Exhibit 10.7

 

 

DKR VENTURES, LLC

 

May 8, 2014

 

Paulson Capital (Delaware) Corp.
1331 NW Lovejoy Street, Suite 720

Portland, Oregon 97209

Attn: Trent Davis

 

Variation Biotechnologies (US), Inc.
222 Third Street, Suite 2241
Cambridge, MA 02142
Attn: Jeff Baxter

 

Dear Sirs:

 

This agreement (the “Leak-Out Agreement”) is being delivered to you in
connection with that certain Agreement and Plan of Merger (the “Merger
Agreement”), dated as of May 8, 2014 (the “Execution Date”), by and among
Variation Biotechnologies (US), Inc., a Delaware corporation (the “Company”);
Paulson Capital (Delaware) Corp., a Delaware corporation (“Parent”); and VBI
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Parent (“Merger Sub”).

 

The undersigned holder (the “Holder”) of securities of Parent (consisting
exclusively of (A) securities acquired upon the purchase or exercise of any
securities acquired (the “Units”) pursuant to that certain Subscription
Agreement dated as of July 25, 2013 (the “SPA”) and (B) securities issued in
replacement of the Units and securities issued thereunder upon conversion,
exercise, exchange or adjustment pursuant to the Merger Agreement, on an
as-converted, or as-exercised basis, if applicable, and without regard to any
limitations on conversion or exercise applicable thereto, if any, collectively,
the “Restricted Securities”), in each case, as described on the signature page
of the undersigned holder, agrees with Parent and the Company as follows:

 

During the period commencing on the Execution Date and ending on the earlier of:
(a) the time of consummation of the merger contemplated by the Merger Agreement
(the “Merger Time”, and such merger, the “Merger”), (b) the termination of the
Merger Agreement by any party thereto, (c) September 23, 2014 (the “Merger
Deadline”) or (d) any breach by Parent of any term of this Leak-Out Agreement or
Section 2(d) of the SPA (Favored Nations Provision), if not cured within 5
business days following delivery of written notice of such breach by Holder to
Parent (“Cured”), neither the Holder, nor any of its Affiliates, successors or
assigns, collectively, shall (i) sell more than the Pre-Merger Sale Limit (as
defined below) of Restricted Securities in any calendar month or (ii) sell any
Restricted Securities for less than $1.00 per share (subject to adjustment for
any stock splits or combinations, stock dividends, recapitalizations or similar
events); provided, that the forgoing restrictions shall not apply to any sale of
Restricted Securities at a price equal to or greater than $3.00 per share
(subject to adjustment for any stock splits or combinations, stock dividends,
recapitalizations or similar events).

 

 
 

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If the Merger Time occurs prior to the Merger Deadline, then during the period
commencing at the Merger Time and ending on the earlier of: (a) the 180th
calendar day immediately following the calendar day on which the Merger Time
occurs, (b) the time of filing with the Securities and Exchange Commission by
Parent (or any of its subsidiaries) of any registration statement (other than on
Form S-8), including without limitation, Form S-1, S-4 or S-3, with respect to
the issuance or resale of any securities of Parent (or any of its subsidiaries)
(other than a registration statement solely registering Restricted Securities
held by an original Unit purchaser under the SPA or their respective Affiliates,
successors or assigns (c) the time of release (whether by termination of an
applicable leak-out agreement or otherwise), in whole or in part, of any
securities of Parent from all, or any part, of any leak-out agreement, transfer
or sale restrictions set forth in any other leak-out agreement entered into in
connection with the Merger or otherwise or (d) any breach by Parent of any term
of this Leak-Out Agreement that is not Cured, neither the Holder, nor any of its
Affiliates, collectively, shall (i) sell more than the Post-Merger Sale Limit
(as defined below) of Restricted Securities in any calendar month or (ii) sell
any Restricted Securities for less than $0.50 per share (subject to adjustment
for any stock splits or combinations, stock dividends, recapitalizations or
similar events); provided, that the forgoing restrictions shall not apply to any
sale of Restricted Securities at a price equal to or greater than $3.00 per
share (subject to adjustment for any stock splits or combinations, stock
dividends, recapitalizations or similar events).

 

For the purpose of this Leak-Out Agreement, the following definitions shall
apply:

 

“Affiliate” means, with respect to any specified Person, (x) any other Person
who or which, directly or indirectly, controls, is controlled by, or is under
common control with such specified Person, including, without limitation, any
partner, officer, director, member of such Person and any fund now or hereafter
existing that is controlled by or under common control with one or more general
partners or managing members of, or shares the same management company with,
such Person or (y) if such Person is a natural person, such Person’s spouse,
lineal descendant (including any adopted child or adopted grandchild) or other
family member, or a custodian or trustee of any trust, partnership or limited
liability company for the benefit of, in whole or in part, or the ownership
interests of which are, directly or indirectly, controlled by, such Person or
any other member or members of such Person’s family.

 

“Cumulative Unsold Amount” means, with respect to any date of determination, the
difference of (i) Eight Hundred Thousand (800,000) Restricted Securities (on an
as converted to common stock basis and subject to adjustment for any stock
splits or combinations, stock dividends, recapitalizations or similar events),
less (ii) the aggregate number of Restricted Securities sold by the Holder and
its Affiliates, successors and assigns, collectively (subject to adjustment for
any stock splits or combinations, stock dividends, recapitalizations or similar
events), in the calendar month immediately prior to the calendar month in which
such date of determination occurs.

 

 
 

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“Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and any governmental or any department or agency thereof.

 

“Post-Merger Sale Limit” means, with respect to any date of determination, such
number of Restricted Securities equal to the greater of (i) Five Hundred
Thousand (500,000) Restricted Securities (on an as converted to common stock
basis and subject to adjustment for any stock splits or combinations, stock
dividends, recapitalizations or similar events) or (ii) the Cumulative Unsold
Amount as of such date of determination, in each case prorated for the first
partial month, if any, and the last partial month, if any, in such period in
which the date of determination occurs.

 

“Pre-Merger Sale Limit” means, with respect to any date of determination, such
number of Restricted Securities equal to the greater of (i) Four Hundred
Thousand (400,000) Restricted Securities (on an as converted to common stock
basis and subject to adjustment for any stock splits or combinations, stock
dividends, recapitalizations or similar events) or (ii) the Cumulative Unsold
Amount as of such date of determination, in each case prorated for the first
partial month, if any, and the last partial month, if any, in such period in
which the date of determination occurs.

 

Notwithstanding anything herein to the contrary, on or after the date hereof,
the Holder may, directly or indirectly, sell or transfer all, or any part, of
the Restricted Securities (or any securities convertible or exercisable into
Restricted Securities, as applicable) to any Person (an “Assignee”) without
complying with (or otherwise limited by) the restrictions set forth in this
Leak-Out Agreement; provided, that as a condition to any such sale or transfer
an authorized signatory of the Company, Parent and such Assignee duly execute
and deliver a leak-out agreement in the form of this Leak-Out Agreement with
respect to such transferred Restricted Securities (or such securities
convertible or exercisable into Restricted Securities, as applicable) (an
“Assignee Agreement”) and sales of Holder and its Affiliates and all Assignees
shall be aggregated for all purposes of this Leak-Out Agreement and all Assignee
Agreements.

 

Parent represents and warrants to the Company that none of the Unit purchasers,
nor any of their respective Affiliates, have purchased securities of Parent from
Parent other than the Restricted Securities.  The Holder represents and warrants
to the Company that neither the Holder, nor any of its respective Affiliates,
have purchased securities of Parent from Parent other than the Restricted
Securities.

 

 
 

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Parent further represents and warrants as of the date hereof and covenants and
agrees from and after the date hereof that none of the terms offered to any
Person entering into a Leak-Out agreement who is a Unit Purchaser under the SPA
(or in connection with any lockup or leak-out agreement entered in connection
with the Merger Agreement or the Merger) (collectively, “Other Agreement”) with
respect to any consent, release, amendment, settlement or waiver of the terms,
conditions or transactions herein or in such Other Agreement, is or will be more
favorable to such Person than those set forth in this Leak-Out Agreement or
provided to any Person unless the provisions of this paragraph are complied
with. If, and whenever on or after the date hereof, Parent desires to provide
terms which might affect any of the actions prohibited in the immediately
preceding sentence, then (i) Parent shall provide the Holder with notice thereof
(x) at least two (2) business days prior to such date and (y) upon the
consummation thereof the terms and conditions of this Leak-Out Agreement shall
be, without any further action by the Holder or Parent, automatically amended
and modified in an economically and legally equivalent manner such that the
Holder shall receive the benefit of the more favorable terms and/or conditions
(as the case may be), provided that upon written notice to Parent at any time
prior to the expiration of such two (2) business day period the Holder may elect
not to accept the benefit of any such amended or modified term or condition, in
which event the term or condition contained in this Leak-Out Agreement shall
continue to apply to the Holder as it was in effect immediately prior to such
amendment or modification as if such amendment or modification never occurred
with respect to the Holder, provided, further, that the on and following the
execution of the Merger Agreement, until the Merger has occurred or the Merger
Agreement is terminated without such a closing, Company must agree in writing to
any such action prior to Parent taking such action. Notwithstanding anything
herein to the contrary, no agreement with the purchasers of Parent’s common
stock issued pursuant to those certain Subscription Agreements dated as of
January 29, 2014 in the aggregate amount of $250,000 (any such agreement, a
“January PIPE Investor Agreement”) shall constitute an Other Agreement requiring
any notice or adjustment hereunder, provided, however, that such January PIPE
Investor Agreement is not amended, modified or waived subsequent to its original
date of effectiveness, in which case, such January PIPE Investor Agreement shall
thereafter constitute an Other Agreement for purposes hereunder.

 

Upon Parent filing a Current Report on Form 8-K and a preliminary Proxy
Statement on Schedule 14A with the Securities and Exchange Commission describing
all the material terms of the transactions contemplated by the Merger Agreement,
including, without limitation, this Leak-Out Agreement, in the forms required by
the Securities Exchange Act of 1934, as amended, and attaching this form of
Leak-Out Agreement as an exhibit thereto, which Parent agrees to file with the
Securities and Exchange Commission no later than four (4) business days
following the Execution Date, Parent shall have disclosed all material,
non-public information (if any) delivered prior to the Merger Time to the Holder
by Parent or any of its subsidiaries, or any of their respective officers,
directors, employees or agents in connection with the transactions contemplated
by the Merger Agreement and this Leak-Out Agreement.

 

 
 

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Provided there have been no changes in applicable law, rule, or regulation or
interpretation by the Staff of the Securities and Exchange Commission following
the Execution Date, Parent agrees not to take any position contrary to that of
the holding period of the Restricted Securities tacking back to July 25, 2013,
the original issue date of the Restricted Securities (or, as applicable, such
securities convertible or exercisable into Restricted Securities (assuming for
such purpose that any warrants to purchase Common Stock of Parent, if any, are
exercised on a cashless basis)). Parent shall use reasonable best efforts to
cause Parent’s transfer agent to timely obtain and process (at Parent’s sole
cost and expense) such opinions of counsel (the “Opinion Firm”) as Parent’s
transfer agent may require or request in connection with the removal of any
restrictive legend and Parent shall provide such required undertakings,
certificates, documentation and additional information as such transfer agent
and Opinion Firm shall require in connection with such activities. As a
condition to the issuance of each such opinion and transfer agent actions,
Parent and its counsel shall have the right to require that Holder timely
execute an attestation as to Holder not being an Affiliate of Parent and that
the Holder (and its Affiliates, successors and assigns) have fully complied with
the terms applicable to Holder under this Leak-Out Agreement and reasonable
evidence of such compliance.

 

This Leak-Out Agreement shall not be effective unless signed and delivered by
all Holders of Units acquired pursuant to the SPA.

 

Any notices, consents, waivers or other communications required or permitted to
be given under the terms of this Leak-Out Agreement must be in writing.

 

This Leak-Out Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof and supersedes all prior
negotiations, letters and understandings relating to the subject matter hereof
and are fully binding on the parties hereto.

 

This Leak-Out Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument. This Leak-Out
Agreement may be executed and accepted by facsimile or PDF signature and any
such signature shall be of the same force and effect as an original signature.

 

The terms of this Leak-Out Agreement shall be binding upon and shall inure to
the benefit of each of the parties hereto and their respective successors and
assigns.

 

This Leak-Out Agreement may not be amended or modified except in writing signed
by each of the parties hereto.

 

All questions concerning the construction, validity, enforcement and
interpretation of this letter agreement shall be governed by the internal laws
of the State of New York, without giving effect to any choice of law or conflict
of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York. Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in The City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper.

 

 
 

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Each party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address for such notices to it under this letter
agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. Each party hereby irrevocably waives any
right it may have, and agrees not to request, a jury trial for the adjudication
of any dispute hereunder or in connection with or arising out of this letter
agreement or any transaction contemplated hereby. 

 

Each party hereto acknowledges that, in view of the uniqueness of the
transactions contemplated by this letter agreement, the other parties hereto
would not have an adequate remedy at law for money damages in the event that
this Leak-Out Agreement has not been performed in accordance with its terms, and
therefore agrees that such other parties shall be entitled to specific
enforcement of the terms hereof in addition to any other remedy to which it may
be entitled, at law or in equity

 

 

Very truly yours,

 

DKR VENTURES, LLC

 

 

__/s/ Barry Honig ___________

Barry Honig, Sole Member

 

List of Restricted Securities:

 

______________________________

 

______________________________

 

______________________________

 

______________________________ 

 

 
 

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Agreed to and Acknowledged:

 

PAULSON CAPITAL (DELAWARE) CORP.

 

By: ___/s/ Trent Davis____________________

       Name: Trent Davis

       Title: President

 

VARIATION BIOTECHNOLOGIES (US), INC.

 

By: __/s/_J. Baxter____________________

       Name: J.R. Baxter

       Title: President and CEO