Document:

exhibit10d2posam3.htm

 

 

Exhibit 10.2

 

	
Lender Registration Agreement

	
 

(Note Commitment, Purchase and Sale Agreement)

 

This Lender Registration Agreement is made and entered into between you and Prosper Marketplace, Inc. ("Prosper", "we", or "us"). This Agreement will govern all purchases of Borrower Payment Dependent Notes (“Notes”) that you may, from time to time, purchase from Prosper.

 

 

Prosper has filed with the U.S. Securities and Exchange Commission a registration statement on Form S-1 (No. 333-147019) (as amended from time to time, the "Registration Statement") to register the continuous offering and sale of Notes issued by Prosper. The Notes are offered pursuant to a prospectus (as supplemented from time to time, the "Prospectus") which forms a part of the Registration Statement. The Registration Statement became effective on July 10, 2009 pursuant to the rules and regulations of the U.S. Securities and Exchange Commission under the Securities Act of 1933, as amended. You acknowledge that the Prospectus has been delivered to you. You should read the Prospectus carefully and retain a copy for your records.

 

 

1. Registration as a Prosper Lender. You are registering as a lender in the Prosper marketplace, so that you may be eligible to post bids on listings displayed on Prosper's online marketplace (the "platform") and purchase from Prosper Notes issued by Prosper that are dependent for payment on payments we receive on the corresponding borrower loans described in the listings ("borrower loans"). As a registered lender you also have access to the Folio Investing Note Trader platform, where you may list Notes that you own for sale to other Prosper lender members, and bid to purchase Notes offered for sale by other lender members, in an auction-style bidding environment. You agree to comply with the terms and provisions of this Agreement, the Terms of Use of the Prosper website, and the policies posted on the Prosper website, each as amended from time to time by Prosper in its sole discretion (collectively, the "Prosper Terms and Conditions").

 

 

Your role as a Prosper "lender" is that of a purchaser of Notes issued by Prosper, and your rights and obligations as a purchaser or prospective purchaser of Notes are set forth below. Although you are referred to in this Agreement and on the Prosper website as a "lender," you are not actually lending your money directly to Prosper borrowers, but are, instead, acting as an investor and making purchase commitments for Notes and purchasing Notes from Prosper that are dependent for payment on payments we receive on borrower loans. Prosper uses the term "lender" instead of "investor" in this Agreement and on portions of Prosper's website for the convenience of Prosper users, who appropriately view Prosper as a marketplace for connecting individuals who wish to borrow money with people who wish to help fund loans to such individuals.

 

 

2. Authorization to Obtain Credit Report. By registering on the platform as a lender, you authorize us to obtain information from your personal credit profile from one or more consumer credit reporting agencies solely for the purpose of confirming your residence and identity.  We confirm your residence and identity to avoid fraudulent transactions in your name.

 

 

3. Placing Bids on Loan Listings. As a registered Prosper lender, you may place bids on loan listings displayed on the platform. A loan listing is a loan request by a Prosper borrower. A bid is the lender's commitment to purchase a Note in the principal amount of the lender's bid, the proceeds of which will be used by Prosper to fund the requested loan.  For each listing, there is a minimum amount of total bids that the listing must receive for the loan to fund.  If the loan funds, the payments Prosper makes to the lenders on the Notes will be dependent on the payments the borrower makes to Prosper on the loan.

 

 

Description of Listings. Listings include the borrower's requested loan amount, borrower’s interest rate on the loan, and the lender’s interest rate on the corresponding Note. Listings also include a Prosper Rating, which is a letter grade that indicates the level of risk associated with the listing and corresponds to an estimated average annualized loss rate range for the listing. Listings also include other information, including but not limited to, the borrower's debt-to-income ratio, credit information from the borrower's credit report, the borrower’s numerical credit score range, the borrower's group affiliation (if any), and the borrower's self-reported annual income range, occupation and employment status. Borrowers are identified by a Prosper user name but are not able to disclose their identity or contact information to lenders.

 

  

  

  

 

Prosper lenders may ask borrowers questions about their listings and borrowers may, but are not required to, respond to such questions. Borrowers who elect to respond to a lender's question may respond privately, or they may elect to have the question and answer posted publicly in the listing. Lenders' questions are not posted in the listing or displayed elsewhere on our website unless the borrower elects to answer the question and elects to make the question and answer publicly available, in which case the question and answer appears in the listing. We do not verify any borrowers' responses to lender members' questions.

 

 

Types of Bids. You can make bids manually by browsing through listings and placing a bid on the listing or listings that you choose. You can also place bids by creating an automated plan, which allows you to have bids placed automatically on listings that meet your plan criteria.  You may have more than one automated plan in place at one time, and you may make manual bids while one or more automated plans are in place.

 

 

Availability of Funds. At the time you place a bid, you must have funds on deposit with Prosper in at least the amount of your bid,. Your funds will be placed in an FDIC-insured non-interest bearing account at Wells Fargo Bank, N. A. (the "Prosper funding account") separate from Prosper's own funds. At the time you register as a lender, you must provide your deposit account information to facilitate electronic transfers of funds to and from the Prosper funding account and your deposit account. You will not earn interest on funds in the Prosper funding account. All of your funds in the Prosper funding account that are not already committed to bids are available for bidding. You may at any time request that your uncommitted funds in the Prosper funding account be returned to you, in which case Prosper will promptly return the remaining funds to your deposit account using the Automated Clearing House ("ACH") network, subject to reasonable restrictions on the amount and timing of transfers of funds.

 

 

Your Note Purchase Commitment.  AT THE TIME YOU PLACE A BID ON A LISTING, YOU ARE COMMITTING TO PURCHASE A NOTE ISSUED BY PROSPER IN THE AMOUNT OF YOUR BID THAT IS DEPENDENT FOR ITS PAYMENT ON PAYMENTS PROSPER RECEIVES ON THE BORROWER LOAN DESCRIBED IN THE LISTING. ONCE YOUR BID IS MADE, IT IS IRREVOCABLE, AND FUNDS IN AT LEAST THE AMOUNT OF YOUR BID MUST BE MAINTAINED IN YOUR PROSPER ACCOUNT AND CANNOT BE USED TO PLACE BIDS ON OTHER LISTINGS UNLESS AND UNTIL (I) THE BIDDING PERIOD FOR THE LISTING EXPIRES WITHOUT THE LISTING HAVING RECEIVED BIDS EQUAL TO OR EXCEEDING THE MINIMUM AMOUNT REQUIRED FOR THE LOAN TO FUND OR (II) PROSPER REMOVES THE LISTING IN ACCORDANCE WITH SECTION 10 BELOW.  IF THE LISTING TERMINATES FOR EITHER OF THE REASONS DESCRIBED IN THE IMMEDIATELY PRECEDING SENTENCE, YOU NO LONGER NEED TO MAINTAIN FUNDS IN YOUR PROSPER ACCOUNT EQUAL TO THE AMOUNT OF YOUR BID AND YOU CAN WITHDRAW THE FUNDS OR USE THEM TO MAKE ANOTHER BID.

 

 

Limits on Bids. Lenders may bid the entire amount requested by the borrower, or may bid a lesser amount, subject to a minimum bid amount of $25; provided, that if the amount available for further bidding on a listing is less than the amount of your bid, your bid will be deemed to be in the amount still available for bidding, and the remainder of your funds will remain in your Prosper funding account, available for further bidding. The aggregate amount of all of your bids, when added to the amount outstanding on all of your Notes, must not exceed five million dollars ($5,000,000) for individual lenders, or fifty million dollars ($50,000,000) for corporate or institutional lenders. Subject to these dollar limits, there is no limit on the amount of funds you may commit to bids on listings.

 

 

YOU AGREE THAT WHEN MAKING BIDS YOU WILL NOT DISCRIMINATE AGAINST ANY BORROWER OR GROUP ON THE BASIS OF RACE, COLOR, RELIGION, NATIONAL ORIGIN, SEX, MARITAL STATUS, AGE, SEXUAL ORIENTATION, MILITARY STATUS, THE BORROWER'S SOURCE OF INCOME, OR ANY OTHER BASIS PROHIBITED BY AN APPLICABLE FEDERAL, STATE OR LOCAL FAIR LENDING LAW, INCLUDING WITHOUT LIMITATION THE EQUAL CREDIT OPPORTUNITY ACT.

 

 

3. Matching of Bids and Listings.

 

 

a. After a listing is posted, lenders can place bids on that listing until 14 days have passed since the listing was posted or the listing has received bids totaling the requested loan amount, whichever is earlier.  Once a listing has received bids totaling the amount of the loan requested, no further bids can be placed.  If the listing does not receive bids equal to or exceeding the minimum amount required for the loan to fund within 14 days of posting, the listing will terminate and the requested loan will not be funded.

 

  

  

  

 

b. When creating a loan listing, the borrower may opt for partial funding, which means the loan can be funded if it receives bids totaling less than the full amount of the requested loan but equal to or exceeding 70% of that amount, subject to any minimum loan amount requirement. Each loan listing will indicate whether the borrower has opted for partial funding as well as the minimum amount required for the loan to fund.  The current percentage threshold for partial funding is 70%, but Prosper may change that threshold from time to time.

 

 

c. Prosper does not warrant or guaranty that you will be able to place a bid on any listing before that listing receives bids totaling the requested loan amount. In the event the amount available for further bidding on a listing is less than the amount of your bid, your bid will be deemed to be in the amount still available for bidding, and the remainder of your funds will remain in your Prosper funding account, available for further bidding. For example, if a listing requesting a loan of $5000 has already received bids totaling $4990, and you place a bid of $25 on that listing, your bid will be deemed to have been for $10.

 

 

d. In most instances, a funded listing will receive more than one bid and each series of Notes corresponding to a borrower loan will have more than one holder. Each series of Notes will correspond to a single borrower loan, as described in the listing, originated to a Prosper borrower member. Payments to the lenders who purchase the Notes are dependent on payments received on the corresponding borrower loan.

 

 

e. To safeguard your privacy rights and those of borrowers, the identities and addresses of borrowers and lenders are not displayed on the platform or elsewhere on the Prosper website. Only the borrower's Prosper screen name will appear on Prosper borrower listings, and only your Prosper screen name will appear with your bids.

 

 

4. Funding and Sale of Borrower Loans. Once the bidding period for a listing has ended, if the listing has received bids from lenders equal to or exceeding the minimum amount required to fund the loan described in the listing, we proceed with the funding of the loan, and with the issuance and sale of Notes to the lenders who were the bidders on the listing.

 

 

Loan funding occurs when loan proceeds are disbursed into the borrower's designated deposit account. All loans are made to Prosper borrowers by WebBank, a Utah-chartered industrial bank ("WebBank") from WebBank's own funds, and will be evidenced by a promissory note naming WebBank as the payee, in the amount of the funded loan. Following disbursement of loan proceeds to the borrower, the loan will be sold and assigned by WebBank to Prosper without recourse to WebBank.

 

 

5. Purchase and Sale of Notes. At the same time a borrower loan is purchased by Prosper, we proceed with the issuance and sale of Notes to the lenders who bid on the related listing. The purchase price of each such Note is the amount of the purchasing lender’s bid.  The principal amount of each Note is equal to its purchase price. All Notes are issued pursuant to an indenture (the "Indenture") between Prosper and an indenture trustee. Funds in the principal amount of each Note are transferred from the purchasing lender's Prosper funding account to Prosper, as payment of the purchase price for the Note. Prosper will use the proceeds of the sale of each series of Notes to purchase the corresponding borrower loan from WebBank.

 

 

Terms of the Notes. The Notes shall have the terms and conditions described in the Prospectus, the Indenture and the Note. The Indenture and the Note are reproduced in Exhibit A to this Agreement, and the Prospectus is available for you to review on the Prosper website.  Subject to the servicing standard set forth in Section 6 below, you understand and agree that we may, in our sole discretion, at any time and from time to time, amend or waive any term of a borrower loan, and we may in our sole discretion charge off any borrower loan that we deem uncollectible.

 

 

PAYMENT ON THE NOTES, IF ANY, DEPENDS ENTIRELY ON THE RECEIPT OF PAYMENTS BY PROSPER IN RESPECT OF THE CORRESPONDING BORROWER LOAN. PROSPER DOES NOT WARRANT OR GUARANTEE IN ANY MANNER THAT YOU WILL RECEIVE ALL OR ANY PORTION OF THE PRINCIPAL OR INTEREST YOU EXPECT TO RECEIVE ON ANY NOTE OR REALIZE ANY PARTICULAR OR EXPECTED RATE OF RETURN.. PROSPER DOES NOT MAKE ANY REPRESENTATIONS AS TO A BORROWER'S ABILITY TO PAY AND DOES NOT ACT AS A GUARANTOR OF ANY LOAN PAYMENT OR PAYMENTS BY ANY BORROWER.

 

  

  

  

 

YOU UNDERSTAND AND AGREE THAT BORROWERS MAY DEFAULT ON THEIR PAYMENT OBLIGATIONS UNDER BORROWER LOANS AND THAT SUCH DEFAULTS WILL REDUCE THE AMOUNTS, IF ANY, YOU MAY RECEIVE UNDER THE TERMS OF ANY NOTES YOU HOLD THAT CORRESPOND TO THOSE BORROWER LOANS.

 

 

6. Servicing and Collection of Borrower Loans. Prosper will service all Prosper borrower loans, both before and after default, and will service all Notes. In servicing borrower loans, Prosper may, in its discretion, utilize affiliated or unaffiliated third party loan servicers, collection agencies or other agents or contractors.

 

 

Prosper and any third-party servicer servicing a borrower loan may, in its sole discretion and subject to the servicing standard set forth in this Section, refer a borrower loan to a collection agency, elect to initiate legal action to collect a borrower loan, or sell a borrower loan to a third party debt buyer at any time. Subject to the fees described below, any amounts received by Prosper on Prosper borrower loans will be forwarded to the holder of the Notes corresponding to the borrower loan.

 

 

Servicing Standard. In servicing borrower loans, Prosper will use commercially reasonable efforts to service and collect the borrower loans in accordance with industry standards customary for loans of the same general type and character as the borrower loans. The referral of a delinquent borrower loan to a collection agency within five (5) business days after it becomes thirty days past-due shall be deemed to constitute commercially reasonable servicing and collection efforts. Prosper and any third-party servicer servicing a borrower loan shall have the right, without your consent, at any time and from time to time and subject to the foregoing servicing standard, to change the payment date, reduce the principal amount or the rate of interest or change the place and manner of making loan payments on a borrower loan, amend or waive any other term of such borrower loan, or charge-off any borrower loan that Prosper or any third-party servicer servicing the borrower loan deems uncollectible.

 

 

Servicing Compensation. As compensation for servicing Prosper borrower loans and Notes, Prosper shall be entitled to retain from payments received on the borrower loans a servicing fee calculated by the application of an annual servicing fee rate to the outstanding principal balance of the Notes. The current servicing fee rates charged by Prosper are posted in the Fees and Charges section of the Prosper website, and are subject to change by Prosper at any time without notice.  However, the servicing fee on each Note will be the servicing fee in effect at the time the listing corresponding to the Note was posted, and will remain unchanged for the term of the Note.  Prosper's current servicing fee rate will be disclosed in all listings.

 

 

Servicing fees will reduce the effective yield on Prosper borrower loans below the borrower interest rate. The servicing fee is payable monthly by deduction from each lender's share of a loan payment by the borrower. The servicing fee is payable on all payments received on borrower loans corresponding to the Notes, including without limitation partial payments made toward a borrower's loan. We will not pay you any non-sufficient funds fees or collection fees we or a third-party collection agency charge, and such fees will be retained by the party receiving the fee as additional servicing compensation. Prosper will pay you any late fees we receive on Prosper borrower loans. Any prepayments received on borrower loans will be paid ratably to the Note holders, subject to applicable servicing fees.

 

 

7. Representations and Warranties as to Notes Sold. Prosper makes the following representations and warranties to you, with respect to each Note sold to you under this Agreement, as of the date the Note is sold, assigned and transferred to you:

 

 

a. Prosper has complied in all material respects with applicable federal, state and local laws in connection with the offer and sale of the Note.

 

 

b. The Note has been duly authorized and, following payment of the purchase price by you and electronic delivery by Prosper to you, will constitute valid and binding obligations of Prosper enforceable against Prosper in accordance with its terms, except as the enforcement of the Note may be limited by applicable bankruptcy, insolvency or similar laws;

 

 

c. The proceeds of the borrower loan corresponding to the Note sold have been fully disbursed to the borrower or the borrower's designated payee prior to your purchase of the Note.

 

  

  

  

 

d. Prosper has made commercially reasonable efforts to authenticate and verify the identity of the borrower obligated on the borrower loan that corresponds to the Note.

 

 

e. In the event either of the following occurs with regard to the listing relating to your Note, the remedies in Section 8 shall apply to your Note: (1) the listing contains a Prosper score different from the score calculated by Prosper for the listing, or (2) Prosper incorrectly applies its formula in determining the Prosper score for the listing, resulting in a Prosper Rating different from the Prosper Rating that should have appeared in the listing. Prosper is not under any obligation to cure, indemnify or repurchase a series of Notes because of the Prosper score or Prosper Rating for any other reason, including because the Prosper score or Prosper Rating proved inaccurate.

 

 

f. In the event of a material default on a Note you purchase from Prosper that is the result of verifiable identity theft of the named borrower's identity, Prosper will repurchase the Note by crediting your Prosper funding account with the remaining unpaid principal balance of the Note. The determination of whether verifiable identity theft has occurred shall be in Prosper's sole discretion. We may require proof of the identity theft, such as a copy of a police report filed by the person whose identity was wrongfully used to obtain the fraudulently-induced borrower loan, an identity theft affidavit or a bank verification letter (or all of the above) in order to determine that verifiable identity theft has occurred. Prosper shall not be required to repurchase a Note under this subsection until such Note is at least 120 days past-due, provided, however, that Prosper may in its sole discretion elect to repurchase a Note at an earlier time. You agree that repurchase of your Note by Prosper is the sole remedy you will have with respect to any such Notes.

 

 

8. Remedies; Cure and Repurchase of Loans. In the event of a breach by Prosper of any of the foregoing representations and warranties that materially and adversely affects your interest in a Note sold to you by Prosper, Prosper shall either (i) cure the breach, if the breach is susceptible to cure, (ii) repurchase the Note from you, or (iii) indemnify and hold you harmless against all losses (including losses resulting from the nonpayment of the Note), damages, expenses, legal fees, costs and judgments resulting from any claim, demand or defense arising as a result of the breach. The decision whether a breach is susceptible to cure, or whether Prosper shall cure or repurchase a Note or indemnify you with respect to the Note, shall be in Prosper's sole discretion. Upon discovery by Prosper of any such breach of the foregoing representations and warranties requiring cure, indemnification or repurchase of the Note, Prosper shall give you notice of the breach, and of Prosper's election to cure, indemnify or repurchase the Note, no later than ninety (90) days after our discovery of the breach. In the event Prosper repurchases a Note, Prosper will pay you a repurchase price equal to the remaining outstanding principal balance of the Note as of the date of repurchase. The repurchase price will be paid to you by remittance into the Prosper funding account. Upon any such repurchase, the Note shall be transferred and assigned by you to Prosper, in each case without recourse, and you authorize and agree that Prosper may execute any endorsements or assignments necessary to effectuate the transfer and assignment of the Note to Prosper. Prosper's obligation to cure or repurchase a Note or indemnify you for a breach of the foregoing representations and warranties pursuant to this Section is your sole remedy with respect to a breach of Prosper's representations and warranties set forth in Section 7 above.

 

 

9. No Advisory Relationship. You acknowledge and agree that (i) the purchase and sale of the Notes is an arms-length transaction between you and Prosper; (ii) in connection with the purchase and sale of the Notes, Prosper is not acting as your agent or fiduciary; (iii) Prosper assumes no advisory or fiduciary responsibility with respect to you in connection with the purchase and sale of the Notes; (iv) Prosper has not provided you with any legal, accounting, regulatory or tax advice with respect to the Notes; and (v) you have consulted your own legal, accounting, regulatory and tax advisors with respect to the Notes to the extent you have deemed it appropriate.

 

 

10. Prosper's Right to Verify Information and Cancel Funding.

 

 

a. Prosper reserves the right to verify the accuracy of all information provided by borrowers, lenders and group leaders in connection with listings, bids and loans. Prosper also reserves the right to determine in its reasonable discretion whether a registered user is using, or has used, the Prosper website illegally or in violation of any order, writ, injunction or decree of any court or governmental instrumentality, for purposes of fraud or deception, or otherwise in a manner inconsistent with the Prosper Terms and Conditions or any registration agreement between Prosper and such user. Prosper may conduct its review at any time - before, during or after the posting of a listing, or before or after the funding or Prosper's purchase of a

 

  

  

  

 

borrower loan or the sale of a Note. You agree to respond promptly to Prosper's requests for information in connection with any such review by Prosper.

 

 

b. In the event Prosper or WebBank, prior to the funding or Prosper's purchase of a borrower loan, reasonably determines that a listing, or a bid for the listing, contains materially inaccurate information (including but not limited to unintended inaccuracies, inaccuracies resulting from errors by Prosper, or inaccuracies resulting from changes in the borrower's income, residence or credit profile between the date a listing is posted and the date the listing is to be funded) or was posted illegally or in violation of any order, writ, injunction or decree of any court or governmental instrumentality, for purposes of fraud or deception, or otherwise in a manner inconsistent with the Prosper Terms and Conditions or any registration agreement, Prosper may refuse to post the listing or, if the listing has already been posted, remove the listing from the Prosper marketplace and cancel all bids against the listing.

 

 

c. When a listing ends with bids equal to or exceeding the minimum amount required for the loan to fund, Prosper may conduct a "pre-funding" review prior to the funding or Prosper's purchase of the borrower loan. Prosper may, at any time and in its sole discretion, delay the funding or Prosper's purchase of a borrower loan in order to enable Prosper to verify the accuracy of information provided by borrowers, lenders and group leaders in connection with the listing or bids against the listing, and to determine whether there are any irregularities with respect to the listing or the bids against the listing. Prosper may cancel or proceed with the funding or Prosper's purchase of the borrower loan, depending on the results of Prosper's pre-funding review. If funding is cancelled, the listing will be removed from the Prosper marketplace, all bids against the listing will be cancelled, and the lenders will no longer be required to maintain funds in the Prosper funding account in the amount of their respective bids.

 

 

d. In most instances, Prosper and WebBank do not verify the income, employment, occupation or other information provided by borrowers in listings. The borrower's income, employment and occupation in listings are self-reported, and the borrower's debt-to-income ratio is determined by Prosper and WebBank from a combination of the borrower's self-reported income and information from the borrower's credit report. The credit data that appears in Prosper borrower listings is taken directly from a credit report obtained on the borrower from a credit reporting agency, without any review or verification by Prosper or WebBank. Prosper and WebBank do not verify any statements by borrowers in Prosper borrower listings as to how loan proceeds are to be used and does not confirm after borrower loan funding how loan proceeds were used. In most instances homeownership status in borrower listings is derived from the borrower's credit report, but is not verified by Prosper or WebBank; if the report reflects an active mortgage loan, the borrower is presumed to be a homeowner. In connection with Prosper's and WebBank's identity and anti-fraud verification of borrowers, Prosper verifies the borrower's deposit account to determine that the borrower is a holder of record of the account.

 

 

11. No Guarantee of Returns or Payments.

 

 

A. PROSPER DOES NOT WARRANT OR GUARANTEE THAT YOU WILL RECEIVE ANY RATE OF RETURN, OR ANY MINIMUM AMOUNT OF PRINCIPAL OR INTEREST ON ANY NOTE, OR ANY PRINCIPAL OR INTEREST AT ALL. THE AMOUNT YOU RECEIVE ON A NOTE IS WHOLLY DEPENDENT UPON THE BORROWERS' PAYMENT PERFORMANCE ON THE BORROWER LOAN CORRESPONDING TO YOUR NOTE. PROSPER DOES NOT GUARANTEE ANY BORROWER LOANS OR NOTES PURCHASED OR SOLD THROUGH THE PLATFORM AND DOES NOT ACT AS A GUARANTOR OF ANY LOAN PAYMENT OR PAYMENTS BY ANY BORROWER.

 

 

B. YOU FURTHER UNDERSTAND AND ACKNOWLEDGE THAT BORROWERS MAY DEFAULT ON THE BORROWER LOANS CORRESPONDING TO YOUR NOTES, AND THAT SUCH DEFAULTS MAY NEGATIVELY AFFECT THE AMOUNT OF PRINCIPAL AND INTEREST YOU RECEIVE ON YOUR NOTES.

 

 

12. Restrictions on Use. Except as provided in Section 14 below, you are not authorized or permitted to use Prosper to bid on or purchase Notes for someone other than yourself. You must be an owner of the deposit account you designate for electronic transfers of funds, with authority to direct that funds be transferred to or from the account. Although you are registering as a lender, you may also register and participate in the Prosper marketplace as a borrower. If you obtain one or more borrower loans through the platform, amounts in your Prosper funding account are subject to set-off against any delinquent amounts owing on your loans. Amounts in your Prosper funding account are also subject to set-off against any

 

  

  

  

 

shortfall resulting from ACH returns of transfers or deposits of funds to your Prosper funding account. You will not receive further notice in advance of our exercise of our right to set-off amounts in your Prosper funding account against any delinquent amounts owing on any loan or loans you obtain. Prosper may in its sole discretion, with or without cause and with or without notice, restrict your access to the platform or the Prosper website.

 

 

13. Financial Suitability Representations and Warranties. You represent and warrant that you satisfy the applicable minimum financial suitability standards and maximum investment limits, established for the platform and the Note Trader platform, and you agree to provide any additional documentation reasonably requested by us, or as may be required by the Securities and Exchange Commission or the securities administrator of any state, to confirm that you meet such minimum financial suitability standards and maximum investment limits. You understand that the Notes will not be listed on any securities exchange, that there may be no, or only a limited, secondary market for the Notes, that any trading of Notes must be conducted in accordance with federal and applicable state securities laws and that Note purchasers should be prepared to hold the Notes they purchase until the Notes mature.

 

 

14. Your Other Representations and Warranties. You warrant and represent to Prosper, as of the date of this Agreement and as of any date that you commit to purchase Notes, that (i) you have received the Prospectus, the Indenture, and the form of the Note; (ii) you have the legal competence and capacity to execute and perform this Agreement and have duly authorized, executed and delivered this Agreement; and (iii) in connection with this Agreement you have complied in all material respects with applicable federal, state and local laws. In addition, if the person entering this Agreement is a corporation, partnership, limited liability company or other entity (each, an "institution"), the institution warrants and represents that (i) the individual executing this Agreement on behalf of the institution has all necessary power and authority to execute and perform this Agreement on the institution's behalf; (ii) the execution and performance of this Agreement will not violate any provision in the institution's charter documents, by-laws, indenture of trust or partnership agreement, or other constituent agreement or instrument governing the institution’s formation or administration; and (iii) the execution and performance of this Agreement will not constitute or result in a breach or default under, or conflict with, any order, ruling or regulation of any court or other tribunal or of any governmental commission or agency, or any agreement or other undertaking to which the institution is a party or by which it is bound.

 

 

15. Prosper's Representations and Warranties. Prosper represents and warrants to you, as of the date of this Agreement and as of any date that you commit to purchase Notes, that: (a) it is duly organized and is validly existing as a corporation in good standing under the laws of Delaware and has corporate power to enter into and perform its obligations under this Agreement; (b) this Agreement has been duly authorized, executed and delivered by Prosper; (c) the Indenture has been duly authorized by Prosper and qualified under the Trust Indenture Act of 1939 and constitutes a valid and binding agreement of Prosper, enforceable against Prosper in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency or similar laws.

 

 

16. Recommendations from Prosper Friends. Prosper allows borrowers to create a network of Prosper friends, and obtain bids and recommendations of listings from one or more of the borrower's designated Prosper friends. Recommendations accompanying bids from borrowers' Prosper friends are displayed with borrowers' listings. Prosper friends do not guarantee payments on any Note or on any corresponding borrower loan, and a bid or recommendation from a borrower's Prosper friend does not obligate the individual making the bid or recommendation to guarantee or make any payments on any Note or on any corresponding borrower loan.

 

 

17. Prohibited Activities. You agree that you will not do the following, in connection with any listings, bids, Notes, borrower loans or other transactions involving or potentially involving Prosper:

 

 

a. Represent yourself to any person, as a director, officer or employee of Prosper, or WebBank, unless you are such director, officer or employee;

 

 

b. Charge, or attempt to charge, any Prosper borrower any fee in exchange for your agreement to bid on or recommend a borrower's listing, or propose or agree to accept any fee, bonus, additional interest, kickback or thing of value of any kind, in exchange for your agreement to bid on or recommend a borrower's listing;

 

  

  

  

 

c. Engage in any activities that require a license as a loan broker, credit services organization, credit counselor, credit repair organization, lender or other regulated entity, including but not limited to soliciting loans or loan applications, quoting loan terms and rates, counseling borrowers on credit issues or loan options, in connection with any Prosper loan;

 

 

d. Take any action on your own to collect, or attempt to collect from any borrower, directly or through any third party, any amount owing under any of your Notes or on any of the borrower loans that correspond to your Notes;

 

 

e. Bring a lawsuit or other legal proceeding against any borrower on any borrower loan;

 

 

f. Contact borrowers on any borrower loans corresponding to your Notes without the borrower's consent;

 

 

g. Contact any collection agency or law firm to which any borrower loan corresponding to your Note has been referred for collection;

 

 

h. Include or display any personally identifying information, including, without limitation, name, address, phone number, email address, Social Security number or driver's license number, or bank account or credit card numbers of any Prosper member on your Prosper member web page, or any blog, website or other public forum;

 

 

i. Contact a borrower, group leader or Prosper friend or take any action to collect, or attempt to collect, any amount from any group leader or any of the borrower's Prosper friends that provided a recommendation of a listing relating to any of your Notes, or take any action that directly or indirectly suggests that any borrower's group leader or Prosper friend is obligated in any way on a borrower loan corresponding to any Note; or

 

 

j. Violate any applicable federal, state or local laws, including but not limited to, the Equal Credit Opportunity Act and other fair lending laws, Truth in Lending Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Federal Trade Commission Act, federal or state consumer privacy laws, state usury or loan fee statutes, state licensing laws, or state unfair and deceptive trade practices statutes.

 

 

18. Tax Treatment. The parties agree that the Notes are intended to be indebtedness of Prosper that have original issue discount for U.S. federal income tax purposes. You agree that you will not take any position inconsistent with such treatment of the Notes for tax, accounting, or other purposes, unless required by law. You further acknowledge that the Notes will be subject to the original issue discount rules of the Internal Revenue Code of 1986, as amended, as described in the Prospectus. You acknowledge that you are prepared to bear the risk of loss of your entire purchase price for any Notes you purchase.

 

 

19. Termination of Registration. Prosper may in its sole discretion, with or without cause, terminate this Agreement by giving you notice as provided below. In addition, upon our reasonable determination that you committed fraud or made a material misrepresentation in connection with a listing, bid or loan, performed any prohibited activity, or otherwise failed to abide by the terms of this Agreement or the Prosper Terms and Conditions, Prosper may, in its sole discretion, immediately and without notice, take one or more of the following actions: (i) terminate or suspend your right to bid or otherwise participate in the Prosper marketplace; or (ii) terminate this Agreement and your registration with Prosper. Upon termination of this Agreement and your registration with Prosper, any bids you have placed on the platform may be terminated, and may be removed from the platform immediately. Any Notes you purchase from Prosper prior to the effective date of termination shall remain in full force and effect in accordance with their terms.

 

 

20. Indemnification. In addition to your indemnification obligations set forth in Prosper's Terms and Conditions, you agree to indemnify, defend, protect and hold harmless Prosper and its officers, directors, shareholders, employees and agents against all claims, liabilities, actions, costs, damages, losses, demands and expenses of every kind, known or unknown, contingent or otherwise, (i) resulting from any material breach of any obligation you undertake in this Agreement, including but not limited to your obligation to comply with any applicable laws; (ii) relating to the contents of your Prosper member web page, your own website or your business; (iii) resulting from your acts, omissions and representations (and those of your employees, agents or representatives) relating to Prosper; or (iv) asserted by third parties against Prosper alleging that the trademarks, trade names, logos or branding you use, display, link to or advertise infringes

 

  

  

  

 

upon the intellectual property rights of any such third party. Your obligation to indemnify Prosper shall survive termination of this Agreement, regardless of the reason for termination.

 

 

21. Prosper's Right to Modify Terms. Prosper has the right to change any term or provision of this Agreement or the Prosper Terms and Conditions. Prosper will give you notice of material changes to this Agreement, or the Prosper Terms and Conditions, in the manner set forth in Section 23. You authorize Prosper to correct obvious clerical errors appearing in information you provide to Prosper, without notice to you, although Prosper expressly undertakes no obligation to identify or correct such errors. This Agreement, along with the Indenture, Notes and Prosper Terms and Conditions, represent the entire agreement between you and Prosper regarding your participation as a lender on the platform, and supersede all prior or contemporaneous communications, promises and proposals, whether oral, written or electronic, between you and Prosper with respect to your involvement as a lender on the platform.

 

 

22. Member Web Page Display and Content. You may, but are not required to, maintain a "Prosper member web page" on the Prosper website, where you can post content, logos or links to websites. If you elect to do so, you authorize Prosper to display on the Prosper website all such material you provide to Prosper. Any material you display on your member page must conform to the Prosper Terms and Conditions, as amended from time to time, and material you display or link to must not (i) infringe on Prosper's or any third party's copyright, patent, trademark, trade secret or other proprietary rights or right of publicity or privacy; (ii) violate any applicable law, statute, ordinance or regulation; (iii) be defamatory or libelous; (iv) be lewd, hateful, violent, pornographic or obscene; (v) violate any laws regarding unfair competition, anti-discrimination or false advertising; (vi) promote violence or contain hate speech; (vii) contain viruses, trojan horses, worms, time bombs, cancelbots or other similar harmful or deleterious programming routines.

 

 

23. Notices. All notices and other communications hereunder shall be given by email to your registered email address or will be posted on the Prosper website, and shall be deemed to have been duly given and effective upon transmission or posting. All notices, required disclosures and other communications to you from the trustee under the Indenture relating to Notes you own will be transmitted to you by e-mail to your registered e-mail address or mailed to you at the address as it appears on the registration books of the Registrar under the Indenture. You can contact us by sending an email to support@prosper.com or calling us toll-free at (866) 615-6319. You also agree to notify us if your registered email address changes, and you agree to update your registered residence address on the Prosper website if you change your residence.

 

 

24. No Warranties. EXCEPT FOR THE REPRESENTATIONS CONTAINED IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATIONS OR WARRANTIES TO THE OTHER PARTY, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

 

 

25. Limitation on Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY LOST PROFITS OR SPECIAL, EXEMPLARY, CONSEQUENTIAL OR PUNITIVE DAMAGES, EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. FURTHERMORE, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHER REGARDING THE EFFECT THAT THE AGREEMENT MAY HAVE UPON THE FOREIGN, FEDERAL, STATE OR LOCAL TAX LIABILITY OF THE OTHER.

 

 

26. Miscellaneous. The parties acknowledge that there are no third party beneficiaries to this Agreement. You may not assign, transfer, sublicense or otherwise delegate your rights under this Agreement to another person without Prosper's prior written consent. Any such assignment, transfer, sublicense or delegation in violation of this Section shall be null and void. This Agreement shall be governed by the laws of the State of New York. Any waiver of a breach of any provision of this Agreement will not be a waiver of any other subsequent breach. Failure or delay by either party to enforce any term or condition of this Agreement will not constitute a waiver of such term or condition. If any part of this Agreement is determined to be invalid or unenforceable under applicable law, then the invalid or unenforceable provision will be deemed superseded by a valid enforceable provision that most closely matches the intent of the original provision, and the remainder of the Agreement shall continue in effect. The parties agree to execute and deliver such further documents and information as may be reasonably required in order to effectuate the purposes of this Agreement.

 

  

  

  

 

 

EXHIBIT A

INDENTURE

 

Available at http://www.prosper.com/downloads/Legal/Prosper_Indenture_2009-06-15.pdfex10-1.htm

Exhibit 10.1

 

 

SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) dated effective as of December 14, 2010 is made by and between Balqon Corporation, a Nevada corporation (the “Company”), and Seven One Limited, a company organized under the laws of the British Virgin Islands (the “Purchaser”).

 

RECITALS

 

WHEREAS, the Purchaser desires to purchase, and the Company desires to issue and sell, upon the terms and conditions stated in this Agreement, (i) 7,812,500 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and (ii) a warrant (the “Warrant”) in the form attached to this Agreement as Exhibit A to acquire up to 7,812,500 shares (the “Warrant Shares”) of the Company’s Common Stock;

 

WHEREAS, it is the intention of the parties that on or about the Closing (as defined below) the Company and the Purchaser shall enter into an distribution agreement (the “Distribution Agreement”) pursuant to which, upon terms mutually agreed to by the Company and the Purchaser, the Company will become the exclusive distributor in the United States of lithium iron phosphate batteries and high voltage charging systems manufactured by the Purchaser’s affiliate, Thunder Sky Battery Limited (also known as Winston Battery Limited), for a period of three years;

 

WHEREAS, in connection with entering into the Distribution Agreement, the Company will issue to the Purchaser (i) 1,375,000 shares of Common Stock (“Distribution Shares”), and (ii) a five-year warrant (“Distribution Warrant”) to purchase up to 1,500,000 shares of Common Stock (“Distribution Warrant Shares”) at an exercise price per share of $1.50; and

 

WHEREAS, it is the intention of Balwinder Samra, President and Chief Executive Officer of the Company, and Purchaser that on or about the Closing, Mr. Samra and Purchaser shall enter into a voting agreement (the “Voting Agreement”), which Voting Agreement shall provide for certain arrangements and understandings respecting ownership of the Company’s voting securities and other matters as set forth in the Voting Agreement.

 

NOW, THEREFORE, in consideration of the agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

 

ARTICLE I

DEFINITIONS

 

1.1 Definitions. Capitalized terms that are not otherwise defined herein have the meanings given to such terms in this Section 1.1:

 

“Action” shall have the meaning ascribed to such term in Section 3.1(j).

 

  

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“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 405 under the Securities Act.

 

“Board of Directors” means the board of directors of the Company.

 

“Bridge Bank” means Bridge Bank, National Association.

 

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

 

“Closing” shall have the meaning ascribed to such term in Section 2.2.

 

“Commission” means the United States Securities and Exchange Commission.

 

“Common Stock” shall have the meaning ascribed to such term in the Recitals hereto.

 

“Common Stock Equivalents” means any securities of the Company which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

 

“Disclosure Schedules” shall have the meaning ascribed to such term in Section 3.1.

 

“Distribution Agreement” shall have the meaning ascribed to such term in the Recitals hereto.

 

“Environmental Laws” shall have the meaning ascribed to such term in Section 3.1(x).

 

“Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(r).

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Intellectual Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).

 

“Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

 

“Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).

 

“Material Permits” shall have the meaning ascribed to such term in Section 3.1(m).

 

  

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“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.

 

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.

 

“Properties” shall have the meaning ascribed to such term in Section 3.1(x).

 

“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).

 

“Registration Rights Agreement” means that certain Registration Rights Agreement between the Company and Purchaser in the form attached to this Agreement as Exhibit B.

 

“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 have the meaning ascribed to such term in Section 3.1(h).

 

“Securities” means the Shares, the Warrant and the Warrant Shares.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

“Shares” shall have the meaning ascribed to such term in the Recitals hereto

 

“Trading Day” means a day on which the principal Trading Market is open for trading.

 

“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE AMEX, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global Select Market, the New York Stock Exchange or the OTC Bulletin Board (or any successors to any of the foregoing).

 

“Transaction Documents” means this Agreement, the Distribution Agreement, the Registration Rights Agreement, the Warrant, all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated hereunder.

 

“Transfer Agent” means Signature Stock Transfer, the current transfer agent of the Company, with a mailing address of 2301 Ohio Drive, Suite 100, Plano, Texas  75093, and any successor transfer agent of the Company.

 

“Voting Agreement” means that certain Voting Agreement between Balwinder Samra and Purchaser in the form attached to this Agreement as Exhibit C.

 

  

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“Warrant” shall have the meaning ascribed to such term in the Recitals hereto.

 

“Warrant Shares” shall have the meaning ascribed to such term in the Recitals hereto.

 

ARTICLE II

PURCHASE AND SALE

 

2.1 Issuance, Sale and Delivery of the Shares and Warrant at the Closing.  At the Closing, on the terms and subject to the conditions of this Agreement, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, the Shares and a Warrant to purchase the Warrant Shares, for the aggregate purchase price of $5,000,000.

 

2.2 Closing. The closing (“Closing”) shall take place at 10:00 a.m. at the offices of Rutan & Tucker, LLP, 611 Anton Blvd., Costa Mesa, California, on the date hereof.  At the Closing, the Company shall issue to the Purchaser (i) the Shares and (ii) a Warrant in definitive form, registered in the name of the Purchaser representing the right to purchase the Warrant Shares.  As payment in full for the Shares and Warrant being purchased by it under this Agreement, and against delivery of the stock certificate or certificates therefor and Warrant as aforesaid, on the Closing Date, the Purchaser shall pay to the Company by wire transfer or by such other method as may be reasonably acceptable to the Company, in immediately available funds in the amount of $5,000,000.  Such amount shall be paid to the account as shall have been designated in writing to the Purchaser at least two (2) business days prior to the date of the Closing by the Company.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

3.1 Representations and Warranties of the Company. Except as set forth in the Disclosure Schedules, which Disclosure Schedules shall be deemed a part hereof and shall qualify any representation or otherwise made herein to the extent of the disclosure contained in the corresponding section of the Disclosure Schedules, the Company hereby makes the following representations and warranties to each Purchaser as of the Closing:

 

(a) Subsidiaries.  The Company has no direct or indirect subsidiaries.

 

(b) Organization and Qualification. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company is not in violation nor default of any of the provisions of its respective articles of incorporation, bylaws or other organizational or charter documents. The Company is duly qualified to conduct business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business or condition (financial or otherwise) of the Company, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

 

  

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(c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the Board of Directors or the Company’s stockholders in connection therewith other than the Required Approvals. Each Transaction Document to which it is a party has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

(d) No Conflicts. Subject to the Required Approvals, the execution, delivery and performance by the Company of the Transaction Documents, the issuance and sale of the Securities and the consummation by the Company of the transactions contemplated hereby and thereby to which it is a party do not and will not: (i) conflict with or violate any of the provisions of the Company’s articles of incorporation, bylaws or other organizational or charter documents, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company debt or otherwise) or other understanding to which the Company is a party or by which any property or asset of the Company is bound or affected, or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.

 

(e) Filings, Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than: (i) the filings required pursuant to Section 4.9, and (ii) the filing of a Form D with the Commission and such filings as are required to be made under applicable state securities laws (collectively, the “Required Approvals”).

 

  

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(f) Issuance of the Securities. The Shares and the Warrant are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Warrant Shares, when issued in accordance with the terms of the Warrant, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Company will reserve from its duly authorized capital stock a number of shares of Common Stock issuable pursuant to this Agreement and for issuance of the Warrant Shares.

 

(g) Capitalization.  The capitalization of the Company is as set forth in Section 3.1(g) of the Disclosure Schedule. The Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than as set forth on Section 3.1(g) of the Disclosure Schedule, pursuant to the exercise of employee stock options under the Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock purchase plans and pursuant to the conversion and/or exercise of Common Stock Equivalents outstanding as of the date of the most recently filed periodic report under the Exchange Act. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities and except as set forth in Section 3.1(g) of the Disclosure Schedule, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchaser). All of the outstanding shares of capital stock of the Company are validly issued, fully paid and non-assessable, have been issued in compliance with all federal and state securities laws (subject to the filing of a Form D with the Commission and such other filings as are required to be made under applicable state securities laws), and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the Securities. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s shareholders.

 

  

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(h) SEC Reports; Financial Statements. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or Section 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “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, as applicable, 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 the light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports 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 accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all 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, immaterial, year-end audit adjustments.

 

(i) Material Changes; Undisclosed Events, Liabilities or Developments. Since the date of the latest audited financial statements included within the SEC Reports, except as set forth on Section 3.1(i) of the Disclosure Schedule or specifically disclosed in a subsequent SEC Report filed prior to the date hereof: (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) 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 disclosed in filings made with the Commission prior to the Closing, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option plans. The Company does not have pending before the Commission any request for confidential treatment of information. Except for the issuance of the Securities contemplated by this Agreement, no event, liability, fact, circumstance, occurrence or development has occurred or exists or is reasonably expected to occur or exist with respect to the Company or its business, properties, operations, assets or financial condition, that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made or deemed made that has not been publicly disclosed at least one (1) Trading Day prior to the date that this representation is made.

 

  

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(j) Litigation. There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company or its properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company under the Exchange Act or the Securities Act.

 

(k) Labor Relations. No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company, which could reasonably be expected to result in a Material Adverse Effect. None of the Company’s employees is a member of a union that relates to such employee’s relationship with the Company, and neither the Company is a party to a collective bargaining agreement, and the Company believes that their relationships with their employees are good. No executive officer, to the knowledge of the Company, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company to any liability with respect to any of the foregoing matters. The Company is in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

 

(l) Compliance. The Company is not: (i) in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company under), nor has the Company received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) in violation of any judgment, decree or order of any court, arbitrator or governmental body or (iii) in or has not been in violation of any statute, rule, ordinance or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business and all such laws that affect the environment, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.

 

  

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(m) Regulatory Permits. The Company possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and the Company has not received any notice of proceedings relating to the revocation or modification of any Material Permit.

 

(n) Title to Assets.  The Company has good and marketable title in fee simple to all real property owned by it and good and marketable title in all personal property owned by it that is material to the business of the Company, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company, Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties and Liens set forth on Section 3.1(n) of the Disclosure Schedule. Any real property and facilities held under lease by the Company is held by the Company under valid, subsisting and enforceable leases with which the Company is in compliance.

 

(o) Patents and Trademarks. The Company has rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights as described in the SEC Reports as necessary or material for use in connection with their respective businesses and which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”).  The Company has not received a notice (written or otherwise) that any of the Intellectual Property Rights used by the Company violates or infringes upon the rights of any Person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. The Company has taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

 

(p) Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company is engaged, including, but not limited to, directors and officers insurance coverage. The Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.

 

  

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(q) Transactions With Affiliates and Employees. Except as set forth in the SEC Reports, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $120,000 other than for: (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) other employee benefits, including stock option agreements under any stock option plan of the Company.

 

(r) Sarbanes-Oxley; Internal Accounting Controls. The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of each Closing. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. The Company’s certifying officers have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”). The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no changes in the Company’s internal control over financial reporting (as such term is defined in the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

(s) Certain Fees. No brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents. The Purchaser shall have no obligation with respect to any 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 by the Transaction Documents.

 

  

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(t) Listing and Maintenance Requirements. The Common Stock is registered pursuant to Section 12(b) or Section 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration. The Company has not, in the twelve (12) months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

 

(u) No Integrated Offering. Assuming the accuracy of the Purchaser’s representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of (i) the Securities Act which would require the registration of any such securities under the Securities Act, or (ii) any applicable shareholder approval provisions of any Trading Market on which any of the securities of the Company are listed or designated.

 

(v) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the Company has no knowledge of a tax deficiency which has been asserted or threatened against the Company.

 

(w) Foreign Corrupt Practices. Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has: (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

 

  

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(x) Environmental Matters.  Except as otherwise disclosed in the SEC Reports, the Company is in compliance in all material respects with the terms and conditions of the applicable Environmental Laws, and is also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws.  The Company has not received any notice of whatever form alleging noncompliance with any Environmental Law and, to the knowledge of the Company, no previous owner or operator of any real property leased and/or operated by the Company (collectively, the “Properties”) or any business currently owned or operated by the Company has received any such notice alleging noncompliance with any Environmental Law.  None of the Properties or any other assets of the Company include any equipment, machinery, device, or other apparatus that contains polychlorinated biphenyls that is now or ever has been leaking, any asbestos that is or reasonably may be anticipated to become in friable condition, or any underground tank.  For purposes herein, Environmental Laws means all federal, state and local laws, rules and regulations relating to pollution or protection of the environment such as laws relating to emissions, discharges, releases or threatened releases of hazardous, toxic or other pollutants, contaminants, chemicals or industrial material, into the natural environment, including, without limitation, into ambient air, surface water, ground water, land surface or subsurface strata or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of hazardous, toxic or other pollutants, contaminants, chemicals or industrial materials, substances or wastes, together with all regulations, rules, codes, plans, decrees, judgments, injunctions, notices and demand letters issued, entered, promulgated or approved thereunder.

 

(y) Full Disclosure.  No representation, warranty or statement made by the Company in this Agreement, or in any other material furnished or to be furnished by the Company to the Purchaser contains any untrue statement of a material fact, or omits to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading.  There is no fact which the Company has not disclosed to the Purchaser herein and of which the Company or any of its officers, directors or executive employees is aware which could reasonably be anticipated to have a Material Adverse Effect on the Company or the ability of the Company to continue operating the business in the same manner as the Company has been conducted prior to the Closing Date.  The Company has disclosed to the Purchaser all material information relating to the Company or the transactions contemplated by this Agreement.

 

3.2 Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants as of the date hereof to the Company as follows (unless as of a specific date therein):

 

(a) Organization; Authority. The Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of the Transaction Documents and performance by the Purchaser of the transactions contemplated by the Transaction Documents have been duly authorized by all necessary corporate, partnership, limited liability company or similar action, as applicable, on the part of the Purchaser. Each Transaction Document to which it is a party has been duly executed by the Purchaser, and when delivered by the Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of the Purchaser, enforceable against it in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

  

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(b) Own Account. The Purchaser understands that the Securities are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities in violation of the Securities Act or any applicable state securities law (this representation and warranty not limiting the Purchaser’s right to sell the Securities pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws).

 

(c) Purchaser Status. At the time the Purchaser was offered the Securities, it was, and as of the date hereof it is, and on each date on which it exercises any Warrants it will be either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act, (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act and/or (iii) a non “U.S. Person” as defined under Regulation S under the Securities Act. The Purchaser is not required to be registered as a broker-dealer under Section 15 of the Exchange Act.

 

(d) Experience of the Purchaser. the Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. The Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.

 

(e) General Solicitation. The Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

 

The Company acknowledges and agrees that the representations contained in Section 3.2 shall not modify, amend or affect such Purchaser’s right to rely on the Company’s representations and warranties contained in this Agreement or any representations and warranties contained in any other Transaction Document or any other document or instrument executed and/or delivered in connection with this Agreement or the consummation of the transaction contemplated hereby.

 

ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

 

4.1 Transfer Restrictions.

 

  

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(a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of the Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, 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. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights and obligations of the Purchaser under this Agreement.

 

(b) The Purchaser agrees to the imprinting, so long as is required by this Section 4.1, of a legend on any of the Securities in the following form:

 

[NEITHER] THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER 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. THIS SECURITY [AND THE SECURITIES ISSUABLE UPON [EXERCISE] OF THIS SECURITY] MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

The Company acknowledges and agrees that the Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, the Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities.

 

  

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4.2 Use of Proceeds. The Company shall use the proceeds from the sale of the Securities in the manner set forth in Schedule 4(2) attached hereto and made a part hereof and shall not, directly or indirectly, use such proceeds for any loan to or investment in any other corporation, partnership, enterprise or other person. Any change in the use of proceeds shall require the consent of Purchaser.

 

4.3 Indemnification of Purchaser. Subject to the provisions of this Section 4.3, the Company will indemnify and hold the Purchaser and its directors, officers, shareholders, members, partners, employees and agents (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls the Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members, partners or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of such controlling persons (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents.  If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (y) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (z) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents.

 

4.4 Appointment to Board.  The Purchaser’s obligations at the Closing are conditioned upon the Purchaser receiving confirmation from the Company that all necessary action on the part of the Company has been taken for Mr. Winston Chung to be appointed as a member and the chairman of the Board of Directors of the Company effective upon the Closing.

 

4.5 Legal Opinion.  The Purchaser’s obligations at the Closing are conditioned upon the Purchaser receiving a legal opinion from Rutan & Tucker, LLP in a form customary in transactions similar to the transactions consummated by this Agreement.

 

  

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4.6 Accredited Investor and/or Non U.S. Person Certification.  The Company’s obligations at the Closing are conditioned upon the Company receiving from the Purchaser certifications and assurances required to ensure compliance with the securities laws of the United States.

 

4.7 Delivery of Stock Certificate.  Within five (5) Trading Days of the Closing, the Company shall deliver to the Purchaser a stock certificate in definitive form, registered in the name of the Purchaser, representing the Shares.

 

4.8 Reservation of Shares of Common Stock.  The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Warrant in such amount as may then be required to fulfill its obligations in full under the Warrant.

 

4.9 Company Deliveries.  The Purchaser’s obligations at the Closing are conditioned upon the Purchaser receiving from the Company a good standing certificate from Secretary of State of the State of Nevada dated within 10 days of the Closing, together with a verbal bring-down on the date of the Closing.

 

4.10 HSR Act Filings.  To the extent required with respect to the Shares and the Warrant Shares, the Company will file, and will provide any and all assistance to the Purchaser necessary to enable the Purchaser to file, all notices, reports and other documents required to be filed with governmental entities, including without limitation the Federal Trade Commission and the U.S. Department of Justice, in connection with the transactions set forth in the Transaction Documents.  Without limitation, if and as requested by the Purchaser, the Company shall prepare and file, as promptly as practical, one or more Notification and Report Forms complying with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and related laws, rules and regulations.  For the avoidance of doubt, after the Closing no Warrant Shares or Distribution Agreement Shares shall be issued to the Purchaser pursuant to the Transaction Documents until such time as any waiting period required by the HSR Act in connection with such issuance shall have expired or been terminated.

 

4.11 Distribution Agreement.  The parties will negotiate in good faith the terms of a Distribution Agreement mutually acceptable to the Company and the Purchaser, which Distribution Agreement shall be executed by the parties thereto at or about the date of the Closing of the purchase and sale of the Shares and Warrant pursuant to the terms and conditions of this Agreement.

 

4.12 Registration Rights Agreement.  The parties will execute and deliver the Registration Rights Agreement at the Closing.

 

4.13 Voting Agreement.  Balwinder Samra and Purchaser will execute and deliver the Voting Agreement at the Closing.

 

4.14 Further Assurances. The parties agree (i) to furnish upon request to each other such further information, (ii) to execute and deliver to each other such other documents, and (iii) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the documents referred to in this Agreement.

 

  

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ARTICLE V

MISCELLANEOUS

 

5.1 Fees and Expenses. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its 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 this Agreement. The Company shall pay all Transfer Agent fees, stamp taxes and other taxes and duties levied in connection with the delivery of any Securities to the Purchaser.

 

5.2 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.

 

5.3 Notices.  Any notice, request, demand or other communication required or permitted to be given to a party pursuant to the provisions of this Agreement will be in writing and will be effective and deemed given under this Agreement on the earliest of:  (a) the date of personal delivery, (b) the date of transmission by facsimile, with confirmed transmission and receipt, (c) two (2) days after deposit with a nationally-recognized courier or overnight service and (d) five (5) days after mailing via first-class mail.  All notices not delivered personally or by facsimile will be sent with postage and other charges prepaid and properly addressed to the party to be notified at the address set forth for such party (i) if to the Purchaser, to Seven One Limited, No. 3 Industrial Zone, Lisonglang Village, Gongming Town, Bao’an Dist., Shenzhen, P.R.C., attention: Mr. Winston Chung, with a copy to Quintairos, Prieto, Wood & Boyer, P.A., One East Broward Boulevard, Suite 1400, Fort Lauderdale, Florida, 33301, attention: Robert Cousins, Esq., facsimile (954) 523-7009, and (ii) if to the Company, to Balqon Corporation., 1420 240th Street, Harbor City, CA 90710, attention:  Balwinder Samra, with a copy to Rutan & Tucker LLP, 611 Anton Boulevard, 14th Floor, Costa Mesa, CA 92626, attention:  Larry A. Cerutti, facsimile (714) 546-9035.  Any party hereto (and such party’s permitted assigns) may change such party’s address for receipt of future notices hereunder by giving written notice to the Company and the Purchaser.

 

5.4 Amendments; Waivers. This Agreement may not be amended or modified, and no provisions hereof may be waived, without the written consent of the Company and the Purchaser.  No action taken pursuant to this Agreement, including without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant or agreement contained herein.  The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach.  No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy.  All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law.

 

  

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5.5 Headings. 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.

 

5.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchaser (other than by merger). The Purchaser may assign any or all of its rights under this Agreement to any Person to whom the Purchaser assigns or transfers any Securities, provided that such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions of the Transaction Documents that apply to the Purchaser.

 

5.7 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.3.

 

5.8 Governing Law.  This Agreement and any controversy arising out of or relating to this Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to conflict of law principles that would result in the application of any law other than the law of the State of California.

 

5.9 Dispute Resolution.  The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the federal and state courts located within the geographic boundaries of Orange County, California for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the federal and state courts located within the geographic boundaries of Orange County, California and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court. The prevailing party shall be entitled to reasonable attorney’s fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled.

 

5.10 Survival. The representations and warranties contained herein shall survive each Closing and the delivery of the Securities for the applicable statute of limitations.

 

5.11 Attorneys’ Fees.  If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of the Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

 

5.12 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 or by e-mail delivery of a “.pdf” format data file, 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 or “.pdf” signature page were an original thereof.

 

  

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5.13 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

 

5.14 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company and the Transfer Agent of such loss, theft or destruction. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Securities.

 

5.15 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, Purchaser 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 contained in the Transaction Documents and hereby agree to waive and not to assert in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

 

5.16 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 not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.

 

 

[SIGNATURE PAGE FOLLOWS]

 

  

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

 

	
  

	

BALQON CORPORATION

 

 

By:                                                                           

       Balwinder Samra,

       Chief Executive Officer

 

 

 

SEVEN ONE LIMITED

 

 

By:                                                                           

       Chung Hung Ka,

       Chief Executive Officer

 

  

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EXHIBIT A

 

WARRANT

 

  

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EXHIBIT B

 

REGISTRATION RIGHTS AGREEMENT

 

  

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EXHIBIT C

 

VOTING AGREEMENT

 

  

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SCHEDULE 4.2

 

USE OF PROCEEDS

 

 

Proceeds from the Securities Purchase Agreement shall be used as follows:

 

1.           Manufacturing of Products

 

2.           Inventory

 

3.           Purchase of batteries under the Distribution Agreement

 

4.           Working Capital expenses as agreed upon by Winston Chung

 

In addition to the restrictions set forth under Section 4(2) of the Agreement, proceeds from the Securities Purchase Agreement may not be used for:

 

1.           Research and Development

 

2.           Repayment of outstanding debentures

 

3.           Executive compensation/bonus, except as otherwise paid in accordance with prior Company practices.

 

  

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DISCLOSURE SCHEDULE

 

to the

 

SECURITIES PURCHASE AGREEMENT

 

by and between

 

BALQON CORPORATION,

 

and

 

SEVEN ONE LIMITED

 

This Disclosure Schedule is hereby delivered by Balqon Corporation, a Nevada corporation (the “Company”) in accordance with the provisions of that certain Securities Purchase Agreement by and among the Company and Seven One Limited (the “Purchaser”) (the “Agreement”).  Capitalized terms that are used in this Disclosure Schedule and are not defined shall have the meaning set forth in the Agreement.

 

Any matter set forth in a section of this Disclosure Schedule with respect to a particular representation and warranty in the Agreement shall be deemed an exception to any other representations and warranties in the Agreement to which it may relate provided the disclosure is in sufficient detail to enable a reasonable person to identify such other representations and warranties to which such information is responsive.  Failure to provide a cross-reference from one section of this Disclosure Schedule to other applicable sections of this Disclosure Schedule shall not, however, in and of itself be deemed a failure to disclose unless a reasonable person would be unable to determine that the disclosure contained in such section of this Disclosure Schedule applies to other representations or warranties contained in the Agreement.

 

Headings have been inserted on the separate sections of this Disclosure Schedule for convenience of reference only and shall not have the effect of amending or changing the content or meaning of the section as set forth in the Agreement.

 

This Disclosure Schedule, which were prepared by the Company and is hereby delivered to the Purchaser, sets forth exceptions to representations and warranties contained in Article III of the Agreement.

 

This Disclosure Schedule is part of the Agreement and is incorporated by reference therein.

 

  

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Section 3.1(g)

 

	
1.  

	
The Company has 25,755,014 shares of Common Stock outstanding.  The Company also may issue up to (i) 7,500,000 shares of Common Stock under the Company’s 2008 Stock Incentive Plan, (ii) 6,611,647 shares of Common Stock under warrants to purchase Common Stock and (iii) 4,096,650 shares of Common Stock under convertible notes and debentures, each calculated immediately prior to the Closing.  The outstanding Common Stock Equivalents are further described in the SEC Reports.

 

	
2.  

	
The Company is obligated to issue warrants to purchase an indeterminate number of shares of its common stock pursuant to an agreement with its investor relations firm.  On November 17, 2010, the Company issued 5,000 shares to its investor relations firm under this agreement.

 

	
3.  

	
Between November 19, 2010 and December 3, 2010, the Company issued $50,000 in principal of its 10% Senior Secured Convertible Promissory Debentures, which debentures are convertible in to 66,666 shares of Common Stock, subject to adjustment, and warrants to purchase 50,000 shares of Common Stock, subject to adjustment, in a private placement transaction. The Company also issued placement agent warrants to purchase up to 4,000 shares of Common Stock, subject to adjustment, in connection with these transactions.

 

Section 3.1(i)

 

	
1.  

	
Between November 19, 2010 and December 3, 2010, the Company issued $50,000 in principal of its 10% Senior Secured Convertible Promissory Debentures.

Section 3.1(n)

 

	
1.  

	
The Company is party to a Business Financing Agreement (the “Credit Agreement”) with Bridge Bank, National Association (the “Lender”) pursuant to which the Lender has provided the Company with an accounts receivable based credit facility in the aggregate amount of up to $2,000,000 (the “Credit Facility”). The Credit Facility is secured by a continuing first priority security interest in all the Company’s personal property (subject to customary exceptions).  At September 30, 2010 there was $219,463 outstanding and $47,262 was available under the terms of the Credit Facility. At December 31, 2009, $128,150 was outstanding and $6,190 was available under the terms of the Credit Facility.

 

	
2.  

	
The Company has issued $850,000 in principal of its 10% Senior Secured Convertible Promissory Debentures.  The Debentures are secured by a security interest in all of the Company’s personal property (subject to customary exceptions), which security interest is subject to and subordinate to the security interest under the Company’s secured credit facilities with one or more financial institution, in an amount of up to $2,500,000 in the aggregate.

 

 

26

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