Document:

Exhibit 4.1

 

AMENDMENT NO. 1 TO RIGHTS
AGREEMENT

 

THIS AMENDMENT NO. 1 TO RIGHTS
AGREEMENT (this “Amendment”) is made as
of the 7th day of July, 2010, by and between DITECH NETWORKS, INC., a Delaware corporation
(formerly Ditech Communications Corporation, the “Company”), and WELLS FARGO BANK, N.A. (the “Rights Agent”).

 

WHEREAS, the Company and the Rights Agent are parties to that certain Rights
Agreement, dated as of March 26, 2001 (the “Rights Agreement”);

 

WHEREAS, Section 27 of the Rights Agreement permits the Company to amend the
Rights Agreement on the terms set forth in this Amendment;

 

WHEREAS, as of the date
hereof, no Person has become an Acquiring Person under the Rights Agreement,
and the Company has satisfied all requirements to effect an amendment to the
Rights Agreement; and

 

WHEREAS, the Board of Directors of the Company has determined that it is in the
best interests of the Company and its stockholders to modify the terms of the
Rights Agreement in an effort to deter acquisitions of Common Shares that might
limit or reduce the availability to the Company of the Company’s net operating
loss carryforwards for United States federal income tax purposes.

 

NOW, THEREFORE, in accordance with the procedures for amendment of the Rights Agreement
set forth in Section 27 thereof, and in consideration of the foregoing and
the mutual agreements herein set forth, the parties hereby agree as follows:

 

1.              Capitalized terms that are not otherwise defined herein shall have the
meanings ascribed to them in the Rights Agreement.

 

2.              Section 1 of the Rights Agreement is amended to read in its entirety
as follows:

 

“Section 1.            Certain
Definitions.  For purposes
of this Agreement, the following terms have the meanings indicated:

 

(a)                                  “Acquiring Person” shall
mean any Person (as such term is hereinafter defined) (other than any Exempt
Person (as such term is hereinafter defined)) who or that, together with all
Affiliates and Associates (as such terms are hereinafter defined) of such Person, without the prior written consent
of the Board of Directors of the Company, shall be the Beneficial Owner (as
such term is hereinafter defined) of 4.99% or more of the Common Shares (as
such term is hereinafter defined) then outstanding; provided,
however, that any Person who would otherwise qualify as an Acquiring
Person as of the Close of Business (as such
term is hereinafter defined) on July 7, 2010 will not be deemed to be an Acquiring Person for any
purpose of this Agreement on and after such date unless and until such time as
such Person acquires beneficial ownership of any 

 

 

additional Common Shares
unless, upon becoming the Beneficial Owner of any such additional Common
Shares, such Person is not then the Beneficial Owner of 4.99% or more of the
Common Shares then outstanding.  Notwithstanding the foregoing, (A) the
term Acquiring Person shall not include (i) the Company, (ii) any
Subsidiary (as such term is hereinafter defined) of the Company, (iii) any
employee benefit or compensation plan of the Company or any Subsidiary of the
Company, or (iv) any entity holding Common Shares for or pursuant to the
terms of any such employee benefit or compensation plan, and (B) no Person
shall become an “Acquiring Person” (x) solely as the result of an
acquisition of Common Shares by the Company that, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 4.99% or more of the Common Shares then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 4.99% or more of the Common Shares then outstanding by
reason of share purchases by the Company and shall, following written notice
from, or public disclosure by, the Company of such share purchases by the
Company, become the Beneficial Owner of any additional Common Shares without
the prior consent of the Board of Directors of the Company and shall then
Beneficially Own more than 4.99% of the Common Shares then outstanding, then
such Person shall be deemed to be an “Acquiring Person,” (y) solely as a
result of an Exempt Transaction unless and until such time as such Person
acquires beneficial ownership of one or more additional Common Shares, or (z) if
the Board of Directors of the Company determines in good faith that a Person
who would otherwise be an “Acquiring Person,” as defined pursuant to the
foregoing provisions of this Section 1(a) has become such
inadvertently, and such Person divests, as promptly as practicable (as
determined in good faith by the Board of Directors of the Company), but in any
event within five Business Days (as such term is hereinafter defined),
following receipt of written notice from the Company of such event, of
Beneficial Ownership of a sufficient number of Common Shares so that such
Person would no longer be an Acquiring Person, as defined pursuant to the
foregoing provisions of this Section 1(a), then such Person shall not be
deemed to be an “Acquiring Person” for any purposes of this Agreement; provided, however, that if such Person shall again become
the Beneficial Owner of 4.99% or more of the Common Shares then outstanding,
such Person shall be deemed an “Acquiring Person,” subject to the exceptions
set forth in this Section 1(a) other than the exception set forth in
this Section 1(a)(B)(z).

 

(b)                                  “Act” shall have the
meaning set forth in Section 9 hereof.

 

(c)                                  “Affiliate” and “Associate”
shall have the respective meanings ascribed to such terms in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), as in effect on the date hereof,  provided, however,
that a Person shall not be deemed to be the Affiliate or Associate of another
Person solely because either or both Persons are or were directors of the
Company; provided,
further, however, that the limited partners of a limited partnership
shall not be deemed to be Associates of such limited partnership solely by
virtue of their limited partnership interests.

 

(d)                                  “Agreement” shall have the
meaning set forth in the first paragraph hereof, and such term shall include
all amendments to this Agreement.

 

2

 

(e)                                  A Person shall
be deemed the “Beneficial Owner” of and shall be
deemed to “beneficially own” any securities:

 

(i)                                    that such
Person or any of such Person’s Affiliates or Associates is deemed to
beneficially own, within the meaning of Rule 13d-3 of the General Rules and
Regulations under the Exchange Act as in effect on the date hereof;

 

(ii)                                that such
Person or any of such Person’s Affiliates or Associates has (A) the right
to acquire (whether such right is exercisable immediately or only after the
passage of time) pursuant to any agreement, arrangement or understanding (other
than customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities), or upon the
exercise of conversion rights, exchange rights, rights (other than the Rights),
warrants or options, or otherwise; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to beneficially
own, securities tendered pursuant to a tender or exchange offer made by or on
behalf of such Person or any of such Person’s Affiliates or Associates until
such tendered securities are accepted for purchase or exchange; or (B) the
right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, any security if the agreement,
arrangement or understanding to vote such security (1) arises solely from
a revocable proxy or consent given to such Person in response to a public proxy
or consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations promulgated under the Exchange Act and (2) is
not also then reportable on Schedule 13D or Schedule 13G under the
Exchange Act (or any comparable or successor report); or

 

(iii)                            that are
beneficially owned, directly or indirectly, by any other Person with which such
Person or any of such Person’s Affiliates or Associates has any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities) for the purpose of acquiring, holding, voting (except
to the extent contemplated by the proviso to Section 1(e)(ii)(B) hereof)
or disposing of any securities of the Company.

 

Notwithstanding anything in this Section 1(e) to
the contrary, the phrase, “then outstanding,” when used with reference to a
Person’s Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding that such Person
would be deemed to beneficially own hereunder.

 

(f)                                    “Business
Day” shall mean any day other than a Saturday, a Sunday, or a day on which
banking institutions in the State of Minnesota  are
authorized or obligated by law or executive order to close.

 

3

 

(g)                                 “Close
of Business” on any given date shall mean 5:00 p.m.,
Central Time, on such date; provided, however, that
if such date is not a Business Day it shall mean 5:00 p.m., Central Time,
on the next succeeding Business Day.

 

(h)                                 “Common
Shares” shall mean the shares of common stock, par value $.001 per share, of
the Company; provided, however, that, “Common
Shares,” when used in this Agreement in connection with a specific reference to
any Person other than the Company, shall mean the capital stock (or equity
interest) with the greatest voting power of such other Person or, if such other
Person is a Subsidiary of another Person, the Person or Persons which
ultimately control such first-mentioned Person.

 

(i)                                    “Company” shall have the
meaning set forth in the first paragraph hereof.

 

(j)                                    “Distribution
Date” shall have the meaning set forth in Section 3(a) hereof.

 

(k)                                “Exchange
Act” shall have the meaning set forth in Section 1(c) hereof.

 

(l)                                    “Exchange
Ratio” shall have the meaning set forth in Section 24(a) hereof.

 

(m)                              “Exempt Person” shall mean a Person whose Beneficial
Ownership (together with all Affiliates and Associates of such Person) of 4.99%
or more of the then-outstanding Common Shares, as determined by the Board of Directors
of the Company in its sole discretion, (i) will not limit or reduce the
availability to the Company of the NOLs (as such term is hereinafter defined)
and who therefore is an Exempt Person for purposes of this Agreement or (ii) is
otherwise in the best interests of the Company; provided,
however, that such a Person will cease
to be an “Exempt Person” if the Board of Directors of the Company makes a contrary determination with respect to the
effect of such Person’s Beneficial Ownership (together with all Affiliates and
Associates of such Person) regardless of the reason therefor.

 

(n)                                 “Exempt Transaction” shall mean any transaction that the
Board of Directors of the Company determines, in its sole discretion, is
exempt, which determination shall be irrevocable.

 

(o)                                  “Final
Expiration Date” shall mean the Close of Business on March 25,
2011, unless Stockholder Approval (as such
term is hereinafter defined) has been obtained prior to such time, in
which case “Final Expiration Date” shall mean the Close of Business on July 7,
2013.

 

(p)                                  “Injunction” shall have the
meaning set forth in Section 11(a) hereof.

 

(q)                                  “Interested
Stockholder” shall mean any Acquiring Person or any Affiliate or
Associate of an Acquiring Person or any other Person in which any such Acquiring
Person, Affiliate or Associate has an interest, or any other Person acting
directly or indirectly on behalf of or in concert with any such Acquiring
Person, Affiliate or Associate.

 

4

 

(r)                                   “NOLs” shall mean the
Company’s net operating loss carryforwards for United States federal income tax
purposes.

 

(s)                                  “Person” shall mean any
individual, firm, corporation or other entity, and shall include any successor
(by merger or otherwise) of such entity.

 

(t)                                    “Preferred
Shares” shall mean shares of Series A Junior Participating Preferred
Stock, par value $.001 per share, of the Company having the designations and
the powers, preferences and rights, and the qualifications, limitations and
restrictions set forth in the Form of Certificate of Designation attached
to this Agreement as Exhibit A.

 

(u)                                 “Principal
Party” shall have the meaning set forth in Section 13(b) hereof.

 

(v)                                   “Purchase
Price” shall have the meaning set forth in Section 7(b) hereof.

 

(w)                                “Record
Date” shall have the meaning set forth in the second paragraph hereof.

 

(x)                                  “Redemption
Date” shall have the meaning set forth in Section 7(a) hereof.

 

(y)                                  “Right” shall have the
meaning set forth in the second paragraph hereof.

 

(z)                                  “Right
Certificate” shall have the meaning set forth in Section 3(a) hereof.

 

(aa)                            “Rights
Agent” shall have the meaning set forth in the first paragraph hereof.

 

(bb)                             “Security” shall have the
meaning set forth in Section 11(d) hereof.

 

(cc)                            “Shares
Acquisition Date” shall mean the first date of public announcement by
the Company or an Acquiring Person that an Acquiring Person has become such; provided, however, that,
if such Person is determined not to have become an Acquiring Person pursuant to
clause (y) or clause (z) of Section 1(a)(B) hereof, then no
Shares Acquisition Date shall be deemed to have occurred.

 

(dd)                            “Stockholder Approval” shall mean the approval of this
Agreement (as amended as of the date of such approval) by the affirmative vote
of the holders of a majority of the votes cast at a meeting of stockholders of
the Company duly held in accordance with the Company’s Certificate of
Incorporation (as amended from time to time) and applicable law.

 

(ee)                            “Subsidiary” of any Person
shall mean any corporation or other entity of which a majority of the voting
power of the voting equity securities or equity interest is owned, directly or
indirectly, by such Person.

 

(ff)                                 “Summary
of Rights” shall have the meaning set forth in Section 3(b) hereof.

 

(gg)                          “Trading
Day” shall have the meaning set forth in Section 11(d) hereof.

 

5

 

(hh)                          “Transaction” shall mean any
merger, consolidation or sale of assets described in Section 13(a) hereof
or any acquisition of Common Shares that would result in a Person becoming an
Acquiring Person or a Principal Party.

 

(ii)                                “Transaction
Person” with respect to a Transaction shall mean (i) any Person who (x) is
or will become an Acquiring Person or a Principal Party if the Transaction were
to be consummated and (y) directly or indirectly proposed or nominated a
director of the Company, which director is in office at the time of
consideration of the Transaction, or (ii) an Affiliate or Associate of
such a Person.”

 

3.              Section 7(a) of the Rights Agreement is amended to read in its
entirety as follows:

 

“(a) The
registered holder of any Right Certificate may exercise the Rights evidenced
thereby (except as otherwise provided herein) in whole or in part at any time
after the Distribution Date upon surrender of the Right Certificate, with the
form of election to purchase on the reverse side thereof duly executed, to the
Rights Agent at the office of the Rights Agent designated for such purpose,
together with payment of the Purchase Price for each one one-thousandth of a
Preferred Share (or such other number of shares or other securities) as to
which the Rights are exercised, at or prior to the earliest of (i) (A) the
Final Expiration Date, (ii) the time at which the Rights are redeemed as
provided in Section 23 hereof (the “Redemption Date”), or (iii) the
time at which such Rights are exchanged as provided in Section 24 hereof.”

 

4.              The penultimate sentence of Section 11(d)(i) of the Rights
Agreement is amended to read in its entirety as follows:

 

“The closing price for each
day shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on
the New York Stock Exchange or The Nasdaq Stock Market or, if the Security is
not listed or admitted to trading on the New York Stock Exchange or The Nasdaq
Stock Market, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Security is listed or admitted to trading or, if the
Security is not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by any
system then in use, or, if on any such date the Security is not so quoted, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Security selected by the Board of Directors
of the Company or, if on any such date no professional market maker is making a
market in the Security, the price as determined in good faith by the Board of
Directors of the Company.”

 

5.              Section 13(c)(iii) of the Rights Agreement is amended to read
in its entirety as follows:

 

“(iii)                                              list the Rights
and the securities purchasable upon exercise of the Rights on each national
securities exchange on which the Common Shares were listed prior to the 

 

6

 

consummation
of such consolidation, merger, sale or transfer of assets or, if the Common
Shares were not listed on a national
securities exchange prior to the consummation of such consolidation, merger,
sale or transfer of assets, on a national securities exchange; and”

 

6.              The penultimate
sentence of Section 14(a) of the
Rights Agreement is amended to read in its entirety as follows:

 

“The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or The Nasdaq Stock Market or, if the
Rights are not listed or admitted to trading on the New York Stock Exchange or
The Nasdaq Stock Market, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the
Rights are listed or admitted to trading or, if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by any
system then in use or, if on any such date the Rights are not so quoted,
the average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board of Directors
of the Company.”

 

7.              Section 23(b)(ii) of the Rights Agreement is amended
to read in its entirety as follows:

 

“(ii)                                                  In addition,
the Board of Directors of the Company may, at its option, at any time after the
time a Person becomes an Acquiring
Person and the expiration of any period during which the holder of Rights may
exercise the rights under Section 11(a)(ii) hereof but prior to any
event described in clause (x), (y) or (z) of the first sentence of
Section 13 hereof, redeem all but not less than all of the then
outstanding Rights at the Redemption Price (x) in connection with any merger, consolidation or sale or other
transfer (in one transaction or in a series of related transactions) of assets
or earning power aggregating 50% or more of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) in which all holders of Common
Shares are treated alike and not involving (other than as a holder of Common
Shares being treated like all other such holders) an Interested Stockholder or
a Transaction Person or (y)(A) if and for so long as the Acquiring Person
is not thereafter the Beneficial Owner of 4.99% or more of the then outstanding
Common Shares, and (B) at the time of redemption no other Persons are
Acquiring Persons.”

 

8.              Exhibit B to the Rights Agreement is amended to read in its entirety
as set forth on Exhibit A hereto.

 

9.              Each reference in the Rights Agreement to Ditech Communications
Corporation is amended to refer to Ditech Networks, Inc.

 

10.       The Rights Agreement, as amended by this Amendment, shall remain in full
force and effect in accordance with its terms. 
To the extent there is a conflict between the terms and 

 

7

 

provisions of the Rights
Agreement and this Amendment, the terms and provisions of this Amendment shall
govern for purposes of the subject matter of this Amendment only.

 

11.       All of the covenants and provisions of this Amendment by or for the
benefit of the Company or the Rights Agent shall bind and inure to the benefit
of their respective successors and assigns hereunder.

 

12.       If any term, provision, covenant or restriction of this Amendment is held
by a court of competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Amendment shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.

 

13.       This Amendment shall be deemed to be a contract made under the laws of
the State of Delaware and for all purposes shall be governed by and construed
in accordance with the laws of such State applicable to contracts to be made
and performed entirely within such State.

 

14.       This Amendment may be executed in any number of counterparts and each of
such counterparts shall for all purposes be deemed to be an original, and all
such counterparts shall together constitute but one and the same instrument.

 

8

 

IN WITNESS WHEREOF, the parties herein have caused this Amendment to be duly executed and
attested, all as of the date and year first above written.

 

 

	
   

  	
  DITECH NETWORKS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Todd Simpson

  
	
   

  	
  Name:

  	
  Todd
  Simpson

  
	
   

  	
  Title:

  	
  Chief
  Executive Officer and President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  WELLS FARGO BANK, N.A.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Pamela E. Herlich

  
	
   

  	
  Name:

  	
  Pamela E. Herlich

  
	
   

  	
  Title:

  	
  Vice President, Account Management

  

 

 

(EXHIBIT A TO AMENDMENT NO. 1 TO RIGHTS AGREEMENT)

 

FORM OF RIGHT CERTIFICATE

 

(EXHIBIT B TO RIGHTS AGREEMENT)

 

	
  Certificate
  No. R-

  	
   Rights

  

 

NOT
EXERCISABLE AFTER JULY 7, 2013 OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS OR
AS OTHERWISE SPECIFIED IN THE RIGHTS AGREEMENT. 
THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE
ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.

 

RIGHT CERTIFICATE

DITECH NETWORKS, INC.

 

This
certifies that                                      
or registered assigns, is the registered owner of the number of Rights set
forth above, each of which entitles the owner thereof, subject to the terms,
provisions and conditions of the Rights Agreement, dated as of March 26,
2001, as the same may be amended from time to time (the “Rights Agreement”),
between Ditech Networks, Inc., a Delaware corporation (the “Company”), and
Wells Fargo Bank, N.A. (the “Rights Agent”), to purchase from the Company at
any time after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5 p.m., Central Time, on July 7, 2013 (or earlier as
specified in the Rights Agreement) at the office of the Rights Agent designated
for such purpose, or at the office of its successor as Rights Agent, one
one-thousandth of a fully paid non-assessable share of Series A Junior
Participating Preferred Stock, par value $.001 per share (the “Preferred Shares”),
of the Company, at a purchase price of $75.00 per one one-thousandth of a
Preferred Share (the “Purchase Price”), upon presentation and surrender of this
Right Certificate with the Form of Election to Purchase duly
executed.  The number of Rights evidenced
by this Right Certificate (and the number of one one-thousandths of a Preferred
Share which may be purchased upon exercise hereof) set forth above, and the
Purchase Price set forth above, are the number and Purchase Price as of April 16,
2001, based on the Preferred Shares as constituted at such date.

 

From
and after the time any Person becomes an Acquiring Person (as such terms are
defined in the Rights Agreement), if the Rights evidenced by this Right
Certificate are beneficially owned by (i) an Acquiring Person or an
Affiliate or Associate of any such Acquiring Person (as such terms are defined
in the Rights Agreement), (ii) a transferee of any such Acquiring Person,
Associate or Affiliate who becomes a transferee after the Acquiring Person
becomes such, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of any such Acquiring Person, Associate or Affiliate
who becomes a transferee prior 

 

A-1

 

to
or concurrently with the Acquiring Person becoming such, such Rights shall
become null and void without any further action and no holder hereof shall have
any right with respect to such Rights from and after the time any Person
becomes an Acquiring Person.

 

As
provided in the Rights Agreement, the Purchase Price and the number of one
one-thousandth of a Preferred Share which may be purchased upon the exercise of
the Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.

 

This
Right Certificate is subject to all of the terms, provisions and conditions of
the Rights Agreement, as amended from time to time, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description
of the rights, limitations of rights, obligations, duties and immunities
hereunder of the Rights Agent, the Company and the holders of the Right
Certificates.  Copies of the Rights
Agreement are on file at the principal executive offices of the Company and the
above-mentioned offices of the Rights Agent.

 

This
Right Certificate, with or without other Right Certificates, upon surrender at
the office of the Rights Agent designated for such purpose, may be exchanged
for another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase.  If this Right Certificate shall be exercised
in part, the holder shall be entitled to receive upon surrender hereof another
Right Certificate or Right Certificates for the number of whole Rights not
exercised.

 

Subject
to the provisions of the Rights Agreement, the Rights evidenced by this
Certificate (i) may be redeemed by the Company at a redemption price of
$.01 per Right or (ii) may be exchanged in whole or in part for shares of
the Company’s Common Stock, par value $.001 per share, or, upon circumstances
set forth in the Rights Agreement, cash, property or other securities of the
Company, including fractions of a share of Preferred Stock.

 

No
fractional Preferred Shares will be issued upon the exercise of any Right or
Rights evidenced hereby (other than fractions which are integral multiples of
one one-thousandth of a Preferred Share, which may, at the election of the
Company, be evidenced by depositary receipts) but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.

 

No
holder of this Right Certificate shall be entitled to vote or receive dividends
or be deemed for any purpose the holder of the Preferred Shares or of any other
securities of the Company which may at any time be issuable on the exercise
hereof, nor shall anything contained in the Rights Agreement or herein be construed
to confer upon the holder hereof, as such, any of the rights of a stockholder
of the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in the Rights Agreement), or
to receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by this Right Certificate shall have been exercised as
provided in the Rights Agreement.

 

A-2

 

This
Right Certificate shall not be valid or obligatory for any purpose until it
shall have been countersigned by the Rights Agent.

 

WITNESS the facsimile signature of the proper officers of
the Company and its corporate seal. 
Dated as of                   .

 

 

	
  ATTEST:

  	
   

  	
  DITECH
  NETWORKS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  William
  J. Tamblyn

  	
   

  	
  Todd
  Simpson

  
	
  Secretary

  	
   

  	
  Chief
  Executive Officer and President

  

 

 

COUNTERSIGNED:

 

 

WELLS FARGO BANK, N.A.,

as
Rights Agent

 

 

	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

A-3

 

Form of Reverse Side
of Right Certificate

 

FORM OF ASSIGNMENT

 

(To be executed by the registered holder if such

holder desires to transfer the Right Certificate.)

 

FOR VALUE RECEIVED                                                                             
hereby sells, assigns and transfers unto

 

 

(Please print name and address of transferee)

 

                                                                                                                                                                    
this Right Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint                                         
Attorney, to transfer the within Right Certificate on the books of the
within-named Company, with full power of substitution.

 

	
  Dated:
  

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature

  

 

A-4

 

SIGNATURE
MEDALLION GUARANTEED:

 

Signatures
must be Medallion Guaranteed by a bank, trust company, broker dealer or other
eligible institution participating in a recognized Signature Medallion
Guarantee program.

 

 

The
undersigned hereby certifies that (1) the Rights evidenced by this Right
Certificate are not being sold, assigned or transferred by or on behalf of a
Person who is or was an Acquiring Person, an Interested Stockholder or an
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement); and (2) after due inquiry and to the best of the knowledge of
the undersigned, the undersigned did not acquire the Rights evidenced by this
Right Certificate from any Person who is or was an Acquiring Person, an
Interested Stockholder, or an Affiliate or Associate thereof.

 

	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature

  

 

A-5

 

Form of Reverse Side
of Right Certificate

 

FORM OF ELECTION TO PURCHASE

 

(To be executed if holder desires to exercise

Rights represented by the Right Certificate.)

 

To
WELLS FARGO BANK, N.A.:

 

The
undersigned hereby irrevocably elects to exercise                                             
Rights represented by this Right Certificate to purchase the Preferred Shares
issuable upon the exercise of such Rights and requests that certificates for
such Preferred Shares be issued in the name of:

 

	
  Please
  insert social security

  	
   

  	
   

  
	
  or
  other identifying number:

  	
   

  	
   

  

 

 

(Please print name and address)

 

 

 

If
such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:

 

	
  Please
  insert social security

  	
   

  	
   

  
	
  or
  other identifying number:

  	
   

  	
   

  

 

 

(Please print name and address)

 

 

 

 

	
  Dated:
  

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature

  

 

A-6

 

SIGNATURE
MEDALLION GUARANTEED:

 

Signatures
must be Medallion Guaranteed by a bank, trust company, broker dealer or other
eligible institution participating in a recognized Signature Medallion
Guarantee program.

 

 

The
undersigned hereby certifies that (1) the Rights evidenced by this Right
Certificate are not beneficially owned by nor are they being exercised on
behalf of an Acquiring Person, an Interested Stockholder or an Affiliate or
Associate thereof (as such terms are defined in the Rights Agreement); and
(2) after due inquiry and to the best of the knowledge of the undersigned,
the undersigned did not acquire the Rights evidenced by this Right Certificate
from any Person who is or was an Acquiring Person, an Interested Stockholder,
or an Affiliate or Associate thereof.

 

	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature

  

 

 

NOTICE

 

The
signature in the Form of Assignment or Form of Election to Purchase,
as the case may be, must conform to the name as written upon the face of this
Right Certificate in every particular, without alteration or enlargement or any
change whatsoever.

 

In
the event the certification set forth above in the Form of Assignment or
the Form of Election to Purchase, as the case may be, is not completed,
the Company and the Rights Agent will deem the beneficial owner of the Rights
evidenced by this Right Certificate to be an Acquiring Person or an Affiliate
or Associate thereof (as defined in the Rights Agreement) and such Assignment
or Election to Purchase will not be honored.

 

A-7ex101.htm

 

 

RESERVE EQUITY FINANCING AGREEMENT

 

 

THIS AGREEMENT dated as of the 7th day of July 2010 (the “Agreement”) between AGS Capital Group, LLC (the “Investor”), and cMoney, Inc. (the “Company”).

 

 

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to One Hundred Million Dollars ($100,000,000) of the Company’s fully registered and freely tradable common stock, par value $.001 per share (the “Common Stock”),; and

 

 

WHEREAS, such investments will be made in reliance upon the provisions of Regulation D (“Regulation D”) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder (the “Securities Act”), and or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder.

 

NOW, THEREFORE, the parties hereto agree as follows:

 

ARTICLE I.

 

Certain Definitions

 

Section 1.1. “Advance” shall mean the portion of the Commitment Amount requested by the Company in the Advance Notice.

 

Section 1.2. “Advance Date” shall mean the first Trading Day after expiration of the applicable Pricing Period for each Advance.

 

Section 1.3. “Advance Notice” shall mean a written notice in the form of Exhibit A attached hereto to the Investor executed by an officer of the Company and setting forth the Advance amount that the Company requests from the Investor.

 

Section 1.4 “Advance Notice Date” shall mean each date the Company delivers (in accordance with Section 2.2(b) of this Agreement) to the Investor an Advance Notice requiring the Investor to purchase the number of shares of Common Stock specified in the Advance Notice, subject to the terms of this Agreement. No Advance Notice Date shall be less than five (5) Trading Days after the prior Advance Notice Date.

 

         Section 1.5 “Average Daily Trading Volume” means the average trading volume of the ten (10) Trading Days prior to the date of delivery of the Advance Notice that results from excluding the three (3) highest trading volume days and three (3) lowest trading volume Trading Days during such ten (10) Trading Day period.

 

Section 1.6. “Bid Price” shall mean, on any date, the closing bid price (as reported by Bloomberg L.P. or other comparable reporting service) of the Common Stock on the Principal Market or if the Common Stock is not traded on a Principal Market, the highest reported bid price for the Common Stock, as furnished by the Financial Industry Regulatory Authority.

 

  

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Section 1.7. “Closing” shall mean one of the closings of a purchase and sale of Common Stock pursuant to Section 2.3.

 

Section 1.8. “Commitment Amount” shall mean the aggregate amount of up to One Hundred Million Dollars ($100,000,000) which the Investor has agreed to provide to the Company in order to purchase the Company’s Common Stock pursuant to the terms and conditions of this Agreement.

 

Section 1.9. “Commitment Period” shall mean the period commencing on the Effective Date, and expiring upon the termination of this Agreement in accordance with Section 10.2.

 

Section 1.10. “Common Stock” shall mean the Company’s common stock, par value $.001 per share.

 

Section 1.11. “Condition Satisfaction Date” shall have the meaning set forth in Section 7.2.

 

Section 1.12. “Damages” shall mean any loss, claim, damage, liability, costs and expenses (including, without limitation, reasonable attorney’s fees and disbursements and costs and expenses of expert witnesses and investigation).

 

Section 1.13. “Effective Date” shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in Section 7.2(a).

 

Section 1.14. Intentionally Omitted.

 

Section 1.15. “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

Section 1.16. “Material Adverse Effect” shall mean any condition, circumstance, or situation that may result in, or reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of the Agreement, (ii) a material adverse effect on the results of operations, assets, business or condition (financial or otherwise) of the Company, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under the Agreement.

 

Section 1.17. “Market Price” shall mean the lowest closing bid price of the Common Stock during the Pricing Period.

 

 

         Section 1.18. “Maximum Advance Amount” shall be equal to at the Investor's election, either: (a) $100,000 or (b) 250% of the Average Daily Trading Volume for the 10 days as reported by Bloomberg or comparable financial news service (U.S market only) (“ADV”) immediately preceding the Advance Notice Date.

 

Section 1.19. “FINRA” shall mean the Financial Industry Regulatory Authority.

 

Section 1.20. “Person” shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

 

Section 1.21. “Pricing Period” shall mean the five (5) consecutive Trading Days after the Advance Notice Date.

 

  

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Section 1.22. “Principal Market” shall mean the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market, the American Stock Exchange, the OTC Bulletin Board, or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock.

 

  Section 1.23. “Purchase Price”

 

                                                If the average closing stock price during the Pricing Period is above 1.00 then the Purchase Price shall be ninety five percent (95%) of the Market Price on the date in question for  such Advance Pricing Period.

 

If the average closing stock price during the Pricing Period is between .75 and .99 then the Purchase Price shall be ninety percent (90%) of the Market Price on the date in question for such Advance Pricing Period.

 

If the average closing stock price during the Pricing Period is between .20 and .74 then the Purchase Price shall be eighty five percent (85%) of the Market Price on the date in question for such Advance Pricing Period.

 

If the average closing stock price during the Pricing Period is between .11 and .19 then the Purchase Price shall be seventy five percent (75%) of the Market Price on the date in question for such Advance Pricing Period.

 

If the average closing stock price during the Pricing Period is below .11 the Purchase Price shall be Fifty percent (50%) of the Market Price on the date in question for such Advance Pricing Period.

 

Section 1.24. “Registrable Securities” shall mean the shares of Common Stock to be issued hereunder (i) in respect of which the Registration Statement has not been declared effective by the SEC, (ii) which have not been sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act (“Rule 144”) or (iii) which have not been otherwise transferred to a holder who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend.

 

Section 1.25. “Registration Rights Agreement” shall mean the Registration Rights Agreement dated the date hereof, regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor.

 

Section 1.26. “Registration Statement” shall mean a registration statement on Form S-1 or Form S-3 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered thereunder in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act.

 

Section 1.27. “Regulation D” shall have the meaning set forth in the recitals of this Agreement.

 

Section 1.28. “SEC” shall mean the United States Securities and Exchange Commission.

 

Section 1.29. “Securities Act” shall have the meaning set forth in the recitals of this Agreement.

 

Section 1.30 Intentionally Omitted.

 

Section 1.31. “Trading Day” shall mean any day during which the New York Stock Exchange shall be open for business.

 

  

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ARTICLE II.

 

Advances

Section 2.1. Advances

 

Subject to the terms and conditions of this Agreement (including, without limitation, the provisions of Article VII hereof), the Company, at its sole and exclusive option, may issue and sell to the Investor, and the Investor shall purchase from the Company, shares of the Company’s Common Stock by the delivery, in the Company’s sole discretion, of Advance Notices. The aggregate maximum amount of all Advances that the Investor shall be obligated to make under this Agreement shall not exceed the Commitment Amount.

 

Section 2.2. Mechanics.

 

(a)   Advance Notice. At any time during the Commitment Period, the Company may require the Investor to purchase shares of Common Stock by delivering an Advance Notice to the Investor, subject to the conditions set forth in Article VII; provided, however, that (i) the amount for each Advance as designated by the Company in the applicable Advance Notice shall not be more than the Maximum Advance Amount, (ii) the aggregate amount of the Advances pursuant to this Agreement shall not exceed the Commitment Amount, (iii) in no event shall the number of shares of Common Stock issuable to the Investor pursuant to an Advance cause the aggregate number of shares of Common Stock beneficially owned (as calculated pursuant to Section 13(d) of the Exchange Act) by the Investor and its affiliates to exceed 4.99% of the then outstanding Common Stock (the “Ownership Limitation”) (as of the date of this Agreement, Investor and its affiliates held 0% of the outstanding Common Stock), and (iv) under no circumstances shall the aggregate offering price or number of Shares, as the case may be, exceed the aggregate offering price or number of Shares available for issuance under the Registration Statement (the “Registration Limitation”).  There shall be a minimum of 5 Trading Days between each Advance Notice Date.  Notwithstanding any other provision in this Agreement, the Company acknowledges and agrees that upon receipt of an Advance Notice, the Investor may sell shares that it is unconditionally obligated to purchase under such Advance Notice prior to taking possession of such shares.

 

(b)    Date of Delivery of Advance Notice. An Advance Notice shall be deemed delivered on (i) the Trading Day it is received by email (to the address set forth in Section 11.1 herein) by the Investor if such notice is received prior to 5:00 pm Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by email after 5:00 pm Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Advance Notice may be deemed delivered on a day that is not a Trading Day. The Company acknowledges and agrees that the Investor shall be entitled to treat any email it receives from officers whose email addresses are identified by the Company purporting to be an Advance Notice as a duly executed and authorized Advance Notice from the Company.

 

Section 2.3. Closings.

 

(a) On the day of the Advance Notice, the Company shall deliver to the Investor such number of shares of the Common Stock registered in the name of the Investor as shall equal the number of shares specified in the Advance Notice. On the later of the Advance Date or one Trading Day following receipt of the shares of Common Stock corresponding to the Advance Notice, the Investor shall deliver to the Company the amount of the Advance by wire transfer of immediately available funds. On or prior to the Advance Date, each of the Company and the Investor shall deliver to the other all documents, instruments and writings required to be delivered by either of them pursuant to Section 2.3(b) below in order to implement and effect the transactions contemplated herein. To the extent the Company has not paid the fees, expenses, and disbursements of the Investor in accordance with Section 12.4, the amount of such fees, expenses, and disbursements may be deducted by the Investor (and shall be paid to the relevant party) directly out of the proceeds of the Advance with no reduction in the amount of shares of the Company’s Common Stock to be delivered on such Advance Date.

 

 (b)    Obligations Upon Closing. The Investor agrees to advance the amount corresponding to the Advance Notice to the Company upon completion of each of the following conditions:

 

(i) The Company shall deliver to the Investor the shares of Common Stock applicable to the Advance in accordance with Section 2.3(a). The certificates evidencing such shares shall be free of restrictive legends.

 

  

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(ii) The Registration Statement filed pursuant to the Registration Rights Agreement shall be effective and available for the resale of all applicable shares of Common Stock to be issued in connection with the Advance and certificates evidencing such shares shall be free of restrictive legends;

 

(iii) the Company shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the Registrable Securities, or shall have the availability of exemptions therefrom. The sale and issuance of the Registrable Securities shall be legally permitted by all laws and regulations to which the Company is subject;

 

(iv) the Company shall have filed with the SEC in a timely manner all reports, notices and other documents required of a “reporting company” under the Exchange Act and applicable Commission regulations;

 

(v) the Company shall pay any unpaid fees as set forth in Section 12.4 below or withhold such amounts as provided in Section 2.3; and

 

(vi) the Company’s transfer agent shall be DWAC eligible.

 

(vii) the conditions in Section 7.2.3(a)(i) above and provided the Company is in compliance with its obligations in Section 2.3, the Investor shall deliver to the Company the amount of the Advance specified in the Advance Notice by wire transfer of immediately available funds are satisfied.

 

       Section 2.4. Lock Up Period. On the date hereof, the Company shall obtain from each officer and director a lock-up agreement, as defined below, in the form annexed hereto as Schedule 2.4.

 

       Section 2.5. Hardship. In the event the Investor sells shares of the Company’s Common Stock after receipt of an Advance Notice and the Company fails to perform its obligations as mandated in Section 2.3, the Company agrees that in addition to and in no way limiting the rights and obligations set forth in Article V hereto and in addition to any other remedy to which the Investor is entitled at law or in equity, including, without limitation, specific performance, it will hold the Investor harmless against any loss, claim, damage, or expense (including reasonable legal fees and expenses), as incurred, arising out of or in connection with such default by the Company and acknowledges that irreparable damage would occur in the event of any such default.  It is accordingly agreed that the Investor shall be entitled to an injunction or injunctions to prevent such breaches of this Agreement and to specifically enforce, without the posting of a bond or other security, the terms and provisions of this Agreement.

 

       Section 2.6. Intentionally Omitted.

 

       Section 2.7      Increase in Commitment Amount.  At any time prior to the one year anniversary of the Effective Date (the “Commitment Increase Date”) the Company may notify the Investor in writing that it wishes to increase the Commitment Amount (provided that the Company has the ability to register the additional Commitment Amount on the Registration Statement) effective upon the Commitment Increase Date and the Commitment Amount shall automatically be deemed increased.

 

       Section 2.8     Promissory Notes.  After the completion of the first Advance under this Agreement and thereafter during the Commitment Period, the Company may request the Investor to purchase promissory notes (each, a “Note”) issued by the Company with a principal amount of up to $1,000,000.  The Investor may decide in its sole discretion whether or not to purchase such Notes.  Any such Notes purchased by the Investor will be on terms mutually acceptable to both the Company and the Investor and will be subject to certain conditions precedent, including without limitation, the completion of due diligence by the Investor to its satisfaction. Any Note will be for a maturity of at least 2 years and an interest rate not exceeding 12%. There shall not be any prepayment penalty.

 

  

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       Section 2.9     Reimbursement.    If (I) the Investor becomes involved in any capacity in any action, proceeding or investigation brought by any shareholder of the Company, in connection with or as a result of the consummation of the transactions contemplated by the Reserve Equity Financing, or if the Investor is impleaded in any such action, proceeding or investigation by any person (other than as a result of a breach of the Investor’s representations and warranties set forth in this Agreement); or (II) the Investor becomes involved in any capacity in any action, proceeding or investigation brought by the SEC against or involving the Company or in connection with or as a result of the consummation of the transactions contemplated by the Reserve Equity Financing (other than as a result of a breach of the Investor’s representations and warranties set forth in this Agreement), or if this Investor is impleaded in any such action, proceeding or investigation by any person, then in any such case, the Company will reimburse the Investor for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. In addition, other than with respect to any matter in which the Investor is a named party, the Company will pay to the Investor the charges, as reasonably determined by the Investor, for the time of any officers or employees of the Investor devoted to appearing and preparing to appear as witnesses, assisting in preparation for hearings, trials or pretrial matters, or otherwise with respect to inquiries, hearing, trials, and other proceedings relating to the subject matter of this Agreement. The reimbursement obligations of the Company under this section shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliates of the Investor that are actually named in such action, proceeding or investigation, and partners, directors, agents, employees, attorneys, accountants, auditors and controlling persons (if any), as the case may be, of Investor and any such affiliate, and shall be binding upon and inure to the benefit of any successors of the Company, the Investor and any such affiliate and any such person.

 

 

 

ARTICLE III.

 

Representations of Investor

 

Investor hereby represents and warrants to, and agrees with, the Company that the following are true and correct as of the date hereof and as of each Advance Date:

 

Section 3.1. Organization and Authorization. The Investor is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority to purchase and hold the securities issuable hereunder. The decision to invest and the execution and delivery of this Agreement by such Investor, the performance by such Investor of its obligations hereunder and the consummation by such Investor of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Investor. The undersigned has the right, power and authority to execute and deliver this Agreement and all other instruments (including, without limitations, the Registration Rights Agreement), on behalf of the Investor. This Agreement has been duly executed and delivered by the Investor and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of the Investor, enforceable against the Investor in accordance with its terms.

 

Section 3.2. Evaluation of Risks. The Investor has such knowledge and experience in financial, tax and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk.

 

Section 3.3. No Legal Advice From the Company. The Investor acknowledges that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction.

 

  

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Section 3.4. Investment Purpose. The securities are being purchased by the Investor for its own account, and for investment purposes. The Investor agrees not to assign or in any way transfer the Investor’s rights to the securities or any interest therein and acknowledges that the Company will not recognize any purported assignment or transfer except in accordance with applicable Federal and state securities laws. No other person has or will have a direct or indirect beneficial interest in the securities. The Investor agrees not to sell, hypothecate or otherwise transfer the Investor’s securities unless the securities are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to the Company, an exemption from such laws is available.

 

Section 3.5. Accredited Investor. The Investor is an “Accredited Investor” as that term is defined in Rule 501(a) of Regulation D of the Securities Act.

 

Section 3.6. Information. The Investor and its advisors (and its counsel), if any, have been furnished with all materials relating to the business, finances and operations of the Company and information it deemed material to making an informed investment decision. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor’s right to rely on the Company’s representations and warranties contained in this Agreement. The Investor understands that its investment involves a high degree of risk. The Investor is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Investor to obtain information from the Company in order to evaluate the merits and risks of this investment. The Investor has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to this transaction.

 

Section 3.7. Receipt of Documents. The Investor and its counsel have received and read in their entirety: (i) this Agreement and the Exhibits annexed hereto; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company’s Form 10-Q for the period ended June 30, 2009 and other SEC filings ; and (iv) answers to all questions the Investor submitted to the Company regarding an investment in the Company; and the Investor has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus.

 

Section 3.8. No General Solicitation. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the shares of Common Stock offered hereby.

 

Section 3.9. Not an Affiliate. The Investor is not an officer, director or a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company or any “Affiliate” of the Company (as that term is defined in Rule 405 of the Securities Act).

 

         Section 3.10. Trading Activities. The Investor’s trading activities with respect to the Company’s Common Stock shall be in compliance with all applicable federal and state securities laws, rules and regulations and the rules and regulations of the Principal Market on which the Company’s Common Stock is listed or traded.  Investor makes no representations or covenants that it will not engage in trading in the securities of the Company, other than the Investor will not engage in any Short Sales of the Company's common stock at any time during the Agreement. The Company acknowledges and agrees that upon receipt of an Advance Notice the Investor has the right to sell the shares to be purchased by the Investor pursuant to the Advance Notice prior to taking possession of such Shares.

 

 

  

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ARTICLE IV.

 

Representations and Warranties of the Company

 

Except as stated below, on the disclosure schedules attached hereto or in the SEC Documents (as defined herein), the Company hereby represents and warrants to, and covenants with, the Investor that the following are true and correct as of the date hereof:

 

Section 4.1. Organization and Qualification. The Company is duly incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole.

 

Section 4.2. Authorization, Enforcement, Compliance with Other Instruments. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement and any related agreements, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by the Company’s Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Registration Rights Agreement and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Registration Rights Agreement and assuming the execution and delivery thereof and acceptance by the Investor and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors’ rights and remedies.

 

Section 4.3. Capitalization. The authorized capital stock of the Company consists of 75,000,000  shares of Common Stock, of which 45,320,179 shares of Common Stock are issued and outstanding, and zero shares of authorized Preferred Stock, of which no shares are issued and outstanding  All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents (as defined in paragraph 4.5), no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents and on Schedule 4.3, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities (iii) there are no outstanding registration statements; and (iv) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the Securities Act (except pursuant to the Registration Rights Agreement), except pursuant to the terms of an agreement between the Company and the Investor. There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Agreement or any related agreement or the consummation of the transactions described herein or therein. The Company has furnished to the Investor true and correct copies of the Company’s Articles of Incorporation, as amended and as in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s By-laws, as in effect on the date hereof (the “By-laws”), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto.

 

Section 4.4. No Conflict. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any material property or asset of the Company or any of its subsidiaries is bound or affected and which would cause a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Articles of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted in violation of any material law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any fact or circumstance which might give rise to any of the foregoing.

 

  

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Section 4.5. SEC Documents; Financial Statements. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under the Securities Exchange Act 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) (all of the foregoing filed prior to the date hereof or amended after the date hereof and all exhibits include therein and financial statements and schedules thereto and documents incorporated by reference therein, being hereinafter referred to as the “SEC Documents”) . The Company has delivered to the Investor or its representatives, or made available through the SEC’s website at http://www.sec.gov., true and complete copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, 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. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Such financial statements have been prepared in accordance with generally accepted accounting principles. No other information provided by or on behalf of the Company to the Buyers which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are or were made and not misleading.

 

Section 4.6. No Misstatement or Omission.  Each part of the Registration Statement, when such part became or becomes effective, and the Prospectus, on the date of filing thereof with the SEC and at each Advance Notice Date and Closing Date, conformed or will conform in all material respects with the requirements of the Securities Act and the rules and regulations promulgated thereunder; each part of the Registration Statement, when such part became or becomes effective, did not or will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Prospectus, on the date of filing thereof with the SEC and at each Advance Notice Date and Share Issuance Date, did not or will not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; except that the foregoing shall not apply to statements or omissions in any such document made in reliance on information furnished in writing to the Company by the Investor expressly stating that such information is intended for use in the Registration Statement, the Prospectus, or any amendment or supplement thereto.

 

Section 4.7. No Default. Except as disclosed in the SEC Documents, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement or any of the exhibits or attachments hereto will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under its Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound, or any statute, or any decree, judgment, order, rules or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, in each case which default, lien or charge is likely to cause a Material Adverse Effect on the Company’s business or financial condition.

 

Section 4.8. Absence of Events of Default . Except for matters described in the SEC Documents and/or this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a Material Adverse Effect on the Company’s business, properties, prospects, financial condition or results of operations.

 

  

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Section 4.9. Intellectual Property Rights. The Company and its subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company, there is no claim, action or proceeding being made or brought against, or to the Company’s knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.

 

Section 4.10. Employee Relations. Neither the Company nor any of its subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company’s or its subsidiaries’ employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good.

 

Section 4.11. Environmental Laws. Except as set forth in the SEC Documents, the Company and its subsidiaries are (i) in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval.

 

Section 4.12. Title. Except as set forth in the SEC Documents, the Company has good and marketable title to its properties and material assets owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries.

 

 Section 4.13. Insurance. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any 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 at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole.

 

Section 4.14. Regulatory Permits. The Company and its subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

 

Section 4.15. Internal Accounting Controls. The Company and each of its subsidiaries maintain 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 generally accepted accounting principles and the rules and regulations as promulgated by the SEC 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.

 

  

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Section 4.16. No Material Adverse Breaches, etc. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company’s officers has or is expected in the future to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries.

 

Section 4.17. Absence of Litigation. Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company’s subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a Material Adverse Effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) have a Material Adverse Effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole.

 

Section 4.18. Subsidiaries. Except as disclosed in the SEC Documents, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity.

 

Section 4.19. Tax Status. Except as disclosed in the SEC Documents, the Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

 

Section 4.20. Certain Transactions. Except as set forth in the SEC Documents none of the officers, directors, or 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 corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

 

Section 4.21. Rights of First Refusal. The Company is not obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties.

 

Section 4.22. Use of Proceeds. The Company shall use the net proceeds from this offering for working capital and other general corporate purposes including paying relevant fees and commissions incurred from this transaction.

 

Section 4.23. Maintenance of Listing or Quotation on Principal Market. For so long as any securities issuable hereunder held by the Investor remain outstanding, the Company acknowledges, represents, warrants and agrees that it will /maintain the listing or quotation, as applicable, of its Common Stock on the Principal Market.

 

Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter from counsel to the Company on the date hereof in the form attached hereto as Exhibit C.

 

Section 4.25. Opinion of Counsel. The Company will obtain for the Investor, at the Company’s expense, any and all opinions of counsel which may be reasonably required in order to sell the securities issuable hereunder without restriction.

 

 

  

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Section 4.26. Dilutive Effect. The Company understands and acknowledges that the number of shares of Common Stock issuable upon purchases pursuant to this Agreement will increase in certain circumstances including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines during the period between the Effective Date and the end of the Open Period. The Company's executive officers and directors have studied and fully understand the nature of the transactions contemplated by this Agreement and recognize that they have a potential dilutive effect on the shareholders of the Company. The Board of Directors of the Company has concluded, in its good faith business judgment, and with full understanding of the implications, that such issuance is in the best interests of the Company. The Company specifically acknowledges that, subject to such limitations as are expressly set forth in the Agreement, its obligation to issue shares of Common Stock upon purchases pursuant to this Agreement is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company.

 

Section 4.27. Acknowledgment Regarding Investor’s Purchase of Shares. The Company acknowledges and agrees that the Investor is acting solely in the capacity of an arm’s length investor with respect to this Agreement and the transactions contemplated hereunder. The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereunder and any advice given by the Investor or any of its representatives or agents in connection with this Agreement and the transactions contemplated hereunder is merely incidental to the Investor’s purchase of the Common Stock hereunder. The Company is aware and acknowledges that it may not be able to request Advances under this Agreement if it cannot obtain an effective Registration Statement or if any issuances of Common Stock pursuant to any Advances would violate any rules of the Principal Market. The Company further is aware and acknowledges that any fees paid pursuant to Section 12.4 hereunder or shares issued pursuant to Section 12.4(b) hereunder shall be earned on the date hereof and not refundable or returnable under any circumstances.

 

 

Section 4.28. No Legal Advice From the Investor. The Company acknowledges that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Company is relying solely on such counsel and advisors and not on any statements or representations of the Investor or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction.  The Company is not relying on any representation except for the representations of the Investor contained in this Agreement.

 

Section 4.29.  No Similar Transactions. Except for the Investment Agreement with Kodiak Capital Group LLC, The Company has not entered into any transaction similar in nature to the one described in this Agreement.

 

Section 4.30   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 the Closing Date.  The Company and the Subsidiaries maintain 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.

 

  

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Section 4.32 Other Transactions.  Except for the agreement with Kodiak Capital Group, during the Term of the Reserve Equity Financing, the Company will be prohibited from effecting or entering into (i) an agreement to effect any financing involving the sale of debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock at a price that is based upon and/or varies with the trading prices of Company’s Common Stock at any time after the initial issuance of such securities or is subject to reset upon the occurrence of specified or contingent events and (ii) any agreement, including but not limited to an Equity Line of Credit, whereby the Issuer may sell securities at a future determined price.

 

Section 4.33 Internal Accounting Controls.  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 generally accepted accounting principles 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.

 

 Section 4.34      The Shares.  Prior to the first Advance Notice the Shares will have been duly authorized and, when issued, delivered and paid for pursuant to this Agreement, will be validly issued and fully paid and non-assessable, free and clear of all encumbrances and will be issued in compliance with all applicable United States federal and state securities laws; the capital stock of the Company, including the Common Stock, conforms in all material respects to the description thereof contained in the Registration Statement  and the Common Stock, including the Shares, will conform to the description thereof contained in the Prospectus as amended or supplemented.  Neither the stockholders of the Company, nor any other Person have any preemptive rights or rights of first refusal with respect to the Shares or other rights to purchase or receive any of the Shares or any other securities or assets of the Company, and no Person has the right, contractual or otherwise, to cause the Company to issue to it, or register pursuant to the Securities Act, any shares of capital stock or other securities or assets of the Company upon the issuance or sale of the Shares.  The Company is not obligated to offer the Shares on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties.

 

ARTICLE V.

 

Indemnification

 

The Investor and the Company represent to the other the following with respect to itself:

 

Section 5.1. Indemnification.

 

 (a)  In consideration of the Investor’s execution and delivery of this Agreement, and in addition to all of the Company’s other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Investor, and all of its officers, directors, partners, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the “Investor Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by the Investor Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Investor Indemnitee not arising out of any action or inaction of an Investor Indemnitee, and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Investor Indemnitees. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law.

 

  

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                  (b)  Contribution.  In the event that the indemnity provided in Section 5.1 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company severally agrees to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending the same) (collectively “Losses”) to which the Company may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand from transactions contemplated by this Agreement. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company and the Investor severally shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and of the Investor on the other in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations.  Benefits received by the Company shall be deemed to be equal to the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by it, and benefits received by the Investor shall be deemed to be equal to the total discounts received by the Investor.  Relative fault shall be determined by reference to, among other things, whether any untrue or any alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information provided by the Company on the one hand or the Investor on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission.  The Company and the Investor agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above.  The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.  Notwithstanding the provisions of this secton the Investor shall not be required to contribute any amount in excess of the amount by which the Purchase Price for Shares actually purchased pursuant to this Agreement exceeds the amount of any damages which the Investor has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.  No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Article V, each person who controls the Investor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each director, officer, employee and agent of the Investor shall have the same rights to contribution as the Investor, and each person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this section.

 

           (c)  The remedies provided for in this Article V are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified person at law or in equity.  The obligations of the parties to indemnify or make contribution under this Article V shall survive termination.

 

Section 5.2  Notification of Claims for Indemnification. Each party entitled to indemnification under this Article V (an “Indemnified Party”) shall, promptly after the receipt of notice of the commencement of any claim against such Indemnified Party in respect of which indemnity may be sought from the party obligated to indemnify such Indemnified Party under this Article V (the “Indemnifying Party”), notify the Indemnifying Party in writing of the commencement thereof. Any such notice shall describe the claim in reasonable detail. The failure of any Indemnified Party to so notify the Indemnifying Party of any such action shall not relieve the Indemnifying Party from any liability which it may have to such Indemnified Party (a) other than pursuant to this Article V or (b) under this Article V unless, and only to the extent that, such failure results in the Indemnifying Party’s forfeiture of substantive rights or defenses or the Indemnifying Party is prejudiced by such delay. The procedures listed below shall govern the procedures for the handling of indemnification claims.

 

(a)   Any claim for indemnification for Indemnified Liabilities that do not result from a Third Party Claim as defined in the following paragraph, shall be asserted by written notice given by the Indemnified Party to the Indemnifying Party. Such Indemnifying Party shall have a period of thirty (30) days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such thirty (30) day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment as set forth in Section 5.1. If such Indemnifying Party does not respond within such thirty (30) day period or rejects such claim in whole or in part, the Indemnified Party shall be free to pursue such remedies as specified in this Agreement.

 

(b)   If an Indemnified Party shall receive notice or otherwise learn of the assertion by a person or entity not a party to this Agreement of any threatened legal action or claim (collectively a “Third Party Claim”), with respect to which an Indemnifying Party may be obligated to provide indemnification, the Indemnified Party shall give such Indemnifying Party written notice thereof within twenty (20) days after becoming aware of such Third Party Claim.

 

  

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(c)   An Indemnifying Party may elect to defend (and, unless the Indemnifying Party has specified any reservations or exceptions, to seek to settle or compromise) at such Indemnifying Party’s own expense and by such Indemnifying Party’s own counsel, any Third Party Claim. Within thirty (30) days after the receipt of notice from an Indemnified Party (or sooner if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnified Party whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions. If such Indemnifying Party does not respond within such thirty (30) day period or rejects such claim in whole or in part, the Indemnified Party shall be free to pursue such remedies as specified in this Agreement. In case any such Third Party Claim shall be brought against any Indemnified Party, and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to assume the defense thereof at its own expense, with counsel satisfactory to such Indemnified Party in its reasonable judgment; provided, however, that any Indemnified Party may, at its own expense, retain separate counsel to participate in such defense at its own expense. Notwithstanding the foregoing, in any Third Party Claim in which both the Indemnifying Party, on the one hand, and an Indemnified Party, on the other hand, are, or are reasonably likely to become, a party, such Indemnified Party shall have the right to employ separate counsel and to control its own defense of such claim if, in the reasonable opinion of counsel to such Indemnified Party, either (x) one or more significant defenses are available to the Indemnified Party that are not available to the Indemnifying Party or (y) a conflict or potential conflict exists between the Indemnifying Party, on the one hand, and such Indemnified Party, on the other hand, that would make such separate representation advisable; provided, however, that in such circumstances the Indemnifying Party (i) shall not be liable for the fees and expenses of more than one counsel to all Indemnified Parties and (ii) shall reimburse the Indemnified Parties for such reasonable fees and expenses of such counsel incurred in any such Third Party Claim, as such expenses are incurred, provided that the Indemnified Parties agree to repay such amounts if it is ultimately determined that the Indemnifying Party was not obligated to provide indemnification under this Article IX. The Indemnifying Party agrees that it shall not, without the prior written consent of the Indemnified Party, settle, compromise or consent to the entry of any judgment in any pending or threatened claim relating to the matters contemplated hereby (if any Indemnified Party is a party thereto or has been actually threatened to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of such Indemnified Party from all liability arising or that may arise out of such claim. The Indemnifying Party shall not be liable for any settlement of any claim effected against an Indemnified Party without the Indemnifying Party’s written consent, which consent shall not be unreasonably withheld, conditioned or delayed. The rights accorded to an Indemnified Party hereunder shall be in addition to any rights that any Indemnified Party may have at common law, by separate agreement or otherwise; provided, however, that notwithstanding the foregoing or anything to the contrary contained in this Agreement, nothing in this Article V shall restrict or limit any rights that any Indemnified Party may have to seek equitable relief.

 

 

ARTICLE VI.

 

Covenants of the Company

 

Section 6.1. Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof. During the Commitment Period, the Company shall notify the Investor promptly if (i) the Registration Statement shall cease to be effective under the Securities Act, (ii) the Common Stock shall cease to be authorized for listing on the Principal Market, (iii) the Common Stock ceases to be registered under Section 12(g) of the Exchange Act or (iv) the Company fails to file in a timely manner all reports and other documents required of it as a reporting company under the Exchange Act.

 

 

  

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Section 6.2. Quotation of Common Stock. The Company shall maintain the Common Stock’s authorization for quotation on the Principal Market.

 

Section 6.3. Exchange Act Registration. The Company will cause its Common Stock to continue to be registered under Section 12(g) of the Exchange Act, will file in a timely manner all reports and other documents required of it as a reporting company under the Exchange Act and will not take any action or file any document (whether or not permitted by Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Exchange Act.

 

Section 6.4. Transfer Agent Instructions. On the Advance Notice Date, the Company shall deliver instructions to its transfer agent to issue shares of Common Stock to the Investor free of restrictive legends on the Advance Notice Date .

 

Section 6.5. Corporate Existence. The Company will take all steps necessary to preserve and continue the corporate existence of the Company.

 

Section 6.6. Notice of Certain Events Affecting Registration; Suspension of Right to Make an Advance. The Company will immediately notify the Investor upon its becoming aware of the occurrence of any of the following events in respect of a registration statement or related prospectus relating to an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus of any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company’s reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Advance Notice during the continuation of any of the foregoing events.

 

Section 6.7. Prohibited Transactions. Except for the agreement with Kodiak Capital Group, during the term of this Agreement, the Company shall not enter into any Prohibited Transaction without the prior written consent of the Investor, which consent may be withheld at the sole discretion of the Investor. For the purposes of this Agreement, the term “Prohibited Transaction” shall refer to the issuance by the Company of any “future priced securities,” which shall mean the issuance of shares of Common Stock or securities of any type whatsoever that are, or may become, convertible or exchangeable into shares of Common Stock where the purchase, conversion or exchange price for such Common Stock is determined using any floating discount or other post-issuance adjustable discount to the market price of Common Stock, including, without limitation, pursuant to any equity line financing that is substantially similar to the financing provided for under this Agreement, provided that any future issuance by the Company of (i) a convertible security (“Convertible Security”) that (A) contains provisions that adjust the conversion price of such Convertible Security in the event of stock splits, dividends, distributions, reclassifications or similar events or pursuant to anti-dilution provisions or (B) is issued in connection with the Company obtaining debt financing for research and development purposes where the issuance of Convertible Securities is conditioned upon the Company meeting certain defined clinical milestones, (ii) securities in a registered direct public offering or an unregistered private placement where the price per share of such securities is fixed concurrently with the execution of definitive documentation relating to the offering or placement, as applicable and (iii) securities issued in connection with a secured debt financing, shall not be a Prohibited Transaction.

 

  

-16-

  

 

        Section 6.8. Consolidation; Merger. The Company shall not, at any time after the delivery of anAdvance Notice and before the Advance Date applicable to such Advance Notice, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all the assets of the Company to another entity (a “Consolidation Event”) unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement.

 

Section 6.9. Issuance of the Company’s Common Stock. The sale of the shares of Common Stock shall be made in accordance with the provisions and requirements of Regulation D and any applicable state securities law.

 

Section 6.10. Review of Public Disclosures. All SEC filings (including, without limitation, all filings required under the Exchange Act, which include Forms 10-Q, 10-K, 8-K, etc) and other public disclosures made by the Company, including, without limitation, all press releases, investor relations materials, and scripts of analysts meetings and calls, shall be reviewed and approved for release by the Company’s attorneys and, if containing financial information, the Company’s independent certified public accountants.

 

Section 6.11. Market Activities   The Company will not, directly or indirectly take any action designed to cause or result in, or that constitutes or might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Stock or (ii) sell, bid for or purchase the Common Stock, or pay anyone any compensation for soliciting purchases of the Common Stock.

 

Section 6.12     Listing of Shares.  The Company will use commercially reasonable efforts to cause the Shares to be listed on the Principal Market and to qualify the Shares for sale under the securities laws of such jurisdictions as the Investor designates; provided that the Company shall not be required in connection therewith to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction.

 

 

  

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ARTICLE VII.

 

Conditions for Advance and Conditions to Closing

 

Section 7.1. Conditions Precedent to the Obligations of the Company. The obligation hereunder of the Company to issue and sell the shares of Common Stock to the Investor incident to each Closing is subject to the satisfaction, or waiver by the Investor in writing, at or before each such Closing, of each of the conditions set forth below.

 

(a)   Accuracy of the Investor’s Representations and Warranties. The representations and warranties of the Investor shall be true and correct in all material respects.

 

(b)  Performance by the Investor. The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing.

 

Section 7.2. Conditions Precedent to the Right of the Company to Deliver an Advance Notice. The right of the Company to deliver an Advance Notice is subject to the fulfillment by the Company, on such Advance Notice Date (a “Condition Satisfaction Date”), of each of the following conditions, any of which may be waived in writing by the Investor:

 

 

(a)  Registration of the Common Stock with the SEC. The Company shall have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities in accordance with and subject to the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement, the Registration Statement shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC’s concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. The Registration Statement must have been declared effective by the SEC prior to the first Advance Notice Date.

 

(b)  Authority. The Company shall have obtained all permits and qualifications required by any applicable state in accordance with the Registration Rights Agreement for the offer and sale of the shares of Common Stock, or shall have the availability of exemptions therefrom. The sale and issuance of the shares of Common Stock shall be legally permitted by all laws and regulations to which the Company is subject.

 

(c)  Fundamental Changes. There shall not exist any fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement.

 

(d)  Performance by the Company. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date.

 

(e)  No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting  any of the transactions contemplated by this Agreement.

 

  

-18-

  

 

(f)  No Suspension of Trading in or Delisting of Common Stock. The Common Stock is trading on a Principal Market. The trading of the Common Stock is not suspended by the SEC or the Principal Market. The issuance of shares of Common Stock with respect to the applicable Closing will not violate the shareholder approval requirements of the Principal Market. The Company shall not have received any notice threatening the continued quotation of the Common Stock on the Principal Market and the Company shall have no knowledge of any event which would be more likely than not to have the effect of causing the Common Stock to not be trading or quoted on a Principal Market.

 

               (g)  Maximum Advance Amount. The amount of an Advance corresponding to the Advance Notice shall not exceed the Maximum Advance Amount. The Floor Price shall be 98% of the average closing price of the Common Stock for the ten (10) Trading Days prior to the Advance Notice Date. If on any day during the Pricing Period, the closing price of the Common Stock falls below the Floor Price, the Maximum Advance Amount will be reduced to one tenth of the initial Advance Amount elected in the Advance Notice.  If trading in the Company’s Common Stock is suspended for any reason during trading hours on the Principal Market on any Trading Day during a Pricing Period, the Advance Amount in respect of such Pricing Period shall be reduced by one fifth of the initial Advance Amount specified in the Advance Notice. In addition, in no event shall the number of shares issuable to the Investor pursuant to an Advance cause the aggregate number of shares of Common Stock beneficially owned by the Investor and its affiliates to exceed 4.99% of the then outstanding shares of Common Stock of the Company (“Ownership Limitation”). If any of the Company’s representations in this Agreement are false or if the Common Stock is less than one cent, then no Advances shall be permitted. Any portion of an Advance that would cause the Investor to exceed the Ownership Limitation shall automatically be withdrawn. For the purposes of this section, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act.

 

 

 (h)  No Knowledge. The Company has no knowledge of any event which would be more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective at Closing.

 

(i)  Executed Advance Notice. The Investor shall have received the Advance Notice executed by an officer of the Company and the representations contained in such Advance Notice shall be true and correct as of each Condition Satisfaction Date.

 

                    (j)  Failure to Deliver Shares. If the Company fails to cause the delivery of the Shares when due, the Company shall pay to the Investor on demand in cash by wire transfer of immediately available funds to an account designated by the Investor as liquidated damages for such failure and not as a penalty, an amount equal to five percent (5%) of the payment required to be paid by the Investor on such Settlement Date (i.e., the Advance Amount) for the initial 30 days following such date until the Shares have been delivered, and an additional 5% for each additional 30-day period thereafter until the Shares have been delivered.

 

                    (k) Fees Paid.  The Company has paid to investor all fees, expenses and shares due under this Agreement.

 

        (l) No Material Notices. None of the following events shall have occurred and be continuing:  (i) receipt by the Company of any request for additional information from the SEC or any other federal or state governmental, administrative or self regulatory authority during the period of effectiveness of the Registration Statement, the response to which would require any amendments or supplements to the Registration Statement  or Prospectus; (ii) the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the occurrence of any event that makes any statement made in the Registration Statement or the Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company’s reasonable determination that a post-effective amendment to the Registration Statement would be required. There shall not exist any fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement.

 

  

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ARTICLE VIII.

 

Due Diligence Review; Non-Disclosure of Non-Public Information

 

Section 8.1. Non-Disclosure of Non-Public Information.

 

 (a)  Subject to Section 6.6 and except as otherwise provided in this Agreement or the Registration Rights Agreement, the Company covenants and agrees that it has not in the past and will refrain in the future from disclosing, and shall cause its officers, directors, employees and agents to refrain from disclosing, any material non-public information to the Investor without also disseminating such information to the public.

 

(b) Nothing herein shall require the Company to disclose material, non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate material, non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts in violation of Regulation FD of the Exchange Act, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided and subject to compliance with Regulation FD, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting material, non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.1 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain material, non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading.

 

  

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ARTICLE IX.

 

Choice of Law/Jurisdiction

 

Section 9.1. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws.

 

Section 9.2. Arbitration.  Any dispute arising out of or in connection with this Agreement or otherwise relating to the parties relationship that cannot be settled by the Company and the Investor after discussion shall be settled solely by arbitration. Any such arbitration shall be fully and finally resolved in binding arbitration in a proceeding in the State of New York, City of New York, in accordance with the rules of the American Arbitration Association before a single arbitrator who is a securities lawyer.  The arbitrator shall not have the authority to modify or change any of the terms of this Agreement.  The arbitrator may award interim relief and grant specific performance in addition to monetary damages.  The Company and the Investor further agree that no demand for punitive or exemplary damages shall be made in any arbitration proceeding.  Any monetary award shall be in U.S. dollars.  The arbitrator's award shall be final and binding upon the parties, and judgment upon the award may be entered in any court of competent jurisdiction in any state of the United States or country or application may be made to such court for a judicial acceptance of the award and an enforcement as the law of such jurisdiction may require or allow.  No party to this agreement will challenge the jurisdiction or venue provisions as provided in this section.  No party to this agreement will challenge the jurisdiction or venue provisions as provided in this section.  

 

ARTICLE X.

 

Assignment; Termination

 

Section 10.1. Assignment. Neither this Agreement nor any rights or obligations of the Company or the Investor hereunder may be assigned to any other Person.

 

Section 10.2. Termination.

 

 (a) Unless earlier terminated as provided hereunder, this Agreement shall terminate automatically on the earliest of (i) the first day of the month next following the 24-month anniversary of the Effective Date, or (ii) the date on which the Investor shall have made payment of Advances pursuant to this Agreement in the aggregate amount of the Commitment Amount.

 

(b) The Company may terminate this Agreement effective upon fifteen Trading Days’ prior written notice to the Investor; provided that (i) there are no Advances outstanding, and (ii) the Company has paid all amounts owed to the Investor pursuant to this Agreement. This Agreement may be terminated at any time by the mutual written consent of the parties, effective as of the date of such mutual written consent unless otherwise provided in such written consent. In the event of any termination of this Agreement by the Company hereunder, so long as the Investor owns any shares of Common Stock issued hereunder, unless all of such shares of Common Stock may be resold by the Investor without registration and without any time, volume or manner of sale limitations pursuant to Rule 144, the Company shall not (i) cancel the common stock issued to Investor or suspend (except as provided for in the Registration Rights Agreement) or  withdraw the Registration Statement or otherwise cause the Registration Statement to become ineffective, or voluntarily delist the Common Stock from, the Principal Market without listing the Common Stock on another Principal Market.

 

  

-21-

  

 

(c) The obligation of the Investor to make an Advance to the Company pursuant to this Agreement shall terminate permanently (including with respect to an Advance Date that has not yet occurred) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of fifty (50) Trading Days, during the Commitment Period, or (ii) the Company shall at any time fail materially to comply with the requirements of Article VI and such failure is not cured within thirty (30) days after receipt of written notice from the Investor, provided, however, that this paragraph (c) shall not apply to any period commencing upon the filing of a post-effective amendment to such Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC.

 

(d) Nothing in this Section 10.2 shall be deemed to release the Company or the Investor from any liability for any breach under this Agreement, or to impair the rights of the Company and the Investor to compel specific performance by the other party of its obligations under this Agreement. The indemnification provisions contained in Sections 5.1 and 5.2 shall survive termination hereunder.

 

ARTICLE XI.

 

Notices

 

Section 11.1. Notices. Any notices, consents, waivers, or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) three (3) days after being sent by U.S. certified mail, return receipt requested, (iii) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same or (iv) or upon confirmation of receipt of email by the recipient emailing back the sender that they are in receipt of the email. The addresses and emails for such communications shall be:

 

	  	  	  
	
If to the Company, to:

	  	
cMoney, Inc.

	  	  	
One Sugar Creek Blvd.

	  	  	
Sugar Land, Texas 72478

	  	  	
Attention: Jennifer Pharris

	  	  	
 Telephone: (713) 589 - 5393

	
With a copy to:

	  	
Email: jPharris@cmoney.com

	  	  	  
	  	  	  
	
If to the Investor(s):

	  	
AGS Capital Group, LLC

	  	  	
2 Water Street, Suite 17G

	  	  	
New York, New York

	  	  	
Attention: Allen Silberstein

	  	  	
Telephone: 212-217-9139

	  	  	
Email: asilberstein@agscapitalgroup.com

	  	  	  
	  	  	  

Each party shall provide five (5) days’ prior written notice to the other party of any change in address or email.

 

  

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ARTICLE XII.

 

Miscellaneous

 

Section 12.1. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which 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.

 

Section 12.2 Entire Agreement; Amendments. This Agreement and the Registration Rights Agreement supersedes all other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement, the Registration Rights Agreement and the instruments referenced herein and therein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement.  The provisions of this agreement shall be construed in favor of the Investor.

 

Section 12.3. Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity.

 

Section 12.4. Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that the Company shall pay a Due Diligence Fee of Twenty Thousand Dollars ($20,000) to Investor. Company shall transfer to Investor 2,333,333 shares of freely tradable Common Stock upon signing this Agreement and an additional 5,666,667 shares of freely tradable Common Stock as a result of the pending 3-for-1 stock spilt (“Commitment Shares”). Company shall also transfer to Investor freely tradable Common Stock equal to 1% of each Advance Amount. The pricing for the Commitment Shares will be based on the average closing price for the 10 trading days preceding the date of this Agreement.

 

Section 12.5. Confidentiality. If for any reason the transactions contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party’s domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herein.

 

Section 12.6 Publicity. The Company and the Investor shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior consent of the other party, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement. Notwithstanding the foregoing, the Company shall not publicly disclose the name of the Investor without the prior consent of the Investor, except to the extent required by law. The Investor acknowledges that this Agreement and all or part of the Reserve Equity Financing Documents may be deemed to be "material contracts" as that term is defined by Item 601(b)(10) of Regulation S-B, and that the Company may therefore be required to file such documents as exhibits to reports or registration statements filed under the 1933 Act or the 1934 Act.  The Investor further agrees that the status of such documents and materials as material contracts shall be determined solely by the Company, in consultation with its counsel.

 

       Section 12.7 Placement Agent. If so required by the SEC, the Company agrees to pay a registered broker dealer, to act as placement agent, a percentage of the Put Amount on each draw toward the fee.  The Investor shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other persons or entities for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Reserve Equity Financing Documents. The Company shall indemnify and hold harmless the Investor, their employees, officers, directors, agents, and partners, and their respective affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses incurred in respect of any such claimed or existing fees, as such fees and expenses are incurred.

 

 

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IN WITNESS WHEREOF, the parties hereto have caused this Reserve Equity Financing Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above.

 

	  	  	  	  	  
	  	  	
COMPANY:

	  	  	
cMoney, Inc

	  	  	  	  	  
	  	  	
By:

	  	  
	  	  	  	  	  
	  	  	
Name:

	  	  	
Title: Chief Executive Officer

	  	  	  	  	  
	  	  	
INVESTOR:

	  	  	
AGS Capital Group, LLC

	  	  	  	  	  
	  	  	
By:

	  	  
	  	  	  	  	  
	  	  	
Name: Allen Silberstein

	  	  	
Title: Chief Executive Officer

 

  

-24-

  

EXHIBIT A

 

ADVANCE NOTICE

 

           cMoney, Inc

 

The undersigned, __________________________hereby certifies, with respect to the sale of shares of Common Stock of cMoney, Inc (the “Company”) issuable in connection with this Advance Notice, delivered pursuant to the Reserve Equity Financing Agreement (the “Agreement”), as follows:

 

1. The undersigned is the duly elected Officer of the Company, its Chief Executive, President or Chief Financial Officer.

 

2. There are no fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post effective amendment to the Registration Statement.

 

3. The Company has performed in all material respects all covenants and agreements to be performed by the Company and has complied in all material respects with all obligations and conditions contained in the Agreement on or prior to the Advance Notice Date, and shall continue to perform in all material respects all covenants and agreements to be performed by the Company through the applicable Advance Date. All conditions to the delivery of this Advance Notice are satisfied as of the date hereof.

 

4. The undersigned hereby represents, warrants and covenants that it has made all filings (“SEC Filings”) required to be made by it pursuant to applicable securities laws (including, without limitation, all filings required under the Securities Exchange Act of 1934, which include Forms 10-Q or, 10-K or, 8-K, etc.). All SEC Filings and other public disclosures made by the Company, including, without limitation, all press releases, analysts meetings and calls, etc. (collectively, the “Public Disclosures”), have been reviewed and approved for release by the Company’s attorneys and, if containing financial information, the Company’s independent certified public accountants. None of the Company’s Public Disclosures contain, as of their respective dates, any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

5. The Advance requested is  _____shares .

 

The undersigned has executed this Certificate this  _____  day of  _____.

 

	  	  	  	  	  
	  	
____________________________

 

	  
	  	
By:  

	  	  
	  	  	
Name:  

	  	  
	  	  	
Title:  

	  	  
	  

 

If Returning This Advance Notice via email Please Send To: asilberstein@agscapitalgroup.com

	  	  	  
	
If by Mail, via Federal Express To:

	  	
AGS Capital Group, LLC, Attention Allen Silberstein

	  	  	
2 Water Street, Ste. 17G, New York, New York, 10004

 

 

  

-25-

  

 

SCHEDULE 2.4

 

cMoney, Inc

 

 

The undersigned hereby agrees that for a period commencing on July 7, 2010 and expiring upon the termination of the Reserve Equity Financing Agreement dated July 7, 2010 between the Company and the Investor (the “Lock-up Period”), he, she or it will not, directly or indirectly, without the prior written consent of the Investor, issue, offer, agree or offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of any securities of the Company, including common stock or options, rights, warrants or other securities underlying, convertible into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any common stock (whether or not beneficially owned by the undersigned), or any beneficial interest therein (collectively, the “Securities”) except in accordance with the volume limitations set forth in Rule 144(e) of the General Rules and Regulations under the Securities Act of 1933, as amended. Notwithstanding the forgoing, nothing herein shall prevent the undersigned from disposing of Securities (i) if the recipient of the Securities agrees to be bound by the terms of this Lock-up, (ii) in connection with a merger where the Company is not the surviving entity, or (iii) outside of a Pricing Period..

 

 

In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Company’s securities with respect to any of the Securities registered in the name of the undersigned or beneficially owned by the undersigned, and the undersigned hereby confirms the undersigned’s investment in the Company.

 

 

Dated: ___________________, 2010

	  	  	  	  	  
	  	  	
Signature

	  	  	  	  	  
	  	  	  
	  	  	
Name:

	  	  
	  	  	  	  	  
	  	  	
Address:

	  	  
	  	  	  	  	  
	  	  	
City, State, Zip Code:

	  	  
	  	  	  	  	  
	  	  	  	  	  
	  	  	
 _____________________________________________________________

	  	  	
Print Social Security Number

	  	  	
or Taxpayer I.D. Number

 

 

  

-26-

  

EXHIBIT C

 

 

 

FORM OF OPINION

 

 

 

1.         The Company is a corporation validly existing and in good standing under the laws of the State of __________, with corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Company’s latest Form 10-K or 10-Q filed by the Company under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and the rules and regulations of the Commission thereunder (the “Public Filings”).

 

2.        The Company has the requisite corporate power and authority to enter into and perform its obligations under the Reserve Equity Financing Agreement and to issue the Common Shares in accordance with their terms.  The execution and delivery of the Reserve Equity Financing Agreement by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors or stockholders is required unless it needs to authorize more shares to have future advances.  The Reserve Equity Financing Agreement has been duly executed and delivered and the Reserve Equity Financing Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its respective terms, except as my be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors’ rights and remedies.

 

3.         The Common Shares are duly authorized and, upon issuance in accordance with the terms of the Reserve Equity Financing Agreement, will be duly and validly issued, fully paid and nonassessable, free of any liens, encumbrances and preemptive or similar rights contained, to our knowledge, in any agreement filed by the Company as an exhibit to the Company’s Public Filings.

 

4.         The execution, delivery and performance of the Reserve Equity Financing Agreement by the Company (other than performance by the Company of its obligations under the indemnification sections of such agreements, as to which no opinion need be rendered) will not (i) result in a violation of the Company’s Articles of Incorporation or By-Laws; (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement or, indenture filed by the Company as an exhibit to the Company’s Public Filings; or (iii) to our knowledge, result in a violation of any federal or state law, rule or regulation, order, judgment or decree applicable to the Company.

 

               5.         To our knowledge without independent investigation and other then as set forth in the Public Filings, there are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company is subject which is required to be disclosed in any Public Filings that are not already so disclosed in the Public Filings.

 

 

  

-27-

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