Document:

SRA Q1.15 10-Q - EX-10.21

ENHANCED SEVERANCE ELIGIBILITY AGREEMENT  

This Severance Agreement (“Agreement”) is made as of this 17th day of September, 2014 (the “Effective Date”) between SRA International, Inc. (“SRA”), a company with its principal place of business located in Fairfax, Virginia, and David Keffer (the “Employee”).

WITNESSETH:

WHEREAS, SRA believes it is in the best interests of SRA to ensure that it will have the continued dedication of the Employee and to encourage Employee’s full attention and dedication to SRA and ensure the compensation and benefits expectations of the Employee are satisfied and competitive with those of other companies; and 

WHEREAS, the parties want to make available enhanced severance benefits to Employee should employment be terminated under certain circumstances; 

NOW, THEREFORE, in consideration of the mutual promises and agreements of the parties hereto and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by the parties hereto, it is agreed as follows:

		
	1.
	TERM:  The “Term” of this Agreement shall commence on the Effective Date and shall expire on the second anniversary of the Effective Date; provided, however, that while this Agreement is in effect, beginning on the one year anniversary of the Effective Date (the “Annual Renewal Date”) the Term shall be automatically extended for an additional one (1) year unless at least three (3) months prior to the Annual Renewal Date, SRA gives written notice to the Employee that the Term shall not be extended.  The Employee’s employment relationship will remain at-will, with either SRA or the Employee able to terminate the employment relationship at any time for any reason with or without notice.  

		
	2.
	TERMINATION:  The Employee’s employment with SRA may be terminated by either party as set forth below.

		
	(a)
	Termination for Cause by SRA:  Termination of Employee’s employment by SRA based upon any of the following grounds shall constitute “Termination for Cause” for purposes of this Agreement: 

		
	(i)
	The refusal or neglect of the Employee to perform substantially his employment-related duties; 

		
	(i)
	The Employee’s personal dishonesty, incompetence, willful misconduct, or breach of fiduciary duty; 

		
	(ii)
	The Employee’s conviction of or entering a plea of guilty or nolo contendere (or any applicable equivalent thereof) to a crime constituting a felony (or a crime or offense of equivalent magnitude 

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in any jurisdiction) or his willful violation of any other law, rule, or regulation (other than a traffic violation or other offense or violation outside of the course of employment that in no way adversely affects SRA or its reputation or the ability of the Employee to perform his employment related duties or to represent SRA); 
		
	(iii)
	The material breach by the Employee of any covenant or agreement with SRA, or any written policy or procedure of SRA; 

		
	(iv)
	The Employee’s knowing violation of any state or federal law, rule or regulation in the course of his employment that directly relates to the affairs of SRA; or

		
	(v)
	the Employee’s failure to maintain the Employee’s eligibility for the government clearances required to perform his duties.  

		
	(b)
	Termination Without Cause by SRA:  If SRA terminates the Employee’s employment for any reason other than those set forth in the preceding subsection, such Termination shall constitute “Termination Without Cause.”  

		
	(c)
	Voluntary Termination by the Employee:  The Employee may voluntarily terminate his employment upon at least fourteen (14) days advance written notice.

		
	(d)
	Termination for Good Reason by Employee:  After the occurrence of a Change in Control (as defined below), the Employee may terminate his employment for “Good Reason” by submitting a written notice of the Employee’s intent to resign pursuant to the occurrence of one of the following events: 

		
	(i) 
	A material adverse change in Employee’s title, position, responsibilities, duties, or compensation; 

		
	(ii) 
	The assignment of duties materially inconsistent with the Executive’s duties as of the date of this Agreement; 

		
	(iii)
	A material change in the Employee’s principal place of employment such that the Employee’s commuting distance as of the date of this Agreement increases by more than twenty-five (25) miles; or 

		
	(iv)
	Failure by SRA to obtain written assumption of this Agreement but a purchaser or successor following a Change in Control.

Employee must give SRA written notice of any Good Reason termination of employment within thirty (30) days following Employee’s knowledge of the first occurrence of a Good Reason circumstance set forth above.  Such notice must specify which of the circumstances set forth above the 

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Employee is relying upon and the particular action(s) or inaction(s) giving rise to such circumstances.  The Good Reason termination shall not be effective if, within ninety (90) days of SRA’s receipt of such notice, SRA remedies the circumstance(s) giving rise to the notice, or if the Employee’s actual Termination Date does not occur within thirty (30) days after the end of the ninety (90) day period provided to SRA to remedy the circumstances giving rise to the notice.  
		
	(e) 
	Death of Employee:  Employee’s employment shall cease upon the event of Employee’s Death.

		
	(f) 
	Disability of Employee:  Employee’s employment shall cease, at the option of SRA, upon the event of Employee’s Disability (as defined herein). “Disability” means a physical or mental impairment which prevents the Employee from performing the essential functions of his position, with or without reasonable accommodation, and which has lasted at least 120 consecutive days.  A physician selected by the SRA or its insurers shall make the determination of the existence of a Disability, and SRA shall provide Employee with thirty (30) days’ advance written notice of such termination.  

		
	(g)
	Termination Date:  As used in this Agreement, “Termination Date” means (i) if Employee’s employment is terminated under Section 2(a)-2(d) above, the last day of active service provided by Employee; (ii) if Employee’s employment is terminated under Section 2(e) above, the date of the Employee’s death; and (iii) if the Employee’s employment is terminated under Section 2(f) above, the date that is 30 days from the date of the notice sent to the Employee under such Section.

3.    BENEFITS UPON TERMINATION UNDER THIS AGREEMENT:  
		
	(a) 
	Termination for Cause by SRA, Voluntary Termination by Employee, and Death or Disability of Employee:  If the Employee’s employment with SRA should terminate under Section 2(a), 2(c), 2(e), or 2(f) above, then Employee shall not be entitled to any benefits under this Agreement.

		
	(b)
	Termination Without Cause by SRA:  If the Employee’s employment with SRA should terminate under Section 2(b) above, then subject to Section 3(d) the Employee shall receive:

		
	(i)
	a cash severance payment equal to the sum of Employee’s annual base salary as of the Termination Date, to be paid in equal installments, less applicable withholding elections and taxes, consistent with the payroll cycle in effect at the time of separation starting on the first payroll date following the twenty-first day following the Effective Date of the Release (as defined below in Section 3(d)) and continuing thereafter for 12 months; 

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	(ii)
	an amount equal to the pro-rated portion of the target amount of the Individual Incentive Compensation (“IIC”) bonus for the year of termination, pro-rated to reflect the time period of Employee’s service during the bonus performance period, to be paid out in a lump sum at the same time IIC bonuses are paid out to the general population of IIC participants, but no later than 21⁄2 months after the end of the calendar year in which such IIC bonuses become payable; 

		
	(iii)
	an amount equal to the target amount of the IIC bonus for the full fiscal year in which termination occurs at an individual metric of 1.0, to be paid out within thirty (30) days following the Effective Date of the Release (as defined below in Section 3(d))

		
	(iv)
	up to six (6) months of executive-level outplacement with an outplacement vendor of SRA’s choosing; and 

		
	(v) 
	if the Employee elects and remains eligible for health, dental and vision insurance coverage in accordance with the Consolidated Omnibus Budget and Reconciliation Act of 1986, as amended (“COBRA”), the employer portion of cost (based on the Employee’s level of health, vision and dental insurance coverages as of the Termination Date) of COBRA premiums for up to twelve (12) months, to be paid directly by SRA. 

		
	(c)
	Termination by Employee for Good Reason Following Change in Control:  If the Employee’s employment with SRA is terminated by the Employee for Good Reason following a Change in Control pursuant to Section 2(d) above, then, subject to Section 3(d), the Employee shall receive: 

(i)        a cash severance payment equal to the sum of Employee’s annual base salary as of the Termination Date, to be paid in equal installments, less applicable withholding elections and taxes, consistent with the payroll cycle in effect at the time of separation starting on the first payroll date following the twenty-first day following the Effective Date of the Release (as defined below in Section 3(d)) and continuing thereafter for 12 months; 
		
	(ii)
	an amount equal to the pro-rated portion of the IIC bonus for the year of termination, to be based on an individual performance metric determined by SRA in its sole discretion and an SRA metric determined in accordance with standard practices, pro-rated to reflect the time period of Employee’s service during the bonus performance period, to be paid out in a lump sum at the same time IIC bonuses are paid out to the general population of IIC participants, but no later than 21⁄2 months after the end of the calendar year in which such IIC bonuses become payable; 

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	(iii)
	an amount equal to the target amount of the IIC bonus for the full fiscal year in which termination occurs at an individual metric of 1.0, to be paid out within thirty (30) days following the Effective Date of the Release (as defined below in Section 3(d))

		
	(iv)
	up to six (6) months of executive-level outplacement with an outplacement vendor of SRA’s choosing; and 

		
	(v) 
	if the Employee elects and remains eligible for health, dental and vision insurance coverage in accordance COBRA, the employer portion of cost (based on the Employee’s level of health, vision and dental insurance coverages as of the Termination Date) of COBRA premiums for up to twelve (12) months, to be paid directly by SRA.

		
	 (d)
	Separation Agreement and Release.  As a condition to entitlement to any payment under Section 3(b) or 3(c), Employee must execute, deliver to SRA, and not revoke a separation agreement in a form acceptable to SRA which shall include a full general release and waiver of any claims the Employee may hold or purport to hold against SRA and its affiliates, employees, etc., a nondisparagement clause, and an affirmation of any post-employment obligations the Employee may have, within the time frame set forth therein (“Release”); provided, that if the revocation period with respect to such a separation agreement begins in one calendar year and ends in another, payments under Section 3(b) and 3(c) shall begin no earlier than January 1 of the calendar year following the commencement of the revocation period. 

		
	(e)
	No Other Benefits.  Except as stated herein, or as required under the health care continuation provisions of COBRA, Employee shall not be eligible to participate in or accrue any additional benefits from SRA after the Termination Date, including, but not limited to, any other severance or salary continuation, whether under any other agreement or policy or otherwise, the 401(k) Plan, short-term or long-term disability, workers’ compensation or other benefits, except Employee shall remain vested in any portion of Employee’s 401(k) account in which Employee was vested as of the Termination Date.

		
	(f)
	Tax Treatment.  All payments hereunder shall be subject to tax withholding except where expressly excluded under the Internal Revenue Code of 1986, as amended.  Notwithstanding anything to the contrary herein, if a payment or benefit under any provision of this Agreement is due to a “separation from service”, within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations and guidance issued thereunder (“Section 409A”), and if the Employee is determined to be a “specified employee” (as determined under Treas. Reg. § 1.409A-1(i) and related procedures of SRA), such payment shall, to the extent necessary to comply 

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with the requirements of Section 409A and Treas. Reg. Section 1.409A-3(i)(2), be made on the later of (a) the date specified by the provisions of this Agreement and (b) the earlier of (x) the date that is six months after the date of the Employee’s separation from service or (y) the Employee’s death.  
		
	(g)
	Definition of Change in Control.  

(i)    For purposes of this Agreement, “Change in Control” means a transaction or series of transactions (other than a Public Offering):
(A)    involving the sale, transfer, or other disposition for cash by the Providence Entities to one or more persons or entities that are not, immediately prior to such sale, affiliates of the Company or the Providence Entities, of all or substantially all of the Common Stock of the Company beneficially owned by the Providence Entities as of the date of such transaction; or
(B)    involving the sale, transfer, or other disposition for cash of all or substantially all of the assets of the Company and the Subsidiaries, taken as a whole, to one or more persons or entities that are not, immediately prior to such sale, transfer, or other disposition, affiliates of the Company or the Providence Entities.
(ii)    For purposes of this Agreement, “Company” means SRA International, Inc., a Virginia corporation, and its parents, Sterling Holdco, Inc., a Delaware corporation, and Sterling Parent LLC, a Delaware Limited Liability Company, and any successor thereto.  
(iii)    For purposes of this Agreement, “Subsidiaries” means any corporations, a majority of whose outstanding voting securities is owned, directly or indirectly, by the Company.  
(iv)    For purposes of this Agreement, “Public Offering” means a public offering pursuant to an effective registration statement filed with the Securities and Exchange Commission that covers shares of Common Stock that, after the closing of such public offering, will be traded on the New York Stock Exchange, the American Stock Exchange, or the National Association of Securities Dealers Automated Quotation System or any comparable non-U.S. exchange or system.  
(v)    For purposes of this Agreement, “Providence Entities” means  collectively, Providence Equity Partners VI L.P., Providence Equity Partners VI-A L.P., Providence Equity Partners, L.L.C., and any of their affiliates or any other investment fund or similar fund managed or advised by Providence Equity Partners VI L.P., Providence Equity Partners VI-A L.P., or Providence Equity Partners, L.L.C.

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	4.
	NONDISCLOSURE OF PROPRIETARY INFORMATION:  The Employee understands that, for purposes of this Agreement, Proprietary Information (“Proprietary Information”) means any and all confidential or proprietary information or trade secrets of SRA, or its subsidiaries, parents, or affiliates (hereinafter “Affiliates”), including, but not limited to, third party information provided to SRA and its Affiliates on a confidential basis, and any confidential or proprietary information of SRA and its Affiliates pertaining to:

		
	(a)
	Product and services sales or marketing information such as SRA and its Affiliates technical, management, or cost proposals; bid or proposal information and strategies; capture plans; indirect cost structure rates; product or services plans, specifications, and associated software; price lists; current or potential client information including names, addresses, identifying information, special needs, purchasing practices, relationship history, contracts and sales agreements; and competitive analyses including future market and product direction;

		
	(b)
	Corporate information such as strategic business plans; operating and financial plans; business plans; financial reports; cost accounting reports; indirect budgets, proposal budgets; DCAA budget submissions; contract analysis summaries; revenue recognition reports; telephone lists; other employees’ salaries data; administrative policies and procedures; employee rosters; organization charts; and all SRA policies and procedures; 

		
	(c)
	Technical information including software code and documentation; data mining algorithms and techniques; patterns, thresholds and values; and all forms of research and development, including but not limited to information related to abandoned or failed technologies or products; and

		
	(d)
	All information which is not generally known to the public or within the industry or trade in which SRA and its Affiliates competes and that gives SRA and its Affiliates any advantage over its competitors, and all physical embodiments of that information in any tangible form, whether written or machine-readable in nature.  

Proprietary Information does not include information which (i) is or becomes generally available to the public other than as a result of a disclosure by the Employee, (ii) was within the Employee’s possession (as proven by the Employee) prior to its being furnished to him by or on behalf of SRA, provided that the source of such information was not bound by a confidentiality agreement with, or other contractual, legal or fiduciary obligation of confidentiality to, SRA and its Affiliates or any other party with respect to such information, or (iii) becomes available to the Employee on a non-confidential basis from a source other than SRA and its Affiliates or any of its representatives, provided that such source is not bound by a confidentiality agreement with, or other contractual, legal or fiduciary obligation of confidentiality to, SRA and its Affiliates or any other party with respect to such information.  For 

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the duration of and after the termination of the Employee’s employment with SRA, the Employee agrees not to disclose, transfer, remove, copy or use, directly or indirectly, any Proprietary Information for any purpose other than in the performance of his duties for SRA.  The Employee understands and agrees that disclosures authorized by SRA for the benefit of SRA must be made in accordance with SRA policies and practices designed to maintain the confidentiality of Proprietary Information.  Further, the Employee agrees to use all reasonable measures to prevent the unauthorized use by others of Proprietary Information that he has in his possession or control.  The Employee agrees to not use or rely on the confidential or proprietary information or trade secrets of a third party in the performance of his work for SRA except when obtained through lawful means such as contractual teaming agreements, purchase of copyrights, or other written permission for use of such information.  The Employee shall obtain prior written consent from an authorized officer of SRA for any article he submits for publication or any public speech he delivers that contains information related to SRA business or that identifies the Employee as a representative of SRA.
		
	5.
	NONSOLICITATION; NONDISPARAGEMENT: In consideration of Employee’s eligibility to receive the benefits set forth herein, Employee agrees as follows:

		
	(a)
	Employee acknowledges Employee’s continuing obligations under Employee’s Non-Disclosure, Non-Solicitation and Assignment of Inventions Agreement, the Nonqualified Stock Option Agreement, and any other such agreements.    

		
	(b)
	For a period of twelve (12) months following the Termination Date, Employee shall not, directly or indirectly, on Employee’s own behalf or the behalf of another person or entity: (i) induce or attempt to induce any person employed by SRA and its Affiliates to leave their employment with SRA and its Affiliates; (ii) hire or employ, or attempt to hire or employ, any person employed by SRA and its Affiliates; or (iii) assist any other person or entity in the hiring of any person employed SRA and its Affiliates.  

		
	(c)
	Employee agrees that, for a period of twelve (12) months following the Termination Date, Employee shall not, directly or indirectly, engage or attempt to engage in providing services to any Customer or Prospective Customer where such services or products are competitive with the services offered by SRA and its Affiliates to the Customer.  “Customer” shall mean any division, department, operating unit, group, or other appropriate sub-entity of a government agency (i) to whom Employee, or persons directly or indirectly under Employee’s supervision, provided services (whether as a prime contractor or as a subcontractor to another company) during the twelve (12) month period immediately preceding the Termination Date or (ii) with whom Employee interacted on behalf of SRA or any Affiliate during the 

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twelve (12) month period immediately preceding the Termination Date.  For purposes of this Agreement, “Prospective Customer” shall mean any division, department, operating unit, group, or other appropriate sub-entity of a government agency to whom the Employee, at any time during the six month period immediately preceding the Termination Date, was involved in soliciting or making a proposal, on behalf of SRA or any Affiliate, for the provision of services.  
		
	(d)
	Employee further agrees that, for the term of Employee’s employment and for a period of twelve (12) months following the Termination Date, the Employee shall not undertake to purposefully interfere with the relationship of SRA or any Affiliate with any Customer or Prospective Customer.  This means that Employee shall refrain: (i) from making disparaging comments about SRA or any Affiliate, or their respective management or employees to any Customer or Prospective Customer; (ii) from attempting to persuade any Customer or Prospective Customer to cease doing business with SRA or any Affiliate; or (iii) from soliciting any Customer or Prospective Customer for the purpose of providing services competitive with the business of SRA or any Affiliate; or (iv) from assisting any person or entity in doing any of the foregoing.

		
	(e)
	Each of the covenants (b) through (d) above is separate and independent, and in the event that one or more of the provisions herein shall be held to be invalid or unenforceable, the parties expressly agree and authorize the court to modify the agreement so as to render such agreement or provision thereof valid enforceable or to sever the unenforceable provision and enforce the remaining the provisions.

		
	6.
	WITHHOLDING FUNDS:  In the event that the Employee shall owe an obligation of any type whatsoever to SRA at any time during or after the termination of employment hereunder, then, subject to any mandatory provisions of law, the Employee expressly authorizes SRA to withhold or deduct an amount equal to said obligation from any wages due to the Employee back from SRA or any amounts due hereunder.  For purposes of this provision, wages shall mean any remuneration, compensation, bonus, commission, and/or fringe benefit provided in return for services provided by the Employee.

		
	7.
	SECTION 409A:  This Agreement is intended to comply with the requirements of Section 409A (including the exceptions thereto), to the extent applicable, and SRA shall administer and interpret this Agreement in accordance with such requirements.  To the extent permitted under Section 409A, each payment (including the provision of taxable benefits) provided under Section 3(b)(ii) and Section 3(c) shall be deemed to be a separate payment for purposes of Section 409A and Treas. Reg. Section 1.409A-2(b), and is intended to be (i) exempt from Section 409A, including, but not limited to, by compliance with the short-term deferral exception as specified in Treas. 

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Reg. Section 1.409A-1(b)(4) and the involuntary separation pay exception within the meaning of Treas. Reg. Section 1.409A-1(b)(9)(iii), or (ii) in compliance with Section 409A, including, but not limited to, being paid pursuant to a fixed schedule or specified date pursuant to Treas. Reg. Section 1.409A-3(A), and the provisions of this Agreement shall be administered, interpreted and construed accordingly.  If, nonetheless, this Agreement either fails to satisfy the requirements of Section 409A or is not exempt from the application of Section 409A, then the parties hereby agree to amend or to clarify this Agreement in a timely manner so that this Agreement either satisfies the requirements of Section 409A or is exempt from the application of Section 409A; provided, however, that no such amendment or clarification shall reduce the economic benefit that Employee was to derive from this Agreement prior to such amendment or clarification.  Notwithstanding the preceding sentence or any other provision of this Agreement hereof,  in no event whatsoever shall SRA be liable for any additional tax, interest or penalties that may be imposed on the Employee by Section 409A or any damages for failing to comply with Section 409A.   
		
	8.
	ENTIRE AGREEMENT: This Agreement, along with Employee’s Non-Disclosure, Non-Solicitation and Assignment of Inventions Agreement and the Nonqualified Stock Option Agreement, constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior written or oral understandings or agreements of the parties related to the subject matter hereof, except for any post-employment obligations entered into by Employee, which shall remain in full force and effect.  The Employee’s obligations under sections 4 and 5 of this Agreement shall survive the expiration or termination of this Agreement.  If Employee has signed a Senior Executive Retention Agreement with SRA this Agreement supersedes the Senior Executive Retention Agreement.  No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by any party hereto.  No change, modification, amendment or addition shall be valid, unless set forth in writing and signed by the party against whom enforcement of any such change, modification, amendment or addition is assigned.

		
	9.
	SEVERABILITY:  If any section or clause of this Agreement is held invalid, unenforceable, void, illegal or contrary to public policy, the remaining provisions of this Agreement shall be unaffected and shall remain fully enforceable.  The parties hereto shall use best efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business, and other purposes of such void or unenforceable provision.

		
	10.
	NON-WAIVER:  No failure or delay by any party to this Agreement in exercising any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.  The rights and remedies 

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provided herein shall be cumulative and in addition to any rights or remedies provided by law or available in equity.
		
	11.
	SUCCESSORS AND ASSIGNS: All covenants, agreements, representations and warranties set forth in this Agreement are binding on and shall inure to the benefit of the parties hereto, as well as their respective successors, assigns, heirs, representatives, agents and employees.  Notwithstanding the foregoing, the Employee expressly acknowledges that SRA has the right to assign this Agreement.

		
	13.
	NOTICES:  Any notice or communications required or permitted to be given to the parties hereto shall be delivered personally, sent by United States registered or certified mail, postage prepaid and return receipt requested, or sent by overnight or next-day delivery, and addressed or delivered as follows, or at such other addresses the party may have substituted by notice pursuant to this Section:

TO SRA:
SRA International, Inc.
4350 Fair Lakes Court
Fairfax, VA 22033
Attention: President and CEO

TO EMPLOYEE:
Last home address shown on SRA’s records

All such notices or communications shall be deemed to have been received (a) if by personal delivery, on the day of such delivery, (b) if by certified or registered mail, on the fifth business day after the mailing thereof, (c) if by next-day or overnight mail or delivery, on the day delivered.

		
	14.
	GOVERNING LAW:  This Agreement shall be governed by and subject to the laws of the Commonwealth of Virginia, without regard to Virginia’s choice of law rules, and the parties hereby agree that any and all actions to enforce or seek interpretation of this Agreement shall be subject to the exclusive jurisdiction of the courts of the County of Fairfax, Commonwealth of Virginia, and Employee hereby consents to personal jurisdiction in such court. 

		
	15.
	COUNTERPARTS:  This Agreement may be executed in one or more counterparts, each of which shall for all purposes, be deemed to be an original and all of which when taken together shall constitute the same instrument.

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The parties acknowledge that they have read the foregoing Agreement, fully understand its contents, and accept and agree to the provisions it contains and hereby execute it voluntarily and knowingly and with full understanding of its consequences with the opportunity to seek advice of counsel prior to execution.

	
				
	 
	/DAVID KEFFER/
	 
	September 17, 2014

	 
	David Keffer
	 
	Date

	 
	 
	 
	 

	SRA International, Inc.
	 
	 

	 
	 
	 
	 

	By:
	/WILLIAM L. BALLHAUS/
	 
	September 17, 2014

	 
	Dr. William Ballhaus
	 
	Date

	 
	President and CEO
	 
	 

12Exhibit 4.11

 

THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE CONDITIONS SPECIFIED HEREIN.

 

DISCOVERY LABORATORIES, INC.

Form of Warrant To Purchase Common Stock

 

Warrant No.: BMI00001

Number of Shares of Common Stock: 1,000,000

Date of Issuance: October 10, 2014 (“Issuance Date”)

 

Discovery Laboratories, Inc., a Delaware corporation (the “Company”), hereby certifies that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Battelle Memorial Institute (“Battelle”), the registered holder hereof or its permitted assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price (as defined below) then in effect, upon surrender of this Warrant to Purchase Common Stock (including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement hereof, the “Warrant”), at any time or times on or after the Exercise Date (defined below), but not after 11:59 p.m., New York time, on the Expiration Date (defined below), One Million (1,000,000) fully paid nonassessable shares of Common Stock (as defined below) (the “Warrant Shares”).  This Warrant is issued in conjunction with that certain Collaboration Agreement (the “Collaboration Agreement”) by and between the Company and Battelle, dated October 10, 2014, entered into in conjunction herewith.  Except as otherwise defined herein, capitalized terms in this Warrant shall have the meanings set forth in Section 16.

 

1.        EXERCISE OF WARRANT.

(a)            Mechanics of Exercise.  Subject to the terms and conditions hereof, this Warrant may be exercised by the Holder on any day on or after the date on which Battelle shall have achieved the Device Development Milestone (as that term is defined in the Collaboration Agreement) (the “Exercise Date”), in whole or in part, upon (i) surrender of this Warrant, with a notice in the form attached hereto as Exhibit A (the “Exercise Notice”), duly completed and executed by an authorized officer of the Holder, together with such evidence of authority as the Company may reasonably request, and (ii) (A) payment of the  Exercise Price multiplied by the number of Warrant Shares as to which this Warrant is being exercised (the “Aggregate Exercise Price”) in cash or by wire transfer of immediately available funds or (B) provided the conditions for cashless exercise set forth in Section 1(d) are satisfied, by notifying the Company that this Warrant is being exercised pursuant to a Cashless Exercise (as defined in Section 1(d)); at the office of the Company, 2600 Kelly Road, Suite 100, Warrington, PA 18976, Phone: (215) 488-9300, Fax: (215) 488-9421, electronic mail (Warrants@discoverylabs.com).  On or before the third (3rd) Business Day (the “Share Delivery Date”) following the date on which the Company has received each of the Exercise Notice and the Aggregate Exercise Price (or notice of a Cashless Exercise) (collectively, the “Exercise Documents”), the Company shall (X) provided that Continental Stock Transfer & Trust Company (the Company’s “Transfer Agent”) is participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, upon the request of the Holder, credit such aggregate number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal At Custodian (“DWAC”) system, or (Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program or the Holder does not request delivery of the Warrant Shares via DWAC, issue and dispatch by overnight courier to the address as specified in the Exercise Notice, a certificate, registered in the Company’s share register in the name of the Holder, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise.  Upon delivery of the Exercise Documents, the Holder shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised, irrespective of the date such Warrant Shares are credited to the Holder’s DTC account or delivered in certificate form, as the case may be.  If this Warrant is submitted to exercise a number of Warrant Shares in connection with any exercise and the number of Warrant Shares represented by this Warrant submitted for exercise is greater than the number of Warrant Shares being acquired upon an exercise, then the Company shall as soon as practicable and in no event later than three Business Days after any exercise and at its own expense, issue a new Warrant (in accordance with Section 8(d)) representing the right to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant, reduced by the number of Warrant Shares being exercised.  No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock to be issued shall be rounded down to the nearest whole number.  The Company shall pay any and all taxes which may be payable with respect to the issuance and delivery of Warrant Shares upon a partial exercise of this Warrant.

 

(b)            Exercise Price.  For purposes of this Warrant, “Exercise Price” means $5.00, subject to adjustment as provided herein.

(c)            Company’s Failure to Timely Deliver Securities.  If the Company shall fail for any reason or for no reason to issue to the Holder within three (3) Business Days of receipt of the Exercise Documents in compliance with the terms of this Section 1, a certificate for the number of shares of Common Stock to which the Holder is entitled and register such shares of Common Stock on the Company’s share register or to credit the Holder’s balance account with DTC for such number of shares of Common Stock to which the Holder is entitled upon the Holder’s exercise of this Warrant, and if on or after such Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of shares of Common Stock issuable upon such exercise that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within three (3) Business Days after the Holder’s request, (1) pay cash to the Holder in the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased in the Buy-in, exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company has failed to deliver in connection with the exercise, by (B) the price at which the sell order giving rise to the Buy-in was executed; and (2) at the option of the Holder, either (xx)  provided that a registration statement covering the issuance of the Warrant Shares that are the subject of the Exercise Notice is effective, deliver to the Holder the number of Warrant Shares that would have been issued had the Company timely complied with the Exercise Notice and its delivery obligations hereunder, or (yy) provided the conditions for cashless exercise set forth in Section 1(d) are satisfied, notify the Company that the Warrant should be exercised pursuant to a Cashless Exercise (as defined in Section 1(d)), or (zz) reinstate that portion of the Warrant and equivalent number of Warrant Shares that the Company failed to deliver (prior to receipt by the Holder of the Exercise Shares),

(d)            Cashless Exercise.  Notwithstanding anything contained herein to the contrary, if, but only if, a registration statement covering the issuance of the Warrant Shares that are the subject of the Exercise Notice (the “Unavailable Warrant Shares”) is not effective and an exemption from registration for the issuance and resale of such Unavailable Warrant Shares would only be available if the exercise of the Warrant were effected pursuant to a Cashless Exercise in accordance with this Section 1(d), then the Holder may exercise this Warrant in whole or in part and, in lieu of making the cash payment upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (a “Cashless Exercise”):

Net Number = (A x B) - (A x C)

B

For purposes of the foregoing formula:

A= the total number of shares with respect to which this Warrant is then being exercised.

B= the arithmetic average of the Closing Sale Prices of the shares of Common Stock for the five (5) consecutive Trading Days ending on the Trading Day immediately preceding the date of the Exercise Notice.

C= the Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

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For sake of clarity, in the event that neither a registration statement nor an exemption from registration is available, there is no circumstance that would require the Company to effect a net cash settlement of the Warrants.

 

(e)            Rule 144.  For purposes of Rule 144(d) promulgated under the Securities Act of 1934 (the “Securities Act”), as in effect on the date hereof, it is intended that the Warrant Shares issued in a Cashless Exercise shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued pursuant to the Underwriting Agreement.

(f)             Disputes.  In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed, and all such disputes shall be resolved pursuant to Section 13.

(g)            Beneficial Ownership.  The Company shall not effect the exercise of this Warrant, and the Holder shall not have the right to exercise this Warrant, to the extent that after giving effect to such exercise, such Person (for the purpose of this clause (g), together with such Person’s affiliates) would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such exercise.  For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Person and its affiliates shall include the number of shares of Common Stock of this Warrant being exercised, but shall exclude shares of Common Stock issuable upon (i) exercise of any unexercised portion of this Warrant beneficially owned by such Person and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by such Person (including, without limitation, any convertible notes or convertible preferred stock or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein.  Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended.  For purposes of this Warrant, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent public filing with the Securities and Exchange Commission, (2) a more recent public announcement by the Company or (3) any notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. To the extent that the limitation contained in this Section 1(g) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of an Exercise Notice shall be deemed to be each Holder’s determination of whether this Warrant is exercisable and which portion of this Warrant is exercisable, and the Company shall have no obligation to verify or confirm the accuracy of such determination.   For any reason at any time, upon the written or oral request of the Holder, the Company shall within two (2) Business Days confirm to the Holder the number of shares of Common Stock then outstanding.  This Section 1(g) shall be construed and implemented in a manner otherwise than in strict conformity with its terms to correct this paragraph or any portion of this paragraph which may be defective or inconsistent with the intended beneficial ownership limitation or to make changes or supplements necessary or desirable to properly give effect to such limitation.

2.            ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES.  The Exercise Price and the number of Warrant Shares shall be adjusted from time to time as follows:

(a)            Adjustment upon Subdivision or Combination of Common Stock.  If the Company at any time on or after the Issuance Date subdivides (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of Warrant Shares will be proportionately increased.  If the Company at any time on or after the Pricing Date combines (by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares will be proportionately decreased.  Any adjustment under this Section 2(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

 

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(b)            Other Events.  If any event occurs of the type contemplated by the provisions of this Section 2 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Exercise Price and the number of Warrant Shares so as to protect the rights of the Holder; provided that no such adjustment pursuant to this Section 2(b) will increase the Exercise Price or decrease the number of Warrant Shares as otherwise determined pursuant to this Section 2.

3.            RIGHTS UPON DISTRIBUTION OF ASSETS.  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to all holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case:

(a)            any Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Exercise Price by a fraction of which (i) the numerator shall be the Closing Bid Price of the shares of Common Stock on the Trading Day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (ii) the denominator shall be the Closing Bid Price of the shares of Common Stock on the Trading Day immediately preceding such record date; and

(b)            the number of Warrant Shares shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of shares of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding paragraph (a); provided that in the event that the Distribution is of shares of Common Stock (or common stock) (“Other Shares of Common Stock”) of a company whose shares of common stock are traded on a national securities exchange or a national automated quotation system, then the Holder may elect to receive a warrant to purchase Other Shares of Common Stock in lieu of an increase in the number of Warrant Shares, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the number of shares of Other Shares of Common Stock that would have been payable to the Holder pursuant to the Distribution had the Holder exercised this Warrant immediately prior to such record date and with an aggregate exercise price equal to the product of the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding paragraph (a) and the number of Warrant Shares calculated in accordance with the first part of this paragraph (b).

4.            PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.

(a)            Purchase Rights.  In addition to any adjustments pursuant to Section 2 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

 

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(b)            Fundamental Transactions.  The Company shall not enter into or be party to a Fundamental Transaction unless the Successor Entity assumes this Warrant in accordance with the provisions of this Section (4)(b), including agreements to deliver to each holder of Warrants in exchange for such Warrants a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant, including, without limitation, an adjusted exercise price equal to the value for the shares of Common Stock reflected by the terms of such Fundamental Transaction, and exercisable for a corresponding number of shares of capital stock equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and satisfactory to the Holder.  Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.   Upon consummation of the Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon exercise of this Warrant at any time after the consummation of the Fundamental Transaction, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property) purchasable upon the exercise of the Warrant prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights) which the Holder would have been entitled to receive upon the happening of such Fundamental Transaction had this Warrant been converted immediately prior to such Fundamental Transaction, as adjusted in accordance with the provisions of this Warrant. In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon an exercise of this Warrant at any time after the consummation of the Fundamental Transaction but prior to the Expiration Date, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property) purchasable upon the exercise of the Warrant prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights) which the Holder would have been entitled to receive upon the happening of such Fundamental Transaction had the Warrant been exercised immediately prior to such Fundamental Transaction.  If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the consideration it receives upon any exercise of this Warrant following such Fundamental Transaction.   The provisions of this Section 4 shall apply similarly and equally to successive Fundamental Transactions and Corporate Events and shall be applied without regard to any limitations on the exercise of this Warrant.

5.            NONCIRCUMVENTION.  The Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation, Bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and will at all times in good faith carry out all the provisions of this Warrant and take all action as may be required to protect the rights of the Holder.  Without limiting the generality of the foregoing, the Company (i) shall not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (ii) shall take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (iii) shall, so long as this Warrant is outstanding, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, 100% of the number of shares of Common Stock issuable upon exercise of this Warrant then outstanding (without regard to any limitations on exercise).

6.            PRIVATE PLACEMENT; REGISTRATION RIGHTS

(a)            Private Placement Representations.  The Holder represents that it is an “accredited investor” within the meaning of Regulation D under the Securities Act who is acquiring the Warrants without having been offered or sold the Warrant by any form of “general solicitation” or “general advertising”, in each case within the meaning of Regulation D under the Securities Act, and that the Warrants are being or will be acquired for its own account or for one or more separate accounts maintained by it or for the account of one or more pension or trust funds and not with a view toward distributing or reselling such securities or any part thereof in any transaction that would be in violation of the Securities Act, federal securities laws or the securities laws of any state, without prejudice, however, to its rights to sell or otherwise dispose of all or any part of the Warrants under an effective registration statement under the Securities Act and applicable state securities laws, or under an exemption from such registration available under the Securities Act and applicable state securities laws.

 

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(b)            Private Offering by the Company.  Neither the Company nor anyone acting on its behalf has offered the Warrants for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than the Holders, each of which has been offered the Warrants at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Warrants to the registration requirements of section 5 of the Securities Act or to the registration requirements of any securities or blue sky laws of any applicable jurisdiction.

(c)            Restrictive Legends.  Each certificate for Warrant Shares issued upon the exercise of the Warrant, and each certificate issued upon the transfer of any such Warrant Shares, shall be stamped or otherwise imprinted with a legend in substantially the following form:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.”

 

(d)            Registration Rights.  The Company and Holder shall negotiate in good faith and, prior to the Exercise Date, enter into a customary registration rights agreement providing for registration rights and procedures relating thereto that are mutually agreeable by the parties acting in good faith with respect to the Warrant Shares that Holder has the right to acquire pursuant the exercise of this Warrant.

7.            WARRANT HOLDER NOT DEEMED A STOCKHOLDER.  Except as otherwise specifically provided herein, the Holder, solely in such Person’s capacity as a holder of this Warrant, shall not be entitled to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in such Person’s capacity as the Holder of this Warrant, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares which such Person is then entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on the Holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.

8.            REISSUANCE OF WARRANTS.

(a)            Transfer of Warrant.  If this Warrant is to be transferred, the Holder shall surrender this Warrant to the Company together with a written assignment of this Warrant in the form attached hereto as Exhibit B duly executed by an authorized officer of the Holder or its agent or attorney, together with such evidence of authority as the Company may reasonably request, whereupon the Company will forthwith, subject to compliance with any applicable securities laws, issue and deliver upon the order of the Holder a new Warrant (in accordance with Section 8(d)), registered as the Holder may request, representing the right to purchase the number of Warrant Shares being transferred by the Holder and, if less than the total number of Warrant Shares then underlying this Warrant is being transferred, a new Warrant (in accordance with Section 8(d)) to the Holder representing the right to purchase the number of Warrant Shares not being transferred.

(b)            Lost, Stolen or Mutilated Warrant.  Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Warrant, the Company shall execute and deliver to the Holder a new Warrant (in accordance with Section 8(d)) representing the right to purchase the Warrant Shares then underlying this Warrant.

 

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(c)            Exchangeable for Multiple Warrants.  This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Warrant or Warrants (in accordance with Section 8(d)) representing in the aggregate the right to purchase the number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the right to purchase such portion of such Warrant Shares as is designated by the Holder at the time of such surrender; provided, however, that no Warrants for fractional shares of Common Stock shall be given.

(d)            Issuance of New Warrants.  Whenever the Company is required to issue a new Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of like tenor with this Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the right to purchase the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued pursuant to Section 8(a) or Section 8(c), the Warrant Shares designated by the Holder which, when added to the number of shares of Common Stock underlying the other new Warrants issued in connection with such issuance, does not exceed the number of Warrant Shares then underlying this Warrant), (iii) shall have an issuance date, as indicated on the face of such new Warrant, which is the same as the Issuance Date, and (iv) shall have the same rights and conditions as this Warrant.

9.            NOTICES.  The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Warrant, including in reasonable detail a description of such action and the reason therefor.  Whenever notice is required to be given under this Warrant, unless otherwise provided herein, such notice shall be given in writing, will be mailed (a) if within the domestic United States by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile or (b) if delivered from outside the United States, by International Federal Express or facsimile, and (c) will be deemed given (i) if delivered by first-class registered or certified mail domestic, three business days after so mailed, (ii) if delivered by nationally recognized overnight carrier, one business day after so mailed, (iii) if delivered by International Federal Express, two business days after so mailed and (iv) if delivered by facsimile, upon electronic confirmation of receipt, and will be delivered and addressed as follows:

		(a)	if to the Company, to:

 

Discovery Laboratories, Inc.

2600 Kelly Road

Warrington, Pennsylvania 18976

Attention: Chief Financial Officer

Facsimile: 215-488-9301

 

with copies to:

 

Discovery Laboratories, Inc.

2600 Kelly Road

Warrington, Pennsylvania 18976

Attention: General Counsel

Facsimile: 215-488-9557

 

(b)            if to the Holder, at its address on the Exercise Notice in the form attached as Exhibit A hereto, or at such other address or addresses as may have been furnished to the Company in writing to the foregoing addresses.

10.            AMENDMENT AND WAIVER.  Except as otherwise provided herein, the provisions of this Warrant may be amended only with the written consent of the Company and the Holder, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only with the written consent of the Holder.

 

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11.            GOVERNING LAW.  This Warrant shall be governed by and construed and enforced in accor­dance with, and all questions concerning the construction, validity, interpretation and performance of this Warrant shall be governed by, the internal laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Delaware.

12.            CONSTRUCTION; HEADINGS.  This Warrant shall be deemed to be jointly drafted by the Company and the Holder and shall not be construed against any person as the drafter hereof.  The headings of this Warrant are for convenience of reference and shall not form part of, or affect the interpretation of, this Warrant.

13.            DISPUTE RESOLUTION.  In the case of a dispute as to the determination of the Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the disputed determinations or arithmetic calculations via facsimile or electronic mail within two (2) Business Days of receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to agree upon such determination or calculation of the Exercise Price or the Warrant Shares within three Business Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two (2) Business Days submit via facsimile or electronic mail (a) the disputed determination of the Exercise Price to an independent, reputable investment bank selected by the Company and approved by the Holder or (b) the disputed arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant.  The Company shall cause at its expense the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than ten Business Days from the time it receives the disputed determinations or calculations.  Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.

14.            REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Warrant shall be cumulative and in addition to all other remedies available under this Warrant, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual damages for any failure by the Company to comply with the terms of this Warrant.

15.            TRANSFER.  This Warrant may not be offered for sale, sold, transferred or assigned prior to the Exercise Date.  Thereafter, subject to compliance with any applicable securities laws, this Warrant may be offered for sale, sold, transferred or assigned without the consent of the Company.

16.            CERTAIN DEFINITIONS.  For purposes of this Warrant, the following terms shall have the following meanings:

(a)            “Bloomberg” means Bloomberg Financial Markets.

(b)            “Business Day” “Business Day” means any day on which both (a) the Common Stock is scheduled to trade for at least 4.5 hours on the Principal Market and (b) the Transfer Agent is open for business.

(c)            “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as the case may be, then the last bid price or the last trade price, respectively, of such security prior to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported by OTC Link LLC (formerly Pink OTC Markets Inc.).  If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as determined by the Board of Directors of the Company in the exercise of its good faith judgment.  All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.

 

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(d)            “Common Stock” means (i) the Company’s shares of Common Stock, par value $0.001 per share, and (ii) any share capital into which such Common Stock shall have been changed or any share capital resulting from a reclassification of such Common Stock.

(e)            “Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for shares of Common Stock.

 

(f)             “Eligible Market” means the Principal Market, The New York Stock Exchange, Inc., The American Stock Exchange, The NASDAQ Global Select Market or The NASDAQ Capital Market.

(g)            “Expiration Date” means the tenth anniversary date of the effective date of the Collaboration Agreement or, if such date falls on a day other than a Business Day or on which trading does not take place on the Principal Market (a “Holiday”), the next date that is not a Holiday; except as otherwise provided in Section 5.D(i) of the Collaboration Agreement upon a material breach by Battelle thereunder.

(h)            “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or more related transactions, (i) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, or (iii) allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than the 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than the 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), (v) reorganize, recapitalize or reclassify its Common Stock, or (vi) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate ordinary voting power represented by issued and outstanding Common Stock.

(i)             “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

(j)             “Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

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

(l)             “Principal Market” means The NASDAQ Capital Market or the principal securities exchange or other securities market on which the Common Stock is being traded at any time.

(m)             “Successor Entity” means the Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so elected by the Holder, the Parent Entity) with which such Fundamental Transaction shall have been entered into.

(n)            “Trading Day” means any day on which the Common Stock are traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock are then traded; provided that “Trading Day” shall not include any day on which the Common Stock are scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock are suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).

[Signature Page Follows]

 

9

IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly executed as of the Issuance Date set out above.

	 	
DISCOVERY LABORATORIES, INC.

	 	 	 
	 	
By:

	
/s/ John Tattory

	 	
Name:

	
John Tattory

	 	
Title:

	
Senior Vice President and Chief Financial Officer

 

EXHIBIT A

 

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK

 

DISCOVERY LABORATORIES, INC.

 

The undersigned holder hereby exercises the right to purchase _________________ of the shares of Common Stock (“Warrant Shares”) of Discovery Laboratories, Inc, a Delaware corporation (the “Company”), evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).  Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

 

1. Form of Exercise Price.  The Holder intends that payment of the Exercise Price shall be made as:

____________                                        a “Cash Exercise” with respect to _________________ Warrant Shares; and/or

 

____________                                        a “Cashless Exercise” with respect to _______________ Warrant Shares.

2.  Payment of Exercise Price.  In the event that the holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of $___________________ to the Company in accordance with the terms of the Warrant.

 

3.  Delivery of Warrant Shares.  The Company shall deliver __________ Warrant Shares in the name of the undersigned holder or in the name of ______________________ in accordance with the terms of the Warrant to the following DWAC Account Number or by physical delivery of a certificate to:

 

	 	       	 
	 	     	 
	 	    	 

 

Date: _______________ __, ______

 

	     	 
	
Name of Registered Holder

	 
	 	 

	
By:

	    	 
	 	
Name:

	 
	 	
Title:

	 

 

 

EXHIBIT B

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

 

FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

_______________________________________________ whose address is

_______________________________________________________________.

 

_______________________________________________________________

Dated:  ______________, _______

 

	 	
Holder’s Signature:

	    	 
	 	 	 	 
	 	
Holder’s Address:

	    	 
	 	 	 	 
	 	 	    	 

 

Signature Guaranteed:  ___________________________________________

 

NOTE:  The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company.  Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

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