EXHIBIT 10.1
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT (this "AGREEMENT"), dated as of June 14, 2007 by and
between ERF Wireless, Inc. a Nevada corporation (the "Company"), and Dutchess
Private Equities Fund, Ltd., a Cayman Islands exempted company (the "Investor").
WHEREAS, the parties desire that, upon the terms and subject to the conditions
contained herein, the Investor shall invest up to Ten Million dollars
($10,000,000) to purchase the Company's Common Stock, $.001 par value per share
(the "Common Stock");
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) under the Securities Act of 1933, as amended (the "1933 Act"), Rule
506 of Regulation D, and the rules and regulations promulgated thereunder,
and/or upon such other exemption from the registration requirements of the 1933
Act as may be available with respect to any or all of the investments in Common
Stock to be made hereunder; and
WHEREAS, contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto (the "Registration Rights Agreement")
pursuant to which the Company has agreed to provide certain registration rights
under the 1933 Act, and the rules and regulations promulgated thereunder, and
applicable state securities laws.
NOW THEREFORE, in consideration of the foregoing recitals, which shall be
considered an integral part of this Agreement, the covenants and agreements set
forth hereafter, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Investor hereby
agree as follows:
SECTION 1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings specified or indicated below, and such meanings shall be equally
applicable to the singular and plural forms of such defined terms.
"1933 Act" shall have the meaning set forth in the preamble of this
agreement.
"1934 Act" shall mean the Securities Exchange Act of 1934, as it may be
amended.
"Affiliate" shall have the meaning specified in Section 5(H), below.
"Agreement" shall mean this Investment Agreement.
"Best Bid" shall mean the highest posted bid price of the Common Stock
during a given period of time.
"By-laws" shall have the meaning specified in Section 4(C).
"Certificate of Incorporation" shall have the meaning specified in Section
4(C).
"Closing" shall have the meaning specified in Section 2(G).
"Closing Date" shall mean no more than seven (7) Trading Days following the
Put Notice Date.
"Common Stock" shall have the meaning set forth in the preamble of this
Agreement.
"Control" or "Controls" shall have the meaning specified in Section 5(H).
"Effective Date" shall mean the date the SEC declares effective under the
1933 Act the Registration Statement covering the Securities.
"Environmental Laws" shall have the meaning specified in Section 4(M).
"Equity Line Transaction Documents" shall mean this Agreement, the
Registration Rights Agreement.
"Execution Date" shall mean the date indicated in the preamble to this
Agreement.
"Indemnities" shall have the meaning specified in Section 11.
"Indemnified Liabilities" shall have the meaning specified in Section 11.
"Ineffective Period" shall mean any period of time that the Registration
Statement or any Supplemental Registration Statement (as defined in the
Registration Rights Agreement between the parties) becomes ineffective or
unavailable for use for the sale or resale, as applicable, of any or all of the
Registrable Securities (as defined in the Registration Rights Agreement) for any
reason (or in the event the prospectus under either of the above is not current
and deliverable) during any time period required under the Registration Rights
Agreement.
"Investor" shall have the meaning indicated in the preamble of this
Agreement.
"Material Adverse Effect" shall have the meaning specified in Section 4(A).
"Maximum Common Stock Issuance" shall have the meaning specified in Section
2(H).
"Minimum Acceptable Price" with respect to any Put Notice Date shall mean
seventy-five percent (75%) of the lowest closing bid prices for the ten (10)
Trading Day period immediately preceding each Put Notice Date.
"Open Market Adjustment Amount" shall have the meaning specified in Section
2(I).
"Open Market Purchase" shall have the meaning specified in Section 2(I)
"Open Market Share Purchase" shall have the meaning specified in Section
2(I).
"Open Period" shall mean the period beginning on and including the Trading
Day immediately following the Effective Date and ending on the earlier to occur
of (i) the date which is thirty-six (36) months from the Effective Date; or (ii)
termination of the Agreement in accordance with Section 9, below.
"Pricing Period" shall mean the period beginning on the Put Notice Date and
ending on and including the date that is five (5) Trading Days after such Put
Notice Date.
"Principal Market" shall mean the American Stock Exchange, Inc., the
National Association of Securities Dealers, Inc. Over-the-Counter Bulletin
Board, the NASDAQ National Market System or the NASDAQ Small Cap Market,
whichever is the principal market on which the Common Stock is listed.
"Prospectus" shall mean the prospectus, preliminary prospectus and
supplemental prospectus used in connection with the Registration Statement.
"Purchase Amount" shall mean the total amount being paid by the Investor on
a particular Closing Date to purchase the Securities.
"Purchase Price" shall mean ninety-three percent (93%) of the lowest
closing Best Bid price of the Common Stock during the Pricing Period.
"Put" shall have the meaning set forth in Section 2(B)(1) hereof.
"Put Amount" shall have the meaning set forth in Section 2(B)(1) hereof.
"Put Notice" shall mean a written notice sent to the Investor by the
Company stating the Put Amount in U.S. dollars the Company intends to sell to
the Investor pursuant to the terms of the Agreement and stating the current
number of Shares issued and outstanding on such date.
"Put Notice Date" shall mean the Trading Day, as set forth below,
immediately following the day on which the Investor receives a Put Notice,
however a Put Notice shall be deemed delivered on (a) the Trading Day it is
received by facsimile or otherwise by the Investor if such notice is received
prior to 9:00 am Eastern Time, or (b) the immediately succeeding Trading Day if
it is received by facsimile or otherwise after 9:00 am Eastern Time on a Trading
Day. No Put Notice may be deemed delivered on a day that is not a Trading Day.
"Put Restriction" shall mean the days between the beginning of the Pricing
Period and Closing Date. During this time, the Company shall not be entitled to
deliver another Put Notice.
"Put Shares Due" shall have the meaning specified in Section 2(I).
"Registration Period" shall have the meaning specified in Section 5(C),
below.
"Registration Rights Agreement" shall have the meaning set forth in the
recitals, above.
"Registration Statement" means the registration statement of the Company
filed under the 1933 Act covering the Common Stock issuable hereunder.
"Related Party" shall have the meaning specified in Section 5(H).
"Resolution" shall have the meaning specified in Section 8(E).
"SEC" shall mean the U.S. Securities & Exchange Commission.
"SEC Documents" shall have the meaning specified in Section 4(F).
"Securities" shall mean the shares of Common Stock issued pursuant to the
terms of the Agreement.
"Shares" shall mean the shares of the Company's Common Stock.
"Subsidiaries" shall have the meaning specified in Section 4(A).
"Trading Day" shall mean any day on which the Principal Market for the
Common Stock is open for trading, from the hours of 9:30 am until 4:00 pm.
SECTION 2. PURCHASE AND SALE OF COMMON STOCK.
(A) PURCHASE AND SALE OF COMMON STOCK. Subject to the terms and conditions set
forth herein, the Company shall issue and sell to the Investor, and the Investor
shall purchase from the Company, up to that number of Shares having an aggregate
Purchase Price of Ten Million dollars ($10,000,000).
(B) DELIVERY OF PUT NOTICES.
(I) Subject to the terms and conditions of the Equity Line Transaction
Documents, and from time to time during the Open Period, the Company may, in its
sole discretion, deliver a Put Notice to the Investor which states the dollar
amount (designated in U.S. Dollars) (the "Put Amount"), which the Company
intends to sell to the Investor on a Closing Date (the "Put"). The Put Notice
shall be in the form attached hereto as Exhibit C and incorporated herein by
reference. The amount that the Company shall be entitled to Put to the Investor
(the "Put Amount") shall be equal to, at the Company's election, either: (A) Two
Hundred percent (200%) of the average daily volume (U.S. market only) of the
Common Stock for the Ten (10) Trading Days prior to the applicable Put Notice
Date, multiplied by the average of the three (3) daily closing bid prices
immediately preceding the Put Date, or (B) two hundred fifty thousand dollars
($250,000). During the Open Period, the Company shall not be entitled to submit
a Put Notice until after the previous Closing has been completed. The Purchase
Price for the Common Stock identified in the Put Notice shall be equal to
ninety-three percent (93%) of the lowest closing Best Bid price of the Common
Stock during the Pricing Period.
(C) COMPANY'S RIGHT TO WITHDRAWAL. The Company shall reserve the right, but not
the obligation, to withdraw that portion of the Put that is below the Minimum
Acceptable Price, by submitting to the Investor, in writing, a notice to cancel
that portion of the Put. Any shares above the Minimum Acceptable price due to
the Investor shall be carried out by the Company under the terms of this
Agreement.
(D) INTENTIONALLY OMITTED
(E) CONDITIONS TO INVESTOR'S OBLIGATION TO PURCHASE SHARES. Notwithstanding
anything to the contrary in this Agreement, the Company shall not be entitled to
deliver a Put Notice and the Investor shall not be obligated to purchase any
Shares at a Closing (as defined in Section 2(G)) unless each of the following
conditions are satisfied:
(I) a Registration Statement shall have been declared effective and shall
remain effective and available for the resale of all the Registrable Securities
(as defined in the Registration Rights Agreement) at all times until the Closing
with respect to the subject Put Notice;
(II) at all times during the period beginning on the related Put Notice
Date and ending on and including the related Closing Date, the Common Stock
shall have been listed on the Principal Market and shall not have been suspended
from trading thereon for a period of two (2) consecutive Trading Days during the
Open Period and the Company shall not have been notified of any pending or
threatened proceeding or other action to suspend the trading of the Common
Stock;
(III) the Company has complied with its obligations and is otherwise not in
breach of or in default under, this Agreement, the Registration Rights Agreement
or any other agreement executed in connection herewith which has not been cured
prior to delivery of the Investor's Put Notice Date;
(IV) no injunction shall have been issued and remain in force, or action
commenced by a governmental authority which has not been stayed or abandoned,
prohibiting the purchase or the issuance of the Securities; and
(V) the issuance of the Securities will not violate any shareholder
approval requirements of the Principal Market.
If any of the events described in clauses (I) through (V) above occurs during a
Pricing Period, then the Investor shall have no obligation to purchase the Put
Amount of Common Stock set forth in the applicable Put Notice.
(F) RESERVED
(G) MECHANICS OF PURCHASE OF SHARES BY INVESTOR. Subject to the satisfaction of
the conditions set forth in Sections 2(E), 7 and 8, the closing of the purchase
by the Investor of Shares (a "Closing") shall occur on the date which is no
later than seven (7) Trading Days following the applicable Put Notice Date (each
a "Closing Date"). Prior to each Closing Date, (I) the Company shall deliver to
the Investor pursuant to this Agreement, certificates representing the Shares to
be issued to the Investor on such date and registered in the name of the
Investor; and (II) the Investor shall deliver to the Company the Purchase Price
to be paid for such Shares, determined as set forth in Section 2(B). In lieu of
delivering physical certificates representing the Securities and provided that
the Company's transfer agent then is participating in The Depository Trust
Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon
request of the Investor, the Company shall use all commercially reasonable
efforts to cause its transfer agent to electronically transmit the Securities by
crediting the account of the Investor's prime broker (as specified by the
Investor within a reasonably in advance of the Investor's notice) with DTC
through its Deposit Withdrawal Agent Commission ("DWAC") system.
The Company understands that a delay in the issuance of Securities beyond the
Closing Date could result in economic damage to the Investor. After the
Effective Date, as compensation to the Investor for such loss, the Company
agrees to make late payments to the Investor for late issuance of Securities
(delivery of Securities after the applicable Closing Date) in accordance with
the following schedule (where "No. of Days Late" is defined as the number of
trading days beyond the Closing Date, with the Amounts as set forth in the table
immediately below):
LATE PAYMENT FOR EACH
NO. OF DAYS LATE $10,000 WORTH OF COMMON STOCK
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
Over 10 $1,000 + $200 for each
Business Day late beyond 10 days
The Company shall make any payments incurred under this Section in immediately
available funds upon demand by the Investor. Nothing herein shall limit the
Investor's right to pursue actual damages for the Company's failure to issue and
deliver the Securities to the Investor, except that such late payments shall
offset any such actual damages incurred by the Investor, and any Open Market
Adjustment Amount, as set forth below.
(H) OVERALL LIMIT ON COMMON STOCK ISSUABLE. Notwithstanding anything contained
herein to the contrary, if during the Open Period the Company becomes listed on
an exchange that limits the number of shares of Common Stock that may be issued
without shareholder approval, then the number of Shares issuable by the Company
and purchasable by the Investor, shall not exceed that number of the shares of
Common Stock that may be issuable without shareholder approval (the "Maximum
Common Stock Issuance"). If such issuance of shares of Common Stock could cause
a delisting on the Principal Market, then the Maximum Common Stock Issuance
shall first be approved by the Company's shareholders in accordance with
applicable law and the By-laws and Amended and Restated Certificate of
Incorporation of the Company, if such issuance of shares of Common Stock could
cause a delisting on the Principal Market. The parties understand and agree that
the Company's failure to seek or obtain such shareholder approval shall in no
way adversely affect the validity and due authorization of the issuance and sale
of Securities or the Investor's obligation in accordance with the terms and
conditions hereof to purchase a number of Shares in the aggregate up to the
Maximum Common Stock Issuance limitation, and that such approval pertains only
to the applicability of the Maximum Common Stock Issuance limitation provided in
this Section 2(H).
(I) If, by the third (3rd) business day after the Closing Date, the Company
fails to deliver any portion of the shares of the Put to the Investor (the "Put
Shares Due") and the Investor purchases, in an open market transaction or
otherwise, shares of Common Stock necessary to make delivery of shares which
would have been delivered if the full amount of the shares to be delivered to
the Investor by the Company (the "Open Market Share Purchase") , then the
Company shall pay to the Investor, in addition to any other amounts due to
Investor pursuant to the Put, and not in lieu thereof, the Open Market
Adjustment Amount (as defined below). The "Open Market Adjustment Amount" is the
amount equal to the excess, if any, of (x) the Investor's total purchase price
(including brokerage commissions, if any) for the Open Market Share Purchase
minus (y) the net proceeds (after brokerage commissions, if any) received by the
Investor from the sale of the Put Shares Due. The Company shall pay the Open
Market Adjustment Amount to the Investor in immediately available funds within
five (5) business days of written demand by the Investor. By way of illustration
and not in limitation of the foregoing, if the Investor purchases shares of
Common Stock having a total purchase price (including brokerage commissions) of
$11,000 to cover an Open Market Purchase with respect to shares of Common Stock
it sold for net proceeds of $10,000, the Open Market Purchase Adjustment Amount
which the Company will be required to pay to the Investor will be $1,000.
(J) LIMITATION ON AMOUNT OF OWNERSHIP. Notwithstanding anything to the contrary
in this Agreement, in no event shall the Investor be entitled to purchase that
number of Shares, which when added to the sum of the number of shares of Common
Stock beneficially owned (as such term is defined under Section 13(d) and Rule
13d-3 of the 1934 Act), by the Investor, would exceed 4.99% of the number of
shares of Common Stock outstanding on the Closing Date, as determined in
accordance with Rule 13d-1(j) of the 1934 Act.
SECTION 3. INVESTOR'S REPRESENTATIONS, WARRANTIES AND COVENANTS.
The Investor represents and warrants to the Company, and covenants, that:
(A) SOPHISTICATED INVESTOR. The Investor has, by reason of its business and
financial experience, such knowledge, sophistication and experience in financial
and business matters and in making investment decisions of this type that it is
capable of (I) evaluating the merits and risks of an investment in the
Securities and making an informed investment decision; (II) protecting its own
interest; and (III) bearing the economic risk of such investment for an
indefinite period of time.
(B) AUTHORIZATION; ENFORCEMENT. This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Investor and is a valid and
binding agreement of the Investor enforceable against the Investor in accordance
with its terms, subject as to enforceability to general principles of equity and
to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
(C) SECTION 9 OF THE 1934 ACT. During the term of this Agreement, the Investor
will comply with the provisions of Section 9 of the 1934 Act, and the rules
promulgated thereunder, with respect to transactions involving the Common Stock.
The Investor agrees not to sell the Company's stock short, either directly or
indirectly through its affiliates, principals or advisors, the Company's common
stock during the term of this Agreement.
(D) ACCREDITED INVESTOR. Investor is an "Accredited Investor" as that term is
defined in Rule 501(a) of Regulation D of the 1933 Act.
(E) NO CONFLICTS. The execution, delivery and performance of the Transaction
Documents by the Investor and the consummation by the Investor of the
transactions contemplated hereby and thereby will not result in a violation of
Partnership Agreement or other organizational documents of the Investor.
(F) OPPORTUNITY TO DISCUSS. The Investor has received all materials relating to
the Company's business, finance and operations which it has requested. The
Investor has had an opportunity to discuss the business, management and
financial affairs of the Company with the Company's management.
(G) INVESTMENT PURPOSES. The Investor is purchasing the Securities for its own
account for investment purposes and not with a view towards distribution and
agrees to resell or otherwise dispose of the Securities solely in accordance
with the registration provisions of the 1933 Act (or pursuant to an exemption
from such registration provisions).
(H) NO REGISTRATION AS A DEALER. The Investor is not and will not be required to
be registered as a "dealer" under the 1934 Act, either as a result of its
execution and performance of its obligations under this Agreement or otherwise.
(I) GOOD STANDING. The Investor is a Limited Partnership, duly organized,
validly existing and in good standing in the State of Delaware.
(J) TAX LIABILITIES. The Investor understands that it is liable for its own tax
liabilities.
(K) REGULATION M. The Investor will comply with Regulation M under the 1934 Act,
if applicable.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Except as set forth in the Schedules attached hereto, or as disclosed on the
Company's SEC Documents, the Company represents and warrants to the Investor
that:
(A) ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized
and validly existing in good standing under the laws of the State of Nevada, and
has the requisite corporate power and authorization to own its properties and to
carry on its business as now being conducted. Both the Company and the companies
it owns or controls ("Subsidiaries") are duly qualified to do business and are
in good standing in every jurisdiction in which its ownership of property or 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. As used in this Agreement, "Material
Adverse Effect" means any material adverse effect on the business, properties,
assets, operations, results of operations, financial condition or prospects of
the Company and its Subsidiaries, if any, taken as a whole, or on the
transactions contemplated hereby or by the agreements and instruments to be
entered into in connection herewith, or on the authority or ability of the
Company to perform its obligations under the Equity Line Transaction Documents
(as defined in Section 1 and 4(B), below).
(B) AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS.
(I) The Company has the requisite corporate power and authority to enter
into and perform this Investment Agreement and the Registration Rights Agreement
(collectively, the "Equity Line Transaction Documents"), and to issue the
Securities in accordance with the terms hereof and thereof.
(II) The execution and delivery of the Equity Line Transaction Documents by
the Company and the consummation by it of the transactions contemplated hereby
and thereby, including without limitation the reservation for issuance and the
issuance of the Securities pursuant to this Agreement, have been duly and
validly 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
shareholders.
(III) The Equity Line Transaction Documents have been duly and validly
executed and delivered by the Company.
(IV) The Equity Line 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.
(C) CAPITALIZATION. As of the date hereof, the authorized capital stock of the
Company consists of 475,000,000 shares of Common Stock, $.001 par value per
share, of which as of May 16, 2007, 35,026,812 shares are issued and
outstanding; 25,000,000 shares of Preferred Stock authorized with 3,615,928
shares issued or outstanding, as of March 31, 2007, and 32,098,465 shares
reserved for issuance during the next 12 months pursuant to options, warrants,
Series A Preferred Stock and other convertible securities. With respect to the
Series A Preferred Stock outstanding at March 31, 2007, the maximum common
shares converted from Series A Preferred shares are contractually restricted to
five percent a quarter or twenty percent a year of the authorized and issued
common shares outstanding at December 31, 2006; resulting in a maximum
14,196,448 shares of common stock issuable upon conversion of Series A Preferred
Stock during calendar 2007. All of such outstanding shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable
Except as disclosed in the Company's publicly available filings with the SEC:
(I) no shares of the Company's capital stock are subject to preemptive rights or
any other similar rights or any liens or encumbrances suffered or permitted by
the Company; (II) there are no outstanding debt securities; (III) there are no
outstanding shares of capital stock, 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 of its
Subsidiaries; (IV) 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 1933 Act (except the Registration Rights Agreement);
(V) there are no outstanding securities of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are
no contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may become bound to redeem a security of the
Company or any of its Subsidiaries; (VI) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities as described in this Agreement; (VII) the Company
does not have any stock appreciation rights or "phantom stock" plans or
agreements or any similar plan or agreement; and (VIII) there is no dispute as
to the classification of any shares of the Company's capital stock.
The Company has furnished to the Investor, or the Investor has had access
through EDGAR to, true and correct copies of the Company's Amended and Restated
Certificate of Incorporation, as in effect on the date hereof (the "Certificate
of Incorporation"), and the Company's By-laws, as in effect on the date hereof
(the "By-laws"), and the terms of all securities convertible into or exercisable
for Common Stock and the material rights of the holders thereof in respect
thereto.
(D) ISSUANCE OF SHARES. The Company has reserved 40,000,000 Shares for issuance
pursuant to this Agreement, which have been duly authorized and reserved those
Shares for issuance (subject to adjustment pursuant to the Company's covenant
set forth in Section 5(F) below) pursuant to this Agreement. Upon issuance in
accordance with this Agreement, the Securities will be validly issued, fully
paid for and non-assessable and free from all taxes, liens and charges with
respect to the issue thereof. In the event the Company cannot register a
sufficient number of Shares for issuance pursuant to this Agreement, the Company
will use its best efforts to authorize and reserve for issuance the number of
Shares required for the Company to perform its obligations hereunder as soon as
reasonably practicable.
(E) NO CONFLICTS. The execution, delivery and performance of the Equity Line
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby will not (I) result in a violation
of the Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the By-laws; or (II) conflict with, or constitute a material default
(or an event which with notice or lapse of time or both would become a material
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, contract, indenture
mortgage, indebtedness or instrument to which the Company or any of its
Subsidiaries is a party, or to the Company's knowledge result in a violation of
any law, rule, regulation, order, judgment or decree (including United States
federal and state securities laws and regulations and the rules and regulations
of the Principal Market or principal securities exchange or trading market on
which the Common Stock is traded or listed) 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. Except as disclosed in Schedule 4(e), neither
the Company nor its Subsidiaries is in violation of any term of, or in default
under, the Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the By-laws or their organizational charter or by-laws, respectively,
or any contract, agreement, mortgage, indebtedness, indenture, instrument,
judgment, decree or order or any statute, rule or regulation applicable to the
Company or its Subsidiaries, except for possible conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations that would
not individually or in the aggregate have or constitute a Material Adverse
Effect. The business of the Company and its Subsidiaries is not being conducted,
and shall not be conducted, in violation of any law, statute, ordinance, rule,
order or regulation of any governmental authority or agency, regulatory or
self-regulatory agency, or court, except for possible violations the sanctions
for which either individually or in the aggregate would not have a Material
Adverse Effect. Except as specifically contemplated by this Agreement and as
required under the 1933 Act or any securities laws of any states, to the
Company's knowledge, the Company is not required to obtain any consent,
authorization, permit or order of, or make any filing or registration (except
the filing of a registration statement as outlined in the Registration Rights
Agreement between the Parties) with, any court, governmental authority or
agency, regulatory or self-regulatory agency or other third party in order for
it to execute, deliver or perform any of its obligations under, or contemplated
by, the Equity Line Transaction Documents in accordance with the terms hereof or
thereof. All consents, authorizations, permits, 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 and are
in full force and effect as of the date hereof. Except as disclosed in Schedule
4(e), the Company and its Subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing. The Company is not, and will not
be, in violation of the listing requirements of the Principal Market as in
effect on the date hereof and on each of the Closing Dates and is not aware of
any facts which would reasonably lead to delisting of the Common Stock by the
Principal Market in the foreseeable future.
(F) SEC DOCUMENTS; FINANCIAL STATEMENTS. As of the date hereof, the Company has
filed all reports, schedules, forms, statements and other documents required to
be filed by it with the SEC pursuant to the reporting requirements of the 1934
Act (all of the foregoing filed prior to the date hereof and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
Documents"). The Company has delivered to the Investor or its representatives,
or they have had access through EDGAR to, true and complete copies of the SEC
Documents. As of their respective filing dates, the SEC Documents complied in
all material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. As of
their respective dates, the financial statements of the Company included in the
SEC Documents 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, by a firm that is a member of the
Public Companies Accounting Oversight Board ("PCAOB") 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 written
information provided by or on behalf of the Company to the Investor which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 4(D) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary to make the
statements therein, in the light of the circumstance under which they are or
were made, not misleading. Neither the Company nor any of its Subsidiaries or
any of their officers, directors, employees or agents have provided the Investor
with any material, nonpublic information which was not publicly disclosed prior
to the date hereof and any material, nonpublic information provided to the
Investor by the Company or its Subsidiaries or any of their officers, directors,
employees or agents prior to any Closing Date shall be publicly disclosed by the
Company prior to such Closing Date.
(G) ABSENCE OF CERTAIN CHANGES. Except as otherwise set forth in the SEC
Documents, the Company does not intend to change the business operations of the
Company in any material way. The Company has not taken any steps, and does not
currently expect to take any steps, to seek protection pursuant to any
bankruptcy law nor does the Company or its Subsidiaries have any knowledge or
reason to believe that its creditors intend to initiate involuntary bankruptcy
proceedings.
(H) ABSENCE OF LITIGATION AND/OR REGULATORY PROCEEDINGS. Except as set forth in
the SEC Documents, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the
executive officers of Company or any of its Subsidiaries, threatened against or
affecting the Company, the Common Stock or any of the Company's Subsidiaries or
any of the Company's or the Company's Subsidiaries' officers or directors in
their capacities as such, in which an adverse decision could have a Material
Adverse Effect.
(I) ACKNOWLEDGMENT REGARDING INVESTOR'S PURCHASE OF SHARES. The Company
acknowledges and agrees that the Investor is acting solely in the capacity of an
arm's length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby. The Company further acknowledges
that the Investor is not acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to the Equity Line Transaction
Documents and the transactions contemplated hereby and thereby and any advice
given by the Investor or any of its respective representatives or agents in
connection with the Equity Line Transaction Documents and the transactions
contemplated hereby and thereby is merely incidental to the Investor's purchase
of the Securities, and is not being relied on by the Company. The Company
further represents to the Investor that the Company's decision to enter into the
Equity Line Transaction Documents has been based solely on the independent
evaluation by the Company and its representatives.
(J) NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR CIRCUMSTANCES. Except as
set forth in the SEC Documents, as of the date hereof, no event, liability,
development or circumstance has occurred or exists, or to the Company's
knowledge is contemplated to occur, with respect to the Company or its
Subsidiaries or their respective business, properties, assets, prospects,
operations or financial condition, that would be required to be disclosed by the
Company under applicable securities laws on a registration statement filed with
the SEC relating to an issuance and sale by the Company of its Common Stock and
which has not been publicly announced.
(K) EMPLOYEE RELATIONS. Neither the Company nor any of its Subsidiaries is
involved in any union labor dispute nor, to the knowledge of the Company or any
of its Subsidiaries, is any such dispute threatened. Neither the Company nor any
of its Subsidiaries is a party to a collective bargaining agreement, and the
Company and its Subsidiaries believe that relations with their employees are
good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has
notified the Company that such officer intends to leave the Company's employ or
otherwise terminate such officer's employment with the Company.
(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. Except as set forth in the SEC Documents, none of the Company's
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
government authorizations, trade secrets or other intellectual property rights
necessary to conduct its business as now or as proposed to be conducted have
expired or terminated, or are expected to expire or terminate within two (2)
years from the date of this Agreement. 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, or of any such development of similar or
identical trade secrets or technical information by others and, except as set
forth in the SEC Documents, 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. The Company and its Subsidiaries have taken commercially
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties.
(M) ENVIRONMENTAL LAWS. The Company and its Subsidiaries (I) are, to the
knowledge of the management and directors of the Company and its Subsidiaries,
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, to the knowledge of the
management and directors of the Company, received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses; and (III) are in compliance, to the knowledge of the
management and directors of the Company, with all terms and conditions of any
such permit, license or approval where, in each of the three (3) foregoing
cases, the failure to so comply would have, individually or in the aggregate, a
Material Adverse Effect.
(N) TITLE. The Company and its Subsidiaries have good and marketable title to
all personal property owned by them which is material to the business of the
Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the SEC Documents or
such as do not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company or any
of its Subsidiaries. Any real property and facilities held under lease by the
Company or any of 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. Each of the Company's Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as management of the Company reasonably believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any of its Subsidiaries has been refused any
insurance coverage sought or applied for and neither the Company nor its
Subsidiaries 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 have a Material Adverse Effect.
(P) REGULATORY PERMITS. The Company and its Subsidiaries have in full force and
effect all certificates, approvals, authorizations and permits from the
appropriate federal, state, local or foreign regulatory authorities and
comparable foreign regulatory agencies, necessary to own, lease or operate their
respective properties and assets and 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,
approval, authorization or permit, except for such certificates, approvals,
authorizations or permits which if not obtained, or such revocations or
modifications which, would not have a Material Adverse Effect.
(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 by a firm with membership to the PCAOB
and to maintain asset accountability; (III) access to assets is permitted only
in accordance with management's general or specific authorization; and (IV) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(R) NO MATERIALLY ADVERSE CONTRACTS, 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. Neither the Company nor any of its Subsidiaries is a party to any
contract or agreement which in the judgment of the Company's officers has or is
expected to have a Material Adverse Effect.
(S) TAX STATUS. The Company and each of its Subsidiaries has made or filed all
United States federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (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) and 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 as set forth in the SEC Documents filed at
least ten (10) days prior to the date hereof and except for 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
disinterested third parties and other than the grant of stock options disclosed
in the SEC Documents, none of the officers, directors, or employees of the
Company is presently a party to any transaction with the Company or any of its
Subsidiaries (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.
(U) DILUTIVE EFFECT. The Company understands and acknowledges that the number of
shares of Common Stock issuable upon purchases pursuant to this Agreement will
increase in certain circumstances including, but not necessarily limited to, the
circumstance wherein the trading price of the Common Stock declines during the
period between the Effective Date and the end of the Open Period. The Company's
executive officers and directors have studied and fully understand the nature of
the transactions contemplated by this Agreement and recognize that they have a
potential dilutive effect on the shareholders of the Company. The Board of
Directors of the Company has concluded, in its good faith business judgment, and
with full understanding of the implications, that such issuance is in the best
interests of the Company. The Company specifically acknowledges that, subject to
such limitations as are expressly set forth in the Equity Line Transaction
Documents, its obligation to issue shares of Common Stock upon purchases
pursuant to this Agreement is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
shareholders of the Company.
(V) LOCK-UP. The Company shall cause its officers, insiders, directors, and
affiliates or other related parties under control of the Company, to refrain
from selling Common Stock during each Pricing Period.
(W) NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, nor
any person acting on its behalf, has engaged in any form of general solicitation
or general advertising (within the meaning of Regulation D) in connection with
the offer or sale of the Common Stock to be offered as set forth in this
Agreement.
(X) NO BROKERS, FINDERS OR FINANCIAL ADVISORY FEES OR COMMISSIONS. No brokers,
finders or financial advisory fees or commissions will be payable by the
Company, it's agents or Subsidiaries, with respect to the transactions
contemplated by this Agreement, except as otherwise disclosed in this Agreement.
SECTION 5. COVENANTS OF THE COMPANY
(A) BEST EFFORTS. The Company shall use all commercially reasonable efforts to
timely satisfy each of the conditions set forth in Section 7 of this Agreement.
(B) BLUE SKY. The Company shall, at its sole cost and expense, on or before each
of the Closing Dates, take such action as the Company shall reasonably determine
is necessary to qualify the Securities for, or obtain exemption for the
Securities for, sale to the Investor at each of the Closings pursuant to this
Agreement under applicable securities or "Blue Sky" laws of such states of the
United States, as reasonably specified by the Investor, and shall provide
evidence of any such action so taken to the Investor on or prior to the Closing
Date.
(C) REPORTING STATUS. Until one of the following occurs, the Company shall file
all reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status, or take an action or fail to take any
action, which would terminate its status as a reporting company under the 1934
Act: (i) this Agreement terminates pursuant to Section 9 and the Investor has
the right to sell all of the Securities without restrictions pursuant to Rule
144(k) promulgated under the 1933 Act, or such other exemption (ii) the date on
which the Investor has sold all the Securities and this Agreement has been
terminated pursuant to Section 9.
(D) USE OF PROCEEDS. The Company will use the proceeds from the sale of the
Shares (excluding amounts paid by the Company for fees as set forth in the
Equity Line Transaction Documents) for general corporate and working capital
purposes and acquisitions or assets, businesses or operations or for other
purposes that the Board of Directors, in its good faith deem to be in the best
interest of the Company.
(E) FINANCIAL INFORMATION. During the Open Period, the Company agrees to make
available to the Investor via EDGAR or other electronic means the following
documents and information on the forms set forth: (I) within five (5) Trading
Days after the filing thereof with the SEC, a copy of its Annual Reports on Form
10-KSB, its Quarterly Reports on Form 10-QSB, any Current Reports on Form 8-K
and any Registration Statements or amendments filed pursuant to the 1933 Act;
(II) copies of any notices and other information made available or given to the
shareholders of the Company generally, contemporaneously with the making
available or giving thereof to the shareholders; and (III) within two (2)
calendar days of filing or delivery thereof, copies of all documents filed with,
and all correspondence sent to, the Principal Market, any securities exchange or
market, or the National Association of Securities Dealers, Inc., unless such
information is material nonpublic information.
(F) RESERVATION OF SHARES. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, a sufficient
number of shares of Common Stock to provide for the issuance of the Securities
to the Investor as required hereunder. In the event that the Company determines
that it does not have a sufficient number of authorized shares of Common Stock
to reserve and keep available for issuance as described in this Section 5(F),
the Company shall use all commercially reasonable efforts to increase the number
of authorized shares of Common Stock by seeking shareholder approval for the
authorization of such additional shares.
(G) LISTING. The Company shall promptly secure and maintain the listing of all
of the Registrable Securities (as defined in the Registration Rights Agreement)
on the Principal Market and each other national securities exchange and
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, such listing
of all Registrable Securities from time to time issuable under the terms of the
Equity Line Transaction Documents. Neither the Company nor any of its
Subsidiaries shall take any action which would be reasonably expected to result
in the delisting or suspension of the Common Stock on the Principal Market
(excluding suspensions of not more than one (1) trading day resulting from
business announcements by the Company). The Company shall promptly provide to
the Investor copies of any notices it receives from the Principal Market
regarding the continued eligibility of the Common Stock for listing on such
automated quotation system or securities exchange. The Company shall pay all
fees and expenses in connection with satisfying its obligations under this
Section 5(G).
(H) TRANSACTIONS WITH AFFILIATES. 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, persons who were officers or directors at any time during
the previous two (2) years, shareholders who beneficially own 5% or more of the
Common Stock, or Affiliates 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 5% or more beneficial interest (each a "Related Party"),
except for (I) customary employment arrangements and benefit programs on
reasonable terms, (II) any agreement, transaction, commitment or arrangement on
an arms-length basis on terms no less favorable than terms which would have been
obtainable from a disinterested third party other than such Related Party, or
(III) 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 5% or more equity interest in that person or entity, (II) has 5% or
more common ownership with that person or entity, (III) controls that person or
entity, or (IV) is under common control with that person or entity. "Control" or
"Controls" for purposes hereof means that a person or entity has the power,
directly or indirectly, to conduct or govern the policies of another person or
entity. (I) FILING OF FORM 8-K. On or before the date which is four (4) Trading
Days after the Execution Date, the Company shall file a Current Report on Form
8-K with the SEC describing the terms of the transaction contemplated by the
Equity Line Transaction Documents in the form required by the 1934 Act, if such
filing is required.
(J) CORPORATE EXISTENCE. The Company shall use all commercially reasonable
efforts to preserve and continue the corporate existence of the Company.
(K) NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION; SUSPENSION OF RIGHT TO MAKE
A PUT. The Company shall promptly notify the Investor upon the occurrence of any
of the following events in respect of a Registration Statement or related
prospectus in respect of an offering of the Securities: (I) receipt of any
request for additional information by the SEC or any other federal or state
governmental authority during the period of effectiveness of the Registration
Statement for amendments or supplements to the Registration Statement or related
prospectus; (II) the issuance by the SEC or any other federal or state
governmental authority of any stop order suspending the effectiveness of any
Registration Statement or the initiation of any proceedings for that purpose;
(III) receipt of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Securities for sale
in any jurisdiction or the initiation or notice of any proceeding for such
purpose; (IV) the happening of any event that makes any statement made in such
Registration Statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of a Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (V) the Company's reasonable determination that a post-effective
amendment to the Registration Statement would be appropriate, and the Company
shall promptly make available to Investor any such supplement or amendment to
the related prospectus. The Company shall not deliver to Investor any Put Notice
during the continuation of any of the foregoing events in this Section 5(K).
(L) REIMBURSEMENT. If (I) the Investor becomes involved in any capacity in any
action, proceeding or investigation brought by any shareholder of the Company,
in connection with or as a result of the consummation of the transactions
contemplated by the Equity Line Transaction Documents, or if the Investor is
impleaded in any such action, proceeding or investigation by any person (other
than as a result of a breach of the Investor's representations and warranties
set forth in this Agreement); or (II) the Investor becomes involved in any
capacity in any action, proceeding or investigation brought by the SEC against
or involving the Company or in connection with or as a result of the
consummation of the transactions contemplated by the Equity Line Transaction
Documents (other than as a result of a breach of the Investor's representations
and warranties set forth in this Agreement), or if this Investor is impleaded in
any such action, proceeding or investigation by any person, then in any such
case, the Company will reimburse the Investor for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which the Investor is a named party, the Company
will pay to the Investor the charges, as reasonably determined by the Investor,
for the time of any officers or employees of the Investor devoted to appearing
and preparing to appear as witnesses, assisting in preparation for hearings,
trials or pretrial matters, or otherwise with respect to inquiries, hearing,
trials, and other proceedings relating to the subject matter of this Agreement.
The reimbursement obligations of the Company under this section shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any affiliates of the Investor that are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees, attorneys, accountants, auditors and controlling
persons (if any), as the case may be, of Investor and any such affiliate, and
shall be binding upon and inure to the benefit of any successors of the Company,
the Investor and any such affiliate and any such person.
(M) TRANSFER AGENT. Upon effectiveness of the Registration Statement, and for so
long as the Registration Statement is effective, the Company shall deliver
instructions to its transfer agent to issue Shares to the Investor that are
covered for resale by the Registration Statement free of restrictive legends.
(N) ACKNOWLEDGEMENT OF TERMS. The Company hereby represent and warrants to the
Investor that: (i) it is voluntarily issuing entering this Agreement of its own
freewill, (ii) it is not entering this Agreement under economic duress, (iii)
the terms of this Agreement are reasonable and fair to the Company, and (iv) the
Company has had independent legal counsel of its own choosing review this
Agreement, advise the Company with respect to this Agreement, and represent the
Company in connection with this Agreement.
SECTION 6. INTENTIONALLY OMITTED
SECTION 7. CONDITIONS OF THE COMPANY'S OBLIGATION TO SELL.
The obligation hereunder of the Company to issue and sell the Securities to the
Investor is further subject to the satisfaction, at or before each Closing Date,
of each of the following conditions set forth below. These conditions are for
the Company's sole benefit and may be waived by the Company at any time in its
sole discretion.
(A) The Investor shall have executed this Agreement and the Registration Rights
Agreement and delivered the same to the Company.
(B) The Investor shall have delivered to the Company the Purchase Price for the
Securities being purchased by the Investor between the end of the Pricing Period
and the Closing Date via a Put Settlement Sheet (hereto attached as Exhibit D).
After receipt of confirmation of delivery of such Securities to the Investor,
the Investor, by wire transfer of immediately available funds pursuant to the
wire instructions provided by the Company will disburse the funds constituting
the Purchase Amount.
(C) No statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
SECTION 8. FURTHER CONDITIONS OF THE INVESTOR'S OBLIGATION TO PURCHASE.
The obligation of the Investor hereunder to purchase Shares is subject to the
satisfaction, on or before each Closing Date, of each of the following
conditions set forth below.
(A) The Company shall have executed the Equity Line Transaction Documents and
delivered the same to the Investor.
(B) The Common Stock shall be authorized for quotation on the Principal Market
and trading in the Common Stock shall not have been suspended by the Principal
Market or the SEC, at any time beginning on the date hereof and through and
including the respective Closing Date (excluding suspensions of not more than
one (1) Trading Day resulting from business announcements by the Company,
provided that such suspensions occur prior to the Company's delivery of the Put
Notice related to such Closing).
(C) The representations and warranties of the Company shall be true and correct
as of the date when made and as of the applicable Closing Date as though made at
that time and the Company shall have performed, satisfied and complied with the
covenants, agreements and conditions required by the Equity Line Transaction
Documents to be performed, satisfied or complied with by the Company on or
before such Closing Date. The Investor may request an update as of such Closing
Date regarding the representation contained in Section 4(C) above.
(D) The Company shall have executed and delivered to the Investor the
certificates representing, or have executed electronic book-entry transfer of,
the Securities (in such denominations as the Investor shall request) being
purchased by the Investor at such Closing.
(E) The Board of Directors of the Company shall have adopted resolutions
consistent with Section 4(B)(II) above (the "Resolutions") and such Resolutions
shall not have been amended or rescinded prior to such Closing Date.
(F) Reserved
(G) No statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
(H) The Registration Statement shall be effective on each Closing Date and no
stop order suspending the effectiveness of the Registration statement shall be
in effect or to the Company's knowledge shall be pending or threatened.
Furthermore, on each Closing Date (I) neither the Company nor the Investor shall
have received notice that the SEC has issued or intends to issue a stop order
with respect to such Registration Statement or that the SEC otherwise has
suspended or withdrawn the effectiveness of such Registration Statement, either
temporarily or permanently, or intends or has threatened to do so (unless the
SEC's concerns have been addressed and Investor is reasonably satisfied that the
SEC no longer is considering or intends to take such action), and (II) no other
suspension of the use or withdrawal of the effectiveness of such Registration
Statement or related prospectus shall exist.
(I) At the time of each Closing, the Registration Statement (including
information or documents incorporated by reference therein) and any amendments
or supplements thereto shall not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or which would require public
disclosure or an update supplement to the prospectus.
(J) If applicable, the shareholders of the Company shall have approved the
issuance of any Shares in excess of the Maximum Common Stock Issuance in
accordance with Section 2(H) or the Company shall have obtained appropriate
approval pursuant to the requirements of Nevada law and the Company's Articles
of Incorporation and By-laws.
(K) The conditions to such Closing set forth in Section 2(E) shall have been
satisfied on or before such Closing Date.
(L) The Company shall have certified to the Investor the number of Shares of
Common Stock outstanding when a Put Notice is given to the Investor. The
Company's delivery of a Put Notice to the Investor constitutes the Company's
certification of the existence of the necessary number of shares of Common Stock
reserved for issuance.
SECTION 9. TERMINATION. This Agreement shall terminate upon any of the following
events:
(I) when the Investor has purchased an aggregate of Ten Million dollars
($10,000,000) in the Common Stock of the Company pursuant to this Agreement; or,
(II) on the date which is thirty-six (36) months after the Effective Date; or,
(III) upon written notice of the Company to the Investor. Any and all shares, or
penalties, if any, due under this Agreement shall be immediately payable and due
upon termination of the Line.
SECTION 10. SUSPENSION
This Agreement shall be suspended upon any of the following events, and shall
remain suspended until such event is rectified:
(I) the trading of the Common Stock is suspended by the SEC, the Principal
Market or the NASD for a period of two (2) consecutive Trading Days during the
Open Period; or,
(II) The Common Stock ceases to be registered under the 1934 Act or listed
or traded on the Principal Market. Immediately upon the occurrence of one of the
above-described events, the Company shall send written notice of such event to
the Investor.
SECTION 11. INDEMNIFICATION.
In consideration of the parties mutual obligations set forth in the Transaction
Documents, each of the parties (in such capacity, an "Indemnitor") shall defend,
protect, indemnify and hold harmless the other and all of the other party's
shareholders, officers, directors, employees, counsel, and direct or indirect
investors and any of the foregoing person's agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and reasonable expenses in
connection therewith (irrespective of whether any such 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 any Indemnitee as a result of, or arising out of, or relating to (I)
any misrepresentation or breach of any representation or warranty made by the
Indemnitor or any other certificate, instrument or document contemplated hereby
or thereby; (II) any breach of any covenant, agreement or obligation of the
Indemnitor contained in the Equity Line Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby; or (III) any
cause of action, suit or claim brought or made against such Indemnitee by a
third party and arising out of or resulting from the execution, delivery,
performance or enforcement of the Equity Line Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, except
insofar as any such misrepresentation, breach or any untrue statement, alleged
untrue statement, omission or alleged omission is made in reliance upon and in
conformity with information furnished to Indemnitor which is specifically
intended for use in the preparation of any such Registration Statement,
preliminary prospectus, prospectus or amendments to the prospectus. To the
extent that the foregoing undertaking by the Indemnitor may be unenforceable for
any reason, the Indemnitor shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law. The indemnity provisions contained herein shall be in
addition to any cause of action or similar rights Indemnitor may have, and any
liabilities the Indemnitor or the Indemnitees may be subject to.
SECTION 12. GOVERNING LAW; DISPUTES SUBMITTED TO ARBITRATION.
All disputes arising under this agreement shall be governed by and
interpreted in accordance with the laws of the Commonwealth of Massachusetts,
without regard to principles of conflict of laws. The parties to this agreement
will submit all disputes arising under this agreement to arbitration in Boston,
Massachusetts before a single arbitrator of the American Arbitration Association
("AAA"). The arbitrator shall be selected by application of the rules of the
AAA, or by mutual agreement of the parties, except that such arbitrator shall be
an attorney admitted to practice law in the Commonwealth of Massachusetts. No
party to this agreement will challenge the jurisdiction or venue provisions as
provided in this section. No party to this agreement will challenge the
jurisdiction or venue provisions as provided in this section. Nothing contained
herein shall prevent the party from obtaining an injunction.
(B) LEGAL FEES; AND MISCELLANEOUS FEES. Except as otherwise set forth in the
Equity Line Transaction Documents, each party shall pay the fees and expenses of
its advisers, counsel, the accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. Any attorneys' fees and
expenses incurred by either the Company or the Investor in connection with the
preparation, negotiation, execution and delivery of any amendments to this
Agreement or relating to the enforcement of the rights of any party, after the
occurrence of any breach of the terms of this Agreement by another party or any
default by another party in respect of the transactions contemplated hereunder,
shall be paid on demand by the party which breached the Agreement and/or
defaulted, as the case may be. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of any Securities.
(C) 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; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original signature.
(D) HEADINGS; SINGULAR/PLURAL. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. Whenever required by the context of this
Agreement, the singular shall include the plural and masculine shall include the
feminine.
(E) 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.
(F) ENTIRE AGREEMENT; AMENDMENTS. This Agreement is the FINAL AGREEMENT between
the Company and the Investor with respect to the terms and conditions set forth
herein, and, the terms of this Agreement may not be contradicted by evidence of
prior, contemporaneous, or subsequent oral agreements of the Parties. No
provision of this Agreement may be amended other than by an instrument in
writing signed by the Company and the Investor, and no provision hereof may be
waived other than by an instrument in writing signed by the party against whom
enforcement is sought. The execution and delivery of the Equity Line Transaction
Documents shall not alter the force and effect of any other agreements between
the Parties, and the obligations under those agreements.
(G) NOTICES. Any notices 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
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (III) 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:
If to the Company:
ERF Wireless, Inc.
2911 South Shore Blvd., Suite 100
League City, TX 77573
Telephone: (281) 538-2101
Facsimile: (281) 538-2121
If to the Investor:
Dutchess Private Equities Fund, Ltd.,
50 Commonwealth Avenue, Suite 2
Boston, MA 02116
Telephone: 617-301-4700
Facsimile: 617-249-0947
Each party shall provide five (5) days prior written notice to the other party
of any change in address or facsimile number.
(H) NO ASSIGNMENT. This Agreement may not be assigned.
(I) NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of
the parties hereto and is not for the benefit of, nor may any provision hereof
be enforced by, any other person, except that the Company acknowledges that the
rights of the Investor may be enforced by its general partner.
(J) SURVIVAL. The representations and warranties of the Company and the Investor
contained in Sections 2 and 3, the agreements and covenants set forth in
Sections 4 and 5, and the indemnification provisions set forth in Section 11,
shall survive each of the Closings and the termination of this Agreement.
(K) PUBLICITY. The Company and the Investor shall consult with each other in
issuing any press releases or otherwise making public statements with respect to
the transactions contemplated hereby and no party shall issue any such press
release or otherwise make any such public statement without the prior consent of
the other party, which consent shall not be unreasonably withheld or delayed,
except that no prior consent shall be required if such disclosure is required by
law, in which such case the disclosing party shall provide the other party with
prior notice of such public statement. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of the Investor without the prior
consent of the Investor, except to the extent required by law. The Investor
acknowledges that this Agreement and all or part of the Equity Line Transaction
Documents may be deemed to be "material contracts" as that term is defined by
Item 601(b)(10) of Regulation S-B, and that the Company may therefore be
required to file such documents as exhibits to reports or registration
statements filed under the 1933 Act or the 1934 Act. The Investor further agrees
that the status of such documents and materials as material contracts shall be
determined solely by the Company, in consultation with its counsel.
(L) 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.
(N) 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, as the parties
mutually agree that each has had a full and fair opportunity to review this
Agreement and seek the advice of counsel on it.
(O) REMEDIES. The Investor shall have all rights and remedies set forth in this
Agreement and the Registration Rights Agreement and all rights and remedies
which such holders have been granted at any time under any other agreement or
contract and all of the rights which the Investor has by law. Any person having
any rights under any provision of this Agreement shall be entitled to enforce
such rights specifically (without posting a bond or other security), to recover
damages by reason of any default or breach of any provision of this Agreement,
including the recovery of reasonable attorneys fees and costs, and to exercise
all other rights granted by law.
(P) PAYMENT SET ASIDE. To the extent that the Company makes a payment or
payments to the Investor hereunder or under the Registration Rights Agreement or
the Investor enforces or exercises its rights hereunder or thereunder, and such
payment or payments or the proceeds of such enforcement or exercise or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside, recovered from, disgorged by or are required to be refunded, repaid
or otherwise restored to the Company, a trustee, receiver or any other person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of any
such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
(Q) PRICING OF COMMON STOCK. For purposes of this Agreement, the bid price of
the Common Stock shall be as reported on Bloomberg.
SECTION 13. NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
(a) The Company shall not disclose non-public information to the Investor, its
advisors, or its representatives.
(b) Nothing herein shall require the Company to disclose non-public information
to the Investor or its advisors or representatives, and the Company represents
that it does not disseminate non-public information to any investors who
purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
non-public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein, in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 13 shall be construed to mean that such
persons or entities other than the Investor (without the written consent of the
Investor prior to disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms of this Agreement and nothing herein shall prevent any such persons or
entities from notifying the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration Statement contains
an untrue statement of material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.
ARTICLE 14 ACKNOWLEDGEMENTS OF THE PARTIES.
Notwithstanding anything in this Agreement to the contrary, the parties hereto
hereby acknowledge and agree to the following: (i) the Investor makes no
representations or covenants that it will not engage in trading in the
securities of the Company, other than the Investor will no sell short the
Company's common stock at any time during this Agreement; (ii) the Company
shall, by 8:30 a.m. Boston Time on the trading day following the date hereof,
file a current report on Form 8-K disclosing the material terms of the
transactions contemplated hereby and in the other Equity Line Transaction
Documents; (iii) the Company has not and shall not provide material non-public
information to the Investor unless prior thereto the Investor shall have
executed a written agreement regarding the confidentiality and use of such
information; and (iv) the Company understands and confirms that the Investor
will be relying on the acknowledgements set forth in clauses (i) through (iii)
above if the Investor effects any transactions in the securities of the Company.
SIGNATURE PAGE OF INVESTMENT AGREEMENT
Your signature on this Signature Page evidences your agreement to be bound by
the terms and conditions of the Investment Agreement and the Registration Rights
Agreement as of the date first written above.
The undersigned signatory hereby certifies that he has read and understands the
Investment Agreement, and the representations made by the undersigned in this
Investment Agreement are true and accurate, and agrees to be bound by its terms.
DUTCHESS PRIVATE EQUITIES FUND, LTD.
By:______________________________
Douglas H. Leighton, Director
ERF WIRELESS, INC.
By:_______________________________________
R. Greg Smith, Chief Financial Officer
LIST OF EXHIBITS
- ----------------
EXHIBIT A Registration Rights Agreement
EXHIBIT B Opinion of Company's Counsel
EXHIBIT C Put Notice
EXHIBIT D Put Settlement Sheet
LIST OF SCHEDULES
- -----------------
Schedule 4(a) Subsidiaries
1. ERF Enterprise Network Services, Inc.
2. ERF Wireless Bundled Services, Inc.
3. ERF Wireless Messaging Services, Inc.
4. ERF Network Operations, Inc.
- --------------------------------------------------------------------------------
EXHIBIT A
- --------------------------------------------------------------------------------
EXHIBIT B
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
Date: __________
[TRANSFER AGENT]
Re: ERF Wireless, Inc.
------------------
Ladies and Gentlemen:
We are counsel to ERF Wireless, Inc., a Nevada corporation (the "Company"),
and have represented the Company in connection with that certain Investment
Agreement (the "Investment Agreement") entered into by and among the Company and
_________________________ (the "Investor") pursuant to which the Company has
agreed to issue to the Investor shares of the Company's common stock, $.001 par
value per share (the "Common Stock") on the terms and conditions set forth in
the Investment Agreement. Pursuant to the Investment Agreement, the Company also
has entered into a Registration Rights Agreement with the Investor (the
"Registration Rights Agreement") pursuant to which the Company agreed, among
other things, to register the Registrable Securities (as defined in the
Registration Rights Agreement), including the shares of Common Stock issued or
issuable under the Investment Agreement under the Securities Act of 1933, as
amended (the "1933 Act"). In connection with the Company's obligations under the
Registration Rights Agreement, on ____________ ___, 2006, the Company filed a
Registration Statement on Form S- ___ (File No. 333-________) (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") relating to
the Registrable Securities which names the Investor as a selling shareholder
thereunder.
In connection with the foregoing, we advise you that [a member of the SEC's
staff has advised us by telephone that the SEC has entered an order declaring
the Registration Statement effective] [the Registration Statement has become
effective] under the 1933 Act at [enter the time of effectiveness] on [enter the
date of effectiveness] and to the best of our knowledge, after telephonic
inquiry of a member of the SEC's staff, no stop order suspending its
effectiveness has been issued and no proceedings for that purpose are pending
before, or threatened by, the SEC and the Registrable Securities are available
for resale under the 1933 Act pursuant to the Registration Statement.
Very truly yours,
[Company Counsel]
- --------------------------------------------------------------------------------
EXHIBIT C
Date:
RE: Put Notice Number __
Dear Mr. Leighton,
This is to inform you that as of today, ERF Wireless, Inc., a Nevada corporation
(the "Company"), hereby elects to exercise its right pursuant to the Investment
Agreement to require Dutchess Private Equities Fund, Ltd. to purchase shares of
its common stock. The Company hereby certifies that:
The amount of this put is $__________.
The Pricing Period runs from ________ until _______.
The current number of shares issued and outstanding as of the Company are:
- -------------------------
The number of shares currently available for issuance on the SB-2 for the Equity
Line are:
- -------------------------
Regards,
- -------------------------
R. Greg Smith, CFO
ERF Wireless, Inc.
- --------------------------------------------------------------------------------
EXHIBIT D
PUT SETTLEMENT SHEET
Date:
Dear Mr. Smith,
Pursuant to the Put given by ERF Wireless, Inc. to Dutchess Private Equities
Fund, Ltd. on _________________ 200_, we are now submitting the amount of common
shares for you to issue to Dutchess.
Please have a certificate bearing no restrictive legend totaling __________
shares issued to Dutchess Private Equities Fund, Ltd. immediately and send via
DWAC to the following account:
XXXXXX
If not DWAC eligible, please send FedEx Priority Overnight to:
XXXXXX
Once these shares are received by us, we will have the funds wired to the
Company.
Regards,
Douglas H. Leighton
DATE..........................PRICE
Date of Day 1 ............... Closing Bid of Day 1
Date of Day 2 ............... Closing Bid of Day 2
Date of Day 3 ............... Closing Bid of Day 3
Date of Day 4 ............... Closing Bid of Day 4
Date of Day 5 ............... Closing Bid of Day 5
LOWEST 1 (ONE) CLOSING BID IN PRICING PERIOD
------------
PUT AMOUNT
------------
AMOUNT WIRED TO COMPANY
------------
PURCHASE PRICE (93)% (NINETY-THREE PERCENT))
------------
AMOUNT OF SHARES DUE
------------
The undersigned has completed this Put as of this ___th day of _________, 200_.
ERF WIRELESS, INC.
- ------------------------------
R. Greg Smith, CFO
- --------------------------------------------------------------------------------
SCHEDULE 4(c) CAPITALIZATION
COMMON STOCK, PREFERRED STOCK AND WARRANTS
The total number of shares of stock of all classes which the Company shall have
the authority to issue is five hundred million (500,000,000), of which twenty
five million (25,000,000) shall be shares of Preferred Stock with a par value of
$.001 per share ("Preferred Stock"), and four hundred seventy five million
(475,000,000) shall be shares of Common Stock with a par value of $.001 per
share ("Common Stock").
COMMON STOCK
As of March 31, 2007, the Company had 31,284,245 shares of its $.001 par value
common stock issued and outstanding.
PREFERRED STOCK
The Company has 25,000,000 shares of Series A Preferred Stock authorized of
which 3,615,928 shares were issued and outstanding as of March 31, 2007. The
Series A Preferred Stock is convertible at holder's option at one preferred
share for 18.676347 shares Common Stock and has a 2:1 liquidation preference.
The holder of Series A Preferred Stock is required to give a 65-day notice of
conversion to the company. With respect to the Series A Preferred Stock
outstanding at March 31, 2007, the maximum common shares converted from Series A
Preferred shares are contractually restricted to five percent a quarter or
twenty percent a year of the authorized and issued common shares outstanding at
December 31, 2006; resulting in a maximum 14,196,448 shares of common stock
issuable upon conversion of Series A Preferred Stock during calendar 2007.
WARRANTS
The Company had warrants outstanding to third parties to purchase 2,067,257
common shares as of March 31, 2007.
Warrants for 880,000 shares were issued by the Company in June 2003.
Specifically, the Company sold 120,000 shares of Common Stock for $25,000 to an
accredited investor of the Securities Act and issued such a warrant to purchase
880,000 shares of Common Stock at an exercise price of $0.20 per share expiring
December 31, 2007. The Company attributed no value to these warrants in the June
2003 period in which they were issued, given that the warrants had an exercise
price of $0.20 per share as compared to the market value of $0.01 per share in
June 2003 on a total volume of 300 shares traded in the open market in June
2003. In January 2006, the Company and the holders of the warrants agreed to (i)
limit the amount of shares that can be sold upon exercise and (ii) purchase a
certain amount of shares of originally issued common stock within 60 days
(subject to extension) of the effective date of the February 2006 resale
registration statement. The Investor exercised 100,000 warrants leaving a
remaining balance of 780,000 warrants to be exercised.
Warrants for 208,339 shares of common stock at $5.00 per share and warrants for
208,339 shares at $7.50 per share were issued by the Company during 2005 and
2006. Specifically, the Company sold 208,312 shares of Common Stock for $312,500
to accredited investors of the Securities Act and issued such warrants to
purchase 208,339 shares of Common Stock at $5.00 per share and 208,339 shares of
common stock at $7.50 per share expiring August 2007. The Company attributed no
value to these warrants in the quarters in which they were issued. During the
4th quarter of 2006, management offered the Private Placement Memorandum Holders
an opportunity to exchange their stock for E-Series Bonds of which several
investors agreed to in aggregate in the amount of $100,000 resulting in
canceling 66,667 of the $7.50 warrants and $5.00 warrants reducing the
outstanding class warrants from 208,339 to 141,670.
Warrants for 389,999 at $3.57 per share were issued by the Company in September
2005 and November 2005. Specifically, the Company issued convertible notes for
$1,500,000 to accredited investors of the Securities Act and issued such
warrants to purchase 389,999 shares of Common Stock at $3.57 per share, subject
to adjustment upon issuance of shares or warrants below market, expiring
September 2010. See Note 9 for valuation and marked-to-market activity.
Warrants for 613,918 shares of common stock at $5.00 per share were issued by
the Company during the year end 2006 and 1st quarter 2007. Specifically, the
Company sold $587,500 of E-series bonds to accredited investors of the
Securities Act. According to the agreement if the Bondholder converts within one
year from investment; the conversion includes a warrant to purchase one
additional share of common stock at a price of $5.00 for every share of common
stock that has been received from the conversion of the Bond principal. The
Company has had twenty-five units converted and has attributed $3,000 in 2007
and $76,000 in 2006 to warrant expense using the Black Scholes option price
model in the quarter in which the unit was converted.
The following table summarizes warrants that are issued, outstanding and
exercisable.
Options/Warrants
Issued & Outstanding
-----------------------
Exercise Expiration March 31, March 31,
Price Date 2007 2006
-------- ---------- --------- ---------
0.20 Dec-07 780,000 780,000
5.00 Aug-07 141,670 191,672
7.50 Aug-07 141,670 191,672
3.57 Sep-10 389,999 389,999
5.00 Aug-09 613,918 -
--------- ---------
2,067,257 1,553,343
========= =========
- --------------------------------------------------------------------------------
SCHEDULE 4(e) CONFLICTS
None
- --------------------------------------------------------------------------------
SCHEDULE 4(g) MATERIAL CHANGES
None
- --------------------------------------------------------------------------------
SCHEDULE 4(h) LITIGATION
None
- --------------------------------------------------------------------------------
SCHEDULE 4(l) INTELLECTUAL PROPERTY
The Company has filed three patent applications on its CryptoVue(TM) technology.
The abstract of the patent application filing included the secure,
triple-controlled system for data over a network, which protects against data
theft or alteration by one or more ("e.g., two") corrupt insiders working
together with outsiders. A combination of dual-control tamper-resistant routers,
physical hardware keys and encryption keys enforces what the Company believes to
be best practice security protocols with thorough auditing. A remote monitoring
center provides a third level of control along with remote auditing and detailed
change-control alerts.
- --------------------------------------------------------------------------------
SCHEDULE 4(n) LIENS
NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debts consist of the following as of March 31, 2007
(in thousands):
Interest Gross Debt
Terms Maturity Date Rate Balance Discount Net Balance
--------------------------------- ------------- ------ -------- -------- ------------
Taylor Economic Development Corp. $1,119 / Month including interest June-07 7.00% 2 - 2
Vangard Wireless, Inc. $200 / Month including interest December-10 6.00% 8 - 8
Axis Capital, Inc $347 / Month including interest August-08 8.60% 5 - 5
Insurance notes $1,993 / Month including interest September-07 9.00% 18 - 18
Investor notes 2 years (See below) Demand 6.00% 790 278 512
Line of credit 2 years/ Quarterly interest February-08 6.00% 2,213 - 2,213
(See below)
E-bond investor notes 3 years/ Semiannual interest Various 10.00% 450 89 361
(See below) ------ -------- -------- ------------
Total debt $ 3,486 $ 367 3,119
======== ========
876
Less current maturities (314)
Less debt discount current maturities ------------
$ 2,557
Long-term debt
The gross maturities of these debts are $876,000, $393,000, $2,215,000 and
$2,000 for the years ended December 31, 2007, 2008, 2009 and 2010, respectively.
INVESTOR NOTES
0n September 13, 2005, the Company closed a financing arrangement with Global
Capital Funding L.P. ("Global"), GCA Strategic Investment Fund
Limited("GCASIF"), HIPL Family Trust ("HIPL"), and DP Securities Inc.
("DPS")("Global," "GCASIF," HIPL" and "DPS," collectively, the "Investors") in
which it issued to: (i) Global, a convertible secured note in the principal
amount of $1,285,000 ("Global Note") and a common stock purchase warrant (the
"Global Warrant") to purchase 300,000 shares of Company common stock; (ii)
GCASIF, a convertible secured note in the principal amount of $50,000 (the
"GCASIF Note") and a common stock purchase warrant (the "GCASIF Warrant") to
purchase up to 13,953 shares of the Company common stock; and (iii) HIPL, a
convertible secured note in the principal amount of $66,750 (the HIPL Note") and
common stock purchase warrant (the "HIPL warrant") to purchase up to 20,930
shares of the common stock; and (iv) DPS a convertible secured note in the
principal amount of $98,250 (the "DPS Note") and a common stock purchase warrant
(the "DPS Warrant") to purchase up to 55,116 shares of common stock. The Global
Note, GCASIF Note, HIPL Note and DPS Note, collectively, "Investor Notes" and
the Global Warrant, GCASIF Warrant, and DPS Warrant, collectively, "Investor
Warrants".
The Investor Notes accrue interest at a rate per annum equal to six percent and
are secured by substantially all of the Company's assets. The Investor Notes are
convertible into shares of the Company common stock at a conversion price equal
to the lesser of (i) $3.50 or (ii) 85% of the average of the three lowest VWAPs,
as reported by Bloomberg, during the ten trading days immediately preceding the
date of the related notice of conversion; provided further, however, that, until
six months following the effective date of the registration statement in no
event will the conversion price be lower than the lesser of (y) $1.50 or (z) 50%
of the VWAP, as reported by Bloomberg, on January 13, 2006, the effective date
of the registration statement. Upon expiration of such six-month period or upon
occurrence of an event of default which is not cured, the foregoing floor
calculation shall no longer be effective. The six months expired on June 13th,
2006. The Company has registered the resale of the shares of the Company common
stock underlying the Investor Notes and the shares issuable upon exercise of the
Investor Warrants.
The Company has the ability to prepay in company common stock amounts owed under
these Investors Notes for a price equal to the greater of: (i) the outstanding
principal amount of the Investor Note, plus all accrued but unpaid interest,
including default interest, if any; and (ii) (x) the number of shares of common
stock into which the Investor Note, including all accrued but unpaid interest
and default interest, if any, is then convertible, times (y) the average VWAP of
the common stock for the five trading days immediately prior to the date that
the Investor Note is called for prepayment. The Company has the right to prepay
the notes in cash at 102% of the outstanding principal and interest in the first
year or 101% of the outstanding principal and interest in the second year. The
associated Investor Warrants are exercisable by the Investors for five years at
$3.57 per share, subject to adjustment upon issuance of shares or warrants below
market, of Company common stock.
LINE OF CREDIT
Effective March 10, 2006, ERF Wireless, Inc. (the "Company"), entered into a
two-year unsecured revolving credit facility with certain private investors that
provides a $2 million dollar line of credit. The terms of the two-year unsecured
revolving credit facility allow ERF Wireless to draw upon the facility as
financing requirements dictate and provide for quarterly interest payments at a
6% rate. The loan may be prepaid without penalty or repaid at maturity. At March
31, 2007, the balance of the credit line was $2,213,041. On April 5, 2007, the
Company amended its two-year $3,000,000 revolving credit facility to mature on
February 28, 2009 and granted the lender a security interest in all the assets
of the Door. The amendment also included a provision that in the event the
Company draws down the full $3 million amount available under the revolving
credit facility on or prior to December 31, 2007, and the Company requires
additional working capital to pursue its business strategy and operations and
has not closed on alternative debt or equity financing aggregating at least $1
million, the lender has agreed to fund up to an additional $1 million during
2007 under the same terms and conditions. The line of credit is secured by the
assets of the Company's Lubbock wireless ISP operations.
- --------------------------------------------------------------------------------
SCHEDULE 4(t) CERTAIN TRANSACTIONS
None