and risks of and to make an informed investment
decision with respect to the proposed purchase, which represents a speculative
investment. The Subscriber has the authority and is duly and legally
qualified to purchase and own the Securities. The Subscriber is able to bear
the risk of such investment for an indefinite period and to afford a complete
loss thereof. The information set forth on the signature page hereto
regarding the Subscriber is accurate. The Subscriber is not required to be
registered as a broker-dealer under Section 15 of the Securities Exchange Act
of 1934, as amended (the "1934 Act") and the Subscriber is not a broker-
dealer.
(f) Purchase of Notes and Warrants. On the Closing Date,
the Subscriber will purchase the Notes and Warrants as principal for its own
account for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof, but Subscriber
does not agree to hold the Notes and Warrants for any minimum amount of time.
(g) Compliance with Securities Act. The Subscriber
understands and agrees that the Securities have not been registered under the
1933 Act or any applicable state securities laws, by reason of their issuance
in a transaction that does not require registration under the 1933 Act (based
in part on the accuracy of the representations and warranties of Subscriber
contained herein), and that such Securities must be held indefinitely unless a
subsequent disposition is registered under the 1933 Act or any applicable
state securities laws or is exempt from such registration. Notwithstanding
anything to the contrary contained in this Agreement, such Subscriber may
transfer (without restriction and without the need for an opinion of counsel)
the Securities to its Affiliates (as defined below) provided that each such
Affiliate is an "accredited investor" under Regulation D and such Affiliate
agrees to be bound by the terms and conditions of this Agreement. For the
purposes of this Agreement, an "Affiliate" of any person or entity means any
other person or entity directly or indirectly controlling, controlled by or
under direct or indirect common control with such person or entity. Affiliate
when employed in connection with the Company includes each Subsidiary [as
defined in Section 5(a)] of the Company. For purposes of this definition,
"control" means the power to direct the management and policies of such person
or firm, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
(h) Shares Legend. The Shares and the Warrant Shares
shall bear the following or similar legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES
ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO WIZZARD
SOFTWARE CORP. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(i) Warrants Legend. The Warrants shall bear the following or
similar legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO WIZZARD
SOFTWARE CORP. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(j) Note Legend. The Note shall bear the following legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND
THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS
NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
WIZZARD SOFTWARE CORP. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(k) Communication of Offer. The offer to sell the Securities
was directly communicated to the Subscriber by the Company. At no time was
the Subscriber presented with or solicited by any leaflet, newspaper or
magazine article, radio or television advertisement, or any other form of
general advertising or solicited or invited to attend a promotional meeting
otherwise than in connection and concurrently with such communicated offer.
(l) Authority; Enforceability. This Agreement and other
agreements delivered together with this Agreement or in connection herewith
have been duly authorized, executed and delivered by the Subscriber and are
valid and binding agreements enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights generally and to general principles of equity; and
Subscriber has full corporate power and authority necessary to enter into this
Agreement and such other agreements and to perform its obligations hereunder
and under all other agreements entered into by the Subscriber relating hereto.
(m) No Governmental Review. Each Subscriber understands
that no United States federal or state agency or any other governmental or
state agency has passed on or made recommendations or endorsement of the
Securities or the suitability of the investment in the Securities nor have
such authorities passed upon or endorsed the merits of the offering of the
Securities.
(n) No Market Manipulation. No Subscriber has taken, and
will not take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the
Securities or affect the price at which the Securities may be issued or
resold.
(o) Correctness of Representations. Each Subscriber
represents as to such Subscriber that the foregoing representations and
warranties are true and correct as of the date hereof and, unless a Subscriber
otherwise notifies the Company prior to each Closing Date shall be true and
correct as of each Closing Date.
(p) Survival. The foregoing representations and
warranties shall survive the Closing Date for a period of three years.
5. Company Representations and Warranties. The Company
represents and warrants to and agrees with each Subscriber that:
(a) Due Incorporation. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has the requisite corporate power to own
its properties and to carry on its business is disclosed in the Reports. The
Company is duly qualified as a foreign corporation to do business and is in
good standing in each jurisdiction where the nature of the business conducted
or property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a Material
Adverse Effect. For purpose of this Agreement, a "Material Adverse Effect"
shall mean a material adverse effect on the financial condition, results of
operations, properties or business of the Company taken individually, or in
the aggregate, as a whole. For purposes of this Agreement, "Subsidiary"
means, with respect to any entity at any date, any corporation, limited or
general partnership, limited liability company, trust, estate, association,
joint venture or other business entity) of which more than 50% of (i) the
outstanding capital stock having (in the absence of contingencies) ordinary
voting power to elect a majority of the board of directors or other managing
body of such entity, (ii) in the case of a partnership or limited liability
company, the interest in the capital or profits of such partnership or limited
liability company or (iii) in the case of a trust, estate, association, joint
venture or other entity, the beneficial interest in such trust, estate,
association or other entity business is, at the time of determination, owned
or controlled directly or indirectly through one or more intermediaries, by
such entity. All the Company's Subsidiaries as of the Closing Date are set
forth on Schedule 5(a) hereto.
(b) Outstanding Stock. All issued and outstanding shares
of capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable.
(c) Authority; Enforceability. This Agreement, the Note,
the Warrants, and the Escrow Agreement, and any other agreements delivered
together with this Agreement or in connection herewith (collectively
"Transaction Documents") have been duly authorized, executed and delivered by
the Company and are valid and binding agreements enforceable in accordance
with their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights generally and to general principles of
equity. The Company has full corporate power and authority necessary to enter
into and deliver the Transaction Documents and to perform its obligations
thereunder.
(d) Additional Issuances. There are no outstanding
agreements or preemptive or similar rights affecting the Company's or any of
its Subsidiaries' Common Stock or other equity and no outstanding rights,
warrants or options to acquire, or instruments convertible into or
exchangeable for, or agreements or understandings with respect to the sale or
issuance of any Common Stock or equity of the Company except as described on
Schedule 5(d). The Common Stock and all other equity of the Company and its
Subsidiaries on a fully diluted basis outstanding as of the last trading day
preceding the Closing Date is set forth on Schedule 5(d).
(e) Consents. No consent, approval, authorization or
order of any court, governmental agency or body or arbitrator having
jurisdiction over the Company, or any of its Affiliates, any Principal Market
(as defined in Section 9(b) of this Agreement), nor the Company's shareholders
is required for the execution by the Company of the Transaction Documents and
compliance and performance by the Company of its obligations under the
Transaction Documents, including, without limitation, the issuance and sale of
the Securities.
(f) No Violation or Conflict. Assuming the
representations and warranties of the Subscribers in Section 4 are true and
correct, neither the issuance and sale of the Securities nor the performance
of the Company's obligations under this Agreement and all other agreements
entered into by the Company relating thereto by the Company will:
(i) violate, conflict with, result in a breach of,
or constitute a default (or an event which with the giving of notice or the
lapse of time or both would be reasonably likely to constitute a default)
under (A) the articles or certificate of incorporation, charter or bylaws of
the Company, (B) to the Company's knowledge, any decree, judgment, order, law,
treaty, rule, regulation or determination applicable to the Company of any
court, governmental agency or body, or arbitrator having jurisdiction over the
Company or over the properties or assets of the Company or any of its
Affiliates, (C) the terms of any bond, debenture, note or any other evidence
of indebtedness, or any agreement, stock option or other similar plan,
indenture, lease, mortgage, deed of trust or other instrument to which the
Company or any of its Affiliates is a party, by which the Company or any of
its Affiliates is bound, or to which any of the properties of the Company or
any of its Affiliates is subject, or (D) the terms of any "lock-up" or similar
provision of any underwriting or similar agreement to which the Company, or
any of its Affiliates is a party except the violation, conflict, breach, or
default of which would not have a Material Adverse Effect; or
(ii) result in the creation or imposition of any
lien, charge or encumbrance upon the Securities or any of the assets of the
Company or any of its Affiliates; or
(iii) result in the activation of any anti-dilution
rights or a reset or repricing of any debt or security instrument of any other
creditor or equity holder of the Company, nor result in the acceleration of
the due date of any obligation of the Company; or
(iv) result in the activation of any piggy-back
registration rights of any person or entity holding securities of the Company
or having the right to receive securities of the Company.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security
interests, liens, claims or other encumbrances, subject to restrictions upon
transfer under the 1933 Act and any applicable state securities laws;
(ii) have been, or will be, duly and validly
authorized and on the date of issuance of the Shares and upon exercise of the
Warrants, the Shares and Warrant Shares will be duly and validly issued, fully
paid and nonassessable or if registered pursuant to the 1933 Act, and resold
pursuant to an effective registration statement will be free trading and
unrestricted);
(iii) will not have been issued or sold in violation
of any preemptive or other similar rights of the holders of any securities of
the Company; and
(iv) will not subject the holders thereof to personal
liability by reason of being such holders.
(h) Litigation. There is no pending or, to the best
knowledge of the Company, threatened action, suit, proceeding or investigation
before any court, governmental agency or body, or arbitrator having
jurisdiction over the Company, or any of its Affiliates that would affect the
execution by the Company or the performance by the Company of its obligations
under the Transaction Documents. Except as disclosed in the Reports, there is
no pending or, to the best knowledge of the Company, basis for or threatened
action, suit, proceeding or investigation before any court, governmental
agency or body, or arbitrator having jurisdiction over the Company, or any of
its Affiliates which litigation if adversely determined would have a Material
Adverse Effect.
(i) Reporting Company. The Company is a publicly-held
company subject to reporting obligations pursuant to Section 13 of the 1934
Act (the "1934 Act") and has a class of common shares registered pursuant to
Section 12(g) of the 1934 Act. Pursuant to the provisions of the 1934 Act,
the Company has timely filed all reports and other materials required to be
filed thereunder with the Commission during the preceding twelve months.
(j) No Market Manipulation. The Company has not taken,
and will not take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Securities or affect the price at which the Securities may be issued or
resold.
(k) Information Concerning Company. The Reports contain
all material information relating to the Company and its operations and
financial condition as of their respective dates and all the information
required to be disclosed therein, except for such omissions as have
subsequently been corrected through filing of amended Reports prior to five
days preceding the Closing Date. Since the last day of the fiscal year of
the most recent audited financial statements included in the Reports ("Latest
Financial Date"), and except as modified in the Other Written Information or
in the Schedules hereto, there has been no Material Adverse Event relating to
the Company's business, financial condition or affairs not disclosed in the
Reports. The Reports including the financial statements therein do not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances when made.
(l) Stop Transfer. The Securities, when issued, will be
restricted securities. The Company will not issue any stop transfer order or
other order impeding the sale, resale or delivery of any of the Securities,
except as may be required by any applicable federal or state securities laws
and unless contemporaneous notice of such instruction is given to the
Subscriber.
(m) Defaults. The Company is not in violation of its
articles of incorporation or bylaws. The Company is (i) not in default under
or in violation of any other material agreement or instrument to which it is a
party or by which it or any of its properties are bound or affected, which
default or violation would have a Material Adverse Effect, (ii) not in default
with respect to any order of any court, arbitrator or governmental body or
subject to or party to any order of any court or governmental authority
arising out of any action, suit or proceeding under any statute or other law
respecting antitrust, monopoly, restraint of trade, unfair competition or
similar matters, or (iii) to the Company's knowledge not in violation of any
statute, rule or regulation of any governmental authority which violation
would have a Material Adverse Effect.
(n) Not an 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 offer
of the Securities pursuant to this Agreement to be integrated with prior
offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions, including, without limitation, under the
rules and regulations of the OTC Bulletin Board ("Bulletin Board") which would
impair the exemptions relied upon in this Offering or the Company's ability to
timely comply with its obligations hereunder. Nor will the Company or any of
its Affiliates take any action or steps that would cause the offer or issuance
of the Securities to be integrated with other offerings which would impair the
exemptions relied upon in this Offering or the Company's ability to timely
comply with its obligations hereunder. The Company will not conduct any
offering other than the transactions contemplated hereby that will be
integrated with the offer or issuance of the Securities, which would impair
the exemptions relied upon in this Offering or the Company's ability to timely
comply with its obligations hereunder.
(o) No General Solicitation. Neither the Company, nor any
of its Affiliates, nor to its knowledge, 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 ▇▇▇▇ ▇▇▇) in connection with the
offer or sale of the Securities.
(p) Listing. The Company's common stock is quoted on the
Bulletin Board under the symbol WIZD.OB. The Company has not received any
oral or written notice that its common stock is not eligible nor will become
ineligible for quotation on the Bulletin Board nor that its common stock does
not meet all requirements for the continuation of such quotation. The Company
satisfies all the requirements for the continued quotation of its common stock
on the Bulletin Board.
(q) No Undisclosed Events or Circumstances. Since the
Latest Financial Date, no event or circumstance has occurred or exists with
respect to the Company or its businesses, properties, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which
has not been so publicly announced or disclosed in the Reports.
(r) Capitalization. The authorized and outstanding
capital stock of the Company as of the date of this Agreement and the Closing
Date (not including the Securities) are set forth on Schedule 5(d). Except as
set forth on Schedule 5(d), there are no options, warrants, or rights to
subscribe to, securities, rights or obligations convertible into or
exchangeable for or giving any right to subscribe for any shares of capital
stock of the Company or any of its Subsidiaries. All of the outstanding
shares of Common Stock of the Company have been duly and validly authorized
and issued and are fully paid and nonassessable.
(s) Dilution. The Company's executive officers and
directors understand the nature of the Securities being sold hereby and
recognize that the issuance of the Securities will have a potential dilutive
effect on the equity holdings of other holders of the Company's equity or
rights to receive equity of the Company. The board of directors of the
Company has concluded, in its good faith business judgment that the issuance
of the Securities is in the best interests of the Company. The Company
specifically acknowledges that its obligation to issue the Shares upon
conversion of the Notes, and the Warrant Shares upon exercise of the Warrants
is binding upon the Company and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Company or parties entitled to receive equity of the Company.
(t) No Disagreements with Accountants and Lawyers. Except
as disclosed on Schedule 5(t), there are no disagreements of any kind
presently existing, or reasonably anticipated by the Company to arise, between
the Company and the accountants and lawyers formerly or presently employed by
the Company, including but not limited to disputes or conflicts over payment
owed to such accountants and lawyers, nor have there been any such
disagreements during the two years prior to the Closing Date.
(u) Transfer Agent/DTC Status. The Company's transfer
agent is a participant in and the Common Stock will be eligible for transfer
pursuant to the Depository Trust Company Automated Securities Transfer Program
prior to the Effective Date (as defined in Section 11.1(iv)). The name,
address, telephone number, fax number, contact person and email address of the
Company transfer agent is set forth on Schedule 5(u) hereto.
(v) Investment Company. Neither the Company nor any
Affiliate is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(w) Subsidiary Representations. The Company makes each
of the representations contained in Sections 5(a), (b), (d), (e), (f), (h),
(k), (m), (q), (s), (t) and (u) of this Agreement, as same relate to each
Subsidiary of the Company.
(x) Company Predecessor. All representations made by or
relating to the Company of a historical or prospective nature and all
undertakings described in Sections 9(g) through 9(l) shall relate, apply and
refer to the Company and its predecessors.
(y) Correctness of Representations. The Company
represents that the foregoing representations and warranties are true and
correct as of the date hereof in all material respects, and, unless the
Company otherwise notifies the Subscribers prior to the Closing Date, shall be
true and correct in all material respects as of the Closing Date.
(z) Survival. The foregoing representations and
warranties shall survive until three years after the Closing Date.
6. Regulation D Offering. The offer and issuance of the
Securities to the Subscribers is being made pursuant to the exemption from the
registration provisions of the 1933 Act afforded by Section 4(2) or Section
4(6) of the 1933 Act and/or Rule 506 of Regulation D promulgated thereunder.
On the Closing Date, the Company will provide an opinion reasonably acceptable
to Subscriber from the Company's legal counsel opining on the availability of
an exemption from registration under the 1933 Act as it relates to the offer
and issuance of the Securities and other matters reasonably requested by
Subscribers. A form of the legal opinion is annexed hereto as Exhibit C. The
Company will provide, at the Company's expense, such other legal opinions in
the future as are reasonably necessary for the issuance and resale of the
Common Stock issuable upon conversion of the Notes and exercise of the
Warrants pursuant to an effective registration statement, Rule 144 under the
1933 Act or an exemption from registration.
7.1. Conversion of Note.
(a) Upon the conversion of a Note or part thereof, the
Company shall, at its own cost and expense, take all necessary action,
including obtaining and delivering, an opinion of counsel to assure that the
Company's transfer agent shall issue stock certificates in the name of
Subscriber (or its permitted nominee) or such other persons as designated by
Subscriber and in such denominations to be specified at conversion
representing the number of shares of Common Stock issuable upon such
conversion. The Company warrants that no instructions other than these
instructions have been or will be given to the transfer agent of the Company's
Common Stock and that the certificates representing such shares shall contain
no legend other than the usual 1933 Act restriction from transfer legend. If
and when the Subscriber sells the Shares and Warrant Shares, assuming (i) the
Registration Statement (as defined below) is effective and the prospectus, as
supplemented or amended, contained therein is current and (ii) the Subscriber
confirms in writing to the transfer agent that the Subscriber has complied
with the prospectus delivery requirements, the restrictive legend can be
removed and the Shares and Warrant Shares will be free-trading, and freely
transferable. In the event that the Shares and Warrant Shares are sold in
compliance with Rule 144 in a manner that complies with an exemption from
registration, the Company will promptly instruct its counsel to issue to the
transfer agent an opinion permitting removal of the legend (indefinitely, if
pursuant to Rule 144(k) of the 1933 Act, or for 90 days if pursuant to the
other provisions of Rule 144 of the 1933 Act).
(b) Subscriber will give notice of its decision to
exercise its right to convert the Note and interest or part thereof by
telecopying an executed and completed Notice of Conversion (a form of which is
annexed as Exhibit A to the Note) to the Company via confirmed telecopier
transmission or otherwise pursuant to Section 13(a) of this Agreement. The
Subscriber will not be required to surrender the Note until the Note has been
fully converted or satisfied. Each date on which a Notice of Conversion is
telecopied to the Company in accordance with the provisions hereof shall be
deemed a Conversion Date. The Company will itself or cause the Company's
transfer agent to transmit the Company's Common Stock certificates
representing the Shares issuable upon conversion of the Note to the Subscriber
via express courier for receipt by such Subscriber within three (3) business
days after receipt by the Company of the Notice of Conversion (such third day
being the "Delivery Date"). In the event the Shares are electronically
transferable, then delivery of the Shares must be made by electronic transfer
provided request for such electronic transfer has been made by the Subscriber
and the Subscriber has complied with all applicable securities laws in
connection with the sale of the Common Stock, including, without limitation,
the prospectus delivery requirements. A Note representing the balance of the
Note not so converted will be provided by the Company to the Subscriber if
requested by Subscriber, provided the Subscriber delivers the original Note to
the Company. In the event that a Subscriber elects not to surrender a Note for
reissuance upon partial payment or conversion, the Subscriber hereby
indemnifies the Company against any and all loss or damage attributable to a
third-party claim in an amount in excess of the actual amount then due under
the Note. "Business day" and "trading day" as employed in the Transaction
Documents is a day that the New York Stock Exchange is open for trading for
three or more hours.
(c) The Company understands that a delay in the delivery
of the Shares in the form required pursuant to Section 7.1 hereof, or the
Mandatory Redemption Amount described in Section 7.2 hereof, respectively
after the Delivery Date or the Mandatory Redemption Payment Date (as
hereinafter defined) could result in economic loss to the Subscriber. As
compensation to the Subscriber for such loss, the Company agrees to pay (as
liquidated damages and not as a penalty) to the Subscriber for late issuance
of Shares in the form required pursuant to Section 7.1 hereof upon Conversion
of the Note in the amount of $100 per business day after the Delivery Date for
each $10,000 of Note principal amount being converted of the corresponding
Shares which are not timely delivered. The Company shall pay any payments
incurred under this Section in immediately available funds upon demand.
Furthermore, in addition to any other remedies which may be available to the
Subscriber, in the event that the Company fails for any reason to effect
delivery of the Shares by the Delivery Date or make payment by the Mandatory
Redemption Payment Date, the Subscriber may revoke all or part of the relevant
Notice of Conversion or rescind all or part of the notice of Mandatory
Redemption by delivery of a notice to such effect to the Company whereupon the
Company and the Subscriber shall each be restored to their respective
positions immediately prior to the delivery of such notice, except that the
liquidated damages described above shall be payable through the date notice of
revocation or rescission is given to the Company.
(d) Nothing contained herein or in any document referred
to herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law. In the event that the rate of interest
or dividends required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall, to the
extent permitted by law, be credited against amounts owed by the Company to
the Subscriber and thus refunded to the Company.
7.2. Mandatory Redemption at Subscriber's Election. In the event
(i) the Company is prohibited from issuing Shares, (ii) the Company fails to
timely deliver Shares on a Delivery Date, (iii) upon the occurrence of any
other Event of Default (as defined in the Note or in this Agreement), any of
the foregoing that continues for more than twenty (20) business days beyond
any applicable cure period, (iv) a Change in Control (as defined below), or
(v) of the liquidation, dissolution or winding up of the Company, then at the
Subscriber's election, the Company must pay to the Subscriber ten (10)
business days after request by the Subscriber ("Calculation Period"), a sum of
money determined by multiplying up to the outstanding principal amount of the
Note designated by the Subscriber by 120%, together with accrued but unpaid
interest thereon ("Mandatory Redemption Payment"). The Mandatory Redemption
Payment must be received by the Subscriber on the same date as the Shares
otherwise deliverable or within ten (10) business days after request,
whichever is sooner ("Mandatory Redemption Payment Date"). Upon receipt of the
Mandatory Redemption Payment, the corresponding Note principal and interest
will be deemed paid and no longer outstanding. Liquidated damages calculated
pursuant to Section 7.1(c) hereof, that have been paid or accrued for the ten
day period prior to the actual receipt of the Mandatory Redemption Payment by
the Subscriber shall be credited against the Mandatory Redemption Payment. For
purposes of this Section 7.2, "Change in Control" shall mean (i) the Company
no longer having a class of shares publicly traded or listed on a Principal
Market, (ii) the Company becoming a Subsidiary of another entity (other than
a corporation formed by the Company for purposes of reincorporation in another
U.S. jurisdiction), (iii) a majority of the board of directors of the Company
as of the Closing Date no longer serving as
directors of the Company except due to natural causes or the appointment of
independent directors, (iv) the resignation of ▇▇▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ as
President and Chief Executive Officer, or (v) the sale, lease or transfer of
substantially all the assets of the Company and Subsidiaries on a consolidated
basis, except if such Change in Control is a result of a strategic merger,
acquisition, consolidation or purchase of substantially all of the securities
or assets of the Company
7.3. Maximum Conversion. The Subscriber shall not be entitled
to convert on a Conversion Date that amount of the Note in connection with
that number of shares of Common Stock which would be in excess of the sum of
(i) the number of shares of common stock beneficially owned by the Subscriber
and its Affiliates on a Conversion Date, and (ii) the number of shares of
Common Stock issuable upon the conversion of the Note with respect to which
the determination of this provision is being made on a Conversion Date, which
would result in beneficial ownership by the Subscriber and its Affiliates of
more than 4.99% of the outstanding shares of common stock of the Company on
such Conversion Date. Beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder. Subject to the foregoing, the Subscriber shall
not be limited to aggregate conversions of only 4.99% and aggregate
conversions by the Subscriber may exceed 4.99%. The Subscriber may decide
whether to convert a Note or exercise Warrants to achieve an actual 4.99%
ownership position as described above.
7.4. Injunction Posting of Bond. In the event a Subscriber
shall elect to convert a Note or part thereof or exercise the Warrant in whole
or in part, the Company may not refuse conversion or exercise based on any
claim that such Subscriber or any one associated or affiliated with such
Subscriber has been engaged in any violation of law, or for any other reason,
unless, an injunction from a court, on notice, restraining and or enjoining
conversion of all or part of such Note or exercise of all or part of such
Warrant shall have been sought and obtained by the Company or at the Company's
request or with the Company's assistance, and the Company has posted a surety
bond for the benefit of such Subscriber in the amount of 120% of the
outstanding principal and interest of the Note, or aggregate purchase price of
the Shares and Warrant Shares which are sought to be subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be
payable to such Subscriber to the extent Subscriber obtains judgment in
Subscriber's favor.
7.5. Buy-In. In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after seven (7)
business days after the Delivery Date the Subscriber or a broker on the
Subscriber's behalf, purchases (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by such Subscriber
of the Common Stock which the Subscriber was entitled to receive upon such
conversion (a "Buy-In"), then the Company shall pay in cash to the Subscriber
(in addition to any remedies available to or elected by the Subscriber) the
amount by which (A) the Subscriber's total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased exceeds (B)
the aggregate principal and/or interest amount of the Note for which such
conversion was not timely honored, together with interest thereon at a rate of
15% per annum, accruing until such amount and any accrued interest thereon is
paid in full (which amount shall be paid as liquidated damages and not as a
penalty). For example, if the Subscriber purchases shares of Common Stock
having a total purchase price of $11,000 to cover a Buy-In with respect to an
attempted conversion of $10,000 of note principal and/or interest, the Company
shall be required to pay the Subscriber $1,000, plus interest. The Subscriber
shall provide the Company written notice indicating the amounts payable to the
Subscriber in respect of the Buy-In.
7.6 Adjustments. The Conversion Price, Warrant exercise price
and amount of Shares issuable upon conversion of the Notes and exercise of the
Warrants shall be adjusted as described in this Agreement, the Notes and
Warrants.
7.7. Mandatory Conversion. Provided an Event of Default has not
occurred, then commencing after the Actual Effective Date, the Company will
have the option by written notice to the Subscriber ("Notice of Mandatory
Conversion") of compelling the Subscriber to convert the outstanding and
unpaid principal of the Notes and accrued interest, thereon, into Common Stock
at the Conversion Price then in affect ("Mandatory Conversion"). The Notice of
Mandatory Conversion must be given, if at all, on the first business day
following a consecutive seven (7) day trading period ("Lookback Period")
during which the closing bid price for the Company's Common Stock as reported
by Bloomberg, LP for the Principal Market is more than $3.00 each day and the
volume during the Lookback Period is at least 80,000 Shares each day. The date
the Notice of Mandatory Conversion is given is the "Mandatory Conversion
Date." The Notice of Mandatory Conversion shall specify the aggregate
principal amount of the Note which is subject to Mandatory Conversion, which
amount may not exceed in the aggregate, for all Holders who receive Notes
similar in term and tenure as this Note, the dollar volume of Common Stock
traded on the Principal Market during the seven (7) trading days immediately
preceding the Mandatory Conversion Date. Mandatory Conversion Notices must be
given proportionately to all Holders of Notes who received Notes similar in
term and tenure as this Note. A Notice of Mandatory Conversion may not be
given unless the Registration Statement described in Section 11.1 (iv) has
been effective for the unrestricted public resale of Shares and Warrant Shares
each day during the Lookback Period. The Company shall reduce the amount of
Note principal and interest subject to a Notice of Mandatory Conversion by the
amount of Note Principal and interest for which the Subscriber had delivered a
Notice of Conversion to the Company during the seven (7) trading days
preceding the Mandatory Conversion Date. Each Mandatory Conversion Date shall
be a deemed Conversion Date and the Company will be required to deliver the
Common Stock issuable pursuant to a Mandatory Conversion Notice in the same
manner and time period as described in Section 2.2 of the Note.
7.8. Redemption. The Note and Warrants shall not be redeemable
or callable except as described in the Note.
8. Fees.
(a) Legal Fees. The Company shall pay to Grushko &
▇▇▇▇▇▇▇, P.C., a fee of $10,000 ("Legal Fees") as reimbursement for services
rendered to the Subscribers in connection with this Agreement and the purchase
and sale of the Notes and Warrants the Offering and acting as Escrow Agent for
the Offering. The Legal Fees will be payable out of funds held pursuant to
the Escrow Agreement.
(b) Due Diligence Fees. The Company will pay a due
diligence fee in the form of a Note exactly the same as the Subscriber Notes
("Due Diligence Fee") described on Schedule 8 hereto to the parties identified
on Schedule 8 hereto ("Due Diligence Fee Recipient").
9. Covenants of the Company. The Company covenants and agrees
with the Subscribers as follows:
(a) Stop Orders. The Company will advise the Subscribers,
promptly after it receives notice of issuance by the Commission, any state
securities commission or any other regulatory authority of any stop order or
of any order preventing or suspending any offering of any securities of the
Company, or of the suspension of the qualification of the Common Stock of the
Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) Listing. The Company shall promptly secure the
listing of the shares of Common Stock and the Warrant Shares upon each
national securities exchange, or automated quotation system upon which they
are or become eligible for listing (subject to official notice of issuance)
and shall maintain such listing so long as any Warrants are outstanding. The
Company will maintain the listing of its Common Stock on the American Stock
Exchange, Nasdaq SmallCap Market, Nasdaq National Market System, Bulletin
Board, or New York Stock Exchange (whichever of the foregoing is at the time
the principal trading exchange or market for the Common Stock (the "Principal
Market")), and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the Principal
Market, as applicable. The Company will provide the Subscribers copies of all
notices it receives notifying the Company of the threatened and actual
delisting of the Common Stock from any Principal Market. As of the date of
this Agreement and the Closing Date, the Bulletin Board is and will be the
Principal Market.
(c) Market Regulations. The Company shall notify the
Commission, the Principal Market and applicable state authorities, in
accordance with their requirements, of the transactions contemplated by this
Agreement, and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal
and valid issuance of the Securities to the Subscribers and promptly provide
copies thereof to Subscriber.
(d) Reporting Requirements. From the date of this
Agreement and until the sooner of (i) three (3) years after the Closing Date,
or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitation, the Company will
(A) cause its Common Stock to continue to be registered under Section 12(b) or
12(g) of the 1934 Act, (B) comply in all respects with its reporting and
filing obligations under the 1934 Act, (C) comply with all reporting
requirements that are applicable to an issuer with a class of shares
registered pursuant to Section 12(b) or 12(g) of the 1934 Act, as applicable,
and (D) comply with all requirements related to any registration statement
filed pursuant to this Agreement. The Company will use its best efforts not
to take any action or file any document (whether or not permitted by the 1933
Act or the 1934 Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said acts until three (3) years after the Closing Date. Until the
earlier of the resale of the Common Stock and the Warrant Shares by each
Subscriber or three (3) years after the Warrants have been exercised, the
Company will use its best efforts to continue the listing or quotation of the
Common Stock on a Principal Market and will comply in all respects with the
Company's reporting, filing and other obligations under the bylaws or rules of
the Principal Market. The Company agrees to timely file a Form D with respect
to the Securities if required under Regulation D and to provide a copy thereof
to each Subscriber promptly after such filing.
(e) Use of Proceeds. The proceeds of the Offering will be
employed by the Company for the purposes set forth on Schedule 9(e) hereto. A
deviation of more than 10% of any single stated use of proceeds or a deviation
in the aggregate of more than 25% will be an Event of Default under the Note.
Except as set forth on Schedule 9(e), the Purchase Price may not and will not
be used for accrued and unpaid officer and director salaries, payment of
financing related debt, redemption of outstanding notes or equity instruments
of the Company nor non-trade obligations outstanding on a Closing Date.
(f) Reservation. Prior to the Closing Date, the Company
undertakes to reserve, pro rata, on behalf of each holder of a Note or
Warrant, from its authorized but unissued common stock, a number of common
shares equal to 150% of the amount of Common Stock necessary to allow each
holder of a Note to be able to convert all such outstanding Notes and interest
and reserve the amount of Warrant Shares issuable upon exercise of the
Warrants. Failure to have sufficient shares reserved pursuant to this
Section 9.1(f) for three (3) consecutive business days or ten (10) days in the
aggregate shall be a material default of the Company's obligations under this
Agreement.
(g) Taxes. From the date of this Agreement and until the
sooner of (i) three (3) years after the Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon the
income, profits, property or business of the Company; provided, however, that
any such tax, assessment, charge or levy need not be paid if the validity
thereof shall currently be contested in good faith by appropriate proceedings
and if the Company shall have set aside on its books adequate reserves with
respect thereto, and provided, further, that the Company will pay all such
taxes, assessments, charges or levies forthwith upon the commencement of
proceedings to foreclose any lien which may have attached as security
therefore.
(h) Insurance. From the date of this Agreement and until
the sooner of (i) three (3) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep its assets which
are of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, explosion and other risks customarily
insured against by companies in the Company's line of business, in amounts
sufficient to prevent the Company from becoming a co-insurer and not in any
event less than one hundred percent (100%) of the insurable value of the
property insured; and the Company will maintain, with financially sound and
reputable insurers, insurance against other hazards and risks and liability to
persons and property to the extent and in the manner customary for companies
in similar businesses similarly situated and to the extent available on
commercially reasonable terms.
(i) Books and Records. From the date of this Agreement
and until the sooner of (i) three (3) years after the Closing Date, or (ii)
until all the Shares and Warrant Shares have been resold or transferred by all
the Subscribers pursuant to the Registration Statement or pursuant to Rule
144, without regard to volume limitations, the Company will keep true records
and books of account in which full, true and correct entries will be made of
all dealings or transactions in relation to its business and affairs in
accordance with generally accepted accounting principles applied on a
consistent basis.
(j) Governmental Authorities. From the date of this
Agreement and until the sooner of (i) three (3) years after the Closing Date,
or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company shall
duly observe and conform in all material respects to all valid requirements of
governmental authorities relating to the conduct of its business or to its
properties or assets.
(k) Intellectual Property. From the date of this
Agreement and until the sooner of (i) three (3) years after the Closing Date,
or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company shall
maintain in full force and effect its corporate existence, rights and
franchises and all licenses and other rights to use intellectual property
owned or possessed by it and reasonably deemed to be necessary to the conduct
of its business.
(l) Properties. From the date of this Agreement and until
the sooner of (i) three (3) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement (as defined in Section
11.1(iv) hereof) or pursuant to Rule 144, without regard to volume
limitations, the Company will keep its properties in good repair, working
order and condition, reasonable wear and tear excepted, and from time to time
make all necessary and proper repairs, renewals, replacements, additions and
improvements thereto; and the Company will at all times comply with each
provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could reasonably be expected to have
a Material Adverse Effect.
(m) Confidentiality/Public Announcement. From the date of
this Agreement and until the sooner of (i) three (3) years after the Closing
Date, or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company agrees
that except in connection with a Form 8-K or the Registration Statement, it
will not disclose publicly or privately the identity of the Subscribers unless
expressly agreed to in writing by a Subscriber or only to the extent required
by law and then only upon five days prior notice to Subscriber. In any event
and subject to the foregoing, the Company shall - file a Form 8-K or make a
public announcement describing the Offering not later than the first business
day after the Closing Date. In the Form 8-K or public announcement, the
Company will specifically disclose the amount of common stock outstanding
immediately after the Closing. A form of the proposed Form 8-K or public
announcement to be employed in connection with the Offering is annexed hereto
as Exhibit D.
(n) Further Registration Statements. Except for a
registration statement filed on behalf of the Subscribers pursuant to Section
11 of this Agreement or one or more Forms S-8 registering not more than
250,000 shares of the Company to be issued to employees, consultants and for
public relations, the Company will not file any registration statements or
amend any already filed registration statement, including but not limited to
Form S-8, with the Commission or with state regulatory authorities without the
consent of the Subscriber until the sooner of (i) the Registration Statement
(as defined in Section 11.1(iv) of this Agreement) shall have been effective
in connection with the public resale of the Shares and Warrant Shares for 90
days or (ii) until all the Shares have been resold or transferred by the
Subscribers pursuant to the Registration Statement or Rule 144, without regard
to volume limitations ("Exclusion Period"). The Exclusion Period will be
tolled during the pendency of an Event of Default as defined in the Note.
(o) Blackout. The Company undertakes and covenants that
until the first to occur of (i) the end of the Exclusion Period, as defined in
Section 9(n) hereof, or (ii) until all the Shares and Warrant Shares have been
resold pursuant to such registration statement or Rule 144, without regard to
volume limitations, the Company will not enter into any acquisition, merger,
exchange or sale or other transaction that could have the effect of delaying
the effectiveness of any pending registration statement or causing an already
effective registration statement to no longer be effective or current. In the
event the Registration Statement is filed on a Form S-3, then the Exclusion
Period for purposes of this Section 9(o) shall end on the Actual Effective
Date (as defined in Section 11.1(iv) of this Agreement).
(p) Non-Public Information. The Company covenants and
agrees that neither it nor any other person acting on its behalf will provide
any Subscriber or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto
such Subscriber shall have agreed in writing to receive such information. The
Company understands and confirms that each Subscriber shall be relying on the
foregoing representations in effecting transactions in securities of the
Company. The Company will offer to the Subscriber an opportunity to review
and comment on the Registration Statement thereto between three and five
business days prior to the proposed filing date thereof.
(q) Offering Restrictions. Until the expiration of the
Exclusion Period and during the pendency of an Event of Default, except for
the Excepted Issuances [as defined in Section 12(a)], the Company will not
enter into an agreement to nor issue any equity, convertible debt or other
securities convertible into common stock or equity of the Company nor modify
any of the foregoing which may be outstanding at anytime, without the prior
written consent of the Subscriber, which consent may be withheld for any
reason. For so long as the Notes are outstanding, except for the Excepted
Issuances, the Company will not enter into any equity line of credit or
similar agreement, nor issue nor agree to issue any floating or variable
priced equity linked instruments nor any of the foregoing or equity with price
reset rights. The only officer, director, employee and consultant stock
option or stock incentive plan currently in effect or contemplated by the
Company has been filed with the Reports prior to five days before the Closing
Date. Other than Excepted Issuances, no other plan will be adopted nor may
any options or equity not included in such plan be issued to such persons for
so long as any sum is outstanding under the Note.
(r) Additional Negative Covenants. So long as the Notes
are outstanding and during the pendency of an Event of Default (as defined in
the Note), without the consent of the Subscribers, the Company will not and
will not permit any of its Subsidiaries to directly or indirectly:
(i) create, incur, assume or suffer to exist any
pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim,
security interest, security title, mortgage, security deed or deed of trust,
easement or encumbrance, or preference, priority or other security agreement
or preferential arrangement of any kind or nature whatsoever (including any
lease or title retention agreement, any financing lease having substantially
the same economic effect as any of the foregoing, and the filing of, or
agreement to give, any financing statement perfecting a security interest
under the Uniform Commercial Code or comparable law of any jurisdiction)
(each, a "Lien") upon any of its property, whether now owned or hereafter
acquired except for (i) the Excepted Issuances, (ii) (a) Liens imposed by law
for taxes that are not yet due or are being contested in good faith and for
which adequate reserves have been established in accordance with generally
accepted accounting principles; (b) carriers', warehousemen's, mechanics',
material men's, repairmen's and other like Liens imposed by law, arising in
the ordinary course of business and securing obligations that are not overdue
by more than 30 days or that are being contested in good faith and by
appropriate proceedings; (c) pledges and deposits made in the ordinary course
of business in compliance with workers' compensation, unemployment insurance
and other social security laws or regulations; (d) deposits to secure the
performance of bids, trade contracts, leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like nature, in
each case in the ordinary course of business; (e) Liens created with respect
to the financing of the purchase of new property in the ordinary course of the
Company's business up to the amount of the purchase price of such property,
(f) easements, zoning restrictions, rights-of-way and similar encumbrances on
real property imposed by law or arising in the ordinary course of business
that do not secure any monetary obligations and do not materially detract from
the value of the affected property, or (g) Liens securing indebtedness for
borrowed money which is not senior or pari passu in right of priority to the
Lien securing the Notes (each of (a) through (g), a "Permitted Lien");
(ii) amend its certificate of incorporation, bylaws
or its charter documents so as to adversely affect any rights of the
Subscriber;
(iii) repay, repurchase or offer to repay, repurchase
or otherwise acquire or make any dividend or distribution in respect of any of
its Common Stock, preferred stock, or other equity securities other than to
the extent permitted or required under the Transaction Documents or in
connection with a settlement with existing or former employees, vendors,
partners or consultants;
(iv) prepay any financing related or other outstanding
debt obligations; or
(v) except as set forth in Schedule 9(r)(v), engage
in any transactions with any officer, director, employee or any Affiliate of
the Company, including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, in each case in
excess of $10,000 other than (i) for payment of compensation for services
rendered, (ii) reimbursement for expenses incurred on behalf of the Company
and (iii) for other employee benefits, including stock option agreements under
any stock option plan of the Company.
10. Covenants of the Company and Subscriber Regarding
Indemnification.
(a) The Company agrees to indemnify, hold harmless,
reimburse and defend the Subscribers, the Subscribers' officers, directors,
agents, Affiliates, control persons, and principal shareholders, against any
claim, cost, expense, liability, obligation, loss or damage (including
reasonable legal fees) of any nature, incurred by or imposed upon the
Subscriber or any such person which results, arises out of or is based upon
(i) any material misrepresentation by Company or breach of any warranty by
Company in this Agreement or in any Exhibits or Schedules attached hereto, or
other agreement delivered pursuant hereto; or (ii) after any applicable notice
and/or cure periods, any breach or default in performance by the Company of
any covenant or undertaking to be performed by the Company hereunder, or any
other agreement entered into by the Company and Subscriber relating hereto.
(b) Each Subscriber agrees to indemnify, hold harmless,
reimburse and defend the Company and each of the Company's officers,
directors, agents, Affiliates, control persons against any claim, cost,
expense, liability, obligation, loss or damage (including reasonable legal
fees) of any nature, incurred by or imposed upon the Company or any such
person which results, arises out of or is based upon (i) any material
misrepresentation by such Subscriber in this Agreement or in any Exhibits or
Schedules attached hereto, or other agreement delivered pursuant hereto; or
(ii) after any applicable notice and/or cure periods, any breach or default in
performance by such Subscriber of any covenant or undertaking to be performed
by such Subscriber hereunder, or any other agreement entered into by the
Company and Subscribers, relating hereto.
(c) In no event shall the liability of any Subscriber or
permitted successor hereunder or under any Transaction Document or other
agreement delivered in connection herewith be greater in amount than the
dollar amount of the net proceeds actually received by such Subscriber upon
the sale of Registrable Securities (as defined herein).
(d) The procedures set forth in Section 11.6 shall apply
to the indemnification set forth in Sections 10(a) and 10(b) above.
11.1. Registration Rights. The Company hereby grants the
following registration rights to holders of the Securities.
(i) On one occasion, for a period commencing one hundred
and twenty-one (121) days after the Closing Date, but not later than two (2)
years after the Closing Date ("Request Date"), upon a written request
therefore from any record holder or holders of more than 50% of the Shares
issued and issuable upon conversion of the Notes and Warrant Shares actually
issued upon exercise of the Warrants, the Company shall prepare and file with
the Commission a registration statement under the 1933 Act registering the
Shares, Warrant Shares issuable upon exercise of the Warrants including Shares
issuable upon conversion of interest accruing on the Notes and Shares issuable
upon exercise of Warrants as more fully described on Schedule 11.1 (i) hereto
(collectively "Registrable Securities") which are the subject of such request
for unrestricted public resale by the holder thereof. For purposes of
Sections 11.1(i) and 11.1(ii), Registrable Securities shall not include (A)
Securities which are registered for resale in an effective registration
statement, (B) included for registration in a pending registration statement,
or (C) which have been issued without further transfer restrictions after a
sale or transfer pursuant to Rule 144 under the 1933 Act. Upon the receipt of
such request, the Company shall promptly give written notice to all other
record holders of the Registrable Securities that such registration statement
is to be filed and shall include in such registration statement Registrable
Securities for which it has received written requests within ten (10) days
after the Company gives such written notice. Such other requesting record
holders shall be deemed to have exercised their demand registration right
under this Section 11.1(i).
(ii) If the Company at any time proposes to register any of
its securities under the 1933 Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms ▇-▇, ▇-▇ or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscribers or Holder pursuant to an effective registration statement,
each such time it will give at least fifteen (15) days' prior written notice
to the record holder of the Registrable Securities of its intention so to do.
Upon the written request of the holder, received by the Company within ten
(10) days after the giving of any such notice by the Company, to register any
of the Registrable Securities not previously registered, the Company will
cause such Registrable Securities as to which registration shall have been so
requested to be included with the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent required to
permit the sale or other disposition of the Registrable Securities so
registered by the holder of such Registrable Securities (the "Seller" or
"Sellers"). In the event that any registration pursuant to this Section
11.1(ii) shall be, in whole or in part, an underwritten public offering of
common stock of the Company, the number of shares of Registrable Securities to
be included in such an underwriting may be reduced by the managing underwriter
if and to the extent that the Company and the underwriter shall reasonably be
of the opinion that such inclusion would adversely affect the marketing of the
securities to be sold by the Company therein; provided, however, that the
Company shall notify the Seller in writing of any such reduction.
Notwithstanding the foregoing provisions, or Section 11.4 hereof, the Company
may withdraw or delay or suffer a delay of any registration statement referred
to in this Section 11.1(ii) without thereby incurring any liability to the
Seller.
(iii) If, at the time any written request for registration
is received by the Company pursuant to Section 11.1(i), the Company has
determined to proceed with the actual preparation and filing of a registration
statement under the 1933 Act in connection with the proposed offer and sale
for cash of any of its securities for the Company's own account and the
Company actually does file such other registration statement, such written
request shall be deemed to have been given pursuant to Section 11.1(ii) rather
than Section 11.1(i), and the rights of the holders of Registrable Securities
covered by such written request shall be governed by Section 11.1(ii).
(iv) The Company shall file with the Commission a Form SB-2
registration statement (the "Registration Statement") (or such other form that
it is eligible to use) in order to register the Registrable Securities for
resale and distribution under the 1933 Act not later than) thirty (30) days
after the Closing Date (the "Filing Date"), and cause to be declared effective
not later than one hundred twenty (120) days after the Closing Date (the
"Effective Date"). The Company will register not less than a number of shares
of common stock in the aforedescribed registration statement that is equal to
150% of the Shares issuable upon conversion of the Notes and all of the
Warrant Shares issuable pursuant to this Agreement upon exercise of the
Warrants. The Registrable Securities shall be reserved and set aside
exclusively for the benefit of each Subscriber and Warrant holder, pro rata,
and not issued, employed or reserved for anyone other than each such
Subscriber and Warrant holder. The Registration Statement will immediately be
amended or additional registration statements will be immediately filed by the
Company as necessary to register additional shares of Common Stock to allow
the public resale of all Common Stock included in and issuable by virtue of
the Registrable Securities. Without the written consent of the Subscriber, no
securities of the Company other than the Registrable Securities will be
included in the Registration Statement. It shall be deemed a Non-Registration
Event if at any time after the date the Registration Statement is declared
effective by the Commission ("Actual Effective Date") the Company has
registered for unrestricted resale on behalf of the Subscriber fewer than 125%
of the amount of Common Shares issuable upon full conversion of all sums due
under the Notes and 100% of the Warrant Shares issuable upon exercise of the
Warrants.
11.2. Registration Procedures. If and whenever the Company is
required by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the
registration of any Registrable Securities under the 1933 Act, the Company
will, as expeditiously as possible:
(a) subject to the timelines provided in this Agreement,
prepare and file with the Commission a registration statement required by
Section 11, with respect to such securities and use its best efforts to cause
such registration statement to become and remain effective for the period of
the distribution contemplated thereby (determined as herein provided),
promptly provide to the holders of the Registrable Securities copies of all
filings and Commission letters of comment and notify Subscribers (by
telecopier and by e-mail addresses provided by Subscribers) and Grushko &
▇▇▇▇▇▇▇, P.C. (by telecopier and by email to ▇▇▇▇▇▇▇▇▇@▇▇▇.▇▇▇) on or before
6pm EST on the same business day that the Company receives notice that (i) the
Commission has no comments or no further comments on the Registration
Statement, and (ii) the registration statement has been declared effective
(failure to timely provide notice as required by this Section 11.2(a) shall be
a material breach of the Company's obligation and an Event of Default as
defined in the Notes and a Non-Registration Event as defined in Section 10.4
of this Agreement);
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective until such registration statement has been effective for a period of
two (2) years, and comply with the provisions of the 1933 Act with respect to
the disposition of all of the Registrable Securities covered by such
registration statement in accordance with the Sellers' intended method of
disposition set forth in such registration statement for such period;
(c) furnish to the Sellers, at the Company's expense, such
number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of the
securities covered by such registration statement or make them electronically
available;
(d) use its commercially reasonable best efforts to
register or qualify the Registrable Securities covered by such registration
statement under the securities or "blue sky" laws of such jurisdictions as the
Sellers shall request in writing, provided, however, that the Company shall
not for any such purpose be required to qualify generally to transact business
as a foreign corporation in any jurisdiction where it is not so qualified or
to consent to general service of process in any such jurisdiction;
(e) if applicable, list the Registrable Securities covered
by such registration statement with any securities exchange on which the
Common Stock of the Company is then listed;
(f) notify the Subscribers within four hours of the
Company's becoming aware that a prospectus relating thereto is required to be
delivered under the 1933 Act, of the happening of any event of which the
Company has knowledge as a result of which the prospectus contained in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing or which becomes subject to a Commission, state or
other governmental order suspending the effectiveness of the registration
statement covering any of the Shares;
(g) provided same would not be in violation of the
provision of Regulation FD under the 1934 Act, make available for inspection
by the Sellers, and any attorney, accountant or other agent retained by the
Seller or underwriter, all publicly available, non-confidential financial and
other records, pertinent corporate documents and properties of the Company,
and cause the Company's officers, directors and employees to supply all
publicly available, non-confidential information reasonably requested by the
seller, attorney, accountant or agent in connection with such registration
statement; and
(h) provide to the Sellers copies of the Registration
Statement and amendments thereto five business days prior to the filing
thereof with the Commission.
11.3. Provision of Documents. In connection with each
registration described in this Section 11, each Seller will furnish to the
Company in writing such information and representation letters with respect to
itself and the proposed distribution by it as reasonably shall be necessary in
order to assure compliance with federal and applicable state securities laws.
11.4. Non-Registration Events. The Company and the Subscribers
agree that the Sellers will suffer damages if the Registration Statement is
not filed by the Filing Date and not declared effective by the Commission by
the Effective Date, and any registration statement required under Section
11.1(i) or 11.1(ii) is not filed within 60 days after written request and
declared effective by the Commission within 120 days after such request, and
maintained in the manner and within the time periods contemplated by Section
11 hereof, and it would not be feasible to ascertain the extent of such
damages with precision. Accordingly, if (A) the Registration Statement is not
filed on or before the Filing Date, (B) is not declared effective on or before
the Effective Date, (C) the Registration Statement is not declared effective
within four (4) business days after receipt by the Company or its attorneys of
a written or oral communication from the Commission that the Registration
Statement will not be reviewed or that the Commission has no further comments,
(D) if the registration statement described in Sections 11.1(i) or 11.1(ii) is
not filed within 60 days after such written request, or is not declared
effective within 120 days after such written request, or (E) any registration
statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv) is filed and
declared effective but shall thereafter cease to be effective (without being
succeeded within fifteen (15) business days by an effective replacement or
amended registration statement) for a period of time which shall exceed 30
days in the aggregate per year (defined as a period of 365 days commencing on
the date the Registration Statement is declared effective) or more than 20
consecutive days (each such event referred to in clauses A through E of this
Section 11.4 is referred to herein as a "Non-Registration Event"), then the
Company shall deliver to the holder of Registrable Securities, as Liquidated
Damages, an amount equal to two percent (2%) for each thirty (30) days or part
thereof, thereafter of the Purchase Price of the Notes remaining unconverted
and purchase price of Shares issued upon conversion of the Notes owned of
record by such holder which are subject to such Non-Registration Event. The
Company must pay the Liquidated Damages in cash. The Liquidated Damages must
be paid within ten (10) days after the end of each thirty (30) day period or
shorter part thereof for which Liquidated Damages are payable. In the event a
Registration Statement is filed by the Filing Date but is withdrawn prior to
being declared effective by the Commission, then such Registration Statement
will be deemed to have not been filed. All oral or written and accounting
comments received from the Commission relating to the Registration Statement
must be responded to within thirty (30) days. Failure to timely respond to
Commission comments is a Non-Registration Event for which Liquidated Damages
shall accrue and be payable by the Company to the holders of Registrable
Securities at the same rate set forth above. Notwithstanding the foregoing,
the Company shall not be liable to the Subscriber under this Section 11.4 for
any events or delays occurring as a consequence of the acts or omissions of
the Subscribers contrary to the obligations undertaken by Subscribers in this
Agreement. Liquidated Damages will not accrue nor be payable pursuant to this
Section 11.4 nor will a Non-Registration Event be deemed to have occurred for
times during which Registrable Securities are transferable by the holder of
Registrable Securities pursuant to Rule 144(k) under the 1933 Act.
11.5. Expenses. All expenses incurred by the Company in
complying with Section 11, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
reasonable counsel fees) incurred in connection with complying with state
securities or "blue sky" laws, fees of the National Association of Securities
Dealers, Inc., transfer taxes, fees of transfer agents and registrars, costs
of insurance and fee of one counsel for all Sellers are called "Registration
Expenses." All underwriting discounts and selling commissions applicable to
the sale of Registrable Securities, including any fees and disbursements of
one counsel to the Seller, are called "Selling Expenses." The Company will
pay all Registration Expenses in connection with the registration statement
under Section 11. Selling Expenses in connection with each registration
statement under Section 11 shall be borne by the Seller and may be apportioned
among the Sellers in proportion to the number of shares sold by the Seller
relative to the number of shares sold under such registration statement or as
all Sellers thereunder may agree.
11.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the 1933 Act pursuant to Section 11, the Company will, to the
extent permitted by law, indemnify and hold harmless the Seller, each officer
of the Seller, each director of the Seller, each underwriter of such
Registrable Securities thereunder and each other person, if any, who controls
such Seller or underwriter within the meaning of the 1933 Act, against any
losses, claims, damages or liabilities, joint or several, to which the Seller,
or such underwriter or controlling person may become subject under the 1933
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such Registrable Securities was registered
under the 1933 Act pursuant to Section 11, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances when made, and
will subject to the provisions of Section 11.6(c) reimburse the Seller, each
such underwriter and each such controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable to the Seller to the extent that
any such damages arise out of or are based upon an untrue statement or
omission made in any preliminary prospectus if (i) the Seller failed to send
or deliver a copy of the final prospectus delivered by the Company to the
Seller with or prior to the delivery of written confirmation of the sale by
the Seller to the person asserting the claim from which such damages arise,
(ii) the final prospectus would have corrected such untrue statement or
alleged untrue statement or such omission or alleged omission, or (iii) to the
extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished by any such
Seller, or any such controlling person in writing specifically for use in such
registration statement or prospectus.
(b) In the event of a registration of any of the
Registrable Securities under the 1933 Act pursuant to Section 11, each Seller
severally but not jointly will, to the extent permitted by law, indemnify and
hold harmless the Company, and each person, if any, who controls the Company
within the meaning of the 1933 Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and
each person who controls any underwriter within the meaning of the 1933 Act,
against all losses, claims, damages or liabilities, joint or several, to which
the Company or such officer, director, underwriter or controlling person may
become subject under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement under which such
Registrable Securities were registered under the 1933 Act pursuant to Section
11, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse the Company and each such officer, director, underwriter and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that the Seller will be liable
hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with information pertaining to such Seller, as such,
furnished in writing to the Company by such Seller specifically for use in
such registration statement or prospectus, and provided, further, however,
that the liability of the Seller hereunder shall be limited to the net
proceeds actually received by the Seller from the sale of Registrable
Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party
hereunder of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party hereunder, notify the indemnifying party in writing thereof, but the
omission so to notify the indemnifying party shall not relieve it from any
liability which it may have to such indemnified party other than under this
Section 11.6(c) and shall only relieve it from any liability which it may have
to such indemnified party under this Section 11.6(c), except and only if and
to the extent the indemnifying party is prejudiced by such omission. In case
any such action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate in and, to the extent it shall wish, to
assume and undertake the defense thereof with counsel satisfactory to such
indemnified party, and, after notice from the indemnifying party to such
indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under this Section 11.6(c) for any legal expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation and of liaison with counsel so selected,
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to
it which are different from or additional to those available to the
indemnifying party or if the interests of the indemnified party reasonably may
be deemed to conflict with the interests of the indemnifying party, the
indemnified parties, as a group, shall have the right to select one separate
counsel and to assume such legal defenses and otherwise to participate in the
defense of such action, with the reasonable expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by
the indemnifying party as incurred.
(d) In order to provide for just and equitable
contribution in the event of joint liability under the 1933 Act in any case in
which either (i) a Seller, or any controlling person of a Seller, makes a
claim for indemnification pursuant to this Section 11.6 but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 11.6 provides for indemnification
in such case, or (ii) contribution under the 1933 Act may be required on the
part of the Seller or controlling person of the Seller in circumstances for
which indemnification is not provided under this Section 11.6; then, and in
each such case, the Company and the Seller will contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (after
contribution from others) in such proportion so that the Seller is responsible
only for the portion represented by the percentage that the public offering
price of its securities offered by the registration statement bears to the
public offering price of all securities offered by such registration
statement, provided, however, that, in any such case, (y) the Seller will not
be required to contribute any amount in excess of the public offering price of
all such securities sold by it pursuant to such registration statement; and
(z) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the ▇▇▇▇ ▇▇▇) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
11.7. Delivery of Unlegended Shares.
(a) Within four (4) business days (such fourth (4th)
business day being the "Unlegended Shares Delivery Date") after the business
day on which the Company has received (i) a notice that Registrable Securities
have been sold either pursuant to the Registration Statement or Rule 144 under
the 1933 Act, (ii) a representation that the prospectus delivery requirements,
or the requirements of Rule 144, as applicable and if required, have been
satisfied, and (iii) the original share certificates representing the shares
of Common Stock that have been sold, and (iv) in the case of sales under Rule
144, customary representation letters of the Subscriber and/or Subscriber's
broker regarding compliance with the requirements of Rule 144, the Company at
its expense, (y) shall deliver, and shall cause legal counsel selected by the
Company to deliver to its transfer agent (with copies to Subscriber) an
appropriate instruction and opinion of such counsel, directing the delivery of
shares of Common Stock without any legends including the legend set forth in
Section 4(h) above, reissuable pursuant to any effective and current
Registration Statement described in Section 11 of this Agreement or pursuant
to Rule 144 under the 1933 Act (the "Unlegended Shares"); and (z) cause the
transmission of the certificates representing the Unlegended Shares together
with a legended certificate representing the balance of the submitted Shares
certificate, if any, to the Subscriber at the address specified in the notice
of sale, via express courier, by electronic transfer or otherwise on or before
the Unlegended Shares Delivery Date. Transfer fees shall be the
responsibility of the Seller.
(b) In lieu of delivering physical certificates
representing the Unlegended Shares, if the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, upon request of a Subscriber, so long as the
certificates therefor do not bear a legend and the Subscriber is not obligated
to return such certificate for the placement of a legend thereon, the Company
shall cause its transfer agent to electronically transmit the Unlegended
Shares by crediting the account of Subscriber's prime Broker with DTC through
its Deposit Withdrawal Agent Commission system. Such delivery must be made on
or before the Unlegended Shares Delivery Date.
(c) The Company understands that a delay in the delivery
of the Unlegended Shares pursuant to Section 11 hereof later than two business
days after the Unlegended Shares Delivery Date could result in economic loss
to a Subscriber. As compensation to a Subscriber for such loss, the Company
agrees to pay late payment fees (as liquidated damages and not as a penalty)
to the Subscriber for late delivery of Unlegended Shares in the amount of $100
per business day after the Delivery Date for each $10,000 of purchase price of
the Unlegended Shares subject to the delivery default. If during any 360 day
period, the Company fails to deliver Unlegended Shares as required by this
Section 11.7 for an aggregate of thirty (30) days, then each Subscriber or
assignee holding Securities subject to such default may, at its option,
require the Company to redeem all or any portion of the Shares and Warrant
Shares subject to such default at a price per share equal to 120% of the
Purchase Price of such Common Stock and Warrant Shares ("Unlegended Redemption
Amount"). The amount of the aforedescribed liquidated damages that have
accrued or paid for the twenty day period prior to the receipt by the
Subscriber of the Unlegended Redemption Amount shall be credited against the
Unlegended Redemption Amount. The Company shall pay any payments incurred
under this Section in immediately available funds upon demand.
(d) In addition to any other rights available to a
Subscriber, if the Company fails to deliver to a Subscriber Unlegended Shares
as required pursuant to this Agreement, within seven (7) business days after
the Unlegended Shares Delivery Date and the Subscriber purchases (in an open
market transaction or otherwise) shares of common stock to deliver in
satisfaction of a sale by such Subscriber of the shares of Common Stock which
the Subscriber was entitled to receive from the Company (a "Buy-In"), then the
Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber's total purchase price (including brokerage commissions, if any)
for the shares of common stock so purchased exceeds (B) the aggregate purchase
price of the shares of Common Stock delivered to the Company for reissuance as
Unlegended Shares together with interest thereon at a rate of 15% per annum,
accruing until such amount and any accrued interest thereon is paid in full
(which amount shall be paid as liquidated damages and not as a penalty). For
example, if a Subscriber purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to $10,000 of
purchase price of shares of Common Stock delivered to the Company for
reissuance as Unlegended Shares, the Company shall be required to pay the
Subscriber $1,000, plus interest. The Subscriber shall provide the Company
written notice indicating the amounts payable to the Subscriber in respect of
the Buy-In.
(e) In the event a Subscriber shall request delivery of
Unlegended Shares as described in Section 11.7 and the Company is required to
deliver such Unlegended Shares pursuant to Section 11.7, the Company may not
refuse to deliver Unlegended Shares based on any claim that such Subscriber or
any one associated or affiliated with such Subscriber has been engaged in any
violation of law, or for any other reason, unless, an injunction or temporary
restraining order from a court, on notice, restraining and or enjoining
delivery of such Unlegended Shares or exercise of all or part of said Warrant
shall have been sought and obtained and the Company has posted a surety bond
for the benefit of such Subscriber in the amount of 120% of the amount of the
aggregate purchase price of the Common Stock and Warrant Shares which are
subject to the injunction or temporary restraining order, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Subscriber to the extent
Subscriber obtains judgment in Subscriber's favor.
12. (a) Right of First Refusal. Until the end of the
Exclusion Period, the Subscribers shall be given not less than seven (7)
business days prior written notice of any proposed sale by the Company of its
common stock or other securities or debt obligations, except in connection
with (i) the Company's issuance of warrants or options to purchase Common
Stock pursuant to employees of the Company, (ii) as a result of the exercise
of options or warrants or conversion of convertible notes which are granted or
issued pursuant to this Agreement, (iii) an aggregate of not more than 250,000
shares issuable to technical consultants and employees, (iv) securities
issuable to investment and public relations firms, (v) as full and partial
consideration in connection with a merger, consolidation or purchase of
substantially all of the securities or assets of any corporation or other
entity, and (vi) as has been described in the Reports or Other Written
Information filed with the Commission or delivered to the Subscribers prior to
the Closing Date (collectively the foregoing are "Excepted Issuances"). The
Subscribers who exercise their rights pursuant to this Section 12(a) shall
have the right during the seven (7) business days following receipt of the
notice to purchase such offered common stock, debt or other securities in
accordance with the terms and conditions set forth in the notice of sale in
the same proportion to each other as their purchase of Notes in the Offering.
In the event such terms and conditions are modified during the notice period,
the Subscribers shall be given prompt notice of such modification and shall
have the right during the seven (7) business days following the notice of
modification, whichever is longer, to exercise such right.
(b) Favored Nations Provision. Other than in connection
with the Excepted Issuances, if at any time while Notes or Warrants are
outstanding the Company shall offer, issue or agree to issue any common stock
or securities convertible into or exercisable for shares of common stock (or
modify any of the foregoing which may be outstanding) to any person or entity
at a price per share or conversion or exercise price per share which shall be
less than the Conversion Price in respect of the Shares, or if less than the
Warrant exercise price in respect of the Warrant Shares, without the consent
of each Subscriber holding Notes, Shares, Warrants, or Warrant Shares, then
the Company shall issue, for each such occasion, additional shares of Common
Stock to each Subscriber so that the average per share purchase price of the
shares of Common Stock issued to the Subscriber (of only the Common Stock or
Warrant Shares still owned by the Subscriber) is equal to such other lower
price per share and the maximum Conversion Price and maximum Warrant exercise
price shall automatically be adjusted to such other lower price per share.
The average Purchase Price of the Shares and average exercise price in
relation to the Warrant Shares shall be calculated separately for the Shares
and Warrant Shares. The foregoing calculation and issuance shall be made
separately for Shares received upon conversion and separately for Warrant
Shares. The delivery to the Subscriber of the additional shares of Common
Stock shall be not later than two (2) business days after the closing date of
the transaction giving rise to the requirement to issue additional shares of
Common Stock. The Subscriber is granted the registration rights described in
Section 11 hereof in relation to such additional shares of Common Stock except
that the Filing Date and Effective Date vis- -vis such additional common
shares shall be, respectively, the thirtieth (30th) and sixtieth (60th) date
after the closing date giving rise to the requirement to issue the additional
shares of Common Stock. For purposes of the issuance and adjustment described
in this paragraph, the issuance of any security of the Company carrying the
right to convert such security into shares of Common Stock or of any warrant,
right or option to purchase Common Stock shall result in the issuance of the
additional shares of Common Stock upon the sooner of the agreement to or
actual issuance of such convertible security, warrant, right or option and
again at any time upon any subsequent issuances of shares of Common Stock upon
exercise of such conversion or purchase rights if such issuance is at a price
lower than the Conversion Price or Warrant exercise price in effect upon such
issuance. The rights of the Subscriber set forth in this Section 12 are in
addition to any other rights the Subscriber has pursuant to this Agreement,
the Note, any Transaction Document, and any other agreement referred to or
entered into in connection herewith.
(c) Option Plan Restrictions. With the exception of the
Company's contemplated 2006 Stock Option Plan, the only officer, director,
employee and consultant stock option or stock incentive plan currently in
effect or contemplated by the Company has been submitted to the Subscribers or
has been made available for the Subscribers' review on the Securities and
Exchange Commission's web site. No other plan will be adopted nor may any
options or equity not included in such plan be issued for so long as any sum
is outstanding under the Note or is available for review at ▇▇▇.▇▇▇.▇▇▇.
(d) Maximum Exercise of Rights. In the event the
exercise of the rights described in Sections 12(a) and 12(b) would result in
the issuance of an amount of common stock of the Company that would exceed the
maximum amount that may be issued to a Subscriber calculated in the manner
described in Section 7.3 of this Agreement, then the issuance of such
additional shares of common stock of the Company to such Subscriber will be
deferred in whole or in part until such time as such Subscriber is able to
beneficially own such common stock without exceeding the maximum amount set
forth calculated in the manner described in Section 7.3 of this Agreement.
The determination of when such common stock may be issued shall be made by
each Subscriber as to only such Subscriber.
13. Miscellaneous.
(a) Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be
in writing and, unless otherwise specified herein, shall be (i) personally
served, (ii) deposited in the mail, registered or certified, return receipt
requested, postage prepaid, (iii) delivered by reputable air courier service
with charges prepaid, or (iv) transmitted by hand delivery, telegram, or
facsimile, addressed as set forth below or to such other address as such party
shall have specified most recently by written notice. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, 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: (i) if to the Company, to: Wizzard Software Corporation, ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇, Attn: ▇▇▇▇▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇,
President and Chief Executive Officer, telecopier: (▇▇▇) ▇▇▇-▇▇▇▇, with a copy
by telecopier only to: ▇▇▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇,
▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, Esq. and ▇▇▇▇▇▇▇ ▇.
▇▇▇▇▇▇▇▇▇▇, Esq., telecopier: (▇▇▇) ▇▇▇-▇▇▇▇, and (ii) if to the Subscribers,
to: the one or more addresses and telecopier numbers indicated on the
signature pages hereto, with an additional copy by telecopier only to: Grushko
& ▇▇▇▇▇▇▇, P.C., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇,
telecopier number: (▇▇▇) ▇▇▇-▇▇▇▇.
(b) Entire Agreement; Assignment. This Agreement and
other documents delivered in connection herewith represent the entire
agreement between the parties hereto with respect to the subject matter hereof
and may be amended only by a writing executed by both parties. Neither the
Company nor the Subscribers have relied on any representations not contained
or referred to in this Agreement and the documents delivered herewith. No
right or obligation of the Company shall be assigned without prior notice to
and the written consent of the Subscribers.
(c) Counterparts/Execution. This Agreement may be
executed in any number of counterparts and by the different signatories hereto
on separate counterparts, each of which, when so executed, shall be deemed an
original, but all such counterparts shall constitute but one and the same
instrument. This Agreement may be executed by facsimile signature and
delivered by facsimile transmission.
(d) Law Governing this Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
without regard to conflicts of laws principles that would result in the
application of the substantive laws of another jurisdiction. Any action
brought by either party against the other concerning the transactions
contemplated by this Agreement shall be brought only in the state courts of
New York or in the federal courts located in the state of New York. The
parties and the individuals executing this Agreement and other agreements
referred to herein or delivered in connection herewith on behalf of the
Company agree to submit to the jurisdiction of such courts and waive trial by
jury. The prevailing party shall be entitled to recover from the other party
its reasonable attorney's fees and costs. In the event that any provision of
this Agreement or any other agreement delivered in connection herewith is
invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable under any
law shall not affect the validity or enforceability of any other provision of
any agreement.
(e) Specific Enforcement, Consent to Jurisdiction. The
Company and Subscriber acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to one or more
preliminary and final injunctions to prevent or cure breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which any of
them may be entitled by law or equity. Subject to Section 13(d) hereof, each
of the Company, Subscriber and any signator hereto in his personal capacity
hereby waives, and agrees not to assert in any such suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction in
New York of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. Nothing in this Section shall affect or limit any right to serve
process in any other manner permitted by law.
(f) Damages. In the event the Subscriber is entitled to
receive any liquidated damages pursuant to the Transactions, the Subscriber
may elect to receive the greater of actual damages or such liquidated damages.
(g) Independent Nature of Subscribers. The Company
acknowledges that the obligations of each Subscriber under the Transaction
Documents are several and not joint with the obligations of any other
Subscriber, and no Subscriber shall be responsible in any way for the
performance of the obligations of any other Subscriber under the Transaction
Documents. The Company acknowledges that each Subscriber has represented that
the decision of each Subscriber to purchase Securities has been made by such
Subscriber independently of any other Subscriber 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 which may have been made
or given by any other Subscriber or by any agent or employee of any other
Subscriber, and no Subscriber or any of its agents or employees shall have any
liability to any Subscriber (or any other person) relating to or arising from
any such information, materials, statements or opinions. The Company
acknowledges that nothing contained in any Transaction Document, and no action
taken by any Subscriber pursuant hereto or thereto (including, but not limited
to, the (i) inclusion of a Subscriber in the Registration Statement and (ii)
review by, and consent to, such Registration Statement by a Subscriber) shall
be deemed to constitute the Subscribers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Subscribers 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 each Subscriber shall be entitled to
independently protect and enforce its rights, including without limitation,
the rights arising out of the Transaction Documents, and it shall not be
necessary for any other Subscriber to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that it has elected to
provide all Subscribers with the same terms and Transaction Documents for the
convenience of the Company and not because Company was required or requested
to do so by the Subscribers. The Company acknowledges that such procedure
with respect to the Transaction Documents in no way creates a presumption that
the Subscribers are in any way acting in concert or as a group with respect to
the Transaction Documents or the transactions contemplated thereby.
(h) Consent. As used in the Agreement, "consent of the
Subscribers" or similar language means the consent of holders of not less than
75% of the total of the Shares issued and issuable upon conversion of
outstanding Notes, in either case owned by Subscribers on the date consent is
requested.
(i) Equal Treatment. No consideration shall be offered
or paid to any person to amend or consent to a waiver or modification of any
provision of the Transaction Documents unless the same consideration is also
offered and paid to all the parties to the Transaction Documents.
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
WIZZARD SOFTWARE CORP.
a Colorado corporation
By:/s/▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Name: ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: President
Dated: October 25, 2006
SUBSCRIBER NOTE PRINCIPAL CLASS A CLASS B
WARRANTS WARRANTS
ALPHA CAPITAL ANSTALT 1,000,000
▇▇▇▇▇▇▇▇▇ ▇
▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇▇
Vaduz, Lichtenstein
Fax: ▇▇▇-▇▇-▇▇▇▇▇▇▇▇
/s/
(Signature)
By:
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
WIZZARD SOFTWARE CORP.
a Colorado corporation
By:/s/▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Name: ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: President
Dated: October 25, 2006
SUBSCRIBER NOTE PRINCIPAL CLASS A CLASS B
WARRANTS WARRANTS
WHALEHAVEN CAPITAL FUND, LTD. 400,000
▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇-▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
/s/
(Signature)
By:
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
WIZZARD SOFTWARE CORP.
a Colorado corporation
By:/s/▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Name: ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Title: President
Dated: October 25, 2006
SUBSCRIBER NOTE PRINCIPAL CLASS A CLASS B
WARRANTS WARRANTS
GENESIS MICROCAP 350,000
C/o SDC Capital LLC
▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
/s/
(Signature)
By:
LIST OF EXHIBITS AND SCHEDULES
Exhibit A1 Form of Class A Warrant
Exhibit A2 Form of Class B Warrant
Exhibit B Escrow Agreement
Exhibit C Form of Legal Opinion
Exhibit D Form of Public Announcement or Form 8-K
Schedule 5(a) Subsidiaries
Schedule 5(d) Additional Issuances / Capitalization
Schedule 5(t) Disagreements with Accountants and Lawyers
Schedule 5(u) Transfer Agent
Schedule 8 Fees
Schedule 9(e) Use of Proceeds
Schedule 9(r)(v) Transactions with Control Persons
Schedule 11.1 (i)