SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of January 28,
2005, by and among Wizzard Software Corp., a Colorado corporation (the
"Company"), and the subscribers identified on the signature page hereto (each
a "Subscriber" and collectively "Subscribers").
WHEREAS, the Company and the Subscribers are executing and delivering
this Agreement in reliance upon an exemption from securities registration
afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D
("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "1933 Act").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers, in the aggregate, shall
purchase up to One Million Four Hundred Thousand Dollars ($1,400,000) (the
"Purchase Price") of principal amount of promissory notes of the Company
("Note" or "Notes") convertible into shares of the Company's common stock,
$0.001 par value (the "Common Stock") at a per share conversion price equal to
$1.50, and share purchase warrants (the "Warrants") in the form attached
hereto as Exhibit A1 and Exhibit A2, to purchase shares of Common Stock (the
"Warrant Shares"). The Notes, shares of Common Stock issuable upon
conversion of the Notes (the "Shares"), the Warrants and the Warrant Shares
are collectively referred to herein as the "Securities"; and
WHEREAS, the aggregate proceeds of the sale of the Notes and the Warrants
contemplated hereby shall be held in escrow pursuant to the terms of a Funds
Escrow Agreement to be executed by the parties substantially in the form
attached hereto as Exhibit B (the "Escrow Agreement").
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement the Company and the Subscribers hereby
agree as follows:
1. Closing. Subject to the satisfaction or waiver of the terms and
conditions of this Agreement, on the "Closing Date" (as defined in Section
13(b) hereof), each Subscriber shall purchase and the Company shall sell to
each Subscriber a Note in the principal amount designated on the signature
page hereto and the amount of Warrants determined pursuant to Section 3 below.
The aggregate principal amount of the Notes to be purchased by the Subscribers
on the Closing Date shall, in the aggregate, be equal to the Purchase Price.
2. Class A Warrants. On the Closing Date, the Company will issue and
deliver Class A Warrants to the Subscribers. Fifty (50) Class A Warrants will
be issued for each one hundred (100) Shares which would be issued on the
Closing Date assuming the complete conversion of the Notes issued on the
Closing Date at the Conversion Price in effect on the Closing Date. The per
Warrant Share exercise price to acquire a Warrant Share upon exercise of a
Class A Warrant shall be $2.50. The Class A Warrants shall be exercisable
until three (3) years after the Closing Date. The Class A Warrants shall have
a cashless feature.
3. Class B Warrants. On the Closing Date, the Company will issue and
deliver Class B Warrants to the Subscribers. One Hundred (100) Class B
Warrants will be issued for each one hundred (100) Shares which would be
issued on the Closing Date assuming the complete conversion of the Notes
issued on the Closing Date at the Conversion Price in effect on the Closing
Date. The per Warrant Share exercise price to acquire a Warrant Share upon
exercise of a Class B Warrant shall be $1.50. The Class B Warrants shall be
exercisable from the Closing Date until the Registration Statement described
in Section 11.1(iv) of this Agreement has been effective for the public,
unrestricted and registered resale of the Warrant Shares for one hundred and
fifty (150) days. The Class B Warrants shall have a cashless feature.
Collectively, the Class A and Class B Warrants are referred to herein as
"Warrants".
4. Subscriber's Representations and Warranties. Each Subscriber
hereby represents and warrants to and agrees with the Company only as to such
Subscriber that:
(a) Organization and Standing of the Subscribers. If the
Subscriber is an entity, such Subscriber is a corporation, partnership or
other entity duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization.
(b) Authorization and Power. Each Subscriber has the requisite
power and authority to enter into and perform this Agreement and to purchase
the Notes and Warrants being sold to it hereunder. The execution, delivery
and performance of this Agreement by such Subscriber and the consummation by
it of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Subscriber or its Board of Directors,
stockholders, partners, members, as the case may be, is required. This
Agreement has been duly authorized, executed and delivered by such Subscriber
and constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Subscriber enforceable against the Subscriber in
accordance with the terms thereof.
(c) No Conflicts. The execution, delivery and performance of this
Agreement and the consummation by such Subscriber of the transactions
contemplated hereby or relating hereto do not and will not (i) result in a
violation of such Subscriber's charter documents or bylaws or other
organizational documents or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of any agreement, indenture or instrument or obligation to which
such Subscriber is a party or by which its properties or assets are bound, or
result in a violation of any law, rule, or regulation, or any order, judgment
or decree of any court or governmental agency applicable to such Subscriber or
its properties (except for such conflicts, defaults and violations as would
not, individually or in the aggregate, have a material adverse effect on such
Subscriber). Such Subscriber is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency in order for it to execute, deliver or perform any of
its obligations under this Agreement or to purchase the Notes or acquire the
Warrants in accordance with the terms hereof, provided that for purposes of
the representation made in this sentence, such Subscriber is assuming and
relying upon the accuracy of the relevant representations and agreements of
the Company herein.
(d) Information on Company. The Subscriber has been furnished
with or has had access at the EDGAR Website of the Commission to the Company's
Form 10-KSB for the year ended December 31, 2003 as filed with the Commission,
together with all subsequently filed Forms 10-QSB, 8-K, and filings made with
the Commission available at the EDGAR website (hereinafter referred to
collectively as the "Reports"). In addition, the Subscriber has received in
writing from the Company such other information concerning its operations,
financial condition and other matters as the Subscriber has requested in
writing (such other information is collectively, the "Other Written
Information"), and considered all factors the Subscriber deems material in
deciding on the advisability of investing in the Securities.
(e) Information on Subscriber. The Subscriber is, and will be at
the time of the conversion of the Notes and exercise of the Warrants, an
"accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the 1933 Act, is experienced in investments and business
matters, has made investments of a speculative nature and has purchased
securities of United States publicly-owned companies in private placements in
the past and, with its representatives, has such knowledge and experience in
financial, tax and other business matters as to enable the Subscriber to
utilize the information made available by the Company to evaluate the merits
and risks of and to make an informed investment decision with respect to the
proposed purchase, which represents a speculative investment. The Subscriber
has the authority and is duly and legally qualified to purchase and own the
Securities. The Subscriber is able to bear the risk of such investment for an
indefinite period and to afford a complete loss thereof. The information set
forth on the signature page hereto regarding the Subscriber is accurate. The
Subscriber is not required to be registered as a broker-dealer under Section
15 of the Securities Exchange Act of 1934, as amended (the "1934 Act") and the
Subscriber is not a broker-dealer.
(f) Purchase of Notes and Warrants. On the Closing Date, the
Subscriber will purchase the Notes and Warrants as principal for its own
account for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof.
(g) Compliance with Securities Act. The Subscriber understands and
agrees that the Securities have not been registered under the 1933 Act or any
applicable state securities laws, by reason of their issuance in a transaction
that does not require registration under the 1933 Act (based in part on the
accuracy of the representations and warranties of Subscriber contained
herein), and that such Securities must be held indefinitely unless a
subsequent disposition is registered under the 1933 Act or any applicable
state securities laws or is exempt from such registration. In any event, and
subject to compliance with applicable securities laws, the Subscriber may
enter into lawful hedging transactions with third parties, which may in turn
engage in short sales of the Securities in the course of hedging the position
they assume and the Subscriber may also enter into short positions or other
derivative transactions relating to the Securities, or interests in the
Securities, and deliver the Securities, or interests in the Securities, to
close out their short or other positions or otherwise settle short sales or
other transactions, or loan or pledge the Securities, or interests in the
Securities, to third parties that in turn may dispose of these Securities.
Resales of the Securities by the Subscriber will be made in compliance with
all applicable securities laws including Regulation M of the Securities
Exchange Act and prospectus delivery requirements.
(h) Shares Legend. The Shares and the Warrant Shares shall bear
the following or similar legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES
ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO WIZZARD
SOFTWARE CORP. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(i) Warrants Legend. The Warrants shall bear the following
or similar legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO WIZZARD
SOFTWARE CORP. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(j) Note Legend. The Note shall bear the following legend:
"THIS NOTE AND THE COMMON SHARES ISSUABLE UPON
CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND
THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS
NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
WIZZARD SOFTWARE CORP. THAT SUCH REGISTRATION IS NOT
REQUIRED."
(k) Communication of Offer. The offer to sell the Securities was
directly communicated to the Subscriber by the Company. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
(l) Authority; Enforceability. This Agreement and other agreements
delivered together with this Agreement or in connection herewith have been
duly authorized, executed and delivered by the Subscriber and are valid and
binding agreements enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights generally and to general principles of equity; and Subscriber has full
corporate power and authority necessary to enter into this Agreement and such
other agreements and to perform its obligations hereunder and under all other
agreements entered into by the Subscriber relating hereto.
(m) Restricted Securities. Subscriber understands that the
Securities have not been registered under the 1933 Act and such Subscriber
will not sell, offer to sell, assign, pledge, hypothecate or otherwise
transfer any of the Securities unless pursuant to an effective registration
statement under the 1933 Act. Notwithstanding anything to the contrary
contained in this Agreement, such Subscriber may transfer (without restriction
and without the need for an opinion of counsel) the Securities to its
Affiliates (as defined below) provided that each such Affiliate is an
"accredited investor" under Regulation D and such Affiliate agrees to be bound
by the terms and conditions of this Agreement. For the purposes of this
Agreement, an "Affiliate" of any person or entity means any other person or
entity directly or indirectly controlling, controlled by or under direct or
indirect common control with such person or entity. Affiliate includes each
subsidiary of the Company. For purposes of this definition, "control" means
the power to direct the management and policies of such person or firm,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise.
(n) No Governmental Review. Each Subscriber understands that no
United States federal or state agency or any other governmental or state
agency has passed on or made recommendations or endorsement of the Securities
or the suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
(m) No Market Manipulation. No Subscriber has taken, and will not
take, directly or indirectly, any action designed to, or that might reasonably
be expected to, cause or result in stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Securities or
affect the price at which the Securities may be issued or resold.
(n) Correctness of Representations. Each Subscriber represents as
to such Subscriber that the foregoing representations and warranties are true
and correct as of the date hereof and, unless a Subscriber otherwise notifies
the Company prior to each Closing Date shall be true and correct as of each
Closing Date.
(o) Survival. The foregoing representations and warranties shall
survive the Closing Date for a period of three years.
5. Company Representations and Warranties. The Company represents
and warrants to and agrees with each Subscriber that:
(a) Due Incorporation. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has the requisite corporate power to own
its properties and to carry on its business is disclosed in the Reports . The
Company is duly qualified as a foreign corporation to do business and is in
good standing in each jurisdiction where the nature of the business conducted
or property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a Material
Adverse Effect. For purpose of this Agreement, a "Material Adverse Effect"
shall mean a material adverse effect on the financial condition, results of
operations, properties or business of the Company taken as a whole.
(b) Outstanding Stock. All issued and outstanding shares of
capital stock of the Company has been duly authorized and validly issued and
are fully paid and nonassessable.
(c) Authority; Enforceability. This Agreement, the Note, the
Warrants, the Escrow Agreement, Security Agreement and Collateral Agent
Agreement, and any other agreements delivered together with this Agreement or
in connection herewith (collectively "Transaction Documents") have been duly
authorized, executed and delivered by the Company and are valid and binding
agreements enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights generally
and to general principles of equity. The Company has full corporate power and
authority necessary to enter into and deliver the Transaction Documents and to
perform its obligations thereunder.
(d) Additional Issuances. There are no outstanding agreements or
preemptive or similar rights affecting the Company's common stock or equity
and no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of any shares of common stock or equity of the
Company or other equity interest in any of the Subsidiaries of the Company
except as described on Schedule 5(d).
(e) Consents. No consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction over the
Company, or any of its Affiliates, the OTC Bulletin Board ("Bulletin Board")
nor the Company's shareholders is required for the execution by the Company of
the Transaction Documents and compliance and performance by the Company of its
obligations under the Transaction Documents, including, without limitation,
the issuance and sale of the Securities.
(f) No Violation or Conflict. Assuming the representations and
warranties of the Subscribers in Section 4 are true and correct, neither the
issuance and sale of the Securities nor the performance of the Company's
obligations under this Agreement and all other agreements entered into by the
Company relating thereto by the Company will:
(i) violate, conflict with, result in a breach of, or constitute a
default (or an event which with the giving of notice or the lapse of time or
both would be reasonably likely to constitute a default) under (A) the
articles or certificate of incorporation, charter or bylaws of the Company,
(B) to the Company's knowledge, any decree, judgment, order, law, treaty,
rule, regulation or determination applicable to the Company of any court,
governmental agency or body, or arbitrator having jurisdiction over the
Company or over the properties or assets of the Company or any of its
Affiliates,(C) the terms of any bond, debenture, note or any other evidence of
indebtedness, or any agreement, stock option or other similar plan, indenture,
lease, mortgage, deed of trust or other instrument to which the Company or any
of its Affiliates is a party, by which the Company or any of its Affiliates is
bound, or to which any of the properties of the Company or any of its
Affiliates is subject, or (D) the terms of any "lock-up" or similar provision
of any underwriting or similar agreement to which the Company, or any of its
Affiliates is a party except the violation, conflict, breach, or default of
which would not have a Material Adverse Effect; or
(ii) result in the creation or imposition of any lien, charge or
encumbrance upon the Securities or any of the assets of the Company or any of
its Affiliates; or
(iii) result in the activation of any anti-dilution rights or a
reset or repricing of any debt or security instrument of any other creditor or
equity holder of the Company, nor result in the acceleration of the due date
of any obligation of the Company; or
(iv) result in the activation of any piggy-back registration rights
of any person or entity holding securities of the Company or having the right
to receive securities of the Company.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security interests,
liens, claims or other encumbrances, subject to restrictions upon transfer
under the 1933 Act and any applicable state securities laws;
(ii) have been, or will be, duly and validly authorized and on the
date of issuance of the Shares and upon exercise of the Warrants, the Shares
and Warrant Shares will be duly and validly issued, fully paid and
nonassessable or if registered pursuant to the 1933 Act, and resold pursuant
to an effective registration statement will be free trading and unrestricted);
(iii) will not have been issued or sold in violation of any
preemptive or other similar rights of the holders of any securities
of the Company; and
(iv) will not subject the holders thereof to personal liability by
reason of being such holders.
(h) Litigation. There is no pending or, to the best knowledge of
the Company, threatened action, suit, proceeding or investigation before any
court, governmental agency or body, or arbitrator having jurisdiction over the
Company, or any of its Affiliates that would affect the execution by the
Company or the performance by the Company of its obligations under the
Transaction Documents. Except as disclosed in the Reports, there is no
pending or, to the best knowledge of the Company, basis for or threatened
action, suit, proceeding or investigation before any court, governmental
agency or body, or arbitrator having jurisdiction over the Company, or any of
its Affiliates which litigation if adversely determined would have a Material
Adverse Effect.
(i) Reporting Company. The Company is a publicly-held company subject
to reporting obligations pursuant to Section 13 of the 1934 Act and has a
class of common shares registered pursuant to Section 12(g) of the 1934 Act.
Pursuant to the provisions of the 1934 Act, the Company has timely filed all
reports and other materials required to be filed thereunder with the
Commission during the preceding twelve months.
(j) No Market Manipulation. The Company has not taken, and will
not take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the
Securities or affect the price at which the Securities may be issued or
resold.
(k) Information Concerning Company. The Reports contain all
material information relating to the Company and its operations and financial
condition as of their respective dates which information is required to be
disclosed therein. Since the date of the financial statements included in
the Reports, and except as modified in the Other Written Information or in the
Schedules hereto, there has been no Material Adverse Event relating to the
Company's business, financial condition or affairs not disclosed in the
Reports. The Reports do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances when
made.
(l) Stop Transfer. The Securities, when issued, will be restricted
securities. The Company will not issue any stop transfer order or other order
impeding the sale, resale or delivery of any of the Securities, except as may
be required by any applicable federal or state securities laws and unless
contemporaneous notice of such instruction is given to the Subscriber.
(m) Defaults. The Company is not in violation of its articles of
incorporation or bylaws. The Company is (i) not in default under or in
violation of any other material agreement or instrument to which it is a party
or by which it or any of its properties are bound or affected, which default
or violation would have a Material Adverse Effect, (ii) not in default with
respect to any order of any court, arbitrator or governmental body or subject
to or party to any order of any court or governmental authority arising out of
any action, suit or proceeding under any statute or other law respecting
antitrust, monopoly, restraint of trade, unfair competition or similar
matters, or (iii) to the Company's knowledge not in violation of any statute,
rule or regulation of any governmental authority which violation would have a
Material Adverse Effect.
(n) No Integrated Offering. Neither the Company, nor any of its
Affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offer of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder
approval provisions, including, without limitation, under the rules and
regulations of the Bulletin Board. Nor will the Company or any of its
Affiliates take any action or steps that would cause the offer or issuance of
the Securities to be integrated with other offerings. The Company will not
conduct any offering other than the transactions contemplated hereby that will
be integrated with the offer or issuance of the Securities.
(o) No General Solicitation. Neither the Company, nor any of its
Affiliates, nor to its knowledge, any person acting on its or their behalf,
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the 1933 Act) in connection with the offer
or sale of the Securities.
(p) Listing. The Company's common stock is quoted on the OTC
Bulletin Board. The Company has not received any oral or written notice that
its common stock is not eligible nor will become ineligible for quotation on
the Bulletin Board nor that its common stock does not meet all requirements
for the continuation of such quotation and the Company satisfies all the
requirements for the continued quotation of its common stock on the Bulletin
Board.
(q) No Undisclosed Liabilities. The Company has no liabilities or
obligations which are material, individually or in the aggregate, which are
not disclosed in the Reports and Other Written Information, other than those
incurred in the ordinary course of the Company's businesses since December 31,
2003 and which, individually or in the aggregate, would reasonably be expected
to have a Material Adverse Effect.
(r) No Undisclosed Events or Circumstances. Since December 31,
2003, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, operations or financial condition,
that, under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the Reports.
(s) Capitalization. The authorized and outstanding capital stock
of the Company as of the date of this Agreement and the Closing Date (not
including the Securities) are set forth on Schedule 5(s). Except as set forth
on Schedule 5(d), there are no options, warrants, or rights to subscribe to,
securities, rights or obligations convertible into or exchangeable for or
giving any right to subscribe for any shares of capital stock of the Company
or any of its Subsidiaries. All of the outstanding shares of Common Stock of
the Company have been duly and validly authorized and issued and are fully
paid and nonassessable.
(t) Dilution. The Company's executive officers and directors
understand the nature of the Securities being sold hereby and recognize that
the issuance of the Securities will have a potential dilutive effect on the
equity holdings of other holders of the Company's equity or rights to receive
equity of the Company. The board of directors of the Company has concluded,
in its good faith business judgment that the issuance of the Securities is in
the best interests of the Company. The Company specifically acknowledges that
its obligation to issue the Shares upon conversion of the Notes, and the
Warrant Shares upon exercise of the Warrants is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company or parties entitled to receive
equity of the Company.
(u) No Disagreements with Accountants and Lawyers. There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the Company and the accountants and lawyers formerly
or presently employed by the Company, including but not limited to disputes or
conflicts over payment owed to such accountants and lawyers.
(v) Correctness of Representations. The Company represents that
the foregoing representations and warranties are true and correct as of the
date hereof in all material respects, and, unless the Company otherwise
notifies the Subscribers prior to each Closing Date, shall be true and correct
in all material respects as of each Closing Date.
(w) DTC Status. The Company's transfer agent is a participant in
and the Common Stock is eligible for transfer pursuant to the Depository Trust
Company Automated Securities Transfer Program.
(x) Investment Company. The Company is not an Affiliate of an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
(y) Survival. The foregoing representations and warranties shall
survive the Closing Date for a period of three years.
6. Regulation D Offering. The offer and issuance of the Securities
to the Subscribers is being made pursuant to the exemption from the
registration provisions of the 1933 Act afforded by Section 4(2) or Section
4(6) of the 1933 Act and/or Rule 506 of Regulation D promulgated thereunder.
On the Closing Date, the Company will provide an opinion reasonably acceptable
to Subscriber from the Company's legal counsel opining on the availability of
an exemption from registration under the 1933 Act as it relates to the offer
and issuance of the Securities and other matters reasonably requested by
Subscribers. A form of the legal opinion is annexed hereto as Exhibit C. The
Company will provide, at the Company's expense, such other legal opinions in
the future as are reasonably necessary for the issuance and resale of the
Common Stock issuable upon conversion of the Notes and exercise of the
Warrants pursuant to an effective registration statement.
7.1. Conversion of Note.
(a) Upon the conversion of a Note or part thereof, the Company
shall, at its own cost and expense, take all necessary action, including
obtaining and delivering, an opinion of counsel to assure that the Company's
transfer agent shall issue stock certificates in the name of Subscriber (or
its nominee) or such other persons as designated by Subscriber and in such
denominations to be specified at conversion representing the number of shares
of Common Stock issuable upon such conversion. The Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company's Common Stock and that, unless waived by the
Subscriber, the Shares will be free-trading, and freely transferable, and will
not contain a legend restricting the resale or transferability of the Shares
provided the Shares are being sold pursuant to an effective registration
statement covering the Shares or are otherwise exempt from registration.
(b) Subscriber will give notice of its decision to exercise its
right to convert the Note or part thereof by telecopying an executed and
completed Notice of Conversion (a form of which is annexed as Exhibit A to the
Note) to the Company via confirmed telecopier transmission or otherwise
pursuant to Section 13(a) of this Agreement. The Subscriber will not be
required to surrender the Note until the Note has been fully converted or
satisfied. Each date on which a Notice of Conversion is telecopied to the
Company in accordance with the provisions hereof shall be deemed a Conversion
Date. The Company will itself or cause the Company's transfer agent to
transmit the Company's Common Stock certificates representing the Shares
issuable upon conversion of the Note to the Subscriber via express courier for
receipt by such Subscriber within four (4) business days after receipt by the
Company of the Notice of Conversion (such third day being the "Delivery
Date"). In the event the Shares are electronically transferable, then
delivery of the Shares must be made by electronic transfer provided request
for such electronic transfer has been made by the Subscriber and the
Subscriber has complied with all applicable securities laws in connection with
the sale of the Common Stock, including, without limitation, the prospectus
delivery requirements. A Note representing the balance of the Note not so
converted will be provided by the Company to the Subscriber if requested by
Subscriber, provided the Subscriber delivers the original Note to the
Company. In the event that a Subscriber elects not to surrender a Note for
reissuance upon partial payment or conversion, the Subscriber hereby
indemnifies the Company against any and all loss or damage attributable to a
third-party claim in an amount in excess of the actual amount then due under
the Note.
(c) The Company understands that a delay in the delivery of the
Shares in the form required pursuant to Section 7.1 hereof, or the Mandatory
Redemption Amount described in Section 7.2 hereof, respectively after the
Delivery Date or the Mandatory Redemption Payment Date (as hereinafter
defined) could result in economic loss to the Subscriber. As compensation to
the Subscriber for such loss, the Company agrees to pay (as liquidated damages
and not as a penalty) to the Subscriber for late issuance of Shares in the
form required pursuant to Section 7.1 hereof upon Conversion of the Note in
the amount of $100 per business day after the Delivery Date for each $10,000
of Note principal amount being converted of the corresponding Shares which are
not timely delivered. The Company shall pay any payments incurred under this
Section in immediately available funds upon demand. Furthermore, in addition
to any other remedies which may be available to the Subscriber, in the event
that the Company fails for any reason to effect delivery of the Shares by the
Delivery Date or make payment by the Mandatory Redemption Payment Date, the
Subscriber will be entitled to revoke all or part of the relevant Notice of
Conversion or rescind all or part of the notice of Mandatory Redemption by
delivery of a notice to such effect to the Company whereupon the Company and
the Subscriber shall each be restored to their respective positions
immediately prior to the delivery of such notice, except that the liquidated
damages described above shall be payable through the date notice of revocation
or rescission is given to the Company.
(d) Nothing contained herein or in any document referred to herein
or delivered in connection herewith shall be deemed to establish or require
the payment of a rate of interest or other charges in excess of the maximum
permitted by applicable law. In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Company to the Subscriber and thus
refunded to the Company.
7.2. Mandatory Redemption at Subscriber's Election. In the event the
Company is prohibited from issuing Shares, or fails to timely deliver Shares
on a Delivery Date, or upon the occurrence of any other Event of Default (as
defined in the Note or in this Agreement) or for any reason other than
pursuant to the limitations set forth in Section 7.3 hereof, then at the
Subscriber's election, the Company must pay to the Subscriber ten (10)
business days after request by the Subscriber, at the Subscriber's election, a
sum of money determined by (i) multiplying up to the outstanding principal
amount of the Note designated by the Subscriber by 120%, or (ii) multiplying
the number of Shares otherwise deliverable upon conversion of an amount of
Note principal and/or interest designated by the Subscriber (with the date of
giving of such designation being a "Deemed Conversion Date") at the then
Conversion Price that would be in effect on the Deemed Conversion Date by the
highest closing price of the Common Stock on the principal market for the
period commencing on the Deemed Conversion Date until the day prior to the
receipt of the Mandatory Redemption Payment, whichever is greater, together
with accrued but unpaid interest thereon ("Mandatory Redemption Payment"). The
Mandatory Redemption Payment must be received by the Subscriber on the same
date as the Company Shares otherwise deliverable or within ten (10) business
days after request, whichever is sooner ("Mandatory Redemption Payment Date").
Upon receipt of the Mandatory Redemption Payment, the corresponding Note
principal and interest will be deemed paid and no longer outstanding.
Liquidated damages calculated pursuant to Section 7.1(c) hereof, that have
been paid or accrued for the twenty day period prior to the actual receipt of
the Mandatory Redemption Payment by the Subscriber shall be credited against
the Mandatory Redemption Payment.
7.3. Maximum Conversion. The Subscriber shall not be entitled to
convert on a Conversion Date that amount of the Note in connection with that
number of shares of Common Stock which would be in excess of the sum of (i)
the number of shares of common stock beneficially owned by the Subscriber and
its Affiliates on a Conversion Date, and (ii) the number of shares of Common
Stock issuable upon the conversion of the Note with respect to which the
determination of this provision is being made on a Conversion Date, which
would result in beneficial ownership by the Subscriber and its Affiliates of
more than 4.99% of the outstanding shares of common stock of the Company on
such Conversion Date. For the purposes of the provision to the immediately
preceding sentence, beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder. Subject to the foregoing, the Subscriber shall
not be limited to aggregate conversions of only 4.99% and aggregate
conversions by the Subscriber may exceed 4.99%.
7.4. Injunction Posting of Bond. In the event a Subscriber shall
elect to convert a Note or part thereof or exercise the Warrant in whole or in
part, the Company may not refuse conversion or exercise based on any claim
that such Subscriber or any one associated or affiliated with such Subscriber
has been engaged in any violation of law, or for any other reason, unless, an
injunction from a court, on notice, restraining and or enjoining conversion of
all or part of such Note or exercise of all or part of such Warrant shall have
been sought and obtained by the Company and the Company has posted a surety
bond for the benefit of such Subscriber in the amount of 120% of the amount of
the Note, or aggregate purchase price of the Warrant Shares which are sought
to be subject to the injunction, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Subscriber to the extent Subscriber obtains judgment.
7.5. Buy-In. In addition to any other rights available to the
Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after seven (7)
business days after the Delivery Date the Subscriber purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Subscriber of the Common Stock which the
Subscriber was entitled to receive upon such conversion (a "Buy-In"), then the
Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber's total purchase price (including brokerage commissions, if any)
for the shares of Common Stock so purchased exceeds (B) the aggregate
principal and/or interest amount of the Note for which such conversion was not
timely honored, together with interest thereon at a rate of 15% per annum,
accruing until such amount and any accrued interest thereon is paid in full
(which amount shall be paid as liquidated damages and not as a penalty). For
example, if the Subscriber purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted
conversion of $10,000 of note principal and/or interest, the Company shall be
required to pay the Subscriber $1,000, plus interest. The Subscriber shall
provide the Company written notice indicating the amounts payable to the
Subscriber in respect of the Buy-In.
7.6 Adjustments. The Conversion Price, Warrant exercise price and
amount of Shares issuable upon conversion of the Notes and exercise of the
Warrants shall be adjusted as described in this Agreement, the Notes and
Warrants.
7.7. Mandatory Conversion. Provided an Event of Default has not
occurred, then commencing after the Actual Effective Date, the Company will
have the option by written notice to the Subscriber ("Notice of Mandatory
Conversion") of compelling the Subscriber to convert the outstanding and
unpaid principal of the Notes and accrued interest, thereon, into Common Stock
at the Conversion Price then in affect ("Mandatory Conversion"). The Notice of
Mandatory Conversion must be given, if at all, on the first business day
following a consecutive seven (7) day trading period ("Lookback Period")
during which the closing bid price for the Company's Common Stock as reported
by Bloomberg, LP for the Principal Market is more than $3.00 each day and the
volume during the Lookback Period is at least 80,000 Shares each day. The date
the Notice of Mandatory Conversion is given is the "Mandatory Conversion
Date." The Notice of Mandatory Conversion shall specify the aggregate
principal amount of the Note which is subject to Mandatory Conversion, which
amount may not exceed in the aggregate, for all Holders who receive Notes
similar in term and tenure as this Note, the dollar volume of Common Stock
traded on the Principal Market during the seven (7) trading days immediately
preceding the Mandatory Conversion Date. Mandatory Conversion Notices must be
given proportionately to all Holders of Notes who received Notes similar in
term and tenure as this Note. A Notice of Mandatory Conversion may not be
given unless the Registration Statement described in Section 11.1 (iv) has
been effective for the unrestricted public resale of Shares and Warrant Shares
each day during the Lookback Period. The Company shall reduce the amount of
Note principal and interest subject to a Notice of Mandatory Conversion by the
amount of Note Principal and interest for which the Subscriber had delivered a
Notice of Conversion to the Company during the seven (7) trading days
preceding the Mandatory Conversion Date. Each Mandatory Conversion Date shall
be a deemed Conversion Date and the Company will be required to deliver the
Common Stock issuable pursuant to a Mandatory Conversion Notice in the same
manner and time period as described in Section 2.2 of the Note.
7.8. Redemption. The Note and Warrants shall not be redeemable or
callable except as described in the Note.
8. Legal Fees. The Company shall pay to Grushko & Mittman, P.C., a
fee of $14,000 ("Legal Fees") as reimbursement for services rendered to the
Subscribers in connection with this Agreement and the purchase and sale of the
Notes and Warrants the Offering and acting as Escrow Agent for the Offering.
The Legal Fees will be payable out of funds held pursuant to the Escrow
Agreement.
9. Covenants of the Company. The Company covenants and agrees with
the Subscribers as follows:
(a) Stop Orders. The Company will advise the Subscribers, promptly
after it receives notice of issuance by the Commission, any state securities
commission or any other regulatory authority of any stop order or of any order
preventing or suspending any offering of any securities of the Company, or of
the suspension of the qualification of the Common Stock of the Company for
offering or sale in any jurisdiction, or the initiation of any proceeding for
any such purpose.
(b) Listing. The Company shall promptly secure the listing of the
shares of Common Stock and the Warrant Shares upon each national securities
exchange, or automated quotation system upon which they are or become eligible
for listing (subject to official notice of issuance) and shall maintain such
listing so long as any Warrants are outstanding. The Company will maintain
the listing of its Common Stock on the American Stock Exchange, Nasdaq
SmallCap Market, Nasdaq National Market System, Bulletin Board, or New York
Stock Exchange (whichever of the foregoing is at the time the principal
trading exchange or market for the Common Stock (the "Principal Market")), and
will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market, as applicable.
The Company will provide the Subscribers copies of all notices it receives
notifying the Company of the threatened and actual delisting of the Common
Stock from any Principal Market. As of the date of this Agreement and the
Closing Date, the Bulletin Board is and will be the Principal Market.
(c) Market Regulations. The Company shall notify the Commission,
the Principal Market and applicable state authorities, in accordance with
their requirements, of the transactions contemplated by this Agreement, and
shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Securities to the Subscribers and promptly provide copies
thereof to Subscriber.
(d) Reporting Requirements. From the date of this Agreement and
until the sooner of (i) three (3) years after the Closing Date, or (ii) until
all the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitation, the Company will (A) cause its Common
Stock to continue to be registered under Section 12(b) or 12(g) of the 1934
Act, (B) comply in all respects with its reporting and filing obligations
under the 1934 Act, (C) comply with all reporting requirements that are
applicable to an issuer with a class of shares registered pursuant to Section
12(b) or 12(g) of the 1934 Act, as applicable, and (D) comply with all
requirements related to any registration statement filed pursuant to this
Agreement. The Company will use its best efforts not to take any action or
file any document (whether or not permitted by the 1933 Act or the 1934 Act or
the rules thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under said acts
until three (3) years after the Closing Date. Until the earlier of the resale
of the Common Stock and the Warrant Shares by each Subscriber or three (3)
years after the Warrants have been exercised, the Company will use its best
efforts to continue the listing or quotation of the Common Stock on a
Principal Market and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the Principal
Market. The Company agrees to timely file a Form D with respect to the
Securities if required under Regulation D and to provide a copy thereof to
each Subscriber promptly after such filing.
(e) Use of Proceeds. The proceeds of the Offering will be employed
by the Company for the purposes set forth on Schedule 9(e) hereto. A
deviation of more than 10% of any single stated use of proceeds or a deviation
in the aggregate of more than 25% will be an Event of Default under the Note.
Except as set forth on Schedule 9(e), the Purchase Price may not and will not
be used for accrued and unpaid officer and director salaries, payment of
financing related debt, redemption of outstanding notes or equity instruments
of the Company nor non-trade obligations outstanding on a Closing Date.
(f) Reservation. Prior to the Closing Date, the Company
undertakes to reserve, pro rata, on behalf of each holder of a Note or
Warrant, from its authorized but unissued common stock, a number of common
shares equal to 150% of the amount of Common Stock necessary to allow each
holder of a Note to be able to convert all such outstanding Notes and interest
and reserve the amount of Warrant Shares issuable upon exercise of the
Warrants. Failure to have sufficient shares reserved pursuant to this
Section 9.1(f) for three (3) consecutive business days or ten (10) days in the
aggregate shall be a material default of the Company's obligations under this
Agreement.
(g) Taxes. From the date of this Agreement and until the sooner of
(i) three (3) years after the Closing Date, or (ii) until all the Shares and
Warrant Shares have been resold or transferred by all the Subscribers pursuant
to the Registration Statement or pursuant to Rule 144, without regard to
volume limitations, the Company will promptly pay and discharge, or cause to
be paid and discharged, when due and payable, all lawful taxes, assessments
and governmental charges or levies imposed upon the income, profits, property
or business of the Company; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall
have set aside on its books adequate reserves with respect thereto, and
provided, further, that the Company will pay all such taxes, assessments,
charges or levies forthwith upon the commencement of proceedings to foreclose
any lien which may have attached as security therefore.
(h) Insurance. From the date of this Agreement and until the
sooner of (i) three (3) years after the Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep its assets which
are of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, explosion and other risks customarily
insured against by companies in the Company's line of business, in amounts
sufficient to prevent the Company from becoming a co-insurer and not in any
event less than one hundred percent (100%) of the insurable value of the
property insured; and the Company will maintain, with financially sound and
reputable insurers, insurance against other hazards and risks and liability to
persons and property to the extent and in the manner customary for companies
in similar businesses similarly situated and to the extent available on
commercially reasonable terms.
(i) Books and Records. From the date of this Agreement and until
the sooner of (i) three (3) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company will keep true records and
books of account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and affairs in accordance
with generally accepted accounting principles applied on a consistent basis.
(j) Governmental Authorities. From the date of this Agreement and
until the sooner of (i) three (3) years after the Closing Date, or (ii) until
all the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company shall duly observe and
conform in all material respects to all valid requirements of governmental
authorities relating to the conduct of its business or to its properties or
assets.
(k) Intellectual Property. From the date of this Agreement and
until the sooner of (i) three (3) years after the Closing Date, or (ii) until
all the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company shall maintain in full force
and effect its corporate existence, rights and franchises and all licenses and
other rights to use intellectual property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business.
(l) Properties. From the date of this Agreement and until the
sooner of (i) three (3) years after the Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement (as defined in Section
11.1(iv) hereof) or pursuant to Rule 144, without regard to volume
limitations, the Company will keep its properties in good repair, working
order and condition, reasonable wear and tear excepted, and from time to time
make all necessary and proper repairs, renewals, replacements, additions and
improvements thereto; and the Company will at all times comply with each
provision of all leases to which it is a party or under which it occupies
property if the breach of such provision could reasonably be expected to have
a Material Adverse Effect.
(m) Confidentiality/Public Announcement. From the date of this
Agreement and until the sooner of (i) three (3) years after the Closing Date,
or (ii) until all the Shares and Warrant Shares have been resold or
transferred by all the Subscribers pursuant to the Registration Statement or
pursuant to Rule 144, without regard to volume limitations, the Company agrees
that except in connection with a Form 8-K or the Registration Statement, it
will not disclose publicly or privately the identity of the Subscribers unless
expressly agreed to in writing by a Subscriber or only to the extent required
by law and then only upon five days prior notice to Subscriber. In any event
and subject to the foregoing, the Company shall - file a Form 8-K or make a
public announcement describing the Offering not later than the first business
day after the Closing Date. In the Form 8-K or public announcement, the
Company will specifically disclose the amount of common stock outstanding
immediately after the Closing. A form of the proposed Form 8-K or public
announcement to be employed in connection with the Offering is annexed hereto
as Exhibit D.
(n) Further Registration Statements. Except for a registration
statement filed on behalf of the Subscribers pursuant to Section 11 of this
Agreement or one or more Forms S-8 registering not more than $250,000 of
equity of the Company to be issued to consultants and for public relations,
the Company will not file any registration statements or amend any already
filed registration statement, including but not limited to Form S-8, with the
Commission or with state regulatory authorities without the consent of the
Subscriber until the sooner of (i) the Registration Statement (as defined in
Section 11.1(iv) of this Agreement) shall have been effective in connection
with the public resale of the Shares and Warrant Shares for 90 days or (ii)
until all the Shares have been resold or transferred by the Subscribers
pursuant to the Registration Statement or Rule 144, without regard to volume
limitations ("Exclusion Period"). The Exclusion Period will be tolled during
the pendency of an Event of Default as defined in the Note.
(o) Blackout. The Company undertakes and covenants that until
the first to occur of (i) the end of the Exclusion Period, as defined in
Section 9(n) hereof, or (ii) until all the Shares and Warrant Shares have been
resold pursuant to such registration statement or Rule 144, without regard to
volume limitations, the Company will not enter into any acquisition, merger,
exchange or sale or other transaction that could have the effect of delaying
the effectiveness of any pending registration statement or causing an already
effective registration statement to no longer be effective or current. In the
event the Registration Statement is filed on a Form S-3, then the Exclusion
Period for purposes of this Section 9(o) shall end on the Actual Effective
Date (as defined in Section 11.1(iv) of this Agreement).
(p) Non-Public Information. The Company covenants and agrees that
neither it nor any other person acting on its behalf will provide any
Subscriber or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto
such Subscriber shall have agreed in writing to receive such information. The
Company understands and confirms that each Subscriber shall be relying on the
foregoing representations in effecting transactions in securities of the
Company.
10. Covenants of the Company and Subscriber Regarding
Indemnification.
(a) The Company agrees to indemnify, hold harmless, reimburse and
defend the Subscribers, the Subscribers' officers, directors, agents,
Affiliates, control persons, and principal shareholders, against any claim,
cost, expense, liability, obligation, loss or damage (including reasonable
legal fees) of any nature, incurred by or imposed upon the Subscriber or any
such person which results, arises out of or is based upon (i) any material
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any Exhibits or Schedules attached hereto, or other agreement
delivered pursuant hereto; or (ii) after any applicable notice and/or cure
periods, any breach or default in performance by the Company of any covenant
or undertaking to be performed by the Company hereunder, or any other
agreement entered into by the Company and Subscriber relating hereto.
(b) Each Subscriber agrees to indemnify, hold harmless, reimburse
and defend the Company and each of the Company's officers, directors, agents,
Affiliates, control persons against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company or any such person which results,
arises out of or is based upon (i) any material misrepresentation by such
Subscriber in this Agreement or in any Exhibits or Schedules attached hereto,
or other agreement delivered pursuant hereto; or (ii) after any applicable
notice and/or cure periods, any breach or default in performance by such
Subscriber of any covenant or undertaking to be performed by such Subscriber
hereunder, or any other agreement entered into by the Company and Subscribers,
relating hereto.
(c) In no event shall the liability of any Subscriber or permitted
successor hereunder or under any Transaction Document or other agreement
delivered in connection herewith be greater in amount than the dollar amount
of the net proceeds actually received by such Subscriber upon the sale of
Registrable Securities (as defined herein).
(d) The procedures set forth in Section 11.6 shall apply to the
indemnification set forth in Sections 10(a) and 10(b) above.
11.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Securities.
(i) On one occasion, for a period commencing one hundred and
twenty-one (121) days after the Closing Date, but not later than two (2) years
after the Closing Date ("Request Date"), upon a written request therefor from
any record holder or holders of more than 50% of the Shares issued and
issuable upon conversion of the Notes and Warrant Shares actually issued upon
exercise of the Warrants, the Company shall prepare and file with the
Commission a registration statement under the 1933 Act registering the Shares,
Warrant Shares issuable upon exercise of the Warrants including Shares
issuable upon conversion of interest accruing on the Notes (collectively
"Registrable Securities") which are the subject of such request for
unrestricted public resale by the holder thereof. For purposes of Sections
11.1(i) and 11.1(ii), Registrable Securities shall not include (A) Securities
which are registered for resale in an effective registration statement, (B)
included for registration in a pending registration statement, or (C) which
have been issued without further transfer restrictions after a sale or
transfer pursuant to Rule 144 under the 1933 Act. Upon the receipt of such
request, the Company shall promptly give written notice to all other record
holders of the Registrable Securities that such registration statement is to
be filed and shall include in such registration statement Registrable
Securities for which it has received written requests within ten (10) days
after the Company gives such written notice. Such other requesting record
holders shall be deemed to have exercised their demand registration
right under this Section 11.1(i).
(ii) If the Company at any time proposes to register any of its
securities under the 1933 Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscribers or Holder pursuant to an effective registration statement,
each such time it will give at least fifteen (15) days' prior written notice
to the record holder of the Registrable Securities of its intention so to do.
Upon the written request of the holder, received by the Company within ten
(10) days after the giving of any such notice by the Company, to register any
of the Registrable Securities not previously registered, the Company will
cause such Registrable Securities as to which registration shall have been so
requested to be included with the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent required to
permit the sale or other disposition of the Registrable Securities so
registered by the holder of such Registrable Securities (the "Seller" or
"Sellers"). In the event that any registration pursuant to this Section
11.1(ii) shall be, in whole or in part, an underwritten public offering of
common stock of the Company, the number of shares of Registrable Securities to
be included in such an underwriting may be reduced by the managing underwriter
if and to the extent that the Company and the underwriter shall reasonably be
of the opinion that such inclusion would adversely affect the marketing of the
securities to be sold by the Company therein; provided, however, that the
Company shall notify the Seller in writing of any such reduction.
Notwithstanding the foregoing provisions, or Section 11.4 hereof, the Company
may withdraw or delay or suffer a delay of any registration statement referred
to in this Section 11.1(ii) without thereby incurring any liability to the
Seller.
(iii) If, at the time any written request for registration is
received by the Company pursuant to Section 11.1(i), the Company
has determined to proceed with the actual preparation and filing of
a registration statement under the 1933 Act in connection with the
proposed offer and sale for cash of any of its securities for the
Company's own account and the Company actually does file such other
registration statement, such written request shall be deemed to
have been given pursuant to Section 11.1(ii) rather than Section
11.1(i), and the rights of the holders of Registrable Securities
covered by such written request shall be governed by Section
11.1(ii).
(iv) The Company shall file with the Commission a Form SB-2
registration statement (the "Registration Statement") (or such
other form that it is eligible to use) in order to register the
Registrable Securities for resale and distribution under the 1933
Act not later than) forty-five (45) days after the Closing Date
(the "Filing Date"), and cause to be declared effective not later
than one hundred twenty (120) days after the Closing Date (the
"Effective Date"). The Company will register not less than a
number of shares of common stock in the aforedescribed registration
statement that is equal to 150% of the Shares issuable upon
conversion of the Notes and all of the Warrant Shares issuable
pursuant to this Agreement upon exercise of the Warrants. The
Registrable Securities shall be reserved and set aside exclusively
for the benefit of each Subscriber and Warrant holder, pro rata,
and not issued, employed or reserved for anyone other than each
such Subscriber and Warrant holder. The Registration Statement
will immediately be amended or additional registration statements
will be immediately filed by the Company as necessary to register
additional shares of Common Stock to allow the public resale of all
Common Stock included in and issuable by virtue of the Registrable
Securities. Without the written consent of the Subscriber, no
securities of the Company other than the Registrable Securities
will be included in the Registration Statement. It shall be deemed
a Non-Registration Event if at any time after the date the
Registration Statement is declared effective by the Commission
("Actual Effective Date") the Company has registered for
unrestricted resale on behalf of the Subscriber fewer than 100% of
the amount of Common Shares issuable upon full conversion of all
sums due under the Notes and 100% of the Warrant Shares issuable
upon exercise of the Warrants.
11.2. Registration Procedures. If and whenever the Company is
required by the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the
registration of any Registrable Securities under the 1933 Act, the Company
will, as expeditiously as possible:
(a) subject to the timelines provided in this Agreement, prepare
and file with the Commission a registration statement required by Section 11,
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as herein provided), promptly
provide to the holders of the Registrable Securities copies of all filings and
Commission letters of comment and notify Subscribers (by telecopier and by e-
mail addresses provided by Subscribers) and Grushko & Mittman, P.C. (by
telecopier and by email to Counslers@aol.com) on or before 6 pm EST on the
same business day that the Company receives notice that (i) the Commission has
no comments or no further comments on the Registration Statement, and (ii) the
registration statement has been declared effective (failure to timely provide
notice as required by this Section 11.2(a) shall be a material breach of the
Company's obligation and an Event of Default as defined in the Notes and a
Non-Registration Event as defined in Section 10.4 of this Agreement);
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective until such registration statement has been effective for a period of
two (2) years, and comply with the provisions of the 1933 Act with respect to
the disposition of all of the Registrable Securities covered by such
registration statement in accordance with the Sellers' intended method of
disposition set forth in such registration statement for such period;
(c) furnish to the Sellers, at the Company's expense, such number
of copies of the registration statement and the prospectus included therein
(including each preliminary prospectus) as such persons reasonably may request
in order to facilitate the public sale or their disposition of the securities
covered by such registration statement;
(d) use its commercially reasonable best efforts to register or
qualify the Registrable Securities covered by such registration statement
under the securities or "blue sky" laws of such jurisdictions as the Sellers
shall request in writing, provided, however, that the Company shall not for
any such purpose be required to qualify generally to transact business as a
foreign corporation in any jurisdiction where it is not so qualified or to
consent to general service of process in any such jurisdiction;
(e) if applicable, list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock
of the Company is then listed;
(f) immediately notify the Sellers when a prospectus relating
thereto is required to be delivered under the 1933 Act, of the happening of
any event of which the Company has knowledge as a result of which the
prospectus contained in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing; and
(g) provided same would not be in violation of the provision of
Regulation FD under the 1934 Act, make available for inspection by the
Sellers, and any attorney, accountant or other agent retained by the Seller
or underwriter, all publicly available, non-confidential financial and other
records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors and employees to supply all publicly
available, non-confidential information reasonably requested by the seller,
attorney, accountant or agent in connection with such registration statement.
11.3. Provision of Documents. In connection with each registration
described in this Section 11, each Seller will furnish to the Company in
writing such information and representation letters with respect to itself and
the proposed distribution by it as reasonably shall be necessary in order to
assure compliance with federal and applicable state securities laws.
11.4. Non-Registration Events. The Company and the Subscribers agree
that the Sellers will suffer damages if the Registration Statement is not
filed by the Filing Date and not declared effective by the Commission by the
Effective Date, and any registration statement required under Section 11.1(i)
or 11.1(ii) is not filed within 60 days after written request and declared
effective by the Commission within 120 days after such request, and maintained
in the manner and within the time periods contemplated by Section 11 hereof,
and it would not be feasible to ascertain the extent of such damages with
precision. Accordingly, if (A) the Registration Statement is not filed on or
before the Filing Date, (B) is not declared effective on or before the
Effective Date, (C) the Registration Statement is not declared effective
within four (4) business days after receipt by the Company or its attorneys of
a written or oral communication from the Commission that the Registration
Statement will not be reviewed or that the Commission has no further comments,
(D) if the registration statement described in Sections 11.1(i) or 11.1(ii) is
not filed within 60 days after such written request, or is not declared
effective within 120 days after such written request, or (E) any registration
statement described in Sections 11.1(i), 11.1(ii) or 11.1(iv) is filed and
declared effective but shall thereafter cease to be effective (without being
succeeded within fifteen (15) business days by an effective replacement or
amended registration statement) for a period of time which shall exceed 30
days in the aggregate per year (defined as a period of 365 days commencing on
the date the Registration Statement is declared effective) or more than 20
consecutive days (each such event referred to in clauses A through E of this
Section 11.4 is referred to herein as a "Non-Registration Event"), then the
Company shall deliver to the holder of Registrable Securities, as Liquidated
Damages, an amount equal to two percent (2%) for each thirty (30) days or part
thereof, thereafter of the Purchase Price of the Notes remaining unconverted
and purchase price of Shares issued upon conversion of the Notes owned of
record by such holder which are subject to such Non-Registration Event. The
Company must pay the Liquidated Damages in cash or an amount equal to two
hundred percent of such cash Liquidated Damages if paid in additional shares
of registered unlegended free-trading shares of Common Stock. Such Common
Stock shall be valued at the Conversion Price in effect on each thirty (30)
day or shorter period for which Liquidated Damages are payable. The
Liquidated Damages must be paid within ten (10) days after the end of each
thirty (30) day period or shorter part thereof for which Liquidated Damages
are payable. In the event a Registration Statement is filed by the Filing
Date but is withdrawn prior to being declared effective by the Commission,
then such Registration Statement will be deemed to have not been filed. All
oral or written and accounting comments received from the Commission relating
to the Registration Statement must be responded to within thirty (30) days.
Failure to timely respond to Commission comments is a Non-Registration Event
for which Liquidated Damages shall accrue and be payable by the Company to the
holders of Registrable Securities at the same rate set forth above.
Notwithstanding the foregoing, the Company shall not be liable to the
Subscriber under this Section 11.4 for any events or delays occurring as a
consequence of the acts or omissions of the Subscribers contrary to the
obligations undertaken by Subscribers in this Agreement. Liquidated Damages
will not accrue nor be payable pursuant to this Section 11.4 nor will a Non-
Registration Event be deemed to have occurred for times during which
Registrable Securities are transferable by the holder of Registrable
Securities pursuant to Rule 144(k) under the 1933 Act.
11.5. Expenses. All expenses incurred by the Company in complying
with Section 11, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including reasonable
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars, costs of insurance and
fee of one counsel for all Sellers are called "Registration Expenses." All
underwriting discounts and selling commissions applicable to the sale of
Registrable Securities, including any fees and disbursements of one counsel to
the Seller, are called "Selling Expenses." The Company will pay all
Registration Expenses in connection with the registration statement under
Section 11. Selling Expenses in connection with each registration statement
under Section 11 shall be borne by the Seller and may be apportioned among the
Sellers in proportion to the number of shares sold by the Seller relative to
the number of shares sold under such registration statement or as all Sellers
thereunder may agree.
11.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable Securities
under the 1933 Act pursuant to Section 11, the Company will, to the extent
permitted by law, indemnify and hold harmless the Seller, each officer of the
Seller, each director of the Seller, each underwriter of such Registrable
Securities thereunder and each other person, if any, who controls such Seller
or underwriter within the meaning of the 1933 Act, against any losses, claims,
damages or liabilities, joint or several, to which the Seller, or such
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such Registrable Securities was registered under the
1933 Act pursuant to Section 11, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances when made, and
will subject to the provisions of Section 11.6(c) reimburse the Seller, each
such underwriter and each such controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable to the Seller to the extent that
any such damages arise out of or are based upon an untrue statement or
omission made in any preliminary prospectus if (i) the Seller failed to send
or deliver a copy of the final prospectus delivered by the Company to the
Seller with or prior to the delivery of written confirmation of the sale by
the Seller to the person asserting the claim from which such damages arise,
(ii) the final prospectus would have corrected such untrue statement or
alleged untrue statement or such omission or alleged omission, or (iii) to the
extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished by any such
Seller, or any such controlling person in writing specifically for use in such
registration statement or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the 1933 Act pursuant to Section 11, each Seller severally
but not jointly will, to the extent permitted by law, indemnify and hold
harmless the Company, and each person, if any, who controls the Company within
the meaning of the 1933 Act, each officer of the Company who signs the
registration statement, each director of the Company, each underwriter and
each person who controls any underwriter within the meaning of the 1933 Act,
against all losses, claims, damages or liabilities, joint or several, to which
the Company or such officer, director, underwriter or controlling person may
become subject under the 1933 Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement under which such
Registrable Securities were registered under the 1933 Act pursuant to Section
11, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse the Company and each such officer, director, underwriter and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action, provided, however, that the Seller will be liable
hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with information pertaining to such Seller, as such,
furnished in writing to the Company by such Seller specifically for use in
such registration statement or prospectus, and provided, further, however,
that the liability of the Seller hereunder shall be limited to the net
proceeds actually received by the Seller from the sale of Registrable
Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
hereunder, notify the indemnifying party in writing thereof, but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to such indemnified party other than under this Section
11.6(c) and shall only relieve it from any liability which it may have to such
indemnified party under this Section 11.6(c), except and only if and to the
extent the indemnifying party is prejudiced by such omission. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such indemnified
party, and, after notice from the indemnifying party to such indemnified party
of its election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this
Section 11.6(c) for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, provided,
however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to
it which are different from or additional to those available to the
indemnifying party or if the interests of the indemnified party reasonably may
be deemed to conflict with the interests of the indemnifying party, the
indemnified parties, as a group, shall have the right to select one separate
counsel and to assume such legal defenses and otherwise to participate in the
defense of such action, with the reasonable expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by
the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution in the
event of joint liability under the 1933 Act in any case in which either (i) a
Seller, or any controlling person of a Seller, makes a claim for
indemnification pursuant to this Section 11.6 but it is judicially determined
(by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 11.6 provides for indemnification
in such case, or (ii) contribution under the 1933 Act may be required on the
part of the Seller or controlling person of the Seller in circumstances for
which indemnification is not provided under this Section 11.6; then, and in
each such case, the Company and the Seller will contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (after
contribution from others) in such proportion so that the Seller is responsible
only for the portion represented by the percentage that the public offering
price of its securities offered by the registration statement bears to the
public offering price of all securities offered by such registration
statement, provided, however, that, in any such case, (y) the Seller will not
be required to contribute any amount in excess of the public offering price of
all such securities sold by it pursuant to such registration statement; and
(z) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
11.7. Delivery of Unlegended Shares.
(a) Within four (4) business days (such fourth (4th) business day
being the "Unlegended Shares Delivery Date") after the business day on which
the Company has received (i) a notice that Registrable Securities have been
sold either pursuant to the Registration Statement or Rule 144 under the 1933
Act, (ii) a representation that the prospectus delivery requirements, or the
requirements of Rule 144, as applicable and if required, have been satisfied,
and (iii) the original share certificates representing the shares of Common
Stock that have been sold, and (iv) in the case of sales under Rule 144,
customary representation letters of the Subscriber and/or Subscriber's broker
regarding compliance with the requirements of Rule 144, the Company at its
expense, (y) shall deliver, and shall cause legal counsel selected by the
Company to deliver to its transfer agent (with copies to Subscriber) an
appropriate instruction and opinion of such counsel, directing the delivery of
shares of Common Stock without any legends including the legend set forth in
Section 4(h) above, reissuable pursuant to any effective and current
Registration Statement described in Section 11 of this Agreement or pursuant
to Rule 144 under the 1933 Act (the "Unlegended Shares"); and (z) cause the
transmission of the certificates representing the Unlegended Shares together
with a legended certificate representing the balance of the submitted Shares
certificate, if any, to the Subscriber at the address specified in the notice
of sale, via express courier, by electronic transfer or otherwise on or before
the Unlegended Shares Delivery Date. Transfer fees shall be the
responsibility of the Seller.
(b) In lieu of delivering physical certificates representing the
Unlegended Shares, if the Company's transfer agent is participating in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer program,
upon request of a Subscriber, so long as the certificates therefor do not bear
a legend and the Subscriber is not obligated to return such certificate for
the placement of a legend thereon, the Company shall cause its transfer agent
to electronically transmit the Unlegended Shares by crediting the account of
Subscriber's prime Broker with DTC through its Deposit Withdrawal Agent
Commission system. Such delivery must be made on or before the Unlegended
Shares Delivery Date.
(c) The Company understands that a delay in the delivery of the
Unlegended Shares pursuant to Section 11 hereof later than two business days
after the Unlegended Shares Delivery Date could result in economic loss to a
Subscriber. As compensation to a Subscriber for such loss, the Company agrees
to pay late payment fees (as liquidated damages and not as a penalty) to the
Subscriber for late delivery of Unlegended Shares in the amount of $100 per
business day after the Delivery Date for each $10,000 of purchase price of the
Unlegended Shares subject to the delivery default. If during any 360 day
period, the Company fails to deliver Unlegended Shares as required by this
Section 11.7 for an aggregate of thirty (30) days, then each Subscriber or
assignee holding Securities subject to such default may, at its option,
require the Company to redeem all or any portion of the Shares and Warrant
Shares subject to such default at a price per share equal to 120% of the
Purchase Price of such Common Stock and Warrant Shares ("Unlegended Redemption
Amount"). The amount of the aforedescribed liquidated damages that have
accrued or paid for the twenty day period prior to the receipt by the
Subscriber of the Unlegended Redemption Amount shall be credited against the
Unlegended Redemption Amount. The Company shall pay any payments incurred
under this Section in immediately available funds upon demand.
(d) In addition to any other rights available to a Subscriber, if
the Company fails to deliver to a Subscriber Unlegended Shares as required
pursuant to this Agreement, within seven (7) business days after the
Unlegended Shares Delivery Date and the Subscriber purchases (in an open
market transaction or otherwise) shares of common stock to deliver in
satisfaction of a sale by such Subscriber of the shares of Common Stock which
the Subscriber was entitled to receive from the Company (a "Buy-In"), then the
Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber's total purchase price (including brokerage commissions, if any)
for the shares of common stock so purchased exceeds (B) the aggregate purchase
price of the shares of Common Stock delivered to the Company for reissuance as
Unlegended Shares together with interest thereon at a rate of 15% per annum,
accruing until such amount and any accrued interest thereon is paid in full
(which amount shall be paid as liquidated damages and not as a penalty). For
example, if a Subscriber purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to $10,000 of
purchase price of shares of Common Stock delivered to the Company for
reissuance as Unlegended Shares, the Company shall be required to pay the
Subscriber $1,000, plus interest. The Subscriber shall provide the Company
written notice indicating the amounts payable to the Subscriber in respect of
the Buy-In.
(e) In the event a Subscriber shall request delivery of Unlegended
Shares as described in Section 11.7 and the Company is required to deliver
such Unlegended Shares pursuant to Section 11.7, the Company may not refuse to
deliver Unlegended Shares based on any claim that such Subscriber or any one
associated or affiliated with such Subscriber has been engaged in any
violation of law, or for any other reason, unless, an injunction or temporary
restraining order from a court, on notice, restraining and or enjoining
delivery of such Unlegended Shares or exercise of all or part of said Warrant
shall have been sought and obtained and the Company has posted a surety bond
for the benefit of such Subscriber in the amount of 120% of the amount of the
aggregate purchase price of the Common Stock and Warrant Shares which are
subject to the injunction or temporary restraining order, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Subscriber to the extent
Subscriber obtains judgment in Subscriber's favor.
12. (a) Right of First Refusal. Until the end of the Exclusion
Period, the Subscribers shall be given not less than seven (7) business days
prior written notice of any proposed sale by the Company of its common stock
or other securities or debt obligations, except in connection with (i) the
Company's issuance of warrants or options to purchase Common Stock pursuant to
employees of the Company, (ii) as a result of the exercise of options or
warrants or conversion of convertible notes which are granted or issued
pursuant to this Agreement, (iii) an aggregate of not more than $100,000 of
securities issuable to technical consultants, (iv) securities issuable to
investment and public relations firms, (v) as full and partial consideration
in connection with a merger, consolidation or purchase of substantially all of
the securities or assets of any corporation or other entity, and (vi) as has
been described in the Reports or Other Written Information filed with the
Commission or delivered to the Subscribers prior to the Closing Date
(collectively the foregoing are "Excepted Issuances"). The Subscribers who
exercise their rights pursuant to this Section 12(a) shall have the right
during the seven (7) business days following receipt of the notice to purchase
such offered common stock, debt or other securities in accordance with the
terms and conditions set forth in the notice of sale in the same proportion to
each other as their purchase of Notes in the Offering. In the event such
terms and conditions are modified during the notice period, the Subscribers
shall be given prompt notice of such modification and shall have the right
during the seven (7) business days following the notice of modification,
whichever is longer, to exercise such right.
(b) Offering Restrictions. Other than Excepted Issuances, until
the end of the Exclusion Period, the Company will not enter into an agreement
to nor issue any equity, convertible debt or other securities convertible into
common stock or equity of the Company nor modify any of the foregoing which
may be outstanding at anytime, without the prior written consent of the
Subscriber, which consent may be withheld for any reason. For so long as the
Notes are outstanding the Company will not enter into any equity line of
credit or similar agreement, nor issue or agree to issue any floating or
variable priced equity linked instruments nor any of the foregoing or equity
with price reset rights.
(c) Favored Nations Provision. Other than the Excepted Issuances,
if at any time Notes are outstanding the Company shall offer, issue or agree
to issue any common stock or securities convertible into or exercisable for
shares of common stock (or modify any of the foregoing which may be
outstanding) to any person or entity at a price per share or conversion or
exercise price per share which shall be less than the Conversion Price in
respect of the Shares, or if less than the Warrant exercise price in respect
of the Warrant Shares, without the consent of each Subscriber holding Notes
and/or Shares, then the Company shall issue, for each such occasion,
additional shares of Common Stock to each Subscriber so that the average per
share purchase price of the shares of Common Stock issued to the Subscriber
(of only the Common Stock or Warrant Shares still owned by the Subscriber) is
equal to such other lower price per share and the Conversion Price and Warrant
Exercise Price shall automatically be reduced to such other lower price per
share. The average Purchase Price of the Shares and average exercise price in
relation to the Warrant Shares shall be calculated separately for the Shares
and Warrant Shares. The foregoing calculation and issuance shall be made
separately for Shares received upon conversion and separately for Warrant
Shares. The delivery to the Subscriber of the additional shares of Common
Stock shall be not later than the closing date of the transaction giving rise
to the requirement to issue additional shares of Common Stock. The Subscriber
is granted the registration rights described in Section 11 hereof in relation
to such additional shares of Common Stock except that the Filing Date and
Effective Date vis-a-vis such additional common shares shall be, respectively,
the sixtieth (60th) and one hundred and twentieth (120th) date after the
closing date giving rise to the requirement to issue the additional shares of
Common Stock. For purposes of the issuance and adjustment described in this
paragraph, the issuance of any security of the Company carrying the right to
convert such security into shares of Common Stock or of any warrant, right or
option to purchase Common Stock shall result in the issuance of the
additional shares of Common Stock upon the issuance of such convertible
security, warrant, right or option and again at any time upon any subsequent
issuances of shares of Common Stock upon exercise of such conversion or
purchase rights if such issuance is at a price lower than the Conversion Price
in effect upon such issuance. The rights of the Subscriber set forth in this
Section 12 are in addition to any other rights the Subscriber has pursuant to
this Agreement, the Note, any Transaction Document, and any other agreement
referred to or entered into in connection herewith.
(d) Option Plan Restrictions. The only officer, director,
employee and consultant stock option or stock incentive plan currently in
effect or contemplated by the Company has been submitted to the Subscribers.
No other plan will be adopted nor may any options or equity not included in
such plan be issued for so long as any sum is outstanding under the Note.
(e) Maximum Exercise of Rights. In the event the exercise of the
rights described in Sections 12(a) and 12(c) would result in the issuance of
an amount of common stock of the Company that would exceed the maximum amount
that may be issued to a Subscriber calculated in the manner described in
Section 7.3 of this Agreement, then the issuance of such additional shares of
common stock of the Company to such Subscriber will be deferred in whole or in
part until such time as such Subscriber is able to beneficially own such
common stock without exceeding the maximum amount set forth calculated in the
manner described in Section 7.3 of this Agreement. The determination of when
such common stock may be issued shall be made by each Subscriber as to only
such Subscriber.
13. Miscellaneous.
(a) Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be
in writing and, unless otherwise specified herein, shall be (i) personally
served, (ii) deposited in the mail, registered or certified, return receipt
requested, postage prepaid, (iii) delivered by reputable air courier service
with charges prepaid, or (iv) transmitted by hand delivery, telegram, or
facsimile, addressed as set forth below or to such other address as such party
shall have specified most recently by written notice. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address
or number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during
normal business hours where such notice is to be received) or (b) on the
second business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur. The addresses for such communications
shall be: (i) if to the Company, to: Wizzard Software Corporation, 5001 Baum
Boulevard, Suite 770, Pittsburgh, PA 15213, Attn: Christopher J. Spencer,
President and Chief Executive Officer, telecopier: (412) 621-2625, with a copy
by telecopier only to: Burningham & Burningham, 455 East 500 South, Suite 205,
Salt Lake City, Utah 84111, Attn: Leonard W. Burningham, Esq. and Branden T.
Burningham, Esq., telecopier: (801) 355-7126, and (ii) if to the Subscribers,
to: the one or more addresses and telecopier numbers indicated on the
signature pages hereto, with an additional copy by telecopier only to: Grushko
& Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176,
telecopier number: (212) 697-3575.
(b) Closing. The consummation of the transactions contemplated
herein shall take place at the offices of Grushko & Mittman, P.C., 551 Fifth
Avenue, Suite 1601, New York, New York 10176, upon the satisfaction of all
conditions to Closing set forth in this Agreement ("Closing Date"). The
Closing Date shall be deemed January 28, 2005. The Company acknowledges
receipt of $1,000,000 of Purchase Price on January 28, 2005.
(c) Entire Agreement; Assignment. This Agreement and other
documents delivered in connection herewith represent the entire agreement
between the parties hereto with respect to the subject matter hereof and may
be amended only by a writing executed by both parties. Neither the Company
nor the Subscribers have relied on any representations not contained or
referred to in this Agreement and the documents delivered herewith. No right
or obligation of the Company shall be assigned without prior notice to and the
written consent of the Subscribers.
(d) Counterparts/Execution. This Agreement may be executed in any
number of counterparts and by the different signatories hereto on separate
counterparts, each of which, when so executed, shall be deemed an original,
but all such counterparts shall constitute but one and the same instrument.
This Agreement may be executed by facsimile signature and delivered by
facsimile transmission.
(e) Law Governing this Agreement. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York without
regard to conflicts of laws principles that would result in the application of
the substantive laws of another jurisdiction. Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. The parties and the
individuals executing this Agreement and other agreements referred to herein
or delivered in connection herewith on behalf of the Company agree to submit
to the jurisdiction of such courts and waive trial by jury. The prevailing
party shall be entitled to recover from the other party its reasonable
attorney's fees and costs. In the event that any provision of this Agreement
or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any
such provision which may prove invalid or unenforceable under any law shall
not affect the validity or enforceability of any other provision of any
agreement.
(f) Specific Enforcement, Consent to Jurisdiction. The Company and
Subscriber acknowledge and agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to one or more
preliminary and final injunctions to prevent or cure breaches of the
provisions of this Agreement and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which any of
them may be entitled by law or equity. Subject to Section 13(e) hereof, each
of the Company, Subscriber and any signator hereto in his personal capacity
hereby waives, and agrees not to assert in any such suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction in
New York of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. Nothing in this Section shall affect or limit any right to serve
process in any other manner permitted by law.
(g) Independent Nature of Subscribers. The Company acknowledges
that the obligations of each Subscriber under the Transaction Documents are
several and not joint with the obligations of any other Subscriber, and no
Subscriber shall be responsible in any way for the performance of the
obligations of any other Subscriber under the Transaction Documents. The
Company acknowledges that each Subscriber has represented that the decision of
each Subscriber to purchase Securities has been made by such Subscriber
independently of any other Subscriber and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial
or otherwise) or prospects of the Company which may have been made or given by
any other Subscriber or by any agent or employee of any other Subscriber, and
no Subscriber or any of its agents or employees shall have any liability to
any Subscriber (or any other person) relating to or arising from any such
information, materials, statements or opinions. The Company acknowledges that
nothing contained in any Transaction Document, and no action taken by any
Subscriber pursuant hereto or thereto (including, but not limited to, the (i)
inclusion of a Subscriber in the Registration Statement and (ii) review by,
and consent to, such Registration Statement by a Subscriber) shall be deemed
to constitute the Subscribers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the
Subscribers are in any way acting in concert or as a group with respect to
such obligations or the transactions contemplated by the Transaction
Documents. The Company acknowledges that each Subscriber shall be entitled to
independently protect and enforce its rights, including without limitation,
the rights arising out of the Transaction Documents, and it shall not be
necessary for any other Subscriber to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that it has elected to
provide all Subscribers with the same terms and Transaction Documents for the
convenience of the Company and not because Company was required or requested
to do so by the Subscribers. The Company acknowledges that such procedure
with respect to the Transaction Documents in no way creates a presumption that
the Subscribers are in any way acting in concert or as a group with respect to
the Transaction Documents or the transactions contemplated thereby.
[THIS SPACE INTENTIONALLY LEFT BLANK]
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
WIZZARD SOFTWARE CORP.
a Colorado corporation
By: /s/ Christopher J. Spencer
Name: Christopher J. Spencer
Title: President
Dated: January _____, 2005
SUBSCRIBER
NOTE
PRINCIPAL
CLASS A
WARRANTS
CLASS B
WARRANTS
ALPHA CAPITAL AKTIENGESELLSCHAFT
Pradafant 7
9490 Furstentums
Vaduz, Lichtenstein
Fax: 011-42-32323196
/s/
(Signature)
By:
$800,000.00
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
WIZZARD SOFTWARE CORP.
a Colorado corporation
By: /s/ Christopher J. Spencer
Name: Christopher J. Spencer
Title: President & CEO
Dated: January _____, 2005
SUBSCRIBER
NOTE
PRINCIPAL
CLASS A
WARRANTS
CLASS B
WARRANTS
GENESIS MICROCAP INC.
483 Green Lanes
London N13 4BS, England
By: Lawrence S. Gibbons
Fax: 011-087-0127-5687
/s/
(Signature)
By:
$200,000.00
SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (C)
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
WIZZARD SOFTWARE CORP.
a Colorado corporation
By: /s/ Christopher J. Spencer
Name: Christopher J. Spencer
Title: President & CEO
Dated: January _____, 2005
SUBSCRIBER
NOTE
PRINCIPAL
CLASS A
WARRANTS
CLASS B
WARRANTS
WHALEHAVEN CAPITAL FUND LIMITED
3rd Floor, 14 Par-Laville Road
Hamilton, Bermuda HM08
Fax: (441) 292-1373
/s/
(Signature)
By:
$400,000.00
LIST OF EXHIBITS AND SCHEDULES
Exhibit A1 Form of Class A Warrant
Exhibit A2 Form of Class B Warrant
Exhibit B Escrow Agreement
Exhibit C Form of Legal Opinion
Exhibit D Form of Public Announcement or Form 8-K
Schedule 5(d) Additional Issuances
Schedule 5(s) Capitalization
Schedule 9(e) Use of Proceeds
EXHIBIT A1
[SEE EXHIBITS 10.6 THROUGH 10.8]
EXHIBIT A2
[SEE EXHIBITS 10.9 THROUGH 10.11]
EXHIBIT B
[SEE EXHIBIT 10.5]
EXHIBIT C
[FORM OF LEGAL OPINION]
December ____, 2004
TO: The Subscribers identified on Schedule A hereto:
We have acted as counsel to Wizzard Software Corp., a Colorado
corporation in connection with the offer and sale by the Company of up to
$1,400,000 principal amount of Convertible Notes (the "Notes") and issuance of
common stock purchase warrants ("Warrants") to the Subscribers identified on
Schedule A hereto, pursuant to the exemption from registration under the
Securities Act of 1933, as amended (the "Act) as set forth in Regulation D
("Regulation D") promulgated thereunder. Capitalized terms used herein and not
otherwise defined shall have the meaning assigned to them in the subscription
agreement (the "Agreement") by and between the Company and Subscribers entered
into at or about the date hereof. The Agreement, and the agreements described
below are sometimes hereinafter referred to collectively as the "Documents".
In connection with the opinions expressed herein, we have made such
examination of law as we considered appropriate or advisable for purposes
hereof. As to matters of fact material to the opinions expressed herein, we
have relied, with your permission, upon the representations and warranties as
to factual matters contained in and made by the Company and the Subscriber
pursuant to the Documents and upon certificates and statements of certain
government officials and of officers of the Company as described below. We
have also examined originals or copies of certain corporate documents or
records of the Company as described below:
(a) Form of Agreement
(b) Form of Note
(c) Form of Common Stock Purchase Warrant (the "Warrants)
(d) Funds Escrow Agreement
(e) Certificate of Incorporation of the Company as amended
(f) Bylaws of the Company
(g) Minutes of the action of the Company's Board of Directors,
including unanimous Board of Directors approval of the Documents,
a copy of which is annexed hereto.
In rendering this opinion, we have, with your permission, assumed: (a) the
authenticity of all documents submitted to us as originals; (b) the conformity
to the originals of all documents submitted to us as copies; (c) the genuiness
of all signatures; (d) the legal capacity of natural persons; (e) the truth,
accuracy and completeness of the information, factual matters, representations
and warranties contained in all of such documents; (f) the due authorization,
execution and delivery of all such documents by Subscribers, and the legal,
valid and binding effect thereof on Subscribers; and (g) that the Company and
the Subscribers will act in accordance with their respective representations
and warranties as set forth in the Documents.
We are members of the bar of the State of ___________. We express no
opinion as to the laws of any jurisdiction other than Colorado, New York, and
the federal laws of the United States of America. We express no opinion with
respect to the effect or application of any other laws. Special rulings of
authorities administering any of such laws or opinions of other counsel have
not been sought or obtained by us in connection with rendering the opinions
expressed herein.
1. The Company is duly incorporated, validly existing and in good
standing in the state of Delaware; have qualified to do business in each state
where required unless the failure to do so would not have a material impact on
the Company's operations; and have the requisite corporate power and authority
to conduct its business, and to own, lease and operate its properties.
2. The Company has the requisite corporate power and authority to
execute, deliver and perform its obligations under the Documents. The
Documents, and the issuance of the Notes, and Warrants and the reservation and
issuance of Common Stock issuable upon conversion of the Notes and exercise of
the Warrants have been (a) duly approved by the Board of Directors of the
Company, and (b) all of the foregoing, when issued pursuant to the Agreement
and upon delivery, shall be validly issued and outstanding, fully paid and non
assessable.
3. The execution, delivery and performance of the Documents by the
Company and the consummation of the transactions contemplated thereby, will
not, with or without the giving of notice or the passage of time or both:
(a) Violate the provisions of the Certificate of Incorporation
or bylaws of the Company; or
(b) To the best of counsel's knowledge, violate any judgment,
decree, order or award of any court binding upon the Company.
4. The Documents constitute the valid and legally binding obligations
of the Company and are enforceable against the Company in accordance with its
respective terms.
5. The Notes, Warrants and the Common Stock issuable upon conversion
of the Notes, and exercise of the Warrants, have not been registered under the
Securities Act of 1933, as amended (the "Act") or under the laws of any state
or other jurisdiction, and are or will be issued pursuant to a valid exemption
from registration.
6. The holders of the Common Stock issuable upon conversion of the
Notes and exercise of the Warrants will not be subject to the provisions of
the anti-takeover statutes of Colorado and New York.
7. The Company has either obtained the approval of the transactions
described in the Documents from the OTC Bulletin Board and its shareholders,
or no such approval is required.
8. The Company and its Board of Directors have taken all necessary
action, if any, in order to render inapplicable any control share acquisition,
business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company's
Certificate of Incorporation (or similar charter documents) or the laws of its
state of incorporation that is or could become applicable to the Subscribers
as a result of the Subscribers and the Company fulfilling their obligations or
exercising their rights under the Documents, including without limitation as a
result of the Company's issuance of the Notes, Warrants and Common Stock
issuable upon conversion of the Notes and exercise of the Warrants and the
Subscribers' ownership of the Notes, Warrants and Common Stock issuable upon
conversion of the Notes and exercise of the Warrants.
Our opinions expressed above are specifically subject to the following
limitations, exceptions, qualifications and assumptions:
A. The effect of bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to or affecting the relief of debtors or the
rights and remedies of creditors generally, including without limitation the
effect of statutory or other law regarding fraudulent conveyances and
preferential transfers.
B. Limitations imposed by state law, federal law or general equitable
principles upon the specific enforceability of any of the remedies, covenants
or other provisions of any applicable agreement and upon the availability of
injunctive relief or other equitable remedies, regardless of whether
enforcement of any such agreement is considered in a proceeding in equity or
at law.
C. This opinion letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage and other
limitations, all as more particularly described in the Accord, including the
General Qualifications and the Equitable Principles Limitation, and this
opinion letter should be read in conjunction therewith.
This opinion is rendered as of the date first written above, is solely
for your benefit in connection with the Agreement and may not be relief upon
or used by, circulated, quoted, or referred to nor may any copies hereof by
delivered to any other person without our prior written consent. We disclaim
any obligation to update this opinion letter or to advise you of facts,
circumstances, events or developments which hereafter may be brought to our
attention and which may alter, affect or modify the opinions expressed herein.
Very truly yours,
SCHEDULE A TO LEGAL OPINION
PURCHASE CLASS A CLASS B
SUBSCRIBER PRICE WARRANTS WARRANTS
ALPHA CAPITAL
AKTIENGESELLSCHAFT $ 800,000
Pradafant 7
9490 Furstentums
Vaduz, Liechtenstein
Fax: 011-42-32323196
GENESIS MICROCAP INC. $ 200,000
483 Green Lanes
London N13 4BS, England
By: Lawrence S. Gibbons
Fax: 011-087-0127-5687
WHALEHAVEN CAPITAL $ 400,000
FUND LIMITED
3rd Floor, 14 Par-Laville Road
Hamilton, Bermuda HM08
Fax: (441) 292-1373
TOTAL $1,400,000
EXHIBIT D
[SEE CURRENT REPORT ON FORM 8-K]
SCHEDULE 5(d)
1. Series 2001-A Eight Percent (8%) Convertible Notes held by Maricopa
Equity Management Corp., a Minnesota corporation
2. Common Stock Purchase Warrants held by Alpha Capital
Aktiengesellschaft; Genesis Microcap, Inc.; and Stonestreet Limited
Partnership, pursuant to Subscription Agreement dated January 23, 2004.
3. The minority stockholders of Wizzard Software Corporation, a Delaware
corporation, are collectively entitled to receive 787,176 shares of the
Company's common stock pursuant to an Agreement and Plan of Merger dated
September 21, 2004.
SCHEDULE 5(s)
Authorized shares of common stock: 100,000,000
Outstanding shares of common stock: 26,094,228
Authorized shares of preferred stock: 10,000,000
Outstanding shares of preferred stock: 0
SCHEDULE 9(e)
USE OF PROCEEDS
Operating capital and acquisition purposes.