Document:

soln_ex101.htm

EXHIBIT 10.1

 

SIXTH AMENDMENT AND AGREEMENT TO JOIN AS A PARTY TO CONVERTIBLE SECURED SUBORDINATED NOTE PURCHASE AGREEMENT, FOURTH AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTES AND FIFTH AMENDMENT AND AGREEMENT TO JOIN AS A PARTY TO REGISTRATION RIGHTS AGREEMENT

 

THIS SIXTH AMENDMENT AND AGREEMENT TO JOIN AS A PARTY TO CONVERTIBLE SECURED SUBORDINATED NOTE PURCHASE AGREEMENT, FOURTH AMENDMENT TO CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTES AND FIFTH AMENDMENT AND AGREEMENT TO JOIN AS A PARTY TO REGISTRATION RIGHTS AGREEMENT (this “Amendment”), effective as of June 26, 2013, is made and entered into by and among Smart Online, Inc., a Delaware corporation (the “Company”), the undersigned holders (the “Holders”, and each individually, a “Holder”) of the Convertible Secured Subordinated Promissory Notes (the “Notes”) issued by the Company from time to time pursuant to that certain Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007 (as amended through the date hereof, the “Note Purchase Agreement”), among the Company and the Holders, and the additional purchaser of the Notes (the “New Investor”).  Capitalized terms used but not defined herein have the meanings assigned to them in the Note Purchase Agreement.

 

WITNESSETH:

 

WHEREAS, in connection with the sale of the Notes, the Company entered into the Note Purchase Agreement with the Investors named therein, the Registration Rights Agreement dated as of November 14, 2007 with the Investors named therein (as amended through the date hereof, the “Registration Rights Agreement”) and a Security Agreement dated as of November 14, 2007 with Doron Roethler as collateral agent for the holders of the Notes (as amended through the date hereof, the “Security Agreement”);

WHEREAS, the Company and the Holders desire to amend the Note Purchase Agreement and the Registration Rights Agreement to permit the Company to sell Additional Notes to the New Investor in a Subsequent Closing;

WHEREAS, the New Investor desires to join as a party to the Note Purchase Agreement and the Registration Rights Agreement in connection with its purchase of Additional Notes in the principal amount set forth opposite the New Investor’s name on Exhibit A hereto;

WHEREAS, the Company and the Investors desire to amend the Notes previously issued pursuant to the Note Purchase Agreement to provide that the Conversion Price of each Note be the greater of: (i) $0.50 or (ii) 80% of the lowest closing price of the Company’s common stock, par value $0.001 per share, (the “Common Stock”), on the Over-The-Counter Bulletin Board, (the “OTC Bulletin Board”), the Nasdaq Stock Market or the principal exchange on which the Common Stock is then listed in the twelve-month period immediately preceding the date such Note is converted, and to provide that the definition of “Conversion Price” contained in any Additional Note issued on or after the date hereof shall be conformed to the definition thereof contained in the Notes, as hereby amended;

 

  

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WHEREAS, the Company and the Investors desire to amend the Notes previously issued pursuant to the Note Purchase Agreement to provide that, prior to the Maturity Date as defined in the Notes, each Investor will have the option to convert all or a portion of the entire principal amount of the Notes outstanding into Common Stock immediately upon the Investor’s request; provided, however, that if, at the time of any particular conversion, the Company does not have the number of authorized shares of Common Stock sufficient to allow for such particular conversion, as well as: (a) the issuance of the maximum amount of Common Stock permitted under the Company’s 2004 Equity Compensation Plan, (b) the shares to be issued in settlement of any outstanding class action lawsuit obligations and (c) an additional 2,000,000 shares of Common Stock unrelated to the foregoing (a) or (b), the Investors may only convert that portion of their Notes outstanding for which the Company has a sufficient number of authorized shares of Common Stock. To the extent multiple Investors request conversion of their Notes on the same date, any limitations on conversion shall be applied on a pro rata basis.  In such case, the Investors may request, in writing, that the Company call a special meeting of the stockholders of the Company specifically for the purpose of increasing the number of authorized shares of Common Stock to cover the remaining portion of the Notes outstanding, as well as the issuances contemplated by the foregoing clauses (a), (b) or (c), within 90 calendar days after the Company’s receipt of the Investors’ written request. Notwithstanding the above, the Company shall use its best efforts to increase its number of authorized shares of Common Stock to 100,000,000 or such greater number so as to allow for the full conversion of any outstanding Notes on the earlier of: (1) June 30, 2014 or (2) any special meeting of the Company’s stockholders that has been called according to the Company’s bylaws;

 

WHEREAS, the Company and the Investors have previously authorized up to $23.3 million aggregate principal amount of Notes to be issued in Subsequent Closings of the sale of Notes pursuant to the Note Purchase Agreement, and the Company and the Investors desire to amend the Note Purchase Agreement to increase this amount by $10,000,000 to $33.3 million;

 

WHEREAS, Section 9(a) of the Note Purchase Agreement provides that any provision of the Note Purchase Agreement may be amended with the written consent of the Company and Holders holding at least a Requisite Percentage;

 

WHEREAS, Section 8 of each of the Notes provides that any provision of the Notes may be amended with the written consent of the Company and Holders holding at least a Requisite Percentage;

 

WHEREAS, Section 3.6 of the Registration Rights Agreement provides that any provision of the Registration Rights Agreement may be amended with the written consent of the Company and the Holders holding a Requisite Percentage; and

 

WHEREAS, Atlas Capital, S.A., a Swiss organization, constitutes the holder of a Requisite Percentage necessary to amend the provisions of each of the Notes, the Registration Rights Agreement and the Note Purchase Agreement.

 

NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

 

  

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Section 1. Amendments to Note Purchase Agreement.

 

(a) The terms “Investor” and “Investors” referenced in the Note Purchase Agreement shall be amended to include the New Investor and the terms “Note” or "Notes” shall be amended to include each of the Additional Notes purchased by the New Investor.

 

(b) Schedule 1 to the Note Purchase Agreement shall be amended to include the schedule set forth in Exhibit A hereto.

 

(c) All references in the Note Purchase Agreement to “Note” or “Notes” shall mean the form of Convertible Secured Subordinated Promissory Note attached hereto as Exhibit B.

 

Section 2. Amendment to Conversion Price.

 

(a) Section 1(c) of each Note shall be deleted in its entirety and the following shall be inserted in lieu thereof:

 

“Conversion Price” shall mean the lowest “Applicable Conversion Price” determined for each Note issued under the Note Purchase Agreement.  The “Applicable Conversion Price” for each Note issued under the Note Purchase Agreement shall be the greater of: (i) $0.50 or (ii) 80% of the lowest closing price of the Common Stock on the OTC Bulletin Board, the Nasdaq Stock Market or the principal exchange on which the Common Stock is then listed in the twelve-month period immediately preceding the date such Note is converted (in each case, as adjusted for stock splits, dividends or combinations, recapitalizations or similar events).

 

(b) The Conversion Price as defined in any Additional Note issued on the date hereof or hereafter shall be the same as provided in the Notes, as hereby amended.

 

Section 3. Amendment to Conversion.

 

(a) Section 6(a) of each Note shall be deleted in its entirety and the following shall be inserted in lieu thereof:

 

  

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“Optional Conversion.  At any time on or prior to the Maturity Date each Investor will have the option to convert all or a portion of the entire principal amount of the Notes outstanding into Common Stock immediately upon the Investor’s request; provided, however, that if, at the time of any particular conversion, the Company does not have the number of authorized shares of Common Stock sufficient to allow for such particular conversion, as well as: (a) the issuance of the maximum amount of Common Stock permitted under the Company’s 2004 Equity Compensation Plan, (b) the shares to be issued in settlement of any outstanding class action lawsuit obligations and (c) an additional 2,000,000 shares of Common Stock unrelated to the foregoing (a) or (b), the Investors may only convert that portion of their Notes outstanding for which the Company has a sufficient number of authorized shares of Common Stock. To the extent multiple Investors request conversion of their Notes on the same date, any limitations on conversion shall be applied on a pro rata basis. In such case, the Investors may request, in writing, that the Company call a special meeting of the stockholders of the Company specifically for the purpose of increasing the number of authorized shares of Common Stock to cover the remaining portion of the Notes outstanding, as well as the issuances contemplated by the foregoing clauses (a), (b) or (c), within 90 calendar days after the Company’s receipt of the Investors’ written request. Notwithstanding the above, the Company shall use its best efforts to increase its number of authorized shares of Common Stock to 100,000,000 or such greater number so as to allow for the full conversion of any outstanding Notes on the earlier of: (1) June 30, 2014 or (2) any special meeting of the Company’s stockholders that has been called according to the Company’s bylaws.  The number of shares of Common Stock that this Note may be converted into shall be determined by dividing the principal amount then outstanding by the Conversion Price at the time of conversion.  If the Investor elects to convert this Note on demand, it shall provide the Company with written notice of its election at least one (1) day prior to the date selected for conversion.  Upon conversion, the Investor shall deliver to the Company the original of this Note (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement reasonably acceptable to the Company whereby the holder agrees to indemnify the Company from any loss incurred by it in connection with this Note).  However, upon such conversion of this Note, this Note shall be deemed converted and of no further force and effect, whether or not the Note is delivered for cancellation as set forth in the preceding sentence.  If there shall occur a Change of Control, the Company shall give written notice to the Investor at least five (5) days prior to any closing thereof and the Investor’s election to convert this Note shall be conditional upon the consummation thereof.”

 

(b) Section 6(b) of each Note shall be deleted in its entirety and the following shall be inserted in lieu thereof:

 

“Mechanics of Optional Conversion.  As soon as practicable following surrender by the Investor of the original of this Note, the Company shall issue and deliver to Investor a certificate or certificates for the shares of Common Stock into which the Note has been converted (bearing such legends as may be required or advisable in the opinion of counsel to the Company).  Such conversion shall be deemed to have been made immediately prior to the close of business on the date selected for the conversion and the Investor shall be treated for all purposes as the record holder or holders of such Common Stock on such date.”

 

(c) The conversion provisions as described in Section 6 of any Additional Note issued on the date hereof or hereafter shall be the same as provided in the Notes, as hereby amended.

 

Section 4. Amendments to Registration Rights Agreement.

 

(a) The terms “Investor” and “Investors” referenced in the Registration Rights Agreement shall be amended to include the New Investor and the terms “Note” or “Notes” shall be amended to include each of the Additional Notes purchased by the New Investor.

 

(b) Section 2.1(a) of the Registration Rights Agreement shall be deleted in its entirety and the following shall be inserted in lieu thereof:

 

  

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Form S-1 Demand. If at any time following the Company’s issuance of Conversion Shares, the Company receives a request from Holders of a majority of the Registrable Securities then outstanding that the Company file a Form S-1 registration statement with respect to at least forty percent (40%) of the Registrable Securities then outstanding (or a lesser percent if the anticipated aggregate offering price, net of Selling Expenses, would exceed $5 million), then the Company shall (i) within ten (10) days after the date such request is given, give notice thereof (the “Demand Notice”) to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within one hundred eighty (180) days after the date such request is given by the Initiating Holders, file a Form S-1 registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and Section 2.3.

 

Section 5. Acknowledgement and Joinder. The New Investor hereby acknowledges that it has received a copy of the Note Purchase Agreement, the Security Agreement and the Registration Rights Agreement and has had the opportunity to review the terms thereof.  The New Investor hereby joins as a party and agrees to be bound by the terms and conditions of the Note Purchase Agreement and the Registration Rights Agreement on the date hereof.  The New Investor further acknowledges and agrees that pursuant to the Note Purchase Agreement and the Security Agreement, Doron Roethler is appointed as the agent for the Investors, including the New Investor, with respect to the matters set forth therein.

 

Section 6. Consent of the Company and the Holders. The Company and the Holders hereby consent to the New Investor joining as a party to the Note Purchase Agreement and the Registration Rights Agreement, to the addition of the name of the New Investor to the applicable exhibit or schedule to such agreements and to the distribution of such applicable exhibit or schedule, as amended, to the other parties to such agreements.

 

Section 7. Sale of Additional Notes. At any time on or before June 30, 2015, the Company may sell Additional Notes in one or more Subsequent Closings in the aggregate principle amount of up to $10,000,000 (the “Maximum Amount”) to either existing holders of the Notes or to the New Investors, in each case subject to the prior written approval of the Agent. As a condition to the sale of any Additional Note to a New Investor not listed on Exhibit A hereto, the Company and such New Investor will execute an Agreement to Join as a Party to the Convertible Secured Subordinated Note Purchase Agreement and Registration Rights Agreement. Promptly after each such Subsequent Closing, the Company shall amend Schedule I to the Note Purchase Agreement, as hereby amended, and Schedule A to the Registration Rights Agreement, as hereby amended, to reflect the sale of any such Additional Notes without any action of the Holders or the parties thereto and shall distribute such revised schedules to the parties to such agreements.

 

Section 8. Waivers. Each Holder, on behalf of itself and each other Investor hereby waives (i) the requirement that the Company provide them with notice of the sale on or prior to June 30, 2015 of Additional Notes up to the Maximum Amount and the right of Investors to participate in such sale of Additional Notes, as required pursuant to Section 1(c) of the Note Purchase Agreement or otherwise and (ii) the requirement that the aggregate principal amount of all Additional Notes issued in any Subsequent Closing shall not be less than $500,000.

 

  

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Section 9. Consent of the Company and the Holders. The Company and the Holders hereby consent to any New Investors joining as a party to the Note Purchase Agreement and the Registration Rights Agreement, to the addition of the name of the purchaser of Additional Notes to the applicable exhibit or schedule to such agreements and to the distribution of such applicable exhibit or schedule, as amended, to the other parties to such agreements.

 

Section 10. Ratification.  Except as specifically amended above, each of the Notes, the Registration Rights Agreement and the Note Purchase Agreement shall continue in full force and effect in accordance with its terms, and is hereby in all respects ratified and confirmed.

 

Section 11. Counterparts.  This Amendment may be executed in several counterparts and by facsimile or other electronic transmission, each of which shall be an original and all of which together shall constitute but one and the same.

 

[Remainder of Page Intentionally Left Blank]

 

 

 

 

  

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first above written.

 

 

	 	SMART ONLINE, INC. 	 
	 	 	 
	 	By: /s/ Gleb Mikhailov	 
	 	 
Name: Gleb Mikhailov

	 
	 	 
Title: Chief Financial Officer

	 
	 	 	 
	 	 	 
	 	 
GRASFORD INVESTMENTS LTD.

	 
	 	 	 
	 	By: /s/ Avy Lugassy	 
	 	 
Name: Avy Lugassy

	 
	 	 
Title:

	 
	 	 	 
	 	 	 
	 	 
ATLAS CAPITAL S.A.

	 
	 	 	 
	 	By:  /s/ Avy Lugassy	 
	 	 
Name: Avy Lugassy

	 
	 	 
Title: Member of the Management

	 
	 	 	 
	 	 	 
	 	 
CRYSTAL MANAGEMENT LTD.

	 
	 	 	 
	 	By: /s/ Doron Roethler	 
	 	 
Name: Doron Roethler

	 
	 	 
Title:

	 
	 	 	 
	 	 	 
	 	 
WILLIAM FURR

	 
	 	 	 
	 	 	 
	 	 
THE BLUELINE FUND

	 
	 	 	 
	 	By:                                        	 
	 	 
Name:

	 
	 	 
Title:

	 
	 	 	 
	 	 	 
	 	 
UBP, UNION BANCAIRE PRIVEE

	 
	 	 	 
	 	By:                                        	 
	 	 
Name:

	 
	 	 
Title:

	 

 

 [Signature Page to Sixth Amendment and Agreement to Join as a Party to Convertible Secured Subordinated Note Purchase Agreement, Fourth Amendment to Convertible Secured Subordinated Promissory Notes and

Fifth Amendment and Agreement to Join as a Party to Registration Rights Agreement]

 

  

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EXHIBIT A

 

SCHEDULE I

Schedule of Investors

Subsequent Closing Held on June 27, 2013

	
INVESTOR’S NAME AND ADDRESS

	
SUBSEQUENT CLOSING NOTE PRINCIPAL AMOUNT

	  	  
	
Grasford Investments Ltd.

c/o Avy Lugassy

126 Chemin Des Hauts Crets,1253,

Vandoeuvres, Geneva, Switzerland

	
US$450,000

 

  

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EXHIBIT B

 

THIS NOTE AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER ANY APPLICABLE STATE SECURITIES LAWS.  THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS.  THE COMPANY, IN ITS SOLE DISCRETION, SHALL HAVE THE RIGHT TO REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH ANY PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS.  THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE.

 

SMART ONLINE, INC.

 

CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTE

 

	$_______________ 	________________, __ ____ 

Durham, NC

 

FOR VALUE RECEIVED, Smart Online, Inc., a Delaware corporation (the “Company”) promises to pay to _____________________ (“Investor”), or its registered assigns, in lawful money of the United States of America the principal sum of ____________________ ($_____), or such lesser amount as shall equal the outstanding principal amount hereof, together with interest from the date of this Note on the unpaid principal balance at a rate equal to 8.00% per annum, computed on the basis of the actual number of days elapsed and a year of 360 days.  All unpaid principal, together with any then unpaid and accrued interest and other amounts payable hereunder, shall be due and payable on the earlier of (i) November 14, 2016, (ii) a Change of Control or (iii) when, upon or after the occurrence of an Event of Default (as defined below), such amounts are declared due and payable by Investor or made automatically due and payable in accordance with the terms hereof (such date upon which all amounts payable hereunder are due is referred to herein as the “Maturity Date”).

 

This Note is one of the “Notes” issued pursuant to the Convertible Secured Subordinated Note Purchase Agreement, dated November 14, 2007 (as amended, modified or supplemented, the “Note Purchase Agreement”), between the Company and the Investors (as defined in the Note Purchase Agreement).  Capitalized terms used herein and not otherwise defined shall have the meanings assigned thereto in the Note Purchase Agreement.  This Note and the Investor are subject to certain restrictions, and are entitled to certain rights and privileges, set forth in the Note Purchase Agreement.

 

THE OBLIGATIONS DUE UNDER THIS NOTE ARE SECURED BY A SECURITY AGREEMENT DATED AS OF NOVEMBER 14, 2007 (AS AMENDED, RESTATED OR SUPPLEMENTED, THE “SECURITY AGREEMENT”) AND EXECUTED BY COMPANY FOR THE BENEFIT OF THE INVESTORS.  ADDITIONAL RIGHTS OF INVESTOR ARE SET FORTH IN THE SECURITY AGREEMENT.

 

  

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The following is a statement of the rights of Investor and the conditions to which this Note is subject, and to which Investor, by the acceptance of this Note, agrees:

 

1. Definitions.  As used in this Note, the following capitalized terms have the following meanings:

 

(a) “Business Day” shall mean any day other than a Saturday or Sunday or other day on which the New York Stock Exchange is permitted or required by law to close.

 

(b) the “Company” includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company under this Note.

 

(c) “Conversion Price” shall mean the lowest “Applicable Conversion Price” determined for each Note issued under the Note Purchase Agreement.  The “Applicable Conversion Price” for each Note issued under the Note Purchase Agreement shall be the greater of: (i) $0.50 or (ii) 80% of the lowest closing price of the Common Stock on the OTC Bulletin Board, the Nasdaq Stock Market or the principal exchange on which the Common Stock is then listed in the twelve-month period immediately preceding the date such Note is converted (in each case, as adjusted for stock splits, dividends or combinations, recapitalizations or similar events).

 

(d) “Change of Control” shall mean (i) any consolidation or merger or other transaction or series of transactions involving the Company pursuant to which the Company’s stockholders own less than fifty percent (50%) of the voting securities of the surviving entity (other than an equity financing) or (ii) the sale of all or substantially all of the assets of the Company.

 

(e) “Event of Default” has the meaning given in Section 4 hereof.

 

(f) “Note Purchase Agreement” has the meaning given in the introductory paragraph hereof.

 

(g) “Obligations” shall mean and include all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to Investor of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note, the Note Purchase Agreement and the Security Agreement, including, all interest, fees, charges, expenses, attorneys’ fees and costs and accountants’ fees and costs chargeable to and payable by the Company hereunder and thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et seq.), as amended from time to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding.

 

(h) “Person” shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.

 

  

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(i) “Requisite Percentage” shall mean, at least a majority of the aggregate outstanding principal amount of the Notes issued pursuant to the Note Purchase Agreement

 

(j) “Securities Act” shall mean the Securities Act of 1933, as amended.

 

(k) “Security Agreement” has the meaning given in the introductory paragraphs to this Note.

 

(l) “Transaction Documents” shall mean this Note, each of the other Notes issued under the Note Purchase Agreement, the Note Purchase Agreement, the Registration Rights Agreement, dated November 14, 2007, as amended, restated and supplemented, and the Security Agreement.

 

2. Interest.  Accrued interest on this Note shall be payable in cash in quarterly installments commencing on the third month anniversary of the date of issuance of this Note with the final installment payable on the Maturity Date.

 

3. Prepayment.  This Note may not be prepaid without the consent of a Requisite Percentage.  Any prepayment must be made in connection with the prepayment of all outstanding Notes.

 

4. Events of Default.  The occurrence of any of the following shall constitute an “Event of Default” under this Note and the other Transaction Documents:

 

(a) Failure to Pay.  The Company shall fail to pay (i) when due any principal or interest payment on the due date hereunder or (ii) any other payment required under the terms of this Note or any other Transaction Document on the date due and, with respect to this subclause (ii) only, such payment shall not have been made within five (5) days of the Company’s receipt of written notice to the Company of such failure to pay;

 

(b) Non-Performance of Affirmative Covenants.  The Company shall default in the due observance or performance of any material covenant set forth in the Note, the Note Purchase Agreement or the Security Agreement, which default shall continue uncured for fifteen (15) days after receipt of written notice to the Company thereof;

 

(c) Voluntary Bankruptcy or Insolvency Proceedings.  The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing;

 

  

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(d) Involuntary Bankruptcy or Insolvency Proceedings.  Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 30 days of commencement;

 

(e) Misrepresentations.  Any of the representations and warranties of the Company in the Note Purchase Agreement or the Security Agreement proves to have been false or misleading in any material respect when made or furnished or deemed made;

 

(f) Judgments.  One or more judgments, decrees or orders (excluding settlement orders) for the payment of money shall be entered against the Company or any of its subsidiaries involving in the aggregate a liability of $1,000,000 or more, and any such judgment, decree or order shall continue without discharge or stay for a period of sixty (60) days; or

 

(g) Cross-Defaults.  The Company or any of its subsidiaries shall default in the performance or observance of any agreement or instrument relating to any indebtedness, or any other event shall occur or condition exist, and the effect of such default, event or condition is to cause or permit the holder or holders of any such indebtedness to cause indebtedness, in excess of $500,000 individually or in the aggregate, to become due prior to its stated maturity.

 

5. Rights of Investor upon Default.  Upon the occurrence or existence of any Event of Default (other than an Event of Default described in Sections 4(c) or 4(d)) and at any time thereafter during the continuance of such Event of Default, Investor may, with the consent of the Agent, by written notice to the Company, declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived.  Upon the occurrence or existence of any Event of Default described in Sections 4(c) and 4(d), immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived.  In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default and subject to the consent of the Agent, Investor may exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both.

 

  

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6. Conversion.

 

(a) Optional Conversion.  At any time on or prior to the Maturity Date each Investor will have the option to convert all or a portion of the entire principal amount of the Notes outstanding into Common Stock immediately upon the Investor’s request; provided, however, that if, at the time of any particular conversion, the Company does not have the number of authorized shares of Common Stock sufficient to allow for such particular conversion, as well as: (a) the issuance of the maximum amount of Common Stock permitted under the Company’s 2004 Equity Compensation Plan, (b) the shares to be issued in settlement of any outstanding class action lawsuit obligations and (c) an additional 2,000,000 shares of Common Stock unrelated to the foregoing (a) or (b), the Investors may only convert that portion of their Notes outstanding for which the Company has a sufficient number of authorized shares of Common Stock. To the extent multiple Investors request conversion of their Notes on the same date, any limitations on conversion shall be applied on a pro rata basis. In such case, the Investors may request, in writing, that the Company call a special meeting of the stockholders of the Company specifically for the purpose of increasing the number of authorized shares of Common Stock to cover the remaining portion of the Notes outstanding, as well as the issuances contemplated by the foregoing clauses (a), (b) or (c), within 90 calendar days after the Company’s receipt of the Investors’ written request. Notwithstanding the above, the Company shall use its best efforts to increase its number of authorized shares of Common Stock to 100,000,000 or such greater number so as to allow for the full conversion of any outstanding Notes on the earlier of: (1) June 30, 2014 or (2) any special meeting of the Company’s stockholders that has been called according to the Company’s bylaws.  The number of shares of Common Stock that this Note may be converted into shall be determined by dividing the principal amount then outstanding by the Conversion Price at the time of conversion.  If the Investor elects to convert this Note on demand, it shall provide the Company with written notice of its election at least one (1) day prior to the date selected for conversion.  Upon conversion, the Investor shall deliver to the Company the original of this Note (or a notice to the effect that the original Note has been lost, stolen or destroyed and an agreement reasonably acceptable to the Company whereby the holder agrees to indemnify the Company from any loss incurred by it in connection with this Note).  However, upon such conversion of this Note, this Note shall be deemed converted and of no further force and effect, whether or not the Note is delivered for cancellation as set forth in the preceding sentence.  If there shall occur a Change of Control, the Company shall give written notice to the Investor at least five (5) days prior to any closing thereof and the Investor’s election to convert this Note shall be conditional upon the consummation thereof.

 

(b) Mechanics of Optional Conversion.  As soon as practicable following surrender by the Investor of the original of this Note, the Company shall issue and deliver to Investor a certificate or certificates for the shares of Common Stock into which the Note has been converted (bearing such legends as may be required or advisable in the opinion of counsel to the Company).  Such conversion shall be deemed to have been made immediately prior to the close of business on the date selected for the conversion and the Investor shall be treated for all purposes as the record holder or holders of such Common Stock on such date.

 

(c) Fractional Shares; Interest; Effect of Conversion.  No fractional shares shall be issued upon conversion of this Note.  In lieu of the Company issuing any fractional shares to Investor upon the conversion of this Note, the Company shall pay to Investor an amount equal to the product obtained by multiplying the Conversion Price by the fraction of a share not issued pursuant to the previous sentence.  Upon conversion of this Note in full and the payment of any amounts specified in this Section 6(c), the Company shall be forever released from all its obligations and liabilities under this Note.

 

  

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7. Successors and Assigns.  Subject to the restrictions on transfer described in Sections 9 and 10 below, the rights and obligations of the Company and Investor shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

 

8. Waiver and Amendment.  Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the holders of a Requisite Percentage.

 

9. Transfer of this Note or Securities Issuable on Conversion Hereof.  With respect to any offer, sale or other disposition of this Note or securities into which such Note may be converted, Investor will give written notice to the Company prior thereto, describing briefly the manner thereof, together with (unless waived by the Company) a written opinion of Investor’s counsel, or other evidence if reasonably satisfactory to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect).  Upon receiving such written notice and reasonably satisfactory opinion, if so requested, or other evidence, the Company, as promptly as practicable, shall notify Investor that Investor may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company.  If a determination has been made pursuant to this Section 9 that the opinion of counsel for Investor, or other evidence, is not reasonably satisfactory to the Company, the Company shall so notify Investor promptly after such determination has been made.  Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act.  The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.  Subject to the foregoing, transfers of this Note shall be registered upon registration books maintained for such purpose by or on behalf of the Company.  Prior to presentation of this Note for registration of transfer, the Company shall treat the registered holder hereof as the owner and holder of this Note for the purpose of receiving all payments of principal and interest hereon and for all other purposes whatsoever, whether or not this Note shall be overdue and the Company shall not be affected by notice to the contrary.  Notwithstanding anything in this Section 9 to the contrary, no opinion of counsel shall be required with respect to any transfer by an Investor to its officers, directors, partners, members or other affiliates.

 

10. Assignment by the Company.  Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the holders of a Requisite Percentage.

 

  

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11. Notices.  All notices, requests, demands, consents, instructions or other communications required or permitted hereunder shall be in writing and faxed, mailed or delivered to each party at the respective addresses of the parties as set forth in the Note Purchase Agreement, or at such other address or facsimile number as the Company shall have furnished to Investor in writing.  All such notices and communications will be deemed effectively given the earlier of (i) when received, (ii) when delivered personally, (iii) one business day after being delivered by facsimile (with receipt of appropriate confirmation), (iv) one business day after being deposited with an overnight courier service of recognized standing or (v) two days after being deposited in the U.S. mail, first class with postage prepaid.

 

12. Pari Passu Notes.  Investor acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Notes issued pursuant to the Note Purchase Agreement or pursuant to the terms of such Notes.  In the event Investor receives payments in excess of its pro rata share of the Company’s payments to the Investors of all of the Notes, then Investor shall hold in trust all such excess payments for the benefit of the holders of the other Notes and shall pay such amounts held in trust to such other holders upon demand by such holders.

 

13. Usury.  In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note.

 

14. Waivers.  The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument.

 

15. Remedies Cumulative.  The remedies of Investor as provided herein and in the Note Purchase Agreement and in any other documents governing or securing repayment hereof shall be cumulative and concurrent and may be pursued singly, successively, or together, at the sole discretion of Investor to the extent provided herein and in the Note Purchase Agreement and may be exercised as often as occasion therefore shall arise.  No act or omission of the Investor, including specifically, but without limitation, any failure to exercise any right, remedy or recourse, shall be effective as a waiver of any right of the Investor hereunder, unless set forth in a written document executed by the Investor, and then only to the extent specifically recited therein.  A waiver or release with reference to one event shall not be construed as continuing, as a bar to, or as a waiver or release of any subsequent right, remedy or recourse as to any subsequent event.  All notices, waivers, releases and/or consents by an Investor shall be directed to the Company only through the Agent.

 

  

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16. No Rights of a Stockholder.  Nothing contained in this Note shall be construed as conferring upon the Investor or any other Person the right to vote or consent or to receive notice as an stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company prior to the time that this Note is converted pursuant to Section 6.

 

17. Governing Law.  This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law provisions of the State of Delaware, or of any other state.

 

(Signature Page Follows)

 

 

 

  

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The Company has caused this Note to be issued as of the date first written above.

 

	 	SMART ONLINE, INC. 

a Delaware corporation

 

By: __________________________________________

Name: ________________________________________

Title: _________________________________________        

 

                                                              

[SIGNATURE PAGE TO CONVERTIBLE SECURED SUBORDINATED PROMISSORY NOTE, DATED ________________, ISSUED TO _________________ BY SMART ONLINE, INC.]

17soln_ex102.htm

EXHIBIT 10.2

 

PROMISSORY NOTE

 

	 	 	Dated May 31, 2013
	$5,000,000.00   	 	Effective as of June 6, 2013
	 	 	New York, New York

 

FOR VALUE RECEIVED, the undersigned, SMART ONLINE INC. (the “Borrower”) HEREBY PROMISES TO PAY to the order of ISRAEL DISCOUNT BANK OF NEW YORK, its successors and assigns (hereinafter the “Bank”), the principal amount of FIVE MILLION DOLLARS ($5,000,000.00), in lawful money of the United States (the “Loan”), in no event later than the Maturity Date, and to pay interest on the unpaid principal balance of this Promissory Note (this “Note”) in the manner and at the rate as hereinafter specified and such amounts due hereunder.

1. Defined Terms. As used in this Note the following terms shall have the following meanings:

The term “Additional Costs” shall have the meaning as defined in Section 16.

The term “Bank” shall have the meaning as defined in the introductory paragraph.

The term “Bankruptcy Code” shall mean Title 11 of the United States Code, as amended, or the equivalent thereof in any other jurisdiction

The term “Borrower” shall have the meaning as defined in the introductory paragraph.

The term “Business Day” shall mean any day other than a Saturday, Sunday, or other day on which commercial banks in New York are authorized or required to close under the laws of the State of New York.

The term “Collateral” shall mean the SBLC and the Deposit Account, collectively.

The term “Default Interest Rate” shall have the meaning as defined in Section 3.

The term “Deposit Account” shall have the meaning as defined in Section 28.

The term “Event of Default” shall mean any of the events or conditions specified in Section 11 hereof.

The term “Guarantor” means each endorser, guarantor and surety of this Note or the Obligations evidenced hereby and any person who is primarily or secondarily liable, in whole or in part, for the repayment of the Obligations or any portion thereof (including without limitation Atlas Capital SA), any person who has granted security for the repayment of the Obligations, together with such person’s heirs, personal representatives, successors and assigns.

 

  

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The term “Indebtedness” shall mean all items of indebtedness, obligation or liability, whether matured or unmatured, liquidated or unliquidated, funded or unfunded, direct or contingent, joint or several, which would properly be included in the liability section of a balance sheet or in a footnote to a financial statement in accordance with generally accepted accounting principles, and shall also include (a) all indebtedness guaranteed, directly or indirectly in any manner, or endorsed (other than for collection or deposit in the ordinary course of business) or sold with recourse, (b) all indebtedness in effect guaranteed, directly or indirectly, through agreements, contingent or otherwise, and (c) all indebtedness secured by (or for which the holder of such indebtedness has a right, contingent or otherwise, to be secured by) any mortgage, deed of trust, pledge, assignment, lien, security interest or other charge or encumbrance upon property owned or acquired subject thereto, whether or not the liabilities secured thereby have been assumed or guaranteed.

The terms “Indemnified Party” or “Indemnified Parties” shall have the meanings as defined in Section 26.

The term “Interest Period” means:

(a) initially, the period commencing on May 31, 2013 and ending one (1) or three (3) months thereafter, as selected by Borrower; and

(b) each Interest Period thereafter shall commence on the day immediately following the expiration of the preceding Interest Period and shall end one (1) or three (3) months thereafter, as selected by Borrower, by irrevocable written notice to Bank before 12:00 p.m., New York time, not less than two (2) Business Days prior to the last day of the then current Interest Period;

(c) provided, however, that all of the foregoing provisions relating to Interest Periods are subject to the following:

(i) if any Interest Period would otherwise end on a day which is not a Business Day, the Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; and

(ii) if Borrower shall fail to give notice as provided in clause (b) above, Borrower shall, in Bank’s sole discretion and determination, be deemed to have requested that the Loan be continued for a successive Interest Period, the term of which shall be one (1) month; and

(iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and

 

  

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(iv) notwithstanding anything to the contrary, no Interest Period may be selected that would end on a day after the Maturity Date.

The term “Interest Rate” shall have the meaning as defined in Section 2(b).

The term “Late Charge” shall have the meaning as defined in Section 9.

The term “LIBOR” shall mean with respect to an Interest Period, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the British Bankers Association LIBOR Rate (“BBA LIBOR”) as published by Bloomberg (or such other commercially available source providing quotations of BBA LIBOR as designated by Bank from time to time) at approximately 11:00 A.M. (London time) 2 Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided however, if more than one BBA LIBOR Rate is specified, the applicable rate shall be the arithmetic mean of all such rates.

The term “Loan” shall have the meaning as defined in the introductory paragraph.

 The term “Loan Documents” shall mean this Note and any other document, instrument or agreement and any amendments thereto, evidencing or securing the Obligations, or now or at any time hereafter executed, delivered or recorded in connection with the Obligations, (including, but not limited to, that certain Guaranty of Atlas Capital SA and that certain Assignment and Pledge of the Deposit Account of Borrower, each dated on or about the date hereof), any other note, any loan commitment, requisition, letter agreement, line of credit agreement, commercial financing agreement, security agreement, guaranty of payment, mortgage, deed of trust, pledge agreement, loan agreement, loan and security agreement, hypothecation agreement, indemnity agreement, letter of credit application and agreement, and assignment, all as amended, restated, extended, renewed, supplemented, modified or replaced from time to time.

The term “Margin” shall mean three hundred basis points (300 bps).

 

 The term “Maturity Date” shall mean the earlier to occur of (i) May 31, 2014 or (ii) 180 days prior to the expiration date of the SBLC.

 The term “Note” shall mean this Promissory Note.

 The term “Obligations” shall mean all existing and future debts, liabilities and obligations of every kind or nature at any time owing by Borrower to Bank, whether under this Note or under any other existing or future instrument, document or agreement, between Borrower and Bank, whether joint or several, related or unrelated, primary or secondary, matured or contingent, due or to become due, including, without limitation, the debts, liabilities and obligations in respect of this Note and any extensions, modifications, substitutions, increases and renewals thereof. Without limiting the generality of the foregoing, Obligations shall include any other loan, advance or extension of credit, under any existing or future loan agreement, promissory note, or other instrument, document or agreement either arising directly between Borrower and Bank or acquired out­right, conditionally or as collateral security from another person or entity by Bank.

 

  

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 The term “Obligor” shall mean individually and collectively Borrower, each endorser and surety of this Note, any person who is primarily or secondarily liable for the repayment of this Note or any portion thereof (including without limitation each Guarantor), any person who has granted security for the repayment of the Note, together with such person’s heirs, personal representatives, successors and assigns.

The term "SBLC" shall mean that certain irrevocable standby letter of credit issued by UBS AG as per the request of applicant Atlas Capital SA on behalf of Borrower in favor of Bank in the aggregate amount of $5,000,000.00 with an expiry date of November 30, 2015 as may be amended, assigned or otherwise renewed or replaced from time to time.

2. Principal and Interest.

(a) The unpaid principal balance of the Loan shall be repaid in one installment on the earlier to occur of (A) an Event of Default or (B) the Maturity Date together with all other outstanding Obligations then due and owing by either:

(i)  A draw by Bank under the SBLC, with the proceeds to be applied toward the payment of the Obligations; or

(ii)  Borrower’s payment to Bank of the outstanding amount of the Obligations, provided that the SBLC shall remain in full force and effect for a period of no less than four (4) months after such final payment.

The Borrower shall also pay Bank interest on the outstanding principal balance of the Loan quarterly in arrears, on August 31, 2013, November 30, 2013, February 28, 2014 and the Maturity Date. The Loan shall bear interest on the unpaid principal amount thereof applicable thereto at a rate per annum equal to the higher of (i) four percent (4.00%) (the “Floor”) or (ii) LIBOR, as selected by Borrower and determined for each such Interest Period therefore in accordance with the terms of this Note, plus the Margin (the “Interest Rate”). Any interest not paid when due hereunder shall be added to the principal amount of this Note and shall bear interest from its due date at the applicable Interest Rate specified above (or the Default Interest Rate, if applicable). Interest shall be calculated on the basis of a 360-day year and actual number of days elapsed. In no event shall the Interest Rate exceed the maximum rate permitted by applicable law. Any change in the Interest Rate shall be effective as of the first day of each Interest Period.

 

(c) Any principal amount of the Loan that is repaid or prepaid may not be reborrowed.

(d) The unpaid principal amount of the Loan may, at any time and from time to time, be voluntarily paid or prepaid in whole or in part (subject to the restriction set forth in Section 2(a) above) except that, with respect to any voluntary prepayment, (i) Bank shall have received written notice of any prepayment five (5) Business Days before the date of prepayment, which notice shall identify the date and amount of the prepayment, (ii) each prepayment shall be accompanied by payment of interest accrued to the date of payment on the amount of principal paid, and (iii) any payment or prepayment of all or on a day other than the last day of the applicable Interest Period shall be accompanied by a prepayment premium equal to, and to partially compensate the Bank, for the amount of interest which Bank would have earned on the principal amount so prepaid from the date of such prepayment to the last day of the then current Interest Period. Bank shall not be obligated to accept any prepayment unless it is accompanied by the prepayment premium.

 

  

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(e)  All amounts due and owing hereunder shall be paid in full no later than the earlier of: (i) Maturity Date; or (ii) the occurrence and continuation of an Event of Default.

3. Default Rate. At the option of the Bank, upon the occurrence and during the continuance of any Event of Default, and in any event if any installment of principal or interest or any fee or cost or other amount payable under this Note, or any other Loan Document, is not paid when due, the Obligations shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the rate otherwise applicable thereto plus five (5%) percent per annum (the “Default Interest Rate”), to the fullest extent permitted by applicable law. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be compounded monthly, on the last day of each calendar month, to the fullest extent permitted by applicable law.

4. Computation of Interest and Fees.

(a) Computation of interest on the Loan and all fees under this Note shall be calculated on the basis of a year of 360 days and the actual number of days elapsed. Borrower acknowledges that such latter calculation method will result in a higher yield to the Bank than a method based on a year of 365 or 366 days.

 

(b) Under no circumstances or event whatsoever shall the aggregate of all amounts deemed interest hereunder and charged or collected pursuant to the terms of this Note exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such court determines Bank has charged or received interest hereunder in excess of the highest applicable rate, Bank shall apply, in its sole discretion, and set off such excess interest received by Bank against other Obligations due or to become due and such rate shall automatically be reduced to the maximum rate permitted by such law.

 

5. Manner and Treatment of Payments.

(a) Each payment due on this Note, or under any other Loan Document, shall be made to Bank, at Bank’s office located at 511 Fifth Avenue, New York, New York 10017-4997, for the account of Bank, in immediately available funds not later than 3:00 p.m., New York local time, on the day of payment (which must be a Business Day). All payments received after these deadlines shall be deemed received on the next succeeding Business Day. All payments shall be made in lawful money of the United States of America.

 

(b) Bank shall have the unconditional right and discretion (and Borrower hereby authorizes Bank) to charge Borrower’s operating and/or deposit account(s) for all of Borrower’s Obligations as they become due from time to time under this Note, or any other Loan Document, including, without limitation, interest, principal, fees, indemnification obligations and reimbursement of expenses.

 

  

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(c) Any payment due under this Note which is paid by check or draft shall be subject to the condition that any receipt issued therefore shall be ineffective unless and until the amount due is actually received by Bank. Each payment received by Bank shall be applied as follows: first, to the payment of any and all costs, fees and expenses incurred by or payable to Bank in connection with the collection or enforcement of this Note; second, to the payment of all unpaid late charges (if any); third, to the payment of all accrued and unpaid interest hereunder; and fourth, to the payment of the unpaid principal balance of this Note, or in any other manner which Bank may, in its sole discretion, elect from time to time.

 

6. Intentionally Omitted.

 

7. Right of Set-Off. To secure payment of this Note and all other Obligations of Borrower to Bank, Borrower and any Obligor of this Note hereby grant Bank a continuing lien and/or right of set-off upon any and all deposit and/or operating accounts now or hereafter maintained with Bank, any and all securities and other property of Borrower and any Obligor and the proceeds thereof now or hereafter coming into the possession or control of Bank, hereby authorizing Bank, at any time, without prior notice, to appropriate and apply such deposits or the proceeds of the sale of such securities or other property to any such Obligations, although contingent and although unmatured, it being understood that Bank shall be under no obligation to effect any such appropriation and application.

8. Repayment Extension. If any payment of principal or interest shall be due on a Saturday, Sunday or any other day on which banking institutions in the State of New York are required or permitted to be closed, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest, unless the result of such extension would be to carry such payment into another calendar month in which event such payment shall be made on the immediately preceding Business Day.

9. Late Charge. Borrower shall unconditionally pay to Bank a late charge (the “Late Charge”) equal to the greater of (a) five (5%) percent of the payment then due or (b) $200.00, if any such payment in whole or in part is not received by Bank within ten (10) days after its due date. The Late Charge is in addition to the Default Interest Rate, if applicable, and shall be payable together with the next payment due hereunder or, at Bank’s option, upon demand by Bank, provided, however, that if any such late charge is not recognized as liquidated damages for such delinquency, and if deemed to be interest in excess of the amount permitted by applicable law, Bank shall be entitled to collect a late charge only at the highest rate permitted by law, and any payment actually collected by Bank in excess of such lawful amount shall be deemed a payment in reduction of the principal sum then outstanding, and shall be so applied.

10. Representations and Warranties. Borrower represents and warrants to Bank that:

Existence and Qualification; Power - Borrower is a corporation or limited liability company duly formed, validly existing and in good standing under the laws of the state of its organization. Borrower is duly qualified or registered to transact business and is in good standing in each jurisdiction in which the conduct of its business or the ownership or leasing of its properties makes such qualification or registration necessary. Borrower has all requisite corporate power and/or other authority to conduct its business, to own and lease its properties and to execute and deliver this Note and each Loan Document to which it is a party and to perform its Obligations;

 

  

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Compliance with Laws - Borrower is in compliance in all material respects with all laws, regulations and other legal requirements applicable to its business, has obtained all authorizations, consents, approvals, orders, licenses and permits from, and has accomplished (or obtained exemptions from) all filings, registrations and qualifications that are necessary for the transaction of its business;

Authority; Compliance With Other Agreements and Instruments - the execution, delivery and performance by Borrower of this Note and the other Loan Documents to which it is a party has been duly authorized by all necessary corporate, partnership or membership action, as applicable, and does not and will not: (i) require any consent or approval not heretofore obtained of any manager, director, stockholder, member, partner, security holder or creditor of such party; (ii) violate or conflict with any provision of Borrower’s partnership agreement, articles of organization, operating agreement, articles of incorporation, charter, by-laws or other comparable instruments; or (iii) result in a breach by Borrower or constitute a default by Borrower under, or cause or permit the acceleration of any obligation owed under, any indenture or loan or credit agreement or any other contractual obligation to which Borrower is a party or by which Borrower or any of its property is bound or affected;

Financial Statements - the financial statements of Borrower previously furnished to Bank are complete and correct and fairly present the financial condition of Borrower through to the date for such fiscal period, and the result of Borrower’s operations as of the end of the most recent fiscal quarter reflect no material adverse change in the financial condition of Borrower;

No Default - no event has occurred and no event is continuing which with the giving of notice or the lapse of time or both would constitute an Event of Default;

 

Regulations T, U and X; Investment Company Act - no part of the proceeds of the Loan will be used to purchase or carry, or to extend credit to others for the purpose of purchasing or carrying, any margin stock within the meaning of Regulations T, U or X of the Board of Governors of the Federal Reserve System. Borrower is not or is not required to be registered as an “investment company” under the Investment Company Act of 1940; and

Patriot Act Compliance - Borrower is not involved in any activity, directly or indirectly, which would constitute a violation of applicable laws concerning money laundering, the funding of terrorism or similar activities. No part of the proceeds of the Loan will be used to fund activities which would constitute a violation of the United States Bank Secrecy Act, the United States Money Laundering Control Act of 1986, the United States International Money Laundering Abatement and Anti-terrorist Financing Act of 2001.

 

  

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11. Events of Default. The occurrence of any one or more of the following events shall constitute an “Event of Default” under this Note:

Payments - if Borrower, or any other Obligor, fails to make any payment of principal or interest under the Obligations when such payment is due and payable; or

Other Charges - if Borrower, or any other Obligor, fails to pay any other charges, fees, expenses or other monetary obligations owing to Bank arising out of or incurred in connection with this Note within ten (10) Business Days after the date such payment is due and payable; or

Particular Covenant Defaults - if Borrower or any other Obligor fails to perform, comply with or observe any covenant or undertaking contained in any Loan Document and such failure continues for thirty (30) days after the occurrence thereof; or

Financial Information - if (i) any statement, report, financial statement, or certificate made or delivered by Borrower, or any other Obligor, to Bank is not true and correct in all material respects when made or delivered, or (ii) otherwise fails to comply with such other requirement or covenants set forth in the line letter agreement executed contemporaneously herewith.

 

Warranties or Representations - if any warranty, representation or other statement by or on behalf of Borrower or any other Obligor contained in or pursuant to this Note, the other Loan Documents or in any document, agreement or instrument furnished in compliance with, relating to, or in reference to this Note, is false, erroneous, or misleading in any material respect when made; or

Agreements with Others - (i) if Borrower or any other Obligor shall default beyond any grace period in the payment of principal or interest of any material Indebtedness of Borrower or any other Obligor; or (ii) if Borrower or any other Obligor otherwise defaults under the terms of any such Indebtedness if the effect of such default is to enable the holder of such Indebtedness to accelerate the payment of Borrower’s or any other Obligor’s obligations, which are the subject thereof, prior to the maturity date or prior to the regularly scheduled date of payment; or

Other Agreements with Bank - if any Obligor breaches or violates the terms of, or if a default occurs under, any other existing or future agreement (related or unrelated) (including, without limitation, the other Loan Documents) between any Obligor and Bank; or

Judgments - if any final judgment exceeding $50,000.00 for the payment of money (i) which is not fully and unconditionally covered by insurance or (ii) for which Borrower or any other Obligor has not established a cash or cash equivalent reserve in the full amount of such judgment, shall be rendered by a court of record against Borrower or any other Obligor and such judgment shall continue unsatisfied and in effect for a period of thirty (30) consecutive days without being vacated, discharged, satisfied or bonded pending appeal; or

Assignment for Benefit of Creditors, etc. - if Borrower or any other Obligor makes or proposes in writing, an assignment for the benefit of creditors generally, offers a composition or extension to creditors, or makes or sends notice of an intended bulk sale of any business or assets now or hereafter owned or conducted by Borrower or any other Obligor; or

 

  

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Bankruptcy, Dissolution, etc. - upon the commencement of any action for the dissolution or liquidation of Borrower or any other Obligor, or the commencement of any proceeding to avoid any transaction entered into by Borrower or any other Obligor, or the commencement of any case or proceeding for reorganization or liquidation of Borrower’s or any other Obligor’s debts under the Bankruptcy Code or any other state, federal or applicable foreign law, now or hereafter enacted for the relief of debtors, whether instituted by or against Borrower or any other Obligor; provided however, that Borrower or any other Obligor shall have twenty (20) Business Days to obtain the dismissal or discharge of involuntary proceedings filed against it, it being understood that during such twenty (20) Business Day period, Bank may seek adequate protection in any bankruptcy proceeding; or

 

Receiver - upon the appointment of a receiver, liquidator, custodian, trustee or similar official or fiduciary for Borrower or any other Obligor or for Borrower’s or any other Obligor’s property; or

Execution Process, etc. - the issuance of any execution or distraint process against any property of Borrower or any other Obligor; or

Termination of Business - if Borrower or any other Obligor ceases any material portion of its business operations as presently conducted; or

Investigations - any indication or evidence received by Bank that reasonably leads it to believe Borrower or any other Obligor may have directly or indirectly been engaged in any type of activity which, would be reasonably likely to result in the forfeiture of any material property of Borrower or any other Obligor to any governmental entity, federal, state or local; or

 

Liens - if any lien in favor of Bank shall cease to be valid, enforceable and perfected and prior to all other liens other than permitted liens; or

Concealment/Removal of Property - if Borrower or any other Obligor, or any other Obligor, conceals, removes or permits to be concealed or removed any part of Borrower’s or any other Obligor’s property with intent to hinder, delay, or defraud any of its creditors; or

Fraudulent Conveyance - the making or suffering by Borrower or any other Obligor, or any other Obligor, of a transfer of any property, which is fraudulent under the law of any applicable jurisdiction; or

Security - if all or any part of any security granted by Borrower or any other Obligor for the Obligations shall, in the reasonable discretion of Bank, materially diminish in value and Borrower or any other Obligor fails upon demand of Bank to furnish such further security or to make payment on account of any of the Obligations as would be satisfactory to Bank; or

Material Adverse Effect - if there is any change in Borrower’s or any other Obligor’s financial condition which, in Bank’s reasonable opinion, has or would be reasonably likely to have a material adverse effect with respect to (a) the assets, properties, financial condition, credit worthiness, business prospects, material agreements or results of business operations of Borrower or any other Obligor, or (b) Borrower’s or any other Obligor’s ability to pay the Obligations in accordance with the terms hereof, or (c) the validity or enforceability of this Note or any of the other Loan Documents or the rights and remedies of Bank hereunder or thereunder.

 

  

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12. Rights and Remedies upon Demand or Default. Upon demand or following the occurrence of an Event of Default hereunder, Bank, in Bank’s sole discretion and without notice or demand to Borrower or any other Obligor, may: (a) declare the entire outstanding principal balance of this Note, together with all accrued interest and all other sums due under this Note to be immediately due and payable, and the same shall thereupon become immediately due and payable without presentment, demand or notice, which are hereby expressly waived (b) exercise its right of set-off against any money, funds, credits or other property of any nature whatsoever of Borrower or any other Obligor now or at any time hereafter in the possession of, in transit to or from, under the control or custody of, or on deposit with, Bank or any affiliate of Bank in any capacity whatsoever, including without limitation, any balance of the Deposit Account or any other deposit account and any credits with Bank or any affiliate of Bank; (c) terminate any outstanding commitments of Bank to Borrower or any Obligor; (d) draw under the SBLC and apply all or a portion of the proceeds of the SBLC in reduction of the Obligations and the Bank shall not be liable or in any way responsible to the Borrower by reason of any draw under the SBLC or any certifications presented to UBS AG or in connection thereof; and (e) exercise any or all rights, powers, and remedies provided for in the Loan Documents or now or hereafter existing at law, in equity, by statute or otherwise.

13. Remedies Cumulative. Each right, power and remedy of Bank hereunder, under the other Loan Documents or now or hereafter existing at law, in equity, by statute or otherwise shall be cumulative and concurrent, and the exercise or the beginning of the exercise of any one or more of them shall not preclude the simultaneous or later exercise by Bank of any or all such other rights, powers or remedies. No failure or delay by Bank to insist upon the strict performance of any one or more provisions of this Note or of the Loan Documents or to exercise any right, power or remedy consequent upon a breach thereof or a default hereunder shall constitute a waiver thereof, or preclude Bank from exercising any such other rights, powers or remedy. By accepting full or partial payment after the due date of any amount of principal or interest on this Note, or other amounts payable on demand, Bank shall not be deemed to have waived the right either to require prompt payment when due and payable of all other amounts of principal or interest on this Note or other amounts payable on demand, or to exercise any rights and remedies available to it in order to collect all such other amounts due and payable under this Note.

14. Inability to Determine LIBOR. If prior to the first day of any Interest Period, Bank shall have determined (which determination shall be conclusive and binding upon Borrower, absent manifest error) that LIBOR can not be determined by any of the means set forth in the definition of “LIBOR” and, by reason of circumstances affecting the London Interbank Market, quotations of interest rates for the relevant Interest Periods are not being provided to Bank in the relevant amount or for the relevant maturities for purposes of determining LIBOR for such Interest Period, Bank shall forthwith furnish notice of such determination, confirmed in writing, to Borrower and thereafter the Interest Rate shall, on the last day of the then applicable current Interest Period, be converted to a rate of interest based on the Prime Rate plus a margin to be determined by the Bank in its discretion.

 

  

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15. Illegality. Notwithstanding any other provision herein, if the adoption of or any change in any law, rule, regulation, guideline or order, or the interpretation or application thereof shall make it unlawful for Bank to make or maintain the Interest Rate based on LIBOR as contemplated hereunder (a) Bank shall promptly give notice thereof to Borrower, (b) the obligation of Bank to continue utilizing LIBOR as the basis for the Interest Rate shall forthwith be cancelled and (c) the Interest Rate for the Loan shall be converted automatically to a rate of interest based on the Prime Rate plus a margin to be determined by Bank in its discretion as of the date notice is given to Borrower under Subsection (a) hereof.

16. Additional Costs. If, as a result of any change in applicable law, regulation, guideline or order, or in the interpretation or application thereof by any governmental authority charged with the administration thereof, there shall be imposed upon or made applicable to Bank any reserve requirement against this Note or any other costs or assessments (hereinafter “Additional Costs”), Borrower shall pay to Bank, on demand (which demand shall be in writing and which will set forth a calculation of such Additional Costs), an amount sufficient to compensate Bank for such Additional Cost. Bank’s calculation of the amount of such Additional Costs shall be presumed correct absent manifest error.

17. Taxes. Any and all payments by or on account of any Obligations hereunder shall be made free and clear of and without deduction for any taxes; provided that if the Borrower shall be required to deduct any taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this paragraph) the Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant governmental authority in accordance with applicable law.

18. Collection Expenses. If this Note is placed in the hands of an attorney for collection following the occurrence of an Event of Default hereunder, Borrower agrees to pay to Bank upon demand costs and expenses, including all attorney’s fees and court costs, paid or incurred by Bank in connection with the enforcement or collection of this Note (whether or not any action has been commenced by Bank to enforce or collect this Note) or in successfully defending any counterclaim or other legal proceeding brought by Borrower contesting Bank’s right collect the outstanding principal balance of this Note. The obligation of Borrower to pay all such costs and expenses shall not be merged into any judgment by confession against Borrower. All of such costs and expenses shall bear interest at the highest rate of Interest permitted under this Note from the date of payment by Bank until repaid in full by the Obligor.

19. Interest Rate after Judgment. If judgment is entered against Borrower on this Note, the amount of the judgment entered (which may include principal, interest, fees and costs) shall bear interest at the higher of (i) the legal rate of interest then applicable to judgments in the jurisdiction in which judgment was entered, or (ii) if otherwise permitted by applicable law, the Default Interest Rate provided herein.

 

  

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20. Certain Waivers by Borrower. Borrower waives demand, presentment, protest and notice of demand, of non-payment, of dishonor, and of protest of this Note. Bank, without notice to or further consent of Borrower or any other Obligor and without in any respect compromising, impairing, releasing, lessening or affecting the obligations of Borrower hereunder or under of the Loan Documents, may: (a) release, surrender, waive, add, substitute, settle, exchange, compromises, modify, extend or grant indulgences with respect to (i) this Note, (ii) any of the Loan Documents, and/or (iii) all or any part of any collateral or security for this Note; and/or (iv) any Obligor; (b) complete any blank space in this Note according to the terms upon which the loan evidenced hereby is made; and (c) grant any extension or other postponements of the time of payment hereof.

21. Choice of Law: Forum Selection: Consent to Jurisdiction. This Note shall be governed by, construed and interpreted in accordance with the laws of the State of New York (excluding the choice of law rules thereof). Borrower hereby irrevocably submits to the jurisdiction of any New York court or federal court sitting in the State of New York in any action or proceeding arising out of or relating to this Note, and hereby irrevocably waives any objection to the laying of venue of any such action or proceeding in any such court and any claim that any such action or proceeding has been brought in an inconvenient forum. A final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment or in any other manner provided by law.

22. Subsequent Holders. In the event that any holder of this Note transfers this Note for value, Borrower agrees that except with respect to a subsequent holder with actual knowledge of a claim or defense, no subsequent holder of this Note shall be subject to any claims or defenses which Borrower may have against a prior holder (which claims or defenses are not waived as to prior holder), all of which are waived as to the subsequent holder, and that all such subsequent holders shall have all of the rights of a holder in due course with respect to Borrower even though the subsequent holder may not qualify, under applicable law, absent this paragraph, as a holder in due course.

23. Invalidity of Any Part. If any provision or part of any provision of this Note shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision (or any remaining part of any provision) of this Note, and this Note shall be construed as if such invalid, illegal or unenforceable provision (or part thereof) had never been contained in this Note, but only to the extent of its invalidity, illegality, or unenforceability. In any event, if any such provision pertains to the repayment of the Obligations evidenced by this Note, then and in such event, at Bank’s option, the outstanding principal balance of this Note, together with all accrued and unpaid interest thereon, shall become immediately due and payable.

24. WAIVER OF JURY TRIAL. BORROWER HEREBY (i) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (ii) WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH BANK AND BORROWER MAY BE PARTIES ARISING OUT OF, IN CONNECTION WITH OR IN ANY WAY PERTAINING TO THIS NOTE, ANY OF THE LOAN DOCUMENTS AND/OR ANY TRANSACTIONS, OCCURRENCES, COMMUNICATIONS, OR UNDERSTANDINGS (OR THE LACK OF ANY OF THE FOREGOING) RELATING IN ANY WAY TO BORROWER-BANK RELATIONSHIP BETWEEN THE PARTIES. IT IS UNDERSTOOD AND AGREED THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO THIS NOTE. THIS WAIVER OF JURY TRIAL IS SEPARATELY GIVEN, KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY BORROWER AND BORROWER HEREBY AGREES THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BANK IS HEREBY AUTHORIZED TO SUBMIT THIS NOTE TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND BORROWER SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF SUCH WAIVER OF RIGHT TO TRIAL BY JURY. BORROWER REPRESENTS AND WARRANTS THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND/OR THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

 

  

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25. Waiver of Defenses, Counterclaims, etc. Borrower hereby waives, in any litigation (whether or not arising out of or related to this note or any other obligation or liabilities to Bank) in which Borrower and Bank shall be adverse parties, the right to interpose any defense, set-off or counterclaim of any nature or description, excluding mandatory counterclaims that, if not raised in such proceeding, would be waived.

26. Indemnification. The Borrower agrees: (i) to pay and reimburse Bank for all of its reasonable and documented out-of-pocket costs and expenses incurred in connection with the preparation and execution of, and any amendment, supplement or modification to, this Note and the other Loan Documents, and the consummation and administration of the transactions contemplated hereby and thereby, including the reasonable fees, disbursements and other charges of internal and external counsel, (ii) to pay and reimburse Bank for reasonable and documented out-of-pocket costs and expenses incurred in connection with the enforcement or preservation of any rights under this Note, Loan Documents and any such other documents, including the reasonable fees, disbursements and other charges of its counsel, whether internal or external, (iii) to pay, indemnify and hold harmless the Bank and its directors, officers and agents (each, an “Indemnified Party” and collectively, “Indemnified Parties”) from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever, including reasonable and documented fees, disbursements and other charges internal or external counsel for all Indemnified Parties in connection with the execution, delivery, enforcement, performance and administration of this Note or the Loan Documents and any such other documents or the use of the proceeds thereof, including any of the foregoing relating to the violation of, noncompliance with or liability applicable to the operations of the Borrower, any of its subsidiaries; provided that the Borrower shall have no obligation hereunder to any Indemnified Party with respect to damages caused directly by the gross negligence or willful misconduct of such Indemnified Party as determined by a non-appealable final judgment.

27. Miscellaneous. Time is of the essence under this Note. The paragraph headings of this Note are for convenience only, and shall not limit or otherwise affect any of the terms hereof. This Note and the other Loan Documents, if any, constitute the entire agreement between the parties with respect to their subject matter and supersede all prior letters, representations, or agreements, oral or written, with respect thereto. No modification, release, or waiver of this Note shall be deemed to be made by Bank unless in writing signed by Bank, and each such waiver, if any, shall apply only with respect to the specific instance involved. No course of dealing or conduct shall be effective to modify, release or waive any provisions of this Note or any of the other Loan Documents. Borrower acknowledges that this Note is an instrument for the payment of money only within the meaning of Section 3213 of the New York Civil Practice Law & Rules. This Note shall inure to the benefit of and be enforceable by Bank and Bank’s successors and assigns and any other person to whom Bank may grant an interest in the obligations evidenced by this Note and shall be binding upon and enforceable against Borrower and Borrower’s successors and assigns, it being understood that Borrower may not assign this Note without the prior written consent of Bank. Whenever used herein, the singular number shall include the plural, the plural the singular, and the use of the masculine, feminine, or neuter gender shall include all genders.

 

  

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28. Interest Reserve Deposit Account. From and after the date hereof through and including the Maturity Date, Borrower shall maintain a deposit account assigned and pledged to Bank (Account No. 03-5817-6) ("Deposit Account") with Bank with an interest reserve deposit in the minimum amount of $250,000.00 ("Deposit Account Amount"), to be utilized solely for the payment of interest under the Note. If the Deposit Account reaches $100,000.00, or such lesser amount as Bank may require in its sole and absolute discretion, based on the total aggregate principal amount outstanding under the Note at the time in question, the Borrower shall be required to immediately replenish the Deposit Account up to the lesser of (i) the Deposit Account Amount or (ii) the remaining interest payments to be due and payable throughout the term of the Note. All interest payments shall be made by automatic debit from the Deposit Account and Borrower shall maintain balances sufficient to pay the payments. Such debit will occur on each payment due date for interest, as specified in Section 2(b) Note.

29. Financial Reporting. Borrower shall furnish to Bank (a) within 90 days after the end of each of its fiscal years, the financial statements of the Borrower dated as of the end of the reported fiscal year, which shall be audited by a certified public accountant acceptable to Bank, which acceptable accountants include Cherry Bekaert Holland, the Borrower’s current accounting firm, and be without material exception or qualification except as identified in the most recent Annual Report on Form 10-K; and (b) within 60 days of each fiscal quarter, the financial statements of the Borrower dated as of the end of the reported fiscal quarter, which shall be reviewed by a certified public accountant acceptable to Bank and be without material exceptions or qualifications except as identified in the most recent Annual Report on Form 10-K.

30. Upfront Fee and Documentation Fee. Borrower shall pay to Bank (i) an upfront fee of $30,000.00 and (ii) a documentation fee of $2,000.00 simultaneously with the execution of this Note, and such fees shall be deemed to be fully earned as of the date hereof. Borrower hereby authorizes Bank to debit its deposit and/or operating account for the payment of such fees.

31. Prior Note. This Note amends, replaces, restates and relates back to the promissory note dated May 31, 2012 in the principal amount of $5,000,000.00 (“Prior Note”), and all sums outstanding under the Prior Note shall be deemed outstanding under this Note as of the date hereof and in the amounts set forth on the Bank’s records.

 

  

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Borrower:

SMART ONLINE INC.

 

	
By: 

	/s/ Gleb Mikhailov	 
	 	Name: Gleb Mikhailov

Title:   CFO

	 

                                                          

 

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