EXHIBIT 10.1
SUBSCRIPTION AGREEMENT
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THIS SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of November
16, 2006, by and among Stem Cell Innovations, Inc. (formerly known as Interferon
Sciences, Inc.), a Delaware 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 not less than Two Million Dollars ($2,000,000) and up to Four Million
Dollars ($4,000,000) (the "Purchase Price") of principal amount of promissory
notes of the Company ("Note" or "Notes") which Notes are convertible into shares
of the Company's common stock, $.01 par value (the "Common Stock") at a per
share conversion price set forth in the Note; and share purchase warrants (the
"Warrants") in the form attached hereto as Exhibit A, 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 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. (a). Closing Date. The "Initial Closing Date"
shall be the date that the Initial Closing Purchase Price is transmitted by wire
transfer or otherwise credited to or for the benefit of the Company. The
consummation of the transactions contemplated herein shall take place at the
offices of Grushko & Xxxxxxx, P.C., 000 Xxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx
Xxxx 00000, upon the satisfaction or waiver of all conditions to closing set
forth in this Agreement. Each of the Initial Closing Date and Second Closing
Date (as defined in Section 1(c) below is referred to herein as a "Closing
Date", as applicable.
(b) Initial Closing. Subject to the satisfaction
or waiver of the terms and conditions of this Agreement, on the Initial 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 ("Initial Closing Notes"), and Warrants as described in Section 2 of this
Agreement ("Initial Closing Warrants"). The Principal Amount of the Notes to be
purchased by the Subscribers on the Initial Closing Date shall be not less than
$1,000,000 and up to $2,000,000 (the "Initial Closing Purchase Price").
(c) Second Closing. The closing date in relation
to up to Two Million Dollars ($2,000,000) (the "Second Closing Purchase Price")
shall be on or about the sixtieth (60th) day after the Initial Closing Date (the
"Second Closing Date"). Subject to the satisfaction or waiver of the conditions
to Closing, on the Second 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 ("Second Closing Notes") and Warrants as described
in Section 2 of this Agreement ("Second Closing Warrants"). The Second Closing
Notes shall be of the same tenor as the Notes issuable on the Initial Closing
Date and have the same maturity date as the Initial Closing Notes.
(d) Conditions to Second Closing. The occurrence
of the Second Closing is expressly contingent on (i) the truth and accuracy, on
the Second Closing Date of the representations and warranties of the Company and
Subscriber contained in this Agreement except for changes that do not constitute
a Material Adverse Event [as defined in Section 5(a)], (ii) continued compliance
with the covenants of the Company set forth in this Agreement, and (iii) the
non-occurrence of an Event of Default set forth in Sections 3.4, 3.6, 3.11 of
the Note or an event that with the passage of time or the giving of notice could
become such Event of Default, or other material default by the Company of its
obligations and undertakings contained in this Agreement.
(e) Second Closing Deliveries. On the Second
Closing Date, the Company will deliver a certificate ("Second Closing
Certificate") signed by its chief executive officer or chief financial officer
(i) representing the truth and accuracy of all the representations and
warranties made by the Company contained in this Agreement, as of the Initial
Closing Date, and the Second Closing Date, as if such representations and
warranties were made and given on all such dates except for changes that do not
constitute a Material Adverse Event [as defined in Section 5(a)], (ii)
certifying that the information contained in the schedules and exhibits hereto
is substantially accurate as of the Second Closing Date, except for changes that
do not constitute a Material Adverse Effect, (iii) adopting and renewing the
covenants and representations set forth in Sections 5, 7, 8, 10, 11, and 12 of
this Agreement in relation to the Second Closing Date, Second Closing Notes, and
Second Closing Warrants, and (iv) certifying that an Event of Default as
described in Section 1(d) above nor an event that with the passage of time or
the giving of notice could become such Event of Default, has not occurred. A
legal opinion nearly identical to the legal opinion referred to in Section 6 of
this Agreement shall be delivered to each Subscriber at the Second Closing in
relation to the Company, Second Closing Notes, and Second Closing Warrants
("Second Closing Legal Opinion").
2. Warrants. On each Closing Date, the Company will
issue and deliver Class B Warrants to the Subscribers. One Class B Warrant will
be issued for each Share which would be issued on the Closing Date assuming the
complete conversion of the Note on the Closing Date at the Conversion Price. The
exercise price to acquire a Warrant Share upon exercise of a Class B Warrant
shall be $0.12, subject to reduction as described in the Class B Warrant. The
Class B Warrants shall be exercisable until five years after the issue date of
the Warrants.
3. Security Interest. Subject to security interests
granted by the Company as of the Closing Date, the Subscribers will be granted a
first priority perfected security interest in all the assets of the Company,
including ownership of Subsidiaries, as defined in Section 5(a) of this
Agreement, and in the assets of the Subsidiaries to be memorialized in a
"Security Agreement", a form of which is annexed hereto as Exhibit C. Each
Subsidiary will execute and deliver to the Subscribers a form of "Guaranty"
annexed hereto as Exhibit D. The Company will execute such other agreements,
documents and financing statements reasonably requested by Subscribers, which
will be filed at the Company's expense with the jurisdictions, states and
counties designated by the Subscribers. The Company will also execute all such
documents reasonably necessary in the opinion of Subscriber to memorialize and
further protect the security interest described herein. The Subscribers will
appoint a Collateral Agent to represent them collectively in connection with the
security interest to be granted to the Subscribers. The appointment will be
pursuant to a "Collateral Agent Agreement", a form of which is annexed hereto as
Exhibit E.
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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.
(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 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 Securities 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 XXXXX Website of the Commission to
the Company's Form 10-KSB for the year ended December 31, 2005 as filed with the
Commission, together with all subsequently filed Forms 10-QSB, 8-K, and filings
made with the Commission available at the XXXXX website (hereinafter referred to
collectively as the "Reports"). The Subscriber has had an opportunity to ask
questions and receive answers from representatives of the Company. 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
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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.
(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.
(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. In any
event, and subject to compliance with applicable securities laws, the Subscriber
may enter into lawful hedging transactions with third parties, which may in turn
engage in short sales of the Securities in the course of hedging the position
they assume and the Subscriber may also enter into short positions or other
derivative transactions relating to the Securities, or interests in the
Securities, and deliver the Securities, or interests in the Securities, to close
out their short or other positions or otherwise settle short sales or other
transactions, or loan or pledge the Securities, or interests in the Securities,
to third parties that in turn may dispose of these Securities.
(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 STEM CELL INNOVATIONS, INC. 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 STEM CELL INNOVATIONS, INC.
THAT SUCH REGISTRATION IS NOT REQUIRED."
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(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 STEM CELL
INNOVATIONS, INC. 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) Restricted Securities. Subscriber
understands that the Securities have not been registered under the 1933 Act and
such Subscriber will not sell, offer to sell, assign, pledge, hypothecate or
otherwise transfer any of the Securities unless pursuant to an effective
registration statement under the 1933 Act, or unless an exemption from
registration is available. 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 includes each subsidiary 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.
(n) 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.
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(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 the Closing Date shall be
true and correct as of the 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 and each of
its Subsidiaries is a corporation 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 properties and to carry on its business as presently
conducted. The Company and each of its Subsidiaries 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 purposes 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 and its Subsidiaries taken 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 has been duly authorized and
validly issued and are fully paid and nonassessable.
(c) Authority; Enforceability. This Agreement,
the Note, the Warrants, 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
common stock or 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 shares of common
stock or equity of the Company or other equity interest in any of the
Subsidiaries of the Company except as described on Schedule 5(d).
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(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, the Principal
Market (as defined in Section 9(b) 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 except as described herein; 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 triggering 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 except as
described on Schedule 5(f) hereto.
(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 upon conversion of
the Notes and the Warrant Shares and upon exercise of the Warrants, the Shares
and Warrant Shares will be duly and validly issued, fully paid and nonassessable
and if registered pursuant to the 1933 Act and resold pursuant to an effective
registration statement will be free trading and unrestricted);
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(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;
(iv) will not subject the holders
thereof to personal liability by reason of being such holders; and
(v) assuming the representations
warranties of the Subscribers as set forth in Section 4 hereof are true and
correct, will not result in a violation of Section 5 under the 1933 Act.
(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
or in the schedules hereto, 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 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 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 and its
Affiliates have 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
and Other Written Information contain all material information relating to the
Company and its operations and financial condition as of their respective dates
which information is required to be disclosed therein. Since the date of the
financial statements included in the Reports, 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 and Other Written Information 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, taken
as a whole, not misleading in light of the circumstances when made.
(l) Stop Transfer. 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. Except as described on Schedule 5(q),
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,
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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) No Integrated Offering. Neither the Company,
nor any of its Affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited any
offers to buy any security under circumstances that would cause the 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 0000 Xxx) in
connection with the offer or sale of the Securities.
(p) Listing. The Common Stock is quoted on the
Bulletin Board under the symbol SCLL.OB. The Company has not received any oral
or written notice that the Common Stock is not eligible nor will become
ineligible for quotation on the Bulletin Board nor that the Common Stock does
not meet all requirements for the continuation of such quotation and the Company
satisfies all the requirements for the continued quotation of the Common Stock
on the Bulletin Board.
(q) No Undisclosed Liabilities. The Company has
no liabilities or obligations which are material, individually or in the
aggregate, which are not disclosed in the Reports and Other Written Information,
other than those incurred in the ordinary course of the Company's businesses
since December 31, 2005 and which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect, except as disclosed on
Schedule 5(q).
(r) No Undisclosed Events or Circumstances.
Since December 31, 2005, 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.
(s) 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.
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(t) 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.
(u) No Disagreements with Accountants and
Lawyers. 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.
(v) DTC Status. The Company's transfer agent is
a participant in and the Common Stock is eligible for transfer pursuant to the
Depository Trust Company Automated Securities Transfer Program. The name,
address, telephone number, fax number, contact person and email address of the
Company transfer agent is set forth on Schedule 5(v) hereto.
(w) Investment Company. Neither the Company nor
any Affiliate is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(x) Subsidiary Representations. The Company
makes each of the representations contained in Sections 5(a), (b), (d), (f),
(h), (k), (m), (q), (r), (s), (u) and (w) of this Agreement, as same relate to
each Subsidiary of the Company.
(y) Company Predecessor. All representations
made by or relating to the Company of a historical or prospective nature and all
undertaking described in Sections 9(g) through 9(l) shall relate and refer to
the Company, its predecessors, and the Subsidiaries.
(z) 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.
(AA) Survival. The foregoing representations and
warranties shall survive the Closing Date for a period of three years.
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 H. 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 pursuant to an effective
registration statement, Rule 144 under the 1933 Act or an exemption from
registration.
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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, 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 will be free-trading, and
freely transferable. In the event that the Shares are sold 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, interest, any sum due to the
Subscriber under the Transaction Documents including Liquidated Damages, 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 five (5) business days
after receipt by the Company of the Notice of Conversion (such fifth 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 of a Note, 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. As employed in
the Transaction Documents "business day" and "trading day" 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
11
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
will be entitled to 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 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 the Company is prohibited from issuing Shares, or fails to timely deliver
Shares on a Delivery Date, or upon the occurrence of any other Event of Default
(as defined in the Note or in this Agreement), each of which that is not cured
during any applicable cure period and an additional twenty (20) days thereafter,
then at the Subscriber's election, the Company must pay to the Subscriber ten
(10) business days after request by the Subscriber, at the Subscriber's
election, a sum of money determined by (i) multiplying up to the outstanding
principal amount of the Note designated by the Subscriber by 120%, or (ii)
multiplying the number of Shares otherwise deliverable upon conversion of an
amount of Note principal and/or interest designated by the Subscriber (with the
date of giving of such designation being a "Deemed Conversion Date") at the then
Conversion Price that would be in effect on the Deemed Conversion Date by the
highest closing price of the Common Stock on the principal market for the period
commencing on the Deemed Conversion Date until the day prior to the receipt of
the Mandatory Redemption Payment, whichever is greater, together with accrued
but unpaid interest thereon and any other sums arising and outstanding under the
Transaction Documents ("Mandatory Redemption Payment"). The Mandatory Redemption
Payment must be received by the Subscriber within ten (10) business days after
request ("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 twenty day period
prior to the actual receipt of the Mandatory Redemption Payment by the
Subscriber shall be credited against the Mandatory Redemption Payment calculated
pursuant to subsections (i) and (ii) above of this Section 7.2. In the event of
a "Change in Control" (as defined below), the Subscriber may demand, and the
Company shall pay, a Mandatory Redemption Payment equal to 120% of the
outstanding principal amount of the Note designated by the Subscriber together
with accrued but unpaid interest thereon and any other sums arising and
outstanding under the Transaction Documents. 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 or merging into or with another entity,
(iii) if the holders of restricted shares of the Company's Common Stock as of
immediately prior to the Closing beneficially own at any time after the Closing
Date less than thirty-five percent of the Company's Common stock, or (iv) the
sale, lease, license or transfer of substantially all the assets of the Company
and its Subsidiaries.
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
12
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. For the purposes of the provision to 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. 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 increase the permitted beneficial ownership
amount up to 9.99% upon and effective after 61 days prior written notice to the
Company. The Subscriber may allocate which of the equity of the Company deemed
beneficially owned by the Subscriber shall be included in the 4.99% amount
described above and which shall be allocated to the excess above 4.99%.
7.4. Injunction Posting of Bond. In the event a Subscriber
shall elect to convert a Note or part thereof, 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 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 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 equitably adjusted and as otherwise described in this
Agreement, the Notes and Warrants.
7.7. Redemption. The Note shall not be redeemable or
callable except as described in the Note. The Warrants shall not be callable or
redeemable.
8. Broker/Legal Fees.
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13
(a) Broker's Fee. The Company on the one hand,
and each Subscriber (for himself only) on the other hand, agree to indemnify the
other against and hold the other harmless from any and all liabilities to any
persons claiming brokerage commissions or finder's fees on account of services
purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby or in
connection with any investment in the Company at any time, whether or not such
investment was consummated and arising out of such party's actions. The Company
represents that there are no other parties entitled to receive fees,
commissions, or similar payments in connection with the Offering except as
described in Section 8(b) below.
(b) Lead Investor Fee. The Company will pay a
"Due Diligence Fee" described on Schedule 8 hereto to the party designated by
the Subscriber purchasing the most Note Principal identified on Schedule 8
hereto.
(c) Legal Fees. The Company shall pay to Grushko
& Xxxxxxx, P.C., a fee of $30,000 ("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. Grushko & Xxxxxxx, P.C. will be reimbursed at Closing for
all UCC search and filing fees.
9. Covenants of the Company. The Company covenants and
agrees with the Subscribers as follows:
(a) Stop Orders. The Company will advise the
Subscribers, within two hours 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 and the Warrant Shares upon each national securities
exchange, or electronic or automated quotation system upon which they are or
become eligible for listing and shall maintain such listing so long as any Notes
or Warrants are outstanding. The Company will maintain the listing of its Common
Stock on the American Stock Exchange, Nasdaq Capital Market, Nasdaq National
Market System, Bulletin Board, Pink Sheets, 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) Filing Requirements. From the date of this
Agreement and until the first to occur of (i) two (2) years after the Closing
Date, (ii) until all the 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 or (iii) the Notes are no longer
outstanding (the date of occurrence of the first such event being the "End
14
Date"), 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) voluntarily comply
with all reporting requirements that are applicable to an issuer with a class of
shares registered pursuant to Section 12(g) of the 1934 Act, if Company is not
subject to such reporting requirements, 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 the End Date. Until
the End Date, 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 must be employed by the Company for the purposes set forth on Schedule
9(e) hereto. 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. For so long as any Notes are outstanding, the Company will not prepay any
financing related debt obligations nor redeem any equity instruments of the
Company. The Company may exercise any rights it has to call Warrants outstanding
as of the Closing Date.
(f) Reservation. Prior to the Closing, 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(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 and an Event
of Default under the Note.
(g) Taxes. From the date of this Agreement and
until the End Date, 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 End Date, 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 less
reasonable deductible amounts; 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.
15
(i) Books and Records. From the date of this
Agreement and until the End Date, 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 End Date, 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 End Date, 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, unless it is sold for
value.
(l) Properties. From the date of this Agreement
and until the End Date, 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 End Date, the Company agrees that
except in connection with a Form 8-K or the Registration Statement or as
otherwise required in any other Commission filing, it will not disclose publicly
or privately the identity of the Subscribers unless expressly agreed to in
writing by a Subscriber, 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
Closing is annexed hereto as Exhibit G.
(n) Non-Public Information. The Company
covenants and agrees that except for schedules and exhibits to this Agreement
which information thereon will be publicly disclosed within two business days
after the Closing Date, 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.
(o) 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
16
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, or (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 (each of (a) through (f), a "Permitted Lien") (iii) indebtedness for
borrowed money which is not senior or pari passu in right of payment to the
payment of the Notes;
(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;
(iv) prepay any financing related or other outstanding debt obligations; or
(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 salary or consulting fees 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.
(p) Offering Restrictions. 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 submitted to the Subscribers. 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.
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,
17
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. 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 X-0, X-0 or
another form not available for registering 150% of the Shares issued and
issuable upon conversion of the Notes and 100% of the Warrant Shares issued and
issuable upon exercise of the Warrants issuable to the Subscribers and Broker
(collectively "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 or
eligible for sale under Rule 144 without regard to volume restrictions, 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 (the "Registration Statement"), 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 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 without thereby incurring any liability to the Seller.
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Except for the Registrable Securities and the securities described on Schedules
5(d) and 12(a), no securities of the Company will be included in the
Registration Statement.
11.2. Registration Procedures. If and whenever the Company
is required by the provisions of Section 11.1 to effect the registration of any
Registrable Securities under the 1933 Act, the Company will, as expeditiously as
possible:
(a) prepare and file with the Commission the
Registration Statement required by Section 11 with respect to such securities
and use its reasonable best efforts to cause the 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 & Xxxxxxx, P.C. (by telecopier and by email to
Xxxxxxxxx@xxx.xxx) on or before 3:00 PM EST on the next 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 11.4 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 the
period specified herein 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;
(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 New York and 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 two 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; and
19
(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.
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 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 the registration
statement described in Section 11.1 is not filed as required by Section 11.1
("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, of the Purchase Price of the
Notes remaining unconverted and purchase price of Shares issued upon conversion
of the Notes and exercise of Warrants owned of record by such holder which are
subject to such Non-Registration Event. The Company must pay the Liquidated
Damages in cash or an amount equal to two hundred percent of such cash
Liquidated Damages if timely paid in additional shares of registered unlegended
free-trading shares of Common Stock. Such Common Stock shall be valued at the
Conversion Price in effect on the first day of each thirty (30) day or shorter
period for which Liquidated Damages are payable. 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. 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 without regard to
volume restrictions.
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,
20
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 and the final prospectus would have
corrected such untrue statement or alleged untrue statement or such omission or
alleged omission, or (ii) 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
21
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 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 reasonably 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 0000 Xxx) 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 five (5) business days (such fifth
business day being the "Unlegended Shares Delivery Date") after the business day
on which the Company has received (i) a notice that Shares or any other Common
Stock held by a Subscriber have been sold 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(i) above (the "Unlegended Shares"); and (z) cause the
22
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.
(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 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 subject to such default at a price per share equal to 120%
of the Purchase Price of such Common Stock ("Unlegended Redemption Amount"). The
amount of the aforedescribed liquidated damages that have accrued or been 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 five (5) business days after the
Unlegended Shares Delivery Date and 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 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
23
enjoining delivery of such Unlegended Shares 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 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) Favored Nations Provision. Except in
connection with (i) the issuance of shares of Common Stock as a result of the
exercise of options or warrants or conversion of convertible Notes or amounts
which are granted, issued or accrue pursuant to this Agreement, or as described
in the Reports or Other Written Information filed with the Commission or
delivered to the Subscribers not later than two business days prior to the
Closing Date prior to the Closing Date, (ii) the delivery of securities in full
or partial consideration in connection with a strategic merger, consolidation or
purchase of substantially all of the securities or assets of a corporation or
other entity provided such shares are not issued in a financing related to such
transaction, (iii) the Company's issuance of securities in connection with
strategic license agreements and other partnering arrangements so long as such
issuances are not for the purpose of raising capital, (iv) the Company's
issuance of Common Stock or the issuance or grants of options to purchase Common
Stock pursuant to the Company's stock option plans and employee stock purchase
plans as they exist on the Closing Date which copies of such plans have been
delivered to the Subscribers or which are adopted hereafter as permitted by
Section 12(b) hereof, and (v) as described on Schedule 12(a) (collectively the
foregoing are "Excepted Issuances"), if at any time 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 or Warrants, then the Conversion Price and Warrant
Exercise Prices shall automatically be reduced to such other lower price per
share. The Subscriber is granted the registration rights described in Section 11
hereof in relation to such additional shares of Common Stock which may be
issuable as a result of the reduction of the Conversion Price. 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, Warrant, any Transaction Document, and any other
agreement referred to or entered into in connection herewith.
(b) Option Plan Restrictions. 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 is described on Schedule 5(d) or in the Reports. No other plan will be
adopted nor may any options or equity not included in such plan be issued until
after the Exclusion Period, provided, however, the Company may adopt any
employee, officer, director and consultant stock option plan which does not
cover, together with any other plans in effect on the date hereof or adopted
pursuant to this proviso, options on securities constituting in excess of 10% of
the Company Common Stock on a fully diluted basis after the consummation of the
transactions contemplated by proposed Form 8-K annexed hereto as Exhibit G and
further provided that such Common Stock which may be issued is issued at not
less than the greater of the Conversion Price in effect on the date of issuance
of the option or the closing price of the Common Stock as reported for the
Principal Market on the date the option is granted except for options issued to
24
regularly engaged employees of the Company who are not directors or consultants
to the Company, which Common Stock may be issued without regard to the
aforedescribed exercise price limitation.
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: Stem Cell Innovations, Inc., 0000 Xxxxx Xxxxxx, Xxxxxx Xxxxxx, Xxx
Xxxxxx 00000, Attn: Xx. Xxxxx X. Xxxxx, CEO, telecopier number: (000) 000-0000,
with an additional copy by telecopier only to: Xxxxxxxxx & Kahr, 000 Xxxx
Xxxxxx, Xxxxx 000, Xxx Xxxx, XX 00000, Attn: Xxxxxx X. Xxxxxxxx, Esq.,
telecopier number: (000) 000-0000, 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 & Xxxxxxx, P.C.,
000 Xxxxx Xxxxxx, Xxxxx 0000, Xxx Xxxx, Xxx Xxxx 00000, telecopier number: (212)
697-3575.
(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
25
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 may 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 seek
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) 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.
26
(h) As used in the Agreement, "consent of the
Subscribers" or similar language means the consent of holders of not less than
65% of the total of the Shares issued and issuable upon conversion of
outstanding Notes owned by Subscribers on the date consent is requested.
[THIS SPACE INTENTIONALLY LEFT BLANK]
27
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.
STEM CELL INNOVATIONS, INC.
a Delaware corporation
By: /s/ XX. XXXXX X. XXXXX
-------------------------------------
Name: Xx. Xxxxx X. Xxxxx
Title: CEO
Dated: November 16, 2006
------------------------------------------------------------------------------------------------------------------------------------
SUBSCRIBER INITIAL CLOSING SECOND CLOSING NOTE INITIAL CLOSING SECOND CLOSING
NOTE PRINCIPAL PRINCIPAL CLASS B CLASS B
WARRANTS WARRANTS
--------------------------------------------------- --------------------- --------------------- ------------------- ----------------
ALPHA CAPITAL ANSTALT $1,000,000.00 $1,000,000.00 10,000,000 10,000,000
Xxxxxxxxx 0
0000 Xxxxxxxxxxx
Xxxxx, Lichtenstein
Fax: 000-00-00000000
----------------------------------
(Signature)
By:
------------------------------------------------------------------------------------------------------------------------------------
LIST OF EXHIBITS AND SCHEDULES
------------------------------
Exhibit A Form of Class A Warrant
Exhibit B Escrow Agreement
Exhibit C Security Agreement
Exhibit D Guaranty
Exhibit E Collateral Agent Agreement
Exhibit F Form of Legal Opinion
Exhibit G Form 8-K or Public Announcement
Schedule 5(a) Subsidiaries
Schedule 5(d) Additional Issuances / Capitalization
Schedule 5(f) Reset Securities
Schedule 5(q) Undisclosed Liabilities
Schedule 5(v) Transfer Agent
Schedule 8 Lead Investor Fee
Schedule 9(e) Use of Proceeds
Schedule 12(a) Excepted Issuances
SCHEDULE 8
----------
DUE DILIGENCE FEE
-----------------
The Lead Investor has designated that Libra Finance, S.A., X.X. Xxx 0000,
Xxxxxx, Xxxxxxxxxxx, Fax: 000-000-000-0000, shall be the Due Diligence Fee
recipient and receive the Due Diligence Fee described below.
The Due Diligence Fee shall be equal to five percent (5%) of the Purchase Price
paid by the Subscribers for Notes and Warrants. One-half of the Due Diligence
Fee will be paid in cash and one-half shall be paid by delivery of Common Stock
at the rate of one Share of Common Stock for each $0.10 of Due Diligence Fee
payable. The Due Diligence Fee Recipient is granted the same rights, benefits,
indemnification and registration rights granted to the Subscribers. The Due
Diligence Fee must be paid on each Closing Date.
