PREFERRED STOCK PURCHASE AGREEMENT BETWEEN LOUNSBERRY HOLDINGS I, INC. AND BARRON PARTNERS LP DATED JANUARY 10, 2006
BETWEEN
▇▇▇▇▇▇▇▇▇▇
HOLDINGS I, INC.
AND
▇▇▇▇▇▇
PARTNERS LP
DATED
JANUARY
10, 2006
This
PREFERRED STOCK PURCHASE AGREEMENT (the “Agreement”)
is
made and entered into as of the 10th
day
of
January, 2006 between ▇▇▇▇▇▇▇▇▇▇
HOLDINGS I, INC., a
corporation organized and existing under the laws of the State of Delaware
(the
“Company”) and ▇▇▇▇▇▇
PARTNERS LP, a
Delaware limited partnership (“Investor”).
PRELIMINARY
STATEMENT:
WHEREAS,
the
Investor wishes to purchase from the Company, upon the terms and subject to
the
conditions of this Agreement, five million four hundred sixteen thousand six
hundred sixty seven (5,416,667) shares of Series A Convertible Preferred Stock,
par value $.0001 per share (“Series A Preferred Stock”), of the Company, with
such preferred stock being as described in the Certificate of Designations,
Rights and Preferences (the “Certificate
of Designation”)
in
substantially the form attached hereto as Exhibit
A
for the
Purchase Price set forth in Section 1.3.14 hereof. Subject to the limitations
set forth in the Certificate of Designation, the Series A Preferred Stock shall
be initially convertible into shares of common stock of the Company at any
time
at a conversion rate (the “Conversion
Rate”)
of two
(2) shares of Common Stock, par value $.0001 per share (“Common
Stock”),
for
each share of Series A Preferred Stock, subject to adjustment as provided in
the
Certificate of Designation. In addition, the Company will issue to the Investor
two Common Stock Purchase Warrants (the “Warrants”)
to
purchase up to ten million shares (10,000,000) of Common Stock of the Company
at
twenty cents ($0.20) per share, and ten million (10,000,000) shares of Common
Stock of the Company at twenty five cents ($0.25) per share, and ten million
(10,000,000) shares of Common Stock of the Company at thirty cents ($0.30)
per
share; and
WHEREAS,
as part
of the transaction by which the Investor is purchasing the Series A Preferred
Stock and Warrants, the holders of all of the outstanding common stock of CNS
Acquisition Corp., a Virginia corporation (“CNS
Acquisition”),
for
which the Company will issue an aggregate of 382,500 shares of Common Stock
and
warrants to purchase 892,500 shares of Common Stock at an exercise price of
twelve cents ($.12) per share, in exchange for all of the issued and outstanding
capital stock of CNS Acquisition; and
WHEREAS,
the
parties intend to memorialize the purchase and sale of such Series A Preferred
Stock and the Warrants.
NOW,
THEREFORE,
in
consideration of the mutual covenants and premises contained herein, and for
other good and valuable consideration, the receipt and adequacy of which are
hereby conclusively acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
ARTICLE
I
INCORPORATION
BY REFERENCE, SUPERSEDER AND DEFINITIONS
1.1. Incorporation
by Reference.
The
foregoing recitals and the Exhibits and Schedules attached hereto and referred
to herein, are hereby acknowledged to be true and accurate, and are incorporated
herein by this reference.
1.2. Superseder.
This
Agreement, to the extent that it is inconsistent with any other instrument
or
understanding among the parties governing the affairs of the Company, shall
supersede such instrument or understanding to the fullest extent permitted
by
law. A copy of this Agreement shall be filed at the Company’s principal
office.
1.3. Certain
Definitions.
For
purposes of this Agreement, the following capitalized terms shall have the
following meanings (all capitalized terms used in this Agreement that are not
defined in this Article 1 shall have the meanings set forth elsewhere in this
Agreement):
1.3.1. “1933
Act”
means
the Securities Act of 1933, as amended.
1.3.2. “1934
Act”
means
the Securities Exchange Act of 1934, as amended.
1.3.3. “Affiliate”
means
a
Person or Persons directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the Person(s) in
question. The term “control,” as used in the immediately preceding sentence,
means, with respect to a Person that is a corporation, the right to the
exercise, directly or indirectly, of more than 50% of the voting rights
attributable to the shares of such controlled corporation and, with respect
to a
Person that is not a corporation, the possession, directly or indirectly, of
the
power to direct or cause the direction of the management or policies of such
controlled Person.
1.3.4. “Articles”
means
the Certificate of Incorporation of the Company, as the same may be amended
from
time to time.
1.3.5. “Closing”
shall
mean the Closing of the transactions contemplated by this Agreement on the
Closing Date.
1.3.6. “Closing
Date”
means
the date on which the payment of the Purchase Price (as defined herein) by
the
Investor to the Company is completed pursuant to this Agreement to purchase
the
Series A Preferred Stock and Warrants, which shall occur on or before January
31, 2005.
1.3.7. “Common
Stock”
means
shares of common stock of the Company, par value $0.0001 per share.
1.3.8. “EBITDA”
shall
mean earnings before interest, taxes, depreciation and amortization, determined
in accordance with U.S. GAAP plus any deduction taken in computing net income
as
a result of the application of SFAS 123R in excess of the deduction which would
have been taken by the Company if SFAS 123R had not been applied.
1.3.9. “Escrow
Agreement”
shall
mean the Escrow Agreement among the Company, the Investor and Katsky
▇▇▇▇▇▇ LLP,
as
Escrow Agent, attached hereto as Exhibit E,
it
being acknowledged that the Escrow Agent is counsel for the Company.
1.3.10. “Exempt
Issuance”
means
the issuance of (a) shares of Common Stock or options to employees, officers,
directors of
and
consultants (other than consultants whose services relate to the raising of
funds)
the
Company pursuant to the Company’s 2006 long-term incentive plan and any other
stock or option plan duly adopted by a majority of the non-employee members
of
the Board of Directors of the Company or a majority of the members of a
committee of non-employee directors established for such purpose, (b) securities
upon the exercise of or conversion of any securities issued hereunder and
pursuant to the Registration Rights Agreement and any other options, warrants
or
convertible securities which are outstanding on after completion of the Closing
and the effectiveness of the Merger, as hereinafter defined, and (c) securities
issued pursuant to acquisitions, licensing agreements, or
other
strategic transactions, provided any such issuance shall only be to a Person
which is, itself or through its subsidiaries, an operating company in a business
which
the
Company’s board of directors believes is beneficial to
the
Company and in which the Company receives benefits in addition to the investment
of funds, but shall not include a transaction in which the Company is issuing
securities primarily for the purpose of raising capital or to an entity whose
primary business is investing in securities.
-2-
1.3.11. “Material
Adverse Effect”
shall
mean any adverse effect on the business, operations, properties or financial
condition of the Company that is material and adverse to the Company and its
subsidiaries, taken as a whole and/or any condition, circumstance, or situation
that would prohibit or otherwise materially interfere with the ability of the
Company to perform any of its material obligations under this Agreement or
the
Registration Rights Agreement or to perform its obligations under any other
material agreement.
1.3.12. “Delaware
Act”
means
the Delaware General Corporation Law, as amended.
1.3.13. “Person”
means
an individual, partnership, firm, limited liability company, trust, joint
venture, association, corporation, or any other legal entity.
1.3.14. “Purchase
Price”
means
the one million
three hundred thousand dollars ($1,300,000) to be
paid by
the Investor to the Company for the Series A Preferred Stock and the
Warrants.
1.3.15. “Registration
Rights Agreement”
shall
mean the registration rights agreement between the Investor and the Company
attached hereto as Exhibit
B.
1.3.16. “Registration
Statement”
shall
mean the registration statement under the 1933 Act to be filed with the
Securities and Exchange Commission for the registration of the Shares pursuant
to the Registration Rights Agreement attached hereto as Exhibit
B.
1.3.17. “Securities”
means
the shares of Series A Preferred Stock, the Warrants and the
Shares.
1.3.18. “SEC”
means
the Securities and Exchange Commission.
1.3.19. “SEC
Documents”
shall
mean the Company’s latest Form 10SB, Form 10-K or Form 10-KSB as of the time in
question, all Forms 10-Q or 10-QSB and 8-K filed thereafter, and the Proxy
Statement for its latest fiscal year as of the time in question until such
time
as the Company no longer has an obligation to maintain the effectiveness of
a
Registration Statement as set forth in the Registration Rights
Agreement.
1.3.20. “Shares”
shall
mean, collectively, the shares of Common Stock of the Company issued upon
conversion of the Series A Preferred Stock subscribed for hereunder and those
shares of Common Stock issuable to the Investor upon exercise of the
Warrants.
1.3.21. “Subsequent
Financing”
shall
mean any offer and sale of shares of the Company’s preferred stock, par value
$.0001 per share, or debt that is initially convertible into shares of Common
Stock or otherwise senior or superior to the Series A Preferred
Stock.
1.3.22. “Transaction
Documents”
shall
mean this Agreement, all Schedules and Exhibits attached hereto and all other
documents and instruments to be executed and delivered by the parties in order
to consummate the transactions contemplated hereby, including, but not limited
to the documents listed in Sections 3.2 and 3.3 hereof.
-3-
1.3.23. “Warrants”
shall
mean the Common Stock Purchase Warrants in the form attached hereto Exhibit
D.
ARTICLE
II
SALE
AND PURCHASE OF PREFERRED STOCK AND WARRANTS; PURCHASE
PRICE
2.1. Sale
of Series A Preferred Stock and Issuance of Warrants.
2.1.1. Upon
the
terms and subject to the conditions set forth herein, and in accordance with
applicable law, the Company agrees to sell to the Investor, and the Investor
agrees to purchase from the Company, on the Closing Date five million
four hundred sixteen thousand six hundred sixty seven (5,416,667)
shares
of Series A Preferred Stock and the Warrants for a purchase price (the
“Purchase
Price”)
of one
million
three hundred thousand dollars ($1,300,000).
The
Purchase Price shall be paid by the Investor to the Company on the Closing
Date
by a wire transfer of the Purchase Price into escrow to be held by the escrow
agent pursuant to the terms of the Escrow Agreement. The Company shall cause
the
Series A Preferred Stock and the Warrants to be issued to the Investor upon
the
release of the Purchase Price to the Company by the escrow agent pursuant to
the
terms of the Escrow Agreement. The Company shall register the shares of Common
Stock into which the Series A Preferred Stock is convertible pursuant to the
terms and conditions of a Registration Rights Agreement attached hereto as
Exhibit
B.
2.1.2. Each
share of Series A Preferred Stock shall initially be convertible by the Investor
into two (2) shares
of
Common Stock; provided, however, that the Investor shall not be entitled to
convert the Series A Preferred Stock into shares of Common Stock to
the
extent that
such
conversion
would
result in beneficial ownership by the Investor and its Affiliates of more than
4.9% of the then outstanding number of shares of Common Stock on such date.
For
the purposes of the immediately preceding sentence, 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.
The
limitation set forth in this Section 2.1.2 is referred to as the “4.9%
Limitation.”
2.1.3. Upon
execution and delivery of this Agreement and the Company’s receipt of the
Purchase Price from the Escrow Agent pursuant to the terms of the Escrow
Agreement, the Company shall issue to the Investor the Warrant to purchase
an
aggregate of 30,000,000
shares
of Common Stock at exercise prices as stated in the Warrants, all pursuant
to
the terms and conditions of the form of Warrants attached hereto as Exhibit
C;
provided, however, that the Investor shall not be entitled to exercise the
Warrants and receive shares of Common Stock that would result in beneficial
ownership by the Investor and its Affiliates of more than 4.9% of the then
outstanding number of shares of Common Stock on such date.
2.2. Purchase
Price.
The
Purchase Price shall be delivered by the Investor in the form of a wire transfer
in United States dollars
from the
Investor to the escrow agent pursuant to the Escrow Agreement on the Closing
Date.
2.3. Acquisition
of CNS Acquisition Stock.
The
stockholders of CNS Acquisition shall transfer to CNS Acquisition all of the
outstanding capital stock of CNS Acquisition in exchange for an aggregate of
285,000
shares of Common Stock and warrants to purchase 1,140,000 shares of Common
Stock
at an exercise price of twelve cents ($.12) per share, in exchange for all
of
the issued and outstanding capital stock of CNS Acquisition.
-4-
ARTICLE
III
CLOSING
DATE AND DELIVERIES AT CLOSING
3.1. Closing
Date. The
closing of the transactions contemplated by this Agreement (the “Closing”),
unless expressly determined herein, shall be held at the offices of the Company,
at 5:00 P.M. local time, on the Closing Date or on such other date and at such
other place as may be mutually agreed by the parties, including closing by
facsimile with originals to follow.
3.2. Deliveries
by the Company.
In
addition to and without limiting any other provision of this Agreement, the
Company agrees to deliver, or cause to be delivered, to the escrow agent under
the Escrow Agreement, the following:
(a) At
or
prior to Closing, an executed Agreement with all exhibits and schedules attached
hereto;
(b) At
or
prior to Closing, executed Warrants
in the
name of the Investor in the form attached hereto as Exhibit C;
(c) The
executed Registration Rights Agreement;
(d) Certifications
in form and substance acceptable to the Company and the Investor from any and
all brokers or agents involved in the transactions contemplated hereby as to
the
amount of commission or compensation payable to such broker or agent as a result
of the consummation of the transactions contemplated hereby and from the Company
or Investor, as appropriate, to the effect that reasonable reserves for any
other commissions or compensation that may be claimed by any broker or agent
have been set aside;
(e) Evidence
of approval of the board
of
directors
of the
Company of the Transaction Documents and the transactions contemplated
hereby;
(f) Evidence
of the filing of the Articles of Merger relating to the acquisition of
Computer
Networks & Software, Inc., a Virginia corporation (“CNS”) through the merger
(the “Merger”) of the Issuer’s wholly-owned subsidiary, CNS Acquisition Corp., a
Virginia corporation (“Acquisition Company”) into CNS.
(g) Certificate
of the President and the Secretary of the Company that the Certificate of
Designation has been adopted and filed;
(h) Evidence
that the Certificate of Amendment to the Certificate of Incorporation of the
Company adopting the provision described in Section 6.19 has been approved
by
the Company’s board of directors subject to stockholder approval.
(i) Good
standing certificates
of the
Company
issued by the Secretary of State of
Delaware;
(j) An
opinion from the Company’s counsel concerning the Transaction Documents and the
transactions contemplated hereby in form and substance reasonably acceptable
to
Investor;
(k) Stock
Certificate in the name of Investor evidencing the Series A Preferred
Stock;
-5-
(l) The
executed Escrow Agreement; and
(m) Copies
of
all executive employment agreements, all past and present financing
documentation or other documentation where stock could potentially be issued
or
issued as payment, all past and present litigation documents and historical
financials,
not
previously provided to Investor.
(n) Such
other documents or certificates as shall be reasonably requested by Investor
or
its counsel.
3.3. Deliveries
by Investor.
In
addition to and without limiting any other provision of this Agreement, the
Investor agrees to deliver, or cause to be delivered, to the escrow agent under
the Escrow Agreement, the following:
(a) A
deposit
in the amount of the Purchase
Price;
(b) The
executed Agreement with all Exhibits and Schedules attached hereto;
(c) The
executed Registration Rights Agreement;
(d) The
executed Escrow Agreement; and
(e) Such
other documents or certificates as shall be reasonably requested by the Company
or its counsel.
In
the
event any document provided to the other party in Paragraphs 3.2 and 3.3 herein
are provided by facsimile, the party shall forward an original document to
the
other party within seven (7) business days.
3.4. Further
Assurances.
The
Company and the Investor shall, upon request, on or after the Closing Date,
cooperate with each other (specifically, the Company shall cooperate with the
Investor, and the Investor shall cooperate with the Company) by furnishing
any
additional information, executing and delivering any additional documents and/or
other instruments and doing any and all such things as may be reasonably
required by the parties or their counsel to consummate or otherwise implement
the transactions contemplated by this Agreement.
3.5. Waiver.
The
Investor may waive any of the requirements of Section 3.2 of this
Agreement
or any
of its rights under the Escrow Agreement,
and the
Company at its discretion may waive any of its rights of Section 3.3 of this
Agreement
or
any
of
its
rights under the
Escrow Agreement.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The
Company represents and warrants to the Investor as of the date hereof and as
of
Closing (which warranties and representations shall survive the Closing
regardless of what examinations, inspections, audits and other investigations
the Investor has heretofore made or may hereinafter make with respect to such
warranties and representations) as follows:
4.1. Organization
and Qualification.
Each
of
the
Company
and
CNS
is
a
corporation duly organized, validly existing and in good standing under the
laws
of the state
of
its
incorporation,
and has
the requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as it is now being conducted and is
duly
qualified to do business in any other jurisdiction by virtue of the nature
of
the businesses conducted by it or the ownership or leasing of its properties,
except where the failure to be so qualified will not, when taken together with
all other such failures, have a Material Adverse Effect on the business,
operations, properties, assets, financial condition or results of operation
of
the Company and its subsidiaries taken as a whole.
-6-
4.2. Articles
of Incorporation and By-Laws.
The
complete and correct copies of the Company’s Articles and By-Laws, as
in
effect
on
the
Closing Date,
has
been delivered to the Investor.
4.3. Capitalization.
4.3.1. The
authorized and outstanding capital stock of the Company as
of the
date of this Agreement
and as
adjusted to reflect issuances pursuant to or contemplated by this Agreement
is
set forth in Schedule 4.3.1 to this Agreement. Schedule 4.3.1
contains
all shares and derivatives currently and potentially outstanding. The
Company
hereby
represents that any and all shares and current potentially dilutive events
have
been included in Schedule 4.3.1,
including employment agreements, acquisition, consulting agreements, debts,
payments, financing or business relationships that could be paid in equity,
derivatives or resulting in additional equity issuances.
4.3.2. All
outstanding shares of capital stock have been duly authorized and are validly
issued, and are fully paid and non-assessable and free from preemptive rights.
All shares of capital stock described above to be issued have been duly
authorized and when issued, will be validly issued, fully paid and
non-assessable and free from preemptive rights.
4.3.3. Except
pursuant to this Agreement and as set forth in Schedule 4.3.1
hereto,
and as set forth in the Company’s SEC Documents, filed with the SEC, as of the
date hereof and as of the Closing Date, there are not now outstanding options,
warrants, rights to subscribe for, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for, shares of any class of capital stock of the Company, or agreements,
understandings or arrangements to which the Company is a party, or by which
the
Company is or may be bound, to issue additional shares of its capital stock
or
options, warrants, scrip or rights to subscribe for, calls or commitment of
any
character whatsoever relating to, or securities or rights convertible into
or
exchangeable for, any shares of any class of its capital stock. The Company
agrees to inform the Investor
in
writing of any additional warrants granted prior to the Closing
Date.
4.3.4. The
Company on the Closing Date (i) will have full right, power, and authority
to
sell, assign, transfer, and deliver, by reason of record and beneficial
ownership, to the Investor, the Series A Preferred Stock hereunder, free and
clear of all liens, charges, claims, options, pledges, restrictions, and
encumbrances whatsoever; and (ii) upon conversion of the Series A Preferred
Stock or exercise of the Warrants, the Investor will acquire title to such
Shares, free and clear of all liens, charges, claims, options, pledges,
restrictions, and encumbrances whatsoever, except as otherwise provided in
this
Agreement as to the limitation on the voting rights of such Shares in certain
circumstances
and
except for any of the foregoing which results from actions or omissions on
the
part of the Investor.
4.4. Authority.
The
Company has all requisite corporate power and authority to execute and deliver
this Agreement, the Series A Preferred Stock, and the Warrants, to perform
its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
by
the Company and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action and no other corporate
proceedings on the part of the Company is necessary to authorize this Agreement
or to consummate the transactions contemplated hereby except as disclosed in
this Agreement. This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.;
provided, however, that no representation is made with respect to the ability
of
the Investor to convert the Series A Preferred Stock or exercise any Warrant
if
and to the extent that the Conversion Price, as defined in the Certificate
of
Designation, of the Series A Preferred Stock or the number of Shares issuable
upon exercise of the Warrants would result in the issuance of a number of shares
of Common Stock which is greater than the amount by which the authorized Common
Stock exceeds the sum of the outstanding Common Stock and the shares of Common
Stock reserved for issuance pursuant to outstanding agreements and outstanding
options, warrants, rights, convertible securities and other securities upon
the
exercise or conversion of which or pursuant to the terms of which additional
shares of Common Stock may be issuable (the foregoing proviso being referred
to
as the “Authorized
Stock Proviso”).
-7-
4.5. No
Conflict; Required Filings and Consents.
The
execution and delivery of this Agreement by the Company does not, and the
performance by the Company of its
obligations hereunder will not: (i) conflict with or violate the Articles or
By-Laws of the Company; (ii) conflict with, breach or violate any federal,
state, foreign or local law, statute, ordinance, rule, regulation, order,
judgment or decree (collectively, “Laws”)
in
effect as of the date of this Agreement and applicable to the Company; or (iii)
result in any breach of, constitute a default (or an event that with notice
or
lapse of time or both would become a default) under, give to any other entity
any right of termination, amendment, acceleration or cancellation of, require
payment under, or result in the creation of a lien or encumbrance on any of
the
properties or assets of the Company pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Company is a party or by the Company
or
any of its properties or assets is bound. Excluding from the foregoing are
such
violations, conflicts, breaches, defaults, terminations, accelerations,
creations of liens, or incumbency that would not, in the aggregate, have a
Material Adverse Effect
except
to the extent that stockholder approval may be required as a result of the
Authorized Stock Proviso, in which event, the Company will seek stockholder
approval to an increase in the authorized Common Stock sufficient to enable
the
Company to be in compliance with this Section 4.5.
4.6. Report
and Financial Statements.
Schedule
4.6 sets forth the audited balance sheet of CNS as of December 31, 2004 and
the
audited statements of operations, stockholders equity and cash flows for the
years ended December 31, 2004 and 2003, and the unaudited balance sheet as
of
September 30, 2005 and unaudited statements of operations and cash flows for
the
nine months ended September 30, 2005 and 2004 and stockholders’ equity for the
nine months ended September 30, 2005, in each cash including notes to the
financial statements
(collectively, the “Financial Statements”). Each of the balance sheets contained
in or incorporated by reference into any such Financial Statements (including
the related notes and schedules thereto) fairly presented the financial position
of CNS,
as of
its date, and each of the statements of operations,
stockholders’ equity and cash flows in such Financial Statements (including any
related notes and schedules thereto) fairly presents, changes in stockholders’
equity and changes in cash flows, as the case may be, of CNS,
for the
periods to which they relate, in each case in accordance with United States
generally accepted accounting principles (“U.S. GAAP”) consistently applied
during the periods involved, except in each case as may be noted therein,
subject to normal year-end audit adjustments in the case of unaudited
statements. The books and records of the Company have been, and are being,
maintained in all material respects in accordance with U.S. GAAP and any other
applicable legal and accounting requirements and reflect only actual
transaction.
-8-
4.7. Compliance
with Applicable Laws.
The
Company is not in violation of, or, to the knowledge of the Company is under
investigation with respect to or has been given notice or has been charged
with
the violation of any Law of a governmental agency, except for violations which
individually or in the aggregate do not have a Material Adverse Effect.
4.8. Brokers.
Except
as set forth on Schedule 4.8, no broker, finder or investment banker is entitled
to any brokerage, finder’s or other fee or Commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or
on behalf of the Company.
4.9. SEC
Documents.
The
Investor acknowledges that the Company is a publicly held company and has made
available to the Investor true and complete copies of any requested SEC
Documents. The Company has registered its Common Stock pursuant to Section
12(g)
of the 1934 Act. The Company has not provided to the Investor any information
that, according to applicable law, rule or regulation, should have been
disclosed publicly prior to the date hereof by the Company, but which has not
been so disclosed.
4.10. Litigation.
To the
knowledge of the Company, no litigation, claim, or other proceeding before
any
court or governmental agency is pending or to the knowledge of the Company,
threatened against the Company
or
CNS,
the
prosecution or outcome of which, if adversely determined, is
likely
to
have a
Material Adverse Effect.
4.11. Exemption
from Registration.
Subject
to the accuracy of the Investor’s representations in Article V, except as
required pursuant to the Registration Rights Agreement, the sale of the Series
A
Preferred Stock and Warrants by the Company to the Investor will not require
registration under the 1933 Act, but may require registration or exemption
from
registration under New York state securities law if applicable to the Investor.
When validly converted in accordance with the terms of the Series A Preferred
Stock, and upon exercise of the Warrants in accordance with their terms, the
Shares underlying the Series A Preferred Stock and the Warrants will be duly
and
validly issued, fully paid, and non-assessable. The Company is issuing the
Series A Preferred Stock and the Warrants in accordance with and in reliance
upon the exemption from securities registration afforded, inter alia, by Rule
506 under Regulation D as promulgated by the SEC under the 1933 Act, and/or
Section 4(2) of the 1933 Act; provided, however, that certain filings and
registrations may be required under state securities “blue sky” laws depending
upon the residency of the Investor.
4.12. No
General Solicitation or Advertising in Regard to this
Transaction.
Neither
the Company nor any of its Affiliates nor, to the knowledge of the Company,
any
Person acting on its or their behalf (i) has conducted or will conduct any
general solicitation (as that term is used in Rule 502(c) of Regulation D as
promulgated by the SEC under the ▇▇▇▇ ▇▇▇) or general advertising with respect
to the sale of the Series A Preferred Stock or Warrants, or (ii) made any offers
or sales of any security or solicited any offers to buy any security under
any
circumstances that would require registration of the Series A Preferred Stock
or
Warrants, under the 1933 Act, except as required herein.
4.13. No
Material Adverse Effect.
Except
as set forth in Schedule 4.13 attached hereto, since September
30,
2005, no
event or circumstance resulting in a Material Adverse Effect has occurred or
exists with respect to CNS.
To
the knowledge of the
Company,
except
as set forth in said Schedule 4.13, no
material
supplier or customer has given notice, oral or written, that it intends to
cease
or reduce the volume of its business with CNS
from
historical levels.
-9-
4.14. Material
Non-Public Information.
The
Company has not disclosed to the Investor any material non-public information
that (i) if disclosed, would reasonably be expected to have a material effect
on
the price of the Common Stock or (ii) according to applicable law, rule or
regulation, should have been disclosed publicly by the Company prior to the
date
hereof but which has not been so disclosed; provided, however, that the Company
has disclosed to the Investor matters relating to the Company’s acquisition of
CNS and the financing of such acquisition.
4.15. Internal
Controls And Procedures.
To the
knowledge of the Company, CNS maintains books and records and internal
accounting controls which provide reasonable assurance that (i) all transactions
to which CNS or any subsidiary is a party or by which its properties are bound
are executed with management’s authorization; (ii) the recorded accounting of
CNS’s consolidated assets is compared with existing assets at regular intervals;
(iii) access to CNS’s consolidated assets is permitted only in accordance with
management’s authorization; and (iv) all transactions to which CNS or any
subsidiary is a party or by which its properties are bound are recorded as
necessary to permit preparation of the financial statements of the Company
in
accordance with
standards
of the Public Company Accounting Oversight Board; it being understood that
CNS
has not conducted an internal controls audit and that no such audit has been
required under applicable law.
4.16. Full
Disclosure.
No
representation or warranty made by the
Company in
this
Agreement and no certificate or document furnished or to be furnished to the
Investor pursuant to this Agreement contains or will contain any untrue
statement of a material fact, or omits or will omit to state a material fact
necessary to make the statements contained herein or therein, taken as a whole,
not misleading.
ARTICLE
V
REPRESENTATIONS
AND WARRANTIES OF THE INVESTORS
The
Investor represents and warrants to the Company that:
5.1. Organization
and Standing of the Investor.
The
Investor is a limited partnership duly formed, validly existing and in good
standing under the laws of the State of Delaware. The state in which any offer
to purchase shares hereunder was made or accepted by such Investor is the state
shown as such Investor’s address. The Investor was not formed for the purpose of
investing solely in the Series A Preferred Stock, the Warrants or the shares
of
Common Stock which are the subject of this Agreement.
5.2. Authorization
and Power.
The
Investor has the requisite power and authority to enter into and perform this
Agreement and to purchase the securities being sold to it hereunder. The
execution, delivery and performance of this Agreement by the Investor and the
consummation by the Investor of the transactions contemplated hereby have been
duly authorized by all necessary partnership action where appropriate. This
Agreement and the Registration Rights Agreement have been duly executed and
delivered by the Investor and at the Closing shall constitute valid and binding
obligations of the Investor enforceable against the Investor in accordance
with
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditors’ rights and remedies or by other
equitable principles of general application.
-10-
5.3. No
Conflicts.
The
execution, delivery and performance of this Agreement and the consummation
by
the Investor of the transactions contemplated hereby or relating hereto do
not
and will not (i) result in a violation of such Investor’s charter documents or
bylaws where appropriate 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 to which the Investor
is
a party, 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 the
Investor 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 Investor). The Investor 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 such
Investor’s obligations under this Agreement or to purchase the securities from
the Company in accordance with the terms hereof, provided that for purposes
of
the representation made in this sentence, the Investor is assuming and relying
upon the accuracy of the relevant representations and agreements of the Company
herein.
5.4. Financial
Risks.
The
Investor acknowledges that such Investor is able to bear the financial risks
associated with an investment in the securities being purchased by the Investor
from the Company and that it has been given full access to such records of
the
Company and the subsidiaries and to the officers of the Company and the
subsidiaries as it has deemed necessary or appropriate to conduct its due
diligence investigation. The Investor is capable of evaluating the risks and
merits of an investment in the securities being purchased by the Investor from
the Company by virtue of its experience as an investor and its knowledge,
experience, and sophistication in financial and business matters and the
Investor is capable of bearing the entire loss of its investment in the
securities being purchased by the Investor from the Company.
5.5. Accredited
Investor.
The
Investor is (i) an “accredited investor” as that term is defined in Rule 501 of
Regulation D promulgated under the 1933 Act by reason of Rule 501(a)(3) and
(6),
(ii) experienced in making investments of the kind described in this Agreement
and the related documents, (iii) able, by reason of the business and financial
experience of its officers (if an entity) and professional advisors (who are
not
affiliated with or compensated in any way by the Company or any of its
affiliates or selling agents), to protect its own interests in connection with
the transactions described in this Agreement, and the related documents, and
(iv) able to afford the entire loss of its investment in the securities being
purchased by the Investor from the Company. The
Investor is acquiring the Securities for investment and not with a view to
the
sale or distribution thereof and understands that such Securities are restricted
securities, as defined in the 1933 Act, and may not be sold or otherwise
distributed except pursuant to an effective registration statement or an
exemption from the registration requirements of the 1933 Act and that the
certificates for such securities shares and Warrants will bear an investment
legend.
5.6. Brokers.
Except
as set forth in Schedule 4.8, no broker, finder or investment banker is entitled
to any brokerage, finder’s or other fee or Commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by
or
on behalf of the Investor.
5.7. Knowledge
of Company.
The
Investor and such Investor’s advisors, if any, have been, upon request,
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the securities
being purchased by the Investor from the Company. The Investor and such
Investor’s advisors, if any, have been afforded the opportunity to ask questions
of the Company and have received complete and satisfactory answers to any such
inquiries.
-11-
5.8. Risk
Factors.
The
Investor understands that such Investor’s investment in the securities being
purchased by the Investor from the Company involves a high degree of risk.
The
Investor understands that no United States federal or state agency or any other
government or governmental agency has passed on or made any recommendation
or
endorsement of the securities being purchased by the Investor from the Company.
The Investor warrants that such Investor is able to bear the complete loss
of
such Investor’s investment in the securities being purchased by the Investor
from the Company.
In
acquiring the Securities, the Investor is not relying upon any projections
of
the future financial condition, results of operations or cash flows relating
to
the Company.
5.9. Full
Disclosure.
No
representation or warranty made by the Investor in this Agreement and no
certificate or document furnished or to be furnished to the Company pursuant
to
this Agreement contains or will contain any untrue statement of a material
fact,
or omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading. Except as set forth or referred
to
in this Agreement, (a)
the
Investor
does not have any agreement or understanding with any person relating to
acquiring, holding, voting or disposing of any equity securities of the
Company.
and (b)
during the past five years there has not occurred any event listed in Item
401(f) of Regulation S-K or any investigation relating to any such event with
respect to the Investor nor any of its managing partners.
ARTICLE
VI
COVENANTS
OF THE COMPANY
6.1. Registration
Rights.
The
Company shall cause the Registration Rights Agreement to remain in full force
and effect according to the provisions of the Registration Rights Agreement
and
the Company shall comply in all material respects with the terms
thereof.
6.2. Reservation
of Common Stock.
As of
the date hereof, the Company has reserved and the Company shall continue to
reserve and keep available at all times, free of preemptive rights, shares
of
Common Stock for the purpose of enabling the Company to issue the Shares
underlying the Series A Preferred Stock and Warrants;
provided, however, that if, as a result of the Authorized Stock Proviso, there
are not sufficient shares reserved as required in this Section 6.2, the Company
shall, within thirty (30) days after the Company becomes aware of such
deficiency, prepare and file with the Commission a proxy statement pursuant
to
which the Company will seek stockholder approval for an increase in the
authorized Common Stock sufficient to enable the Company to be in compliance
with this Section 6.2. The Investor agrees to vote in favor of such
proposal.
6.3. Compliance
with Laws.
The
Company hereby agrees to comply in all
material
respects
with the Company’s reporting, filing and other obligations under the
Laws.
6.4. Exchange
Act Registration.
The
Company will use its best efforts to comply in all respects with its reporting
and filing obligations under the 1934 Act, and will not take any action or
file
any document (whether or not permitted by the 1934 Act or the rules thereunder)
to terminate or suspend any such registration or to terminate or suspend its
reporting and filing obligations under the 1934 until the Investors have
disposed of all of their Shares.
-12-
6.5. Corporate
Existence; Conflicting Agreements.
The
Company will take all steps necessary to preserve and continue the corporate
existence of the Company. The Company shall not enter into any agreement, the
terms of which agreement would restrict or impair the right or ability of the
Company to perform any of its obligations under this Agreement or any of the
other agreements attached as exhibits hereto.
6.6. Series
A Preferred Stock.
Until
the
earlier of (a) three years from the Closing or (b) such date as the Investor
shall have converted not less than 90% of the shares of Series A Preferred
Stock
and sold the underlying Shares or (c) such date as the Investor shall have
transferred not less than 90% of the shares of Series A Preferred Stock or
(d)
such date as the total number of shares of Preferred Stock which the Investor
shall have either transferred or converted and sold the underlying Shares shall
represent not less than 90% of the shares of Series A Preferred Stock issued
to
the Investor, the Company will not
issue
any preferred stock of the Company with the exception of Series A Preferred
Stock issued to the Investor.
6.7. Convertible
Debt.
On or
prior to the Closing Date, the Company will cause to be cancelled all
convertible debt in the Company. Until
the
earlier of (a) three years from the Closing or (b) such date as the Investor
shall have converted not less than 90% of the shares of Series A Preferred
Stock
and sold the underlying Shares or (c) such date as the Investor shall have
transferred not less than 90% of the shares of Series A Preferred Stock or
(d)
such date as the total number of shares of Preferred Stock which the Investor
shall have either transferred or converted and sold the underlying Shares shall
represent not less than 90% of the shares of Series A Preferred Stock issued
to
the Investor, the Company will not
issue
any convertible debt.
6.8. Debt
Limitation.
The
Company agrees for two years after Closing not to enter into any new borrowings
of more than three times the sum of the EBITDA from recurring operations over
the trailing four quarters.
6.9. Reset
Equity Deals.
On or
prior to the Closing Date, the Company will cause to be cancelled any and all
reset features related to any shares outstanding that could result in additional
shares being issued. For a period of three years from the closing the Company
will not enter into any transactions that have any reset features that could
result in additional shares being issued.
For
purposes of this Section 6.9, a reset provision for a convertible security
or
derivative security shall mean a provision whereby the issuance of securities
at
a lower price or having a lower conversion or exercise price will result in
the
conversion or exercise price of the security being reduced to the lower price
or
lower conversion or exercise price or more shares being issued, as the case
may
be or which have a conversion or exercise price that is based on the market
price at the time of conversion or exercise or any other device which results
in
an
adjustment to the exercise price or conversion price of the above mentioned
securities in section 6.9 other than stock dividends, stock splits, stock
distributions, combination of shares, reverse splits, and other
recapitalizations, as long as they effect all stockholders
appropriately.
6.10. Independent
Directors.
6.10.1. The
Company shall have caused the appointment of the majority of the board of
directors to be independent directors, as defined by the rules
of
the Nasdaq Stock Market, not later than sixty (60) days after
Closing.
6.10.2. If,
at
any time from the expiration of such sixty (60) day period and until the earlier
of (a) three years from the Closing or (b) such date as the Investor shall
have
converted not less than 90% of the shares of Series A Preferred Stock and sold
the underlying Shares or (c) such date as the Investor shall have transferred
not less than 90% of the shares of Series A Preferred Stock, the board of
directors shall not be composed of a majority of independent
directors:
-13-
6.10.2.1. for
a
reason other than for an excused reason, the Company shall have 75 days, to
take
such steps as are necessary so that a majority of the Company’s directors are
independent directors, and
6.10.2.2. for
an
excused reason, the Company shall have 75 days from the date that the Company
becomes aware of the event (or the last event if there are more than one such
event) giving rise to the excused reason, to take such steps as are necessary
so
that a majority of the Company’s directors are independent
directors.
6.10.3. For
purposes of this Section 6.10, an excused reason shall mean the death or
resignation of an independent director or the occurrence of an event whereby
an
independent director ceases to be independent.
6.10.4. If,
during the period referred to in Section 6.10.2 of this Agreement, the Company
shall have failed to have a board of directors composed of a majority of
independent directors after the date by which such situation was to have been
cured pursuant to Section 6.10.2.1 or Section 6.10.2.2 of this Agreement,
whichever shall apply,
the
Company shall pay to the Investor,
as
liquidated damages and not as a penalty, an amount equal to twelve percent
(12%)
per
annum
of the
Purchase Price of the then outstanding shares of Series A Preferred Stock,
payable monthly in cash or Series A Preferred Stock at the option of the
Investor,
based
on the number of days that such condition exists.
The
parties agree that the only damages payable for a violation of such
provisions
shall be
such liquidated damages. Nothing shall preclude the Investor from pursuing
or
obtaining specific performance or other equitable relief with respect to this
Agreement. The parties hereto agree that the liquidated damages provided for
in
this Section 6.10.4
constitute a reasonable estimate of the damages that may be incurred by the
Investor by reason of the failure of the Company to have
a
majority of directors as
independent directors.
6.10.5. In
no
event shall the total payments made pursuant to this Section 6.10 and Section
6.11, whether in cash or Series A Preferred Stock exceed in the aggregate
eighteen percent (18%) of the Purchase Price of the outstanding shares of Series
A Preferred Stock
6.10.6. Until
the
Company has a board of directors with a majority if independent directors,
the
shares of Common Stock owned by ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ will be held in escrow;
provided, however, that this Section 6.10.6 shall not be applicable as long
as
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ has pledged such shares of Common Stock to Cornell Capital
Partners, LP.
6.11. Independent
Directors Become Majority of Audit and Compensation
Committees.
The
Company will cause the appointment of a majority of independent
directors to the audit and compensation committees of the board of directors
within sixty (60) days after Closing. If at any time after the expiration of
such sixty (60) day period, independent directors do not compose the majority
of
the audit and compensation committees, the Company shall pay to the Investors,
pro rata, as liquidated damages and not as a penalty, an amount equal to twelve
percent (12%)
per
annum of the Purchase Price of the then outstanding Series A Preferred Stock,
payable monthly in cash or Series A Preferred Stock at the option of the
Investor,
such
payment shall be based on the number of days that such condition
exists.
The
parties agree that the only damages payable for a violation of the terms of
this
Agreement with respect to which liquidated damages are expressly provided shall
be such liquidated damages. Nothing shall preclude the Investor from pursuing
other remedies or obtaining specific performance or other equitable relief
with
respect to this Agreement. Notwithstanding
the foregoing, no liquidated damages shall be payable pursuant to this Section
6.11 during any period for which liquidated damages are payable pursuant to
Section 6.10.
-14-
6.12. Use
of Proceeds.
The
Company will use the proceeds from the sale of the Series A Preferred Stock
and
the Warrants (excluding amounts paid by the Company for legal and administrative
fees in connection with the sale of such securities) for
the
acquisition of CNS and
working
capital.
6.13. Right
of First Refusal
6.13.1. In
the
event that the Company seeks to raise additional funds through a private
placement of its securities (a “Proposed Financing”), other than Exempt
Issuances, the Investor shall have the right to participate in any subsequent
funding by the Company of the offering price on a pro rata basis, based on
the
percentage that (a) the number of Shares held by the Investor plus the number
of
Shares issuable upon exercise of the Series A Preferred Stock then owned by
the
Investor, without regard to the 4.9% Limitation, bears to (b) the total number
of shares of Common Stock outstanding plus the number of Shares issuable upon
conversion of the Series A Preferred Stock and any other series of convertible
preferred stock or debt securities, without regard to the 4.9% Limitations
any
other limitations on exercise such other convertible preferred stock or debt
securities.
6.13.2. The
terms
on which the Investor shall purchase securities pursuant to Proposed Financing
shall be the same as such securities are purchased by other investors. The
Company shall give the Investor not less than ten (10) days notice setting
forth
the terms of the Proposed Financing. In the event that the terms of the Proposed
Financing are changed, the Company shall provide the Investor with the same
notice of the revised terms that are provided to the other
investors.
6.13.3. In
the
event that the Investor does not exercise its right to participate in the
Proposed Financing, the Company may sell the securities in the Proposed
Financing at a price and on terms which are no more favorable to the investors
than the terms provided to the Investor. If the Company subsequently changes
the
price or terms so that the terms are at a price or more favorable to the
investors, the Company shall reoffer the securities to the Investor as provided
in Section 6.12.2 of this Agreement.
6.14. Price
Adjustment.
From
the
date hereof until such time as the Investor holds no Securities, except for
Exempt Issuances, as to which this Section 6.14 does not apply, if the Company
closes on the sale or issuance of Common Stock at a price, or warrants, options,
convertible debt or equity securities with a exercise price per share or
exercise price per share which is less than the Conversion Price then in effect
(such lower sales price, conversion or exercise price, as the case may be,
being
referred to as the “Lower Price”), the Conversion Price in effect from and after
the date of such transaction shall be reduced to the Lower Price. For purpose
of
determining the exercise price of warrants issued by the Company, the price,
if
any, paid per share for the warrants shall be added to the exercise price of
the
warrants. A similar provision shall be included in the Warrants.
6.15. Price
Adjustment Based on EBITDA
Per Share.
In
the
event the Company’s
EBITDA per
share
of Common Stock is between $0.039 and $0.031 per share (where such EBITDA per
share is defined as EBITDA as reported for the audited fiscal year ended
December 31, 2006 from recurring operations before any charges relating to
the
transaction contemplated by this Agreement and any other non-recurring items,
including warrants, but excluding the employee stock option plan), the
conversion price shall be reduced proportionately by 0% if the EBITDA is $0.039
per share and by 20% if EBITDA is $0.031 per share or lower. The number of
shares used in determining EBITDA per share of Common Stock shall be determined
in the same manner as for fully-diluted earnings per share, except as otherwise
provided in this Section 6.15. For example, if the Company’s EBITDA is
$0.033 per share, or 15% below $0.039 per share, then the Conversion Price
shall
be reduced by 15%. Such reduction shall be made at the time the Company files
its Form 10-K or Form 10-KSB for the year ended December 31, 2006. In the
event that EBITDA per share is less than $0.031, or the Company has a loss,
the
Conversion Price shall be reduced by a maximum of 20%. This Section 6.15.1
shall
apply to the all of the Series A Preferred Stock which is outstanding on the
date the Form 10-KSB or Form 10-K is filed, or, if not filed on time, on the
date that filing was required.
-15-
6.16. Insider
Selling.
The
earliest any “Insiders” can start selling their shares in
the
public market shall
be
eighteen
months from Closing. After eighteen months following the Closing, no Insider
shall sell more than 10% of his or her shares in the Company in the public
market, and such shares may be sold pursuant to either Rule 144 or any
registration statement which may cover such shares. Insiders
shall include all persons
who are officers
and directors of the Company
at the
Closing or who become officers and directors during the fiscal year ended March
31, 2006.
▇▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇ and the Investor shall not be considered “Insiders.”
The
restrictions in this Section 6.16 shall not apply to shares issued pursuant
to a
stock option or long-term incentive plans which may be approved by the
Compensation Committee provided that such committee is comprises of a majority
of independent directors.
The
Company may include in the registration statement filed pursuant to the
Registration Rights Agreement all of the shares of Common Stock which are
outstanding immediately prior to the Closing, none of which shall be owned
by
Affiliates of the Company or CNS.
6.17. Employment
and Consulting Contracts.
For
three
years after the Closing, Company must have a unanimous opinion from the
Compensation Committee of the Board of Directors that any awards other than
salary are usual, appropriate and reasonable for any officer, director or
consultants whose compensation is more than $100,000 per annum holding a similar
position in other public companies with independent majority boards with similar
market capitalizations in the same industry with securities listed on the OTCBB,
ASE, NYSE or Nasdaq.
6.18. Subsequent
Equity Sales.
From
the date hereof until such time as the Investor holds no more than 5% of the
Shares (determined as if the Series A Preferred Stock were fully converted
and
the Warrants fully exercised), the Company shall be prohibited from
effecting
or
entering into an agreement to effect any Subsequent Financing involving a
“Variable
Rate Transaction”
or
an
“MFN
Transaction”
(each
as defined below). The term “Variable
Rate Transaction”
shall
mean a transaction in which the Company issues or sells (i) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A) at
a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities, or
(B)
with a conversion, exercise or exchange price that is subject to being reset
at
some future date after the initial issuance of such debt or equity security
or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock.
The
term “MFN
Transaction”
shall mean a transaction in which the Company issues or sells any securities
in
a capital raising transaction or series of related transactions which grants
to
an investor the right to receive additional shares based upon future
transactions of the Company on terms which
are
more
favorable to
such
investor than
the
terms
granted
to the
Investor in this Agreement.
Any
Purchaser shall be entitled to obtain injunctive relief against the Company
to
preclude any such issuance, which remedy shall be in addition to any right
to
collect damages. Notwithstanding the foregoing, this Section 6.17
shall
not apply in respect of an Exempt Issuance, except that no Variable Rate
Transaction or MFN Transaction shall be an Exempt Issuance.
-16-
6.19. Amendment
to Certificate of Incorporation.
At or
before the next annual meeting of the stockholders of the Company, the Board
of
Directors shall propose and submit to the holders of the Common Stock for
approval, an amendment to the Certificate of Incorporation that provides
substantially as follows:
“The
terms and conditions of any rights, options and warrants approved by the Board
of Directors may provide that any or all of such terms and conditions may be
waived or amended only with the consent of the holders of a designated
percentage of a designated class or classes of capital stock of the Corporation
(or a designated group or groups of holders within such class or classes,
including but not limited to disinterested holders), and the applicable terms
and conditions of any such rights, options or warrants so conditioned may not
be
waived or amended absent such consent.”
6.20. Stock
Splits.
All
forward and reverse stock splits shall effect all equity and derivative holders
proportionately.
6.21. Payment
of Due Diligence Expenses.
At
Closing the Escrow Agent shall disperse to the Investor Fifty Thousand Dollars
($50,000.00) for due diligence, legal and any other expenses which the Investor
may incur in connection with this Agreement.
ARTICLE
VII
COVENANTS
OF THE INVESTOR
7.1. Compliance
with Law.
The
Investor’s trading activities with respect to shares of the Company’s Common
Stock will be in compliance with all applicable state and federal securities
laws, rules and regulations and rules and regulations of any public market
on
which the Company’s Common Stock is listed.
7.2. Transfer
Restrictions.
The
Investor’s acknowledge that (1) the Series A Preferred Stock, Warrants and
shares underlying the Series A Preferred Stock and Warrants have not been
registered under the provisions of the 1933 Act, and may not be transferred
unless (A) subsequently registered thereunder or (B) the Investor shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in
form,
scope and substance to the Company, to the effect that the Series A Preferred
Stock, Warrants and Shares underlying the Series A Preferred Stock and Warrants
to be sold or transferred may be sold or transferred pursuant to an exemption
from such registration; and (2) any sale of the Series A Preferred Stock,
Warrants and shares underlying the Series A Preferred Stock and Warrants made
in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the
SEC
thereunder.
7.3. Restrictive
Legend.
The
Investor acknowledges and agrees that the Series A Preferred Stock, the Warrants
and the Shares underlying the Series A Preferred Stock and Warrants, and, until
such time as the Shares underlying the Series A Preferred Stock and Warrants
have been registered under the 1933 Act and sold in accordance with an effective
Registration Statement, certificates and other instruments representing any
of
the Shares, shall bear a restrictive legend in substantially the following
form
(and a stop-transfer order may be placed against transfer of any such
securities):
-17-
“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SHARES NOR ANY INTEREST THEREIN MAY BE OFFERED,
SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT, OR (2)
IN
ACCORDANCE WITH THE PROVISIONS OF REGULATION S, OR (3) AN EXEMPTION FROM
REGISTRATION IS AVAILABLE UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS AND THE HOLDER HAS PROVIDED THE COMPANY WITH AN OPINION OF
COUNSEL TO SUCH EFFECT.”
7.4. Amendment
to Certificate of Incorporation.
Investor hereby agrees to vote any shares of capital stock that it may own
directly or beneficially, for the amendment to the Certificate of Incorporation
referenced in Section 6.19. Pending adoption of such amendment, Investor hereby
agrees for itself and its successors and assigns that neither this Section
7.4
or Section 6.19 above, or any restriction on exercise of the Warrant shall
be
amended, modified or waived without the consent of the holders of a majority
of
the shares of Common Stock held by Persons who are not Affiliates of the
Company, or the Investor or Affiliates of the Investor.
ARTICLE
VIII
CONDITIONS
PRECEDENT TO THE COMPANY’S OBLIGATIONS
The
obligation of the Company to consummate the transactions contemplated hereby
shall be subject to the fulfillment, on or prior to Closing Date, of the
following conditions:
8.1. No
Termination.
This
Agreement shall not have been terminated pursuant to Article X
hereof.
8.2. Representations
True and Correct.
The
representations and warranties of the Investor contained in this Agreement
shall
be true and correct in all material respects on and as of the Closing Date
with
the same force and effect as if made on as of the Closing Date.
8.3. Compliance
with Covenants.
The
Investor shall have performed and complied in all material respects with all
covenants, agreements, and conditions required by this Agreement to be performed
or complied by it prior to or at the Closing Date.
8.4. No
Adverse Proceedings.
On the
Closing Date, no action or proceeding shall be pending by any public authority
or individual or entity before any court or administrative body to restrain,
enjoin, or otherwise prevent the consummation of this Agreement or the
transactions contemplated hereby or to recover any damages or obtain other
relief as a result of the transactions proposed hereby.
-18-
ARTICLE
IX
CONDITIONS
PRECEDENT TO INVESTOR’S OBLIGATIONS
The
obligation of the Investors to consummate the transactions contemplated hereby
shall be subject to the fulfillment, on or prior to Closing Date unless
specified otherwise, of the following conditions:
9.1. No
Termination.
This
Agreement shall not have been terminated pursuant to Article X
hereof.
9.2. Representations
True and Correct.
The
representations and warranties of the Company contained in this Agreement shall
be true and correct in all material respects on and as of the Closing Date
with
the same force and effect as if made on as of the Closing Date.
9.3. Compliance
with Covenants.
The
Company shall have performed and complied in all material respects with all
covenants, agreements, and conditions required by this Agreement to be performed
or complied by it prior to or at the Closing Date.
9.4. No
Adverse Proceedings.
On the
Closing Date, no action or proceeding shall be pending by any public authority
or individual or entity before any court or administrative body to restrain,
enjoin, or otherwise prevent the consummation of this Agreement or the
transactions contemplated hereby or to recover any damages or obtain other
relief as a result of the transactions proposed hereby.
ARTICLE
X
TERMINATION,
AMENDMENT AND WAIVER
10.1. Termination.
This
Agreement may be terminated at any time prior to the Closing Date
10.1.1. by
mutual
written consent of the Investor and the Company;
10.1.2. by
the
Company upon a material breach of any representation, warranty, covenant or
agreement on the part of the Investor set forth in this Agreement, or the
Investor upon a material breach of any representation, warranty, covenant or
agreement on the part of the Company set forth in this Agreement, or if any
representation or warranty of the Company or the Investor, respectively, shall
have become untrue, in either case such that any of the conditions set forth
in
Article VIII or Article IX hereof would not be satisfied (a “Terminating
Breach”),
and
such breach shall, if capable of cure, not have been cured within five (5)
business days after receipt by the party in breach of a notice from the
non-breaching party setting forth in detail the nature of such
breach.
10.2. Effect
of Termination.
Except
as otherwise provided herein, in the event of the termination of this Agreement
pursuant to Section 10.1 hereof, there shall be no liability on the part of
the
Company or the Investor or any of their respective officers, directors, agents
or other representatives and all rights and obligations of any party hereto
shall cease.
10.3. Amendment.
This
Agreement may be amended by the parties hereto any time prior to the Closing
Date by an instrument in writing signed by the parties hereto;
provided, however that the 4.9% Limitation may not be amended or
waived.
-19-
10.4. Waiver.
At any
time prior to the Closing Date, the Company or the Investor, as appropriate,
may: (a) extend the time for the performance of any of the obligations or other
acts of other party or; (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto which
have been made to it or them; or (c) waive compliance with any of the agreements
or conditions contained herein for its or their benefit other than the 4.9%
Limitation which may not be waived. Any such extension or waiver shall be valid
only if set forth in an instrument in writing signed by the party or parties
to
be bound hereby.
ARTICLE
XI
GENERAL
PROVISIONS
11.1. Transaction
Costs.
Except
as otherwise provided herein, each of the parties shall pay all of his or its
costs and expenses (including attorney fees and other legal costs and expenses
and accountants’ fees and other accounting costs and expenses) incurred by that
party in connection with this Agreement; provided, the Company shall pay
Investor for
its
expenses
as provided
in Section 6.21.
11.2. Indemnification.
The
Investor agrees to indemnify, defend and hold the Company (following the Closing
Date) and its officers and directors harmless against and in respect of any
and
all claims, demands, losses, costs, expenses, obligations, liabilities or
damages, including interest, penalties and reasonable attorney’s fees, that it
shall incur or suffer, which arise out of or result from any breach of this
Agreement by such Investor or failure by such Investor to perform with respect
to the
representations, warranties or covenants contained in this Agreement or in
any
exhibit or other instrument furnished or to be furnished under this Agreement.
The Company agrees to indemnify, defend and hold the Investor (following
the Closing Date) harmless
against and in respect of any and all claims, demands, losses, costs, expenses,
obligations, liabilities or damages, including interest, penalties and
reasonable attorney’s fees, that it shall incur or suffer, which arise out of,
result from or relate to any breach of this Agreement or failure by the Company
to perform with respect to the
representations, warranties or covenants contained in this Agreement or in
any
exhibit or other instrument furnished or to be furnished under this Agreement.
In no event shall the Company or the Investors be entitled to recover
consequential or punitive damages resulting from a breach or violation of this
Agreement nor shall any party have any liability hereunder in the event of
gross
negligence or willful misconduct of the indemnified party. In the event of
the
failure of the Company to issue the Series A Preferred Stock and Warrants in
violation of the provisions
of this
Agreement, the Investor,
as its
sole remedy,
shall be
entitled to pursue a remedy of specific performance upon tender into the Court
an amount equal to the Purchase Price hereunder. The indemnification by the
Investor shall be limited to $50,000.00.
This
Section 11.2 shall not relate to indemnification under the Registration Rights
Agreement.
11.3. Headings.
The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this
Agreement.
11.4. Entire
Agreement.
This
Agreement (together with the Schedule, Exhibits, Warrants and documents referred
to herein) constitute the entire agreement of the parties and supersede all
prior agreements and undertakings, both written and oral, between the parties,
or any of them, with respect to the subject matter hereof.
11.5. Notices.
All
notices and other communications hereunder shall be in writing and shall be
deemed to have been given (i) on the date they are delivered if delivered in
person; (ii) on the date initially received if delivered by facsimile
transmission followed by registered or certified mail confirmation; (iii) on
the
date delivered by an overnight courier service; or (iv) on the on
the
date of delivery as shown on the return receipt, if
mailed
by registered or certified mail, return receipt requested with postage and
other
fees prepaid as follows:
-20-
If
to
the Company or CNS:
c/o
▇▇.
▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇
▇▇▇▇▇
Facsimile:
With
a
copy to:
Katsky
▇▇▇▇▇▇ LLP
▇▇▇
▇▇▇▇▇
▇▇▇▇▇▇
▇▇▇
▇▇▇▇,
▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attention:
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ P.C.
Facsimile
No.: (▇▇▇)
▇▇▇-▇▇▇▇
If
to
the Investor:
▇▇▇▇▇▇
Partners L.P.
c/▇
▇▇▇▇▇▇ Capital Advisors, LLC
▇▇▇
▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇
▇▇▇▇▇
▇▇▇
▇▇▇▇,
▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn:
▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
11.6. Severability.
If any
term or other provision of this Agreement is invalid, illegal or incapable
of
being enforced by any rule of law or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon
such
determination that any such term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith
to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.
11.7. Binding
Effect.
All the
terms and provisions of this Agreement whether so expressed or not, shall be
binding upon, inure to the benefit of, and be enforceable by the parties and
their respective administrators, executors, legal representatives, heirs,
successors and assignees.
11.8. Preparation
of Agreement.
This
Agreement shall not be construed more strongly against any party regardless
of
who is responsible for its preparation. The parties acknowledge each contributed
and is equally responsible for its preparation.
11.9. Governing
Law.
This
Agreement shall be governed by, and construed in accordance with, the laws
of
the State of New York, without giving effect to applicable principles of
conflicts of law.
11.10. Jurisdiction.
This
Agreement shall be exclusively governed by and construed in accordance with
the
laws of the State of New York. If any action is brought among the parties with
respect to this Agreement or otherwise, by way of a claim or counterclaim,
the
parties agree that in any such action, and on all issues, the parties
irrevocably waive their right to a trial by jury. Exclusive jurisdiction and
venue for any such action shall be the federal
and state courts situated in the City, County and
State of
New York. In the event suit or action is brought by any party under this
Agreement to enforce any of its terms, or in any appeal therefrom, it is agreed
that the prevailing party shall be entitled to reasonable attorneys fees to
be
fixed by the arbitrator, trial court, and/or appellate court
if such
party prevails on substantially all issues in dispute.
-21-
11.11. Preparation
and Filing of Securities and Exchange Commission
filings.
The
Investor shall reasonably assist and cooperate with the Company in the
preparation of all filings with the SEC after the Closing Date due after the
Closing Date.
11.12. Further
Assurances, Cooperation.
Each
party shall, upon reasonable request by the other party, execute and deliver
any
additional documents necessary or desirable to complete the transactions herein
pursuant to and in the manner contemplated by this Agreement. The parties hereto
agree to cooperate and use their respective best efforts to consummate the
transactions contemplated by this Agreement.
11.13. Survival.
The
representations, warranties, covenants and agreements made herein shall survive
the Closing of the transaction contemplated hereby.
11.14. Third
Parties.
Except
as disclosed in this Agreement, nothing in this Agreement, whether express
or
implied, is intended to confer any rights or remedies under or by reason of
this
Agreement on any persons other than the parties hereto and their respective
administrators, executors, legal representatives, heirs, successors and
assignees. Nothing in this Agreement is intended to relieve or discharge the
obligation or liability of any third persons to any party to this Agreement,
nor
shall any provision give any third persons any right of subrogation or action
over or against any party to this Agreement.
11.15. Failure
or Indulgence Not Waiver; Remedies Cumulative.
No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty, covenant or
agreement herein, nor shall nay single or partial exercise of any such right
preclude other or further exercise thereof or of any other right. All rights
and
remedies existing under this Agreement are cumulative to, and not exclusive
of,
any rights or remedies otherwise available.
11.16. Counterparts.
This
Agreement may be executed in one or more counterparts, and by the different
parties hereto in separate counterparts, each of which when executed shall
be
deemed to be an original, but all of which taken together shall constitute
one
and the same agreement. A facsimile transmission of this signed Agreement shall
be legal and binding on the
party
who delivered the Agreement by facsimile transmission; provided, that such
party
shall promptly deliver the signed Agreement by overnight courier
services.
[SIGNATURES
ON FOLLOWING PAGE]
-22-
IN
WITNESS WHEREOF,
the
Investors and the Company have as of the date first written above executed
this
Agreement.
THE
COMPANY:
▇▇▇▇▇▇▇▇▇▇
HOLDINGS I, INC.
By:
▇▇▇▇
▇. ▇▇▇▇▇▇▇▇▇, President and CEO
INVESTOR:
▇▇▇▇▇▇
PARTNERS LP
By:
▇▇▇▇▇▇ Capital Advisors, LLC, its General Partners
▇▇▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇
President
▇▇▇
▇▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇
▇▇▇
▇▇▇▇
▇▇ ▇▇▇▇▇
-23-
Schedule
A
|
NAME
AND ADDRESS
|
AMOUNT
OF INVESTMENT
|
NUMBER
OF SHARES
OF
COMMON STOCK
INTO
WHICH PREFERRED
STOCK
IS CONVERTIBLE
|
NUMBER
OF SHARES UNDERLYING
“A,”
“B” AND “C” WARRANTS
|
|
▇▇▇▇▇▇
Partners LP
▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇
▇▇▇▇▇
▇▇▇
▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Attn:
▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
|
$1,300,000
|
10,833,334
|
10,000,000/10,000,000/
10,000,000
|
-24-
Schedule
4.3.1 - Capitalization
-25-
Schedule
4.8 - List of Brokers
-26-
Exhibit
A
Form
of Certificate of Deisgnation of Preferences, Rights and
Limitations
-27-
Exhibit
B
Registration
Rights Agreement
-28-
Exhibit
C
Warrants
-29-
Exhibit
D
Escrow
Agreement
-30-