Convertible Note Financing Agreement

 

August 14, 2013

 

This Convertible Note Financing Agreement (this “Agreement”) sets forth all
principal terms of a business transaction between Mandalay Digital Group, Inc.,
a Delaware corporation (“Issuer”), and Taja, LLC (“Investor”).

 

For good and valuable consideration, the parties hereto hereby agree as follows:

 

Securities Issuance:   The Investor hereby subscribes for, and the Company
hereby promises to issue to Investor in accordance with this Agreement, 80,000
shares (the “Closing Shares”) of the Issuer’s fully paid, duly authorized and
non-assessable shares of its common stock (par value $0.0001 per share) (“Common
Stock”) and warrants to purchase 120,000 shares of Common Stock, having the
terms described below under “Warrants” (the “Warrants”).  In addition, the
Investor is converting certain debt securities into additional shares of Common
Stock (the “Conversion Shares”) on the terms described below under “Conversion
of Unsecured Note.”  The Closing Shares, the Warrants and the Conversion Shares
are all referred to herein as the “Securities”, and the Securities shall be
delivered as soon as practicable following the date hereof at the offices of the
Issuer by delivery of physical certificates or such other manner of delivery as
the parties agree.  The Closing Shares and Warrants are restricted under the
securities laws and shall bear standard Securities Act of 1933 legends.  The
Investor hereby represents that (a) it is an accredited investor as that term is
defined in Regulation D under the Securities Act of 1933, (b) it is purchasing
for investment purposes only and not with a view to a distribution and (c) it
owns and has not transferred or assigned any interest in the Unsecured Note, the
Secured Note or the warrants previously issued to Investor as set forth
herein.  Except as set forth in this Agreement, no representations or other
agreements are made by either party in connection with the transactions
contemplated hereby.           The Investor shall have the following
registration rights with respect to the Closing Shares, the shares underlying
the Warrants and the 50,000 shares of common stock issued as consideration for
the consent granted by the Investor in the MIA acquisition (the “Registrable
Securities”): the Company shall file a registration statement on Form S-3 (the
“Registration Statement”) not later than August 31, 2013 covering the resale of
the Registrable Securities and shall use its best efforts to cause such
registration statement to be declared effective as soon as practicable
thereafter.

 

 

 

 

    In addition, if the Company and Investor in their respective discretion
agree for the Company to issue the Investor additional securities as
consideration or in exchange for securities already owned by the Investor
(“Exchange Securities”), and if such Exchange Securities are not issued in
compliance with Section 3(a)(9) under the Securities Act, then the Company shall
agree to either file (i) a post-effective amendment to the Registration
Statement or (ii) a new registration statement on Form S-3, in each case within
30 days of the closing of such new issuance of Exchange Securities and covering
the resale of such securities, and use its best efforts to cause such
registration statement to be declared effective by the SEC as soon as
practicable after the filing thereof.             In each case of the Company’s
registration obligations above: (i) the Investor will reasonably cooperate,
including providing customary selling stockholder questionnaires as a condition
to inclusion, (ii) registrable securities (under either paragraph above) shall
cease to be such when they all can be sold under Rule 144 in a three month
period without limitation or under 3(a)(9), or once they have been sold, or
after a period of 3 years from the date the registration statement is first
declared effective (plus the additional period extending such 3 year period
equal to the sum of all periods of blackout periods noted in clause (iv) below);
(iii) if Form S-3 is not available then the Company shall instead use Form S-1;
and (iv) the Company may suspend the use of the Registration Statement not more
than one 45 day period in any 12 month period if the Company’s CEO certifies
that doing so is necessary to avoid material detriment to the Company.      
Conversion of Unsecured Note:   On the date hereof, $1,000,000.00 of the
outstanding principal amount of the Unsecured Note is hereby converted into
285,714 Conversion Shares and the remaining principal of $180,000 and unpaid
interest of $55,977 (in the amount of $239,977, and referred to as the “Exchange
Amount”) is hereby exchanged for a like amount of additional Secured Notes as
described in the next section.  Accordingly, the Unsecured Note is on the date
hereof deemed to be repaid in full through a combination of conversion and
exchange as set forth in this section.  The term “Unsecured Note” means that
certain unsecured subordinated convertible note the terms of which are reflected
in that certain Convertible Note Financing Binding Term Sheet dated December 29,
2011 as amended by that certain Convertible Note Financing Binding Term Sheet
dated March 1, 2012.         Increase of Principal of Secured Note:   On the
date hereof, the principal amount of the Secured Note is hereby increased by the
Exchange Amount.  The new current remaining balance of principal and interest
under the Secured Note as of the date hereof shall be $1,537,529.  The term
“Secured Note” means that certain Second Amended and Restated Senior
Subordinated Secured Note Due June 21, 2013 between Twistbox Entertainment,
Inc., a subsidiary of the Issuer, and the Investor, as amended by those certain
binding term sheets dated December 29, 2011 and March 1, 2012 between the Issuer
and Investor.  Other than as expressly set forth in this Agreement (including
the next section), the terms of the Secured Note shall remain in full force and
effect.  

 

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Convertibility of Secured Note:   A new Section at the very end of the Secured
Note is hereby added as of the date hereof as follows: “Notwithstanding anything
herein to the contrary, this Note may, upon 10 days prior written notice to the
Issuer, be converted into shares of Common Stock of Issuer, at a conversion
price equal to $4.00 per share (subject to proportional adjustment for stock
splits, stock dividends and the like occurring after the date hereof) at the
Investor’s option at any time through the maturity date of the Secured Note,
provided, however, notwithstanding the foregoing, the conversion rights shall
effective immediately be deemed limited by a customary and reasonable beneficial
ownership blocker set at 4.9% of the Issuers outstanding shares, all as measured
in accordance with the applicable Rule 13d-3 standards.  If this Note is
converted, the closing shall occur in a reasonable time, place and manner after
the effective date of the conversion.”           The parties shall negotiate a
long form of the above-referenced beneficial ownership blocker in good faith
within 30 days but such short form blocker shall remain in effect until
superseded by agreement.       Warrant Coverage:  

The Warrant shall have an exercise price equal to the same price paid per share
for shares of the Issuer’s Common Stock in the Issuer’s next round of equity
financing, or, if no equity financing has occurred by September 9, 2013, the
closing price of the Issuer’s Common Stock on such date on the Nasdaq Capital
market. The Warrant shall have a five (5) year term from the date of the
issuance and may be exercised by the Investor only following the first
anniversary of the date hereof. The Warrants shall be in substantially the form
of the most recent warrants issued by the Issuer to outside investors, modified
only to reflect the specific terms herein. For purposes of determining the price
paid for the Issuer’s Common Stock in the next equity financing, the price of
the Common Stock issued in such financing shall be deemed to be aggregate gross
proceeds raised divided by the number of shares of Common Stock issued at the
closing, irrespective of any warrants.

 

Existing Note Warrants:   The warrants described under the heading “Existing
Note Warrant” in the term sheet dated December 29, 2011 shall vest and be
exercisable February 4, 2014, and shall have a six (6) year term from the date
of original issuance.  All other aspects of these warrants shall otherwise
remain unchanged.             The warrants described under the heading “Warrant
Coverage” in the term sheet dated December 29, 2011 shall vest and be
exercisable February 4, 2014, and shall have a six (6) year term from the date
of original issuance.  All other aspects of these warrants shall otherwise
remain unchanged.             The section of the March 1, 2012 term sheet
entitled “Warrant Coverage” is hereby deleted.  

 

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Prepayment Rights and Obligations:   Issuer may prepay the Secured Note, in
whole or in part, without penalty at any time upon 10 days’ prior notice to
Investor.             In addition, the obligation of the Issuer to prepay the
Secured Note described under the heading “Existing Note Prepayment” in the
binding term sheet dated March 1, 2012 shall be amended and restated in its
entirety to read in full as follows:           In the event of the consummation
of any sale by Issuer of the equity securities of Issuer that generates net
proceeds to Issuer, when combined with the aggregate net proceeds generated by
any and all previous equity sales occurring from and after the date of the March
1, 2012 Term Sheet of at least $10,000,000, Issuer shall give Investor written
notice thereof (a “Notice of Receipt of Proceeds”) within five business days of
such consummation.  The Notice of Receipt of Proceeds shall (a) state the
aggregate net proceeds generated from the most recent equity sale and all
previous equity sales occurring from and after the date of the March 1, 2012
Term Sheet and (b) set forth, if full prepayment in cash of all then outstanding
principal and accrued and unpaid interest under the Secured Note is not tendered
contemporaneously with the Notice of Receipt of Proceeds, a request by Issuer
that Investor refrain from accelerating the Secured Note.  Upon receipt of any
Notice of Receipt of Proceeds, and for a period of 30 days thereafter, Investor
shall have the right, notwithstanding any request by Issuer to the contrary, to
elect that all outstanding principal and accrued and unpaid interest under the
Secured Note be accelerated and become immediately due and payable by Issuer. 
Such election by Investor shall be exercised by written notice thereof given by
Investor no later than 30 days after receipt by Investor of the Notice of
Receipt of Proceeds.”          Consent to Amend Notes   Section 6(a) of the
Secured Note shall hereby be amended to include the word, “amend,” following the
word “Incur,” in the first clause of such Section.         Press Release  
Issuer intends to issue a press release following the execution of this
Agreement and, to the extent Investor’s name is disclosed in such press release
then the Issuer shall obtain the consent of the Investor with regard to the
content of the press release, which such consent shall not be unreasonably
withheld by the Investor.  This Agreement may be filed with the SEC to the
extent required by securities laws or regulations of the Nasdaq.      
Conflicts:   To the extent that this Agreement conflicts with the terms of any
prior term sheet or note relating to the Unsecured Note or the Secured Note,
this Agreement shall govern.

 

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Nasdaq Limitation:   Notwithstanding anything to the contrary herein, under no
circumstances will this Agreement obligate the Issuer to issue any securities to
the extent that, as a result thereof, more than 19.99% of the Common Stock or
voting power outstanding immediately before the enactment of this Agreement
(calculated under Nasdaq rules for determining shareholder approval) are (a)
issued in the aggregate pursuant to this agreement or the transactions
contemplated thereby or (b) owned by the Investor or any of its Affiliates.

 

This Agreement shall be binding on the parties hereto and their respective
successors and assigns and shall govern the parties’ respective rights and
obligations under the Unsecured Note and the Secured Note. This Agreement will
be governed by and construed in accordance with the laws of the State of
California. Any disputes arising out of or relating to this Agreement shall be
heard exclusively in state or federal courts located in California, each party
waiving any and all objections to such venue. This Agreement and the documents
amended by this Agreement comprise the entire understanding of the parties with
respect to the subject matter hereof, as of the date hereof. This Agreement
shall not be amended, or any provision hereof waived, except in a writing signed
by each party hereto. This Agreement may be executed in any number of original,
facsimile or other electronic counterparts.

 

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In Witness Whereof, the parties hereto have executed this Agreement as of the
date first above written.

 

ISSUER:   INVESTOR:       MANDALAY DIGITAL GROUP, INC.   TAJA, LLC       By:    
By:   Name:   Name: Title:   Title:          

 

Binding Term Sheet

 

Convertible Note Financing

 

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