Document:

ex10-4.htm

Exhibit 10.4

 

SUBSCRIPTION AGREEMENT

 

THIS SUBSCRIPTION AGREEMENT (this “Agreement”), dated as of August  ___, 2013, by and among ISC8 Inc., a Delaware corporation (the “Company”), and the subscriber identified on the signature page hereto (“Subscriber”).

 

WHEREAS, the Company is offering senior convertible promissory notes in the aggregate principal amount of up to $4,875,000 in such denominations as the Company deems advisable, bearing simple interest of 12% per annum and with a maturity date of January 31, 2014 (individually, a “Note” and, collectively, the “Notes”).  As additional consideration for the purchase of Notes, the Company shall issue to the Subscriber: (a) shares of its common stock, par value $0.01 per share (“Common Stock”) having a value equal to 25% of the principal amount of the Notes purchased by such Subscriber (the “Shares”), calculated using a per Share value equal to the closing market price of the Company’s stock but not less than $0.09 per share; and (b) a warrant to purchase up to a number of Shares of Common Stock of the Company equal to 3.66 shares per dollar in principal of note purchased, at a price of $.001 per Share, which expires on September 30, 2013 (the “Warrant”).  The Notes will only be offered and sold to a limited number of subscribers who are “Accredited Investors,” as such term is defined hereinafter.

 

WHEREAS, the Company and the Subscriber are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the provisions of Section 4(2) and/or Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “1933 Act”), and similar exemptions under applicable state securities laws.

 

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Subscriber, as provided herein, and the Subscriber shall purchase, a Note (the “Note”), the Shares and the Warrant.  The Subscriber desires to acquire the Note in the original principal amount set forth on the signature page hereto, adjusted for any original issue discounts,  pursuant to the terms and conditions of this Agreement.  The Note, the Shares and the Warrant are collectively referred to herein as the “Securities”.

 

NOW, THEREFORE, in consideration of the mutual covenants and other agreements contained in this Agreement the Company and the Subscriber hereby agree as follows:

 

1.           (a)           Subscription.  In accordance with the terms and conditions of this Agreement, the Subscriber, intending to be legally bound, hereby irrevocably subscribes for and agrees to purchase a Note in the original principal amount set forth on the signature page hereto and to pay the original principal amount in immediately available funds contemporaneously with the execution and delivery of this Subscription Agreement.  The execution and delivery of this Agreement by the Subscriber will not constitute an agreement between the Subscriber and the Company until this Agreement has been accepted by the Company evidenced by receipt by the Placement Agent on behalf of the Subscriber of an acceptance page of this Agreement signed by the Company, and then subject to the terms and conditions of this Agreement.  The Subscriber understands that acceptance or rejection, in whole or in part, by the Company of the subscription and agreement of the Subscriber to purchase the Note is within the sole and absolute discretion of the Company, and the Company may reject any subscription in whole or in part, for any reason or without any reason.  Likewise, the Subscriber understands acknowledges and agrees that acceptance by the Company of any subscription of a Subscriber, in whole or in part, is predicated upon the representations and warranties of the Subscriber as set forth hereinafter and that SUBSCRIPTIONS, ONCE RECEIVED BY THE COMPANY AND/OR THE PLACEMENT AGENT, ARE IRREVOCABLE BY THE SUBSCRIBER, AND, THEREFORE, MAY NOT BE WITHDRAWN.

 

           (b)           Closing Date.  The closing of the purchase and sale of the Notes hereunder and under other Subscription Agreements (the “Closing”) shall be held at the offices of Griffin Partners, 555 Montgomery Street, Suite 650, San Francisco, CA 94111 after subscriptions for the Notes have been accepted by the Company.  The Company in its discretion may have multiple Closings.  The date of the Closing of the Notes being purchased hereunder is referred to herein as the “Closing Date.”  Subscriptions will not be refunded unless the Company rejects Subscriber’s subscription, in whole or in part, in which case, the refund shall be without interest.

  

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(c)           Deliveries. The Subscriber shall deliver at the Closing the Omnibus Signature Page to this Agreement which the Company shall be authorized, upon satisfaction of the conditions set forth in Section 7 hereof, to attach to an execution version of the Note, in substantially the formcirculated to investors in connection with this Subscription AgreementJ, with such minor modifications thereto, if any, as the Company deems are necessary and appropriate.

 

(d)           Authority of Placement Agent.  The Subscriber agrees that the Placement Agent, Griffin Partners, LLC, shall have the authority to act on behalf of the Subscriber in connection with this subscription and all matters related to the Offering including, without limitation, collection of and delivery to the Company of the Omnibus Signature Page to this Agreement, collection and disbursement of the purchase price for the Notes, and collection of and delivery to the Subscriber of the securities evidencing the Notes being purchased hereby.

 

(e)           Piggyback Registration Rights.  If at any time that the Shares or any shares of the Common Stock issuable or issued upon conversion or exercise of the Securities (the “Registrable Securities”) are not eligible for resale pursuant to Rule 144 promulgated under the 1933 Act, the Company shall determine to prepare and file with the SEC a registration statement relating to an offering for its own account or the account of others under the 1933 Act of any of its equity securities, other than on Form S-4 or any similar form for the registration of Common Stock to be issued in connection with business combination transactions or similar transactions or Form S-8 or any similar form for the registration of equity securities to be issued pursuant to benefit or incentive plans or arrangements, or successor forms, and the registration form to be used may be used for the registration of the Registrable Securities, then the Company shall within twenty (20) days of such determination deliver to the Subscriber a written notice of such determination and, if within twenty (20) days after the date of the delivery of such notice, the Subscriber shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Subscriber requests to be registered; provided, however, that the foregoing piggy-back registration rights shall be subject to customary pro rata cut-back provisions in the event that such piggy-back registration is in connection with an underwritten offering, if the managing underwriters so determines that such pro-rata cut backs are advisable.

 

2.           Shares and Warrant.

 

(a) As additional consideration for the purchase of Notes, the Company shall issue to the Subscriber: (a) shares of its common stock, par value $0.01 per share (“Common Stock”) having a value equal to 25% of the principal amount of the Notes purchased by such Subscriber (the “Shares”), calculated using a per Share value equal to the closing market price of the Company’s stock but not less than $0.09 per share; and (b) warrants to purchase up to 17,857,153 Shares of Common Stock of the Company at a price of $.001 per Share, which expires on September 30, 2013 (the “Warrant”).

 

(b) Subscriber acknowledges and agrees that the face value of the Note(s) purchased hereunder may exceed the purchase price paid therefor, to reflect original issue discount, and that other subscribers may acquire Notes hereunder as to which such original issue discount is not applied, as set forth in the allocation attached as Exhibit A (the “Allocation”), and hereby indemnifies and holds harmless the Company and its officers and directors (the “Company Indemnitees”) for any and all facts and circumstances related to or resulting from the Allocation.

 

3.           Right to Board of Directors Representation.  Upon the close of funding at least $9.5 million through the purchase of securities issued by ISC8, Inc. in connection with this and other financings to be completed prior to December 31, 2013, and provided that Diamond Millennium, Limited funds at least $3 million aggregate into these financings, then Diamond Millennium, Limited will be entitled to appoint an additional director to the Board of Directors of ISC8, Inc.

4.           Subscriber's Representations and Warranties.   The Subscriber hereby represents and warrants to and agrees with the Company that:

  

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(a)           Information on Company.  The Subscriber has had access at the EDGAR Website of the Commission to the Company’s Annual Report on Form 10-K for the year ended September 30, 2012, and all periodic and current reports filed with the Commission thereafter (hereinafter referred to as the “Reports”).  The Subscriber has had the opportunity to review information regarding the Company, its business, operations, financial condition and the terms and conditions of the Securities, and considered all factors Subscriber deems material in deciding on the advisability of investing in the Securities.  The offer to sell the Securities to the Subscriber was communicated to the Subscriber by the Company and/or Placement Agent in such a manner that the Subscriber was able to ask questions of and received answers from the Company or a person acting on the Company’s behalf concerning the terms and conditions of this transaction as well as to obtain any information requested by the Subscriber.  Any questions raised by the Subscriber or its representatives concerning the transactions contemplated by this Agreement have been answered to the satisfaction of the Subscriber and its representatives.  The Subscriber can fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities.  Except as set forth in this Agreement, no representations or warranties have been made to the Subscriber by the Company or any agent, employee or affiliate of the Company and in entering into this Agreement, the Subscriber is not relying on any information, other than the results of any independent investigation by the Subscriber.

 

(b)           Information on Subscriber.  The Subscriber is, and will be at the time of issuance of the Securities, an “accredited investor”, as such term is defined in Regulation D promulgated by the Commission under the 1933 Act, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of United States publicly-owned companies in private placements in the past and has such knowledge and experience in financial, tax and other business matters as to enable the Subscriber to utilize the information made available by the Company to evaluate the merits and risks of and to make an informed investment decision with respect to the proposed purchase, which represents a speculative investment.  The Subscriber is not a broker-dealer under Section 15 of the Exchange Act or an officer, director or affiliate of the Company.  The Subscriber has or had a relationship with the Company and/or Placement Agent prior to receipt of the deal materials. The Subscriber has the authority and is duly and legally qualified to purchase and own the Securities.  The Subscriber is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof.  The information set forth on the signature page hereto regarding the Subscriber is accurate. The information set forth in Schedule 1 hereto is correct in all respects.

 

(c)           Purchase of Securities.  The Subscriber is acquiring the Securities in the ordinary course of its business as principal for its own account, and not as nominee, for investment only and not with a view toward, or for resale in connection with, the public sale or any distribution thereof.  The Subscriber does not have any contract, undertaking, agreement, understanding or arrangement, directly or indirectly, with any Person to distribute, sell, transfer or pledge to such Person, or anyone else, all or any part of the Securities, and the Subscriber has no present plan to enter into any such contract, undertaking, agreement, understanding or arrangement.  The Subscriber further agrees to execute and deliver any further investment certificates as counsel to the Company deems necessary or advisable to comply with state or federal securities laws.  The Subscriber understands that it shall not have any of the rights of a stockholder with respect to any securities issuable upon conversion or exercise of the Securities until the Shares and such securities are issued as provided herein and in the Note.

 

(d)           Compliance with Securities Act.  The Subscriber understands and agrees that the Securities have not been registered under the 1933 Act or any applicable state securities laws, by reason of their issuance in a transaction that does not require registration under the 1933 Act (based on the accuracy of the representations and warranties of the Subscriber contained herein), and that such Securities may not be sold, assigned or transferred and must be held indefinitely in the absence of (i) an effective registration statement under the Act and applicable state securities laws with respect thereto or (ii) an opinion of counsel satisfactory to the Company that such registration is not required.  The Subscriber understands that the Company is under no obligation to register the Securities, except as set forth in Section 12 of this Agreement, and does not intend to do so.  Furthermore, the Subscriber has read and acknowledges the potential issues regarding the registration of the shares of Common Stock underlying the Notes and the Shares which may affect the future liquidity of such securities as described in the “Risk Factors” section contained in the Company’s form 10-K filed with the U.S. Securities & Exchange Comission.

  

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(e)           Notes Legend.  The Notes shall bear the following or similar legend (in addition to such other restrictive legends as are required or deemed advisable under any applicable law or any other agreement to which the Company is a party):

 

“THE TRANSFER OF THIS NOTE IS SUBJECT TO RESTRICTIONS CONTAINED HEREIN.  THIS NOTE HAS BEEN ISSUED IN RELIANCE UPON THE REPRESENTATION OF PAYEE THAT IT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARDS THE RESALE OR OTHER DISTRIBUTION THEREOF.  THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL SATISFACTORY TO COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(f)           Stock Legend.  The stock certificates for the Shares and any securities issuable upon conversion or exercise of the Securities shall bear the following or similar legend (in addition to such other restrictive legends as are required or deemed advisable under any applicable law or any other agreement to which the Company is a party):

 

“THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, AND APPLICABLE STATE SECURITIES LAWS, COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES OR (B) THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.”

 

(g)           Tax Advisors.  The Subscriber has had the opportunity to review with such Subscriber’s own tax advisors the federal, state and local tax consequences of this investment, where applicable, and the transactions contemplated by this Agreement.  The Subscriber is relying solely on the Subscriber’s own determination as to tax consequences or the advice of such tax advisors and not on any statements or representations of the Company or any of its agents and understands that such Subscriber (and not the Company) shall be responsible for such Subscriber’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.

 

(h)           Communication of Offer.  The offer to sell the Securities was directly communicated to the Subscriber by the Company and/or Placement Agent.  At no time was the Subscriber presented with or solicited by any leaflet, advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio, or any other form of general advertising, or solicited or invited to attend a promotional meeting or any seminar or meeting by any general solicitation or general advertising.

  

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(i)           Authority; Enforceability.  If the Subscriber is an entity, it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate, limited liability company or partnership power and authority to enter into and to consummate the transactions contemplated by this Agreement and the Notes and otherwise to carry out its obligations hereunder.  This Agreement, the Notes and other agreements delivered together with this Agreement or in connection herewith have been duly authorized, executed and delivered by the Subscriber and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity; and Subscriber has full corporate power and authority necessary to enter into this Agreement, the Notes and such other agreements and to perform its obligations hereunder, thereunder and under all other agreements entered into by the Subscriber relating hereto and thereto.

 

(j)           No Governmental Review.  The Subscriber understands that no United States federal or state agency or any other governmental or state agency has passed on or made recommendations or endorsement of the Securities or the fairness or suitability of the investment in the Securities, nor have such authorities passed upon or endorsed the merits of the offering of the Securities.  The Subscriber understands that neither legal counsel to the Company, the Placement Agent, nor its counsel has independently verified the information concerning the Company included herein, all of which has been provided by the Company, nor has such legal counsel passed upon the adequacy or accuracy of information provided to the Investor.  No independent third party, such as an investment banking firm, the Placement Agent, or other expert in evaluating businesses or securities, has made an evaluation of the economic potential of the Company.

 

(k)           Certain Trading Activities.  The Subscriber has not directly or indirectly, nor has any Person acting at the direction of the Subscriber, engaged in any transactions in the securities of the Company (including, without limitation, any short sales involving the Company’s securities) since the earlier to occur of (i) the time the Subscriber was first contacted by the Company or any other Person regarding the investment in the Company and (ii) the 30th day prior to the date of this Agreement.  The Subscriber covenants that neither it nor any Person acting at the direction of the Subscriber will engage in any transactions in the securities of the Company (including short sales) after the date hereof and prior to the date that the transactions contemplated by this Agreement are publicly disclosed.

 

(l)           Correctness of Representations.  The Subscriber represents as to the Subscriber that the foregoing representations and warranties are true and correct as of the date hereof and, unless the Subscriber otherwise notifies the Company prior to the Closing Date, shall be true and correct as of the Closing Date and as of the issuances of the Shares and as of the issuance of any securities upon conversion or exercise of the Securities.

 

5.           Company Representations and Warranties.  The Company represents and warrants to and agrees with the Subscriber that:

 

(a)           Due Incorporation.  The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power to own its properties and to carry on its business as disclosed in the Reports.  The Company is duly qualified as a foreign corporation to do business and is in good standing in California.

 

(b)           Outstanding Stock.  All issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable.

 

(c)           Authority; Enforceability.  This Agreement, the Notes, the Warrant, and any other agreements delivered together with this Agreement or in connection herewith (collectively “Transaction Documents”) have been duly authorized, executed and delivered by the Company and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity.  The Company has full corporate power and authority necessary to enter into and deliver the Transaction Documents and to perform its obligations thereunder.

  

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(d)           Consents.  No consent, approval, authorization or order of any court, governmental agency or body or arbitrator having jurisdiction over the Company is required for the execution by the Company of the Transaction Documents and compliance and performance by the Company of its obligations under the Transaction Documents, including, without limitation, the issuance and sale of the Securities, other than the filing by the Company of a Notice of Sale of Securities on Form D with the Commission under Regulation D of the Securities Act, applicable Blue Sky filings, or otherwise as may be required by law or regulation.  The Transaction Documents and the Company’s performance of its obligations thereunder have been approved by the Company’s board of directors.

 

(e)           No Violation or Conflict.  Neither the issuance and sale of the Securities nor the performance of the Company’s obligations under this Agreement and all other agreements entered into by the Company relating thereto by the Company will violate, conflict with, result in a breach of, or constitute a default under (A) the certificate of incorporation or bylaws of the Company, (B) to the Company's knowledge, any decree, judgment, order, law, treaty or regulation applicable to the Company of any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or (C) the terms of any material bond, debenture, note or other evidence of indebtedness, agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which the Company is a party or by which it is bound, except the violation, conflict, breach, or default of which would not have a Material Adverse Effect on the Company.  For purpose of this Agreement, a “Material Adverse Effect” shall mean a material adverse effect on the financial condition, results of operations, properties or business of the Company and its Subsidiaries taken as a whole.  For purposes of this Agreement, “Subsidiary” means, with respect to any entity at any date, any corporation, limited or general partnership, limited liability company, trust, estate, association, joint venture or other business entity) of which more than 50% of (i) the outstanding capital stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors or other managing body of such entity, (ii) in the case of a partnership or limited liability company, the interest in the capital or profits of such partnership or limited liability company or (iii) in the case of a trust, estate, association, joint venture or other entity, the beneficial interest in such trust, estate, association or other entity business is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such entity.

 

(f)           The Securities.  The Securities upon issuance (and any shares of Common Stock issued upon conversion or exercise of the Securities):

 

(i)           will be, free and clear of any security interests, liens, claims or other encumbrances, subject to restrictions upon transfer set forth herein, under the 1933 Act and any applicable state securities laws;

 

 (ii)           have been, or will be, duly and validly authorized and on the date of issuance of any shares of Common Stock will be duly and validly issued, fully paid and nonassessable;

 

(iii)           will not have been issued or sold in violation of any preemptive or other similar rights of the holders of any securities of the Company;

 

(iv)           will not subject the holders thereof to personal liability by reason of being such holders; and

 

(v)           will have been issued in reliance upon an exemption from the registration requirements of and will not result in a violation of Section 5 under the 1933 Act.

 

(g)           Reporting Company.  The Company is a publicly-held company subject to reporting obligations pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "1934 Act") and has a class of common shares registered pursuant to Section 12(g) of the 1934 Act.  Pursuant to the provisions of the 1934 Act, the Company has timely filed all reports and other materials required to be filed thereunder with the Commission during the preceding twelve months.

  

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(h)           No General Solicitation.  Neither the Company, nor any of its Affiliates, nor to its knowledge, 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 1933 Act) in connection with the offer or sale of the Securities.

 

(i)           Correctness of Representations.  The Company represents that the foregoing representations and warranties are true and correct as of the date hereof in all material respects, and, unless the Company otherwise notifies the Subscribers prior to the Closing Date, shall be true and correct in all material respects as of the Closing Date.

 

(j)           No Material Adverse Effect.  No Material Adverse Effect has occurred since the preparation of this Subscription Agreement. .

 

6.           Escrow and Use of Purchase Price.  The subscription payments made pursuant hereto prior to the Closing of the Offering will be deposited by the Placement Agent in an escrow account at a commercial bank or trust company of the Placement Agent’s choosing and agreeable to the Company.  No interest will be earned by the Subscriber on subscription payments held in any escrow account.  If for any reason the Closing of the purchase and sale of the Notes does not take place, the subscription payment will be returned to the Subscriber without interest and without deduction.  Upon receipt of the Agreement and the subscription payment, and upon acceptance of the subscription by the Company, the subscription payments shall belong to the Company.  If the subscription is not accepted by the Company then this Agreement will be null and void and the subscription payment will be returned to the Subscriber without interest and without deduction.

 

7.           Securities Law Disclosures.  The Company may in its sole discretion, following the Closing Date, (i) issue a press release and/or file a Current Report on Form 8-K disclosing the transactions contemplated hereby and (ii) make such other disclosures, filings and notices in the manner and time required by the Commission or any state securities commission.

 

8.           Conditions to Subscriber’s Obligations.  The obligations of the Subscriber under Section 1(b) of this Agreement are subject to the fulfillment at or before the Closing of each of the following conditions, any of which may be waived in writing by the Subscriber:

 

(a)           Representations and Warranties.  The representations and warranties of the Company contained in Section 4 shall be true and correct in all material respects on and as of the Closing with the same effect as if made on and as of the Closing.

 

(b)           Performance.  The Company shall have performed or fulfilled in all material respects all agreements, obligations and conditions contained herein required to be performed or fulfilled by the Company at or prior to the Closing.

 

(c)           Regulatory Matters.  None of the issuance and sale of the Securities pursuant to this Agreement or any of the transactions contemplated by any of the other Transaction Documents shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued in respect thereof.  There shall not have been any legal action, order, decree or other administrative proceeding instituted against the Company or against the Subscriber relating to the issuance of the Securities or the Subscriber’s activities in connection therewith or any other transactions contemplated by this Agreement or the other Transaction Documents.

 

(d)           Consents.  The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Transaction Documents.

  

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(e)           Secretary’s Certificate.  The Company shall have furnished to the Placement Agent a corporate secretary’s certificate certifying, among other things, (i) copies of resolutions or written consents duly adopted by the Company’s board of directors and stockholders evidencing the taking of all corporate action necessary to authorize the Offering, the execution and delivery of the transaction documents, including the Notes, and the transactions contemplated thereby, (ii) the accuracy of the Company’s certificate of incorporation and bylaws, (iii) the good standing of the Company in the State of Delaware, and (iv) the number of authorized, outstanding and reserved shares of the Company’s Common Stock, all in such reasonable detail as Placement Agent and its counsel shall request.

 

(f)           Officer’s Certificate.  The Chief Financial Officer or the Chief Executive Officer of the Company shall deliver a certificate to the Subscriber, certifying, among other things, that the representations and warranties of the Company set forth in Section 4 of this Agreement are true and correct in all material respects as of the Closing Date, that all covenants and obligations required by this Agreement to be so performed or complied with by the Company at or before the Closing have been complied with and the Company’s business, financial condition or assets has not suffered a Material Adverse Effect since the date these documents were prepared.

 

(g)           Execution of Seventh Omnibus Amendment. A Seventh Omnibus Amendment, to amend prior secured promissory notes and the Security Agreement, shall be executed in full by all necessary parties thereto.

 

9.           Conditions to the Company’s Obligations.  The obligations of the Company under Section 1(b) of this Agreement are subject to the fulfillment at or before the Closing of each of the following conditions, any of which may be waived in writing by the Company:

 

(a)           Representations and Warranties.  The representations and warranties of the Subscriber contained in Section 3 shall be true and correct in all material respects on and as of the Closing with the same effect as if made on and as of the Closing.

 

(b)           Performance.  The Subscriber shall have performed or fulfilled in all material respects all agreements, obligations and conditions contained herein required to be performed or fulfilled by the Subscriber at or prior to the Closing.

 

(c)           Subscription Payments.  The Subscriber shall have delivered the aggregate subscription payment for the Note in the amount specified for the Subscriber on the signature page hereto.

 

(d)           Regulatory Matters.  None of the issuance and sale of the Securities pursuant to this Agreement or any of the transactions contemplated by any of the other Transaction Documents shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued in respect thereof.  There shall not have been any legal action, order, decree or other administrative proceeding instituted against the Company or against the Subscriber relating to the issuance of the Securities or the Subscriber’s activities in connection therewith or any other transactions contemplated by this Agreement or the other Transaction Documents.

 

(e)           Consents.  The Company shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Transaction Documents.

10.           Covenants of Subscriber Not to Short Stock.  The Subscriber and its Affiliates and assigns agree not to make any short sale of, or grant any option for the purchase of or enter into any hedging or similar transaction with the same economic effect as a short sale, of Common Stock until one-hundred eighty (180) days following the issuance of any shares of Common Stock.11.Miscellaneous.

  

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(a)           Notices.  All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable overnight courier service with charges prepaid, or (iv) transmitted by hand delivery, electronic mail, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice.  Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by electronic mail or facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), (b) the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (c) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be: (i) if to the Company, to: ISC8 Inc., 840 F Avenue,  Plano, TX 75093, Attn: Chief Financial Officer, telecopier: (714) 444-8773, and (ii) if to the Subscriber, to: the address and telecopier number indicated on the signature pages hereto.

 

(b)           Entire Agreement; Assignment.  This Agreement and other documents delivered in connection herewith represent the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended only by a writing executed by both parties.  Neither the Company nor the Subscriber have relied on any representations not contained or referred to in this Agreement and the documents delivered herewith.  No right or obligation of the Company shall be assigned without prior notice to and the written consent of the Subscriber.

 

(c)           Counterparts/Execution.  This Agreement may be executed in any number of counterparts and by the different signatories hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument.  This Agreement may be executed by facsimile or electronic mail signature and delivered by facsimile transmission or electronic mail.

 

(d)           Law Governing this Agreement.  This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws.  Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of California or in the federal courts located in the state of California.  The parties and the individuals executing this Agreement and other agreements referred to herein or delivered in connection herewith on behalf of the Company agree to submit to the jurisdiction of such courts.  The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs.  In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law.  Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement.

 

(e)           Specific Enforcement, Consent to Jurisdiction.  The Company and the Subscriber acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.  It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity.  Subject to Section 9(d) hereof, each of the Company, the Subscriber and any signatory hereto in his personal capacity hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction in New York of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper.  Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law.

  

-9-

  

 

(f)           Independent Nature of Subscribers.  The Company acknowledges that the obligations of the Subscriber under the Transaction Documents are several and not joint with the obligations of any other Subscriber who is also purchasing Securities in the transaction (collectively, with the Subscriber, referred to as the “Subscribers”), and none of the Subscribers shall be responsible in any way for the performance of the obligations of any of the other Subscribers under the Transaction Documents.  The Company acknowledges that the decision of each of the Subscribers to purchase Securities has been made by each of such Subscribers independently of any of the other Subscribers and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company which may have been made or given by any of the other Subscribers or by any agent or employee of any of the other Subscribers, and none of the Subscribers or any of its agents or employees shall have any liability to any of the Subscribers (or any other person) relating to or arising from any such information, materials, statements or opinions.  The Company acknowledges that nothing contained in any Transaction Document, and no action taken by any of the Subscribers pursuant hereto or thereto shall be deemed to constitute the Subscribers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Subscribers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents.  The Company acknowledges that each of the Subscribers shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of the Transaction Documents, and it shall not be necessary for any of the other Subscribers to be joined as an additional party in any proceeding for such purpose.  The Company acknowledges that it has elected to provide all of the Subscribers with the same terms and Transaction Documents for the convenience of the Company and not because Company was required or requested to do so by the Subscribers.  The Company acknowledges that such procedure with respect to the Transaction Documents in no way creates a presumption that the Subscribers are in any way acting in concert or as a group with respect to the Transaction Documents or the transactions contemplated thereby.

 

 (h)           Omnibus Signature Page.  This Agreement is intended to be read and construed in conjunction with the senior subordinated secured promissory note pertaining to the issuance by the Company of the Securities pursuant to this document.  Accordingly, pursuant to the terms and conditions of this Agreement it is hereby agreed that the execution by the Subscriber of this Agreement, in the place set forth herein shall constitute agreement to be bound by the terms and conditions of the senior subordinated secured promissory note, with the same effect as if such separate, but related agreement, was separately signed.

 

           11.           Payment.

 

                      (a)           Payment shall be provided via Federal Wire Transfer using wire instructions that will be provided separately from this Subscription Agreement.

 

[THIS SPACE INTENTIONALLY LEFT BLANK]

  

-10-

  

 

OMNIBUS SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT AND

 

 SENIOR SUBORDINATED SECURED PROMISSORY NOTE

 

           IN WITNESS WHEREOF, the Subscriber hereby represents and warrants that the Subscriber has read this entire Agreement and hereby executes and delivers this Agreement and the senior subordinated secured promissory note as of the ___ day of ______, 2013.

 

 

	
SUBSCRIBER

	
NOTE PRINCIPAL

	
 

Name:

Address:

 

 

Fax:

 

 

_____________________________________

(Signature)

Title:

 

	
$

 

ACCEPTANCE

IN WITNESS WHEREOF, the Company has duly executed and delivered this Agreement as of the ___ day of ________, 2013.

ISC8 INC.

a Delaware corporation

 

 

By:_________________________________

 

Name:

 

Title:

 

 

  

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Schedule 1 to Subscription Agreement

 

Name: ___________________________

 

INVESTOR QUESTIONNAIRE

 

Purpose of this Questionnaire

The senior subordinated secured promissory notes and the Shares of Common Stock to be issued in connection with such senior subordinated secured promissory notes (collectively, the “Securities”) of ISC8 Inc., a Delaware corporation (the “Company”), will be offered without registration under the Securities Act of 1933, as amended (the “Act”), or the securities laws of any state, in reliance on the exemptions contained in Section 4(2) of the Act and Regulation D promulgated thereunder and on similar exemptions under applicable state laws.  Under Section 4(2) of the Act and/or certain state securities laws, the Company may be required to determine that an individual, or an individual together with a “purchaser representative,” or each individual equity owner of an investing entity meets certain suitability requirements before offering to sell the Securities to such individual or entity.  THE COMPANY MAY, IN ITS DISCRETION, EXCLUDE ANY INDIVIDUAL FROM THE OFFERING TO THE EXTENT NECESSARY TO COMPLY WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS.  This Investor Questionnaire does not constitute an offer to sell or a solicitation of an offer to buy the Securities or any other security.

Instructions. Please complete this questionnaire by filling in the information called for, checking the appropriate boxes, and signing below.  Please fax and mail the completed questionnaire to Griffin Partners, LLC.

Representations

 

The undersigned hereby represents to the Company as follows:

 

1.           Accredited Investor Status.  The undersigned has read the definition of “accredited investor” as defined in Rule 501 of Regulation D attached hereto as Attachment 1, and certifies that either (check one):

 

c           The undersigned is an “accredited investor;” or

c           The undersigned is not an “accredited investor.”

 

2.           Domicile/State of Organization.  The undersigned’s state of domicile/organization is: _______________.

 

The foregoing representations are true and accurate as of the date hereof.  The undersigned undertakes to notify the Company regarding any material change in the information set forth above prior to the purchase by the undersigned of any securities of the Company.

 

 

Dated:                      

 

__________________________                                            Address:_________________________

 

Signature of Investor(s)                                                              Telephone:_______________________

 

Facsimile:________________________

 

Email:__________________________

 

__________________________

 

Print Name of Investor(s)

 

__________________________

 

Print Title (if applicable)

  

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EXHIBIT A

 

ALLOCATION OF WARRANTS AND DISCOUNT AMONG SUBSCRIBERS TO THIS OFFERING

 

(For $3,412,500 principal value of notes issued through August 10, 2013)

  

-13-

  

ATTACHMENT 1

 

Rule 501.                      Definitions and Terms Used in Regulation D under the Act.

 

As used in Regulation D, the term “accredited investor” shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

 

(1) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Exchange Act, any insurance company as defined in section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

 

(2) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

 

(3) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

 

(4) Any director, executive officer, or general partner of the Company;

 

(5) Any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000.

 

(i) For purposes of calculating net worth under this paragraph (5):

 

(A) The person's primary residence shall not be included as an asset;

 

(B) Indebtedness that is secured by the person's primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, shall not be included as a liability (except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability); and

 

(C) Indebtedness that is secured by the person's primary residence in excess of the estimated fair market value of the primary residence at the time of the sale of securities shall be included as a liability;

 

(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

 

  

-14-

  

 

(7) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) under the Act; and

 

(8) Any entity in which all of the equity owners are accredited investors.

 

For purposes of this definition, the term “net worth” means the excess of total assets over total liabilities, subject to the provisions of paragraph 5 above. In determining income, an investor should add to his or her adjusted gross income any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depreciation, contributions to an IRA or Keogh retirement plan, alimony payments and any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income.

 

 

 

-15-ex10-5.htm

Exhibit 10.5

 

FORM OF SENIOR SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTE

NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (i) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (ii) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.

 

ISC8 Inc.

 

Senior Subordinated Secured Convertible Promissory Note

 

Issuance Date: ________________ Principal: U.S. $________

 

FOR VALUE RECEIVED, ISC8 Inc., a Delaware corporation (the “Company”), hereby promises to pay to [Holder] or its registered assigns (the “Holder”) the amount set out above opposite the caption “Principal” (as such amount may be increased or reduced from time to time pursuant to the terms hereof, whether through the payment of PIK Interest (as defined below) or through prepayment or otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined below), acceleration, prepayment or otherwise (in each case, in accordance with the terms hereof) and to pay Interest (as defined below) on the outstanding Principal at the rates, in the manner and at the times set forth herein.  This Senior Subordinated Secured Convertible Promissory Note (including all Senior Subordinated Secured Convertible Promissory Notes issued in exchange, transfer or replacement hereof) is part of the same series of notes (the “Notes”) as those 12% senior subordinated promissory notes issued on or after September 27, 2012 to The Griffin Fund, LP and its affiliates and certain other investors (the “Griffin Notes”).  The Company’s $4,000,000 in aggregate principal amount of 12% senior subordinated promissory notes due 2013 and previously issued in 2011 to Costa Brava Partnership III, L.P. and certain other investors are referred to herein as the “Other Senior Subordinated Notes”.  Certain capitalized terms used herein are defined in Section 31.

 

	
1)  

	
PAYMENTS OF PRINCIPAL.

 

(a) Voluntary.  Subject to the Holder’s right to convert under Section 3, the Company may prepay this Note at any time, in whole or in part, without penalty or premium; provided that at least an aggregate of 90 days of interest is being repaid with such prepayment in the event such prepayment is less than 90 days after the issuance of the Note being prepaid.  All prepayments of Principal made pursuant to this Section 1(a) shall be accompanied by accrued and unpaid Interest thereon through such prepayment date and subject to the proviso in the foregoing sentence.

 

(b) Mandatory.  Subject to the Holder’s right to convert under Section 3, on the Maturity Date, the Holder shall surrender this Note to the Company and the Company shall pay to the Holder in cash an amount equal to the outstanding Principal and accrued and unpaid Interest thereon.  The “Maturity Date” shall be the earlier of (i) January 31, 2014, and (ii) the closing of a Qualified Financing.

 

2) INTEREST.  Simple interest (“Interest”) shall accrue on the outstanding Principal at the Interest Rate from and including the date set forth above opposite the caption “Issuance Date” (the “Issuance Date”) until the Principal is paid in full, shall be computed on the basis of a 365-day year and actual days elapsed.

  

-1-

  

(a) Payment of Interest.  Unless the Holder of the Note requires otherwise but except for the period when Interest is calculated at the default rate, Interest shall be payable on the Maturity Date to the record holder of this Note as of the last day of the Interest Period through the addition of the amount of such Interest to the then outstanding Principal (any Interest paid in such manner, “PIK Interest”). Interest payments that are instead required to be made in cash (“Cash Interest”) shall be subject to Section 2(b).

 

(b) Restrictions on Cash Interest Payments.  Notwithstanding the foregoing, in the event that the Company would otherwise be required under this Section 2 to pay Interest in the form of Cash Interest but is not permitted to do so pursuant to Section 33 hereof, the Company shall instead pay such Interest as PIK Interest.  Interest that is paid in the form of PIK Interest shall be considered paid or duly provided for, for all purposes under this Note, and shall not be considered overdue.

 

3) CONVERSION OF NOTE. This Note shall be convertible into shares or units of Company Financing Securities, on the terms and conditions set forth in this Section 3.

 

(a) Conversion Right. (i) At any time after Issuance Date, upon election by the Holder, all of the outstanding Principal and accrued and unpaid Interest on this Note shall automatically convert, in whole without any further action by the Holder, into fully paid and nonassessable shares of Company Common Stock at the Conversion Rate (as defined below).  (ii) Also, at the discretion of the noteholder, the outstanding principal of a Note and any accrued interest thereon may be converted within fifteen (15) business days after receiving notice from the Company of the closing of the “Qualified Financing” (as defined herein) into Company Financing Securities (defined below) at the Financing Conversion Rate (as defined below).  The Company shall not issue any fraction of a share or unit of a Company Conversion Security upon any conversion.  If the issuance would otherwise result in the issuance of a fraction of a share or unit of a Company Conversion Security, the Company shall round such fraction of a share or unit of Company Conversion Security up to the nearest whole share or unit and issue such rounded up number of shares or units upon conversion.  The Company shall pay any and all taxes that may be payable with respect to the issuance and delivery of Company Conversion Securities upon conversion of the Conversion Amount; provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of Company Conversion Securities to any Person other than the Holder or with respect to any income tax due by the Holder with respect to such Company Conversion Securitiesissued upon conversion.

 

(b) Standard Conversion Rate. The number of shares of Company Common Stock issuable upon conversion of the Conversion Amount pursuant to Section 3(a)(i) shall be determined by dividing (x) the Conversion Amount by (y) $0.06 (the “Standard Conversion Rate”).

 

(c) Financing Conversion Rate. The number of shares or units of Company Financing Securities issuable upon conversion of the Conversion Amount pursuant to Section 3(a)(ii) shall be determined by dividing (x) the Conversion Amount by (y) the price per share or unit of Company Financing Security sold in any Qualified Financing (the “Financing Conversion Rate”).

 

  

-2-

  

(d) Mechanics of Conversion. To convert the Notes into Company Conversion Securities on any date (the “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 5:00 p.m., Pacific Time, on such date, written notice to the Company electing to convert all of the Notes (the “Conversion Notice”); provided, however, that in the event the Holder desires to convert the Conversion Amount into shares of units of Company Financing Securities issued in a Qualified Financing, the Holder must deliver the Conversion Notice within fifteen (15) business days after receiving the Qualified Financing Note (as defined_below).  The Conversion Notice shall specify whether the Notes shall be converted into Company Common Stock at the Standard Conversion Rate or Company Financing Securities at the Financing Conversion Rate.  In addition, in the event of a conversion of the Conversion Amount into shares of Company Common Stock, the Holder must be an Accredited Investor (as such term is defined in Rule 501 under the Securities Act) at the time of such conversion and, in the event of a conversion of the Conversion Amount into Company Financing Securities, that Holder must be an Accredited Investor at the time of such conversion and must enter into and execute the same documents, satisfy the same conditions and agree to be bound by the same terms as all other investors in the Qualified Financing.  As soon as practicable after the Conversion Date (but in no event more than ten (10) Business Days after the Conversion Date), the Company shall issue and deliver to the Holder a certificate (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to the Company), registered in the name of the Holder or its designee, for the number of shares or units of Company Conversion Securities to which the Holder shall be entitled.  The Person or Persons entitled to receive the shares or units of Company Conversion Securities issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares or units of Company Conversion Securities on the Conversion Date to the extent permitted by applicable law.

 

	
4)  

	
[Reserved]

 

	
5)  

	
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT.

 

(a) Events of Default.  Each of the following events (so long as it is continuing) shall constitute an “Event of Default”:

 

i. any Change of Control;

 

ii. the Company’s failure to pay to the Holder any amount of Principal, Interest, or other amounts when and as due under this Note, provided, that in the case of a failure to pay Interest when and as due, such failure shall constitute an Event of Default only if such failure continues for a period of at least five (5) Business Days;

 

iii. any event of default under, redemption of or acceleration prior to maturity of any Indebtedness of the Company or any of its Subsidiaries (other than this Note) in an aggregate principal amount in excess of $500,000;

 

iv. the Company or any of its Subsidiaries pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official (a “Custodian”), (D) makes a general assignment for the benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as they become due;

 

v. a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against the Company or any of its Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or any of its Subsidiaries or (C) orders the liquidation of the Company or any of its Subsidiaries;

 

  

-3-

  

vi. a final judgment or judgments for the payment of money aggregating in excess of $500,000 are rendered against the Company or any of its Subsidiaries and which judgments are not, within sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a creditworthy party shall not be included in calculating the $500,000 amount set forth above so long as the Company provides the Holder Representative with a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder Representative) to the effect that such judgment is covered by insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity within thirty (30) days of the issuance of such judgment or such later date as provided by the terms of such insurance policy;

 

vii. any representation or warranty made by the Company in this Note or the Security Agreement shall prove to be materially false or misleading as of the date made or deemed made;

 

viii. the Company shall breach any covenant or other term or condition of this Note or the Security Agreement and, in the case of a breach of a covenant or term or condition which is curable, such breach continues for a period of at least ten (10) consecutive Business Days;

 

ix. any material provision of this Note or the Security Agreement ceases to be of full force and effect other than by its terms, or the Company contests in writing (or supports any other person in contesting) the validity or enforceability of any provision of this Note or the Security Agreement;

 

x. the Security Agreement, dated December 23, 2010, between the Company and Costa Brava Partnership III L.P., as amended from time to time (the “Security Agreement”) shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected lien, with the priority required by the Security Agreement, on, and security interest in, any material portion of the Collateral purported to be covered thereby, subject to Permitted Liens and Liens security the Existing Secured Debt; or

 

xi. any Event of Default (as defined in the Other Senior Subordinated Notes) occurs with respect to any Other Senior Subordinated Note.

 

(b) Acceleration.  Upon the occurrence and during the continuance of an Event of Default, but subject to Section 33, the Holder Representative may, and at the request of the Required Holders shall, take either or both of the following actions: (i) declare all or any part of the outstanding Principal, accrued and unpaid Interest and any other amounts outstanding under this Note (the aggregate of such amounts, the “Outstanding Note Obligations”) and the Other Senior Subordinated Notes to be immediately due and payable; provided, however, that if an Event of Default shall occur under either clause (iv) or clause (v) of Section 5(a), the outstanding Principal, accrued and unpaid Interest and any other amounts outstanding under this Note shall automatically become immediately due and payable, and (ii) exercise on behalf of itself and the other Holders all rights and remedies available to it under the Security Agreement and applicable law.  To the extent that the Holder Representative declares this Note to be immediately due and payable (or this Note become due and payable following an Event of Default under clauses (iv) or (v) of Section 5(a)), the Company shall pay the sum of the Outstanding Note Obligations to the Holder within five (5) Business Days after the date that the Outstanding Note Obligations are declared due and payable, and upon full payment, the Note shall be extinguished.

 

  

-4-

  

6) RIGHTS UPON FUNDAMENTAL TRANSACTION.  The Company shall not enter into or be party to a Fundamental Transaction unless the Successor Entity assumes in writing all of the obligations of the Company under this Note in accordance with the provisions of this Section 6 pursuant to written agreements in form and substance satisfactory to and approved by the Required Holders (such approval not to be unreasonably withheld or delayed and the Required Holders shall not be permitted to approve any written agreement that materially modifies, alters or changes the terms of the Notes in a manner adverse to the Holders) prior to such Fundamental Transaction, including agreements to deliver to the Holder in exchange for this Note a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Note, including, without limitation, having a principal amount and interest rate equal to the principal amount and the interest rate of this Note and having similar ranking to this Note, and satisfactory to the Required Holders (any such approval not to be unreasonably withheld or delayed).  Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note with the same effect as if such Successor Entity had been named as the Company herein.  The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations on the redemption of this Note.

 

7) [Reserved]

 

8) [Reserved]

 

9) [Reserved]

 

10) [Reserved]

 

11) [Reserved]

 

12) [Reserved]

 

13) RESERVATION OF AUTHORIZED SHARES.  Prior to the Issuance Date, the Company shall reserve out of its authorized and unissued Company Common Stock a number of shares of Company Common Stock equal to the number of shares of Company Common Stock as shall be necessary to effect the conversion of this Note.  Thereafter, so long as this Note is outstanding, the Company shall take all action necessary to reserve and keep available out of its authorized and unissued Company Common Stock, solely for the purpose of effecting the conversion of this Note, the number of shares of Company Common Stock as shall from time to time be necessary to effect the conversion of this Note.

 

14) REPRESENTATIONS AND WARRANTIES OF THE COMPANY.  The Company hereby represents and warrants to the Holder that:

 

(a) Organization.  The Company and each of its Subsidiaries (a) is duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its formation, except, in the case of its Subsidiaries, where the failure to be so incorporated, organized, existing or in good standing would not have a Material Adverse Effect, (b) is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction where the nature of the property owned or leased by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect, (c) has its principal place of business and chief executive office at 840 F Avenue,  Plano, TX 75093 and (d) has all requisite corporate or other power and authority to own or lease and operate its assets and carry on its business as presently being conducted.

  

-5-

  

(b) Authorization; Enforcement.  The Company has all requisite corporate power and has taken all necessary corporate action required for the due authorization, execution, delivery and performance by the Company of this Note and no action on the part of the stockholders of the Company is required.  This Note has been duly executed and delivered by the Company, and this Note constitutes a legal, valid and binding obligation of the Company enforceable against it in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application affecting enforcement of creditors’ rights generally, and as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.

 

(c) Governmental Consents.  All consents, approvals, orders, or authorizations of, or registrations, qualifications, designations, declarations, or filings with, any governmental authority, required on the part of the Company in connection with the valid execution and delivery of the offer, sale or issuance of the Notes, and the equity securities issuable upon conversion of the Note shall have been obtained and will be effective prior to the Issuance Date.

 

(d) No Conflicts.  Neither the execution and issuance of this Note or the consummation of any of the transactions contemplated hereby nor compliance with or fulfillment of the terms, conditions and provisions hereof or thereof will conflict with, result in a breach of the terms, conditions or provisions of, or constitute a default (with or without notice or lapse of time, or both), or an event creating rights of acceleration, termination or cancellation or a loss of rights under (i) any material note, instrument, agreement, mortgage, lease, license, franchise, permit or other authorization, right, restriction or obligation to which the Company is a party or by which the Company or any of its properties is bound, (ii) any judgment or decree applicable to, or affecting, the Company or (iii) any statute, law or rule to which the Company is subject.

 

(e) No Litigation.  There is no action, suit, proceeding, judgment, claim or investigation pending or, to the knowledge of the Company, threatened against the Company which could reasonably be expected in any manner to challenge or seek to prevent, enjoin, alter or materially delay any of the transactions contemplated by this Note.

 

(f) SEC Filings.

 

i. Since December 31, 2011, the Company has filed all reports, registrations, documents, filings, statements and submissions, together with any amendments thereto, that the Company was required to file with the SEC (the “SEC Filings”).  As of the time it was filed (or, if amended or superseded by a filing prior to the date of this Note, then on the date of such filing): (i) each of the SEC Filings complied as to form in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be), and (ii) none of the SEC Filings contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

ii. The consolidated financial statements contained in the SEC Filings: (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered, except as may be indicated in the notes to such financial statements and (in the case of unaudited financial statements) as permitted by Form 10-Q of the SEC, and except that unadjusted financial statements may not contain footnotes and are subject to year-end audit adjustments; and (iii) fairly present the consolidated financial position of the Company and its subsidiaries as of the respective dates thereof and the consolidated results of operations of the Company and its subsidiaries for the periods covered thereby.

 

15) REPRESENTATIONS AND WARRANTIES OF THE HOLDER.  By its acceptance of this Note, the Holder hereby represents and warrants to the Company that:

 

(a) Organization.  The Holder is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation, has not been organized, reorganized or recapitalized specifically for the purpose of investing in the Company and has all power and authority to purchase this Note and instruments referred to herein to which it is a party.

 

  

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(b) Investment Representations and Warranties.  The Holder understands and agrees that the offering and sale of this Note has not been registered under the Securities Act or any applicable state securities laws and are being made in reliance upon federal and state exemptions for transactions not involving a public offering which depend upon, among other things, the bona fide nature of the investment intent and the accuracy of the Holder’s representations as expressed herein.  The Holder acknowledges that the Company has no obligation to register or qualify this Note for resale.

 

(c) Acquisition for Own Account.  The Holder is acquiring the Note for its own account for investment and not with a view toward distribution in a manner which would violate the Securities Act or any applicable state securities laws.

 

(d) Ability to Protect Its Own Interests and Bear Economic Risks.  The Holder, by reason of the business and financial experience of its management, has the capacity to protect its own interests in connection with the transactions contemplated by this Note and is capable of evaluating the merits and risks of the investment in this Note.  The Holder is able to bear the economic risk of an investment in this Note and is able to sustain a loss of all of its investment in this Note without economic hardship if such a loss should occur.

 

(e) Accredited Investor.  The Holder is an “accredited investor” as that term is defined in Regulation D promulgated under the Securities Act.

 

(f) Access to Information.  The Holder has been given access to all Company documents, records, and other information, and has had adequate opportunity to ask questions of, and receive answers from, the Company’s officers, employees, agents, accountants, and representatives concerning the Company’s business, operations, financial condition, assets, liabilities, and all other matters relevant to its investment in this Note.  The foregoing, however, does not limit or modify the representations and warranties made by the Company pursuant to Section 14 of this Note or the right of the Holder to rely thereon.

 

(g) Restricted Securities.

 

i. The Holder understands that this Note and the Company Conversion Securities issuable upon conversion of any Conversion Amount will be characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations this Note may be resold without registration under the Securities Act only in certain limited circumstances.

 

ii. The Holder acknowledges that this Note and the Company Conversion Securities issuable upon conversion of any Conversion Amount must be held indefinitely unless subsequently registered under the Securities Act and under applicable state securities laws or an exemption from such registration is available.  The Holder understands that the Company is under no obligation to register this Note or the Company Conversion Securities issuable upon conversion of any Conversion Amount.

 

iii. The Holder is aware of the provisions of Rule 144 under the Securities Act which permit limited resale of securities purchased in a private placement.

 

(h) Legends.  It is understood that the certificates evidencing any Company Conversion Securities issuable upon conversion of any Conversion Amount may bear substantially the following legends (in addition to any other legends as legal counsel for the Company deems necessary or advisable under the applicable state and federal securities laws or any other agreement to which the Company is a party):

 

“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS.  THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT.”

  

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16) [Reserved]

 

17) COVENANTS.

 

(a) Incurrence of Indebtedness.  So long as this Note is outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than (i) the Indebtedness evidenced by this Note, and (ii) Permitted Indebtedness.

 

(b) Existence of Liens.  So long as this Note is outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest or other similar encumbrance upon or in any property or assets (including accounts and contract rights) owned by the Company or any of its Subsidiaries (collectively “Liens”) other than Permitted Liens.

 

(c) Restricted Payments.  The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Indebtedness described in clause (A) of the definition of “Permitted Indebtedness”, whether by way of payment in respect of principal of (or premium, if any) or interest on such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing.

 

(d) Qualified Financing.  So long as this Note is outstanding, the Company shall provide the Holder written notice of any proposed Qualified Financing no later than five (5) Business Days prior to the consummation of such Qualified Financing (the “Qualified Financing Notice”).  The Company shall be required to use the net proceeds from such Qualified Financing to, first, pay such amounts to the Existing Secured Debt Holder as is necessary to permit payments on the Notes under that certain Loan and Security Agreement, dated December 14, 2011, by and among the Company and the Existing Secured Debt Holder and any other agreement between the Company and Existing Secured Debt Holder, and, second, to pay all amounts owing under the Turner Notes (other than those Turner Notes that the holder thereof converts into the securities issued in the Qualified Financing) on a pro rata basis.  The Company shall not be permitted to pay any other Indebtedness, including, without limitation, the Griffin Notes, the Other Senior Subordinated Notes or the 2015 Notes, from the proceeds of a Qualified Financing for as long as any Turner Note is outstanding.

 

18) [Reserved]

 

19) AMENDMENTS.  The written consent of the Holder of this Note shall be required for any amendment or waiver of this Note.  Furthermore, the affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the Required Holders (or the Holder Representative acting at the direction of the Required Holders) shall be required for any amendment or waiver to the Security Agreement (including to release all or substantially all of the Collateral, in any transaction or series of related transactions); provided that no such amendment or waiver shall adversely affect the rights of the holders of the Turner Notes.

 

  

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20) HOLDER REPRESENTATIVE.

 

(a) Appointment of Holder Representative.  By acceptance of this Note, the Holder hereby appoints Griffin Partners, LLC (“Griffin”) to serve as Holder Representative. The Holder further agrees that the Holder Representative may be removed at any time by a vote of the Required Holders, and that if the Holder Representative is so removed, or if it at any time resigns or declines to serve as Holder Representative, the successor Holder Representative shall be the holder of the Notes that at any given time holds Notes in an aggregate principal amount that is greater than the aggregate principal amount of the Notes held by any other holder of the Notes. The Holder hereby (a) irrevocably authorizes the Holder Representative to (i) enter into the Security Agreement and (ii) at its discretion, to take or refrain from taking such actions as Holder Representative and to exercise or refrain from exercising such powers under the Notes or the Security Agreement as are delegated by the terms hereof or thereof, as applicable, together with all powers reasonably related thereto and (b) agrees and consents to all of the provisions of the Security Agreement.

 

	
(b)  

	
Concerning the Holder Representative.

 

i. Standard of Conduct. The Holder Representative and its officers, directors, employees and agents shall be under no liability to the Holder or to any of its successors or assigns for any action or failure to act taken or suffered in its capacity as Holder Representative in the absence of gross negligence and willful misconduct, and any action or failure to act in accordance with an opinion of its counsel shall conclusively be deemed to be in the absence of gross negligence and willful misconduct.

 

ii. No Implied Duties. The Holder Representative shall have no duties or responsibilities except as set forth in the Note and the Security Agreement, nor shall it have any fiduciary relationship with the Holder, and no implied covenants, responsibilities, duties, obligations or liabilities shall be read into the Note or the Security Agreement or otherwise exist against the Holder Representative.

 

iii. Validity. The Holder Representative shall not be responsible to the Holder or to any of its successors or assigns (a) for the legality, validity, enforceability or effectiveness of the Note or the Security Agreement, (b) for any recitals, reports, representations, warranties or statements contained in or made in connection with the Note or the Security Agreement, (c) for the existence or value of any assets included in the Collateral, (d) for the effectiveness of any Lien purported to be created by the Security Agreement, or (e) unless the Holder Representative shall have failed to comply with sub-paragraph (i) above, for the perfection of the security interests created by the Security Agreement.

 

(c) Compliance. The Holder Representative shall not be obligated to ascertain or inquire as to the performance or observance of any of the terms of this Note.

 

(d) Employment of Agents and Counsel. The Holder Representative may execute any of its duties as Holder Representative under this Note by or through employees, agents and attorneys-in-fact and shall not be responsible to any of the parties hereto for the default or misconduct of any such agents or attorneys-in-fact selected by the Holder Representative acting in the absence of gross negligence and willful misconduct. The Holder Representative shall be entitled to advice of counsel concerning all matters pertaining to the agency hereby created and its duties hereunder.

 

(e) Reliance on Documents and Counsel. The Holder Representative shall be entitled to rely, and shall be fully protected in relying, upon any affidavit, certificate, cablegram, consent, instrument, letter, notice, order, document, statement, telecopy, telegram, telex or teletype message or writing reasonably believed in good faith by the Holder Representative to be genuine and correct and to have been signed, sent or made by the Person in question, including any telephonic or oral statement made by such Person, and, with respect to legal matters, upon an opinion or the advice of counsel selected by the Holder Representative.

 

  

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(f) Holder Representative’s Reimbursement. The Company agrees to indemnify the Holder Representative for any losses arising from its appointment as Holder Representative or from the performance of its duties hereunder and to reimburse the Holder Representative for any reasonable expenses; provided, however, that the Holder Representative shall not be indemnified or reimbursed for liabilities or expenses to the extent resulting from its own gross negligence, bad faith or willful misconduct.

 

21) REISSUANCE OF THIS NOTE.

 

(a) Transfer.  The Company may, as a condition to the transfer of any of this Note, require that the request for transfer be accompanied by an opinion of counsel reasonably satisfactory to the Company, to the effect that the proposed transfer does not result in a violation of the Securities Act, unless such transfer is covered by an effective registration statement or by Rule 144 or Rule 144A under the Securities Act; provided, however, that an opinion of counsel shall not be required for a transfer by a Holder that is (A) a partnership transferring to its partners or former partners in accordance with partnership interests, (B) a corporation transferring to a wholly owned subsidiary or a parent corporation that owns all of the capital stock of the Holder, (C) a limited liability company transferring to its members or former members in accordance with their interest in the limited liability company, (D) an individual transferring to the Holder’s family member or trust for the benefit of an individual Holder, or (E) transferring its Note to any Affiliate of the Holder, in the case of an institutional investor, or other Person under common management with such Holder; provided, further, that (i) the transferee in each case agrees to be subject to the restrictions in this Section 21 and provides the Company with a representation letter containing substantially the same representations and warranties set forth in Section 15 hereof, (ii) the Company satisfies itself that the number of transferees is sufficiently limited and (iii) in the case of transferees that are partners or limited liability company members, the transfer is for no consideration.  It is understood that the certificates evidencing any Notes may bear substantially the following legends (in addition to any other legends as legal counsel for the Company deems necessary or advisable under the applicable state and federal securities laws or any other agreement to which the Company is a party):

 

“NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (i) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (ii) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.”

 

If this Note is to be transferred in compliance with the foregoing, the Holder shall surrender this Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder a new Note (in accordance with Section 21(d)), registered as the Holder may request, representing the outstanding Principal being transferred by the Holder and, if less then the entire outstanding Principal is being transferred, a new Note (in accordance with Section 21(d)) to the Holder representing the outstanding Principal not being transferred.

 

(b) Lost, Stolen or Mutilated Note.  Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of an indemnification undertaking by the Holder to the Company, in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with Section 21(d)) representing the outstanding Principal.

 

(c) Note Exchangeable for Different Denominations.  This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in accordance with Section 21(d)) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

  

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(d) Issuance of New Notes.  Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 21(a) or Section 21(c), the Principal designated by the Holder which, when added to the principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as indicated on the face of such new Note which is the same as the Issuance Date of this Note, (iv) shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid Interest of this Note from the Issuance Date.

 

22) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.

 

(a) The remedies provided in this Note shall be cumulative and in addition to all other remedies available at law or in equity (including a decree of specific performance and/or other injunctive relief), and, subject to Section 22(b) and Section 33 below, nothing herein shall limit the Holder’s right to pursue monetary damages for any failure by the Company to comply with the terms of this Note.  Amounts set forth or provided for herein with respect to payments and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof).  The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

 

(b) Notwithstanding the foregoing, but subject to Section 33, the right of the Holder to receive payment of Principal and Interest on this Note, on or after the respective due dates set forth herein, or to bring suit for the enforcement of any such right to payment, shall not be impaired or affected without the consent of the Holder.

 

23) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS.  If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, reasonable attorneys’ fees and disbursements.

 

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

 

25) FAILURE OR INDULGENCE NOT WAIVER.  No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

 

26) [Reserved]

  

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27) NOTICES; PAYMENTS.

 

(a) Notices.  All notices, requests, consents, and other communications under this Note shall be in writing and shall be deemed delivered (a) when delivered, if delivered personally, (b) four business days after being sent by registered or certified mail, return receipt requested, postage prepaid; (c) one Business Day after being sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, or (d) when receipt is acknowledged, in the case of facsimile, in each case to the intended recipient as set forth below:

 

	
i.  

	
If to the Holder, at its address set forth on the signature page hereto.

 

	
ii.  

	
If to the Company:

 

ISC8 Inc.

840 F Avenue

Plano, TX 75093

Attention: Marcus A. Williams

Facsimile No.: (714) 444-8773

or at such other address as the Company or the Holder each may specify by written notice to the other parties hereto in accordance with this Section 27.

The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Note, including in reasonable detail a description of such action and the reason therefore.

(b) Payments.  Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, such payment shall be made in lawful money of the United States of America by a check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing; provided that the Holder may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written notice setting out such request and the Holder’s wire transfer instructions.  Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day.

 

(c) Withholding Taxes.  All payments made by the Company hereunder shall be made without withholding for or on account of any present or future taxes (other than overall net income taxes imposed on the recipient).  If any such withholding is so required, the Company shall make the withholding, pay the amount withheld to the appropriate authority before penalties attach thereto or interest accrues thereon and pay to the recipient such additional amount as may be necessary to ensure that the net amount actually received by the recipient free and clear of such taxes (including taxes on such additional amount) is equal to the amount that the recipient would have received had such withholding not been made.  If the recipient is required to pay any such taxes, penalties or interest, the Company shall reimburse the recipient for that payment on demand.  If the Company pays any such taxes, penalties or interest, it shall deliver official tax receipts or other evidence of payment to the recipient on whose account such withholding was made on or before the thirtieth day after payment.  The Holder agrees to provide, promptly following the Company’s request therefore, such forms or certifications as it is legally able to provide to establish an exemption from, or a reduction in, any withholding taxes that might otherwise apply.

 

28) CANCELLATION.  After all Principal, accrued Interest and other amounts at any time owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.

 

29) WAIVER OF NOTICE.  To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note.

 

  

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

 

31) CERTAIN DEFINITIONS.  For purposes of this Note, the following terms shall have the following meanings:

 

(a) “Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such entity provided that, for purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise.

 

(b) “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

 

(c) “Change of Control” means any Fundamental Transaction other than (A) a Fundamental Transaction in which holders of the Company’s voting power immediately prior to the Fundamental Transaction continue after the Fundamental Transaction to hold publicly traded securities and, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, (B) a Fundamental Transaction with any Holder, any Affiliate of any Holder or any person otherwise related to or associated with a Holder, or (C) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company.

 

(d) “Collateral” has the meaning given to such term in the Security Agreement.

 

(e) “Company Financing Securities” means any debt or equity security of the Company, or securities of the Company convertible into or exchangeable therefor, or any combination thereof (including but not limited to Company Common Stock, Preferred Stock, Warrants or a combination thereof) offered for sale by the Company to one or more investors in a Qualified Financing.

 

(f) “Company Conversion Securities” means the Company Common Stock and/or Company Financing Securities issuable upon conversion of this Note.

 

(g) “Contractual Obligation” means, with respect to any Person, any contract, agreement, deed, mortgage, lease, sublease, license, sublicense or other legally enforceable commitment, promise, undertaking, obligation, arrangement, instrument or understanding, whether written or oral, to which or by which such Person is a party or otherwise subject or bound or to which or by which any property, business, operation or right of such Person is subject or bound.

 

(h) “Conversion Amount” means, on the Conversion Date, the sum of (A) the Principal, and (B) accrued and unpaid Interest with respect to the Principal.

 

  

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(i) “Distribution” means (i) any payment or distribution made by the Company on account of the Note, whether in the form of cash, securities or other property, by setoff or otherwise, or (ii) any redemption, purchase or other acquisition by the Company of all or a portion of the Note, in each of cases (i) and (ii), other than any payment, distribution, redemption, purchase or other acquisition made (x) through the exchange of all or a portion of the Note into or for (I) equity securities of the Company or (II) debt securities of the Company that (A) are subordinated in right of payment to the Existing Secured Debt to at least the same extent as this Note is subordinated to the Existing Secured Debt, (B) do not have the benefit of any obligation of any Person (whether as issuer, guarantor or otherwise) unless the Existing Secured Debt has at least the same benefit of the obligation of such Person and the obligation of such Person to the Holder is subordinated to the obligations of such Person to the Existing Secured Debt Holder to at least the same extent that this Note is subordinated to the Existing Secured Debt and (C) is either unsecured or secured by liens that are subordinated to the liens securing the Existing Secured Debt, (y) at any time that no “Default” (as defined in the Existing Secured Debt) has occurred and is continuing under Section 6(a) or 6(c) of the Existing Secured Debt or (z) through the accrual and addition to principal of capitalized interest in the amounts and at the times specified in this Note.

 

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

 

(k) “Existing Secured Debt” means all obligations, liabilities and indebtedness of every nature of the Company from time to time owed to Partners for Growth III, L.P. pursuant to that certain Loan and Security Agreement dated December 14, 2011 between the Company and Partners for Growth III, L.P.

 

(l) “Existing Secured Debt Holder” means Partners for Growth III, L.P. and any of its grantees, successors or assigns.

 

(m) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or more related transactions, (i) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the assets of the Company to another Person, or (iii) allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than the 50% of the outstanding shares of Company Common Stock (not including any shares of Company Common Stock held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than the 50% of the outstanding shares of Company Common Stock (not including any shares of Company Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), or (v) reorganize, recapitalize or reclassify its Company Common Stock.

 

(n) “Guarantee” means, with respect to any Person, (a) any guarantee of the payment or performance of, or any contingent obligation in respect of, any Indebtedness or other Liability of any other Person, (b) any other arrangement whereby credit is extended to any obligor (other than such Person) on the basis of any promise or undertaking of such Person (i) to pay the Indebtedness or other Liability of such obligor, (ii) to purchase any obligation owed by such obligor, (iii) to purchase or lease assets under circumstances that are designed to enable such obligor to discharge one or more of its obligations or (iv) to maintain the capital, working capital, solvency or general financial condition of such obligor and (c) any liability as a general partner of a partnership or as a venturer in a joint venture in respect of Indebtedness or other Liabilities of such partnership or venture.

 

(o) “Holder Representative” means Griffin Partners, LLC, or such other Person appointed to act as Holder Representative pursuant to Section 20(a).

  

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(p) “Indebtedness” means, with respect to any Person, and without duplication, all Liabilities, including all obligations in respect of principal, accrued interest, penalties, fees and premiums, of such Person (a) for borrowed money (including amounts outstanding under overdraft facilities), (b) evidenced by notes, bonds, debentures or other similar Contractual Obligations, (c) in respect of “earn-out” obligations and other obligations for the deferred purchase price of property, goods or services (other than trade payables or accruals incurred in the ordinary course of business), (d) for the capitalized liability under all capital leases of such Person (determined in accordance with GAAP), (e) in respect of letters of credit and bankers’ acceptances, (f) for Contractual Obligations relating to interest rate protection, swap agreements and collar agreements, in each case, to the extent payable if such Contractual Obligation is terminated at the Closing, and (g) in the nature of Guarantees of the obligations described in clauses (a) through (f) above of any other Person.

 

(q) “Interest Period” means the period beginning on and including the Issuance Date and ending on and including the Maturity Date.

 

(r) “Interest Rate” means twelve percent (12.0%) per annum; provided that upon the occurrence and during the continuance of an Event of Default, the Interest Rate shall be increased to twenty percent (20.0%) per annum.  In the event that such Event of Default is subsequently cured or waived, the Interest Rate shall be reduced to twelve percent (12.0%) per annum as of the date of such cure or waiver, it being understood, however, that unless the Holder otherwise agrees in writing, such reduction shall not apply retroactively to the period when such Event of Default was continuing.

 

(s) “Issuance Date” has the meaning set forth in Section 2 hereof.

 

(t) “Liability” means, with respect to any Person, any liability or obligation of such Person whether known or unknown, whether asserted or unasserted, whether determined, determinable or otherwise, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, whether directly incurred or consequential, whether due or to become due and whether or not required under GAAP to be accrued on the financial statements of such Person.

 

(u) “Material Adverse Effect” means any (i) adverse effect on the issuance or validity of this Note or the transactions contemplated hereby or on the ability of the Company to perform its obligations under this Note, or (ii) material adverse effect on the condition (financial or otherwise), properties, assets, liabilities, business or operations of the Company and its Subsidiaries taken as a whole.

 

(v) “Outstanding Note Obligations” shall have the meaning given to such term in Section 5(b).

 

(w) “Permitted Indebtedness” means (A) Indebtedness incurred by the Company that is made expressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflected in a written agreement reasonably acceptable to the Holder Representative and approved by the Holder Representative in writing, and which Indebtedness does not provide at any time for (1) the payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal or premium, if any, thereon until ninety-one (91) days after the Maturity Date or later and (2) total interest and fees at a rate in excess of six percent (6%) per annum, (B) Indebtedness secured by Permitted Liens, (C) Indebtedness to trade creditors or for professional services incurred in the ordinary course of business, (D) any Indebtedness owing under the Company’s 12% convertible secured notes due 2015 (the “2015 Notes”), (E) any Indebtedness owing under the Griffin Notes, Other Senior Subordinated Notes or Turner Notes, (F) any Indebtedness owing under the Existing Secured Debt, and (G) extensions, refinancings and renewals of any items of Permitted Indebtedness described in clauses (A) through (F) above, provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon the Company or its Subsidiary, as the case may be.

 

  

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(x) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, (iii) any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other similar liens, arising in the ordinary course of business with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv) Liens securing the Company’s obligations under the Griffin Notes, the Other Senior Subordinated Notes and the Turner Notes, (v) Liens (A) upon or in any equipment acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment, (vi) Liens securing the 2015 Notes, (vii) Liens securing the Company’s obligations under the Existing Secured Debt, (viii) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (i) through (vii) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced does not increase, (ix) leases or subleases and licenses and sublicenses granted to others in the ordinary course of the Company’s business, not interfering in any material respect with the business of the Company and its Subsidiaries taken as a whole, (x) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the importation of goods, and (xi) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 5(a)(vi).

 

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

 

(z) “Qualified Financing” means any sale by the Company of Company Financing Securities to one or more investors and raising gross proceeds to the Company of at least $5,000,000 (not including any conversion of the Notes).

 

(aa) “Required Holders” means the holders of Notes representing at least a majority of the aggregate principal amount of the Notes then outstanding; provided, that in all events “Required Holders” shall also include any holder of Notes with a face amount of $500,000 or more.

 

(bb) “SEC” means the United States Securities and Exchange Commission.

 

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

 

(dd) “Subsidiary” means any corporation, association trust, limited liability company, partnership, joint venture or other business association or entity (i) at least 50% of the outstanding voting securities of which are at the time owned or controlled directly or indirectly by the Company or (ii) with respect to which the Company possesses, directly or indirectly, the power to direct or cause the direction of the affairs or management of such Person.

 

(ee) “Successor Entity” means the Person, which may be the Company, formed by, resulting from or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction shall have been made.

 

	
32)  

	
SECURITY. The Notes shall be secured by and to the extent provided in the Security Agreement, as amended through the date hereof.

 

  

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33) SUBORDINATION.  It is a requirement of the Existing Secured Debt that any Indebtedness of the Company, including this Note, be subordinated in right of payment to the Existing Secured Debt.  Accordingly, each of the Company and, by acceptance of this Note, the Holder and each of its successors and assigns hereby covenants and agrees that for so long (but only for so long) as the Outstanding Note Obligations are secured by any of the assets of the Company, the following provisions of this Section 33 shall apply:

 

(a) Subordination of Note to Existing Secured Debt.  Notwithstanding anything to the contrary set forth herein, this Note shall be subordinated in right and time of payment, to the extent and in the manner set forth in this Section 33, to the prior indefeasible payment in full in cash of the Existing Secured Debt.

 

(b) Payment Restrictions.  The Company hereby agrees that it may not make, and the Holder hereby agrees that it will not accept, any Distribution with respect to this Note until the earlier of (a) the date that is one (1) day following the date the Existing Secured Debt is indefeasibly paid in full in cash and (b) in the event that the Existing Secured Debt Holder has acknowledged in writing that the Existing Secured Debt has been indefeasibly paid in full in cash, the date of such payment and acknowledgment in writing.

 

34) Registered Obligation.  The Company shall establish and maintain a record of ownership (the “Register”) in which it will register by book entry the interest of the Holder and of each subsequent assignee in this Note, and in the right to receive any payments of principal and interest or any other payments hereunder, and any assignment of any such interest.  Notwithstanding anything herein to the contrary, this Note is intended to be treated as a registered obligation for federal income tax purposes and the right, title, and interest of the Holder and its assignees in and to payments under this Note shall be transferable only upon notation of such transfer in the Register.  This Section shall be construed so that the Note is at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the Internal Revenue Code and any related regulations (or any successor provisions of the Code or such regulations).

 

[Signature Page Follows]

  

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

ISC8 INC.

 

By: ___________________

       Name:

       Title:

 

 

Accepted and Agreed:

HOLDER:

Acknowledgement and Agreement contained in the Omnibus

Signature Page in the Subscription Agreement

Name:

Address:

 

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