**Exhibit 10.18**

 

**AGREEMENT TO EXCHANGE**

## **SERIESH PREFERRED SHARES**

### **FORSERIES E PREFERRED SHARES**

 

 

**THIS AGREEMENT**,dated as of July     , 2003, is entered into by and between**STRATUS SERVICES GROUP, INC.**, aDelaware corporation, with headquarters located at 500 Craig Road, Suite 201,Manalapan, New Jersey 07726 (the “Company”) and Pinnacle Investment Partners,L.P., a New York limited partnership, with headquarters c/o Delta AssetManagement, The Trump Tower, 40 Wall Street, 33rd Floor, New York,New York 10005 (“Pinnacle”).

 

**WITNESSETH:**

 

**WHEREAS,** onSeptember 30, 2002, Pinnacle entered into and a Securities Purchase Agreement(the “Purchase Agreement”), whereby Pinnacle, in the aggregate, purchased 5,000shares of Series H Preferred Stock for an aggregate purchase price of $500,000;and

 

**WHEREAS**, the Companyalso owes Pinnacle certain monies for dividends due and owing on such Series HPreferred Stock in the total amount of $8750.00, and Pinnacle wishes to,instead of receiving cash for such accrued dividends and penalties, exchangesame for additional Series E stock.

 

**NOW, THEREFORE,** inconsideration for the foregoing, the parties hereto agree as follows:

 

1.               **Exchangeof Shares.**  Pinnacle’s5,000 shares of Series H Preferred Stock in the principal amount of $500,000will be exchanged on July 15, 2003 for 5,000 shares of Series E PreferredStock, $.01 par value per share and accrued dividends thereon as ofJuly 15, 2003 and penalties

 

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and fees due to Pinnacle, all in the aggregate amount of $508,750.00will be exchanged for 5087 shares of Series E Preferred Stock;

 

2.               **Taxes.**  If Series E Preferred Stock is to be issuedin the name of an entity other than Pinnacle, Pinnacle will pay all transfertaxes payable with respect thereto.  Nofee will be charged to Pinnacle for the exchange except for such transfertaxes, if any.

 

3.               **Pinnacle’sRepresentations, Warranties, Etc.; Access To Information; IndependentInvestigation**.  Pinnaclerepresents and warrants to, and covenants and agrees with, the Company asfollows:

 

a.               Pinnacle is exchanging the Series HPreferred Stock and accrued dividends for the Series E Preferred Stock for itsown account for investment only and not with a view towards the public sale ordistribution thereof and not with a view to or for sale in connection with anydistribution thereof.

 

b.              Pinnacle is (i) an “accredited investor”as that term is defined in Rule 501 of the General Rules and Regulations underthe 1933 Act by reason of Rule 501(a)(3), and (ii) experienced in makinginvestments of the kind described in this Agreement and the related documents,(iii) able, by reason of the business and financial experience of its officers(if an entity) and professional advisors (who are not affiliated with orcompensated in any way by the Company or any of its affiliates or sellingagents), to protect its own interests in connection with the transactionsdescribed in this Agreement, and the related documents, and (iv) able to affordthe entire loss of its investment in the Preferred.

 

c.               Pinnacle understands that the 5,000shares of Series H Preferred Stock, plus accrued dividends totaling $8750.00are being exchanged for the Series E Preferred Stock and the 5087 shares ofSeries E Preferred Stock are being purchased in reliance on specific

 

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exemptions from the registration requirements of United States federaland state securities laws and that the Company is relying upon the truth andaccuracy of, and Pinnacle’s compliance with, the representations, warranties,agreements, acknowledgements and understandings of Pinnacle set forth herein inorder to determine the availability of such exemptions and the eligibility ofPinnacle to acquire the Preferred Stock.

 

d.              Pinnacle and its advisors, if any, havebeen furnished with all materials relating to the business, finances andoperations of the Company and materials relating to the exchange of the SeriesH Preferred Stock and the issuance of Series E Preferred Stock which have beenrequested by Pinnacle.  Pinnacle and itsadvisors, if any, have been afforded the opportunity to ask questions of theCompany and have received complete and satisfactory answers to any suchinquiries;

 

e.               Pinnacle understands that no UnitedStates federal or state agency or any other government or governmental agencyhas passed on or made any recommendation or endorsement of the Series EPreferred Shares.

 

f.                 This Agreement has been duly andvalidly authorized, executed and delivered on behalf of Pinnacle and is a validand binding agreement of Pinnacle enforceable in accordance with its terms,subject as to enforceability to general principles of equity and to bankruptcy,insolvency, moratorium and other similar laws affecting the enforcement ofcreditors’ rights generally.

 

4.                                      **Company Representations, Etc**.  The Company represents and warrants toPinnacle that:

 

a.          Concerning the Common Stock**.** There are no preemptive rights of any stockholder of the Company, assuch, to acquire the Company’s Series E Preferred.

 

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b.         Reporting Company Status**.** The Company is a corporation duly organized, validly existing and ingood standing under the laws of the State of Delaware, and has the requisitecorporate power to own its properties and to carry on its business as now beingconducted.  The Company is dulyqualified as a foreign corporation to do business and is in good standing ineach jurisdiction where the nature of the business conducted or property ownedby it makes such qualification necessary other than those jurisdictions inwhich the failure to so qualify would not have a material and adverse effect onthe business, operations, properties, prospects or condition (financial orotherwise) of the Company.  The Companyhas registered its Common Stock pursuant to Section 12 of the SecuritiesExchange Act of 1934, as amended (the “1934 Act”), and the Common Stock islisted and traded on the OTC Bulletin Board Market.

 

c.          Authorized Shares**.** The shares of Series E Preferred Stock tobe issued pursuant to this agreement and the Shares of Common Stock issuableupon conversion of the Series E Preferred Stock have been duly authorized and,when issued to Pinnacle, will be duly and validly issued, fully paid andnon-assessable and will not subject the holder thereof to personal liability byreason of being such holder.

 

d.         Conversion Agreement**.** This Agreement and the transactions contemplated hereby, have been dulyand validly authorized by the Company. This Agreement has been duly executed and delivered by the Company andis a valid and binding agreement of the Company enforceable in accordance withits terms, subject as to enforceability to general principles of equity and tobankruptcy, insolvency, moratorium, and other similar laws affecting the enforcementof creditors’ rights generally.

 

e.          Non-contravention**. **Theexecution and delivery of this Agreement by the Company, the issuance of theSeries E Preferred Stock, and the consummation by the Company

 

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of the other transactions contemplated by this Agreement do not andwill not conflict with or result in a breach by the Company of any of the termsor provisions of, or constitute a default under (i) the articles ofincorporation or by-laws of the Company, (ii) any indenture, mortgage, deed oftrust, or other material agreement or instrument to which the Company is aparty or by which it or any of its properties or assets are bound, (iii) to itsknowledge, any existing applicable law, rule, or regulation or any applicabledecree, judgment, or (iv) to its knowledge, order of any court, United Statesfederal or state regulatory body, administrative agency, or other governmentalbody having jurisdiction over the Company or any of its properties or assets,except such conflict, breach or default which would not have a material adverseeffect on the transactions contemplated herein. The Company is not in violationof any material laws, governmental orders, rules, regulations or ordinances towhich its  property, real, personal,mixed, tangible or intangible,  or itsbusinesses related to such properties, are subject.

 

f.            Approvals**.**  No authorization,approval or consent of any court, governmental body, regulatory agency,self-regulatory organization, or stock exchange or market is required to beobtained by the Company for the issuance and sale of the Series E PreferredStock to Pinnacle as contemplated by this Agreement, except suchauthorizations, approvals and consents that have been obtained.

 

g.         SEC Documents, Financial Statements**.** The Common Stock of the Company is registered pursuant to Section 12(g)of the 1934 Act and the Company has filed all reports, schedules, forms,statements and other documents required to be filed by it with the SEC pursuantto the reporting requirements of the Exchange Act, including material filedpursuant to Section 13(a) or 15(d), in addition to one or more registration

 

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statements and amendments thereto heretofore filed by the Company withthe SEC under the Act (all of the foregoing including filings incorporated byreference therein being referred to herein as the “SEC Documents”).  The Company, through its agent, hasdelivered to Pinnacle true and complete copies of the SEC Documents (except forexhibits and incorporated documents). The Company has not provided to Pinnacle any information which,according to applicable law, rule or regulation, should have been disclosedpublicly by the Company but which has not been so disclosed, other than withrespect to the transactions contemplated by this Agreement.

 

As of their respective dates, the SEC Documents complied in allmaterial respects with the requirements of the Act or the Exchange Act as thecase may be and the rules and regulations of the SEC promulgated thereunder andother federal, state and local laws, rules and regulations applicable to suchSEC Documents, and none of the SEC Documents contained any untrue statement ofa material fact or omitted to state a material fact required to be statedtherein or necessary in order to make the statements therein, in light of thecircumstances under which they were made, not misleading.  The financial statements of the Companyincluded in the SEC Documents comply as to form in all material respects withapplicable accounting requirements and the published rules and regulations ofthe SEC or other applicable rules and regulations with respect thereto.  Such financial statements have been preparedin accordance with generally accepted accounting principles applied on aconsistent basis during the periods involved (except (i) as may be otherwiseindicated in such financial statements or the notes thereto or (ii) in the caseof unaudited interim statements, to the extent they may not include footnotesor may be condensed or summary statements) and fairly present in all materialrespects the financial position of the Company as of the dates thereof

 

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and theresults of operations and cash flows for the periods then ended (subject, inthe case of unaudited statements, to normal year-end audit adjustments).

 

h.         Absence of Certain Changes**.** Since March 31, 2003, there has been no material adverse change and nomaterial adverse development in the business, properties, operations, financialcondition, or results of operations of the Company, except as set forth in theCompany’s Form 10-Q filed with the SEC on May 1, 2003.

 

i.             Full Disclosure**.** There is no fact known to the Company (other than general economicconditions known to the public generally) or as disclosed in the documentsreferred to in Section 4(g), that has not been disclosed in writing to Pinnaclethat (i) would reasonably be expected to have a material adverse effect on thebusiness or financial condition of the Company or (ii) would reasonably beexpected to materially and adversely affect the ability of the Company toperform its obligations pursuant to this Agreement.

 

5.                                      **Certain Covenants And Acknowledgments.**

 

a.          Filings.  The Company undertakes and agrees to make all necessary filingsin connection with the exchange of the Series E Preferred Stock to Pinnacleunder any United States laws and regulations, or by any domestic securitiesexchange or trading market, and to provide a copy thereof to Pinnacle promptlyafter such filing.

 

b.         Reporting Status.  So long as Pinnacle beneficially owns any ofthe Series E Preferred Stock, the Company shall file all reports required to befiled with the SEC pursuant to Section 13 or 15(d) of the 1934 Act,  and the Company shall not terminate itsstatus as an issuer required to file reports under the 1934 Act even if the1934 Act or the rules and regulations thereunder would permit such termination.

 

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6.                                      **Covenant to Register**.

 

a.               For purposes of this Section, thefollowing definitions shall apply:

 

i.                                          Theterms “register”, “registered” and “registration” refer to a registration underthe 1933 Act, effected by preparing and filing a registration statement orsimilar document in compliance with the 1933 Act, and the declaration orordering of effectiveness of such registration statement, document or amendmentthereto.

 

ii.                                       Theterm “Registrable Securities” means the Series E Preferred Stock, and anysecurities of the Company or securities of any successor corporation issued asor issuable upon the conversion or exercise of any warrant, right or othersecurity that is issued as a dividend or other distribution with respect to, orin exchange for, or in replacement of, the Series E Preferred Stock.

 

iii.                                    Theterm “holder of Registrable Securities” means Pinnacle and any permittedassignee of registration rights pursuant to Section 6(g).

 

b.                                       i.                                       TheCompany shall use its best efforts to prepare and file a registration statementon Form S-1 within sixty (60) days of the date hereof and cause suchregistration statement to become effective as soon as possible, but no laterthan one hundred and twenty (120) days from the date of this Agreement.

 

ii.                                       TheCompany may suspend, on no more than two (2) occasions per twelve-month period,the effectiveness of any registration effected pursuant to this Subsection (b)in the event and for such period of time as, such a suspension is required bythe rules and regulations of the Securities and Exchange Commission(“SEC”).  The Company will use its bestefforts to cause such suspension to terminate at the earliest possible date.

 

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iii.                                    Ifa registration statement covering all Registrable Securities is not effectiveby one hundred and twenty (120) days after the date of this Agreement (the“Target Date”), the Company shall pay Pinnacle as liquidated damages an amountequal to fifteen percent (15%) of the total Purchase Price of the Series EPreferred Stock.  Thereafter, theCompany will pay additional penalty payments of fifteen percent (15%) of thepurchase price of the Series E Preferred Stock for every successive one hundredand twenty (120) day period that a registration statement has still not beendeclared effective.  Each such paymentshall be made to Pinnacle by cashier’s check or wire transfer in immediatelyavailable funds to such account as shall be designated in writing by Pinnacle.

 

c.               Whenever required under this Section 6to effect the registration of any Registrable Securities, the Company shall, asexpeditiously as reasonably possible:

 

i.                                          Prepareand file with the SEC such amendments and supplements to such registrationstatement and the prospectus used in connection with such registrationstatement as may be necessary to comply with the provisions of the 1933 Actwith respect to the disposition of all securities covered by such registrationstatement and notify the holders of the filing and effectiveness of suchRegistration statement and any amendments or supplements;

 

ii.                                       Furnishto Pinnacle such numbers of copies of a current prospectus, includingpreliminary prospectus, conforming with the requirements of the 1933 Act,copies of the registration statement any amendment or supplement to any thereofand any documents incorporated by reference therein, and such other documentsas Pinnacle may reasonably require in order to facilitate the

 

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disposition of the shares of Common Stock issuable under the Series EPreferred Stock;

 

iii.                                    Useits best efforts to register and qualify the securities covered by suchregistration statement under such other securities or “Blue Sky” laws of suchjurisdictions as shall be reasonably requested by Pinnacle;

 

iv.                                   NotifyPinnacle immediately of the happening of any event as a result of which theprospectus included in such registration statement, as then in effect, includesan untrue statement of material fact or omits to state a material fact requiredto be stated therein or necessary to make the statements therein not misleadingin light of the circumstances then existing, and use its best efforts topromptly update and/or correct such prospectus.

 

d.              Upon request of the Company, Pinnaclewill furnish to the Company in connection with any registration under thisSection such information regarding itself, the securities of the Company heldby it, and the intended method of disposition of such securities as shall bereasonably required to affect the registration of the****securities held by Pinnacle.

 

e.                                        i.                                       Tothe fullest extent permitted by law, the Company shall indemnify, defend andhold harmless Pinnacle and each holder of Registrable Securities which areincluded in a registration statement and each of its officers, directors,employees, agents, partners or controlling persons (within the meaning of the1933 Act) (each, an “indemnified party”) from and against, and shall reimbursesuch indemnified party with respect to, any and all claims, suits, demands,causes of action, losses, damages, liabilities, costs or expenses(“Liabilities”) to which such indemnified party may become subject under the1933 Act or otherwise,

 

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arising from or relating to (A) any untrue statement or alleged untruestatement of any material fact contained in such registration statement, anyprospectus contained therein or any amendment or supplement thereto, or (B) theomission or alleged omission to state therein a material fact required to bestated therein or necessary to make the statements therein, in light of thecircumstances in which they were made, not misleading; *provided, however,*that the Company shallnot be liable in any such case to the extent that any such Liability arises outof or is based upon an untrue statement or omission so made in strictconformity with information furnished by such indemnified party in writingspecifically for use in the registration statement.

 

ii.                                       Inthe event of any registration under the 1933 Act of Registrable Securities,Pinnacle agrees to indemnity, defend and hold harmless the Company, and itsofficers, directors, employees, agents, partners, or controlling persons(within the meaning of the 1933 Act) (each, an “indemnified party”) from andagainst, and shall reimburse such indemnified party with respect to, any andall Liabilities to which such indemnified party may become subject under the1933 Act or otherwise, arising from or relating to (A) any untrue statement oralleged untrue statement of any material fact contained in such registrationstatement, any prospectus contained therein or any amendment or supplementthereto, or (B) the omission or alleged omission to state therein a materialfact required to be stated therein or necessary to make the statements therein,in light of the circumstances in which they were made, not misleading;*****provided,that*****Pinnacle will beliable in any such case to the extent and only to the extent, that any suchLiability arises out of or is based upon an untrue statement or alleged untruestatement or omission or

 

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alleged omission made in such registration statement, prospectus oramendment or supplement thereto in reliance upon and in conformity with writteninformation furnished by Pinnacle specifically for use in the preparationthereof, and such Liability may in no event exceed the value of the RegistrableSecurities so registered.

 

iii.                                    Promptlyafter receipt by any indemnified party of notice of the commencement of anyaction, such indemnified party shall, if a claim in respect thereof is to bemade against another party (the “indemnifying party”) hereunder, notify suchparty in writing thereof, but the omission so to notify such party shall notrelieve such party from any Liability which it may have to the indemnifiedparty other than under this Section and shall only relieve it from anyLiability which it may have to the indemnified party under this Section if andto the extent an indemnifying party is materially prejudiced by suchomission.  In case any such action shallbe brought against any indemnified party and such indemnified party shallnotify an indemnifying party of the commencement thereof, the indemnifying partyshall be entitled to participate in and, to the extent it shall wish, to assumeand undertake the defense thereof with counsel reasonably satisfactory to suchindemnified party, and, after notice from the indemnifying party to theindemnified party of its election so to assume and undertake the defensethereof, the indemnifying party shall not be liable to the indemnified partyunder this Section for any legal expenses subsequently incurred by theindemnified party in connection with the defense thereof other than reasonablecosts of investigation and of liaison with counsel so selected; *provided, however,*that if the defendantsin any such action include both parties and the indemnified party shall have

 

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reasonably concluded that there may be reasonable defenses available tothem which are different from or additional to those available to theindemnifying party or if the interests of the indemnified party reasonably maybe deemed to conflict with the interests of the indemnifying party, theindemnified party shall have the right to select a separate counsel and toassume such legal defenses and otherwise to participate in the defense of suchaction, with the reasonable expenses and fees of one such separate counsel andother reasonable expenses related to such participation to be reimbursed by theindemnifying party as incurred.

 

f.                 With respect to the above-referencedregistration statement, all fees, costs and expenses of and incidental to suchregistration, inclusion and public offering shall be borne by the Company,except any underwriting discounts and commissions.

 

g.              The rights to cause the Company toregister all or any portion of securities pursuant to this Section 6 may beassigned by Pinnacle to a proper transferee or assignee as describedherein.  Within a reasonable time aftersuch transfer, Pinnacle shall notify the Company of the name and address ofsuch transferee or assignee, and the securities with respect to which suchregistration rights are being assigned. Such assignment shall be effective only if, (i) Pinnacle agrees inwriting with the transferee or assignee to assign such rights, and a copy ofsuch agreement is furnished to the Company within a reasonable time after suchtransfer or assignment (subject to the purchase price of the shares being keptconfidential by Pinnacle and such transferee or assignee), (ii) theCompany  is, within a reasonable timeafter such transfer or assignment, furnished with written notice of (A) thename and address of such transferee or assignee, (B) the securities withrespect to which such registration rights are being assigned, (iii) followingsuch transfer or

 

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assignment,the further disposition of the Registrable Securities by the transferee orassignee is restricted under the 1933 Act and applicable state securities laws,(iv) at or before the time that the Company receives the written noticecontemplated by clause (ii) of this sentence the transferee or assignee agreesin writing with the Company to be bound by all of the provisions containedherein, (v) such transfer shall have been made in accordance with theapplicable requirements of the purchase agreement covering the transaction and(vi) such transferee shall be an “accredited investor”, as that term is definedin Rule 501 of Regulation D, promulgated under the 1933 Act.

 

7.                                      **Governing Law: Miscellaneous.** This Agreement shall be governed by and interpreted in accordance withthe laws of the State of New York.  Afacsimile transmission of this signed Agreement shall be legal and binding onall parties hereto.  This Agreement maybe signed in one or more counterparts, each of which shall be deemed anoriginal.  The headings of this Agreementare for convenience of reference and shall not form part of, or affect theinterpretation of, this Agreement.  Ifany provision of this Agreement shall be invalid or unenforceable in anyjurisdiction, such invalidity or unenforceability shall not affect the validityor enforceability of the remainder of this Agreement or the validity orenforceability of this Agreement in any other jurisdiction.  This Agreement may be amended only by aninstrument in writing signed by the party to be charged with enforcement.  This Agreement, and the related agreementsreferred to herein, contain the entire agreement of the parties with respect tothe subject matter hereto, superceding all prior agreements, understandings ordiscussions.

 

8.                                      **Notices.**  Any notice required or permitted hereunder shall be given inwriting (unless otherwise specified herein) and shall be deemed effectivelygiven, (i) on the date delivered, (a) by personal delivery, or (b) if advancecopy is given by fax, (ii) seven business days after deposit

 

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in the United States Postal Service by regular or certified mail, or(iii) three business days mailing by international express courier, withpostage and fees prepaid, addressed to each of the other parties thereuntoentitled at the following **addresses**,or at such other addresses as a party may designate by ten days advance writtennotice to each of the other parties hereto.

 
|   | **COMPANY**:  |   | STRATUS SERVICES GROUP, INC.        |
|--------|---------------|--------|-------------------------------------|
|   |          |   | 500 Craig Road, Suite 201           |
|   |          |   | Manalapan, NJ 07726                 |
|   |          |   | Attn: Suzette Nanovic Berrios, Esq. |
|   |          |   | Telecopier No.: (732) 866-6676      |
|   |          |   |                                |
|   | **PINNACLE**: |   | PINNACLE INVESTMENT PARTNERS, L.P.  |
|   |          |   | The Trump Building                  |
|   |          |   | 40 Wall Street, 33rd Floor          |
|   |          |   | New York, New York 10005            |
|   |          |   | Attn: Mr. Chris Janish              |
|   |          |   | Telecopier No.: (212) 480-9933      |

 

9.                                      **Successors And Assigns.**   This Agreement shall be binding upon andinure to the benefit of the parties hereto and their respective successors andpermitted assigns.

 

**IN WITNESS WHEREOF,**the Company and Pinnacle have caused this Agreement to be executed by theirduly authorized representatives on the date as first written above.

 
|   |   | **STRATUS SERVICES GROUP, INC.**       |
|--------|--------|----------------------------------------|
|   |   |                                   |
|   |   |                                   |
|   |   | By:                                    |   | s*/ Michael A. Maltzman* |   |
|   |   | Name:                                  | Michael Maltzman |
|   |   | Title:                                 | Chief Financial Officer |
|   |   |                                   |
|   |   | **PINNACLE INVESTMENT PARTNERS, L.P.** |
|   |   | By:                                    | PIP Management, Inc., General Partner |
|   |   |                                   |
|   |   |                                   |
|   |   | By:                                    |   | s*/ Christopher Janish* |   |
|   |   | Name:                                  | Christopher Janish |
|   |   | Title:                                 | President |
|        |        |                                        |  |  |  |  |  |

 

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