Exhibit 10.3

 
THE SECURITIES REPRESENTED BY THIS AGREEMENT AND ISSUABLE UPON THE EXERCISE OF
THE OPTION EVIDENCED HEREBY (COLLECTIVELY, THE “SECURITIES”) HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE
STATE SECURITIES LAWS AND THE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER AND AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED AND IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION FROM REGISTRATION
UNDER ANY APPLICABLE STATE SECURITIES LAWS WITH AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY REGARDING COMPLIANCE WITH AND THE AVAILABILITY OF
ANY SUCH STATE SECURITIES LAWS.
 
 
INVESTMENT OPTION AGREEMENT
 
 
This INVESTMENT OPTION AGREEMENT, dated as of August 31, 2006, by and between
SOLIDUS NETWORKS, INC., a Delaware corporation (the “Optionee”) and WINWIN
GAMING, INC., a Delaware corporation (the “Company”). Capitalized terms used,
but not otherwise defined, herein have the meanings ascribed to those terms in
the JV Agreement (as defined below).
 
 
BACKGROUND
 
 
The Optionee and the Company are parties to a Second Amended and Restated Joint
Venture Agreement, dated August 31, 2006 (the “JV Agreement”). It is a condition
precedent of the Initial Closing that the Company grant to the Optionee this
option to acquire an additional number of shares of the Company’s Series A-1
Preferred Stock, prior to the Filing Date (as defined below), or Series A
Preferred Stock, from and after the Filing Date, such that upon exercise of this
option, the Optionee will be the beneficial owner of a percentage of the
Company’s outstanding common stock on a Fully Diluted Basis (as defined below)
indicated by the Optionee on the Option Notice (as defined below) after giving
effect to the exercise of this Option (the “Election Percentage”), which
Election Percentage may not be greater than eighty percent (80%).
 
 
The Company is issuing shares of its Series A-1 Preferred Stock to the Optionee
at the Initial Closing and is seeking stockholder approval of the adoption and
filing of the Restated Charter under which, among other things, its Series A
Preferred Stock will be authorized, each outstanding share of Series A-1
Preferred Stock will be automatically converted into one tenth of a share of
Series A Preferred Stock and additional shares of common stock will be
authorized such that there will be sufficient authorized common stock for
issuance upon the conversion of the Series A Preferred Stock. The date of the
filing of the Restated Charter is referred to herein as the “Filing Date”.
 
 
NOW, THEREFORE, in consideration of the premises, mutual covenants herein set
forth and other good and valuable consideration, subject to the terms and
conditions herein, the Company and the Optionee hereby agree as follows:
 

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1.  Grant of Option; Term; Exercise Price.
 
(a)  Subject to the terms and conditions herein, the Company hereby grants to
the Optionee an option (the “Option”), prior to the Filing Date, to acquire a
number of shares of the Company’s Series A-1 Preferred Stock, and from and after
the Filing Date, to purchase a number of shares of the Company’s Series A
Preferred Stock (such shares of Series A-1 Preferred Stock or Series A Preferred
Stock, as applicable, being referred to herein as the “Option Shares”) that,
together with other securities of the Company held by the Optionee at the time
of exercise, constitute a percentage of the common stock of the Company on a
Fully Diluted Basis after giving effect to the exercise of the Option equal to
the Election Percentage. For purposes of this Agreement, “Fully Diluted Basis”
means the number of shares of the Company’s Common Stock outstanding assuming,
for such purpose, the exercise, exchange, or conversion into Common Stock of the
Company of all options, warrants and other securities of the Company that are
exercisable or exchangeable for, or convertible into, Common Stock at the time
of the exercise of the Option.
 
(b)  The Option is exercisable by Optionee’s delivery to the Company of an
Exercise Notice at any time from the date of this Investment Option Agreement
until Midnight Pacific Time on the date that is third anniversary of the date of
this Investment Option Agreement (the “Exercise Period”); provided, however,
that the Option shall automatically terminate upon the closing of the sale of
all or substantially all of the assets of the Optionee, or upon the closing of a
merger, consolidation or similar transaction in which the stockholders of the
Optionee as of immediately prior to the transaction do not own a majority of the
voting power of the surviving company as of immediately following such
transaction.
 
(c)  The exercise price per Option Share (the “Exercise Price”) shall be equal
to the fair market value of a share of the Company’s Series A-1 Preferred Stock
or Series A Preferred Stock, as applicable, as of the date of exercise as
determined by an Appraisal (as defined below). Whenever this Option calls for an
“Appraisal,” the fair market value of the Option Shares will be determined on
the basis of the value of the percentage of the entire Company represented by
the Option Shares at the time of determination in accordance with the following
mechanism. A representative of the Optionee and a representative of the Company
shall attempt to negotiate a mutually agreeable fair market value within thirty
(30) days of the date that the Company receives an Exercise Notice from the
Optionee. If the representatives are unable to reach an agreement within such
time period, each of the Optionee and the Company will at its own cost appoint a
nationally recognized investment banking firm as an appraiser of the value of
the Option Shares. Each of the investment banking firms shall separately
determine, within forty-five (45) days of the end of such thirty (30) day
period, the fair market value of the shares taking into account the fact that
the exercise of the Option may involve the acquisition of a controlling interest
in the Company by the Optionee to the extent that the Optionee does not already
own a controlling interest in the Company. Each of the investment banking firms
shall express its valuation as a single number in US dollars. The mid-point of
the valuations (the “Mid-Point”) will then be calculated by dividing the sum of
the separate valuations by two (2). To the extent that each valuation is within
the range which is 10% above or 10% below the Mid-Point (the “Range”), the
Mid-Point shall be used. If either or both of the valuations falls outside of
the Range, then the parties shall jointly choose (or if the parties are unable
to so jointly choose within three (3) business days, the two appraisers shall
choose) a disinterested nationally recognized investment banking firm as a third
appraiser, at a cost to be shared on an equal basis between the parties, to
complete an appraisal within an additional forty-five (45) days, which appraisal
shall be equal to or somewhere between the two prior appraisals and such third
appraisal shall be the final and binding determination of the fair market value.
 
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(d)  The Exercise Price shall be payable in cash; provided, however, that if at
the time the Option is exercised there is a public trading market for the
Optionee’s common stock, then, at the option of the Optionee, the Optionee may
pay the Exercise Price in cash or registered (“free-trading”) shares of the
Optionee’s common stock, or a combination thereof. If the Optionee elects to pay
the Exercise Price, in whole or in part, by delivery of registered shares of the
Optionee’s common stock, then such shares shall be valued at the average closing
price of the Optionee’s common stock over a period of twenty (20) trading days
prior to the exercise of the Option.
 
(e)  this Investment Option Agreement shall terminate and cease to be effective
on the date on which the JV Agreement is validly terminated in accordance with
Section 13 thereof.
 
2.  Exercise Procedure.
 
(a)  Procedure.
 
(i)  The Optionee may exercise the Option, in whole, but not in part, at any
time during the Exercise Period, by delivering to the Company a written notice
duly signed by the Optionee indicating that the Optionee is exercising the
Option and the Election Percentage (the “Exercise Notice’). The Option shall not
be deemed exercised, however, until full payment in an amount equal to the full
purchase price for the Option Shares has been made. Optionee may withdraw the
Exercise Notice and elect not to exercise the Option at any time before making
full payment.
 
(ii)  Following receipt by the Company of such Exercise Notice and full payment
of the Exercise Price, the Company shall issue, as soon as practicable, a stock
certificate for the Option Shares in the name as designated by the Optionee and
deliver the certificate to the Optionee.
 
(b)  Other Terms. Other than the terms regarding pricing and consideration set
forth in Section 1 of this Investment Option Agreement, the issuance and sale of
the Option Shares shall be subject to the same conditions of and on the same
terms as the issuance and sale of the Second Closing WinWin Shares in the Second
Closing.
 
(c)  Legend. If the Option Shares are not then covered by a registration
statement, each certificate for the Option Shares shall bear a legend that is
substantially similar to the following:
 
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS THE REGISTRATION PROVISIONS OF SAID ACT HAVE BEEN COMPLIED WITH OR UNLESS
THE COMPANY HAS RECEIVED AN OPINION OF ITS COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED.”
 
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3.  Rights of Optionee. The Optionee shall not have any rights to dividends or
any other rights of a stockholder with respect to any Option Shares until such
Option Shares shall have been issued to Optionee (as evidenced by the
appropriate entry on the transfer books of the Company).
 
4.  Notices. Any notices and other communications required or permitted under
this Agreement shall be in writing and shall be delivered (i) personally by hand
or by courier, (ii) mailed by United States first-class mail, postage prepaid or
(iii) sent by facsimile, to a Party's address or facsimile number as follows:
 
if to WinWin: WinWin Gaming, Inc.
 
8687 West Sahara, Suite 201
Las Vegas, NV 89117
Tel: (702) 212-4530
Fax: (702) 212-4553
Attention: Patrick Rogers

with a copy to:
Thelen Reid & Priest LLP
701 Eighth Street, N.W.
Washington, D.C.  20001
Tel: 202.508.4281
Fax: 202.654.1804
Attention: Louis A. Bevilacqua

if to PBT: Solidus Networks, Inc.
 
101 Second Street, Suite 1100
San Francisco, California 94105
Tel: (415) 281-2200
Fax: (415) 281-2202
Attention: Gus Spanos

with a copy to:
Cooley Godward llp
101 California Street, 5th Floor
San Francisco, CA 94111-5800
Tel: (415) 693-2000
Fax: (415) 693-2222
Attention: Kenneth L. Guernsey
 
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or at such other address or facsimile number as a Party may designate by giving
at least ten days' advance written notice to the other Party. All such notices
and other communications shall be deemed given upon (I) receipt or refusal of
receipt, if delivered personally, (II) three days after being placed in the
mail, if mailed, or (III) confirmation of facsimile transfer, if faxed.
 
5.  Binding; Assignment. Optionee shall not assign this Agreement, or any rights
hereunder, without the Company's prior written consent. This Agreement shall be
binding upon and inure to the benefit of the parties hereto, and their
successors and permitted assigns, if any.
 
6.  Dispute Resolution. Any unresolved controversy or claim arising out of or
relating to this Agreement, except as (i) otherwise provided in this Agreement,
or (ii) any such controversies or claims arising out of either party’s
intellectual property rights for which a provisional remedy or equitable relief
is sought, shall be submitted to arbitration by one arbitrator mutually agreed
upon by the parties, and if no agreement can be reached within 30 days after
names of potential arbitrators have been proposed by the American Arbitration
Association (the “AAA”), then by one arbitrator having reasonable experience in
corporate finance transactions of the type provided for in this Agreement and
who is chosen by the AAA. The arbitration shall take place in San Francisco,
California, in accordance with the AAA rules then in effect, and judgment upon
any award rendered in such arbitration will be binding and may be entered in any
court having jurisdiction thereof. There shall be limited discovery prior to the
arbitration hearing as follows: (a) exchange of witness lists and copies of
documentary evidence and documents relating to or arising out of the issues to
be arbitrated, (b) depositions of all party witnesses and (c) such other
depositions as may be allowed by the arbitrators upon a showing of good cause.
Depositions shall be conducted in accordance with the California Code of Civil
Procedure, the arbitrator shall be required to provide in writing to the parties
the basis for the award or order of such arbitrator, and a court reporter shall
record all hearings, with such record constituting the official transcript of
such proceedings. The prevailing party shall be entitled to reasonable
attorney’s fees, costs, and necessary disbursements in addition to any other
relief to which such party may be entitled.
 
7.  Entire Agreement. This Agreement constitutes the entire agreement between
the parties hereto with respect to the matters herein, and cannot be amended,
modified or terminated except by an agreement in writing executed by the parties
hereto.
 
8.  Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the State of Delaware without regard to the conflicts of
law principles thereof.
 
[Signature page follows]
 
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IN WITNESS WHEREOF, the parties hereto have executed this Investment Option
Agreement as of the date first set forth above.
 

 
Solidus Networks, Inc.
 
By:_______________________
Name:
Title:
 
 
WinWin Gaming, Inc.
 
By: /s/ Patrick O. Rogers                 
Name: Patrick O. Rogers
Title: President/CEO
   

 

[Signature page to Investment Option Agreement]
 
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IN WITNESS WHEREOF, the parties hereto have executed this Investment Option
Agreement as of the date first set forth above.
 

 
Solidus Networks, Inc.
 
By: /s/ Steve Zelinger                   
Name: Steve Zelinger
Title: EVP & GC
 
 
WinWin Gaming, Inc.
 
By:______________________
Name:
Title:
   

[Signature page to Investment Option Agreement]

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