EXHIBIT 10.5
LOAN AGREEMENT
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This Loan Agreement ("Agreement") is entered into as of November 5,
2002, by and between Gender Sciences, Inc., a New Jersey corporation (the
"Company"), and The Xxxxxx Family Partnership ("Lender"). The Company and Lender
agree as follows:
1. Loan. Lender hereby lends to the Company the sum of $400,000 (the
"Loan").
2. Note. The Loan shall be evidenced by a convertible promissory note
(the "Note") (a copy of which is attached as Exhibit "A") executed by the
Company, dated as of the date the Loan is made, providing for the payment of the
principal amount plus simple interest at the rate of eight percent (8%) per
annum, and payable on the third (3rd) anniversary of the date of this Agreement
("Maturity Date") at which time the entire unpaid balance of principal and all
accrued and unpaid interest shall be due and payable in a single installment.
Prior to the Maturity Date, the Note may be converted into the common or
preferred stock of the Company as provided hereinbelow. The Note shall also
provide that the Company may prepay the Note, in whole or in part, at any time
or from time to time upon fifteen (15) days' prior written notice to the Lender,
without penalty or additional fees; provided, however that the Lender shall be
first given the opportunity to convert the entire unpaid balance of principal
and accrued and unpaid interest thereon prior to any prepayment by the Company.
3. Warrant. The Company shall, as further consideration, interest grant
Lender a Warrant to purchase 8,000,000 shares of Common Stock at a price per
share equal to Five Cents ($0.05) (the "Strike Price"); provided, however that
if, pursuant to the Qualifying Equity Financing (as defined below), the Company
sells (i) Common Stock at a price per share less than the Strike Price, then the
Company shall exchange the Warrant for a warrant to purchase the same number of
shares of Common Stock at a price per share equal to the price per share offered
in the Qualifying Equity Financing; or (ii) Preferred Stock at a price equal to
or less than the Strike Price, then the Company shall exchange the Warrant for
warrant to purchase the same number of shares of Preferred Stock at a price per
share equal to the price per share offered in the Qualifying Equity Financing.
The Warrant shall be substantially in the form of Exhibit "B," attached hereto
and incorporated herein.
4. Conversion.
4.1 Voluntary Conversion. If not sooner converted as described
in Section 4.2 below, all or some of the outstanding principal balance of, and
all or some of the accrued and unpaid interest on, the Note may be converted at
any time prior to the Maturity Date, at the option of the Lender, into shares of
Common Stock of the Company at a conversion price per share equal to Five Cents
($0.05).
4.2 Automatic Conversion. At the closing of a Qualifying
Equity Financing (as defined below) on or before the Maturity Date, the entire
outstanding principal balance of, and all accrued and unpaid interest on, the
Note shall be automatically converted into the number of shares of either (1)
Preferred Stock or Common Stock, as the case may be, if the price per share in
the Qualified Equity Financing is equal to or less than Five Cents ($0.05); or
(2) Common Stock if the price per share is greater in the Qualified Equity
Financing than Five Cents ($0.05), as is obtained by dividing (a) the
outstanding principal balance of, and all accrued and unpaid interest on, the
Note as of the closing date of the Qualified Equity Financing by (b) the lower
of (i) Five Cents ($0.05) or (ii) the price per share of Common Stock or
Preferred Stock, as the case may be, issued in the Qualified Equity Financing. A
"Qualified Equity Financing" shall mean an equity financing in which the Company
sells shares of Common Stock or Preferred Stock and obtains net proceeds
(including conversion of all convertible notes in connection with the bridge
financing) in an amount not less than Two Million Dollars ($2,000,000).
4.3 Exchange of Note. As promptly as practicable following the
date of the Qualified Equity Financing, the Lender shall deliver the Note to the
Company. The conversion of the Note shall be deemed to have been effected
immediately upon the closing of the Qualified Equity Financing, and at such time
the rights of the Lender to receive principal and interest shall cease, and the
Lender shall be treated for all purposes as the record holder of the number of
shares of Common Stock or Preferred Stock, as the case may be, into which this
Note converts in accordance herewith. As promptly as practicable after the
receipt of the Note from Lender, the Company shall cause to be issued and
delivered to the Lender a certificate or certificates for the number of shares
of Common Stock or Preferred Stock, as the case may be, issuable upon conversion
of the Note. Such certificate or certificates shall bear such legends required,
in the opinion of counsel for the Company, under applicable securities law.
4.4 Fractional Shares. No fractional shares of shall be issued
in connection with any conversion under the Note, but in lieu of such fractional
shares, the Company shall round up the shares received upon conversion of the
Note to the next whole share of stock.
4.5 Converted Shares Subject to Lock Up. The shares of the
Company's capital stock issued to Lender in conversion of the Note shall be
subject to a lock-up agreement, wherein the holder of such shares agrees not to
sell, assign or transfer the shares for a specific period of time following any
underwritten public offering of the Company's securities. The holder of the
converted shares agrees to sign a Lock-Up Agreement with terms no more
restrictive than the Lock-Up Agreements entered into by the shareholders of the
Company who are officers, directors or five percent (5%) shareholders of the
Company.
4.6 Restricted Shares Upon Conversion. The shares of the
Company's stock issued to Lender in conversion of the Note shall be "restricted
securities" as defined in Sections 7.6 and shall be subject to the limitations
and legend conditions as set forth in Sections 7.7 through 7.10 herein below.
4.7 Reservation of Shares. The Company currently has enough
authorized shares sufficient to effect the conversion of the Note and the
exercise of the Warrant. Notwithstanding the foregoing, the Company's current
authorized shares are not sufficient to effect the conversion of the Note and
the exercise of the Warrant assuming full exercise and conversion of the
Company's other outstanding options and convertible securities. Accordingly, the
Company covenants and agrees to expeditiously take such corporate action as may
be necessary to amend the Company's Articles of Incorporation to increase its
authorized but unissued shares of capital stock to the number of shares as shall
be sufficient for the conversion of all of its outstanding options and
convertible securities.
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5. Conditions Precedent to Lender's Obligations. Lender's obligation to
disburse the Loan is subject to the condition that, on the date of disbursement
("Closing Date"), there shall have been delivered to Lender, in form and
substance satisfactory to Lender and its counsel:
5.1 Note. The Note substantially in the form attached hereto
as Exhibit "A," executed by a duly authorized officer of the Company.
5.2 Warrant. The Warrant substantially in the form as attached
hereto as Exhibit "B", executed by a duly authorized officer of the Company.
6. Representations and Warranties of Company. The Company represents
and warrants that:
6.1 Organization. The Company is a corporation duly organized
and existing under the laws of the State of New Jersey with its principal place
of business at 00 Xxxx Xxxxxx Xxxxxx, Xxxxxxxxx, Xxx Xxxxxx 00000. It has the
power to own its property and to carry on its business as it is now being
conducted. It is duly qualified and authorized to do business and is in good
standing in every state, country, or other jurisdiction in which the nature of
its business and properties makes such qualification necessary.
6.2 Authority. The Company has full power and authority
(corporate and other) to borrow the sums provided for in this Agreement, to
execute and deliver this Agreement, to issue the Warrant, the Note and any other
instrument or agreement required under this Agreement, and to perform and
observe the terms and provisions of this Agreement and of all such other
instruments and agreements.
6.3 Corporate Action. All corporate action by the Company, its
directors or stockholders, necessary for the authorization, execution, delivery,
and performance of this Agreement, issuance of the Warrant, and the Note and any
other instrument or agreement required under this Agreement has been duly taken.
6.4 Incumbency and Authority of Signators. The officers of the
Company executing this Agreement, the Warrant, the Note and any other instrument
or agreement required under this Agreement are duly and properly in office and
fully authorized to execute them.
6.5 Due and Valid Execution. This Agreement has been duly
authorized, executed, and delivered by the Company, and is a legal, valid, and
binding agreement of the Company, enforceable against the Company in accordance
with its terms and the Warrant and the Note and any other instrument or
agreement required under this Agreement has been so authorized and, when
executed and delivered, will be similarly valid, binding and enforceable.
6.6 Capitalization.
6.6.1 Conversion of Debt. Concurrently with the
execution of this Agreement, the Two Hundred Forty Five Thousand Dollar
($245,000) loan from Unity Venture Capital Associates Ltd. ("UVCA") shall be
converted into 4,900,000 shares of the Company's Common Stock, which are hereby
deemed fully paid and non assessable in the form of a cancellation of a loan to
the Company made by UVCA in the principal amount of Two Hundred Forty Five
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Thousand Dollars ($245,000) plus accrued interest thereon. As further
consideration for the conversion of the loan, the Company shall issue UVCA a
warrant to purchase 4,900,000 shares of the Company's Common Stock exercisable
at a price per share equal to the Strike Price and subject to the same terms and
conditions as the Warrant set forth above.
6.6.2 Capitalization Table. Attached hereto as
Exhibit "E" is the Company's current capitalization table that sets forth the
Company's current issued and outstanding stock and the total number of Common
Stock post-financing (assuming a $0.05 exercise price) on an as-converted basis.
6.7 Reserved Shares. The Company shall expeditiously take such
corporate action as may be necessary to amend the Company's Articles of
Incorporation to increase its authorized but unissued shares of capital stock to
the number of shares as shall be sufficient for the conversion of the Note,
Warrant and other outstanding options and convertible securities.
6.8 No Violation. There is no charter, bylaw, or capital stock
provision of the Company, and no provision of any indenture or agreement,
written or oral, to which the Company is a party or under which the Company is
obligated, nor is there any statute, rule, or regulation, or any judgment,
decree, or order of any court or agency binding on the Company which would be
contravened by the execution and delivery of this Agreement, the Warrant, the
Note or any other instrument or agreement required under this Agreement, or by
the performance of any provision, condition, covenant or other term of this
Agreement, the Warrant, the Note or any such other instrument or agreement.
6.9 Litigation Pending. There is no litigation, tax claim,
proceeding or dispute pending, or, to the knowledge of the Company, threatened,
against or affecting the Company or its property, the adverse determination of
which might affect the Company's financial condition or operations or impair the
Company's ability to perform its obligations under this Agreement or under the
Warrant, the Note or any other instrument or agreement required by this
Agreement.
7. Representations and Warranties of Lender. This Agreement is made
with Lender in reliance upon Lender's representation and warranties to the
Company, which by Lender's execution of this Agreement Lender hereby confirms,
that:
7.1 Authorization. This Agreement constitutes Lender's valid
and legally binding obligation, enforceable in accordance with its terms.
7.2 Investment Intent. The Note and Warrant to be received by
Lender will be acquired for investment for Lender's or his designee's, own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that Lender has no present intention of
selling, granting any participation in, or otherwise distributing the same. By
executing this Agreement, Lender further represents that Lender does not have
any contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participation to such person or to any third person, with
respect to the Note or the Warrant or any capital stock underlying the Warrant.
7.3 Enforceability. The Lender hereby represents and warrants
that the execution and delivery by Lender of this Agreement, when duly executed
by the other parties hereto, will result in legally binding obligations of
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Lender, enforceable against him, her or it in accordance with the respective
terms and provisions hereof, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights and (b) general principles of equity
that restrict the availability of equitable remedies.
7.4 Disclosure of Information. Lender has been provided with
copies of the Company's Annual Report on Form 10-KSB for the year ended January
31, 2002, the Company's Quarterly Reports on Form 10-QSB for the quarters ended
April 30, 2002 and July 31, 2002 respectively and each Report on Form 8-K filed
by the Company since January 1, 2002. In addition, Lender has been provided with
a copy of the Company's proxy statement in connection with its most recent
annual meeting of shareholders. Lender believes he/she/they have received all
the information he/she/they consider necessary or appropriate for deciding
whether to make the Loan, and acquire the Note and the Warrant. Lender further
represents that he/she/they have had an opportunity to ask questions and receive
answers from officers of the Company regarding the Company, its business and the
terms and conditions of the Note and the Warrant. Lender recognizes that any
investment in the Company must be considered to be highly speculative.
7.5 Confidentiality. Lender hereby represents, warrants and
covenants that he/she/they shall maintain in confidence, and shall not use or
disclose without the prior written consent of the Company, any information
identified as confidential that is furnished to him/her/them by the Company in
connection with this Agreement. This obligation of confidentiality shall not
apply, however, to any information (a) in the public domain through no
unauthorized act or failure to act by Lender; or (b) lawfully disclosed to
Lender by a third party who possessed such information without any obligation of
confidentiality. Lender further covenants that he/she/they shall return to the
Company all tangible materials containing such information upon request by the
Company.
7.6 Investment Experience. Lender is a lender and investor in
notes and securities of companies in the development stage and acknowledges he/
she/ they are able to fend for themselves, can bear the economic risk and
complete loss of his/her/their investment and has such knowledge and experience
in financial or business matters that he/she/they are capable of evaluating the
merits and risks of the investment in the Note and the Warrant.
7.7 Restricted Securities. Lender understands the Note, the
shares resulting from the conversion of the Note, the Warrant and the shares
underlying the Warrant he/she/they are acquiring are characterized as
"restricted securities" under the federal securities laws in as much as they are
being acquired from the Company in a transaction not involving a public offering
and that under such laws and applicable regulations such securities may not be
resold without registration under the Securities Act of 1933, as amended (the
"Securities Act"), except in certain limited circumstances. In this connection
Lender represents that he/she/they are familiar with Securities and Exchange
Commission ("SEC") Rule 144, as presently in effect, and understand the resale
limitations imposed thereby and by the Securities Act.
7.8 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, Lender further agrees not to make
any disposition of all or any portion of the Note, the shares resulting from the
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conversion of the Note, the Warrant or the shares underlying the Warrant unless
and until:
7.8.1 There is then in effect a registration
statement under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement; or
7.8.2 (i) Lender shall have notified the Company of
the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition and (ii) if
reasonably requested by the Company, Lender shall have the furnished the Company
with an opinion of counsel, that such disposition will not require registration
of such shares under the Securities Act.
7.9 Legends.
7.9.1 It is understood the Note, the certificate
representing the shares resulting from the conversion of the Note, the Warrant,
or a certificate for the Company's stock evidencing the shares underlying the
Warrant ("Certificate") may bear one or more of the following legends:
"These securities have not been registered under the
Securities Act of 1933. They may not be sold, offered for
sale, pledged or hypothecated in the absence of a registration
statement in effect with respect to the securities under such
Act or an opinion of counsel satisfactory to the Company that
such registration is not required or unless sold pursuant to
Rule 144 of such Act."
7.10 Accredited Investor. Lender is an "accredited investor"
as that term is defined in CFR Section 230. 501(a) (Regulation D), as amended,
of the SEC under the Securities Act. To be an accredited investor, an investor
must fall within one of the categories set forth on Exhibit "C" attached hereto.
7.11 Removal of Legends; Further Covenants.
7.11.1 Any legend placed on the Note, the Warrant or
a Certificate pursuant to Section 7.8 hereof shall be removed (i) if the Note,
the Warrant or the shares represented by such Certificates shall have been
effectively registered under the Securities Act or otherwise lawfully sold in a
public transaction, (ii) if the shares may be transferred in compliance with
Rule 144(k) promulgated under the Securities Act, or (iii) if Lender shall have
provided the Company with an opinion of counsel, in form and substance
acceptable to the Company and its counsel and from attorneys reasonably
acceptable to the Company and its counsel, stating that a public sale, transfer
or assignment of the Note, the Warrant or the shares underlying the Warrant may
be made without registration.
7.11.2 Any legend placed on the Note or a Certificate
pursuant to Section 8.8 hereof shall be removed if the Company receives an order
of the appropriate state authority authorizing such removal or if Lender
provides the Company with an opinion of counsel, in form and substance
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acceptable to the Company and its counsel and from attorneys reasonably
acceptable to the Company and its counsel, stating that such state legend may be
removed.
7.11.3 Lender further covenants that Lender will not
transfer the Note or the Warrant, in violation of the Securities Act, the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), or the
rules of the Commission promulgated thereunder, including Rule 144 under the
Securities Act. Further, Lender agrees that Lender will not transfer the Note,
the Warrant or any shares underlying the Warrant without the Company's prior
consent, even if Lender is otherwise permitted to transfer them pursuant to this
Agreement and all applicable law.
7.12 Risk Factors. The Lender agrees and acknowledges that
there are risk factors related to, among other things, (i) the sale by the
Company of the Note, and (ii) the Company's business and financial condition.
Lender and his, her or its representatives acknowledge and agree that they have
carefully reviewed the RISK FACTORS attached hereto as Exhibit "D" in their
entirety. Such Risk Factors are incorporated herein by this reference. THE
LENDER IS AWARE THAT HIS, HER OR ITS INVESTMENT IN THE NOTE IS A SPECULATIVE
INVESTMENT THAT HAS LIMITED LIQUIDITY AND IS SUBJECT TO THE RISK OF COMPLETE
LOSS. THE LENDER IS ABLE, WITHOUT IMPAIRING HIS, HER OR ITS FINANCIAL CONDITION,
TO SUFFER A COMPLETE LOSS OF HIS, HER OR ITS INVESTMENT IN THE NOTE.
8. Board of Directors. Immediately following the execution of this
Agreement, Xxxxxxx Xxxxxx, or a representative of the Xxxxxx family, and Xxxxx
Xxxxxx will be appointed to the Company's Board of Directors as outside
independent directors and shall be entitled to the standard option package
provided to the Company's outside directors.
9. Miscellaneous.
9.1 Notices. Any communications between the parties or notices
provided for in this Agreement may be given by mailing them, first class,
postage prepaid, to Lender at:
The Xxxxxx Family Partnership
Address:_______________________
_______________________________
and to the Company at:
Gender Sciences, Inc.
00 Xxxx Xxxxxx Xxxxxx
Xxxxxxxxx, Xxx Xxxxxx 00000
Attn: Xxxxxx Xxxxx
With a copy to:
Xxxxx & Lardner
000 Xxxx Xxxxxxxx, 00xx Xxxxx
Xxx Xxxxx, Xxxxxxxxxx 00000
Attn: Xxxxxxx X. Xxxxx
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or to such other address as either party may indicate to the other in writing
after the date of this Agreement.
9.2 Successors and Assigns. This Agreement shall bind and
inure to the benefit of the parties and their respective successors and assigns;
provided, however, that the Company shall not assign this Agreement or any of
the rights, duties, or obligations of the Company under this Agreement without
the prior written consent of Lender.
9.3 Delay and Waivers. No delay or omission to exercise any
right, power, or remedy accruing to Lender on any breach or default of the
Company under this Agreement shall impair any such right, power, or remedy of
Lender, nor shall it be construed to be a waiver of any such breach or default,
or an acquiescence in such breach or default, or waiver of or acquiescence in
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be considered a waiver of any other prior or subsequent
breach or default. Any waiver, permit, consent, or approval of any kind by
Lender of any breach or default under this Agreement, or any waiver by Lender of
any provision or condition of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in that writing. All
remedies, either under this Agreement or by law or otherwise afforded to Lender,
shall be cumulative and not alternative.
9.4 Attorneys Fees. In the event of any legal action or suit
in relation to this Agreement or any note or other instrument or agreement
required under this Agreement, or in the event that Lender incurs any legal
expense in protecting its rights under this Agreement or under any security
agreement in any legal proceeding, the Company, in addition to all other sums
which the Company may be called on to pay, will pay to Lender the amount of such
legal expense and will, if Lender prevails in such action, pay to Lender a
reasonable sum for its attorney's fees and all other costs and expenses.
9.5 Severability. In the event any sentence or paragraph of
this Agreement is declared void by a court of competent jurisdiction, said
sentence or paragraph shall be deemed severed from the remainder of this
Agreement, and the balance of this Agreement shall remain in effect.
9.6 Titles, Captions and Paragraph Headings. Paragraph and
subparagraph titles and captions contained in this Agreement are inserted only
as a matter of convenience for reference. Such titles, captions, and paragraph
headings in no way define, limit, extend or describe the scope of this Agreement
or the intent of any provisions hereof.
9.7 Number and Gender. Whenever a singular number is used in
this Agreement or where required by context, the same shall include plural.
Masculine gender shall include feminine and neuter genders and the word "person"
shall include corporation, firm, partnership, or other forms of association.
9.8 Entire Agreement. This Agreement constitutes the entire
Agreement between all parties herein and supersedes all prior Agreements and
understandings, oral or written, between the parties hereto with respect to the
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subject matter hereof, and shall not be modified or amended except in writing,
executed by all parties herein.
9.9 Counterparts. This Agreement may be executed in several
counterparts, and as so executed shall constitute an Agreement, binding to all
parties herein. Each counterpart may be signed and transmitted with the same
validity as if it were an ink-signed document.
9.10 Non-Waiver. No delay or omission on the part of any party
herein in exercising any rights or remedies herein shall operate as a waiver of
such rights or remedies. No waiver of any default shall constitute a waiver of
any other default, whether of the same or any other covenant or condition. No
waiver, benefit, privilege or service voluntarily given or performed by any
party herein shall give the other parties any contractual right by custom,
estoppel or otherwise. Any waiver by any party herein must be executed in
writing, expressly specifying the subject and extent of the waiver.
9.11 Governing Law and Venue. This Agreement and all
amendments thereto shall be governed, construed, and enforced in accordance with
the laws of the State of New Jersey.
9.12 Legal Representation. The law firm of Xxxxx & Lardner has
prepared this Agreement solely on behalf of the Company based on instructions
received. The Lender has been advised to seek and obtain separate legal counsel
with respect to the preparation and execution of this Agreement, and he/she has
had an opportunity to do so, has access to qualified independent counsel and has
sought and obtained such advice and counsel to the extent desired.
9.13 Construction. This Agreement has been negotiated between
the parties and their advisors, and shall not be construed against the party
preparing it, but shall be construed as if all parties jointly prepared this
Agreement and any uncertainty and ambiguity shall not be interpreted against any
one party.
9.14 No Other Inducement. The making, execution and delivery
of this Agreement by the parties hereto has been induced by no representations,
statements, warranties or agreements other than those expressed herein.
9.15 Disputes. In the event of an inconsistency arising
between the terms of the Note or the Warrant and this Loan Agreement, the terms
of the Loan Agreement shall control.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties to this Agreement have executed this
loan Agreement by their duly authorized officers effective as of the day and
year first above written.
"Company" Gender Sciences, Inc.,
a New Jersey corporation
/s/ XXXXXX XXXXX
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Xxxxxx Xxxxx, Chairman
"Lender" The Xxxxxx Family Partnership
/s/ XXXXXXX XXXXXX
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Xxxxxxx Xxxxxx, Partner
[Signature Page to Loan Agreement]
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TABLE OF EXHIBITS
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Exhibit "A" Form of Convertible Promissory Note
Exhibit "B" Form of Warrant
Exhibit "C" Definition of "accredited investor"
Exhibit "D" Risk Factors
Exhibit "E" Capitalization Table
Exhibit List
EXHIBIT A
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NOTE
A-1
NEITHER THIS PROMISSORY NOTE NOR THE SHARES INTO WHICH IT IS CONVERTIBLE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW.
THE COMPANY WILL NOT TRANSFER THIS PROMISSORY NOTE OR THE UNDERLYING SHARES
UNLESS: (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH PROMISSORY NOTE OR
SUCH SHARES, AS THE CASE MAY BE, UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE
STATE SECURITIES LAWS, OR (ii) IT FIRST RECEIVES A LETTER FROM AN ATTORNEY,
ACCEPTABLE TO THE BOARD OF DIRECTORS OR ITS AGENTS, STATING THAT IN THE OPINION
OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE SECURITIES LAWS.
GENDER SCIENCES, INC.
CONVERTIBLE PROMISSORY NOTE
$400,000 November 5, 2002
Gender Sciences, Inc., a New Jersey corporation (the
"Company"), for value received, hereby promises to pay to The Xxxxxx Family
Partnership ("Lender"), on the Maturity Date (as hereinafter defined), the
principal amount of Four Hundred Thousand Dollars ($400,000) plus accrued and
unpaid interest thereon, at a simple interest rate of Eight Percent (8%) per
annum from the date hereof until the Maturity Date. Unless converted into shares
of the Company's capital stock, all sums due pursuant to this Note shall be due
and payable on the third (3rd) anniversary of the date of this Note ("Maturity
Date") at the principal office of the Company at 00 Xxxx Xxxxxx Xxxxxx,
Xxxxxxxxx, Xxx Xxxxxx 00000 in currency of the United States of America which at
the time of payment shall be legal tender for payment of public and private
debts.
This Note is made pursuant to a Loan Agreement of even date
herewith. All capitalized terms not otherwise defined herein shall have the
meaning attributed to them in the Loan Agreement. Any conflict between the Loan
Agreement and this Note shall be determined by the Loan Agreement.
1. Waiver. The Company and any and each other person or entity liable
for the payment or collection of this Note expressly waives demand and
presentment for payment, notice of nonpayment, protest, notice of protest,
notice of dishonor, bringing of suit and diligence in taking any action to
collect amounts called for under this Note and in the handling of property at
any time existing as security in connection with this Note, and shall be
directly and primarily liable for the payment of all sums owing and to be owing
on this Note, regardless of and without any notice, diligence, act or omission
as or with respect to the collection of any amount called for under this Note.
2. Costs of Collection. The Company agrees to pay all reasonable costs,
including reasonable attorneys' fees, incurred by the Lender in collecting or
enforcing payment of this Note in accordance with its terms.
3. Conversion.
3.1 Voluntary Conversion. If not sooner converted as described
in Section 3.2 below, all or some of the outstanding principal balance
of, and all or some of the accrued and unpaid interest on, this Note
may be converted at any time prior to the Maturity Date, at the option
of the Lender, into shares of Common Stock of the Company at a
conversion price per share equal to Five Cents ($0.05).
3.2 Automatic Conversion. At the closing of a Qualifying
Equity Financing (as defined below) on or before the Maturity Date, the
entire outstanding principal balance of and all accrued and unpaid
interest on, this Note shall be automatically converted into the number
of shares of either (1) Preferred Stock or Common Stock, as the case
may be, if the price per share in the Qualified Equity Financing is
equal to or less than Five Cents ($0.05); or (2) Common Stock if the
price per share is greater in the Qualified Equity Financing than Five
Cents ($0.05), as is obtained by dividing (a) the outstanding principal
balance of, and all accrued and unpaid interest on, the Note as of the
closing date of the Qualified Equity Financing by (b) the lower of (i)
Five Cents ($0.05) or (ii) the price per share of Common Stock or
Preferred Stock, as the case may be, issued in the Qualified Equity
Financing. A "Qualified Equity Financing" shall mean an equity
financing in which the Company sells shares of Common Stock or
Preferred Stock and obtains net proceeds (including conversion of all
convertible notes in connection with the bridge financing) in an amount
not less than Two Million Dollars ($2,000,000).
3.3 Notice. If this Note is automatically converted as
provided for in Section 3.2 above, written notice shall be delivered to
the Lender at the address last shown on the records of the Company for
the Lender or given by the Lender to the Company for the purpose of
notice, or, if no such address appears or is given, at the place where
the principal executive office of the Company is located, notifying the
Lender of the conversion, specifying the principal amount of this Note
converted, the amount of accrued and unpaid interest converted, the
date of such conversion and calling upon the Lender to surrender this
Note to the Company in exchange for equity securities of the Company as
provided herein, in the manner and at the place designated by the
Company.
3.4 Certificate. As promptly as practicable after the
conversion of this Note, the Company at its expense will issue and
deliver to the Lender, upon surrender of this Note, a certificate or
certificates for the number of full shares of equity securities
issuable upon such conversion. No fractional shares shall be issued in
connection with any conversion under this Note, but in lieu of such
fractional shares, the Company shall round up the number of shares to
be received upon conversion of this Note to the next whole share of
stock.
4. Usury Savings Clause. Notwithstanding any provision of this Note,
the Company shall not and will not be required to pay interest at a rate or any
fee or charge in an amount prohibited by applicable law. If interest or any fee
or charge payable on any date would be prohibited, then such interest, fee or
charge will be automatically reduced to the maximum amount that is not
prohibited. In the event that Lender receives payment of any interest, fee, or
charge that would cause the amount so received to exceed the maximum amount
permitted under applicable law, then, to the extent that the amount so received
exceeds the maximum amount permitted under applicable law: (a) in the first
2
instance, the amount received shall be applied to principal and (b) in the
second instance, in the event that the principal amount of this Note has been
paid in full, the remaining amount so received shall be deemed to be a loan from
the Company to Lender, repayable upon the demand of the Company with interest at
the legal rate from the date of Lender's receipt of each payment in excess
interest, fees, or charges.
5. Representations of Lender.
5.1 Acquisition for Personal Account. Lender represents and
warrants that it is acquiring this Note and the Conversion Shares (as
defined below) (the "Securities") solely for its account for investment
and not with a view to or for sale or distribution of said Securities.
Lender also represents that the entire legal and beneficial interests
it may acquire in the Securities are being acquired for, and will be
held for, Lender's account only.
5.2 Securities Are Not Registered. Lender understands that the
Securities have not been registered under the Securities Act of 1933,
as amended (the "Act") on the basis that no distribution or public
offering of the securities of the Company is to be effected. Lender
realizes that the basis for the exemption may not be present if,
notwithstanding its representations, Lender has a present intention of
acquiring the securities for a fixed or determinable period in the
future, selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the
Securities. Lender has no such present intention.
5.3 Accredited Investor. Lender is an "accredited investor"
within the meaning of Securities and Exchange Commission ("SEC") Rule
501 of Regulation D, as presently in effect.
6. Covenants of the Company.
6.1 Authorization. All corporate action on the part of the
Company, its directors and its stockholders necessary for the
authorization, execution, delivery and performance of this Note by
Company and the performance of the Company's obligations hereunder,
including the issuance and delivery of this Note and the shares of
equity securities issuable upon conversion of this Note ("Conversion
Shares") and the reservation of the Conversion Shares has been taken or
will be taken prior to the issuance of such Conversion Shares. This
Note, when executed and delivered by the Company, shall constitute a
valid and binding obligation of the Company enforceable in accordance
with its terms, subject to laws of general application relating to
bankruptcy, insolvency, the relief of debtors and, with respect to
rights to indemnity, subject to federal and state securities laws. The
Conversion Shares, when issued in compliance with the provisions of
this Note, will be validly issued, fully paid and nonassessable and
free of any liens or encumbrances.
6.2 No Impairment. Except and to the extent as waived or
consented to by Lender, the Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of
3
assets, consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder
by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Note and in the taking of
all such action as may be necessary or appropriate in order to protect
the conversion rights of Lender against impairment.
7. Default. Each of the following events shall be an "Event of Default"
hereunder:
7.1 the Company fails to pay timely any of the principal
amount due under this Note or any accrued interest or other amounts due
under this Note on the date the same becomes due and payable or within
twenty (20) business days thereafter;
7.2 the Company files any petition or action for relief under
any bankruptcy, reorganization, insolvency or moratorium law or any
other law for the relief of, or relating to, debtors, now or hereafter
in effect, or makes any assignment for the benefit of creditors or
takes any corporate action in furtherance of any of the foregoing; or
7.3 an involuntary petition is filed against the Company
(unless such petition is dismissed or discharged within ninety (90)
days) under any bankruptcy statute now or hereafter in effect, or a
custodian, receiver, trustee, assignee for the benefit of creditors (or
other similar official) is appointed to take possession, custody or
control of any property of the Company.
Upon the occurrence of an Event of Default hereunder, all
unpaid principal, accrued interest and other amounts owing hereunder shall, at
the option of Lender, be immediately due, payable and collectible by Lender
pursuant to applicable law.
8. Miscellaneous
8.1 The Company currently has enough authorized shares
sufficient to effect the conversion of this Note. Notwithstanding the
foregoing, the Company's current authorized shares are not sufficient
to effect the conversion of this Note assuming full exercise and
conversion of the Company's other outstanding options and convertible
securities. Accordingly, the Company hereby covenants and agrees to
expeditiously take such corporate action as may be necessary to amend
the Company's Articles of Incorporation to increase its authorized but
unissued shares of capital stock to the number of shares as shall be
sufficient for the conversion of all of its outstanding options and
convertible securities.
8.2 The Company hereby agrees that no failure on the part of
the Lender to exercise any power, right or privilege hereunder, or to
insist upon prompt compliance with the terms hereof, shall constitute a
waiver thereof.
8.3 The Lender shall not be deemed, by any act of omission or
commission, to have waived any of their rights or remedies hereunder
unless such waiver is in writing and signed by the Lender, and then
only to the extent specifically set forth in writing. A waiver with
reference to one event shall not be construed and continuing or as a
4
bar to or waiver of any right or remedy as to a subsequent event. No
delay or omission of the Lender to exercise any right, whether before
or after an event of default or a default thereunder, shall impair any
such right or shall be construed to be a waiver of any right or
default, and the acceptance at any time by the Lender of any past due
amounts shall not be deemed to be a waiver of the right to require
prompt payment when due of any other amounts then or thereafter due and
payable.
8.4 The remedies of the Lender in this Note or at law or in
equity, shall be cumulative and concurrent, and may be pursued singly,
successively or together at the sole discretion of the Lender, and may
be exercised as often as occasion therefor shall occur; and the failure
to exercise any such right or remedy shall in no event be construed as
a waiver or release thereof.
8.5 Lender shall not become or be deemed a partner or joint
venturer with the Company by reason of any provisions of this Note.
8.6 If any amount of principal or interest on or in respect of
this Note becomes due and payable on any date which is not a Business
Day, such amount shall be payable on the next preceding Business Day.
"Business Day" means any day other than a Saturday, Sunday, statutory
holiday or other day on which banks in the State of California are
required by law to close or are customarily closed.
8.7 If any of the provisions of this Note or the application
thereof to any persons or circumstances shall, to any extent, be held
to be invalid or unenforceable, the remainder of this Note by the
application of such provision or provisions to persons or circumstances
other than those as for whom or of which it is held invalid or
unenforceable shall not be affected thereby, and every provision of
this Note shall be valid and enforceable to the fullest extent
permitted by law.
8.8 The terms of this Note shall apply to, inure to the
benefit of, and bind all parties hereto, their heirs, legatees,
devisees, administrators, executors, successors, assigns or any entity
formed as a result of the Company reincorporating in another
jurisdiction.
8.9 Time is of the essence of this Note and the performance of
all provisions hereof.
8.10 This Note is registered on the books of the Company and
is transferable only by surrender thereof at the principal office of
the Company duly endorsed or accompanied by a written instrument of
transfer duly executed by the registered Lender of this Note or its
attorney duly authorized in writing. Payment of or on account of
principal and interest on this Note shall be made only to or upon the
order in writing of the registered Lender.
8.11 Note is governed by and construed in accordance with me
laws or the State of New Jersey.
5
8.12 The Lender will not be entitled to vote, receive
dividends or exercise any of the rights of the holders of the Company's
equity securities for any purpose prior to the conversion of this Note.
[Remainder of Page Intentionally Left Blank]
6
"Company" Gender Sciences, Inc.,
a New Jersey corporation
/s/ XXXXXX XXXXX
-------------------------------------
Xxxxxx Xxxxx, Chairman
"Lender" The Xxxxxx Family Partnership
/s/ XXXXXXX XXXXXX
-------------------------------------
Xxxxxxx Xxxxxx, Partner
[Signature Page to Convertible Note]
7
EXHIBIT B
---------
WARRANT
B-1
VOID AFTER 5:00 P.M. EASTERN TIME ON NOVEMBER 5, 2005
NEITHER THIS WARRANT NOR THE WARRANT SHARES HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE COMPANY WILL NOT TRANSFER THIS WARRANT OR THE
WARRANT SHARES UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH
WARRANT OR SUCH WARRANT SHARES, AS THE CASE MAY BE, UNDER THE SECURITIES ACT OF
1933 AND APPLICABLE STATES SECURITIES LAWS, (ii) IT FIRST RECEIVES A LETTER FROM
AN ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS AND ITS AGENTS, STATING THAT
IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM REGISTRATION
UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE SECURITIES LAWS,
OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF
1933.
GENDER SCIENCES, INC.
COMMON STOCK PURCHASE WARRANT
-----------------------------
Warrant to Subscribe for
November 5, 2002 8,000,000 Shares of Common Stock
Not Transferable or Exercisable
Except Upon Conditions Herein Specified
---------------------------------------
THIS CERTIFIES that, for value received, The Xxxxxx Family Partnership
(such person or entity and any successor and assign being hereinafter referred
to as the `Holder") is entitled to subscribe for and purchase from Gender
Sciences, Inc., a New Jersey corporation (hereinafter called the "Company"),
Eight Million (8,000,000) shares of Common Stock, (the "Common Stock"), of the
Company (such shares to be subject to adjustment in accordance with Sections 1
and 5 hereof, hereinafter sometimes called the "Warrant Shares") at an exercise
price of Five Cents ($0.05) per share as adjusted in accordance with Section 1
hereof (the "Strike Price'), at any time or from time to time from the date
hereof to and including November _, 2005 (the "Exercise Period").
1. Exercise of Warrant.
1.1 The rights represented by this Warrant may be
exercised by the Holder hereof, in whole at any time or in part from time to
time during the Exercise Period, but not as to a fractional share of Common
Stock, by the surrender of this Warrant (properly endorsed) at the principal
office of the Company, at 00 Xxxx Xxxxxx Xxxxxx, Xxxxxxxxx, Xxx Xxxxxx 00000 (or
at such other agency or office of the Company in the United States of America as
the Company may designate by notice in writing to the Holder hereof at the
address of such Holder appearing on the books of the Company), and by payment to
the Company of the Strike Price in cash or by certified or official bank check
in United States Dollars for each share being purchased (the "Exercise
Payment"); provided, however, that, at the option of the Holder, the Exercise
Payment may instead be satisfied by withholding from those Warrant Shares that
would otherwise be obtained upon such exercise (the "Total Warrant Shares") a
number of Warrant Shares having an aggregate Current Fair Market Value (as
defined below) equal to the aggregate Strike Price that would otherwise have
been payable for the Total Warrant Shares.
1.2 In the event of any exercise of the rights
represented by this Warrant, (i) a certificate or certificates for the shares of
Common Stock so purchased, registered in the name of the person entitled to
receive the same, shall be mailed to the Holder within a reasonable time after
the rights represented by this Warrant shall have been so exercised; provided,
however, that the Company shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
such certificate in a name other than that of the registered Holder thereof, and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid; and (ii) unless this
Warrant has expired, a new Warrant representing the number of shares (except a
remaining fractional share), if any, with respect to which this Warrant shall
not then have been exercised shall also be issued to the Holder hereof within
such time. The person in whose name any certificate for shares of Common Stock
is issued upon exercise of this Warrant, shall for all purposes be deemed to
have become the Holder of record of such shares on the date on which this
Warrant was surrendered and payment of the Strike Price was made (unless the
cashless exercise option described in the foregoing proviso is selected by the
Holder), irrespective of the date of delivery of such certificate, except that,
if the date of such surrender and payment is a date when the stock transfer
books of the Company are closed, such person shall be deemed to have become the
Holder of record of such shares at the close of business on the next succeeding
date on which the stock transfer books are open. The issuance of any shares of
Common Stock pursuant to the terms of this Warrant shall at all times be subject
to compliance with all requirements of the Securities Act of 1933, as amended,
and with all applicable foreign and state securities and blue sky laws then in
effect. If the Holder elects to use the cashless exercise option described in
Section 1.1 above to exercise this Warrant by withholding a portion of the Total
Warrant Shares, this Warrant shall be terminated with respect to the number of
Total Warrant Shares withheld.
1.3 Current Fair Market Value. For the purposes of this
Warrant, the "Current Fair Market Value" of each share of Common Stock shall be
determined as follows:
1.3.1 If the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges on such an
exchange, the Current Fair Market Value shall be the average of the last
reported sale prices of the Common Stock on such exchange based on the last
thirty (30) Business Days (as defined below) prior to the date of exercise of
this Warrant, or, if the Common Stock is not so listed or admitted to unlisted
trading privileges on a national securities exchange but is listed on NASDAQ,
the Current Fair Market Value shall be the average of the last reported sale
prices of the Common Stock on NASDAQ based on the last thirty (30) Business Days
prior to the date of exercise of this Warrant; or
1.3.2 If the Common Stock is not so listed or
admitted to unlisted trading privileges on a national securities exchange or
quoted on NASDAQ, the Current Fair Market Value shall be the average mean of the
-2-
last closing bid and asked prices reported on the last five (5) Business Days
prior to the date of exercise of this Warrant (x) by NASDAQ, or (y) if reports
are unavailable under clause (x) above, by the National Quotation Bureau
Incorporated ("NAB"); or
1.3.3 If the Common Stock is not so listed or
admitted to unlisted trading privileges on a national securities exchange and
bid and asked prices are not so reported by NASDAQ or NAB, the Current Fair
Market Value shall be an amount per share, determined in such reasonable manner
as may be prescribed by the Company's Board of Directors in good faith.
1.3.4 As used in this Section 3, "Business Day"
means any day other than a Saturday or Sunday on which the relevant exchange,
system or service is open or available, as the case may be.
1.4 Adjustments in Number and Strike Prices of Warrant
Shares. If, pursuant to the Qualifying Equity Financing (as defined below), the
Company sells (i) Common Stock at a price per share less than the Strike Price,
then the Company shall exchange this Warrant for a warrant to purchase the same
number of shares of Common Stock at a price per share equal to the price per
share offered in the Qualifying Equity Financing; or (ii) Preferred Stock at a
price per share equal to or less than the Strike Price, then the Company shall
exchange the Warrant for warrant to purchase the same number of shares of
Preferred Stock at a price per share equal to the price per share offered in the
Qualifying Equity Financing. A "Qualified Equity Financing" shall mean an equity
financing in which the Company sells shares of Common Stock or Preferred Stock
and obtains net proceeds (including conversion of all convertible notes in
connection with a bridge financing) in an amount not less than Two Million
Dollars ($2,000,000).
1.5 Covenants as to Common Stock. The Company covenants
and agrees all Warrant Shares will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company currently has enough authorized shares sufficient
to effect the exercise of this Warrant. Notwithstanding the foregoing, the
Company's current authorized shares are not sufficient to effect the exercise of
this Warrant assuming full exercise and conversion of the Company's other
outstanding options and convertible securities. Accordingly, the Company hereby
covenants and agrees to expeditiously take such corporate action as may be
necessary to amend the Company's Articles of Incorporation to increase its
authorized but unissued shares of capital stock to the number of shares as shall
be sufficient for the conversion of all of its outstanding options and
convertible securities. If and so long as the Common Stock issuable upon the
exercise of this Warrant is listed on any national securities exchange, the
Company will, if permitted by the rules of such exchange, list and keep listed
on such exchange, upon official notice of issuance, all of the Warrant Shares.
2. Transfer.
2.1 Securities Laws. Neither this Warrant nor the Warrant
Shares have been registered under the Securities Act of 1933. The Company will
not transfer this Warrant or the Warrant Shares unless (i) there is an effective
-3-
registration covering such Warrant or such shares, as the case may be, under the
Securities Act of 1933 and applicable states securities laws, (ii) it first
receives a letter from an attorney, acceptable to the Company's board of
directors or its agents, stating that in the opinion of the attorney the
proposed transfer is exempt from registration under the Securities Act of 1933
and under all applicable state securities laws, or (iii) the transfer is made
pursuant to Rule 144 under the Securities Act of 1933.
2.2 Compliance With Blue Sky Laws. The Company will be
able to issue the Warrant Shares upon exercise of the Warrant only if there is a
then current Offering Memorandum or registration statement available for and
distributed to the Warrant Holders relating to such Common Stock, and only if
such Warrant and Common Stock is qualified for sale or exempt from qualification
under applicable state securities laws of the jurisdiction in which the Holders
of the Warrants reside. The Company reserves the right in its sole discretion to
determine not to apply for exemptions or to register such Common Stock in any
jurisdiction where the time and expense do not justify the costs of such
exemption filing or registration. The Warrants may be deprived of any value in
the event the Company does not satisfy or the Company chooses not to satisfy any
such requirements. Although it is the present intention of the Company to
satisfy such requirements, there can be no assurance the Company will be able to
do so; provided, however, the Company will not be permitted to accelerate the
termination of the Exercise Period of these Warrants unless such acceleration is
accomplished in full compliance with Section 1 hereof.
2.3 Investment Representations. The Holder of the Warrant
agrees and acknowledges the Warrant is being purchased for his own account, for
investment purposes only, that he, she or it either has a prior personal or
business relationship with the officers, directors or controlling persons, or by
reason of his business or financial experience, or the business or financial
experience of he and his professional advisors who are unaffiliated with and not
compensated by the Company, could be reasonably assumed to have the capacity to
protect his, her or its own interests in connection with the purchase of and the
exercise of the Warrants, and not for the account of any other person, and not
with a view to distribution, assignment or resale to others or to
fractionalization in whole or in part, and the Holder further represents,
warrants and agrees as follows: no other person has or will have a direct or
indirect beneficial interest in this Warrant and the Holder will not sell,
hypothecate or otherwise transfer his Warrant except in accordance with the Act
and applicable state securities laws or unless, in the opinion of counsel for
the Holder acceptable to the Company, an exemption from the registration
requirements of the Securities Act and such state laws is available.
2.4 Conditions to Transfer. Prior to any such proposed
transfer, and as a condition thereto, if such transfer is not made pursuant to
an effective registration statement under the Securities Act, the Holder will,
if requested by the Company, deliver to the Company (i) an investment covenant
signed by the proposed transferee, (ii) an agreement by such transferee that the
restrictive investment legend set forth above be placed on the certificate or
certificates representing the securities acquired by such transferee, (iii) an
agreement by such transferee that the Company may place a "stop transfer order"
with its transfer agent or registrar, and (iv) an agreement by the transferee to
indemnify the Company to the same extent as set forth in the next succeeding
paragraph.
-4-
2.5 Indemnity. The Holder acknowledges the Holder
understands the meaning and legal consequences of this Section, and the Holder
hereby agrees to indemnify and hold harmless the Company, its representatives
and each officer, director, agent, and legal counsel thereof from and against
any and all loss, damage or liability (including all attorneys' fees and costs
incurred in enforcing this indemnity provision) due to or arising out of (a) the
inaccuracy of any representation or the breach of any warranty of the Holder
contained in, or any other breach of, this Warrant, (b) any transfer of any of
this Warrant or the Warrant Shares in violation of the Securities Act of 1933,
the Securities Exchange Act of 1934, as amended, or the rules and regulations
promulgated under either of such acts, (c) any transfer of this Warrant or any
of the Warrant Shares not in accordance with this Warrant or (d) any untrue
statement or omission to state any material fact in connection with the
investment representations or with respect to the facts and representations
supplied by the Holder to counsel to the Company upon which its opinion as to a
proposed transfer shall have been based.
2.6 Holdback Period and Transfer. Except as specifically
restricted hereby, this Warrant and the Warrant Shares issued may be transferred
by the Holder in whole or in part at any time or from time to time. Upon
surrender of this Warrant certificate to the Company or at the office of its
stock transfer agent, if any, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay any transfer tax, and upon compliance with
the foregoing provisions, the Company shall, without charge, execute and deliver
a new Warrant certificate in the name of the assignee named in such instrument
of assignment, and this Warrant certificate shall promptly be canceled. Any
assignment, transfer, pledge, hypothecation or other disposition of this Warrant
attempted contrary to the provisions of this Warrant, or any levy of execution,
attachment or other process attempted upon this Warrant, shall be null and void
and without effect.
3. Rights of the Holder. The Holder shall not, by virtue hereof,
be entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant.
4. Anti-Dilution Provisions.
4.1 Stock Splits, Dividends, Etc.
4.1.1 If the Company shall at any time after the
date hereof subdivide its outstanding shares of Common Stock (or other
securities at the time receivable upon the exercise of the Warrant) by
recapitalization, reclassification or split-up thereof, or if the Company shall
declare a stock dividend or distribute shares of Common Stock to its
stockholders, the number of shares of Common Stock subject to this Warrant
immediately prior to such subdivision shall be proportionately increased, and if
the Company shall at any time combine the outstanding shares of Common Stock by
recapitalization, reclassification or combination thereof, the number of shares
of Common Stock subject to this Warrant immediately prior to such combination
shall be proportionately decreased. Any such adjustment to the Strike Price
pursuant to this Section shall be effective at the close of business on the
effective date of such subdivision or combination or if any adjustment is the
result of a stock dividend or distribution then the effective date for such
adjustment based thereon shall be the record date therefor.
-5-
4.1.2 Whenever the number of shares of Common
Stock purchasable upon the exercise of this Warrant is adjusted, as provided in
this Section, the Strike Price shall be adjusted to the nearest cent by
multiplying such Strike Price immediately prior to such adjustment by a fraction
(x) the numerator of which shall be the number of shares of Common Stock
purchasable upon the exercise immediately prior to such adjustment, and (y) the
denominator of which shall be the number of shares of Common Stock so
purchasable immediately thereafter.
4.2 Adjustment for Reorganization, Consolidation, Merger,
Etc. In case of any reorganization of the Company (or any other corporation, the
securities of which are at the time receivable on the exercise of this Warrant)
after the date hereof, or in case after such date the Company (or any such other
corporation) shall consolidate with or merge into another corporation or convey
all or substantially all of its assets to another corporation, then, and in each
such case, the Holder of this Warrant upon the exercise as provided in Section 1
above at any time after the consummation of such reorganization, consolidation,
merger or conveyance, shall be entitled to receive, in lieu of the securities
and property receivable upon the exercise of this Warrant prior to such
consummation, the securities or property to which such Holder would have been
entitled upon such consummation if such Holder had exercised this Warrant
immediately prior thereto; in each such case, the terms of this Warrant shall be
applicable to the securities or property received upon the exercise of this
Warrant after such consummation.
4.3 Certificate as to Adjustments. In each case of an
adjustment in the number of shares of Common Stock receivable on the exercise of
this Warrant, the Company at its expense shall promptly compute such adjustment
in accordance with the terms of the Warrant and prepare a certificate executed
by an officer of the Company setting forth such adjustment and showing the facts
upon which such adjustment is based. The Company shall forthwith mail a copy of
each such certificate to each Holder.
4.4 Notices of Record Date, Etc. In case:
4.4.1 the Company shall take a record of the
holders of its Common Stock (or other securities at the time receivable upon the
exercise of the Warrant) for the purpose of entitling them to receive any
dividend (other than a cash dividend at the same rate as the rate of the last
cash dividend theretofore paid) or other distribution, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities, or to receive any other right; or
4.4.2 of any voluntary or involuntary dissolution,
liquidation or winding-up of the Company, then, and in each such case, the
Company shall mail or cause to be mailed to each Holder a notice specifying, as
the case may be, (A) the date on which a record is to be taken for the purpose
of such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, or (B) the date on which such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up is to take place, and the time, if any,
to be fixed, as to which the holders of record of Common Stock (or such other
securities at the time receivable upon the exercise of this Warrant) shall be
entitled to exchange their shares of Common Stock (or such other securities) for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
-6-
winding-up. Such notice shall be mailed at least twenty (20) days prior to the
date therein specified, and this Warrant may be exercised prior to said date
during the term of the Warrant.
4.5 Threshold for Adjustments. Anything in this Section
to the contrary notwithstanding, the Company shall not be required to give
effect to any adjustment until the cumulative resulting adjustment in the Strike
Price pursuant to this Section shall have required a change of the Strike Price
by at least $0.10. No adjustment shall be made by reason of the issuance of
shares upon conversion rights, stock issuance rights or similar rights currently
outstanding or any change in the number of treasury shares held by the Company.
5. Legend and Stop Transfer Orders. Unless the Warrant Shares
have been registered under the Securities Act, upon exercise of any of this
Warrant and the issuance of any of the Warrant Shares, the Company shall
instruct its transfer agent, if any, to enter stop transfer orders with respect
to such shares, and all certificates representing shares of Warrant Shares shall
bear on the face thereof substantially the following legend:
This certificate has not been registered under the
Securities Act of 1933. The Company will not
transfer this certificate unless (i) there is an
effective registration covering the shares
represented by this certificate under the Securities
Act of 1933 and all applicable state securities
laws, (ii) it first receives a letter from an
attorney, acceptable to the board of directors or
its agents, stating that in the opinion of the
attorney the proposed transfer is exempt from
registration under the Securities Act of 1933 and
under all applicable state securities laws, (iii)
the transfer is made pursuant to Rule 144 under the
Securities Act of 1933.
6. Officer's Certificate. Whenever the number or kind of
securities purchasable upon exercise of this Warrant or the Strike Price shall
be adjusted as required by the provisions hereof, the Company shall forthwith
file with its Secretary or Assistant Secretary at its principal office and with
its stock transfer agent, if any, an officer's certificate showing the adjusted
number of kind of securities purchasable upon exercise of this Warrant and the
adjusted Strike Price determined as herein provided and setting forth in
reasonable detail such facts as shall be necessary to show the reason for and
the manner of computing such adjustments. Each such officer's certificate shall
be made available at all reasonable times for inspection by the Holder and the
Company shall, forthwith after each such adjustment, mail by certified mail a
copy of such certificate to the Holder.
7. Transfer of Warrant. Subject to Section 3 hereof, this Warrant
and all rights hereunder are transferable in whole (or in part), at the agency
of office of the Company referred to in Section 1 hereof by the Holder hereof in
person or by duly authorized attorney, upon surrender of this Warrant properly
endorsed. Each taker and Holder of this Warrant, by taking or holding the same,
consents and agrees that this Warrant, when endorsed, in blank, shall be deemed
negotiable, and, when so endorsed the Holder hereof may be treated by the
Company and all other persons dealing with this Warrant as the absolute owner
hereof for all purposes and as the person entitled to exercise the rights
-7-
represented by this Warrant, or to the transfer hereof on the books of the
Company, any notice to the contrary notwithstanding; but until each transfer on
such books, the Company may treat the registered Holder hereof as the owner
hereof for all purposes.
8. Elimination of Fractional Interests. The Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, nor shall it be required to issue script or pay cash in lieu of
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated.
9. Exchange of Warrant. Subject to the limitations set forth
herein this Warrant is exchangeable, upon the surrender hereof by the Holder
hereof at the office or agency of the Company designated in Section 1 hereof,
for a new Warrant of like tenor representing the right to subscribe for and
purchase the number of Warrant Shares which may be subscribed for and purchased
hereunder.
10. Notices to Warrant Holders. Nothing contained in this Warrant
shall be construed as conferring upon the Holder hereof the right to vote or to
consent to or receive notice as a shareholder in respect of any meetings of
shareholders for the election of Directors or any other matter, or as having any
rights whatsoever as a shareholder of the Company. If, however, at any time
prior to the expiration of the Warrant and prior to its exercise, any of the
following events shall occur:
10.1 The Company shall offer to all of the holders of its
Common Stock any additional shares of stock of the Company or securities
convertible into or exchangeable for shares of stock of the Company, or any
option, right or warrant to subscribe therefor; or
10.2 A dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or merger) or a sale of
all or substantially all of its property, assets and business as an entirety
(whether by merger, consolidation or sale of assets) shall be proposed; then, in
any one or more of said events, the Company shall give written notice of such
events at least fifteen (15) days prior to the date fixed as a record date or
the date of closing the transfer books for the determination of the shareholders
entitled to such convertible or exchangeable securities or subscription rights,
or entitled to vote on such proposed dissolution, liquidation, winding up or
sale. Such notice shall specify such record date or the date of closing the
transfer books, as the case may be. Failure to give such notice or any defect
therein shall not affect the validity of any action taken in connection with the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
11. Lost, Stolen, Mutilated or Destroyed Warrant. Upon surrender
by the Holder of this Warrant to the Company, the Company at its expense will
issue in exchange therefor, and deliver to such Holder, a new Warrant. Upon
receipt of evidence satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant, and in the case of any such loss, theft or
destruction, upon delivery by such Holder of an indemnity agreement or security
satisfactory to the Company, and in case of any such mutilation, upon surrender
and cancellation of this Warrant, the Company, upon reimbursement of all
reasonable expenses incident thereto, will issue and deliver to such Holder a
-8-
new Warrant of like tenor, in lieu of such lost, stolen, destroyed or mutilated
Warrant. Any Warrant delivered to such Holder in accordance with this Section 11
shall bear the same securities legends as the Warrant which it replaced.
12. Governing Law. This Warrant shall be governed by, and
construed in accordance with, the laws of the State of New Jersey applicable to
contracts made therein.
13. Notices. Any communications between the parties or notices
provided for in this Agreement may be given by mailing them, first class,
postage prepaid, to Holder at:
The Xxxxxx Family Partnership
Address:___________________________
___________________________________
and to the Company at:
Gender Sciences, Inc.
00 Xxxx Xxxxxx Xxxxxx
Xxxxxxxxx, Xxx Xxxxxx 00000
Attn: Xxxxxx Xxxxx
With a copy to:
Xxxxx & Xxxxxxx
000 Xxxx Xxxxxxxx, 00xx Xxxxx
Xxx Xxxxx, Xxxxxxxxxx 00000
Attn: Xxxxxxx X. Xxxxx
or to such other address as either party may indicate to the other in writing
after the date of this Agreement.
14. Successors. All the covenants, agreements, representations and
warranties contained in this Warrant shall bind the parties hereto and their
respective heirs, executors, administrators, distributees, successors and
assigns.
15. Headings. The Article and Section headings in this Warrant are
inserted for purposes of convenience only and shall have no substantive effect.
[Remainder of Page Intentionally Left Blank]
-9-
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by a duly authorized officer under its corporate seal and to be dated as of the
date first above written.
"Company" Gender Sciences, Inc., a New Jersey corporation
/s/ XXXXXX XXXXX
------------------------------------
Xxxxxx Xxxxx, Chairman
"Holder" The Xxxxxx Family Partnership
/s/ XXXXXXX XXXXXX
------------------------------------
Xxxxxxx Xxxxxx, Partner
[Signature Page to Warrant]
-10-
FORM OF ASSIGNMENT
------------------
[To be signed only upon transfer of the Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto _____________________________, all of the rights represented by the within
Warrant to purchase _____________shares of Common Stock of Gender Sciences, Inc.
to which the within Warrant relates, and appoints Xxxxxxx X. Xxxxx as the
attorney to transfer such rights on the books of Gender Sciences, Inc. with full
power of substitution in the premises.
Dated
----------------------- -----------------------------------
(Signature)
-----------------------------------
-----------------------------------
(Address)
Notarization Required:
FORM OF EXERCISE
----------------
[To be signed only upon exercise of the Warrant]
THE UNDERSIGNED, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________ shares of Common Stock of Gender Sciences, Inc.
and herewith tenders payment of $______________ in full payment of the exercise
price for such shares, and requests that the certificates for such shares be
issued in the name of, and delivered to, _________________________ whose address
is________________________________________________
Dated:
----------------------- -----------------------------------
(Signature)
-----------------------------------
-----------------------------------
(Address)
EXHIBIT C
---------
Definition of "accredited investor"
Individuals:
* An individual who, together with your spouse, has a net worth
in excess of $1,000,000 (including home, furnishings and
automobiles).
* An individual who had gross income in excess of $200,000, or
joint income with spouse in excess of $300,000, for each of
the last two years and reasonably expects to have gross income
of $200,000, or joint income in excess of $300,000, for the
current year.
* A director or executive officer of the Company
Entities:
* A bank as defined in Section 3(a)(2) of the Securities Act of
1933 (the "Act"), or any savings and loan association defined
in Section 3(a)(5)(A) of the Act, whether acting in its
individual or fiduciary capacity; any broker-dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934;
insurance company as defined in Section 2(13) of the Act;
investment company registered under the Investment Company Act
of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; Small Business Investment
Company licensed by the U.S. Small Business Administration
under Section 301(c) or (d) of the Small Business Investment
Act of 1958.
* An employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act, if investment
decisions are made by a plan fiduciary, as defined in Section
3(21) of that act, which is either a bank, savings and loan
association, insurance company, or registered investment
advisor, or if the employee benefit plan has total assets in
excess of $5,000,000.
* A self-directed employee benefit plan within the meaning of
Title I of the Employee Retirement Income Security Act of
1974, whose investment decisions are made solely by accredited
investors.
* Any private business development company as defined in Section
202(a)(22) of the Investment Advisors Act of 1940.
* Any organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar
business trust, or partnership, not formed for the specific
purpose of making this investment, with total assets in excess
of $5,000,000.
* Any trust with total assets in excess of $5,000,000 not formed
for the specific purpose of acquiring securities offered by
the Company, if the investment is directed by a person who has
such knowledge and experience in financial and business
matters that he or she is capable of evaluating the merits and
risks of the proposed investment.
* Any entity in which all of the equity owners individually
qualify as accredited investors.
C-1
EXHIBIT "D"
-----------
RISK FACTORS
An investment in the Company is highly speculative and subject to a high degree
of risk. Only those investors who can bear the risk of the entire loss of their
investment should participate. You should carefully consider the risks described
below, in addition to the other information in these materials, before making an
investment in the securities. The risks and uncertainties described below are
not the only ones facing the Company. Additional risks and uncertainties not
presently known to the Company or that it currently considers immaterial may
also impair its operations. If any of the following risks actually occur, the
Company's business, financial condition or results of operations could be
materially adversely affected. In that case, the value of your investment could
decline, and you may lose all or part of your investment.
1. RISKS RELATED TO THE COMPANY'S BUSINESS AND FINANCIAL CONDITION
1.1 Need for Additional Financing
The Company will need to raise additional capital to continue its
activities and operations (the "Additional Financing"). The failure to obtain
Additional Financing will seriously jeopardize the Company's ability to continue
as a going concern. Accordingly, the Company will require Additional Financing
for its operations and there can be no assurance that the Company will be able
to acquire Additional Financing on favorable terms, or at all. The Company may
seek Additional Financing through public or additional private debt or equity
offerings. Providers of Additional Financing may require repayment, interest,
fees or other payments from revenues derived from the Company's products and
services distribution and other exploitation which may significantly reduce
revenues and/or profits generated by the Company. In addition, Additional
Financing may be senior to the Convertible Promissory Notes (the "Convertible
Notes") offered by the Company. There are no guarantees that attempts to secure
any such Additional Financing will be successful. Other financing needs may also
arise and no assurance can be given that the Company will be able to meet such
needs as they arise.
If adequate funds are not available or are not available on acceptable
terms, the Company might not be able to take advantage of unanticipated
opportunities, develop new products or services or otherwise respond to
unanticipated competitive pressures.
1.2 Significant Amount of Revenues Generated From Single
Customer.
For the fiscal year ended January 31, 2002, one customer accounted for
approximately 32% of the Company's total revenues. The Company does not have a
contract with this customer and, as a result, there is no assurance that this
customer will continue to order products from the Company or will continue to
order the products in the same amount. The loss of this customer would have a
material effect upon the operation of the Company.
D-1
1.3 The Company has recently instituted its new business
strategy. Its business must expand for it to attain profitability.
The Company has only recently commenced the implementation of its new
business strategy. The Company may not successfully complete the transition to
successful operations or profitability pursuant to its new strategy. The Company
may encounter problems, delays and expenses in implementing its new business
strategy. These may include, but not be limited to, unanticipated problems and
13 additional costs related to marketing, competition and product acquisitions
and development. These problems may be beyond the Company's control, and in any
event, could adversely affect the Company's results of operations.
1.4 If the Company Does Not Successfully Manage Any Growth It
Experiences, it May Experience Increased Expenses without Corresponding Revenue
Increases.
The Company's business plan will, if implemented, result in expansion
of its operations. This expansion may place a significant strain on management,
financial and other resources. It also will require the Company to increase
expenditures before it generates corresponding revenues. The Company's ability
to manage future growth, should it occur, will depend upon its ability to
identify, attract, motivate, train and retain highly skilled managerial,
financial, business development, sales and marketing and other personnel.
Competition for these employees is intense. Moreover, the addition of products
or businesses will require the Company's management to integrate and manage new
operations and an increasing number of employees. The Company may not be able to
implement successfully and maintain its operational and financial systems or
otherwise adapt to growth. Any failure to manage growth, if attained, would have
a material adverse effect on the Company's business. The Company, due to its
limited capital presently has only three full time employees which creates an
additional risk that the Company may not be successful in implementing its
strategy.
1.5 The Company is Dependent an a Limited Number of Sources of
Supply for Many of the Products it Offers. If One of its Suppliers Fails to
Supply Adequate Amounts of a Product the Company Offers, the Company's Sales May
Suffer and it Could Be Required to Abandon a Product Line.
The Company is dependent on a limited number of sources of supply for
many of the products it offers. With respect to these products, the Company
cannot guarantee that these third parties will be able to provide adequate
supplies of products in a timely fashion. The Company also faces the risk that
one of its suppliers could become insolvent, declare bankruptcy, lose its
production facilities in a disaster, be unable to comply with applicable
government regulations or lose the governmental permits necessary to manufacture
the products it supplies to the Company. If the Company is unable to renew or
extend an agreement with a third-party supplier, if an existing agreement is
terminated or if a third-party supplier otherwise cannot meet the Company's need
for a product, the Company may not be able to obtain an alternative source of
D-2
supply in a timely manner or at all. In these circumstances, the Company may be
unable to continue to market products as planned and could be required to
abandon or divest itself of a product line on terms which would materially
affect it.
1.6 The Company May Be Exposed To Product Liability Claims Not
Covered By Insurance That Would Harm its Business.
The Company may be exposed to product liability claims. Although the
Company believes that it currently carries and intends to maintain a
comprehensive multi peril liability package, the Company cannot guarantee that
this insurance will be sufficient to cover all possible liabilities. A
successful suit against the Company could have an adverse effect on its business
and financial condition if the amounts involved are material.
1.7 The Company is Uncertain of its Ability to Obtain
Additional Financing for its Future Capital Needs. If the Company is Unable to
Obtain Additional Financing, it May Not Be Able to Continue to Operate its
Business.
The Company will require significant amounts of additional capital to
achieve its stated goals. The Company believes that the net proceeds from the
Company's recent private offering of common stock will not be sufficient to
completely implement its strategy in calendar year 2002. The Company's future
capital requirements will depend on many factors including: (i) the costs of its
sales and marketing activities and its education programs for its markets, o
competing product and market developments, (ii) the costs of acquiring or
developing new products,(iii) the costs of expanding its operations, and (iv)
its ability to generate positive cash flow from its sales.
Additional funding may not be available on acceptable terms, if at all.
If adequate funds are not available, the Company may be required to curtail
significantly or defer one or more of its marketing programs or to limit or
postpone obtaining new products through license, acquisition or other
agreements. If the Company raises additional funds through the issuance of
equity securities, the percentage ownership of its then-current stockholders may
be reduced and such equity securities may have rights, preferences or privileges
senior to those of the holders of its common stock. If the Company raises
additional funds through the issuance of additional debt securities, these new
securities would have certain rights, preferences and privileges senior to those
of the holders of its common stock, and the terms of these debt securities could
impose restrictions on its operations.
1.8 Going Concern Qualification Contained In Report of
Independent Auditors.
The Company has received from its auditors a report that raises
substantial doubt about its ability to continue as a going concern. If the
Company fails to raise additional funds or its new operating plan is not
successful, an investor in the Company could lose his entire investment.
D-3
1.9 The Company's Inability to Obtain New Proprietary Rights
or to Protect and Retain its Existing Rights Could Impair its Competitive
Position and Adversely Affect its Sales.
The Company believes that the trademarks, copyrights and other
proprietary rights that it owns or licenses, or that it will own or license in
the future, will continue to be important to its success and competitive
position. If the Company fails to maintain its existing rights or cannot acquire
additional rights in the future, its competitive position may be harmed. While
some products we offer incorporate patented technology, most of the products we
sell are not protected by patents. The Company intends to take the actions that
it believes are necessary to protect its proprietary rights, but it may not be
successful in doing so on commercially reasonable terms, if at all. In addition,
parties that license their proprietary rights to the Company may face challenges
to their patents and other proprietary rights and may not prevail in any
litigation regarding those rights. Moreover, the Company's trademarks and the
products it offers may conflict with or infringe upon the proprietary rights of
third parties. If any such conflicts or infringements should arise, the Company
would have to defend itself against such challenges. The Company also may have
to obtain a license to use those proprietary rights or possibly cease using
those rights altogether. Any of these events could harm the Company's business.
1.10 If the Marketing Companies Do Not Successfully Sell the
Products the Company Offers, the Company May Experience Significant Losses.
The products the Company offers may not achieve market acceptance. The
market acceptance of these products will depend on, among other factors, their
advantages over existing competing products, and their perceived efficacy and
safety. The Company's business model assumes that the marketing programs
instituted by the marketing companies with which it has alliances will result in
increased demand for the products it offers. If the marketing programs do not
succeed in generating a substantial increase in demand for its products, the
Company will be unable to realize its operating objectives. In addition, the
Company's business model seeks to build on the expanding roles of marketing
partners, and its marketing efforts are concentrated on these groups. If these
distribution companies do not successfully sell the products the Company offers
or if their customers do not regularly use these products, the Company may
experience significant losses and its business will be adversely affected.
1.11 The Health Care Industry and The Markets for the Products
the Company Offers are Very Competitive. The Company May Not Be Able to Compete
Effectively, Especially Against Established Industry Competitors with
Significantly Greater Financial Resources.
The health care industry is highly competitive. Many of the Company's
competitors are large well-known health care companies that have considerably
greater financial, sales, marketing and technical resources than the Company.
Additionally, these competitors have research and development capabilities that
may allow them to develop new or improved products that may compete with product
lines the Company markets and distributes. In addition, competitors may elect to
D-4
devote substantial resources to marketing their products to similar outlets and
may choose to develop educational and information programs like those developed
by the Company to support their marketing efforts. The Company's business,
financial condition and results of operations could be materially and adversely
affected by any one or more of such developments. Competition for the self-care
products the Company offers is significant. These products compete against a
number of well-known brands of similar products. The Company's failure to
adequately respond to the competitive challenges faced by the products it offers
could have a material adverse effect on its business, financial condition and
results of operations.
1.12 The Company's Quarterly Financial Results are Likely to
Fluctuate Significantly and May Fail to Meet or Exceed the Expectations of
Securities Analysts or Investors, which Could Cause the Price of the Company's
Stock to Decline Significantly.
The Company's quarterly operating results may fluctuate significantly
based on factors such as: (i) changes in the acceptance or availability of the
products it offers, (ii) the timing of new product offerings, acquisitions or
other significant events by the Company or its competitors, (iii) regulatory
approvals and legislative changes affecting the products it offers or those of
its competitors, (iv) the timing of expenditures for the expansion of its
operations, and (v) general economic and market conditions and conditions
specific to the health care industry. Due to the Company's short operating
history pursuant to its new business strategy and the difficulty of predicting
demand for the products it offers, the Company is unable to accurately forecast
its revenues. Accordingly, the Company's operating results in one or more future
quarters may fail to meet the expectations of securities analysts or investors,
which could have a material adverse effect on the Company's stock price.
1.13 The Public Market for the Company's Common Stock may be
Volatile, and the Price of the Common Stock may Fluctuate for Reasons Unrelated
to the Company's Operating Performance. A Significant Decline in the Price of
the Common Stock could Lead to a Class Action Lawsuit Against the Company.
There has been a very limited public market for the Company's common
stock, and the Company does not know whether investor interest in the Company
will lead to the development of a more active trading market. The market prices
and trading volumes for securities of emerging companies, such as the Company,
historically have been highly volatile and have experienced significant
fluctuations both related and unrelated to the operating performance of those
companies. The price of the Company's common stock may fluctuate widely,
depending on many factors, including factors that may cause the Company's
quarterly operating results to fluctuate as well as market expectations and
other factors beyond the Company's control.
2. RISKS RELATED TO THIS FINANCING
2.1 No rights as stockholders.
D-5
Holders of Convertible Notes will not be entitled to vote, receive
dividends or exercise any of the rights of the Company's stockholders for any
purpose prior to conversion of the Convertible Notes. Thus, actions that
adversely affect the holders of Convertible Notes may be taken without the
approval of such holders.
2.2 The Convertible Notes are unsecured obligations of the
Company.
The Convertible Notes will be general unsecured obligations, junior in
right of payment to all of the Company's existing and future senior debt. The
Convertible Notes will not be secured by any of the Company's assets, and as
such will be effectively subordinated to any existing and future secured debt of
the Company.
2.3 Broad Discretion of Use of Proceeds.
Although the Company's management anticipates utilizing the proceeds of
this financing to provide the Company with working capital and for general
corporate purposes, the Company and its management will retain broad discretion
to allocate the proceeds of this financing as well as the timing of its
expenditures. Lenders will not have the opportunity to evaluate the economic,
financial or other information that the Company and its affiliates may use to
determine how it uses these proceeds. Management's failure to apply these funds
effectively could have a material adverse effect on the Company's business,
financial condition, and results of operations.
2.4 This is a best efforts Financing.
The Convertible Notes are being offered on a "best efforts" basis.
Thus, there can be no assurance that all of the offered Convertible Notes will
be sold. Lenders bear the risk that the Company will accept subscriptions for
less than the maximum amount of the financing and then be unable to successfully
complete all of the anticipated uses of the proceeds of the financing. If less
than the maximum amount of the financing is sold, the Company's business,
financial condition and results of operations could be adversely affected.
D-6
EXHIBIT "E"
-----------
Fully Diluted Capitalization
----------------------------
------------------------------------------------------------------------------------------------------------
Pre-Financing Post-Financing
------------------------------------------------------------------------------------------------------------
Number of Shares % Number of Shares %
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Common Stock and Equivalents(1) 39,109,680 62.2% 44,009,680(2) 48.5%
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Warrants and Options 23,807,750 37.8% 23,807,750 26.2%
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Convertible Note Shares(3) N/A 9,000,000 10.0%
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Convertible Note Warrants(4) N/A 13,900,000(5) 15.3%
------------------------------------------------------------------------------------------------------------
============================================================================================================
TOTAL 62,917,430 100% 90,717,430 100%
------------------------------------------------------------------------------------------------------------
----------------------
(1) Excludes Common Stock issued pursuant to conversion of the
Convertible Notes and warrants issued in connection therewith.
(2) Includes the 4,900,000 shares issued in connection with the
conversion of the UVCA loan as described in Section 6.6.1 above.
(3) Assumes a $0.05 price per share for the Convertible Notes on an as
converted basis.
(4) Assumes a $0.05 exercise price for the warrants on an as converted
basis.
(5) Includes the 4,900,000 warrants issued pursuant to the conversion
of the UVCA loan as more specifically described in Section 6.6.1 above.
E-1
