Document:

edgewave_ex1001.htm

EXHIBIT 10.1

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”) is dated as of December 5, 2011, among EdgeWave, Inc., a Delaware corporation (the “Company”), and the investors identified on the signature pages hereto (each, an “Investor” and collectively, the “Investors”).

 

WHEREAS, the Company wishes to sell to each Investor, and each Investor wishes to purchase, severally and not jointly with the other Investors, on the terms and subject to the conditions set forth in this Agreement, a Convertible Note in the form attached hereto as Exhibit A (collectively, the “Notes”).

NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Investor hereby agree as follows:

 

ARTICLE I.

DEFINITIONS

 

1.1  Definitions.  In addition to the terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms shall have the meanings indicated in this Section 1.1:

 

“Action” means any action, suit, inquiry, notice of violation, proceeding (including any partial proceeding such as a deposition) or investigation pending or threatened in writing against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency, regulatory authority (federal, state, county, local or foreign), stock market, stock exchange or trading facility.

 

“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144.

 

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

 

“Closing” has the meaning set forth in Section 2.3.

 

“Closing Date” has the meaning set forth in Section 2.3.

 

“Collateral” has the meaning set forth in Section 4.7.

 

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the common stock of the Company, $0.01 par value per share, and any securities into which such common stock may hereafter be reclassified.

 

  

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 “Contract” means any contract, plan, undertaking, understanding, agreement, license, lease, note, mortgage or other binding commitment, whether written or oral.

 

“Conversion Shares” means the shares of Common Stock into which the Notes are convertible.

 

“Court” means any court or arbitration tribunal of the United States, any domestic state, or any foreign country, and any political subdivision thereof.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“GAAP” means United States generally accepted accounting principles and practices in effect from time to time consistently applied.

 

“Governmental Authority” means any governmental or legislative agency or authority (other than a Court) of the United States, any domestic state, or any foreign country, and any political subdivision or agency thereof, and includes any authority having governmental or quasi-governmental powers, including any administrative agency or commission.

 

“Knowledge” means (a) in the case an individual, knowledge of a particular fact or other matter if (i) such individual is actually aware of such fact or other matter, or (ii) a prudent individual could be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonable investigation concerning the existence of such fact or other matter, and (b) in the case of a Person (other than an individual) such Person will be deemed to have knowledge of a particular fact or other matter if (i) any individual who is serving, as a director, officer, partner, executor, or trustee of such Person (or in any similar capacity) has or at any time had, knowledge of such fact or other matter, or (ii) such Person could reasonably be expected to discover or otherwise become aware of such fact or other matter.

 

“Law” means all laws, statutes, ordinances and Regulations of any Governmental Authority including all decisions of Courts having the effect of law in each such jurisdiction.

 

“Lien” means any lien, charge, encumbrance, security interest, right of first refusal or other restrictions of any kind.

 

“Litigation” means any suit, action, arbitration, cause of action, claim, complaint, criminal prosecution, investigation, inquiry, demand letter, governmental or other administrative proceeding, whether at law or at equity, before or by any Court, Governmental Authority, arbitrator or other tribunal.

 

“Material Adverse Effect” means any circumstance, change in, or effect on, the business, assets, properties or operations of the Company that, individually or in the aggregate with any other circumstances, changes in, or effects on, the Company and/or its business, assets, properties or operations (a) is, or could be, materially adverse to the business, operations, assets or liabilities (including, without limitation, contingent liabilities), employee relationships, customer or supplier relationships, prospects, results of operations or the condition (financial or otherwise) of the Company, or (b) could reasonably be expected to materially adversely affect the ability of the Company to operate or conduct the Company’s business in the manner in which it is currently operated or conducted, or contemplated to be conducted; except to the extent that any such Material Adverse Effect primarily results from (A) adverse changes or developments in the general economic or regulatory condition (provided that such changes do not affect the Company disproportionately as compared to the Company’s competitors); (B) changes or developments affecting the industry generally in which the Company operates (provided that such changes do not affect the Company disproportionately as compared to the Company’s competitors); or (C) any action or omission of the Company taken at the prior written consent of the Investors.

 

  

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“Order” means any judgment, order, writ, injunction, ruling, stipulation, determination, award or decree of or by, or any settlement under the jurisdiction of, any Court or Governmental Authority.

 

“Permits” means any licenses, permits, pending applications, consents, certificates, registrations, approvals and authorizations.

 

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

 

“Purchase Price” means, with respect to a Note purchased at Closing, the original amount of such Note.

 

“Regulation” shall mean any rule or regulation of any Governmental Authority.

 

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

 

 “SEC Reports” shall mean all reports required to be filed by the Company under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two (2) years preceding the date hereof (or such shorter period as the Company was required by law to file such material).

 

“Securities” means the Notes and the Conversion Shares,.

 

“Securities Act” means the Securities Act of 1933, as amended.

 

 “Subsidiary” means any “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X promulgated by the Commission under the Exchange Act.

 

“Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market, or (ii) if the Common Stock is not listed on a Trading Market, a day on which the Common Stock if traded in the over-the-counter market is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i) or (ii) hereof, then Trading Day shall mean a Business Day.

 

  

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“Trading Market” means whichever of the New York Stock Exchange, the NYSE Amex, The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ Capital Market or OTC Bulletin Board on which the Common Stock is listed or quoted for trading on the date in question.

 

“Transaction Documents” means this Agreement, the Notes, and any other documents or agreements executed in connection with the transactions contemplated hereunder.

 

ARTICLE II.

PURCHASE AND SALE

 

2.1 Purchase and Sale.  Upon the terms and subject to the satisfaction or waiver of the conditions set forth herein, the Company agrees to sell and each Investor agrees to purchase a Note with a principal amount equal to the amount set forth next to such Investor’s name on Annex I hereto.

 

2.2 First Closing.  The first closing of the transactions contemplated herein (the “First Closing”) will be held at the offices of the Company, 15333 Avenue of Science, San Diego, CA 92128 on December 5, 2011, or at such other time and place as the Company and the Investors shall determine (the "First Closing Date").  At the First Closing, (A) this Agreement and the other Transaction Documents shall have been executed and delivered by the Company and each Investor participating in such First Closing, (B) each of the conditions precedent described in Sections 5.1 and 5.2 of this Agreement shall have been satisfied or waived as specified herein and (C) full payment of each such Investor’s Purchase Price shall have been made by wire transfer of immediately available funds and/or book entry of the application of the payoff of prior promissory notes of the Company against physical delivery by the Company of duly executed certificates representing the Note being purchased by such Investor.

 

2.3 Second Closing.  At any time within 60 days after the First Closing Date, the Company may issue and sell additional Notes at a second closing (the “Second Closing”) to Investors who are accredited investors, as such term is defined in the Securities Act.  The Second Closing shall occur at such time and place as the Company and the Investors participating in such Second Closing shall determine (the "Second Closing Date").  Any such Second Closing shall be made on the terms and conditions set forth in this Agreement.  At the Second Closing, (A) this Agreement and the other Transaction Documents shall have been executed and delivered by the Company and each Investor participating in such Second Closing, (B) each of the conditions precedent described in Sections 5.1 and 5.2 of this Agreement shall have been satisfied or waived as specified herein and (C) full payment of each such Investor participating in such Second Closing Purchase Price shall have been made by wire transfer of immediately available funds against physical delivery by the Company of duly executed certificates representing the Note being purchased by such Investor participating in such Second Closing.  Upon the consummation of the Second Closing Annex I shall be amended by the Company to reflect the sale of the Notes in the Second Closing.

 

  

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2.4 Third Closing.  At any time following the Second Closing and on or prior to ninety (90) days after the First Closing, the Company may issue and sell additional Notes at a third closing (the “Third Closing” and each of the First Closing, the Second Closing and the Third Closing, a “Closing”) to Investors who are accredited investors, as such term is defined in the Securities Act. The Third Closing shall occur on or before ninety (90) days after the First Closing, or at such time and place as the Company and  the Investors participating in such Third Closing shall determine (the "Third Closing Date" and each of the First Closing Date, the Second Closing Date, and the Third Closing Date, a “Closing Date”).  Any such Third Closing shall be made on the terms and conditions set forth in this Agreement.  At the Third Closing, (A) this Agreement and the other Transaction Documents shall have been executed and delivered by the Company and each Investor participating in such Third Closing, (B) each of the conditions precedent described in Sections 5.1 and 5.2 of this Agreement shall have been satisfied or waived as specified therein and (C) full payment of each such Investor participating in such Third Closing Purchase Price shall have been made by wire transfer of immediately available funds against physical delivery by the Company of duly executed certificates representing the Note being purchased by such Investor participating in such Third Closing.  Upon the consummation of the Third Closing, Annex I shall be amended by the Company to reflect the sale of the Notes in the Third Closing.

 

2.5 Aggregate Purchase Price.  The Company may sell Notes as part of the First Closing, Second Closing and Third Closing up to an aggregate purchase price for all Closings not to exceed $7,000,000.

 

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

 

3.1 Representations and Warranties of the Company.  The Company hereby makes the following representations and warranties to each Investor as of the date hereof and the applicable Closing Date:

 

(a) Organization and Qualification.  The Company is (i) a corporation duly organized validly existing and in good standing under the laws of Delaware; (ii) duly licensed or qualified to transact business as a foreign corporation and is in good standing in each of the jurisdictions in which the failure to be so licensed or qualified could have a Material Adverse Effect on the Company.

 

(b) Authorization; Enforceability.  The Company has the corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents.  The execution, delivery and performance of this Agreement and the other Transaction Documents and the consummation of the transactions contemplated herein and therein have been duly authorized and approved by the Company, and no other action on the part of the Company is necessary in order to give effect thereto. This Agreement and each of the other Transaction Documents to be executed and delivered by the Company have been duly executed and delivered by, and constitute the legal, valid and binding obligations of, the Company, enforceable against the Company, in accordance with their terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought.

 

  

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(c) No Violation or Conflict.  None of (a) the execution and delivery by the Company of this Agreement and the other Transaction Documents to be executed and delivered by the Company, (b) consummation by the Company of the transactions contemplated by this Agreement and the other Transaction Documents, or (c) the performance of this Agreement and the other Transaction Documents required by this Agreement to be executed and delivered by the Company at the Closing, will (i) conflict with or violate the Certificate of Incorporation or By-Laws of the Company, (ii) conflict with or violate any Law, Order or Permit applicable to the Company  or (iii) result in any breach or violation of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or impair the Company’s rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any Lien on any of the properties or assets of the Company pursuant to, any Contract or other instrument or obligation to which the Company is a party or by which the Company or its properties are bound or affected except, in the case of clause (b) or (c) above, for any such conflict, breach, violation, default or other occurrence that would not individually or in the aggregate, have a Material Adverse Effect.

 

(d) Governmental Consents and Approvals.  The execution, delivery and performance of this Agreement and the other Transaction Documents by the Company do not and will not require any consent, approval, authorization, Permit or other order of, action by, filing with or notification to, any Governmental Authority.

 

(e) Brokers.  The Company has not employed any financial advisor, broker or finder in connection with the transactions contemplated by this Agreement.

 

(f) Capitalization.  As of November 29, 2011, the authorized capital stock of the Company consists of 50,000,000 shares of common stock, $0.01 par value per share, of which 16,942,173 shares are issued and outstanding and 5,000,000 shares of preferred stock, $0.01 par value per share, of which no shares are issued and outstanding.  The issuance of the Notes is duly authorized and free from all taxes, liens and charges with respect to the issue thereof.  Upon conversion in accordance with the terms of the Notes the Conversion Shares when issued will be validly issued, fully paid and nonassessable, free from all taxes, liens and charges with respect to the issue thereof.  The designations, powers, preferences, rights (including the liquidation rights), qualifications, limitations and restrictions in respect of the capital stock of the Company are as set forth in the Company’s Certificate of Incorporation, as amended, a copy of which has been provided to the Company.  As of November 29, 2011, the Company has authorized 6,239,213 shares of common stock for issuance to employees, consultants and directors pursuant to its 2005 Stock Option Plan, the 2010 Employee, Director and Consultant Equity Incentive Plan and the and the 2006 Recruitment Equity Incentive Plan, of which options to purchase 3,393,579 shares are issued and outstanding as of such date and 382,250 shares of restricted stock are issued and outstanding.  As of November 29, 2011, the Company has issued warrants to purchase 1,388,961 shares of common stock that are issued and outstanding.  Except as set forth in the SEC Reports, there are no outstanding subscriptions, options, warrants, rights, calls or convertible securities, stock appreciation rights (phantom or otherwise), joint venture, partnership or other commitments of any nature relating to shares of the capital stock of the Company and the Company has no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity securities or any interest therein or to pay any dividend or make any other distribution in respect thereof.  Except as set forth in the SEC Reports, there are no shareholder agreements, voting trusts, proxies or other agreements, instruments or understandings with respect to the voting of the capital stock of the Company.

 

  

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(g) Absence of Changes.  Since the date of the Company's latest audited financial statements included in the SEC Reports and except as disclosed in the SEC Reports, (i) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (ii) the Company has not altered its method of accounting or the identity of its auditors, (iii) the Company has not declared or made any dividend or distribution of cash or other property to its shareholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (iv) the Company has not issued any equity securities to any officer or director, except pursuant to existing Company stock option and employee plans.

 

(h) SEC Reports.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports, as subsequently amended, comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in all material respects in accordance with GAAP, except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain footnotes required by GAAP, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, year-end audit adjustments.

 

(i) Litigation.  Except as set forth in the SEC Reports, there is no Litigation or investigation pending or, to the Knowledge of the Company, threatened in writing against, or otherwise adversely affecting, the business of the Company before any Court or Governmental Authority in excess of $50,000.  The Company is not subject to any outstanding Litigation or Order, which, individually or in the aggregate, would prevent, hinder or delay the Company from consummating the transactions contemplated by this Agreement.

 

  

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(j) Disclaimer of Other Representations and Warranties.  The Company does not make, has not made and shall not be deemed to have made, any representations or warranties relating to its business, operations, properties, assets or otherwise in connection with the transactions contemplated hereby, other than those expressly set forth in this Section 3.1.  Without limiting the generality of the foregoing, the Company has not made and shall not be deemed to have made, any representations or warranties as to the information contained in any presentation relating to the Company in connection with the transactions contemplated hereby, and no statement made in any such presentation shall be deemed a representation or warranty hereunder or otherwise.  It is understood that any cost estimates, projections or other predictions, any data, any financial information or any memoranda or presentations are not and shall not be deemed to be or to include representations or warranties of Company.

 

(k) Disclosure.  No representation or warranty of the Company contained in this Agreement and the other Transaction Documents contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading or omits or will omit to state a material fact necessary in order to provide the Investors with full and proper information as to the business, financial condition, assets, results of operation or prospects of the Company and the value of its properties and assets.

 

3.2 Representations and Warranties of the Investors.  Each Investor hereby, for itself and for no other Investor, represents and warrants to the Company as follows:

 

(a) Organization.  Such Investor is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the applicable Transaction Documents and otherwise to carry out its obligations thereunder.

 

(b) No Registration.  Such Investor understands that the Securities have not been, and will not be, registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Investor’s representations as expressed herein or otherwise made pursuant hereto.

 

(c) Investment Intent.  Such Investor is acquiring the Securities for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution thereof, and such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same.  Such Investor further represents that it does not have any contract, undertaking, agreement or arrangement with any person or entity to sell, transfer or grant participation to such person or entity or to any third person or entity with respect to any of the Securities.

 

  

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(d) Investment Experience.  Such Investor has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company and acknowledges that the Investor can protect its own interests.  Such Investor has such knowledge and experience in financial and business matters so that the Investor is capable of evaluating the merits and risks of its investment in the Company.

 

(e) Speculative Nature of Investment.  Such Investor understands and acknowledges that an investment in the Company is highly speculative and involves substantial risks. Such Investor can bear the economic risk of the Investor’s investment and is able, without impairing the Investor’s financial condition, to hold the Securities for an indefinite period of time and to suffer a complete loss of the Investor’s investment.

 

(f) Access to Data.  Such Investor has had an opportunity to ask questions of, and receive answers from, the officers of the Company concerning the Securities, the Agreement, the exhibits and schedules attached hereto and the transactions contemplated by the Agreement, as well as the Company’s business, management and financial affairs, which questions were answered to its satisfaction. Such Investor believes that it has received all the information the Investor considers necessary or appropriate for deciding whether to purchase the Securities.  Such Investor acknowledges that any business plans prepared by the Company have been, and continue to be, subject to change and that any projections included in such business plans or otherwise are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results.  Such Investor also acknowledges that it is relying solely on its own counsel and not on any statements or representations of the Company or its agents for legal advice with respect to this investment or the transactions contemplated by the Agreement.

 

(g) Accredited Investor.  Such Investor is an “accredited investor” within the meaning of Regulation D, Rule 501(a), promulgated by the Commission under the Securities Act and shall submit to the Company such further assurances of such status as may be reasonably requested by the Company, including without limitation, the residency or principal place of business of the Investor.

 

(h) Rule 144.  Such Investor acknowledges that the Securities must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available.  Such Investor is aware of the provisions of Rule 144 promulgated under the Securities Act which permit resale of shares purchased in a private placement subject to the satisfaction of certain conditions, which may include, among other things, the availability of certain current public information about the Company; the resale occurring not less than a specified period after a party has purchased and paid for the security to be sold; the number of shares being sold during any three-month period not exceeding specified limitations; the sale being effected through a “brokers’ transaction,” a transaction directly with a “market maker” or a “riskless principal transaction” (as those terms are defined in the Securities Act or the Exchange Act and the rules and regulations promulgated thereunder); and the filing of a Form 144 notice, if applicable.  Such Investor acknowledges that, in the event the applicable requirements of Rule 144 are not met, registration under the Securities Act or an exemption from registration will be required for any disposition of the Securities. Such Investor understands that, although Rule 144 is not exclusive, the Commission has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk.

 

  

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(i) Authorization.  Such Investor has all requisite power and authority to execute and deliver the Agreement, to receive the Securities hereunder as contemplated herein and to carry out and perform its obligations under the terms of the Agreement.  All action on the part of the Investor necessary for the authorization, execution, delivery and performance of the Agreement, and the performance of all of the Investor’s obligations under the Agreement, has been taken or will be taken prior to the applicable Closing Date.  The Agreement, when executed and delivered by the Investor, will constitute valid and legally binding obligations of the Investor, enforceable in accordance with their terms except: (i) to the extent that the indemnification provisions contained in the Agreement may be limited by applicable law and principles of public policy, (ii) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and (iii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies or by general principles of equity.  No consent, approval, authorization, order, filing, registration or qualification of or with any court, governmental authority or third person is required to be obtained by the Investor in connection with the execution and delivery of the Agreement by the Investor or the performance of the Investor’s obligations hereunder.

 

(j) Brokers or Finders.  Such Investor has not engaged any brokers, finders or agents, and neither the Company nor any other Investor has, nor will, incur, directly or indirectly, as a result of any action taken by the Investor, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with the Agreement.

 

(k) Tax Advisors.  Such Investor has reviewed with its own tax advisors the U.S. federal, state, local and foreign tax consequences of this investment and the transactions contemplated by the Agreements. With respect to such matters, such Investor relies solely on such advisors and not on any statements or representations of the Company or any of its agents, written or oral. Such Investor understands that it (and not the Company) shall be responsible for its own tax liability that may arise as a result of this investment or the transactions contemplated by the Agreements.

 

  

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ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

 

4.1 (a)  Except with respect to any sale or transfer of the Notes to any Affiliate of an Investor, any such Investor desiring to sell or transfer such Investor’s Notes shall obtain the prior written consent of the Company.  The Securities may only be disposed of in compliance with state and federal securities laws.  In connection with any transfer of the Securities other than pursuant to an effective registration statement, to the Company, or to an Affiliate of an Investor, the Company may also require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act.

 

(b)  Certificates evidencing the Notes will contain a legend in substantially the following form:

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE PLEDGED AS COLLATERAL FOR ANY SHORT SALE OF THE SHARES OF THE COMPANY.

 

Certificates evidencing the Conversion Shares will contain a legend in substantially the following form, until such time as they are not required under Section 4.1(c):

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

  

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(c)  Certificates evidencing the Conversion Shares shall not contain any legend (including the legend set forth in Section 4.1(b)): (i) following a sale of such Conversion Shares pursuant to an effective registration statement so long as the purchaser of the Conversion Shares is not an Affiliate of the Company, or (ii) following a sale of such Conversion Shares pursuant to Rule 144 (or any successor provision), subject to receipt by the Company of customary documentation reasonably acceptable to the Company in connection therewith or (iii) while such Conversion Shares are eligible for resale under Rule 144 (or any successor provision) without regard to the number of shares that may be sold.  Following such time as restrictive legends are not required to be placed on certificates representing Conversion Shares, the Company will, not later than five Trading Days following the delivery by an Investor to the Company or the Company’s transfer agent of a request for legend removal and a certificate representing such Conversion Shares containing a restrictive legend, deliver or cause to be delivered to such Investor a certificate representing such Conversion Shares that is free from all restrictive and other legends, subject to the Company’s receipt of all reasonably required representations and documentation from the Investor.

 

4.2 Securities Laws Disclosure; Publicity.  Within four Business Days following the date of this Agreement, the Company shall file a Current Report on Form 8-K describing the terms of the transactions contemplated by the Transaction Documents in the form required by the Exchange Act and attaching the material Transaction Documents (including, without limitation, this Agreement, the form of the Note) as exhibits to such filing.  Except as may be required by applicable law and/or this Agreement, the Company shall not use, directly or indirectly, any Investor’s name or the name of any of its Affiliates in any advertisement, announcement, press release or other similar communication unless it has received the prior written consent of such Investor or its Affiliate, as the case may be, for the specific use contemplated or as otherwise required by applicable law or regulation.

 

4.3 Non-Public Information.  The Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Investor or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Investor shall have executed a written agreement regarding the confidentiality and use of such information.  The Company understands and confirms that each Investor shall be relying on the foregoing representations in effecting transactions in securities of the Company.

 

4.4 Use of Proceeds.  The Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes.

 

4.5 Reservation of Shares.  The Company shall at all times have authorized, and reserved for the purpose of issuance, such number of shares of Common Stock as shall be necessary to effect the full conversion of the Notes that have been issued hereunder (the “Share Reserve”).  If at any time the Share Reserve is insufficient to effect the full conversion of the Notes then outstanding the Company shall, promptly (and in any event within 90 days) increase the Share Reserve accordingly.

 

  

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4.6 Company’s Instructions to Transfer Agent.  On or prior to the applicable Closing Date, the Company shall execute and deliver irrevocable written instructions to the transfer agent for its Common Stock (the “Transfer Agent”), and provide each Investor with a copy thereof, directing the Transfer Agent (i) to issue certificates representing Conversion Shares upon conversion of the Notes and receipt of a valid Conversion Notice (as defined in the Notes) from an Investor, in the amount specified in such Conversion Notice, in the name of such Investor or its nominee, and (ii) to deliver such certificates to such Investor no later than the close of business on the third (3rd) Trading Day following the related Conversion Date (as defined in the Notes).  Such certificates may bear legends pursuant to applicable provisions of this Agreement or applicable law.  The Company shall instruct the transfer agent that, in lieu of delivering physical certificates representing shares of Common Stock to an Investor upon conversion of the Notes, and as long as the Transfer Agent is a participant in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program, and such Investor has not informed the Company that it wishes to receive physical certificates therefor, and no restrictive legend is required to appear on any physical certificate if issued, the transfer agent may effect delivery of Conversion Shares by crediting the account of such Investor or its nominee at DTC for the number of shares for which delivery is required hereunder within the time frame specified above for delivery of certificates.  The Company represents to and agrees with each Investor that it will not give any instruction to the Transfer Agent that will conflict with the foregoing instruction or otherwise restrict such Investor’s right to convert the Notes or to receive Conversion Shares in accordance with the terms of the Notes.  In the event that the Company’s relationship with the Transfer Agent should be terminated for any reason, the Company shall use its commercially reasonable efforts to cause the Transfer Agent to continue acting as transfer agent pursuant to the terms hereof until such time that a successor transfer agent is appointed by the Company and receives the instructions described above.

 

4.7 Grant of Security Interest.  As collateral security for the payment and performance of all debts owed to the Investors under the Notes, Company hereby grants to the Investors a security interest in all of Company’s personal property and assets, tangible or intangible, in each case whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title, or interest, including all of the following property in which it now has or at any time in the future may acquire any right, title or interest (such terms having the meanings ascribed thereto in the Uniform Commercial Code as the same may, from time to time, be in effect in the State of California): all accounts; all deposit accounts; all money; all commodity contracts; all investment property; all inventory; all equipment; all goods; all chattel paper; all documents; all instruments; all general intangibles; all letter-of-credit rights; all letters of credit; all commercial tort claims; and to the extent not otherwise included, all proceeds and products of all and any of the foregoing, and all collateral security and guarantees given by any person with respect to any of the foregoing (collectively, the “Collateral”).  Company agrees that the Notes and all other monies owed to Investors creates, and is intended to create, valid and continuing liens upon the Collateral in favor of the Investors. The Company agrees to execute and file an initial UCC financing statement in Delaware indicating the Investor’s security interest in the Collateral and agrees to use its best commercial efforts to execute and to file in all applicable Uniform Commercial Code jurisdictions any financing statements and amendments thereto required to perfect the Investor’s interest in the Collateral (subject to the liens of SVB or other potential senior creditors) and further covenants and agrees to use its best commercial efforts to execute and file the appropriate financing statements and other documents reasonably necessary to perfect the security interest of the Investors in the Collateral.

 

  

13

  

 

ARTICLE V.

CONDITIONS PRECEDENT TO CLOSING

 

5.1 Conditions Precedent to the Obligations of Investors.  The obligations of each Investor to purchase its respective Note at each Closing are subject to the fulfillment, on or before such Closing, of each of the following conditions, unless otherwise waived:

 

(a)   Representations, Warranties and Covenants.  The representations and warranties of the Company contained in this Agreement shall have been true and correct when made and shall be true and correct in all material respects as of the Closing (other than such representations and warranties that are qualified by materiality, which shall be true and correct as of the Closing), with the same force and effect as if made as of the Closing Date, other than such representations and warranties that are expressly made as of another date, in which case such representations and warranties shall be true only as of such date.

 

(b)   Performance.  The Company shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by the Company on or before such Closing.

 

(c)   SVB Consent.  Silicon Valley Bank shall have consented in writing to the consummation of the transactions contemplated by this Agreement and the Notes.

 

5.2 Conditions Precedent to the Obligations of the Company.  The obligations of the Company to sell the Notes to the Investors at each Closing are subject to the fulfillment, on or before such Closing, of each of the following conditions, unless otherwise waived:

 

(a)   Representations, Warranties and Covenants.  The representations and warranties of each Investor contained in this Agreement shall have been true and correct when made and shall be true and correct in all material respects as of the Closing (other than such representations and warranties that are qualified by materiality, which shall be true and correct as of the Closing), with the same force and effect as if made as of the Closing Date, other than such representations and warranties that are expressly made as of another date, in which case such representations and warranties shall be true only as of such date.

 

  

14

  

 

(b)   Performance.  The Investors shall have performed and complied with all covenants, agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by the Investors on or before such Closing.

 

(c)   SVB Consent.  Silicon Valley Bank shall have consented in writing to the consummation of the transactions contemplated by this Agreement and the Notes.

 

ARTICLE VI.

MISCELLANEOUS

 

6.1 Fees and Expenses.  Unless agreed otherwise on a case-by-case basis, each Investor and the Company shall pay the fees and expenses of its own advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of the Transaction Documents.  The Company will reimburse up to $5,000 in legal fees for every Investor who purchases Notes as part of a Closing in excess of $500,000. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Securities under this Agreement.

 

6.2 Entire Agreement.  The Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

 

6.3 Notices.  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:00 p.m. (eastern time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 5:00 p.m. (eastern time) on any Trading Day, (c) the Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices and communications shall be as follows:

 

	 	
If to the Company:

	  	
EdgeWave, Inc.

	 	  	  	
15333 Avenue of Science

	 	  	  	
San Diego, CA 92128

	 	  	  	
Attn: President

	 	  	  	
Facsimile: 858-676-2299

	 	 	 	 
	 	 	 	 
	 	With a copy to: 	 	Michel Urich, Esq.
	 	 	 	7668 El Camino Real, Suite 104-238
	 	 	 	Carlsbad, CA 92009
	 	 	 	Facsimile: 213-341-0974
	 	 	 	 
	 	 	 	 
	 	If to an Investor:	 	
To the address set forth under such Investor’s name

on the signature pages hereof;

	 	 	 	 

                                               

 

  

15

  

 

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

 

6.4 Amendments; Waivers.  No provision of this Agreement may be waived or amended except in a written instrument signed by the Company and the Investors holding at least fifty one percent (51%) of the outstanding and unpaid principal amount of the Notes; provided that any amendment or waiver which adversely affects the rights of any of the Investors in a manner that is disproportionate to the adverse effect on the rights of the other Investors, respectively, shall require the written consent of fifty one percent (51%) of the outstanding and unpaid principal amount of the Notes held by such disproportionately affected Investors.  No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.  Each Investor acknowledges that by the operation of this paragraph, the holders of fifty one percent (51%) of the outstanding and unpaid principal amount of the Notes issued hereunder will have the right and power to diminish or eliminate all rights of such Investor under this Agreement.

 

6.5 Construction.  The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.  This Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement or any of the Transaction Documents.

 

6.6 Successors and Assigns.  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties.  Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. Any transferee of the Notes in accordance with the terms hereof shall, as a condition precedent to such transfer, execute an acknowledgment agreeing to be bound by the applicable provisions of this Agreement, in which case the term “Investor” shall be deemed to refer to such transferee as though such transferee were an original signatory hereto.

 

  

16

  

 

6.7 Governing Law; Jurisdiction. This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the Law of the State of California without giving effect to the conflict of law principles thereof.  Any legal action or proceeding with respect to this Agreement shall be brought in the courts of State of California or of the United States of America located in San Diego, California.  By execution and delivery of this Agreement, each of the parties hereto accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts.  The parties hereby irrevocably waive an objection or defense that they now or hereafter have to the assertion of personal jurisdiction by any court in any such action or to the laying of the venue of any such action in any such court, and hereby waive, to the extent not prohibited by law, and agree not to assert, by way of motion, as a defense, or otherwise, in any such proceeding, any claim that it is not subject to the jurisdiction of the above-named courts for such proceedings.   Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.   If either party shall commence a legal proceeding to enforce any provisions of this Agreement, then the prevailing party in such legal proceeding shall be entitled to recover its fees and other costs and expenses (including reasonable attorneys’ fees) incurred with the investigation, preparation and prosecution of such legal proceeding.

 

6.8 Survival.  The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery of the Securities.

 

6.9 Execution.  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

 

6.10 Severability.  If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

 

6.11 Remedies.  In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Investors and the Company will be entitled to specific performance under the Transaction Documents.  The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

 

 

  

17

  

6.12 Independent Nature of Investors’ Obligations and Rights.  The obligations of each Investor under any Transaction Document are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any Transaction Document.  The decision of each Investor to purchase Securities pursuant to the Transaction Documents has been made by such Investor independently of any other Investor.  Nothing contained herein or in any Transaction Document, and no action taken by any Investor pursuant thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Document.  Each Investor acknowledges that no other Investor has acted as agent for such Investor in connection with making its investment hereunder and that no Investor will be acting as agent of such Investor in connection with monitoring its investment in the Securities or enforcing its rights under the Transaction Documents.  Each Investor shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such purpose.

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOLLOW]

 

 

  

18

  

 

IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first written above.

 

 

EDGEWAVE, INC.

 

By: ___________________________

Louis Ryan

President and Chief Executive Officer

 

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOR INVESTORS FOLLOW]

 

 

  

19

  

 

IN WITNESS WHEREOF, the parties have executed this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first written above.

 

[INVESTOR]

 

 

By:_____________________________________

Name:

Title:

 

 

Purchase Price:  $[__________]

 

 

Address for Notice:

 

 

 

  

20

  

 

ANNEX 1

SCHEDULE OF NOTEHOLDERS

	
Noteholder and Address

	 	
Amount Credited to Purchase Price from prepayment of previous convertible notes dated August, 2, 2010 and September 20, 2010

	 	
Portion of Purchase Price provided by wire transfer

	 	
Total Purchase Price

	
1. ATA Affiliates Fund II, L.P.

203 Redwood Shores Parkway, Suite 550

Redwood City, CA 94065

Tel: 650.594.0189

Fax: 650.594.0257

	 	
$27,190.27

	 	 	
$13,073.48

	 	 	
$40,263.75

	 
	
2. ATA Investment Fund II, L.P.

203 Redwood Shores Parkway, Suite 550

Redwood City, CA 94065

Tel: 650.594.0189

Fax: 650.594.0257

	 	
$5,388.74

	 	 	
$2,591.44

	 	 	
$7,980.18

	 
	
3. ATA Ventures II, L.P.

203 Redwood Shores Parkway, Suite 550

Redwood City, CA 94065

Tel: 650.594.0189

Fax: 650.594.0257

	 	
$1,858,252.20

	 	 	
$893,503.87

	 	 	
$2,751,756.07

	 
	
4. RWI Ventures II, L.P.

900 E. Hamilton Avenue, Suite 100

Campbell, CA 95008

Tel: 408.879.7343

Fax: 408.879.7205

	 	
$1,100,025.75

	 	 	
$599,974.25

	 	 	
$1,700,000

	 
	
5.

	 	
$2,990,856.96

	 	 	
$1,509,143.04

	 	 	
$4,500,000

	 

	  

 

 

 

 

21edgewave_ex1002.htm

EXHIBIT 10.2

 

THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE PLEDGED AS COLLATERAL FOR ANY SHORT SALE OF THE SHARES OF THE COMPANY. THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT, REDEMPTION OR CONVERSION HEREOF. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT SHOWN BELOW.

 

THIS NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF A SUBORDINATION AGREEMENT DATED DECEMBER 5, 2011 (THE “SVB SUBORDINATION AGREEMENT”) BY AND BETWEEN SILICON VALLEY BANK AND THE HOLDER AND MAY BECOME SUBJECT TO SUBORDINATION AGREEMENTS TO BE ENTERED INTO BY AND BETWEEN THE HOLDER AND (I) PARTNERS FOR GROWTH III, L.P. (THE “PFG SUBORDINATION AGREEMENT”) AND (II) MONTAGE CAPITAL, LLC (SUCH SUBORDINATION AGREEMENTS, TOGETHER WITH THE SVB SUBORDINATION AGREEMENT, THE “SUBORDINATION AGREEMENTS”).

 

EDGEWAVE, INC.

 

SECURED SUBORDINATED CONVERTIBLE NOTE

 

	
Issue Date: [_______ __], 2011

	
$[________]

 

FOR VALUE RECEIVED, EDGEWAVE, INC., a Delaware corporation (the “Company”), hereby promises to pay to the order of [Purchaser] or its permitted successors or assigns (the “Holder”) the sum of [______________] Dollars ($[______]) in same day funds on or before December 4, 2015 (the “Maturity Date”), unless this Note is earlier converted pursuant to Section 3 hereof.  The Holder may convert amounts of principal of and interest accrued on this Note into shares (“Conversion Shares”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”), on the terms and subject to the conditions set forth herein.

 

The Company has issued this Note pursuant to a Securities Purchase Agreement, dated as of December 5, 2011 (the “Securities Purchase Agreement”).  This Note may be sold, transferred or assigned only in accordance with the terms of the Securities Purchase Agreement.  The Notes issued by the Company pursuant to the Securities Purchase Agreement, including this Note, are collectively referred to herein as the “Notes.”

 

  

1

  

 

The following terms shall apply to this Note:

 

1. DEFINITIONS.

 

“Applicable Interest Rate” means an annual rate equal to seven percent (7%), computed on the basis of a 360-day year and calculated using the actual number of days elapsed since the Issue Date or the date on which Interest was most recently paid, as the case may be, and compounded annually; provided that the Applicable Interest Rate may be subject to adjustment as provided in Section 2(a) hereof.

 

“Business Day” means any day other than a Saturday, a Sunday or a day on which the New York Stock Exchange is closed or on which banks are authorized by law to close in San Diego, California.

 

“Conversion” means an Optional Conversion or a Mandatory Conversion.

 

“Conversion Date” means an Optional Conversion Date or a Mandatory Conversion Date.

 

“Conversion Price” means $0.70 (subject to adjustment as provided herein).

 

“Effective Interest Rate” means the cash consideration payable by the Company at the maturity of a New Note minus the cash consideration provided to the Company for such New Note then divided by the cash consideration provided to the Company for such New Note, then divided by the number of years between the issuance of such New Note and the maturity of the New Note (based on a 360 day year).

 

“Issue Date” means the date on which this Note is issued pursuant to the Securities Purchase Agreement.

 

“Major Transaction” means a merger, consolidation, business combination, tender offer, exchange of shares, recapitalization, reorganization, redemption or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or the Company shall sell all or substantially all of its assets.

 

“Maturity Date” has the meaning set forth in the preamble to this Agreement.

 

“New Note” means a promissory note that is convertible into equity securities of the Company or combination of securities that have a substantially similar economic effect as a convertible note.

 

“New Note Conversion Rate” means the cash consideration provided to the Company for a New Note divided by the maximum number of shares of Common Stock issuable upon conversion, exchange and/or exercise of such New Note.

 

“Principal Market” means the principal securities exchange or market on which the Common Stock is listed or traded.

 

  

2

  

 

“Trading Day” means a Business Day on which shares of Common Stock are purchased and sold on the Principal Market.

 

All definitions contained in this Note are equally applicable to the singular and plural forms of the terms defined.  The words “hereof,” “herein” and “hereunder” and words of similar import referring to this Note refer to this Note as a whole and not to any particular provision of this Note.  Any capitalized term used but not defined herein has the meaning specified in the Note Purchase Agreement.

 

2. INTEREST.

 

(a) Interest Rate.  This Note shall bear interest on the unpaid principal amount hereof (“Interest”) at a rate per annum equal to the Applicable Interest Rate; provided, however, that in the event that prior to December 5, 2012 the Company issues a New Note or a series of New Notes for aggregate consideration of in excess of $25,000, with an Effective Interest Rate greater than the then current Applicable Interest Rate of this Note then the Applicable Interest Rate of this Note will, going forward, automatically be increased to such Effective Interest Rate.

 

(b) Interest Payments.  The Company shall pay accrued and unpaid Interest (unless converted pursuant to the terms hereof) (i) on the Maturity Date and (ii) on any date on which the entire principal amount of this Note is paid in full (whether through conversion or otherwise).  The Company shall pay Interest in cash by wire transfer of immediately available funds.

 

3. CONVERSION.

 

(a) Optional Conversion.  Subject to the conditions and limitations specifically provided herein or in the Securities Purchase Agreement, the Holder shall have the right to convert, at any time and from time to time after the Issue Date and prior to the Maturity Date, all or any part of the outstanding and unpaid principal amount of this Note and, at the option of the Holder, all or any part of the accrued and unpaid Interest under this Note, into such number of fully paid and non-assessable Conversion Shares as is determined in accordance with Section 3(d) hereof (an “Optional Conversion”).  With respect to any Optional Conversion, in order to convert principal of (and, if the Holder so chooses, Interest accrued on) this Note, the Holder shall send by facsimile transmission, at any time prior to 5:00 p.m., pacific time, on the Business Day on which the Holder wishes to effect such Optional Conversion (the “Optional Conversion Date”), a properly completed notice of conversion to the Company, in the form set forth on Annex I hereto, stating the amount of principal to be converted (and, if the Holder so chooses, accrued and unpaid Interest to be converted) and a calculation of the number of shares of Common Stock issuable upon such Optional Conversion (a “Conversion Notice”).  The Conversion Notice shall also state the name or names (if not the Holder) in which the shares of Common Stock that are issuable on such Optional Conversion shall be issued.

 

(b) Mandatory Conversion.  At any time after the Issue Date and prior to the Maturity Date, the entire unpaid principal amount of this Note together with any and all interest accrued but unpaid thereon shall, provided that no Event of Default has occurred, automatically be converted into such number of fully paid and non-assessable Conversion Shares as is determined in accordance with the terms of Section 3(d) hereof, on the Trading Day (the “Mandatory Conversion Date”) following the occurrence of any period of 60 consecutive Trading Days where the average closing price of the Common Stock for such period is equal to or greater than $1.00 per share (a “Mandatory Conversion”).

 

  

3

  

 

(c) Conversion Mechanics.  The Holder shall not be required to physically surrender this Note to the Company in order to effect any Conversion.  The Company shall maintain a record showing, at any given time, the unpaid principal amount of this Note and the date of each Conversion or other payment of principal hereof.  The Holder shall amend Annex II hereto upon any such Conversion or payment of principal to reflect the unpaid principal amount hereof.  In the case of a dispute as to the number of Conversion Shares issuable upon a Conversion (including without limitation as a result of adjustments to the Conversion Price made in accordance with Section 4 below), the Company shall promptly issue to the Holder the number of Conversion Shares that are not disputed and shall submit the disputed calculations to an independent accountant mutually selected by the Company and the Holder, within two (2) Business Days of receipt of the Holder’s Conversion Notice.  The Company shall use its best efforts to cause such accountants to calculate the Conversion Price as provided herein and to notify the Company and the Holder of the results in writing no later than two (2) Business Days following the day on which such accountant received the disputed calculations (the “Dispute Procedure”).  Such accountant’s calculation shall be deemed conclusive absent manifest error.  The fees of any such accountant shall be borne by the party whose calculations are most at variance with those of such accountant.

 

(d) Number of Conversion Shares.  The number of Conversion Shares to be delivered by the Company pursuant to a Conversion hereunder shall be equal to (i) the unpaid principal amount of and accrued and unpaid Interest on this Note that is being converted divided by (ii) the Conversion Price.

 

(e) Delivery of Common Stock Upon Conversion.  (i) The Company shall, no later than the close of business on the third (3rd) Business Day following the Optional Conversion Date set forth in such Conversion Notice or the Mandatory Conversion Date, as applicable (the “Delivery Date”), issue and deliver or cause to be delivered to the Holder the number of Conversion Shares determined pursuant to paragraph 3(d) above, provided, however, that any Conversion Shares that are the subject of a Dispute Procedure shall be delivered no later than the close of business on the third (3rd) Business Day following the determination made pursuant thereto. The Company shall effect delivery of Conversion Shares to the Holder, as long as the Company’s designated transfer agent or co-transfer agent in the United States for the Common Stock (the “Transfer Agent”) participates in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program (“FAST”) and no restrictive legend is required pursuant to the terms of this Note or the Securities Purchase Agreement, by crediting the account of the Holder or its nominee at DTC (as specified in the applicable Conversion Notice) with the number of Conversion Shares required to be delivered, no later than the close of business on such Delivery Date.  In the event that the Transfer Agent is not a participant in FAST or if the Holder so specifies in a Conversion Notice or otherwise in writing on or before the Conversion Date, or if a restrictive legend is required pursuant to the terms of this Note or the Securities Purchase Agreement, the Company shall effect delivery of Conversion Shares by delivering to the Holder or its nominee physical certificates representing such Conversion Shares, no later than the close of business on such Delivery Date. If any Conversion would create a fractional Conversion Share, such fractional Conversion Share shall be disregarded and the number of Conversion Shares issuable upon such Conversion, in the aggregate, shall be rounded up or down, as the case may be, to the nearest whole number of Conversion Shares.

 

  

4

  

 

(ii)   The Company’s obligations to issue and deliver Conversion Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same.  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 the required Conversion Shares in the manner required pursuant to this Section upon conversion of this Note.

 

4. ADJUSTMENTS TO CONVERSION PRICE.

 

(a) Stock Dividends and Splits, Etc.  If, at any time on or after the Issue Date, the Company subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a greater number of shares, then after the date of record for effecting such subdivision, the Conversion Price shall be proportionately reduced or, if the Company combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a smaller number of shares, the Conversion Price shall be proportionately increased.

 

(b) Major Transactions.  If, at any time after the Issue Date, any Major Transaction shall occur, then the Holder shall thereafter have the right to receive upon Conversion, in lieu of the shares of Common Stock otherwise issuable, such shares of stock, securities and/or other property as would have been issued or payable upon such Major Transaction with respect to or in exchange for the number of shares of Common Stock which would have been issuable upon Conversion had such Major Transaction not taken place.  The above provisions shall apply regardless of whether or not there would have been a sufficient number of shares of Common Stock authorized and available for issuance upon conversion of this Note as of the date of such transaction, and shall similarly apply to successive Major Transactions.

 

(c) Price-Based Adjustment.  In the event that prior to December 5, 2012 the Company issues a New Note or a series of New Notes for aggregate consideration of in excess of $25,000, and the New Note Conversion Rate of any New Note is less than the then current Conversion Price of this Note then going forward the Conversion Price of the portion of this Note that has not previously been converted into equity securities pursuant to Section 3 will automatically be reduced to such New Note Conversion Rate.

 

5. LIMITATIONS ON CONVERSIONS.

 

(a) The Company shall not effect any Conversion of this Note, and the Holder of this Note shall not have the right to convert any portion of this Note pursuant to Section 3(a), to the extent that after giving effect to such Conversion, the Holder (together with the Holder’s affiliates) would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the number of shares of Common Stock outstanding immediately after giving effect to such conversion.  For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon Conversion of this Note 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) Conversion of the remaining, non-converted portion of this Note beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including, without limitation, any other Notes or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates.  Except as set forth in the preceding sentence, for purposes of this Section 5 beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”).  The number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  By written notice to the Company, the Holder may increase or decrease the Maximum Percentage to any other percentage specified in such notice; provided that (i) any such increase will not be effective until the sixty-first (61st) day after such notice is delivered to the Company, and (ii) any such increase or decrease will apply only to the Holder and not to any other holder of any Notes.

 

  

5

  

 

(b) Notwithstanding anything herein to the contrary, the provisions of Section 5(a) shall not apply with regard to a Mandatory Conversion or a conversion in connection with a Major Transaction.

 

6. EVENTS OF DEFAULT; ACCELERATION.  Upon the occurrence of any of the following events (each, an “Event of Default”):

 

(a) the Company  shall (i) apply for or consent to the appointment of a receiver, trustee or liquidator of itself or of its property, (ii) make a general assignment for the benefit of creditors, (iii) be adjudicated a bankrupt or insolvent, (iv) file a voluntary petition in bankruptcy, or a petition or answer seeking reorganization or an arrangement with creditors to take advantage of any insolvency law, or an answer admitting the material allegations of a bankruptcy, reorganization or insolvency petition filed against it, (vi) take corporate action for the purpose of effecting any of the foregoing, or (vii) have an order for relief entered against it in any proceeding under the United States Bankruptcy Code;

 

(b) An order, judgment or decree shall be entered, without the application, approval or consent of the Company by any court of competent jurisdiction, approving a petition seeking reorganization of the Company or appointing a receiver, trustee or liquidator of the Company or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) consecutive days;

 

(c) the Company shall fail to pay as and when due any principal or interest hereunder and such nonpayment shall continue uncured for a period of five (5) business days after written notice by the Holder thereof; or

 

  

6

  

 

(d) A default or defaults (after exhausting all applicable cure periods) in the amount of $100,000 individually or in the aggregate under the terms of one or more instruments evidencing or securing indebtedness of the Company, or any of its subsidiaries;

 

then, and in every such event and at any time thereafter, the Holder may, by written notice to the Company and subject to the Subordination Agreements, accelerate the payment of all amounts due under this Note, whereupon the unpaid principal of this Note, together with any accrued and unpaid Interest hereon shall become immediately due and payable.

 

7. PREPAYMENT.

 

(a) Voluntary Prepayment.  Subject to the Subordination Agreements, the Company shall have the right to prepay at any time prior to the Maturity Date any and all amounts of principal and/or interest outstanding under this Note, subject to the terms set forth herein.  In the event that the Company desires to make any such prepayment hereunder, the Company shall so notify the Holder in writing, and the Holder shall have seven (7) days from delivery of such notice (the “Prepayment Period”) to execute an Optional Conversion with respect to the amounts of principal and/or interest outstanding under this Note in accordance with Section 3 hereof, after which Prepayment Period the Company shall be permitted to make such prepayment.

 

(b) Mandatory Prepayment.  In the event of a Liquidity Event, the outstanding principal amount of this Note, plus all accrued and unpaid interest (subject to Section 7(c) below), in each case that has not otherwise been converted into equity securities pursuant to Section 3, shall, subject to the Subordination Agreements, be due and payable immediately prior to the closing of such Liquidity Event.  The term “Liquidity Event” shall mean (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions to which the Company is a party (including, without limitation, any stock acquisition, reorganization, merger or consolidation, but excluding any sale of stock for capital raising purposes and any transaction effected primarily for purposes of changing the Company’s jurisdiction of incorporation) other than (A) a transaction or series of related transactions in which the holders of the voting securities of the Company outstanding immediately prior to such transaction or series of related transactions retain, immediately after such transaction or series of transactions, as a result of shares in the Company held by such holders prior to such transaction or series of transactions, at least thirty-three and one-third percent (33 1/3%) of the total voting power represented by the outstanding voting securities of the Company or such other surviving or resulting entity (or if the Company or such other surviving or resulting entity is a wholly-owned subsidiary immediately following such acquisition, its parent) or (B) a transaction or series of related transactions in which at least fifty percent (50%) of the members of the Company’s board of directors prior to such transaction or series of related transactions remain on the board of directors of the newly constituted entity following such transaction or series of related transactions, or (ii) a sale, lease or other disposition of all or substantially all of the assets of the Company and its subsidiaries taken as a whole by means of any transaction or series of related transactions, except where such sale, lease or other disposition is to a wholly-owned subsidiary of the Company.

 

  

7

  

 

(c) Calculation of Interest upon Mandatory Prepayment Prior to December 5, 2012.   Subject to the Subordination Agreements, in the event of a Liquidity Event prior to December 5, 2012, then the Interest on the portion of this Note that has not otherwise been converted into equity securities pursuant to Section 3 or prepaid and which Interest would have accrued between the date of the Liquidity Event and the Maturity Date shall accelerate and shall be accrued immediately, such that the mandatory prepayment amount required under Section 7(b) shall include all the outstanding principal amount of this Note that has not been converted into equity security pursuant to Section 3, plus all accrued and unpaid interest prior to the date of the Liquidity Event that has not been converted into equity security, plus all interest that would have accrued between the date of the Liquidity Event and the Maturity Date under the portion of the Note that has not been converted into equity security.

 

8. MISCELLANEOUS.

 

(a) Priority.  This Note shall rank pari passu with the other Notes issued pursuant to the Securities Purchase Agreement.  Payments under the Notes shall be made on a pro rata basis among all the Notes.

 

(b) Security. This Note is secured pursuant to the Company’s grant of a security interest as set forth in the Securities Purchase Agreement.  Reference is hereby made to the Securities Purchase Agreement for a description of the nature and extent of the security for this Note and the rights with respect thereto.

 

(c) Notices.  Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Note shall be in writing and shall be deemed delivered on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 5:00 p.m. (pacific time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 5:00 p.m. (pacific time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given, addressed as follows:

 

If to the Company:

 

Edgewave, Inc.

15333 Avenue of Science

San Diego, CA 92128

Attn: President

Facsimile: 858-676-2299

 

  

8

  

with a copy to:

Michel Urich, Esq.

7668 El Camino Real, Suite 104-238

Carlsbad, CA 92009

Facsimile: 213-341-0974

and if to the Holder, at such address as the Holder shall have furnished the Company in writing. Any party may change its address for receiving notice by giving written notice thereof to the other parties in accordance with this paragraph 8(b).

 

(d) Amendments; Waivers.  No provision of this Note may be waived or amended except in a written instrument signed by the Company and the Holders holding at least fifty-one  percent (51%) of the outstanding and unpaid principal amount of the Notes; provided that any amendment or waiver which adversely affects the rights of any of the Holders in a manner that is disproportionate to the adverse effect on the rights of the other Holders, respectively, shall require the written consent of  fifty-one percent (51%) of the outstanding and unpaid principal amount of the Notes held by such disproportionately affected Holders.  No waiver of any default with respect to any provision, condition or requirement of this Note shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.  Each Holder acknowledges that by the operation of this paragraph, the Holders of  fifty-one percent (51%) of the outstanding and unpaid principal amount of the Notes issued hereunder will have the right and power to diminish or eliminate all rights of such Holder under this Note.

 

(e) Lost or Stolen Note.  Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Note, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of this Note, if mutilated, the Company shall execute and deliver to the Holder a new Note identical in all respects to this Note.

 

(f) Governing Law.  This Note shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed entirely within the State of California.

 

(g) Successors and Assigns.  The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors (whether by merger or otherwise) and permitted assigns of the Company and the Holder.  The Company may not assign its rights or obligations under this Note except as specifically required or permitted pursuant to the terms hereof.

 

(h) Usury.  This Note is subject to the express condition that at no time shall the Company be obligated or required to pay interest hereunder at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum interest rate which the Company is permitted by applicable law to contract or agree to pay.  If by the terms of this Note, the Company is at any time required or obligated to pay interest hereunder at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of this Note.

 

[Signature Page to Follow]

 

  

9

  

 

IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by its duly authorized officer on the date first above written.

 

EDGEWAVE, INC.

 

By: ___________________________

Name:           

Title:           

 

 

  

10

  

ANNEX I

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal of and/or interest accrued on the Convertible Note (the “Note”) issued by EDGEWAVE, INC. (the “Company”) into shares of common stock (“Common Stock”) of the Company according to the terms and conditions of the Note.  Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Note.

 

	  	
Date of Conversion:

	  
	 	 	 
	  	
Principal Amount of

	  
	  	
Note to be Converted:

	  
	  	  	  
	  	
Interest Accrued on

	  
	  	
Note to be Converted:

	  
	  	  	  
	  	
Number of Shares of

	  
	  	
Common Stock to be Issued:

	  
	  	  	  
	  	
Name of Holder:

	  
	  	  	  
	  	
Address:

	  
	  	  	  
	  	  	  
	  	
Signature:

 

Name:

 

Title:

	  

 

Holder Requests Delivery to be made:  (check one)

 

o           By Delivery of Physical Certificates to the Above Address

 

o           Through Depository Trust Corporation

(Account _______________)

 

 

 

	 	Confirmed:
	 	 
	
 

	
EDGEWAVE, INC.

	
 

	
 

	
 

	
By:     ___________________________________

	  
	  	
     Name:

	
 

	
     Title:

	 	 
	 	Date: ___________________________________ 

 

 

 

  

11

  

 

ANNEX II

 

Schedule of

Decreases

of Principal Amount

 

	
Principal Balance

	
Amount of Decrease

	
Date

	
$[_________]

	  	  
	  	  	  
	  	  	  
	  	  	  
	  	  	  

 

 

 

 

 

 

 

 

 

 

 

 

12

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