SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of
November 30, 2005, by and among COMPLIANCE SYSTEMS CORPORATION, a Delaware
corporation (the "Company"), and the Buyers listed on Schedule I attached
hereto (individually, a "Buyer" or collectively "Buyers").
RECITALS:
WHEREAS, the Company and the Buyer(s) are executing and delivering this
Agreement in reliance upon an exemption from securities registration pursuant
to Section 4(2) and/or Rule 506 of Regulation D ("Regulation D") as
promulgated by the U.S. Securities and Exchange Commission (the "SEC") under
the Securities Act of 1933, as amended (the "Securities Act");
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the
Buyer(s), as provided herein, and the Buyer(s) shall purchase up to One
Million Dollars ($1,000,000) of secured convertible debentures (the
"Convertible Debentures"), which shall be convertible into shares of the
Company's common stock, par value $0.001 (the "Common Stock") (as converted,
the "Conversion Shares") of which Six Hundred Thousand Dollars ($600,000)
shall be funded on the fifth (5th) business day following the date hereof
(the "First Closing") and Four Hundred Thousand Dollars ($400,000) shall be
funded two (2) business days prior to the date the registration statement
(the "Registration Statement") is filed, pursuant to the Investor
Registration Rights Agreement dated the date hereof, with the United States
Securities and Exchange Commission (the "SEC") (the "Second Closing")
(individually referred to as a "Closing" collectively referred to as the
"Closings"), for a total purchase price of up to One Million Dollars
($1,000,000), (the "Purchase Price") in the respective amounts set forth
opposite each Buyer(s) name on Schedule I (the "Subscription Amount");
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration
Rights Agreement substantially (the "Investor Registration Rights Agreement")
pursuant to which the Company has agreed to provide certain registration
rights under the Securities Act and the rules and regulations promulgated
there under, and applicable state securities laws;
WHEREAS, the aggregate proceeds of the sale of the Convertible
Debentures contemplated hereby shall be held in escrow pursuant to the terms
of an escrow agreement (the "Escrow Agreement");
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Security
Agreement and each wholly owned subsidiary of the Company is entering into a
Security Agreement (collectively the "Security Agreement") pursuant to which
the Company and its subsidiaries have agreed to provide the Buyer a security
interest in Pledged Collateral (as this term is defined in the Security
Agreement) to secure the Company's obligations under the Transaction
Documents or any other obligations of the Company to the Buyer;
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto, Barry Brookstein, and Dean Garfinkel are
executing and delivering a Insider Pledge and Escrow Agreements (collectively
the "Pledge and Escrow Agreement") pursuant to which the Dean Garfinkel and
Barry Brookstein have agreed to provide the Buyer a security interest in the
Pledged Shares (as this term is defined in the Pledge and Escrow Agreement)
to secure the Company's obligations under the Transaction Documents or any
other obligations of the Company to the Buyer; and
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering Irrevocable
Transfer Agent Instructions (the "Irrevocable Transfer Agent Instructions").
NOW, THEREFORE, for and in consideration of the mutual covenants and
other agreements contained in this Agreement the Company and the Buyer(s)
hereby agree as follows:
1. PURCHASE AND SALE OF CONVERTIBLE DEBENTURES.
(a) Purchase of Convertible Debentures. Subject to the
satisfaction (or waiver) of the terms and conditions of this Agreement, each
Buyer agrees, severally and not jointly, to purchase at each Closing and the
Company agrees to sell and issue to each Buyer, severally and not jointly, at
each Closing, Convertible Debentures in amounts corresponding with the
Subscription Amount set forth opposite each Buyer's name on Schedule I
hereto. Upon execution hereof by a Buyer, the Buyer shall wire transfer the
Subscription Amount set forth opposite his name on Schedule I in same-day
funds or a check payable to "David Gonzalez, Esq., as Escrow Agent for
Compliance Systems Corporation/Cornell Capital Partners, LP", which
Subscription Amount shall be held in escrow pursuant to the terms of the
Escrow Agreement (as hereinafter defined) and disbursed in accordance
therewith. Notwithstanding the foregoing, a Buyer may withdraw his
Subscription Amount and terminate this Agreement as to such Buyer at any time
after the execution hereof and prior to Closing (as hereinafter defined).
(b) Closing Date. The First Closing of the purchase and
sale of the Convertible Debentures shall take place at 10:00 a.m. Eastern
Standard Time on the fifth (5th) business day following the date hereof,
subject to notification of satisfaction of the conditions to the First
Closing set forth herein and in Sections 6 and 7 below (or such later date as
is mutually agreed to by the Company and the Buyer(s)) (the "First Closing
Date") and the Second Closing of the purchase and sale of the Convertible
Debentures shall take place at 10:00 a.m. Eastern Standard Time two (2)
business days prior to the date the Registration Statement is filed with the
SEC, subject to notification of satisfaction of the conditions to the Second
Closing set forth herein and in Sections 6 and 7 below (or such later date as
is mutually agreed to by the Company and the Buyer(s)) (the "Second Closing
Date") (collectively referred to a the "Closing Dates"). The Closing shall
occur on the respective Closing Dates at the offices of Yorkville Advisors,
LLC, 3700 Hudson Street, Suite 3700, Jersey City, New Jersey 07302 (or such
other place as is mutually agreed to by the Company and the Buyer(s)).
(c) Escrow Arrangements; Form of Payment. Upon execution
hereof by Buyer(s) and pending the Closings, the aggregate proceeds of the
sale of the Convertible Debentures to Buyer(s) pursuant hereto shall be
deposited in a non-interest bearing escrow account with David Gonzalez, Esq.,
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as escrow agent (the "Escrow Agent"), pursuant to the terms of the Escrow
Agreement. Subject to the satisfaction of the terms and conditions of this
Agreement, on the Closing Dates, (i) the Escrow Agent shall deliver to the
Company in accordance with the terms of the Escrow Agreement such aggregate
proceeds for the Convertible Debentures to be issued and sold to such
Buyer(s), and (ii) the Company shall deliver to each Buyer, Convertible
Debentures which such Buyer(s) is purchasing in amounts indicated opposite
such Buyer's name on Schedule I, duly executed on behalf of the Company.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants, severally and not jointly, that:
(a) Investment Purpose. Each Buyer is acquiring the
Convertible Debentures and, upon conversion of Convertible Debentures, the
Buyer will acquire the Conversion Shares then issuable, for its own account
for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the Securities Act; provided, however, that by
making the representations herein, such Buyer reserves the right to dispose
of the Conversion Shares at any time in accordance with or pursuant to an
effective registration statement covering such Conversion Shares or an
available exemption under the Securities Act.
(b) Accredited Investor Status. Each Buyer is an
"Accredited Investor" as that term is defined in Rule 501(a)(3) of Regulation
D.
(c) Reliance on Exemptions. Each Buyer understands that
the Convertible Debentures are being offered and sold to it in reliance on
specific exemptions from the registration requirements of United States
federal and state securities laws and that the Company is relying in part
upon the truth and accuracy of, and such Buyer's compliance with, the
representations, warranties, agreements, acknowledgments and understandings
of such Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of such Buyer to acquire such securities.
(d) Information. Each Buyer and its advisors (and his
or, its counsel), if any, have been furnished with all materials relating to
the business, finances and operations of the Company and information he
deemed material to making an informed investment decision regarding his
purchase of the Convertible Debentures and the Conversion Shares, which have
been requested by such Buyer. Each Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company and its management.
Neither such inquiries nor any other due diligence investigations conducted
by such Buyer or its advisors, if any, or its representatives shall modify,
amend or affect such Buyer's right to rely on the Company's representations
and warranties contained in Section 3 below. Each Buyer understands that its
investment in the Convertible Debentures and the Conversion Shares involves a
high degree of risk. Each Buyer is in a position regarding the Company,
which, based upon employment, family relationship or economic bargaining
power, enabled and enables such Buyer to obtain information from the Company
in order to evaluate the merits and risks of this investment. Each Buyer has
sought such accounting, legal and tax advice, as it has considered necessary
to make an informed investment decision with respect to its acquisition of
the Convertible Debentures and the Conversion Shares.
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(e) No Governmental Review. Each Buyer understands that
no United States federal or state agency or any other government or
governmental agency has passed on or made any recommendation or endorsement
of the Convertible Debentures or the Conversion Shares, or the fairness or
suitability of the investment in the Convertible Debentures or the Conversion
Shares, nor have such authorities passed upon or endorsed the merits of the
offering of the Convertible Debentures or the Conversion Shares.
(f) Transfer or Resale. Each Buyer understands that
except as provided in the Investor Registration Rights Agreement: (i) the
Convertible Debentures have not been and are not being registered under the
Securities Act or any state securities laws, and may not be offered for sale,
sold, assigned or transferred unless (A) subsequently registered thereunder,
or (B) such Buyer shall have delivered to the Company an opinion of counsel,
in a generally acceptable form, to the effect that such securities to be
sold, assigned or transferred may be sold, assigned or transferred pursuant
to an exemption from such registration requirements; (ii) any sale of such
securities made in reliance on Rule 144 under the Securities Act (or a
successor rule thereto) ("Rule 144") may be made only in accordance with the
terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
such securities under circumstances in which the seller (or the person
through whom the sale is made) may be deemed to be an underwriter (as that
term is defined in the Securities Act) may require compliance with some other
exemption under the Securities Act or the rules and regulations of the SEC
thereunder; and (iii) neither the Company nor any other person is under any
obligation to register such securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder. The Company reserves the right to place stop transfer
instructions against the shares and certificates for the Conversion Shares.
(g) Legends. Each Buyer understands that the
certificates or other instruments representing the Convertible Debentures and
or the Conversion Shares shall bear a restrictive legend in substantially the
following form (and a stop transfer order may be placed against transfer of
such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.
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The legend set forth above shall be removed and the Company within two (2)
business days shall issue a certificate without such legend to the holder of
the Conversion Shares upon which it is stamped, if, unless otherwise required
by state securities laws, (i) in connection with a sale transaction, provided
the Conversion Shares are registered under the Securities Act or (ii) in
connection with a sale transaction, after such holder provides the Company
with an opinion of counsel, which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions, to the
effect that a public sale, assignment or transfer of the Conversion Shares
may be made without registration under the Securities Act.
(h) Authorization, Enforcement. This Agreement has been
duly and validly authorized, executed and delivered on behalf of such Buyer
and is a valid and binding agreement of such Buyer enforceable in accordance
with its terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting
generally, the enforcement of applicable creditors' rights and remedies.
(i) Receipt of Documents. Each Buyer and his or its
counsel has received and read in their entirety: (i) this Agreement and each
representation, warranty and covenant set forth herein, and the Transaction
Documents; (ii) all due diligence and other information necessary to verify
the accuracy and completeness of such representations, warranties and
covenants; and (iii) answers to all questions each Buyer submitted to the
Company regarding an investment in the Company; and each Buyer has relied on
the information contained therein and has not been furnished any other
documents, literature, memorandum or prospectus.
(j) Due Formation of Corporate and Other Buyers. If the
Buyer(s) is a corporation, trust, partnership or other entity that is not an
individual person, it has been formed and validly exists and has not been
organized for the specific purpose of purchasing the Convertible Debentures
and is not prohibited from doing so.
(k) No Legal Advice From the Company. Each Buyer
acknowledges, that it had the opportunity to review this Agreement and the
transactions contemplated by this Agreement with his or its own legal counsel
and investment and tax advisors. Each Buyer is relying solely on such
counsel and advisors and not on any statements or representations of the
Company or any of its representatives or agents for legal, tax or investment
advice with respect to this investment, the transactions contemplated by this
Agreement or the securities laws of any jurisdiction.
(l) No Buyer makes any representation or warranty
regarding the Company's ability to successfully become a public company or to
have any registration statement filed by the Company pursuant to the
Registration Rights Agreement or otherwise declared effective by the SEC.
The Company has the sole obligation to make any and all such filings as may
be necessary to become a public company and to have any registration
statement declared effective by the SEC.
5
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers that, except
as set forth in the Disclosure Schedule attached as Exhibit A hereto:
(a) Organization and Qualification. The Company and its
subsidiaries are corporations duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are incorporated,
and have the requisite corporate power to own their properties and to carry
on their business as now being conducted. Each of the Company and its
subsidiaries is duly qualified as a foreign corporation to do business and is
in good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries taken as a whole.
(b) Authorization, Enforcement, Compliance with Other
Instruments. (i) The Company has the requisite corporate power and authority
to enter into and perform this Agreement, the Security Agreement, the
Investor Registration Rights Agreement, the Irrevocable Transfer Agent
Agreement, the Escrow Agreement, the Pledge and Escrow Agreements, and any
related agreements (collectively the "Transaction Documents") and to issue
the Convertible Debentures and the Conversion Shares in accordance with the
terms hereof and thereof, (ii) the execution and delivery of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby, including, without limitation, the issuance
of the Convertible Debentures the Conversion Shares and the reservation for
issuance and the issuance of the Conversion Shares issuable upon conversion
or exercise thereof, have been duly authorized by the Company's Board of
Directors and no further consent or authorization is required by the Company,
its Board of Directors or its stockholders, (iii) the Transaction Documents
have been duly executed and delivered by the Company, (iv) the Transaction
Documents constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as
such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of
creditors' rights and remedies. The authorized officer of the Company
executing the Transaction Documents knows of no reason why the Company cannot
file the registration statement as required under the Investor Registration
Rights Agreement or perform any of the Company's other obligations under such
documents.
(c) Capitalization. As of the date hereof the authorized
capital stock of the Company consists of 40,000,000 shares of Common Stock
and no shares of Preferred Stock, of which 12,965,003 shares of Common Stock
are issued and outstanding. All of such outstanding shares have been validly
issued and are fully paid and nonassessable. No shares of Common Stock are
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company. As of the date of this
Agreement, (i) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to,
or securities or rights convertible into, any shares of capital stock of the
Company or any of its subsidiaries, or contracts, commitments, understandings
or arrangements by which the Company or any of its subsidiaries is or may
become bound to issue additional shares of capital stock of the Company or
any of its subsidiaries or options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, any shares of capital stock of the Company or any
6
of its subsidiaries, (ii) there are no outstanding debt securities and (iii)
there are no agreements or arrangements under which the Company or any of its
subsidiaries is obligated to register the sale of any of their securities
under the Securities Act (except pursuant to the Registration Rights
Agreement) and (iv) there are no outstanding registration statements and
there are no outstanding comment letters from the SEC or any other regulatory
agency. There are no securities or instruments containing anti-dilution or
similar provisions that will be triggered by the issuance of the Convertible
Debentures as described in this Agreement. The Company has furnished to the
Buyer true and correct copies of the Company's Articles of Incorporation, as
amended and as in effect on the date hereof (the "Articles of
Incorporation"), and the Company's Bylaws, as in effect on the date hereof
(the "Bylaws"), and the terms of all securities convertible into or
exercisable for Common Stock and the material rights of the holders thereof
in respect thereto other than stock options issued to employees and
consultants.
(d) Issuance of Securities. The Convertible Debentures
are duly authorized and, upon issuance in accordance with the terms hereof,
shall be duly issued, fully paid and nonassessable, are free from all taxes,
liens and charges with respect to the issue thereof. The Conversion Shares
issuable upon conversion of the Convertible Debentures have been duly
authorized and reserved for issuance. Upon conversion or exercise in
accordance with the Convertible Debentures the Conversion Shares will be duly
issued, fully paid and nonassessable.
(e) No Conflicts. The execution, delivery and
performance of the Transaction Documents by the Company and the consummation
by the Company of the transactions contemplated hereby will not (i) result in
a violation of the Articles of Incorporation, any certificate of designations
of any outstanding series of preferred stock of the Company or the Bylaws or
(ii) conflict with or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of The National
Association of Securities Dealers Inc.'s OTC Bulletin Board on which the
Common Stock is quoted) applicable to the Company or any of its subsidiaries
or by which any property or asset of the Company or any of its subsidiaries
is bound or affected. Neither the Company nor its subsidiaries is in
violation of any term of or in default under its Articles of Incorporation or
Bylaws or their organizational charter or Bylaws, respectively, or any
material contract, agreement, mortgage, indebtedness, indenture, instrument,
judgment, decree or order or any statute, rule or regulation applicable to
the Company or its subsidiaries. The business of the Company and its
subsidiaries is not being conducted, and shall not be conducted in violation
of any material law, ordinance, or regulation of any governmental entity.
Except as specifically contemplated by this Agreement and as required under
the Securities Act and any applicable state securities laws, the Company 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 or contemplated
by this Agreement or the Registration Rights Agreement in accordance with the
terms hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date
hereof. The Company and its subsidiaries are unaware of any facts or
circumstance, which might give rise to any of the foregoing.
7
(f) Financial Statements. As of their respective dates,
the financial statements of the Company (the "Financial Statements") for the
two most recently completed fiscal years and any subsequent interim period
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such Financial
Statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and, fairly present in all material respects the
financial position of the Company as of the dates thereof and the results of
its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). No
other information provided by or on behalf of the Company to the Buyer,
including, without limitation, information referred to in this Agreement,
contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(g) Absence of Litigation. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending against or
affecting the Company, the Common Stock or any of the Company's subsidiaries,
wherein an unfavorable decision, ruling or finding would (i) have a material
adverse effect on the transactions contemplated hereby (ii) adversely affect
the validity or enforceability of, or the authority or ability of the Company
to perform its obligations under, this Agreement or any of the documents
contemplated herein, or (iii) have a material adverse effect on the business,
operations, properties, financial condition or results of operations of the
Company and its subsidiaries taken as a whole.
(h) Acknowledgment Regarding Buyer's Purchase of the
Convertible Debentures. The Company acknowledges and agrees that the
Buyer(s) is acting solely in the capacity of an arm's length purchaser with
respect to this Agreement and the transactions contemplated hereby. The
Company further acknowledges that the Buyer(s) is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect
to this Agreement and the transactions contemplated hereby and any advice
given by the Buyer(s) or any of their respective representatives or agents in
connection with this Agreement and the transactions contemplated hereby is
merely incidental to such Buyer's purchase of the Convertible Debentures or
the Conversion Shares. The Company further represents to the Buyer that the
Company's decision to enter into this Agreement has been based solely on the
independent evaluation by the Company and its representatives.
(i) No General Solicitation. Neither the Company, nor
any of its affiliates, nor 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 Securities Act) in connection with the
offer or sale of the Convertible Debentures or the Conversion Shares.
8
(j) 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 require
registration of the Convertible Debentures or the Conversion Shares under the
Securities Act or cause this offering of the Convertible Debentures or the
Conversion Shares to be integrated with prior offerings by the Company for
purposes of the Securities Act.
(k) Employee Relations. Neither the Company nor any of
its subsidiaries is involved in any labor dispute nor, to the knowledge of
the Company or any of its subsidiaries, is any such dispute threatened. None
of the Company's or its subsidiaries' employees is a member of a union and
the Company and its subsidiaries believe that their relations with their
employees are good.
(l) Intellectual Property Rights. The Company and its
subsidiaries own or possess adequate rights or licenses to use all
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct
their respective businesses as now conducted. The Company and its
subsidiaries do not have any knowledge of any infringement by the Company or
its subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secret or other similar rights of others, and, to the
knowledge of the Company there is no claim, action or proceeding being made
or brought against, or to the Company's knowledge, being threatened against,
the Company or its subsidiaries regarding trademark, trade name, patents,
patent rights, invention, copyright, license, service names, service marks,
service mark registrations, trade secret or other infringement; and the
Company and its subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing.
(m) Environmental Laws. The Company and its subsidiaries
are (i) in compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval.
(n) Title. Any real property and facilities held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material
and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries.
(o) Insurance. The Company and each of its subsidiaries
are insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as management of the Company believes to
be prudent and customary in the businesses in which the Company and its
subsidiaries are engaged. Neither the Company nor any such subsidiary has
been refused any insurance coverage sought or applied for and neither the
Company nor any such subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
9
b
(p) Regulatory Permits. The Company and its subsidiaries
possess all material certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, and neither the Company nor any such
subsidiary has received any notice of proceedings relating to the revocation
or modification of any such certificate, authorization or permit.
(q) Internal Accounting Controls. The Company and each
of its subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, and (iii) the recorded amounts for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(r) No Material Adverse Breaches, etc. Neither the
Company nor any of its subsidiaries is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of the Company's officers has or is expected in the
future to have a material adverse effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries. Neither the Company nor any of its subsidiaries
is in breach of any contract or agreement which breach, in the judgment of
the Company's officers, has or is expected to have a material adverse effect
on the business, properties, operations, financial condition, results of
operations or prospects of the Company or its subsidiaries.
(s) Tax Status. The Company and each of its subsidiaries
has made and filed all federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject
and (unless and only to the extent that the Company and each of its
subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to
the periods to which such returns, reports or declarations apply. There are
no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim.
(t) Certain Transactions. Except (i) as noted in the
Budget, (ii) arm's-length transactions pursuant to which the Company makes
payments in the ordinary course of business upon terms no less favorable than
the Company could obtain from third parties, or (iii) the grant of stock
options disclosed in the Disclosure Schedule, none of the officers,
directors, or employees of the Company is presently a party to any
transaction with the Company (other than for services as employees, officers
and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of
real or personal property to or from, or otherwise requiring payments to or
from any officer, director or such employee or, to the knowledge of the
Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
10
(u) Fees and Rights of First Refusal. The Company is not
obligated to offer the securities offered hereunder on a right of first
refusal basis or otherwise to any third parties including, but not limited
to, current or former shareholders of the Company, underwriters, brokers,
agents or other third parties.
(v) The Company acknowledges that the Buyer is relying on
the representations and warranties made by the Company hereunder and that
such representations and warranties are a material inducement to the Buyer
purchasing the Convertible Debentures. The Company further acknowledges that
without such representations and warranties of the Company made hereunder,
the Buyer would not enter into this Agreement.
4. COVENANTS.
(a) Best Efforts. Each party shall use its best efforts
to timely satisfy each of the conditions to be satisfied by it as provided in
Sections 6 and 7 of this Agreement.
(b) Form D. The Company agrees to file a Form D with
respect to the Conversion Shares as required under Regulation D and to
provide a copy thereof to each Buyer promptly after such filing. The Company
shall, on or before the Closing Date, take such action as the Company shall
reasonably determine is necessary to qualify the Conversion Shares, or obtain
an exemption for the Conversion Shares for sale to the Buyers at the Closing
pursuant to this Agreement under applicable securities or "Blue Sky" laws of
the states of the United States, and shall provide evidence of any such
action so taken to the Buyers on or prior to the Closing Date.
(c) Reporting Status. Commencing on the effectiveness of
the Registration Statement and until the earlier of (i) the date as of which
the Buyer(s) may sell all of the Conversion Shares without restriction
pursuant to Rule 144(k) promulgated under the Securities Act (or successor
thereto), or (ii) the date on which (A) the Buyer(s) shall have sold all the
Conversion Shares and (B) none of the Convertible Debentures are outstanding
(the "Registration Period"), the Company shall file in a timely manner all
reports required to be filed with the SEC pursuant to the Exchange Act and
the regulations of the SEC thereunder, and the Company shall not terminate
its status as an issuer required to file reports under the Exchange Act even
if the Exchange Act or the rules and regulations thereunder would otherwise
permit such termination.
(d) Use of Proceeds. The Company will use the proceeds
from the sale of the Convertible Debentures for general corporate and working
capital purposes in a manner consistent with the uses described in the budget
attached hereto as Exhibit B (the "Budget"). The Company, in its discretion
and without prior consent of or notice to the Buyers, may deviate up to ten
percent (10%) for any single line item described in the Budget.
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(e) Reservation of Shares. The Company shall take all
action reasonably necessary to at all times have authorized, and reserved for
the purpose of issuance, such number of shares of Common Stock as shall be
necessary to effect the issuance of the Conversion Shares. If at any time
the Company does not have available such shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all of the Conversion
Shares, the Company shall call and hold a special meeting of the shareholders
within sixty (60) days of such occurrence, for the sole purpose of increasing
the number of shares authorized. The Company's management shall recommend to
the shareholders to vote in favor of increasing the number of shares of
Common Stock authorized. Management shall also vote all of its shares in
favor of increasing the number of authorized shares of Common Stock.
(f) Listings or Quotation. The Company shall,
concurrently with the effectiveness of the registration statement filed with
the SEC pursuant to the Investor Registration Rights Agreement, secure the
listing or quotation of its Common Stock (including, without limitation, the
Conversion Shares) upon a national securities exchange, automated quotation
system or the Over-The-Counter Bulletin Board ("OTCBB") maintained by the
National Association of Securities Dealers, Inc. The Company shall maintain
the listing or quotation of the Common Stock for so long as the Buyer is the
beneficial owner of any Common Stock or Conversion Shares (whether obtained
or to be obtained under this Agreement), the Convertible Debentures or any
other agreement between the Company and the Buyer. The Company shall
maintain the Common Stock's authorization for quotation on the OTCBB. It
shall be an event of default hereunder if the Company fails to strictly
comply with its obligations under this Section 4(f).
(g) Fees and Expenses.
Each of the Company and the Buyer(s) shall pay all
costs and expenses incurred by such party in connection with the negotiation,
investigation, preparation, execution and delivery of the Transaction
Documents. The Company shall pay Yorkville Advisors Management LLC a fee
equal to ten percent (10%) of the Purchase Price.
The Company shall pay a structuring fee to Yorkville
Advisors Management, LLC of Twenty Five Thousand Dollars ($25,000) which
shall be paid directly from the proceeds of the First Closing.
The Company shall pay the Buyers a non-refundable due
diligence fee of Two Thousand Five Hundred Dollars ($2,500) which shall be
paid directly from the proceeds of the First Closing.
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(h) The Company shall be solely responsible for the
contents of the Registration Statement, prospectus or other filing made with
the SEC or otherwise used in the offering of the Company's securities (except
as such disclosure relates solely to the Buyer and then only to the extent
that such disclosure conforms with information furnished in writing by the
Buyer to the Company), even if the Buyer or its agents as an accommodation to
the Company participate or assist in the preparation of such Registration
Statement, prospectus or other SEC filing. The Company shall retain its own
legal counsel to review, edit, confirm and do all things such counsel deems
necessary or desirable to such Registration Statement, prospectus or other
SEC filing to ensure that it does not contain an untrue statement or alleged
untrue statement of material fact or omit or alleged to omit a material fact
necessary to make the statements made therein, in light of the circumstances
under which the statements were made, not misleading.
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(i) Corporate Existence. So long as any of the
Convertible Debentures remain outstanding, the Company shall not directly or
indirectly consummate any merger, reorganization, restructuring, reverse
stock split consolidation, sale of all or substantially all of the Company's
assets or any similar transaction or related transactions (each such
transaction, an "Organizational Change") unless, prior to the consummation an
Organizational Change, the Company obtains the written consent of each
Buyer. In any such case, the Company will make appropriate provision with
respect to such holders' rights and interests to insure that the provisions
of this Section 4(h) will thereafter be applicable to the Convertible
Debentures.
(j) Transactions With Affiliates. So long as any
Convertible Debentures are outstanding, the Company shall not, and shall
cause each of its subsidiaries not to, enter into, amend, modify or
supplement, or permit any subsidiary to enter into, amend, modify or
supplement any agreement, transaction, commitment, or arrangement with any of
its or any subsidiary's officers, directors, person who were officers or
directors at any time during the previous two (2) years, stockholders who
beneficially own five percent (5%) or more of the Common Stock, or Affiliates
(as defined below) or with any individual related by blood, marriage, or
adoption to any such individual or with any entity in which any such entity
or individual owns a five percent (5%) or more beneficial interest (each a
"Related Party"), except for (a) customary employment arrangements and
benefit programs on reasonable terms, (b) any investment in an Affiliate of
the Company, (c) any agreement, transaction, commitment, or arrangement on
an arm's-length basis on terms no less favorable than terms which would have
been obtainable from a person other than such Related Party, (d) any
agreement, transaction, commitment, or arrangement which is approved by a
majority of the disinterested directors of the Company; for purposes hereof,
any director who is also an officer of the Company or any subsidiary of the
Company shall not be a disinterested director with respect to any such
agreement, transaction, commitment, or arrangement. "Affiliate" for purposes
hereof means, with respect to any person or entity, another person or entity
that, directly or indirectly, (i) has a ten percent (10%) or more equity
interest in that person or entity, (ii) has ten percent (10%) or more common
ownership with that person or entity, (iii) controls that person or entity,
or (iv) shares common control with that person or entity. "Control" or
"controls" for purposes hereof means that a person or entity has the power,
direct or indirect, to conduct or govern the policies of another person or
entity.
(k) Transfer Agent. The Company covenants and agrees
that, in the event that the Company's agency relationship with the transfer
agent should be terminated for any reason prior to a date which is two (2)
years after the Closing Date, the Company shall immediately appoint a new
transfer agent and shall require that the new transfer agent execute and
agree to be bound by the terms of the Irrevocable Transfer Agent Instructions
(as defined herein).
(l) Restriction on Issuance of the Capital Stock. So long
as any Convertible Debentures are outstanding, the Company shall not, without
the prior written consent of the Buyer(s), (i) issue or sell shares of Common
Stock or Preferred Stock without consideration or for a consideration per
share less than the fair market value of the Common Stock determined
13
immediately prior to its issuance, (ii) issue any warrant, option, right,
contract, call, or other security instrument granting the holder thereof, the
right to acquire Common Stock without consideration or for a consideration
less than such Common Stock's fair market value determined immediately prior
to it's issuance, (iii) enter into any security instrument granting the
holder a security interest in any and all assets of the Company, except in
connection with the Company leasing or purchasing office equipment, computer
and networking equipment, co-location equipment and other equipment and
supplies in the ordinary course of the Company's business, provided such
equipment and supplies do not, in the aggregate, exceed fifty thousand
dollars ($50,000.00) per annum, or (iv) file any registration statement on
Form S-8.
(m) Lock-up Agreement. On the date hereof, the Company
shall obtain from each officer and director of the Company a lock-up
agreement. Such lock-up agreement shall prohibit sales of the Company's
Common Stock for so long as any portion of the Convertible Debenture is
outstanding.
(n) No Payment of Management Fees. Except as
disclosed in the Budget, the Company shall not make any payments of (i)
salaries, management fees, commissions or any other remuneration to officers
or directors of the Company or any person or entity that is an "affiliate" of
any such person or entity (the "Management Group") or (ii) on any notes,
accounts payable or other obligations or liabilities owed to any member of
Management Group until the Registration Statement has been effective (as
declared by the Securities and Exchange Commission) for a period of at least
90 days (the "Prohibition Period").
(o) No Indebtedness. For so long as the Convertible
Debenture is outstanding, the Company shall not incur any indebtedness for
borrowed money or become a guarantor or otherwise contingently liable for any
such indebtedness except for (i) trade payables or purchase money obligations
incurred in the ordinary course of business, or (ii) amounts not to exceed
one hundred thousand dollars ($100,000).
(p) No Other Registration Statements. Except for the
filing of the registration statements contemplated in this transaction (the
"Permitted Registration Statements"), for so long as the Convertible
Debenture is outstanding, the Company shall not file any other registration
statements on any form (including but not limited to forms S-1, SB-2, S-3 and
S-8) without the prior written consent of the Buyer. Further, the Company
shall not register for sale or resale of any shares of capital stock in the
Permitted Registration Statements other than the capital stock beneficially
owned by the Buyer or to be issued to the Buyer upon conversion of the
Convertible Debentures, exercise of warrants or issuance under the Standby
Equity Distribution Agreement of even date herewith.
(q) Neither the Buyer(s) nor any of its affiliates have
an open short position in the Common Stock of the Company, and the Buyer(s)
agrees that it shall not, and that it will cause its affiliates not to,
engage in any short sales of or hedging transactions with respect to the
Common Stock as long as any Convertible Debenture or warrants to purchase the
Warrant Shares shall remain outstanding.
14
(r) Following the consummation of a merger with a public
entity, the public entity or the surviving entity, shall have entered into a
pledge and escrow agreement substantially in the form of Exhibit C
("Subsequent Pledge Agreement"), pursuant to which the public entity or the
surviving entity shall provide the Buyer a security interest in the shares of
the public entity or the surviving entity in such amount that together with
the Pledged Shares from Barry Brookstein and Dean Garfinkel equals 51% of the
outstanding stock of the public entity or surviving entity to secure the
obligations of the Company under this Agreement and under the Transaction
Documents, which the public entity or the surviving entity will have assumed
in accordance with the merger.
(s) Immediately upon the First Closing, the Company shall
instruct BP Audit Group, PLLC to resume its audit of the Company's financial
statements and the Company shall use its best efforts to have the audit
complete within 30 days of the First Closing Date.
5. TRANSFER AGENT INSTRUCTIONS.
(a) The Company shall issue the Irrevocable Transfer
Agent Instructions to its transfer agent irrevocably appointing David
Gonzalez, Esq. as the Company's agent for purpose of having certificates
issued, registered in the name of the Buyer(s) or its respective nominee(s),
for the Conversion Shares representing such amounts of Convertible Debentures
as specified from time to time by the Buyer(s) to the Company upon conversion
of the Convertible Debentures, for interest owed pursuant to the Convertible
Debenture, and for any and all Liquidated Damages (as this term is defined in
the Investor Registration Rights Agreement). David Gonzalez, Esq. shall be
paid a cash fee of Fifty Dollars ($50) for every occasion they act pursuant
to the Irrevocable Transfer Agent Instructions. The Company shall not change
its transfer agent without the express written consent of the Buyer(s), which
may be withheld by the Buyer(s) in its sole discretion. Prior to
registration of the Conversion Shares under the Securities Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of
this Agreement. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 5, and
stop transfer instructions to give effect to Section 2(g) hereof (in the case
of the Conversion Shares prior to registration of such shares under the
Securities Act) will be given by the Company to its transfer agent and that
the Conversion Shares shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and
the Investor Registration Rights Agreement. Nothing in this Section 5 shall
affect in any way the Buyer's obligations and agreement to comply with all
applicable securities laws upon resale of Conversion Shares. If the Buyer(s)
provides the Company with an opinion of counsel, in form, scope and substance
customary for opinions of counsel in comparable transactions to the effect
that registration of a resale by the Buyer(s) of any of the Conversion Shares
is not required under the Securities Act, the Company shall within two (2)
business days instruct its transfer agent to issue one or more certificates
in such name and in such denominations as specified by the Buyer. The
Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Buyer by vitiating the intent and purpose of
the transaction contemplated hereby. Accordingly, the Company acknowledges
that the remedy at law for a breach of its obligations under this Section 5
will be inadequate and agrees, in the event of a breach or threatened breach
by the Company of the provisions of this Section 5, that the Buyer(s) shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
15
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Convertible Debentures to the Buyer(s) at the Closings is subject to the
satisfaction, at or before the Closing Dates, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion:
(a) Each Buyer shall have executed the Transaction
Documents and delivered them to the Company.
(b) The Buyer(s) shall have delivered to the Escrow Agent
the Purchase Price for Convertible Debentures in respective amounts as set
forth next to each Buyer as outlined on Schedule I attached hereto and the
Escrow Agent shall have delivered the net proceeds to the Company by wire
transfer of immediately available U.S. funds pursuant to the wire
instructions provided by the Company.
(c) The representations and warranties of the Buyer(s)
shall be true and correct in all material respects as of the date when made
and as of the Closing Dates as though made at that time (except for
representations and warranties that speak as of a specific date), and the
Buyer(s) shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Buyer(s) at or
prior to the Closing Dates.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
(a) The obligation of the Buyer(s) hereunder to purchase
the Convertible Debentures at the First Closing is subject to the
satisfaction, at or before the First Closing Date, of each of the following
conditions:
(i) The Company shall have executed the Transaction
Documents and delivered the same to the Buyer(s).
(ii) The representations and warranties of the
Company shall be true and correct in all material respects (except to the
extent that any of such representations and warranties is already qualified
as to materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the First Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date)
and the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or
prior to the First Closing Date. If requested by the Buyer, the Buyer shall
have received a certificate, executed by the President of the Company, dated
as of the First Closing Date, to the foregoing effect and as to such other
matters as may be reasonably requested by the Buyer including, without
limitation an update as of the First Closing Date regarding the
representation contained in Section 3(c) above.
(iii) The Company shall have executed and delivered
to the Buyer a Convertible Debentures in the amount of Six Hundred Thousand
Dollars ($600,000).
16
(iv) The Buyer(s) shall have received an opinion of
counsel from in a form satisfactory to the Buyer(s).
(v) The Company shall have provided to the Buyer(s)
a certificate of good standing from the secretary of state from the state in
which the company is incorporated.
(vi) The Company or the Buyer shall have filed a
form UCC-1 or such other forms as may be required to perfect the Buyer's
interest in the Pledged Property as detailed in the Security Agreement dated
the date hereof and provided proof of such filing to the Buyer(s).
(vii) Barry Brookstein and Dean Garfinkel shall have
delivered to the Escrow Agent the Pledged Shares as well as any transfer
documents as required pursuant to the Pledge and Escrow Agreement.
(viii) The Company shall have provided to the
Buyer an acknowledgement, to the satisfaction of the Buyer, from the
Company's independent certified public accountants as to its ability to
provide all consents required in order to file a registration statement in
connection with this transaction.
(ix) The Company shall have reserved out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Convertible Debentures, shares of Common Stock to effect
the conversion of all of the Conversion Shares then outstanding.
(x) The Irrevocable Transfer Agent Instructions, in
form and substance satisfactory to the Buyer, shall have been delivered to
and acknowledged in writing by the Company's transfer agent.
(b) The obligation of the Buyer(s) hereunder to accept
the Convertible Debentures at the Second Closing is subject to the
satisfaction, at or before the Second Closing Date, of each of the following
conditions:
(i) The Common Stock shall be authorized for
quotation on the OTCBB, trading in the Common Stock shall not have been
suspended for any reason, and all the Conversion Shares issuable upon the
conversion of the Convertible Debentures shall be approved by the OTCBB.
(ii) The representations and warranties of the
Company shall be true and correct in all material respects (except to the
extent that any of such representations and warranties is already qualified
as to materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the Second Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date)
and the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or
prior to the Second Closing Date. If requested by the Buyer, the Buyer shall
have received a certificate, executed by two officers of the Company, dated
as of the Second Closing Date, to the foregoing effect and as to such other
matters as may be reasonably requested by the Buyer including, without
limitation an update as of the Second Closing Date regarding the
representation contained in Section 3(c) above.
17
(iii) The Company shall have executed and delivered
to the Buyer(s) the Convertible Debenture in the amount of Four Hundred
Thousand Dollars ($400,000).
(iv) The Company shall have consummated a merger
with a public entity and the public entity shall have filed all required
public filings in connection with such transaction, including audited and pro
forma financial statements.
(v) As part of the merger, the public entity shall
have assumed any and all obligations of the Company relating to the Buyer,
including, without limitation, this Agreement, the Transaction Documents and
related documents all of even date herewith. The Company shall have provided
the Buyer with the relevant merger documents.
(vi) Following the consummation of the merger, the
public entity or the surviving entity, shall have entered into a Security
Agreement with the Buyer, providing a security interest in the assets of the
public entity and all subsidiaries to secure the obligations of under this
Agreement and under the Transaction Documents. The public entity or the
surviving entity, shall have filed a form UCC-1 with regard to the pledged
property and provided proof of such filing to the Buyer.
(vii) Following the consummation of the merger, Barry
Brookstein and Dean Garfinkel shall have replaced the Pledged Shares with
shares of common stock of the surviving entity.
(viii) The public company or the surviving
entity shall have entered into the Subsequent Pledge Agreement pursuant to
which the public entity or the surviving entity shall provide the Buyer a
security interest in the shares of the public entity or the surviving entity
in such amount that together with the Pledged Shares from Barry Brookstein
and Dean Garfinkel equals 51% of the outstanding stock of the public entity
or surviving entity and shall have delivered such shares to the Escrow Agent
along with all transfer documents as set forth in the Subsequent Pledge
Agreement.
(viii) No Events of Default shall have occurred
under this Agreement or the Transaction Documents.
(ix) The Company shall have certified that all
conditions to the Second Closing have been satisfied and that the Company
will file the Registration Statement with the SEC in compliance with the
rules and regulations promulgated by the SEC for filing thereof two (2)
business days after the Second Closing. If requested by the Buyer, the Buyer
shall have received a certificate, executed by the two officers of the
Company, dated as of the Second Closing Date, to the foregoing effect.
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8. INDEMNIFICATION.
(a) In consideration of the Buyer's execution and
delivery of this Agreement and acquiring the Convertible Debentures and the
Conversion Shares hereunder, and in addition to all of the Company's other
obligations under this Agreement, the Company shall defend, protect,
indemnify and hold harmless the Buyer(s) and each other holder of the
Convertible Debentures and the Conversion Shares, and all of their officers,
directors, employees and agents (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the "Buyer Indemnitees") from and against any and all actions,
causes of action, suits, claims, losses, costs, penalties, fees, liabilities
and damages, and expenses in connection therewith (irrespective of whether
any such Buyer Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and
disbursements (the "Indemnified Liabilities"), incurred by the Buyer
Indemnitees or any of them as a result of, or arising out of, or relating to
(a) any misrepresentation or breach of any representation or warranty made by
the Company in this Agreement, the Convertible Debentures or the Investor
Registration Rights Agreement or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in this Agreement, or the
Investor Registration Rights Agreement or any other certificate, instrument
or document contemplated hereby or thereby, or (c) any cause of action, suit
or claim brought or made against such Indemnitee and arising out of or
resulting from the execution, delivery, performance or enforcement of this
Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the parties hereto, any transaction financed or to be
financed in whole or in part, directly or indirectly, with the proceeds of
the issuance of the Convertible Debentures or the status of the Buyer or
holder of the Convertible Debentures the Conversion Shares, as a Buyer of
Convertible Debentures in the Company. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each
of the Indemnified Liabilities, which is permissible under applicable law.
(b) In consideration of the Company's execution and
delivery of this Agreement, and in addition to all of the Buyer's other
obligations under this Agreement, the Buyer shall defend, protect, indemnify
and hold harmless the Company and all of its officers, directors, employees
and agents (including, without limitation, those retained in connection with
the transactions contemplated by this Agreement) (collectively, the "Company
Indemnitees") from and against any and all Indemnified Liabilities incurred
by the Indemnitees or any of them as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or
warranty made by the Buyer(s) in this Agreement, instrument or document
contemplated hereby or thereby executed by the Buyer, (b) any breach of any
covenant, agreement or obligation of the Buyer(s) contained in this
Agreement, the Investor Registration Rights Agreement or any other
certificate, instrument or document contemplated hereby or thereby executed
by the Buyer, or (c) any cause of action, suit or claim brought or made
against such Company Indemnitee based on material misrepresentations or due
to a material breach and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement, the Investor
Registration Rights Agreement or any other instrument, document or agreement
executed pursuant hereto by any of the parties hereto. To the extent that
the foregoing undertaking by each Buyer may be unenforceable for any reason,
each Buyer shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities, which is permissible
under applicable law.
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9. GOVERNING LAW: MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of New Jersey
without regard to the principles of conflict of laws. The parties further
agree that any action between them shall be heard in Hudson County, New
Jersey, and expressly consent to the jurisdiction and venue of the Superior
Court of New Jersey, sitting in Hudson County and the United States District
Court for the District of New Jersey sitting in Newark, New Jersey for the
adjudication of any civil action asserted pursuant to this Paragraph.
(b) Counterparts. This Agreement may be executed in two
or more identical counterparts, all of which shall be considered one and the
same agreement and shall become effective when counterparts have been signed
by each party and delivered to the other party. In the event any signature
page is delivered by facsimile transmission, the party using such means of
delivery shall cause four (4) additional original executed signature pages to
be physically delivered to the other party within five (5) days of the
execution and delivery hereof.
(c) Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) Severability. If any provision of this Agreement
shall be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
(e) Entire Agreement, Amendments. This Agreement
supersedes all other prior oral or written agreements between the Buyer(s),
the Company, their affiliates and persons acting on their behalf with respect
to the matters discussed herein, and this Agreement and the instruments
referenced herein contain the entire understanding of the parties with
respect to the matters covered herein and therein and, except as specifically
set forth herein or therein, neither the Company nor any Buyer makes any
representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than
by an instrument in writing signed by the party to be charged with
enforcement.
(f) Notices. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i)
upon receipt, when delivered personally; (ii) upon confirmation of receipt,
when sent by facsimile; (iii) three (3) days after being sent by U.S.
certified mail, return receipt requested, or (iv) one (1) day after deposit
with a nationally recognized overnight delivery service, in each case
properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
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If to the Company, to: Compliance Systems Corporation
90 Pratt Oval
Glen Cove, NY 11542
Attention: Dean Garfinkel
Telephone: (516) 656-5155
Facsimile: (516) 676-2420
With a copy to: Kirkpatrick & Lockhart Nicholson Graham, LLP
201 South Biscayne Boulevard, Suite 2000
Miami, Florida 33131
Attention: Clayton E. Parker, Esq.
Telephone: (305) 539-3306
Facsimile: (305) 328-7095
If to the Buyer(s), to its address and facsimile number on Schedule I,
with copies to the Buyer's counsel as set forth on Schedule I. Each party
shall provide five (5) days' prior written notice to the other party of any
change in address or facsimile number.
(g) Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns. Neither the Company nor any Buyer shall assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the other party hereto.
(h) No Third Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.
(i) Survival. Unless this Agreement is terminated under
Section 9(l), the representations and warranties of the Company and the
Buyer(s) contained in Sections 2 and 3, the agreements and covenants set
forth in Sections 4, 5 and 9, and the indemnification provisions set forth in
Section 8, shall survive the Closing for a period of two (2) years following
the date on which the Convertible Debentures are converted in full. The
Buyer(s) shall be responsible only for its own representations, warranties,
agreements and covenants hereunder.
(j) Publicity. The Company and the Buyer(s) shall have
the right to approve, before issuance any press release or any other public
statement with respect to the transactions contemplated hereby made by any
party; provided, however, that the Company shall be entitled, without the
prior approval of the Buyer(s), to issue any press release or other public
disclosure with respect to such transactions required under applicable
securities or other laws or regulations (the Company shall use its best
efforts to consult the Buyer(s) in connection with any such press release or
other public disclosure prior to its release and Buyer(s) shall be provided
with a copy thereof upon release thereof).
(k) Further Assurances. Each party shall do and perform,
or cause to be done and performed, all such further acts and things, and
shall execute and deliver all such other agreements, certificates,
instruments and documents, as the other party may reasonably request in order
to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.
21
(l) Termination. In the event that the Closing shall not
have occurred with respect to the Buyers on or before five (5) business days
from the date hereof due to the Company's or the Buyer's failure to satisfy
the conditions set forth in Sections 6 and 7 above (and the non-breaching
party's failure to waive such unsatisfied condition(s)), the non-breaching
party shall have the option to terminate this Agreement with respect to such
breaching party at the close of business on such date without liability of
any party to any other party; provided, however, that if this Agreement is
terminated by the Company pursuant to this Section 9(l), the Company shall
remain obligated to reimburse the Buyer(s) for the fees and expenses of
Yorkville Advisors Management, LLC described in Section 4(g) above.
(m) No Strict Construction. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied
against any party.
[SIGNATURE PAGE FOLLOWS; REMAINDER PAGE INTENTIONALLY BLANK]
22
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first
written above.
COMPANY:
COMPLIANCE SYSTEMS CORPORATION
By:_________________________________
Name: Dean Garfinkel
Title: Chairman
23
EXHIBIT A
DISCLOSURE SCHEDULE
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
(c) Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of 40,000,000 shares of Common Stock
and no shares of Preferred Stock, of which 12,965,003 shares of Common Stock
are issued and outstanding.
In August 2004, the Company entered into a consulting agreement
with Leonard Neuhaus for his services in connection with obtaining suitable
financing for the Company. Under the terms of the consulting agreement, Mr.
Neuhaus will receive: (x) a fee equal to 5% of the initial $1 million of
gross proceeds received by the Company or its subsidiaries, with such fee to
be paid entirely in cash; and (y) a fee equal to 5% of any amounts in excess
of the $1 million of gross proceeds received by the Company or its
subsidiaries, with such fee to be paid 50% in cash and 50% in common stock of
the Company. All fees shall be paid at the closing of the transaction to
which they relate. The share price for all fees to be paid to Mr. Neuhaus in
the form of common stock of the Company will be equal to the conversion price
paid by Montgomery Equity Partners, Ltd. to the Company in connection with
Montgomery's conversion of any principal amount in excess of the initial $1
million debenture issued by the Company or any successor to Montgomery. If
there is more than one such conversion, then the conversion price for
purposes of calculating the fee to be paid to Mr. Neuhaus under the
cosnulting agreement will be the last one in time. Notwithstanding the
foregoing, in its sole and absolute discretion, the Company may pay Mr.
Neuhaus' fee as calculated above entirely in the form of cash. All common
stock issued to Mr. Neuhaus as a fee under the consulting agreement in
connection with any transaction with Montgomery will either be registered and
freely tradable or be included and registered for resale pursuant to the
Securities Act of 1933, as amended, in the first registration statement filed
by the Company following the transaction with /Montgomery for which such fees
were earned.
As of the date hereof, there are outstanding warrants to purchase
580,000 shares of Common Stock at $1.50 per share. These warrants will
expire on September 30, 2008.
Please refer to Schedule F-1 below for a list of the Company's
debt securities.
(t) Certain Transactions. Dean Garfinkel and Alison Garfinkel
each loaned the Company $125,000. Barry M. Brookstein loaned the Company
$750,000, and his wholly-owned company, Spirits Management, Inc., loaned the
Company $125,000. In addition, monies totaling $500,000 were borrowed from
Amanuensis, an independent third-party, with Barry M. Brookstein acting as an
intermediary. Although Mr. Brookstein is President of Tele-Serv Inc.,
Telemax Co., Inc., and Phone-Tel New Corp., he is not a shareholder of any of
these companies.
24
4. COVENANTS
(d) Use of Proceeds. Please refer to Exhibit H attached hereto
for the Company's Budget, which details the proposed use of Proceeds by the
Company.
25
Schdeule F-1
Compliance Systems Corporation
Schedule of Debt Securities
as of November 7, 2005
Balance
------------
Secured Debt (UCCs Filed):
Notes Payable - Robert Lippe 30,000.00
Capitalized Leases Payable:
Dell Financial Services 8,795.00
Bank of the West 32,849.00
GE Capital 27,756.00
Axis Capital Inc. 17,900.00
M&T Credit Services LLC 18,080.00
Netbank Business Finance (formerly Republic Leasing) 30,620.00
US Bancorp 35,615.00
------------
Total Leases Payable 171,615.00
Secured Lease - Ford Credit 10,400.00
Total Secured Debt 212,015.00
------------
Balance
------------
Unsecured Debt:
AMGRO 13,420.00
Brad Friedman 50,000.00
Henry Ponzio 237,500.00
HSBC Bank 100,000.00
Phone-Tel New Corp 163,376.00
Spirits Management Inc. 163,376.00
Tele-Serv Inc. 108,917.00
Telmax Co. Inc. 108,917.00
Amanuensis Ltd. 500,000.00
Spirits Management Inc. 11,826.00
Alison Garfinkel 125,000.00
Dean Garfinkel 125,000.00
Barry M. Brookstein 750,000.00
Stock Repurchase Payable to Alison Garfinkel 82,800.00
Spirits Management Inc. 125,000.00
------------
Total Unsecured Debt 2,665,132.00
------------
Total 2,877,147.00
============
EXHIBIT B
BUDGET
[to be manually inserted at First Closing]
EXHIBIT C
SUBSEQUENT PLEDGE AND ESCROW AGREEMENT
SCHEDULE I
SCHEDULE OF BUYERS
Address/Facsimile Amount of
Name Signature Number of Buyer Subscription
---- --------- --------------- ------------
Montgomery Equity By: Yorkville 101 Hudson Street - $1,000,000
Partners, Ltd. Advisors, LLC Suite 3700
Its: General Partner Jersey City, NJ 07303
Facsimile: (201)
985-8266
By:_________________
Name: Mark Angelo
Its: Portfolio
Manager
With a copy to: David Gonzalez, Esq. 101 Hudson Street -
Suite 3700
Jersey City, NJ 07302
Facsimile:
(201) 985-8266