Document:

technest_8k-ex1001.htm

Exhibit 10.1

 

 

SECURITIES PURCHASE AGREEMENT

 

 

THIS SECURITIES PURCHASE AGREEMENT is made as of the 17th day of July, 2009, by and between Technest Holdings, Inc. (the “Company”), a Nevada corporation, and each of the persons whose names are set forth on the Schedule of Purchasers attached
hereto as Exhibit A (the “Purchasers” and each individually as a “Purchaser”).

 

WHEREAS, each Purchaser wishes to purchase from the Company, and the Company wishes to sell to each Purchaser, certain shares (the “Shares”) of the Company’s Series D 5% Convertible Preferred
Stock, par value $0.0001 per share (“Series D Preferred”) a copy of whose certificate of designation is set forth below in Exhibit B;

 

NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties agree as follows:

 

SECTION 1  Sale of Securities.

 

1.1  Authorization of Sale of the Securities.  Subject to the terms and conditions of this Agreement, the Company has authorized the sale and issuance to the Purchasers of the number of Shares
set forth next to each Purchaser’s name on Exhibit A hereof.

 

1.2  Agreement to Sell and Purchase the Shares.  At the Closing (as defined below), the Company will issue and sell the Shares to each Purchaser, severally and not jointly, and each Purchaser
will buy the Shares from the Company set forth opposite such Purchaser’s name on Exhibit A, upon the terms and conditions hereinafter set forth, at the purchase price set forth on Exhibit A.

 

1.3  Several and not Joint Obligations.  The representations, warranties, covenants, agreements and obligations of the Purchasers under this Agreement are several and not joint.

1.4  Time of the Essence.  Time is of the essence in this Agreement.  If no Closing (as hereinafter defined) has take place by July 17, 2009, the Company may unilaterally and in
its sole discretion terminate this Agreement as to any or all Purchasers, in which case no terminated party shall have any liability to or claim against the Company under or in connection with this Agreement or the transactions contemplated by this Agreement.

1.5  Closing.  Subject to and in reliance upon all of the representations, warranties, covenants, terms and conditions of this Agreement, the closing shall take place at the offices of the
Company located in Bethesda, Maryland at 10:00 a.m., local time, on July 17, 2009, or at such other location, date and time as many be agreed upon between the applicable Purchasers and Company (such closing being called the “Closing”).

SECTION 2  Representations, Warranties and Covenants of the Company.

 

The Company hereby represents and warrants to, and covenants with, the Purchasers as follows:

 

3.1  Organization and Qualification.  The Company is a corporation, validly existing and in good standing under the laws of the State of Nevada; and the Company is duly qualified to do business
as a foreign corporation and is in good standing in each other jurisdiction in which qualification is required, except where the failure to be so qualified will not have a material adverse effect.

 

  

 

  

3.2  Issuance, Sale and Delivery of the Shares.  Both the Shares being purchased hereunder, and the underlying shares of the Company’s common stock into which the Shares may convert
are duly authorized and, when issued, delivered and paid for in the manner set forth in this Agreement, will be duly authorized, validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances other than liens or encumbrances created or imposed upon the Purchasers.

 

3.3  Due Execution, Delivery and Performance of the Agreements.  The Company has full corporate power and authority to enter into this Agreement, to issue and sell the Shares, and perform
the transactions contemplated by this Agreement.  The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions therein contemplated will not violate any provision of the Restated Articles of Incorporation or by-laws of the Company.

 

3.4  SEC Filings.  Each report, schedule, registration statement and definitive proxy statement filed by the Company with the Securities and Exchange Commission (the “Commission”)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), since December 31, 2007 is available on EDGAR (as such documents have since the time of their filing been amended, the “Information Documents”), which are all the documents (other than preliminary material) that the Company was required to file with the Commission since such date.  Except
as disclosed to the Purchasers, as of their respective dates, the Information Documents complied in all material respects with  the requirements of the Exchange Act and the rules and regulations of the Commission thereunder applicable to the Information Documents, and none of the Information Documents contained at the time they were filed, any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.

 

3.5 Authorized Shares.  The authorized capital stock of the Company consists of (i) 495,000,000 shares of Common Stock, $.001 par value per share, of which  20,676,739 shares have
been issued and are outstanding as of the date hereof and (ii) 5,000,000 of Preferred Stock, of which 150 shares have been designated as Series A Preferred Stock, 64.631  shares of which have been issued and are outstanding;  1,149,425 shares have been designated as Series B Preferred Stock, none of which are outstanding;  1,149,425 shares have been designated as Series C Preferred Stock,  402,294 shares of which have been issued and are outstanding; 3,000 shares have been
designated as Series D Preferred Stock, 1,640 shares of which have been issued and are outstanding as of the date hereof.  All issued and outstanding shares of Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and nonassessable.

 

3.6 Brokers, Finders.  The Company has taken no action which would give rise to any claim by any person for brokerage commission,
finder's fees or similar payments by Investor relating to this Agreement or the transactions contemplated hereby.  Investor shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated hereby.  The Company shall indemnify and hold harmless each of Investor, its employees, officers, directors, agents, and partners, and their
respective affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as and when incurred.

  

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3.7 Amendments, Modification or Waivers.  The Company shall pay all reasonable fees and expenses incurred by the Investor in connection with any amendments, modifications or waivers
of this Agreement incurred in connection with the enforcement of this Agreement, including, without limitation, all reasonable attorneys’ fees and expenses. The Company shall pay all stamp or other similar taxes and duties levied in connection with issuance of the Shares pursuant hereto.

 

SECTION 4  Representations, Warranties and Covenants of the Purchasers

 

4.1  Experience; Accredited Investor Status.  Each Purchaser, individually and not jointly, represents and warrants to, and covenants with, the Company that: (i) he is an “accredited
investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, (ii) he is knowledgeable, sophisticated and experienced in making, and is qualified to make, decisions with respect to investments in securities representing an investment decision like that involved in the purchase of the Shares, including investments in securities issued by the Company, and has requested, received, reviewed and understood all information he deems relevant in making an informed decision to purchase
the Shares; (iii) he acknowledges that the offering of the Shares pursuant to this Agreement has not been reviewed by the Securities and Exchange Commission or any state regulatory authority; (iv) it is acquiring the Shares set forth next to his name on Exhibit A hereto, for his own account for investment only and with no intention of effecting a distribution any of such Shares or any arrangement or understanding with any other persons regarding
the distribution of such Shares; (v) he will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Shares except in compliance with the Securities Act of 1933, as amended (the “Securities Act”), rules and regulations promulgated under the Securities Act and any applicable state securities or blue sky laws; (vi) he
understands that the securities are “restricted securities” as such term is defined in Rule 144(a)(3) promulgated under the Securities Act, and that the Shares are illiquid in that they may not readily be resold and that the Company has no obligation or plan to register the resale of the Shares by the Purchaser under the Securities Act; (vii) he has, in connection with his decision to purchase Shares, not relied upon any representations or other information (whether oral or written) other than as
set forth in the representations and warranties of the Company contained herein; (viii) he has had an opportunity to discuss this investment with representatives of the Company and ask questions of them and such questions have been answered to his full satisfaction.

 

4.2  Acknowledgement of Risk.  Each Purchaser, individually and not jointly, recognizes that an investment in the Shares is speculative and involves a high degree of risk, including a risk
of total loss of the Purchaser’s investment.  Each Purchaser, individually and not jointly, acknowledges that they have been afforded an opportunity to ask questions and to review any documents that might be necessary to evaluate the degree of risk involved in the transactions contemplated by this Agreement.

 

  

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4.3  Acknowledgement of Company’s Reliance.  Each Purchaser, individually and not jointly, represents and warrants that all of the information provided to the Company or its agents or
representatives concerning such Purchaser’s suitability to invest in the Company and the representations and warranties contained herein, are complete, true, and correct as of the date hereof, and understands that the Company is relying on the statements contained herein to establish an exemption from registration under U.S. federal and state securities laws.  Each Purchaser, individually and not jointly, represents and warrants that the address set forth in the signature page hereto is such Purchaser’s
true and correct domicile.

4.4  Restrictions on Transfer.  Each Purchaser agrees to not, without the prior written consent of the Company, directly or indirectly, make any offer, sale, assignment, transfer, encumbrance,
contract to sell, grant of an option to purchase or other disposition of any Shares beneficially owned (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by the Purchaser on the date hereof or hereafter acquired for a period of six months subsequent to the date hereof.  Each Purchaser agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent against the transfer of Shares except in compliance with this agreement.

SECTION 5.  Certain Covenants of the Company

5.1 Filings.  (i)  The Company undertakes and agrees to promptly and timely make all necessary filings and other applications in connection with the sale of the Shares to the Purchaser
under any United States laws and regulations applicable to the Company, or by any domestic securities exchange or trading market, and to provide a copy thereof to the Investor promptly after such filing.

5.2 Reporting Status.  So long as the Purchaser beneficially owns any of the Shares, the Company shall file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934
Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination.  The Company will take all reasonable action under its control to obtain and to continue the listing and trading of its Common Stock (including, without limitation, all Converted Shares) on the principal exchange where its common stock is traded.

5.3 Available Shares.  The Company shall have at all times hereafter authorized and reserved for issuance, free from preemptive rights, shares of Common Stock sufficient to issue one hundred percent
(100%) of the number of shares of Common Stock as may be required to satisfy the conversion rights of the Purchaser pursuant to the terms and conditions of the Certificate of Designation.

5.4 Negative Covenants.  So long as any of the Shares are outstanding, the Company shall not and shall not cause its subsidiaries to, without
the affirmative vote of seventy five percent (75%) of the holders of the Shares then outstanding, (a) alter or adversely change the powers, preferences or rights given to the Shares, (b) alter or amend the Certificate of Designation associated with the Shares, (c) authorize or create any class of stock ranking as to dividends or distribution of assets upon a liquidation or otherwise senior to or pari passu with the Shares, (d) amend its certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of any holders of the Shares, (e) increase the authorized or designated number of the Shares, (f) allow for the creation of a corporate obligation other than in the ordinary course of business, (g) allow the creation of any lien on any of its assets or the assets of any subsidiary, (h) issue any additional Shares (including the reissuance of any Shares previously converted into common stock) or (i) enter into any agreement with respect to the foregoing.

  

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SECTION 6  Expenses.  Each party hereto will pay its own expenses in connection with the transactions contemplated hereby, whether or not such transactions shall be consummated.

 

SECTION 7  Notices.  All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be delivered by hand, sent via overnight courier, sent by
facsimile, or mailed by first class certified or registered mail, return receipt requested, postage prepaid:

 

if to the Company, to:

 

Technest Holdings, Inc.

10411 Motor City Drive, Suite 650

Bethesda, MD 20817

or to such other person at such other place as the Company shall designate to the Purchasers in writing; and if to the Purchasers, at the address as set forth on Exhibit A, or at such other address or addresses as may have been furnished to the Company in writing
pursuant to this Section 7.

 

SECTION 8  Severability.  In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired thereby.

 

SECTION 9  Governing Law.  This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without
giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the federal courts whose districts encompass any part of the County of New York or the state courts of the State of New York sitting in the County of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum
non conveniens, to the bringing of any such proceeding in such jurisdictions.  Each party hereto agrees to waive its right to a trial by jury in any proceeding in connection with any dispute associated with this Agreement.

SECTION 10  Entire Agreement.  This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and supersedes and is in full substitution for any and
all prior oral or written agreements and understandings between them related to such subject matter, and neither party hereto shall be liable or bound to the other party hereto in any manner with respect to such subject matter by any representations, indemnities, covenants or agreements except as specifically set forth herein.

 

  

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be executed as of the date first above written by their duly authorized representatives shown below:

 

 

TECHNEST HOLDINGS, INC.

 

By:   /s/ Gino M. Pereira                                                                                                      

 

Name: _________Gino M. Pereira_____________

 

Title:  _________Chief Executive Officer________

 

 

SOUTHRIDGE CAPITAL MANAGEMENT LLC

 

By:  /s/ Stephen Hicks                                                                                                                               

 

Name: _____Stephen Hicks__________________

 

Title:  ___President of the General Partner_______

 

 

  

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 Exhibit A

 

Schedule of Purchasers

 

	
Name and Address:
	
Shares:
	
Purchase Price:

	
Southridge Capital Management LLC

90 Grove Street,

Ridgefield CT
	
300
	
$150,000

	  	  	  

 

 

 

 

 

 

 

 

 

 

 

 

 

  

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Exhibit B

 

 

Certificate of Designation

 

 

 

 

 

 

 

 

 

 

 

  

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CERTIFICATE OF DESIGNATION OF RIGHTS AND PREFERENCES

FOR SERIES D 5% CONVERTIBLE PREFERRED STOCK

OF

TECHNEST HOLDINGS, INC.

Pursuant to Section 78.1955 of the Nevada Revised Statutes, Technest Holdings, Inc., a Nevada corporation (the "Company"), does hereby certify:

FIRST: That pursuant to authority expressly vested in it by the Restated Articles of Incorporation, as amended, of the Company, the Board of Directors of the Company has adopted the following resolution establishing a new series of Preferred Stock of the Company, consisting of Three Thousand (3,000) shares designated "Series
D 5% Convertible Preferred Stock," with such powers, designations, preferences, and relative participating, optional, or other rights, if any, and the qualifications, limitations, or restrictions thereof, as are set forth in the resolutions:

RESOLVED, that the Company's Board of Directors hereby approves the designation and issuance of the Series D 5% Convertible Preferred Stock according to the terms and conditions as set forth in Exhibit A and authorizes and instructs the Company's Executive Officers to proceed in filing the Certificate of Designation with
the State of Nevada and to take such other action as shall be appropriate in connection with the issuance of the Series D 5% Convertible Preferred Stock.

SECOND: That said resolutions of the directors of the Company were duly adopted in accordance with the provisions of Sections 78.315 and 78.1955 of the Nevada Revised Statutes.

IN WITNESS WHEREOF, the undersigned hereby affirms, under penalties of perjury, that the foregoing instrument is the act and deed of the Company and that the facts stated therein are true.  Dated as of the 1st day of October, 2008.

 

 

	 	
TECHNEST HOLDINGS, INC.,

a Nevada corporation,

 

By: /s/ Gino Pereira                                                     

Name:  Gino Pereira

Title:    President

 

 

  

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EXHIBIT A

SECTION 1.   SERIES D 5% CONVERTIBLE PREFERRED STOCK TERMS

 

Section 1.      Designation, Amount and Par Value.  The series of preferred stock shall be designated as the Series D 5% Convertible Preferred Stock (the "Preferred
Stock"), and the number of shares so designated and authorized shall be Three Thousand (3,000).  Each share of Preferred Stock shall have a par value of $0.0001 per share and a stated value of $1,000 per share (the "Stated Value").

Section 2.      Dividends.

(a)           Holders of Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors either out of funds legally available therefor or through the issuance of shares of the Company’s
common stock, and the Company shall accrue, quarterly in arrears on March 31, June 30, September 30, and December 31 of each year, commencing on the earlier of December 31, 2008, or any Conversion Date (as defined below), cumulative dividends on the Preferred Stock at the rate per share (as a percentage of the Stated Value per share) equal to five percent (5%) per annum, payable in cash or shares of Common Stock (as defined in Section 7) at the option of the Holders.  The Company may pay, at its option,
accrued dividends at any time while the Preferred Stock remains outstanding.  The Company shall pay all accrued and unpaid dividends within five (5) days following either (a) the conversion of any or all of the Preferred Stock or (b) the redemption by the Company of any or all of the remaining outstanding shares of Preferred Stock.  The number of shares of Common Stock issuable as payment of dividends hereunder shall equal the aggregate dollar amount of dividends then being paid, divided by
the Conversion Price (as defined in Section 5(c)) then in effect.  Dividends on the Preferred Stock shall be calculated on the basis of a 360-day year, shall accrue daily commencing the Issuance Date (as defined in Section 7), and shall be deemed to accrue on such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends.  The party that holds the Preferred Stock on an applicable record
date for any dividend payment will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such dividend payment date, without regard to any sale or disposition of such Preferred Stock subsequent to the applicable record date but prior to the applicable dividend payment date.  Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on account of the Preferred Stock, such payment shall
be distributed ratably among the Holders of the Preferred Stock based upon the number of shares then held by each Holder in proportion to the total number of shares of Preferred Stock then outstanding.  In order for the Holders to exercise the right to have dividends paid in cash on any Conversion Date, the Holders must indicate such intention in the Conversion Notice, which notice will remain in effect for subsequent Conversion Notices until rescinded by the Holder in a written notice to such effect
that is addressed to the Company.

  

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(b)  Notwithstanding anything to the contrary contained herein, the Company may not issue shares of Common Stock in payment of dividends on the Preferred Stock (and must deliver cash in respect thereof) if:  (i)  the number of shares of Common Stock at the time authorized, unissued and unreserved
for all purposes, or held as treasury stock, is either insufficient to issue such dividends in shares of Common Stock or the Company has not duly reserved for issuance in respect of such dividends a sufficient number of shares of Common Stock, (ii) such shares are not listed for trading on the Nasdaq SmallCap Market or the OTC Bulletin Board ("OTC BB")(and any other exchange, market or trading facility in which the Common Stock is then listed for trading). Payment of dividends in shares of Common Stock is further
subject to the provisions of Section 5.

 

(c)  So long as any shares of Preferred Stock remain outstanding, neither the Company nor any subsidiary thereof shall, without the consent of the Holders of seventy five percent (75%) of the shares of Preferred Stock then outstanding, redeem, repurchase or otherwise acquire directly or indirectly any Junior
Securities (as defined in Section 7), nor shall the Company directly or indirectly pay or declare any dividend or make any distribution upon, nor shall any distribution be made in respect of, any Junior Securities, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities.

Section 3.     Voting Rights; Negative Covenants.  The Preferred Stock shall have the right to vote on an as converted basis on any matter that may from time to time be submitted to the Company’s shareholders for a vote,
either by written consent or by proxy.  So long as any shares of Preferred Stock are outstanding, the Company shall not and shall cause its subsidiaries not to, without the affirmative vote of seventy five percent (75%) of the holders of the Preferred Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock, (b) alter or amend this Certificate of Designation, (c) authorize or create any class of stock ranking as to dividends or distribution
of assets upon a Liquidation (as defined in Section 4) or otherwise senior to or pari passu with the Preferred Stock, (d) amend its certificate of incorporation, bylaws or other charter documents so as to affect adversely any rights of any holders of the Preferred Stock, (e) increase the authorized or designated number of shares of Preferred Stock, (f) allow for the creation of a corporate obligation other than in the ordinary course of business, (g) allow the creation of any lien on any of its assets or the
assets of any subsidiary, (h) issue any additional shares of Preferred Stock (including the reissuance of any shares of Preferred Stock converted for Common Stock) or (i) enter into any agreement with respect to the foregoing.

Section 4.     Liquidation.  Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a "Liquidation"), and subject to
the rights of the holders of the Company’s Series A Convertible Preferred Stock and Series C Convertible Preferred Stock then outstanding, the holders of the Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid dividends per share, whether declared or not, and all other amounts in respect thereof (including liquidated damages, if any) then
due and payable prior to any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the holders of Preferred Stock shall be distributed among the holders of Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.  The Company shall mail written notice of
any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record holder of Preferred Stock.

  

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Section 5.     Conversion.

(a)  Conversions at Option of Holder.  Each share of Preferred Stock shall be convertible into shares of Common Stock at the Conversion Ratio (as defined in Section 7) at the option of a Holder, at any time and from time to time, from
and after the issuance of the Preferred Stock.  A Holder shall effect conversions by surrendering to the Company the certificate or certificates representing the shares of Preferred Stock to be converted to the Company, together with a completed form of conversion notice attached hereto as Exhibit A (the "Conversion Notice").  Each Conversion Notice shall specify
the number of shares of Preferred Stock to be converted, the date on which such conversion is to be effected, which date may not be prior to the date the holder delivers such Conversion Notice by facsimile (the "Conversion Date") and the Conversion Price determined as specified in Section 5(c) hereof.  If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that the Conversion Notice is deemed delivered
pursuant to this Section 5(a).  Subject to Section 5(b) hereof, each Conversion Notice, once given, shall be irrevocable.

(b)   Not later than five (5) Trading Days after a Conversion Date, the Company will deliver to the holder (i) a certificate or certificates representing the number of shares of Common Stock being issued upon the conversion of shares of Preferred Stock, (ii) one or more certificates representing the number
of shares of Preferred Stock not converted, (iii) a bank check in the amount of accrued and unpaid dividends (if the Holder has elected to pay accrued and unpaid dividends in cash) and (iv) if the Holder has elected and is permitted hereunder to pay accrued dividends in shares of Common Stock, certificates representing such number of shares of Common Stock as are issuable on account of accrued dividends in such number as determined in accordance with Section 2(a).  The Company shall, upon request of
the Holder, use reasonable efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Company or another established clearing corporation performing similar functions.  If in the case of any Conversion Notice such certificate or certificates, including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder as specifically determined
by the Company, are not delivered to or as directed by the applicable holder by the third Trading Day after the Conversion Date, the holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such conversion, in which event the Company shall immediately return the certificates representing the shares of Preferred Stock tendered for conversion.

  

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(c) The conversion price for each share of Preferred Stock (the “Conversion Price”) on any Conversion Date shall be twenty cents ($0.20), subject to Section 5(d) and Section 6 below.  All calculations under this Section 5 shall be
made to the nearest whole share of common stock.

(d)  If at any time conditions shall arise by reason of action taken by the Company which in the opinion of the Board of Directors are not adequately covered by the other provisions hereof and which might materially and adversely affect the rights of the holders of Preferred Stock (different than or distinguished
from the effect generally on rights of holders of any class of the Company's capital stock) or if at any time any such conditions are expected to arise by reason of any action contemplated by the Company, the Company shall mail a written notice briefly describing the action contemplated and the material adverse effects of such action on the rights of the holders of Preferred Stock at least 30 calendar days prior to the effective date of such action, and an Appraiser selected by the holders of majority in interest
of the Preferred Stock shall give its opinion as to the adjustment, if any (not inconsistent with the standards established in this Section 5), of the Conversion Price (including, if necessary, any adjustment as to the securities into which shares of Preferred Stock may thereafter be convertible) and any distribution which is or would be required to preserve without diluting the rights of the holders of shares of Preferred Stock; provided, however,
that the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in good faith, in which case the adjustment shall be equal to the average of the adjustments recommended by each such Appraiser.  The Board of Directors shall make the adjustment recommended forthwith upon the receipt of such opinion or opinions or the taking of any such action contemplated, as the case may be; provided, however,
that no such adjustment of the Conversion Price shall be made which in the opinion of the Appraiser(s) giving the aforesaid opinion or opinions would result in an increase of the Conversion Price to more than the Conversion Price then in effect.

(e)  The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Preferred Stock and payment of dividends on Preferred Stock, each as herein provided, free from preemptive rights or any other
actual or contingent purchase rights of persons other than the holders of Preferred Stock, not less than 150% of such number of shares of Common Stock as shall be issuable (taking into account the adjustments and restrictions of Section 5(d)) upon the conversion of all outstanding shares of Preferred Stock and payment of dividends hereunder.  The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid and nonassessable.

(f)  Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted and unless waived by the holder of the Preferred Stock, make a cash payment in respect of any final fraction of a share based on the
Per Share Market Value at such time.  If the Company elects not, or is unable, to make such a cash payment, the holder of a share of Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

  

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(g)  The issuance of certificates for shares of Common Stock on conversion of Preferred Stock shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that
the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the holder of such shares of Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.

(h)  Shares of Preferred Stock converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of undesignated preferred stock.

(i)  Any and all notices or other communications or deliveries to be provided by the Holders of the Preferred Stock hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered by facsimile, sent by a nationally recognized overnight courier service, or sent by certified
or registered mail, postage prepaid, addressed to the attention of the President of the Company at the facsimile telephone number or address of the principal place of business of the Company.  Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each holder of Preferred Stock at the
facsimile telephone number or address of such holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder.  Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:00 p.m. (New York time), (ii)
the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:00 p.m. (New York time) on any date and earlier than 11:59 p.m. (New York time) on such date, (iii) four days after deposit in the United States mails, (iv) the Business Day following the date of mailing, if send by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be
given.

Section 6.     Redemption; Adjustments to Conversion Price.

(a)           Redemption.

	
  
	
(i)
	
The Company shall have the obligation, subject to the Holder’s right of conversion under Section 5, to redeem from funds legally available therefor all or any portion of the then-outstanding and unconverted shares of the Preferred Stock at a price equal to the Redemption Price (defined below), at such time as the Company has received proceeds from the sale of EOIR, or if no such proceeds become available, as
such time as the Company has funds legally available for redemption.  Any redemption pursuant to this Section 6(a)(i) shall be effected by the delivery of a notice to each holder of Preferred Stock to be redeemed, which notice shall indicate the number of shares of Preferred Stock of each holder to be redeemed and the date that such redemption is to be effected, which shall be the tenth (10th) day after the date such notice
is deemed delivered (the "Redemption Date").  All redeemed shares of Preferred Stock shall cease to be outstanding and shall have the status of authorized but unissued preferred stock.

  

- 14 -

  

(b)     The Conversion Price shall be subject to adjustment from time to time as follows:

(i).           Sale.   If, for as long as any shares of Preferred Stock remain outstanding, the Company enters into a merger (other than where the Company is the surviving entity) or consolidation with another
corporation or other entity (collectively, a “Sale”), the Company will require, in the agreements reflecting such transaction, that the surviving entity and, if an entity different from the successor or surviving entity, the entity whose capital stock or assets the holders of Common Stock of the Company are entitled to receive as a result of such transaction,  expressly assume the obligations of the Company hereunder.  Notwithstanding the foregoing, if the Company enters into a
Sale and the holders of the Common Stock are entitled to receive stock, securities or property in respect of or in exchange for Common Stock, then as a condition of such Sale, the Company and any such successor, purchaser or transferee will agree that the  Preferred Stock may thereafter be converted on the terms and subject to the conditions set forth above into the kind and amount of stock, securities or property receivable upon such merger, consolidation or transfer by a Holder of the number of shares
of Common Stock into which then outstanding shares of Preferred Stock might have been converted immediately before such merger, consolidation or transfer, subject to adjustments which shall be as nearly equivalent as may be practicable.  In the event of any such proposed Sale, the Holder hereof shall have the right to either (i) convert all of any of the outstanding Preferred Stock by delivering a Notice of Conversion to the Company within 10 days of receipt of notice of such Sale from the Company or
(ii) if the surviving entity in the transaction is not a publicly traded entity listed on a Principal Trading Market, demand a redemption of all or any of the outstanding  Preferred Stock at the  Redemption Price by delivering a notice to such effect  to the Company within ten (10) days of receipt of notice of such Sale from the Company.

(ii).           Spin Off.  If, for as long as any shares of Preferred Stock remain outstanding  the Company consummates a  spin off or otherwise divests itself of a part of its business or
operations or disposes of all or of a part of its assets in a transaction (the “Spin Off”) in which the Company, in addition to or in lieu of any other compensation received by the Company  for such business, operations or assets, causes securities of another entity (the “Spin Off Securities”) to be issued to security holders of the Company, then the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder
had all of the Holder’s shares of Preferred Stock outstanding on the record date (the “Record Date”) for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the “Outstanding Preferred Stock”) been converted as of the close of business on the Trading Day immediately before the Record Date (the “Reserved Spin Off Securities”), and (ii) to be issued to the Holder upon the conversion of all or any of the Outstanding Preferred
Stock, such amount of the Reserved Spin Off Securities equal to (x) the Reserved Spin Off Securities multiplied by (y) a fraction, of which (a) the numerator is the principal amount of the Outstanding Preferred Stock  then being converted, and (b) the denominator is the principal amount of the Outstanding Preferred Stock.

  

- 15 -

  

(iii).           Stock Splits, etc.  If, at any time while any shares of Preferred Stock remain outstanding, the Company effectuates a stock split or reverse stock split of its Common Stock or issues a dividend
on its Common Stock consisting of shares of Common Stock, the Conversion Price and any other amounts calculated as contemplated by this Certificate of Designations shall be equitably adjusted to reflect such action.  By way of illustration, and not in limitation, of the foregoing (i) if the Company effectuates a 2:1 split of its Common Stock, thereafter, with respect to any conversion for which the Company issues shares after the record date of such split, the Conversion Price shall be deemed to be
one-half of what it had been calculated to be immediately prior to such split; (ii) if the Company effectuates a 1:10 reverse split of its Common Stock, thereafter, with respect to any conversion for which the Company issues shares after the record date of such reverse split, the Conversion Price shall be deemed to be ten times what it had been calculated to be immediately prior to such split; and (iii) if the Company declares a stock dividend of one share of Common Stock for every 10 shares outstanding, thereafter,
with respect to any conversion for which the Company issues shares after the record date of such dividend, the Conversion Price shall be deemed to be such amount multiplied by a fraction, of which the numerator is the number of shares (10 in the example) for which a dividend share will be issued and the denominator is such number of shares plus the dividend share(s) issuable or issued thereon (11 in the example).

(iv).           Notice of Adjustments.  Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article 6, the Company, at its expense, shall promptly compute such adjustment
or readjustment and prepare and furnish to each Holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based.  The Company shall, upon the written request at any time of any Holder of Preferred Stock, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price in effect at the time and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be received upon conversion of a share of Designated Preferred Stock.

Section 7.  Definitions.  For the purposes hereof, the following terms shall have the following meanings:

"Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the State of Delaware are authorized or required by law or other government action to close.

  

- 16 -

  

"Closing Bid Price" shall mean the closing bid price (as reported by Bloomberg L.P.) of the Common Stock on the OTC Bulletin Board or such other exchange or trading facility on which the common stock is traded.

"Common Stock" means the common stock, $.001 par value per share, of the Company, and stock of any other class into which such shares may hereafter have been reclassified or changed.

"Conversion Ratio" means, at any time, a fraction, the numerator of which is Stated Value plus accrued but unpaid dividends to the extent to be paid in shares of Common Stock and the denominator of which is the Conversion Price at such time.

“Issuance Date" means the earliest date on which a Holder receives shares of the Preferred Stock, regardless of the number of certificates which may be issued to evidence such Preferred Stock.

"Junior Securities" means the Common Stock and all other equity securities of the Company except for the Company’s Series A Convertible Preferred Stock and Series
C Convertible Preferred Stock.

"Per Share Market Value" means on any particular date (a) the closing bid price per share of the Common Stock on such date on the OTC BB or other principal stock exchange or quotation system on which the Common Stock is then listed or quoted or if there
is no such price on such date, then the closing bid price on such exchange or quotation system on the date nearest preceding such date, or (b) if the Common Stock is not listed then on the OTC BB or any stock exchange or quotation system, the closing bid price for a share of Common Stock in such other over-the-counter market, as reported by the Nasdaq Stock Market or in the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices at the close of
business on such date, or (c) if the Common Stock is not then reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices, then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the holder, or (d) if the Common Stock is not then publicly traded the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the holders of a majority in interest
of the shares of the Preferred Stock; provided, however, that the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser.

"Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any
kind.

  

- 17 -

  

"Redemption Price" shall be equal to the Stated Value of such shares of Preferred Stock plus all accrued dividends thereon.

"Trading Day" means (a) a day on which the Common Stock is traded on the OTC BB or other stock exchange or market on which the Common Stock has been listed, or (b) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock
is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices).

 

 

 

 

 

 

 

 

 

 

 

  

- 18 -

  

EXHIBIT B

NOTICE OF CONVERSION

(To be executed by the registered holder

to convert shares of Preferred Stock)

The undersigned hereby elects to convert the number of shares of Series D 5% Convertible Preferred Stock indicated below, into shares of Common Stock, par value $.001 per share (the "Common Stock"), of Technest Holdings, Inc. (the "Company") according to the conditions hereof, as of the date written below.  If
shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith.  No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.

 

	 	
Conversion calculations:

______________________________________________________

Date to effect conversion

______________________________________________________

Number of shares of Preferred Stock to be converted

______________________________________________________

Number of shares of Common Stock to be issued

______________________________________________________

Applicable conversion price

______________________________________________________

Name of Holder

______________________________________________________

______________________________________________________

Address of Holder

__________________________________

Authorized Signature

 

- 19 -Exhibit 4.1

 

Form of Warrant

 

COMMON STOCK PURCHASE WARRANT

 

To Purchase [              ] Shares of Class A Common
Stock of

 

Date:  July 22, 2009

 

WAVE SYSTEMS CORP.

 

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received, [                                     ] (the “Holder”),
is entitled, upon the terms and subject to the limitations on exercise and the
conditions hereinafter set forth, at any time after January 22, 2010 (the “Initial
Exercise Date”) and on or prior to the fifth anniversary of the Initial
Exercise Date (the “Termination Date”) but not thereafter, to subscribe
for and purchase from Wave Systems Corp., a Delaware corporation (the “Company”),
up to [          ]  shares (the “Warrant Shares”) of Class A
Common Stock, par value $0.01 per share, of the Company (the “Common Stock”).  The purchase price of one share of Common
Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).  This Warrant is being issued pursuant to the
terms of that certain Subscription Agreement, of even date herewith (the “Subscription
Agreement”), among the Company and the Holder.

 

Section 1.       Definitions.  As used herein, the following terms shall
have the following meanings:

 

“Trading Day” means a day on which the
Common Stock is traded on a Trading Market.

 

“Trading Market” means the following
markets or exchanges on which the Common Stock is listed or quoted for trading
on the date in question: the Nasdaq Capital Market, the Nasdaq Global Market,
the American Stock Exchange, the New York Stock Exchange, the Nasdaq National
Market or the OTC Bulletin Board.

 

Section 2.       Exercise.

 

a)             Exercise of Warrant.  Exercise of the purchase rights represented
by this Warrant may be made, in whole or in part, at any time or times on or
after the Initial Exercise Date and on or before the Termination Date by
delivery to the Company of a duly executed facsimile copy of the Notice of
Exercise Form annexed hereto (or such other office or agency of the
Company as it may designate by notice in writing to the registered Holder at
the address of such Holder appearing on the books of the Company).  The Holder shall be required to physically
surrender this Warrant to the Company when the Holder has purchased all of the
Warrant Shares available hereunder and the Warrant has been exercised in
full.  Partial exercises of this Warrant
resulting in purchases of a portion of the total number of Warrant Shares
available hereunder shall have the effect of lowering the outstanding number of
Warrant Shares purchasable hereunder in an amount equal to the applicable
number of Warrant Shares purchased.  The
Holder and the Company shall maintain records showing the number of Warrant
Shares purchased and the date of such purchases.  The Company shall honor any valid Notice of
Exercise Form pursuant to the terms hereof.  The Company
shall deliver an objection to any 

 

1

 

invalid Notice of Exercise Form within 3 Trading Days of its
receipt thereof.  The Holder and any
assignee, by acceptance of this Warrant, acknowledge and agree that, by reason
of the provisions of this paragraph, following the purchase of a portion of the
Warrant Shares hereunder, the number of Warrant Shares available for purchase
hereunder at any given time may be less than the amount stated on the face
hereof.

 

b)            Exercise Price.  The exercise price of the Common Stock under
this Warrant shall be $1.155, subject to adjustment hereunder (the “Exercise
Price”).

 

c)             Cashless Exercise.  If at any time after January 22, 2010 there
is no effective registration statement registering, or no current prospectus
available for, the resale of the Warrant Shares by the Holder, then this
Warrant may also be exercised at such time by means of a “cashless exercise” in
which the Holder shall be entitled to receive a certificate for the number of
Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A),
where:

 

(A) = the VWAP on the Trading Day immediately
preceding the date of such election;

 

(B) = 
the Exercise Price of this Warrant, as adjusted; and

 

(X) = the number of Warrant Shares issuable upon exercise of this
Warrant in accordance with the terms of this Warrant by means of a cash
exercise rather than a cashless exercise.

 

For purposes hereof “VWAP” means, for any date, the price determined by
the first of the following clauses that applies: (a) if the Common Stock
is then listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date) on the
Trading Market on which the Common Stock is then listed or quoted for trading
as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m.
(New York City time) to 4:02 p.m. (New York City time); (b) if the
OTC Bulletin Board is not a Trading Market, the volume weighted average price
of the Common Stock for such date (or the nearest preceding date) on the OTC
Bulletin Board; (c) if the Common Stock is not then quoted for trading on
the OTC Bulletin Board and if prices for the Common Stock are then reported in
the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or
agency succeeding to its functions of reporting prices), the most recent bid
price per share of the Common Stock so reported; or (d) in all other
cases, the fair market value of a share of Common Stock as determined in a
reasonable manner and in good faith by the Company.

 

For purposes of Rule 144(d) promulgated under 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
Subscription Agreement.

 

2

 

d)            Mechanics of Exercise.

 

i.              Authorization of Warrant
Shares.  The Company covenants that all
Warrant Shares which may be issued upon the exercise of the purchase rights
represented by this Warrant will, upon exercise of the purchase rights
represented by this Warrant, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).

 

ii.             Delivery of Certificates
Upon Exercise. 
Certificates for shares purchased hereunder shall be transmitted by the
transfer agent of the Company to the Holder by crediting the account of the
Holder’s prime broker with the Depository Trust Company through its Deposit
Withdrawal Agent Commission (“DWAC”) system if the Company is a
participant in such system, and otherwise by physical delivery to the address
specified by the Holder in the Notice of Exercise within 3 Trading Days from
the delivery to the Company of the Notice of Exercise Form, surrender of this
Warrant (if required) and payment of the aggregate Exercise Price as set forth
above (“Warrant Share Delivery Date”). 
This Warrant shall be deemed to have been exercised on the date the
Exercise Price is received by the Company. 
The Warrant Shares shall be deemed to have been issued, and Holder or
any other person so designated to be named therein shall be deemed to have
become a holder of record of such shares for all purposes, as of the date the
Warrant has been exercised by payment to the Company of the Exercise Price and
all taxes required to be paid by the Holder, if any, have been paid.  The Company and the Holder may also agree to
make arrangements for the delivery of the Warrant Shares, and the payment of
the aggregate Exercise Price, by means of “DVP”, as described in the
Subscription Agreement.

 

iii.            Delivery of New Warrants
Upon Exercise.  If this
Warrant shall have been exercised in part, the Company shall, at the request of
a Holder and upon surrender of this Warrant certificate, at the time of
delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant.

 

iv.            Rescission Rights.  If the Company fails to cause its transfer
agent to transmit to the Holder a certificate or certificates representing the
Warrant Shares pursuant to this Section 2(d) by the Warrant Share
Delivery Date, then the Holder will have the right to rescind such exercise.

 

v.             No Fractional Shares or
Scrip.  No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.  As to any fraction of a share
which Holder would otherwise be entitled to purchase upon such exercise, the
Company shall pay a cash adjustment in respect of such final fraction in an
amount equal to such fraction multiplied by the Exercise Price.

 

3

 

vi.            Charges, Taxes and Expenses.  Issuance of certificates for Warrant Shares
shall be made without charge to the Holder for any issue or transfer tax or
other incidental expense in respect of the issuance of such certificate, all of
which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; provided, however, that in the event
certificates for Warrant Shares are to be issued in a name other than the name
of the Holder, this Warrant when surrendered for exercise shall be accompanied
by the Assignment Form attached hereto duly executed by the Holder; and
the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.

 

vii.           Closing of Books.  The Company will not close its stockholder
books or records in any manner which prevents the timely exercise of this
Warrant, pursuant to the terms hereof.

 

viii.          Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Exercise.  In addition to any other rights available to
the Holder, if the Company fails to cause its transfer agent to transmit to the
Holder a certificate or certificates representing the Warrant Shares pursuant
to an exercise on or before the Warrant Share Delivery Date, and if after such
date the Holder is required by its broker to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the Holder of the Warrant Shares which the Holder anticipated
receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay
in cash to the Holder the amount by which (x) the Holder’s total purchase
price (including brokerage commissions, if any) for the shares of Common Stock
so purchased exceeds (y) the amount obtained by multiplying (A) the
number of Warrant Shares that the Company was required to deliver to the Holder
in connection with the exercise at issue times (B) the price at which the
sell order giving rise to such purchase obligation was executed, and (2) at
the option of the Holder, either reinstate the portion of the Warrant and
equivalent number of Warrant Shares for which such exercise was not honored or
deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its exercise and delivery obligations
hereunder.  For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted exercise of shares of Common Stock with an
aggregate sale price giving rise to such purchase obligation of $10,000, under
clause (1) of the immediately preceding sentence the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the Buy-In,
together with applicable confirmations and other evidence reasonably requested
by the Company.  Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company’s failure to
timely deliver certificates representing shares of Common Stock upon exercise
of the Warrant as required pursuant to the terms hereof.

 

4

 

e)             Exercise Limitations.

 

i.              Holder’s Restrictions.  The Company shall not effect any exercise of
this Warrant, and a Holder shall not have the right to exercise any portion of
this Warrant, pursuant to Section 2 or otherwise, to the extent that after
giving effect to such issuance after exercise, such Holder (together with such
Holder’s affiliates, and any other person or entity acting as a group together
with such Holder or any of such Holder’s affiliates), as set forth on the
applicable Notice of Exercise, would beneficially own in excess of the
Beneficial Ownership Limitation (as defined below).  For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
such Holder and its affiliates shall include the number of shares of Common
Stock issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (A) exercise of the
remaining, nonexercised portion of this Warrant beneficially owned by such
Holder or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
(including, without limitation, any other Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by such Holder or any of its affiliates.  Except as set
forth in the preceding sentence, for purposes of this Section 2(e),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated thereunder, it
being acknowledged by a Holder that the Company is not representing to such
Holder that such calculation is in compliance with Section 13(d) of
the Exchange Act and such Holder is solely responsible for any schedules
required to be filed in accordance therewith. 
To the extent that the limitation contained in this Section 2(e) 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 a Holder, and the submission of
a Notice of Exercise shall be deemed to be each Holder’s determination of
whether this Warrant is exercisable (in relation to other securities owned by
such Holder) and of which portion of this Warrant is exercisable, in each case
subject to such aggregate percentage limitation, and the Company shall have no obligation
to verify or confirm the accuracy of such determination.  In addition, a determination as to any group
status as contemplated above shall be determined in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated
thereunder.  For purposes of this Section 2(e),
in determining the number of outstanding shares of Common Stock, a Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x) the
Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a
more recent public announcement by the Company or (z) any other notice by
the Company or the Company’s Transfer Agent setting forth the number of shares
of Common Stock outstanding.   Upon
the written or oral request of a Holder, the Company shall within two Trading
Days confirm orally and in writing to such Holder the number of shares of
Common Stock then outstanding.   In
any case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the 

 

5

 

conversion or exercise of securities of the Company, including this
Warrant, by such Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.  The “Beneficial Ownership Limitation” shall
be 4.99% of the number of shares of the Common Stock outstanding immediately
after giving effect to the issuance of shares of Common Stock issuable upon
exercise of this Warrant.  The Beneficial
Ownership Limitation provisions of this Section 2(e) may be waived by
such Holder, at the election of such Holder, upon not less than 61 days’ prior
notice to the Company to change the Beneficial Ownership Limitation to 9.99% of
the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock upon exercise of this Warrant,
and the provisions of this Section 2(e) shall continue to apply.  Upon such a change by a Holder of the
Beneficial Ownership Limitation from such 4.99% limitation to such 9.99%
limitation, the Beneficial Ownership Limitation may not be waived by such
Holder.  The provisions of this paragraph
shall be implemented in a manner otherwise than in strict conformity with the
terms of this Section 2(e) to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the intended Beneficial
Ownership Limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such limitation. The limitations
contained in this paragraph shall apply to a successor holder of this Warrant.

 

ii.             Exercise Without
Registration Statement.  If,
at the time of any exercise of this Warrant, the Warrant Shares shall not be
registered under the Securities Act of 1933, as amended (the “Securities Act”),
the Company may require, as a condition of such exercise, that the Holder
furnish to the Company an opinion of counsel reasonably satisfactory to the
Company to the effect that such exercise may be made without registration under
the Securities Act or registration or qualification under any state or other
applicable securities laws.

 

Section 3.       Certain  Adjustments.

 

a)             Stock Dividends and Splits. If the
Company, at any time while this Warrant is outstanding: (A) pays a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Warrant), (B) subdivides
outstanding shares of Common Stock into a larger number of shares, (C) combines
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (D) issues by reclassification of
shares of the Common Stock any shares of capital stock of the Company, then in
each case the Exercise Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event and the number of shares issuable upon exercise of
this Warrant shall be proportionately adjusted. 
Any adjustment made pursuant to this Section 3(a) shall become
effective immediately after 

 

6

 

the record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or re-classification.

 

b)            Fundamental Transactions.  If, at any time after the Initial Exercise
Date, there shall occur any capital reorganization or reclassification of the
Common Stock (other than a change in par value or a subdivision or combination
as provided for in Section 3(a) above), or any consolidation or
merger of the Company with or into another corporation, or a transfer of all or
substantially all of the assets of the Company, or the payment of a liquidating
distribution, then, as part of any such reorganization, reclassification,
consolidation, merger, sale, or liquidating distribution, lawful provision
shall be made so that Holder shall have the right thereafter to receive upon
the exercise hereof (to the extent still exercisable) the kind and amount of
shares of stock or other securities or property to which Holder would have been
entitled to receive if, immediately prior to any such reorganization,
reclassification, consolidation, merger, sale, or liquidating distribution, as
the case may be, Holder had held the number of shares of Common Stock which
were then purchasable upon the exercise of this Warrant.  In any such case, appropriate adjustment (as
reasonably determined by the Board of Directors of the Company) shall be made
in the application of the provisions set forth herein with respect to the
rights and interests thereafter of Holder such that the provisions set forth in
this paragraph (b) shall thereafter be applicable, as nearly as is
reasonably practicable, in relation to any shares of stock or other securities
or property thereafter deliverable upon the exercise of this Warrant.

 

c)             Calculations. All calculations under
this Section 3 shall be made to the nearest cent or the nearest 1/100th of
a share, as the case may be. For purposes of this Section 3, the number of
shares of Common Stock deemed to be issued and outstanding as of a given date
shall be the sum of the number of shares of Common Stock (excluding treasury
shares, if any) issued and outstanding.

 

d)            Notice to Holders.  Whenever the Exercise Price is adjusted
pursuant to this Section 3, the Company shall promptly mail to each Holder
a notice setting forth the Exercise Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.

 

Section 4.       Transfer of Warrant.

 

a)             Transferability.  Subject to Section 5(a) below, this
Warrant and all rights hereunder are transferable, in whole or in part, upon
surrender of this Warrant at the principal office of the Company, together with
a written assignment of this Warrant substantially in the form attached hereto
duly executed by the Holder or its agent or attorney and funds sufficient to
pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denomination or denominations
specified in such instrument of assignment, and shall issue to the assignor a
new Warrant evidencing the portion of this Warrant not so assigned, and this
Warrant shall promptly be cancelled.  A
Warrant, if properly assigned, 

 

7

 

may be exercised by a new holder for the purchase of Warrant Shares
without having a new Warrant issued.

 

b)            New Warrants. This Warrant may be
divided or combined with other Warrants upon presentation hereof at the
aforesaid office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued, signed by the
Holder or its agent or attorney.  Subject
to compliance with Section 4(a), as to any transfer which may be involved
in such division or combination, the Company shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice.

 

Section 5.       Miscellaneous.

 

a)             Title to Warrant.  Prior to the Termination Date and subject to
compliance with applicable laws and Section 4 of this Warrant, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
office or agency of the Company by the Holder in person or by duly authorized
attorney, upon surrender of this Warrant together with the Assignment Form annexed
hereto properly endorsed.

 

b)            No Rights as Shareholder Until Exercise.  This Warrant does not entitle the Holder to
any voting rights or other rights as a shareholder of the Company prior to the
exercise hereof.  Upon the surrender of
this Warrant and the payment of the aggregate Exercise Price (or by means of a
cashless exercise), the Warrant Shares so purchased shall be and be deemed to
be issued to such Holder as the record owner of such shares as of the close of
business on the later of the date of such surrender or payment.

 

c)             Loss, Theft, Destruction or Mutilation of
Warrant. The Company covenants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant or any stock certificate relating to the Warrant Shares, and in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it (which, in the case of the Warrant, shall not include the
posting of any bond), and upon surrender and cancellation of such Warrant or
stock certificate, if mutilated, the Company will make and deliver a new
Warrant or stock certificate of like tenor and dated as of such cancellation,
in lieu of such Warrant or stock certificate.

 

d)            Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking
of any action or the expiration of any right required or granted herein shall
be a Saturday, Sunday or a legal holiday, then such action may be taken or such
right may be exercised on the next succeeding day not a Saturday, Sunday or
legal holiday.

 

e)             Authorized Shares.  The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the
Warrant Shares upon the exercise of any purchase rights under this
Warrant.  The Company further covenants
that its issuance of this Warrant shall constitute full authority to its
officers who are charged with the duty of executing stock certificates to
execute and issue the necessary 

 

8

 

certificates for the Warrant Shares upon the exercise of the purchase
rights under this Warrant.

 

f)             Governing Law; Jurisdiction.  This Warrant will be governed by, and
construed in accordance with, the internal laws of the State of New York,
without giving effect to the principles of conflicts of law that would require
the application of the laws of any other jurisdiction.  Any legal action, suit or proceeding arising
out of or relating to this Warrant or the transactions contemplated hereby
shall only be instituted, heard and adjudicated (excluding appeals) only in a
state or federal court located in New York, and each party hereto knowingly,
voluntarily and intentionally waives any objection which such party may now or
hereafter have to the laying of the venue of any such action, suit or
proceeding, and irrevocably submits to the exclusive personal jurisdiction of
any such court in any such action, suit or proceeding.  Service of process in connection with any
such action, suit or proceeding may be served on each party hereto anywhere in
the world by the same methods as are specified for the giving of notices under
this Agreement.

 

g)            Restrictions.  The Holder acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.

 

h)            Notices.  Any notice, request or other document
required or permitted to be given or delivered to the Holder by the Company
shall be delivered in accordance with the notice provisions of the Subscription
Agreement.

 

i)              Limitation of Liability.  No provision hereof, in the absence of any
affirmative action by Holder to exercise this Warrant or purchase Warrant
Shares, and no enumeration herein of the rights or privileges of Holder, shall
give rise to any liability of Holder for the purchase price of any Common Stock
or as a stockholder of the Company, whether such liability is asserted by the
Company or by creditors of the Company.

 

j)              Remedies.  Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of the provisions of this Warrant and hereby agrees to waive the defense
in any action for specific performance that a remedy at law would be adequate.

 

k)             Successors and Assigns.  Subject to applicable securities laws, this
Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of Holder.  The
provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant and shall be enforceable by any such Holder
or holder of Warrant Shares.

 

l)              Amendment.  This Warrant may be modified or amended or
the provisions hereof waived with the written consent of the Company and the
Holder.

 

9

 

m)            Severability.  Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.

 

n)            Headings.  The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.

 

********************

 

10

 

IN WITNESS WHEREOF, the Company has caused
this Warrant to be executed by its officer thereunto duly authorized.

 

 

Dated:  July 22, 2009

 

 

	
   

  	
  WAVE
  SYSTEMS CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

11

 

NOTICE OF EXERCISE

 

TO:         WAVE SYSTEMS
CORP.

 

(1)   The undersigned hereby elects to purchase                 
Warrant Shares of the Company pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

 

(2)   Payment shall take the form of (check applicable box):

 

o in lawful money of the United States; or

 

o the cancellation of such number of
Warrant Shares as is necessary, in accordance with the formula set forth in
subsection 2(c), to exercise this Warrant with respect to the maximum number of
Warrant Shares purchasable pursuant to the cashless exercise procedure set
forth in subsection 2(c).

 

(3)   Please issue a certificate or certificates
representing said Warrant Shares in the name of the undersigned or in such
other name as is specified below:

 

 

 

The
Warrant Shares shall be delivered to the following:

 

 

 

 

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, 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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