Document:

formlockup.htm

Exhibit 10.3

Dated as of September __, 2013

MDB Capital Group, LLC

401 Wilshire Boulevard

Santa Monica, CA  90401

Ladies and Gentlemen:

 

    This agreement is being delivered to you in connection with the proposed Underwriting Agreement (the “Underwriting Agreement”) between Ideal Power Converters, Inc., a Delaware corporation (the “Company”), and MDB Capital Group, LLC (“MDB”) relating to a proposed underwritten public offering of shares (the “Shares”) of the Company’s Common Stock (the “Common Stock”).

 

    In order to induce MDB to enter into the Underwriting Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees that, during the period beginning on and including the date of the Underwriting Agreement through and including the date that is the one year anniversary of the date of the Underwriting Agreement (the “Lock-Up Period”), the undersigned, or any affiliated party of the undersigned, will not, without the prior written consent of MDB, directly or indirectly:

 

    (i)           offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or

 

    (ii)           enter into any swap or other agreement, arrangement or transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic consequence of ownership of any Common Stock or any securities convertible into or exercisable or exchangeable for any Common Stock,

 

whether any transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock, other securities, in cash or otherwise. Moreover, if:

 

    (1)           during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or

 

    (2)           prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the Lock-Up Period,

the Lock-Up Period shall be extended and the restrictions imposed by this agreement shall continue to apply until the expiration of the 18-day period beginning on the date of issuance of the earnings release or the occurrence of the material news or material event, as the case may be, unless MDB waives, in writing, such extension.

 

  

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    Notwithstanding the provisions set forth in the immediately preceding paragraph, the undersigned may, without the prior written consent of MDB, (1) transfer any Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock as a bona fide gift or gifts, or by will or intestacy, to any member of the immediate family (as defined below) of the undersigned or to a trust the beneficiaries of which are exclusively the undersigned or members of the undersigned’s immediate family or to a charity or educational institution; provided, however, that it shall be a condition to the transfer that (A) the transferee executes and delivers to MDB not later than one business day prior to such transfer, a written agreement, in substantially the form of this agreement and otherwise satisfactory in form and substance to MDB, and (B) if the undersigned is required to file a report under Section 16(a) of the Securities Exchange Act of 1934, as amended, reporting a reduction in beneficial ownership of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock by the undersigned during the Lock-Up Period (as the same may be extended as described above), the undersigned shall include a statement in such report to the effect that such transfer or distribution is not a transfer for value and that such transfer is being made as a gift or by will or intestacy, as the case may be or (2) exercise or convert currently outstanding warrants, options and convertible debentures, as applicable, and exercise options under an acceptable stock option plan, so long as the undersigned agrees that the shares of Common Stock received from any such exercise or conversion will be subject to this agreement. For purposes of this paragraph, “immediate family” shall mean a spouse, child, grandchild or other lineal descendant (including by adoption), father, mother, brother or sister of the undersigned.

    The undersigned further agrees that (i) it will not, during the Lock-Up Period (as the same may be extended as described above), make any demand for or exercise any right with respect to the registration under the Securities Act of 1933, as amended (the “1933 Act”), of any Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, and (ii) the Company may, with respect to any Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock owned or held (of record or beneficially) by the undersigned, cause the transfer agent or other registrar to enter stop transfer instructions and implement stop transfer procedures with respect to such securities during the Lock-Up Period (as the same may be extended as described above).

 

    In addition, the undersigned hereby waives any and all notice requirements and rights with respect to the registration of any securities pursuant to any agreement, instrument, understanding or otherwise, including any registration rights agreement or similar agreement, to which the undersigned is a party or under which the undersigned is entitled to any right or benefit and any tag-along rights or other similar rights to have any securities (debt or equity) included in the offering contemplated by the Underwriting Agreement or sold in connection with the sale of Common Stock pursuant to the Underwriting Agreement, provided that such waiver shall apply only to the public offering of Common Stock pursuant to the Underwriting Agreement and each registration statement filed under the 1933 Act in connection therewith.

 

    The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this agreement and that this agreement has been duly executed and delivered by the undersigned and is a valid and binding agreement of the undersigned. This agreement and all authority herein conferred are irrevocable and shall survive the death or incapacity of the undersigned and shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned.

[Signature Page Immediately Follows]

  

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    IN WITNESS WHEREOF, the undersigned has executed and delivered this agreement as of the date first set forth above.

_____________________________________

Print Name: ___________________________formspa.htm

Exhibit 10.10

 

 

 

Securities Purchase Agreement

 

Investor Package

 

 

 

August __, 2012

 

 

 

Ideal Power Converters, Inc.

5004 Bee Creek Road, Suite 600

Spicewood, Texas 78669

  

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INSTRUCTIONS FOR INVESTING

 

If you wish to purchase the offered securities of Ideal Power Converters, Inc., please:

 

	
  

	
(1)

	
Review this Securities Purchase Agreement, Registration Rights Agreement, Senior Secured Convertible Promissory Note, Warrant, Security Agreement, and Subordination Agreement.

 

	
  

	
(2)

	
Indicate where appropriate, in Section 6(a) of the Securities Purchase Agreement, your status as an Accredited Investor by initialing the appropriate accreditation categories.

 

	
  

	
(3)

	
Type or print all information required in the blank sections in Section 6(b) of the Securities Purchase Agreement, including your requested subscription amount and your federal taxpayer identification number.

 

	
  

	
(4)

	
Execute the signature pages to the Securities Purchase Agreement, Registration Rights Agreement, Security Agreement, and Subordination Agreement.

 

	
  

	
(5)

	
If you are an individual, complete and execute, or cause to be executed, the enclosed Spousal Consent by either (i) having your spouse execute such consent or (ii) if  you are not married, by confirming your status as single on such consent.

 

	
  

	
(6)

	
Along with the completed and executed signature pages to this Securities Purchase Agreement, the Registration Rights Agreement, the Security Agreement, and the Subordination Agreement, send the completed Purchaser Information (Section 6 of this Securities Purchase Agreement) as well as the Spousal Consent to the following, preferably by fax or e-mail:

 

MDB Capital Group

401 Wilshire Boulevard, Suite 1020

Santa Monica, California 90401

Attn.: Mr. Bob Clifford

Fax No.: (310) 526-5020

E-mail address: bclifford@mdb.com

 

    Once all of the signature pages, the Purchaser Information and the Spousal Consent are collected and the Company accepts and countersigns the signature pages, wire instructions will be forwarded to you.

 

    The Company may choose not to accept all or some of any investor’s subscription for any reason (regardless of whether any check or wire transfer relating to this subscription is deposited in a bank or trust account).  The Company will send to you a fully executed copy of the transaction documents if your subscription is accepted.  If you have any questions in completing the transaction documents, please contact Christopher Cobb at Christopher.Cobb@idealpowerconverters.com.

  

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IDEAL POWER CONVERTERS, INC.

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (the “Agreement”) is entered into by and between IDEAL POWER CONVERTERS, INC., a Texas corporation (the “Company”), and the undersigned purchasers (each, a “Purchaser”, and collectively, the “Purchasers”) as of the latest date set forth on the signature page hereto.

 

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

 

1. Purchase of Securities and Matters Related Thereto.  (Capitalized terms used below and not otherwise defined are defined in Section 2 of the Agreement.)

 

(a) Subject to the terms and conditions of this Agreement, the undersigned Purchaser hereby subscribes for (i) a senior secured convertible promissory note in the form attached as Exhibit C (“Note”), and (ii) a warrant for the purchase of shares of the Company's common stock, $0.001 par value (the "Common Stock") in the form attached as Exhibit D (“Warrant”) (sometimes the Note and the Warrant are collectively referred to as the “Securities”).  The total amount to be paid for the Securities shall be the amount (if any) accepted by the Company in connection with this investment, which may be less than or equal to the amount indicated by the undersigned Purchaser on the signature page hereto (the “Subscription Amount”).  The offering, purchase and sale of the Securities is referred to herein as the “Offering.”

 

(b) If, prior to the Calendar Due Date, the Company closes a firm commitment underwritten initial public offering ("IPO") of its Common Stock that raises at least $10 million (the "IPO Financing"), the principal amount of the Note and all accrued but unpaid interest as well as any other amounts payable under the Note will be repaid with shares of the Company's Common Stock in accordance with the terms of the Note.  The conversion price will be equal to 0.70 times the IPO Price.  In the event that an IPO Financing does not occur prior to the Calendar Due Date of the Note, the Note shall not be convertible but shall be paid on the Calendar Due Date with U.S. dollars.  Prior to the Calendar Due Date or a conversion in the event of an IPO financing, each Purchaser will also have the right, but not the obligation, in accordance with the terms set forth in the Note, to convert the Note into shares of the Company's Common Stock, including for the purpose of participating in any other financing undertaken by the Company prior to the Calendar Due Date (so long as such financing is for capital-raising purposes) or in the event of a Change of Control, as defined in the Note.  In the event of such conversion, the Note shall be converted into that number of shares of Common Stock determined by dividing (x) the Principal Amount and all accrued interest by (y) the lower of (i) $3.21 or (ii) 0.70 times the per share consideration paid (A) in the event of a Change of Control or (B) in the most recent Private Equity Financing to occur prior to the Holder's election (as appropriately adjusted to reflect stock dividends, stock splits, combinations, recapitalizations and the like).  With the permission of the Purchaser, the Company may pre-pay the Note prior to an IPO or the Calendar Due Date with U.S. dollars.  In that case, the payment will equal 110% of the principal amount of the Note.

 

(c) The Purchasers will be granted a first priority senior security interest in and to the assets of the Company, including its intellectual property, pursuant to the terms of a Security Agreement, a form of which is attached hereto as Exhibit E (“Security Agreement”).  It is anticipated that the Company may raise up to a total of $4.25 million in additional funds through subsequently issued senior secured convertible promissory notes (the "Subsequent Notes").  In that event, holders of the Subsequent Notes will have security interests identical to those granted to the Purchasers.

 

(d) The Texas Emerging Technology Fund, which currently holds a senior security interest in the Company's assets, has agreed to subordinate its interest to the interests of the Purchasers in accordance with the Subordination Agreement in the form attached hereto as Exhibit F (“Subordination Agreement”).

  

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(e) The Warrant has a term of seven years.  The number of shares of Common Stock issuable upon exercise of the Warrant and the exercise price shall be determined as follows: (i) in the event of an IPO, the principal amount of the Note divided by 0.70 of the IPO Price will determine the number of shares covered by the Warrant while the per-share exercise price will be equal to 0.70 times the IPO Price; or (ii) in the event that, prior to the Calendar Due Date, the Company does not complete an IPO but, instead, completes a Private Equity Financing, the principal amount of the Note divided by 0.70 of the Private Equity Financing Price will determine the number of shares covered by the Warrant, with a per-share exercise price equal to 0.70 times the Private Equity Financing Price provided, however, that (A) if the Company undertakes first, a Private Equity Financing and secondly, an IPO prior to the Calendar Due Date and (B) the Private Equity Financing Price is higher than the IPO Price, then the number of shares of Common Stock covered by the Warrant and the per share exercise price will be adjusted to equal the number of shares of Common Stock and the exercise price calculated in accordance with subsection (i) above.  If the Company does not complete either a Private Equity Financing or an IPO prior to the Calendar Due Date, then the number of Shares covered by the Warrant will equal the principal amount of the Note divided by $3.32, and the exercise price will be $3.32 per share.  The Warrant also includes a cashless exercise provision.

 

(f) The Purchasers will have certain registration rights relating to the Common Stock underlying the Securities, which rights are set forth in the Registration Rights Agreement, a form of which is attached hereto as Exhibit G (“Registration Rights Agreement”).

 

(g) The Purchasers and their permitted transferees and assignees shall be subject to a 180 day lockup following the IPO as set forth in Section 8 of this Agreement.  Officers, directors, employees and owners of 5% or more of the Company's Common Stock will be locked up for the greater of 12 months (i) following the IPO and (ii) 12 months after shares of the Company's Common Stock are listed for trading on NASDAQ or a national securities exchange.

 

(h) It is anticipated that the Company will raise up to an additional $4.25 million by selling secured convertible promissory notes (the "Second Note Offering").  By executing this Purchase Agreement and the other Transaction Documents and by accepting the Note, the Holder agrees that if the Second Note Offering is consummated, this Note shall be cancelled and replaced with the form of note issued to the investors in the Second Note Offering.

 

(i)           MDB Capital Group, LLC has been retained by the Company as the sole placement agent for the Offering (the “Placement Agent”).

 

The foregoing description of the Note, the Warrant, the Security Agreement and the Subordination Agreement are qualified in their entirety by the terms of those agreements.

 

2. Certain Definitions.  For purposes of this Agreement and the agreements referenced herein, the following terms shall have the respective definitions set forth below:

 

(a) “Calendar Due Date” shall be a date that is 12 months from the Closing Date of this Offering.

 

(b)  “IPO Price” means the price per share of the Company's Common Stock offered to public investors in an IPO, without regard to any underwriting discount or expense (as appropriately adjusted to reflect stock dividends, stock splits, combinations, recapitalizations and the like with respect to the Company’s capital stock after the date hereof).

  

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(c)  “Private Equity Financing” means a privately marketed equity financing resulting in gross proceeds in excess of $250,000 which closes before the Calendar Due Date; provided, however, that none of the following issuances of securities shall constitute a “Private Equity Financing”: (i) this Offering and any subsequent offerings of senior secured convertible promissory notes or any other debt offering; (ii) securities issued without consideration in connection with any stock or unit split of, or stock or unit dividend on, the Company’s Common Stock; (iii) securities issued to the Company’s employees, officers, directors, consultants, advisors or service providers pursuant to any plan, agreement or similar arrangement unanimously approved by the Company’s board of directors; (iv) securities issued to banks or equipment lessors; (v) securities issued in connection with sponsored research, collaboration, technology license, development, original equipment manufacturing (OEM), marketing or other similar agreements or strategic partnerships; (vi) securities issued in connection with a bona fide business acquisition of or by the Company (whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise); (vii) the Investment Unit dated October 1, 2010, issued by the Company to the Office of the Governor Economic Development and Tourism, and any securities relating to the conversion or exercise thereof; or (viii) any right, option or warrant to acquire any security convertible into or exercisable for the securities listed in clauses (i) through (vii) above.

 

(d) “Private Equity Financing Price” means the price per share paid by investors in a Private Equity Financing.

 

3. Closing.

 

(a) On or prior to the applicable Closing Date (as defined below), the Purchaser shall deliver or cause to be delivered the following in accordance with the subscription procedures described in Section 2(b) below:

 

(i) a completed and duly executed signature page of this Agreement;

 

(ii) the completed Purchaser Information included on pages 14 and 15 of this Agreement;

 

(iii) a spousal consent substantially in the form of Exhibit B, attached hereto (the “Spousal Consent”); and

 

(iv) duly executed signature pages of the Registration Rights Agreement, the Security Agreement and the Subordination Agreement.

 

(b) The Purchaser shall deliver or cause to be delivered, preferably by fax or e-mail, the closing deliveries described above to the Placement Agent at the following address:

 

MDB Capital Group

401 Wilshire Boulevard, Suite 1020

Santa Monica, California 90401

Attn.: Mr. Bob Clifford

Fax No.: (310) 526-5020

E-mail address: bclifford@mdb.com

 

    Immediately following receipt of the deliverables from all of the Purchasers and acceptance by the Company in accordance with subsection (c) below, wire instructions will be forwarded to the Purchaser and the Purchaser shall be obligated to deliver funds no later than three business days thereafter.

  

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(c) This Agreement sets forth various representations, warranties, covenants and agreements of the Company and of the Purchaser, as the case may be, all of which shall be deemed made, and shall be effective without further action by the Company and the Purchaser, immediately upon the Company’s acceptance of the Purchaser’s subscription and shall thereupon be binding upon the Company and the Purchaser.  Acceptance shall be evidenced only by execution of this Agreement by the Company on its signature page attached hereto and the Company shall have no obligation hereunder to the Purchaser until a fully executed copy of this Agreement shall have been delivered to the Purchaser.  Upon the Company's acceptance of the Purchaser's subscription and receipt of the Subscription Amount, on the applicable Closing Date the Placement Agent shall deliver to the Purchaser a duly executed copy of each of the Agreement, the Note, the Warrant, the Registration Rights Agreement, the Security Agreement and the Subordination Agreement.

 

(d) The purchase and sale of the Securities shall be consummated on or before August 31, 2012 (the “Initial Closing Date”); provided, however, that the Company reserves the right to extend the Offering for up to an additional 30 days beyond the Initial Closing Date (the “Final Closing Date” and together with the Initial Closing Date, the “Closing Date” or the “Closing Dates”, depending on the context used).

 

4. Company Representations and Warranties.  The Company hereby represents and warrants that, as of the Closing Date applicable to the Purchaser:

 

(a) Organization and Business.  The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted.  The Company has no direct or indirect subsidiaries.  The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect.  As used in this Agreement, the term “Material Adverse Effect” means any material adverse effect on the business, operations, assets (including intangible assets), liabilities (actual or contingent), financial condition, or prospects of the Company, if any, taken as a whole, or on the transactions contemplated hereby or by the Transaction Documents (as defined below).  Information about the Company’s business is included on Exhibit A to this Agreement (the “Company Information”).

 

(b) Capitalization.

 

(i) The Company has two classes of authorized capital stock consisting of 5,000,000 shares of Common Stock and 275,000 shares of Preferred Stock, of which 3,503,757 shares of Common Stock are issued and outstanding and no shares of Preferred Stock are issued and outstanding.  The Company has reserved 371,000 shares of Common Stock for issuance in accordance with the terms of the Company's 2011 Stock Option/Stock Issuance Plan (the "Plan").  The number of shares included in the Plan is to be increased to 420,000 shares to accommodate new option grants to the Chief Executive Officer.  Schedule 4(b)(i) includes a detailed schedule of the Company's capitalization as of the date of this Agreement.

 

(ii) Except as set forth on Schedule 4(b)(ii) to this Agreement: (A) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, any capital stock of the Company, or arrangements by which the Company is or may become bound to issue additional capital stock, (B) there are no agreements or arrangements under which the Company is obligated to register the sale of any of its or their securities under the Securities Act of 1933, as amended (the “Securities Act”) and (C) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Securities.

 

(iii) No shares of capital stock of the Company are subject to preemptive rights or any other similar rights of anyone or any mortgage, lien, title claim, assignment, encumbrance, security interest, adverse claim, contract of sale, restriction on use or transfer (other than restrictions on transfer under applicable state and federal securities laws or “blue sky” or other similar laws (collectively, the “Securities Laws”)) or other defect of title of any kind (each, a “Lien”) imposed through the actions or failure to act of the Company.

 

  

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(c) Authorization; Enforceability.  All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of the Transaction Documents (as defined in subsection (f) below), the performance of all obligations of the Company under the Transaction Documents, and the authorization, issuance, sale and delivery of the Securities has been taken, and each Transaction Document constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights and general principles of equity that restrict the availability of equitable or legal remedies.

 

(d) Valid Issuance.  The Securities being acquired by the Purchasers hereunder, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and non-assessable, and will be free of Liens other than restrictions on transfer under this Agreement.

 

(e) Litigation.  There is no action, suit, proceeding or investigation pending or, to the Company’s knowledge, currently threatened against the Company.  The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality.  There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate.

 

(f) No Conflict.  The execution, delivery and performance of this Agreement, the Security Agreement, the Note, the Warrant, the Registration Rights Agreement, the Subordination Agreement, and the other agreements entered into by the Company in connection with the Offering (the “Transaction Documents”) and the consummation by the Company of the transactions contemplated hereby and thereby will not: (i) conflict with or result in a violation of any provision of the charter or by-laws of the Company or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or by which any property or asset of the Company is bound or affected.  The Company is not in violation of its charter, bylaws, or other organizational documents.  The business of the Company is not being conducted in violation of any law, rule, ordinance or regulation of any governmental entity, except for possible violations which would not, individually or in the aggregate, have a Material Adverse Effect.  Except for filings pursuant to Regulation D of the Securities Act, and applicable state securities laws, which have been made or will be made by the Company in the required time thereunder, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self-regulatory organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement or any Transaction Document in accordance with the terms hereof or thereof or to issue and sell the Securities in accordance with the terms hereof.

 

(g) Intellectual Property.  Other than inventions of the Company whose patent applications have yet to be filed (the “Confidential IP”), Schedule 4(g) to this Agreement sets forth a complete and accurate listing of all of the Company’s patents and patent applications (“Patents”).  At the Purchaser’s request the Company shall make available to the Purchaser prior to the applicable Closing Date a schedule of Confidential IP, provided that the Purchaser execute and deliver a non-disclosure agreement relating to the Confidential IP that is reasonably acceptable to the Company.  The Company owns valid title, free and clear of any Liens, or possesses the requisite valid and current licenses or rights, free and clear of any Liens, to use all Patents in connection with the conduct of its business as now operated, and to the best of the Company’s knowledge, as presently contemplated to be operated in the future.  There is no claim or action by any person pertaining to, or proceeding pending, or to the Company’s knowledge threatened, which challenges the right of the Company with respect to any Patents necessary to enable it to conduct its business as now operated, and to the Company’s knowledge, as presently contemplated to be operated in the future.  To the Company’s knowledge, the Company’s current and intended products, services and processes do not infringe on any Intellectual Property or other rights held by any person, and the Company is unaware of any facts or circumstances which might give rise to any of the foregoing.  The Company has not received any notice of infringement of, or conflict with, the asserted rights of others with respect to the Patents.  It will not be necessary to use any inventions of any of its employees or consultants (or persons it currently intends to hire) made prior to their employment by the Company.  Each employee and consultant of the Company has assigned to the Company all intellectual property rights he or she owns that are related to the Company’s business as now conducted and as presently proposed to be conducted.

  

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(h) Management.  As of the date of this Agreement, the Company's Board of Directors consists of five members, namely, Christopher Cobb, Bill Alexander, Dr. David Breed, Hamo Hacopian and Charles De Tarr, and the Company has the following officers:

 

Christopher Cobb                                           Chief Executive Officer

Charles De Tarr                                           Chief Financial Officer, Secretary

Bill Alexander                                           Chief Technology Officer

Paul Bundschuh                                           Vice President of Business Development

 

Prior to an offering of the Common Stock to the public, the Company intends to enter into a formal employment agreement with the Chief Executive Officer.

 

        (i)           Financial Statements.  Schedule 4(i) to this Agreement includes a true and complete copy of (A) the audited financial statements for 2011, 2010 and 2009 and (B) un-audited balance sheet as of June 30, 2012 and the un-audited income statement for the six month period ended June, 2012. (the "Income Statements" and collectively with the Balance Sheet, the "Financial Statements").  The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments.  Except as set forth in the Financial Statements, the Company has no material liabilities or obligations, contingent or otherwise, other than liabilities incurred in connection with the consummation of the transactions contemplated under the Offering, an estimate of which is set forth on Schedule 4(i), and those incurred in the ordinary course of business subsequent to June 30, 2012.

 

(j)           Financial Information and Projections.  Any financial estimates and projections in the Company Information and/or Budget have been prepared by management of the Company and are the most current financial estimates and projections available by the Company.  Although the Company does not warrant that the results contained in such projections will be achieved, to the best of the Company’s knowledge and belief, such projections are reasonable estimations of future financial performance of the Company and its expected financial position, results of operations, and cash flows for the projection period (subject to the uncertainty and approximation inherent in any projection).  At the time they were made, all of the material assumptions upon which the projections are based were, to the best of the Company’s knowledge and belief, reasonable and appropriate.  Nothing in this Section 4(j) is intended to modify or amend in any way the representations and warranties of Purchaser in Section 5.

 

(k)           Tax Matters.  Except as set forth on Schedule 4(k) to this Agreement, the Company has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and has paid all taxes and other governmental assessments and charges, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply.  All such tax returns and reports filed on behalf of the Company were complete and correct and were prepared in good faith without willful misrepresentation.  There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.  The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax.  The Company has not received notice that any of its tax returns is presently being audited by any taxing authority.

 

(l)           Certain Transactions.  Except as set forth on Schedule 4(l) to this Agreement, there are no loans, leases, royalty agreements or other transactions between: (i) the Company or any of its respective customers or suppliers, and (ii) any officer, employee, consultant or director of the Company or any person owning 5% or more of the ownership interests of the Company or any member of the immediate family of such officer, employee, consultant, director, shareholder or owner or any corporation or other entity controlled by such officer, employee, consultant, director, shareholder or owner, or a member of the immediate family of such officer, employee, consultant, director, shareholder or owner.

  

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(m)           Material Agreements.  Except as disclosed on Schedule 4(m) to this Agreement (each contract, agreement, commitment or understanding disclosed on Schedule 4(m) being hereinafter referred to as a "Material Agreement") or as contemplated by this Agreement or any Transaction Document, there are no agreements, understandings, commitments, instruments, contracts, employment agreements, proposed transactions or judgments to which the Company is a party or by which it is bound which may involve obligations (contingent or otherwise), or a related series of obligations (contingent or otherwise), of or to, or payments, or a related series of payments, by or to the Company in excess of $10,000 in any one year.  All Material Agreements are in full force and effect and constitute legal, valid and binding obligations of the Company, and to the Company's knowledge, the other parties thereto, and are enforceable in accordance with their respective terms.  Neither the Company nor any person is in default under the terms of any Material Agreement, and no circumstance exists that would, with the giving of notice or the passage of time, constitute a default under any Material Agreement.

 

(n)           Title to Assets.  The Company has good and marketable title to all real and personal property owned by it that is material to the business of the Company, in each case free and clear of all liens and encumbrances, except those, if any, included on Schedule 4(n) or incurred in the ordinary course of business consistent with past practice.  Any real property and facilities held under lease by the Company are held by it under valid, subsisting and enforceable leases (subject to laws of general application relating to bankruptcy, insolvency, reorganization, or other similar laws affecting creditors' rights generally and other equitable remedies) with which the Company is in compliance in all material respects.

 

(o)      Subsidiaries; Joint Ventures.  Except for the subsidiaries described in Schedule 4(o), the Company has no subsidiaries and (i) does not otherwise own or control, directly or indirectly, any other Person and (ii) does not hold equity interests, directly or indirectly, in any other Person.  Except as described in Schedule 4(o), the Company is not a participant in any joint venture, partnership, or similar arrangement material to its business.  "Person" means an individual, entity, partnership, limited liability company, corporation, association, trust, joint venture, unincorporated organization, and any government, governmental department or agency or political subdivision thereof.

 

(p)           No General Solicitation. Neither the Company nor any person participating on the Company’s behalf in the transactions contemplated hereby has conducted any “general solicitation,” as such term is defined in Regulation D promulgated under the Securities Act, with respect to any securities offered in the Offering.

 

(q)           No Integrated Offering.  Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the Securities Act of the issuance of the Securities.  The issuance of the Securities will not be integrated (as defined in Rule 502 of the Securities Act) with any other issuance of the Company’s securities (past, current or future) that would require registration under the Securities Act of the issuance of the Securities.

 

(r)           No Brokers.  The Company has taken no action which would give rise to any claim by any person for brokerage commissions, transaction fees or similar payments relating to this Agreement or the transactions contemplated hereby, other than to the Placement Agent, whose fee is described in Section 5(g).

 

(s)           Offering.  Subject to the accuracy of the Purchaser’s representations and warranties in Section 5 of this Agreement, and the accuracy of other purchasers’ representations and warranties in their respective Securities Purchase Agreements, the offer, sale and issuance of the Securities in the Offering, constitute transactions exempt from the registration requirements of Section 5 of the Securities Act and from the registration or qualification requirements of applicable state securities laws, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption.

 

(t)           Risks Related to the Company and the Offering.  An investment in the Securities involves a high degree of risk and uncertainty.  Schedule 4(t) includes information about the material risks faced by the Company, however, they may not be the only risks.  Additional unknown risks or risks that the Company currently considers to be immaterial may also impair the Company's business operations.  If any of the events or circumstances described in Schedule 4(t) actually occurs, the Company's business, financial condition or results of operations could suffer.

  

-9-

  

 

5. Purchaser Acknowledgements and Representations.  In connection with the purchase of the Securities, Purchaser represents and warrants as of the Closing Date applicable to the Purchaser and/or acknowledges, to the Company, the following:

 

(a) Acceptance.  The Company may accept or reject this Agreement and the number of Securities subscribed for hereunder, in whole or in part, in its sole and absolute discretion.  The Company has no obligation to issue any of the Securities to any person who is a resident of a jurisdiction in which the issuance of the Securities would constitute a violation of the Securities Laws.

 

(b) Irrevocability.  This Agreement is and shall be irrevocable, except that the Purchaser shall have no obligations hereunder to the extent that this Agreement is rejected by the Company.

 

(c) Binding.  This Agreement and the rights, powers and duties set forth herein shall be binding upon the Purchaser, the Purchaser's heirs, estate, legal representatives, successors and assigns and shall inure to the benefit of the Company, its successors and assigns.

 

(d) No Governmental Review.  No federal or state agency has made any finding or determination as to the fairness of the Offering for investment, or any recommendation or endorsement of the Securities.

 

(e) No Preemptive or Voting Rights.  Unless and until the entire Principal Amount is converted into Common Stock or the Warrant exercised and the Common Stock issued, the Purchaser is not entitled to voting rights.  The Securities do not entitle the Purchaser to preemptive rights.

 

(f) Professional Advice; Investment Experience.  The Company has made available to the Purchaser, or to the Purchaser's attorney, accountant or representative, all documents that the Purchaser has requested, and the Purchaser has requested all documents and other information that the Purchaser has deemed necessary to consider respecting an investment in the Company.  The Company has provided answers to all questions concerning the Offering and an investment in the Company.  The Purchaser has carefully considered and has, to the extent the Purchaser believes necessary, discussed with the Purchaser's professional technical, legal, tax and financial advisers and his/her/its representative (if any) the suitability of an investment in the Company for the Purchaser's particular tax and financial situation.  All information the Purchaser has provided to the Company concerning the Purchaser and the Purchaser's financial position is, to Purchaser’s knowledge, correct and complete as of the date set forth below, and if there should be any material adverse change in such information prior to the acceptance of this Agreement by the Company, the Purchaser will immediately provide such information to the Company.  The Purchaser has such knowledge, skill, and experience in technical, business, financial, and investment matters so that he/she/it is capable of evaluating the merits and risks of an investment in the Securities.  To the extent necessary, the Purchaser has retained, at his/her/its own expense, and relied upon, appropriate professional advice regarding the technical, investment, tax, and legal merits and consequences of this Agreement and owning the Securities.  The Purchaser acknowledges and understands that the proceeds from the sale of the Securities will be used as described in Section 7(b).

 

(g) Brokers and Finders; Placement Agent Services.  For the $750,000 in Principal Amount raised in the Offering, the Placement Agent has agreed to charge no fees but the Company has agreed to reimburse the Placement Agent for its expenses of this Offering, including fees of its legal counsel.

 

(h) Investment Purpose.  Purchaser is purchasing the Securities for investment for his, her or its own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act in violation of such act.  Purchaser further represents that he/she/it does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities.  If the Purchaser is an entity, the Purchaser represents that it has not been formed for the specific purpose of acquiring the Securities.  Purchaser acknowledges that an investment in the Securities is a high-risk, speculative investment.

  

-10-

  

 

(i) Reliance on Exemptions.  Purchaser understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Securities.

 

(j) Restricted Securities.  Purchaser understands that the Securities are “restricted securities” under applicable Securities Laws and that, pursuant to these laws, Purchaser must hold the Securities indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities, or an exemption from such registration and qualification requirements is available.  Purchaser acknowledges that the Company has no obligation to register or qualify the Securities for resale, except as provided in Section 11 herein.  Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Securities, and requirements relating to the Company which are outside of the Purchaser's control, and which the Company is under no obligation and may not be able to satisfy.

 

(k) Professional Advice.  The Company has not received from its legal counsel, accountants or professional advisors any independent valuation of the Company or any of its equity securities, or any opinion as to the fairness of the terms of the Offering or the adequacy of disclosure of materials pertaining to the Company or the Offering.

 

(l) Risk of Loss.  The Purchaser has adequate net worth and means of providing for his/her/its current needs and personal contingencies to sustain a complete loss of the investment in the Company at the time of investment, and the Purchaser has no need for liquidity in the investment in the Securities.  The Purchaser understands that an investment in the Securities is highly risky and that he/she/it could suffer a complete loss of his/her/its investment.

 

(m) Information.  The Purchaser understands that any plans, estimates and projections, provided by or on behalf of the Company, involve significant elements of subjective judgment and analysis that may or may not be correct; that there can be no assurance that such plans, projections or goals will be attained; and that any such plans, projections and estimates should not be relied upon as a promise or representation of the future performance of the Company.  The Purchaser acknowledges that neither the Company, the Placement Agent nor anyone acting on the Company’s behalf makes any representation or warranty, express or implied, as to the accuracy or correctness of any such plans, estimates and projections, and there are no assurances that such plans, estimates and projections will be achieved.  The Purchaser understands that the Company’s technology and products are new, and not all of the technology and/or products may be tested and commercialized, and that there is no guarantee that the technology and products will be commercially successful.  The Purchaser understands that all of the risks associated with the technology are not now known.  Before investing in the Offering, the Purchaser has been given the opportunity to ask questions of the Company about the technology and the Company’s business and the Purchaser has received answers to those questions.

 

(n) Authorization; Enforcement.  Each Transaction Document to which a Purchaser is a party: (i) has been duly and validly authorized, (ii) has been duly executed and delivered on behalf of the Purchaser, and (iii) will constitute, upon execution and delivery by the Purchaser thereof and the Company, the valid and binding agreements of the Purchaser enforceable in accordance with their terms, except to the extent limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights and general principles of equity that restrict the availability of equitable or legal remedies.

 

(o) Residency.  If the Purchaser is an individual, then Purchaser resides in the state or province identified in the address of such Purchaser set forth in Section 6; if the Purchaser is a partnership, corporation, limited liability company or other entity, then the office or offices of the Purchaser in which its principal place of business is identified in the address or addresses of the Purchaser set forth in Section 6.

  

-11-

  

(p) Communication of Offer. The Purchaser was contacted by either the Company or the Placement Agent with respect to a potential investment in the Securities.  The Purchaser is not purchasing the Securities as a result of any “general solicitation” or “general advertising,” as such terms are defined in Regulation D of the Securities Act, which includes, but is not limited to, any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or on the internet or broadcast over television, radio or the internet or presented at any seminar or any other general solicitation or general advertisement.

 

(q) No Conflicts.  The execution, delivery and performance by the Purchaser of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby will not (i) result in a violation of the organizational documents of the Purchaser (if the Purchaser is an entity), (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Purchaser is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to the Purchaser.

 

(r) Organization.  If the Purchaser 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 or partnership power and authority to enter into and to consummate the transactions contemplated by the applicable Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.  If the Purchaser is an entity, the execution, delivery and performance by the Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate or, if the Purchaser is not a corporation, such partnership, limited liability company or other applicable like action, on the part of the Purchaser.

 

(s) No Other Representations.  Other than the representations and warranties contained herein, the Purchaser has not received and is not relying on any representation, warranties or assurances as to the Company, its business or its prospects from the Company or any other person or entity.

 

 

[Remainder of Page Intentionally Blank; Agreement Continues on Following Page]

  

-12-

  

6. Purchaser Information.

 

(a) Status as an Accredited Investor.  By initialing the appropriate space(s) below, the Purchaser represents and warrants that he/she/it is an “Accredited Investor” within the meaning of Regulation D of the Securities Act.

 

	
o  a.

	
A director, executive officer or general partner of Company.

	
o  b.

	
A natural person whose individual net worth or joint net worth with spouse at time of purchase exceeds $1,000,000.  (In calculation of net worth, you may include equity in personal property and real estate (excluding your principal residence), cash, short term investments, stocks and securities.  Equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property.)

	
o  c.

	
A natural person who had an individual income in excess of $200,000 in each of two most recent years or joint income with spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching same level of income in current year.

	
o  d.

	
A corporation, limited liability company, partnership, tax-exempt organization (under Section 501(c)(3) of Internal Revenue Code of 1986, as amended) or Massachusetts or similar business trust (i) not formed for specific purpose of acquiring Common Stock and (ii) having total assets in excess of $5,000,000.

	
o  e.

	
An entity which falls within one of following categories of institutional accredited investors, set forth in 501(a) of Regulation D under Securities Act [if you have marked this category, also mark which of following items describes you:]

	  	
o  1.

	
A bank as defined in Section 3(a)(2) of Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of Securities Act whether acting in its individual or a fiduciary capacity.

	  	
o  2.

	
A broker/dealer registered pursuant to Section 15 of Securities Exchange Act of 1934.

	  	
o  3.

	
An insurance company as defined in Section 2(13) of Securities Act.

	  	
o  4.

	
An investment company registered under Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that act.

	  	
o  5.

	
A Small Business Investment Company licensed by U.S. Small Business Administration under Section 301(c) or (d) of Small Business Investment Act of 1958.

	  	
o  6.

	
Any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions for benefit of its employees, if such plan has total assets in excess of $5,000,000.

	  	
o  7.

	
Any private business development company as defined in Section 202(a)(22) of Investment Advisers Act of 1940.

	  	
o  8.

	
An employee benefit plan within meaning of Employee Retirement Income Security Act of 1974, if 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 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.

	  	
o  9.

	
A trust, with total assets in excess of $5,000,000, not formed for specific purpose of acquiring Class A Common Stock offered, whose purchase is directed by sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D.

	
o  f.

	
An entity in which all equity owners are accredited investors as described above.

 

  

-13-

  

 

PURCHASER MUST INDICATE THE APPLICABLE CATEGORY OR CATEGORIES BY INITIALING EACH APPLICABLE SPACE ABOVE; IF JOINT INVESTORS, BOTH PARTIES MUST INITIAL.

 

(b) Subscription Information.  Please complete the following information.

Requested Subscription Amount: $_______________

(subject to Company acceptance)

 

Name of Purchaser as it is to appear on the Senior Secured Convertible Promissory Note and Warrant

 

Indicate ownership as:

 

____ (a)                       Individual

____ (b)                       Community Property

____ (c)                       Joint Tenants with Right of Survivorship                                                                           ) All parties

____ (d)                      Tenants in Common                                                                           ) must sign

____ (e)                       Corporate

____ (f)                        Partnership

____ (g)                       Trust

	
____________________________________

Address of Residence

(or Business, if not an individual)

 

	
__________________________________

Address for Sending Notices

(if different)

	
__________________________________

City, State and Zip Code

	
__________________________________

City, State and Zip Code

 

	
__________________________________

Telephone

	
__________________________________

Telephone

 

	
__________________________________

State of Residence

(or State of Organization, if an entity)

 

	
__________________________________

State of Residence

(or State of Organization, if an entity)

	
__________________________________

SSN/TIN

	
__________________________________

SSN/TIN

 

	
__________________________________

E-mail

 

 

	
__________________________________

E-mail

 

 [Remainder of Page Intentionally Left Blank; Agreement Continues on Following Page]

 

  

-14-

  

 

7. Covenants.

 

(a)           In addition to the other agreements and covenants set forth herein, as long as a Note (or any Subsequent Note) is outstanding, without the consent of a majority in interest of the Purchasers, the Company will not, and will not permit any of its subsidiaries to, directly or indirectly, to undertake the following:

 

(i)           The Company will not enter into any equity line of credit or similar agreement, nor issue nor agree to issue any floating or Variable Rate Securities nor any of the foregoing or equity with price reset rights.  For purposes hereof, “Equity Line of Credit” shall include any transaction involving a written agreement between the Company and an investor or underwriter whereby the Company has the right to “put” its securities to the investor or underwriter over an agreed period of time and at an agreed price or price formula, and “Variable Rate Securities” shall include: (A) any debt or equity securities which are convertible into, exercisable or exchangeable for, or carry the right to receive additional shares of Common Stock or with a fixed conversion, exercise or exchange price that is subject to being reset at some future date at any time after the initial issuance of such debt or equity security, and (B) any amortizing convertible security which amortizes prior to its maturity date, where the Company is required or has the option to (or any investor in such transaction has the option to require the Company to) make such amortization payments in shares of Common Stock.

 

(ii)           The Company will not enter into an agreement to issue, nor will the Company issue, any equity, convertible debt or other securities convertible into Common Stock or other equity of the Company nor modify any of the foregoing which may be outstanding.

 

(b)           In addition to the other agreements and covenants set forth herein, the Company agrees to the following:

 

(i)           All promissory notes outstanding on the IPO closing date, other than the Notes issued in conjunction with this Offering or any Second Note Offering, will be converted into Common Stock at the IPO Price on the IPO closing date.

 

(ii)           The Company will use the net proceeds from the Offering for the following purposes: (A) approximately $350,000 will be used for accounts payables; (B) approximately  $275,000 will be used for payroll and (C) approximately $125,000 will be used for other expenses.

 

(iii)           The Company will retain the services of a PCAOB registered auditor prior to an IPO and such auditor will perform and complete the audits of the financial statements necessary to meet SEC filing and the listing requirements of NASDAQ or AMEX exchanges.

 

(iv)           The Company will have a capital structure acceptable to the Placement Agent and, as noted above, will cause the conversion of all promissory notes and preferred shares outstanding prior to this Offering (including securities owned by TETF) to Common Stock at the time of an IPO.  The promissory notes will convert at the IPO Price according to their terms and the TETF owned securities at the IPO Price less their contractual discount.  All rights attached shall be extinguished.  Existing warrant holders will continue to maintain the existing warrants under the terms of the warrant agreement as issued.

(v)           Within 90 days of the Closing Date, the Company's Board of Directors shall be composed of five members with three independent directors mutually acceptable to the Company and the Placement Agent.

(vi)           The Company and the Placement Agent will agree to an intellectual property strategy, which the Company will implement.

(vii)           The Company will institute an employee stock option or equity incentive plan acceptable to the Placement Agent.

  

-15-

  

(viii)           In addition to the shares of Common Stock that will be locked up in accordance with Section 8 below, the shares of Common Stock or securities convertible into or exercisable for shares of Common Stock which are held by (A) all officers, directors and employees of the Company, (B) 5% or greater holders as determined pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended, (C) merger participants, if any and (D) the Placement Agent and IP Development Company will be locked up until the later of (x) 12 months following the date of the final prospectus for the IPO and (y) the listing of the Company's Common Stock on an exchange, which may include a listing on any listing level of Nasdaq.

8.           Market Stand-Off; Purchaser Distribution.

 

(a)           Lock-Up.  In connection with the initial underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, Purchaser shall not, without the prior written consent of the Company’s managing underwriter, (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are then owned by the Purchaser or are thereafter acquired), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of stock or such other securities, in cash or otherwise.  Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters.  In no event, however, shall such period exceed 180 days or such longer period requested by the underwriters to comply with regulatory restrictions on the publication of research reports (including, without limitation, NASD Rule 2711).  In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities that are by reason of such transaction distributed with respect to any Company Common Stock subject to the Market Stand-Off, or into which such Company Common Stock thereby becomes convertible, shall immediately be subject to the Market Stand-Off.  To enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Securities until the end of the applicable stand-off period.  This Section 8(a) shall not apply to Securities registered in the public offering under the Securities Act, and the Purchaser shall be subject to this Section 8(a) only if the directors and officers of the Company are subject to the lockup arrangements included in Section 7(b)(viii) above.

 

(b)           Securities.  As used in this Section 8 and in Section 9, the term “securities” also refers to the purchased Securities, all securities received in conversion, exercise, or replacement thereof, or in connection with the Securities pursuant to stock dividends or splits, all securities received in replacement of the Securities in a recapitalization, merger, reorganization, exchange or the like, and all new, substituted or additional securities or other properties to which Purchaser is entitled by reason of Purchaser’s ownership of the Securities.

 

9.           Restrictive Legends and Stop-Transfer Orders.

 

(a)           Legends.  The certificate or certificates representing the Securities shall bear the following legends (as well as any legends required by applicable state corporate law and the Securities Laws):

 

	
(i)  

	
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.  NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (OR OTHER EVIDENCE) IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.

 

  

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(ii)  

	
THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A SECURITIES PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE SECURITY HOLDER DATED ____________, 2012, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

 

	
(iii)  

	
Any legend required to be placed thereon by any appropriate securities commissioner.

 

(b)           Stop-Transfer Notices.  The Purchaser agrees that, to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

 

(c)           Refusal to Transfer.  The Company shall not be required (i) to transfer on its books any Securities that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Securities or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Securities shall have been so transferred.

 

(d)           Removal of Legend.  The Securities held by Purchaser will no longer be subject to the legend referred to in Section 9(a)(ii) following the expiration or termination of the lock-up provisions of Section 8 (and of any agreement entered pursuant to Section 8).  After such time, and upon Purchaser's request, a new certificate or certificates representing the Securities shall be issued without the legend referred to in Section 9(a)(ii), and delivered to Purchaser.  The Company will bear any cost or expense related to removing the legend.

 

10.           Conditions to Closing.

 

(a)           Conditions to the Company’s Obligation to Sell.  The obligation of the Company hereunder to issue and sell the Securities to the Purchaser is subject to the satisfaction, at or before the applicable Closing Date of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion:

 

(i)           The Purchaser shall have complied with Section 3(a);

 

(ii)           The representations and warranties of the Purchaser shall be true and correct in all material respects; and

 

(iii)           No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

(b)           Conditions to Each Purchaser’s Obligation to Purchase.  The obligation of the Purchaser hereunder to purchase the Securities is subject to the satisfaction, at or before the applicable Closing Date of each of the following conditions, provided that these conditions are for the Purchaser’s sole benefit and may be waived by the Purchaser at any time in his/her/its sole discretion:

 

(i)           The Company shall have complied with Section 3(c);

 

(ii)           The representations and warranties of the Company shall be true and correct as of the applicable Closing Date, and the Company shall have performed, satisfied and complied with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the applicable Closing Date.  The Purchaser shall have received a certificate or certificates, executed by the Chief Executive Officer of the Company, dated as of the applicable Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Purchaser including, but not limited to, certificates with respect to the Company’s charter, by-laws and Board of Directors’ resolutions relating to the transactions contemplated hereby;

  

-17-

  

(iii)           No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement;

 

(iv)           No event shall have occurred which would reasonably be expected to have a Material Adverse Effect;

 

(v)           The Company shall have caused its legal counsel, Richardson & Patel LLP to deliver a legal opinion addressed to the Purchasers and to the Placement Agent with respect to the matters set forth on Exhibit H attached hereto; and

 

(vi)           The Company shall have provided such other documents as the Placement Agent may reasonably request, each in form and substance satisfactory to the Placement Agent.

 

11.           Public Company Status; Registration Rights.  The Company will use reasonable best efforts to become a publicly traded and publicly reporting company under both the Securities Act and the Securities Exchange Act of 1934 and the Purchaser shall have certain registration rights, all in accordance with the Registration Rights Agreement of even date herewith.

 

12.           Miscellaneous.

 

(a)           Governing Law.  This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of New York, without giving effect to principles of conflicts of law.

 

(b)           Entire Agreement; Enforcement of Rights.  This Agreement together with the exhibits and schedules attached hereto, set forth the entire agreement and understanding of the parties relating to the subject matter herein and supersedes any and all prior agreements or discussions between them, including any term sheet, letter of intent or other document executed by the parties prior to the date hereof relating to such subject matter.  No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement; provided, however, that the Purchaser acknowledges and agrees that the Placement Agent may, in its sole discretion acting by prior written consent on behalf of Purchaser, waive any covenant of the Company described in Section 7.  The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.

 

(c)           Severability.  If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith.  If the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms.

 

(d)           Construction.  This Agreement is the result of negotiations between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto.

 

(e)           Notices.  Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient when delivered personally (including two business days after deposit with a reputable overnight courier service, properly addressed to the party to receive the same) or sent by fax or 48 hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth herein or as subsequently modified by written notice.

 

(f)           Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

 

  

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(g)           Successors and Assigns.  The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable by the Company's successors and assigns.  The covenants and obligations of the Company hereunder shall inure to the benefit of, and be enforceable by the Purchaser against the Company, its successors and assigns, including any entity into which the Company is merged.  The rights and obligations of Purchasers under this Agreement may only be assigned with the prior written consent of the Company.

 

(h)           Third Party Beneficiary.  This Agreement is intended for the benefit of the undersigned parties and their respective permitted successors and assigns, and the Placement Agent, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

 

(i)           Further Assurances.  Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

(j)           Expenses.  Each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of the Agreement; provided, however, that the Company shall, on the Closing Date, reimburse the fees and expenses of counsel to the Placement Agent.

 

(k)           Survival.  The representations, warranties, covenants and agreements made herein shall survive the closing of the transaction contemplated hereby.  All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument.  The representations, warranties, covenants and obligations of the Company, and the rights and remedies that may be exercised by the Purchaser, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or knowledge of, any of the Purchasers or any of their representatives.

 

(l)           Attorneys’ Fees.  In the event that any suit or action is instituted under or in relation to this Agreement, including without limitation to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals.

 

(m)           Remedies.  All remedies afforded to any party by law or contract, shall be cumulative and not alternative and are in addition to all other rights and remedies a party may have, including any right to equitable relief and any right to sue for damages as a result of a breach of this Agreement.  Without limiting the foregoing, no exercise of a remedy shall be deemed an election excluding any other remedy.

 

(n)           Consent of Spouse.  If the Purchaser is married on the date of this Agreement, such Purchaser’s spouse shall execute and deliver to the Company the Spousal Consent, effective on the date hereof.  Notwithstanding the execution and delivery thereof, such consent shall not be deemed to confer or convey to the spouse any rights in such Purchaser’s Securities that do not otherwise exist by operation of law or the agreement of the parties.  If any Purchaser should marry or remarry subsequent to the date of this Agreement, such Purchaser shall within 30 days thereafter obtain his/her new spouse’s acknowledgement of and consent to the existence and binding effect of all restrictions contained in this Agreement by causing such spouse to execute and deliver a Consent of Spouse acknowledging the restrictions and obligations contained in this Agreement and agreeing and consenting to the same.

 

[Remainder of Page Intentionally Left Blank]

  

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The Purchaser, by his or her signature below, or by that of its authorized representative, confirms that Purchaser has carefully reviewed and understands this Agreement.

 

IN WITNESS WHEREOF, the Purchaser has executed this Agreement as of August __, 2012.

 

	
PURCHASER (if individual):

 

 

 

Signature

 

 

Name (type or print)

	
PURCHASER (if entity):

 

 

 

Name of Entity

 

By:                                                           

 

	
 

 

Signature of Co-Signer (if any)

 

 

Name of Co-Signer (type or print)

	
 

Name:                                                           

 

 

Its:                                                           

	  	  

 

AGREED AND ACCEPTED as of __________, 2012.

 

 

IDEAL POWER CONVERTERS, INC.

 

By: ___________________________________

      Christopher Cobb

      Chief Executive Officer

 

Subscription Amount (as accepted by the Company):

 

$________________________

  

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EXHIBIT A

COMPANY INFORMATION

[see attached]

  

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EXHIBIT B

 

SPOUSAL CONSENT

 

I, ________________________________, spouse of ____________, have read and hereby approve the foregoing Agreement.  In consideration of the Company's granting my spouse the right to purchase the Securities as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or similar interest that I may have in the Securities shall be similarly bound by the Agreement.  I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement.

 

 

Spouse of ___________________________

 

OR

 

I hereby represent and warrant that I am unmarried as of the date of this Agreement.

 

 

Signature

  

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EXHIBIT C

 

FORM OF NOTE

 

 

 

[see attached]

 

  

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THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY OTHER JURISDICTION.  BY ACQUIRING THIS NOTE, THE HOLDER REPRESENTS THAT THE HOLDER WILL NOT SELL OR OTHERWISE DISPOSE OF THIS NOTE WITHOUT REGISTRATION OR COMPLIANCE WITH AN EXEMPTION FROM REGISTRATION UNDER THE AFORESAID ACTS AND THE RULES AND REGULATIONS THEREUNDER.

THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A SECURITIES PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE SECURITY HOLDER DATED ____________, 2012, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

IDEAL POWER CONVERTERS, INC.

SENIOR SECURED CONVERTIBLE PROMISSORY NOTE

	
$___________ 

	
August __, 2012

    FOR VALUE RECEIVED, Ideal Power Converters, Inc. (the “Maker”) hereby promises to pay to the order of __________________ or its successors or assigns (the “Holder”) the principal amount of __________________ Dollars ($________) (the "Principal Amount").  This Senior Secured Convertible Promissory Note shall be referred to herein as the “Note”.

 

    1.      Purpose.  This Note is made and delivered by the Maker to the Holder pursuant to the terms of that certain Securities Purchase Agreement, dated as of August __, 2012 (the “Original Issue Date”), by and among the Maker, the Escrow Agent, the Holder, and the other Purchasers of the Maker’s Notes (the “Purchase Agreement”).  This Note is one of a series of substantially identical Notes issued by the Maker under the Purchase Agreement.  All capitalized terms used and not defined herein shall have the meanings ascribed to them in the Purchase Agreement.

    2.      Interest.  Interest on the Principal Amount from time-to-time remaining unpaid shall accrue from the date of this Note at the higher of: (i) the rate of one percent (1%) per annum, simple interest; or (ii) at the lowest rate that may accrue without causing the imputation of interest under the Internal Revenue Code.  Interest shall be computed on the basis of a 360 day year and a 30 day month.

    3.      Maturity Date.  All amounts payable hereunder shall be due and payable on the earlier to occur of (i) August __, 2013 (the "Calendar Due Date"), (ii) the occurrence of an Event of Default (as defined below) or (iii) the closing of an IPO Financing (as defined below).

    4.      Method of Repayment.

    4.1           Mandatory Conversion Upon Initial Public Offering.  If, prior to the Calendar Due Date, the Maker closes a firm commitment underwritten initial public offering of its common stock that raises at least $10 million (the "IPO Financing"), the amounts payable hereunder shall be repaid with shares of the Maker's Common Stock in accordance with the terms of paragraph 5.1 of this Note.

    4.2           Other Optional Conversions.  At any time prior to a conversion pursuant to paragraph 4.1 above or the Calendar Due Date, including in the event that the Maker consummates a Change of Control, at the option of the Holder all amounts payable under this Note may be converted into shares of the Maker’s Common Stock.  In the event of such conversion, this Note shall be converted into that number of shares of Common Stock determined by dividing (x) Principal Amount and accrued interest by (y) the lower of (i) $3.21 or (ii) 0.70 of the per share consideration paid (A) in the event of a Change of Control or (B) in the most recent Private Equity Financing to occur prior to the Holder's election (as appropriately adjusted to reflect stock dividends, stock splits, combinations, recapitalizations and the like with respect to the Maker’s capital stock after the date hereof).

  

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    4.3           Repayment Election.  If this Note is not repaid prior to the Calendar Due Date in accordance with paragraphs 4.1 or 4.2 above, or if, by the Calendar Due Date this Note is not cancelled and replaced in accordance with the terms of Section 5.8 below, the Holder may elect to be repaid on the Calendar Due Date in one of the following ways: (i) the Holder may elect to receive, and the Maker shall repay, all amounts payable hereunder in a lump sum, in lawful money of the United States, which payment shall be equal to the Principal Amount and all accrued interest or (ii) the Holder may elect to receive the lump sum payment in shares of the Maker's Common Stock in accordance with subparagraph 5.2 below.

    4.4           Prepayment Right.  The Maker has the right to prepay this Note in lawful money of the United States with the consent of the Holder.  If this Note is prepaid in lawful money of the United States prior to an IPO, the payment amount shall equal 110% of the Principal Amount.

    5.      Conversion of Note.  The following provisions shall govern the conversion of any and all amounts due under this Note.

    5.1           Conversion in Conjunction with an IPO Financing.  In the event of an IPO Financing which closes prior to the Calendar Due Date, the Note shall have a conversion price equal to 0.70 times the IPO Price (the "IPO Conversion Price").  The IPO Price means the price per share paid by public investors in the IPO, without regard to any underwriting discount or expense (as appropriately adjusted to reflect stock dividends, stock splits, combinations, recapitalizations and the like with respect to the Maker’s capital stock after the date hereof).

    5.2           Conversion in Conjunction with an Election.  In the event that the Holder elects to receive payment of this Note in shares of the Maker's Common Stock in accordance with subparagraph 4.3(ii) above, the Note shall have a conversion price equal to 0.70 times the price per share paid by investors in the most recent Private Equity Financing to occur prior to the Calendar Due Date, after giving effect to adjustments that reflect stock dividends, stock splits, combinations, recapitalizations and the like with respect to the Maker’s capital stock after the date hereof) (the "Private Financing Conversion Price").

    5.3           Conversion Rate.  The number of shares of Common Stock issuable upon conversion pursuant to subparagraphs 5.1 or 5.2 shall be determined by dividing (x) the Principal Amount and accrued interest (the "Conversion Amount") by (y) the IPO Conversion Price or the Private Financing Conversion Price, as applicable.

 

    5.4           No Fractional Shares.  The Maker shall not issue any fraction of a share of Common Stock upon any conversion.  If the issuance would result in the issuance of a fraction of a share of Common Stock, the Maker shall round up such fraction of a share of Common Stock up to the nearest whole share.  The Maker shall pay any and all transfer, stamp and similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon conversion.

    5.5           Mechanics of Conversion.

       5.5.1           Mandatory Conversion.  The closing of an IPO Financing prior to the Calendar Due Date will be the "Conversion Date".  Within 20 days of the Conversion Date, the Maker shall transmit to the Holder a certificate for the number of shares of Common Stock representing full repayment of the Conversion Amount on the Conversion Date, together with an explanation of the calculation.  Upon receipt of such notice, the Holder shall surrender this Note to a common carrier for delivery to the Maker as soon as practicable on or following such date (or an indemnification undertaking with respect to this Note in the case of its loss, theft or destruction).  The person or persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

  

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       5.5.2           Voluntary Conversion.  If this Note is voluntarily converted pursuant to paragraphs 4.2 or 4.3, the Holder shall give written notice to the Maker notifying the Maker of its election to convert.   Before the Holder shall be entitled to voluntarily convert this Note, the Holder shall surrender this Note at the Maker’s principal executive office, or, if this Note has been lost, stolen, destroyed or mutilated, then, in the case of loss, theft or destruction, the Holder shall deliver an indemnity agreement reasonably satisfactory in form and substance to the Maker (without the requirement of a bond) or, in the case of mutilation, the Holder shall surrender and cancel this Note.  The Maker shall, as soon as practicable thereafter, issue and deliver to such Holder at such principal executive office a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled upon such conversion (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to the Maker), together with a replacement Note (if any principal amount or interest is not converted).  Such conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of this Note or the delivery of an indemnification agreement (or such later date requested by the Holder or such earlier date agreed to by the Maker and the Holder).  The person or persons entitled to receive securities issuable upon such conversion shall be treated for all purposes as the record holder or holders of such securities on such date.

 

    5.6           Reservation of Common Stock.  Until the Notes are paid in full, the Maker shall at all times keep reserved for issuance under this Note a number of shares of Common Stock as shall be necessary to satisfy the Maker’s obligation to issue shares of Common Stock hereunder (without regard to any limitation otherwise contained herein with respect to the number of shares of Common Stock that may be acquirable upon exercise of this Note).  If, notwithstanding the foregoing, and not in limitation thereof, at any time while any of the Notes remain outstanding the Maker does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon exercise of the Notes at least a number of shares of Common Stock equal to the number of shares of Common Stock as shall from time to time be necessary to effect the exercise of the Notes then outstanding (the “Required Reserve Amount”) (an “Authorized Share Failure”), then the Maker shall immediately take all action necessary to increase the Maker’s authorized shares of Common Stock to an amount sufficient to allow the Maker to maintain the Required Reserve Amount for all the Notes then outstanding.  Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than 60 days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its shareholders for the approval of an increase in the number of authorized shares of Common Stock.  In connection with such meeting, the Maker shall provide each shareholder with a proxy statement and shall use its best efforts to solicit its shareholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the shareholders that they approve such proposal.

 

    5.7           Adjustments.  The Conversion Price and number and kind of shares or other securities to be issued upon conversion determined pursuant to Section 5 hereof, shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:

 

       5.7.1           Merger, Sale of Assets, etc.  If the Maker at any time shall consolidate with or merge into or sell or convey all or substantially all its assets to any other corporation, this Note, as to the unpaid Principal Amount thereof and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase such number and kind of shares or other securities and property as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance, upon or with respect to the securities subject to the conversion or purchase right immediately prior to such consolidation, merger, sale or conveyance.  The foregoing provision shall similarly apply to successive transactions of a similar nature by any such successor or purchaser.  Without limiting the generality of the foregoing, the anti-dilution provisions of this Section shall apply to such securities of such successor or purchaser after any such consolidation, merger, sale or conveyance.

 

       5.7.2                 Reclassification, etc.  If the Maker at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes that may be issued or outstanding, this Note, as to the unpaid principal portion thereof and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.

  

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       5.7.3           Notice of Adjustment.  Whenever the applicable Conversion Price is adjusted pursuant to this Section 5.7, the Maker shall promptly mail to the Holder a notice setting forth the applicable Conversion Price after such adjustment and setting forth a statement of the facts requiring such adjustment.

 

    5.8      Exchange of Note in the Event of Additional Loans.  It is anticipated that the Maker will raise up to an additional $4.25 million by selling secured convertible promissory notes (the "Second Note Offering").  By accepting this Note and executing the Purchase Agreement and the other Transaction Documents, the Holder agrees that if the Second Note Offering is consummated, the Holder will, if requested, surrender this Note to the Maker and this Note shall be cancelled and replaced with the form of note issued to the investors in the Second Note Offering.

 

    6.      Registration; Book-Entry. The Company shall maintain a register (the “Register”) for the recordation of the names and addresses of the holders of each Note and the Principal Amount of the Notes held by such holders (the “Registered Notes”).  The entries in the Register shall be conclusive and binding for all purposes absent manifest error.  The Maker and the holders of the Notes shall treat each person whose name is recorded in the Register as the owner of a Note for all purposes, including, without limitation, the right to receive payments of the Principal Amount and interest, if any, hereunder, notwithstanding notice to the contrary.  A Registered Note may be assigned or sold in whole or in part only in accordance with the terms of paragraph 12.3 of this Note and by registration of such assignment or sale on the Register.

 

    7.      Defaults; Remedies.

 

    7.1           Events of Default.  The occurrence of any one or more of the following events shall constitute an event of default hereunder (each, an “Event of Default”):

 

       7.1.1           The Maker fails to make any payment when due under this Note;

       7.1.2           The Maker fails to observe and perform any of its covenants or agreements on its part to be observed or performed under the Purchase Agreement or any other Transaction Document, and such failure shall continue for more than 30 days after notice of such failure has been delivered to the Maker;

 

       7.1.3           Any representation or warranty made by the Maker in the Purchase Agreement or any other Transaction Document is untrue in any material respect as of the date of such representation or warranty except, in the case of a breach of a covenant which is curable, only if such breach continues for a period of at least 10 consecutive Business Days;

       7.1.4           The Maker admits in writing its inability to pay its debts generally as they become due, files a petition in bankruptcy or a petition to take advantage of any insolvency act, makes an assignment for the benefit of its creditors, consents to the appointment of a receiver of itself or of the whole or any substantial part of its property, on a petition in bankruptcy filed against it be adjudicated a bankrupt, or files a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any State thereof;

 

       7.1.5           A court of competent jurisdiction enters an order, judgment, or decree appointing, without the consent of the Maker, a receiver of the Maker or of the whole or any substantial part of its property, or approving a petition filed against the Maker seeking reorganization or arrangement of the Maker under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any State thereof, and such order, judgment, or decree shall not be vacated or set aside or stayed within 60 days from the date of entry thereof;

       7.1.6           Any court of competent jurisdiction assumes custody or control of the Maker or of the whole or any substantial part of its property under the provisions of any other law for the relief or aid of debtors, and such custody or control is not be terminated or stayed within 60 days from the date of assumption of such custody or control;

  

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       7.1.7.           The Notes shall cease to be, or be asserted by the Maker not to be, a legal, valid and binding obligation of the Maker enforceable in accordance with their terms;

       7.1.8           A judgment or judgments for the payment of money aggregating in excess of $75,000 are rendered against the Maker which judgments are not, within 60 days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the $75,000 amount set forth above so long as the Maker provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance or an indemnity and the Maker will receive the proceeds of such insurance or indemnity within 30 days of the issuance of such judgment;

       7.1.9           Any Event of Default occurs with respect to any of the Notes;

       7.1.10           A default by the Maker under any one or more obligations in an aggregate monetary amount in excess of $50,000 for more than 30 days after the due date, unless the Maker is contesting the validity of such obligation in good faith and has segregated cash funds equal to not less than one-half of the disputed amount;

       7.1.11           A default by the Maker under the Texas Emerging Technology Fund Award and Security Agreement dated October 1, 2010 or the Investment Unit dated October 1, 2010, each between the Maker and the Office of the Governor Economic Development and Tourism of the State of Texas, which default continues for more than 30 days after notice of such default has been delivered to the Maker;

       7.1.12           The Maker fails to deliver the shares of Common Stock to the Holder pursuant to and in the form required by this Note or, if required, a replacement Note more than five Business Days after the required delivery date of such Common Stock or Note;

       7.1.13           The Maker fails to have reserved for issuance upon conversion of the Note the amount of Common stock as set forth in this Note; or

       7.1.14           The security interest created in the Collateral, as defined in the Security Agreement, is not a perfected first lien.

    7.2           Notice by the Maker.  The Maker shall notify the Holder in writing as soon as reasonably practicable but in no event more 5 days after the occurrence of any Event of Default of which the Maker acquires knowledge.

 

    7.3           Remedies.  Upon the occurrence of any Event of Default, all other sums due and payable to the Holder under this Note shall, at the option of the Holder, become due and payable immediately without presentment, demand, notice of nonpayment, protest, notice of protest, or other notice of dishonor, all of which are hereby expressly waived by the Maker.  Any payment under this Note (i) not paid within 10 days following the Calendar Due Date or (ii) due immediately following acceleration by the Holder shall bear interest at the rate of 15% from the date of the Note until paid, subject to paragraph 7.5.  To the extent permitted by law, the Maker waives the right to and stay of execution and the benefit of all exemption laws now or hereafter in effect.  In addition to the foregoing, upon the occurrence of any Event of Default, the Holder may forthwith exercise singly, concurrently, successively, or otherwise any and all rights and remedies available to the Holder by law, equity, or otherwise.

 

  

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    7.4           Remedies Cumulative, etc.  No right or remedy conferred upon or reserved to the Holder under this Note, or now or hereafter existing at law or in equity or by statute or other legislative enactment, is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and concurrent, and shall be in addition to every other such right or remedy, and may be pursued singly, concurrently, successively, or otherwise, at the sole discretion of the Holder, and shall not be exhausted by any one exercise thereof but may be exercised as often as occasion therefor shall occur.  No act of the Holder shall be deemed or construed as an election to proceed under any one such right or remedy to the exclusion of any other such right or remedy; furthermore, each such right or remedy of the Holder shall be separate, distinct, and cumulative and none shall be given effect to the exclusion of any other.

    7.5           Usury Compliance.  All agreements between the Maker and the Holder are expressly limited, so that in no event or contingency whatsoever, whether by reason of the consideration given with respect to this Note, the acceleration of maturity of the unpaid Principal Amount and interest thereon, or otherwise, shall the amount paid or agreed to be paid to the Holder for the use, forbearance, or detention of the indebtedness which is the subject of this Note exceed the highest lawful rate permissible under the applicable usury laws.  If, under any circumstances whatsoever, fulfillment of any provision of this Note shall involve transcending the highest interest rate permitted by law which a court of competent jurisdiction deems applicable, then the obligations to be fulfilled shall be reduced to such maximum rate, and if, under any circumstances whatsoever, the Holder shall ever receive as interest an amount that exceeds the highest lawful rate, the amount that would be excessive interest shall be applied to the reduction of the unpaid Principal Amount under this Note and not to the payment of interest, or, if such excessive interest exceeds the unpaid balance of the Principal Amount under this Note, such excess shall be refunded to the Maker.  This provision shall control every other provision of all agreements between the Maker and the Holder.

    8.      Replacement of Note.  Upon receipt by the Maker of evidence satisfactory to it of the loss, theft, destruction, or mutilation of this Note and (in case of loss, theft, or destruction) of indemnity satisfactory to it, and upon surrender and cancellation of this Note, if mutilated, the Maker will make and deliver a new Note of like tenor in lieu of this Note.

    9.           Intentionally omitted.

    10.           Maker's Covenants.

    10.1           Rank.  All payments due under this Note (a) shall rank pari passu with all other Notes and (b) shall be senior to all other indebtedness of the Maker.

    10.2           Security.  This Note and the other Notes are secured to the extent and in the manner set forth in the Security Agreement of even date herewith.  However, it is anticipated that the Maker may raise up to a total of $4.25 million in additional funds through subsequently issued senior secured convertible promissory notes (the "Subsequent Notes").  By accepting this Note the Holder agrees that holders of the Subsequent Notes will have security interests identical to and pari passu with those granted to the Holder.

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

    10.4           Restricted Payments.  The Maker shall not, and the Maker shall not permit any of its subsidiaries (is any) 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, 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.

 

    10.5           Valid Issuance of Securities.  The Maker covenants that the securities issuable upon the conversion of this Note will, upon conversion of this Note, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof.

 

    10.6           Timely Notice.  The Maker shall give the Holder at least 10 days’ advance written notice of (i) a proposed financing which would permit the Holder to convert the Principal Amount, accrued interest, and any other amount due under this Note in accordance with paragraph 4.3 or (ii) a proposed Change of Control, provided that the Holder agrees to be bound by any applicable confidentiality agreement or agreements as the Maker shall deem necessary or appropriate.

 

    11.      Certain Definitions.

 

    11.1           "Business Days" shall mean any day that is not a Saturday, Sunday or a federal holiday.

 

    11.2           “Change of Control” means any liquidation, dissolution or winding up of the Maker, either voluntary or involuntary, and shall be deemed to be occasioned by, or to include, (i) the acquisition of the Maker by another entity by means of any transaction or series of related transactions (including, without limitation, any stock acquisition, reorganization, merger or consolidation) unless the Maker’s shareholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Maker’s acquisition or sale or otherwise) hold at least a majority of the voting power of the surviving or acquiring entity, or its direct or indirect parent entity (except that any bona fide equity or debt financing transaction for capital raising purposes shall not be deemed a Change of Control for this purpose) or (ii) a sale, exclusive license or other disposition of all or substantially all of the assets of the Maker, including a sale, exclusive license or other disposition of all or substantially all of the assets of the Maker’s subsidiaries, if such assets constitute substantially all of the assets of the Maker and such subsidiaries taken as a whole.

 

    11.3           "Permitted Liens" shall have the meaning included in the Security Agreement of even date herewith.

 

  

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    12.1                 Amendments, Waivers, and Consents.

 

    12.1                 Amendment and Waiver by the Holders.  The Notes, including this Note, may be amended, modified, or supplemented, and waivers or consents to departures from the provisions of the Notes may be given, if the Maker and holders of an aggregate majority of the Principal Amount of the Notes then outstanding, consent to the amendment; provided, however, that no term of this Note may be amended or waived in such a way as to adversely affect the Holder disproportionately to the holder or holders of any other Notes without the written consent of the Holder and neither the principal balance or interest rate of the Note may be amended or modified without the consent of the Holder.  Such consent may not be effected orally, but only by a signed statement in writing.  Any such amendment or waiver shall apply to and be binding upon the Holder of this Note, upon each future holder of this Note, and upon the Maker, whether or not this Note shall have been marked to indicate such amendment or waiver.  No such amendment or waiver shall extend to or affect any obligation not expressly amended or waived or impair any right consequent thereon.

 

    12.2                      Severability.  In the event that for any reason one or more of the provisions of this Note or their application to any person or circumstance shall be held to be invalid, illegal, or unenforceable in any respect or to any extent, such provision shall nevertheless remain valid, legal, and enforceable in all such other respects and to such extent as may be permissible.  In addition, any such invalidity, illegality, or unenforceability shall not affect any other provisions of this Note, but this Note shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein.

    12.3                      Assignment; Binding Effect.  The Maker may not assign this Note without the prior written consent of the Holder.  Any attempted assignment in violation of this Section 12.3 shall be null and void.  Subject to the foregoing, this Note inures to the benefit of the Holder, its successors and assigns, and binds the Maker, and their respective successors and permitted assigns, and the words “Holder” and “Maker” whenever occurring herein shall be deemed and construed to include such respective successors and assigns.

    12.4                      Notice Generally.  All notices required to be given to any of the parties hereunder shall be given as set forth in the Purchase Agreement.

    12.5                      Governing Law; Jurisdiction; Jury Trial. 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.  The Maker hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.  The Maker hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address it set forth on the signature page hereto and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  In the event that any provision of this Note 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 this Note.  Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Maker in any other jurisdiction to collect on the Maker’s obligations to the Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other court ruling in favor of the Holder.  THE MAKER HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.  This Note shall be deemed an unconditional obligation of Maker for the payment of money and, without limitation to any other remedies of Holder, may be enforced against Maker by summary proceeding pursuant to New York Civil Procedure Law and Rules Section 3213 or any similar rule or statute in the jurisdiction where enforcement is sought.  For purposes of such rule or statute, any other document or agreement to which Holder and Maker are parties or which Maker delivered to Holder, which may be convenient or necessary to determine Holder’s rights hereunder or Maker’s obligations to Holder are deemed a part of this Note, whether or not such other document or agreement was delivered together herewith or was executed apart from this Note.

 

  

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    12.6                      Section Headings, Construction.  The headings of paragraphs in this Note are provided for convenience only and will not affect its construction or interpretation.  All words used in this Note will be construed to be of such gender or number as the circumstances require.  Unless otherwise expressly provided, the words “hereof” and “hereunder” and similar references refer to this Note in its entirety and not to any specific section or subsection hereof.

    12.7                      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 Maker or other proceedings affecting the Maker's creditors’ rights and involving a claim under this Note, then the Maker 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, attorneys’ fees and disbursements.

    12.8                      Delays or Omissions.  No delay or omission to exercise any right, power, or remedy accruing to the Holder, upon any breach or default of the Maker under this Note shall impair any such right, power, or remedy of the Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring.  Any waiver, permit, consent, or approval of any kind or character on the part of the Holder of any breach or default under this Note or any waiver on the part of the Holder of any provisions or conditions of this Note must be made in writing and shall be effective only to the extent specifically set forth in such writing.  All remedies, either under this Note or by law or otherwise afforded to the Holders, shall be cumulative and not alternative.

[EXECUTION PAGE FOLLOWS]

  

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    IN WITNESS WHEREOF, Ideal Power Converters, Inc. has caused this Senior Secured Convertible Promissory Note to be executed and delivered on the date set forth above on the cover page of this Note.

IDEAL POWER CONVERTERS, INC.

By:                                                                

     Christopher Cobb, Chief Executive Officer

By:                                                                

     Charles Detarr, Chief Financial Officer

  

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EXHIBIT D

 

FORM OF WARRANT

 

 

 

[see attached]

  

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No.__ Issue Date:August____, 2012

 

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE.  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 AND/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 OF SUCH ACT.

THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF A SECURITIES PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE SECURITY HOLDER DATED ____________, 2012, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

 

IDEAL POWER CONVERTERS, INC.

 

 

STOCK PURCHASE WARRANT

 

    THIS CERTIFIES that __________________ (the “Holder”) is entitled, upon the terms and subject to the conditions hereinafter set forth in this Warrant (this “Warrant”), at any time on or after (except as otherwise limited below) the date of the applicable event specified below and on or prior to the Expiration Date, but not thereafter, to subscribe for and to purchase from Ideal Power Converters, Inc., a Texas corporation (the “Company”), shares of the Company's common stock, $0.001 par value (the “Common Stock”).

 

    This Warrant is issued pursuant to a Securities Purchase Agreement and in connection with the issuance to the Holder of a Convertible Promissory Note (the “Note”) of even date herewith, and is one of the Warrants (collectively, the “Warrants”) being issued in connection with the issuance of a series of Senior Secured Convertible Promissory Notes of like tenor (collectively, “Notes”) being issued by the Company to raise interim financing of up to $750,000 (the “Offering”).  Capitalized terms used herein, but not otherwise defined, shall have the meanings ascribed to such terms in the Securities Purchase Agreement.

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

    1      Certain Definitions.

 

    1.1           “Calendar Due Date” shall be a date that is 12 months from the closing date of the Offering.

 

    1.2           “Change of Control”meansany liquidation, dissolution or winding up of the Company, either voluntary or involuntary, and shall be deemed to be occasioned by, or to include, (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any stock acquisition, reorganization, merger or consolidation) unless the Company’s shareholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Company’s acquisition or sale or otherwise) hold at least a majority of the voting power of the surviving or acquiring entity, or its direct or indirect parent entity (except that the sale by the Company of shares of its capital stock to investors in bona fide equity financing transactions shall not be deemed a Change of Control for this purpose) or (ii) a sale, exclusive license or other disposition of all or substantially all of the assets of the Company, including a sale, exclusive license or other disposition of all or substantially all of the assets of the Company’s subsidiaries, if such assets constitute substantially all of the assets of the Company and such subsidiaries taken as a whole.

  

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    1.3      “Exercise Price” is defined in Section 2 below.

 

    1.4      “Expiration Date” means, unless earlier terminated pursuant to Section 9 hereof, that date that is seven years after the issue date set forth above, provided, however, if the Company closes the IPO after the fifth anniversary date of the issue date but prior to the Expiration Date, then the Expiration Date shall be extended for an additional five years following the close of the IPO.

 

    1.5           “IPO” means a firm commitment underwritten initial public offering of the Company’s Common Stock pursuant to a registration statement declared effective by the Securities and Exchange Commission which closes before the Calendar Due Date and results in gross proceeds to the Company of at least $10 million.

 

    1.6            “IPO Price” means the price per share of the Company's Common Stock offered to public investors in an IPO, without regard to any underwriting discount or expense (as appropriately adjusted to reflect stock dividends, stock splits, combinations, recapitalizations and the like with respect to the Company’s capital stock after the date hereof).

 

    1.7           “Private Equity Financing” means a privately marketed equity financing resulting in gross proceeds in excess of $250,000 which closes before the Calendar Due Date; provided, however, that none of the following issuances of securities shall constitute a “Private Equity Financing”: (i) the Offering and any subsequent offerings of senior secured convertible promissory notes or any other debt offering; (ii) securities issued without consideration in connection with any stock split or stock dividend on, the Company’s Common Stock; (iii) securities issued to the Company’s employees, officers, directors, consultants, advisors or service providers pursuant to any plan, agreement or similar arrangement unanimously approved by the Company’s board of directors; (iv) securities issued to banks or equipment lessors; (v) securities issued in connection with sponsored research, collaboration, technology license, development, original equipment manufacturing (OEM), marketing or other similar agreements or strategic partnerships; (vi) securities issued in connection with a bona fide business acquisition of or by the Company (whether by merger, consolidation, sale of assets, sale or exchange of stock or otherwise); (vii) the Investment Unit dated October 1, 2010, issued by the Company to the Office of the Governor Economic Development and Tourism, and any securities relating to the conversion or exercise thereof; or (viii) any right, option or warrant to acquire any security convertible into or exercisable for the securities listed in clauses (i) through (vii) above.

 

    1.8      “Private Equity Financing Price” means the price per share of Common Stock paid by investors in the Private Equity Financing, which shall be determined by dividing (a) the total consideration received or to be received by each investor assuming exercise in full of all warrants or similar securities, divided by (b) the total number of shares of Common Stock acquirable either directly or by conversion or exercise of instruments, by the Holder, on a fully diluted basis.

 

    1.9           “Shares” means the shares of Common Stock issuable under this Warrant, computed in accordance with Section 2 below.

    2.      Number of Shares and Exercise Price.

    The number of shares of Common Stock (the “Shares”) covered by this Warrant and the per share Exercise Price shall be determined as follows (subject to appropriate adjustments pursuant to Section 10):

       (i)           in the event of an IPO that occurs prior to the Calendar Due Date, the principal amount of the Holder's Note divided by .70 of the IPO Price shall determine the number of shares covered by the Warrant while the per-share exercise price shall be equal to 0.70 times the IPO Price; or

 

       (ii)           in the event of a Private Equity Financing that occurs prior to the Calendar Due Date, the principal amount of the Holder's Note divided by 0.70 of the Private Equity Financing Price shall determine the number of shares covered by the Warrant, with a per-share exercise price equal to 0.70 times the Private Equity Financing Price; provided, however, that (A) if the Company undertakes first, a Private Equity Financing and secondly, an IPO prior to the Calendar Due Date and (B) the Private Equity Financing Price is higher than the IPO Price, then the number of shares of Common Stock covered by the Warrant and the per share exercise price shall be adjusted to equal the number of shares of Common Stock and the exercise price calculated in accordance with subsection (i) above; or

  

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       (iii)           If the Company does not undertake either a Private Equity Financing or an IPO prior to the Calendar Due Date, then the number of Shares covered by this Warrant shall equal the original principal amount of the Holder’s Note divided by $3.32, and the exercise price shall be $3.32 per share.

 

    3.      Exercise of Warrant.

    3.1           Unless earlier terminated pursuant to Section 9 hereof, the purchase rights represented by this Warrant are exercisable by the Holder, in whole or in part, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly executed at the Company’s principal executive office (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), and upon payment of the aggregate Exercise Price of the Shares thereby purchased (by cash or by check or bank draft payable to the order of the Company); whereupon the Holder shall be entitled to receive a certificate for the number of Shares so purchased. The Company agrees that if at the time of the surrender of this Warrant and purchase of the Shares, the Holder shall be entitled to exercise this Warrant, the Shares so purchased shall be issued to the Holder as the record owner of such Shares as of the close of business on the date on which this Warrant shall have been exercised as aforesaid or on such later date requested by the Holder or on such earlier date agreed to by the Holder and the Company.

 

    3.2           Unless earlier terminated pursuant to Section 9 hereof, in lieu of exercising this Warrant by payment of cash or check or bank draft payable to the order of the Company pursuant to subsection 3.1 above, the Holder may elect to receive Shares equal to the value of this Warrant (or the portion thereof being exercised), at any time after the date hereof and before the close of business on the Expiration Date, by surrender of this Warrant at the principal executive office of the Company, together with the Notice of Cashless Exercise annexed hereto, in which event the Company will issue to the Holder Shares in accordance with the following formula:

 

Y(A-B)

X     =          A

	
Where,

	
X

	
=

	
The number of Shares to be issued to Holder;

	  	
Y

	
=

	
The number of Shares for which the Warrant is being exercised;

	  	
A

	
=

	
The fair market value of one Share; and

	  	
B

	
=

	
The Exercise Price.

 

       (a)           For purposes of this subsection 3.2, the fair market value of a Share is defined as follows:

 

       (i)           if the Holder exercises within three days of the closing of the IPO, then the fair market value shall be the IPO Price;

 

       (ii)           if the Holder exercises after receipt of a notice of a Change of Control but before a Change of Control, then the fair market value shall be the value to be received in such Change of Control by the holders of the Company's Common Stock;

 

       (iii)           if the exercise occurs more than three days after the closing of the IPO, and:

 

          (1)           if the Common Stock is traded on a securities exchange or the Nasdaq Stock Market, the fair market value shall be the last sale price on the trading day immediately prior to the Company's receipt of the Notice of Conversion or, if no sale of the Company's Common Stock took place on the trading day immediately prior to the receipt of the Notice of Conversion, then the fair market value shall be the last sale price on the most recent day prior to the receipt of the Notice of Conversion on which trades were made and reported; or

 

  

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          (2)           if the Common Stock is traded over-the-counter, the value shall be deemed to be the last sale price on the trading day immediately prior to the Company's receipt of the Notice of Conversion or, if no sale of the Company's Common Stock took place on the trading day immediately prior to the receipt of the Notice of Conversion, then the fair market value shall be the last sale price on the most recent day prior to the receipt of the Notice of Conversion on which trades were made and reported;

 

       (iv)           if there is no active public market for the Common Stock, the fair market value thereof shall be determined in good faith by the Company’s Board of Directors.

 

    3.3           The exercise or conversion of this Warrant in connection with a Change of Control may, at the election of the Holder, be conditioned upon the closing of such Change of Control, in which event the Holder shall not be deemed to have exercised or converted this Warrant until immediately prior to the closing of such Change of Control.

 

    4.      Nonassessable.

 

    The Company covenants that all Shares which may be issued upon the exercise of this Warrant will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof.  Certificates for Shares purchased hereunder shall be delivered to the Holder promptly after the date on which this Warrant shall have been exercised.

 

    5.      Fractional Shares.

 

    No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  With respect to any fraction of a share called for upon the exercise of this Warrant, such fractional share shall be rounded down to the nearest whole share, and the Company shall pay to the Holder the amount of such fractional share multiplied by an amount equal to such fraction multiplied by the then current fair market value (determined in accordance with Section 3.2(a)) of a Share shall be paid in cash to the Holder.

 

    6.      Charges, Taxes and Expenses.

 

    Issuance of certificates for Shares upon the exercise of this Warrant shall be made without charge to the Holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder.

 

    7.      No Rights as Shareholders.  This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof.

 

    8      Saturdays, Sundays, Holidays, etc.

 

    If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, a Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day that is not a Saturday, Sunday or legal holiday.

 

    9.      Early Termination.

 

    Notwithstanding anything in this Warrant to the contrary, this Warrant shall terminate upon the closing of a Change of Control.

 

    10      Adjustments.

 

    The Exercise Price and the number of Shares purchasable hereunder are subject to adjustment from time to time as set forth in this Section 10.

 

    10.1         Reclassification, etc.  If the Company, at any time while this Warrant, or any portion hereof, remains outstanding and unexpired by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities or any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 10.

 

  

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    10.2         Subdivision or Combination of Shares.  In the event that the Company shall at any time subdivide the outstanding securities as to which purchase rights under this Warrant exist, or shall issue a stock dividend on the securities as to which purchase rights under this Warrant exist, the number of securities as to which purchase rights under this Warrant exist immediately prior to such subdivision or to the issuance of such stock dividend shall be proportionately increased, and the Exercise Price shall be proportionately decreased, and in the event that the Company shall at any time combine the outstanding securities as to which purchase rights under this Warrant exist, the number of securities as to which purchase rights under this Warrant exist immediately prior to such combination shall be proportionately decreased, and the Exercise Price shall be proportionately increased, effective at the close of business on the date of such subdivision, stock dividend or combination, as the case may be.

 

    10.3         Cash Distributions.  No adjustment on account of cash dividends or interest on the securities as to which purchase rights under this Warrant exist will be made to the Exercise Price under this Warrant.

 

    11.      Notice of Certain Events.

 

    The Company will provide notice to the Holder with at least 20 days notice prior to the closing of a Change of Control or an IPO.  Such notice shall be in accordance with the notice provision included at Section 12(e) of the Securities Purchase Agreement of even date herewith.

 

    12.      Purchase Rights; Fundamental Transactions.  In addition to any adjustments pursuant to Section 10 above, if at any time the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of Common Stock (“Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

 

    13.           Put Right.  In conjunction with the Offering, the Holder has received certain registration rights relating to the Shares pursuant to the terms of a Registration Rights Agreement of even date herewith.  If the right to have the Shares registered pursuant to the Registration Rights Agreement terminates in accordance with Section 2(f) of the Registration Rights Agreement (the "Registration Rights Termination"), the Holder will have the right to require the Company to purchase the Warrant from the Holder (the "Put Right") at a price equal to 20% of the principal amount of the Holder's Note (the "Put Price").  The Company shall pay the Holder the Put Price as promptly as practicable but in any event not later than 10 days after the Holder delivers notice to the Company of exercise of the Put Right.  The Put Right will expire 12 months from the Registration Rights Termination.

    14.           Miscellaneous.

    14.1           Loss, Theft, Destruction or Mutilation of Warrant.  Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company shall execute and deliver, in lieu of this Warrant, a new Warrant executed in the same manner as this Warrant and of like tenor and amount.

   14.2           Waivers and Amendments.  This Warrant and the obligations of the Company and the rights of the Holder under this Warrant may be amended, waived, discharged or terminated (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely) with the written consent of the Company (which shall not be required in connection with a waiver of rights in favor of the Company) and the holders of at least a majority of the then-outstanding aggregate principal amount under the Notes; provided, however, that no such amendment or waiver shall reduce the number of Shares represented by this Warrant without the consent of the Holder hereof; and provided further, however, that nothing shall prevent the Holder from individually agreeing to waive the observation of any term of this Warrant.  Any amendment, waiver, discharge or termination effected in accordance with this Section14.2 shall be binding upon the Company, the Holder, and except pursuant to a waiver by an individual holder of another Warrant pursuant to the final proviso in the immediately preceding sentence, each other holder of Warrants.

 

  

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    14.3           Notices.  Any notice, request or other communication required or permitted hereunder shall be given in accordance with the Purchase Agreement.

 

    14.4           Severability.  If one or more provisions of this Warrant are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Warrant and the balance of this Warrant shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms.

 

    14.5           Successors and Assigns.  Neither this Warrant nor any rights hereunder are transferable without the prior written consent of the Company.  Notwithstanding the foregoing, the Holder shall be permitted to transfer this Warrant to any affiliate (as that term is defined in the Securities Act of 1933) of the Holder.  If a transfer is permitted pursuant to this Section, the transfer shall be recorded on the books of the Company upon the surrender of this Warrant, properly endorsed, to the Company at its principal offices, and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer.  In the event of a partial transfer, the Company shall issue to the holders one or more appropriate new warrants.  Subject to the foregoing, the provisions of this Warrant shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the Company and the Holder.

 

    14.6           Delays or Omissions.  No delay or omission to exercise any right, power, or remedy accruing to the Holder, upon any breach or default of the Company under this Warrant shall impair any such right, power, or remedy of the Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring.  Any waiver, permit, consent, or approval of any kind or character on the part of the Holder of any breach or default under this Warrant or any waiver on the part of the Holder of any provisions or conditions of this Warrant must be made in writing and shall be effective only to the extent specifically set forth in such writing.  All remedies, either under this Warrant or by law or otherwise afforded to the Investors, shall be cumulative and not alternative.

 

    14.7           Titles and Subtitles.  The titles of the paragraphs and subparagraphs of this Warrant are for convenience of reference only and are not to be considered in construing this Warrant.

 

    14.8           Construction.  The language used in this Warrant will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.

 

    14.9           Governing Law.  THIS WARRANT SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS OF THE STATE OF NEW YORK AS SUCH LAWS ARE APPLIED TO AGREEMENTS BETWEEN NEW YORK RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN NEW YORK.

 

[Remainder of page intentionally left blank]

  

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized.

Ideal Power Converters, Inc.

By:                                                                           

Christopher Cobb

Chief Executive Officer

Address:   5004 Bee Creek Rd. Suite 600

                  Spicewood TX 78669

Attn:          Christopher Cobb

  

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NOTICE OF EXERCISE

TO:                 Ideal Power Converters, Inc.

                5004 Bee Creek Road, Suite 600

                Spicewood, Texas 78669

                Attn:  Secretary

 

The undersigned hereby elects to purchase ______________ shares (the “Shares”) of the Common Stock of Ideal Power Converters, Inc. pursuant to the terms of the attached Warrant and tenders herewith payment of the purchase price in full.

 

Please issue a certificate or certificates representing the Shares in the name of the undersigned or in such other name as is specified below:

 

(Print Name)

Address:                                                           

 

The undersigned confirms that the undersigned is an “accredited investor,” and that the Shares are being acquired for the account of the undersigned for investment only and not with a view to, or for resale in connection with, the distribution thereof, and that the undersigned has no present intention of distributing or selling the Shares.

 

(Date)                                                                      (Signature)

(Print Name)

  

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NOTICE OF CASHLESS EXERCISE

 

TO:                 Ideal Power Converters, Inc.

               5004 Bee Creek Road, Suite 600

               Spicewood, Texas 78669

               Attn:  Secretary

 

The undersigned hereby elects to purchase ______________ shares (the “Shares”) of the Common Stock of Ideal Power Converters, Inc. pursuant to the cashless exercise provision of Section 3 of the attached Warrant.

 

 

Please issue a certificate or certificates representing the Shares in the name of the undersigned or in such other name as is specified below:

 

(Print Name)

Address:                                                           

 

The undersigned represents that the undersigned is an “accredited investor,” and that the Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof, and that the undersigned has no present intention of distributing or reselling such shares.

 

(Date)                                                                      (Signature)

(Print Name)

  

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EXHIBIT E

SECURITY AGREEMENT

 

 

[see attached]

  

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SECURITY AGREEMENT

    THIS SECURITY AGREEMENT (the “Agreement”), dated as of August __, 2012, is entered into by and among IDEAL POWER CONVERTERS, INC., a Texas corporation (“Debtor”), the Subscribers identified on Schedule 1 hereto (the “Subscribers”), who are parties to the Securities Purchase Agreement dated as of August __, 2012 (the “Purchase Agreement”), by and among Debtor and such Subscribers, and [Name of Collateral Agent] (“Collateral Agent”).

RECITALS

    WHEREAS, Subscribers are making senior secured loans in one or more tranches or series, initially in the amount $750,000 (the "Initial Senior Debt") and thereafter up to an aggregate principal amount of $5,000,000 inclusive of the Initial Senior Debt (collectively “Senior Loans”) to the Debtor, intended, collectively, as a loan secured by a first-priority senior security interest in all assets of the Debtor.

    WHEREAS, the Senior Loans will be evidenced by one or more senior secured convertible promissory notes (each a “Note”) issued by the Debtor on or about the date of this Agreement pursuant to the Purchase Agreement.  The Notes were or will be executed by the Debtor as borrower, in favor of and to document indebtedness to, the Subscribers (each, a “Holder” and collectively the “Holders”).

    WHEREAS, concurrently with this Agreement, the Debtor, the Subscribers and the Collateral Agent are entering into a Subordination Agreement with The Office of the Governor Economic Development and Tourism, of the State of Texas (“Subordinated Lender”) pursuant to which the Subordinated Lender is agreeing to subordinate its rights, priority and claims under its Subordinated Debt Instrument, to the Senior Loans made or being made under the Notes.

    WHEREAS, in consideration of the Senior Loans made and to be made by the Subscribers to the Debtor and for other good and valuable consideration, and as security for the performance by the Debtor of its obligations under the Notes, and as security for the repayment of the Senior Loans and all other sums due from the Debtor to the Subscribers arising under the Transaction Documents (as defined in the Purchase Agreement, the Notes, and any other agreement between or among them (collectively, the “Obligations”)), the Debtor, for good and valuable consideration, receipt of which is acknowledged, has agreed to grant to the Subscribers and to the Collateral Agent on behalf of the Subscribers a security interest in the Collateral (as such term is hereinafter defined), on the terms and conditions hereinafter set forth.

    WHEREAS, the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are included on Schedule 2 and are used herein as so defined:  Account, Chattel Paper, Documents, Equipment, General Intangible, Goods, Instrument, Inventory and Proceeds.

AGREEMENT

1.      Definitions; Interpretation.  All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Note and Purchase Agreement.  As used in this Agreement, the following terms shall have the following meanings:

 

“Agreement” means this Security Agreement, including any amendments hereto.

 

“Collateral Agent” shall have the meaning as set forth in the Preamble.

 

“Collateral” shall have the meaning as set forth in Section 2.2.

 

“Debtor” shall have the meaning as set forth in the Preamble.

 

 “Event of Default” shall have the meaning as set forth in Section 8.

  

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“Holder” or “Holders” shall have the meaning as set forth in the Recitals.

 

“Senior Loans” shall have the meaning as set forth in the Recitals.

 

“Majority in Interest” shall have the meaning as set forth in Section 12.3.

 

“Note” shall have the meaning as set forth in the Recitals.

 

“Obligations” shall have the meaning as set forth in the Recitals.

 

“Permitted Liens” shall have the meaning as set forth in Section 5.1.

 

“Subscribers” shall have the meaning as set forth in the Preamble.

2.      Grant of General Security Interest in Collateral.

2.1 As security for the Obligations of the Debtor, the Debtor hereby grants each of the Subscribers, a security interest in the Collateral.

2.2 “Collateral” shall mean all of the following property of the Debtor:

                 (A)           All now owned and hereafter acquired right, title and interest of the Debtor in, to and in respect of all Accounts, Goods, real or personal property, all present and future books and records relating to the foregoing and all products and Proceeds of the foregoing, and as set forth below:

(i)           all now owned and hereafter acquired right, title and interest of the Debtor in, to and in respect of all: Accounts, interests in goods represented by Accounts, returned, reclaimed or repossessed goods with respect thereto and rights as an unpaid vendor; contract rights; Chattel Paper; investment property; General Intangibles (including but not limited to, tax and duty claims and refunds, registered and unregistered patents, trademarks, service marks, certificates, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, choses in action and other claims, and existing and future leasehold interests and claims in and to equipment, real estate and fixtures); Documents; Instruments; letters of credit, bankers’ acceptances or guaranties; cash moneys, deposits including but not limited to the deposit accounts identified on Schedule 3; securities, bank accounts, deposit accounts, credits and other property now or hereafter owned or held in any capacity by Debtors, as well as agreements or property securing or relating to any of the items referred to above;

                           (ii)           Goods.  All now owned and hereafter acquired right, title and interest of Debtors in, to and in respect of goods, including, but not limited to:

(a)           All Inventory, wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description, including all raw materials, work-in-process, finished goods, and materials to be used or consumed in the Debtor's business; finished goods, timber cut or to be cut, oil, gas, hydrocarbons, and minerals extracted or to be extracted, and all names or marks affixed to or to be affixed thereto for purposes of selling same by the seller, manufacturer, lessor or licensor thereof and all Inventory which may be returned to the Debtor by its customers or repossessed by the Debtor and all of the Debtor's right, title and interest in and to the foregoing (including all of the Debtor’s rights as a seller of goods);

(b)           All Equipment and fixtures, wherever located, whether now owned or hereafter acquired, including, without limitation, all machinery, furniture and fixtures, and any and all additions, substitutions, replacements (including spare parts), and accessions thereof and thereto (including, but not limited to the Debtor's rights to acquire any of the foregoing, whether by exercise of a purchase option or otherwise);

(iii)           Property.  All now owned and hereafter acquired right, title and interests of the Debtor in, to and in respect of any other personal property in or upon which the Debtor has or may hereafter have a security interest, lien or right of setoff;

 

  

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(iv)           Books and Records.  All present and future books and records relating to any of the above including, without limitation, all computer programs, printed output and computer readable data in the possession or control of the Debtor, any computer service bureau or other third party; and

                 (v)           Products and Proceeds.  All products and Proceeds of the foregoing in whatever form and wherever located, including, without limitation, all insurance proceeds and all claims against third parties for loss or destruction of or damage to any of the foregoing.

(B)           All now owned and hereafter acquired right, title and interest of the Debtor in, to and in respect of the following:

(i)           all additional shares of stock, partnership interests, member interests or other equity interests from time to time acquired by the Debtor, in any subsidiary of the Debtor, the certificates representing such additional shares, and other rights, contractual or otherwise, in respect thereof and all dividends, distributions, cash, instruments, investment property and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, interests or equity; and

(ii)           all security entitlements of the Debtor in, and all Proceeds of any and all of the foregoing in each case, whether now owned or hereafter acquired by the Debtor and howsoever its interest therein may arise or appear (whether by ownership, security interest, lien, claim or otherwise).

Notwithstanding anything to the contrary set forth in Section 2.2 above, the types or items of Collateral described in such Section shall not include any rights or interests in any contract, lease, permit, license, charter or license agreement covering real or personal property, as such, if under the terms of such contract, lease, permit, license, charter or license agreement, or applicable law with respect thereto, the valid grant of a security interest or lien therein to the Subscribers is prohibited or would result in a breach and such prohibition or breach has not been or is not waived or the consent of the other party to such contract, lease, permit, license, charter or license agreement has not been or is not otherwise obtained or under applicable law such prohibition or breach cannot be waived. 

Notwithstanding anything to the contrary set forth in Section 2.2 above, the types or items of Collateral described in such Section shall not include any Equipment which is, or at the time of the Debtor’s acquisition thereof shall be, subject to a purchase money mortgage or other purchase money lien or security interest (including capitalized or finance leases) permitted hereunder if: (a) the valid grant of a security interest or lien therein to the Subscribers in such Equipment is prohibited by the terms of the agreement between the Debtor and the holder of such purchase money mortgage or other purchase money lien or security interest or under applicable law and such prohibition has not been or is not waived, or the consent of the holder of the purchase money mortgage or other purchase money lien or security interest has not been or is not otherwise obtained, or under applicable law such prohibition cannot be waived and (b) the purchase money mortgage or other purchase money lien or security interest on such item of Equipment is or shall become valid and perfected.  To the extent each of the foregoing conditions is satisfied, the Subscribers shall, through the Collateral Agent, at the request of the Debtor and at the Debtor’s expense, execute and deliver a UCC-3 partial release with respect to any such Equipment subject to such a purchase money security interest or lien, provided, that, such partial release shall be in form and substance satisfactory to the Collateral Agent.

“Equipment” shall include all of the Debtor's now owned and hereafter acquired equipment, machinery, laboratory and research equipment and tools, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located.

2.3           The Subscribers and the Collateral Agent are hereby specifically authorized, after the Maturity Date (defined in the Note) accelerated or otherwise, and after the occurrence of an Event of Default (as defined herein) and the expiration of any applicable cure period, to transfer any Collateral into the name of the Collateral Agent and to take any and all action deemed advisable to the Subscribers to remove any transfer restrictions affecting the Collateral.

 

  

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3.      Perfection of Security Interest.

3.1           The Debtor shall prepare, execute and deliver to the Collateral Agent  UCC-1 Financing Statements or other instruments necessary to perfect a security interest in any item of the Collateral (collectively, the "Lien Documents") in form and substance acceptable to the Collateral Agent.  The Collateral Agent is instructed to prepare and file at the Debtor’s cost and expense, the Lien Documents in such United States and foreign jurisdictions deemed advisable to the Collateral Agent, including but not limited to Washington, D.C., and the State of Texas.

3.2           All other certificates and instruments constituting Collateral from time to time required to be pledged to the Subscribers pursuant to the terms hereof (the “Additional Collateral”) shall be delivered to the Collateral Agent promptly upon receipt thereof by or on behalf of the Debtor.  All such certificates and instruments shall be held by or on behalf of the Subscribers pursuant hereto and shall be delivered in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment or undated stock powers executed in blank, all in form and substance satisfactory to the Collateral Agent.  If any Collateral consists of uncertificated securities, unless the immediately following sentence is applicable thereto, the Debtor shall cause the Collateral Agent to become the registered holder thereof, or cause each issuer of such securities to agree that it will comply with instructions originated by the Collateral Agent with respect to such securities.  If any Collateral consists of security entitlements, the Debtor shall transfer such security entitlements to the Collateral Agent or cause the applicable securities intermediary to agree that it will comply with entitlement orders by the Collateral Agent.

3.3           If the Debtor shall receive, by virtue of the Debtor being or having been an owner of any Collateral, any (i) stock certificate (including, without limitation, any certificate representing a stock dividend or distribution in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock split, spin-off or split-off), promissory note or other instrument, (ii) option or right, whether as an addition to, substitution for, or in exchange for, any Collateral, or otherwise, (iii) dividends payable in cash or in securities or other property or (iv) dividends or other distributions in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, the Debtor shall receive such stock certificate, promissory note, instrument, option, right, payment or distribution in trust for the benefit of the Subscribers, shall segregate it from the Debtor’s other property and shall deliver it forthwith to the Subscribers, in the exact form received, with any necessary endorsement and/or appropriate stock powers duly executed in blank, to be held by the Subscribers as Collateral and as further collateral security for the Obligations.

4.           Voting Power Relating to Collateral/Dividends and Distributions.

4.1           So long as an Event of Default does not exist, the Debtor shall be entitled to exercise all voting power pertaining to any of the Collateral, provided such exercise is not contrary to the interests of the Subscribers and does not impair the Collateral.

4.2.           At any time an Event of Default exists or has occurred and is continuing, all rights of the Debtor, upon notice given by the Collateral Agent, to exercise the voting power shall cease and all such rights shall thereupon become vested in the Collateral Agent for the benefit of the Subscribers, which shall thereupon have the sole right to exercise such voting power and receive such payments.

4.3           All dividends, distributions, interest and other payments which are received by Debtor contrary to the provisions of Section 4.2 shall be received in trust for the benefit of the Subscribers as security and Collateral for payment of the Obligations, shall be segregated from other funds of Debtor, and shall be forthwith paid over to the Collateral Agent as Collateral in the exact form received with any necessary endorsement and/or appropriate stock powers duly executed in blank, to be held by the Collateral Agent as Collateral and as further collateral security for the Obligations.

 

  

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5.      Further Action By Debtors; Covenants and Warranties.

5.1           The Subscribers at all times shall have a perfected security interest in the Collateral.  The Debtor represents that other than the security interests described on Schedule 5.1, it has and will continue to have full title to the Collateral free from any liens, leases, encumbrances, judgments or other claims, except for “Permitted Liens” (defined below).  The Subscribers’ security interest in the Collateral constitutes and will continue to constitute a first, prior and indefeasible security interest in favor of the Subscribers, subject only to the security interests described on Schedule 5.1.  The Debtor will do all acts and things, and will execute and file all instruments (including, but not limited to, security agreements, financing statements, continuation statements, etc.) reasonably requested by the Collateral Agent to establish, maintain and continue the perfected security interest of the Subscribers in the perfected Collateral, and will promptly on demand, pay all costs and expenses of filing and recording, including the costs of any searches reasonably deemed necessary by the Collateral Agent from time to time to establish and determine the validity and the continuing priority of the security interest of the Subscribers, and also pay all other claims and charges that, in the opinion of the Subscribers are reasonably likely to materially prejudice, imperil or otherwise affect the Collateral or the Subscribers’ security interests therein.   For purposes of this Agreement, “Permitted Liens” shall include:

 

	
  

	
(a)  

	
liens  for  the  payment  of  taxes  which  are  not  yet  due  and payable;

 

	
  

	
(b)

	
liens  arising  by  statute  in  connection  with  worker’s compensation, unemployment insurance, old age benefits, social security obligations, taxes, assessments, statutory obligations or other similar charges (other than Liens arising under ERISA), good faith cash deposits in connection with tenders, contracts or leases to which the the Debtor is a party or other cash deposits required to be made in the ordinary course of business, provided in each case that the obligation is not for borrowed money and that the obligation secured is not overdue or, if overdue, is being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor;

 

	
  

	
(c) 

	
mechanics’, workmen’s, materialmen’s, landlords’, carriers’ or other similar liens arising in the ordinary course of business with respect to obligations which are not due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest;

 

	
  

	
(d) 

	
any interest or title of a lessor under any operating lease or capital lease; and

 

	
  

	
(e) 

	
liens on real property of the Debtor or created solely for the purpose of securing indebtedness incurred to finance the purchase price of such real property;

 

	
  

	
(f) 

	
cash deposits to secure performance bonds and other obligations of a like nature (in each case, other than for Indebtedness) incurred in the ordinary course of business for obligations not yet due or which are being contested in good faith by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves have been established therefor;

 

	
  

	
(g)

	
easements, rights-of-way, zoning and similar restrictions, building codes, reservations,  covenants,  conditions,  waivers,  survey  exceptions  and  other  similar encumbrances or title defects and, with respect to any interests in real property held or leased by the Debtor or any of its subsidiaries, mortgages, deeds of trust and other encumbrances incurred, created, assumed or permitted to exist and arising by, through or under  a  landlord  or  owner  of  such  property  encumbering  solely  such  landlord’s or owner’s interest in such real property, with or without the consent of the lessee;

 

	
  

	
(h) 

	
liens in existence on the date hereof;

 

	
  

	
(i) 

	
any  interest  of  a  licensor  under  a  license  entered  into  in  the  ordinary course of the Debtor’s business; and

 

	
  

	
(j)

	
any  lien  existing  on  any  part  of  any  business acquired by the Debtor,  prior  to  the acquisition  thereof  by  the  Debtor.

 

  

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5.2           Except in connection with sales of Collateral in the ordinary course of business, for fair value and in cash, and except for Collateral which is substituted by assets of identical or greater value (subject to the consent of the Collateral Agent) or which is not material to the Debtor’s business, the Debtor will not sell, transfer, assign or pledge those items of Collateral (or allow any such items to be sold, transferred, assigned or pledged), without the prior written consent of the Collateral Agent other than a transfer of the Collateral to a wholly-owned United States formed and located subsidiary of the Debtor with prior notice to the Collateral Agent, and provided the Collateral remains subject to the security interest herein described.  Although Proceeds of Collateral are covered by this Agreement, this shall not be construed to mean that the Collateral Agent or the Subscribers consent to any sale of the Collateral, except as provided herein.  Sales of Collateral in the ordinary course of business as described above shall be free of the security interest of the Subscribers and the Collateral Agent shall promptly execute such documents (including without limitation releases and termination statements) as may be required by the Debtor to evidence or effectuate the same.

5.3           The Debtor will, at all reasonable times during regular business hours and upon reasonable notice, allow Collateral Agent or its representatives free and complete access to the Collateral and all of the Debtor’s records that in any way relate to the Collateral, for such inspection and examination as the Collateral Agent reasonably deems necessary.

5.4           The Debtor, at its sole cost and expense, will protect and defend the Collateral against the claims and demands of all persons other than the Subscribers.

5.5           The Debtor will promptly notify the Collateral Agent of any levy, distraint or other seizure by legal process or otherwise of any part of the Collateral, and of any threatened or filed claims or proceedings that are reasonably likely to affect or impair any of the rights of the Subscribers under this Security Agreement in any material respect.

5.6           The Debtor will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other reasonable assurances or instruments and take further steps relating to the Collateral and other property or rights covered by the security interest hereby granted, as the Collateral Agent may reasonably require to perfect the security interest of the Subscribers hereunder.

5.7           The Debtor represents and warrants that it is the true and lawful exclusive owner of the Collateral, free and clear of any liens, encumbrances and claims other than those listed on Schedule 5.1.

6.      Power of Attorney.

At any time an Event of Default has occurred, and only after the applicable cure period as set forth in this Agreement and the other Transaction Documents, and is continuing, the Debtor hereby irrevocably constitutes and appoints the Collateral Agent as the true and lawful attorney of the Debtor, with full power of substitution, in the place and stead of Debtor and in the name of the Debtor or otherwise, at any time or times, in the discretion of the Collateral Agent, to take any action and to execute any instrument or document which is reasonably and prudently necessary to protect the Subscribers’ rights in the Collateral as set forth in this Agreement.  This power of attorney is coupled with an interest and is irrevocable until the Obligations are satisfied.

7.           Performance by the Subscribers.

If the Debtor fails to perform any material covenant, agreement, duty or obligation of the Debtor under this Agreement, the Collateral Agent may, after any applicable cure period and notice required hereunder, at any time or times in its discretion, take action to effect performance of such obligation.  All reasonable expenses of the Subscribers incurred in connection with the foregoing authorization shall be payable by the Debtor as provided in Paragraph 10.1 hereof.  No discretionary right, remedy or power granted to the Subscribers under any part of this Agreement shall be deemed to impose any obligation whatsoever on the Subscribers with respect thereto, such rights, remedies and powers being solely for the protection of the Subscribers.

 

  

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8.      Event of Default.

An event of default (“Event of Default”) shall be deemed to have occurred hereunder upon the occurrence of any event of default as defined and described in this Agreement, in the Note, the Purchase Agreement, Transaction Documents (as defined in the Purchase Agreement), and any other agreement to which the Debtor and the Subscribers are parties.  Upon and after any Event of Default, after the applicable cure period, if any, any or all of the Obligations shall become immediately due and payable at the option of the Collateral Agent, and the Collateral Agent may dispose of Collateral as provided herein.  A default by the Debtor of any of its material obligations pursuant to this Agreement and any of the Transaction Documents shall be an Event of Default hereunder and an “Event of Default” as defined in the Note, and Subscription Agreement.

9.      Disposition of Collateral.

Upon and after any Event of Default which is then continuing,

9.1           The Collateral Agent may exercise its rights with respect to each and every component of the Collateral, without regard to the existence of any other security or source of payment, in order to satisfy the Obligations.  In addition to other rights and remedies provided for herein or otherwise available to it, the Subscribers shall have all of the rights and remedies of a secured party on default under the Uniform Commercial Code then in effect in the State of New York.

9.2           If any notice to the Debtor of the sale or other disposition of Collateral is required by then applicable law, five (5) business days prior written notice (which the Debtor agrees is reasonable notice within the meaning of Section 9.612(a) of the Uniform Commercial Code) shall be given to the Debtor of the time and place of any sale of Collateral which the Debtor hereby agrees may be by private sale.  The rights granted in this Section are in addition to any and all rights available to the Subscribers under the Uniform Commercial Code.

9.3           The Collateral Holder is authorized, at any such sale, if the Collateral Holder deems it advisable to do so, in order to comply with any applicable securities laws, to restrict the prospective bidders or purchasers to persons who will represent and agree, among other things, that they are purchasing the Collateral for their own account for investment, and not with a view to the distribution or resale thereof, or otherwise to restrict such sale in such other manner as the Subscribers deem advisable to ensure such compliance.  Sales made subject to such restrictions shall be deemed to have been made in a commercially reasonable manner.

9.4           All proceeds received by the Subscribers in respect of any sale, collection or other enforcement or disposition of Collateral, shall be applied (after deduction of any amounts payable to the Subscribers pursuant to Paragraph 10.1 hereof) against the Obligations.   Upon payment in full of all Obligations, the Debtor shall be entitled to the return of all Collateral, including cash, which has not been used or applied toward the payment of the Obligations or used or applied to any and all costs or expenses of the Subscribers incurred in connection with the liquidation of the Collateral (unless another person is legally entitled thereto).  Any assignment of Collateral by the Collateral Holder to the Debtor shall be without representation or warranty of any nature whatsoever and wholly without recourse.  To the extent allowed by law, the Collateral Holder may purchase the Collateral and pay for such purchase by offsetting the purchase price with sums owed to the Subscribers by the Debtor arising under the Obligations or any other source.

9.5           Without limiting, and in addition to, any other rights, options and remedies the Subscribers have under the Transaction Documents, the UCC, at law or in equity, or otherwise, upon the occurrence and continuation of an Event of Default, the Collateral Holder shall have the right to apply for and have a receiver appointed by a court of competent jurisdiction.  The Debtor expressly agrees that such a receiver will be able to manage, protect and preserve the Collateral and continue the operation of the business of the Debtor to the extent necessary to collect all revenues and profits thereof and to apply the same to the payment of all expenses and other charges of such receivership, including the compensation of the receiver, until a sale or other disposition of such Collateral shall be finally made and consummated.

 

  

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9.6           Provided an Event of Default or an event, which with the passage of time or the giving of notice could become an Event of Default is not pending, then from and after the date the Subscriber has exercised its conversion rights with respect to not less than one-half of the Principal Amount of the Subscriber’s Note and the Debtor has complied with its obligations with respect to all such conversions, then the Subscriber’s security interest granted pursuant to this Agreement shall be automatically released.

10.      Miscellaneous.

10.1                 Expenses.  The Debtor shall pay to the Collateral Agent for the benefit of the Subscribers, on demand, the amount of any and all reasonable expenses, including, without limitation, attorneys’ fees, legal expenses and brokers’ fees, which the Collateral Agent may incur in connection with (a) exercise or enforcement of any the rights, remedies or powers of the Subscribers hereunder or with respect to any or all of the Obligations upon breach; or (b) failure by the Debtor to perform and observe any agreements of the Debtor contained herein which are performed by Collateral Agent.

10.2                 Waivers, Amendment and Remedies.  No course of dealing by the Collateral Agent or the Subscribers and no failure by the Collateral Agent or the Subscribers to exercise, or delay by the Collateral Agent or the Subscribers in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, and no single or partial exercise thereof shall preclude any other or further exercise thereof or the exercise of any other right, remedy or power of the Collateral Agent or the Subscribers.  No amendment, modification or waiver of any provision of this Agreement and no consent to any departure by the Debtor therefrom shall, in any event, be effective unless contained in a writing signed by the Collateral Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. The rights, remedies and powers of the Collateral Agent, not only hereunder, but also under any instruments and agreements evidencing or securing the Obligations and under applicable law are cumulative, and may be exercised by the Collateral Agent for the benefit of the Subscribers from time to time in such order as the Collateral Agent may elect.

10.3                 Notices.  All notices or other communications given or made hereunder shall be in writing and shall be personally delivered or deemed delivered the first business day after being faxed (provided that a copy is delivered by first class mail) to the party to receive the same at its address set forth below or to such other address as either party shall hereafter give to the other by notice duly made under this Section:

	
To Debtors:

	
Ideal Power Converters, Inc.

5004 Bee Creek Rd., Suite 600

Spicewood, Texas 78669

Attn: Chief Executive Officer

Christopher.Cobb@idealpowerconverters.com

	
With a copy by facsimile only to:

	
Richardson & Patel LLP

1100 Glendon Avenue, Suite 850

Los Angeles, CA 90024

Fax: (310) 208-1154

Tel: (310) 208-1182

 

	
To Holders:

	
To the addresses specified in the Subscription Agreement for each Holder

 

	
To Collateral Agent:

	
[Name and address of Collateral Agent]

[To be provided.]

 

	
With a copy (not constituting notice) to:

	
Law Offices of Aaron A. Grunfeld & Associates

1100 Glendon Avenue, Suite 850

Los Angeles, California 90024

Attention: Aaron A. Grunfeld

Tel: (310) 788-7577

agrunfeld@grunfeldlaw.com

 

  

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Any party may change its address by written notice in accordance with this paragraph.

10.4                 Term; Binding Effect.  This Agreement shall (a) remain in full force and effect until payment and satisfaction in full of all of the Obligations; (b) be binding upon the Debtor, and its successors and permitted assigns; and (c) inure to the benefit of the Subscribers and its successors and assigns.

10.5                 Captions.  The captions of Paragraphs, Articles and Sections in this Agreement have been included for convenience of reference only, and shall not define or limit the provisions of this agreement and have no legal or other significance whatsoever.

10.6                 Governing Law; Venue; Severability.  This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to conflicts of laws principles that would result in the application of the substantive laws of another jurisdiction, except to the extent that the perfection of the security interest granted hereby in respect of any item of Collateral may be governed by the law of another jurisdiction.  Any legal action or proceeding against the Debtor with respect to this Agreement must be brought only in the courts in the State of New York  or United States federal courts located within the State of New York, and, by execution and delivery of this Agreement, the Debtor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts.  The Debtor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the aforesaid courts and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum.  If any provision of this Agreement, or the application thereof to any person or circumstance, is held invalid, such invalidity shall not affect any other provisions which can be given effect without the invalid provision or application, and to this end the provisions hereof shall be severable and the remaining, valid provisions shall remain of full force and effect.

10.7                 Entire Agreement.  This Agreement contains the entire agreement of the parties and supersedes all other agreements and understandings, oral or written, with respect to the matters contained herein.

10.8                 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 signature and delivered by electronic transmission.

11.           Termination; Release.  When the Obligations have been indefeasibly paid and performed in full or all outstanding Notes have been converted to Common Stock pursuant to the terms of the Note and the Purchase Agreements, this Agreement shall terminate, and the Subscribers or the Collateral Agent, as appropriate, at the request and sole expense of the Debtor, will execute and deliver to the Debtor the proper instruments (including UCC termination statements) acknowledging the termination of the Security Agreement, and duly assign, transfer and deliver to the Debtor, without recourse, representation or warranty of any kind whatsoever, such of the Collateral, as may be in the possession of the Collateral Agent or Subscribers.

12.           Subscribers' Powers.

12.1                 Subscribers' Powers.  The powers conferred on the Subscribers hereunder are solely to protect Subscribers’ interest in the Collateral and shall not impose any duty on the Subscribers to exercise any such powers.

12.2                 Reasonable Care.  The Collateral Agent is required to exercise reasonable care in the custody and preservation of any Collateral in its possession.

12.3                 Majority in Interest.   The rights of the Subscribers hereunder, except as otherwise set forth herein shall be exercised upon the approval of Subscribers holding 51% of the outstanding Obligations (“Majority in Interest”) at the time such approval is sought or given.  Any tangible or physical Collateral shall be delivered to and be held by the Collateral Agent pursuant to this Agreement and on behalf of all Subscribers as to their respective rights.

 

  

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12.4                 Authority of Collateral Agent.  By executing this Agreement the Subscribers appoint the Collateral Agent as their agent to exercise all of the rights, benefits and remedies granted to them as secured parties under this Agreement.  The Collateral Agent agrees to exercise all of the rights, benefits and remedies conveyed by this Agreement solely for the benefit of the Subscribers and, unless a delay would cause irreparable damage to the Collateral or any part of it, only after consultation with the Majority in Interest.  In accordance with its role as the agent for the Subscribers, the Lien Documents will identify the Collateral Agent as the secured party.

12.5                 Duties of the Collateral Agent.  The Collateral Agent agrees to hold and dispose of the Collateral in accordance with and subject only to the terms of this Agreement.

12.6                 Appointment of Attorney-in-Fact.  The Debtor hereby irrevocably appoints the Collateral Agent as the Debtor’s attorney-in-fact to arrange for the transfer of the Collateral and to do and perform all actions that are necessary or appropriate in order to effect the terms of this Agreement.

12.7           Matters Pertaining to Collateral Agent.

12.7.1           The Collateral Agent shall not be personally liable for any act it may do or omit to do under this Agreement while acting in good faith and in the exercise of its best judgment, and any act done or omitted by the Collateral Agent pursuant to the advice of the Collateral Agent’s attorney shall be conclusive evidence of such good faith.  Except as expressly provided herein, the Collateral Agent is expressly authorized and directed to disregard any and all notices or warnings given by any of the parties, or by any other person or corporation, excepting only orders or process of court, and is hereby expressly authorized to comply with and obey any and all orders, judgments or decrees of any court.  If the Collateral Agent obeys or complies with any such order, judgment or decree of any court, it shall not be liable to the Subscribers or the Debtor or to any other person, firm or corporation by reason of such compliance, notwithstanding that any such order, judgment or decree be subsequently reversed, modified, annulled, set aside or vacated, or found to have been entered without jurisdiction.

12.7.2           The Subscribers and the Debtor expressly agree the Collateral Agent has the absolute right at the Collateral Agent’s election, if the Collateral Agent considers it appropriate, to file an action in interpleader in a court of proper jurisdiction requiring the parties to answer and litigate their claims and rights among themselves, and the Collateral Agent is authorized to deposit with the clerk of the court all documents and funds held by him pursuant to this Agreement.  In the event such action is filed, the Debtor agrees to pay all costs, expenses and reasonable attorneys’ fees that the Collateral Agent incurs in such interpleader action.  Upon filing of such action the Collateral Agent shall thereupon be fully released and discharged from all obligations to further perform any duties or obligations otherwise imposed by the terms of this Agreement.

12.7.3           The Collateral Agent shall not be bound in any way by any other agreement between the Subscribers and the Debtor as to which the Collateral Agent is not a party, whether or not the Collateral Agent has knowledge thereof, nor by any notice of a claim or demand with respect to this Agreement or the Collateral.  The Collateral Agent shall have no duties or responsibilities except as expressly set forth in this Agreement.  The Collateral Agent may rely conclusively on any certificate, statement, request, waiver, receipt, agreement or other instrument that the Collateral Agent believes to be genuine and to have been signed and presented by an appropriate person or persons.

12.7.4           The retention and distribution of the Collateral in accordance with the terms and provisions of this Agreement shall fully and completely release the Collateral Agent from any obligation or liability assumed by the Collateral Agent hereunder as to the Collateral.

12.7.5           The Collateral Agent, while in possession of the Collateral prior to or following the occurrence of an Event of Default, as hereinabove provided, and while acting in accordance with the terms of this Agreement or applicable law, is not responsible for any fluctuations in value or delays in disposing of the Collateral.

 

  

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12.7.6           The Collateral Agent shall not be liable in any respect for verifying the identity, authority or rights of the parties executing or delivering or purporting to execute and/or deliver this Agreement.

12.7.7           Notwithstanding anything herein to the contrary, the Collateral Agent shall have no duty with respect to the Collateral other than the duty to use reasonable care in the custody and preservation of the Collateral if it is in the Collateral Agent's possession.  The Collateral Agent shall be under no obligation to take any steps necessary to preserve rights in the Collateral against any other parties, to sell the Collateral if it threatens to decline in value, or to exercise any rights represented thereby, except as directed by the Majority in Interest pursuant to the terms of this Agreement.

12.7.8           The Debtor and the Subscribers agree to and each does hereby indemnify, defend (with counsel acceptable to the Collateral Agent) and hold the Collateral Agent harmless against any and all losses, damages, claims and expenses, including reasonable attorneys’ fees, that may be incurred by the Collateral Agent by reason of it compliance with the terms of this Agreement.  If, as a result of any disagreement between the parties and/or adverse demands and claims being made by any or all of them upon the Collateral Agent, the Collateral Agent shall become involved in litigation, including any interpleader brought by the Collateral Agent as provided in this Agreement, the Debtor agrees that it shall be liable to the Collateral Agent on demand for all costs, expenses and attorneys’ fees that the Collateral Agent shall incur and/or be compelled to pay by reason of such litigation.

12.8           Replacement of Collateral Agent.  In the event the Collateral Agent is or becomes unwilling or unable to act in such capacity for any reason, the Majority in Interest shall appoint a successor.  The Majority in Interest (but not Debtor) shall have the right, after delivery of written notice signed by the Majority in Interest to the Collateral Agent, to terminate the Collateral Agent and to name the Collateral Agent’s successor.

 

[THIS SPACE INTENTIONALLY LEFT BLANK]

 

  

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IN WITNESS WHEREOF, the undersigned have executed and delivered this Security Agreement, as of the date first written above.

“DEBTOR”

IDEAL POWER CONVERTERS, INC.

a Texas corporation

By: _____________________________________       Christopher Cobb

      Chief Executive Officer

 

Agreed and Accepted by:

“COLLATERAL AGENT”

[NAME OF COLLATERAL AGENT]

By:  _____________________________________

Name:  __________________________________

Title:  ___________________________________

 

This Security Agreement may be signed by facsimile signature and

delivered by confirmed facsimile transmission.

  

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OMNIBUS SUBSCRIBER SIGNATURE PAGE TO

SECURITY AGREEMENT

 

    The undersigned, in its capacity as a Subscriber, hereby executes and delivers the Security Agreement to which this signature page is attached and agrees to be bound by the Security Agreement on the date set forth on the first page of the Security Agreement. This counterpart signature page, together with all counterparts of the Security Agreement and signature pages of the other parties named therein, shall constitute one and the same instrument in accordance with the terms of the Security Agreement.

 

	
 

_________________________________

[Print Name of Subscriber]

	
 

__________________________________

[Name of Co-Subscriber, if applicable]

	  	  
	
__________________________________

[Signature]

	
__________________________________

[Signature]

	  	  
	  	  
	
Name:                                                        

	
Name:_____________________________

	
Title:______________________________

	
Title: ______________________________

	  	  
	  	  
	
Mailing Address:

	
Telephone No.:_____________________

	  	
Facsimile No:______________________

	  	
Email Address:_____________________

	  	  
	
(City, State and Zip)

	  

  

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IDEAL POWER CONVERTERS, INC.

SECURITY AGREEMENT EXHIBITS AND SCHEDULES

Schedule 1 – Subscribers

Schedule 2 - Provisions of the New York Uniform Commercial Code

Schedule 3 – Deposit Accounts

Schedule 5.1 – Security Interests

 

  

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SCHEDULE 1

SUBSCRIBERS

 

	
SUBSCRIBER AND ADDRESS

	
NOTE PRINCIPAL AMOUNT

	
WARRANTS

	  	  	  
	  	  	  
	  	  	  
	  	  	  
	  	  	  
	
TOTAL

	
$

	  

 

  

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SCHEDULE 2

UNIFORM COMMERCIAL CODE OF NEW YORK

 

Definitions from § 9.102 of the New York Uniform Commercial Code

 

(2) "Account", except as used in "account for", means a right to payment of a monetary obligation, whether or not earned by performance, (i) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, (ii)for services rendered or to be rendered, (iii) for a policy of insurance issued or to be issued, (iv) for a secondary obligation incurred or to be incurred, (v) for energy provided or to be provided, (vi) for the use or hire of a vessel under a charter or other contract, (vii) arising out of the use of a credit or charge card or information contained on or for use with the card, or (viii) as winnings in a lottery or other game of chance operated or sponsored by a state, governmental unit of a State, or person licensed or authorized to operate the game by a State or governmental unit of a State.  The term includes health-care-insurance receivables.  The term does not include (i) rights to payment evidenced by chattel paper or an instrument, (ii) commercial tort claims, (iii) deposit accounts, (iv) investment property, (v) letter-of-credit rights or letters of credit, or (vi) rights to payment for money or funds advanced or sold, other than rights arising out of the use of a credit or charge card or information contained on or for use with the card.

 

(11) "Chattel paper" means a record or records that evidence both a monetary obligation and a security interest in specific goods, a security interest in specific goods and software used in the goods, a security interest in specific goods and license of software used in the goods, a lease of specific goods, or a lease of specific goods and license of software used in the goods.  In this paragraph, "monetary obligation" means a monetary obligation secured by the goods or owed under a lease of the goods and includes a monetary obligation with respect to software used in the goods.  The term does not include (i) charters or other contracts involving the use or hire of a vessel or (ii) records that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.  If a transaction is evidenced by records that include an instrument or series of instruments, the group of records taken together constitutes chattel paper.

 

(30) "Document" means a document of title or a receipt of the type described in Section 7--201(2).

 

    7-201(2): Where goods including distilled spirits and agricultural commodities are stored under a statute requiring a bond against withdrawal or a license for the issuance of receipts in the nature of warehouse receipts, a receipt issued for the goods has like effect as a warehouse receipt even though issued by a person who is the owner of the goods and is not a warehouseman.

 

(33) "Equipment" means goods other than inventory, farm products, or consumer goods.

 

(42) "General intangible" means any personal property, including things in action, other than accounts, chattel  paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction.  The term includes payment intangibles and software.

 

(44) "Goods" means all things that are movable when a security interest attaches.  The term includes (i) fixtures, (ii) standing timber that is to be cut and removed under a conveyance or contract for sale, (iii) the unborn young of animals, (iv) crops grown, growing, or to be grown, even if the crops are produced on trees, vines, or bushes, and (v) manufactured homes.  The term also includes a computer program embedded in goods and any supporting information provided in connection with a transaction relating to the program if (i) the program is associated with the goods in such a manner that it customarily is considered part of the goods, or (ii) by becoming the owner of the goods, a person acquires a right to use the program in connection with the goods.  The term does not include a computer program embedded in goods that consists solely of the medium in which the program is embedded.  The term also does not include accounts, chattel paper, commercial tort claims, deposit accounts, documents, general intangibles, instruments, investment property, letter-of-credit rights, letters of credit, money, or oil, gas, or other minerals before extraction.

  

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(47) "Instrument" means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment.  The term does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.

(48) "Inventory" means goods, other than farm products, which:

    (A) are leased by a person as lessor;

    (B) are held by a person for sale or lease or to be furnished under a contract of service;

    (C) are furnished by a person under a contract of service; or

    (D) consist of raw materials, work in process, or materials used or consumed in a business.

(64) "Proceeds", except as used in Section 9--609(b), means the following property:

    (A) Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;

    (B) whatever is collected on, or distributed on account of, collateral;

    (C) rights arising out of collateral;

    (D) to the extent of the value of collateral, claims  arising out  of the loss, nonconformity, or interference with the use of, defects or infringement of rights in,  or  damage to, the collateral; or

    (E) to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance  payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral.

  

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SCHEDULE 3

DEPOSIT ACCOUNTS

 

	
Bank

	 	
Account No.

	 	
Bank Address

	  	 	 	 	  
	
BBVA Compass Bank (main acct)

	 	 	0034253943	 	
5800 North Mopac,Austin TX

	
 

BBVA Compass Bank (exp acct)

	 	 	2529218454	 	
 

5800 North Mopac,Austin TX

	
 

BBVA Compass Bank

	 	 	2532425878	 	
 

5800 North Mopac,Austin TX

  

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SCHEDULE 5.1

SECURITY INTERESTS

 

Not applicable.

 

Interest of the Officer of the Governor, Economics Development and Tourism, has been subordinated.

  

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EXHIBIT F

SUBORDINATION AGREEMENT

[see attached]

 

  

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EXHIBIT G

REGISTRATION RIGHTS AGREEMENT

 

 

[see attached]

 

  

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IDEAL POWER CONVERTERS, INC.

 

REGISTRATION RIGHTS AGREEMENT

 

    This REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of August ___, 2012, is made and entered into by and between Ideal Power Converters, Inc., a Texas corporation with headquarters located at5004 Bee Creek Rd., Suite 600 Spicewood, Texas 78669 (the “Company”), and each of the purchasers set forth on the signature pages hereto (the “Purchasers”).

 

    WHEREAS, in connection with the Securities Purchase Agreement by and among the parties hereto of even date herewith (the “Securities Purchase Agreement”), the Company has agreed, upon the terms and subject to the conditions contained therein, to issue and sell to the Purchasers:  (i) Senior Secured Convertible Promissory Notes for an aggregate purchase price of $750,000 (the “Notes”), and (ii) warrants to purchase shares of the Company's common stock, $0.001 par value( the “Common Stock”) of the Company (the “Warrants”);

    WHEREAS, the Company intends to issue senior secured convertible promissory notes in a subsequent financing for up to an additional aggregate amount of $4.25 million (“Subsequent Financing”); and

 

    WHEREAS, in order to induce the Purchasers to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “Securities Act”), and applicable state securities laws.

 

    NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each Purchaser hereby agree as follows:

 

    1.      Definitions.

 

    As used in this Agreement, the following capitalized terms shall have the following meanings.  Capitalized terms used but not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement.

 

       (a)      “Business Day” means any day other than Saturday, Sunday or a federal holiday.

 

       (b)      “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement.

 

       (c)      “Effectiveness Deadline” means (i) with respect to any Registration Statement required to be filed pursuant to Section 2(a), 90 days after the Filing Deadline for such initial Registration Statement, and (ii) with respect to any additional Registration Statements that may be required to be filed by the Company pursuant to this Agreement, the earlier of the (A) 90th calendar day following the date on which the Company was required to file such additional Registration Statement and (B) 2nd Business Day after the date the Company is notified (orally or in writing, whichever is earlier) by the SEC that such Registration Statement will not be reviewed or will not be subject to further review.

 

       (d)      “Filing Deadline” means (i) with respect to any Registration Statement required to be filed pursuant to Section 2(a), within 60 days after receipt of a written request from the Required Holders pursuant to Section 2(a), and (ii) with respect to any additional Registration Statements that may be required to be filed by the Company pursuant to this Agreement, the date on which the Company was required to file such additional Registration Statement pursuant to the terms of this Agreement.

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

 

       (f)      “Purchasers” means the Purchasers and any transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof.

 

  

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       (g)      “register,” “registered,” and “registration” refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis (“Rule 415”), and the declaration or ordering of effectiveness of such Registration Statement by the U.S. Securities and Exchange Commission (the “SEC”); provided, however, if the Required Holders in good faith determine that under applicable SEC interpretations, rules or policies a Rule 415 registration would not, in light of the circumstances of the Company or the proposed offering, permit the resale of all of the Registrable Securities immediately after effectiveness, or material limitations would be imposed on any such resale, then the registration shall be on Form S-1 or such other form that permits the maximum ability of holders of Registrable Securities to effectuate an unrestricted resale of such securities.

       (h)      “Registrable Securities” means (i) the Common Stock into which the Principal Amount, together with any accrued interest and any other amounts payable under the Notes may be converted and (ii) the shares of Common Stock issuable upon exercise or otherwise pursuant to the Warrants (without regard to any limitations on exercise set forth therein) (the "Warrant Shares"), and (iii) any shares of capital stock issued or issuable in exchange for or otherwise with respect to the foregoing.

       (i)      “Registration Statement” means a registration statement of the Company under the Securities Act which the Company may or is obligated to file hereunder.

 

       (j)      “Required Holders” means the holders of at least a majority of the Registrable Securities (excluding any Registrable Securities held by the Company or any of its subsidiaries) holding Notes, including senior secured promissory notes issued in the Subsequent Financing, with an aggregate minimum Principal Amount of $3 million.

 

       (k)      “Rule 144” means Rule 144 promulgated by the SEC under the Securities Act, as such rule may be amended from time to time, or any other similar or successor rule or regulation of the SEC that may at any time permit the Purchasers to sell securities of the Company to the public without registration.

       (l)      “Rule 415” means Rule 415 promulgated by the SEC under the Securities Act, as such rule may be amended from time to time, or any other similar or successor rule or regulation of the SEC providing for offering securities on a continuous or delayed basis.

 

       (m)    “SEC” means the United States Securities and Exchange Commission or any successor thereto.

    2.      Registration.

       (a)      Mandatory Registration.  Subject to the terms and conditions, and in accordance with the provisions of Section 3 and Section 4 hereof, at any time after the one year anniversary of the Closing Date, if the Company shall receive a written request from the Required Holders that the Company file a registration statement under the Securities Act covering the registration of at least 25% of the Registrable Securities then outstanding, then the Company shall, within 30 days of the receipt thereof, give written notice of such request to the remaining Purchasers, and subject to the limitations of this Section 2, prepare and, as soon as practicable, but in no event later than the Filing Deadline, file with the SEC an initial Registration Statement on Form S-1 covering the resale of all of such Registrable Securities.  Such initial Registration Statement, and each other Registration Statement required to be filed pursuant to the terms of this Agreement, shall contain (except if otherwise directed by the Required Holders) the “Selling Shareholders” and “Plan of Distribution” sections in substantially the form attached hereto as Exhibit 1.  The Company shall use reasonable best efforts to have such initial Registration Statement, and each other Registration Statement required to be filed pursuant to the terms of this Agreement, declared effective by the SEC as soon as practicable, but in no event later than the applicable Effectiveness Deadline for such Registration Statement.

  

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       (b)      Piggy-Back Registrations.  Subject to the terms and conditions, and in accordance with the provisions of, Section 4 hereof, in the event that all Registrable Securities are not registered for resale, should the Company at any time prior to the expiration of the Registration Period (as hereinafter defined), determine to file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities (other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other bona fide employee benefit plans), the Company shall send to each Purchaser who is entitled to registration rights under this Section 2(b) written notice of such determination and, if within 20 days after the effective date of such notice (as provided for in Section 11(b) hereof), such Purchaser shall so request in writing, the Company shall include in such Registration Statement all or any part of the Registrable Securities such Purchaser requests to be registered.  Notwithstanding any other provision of this Agreement, the Company may withdraw any registration statement referred to in this Section 2(b) without incurring any liability to the Purchasers.

       (c)      Offering. Notwithstanding anything to the contrary contained in this Agreement, in the event the staff of the SEC (the “Staff”) or the SEC seeks to characterize any offering pursuant to a Registration Statement filed pursuant to this Agreement as constituting an offering of securities by, or on behalf of, the Company, or in any other manner, such that the Staff or the SEC do not permit such Registration Statement to become effective and used for resales in a manner that does not constitute such an offering and that permits the continuous resale at the market by the Purchasers participating therein (or as otherwise may be acceptable to each Purchaser) without being named therein as an “underwriter,” then the Company shall reduce the number of shares to be included in such Registration Statement by all Purchasers until such time as the Staff and the SEC shall so permit such Registration Statement to become effective as aforesaid.  In making such reduction, the Company shall reduce the number of shares to be included by all Purchasers on a pro rata basis (based upon the number of Registrable Securities otherwise required to be included for each Purchaser) unless the inclusion of shares by a particular Purchaser or a particular set of Purchasers are resulting in the Staff or the SEC’s “by or on behalf of the Company” offering position, in which event the shares held by such Purchaser or set of Purchasers shall be the only shares subject to reduction (and if by a set of Purchasers on a pro rata basis by such Purchasers or on such other basis as would result in the exclusion of the least number of shares by all such Purchasers); provided, that, with respect to such pro rata portion allocated to any Purchaser, such Purchaser may elect the allocation of such pro rata portion among the Registrable Securities of such Purchaser.  In addition, in the event that the Staff or the SEC requires any Purchaser seeking to sell securities under a Registration Statement filed pursuant to this Agreement to be specifically identified as an “underwriter” in order to permit such Registration Statement to become effective, and such Purchaser does not consent to being so named as an underwriter in such Registration Statement, then, in each such case, the Company shall reduce the total number of Registrable Securities to be registered on behalf of such Purchaser, until such time as the Staff or the SEC does not require such identification or until such Purchaser accepts such identification and the manner thereof.

 

       (d)      Allocation of Registrable Securities. The initial number of Registrable Securities included in any Registration Statement and any increase in the number of Registrable Securities included therein shall be allocated pro rata among the Purchasers based on the number of Registrable Securities held by each Purchaser at the time such Registration Statement covering such initial number of Registrable Securities or increase thereof is declared effective by the SEC.  In the event that a Purchaser sells or otherwise transfers any of such Purchaser’s Registrable Securities, each transferee or assignee (as the case may be) that becomes an Purchaser shall be allocated a pro rata portion of the then-remaining number of Registrable Securities included in such Registration Statement for such transferor or assignee (as the case may be). Any shares of Common Stock included in a Registration Statement and which remain allocated to any Person which ceases to hold any Registrable Securities covered by such Registration Statement shall be allocated to the remaining Purchasers, pro rata based on the number of Registrable Securities then held by such Purchasers which are covered by such Registration Statement.

 

       (e)      No Inclusion of Other Securities.  With the exception of any Registrable Securities that result from the Second Note Offering (as defined in the Securities Purchase Agreement), in no event shall the Company include any securities other than Registrable Securities on any Registration Statement without the prior written consent of the Required Holders.  With the exception of the investors in the Second Note Offering who will be granted registration rights, until the Applicable Date the Company shall not enter into any agreement providing any registration rights to any of its security holders without the consent of the Required Holders.

  

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       (f)      Termination.  All registration rights under this Section 2 shall terminate and be of no further force and effect upon repayment of the Notes (with respect to each Note); provided, however, that if the Warrant Shares are not registered prior to the termination of the registration rights, then the Purchaser will have the right to require the Company to purchase the Warrant in accordance with Section 13 of the Warrant (the "Put Right").  The Put Right will expire 12 months from the termination of the registration rights in accordance with this Section 2(f).

 

       (g)      Late Fees. If for any reason the Company does not file a registration statement by the Filing Deadline ("Filing Default") or if for any reason it is unable to have that registration statement declared effective by the SEC as of the Effectiveness Deadline ("Effectiveness Default"), then the Company shall pay promptly an amount that is determined by (A) multiplying (i) the amount of the Offering, by (ii) 0.03, and then (iii) dividing by 30, followed by (B) multiplying the result by the number of elapsed days needed to cure the Filing Default or the Effectiveness Default. By way of example if the Company cured the Filing Default or the Effectiveness Default 10 days after the Filing Deadline or 10 days after the Effectiveness Deadline, then it would be required to pay the Purchasers as a group an aggregate of $2,250, according to their respective interests, no later than the earlier of (x) 10 business days after cure of the Filing Default or of the Effectiveness Default, or (ii) 10 business days after the month in which the Filing Default or the Effectiveness Default has occurred.

    3.      Obligations of the Company.  In connection with the registration of the Registrable Securities, the Company shall have the following obligations:

 

       (a)      On or prior to the Filing Deadline the Company will use reasonable best efforts to become a publicly traded and publicly reporting company under both the Securities Act and the Securities Exchange Act of 1934 and will use reasonable best efforts to file a Registration Statement with the Securities and Exchange Commission (“SEC”) on Form S-1 covering the registration of Common Stock of the Company, including the Registrable Securities, on or prior to the Filing Deadline and shall use its reasonable best efforts to cause such Registration Statement to be declared effective by the SEC as soon as practicable after such filing (but in no event later than the Effectiveness Date), and the Company shall take all such other actions associated with being a publicly traded company, including filing an application for listing the Common Stock on the NASDAQ Capital Market or such other exchange as agreed to by the Company and the underwriter.  Subject to Allowable Grace Periods, upon effectiveness, the Company shall use its reasonable best efforts to keep such Registration Statement effective pursuant to Rule 415 at all times until such date as is the earlier of:  (i) the date on which all of the Registrable Securities covered by the Registration Statement have been sold and (ii) the date on which the Registrable Securities (in the opinion of counsel to the Purchasers reasonably acceptable to the Company) may be immediately sold to the public by non-affiliates without registration or restriction (including, without limitation, as to volume by each holder thereof) under the Securities Act (the “Registration Period”).  Notwithstanding anything to the contrary contained in this Agreement, the Company shall ensure that, when filed and at all times while effective, each Registration Statement (including, without limitation, all amendments and supplements thereto) and the prospectus (including, without limitation, all amendments and supplements thereto) used in connection with such Registration Statement (1) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein (in the case of prospectuses, in the light of the circumstances in which they were made) not misleading and (2) will disclose (whether directly or through incorporation by reference to other SEC filings to the extent permitted) all material information regarding the Company and its securities. The Company shall submit to the SEC, within one Business Day after the later of the date that (i) the Company learns that no review of a particular Registration Statement will be made by the Staff or that the Staff has no further comments on a particular Registration Statement (as the case may be) and (ii) the consent of Legal Counsel is obtained pursuant to Section 3(c) (which consent shall be immediately sought), a request for acceleration of effectiveness of such Registration Statement to a time and date not later than 48 hours after the submission of such request.

  

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       (b)      The Company shall use reasonable best efforts to prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statements and the prospectus used in connection with the Registration Statements, which prospectus is to be filed pursuant to Rule 424 promulgated under the Securities Act, as may be necessary to keep the Registration Statements effective at all times during the Registration Period, and, during such period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statements; provided, however, by 8:30 a.m. (New York time) on the Business Day immediately following each Effective Date, the Company shall file with the SEC in accordance with Rule 424(b) under the Securities Act the final prospectus to be used in connection with sales pursuant to the applicable Registration Statement (whether or not such a prospectus is technically required by such rule).

       (c)      If requested by a Purchaser, the Company shall furnish to each Purchaser whose Registrable Securities are included in a Registration Statement promptly (but in no event more than two business days) after the Registration Statement is declared effective by the SEC, such number of copies of a final prospectus and all amendments and supplements thereto and such other documents as such Purchaser may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Purchaser.  The Company will promptly notify each Purchaser of the effectiveness of each Registration Statement or any post-effective amendment.  The Company will, as promptly as reasonably practical, respond to any and all comments received from the SEC (which comments relating to such Registration Statement that pertain to the Purchasers as “Selling Shareholders” shall promptly be made available to the Purchasers upon request; provided that, the Company shall not be obligated to make available any comments that would result in the disclosure to the Purchasers of material and non-public information concerning the Company or that contain information for which the Company has sought confidential treatment), with a view towards causing each Registration Statement or any amendment thereto to be declared effective by the SEC as soon as practicable, shall promptly file an acceleration request as soon as practicable following the resolution or clearance of all SEC comments or, if applicable, following notification by the SEC that any such Registration Statement or any amendment thereto will not be subject to review and, if required by law, shall promptly file with the SEC a final prospectus as soon as practicable following receipt by the Company from the SEC of an order declaring the Registration Statement effective.

       (d)      The Company shall use reasonable best efforts to:  (i) register and qualify the Registrable Securities covered by the Registration Statements under such other securities or “blue sky” laws of such jurisdictions in the United States as the Purchasers who hold a majority-in-interest of the Registrable Securities being offered reasonably request (not to exceed 10 states), (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to:  (a) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (b) subject itself to general taxation in any such jurisdiction, (c) file a general consent to service of process in any such jurisdiction, (d) provide any undertakings that cause the Company undue expense or burden, or (e) make any change in its charter or bylaws, which in each case the Board of Directors of the Company determines to be contrary to the best interests of the Company and its shareholders.

       (e)      The Company shall promptly notify each Purchaser (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, when a Registration Statement or any post-effective amendment has become effective, and when the Company receives written notice from the SEC that a Registration Statement or any post-effective amendment will be reviewed by the SEC, (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, (iii) of the Company’s reasonable determination that a post-effective amendment to a Registration Statement would be appropriate; and (iv) of the receipt of any request by the SEC or any other federal or state governmental authority for any additional information relating to the Registration Statement or any amendment or supplement thereto or any related prospectus. The Company shall respond as promptly as practicable to any comments received from the SEC with respect to each Registration Statement or any amendment thereto.

  

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       (f)      The Company shall use its reasonable best efforts to prevent the issuance of any stop order or other suspension of effectiveness of any Registration Statement, and, if such an order is issued, to obtain the withdrawal of such order at the earliest possible moment and to notify each Purchaser who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance of such order and the resolution thereof.

       (g)      The sections of such Registration Statement covering information with respect to the Purchasers, the Purchaser’s beneficial ownership of securities of the Company or the Purchasers intended method of disposition of Registrable Securities shall conform to the information provided to the Company by each of the Purchasers.

 

       (h)      In connection with an underwritten offering only, at the request of the Required Holders, the Company shall furnish, on the date that Registrable Securities are delivered to an underwriter for sale in connection with any Registration Statement:  (i) an opinion, dated as of such date, from counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the underwriters, if any, and the Purchasers and (ii) a letter, dated such date, from the Company’s independent registered public accounting firm in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and the Purchasers.

 

       (i)      The Company shall take all reasonable efforts to cause all the Registrable Securities covered by the Registration Statement to be quoted on the NASDAQ Capital Market (or equivalent reasonably acceptable to the Required Holders) or listed on a national exchange.

 

       (j)      The Company shall provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement.

       (k)           The Company shall use its reasonable best efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

 

       (l)           The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with, and in the manner provided by, the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Company’s fiscal quarter next following the applicable Effective Date of each Registration Statement.

       (m)           The Company shall use its reasonable best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

       (n)           Notwithstanding anything to the contrary herein (but subject to the last sentence of this Section 3(n)), at any time after the Effective Date of a particular Registration Statement, the Company may delay the disclosure of material, non-public information concerning the Company or any of its subsidiaries the disclosure of which at the time is not, in the good faith opinion of the board of directors of the Company, in the best interest of the Company and, upon the advice of counsel to the Company, otherwise required (a “Grace Period”), provided that the Company shall promptly notify the Purchasers in writing of the existence of material, non-public information giving rise to a Grace Period (provided that in each such notice the Company shall not disclose the content of such material, non-public information to any of the Purchasers) and the date on which such Grace Period will begin and end.

 

  

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    4.      Underwriting Requirements.  In connection with any Registration Statement involving an underwritten offering of shares of the Company’s Common Stock, the Company shall not be required to include any of the Purchasers' Registrable Securities in such underwriting unless the Purchaser accepts the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriter in its sole discretion determines will not jeopardize the success of the offering by the Company.  If the total number of Registrable Securities to be included in such offering (the “Requested Securities”) exceeds the number of securities to be sold (other than by the Company) that the underwriter in its reasonable discretion determines is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such Requested Securities which the underwriter, in its sole discretion, determines will not jeopardize the success of the offering.  If the underwriter determines that less than all of the Requested Securities requested to be registered can be included in such offering, then the securities to be registered that are included in such offering shall be allocated among the holders of the Registrable Securities (the “Holders”) in proportion (as nearly as practicable to) the number of Requested Securities owned by each Holder.  To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 10 shares.  For purposes of the provision in this Section 4 concerning apportionment, for any Holder that is a partnership, limited liability company, or corporation, the partners, members, retired partners, retired members, shareholders, and affiliates of such Holder, or the estates and immediate family members of any such partners, retired partners, members, and retired members and any trusts for the benefit of any of the foregoing persons, shall be deemed to be a single “Holder,” and any pro rata reduction with respect to such “Holder” shall be based upon the aggregate number of Requested Securities owned by all persons included in such “Holder,” as defined in this sentence.  The Purchasers understand that the underwriter may determine that none of the Registrable Securities can be included in the offering.

 

    5.      Obligations of the Purchasers. In connection with the registration of the Registrable Securities, the Purchasers shall have the following obligations:

 

       (a)      It shall be a condition precedent to the obligations of the Company to include any Purchaser’s Registrable Securities in any Registration Statement that such Purchaser shall timely furnish to the Company such information regarding itself, the Registrable Securities held by it, the intended method of disposition of the Registrable Securities held by it and any other information as shall be reasonably required to effect the registration of such Registrable Securities and shall provide such information and execute such documents in connection with such registration as the Company may reasonably request.  At least three business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Purchaser of the information the Company requires from each such Purchaser.

 

       (b)      Each Purchaser, by such Purchaser’s acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statements hereunder, unless such Purchaser has notified the Company in writing of such Purchaser’s election to exclude all of such Purchaser’s Registrable Securities from the Registration Statements.

 

       (c)      In the event that Purchasers holding a majority-in-interest of the Registrable Securities being registered determine to engage the services of an underwriter, each Purchaser agrees to enter into and perform such Purchaser’s obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Purchaser has notified the Company in writing of such Purchaser’s election to exclude all of such Purchaser’s Registrable Securities from such Registration Statement.

 

       (d)      Each Purchaser agrees that, upon receipt of any notice from the Company of the happening of any event of which the Company has knowledge as a result of which the prospectus included in any Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or of the issuance of a stop order or other suspension of effectiveness of any Registration Statement, such Purchaser will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Purchaser’s receipt of the copies of the supplemented or amended prospectus and, if so directed by the Company, such Purchaser shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Purchaser’s possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice.

  

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       (e)      No Purchaser may participate in any underwritten registration hereunder unless such Purchaser:  (i) agrees to sell such Purchaser’s Registrable Securities on the basis provided in any underwriting arrangements in usual and customary form entered into by the Company, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and any expenses in excess of those payable by the Company pursuant to Section 6 below.

       (f)      Each Purchaser covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it or an exemption therefrom in connection with the offer and sale of Registrable Securities pursuant to any Registration Statement.

 

    6.      Expenses of Registration.  All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualification fees, printers and accounting fees, the fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of legal counsel to the underwriter (if any) shall be borne by the Company.

 

    7.      Indemnification.

 

       (a)      To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Purchaser and each of its directors, officers, shareholders, members, partners, employees, agents, advisors, representatives (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding the lack of such title or any other title) and each Person, if any, who controls such Purchaser within the meaning of the Securities Act or the Exchange Act and each of the directors, officers, shareholders, members, partners, employees, agents, advisors, representatives (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding the lack of such title or any other title) of such controlling Persons (each, an “Indemnified Person”), against any losses, obligations, claims, damages, liabilities, contingencies, judgments, fines, penalties, charges, costs (including, without limitation, court costs, reasonable attorneys’ fees and costs of defense and investigation), amounts paid in settlement or expenses, joint or several, (collectively, “Claims”) incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other “blue sky” laws of any jurisdiction in which Registrable Securities are offered (“Blue Sky Filing”), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, “Violations”). Subject to Section 7(c), the Company shall reimburse the Indemnified Persons, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim.  Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 7(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person for such Indemnified Person expressly for use in connection with the preparation of such Registration Statement or any such amendment thereof or supplement thereto and (ii) shall not be available to a particular Purchaser to the extent such Claim is based on a failure of such Purchaser to deliver or to cause to be delivered the prospectus made available by the Company (to the extent applicable), including, without limitation, a corrected prospectus, if such prospectus or corrected prospectus was timely made available by the Company and then only if, and to the extent that, following the receipt of the corrected prospectus no grounds for such Claim would have existed; and (iii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person.

  

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       (b)      In connection with any Registration Statement in which an Purchaser is participating, such Purchaser agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 7(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act (each, an “Indemnified Party”), against any Claim or Indemnified Damages to which any of them may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case, to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Purchaser expressly for use in connection with such Registration Statement; and, subject to Section 7(c) and the below provisos in this Section 7(b), such Purchaser will reimburse promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim; provided, however, the indemnity agreement contained in this Section 7(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Purchaser, which consent shall not be unreasonably withheld or delayed, provided further that such Purchaser shall be liable under this Section 7(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Purchaser as a result of the applicable sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party.

 

        (c)      Promptly after receipt by an Indemnified Person or Indemnified Party (as the case may be) under this Section 7 of notice of the commencement of any action or proceeding (including, without limitation, any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party (as the case may be) shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 7, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party (as the case may be); provided, however, an Indemnified Person or Indemnified Party (as the case may be) shall have the right to retain its own counsel with the fees and expenses of such counsel to be paid by the indemnifying party if: (i) the indemnifying party has agreed in writing to pay such fees and expenses; (ii) the indemnifying party shall have failed promptly to assume the defense of such Claim and to employ counsel reasonably satisfactory to such Indemnified Person or Indemnified Party (as the case may be) in any such Claim; or (iii) the named parties to any such Claim (including, without limitation, any impleaded parties) include both such Indemnified Person or Indemnified Party and the indemnifying party, and such Indemnified Person or such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Person or such Indemnified Party and the indemnifying party (in which case, if such Indemnified Person or such Indemnified Party notifies the indemnifying party in writing that it elects to employ separate counsel at the expense of the indemnifying party, then the indemnifying party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party, provided further that in the case of clause (iii) above the indemnifying party shall not be responsible for the reasonable fees and expenses of more than one separate legal counsel for such Indemnified Person or Indemnified Party). The Indemnified Party or Indemnified Person shall reasonably cooperate with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person reasonably apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent; provided, however, the indemnifying party shall not unreasonably withhold, delay or condition its consent.  No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim or litigation, and such settlement shall not include any admission as to fault on the part of the Indemnified Party. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 7, except to the extent that the indemnifying party is materially and adversely prejudiced in its ability to defend such action.

  

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       (d)      No Person involved in the sale of Registrable Securities who is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) in connection with such sale shall be entitled to indemnification from any Person involved in such sale of Registrable Securities who is not guilty of fraudulent misrepresentation.

 

       (e)      The indemnity and contribution agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

 

    8.      Amendment of Registration Rights.  The terms and provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with written consent of the Company and the Required Holders.  Any amendment or waiver effected in accordance with this Section 8 shall be binding upon each Purchaser and the Company; provided that no such amendment shall be effective to the extent that it (1) applies to less than all of the holders of Registrable Securities or (2) imposes any obligation or liability on any Purchaser without such Purchaser’s prior written consent (which may be granted or withheld in such Purchaser’s sole discretion). No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party.  No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.

 

    9.      Miscellaneous.

 

       (a)      A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities.  If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.

 

       (b)      Any notices required or permitted to be given under the terms hereof shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service)or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party.  The addresses for such communications shall be:

 

	
If to the Company:

 

Ideal Power Converters, Inc.

5004 Bee Creek Road, Suite 600

Spicewood, Texas 78669

Attention:  Chief Executive Officer

Telephone:

Facsimile No.:

 

	
If to a Purchaser:

 

To the address set forth on the signature page of this Agreement.

	
 

With a copy (not constituting notice) to:

 

MDB Capital Group, LLC

401 Wilshire Blvd., Suite 1020

Santa Monica, CA 90401

Attention: Anthony DiGiandomenico

Telephone: (310) 526-5015

Facsimile No.:

 

  

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    Each party shall provide notice to the other party of any change in address.

 

       (c)      Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

 

       (d)      This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New York without regard to the choice of law principles thereof.  Each of the parties hereto irrevocably submits to the exclusive jurisdiction of the courts of the State of New York located in New York County and the United States District Court for the Southern District of New York for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Agreement and the transactions contemplated hereby.  Service of process in connection with any such suit, action or proceeding may be served on each party hereto anywhere in the world by the same methods as are specified for the giving of notices under this Agreement.  Each of the parties hereto irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding and to the laying of venue in such court.  Each party hereto irrevocably waives any objection to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.  EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

 

       (e)      In the event that any provision of this Agreement 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 provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.

 

       (f)      This Agreement and the other Transaction Documents (including all schedules and exhibits thereto) constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof.  There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein.  This Agreement and the other Transaction Documents (including all schedules and exhibits thereto) supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.

 

       (g)      This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns.  This Agreement is not for the benefit of, nor may any provision hereof be enforced by, any Person, other than the parties hereto or their respective permitted successors and assigns.

 

       (h)      The headings in this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.  Unless the context clearly indicates otherwise, each pronoun herein shall be deemed to include the masculine, feminine, neuter, singular and plural forms thereof. The terms “including,” “includes,” “include” and words of like import shall be construed broadly as if followed by the words “without limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import refer to this entire Agreement instead of just the provision in which they are found.

       (i)      This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party.  This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission or electronic mail delivery of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

       (j)      Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

       (k)      Except as otherwise provided herein, all consents and other determinations to be made by the Purchasers pursuant to this Agreement shall be made by the Required Holders.

  

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       (l)      The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

 

       (m)                 The obligations of each Purchaser under this Agreement and the other Transaction Documents are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under this Agreement or any other Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as, and the Company acknowledges that the Purchasers do not so constitute, a partnership, an association, a joint venture or any other kind of group or entity, or create a presumption that the Purchasers are in any way acting in concert or as a group or entity with respect to such obligations or the transactions contemplated by the Transaction Documents or any matters, and the Company acknowledges that the Purchasers are not acting in concert or as a group, and the Company shall not assert any such claim, with respect to such obligations or the transactions contemplated by this Agreement or any of the other the Transaction Documents. Each Purchaser shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.

 

 

[Remainder of page intentionally left blank; signature pages follow.]

  

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    IN WITNESS WHEREOF, the undersigned Purchasers and the Company have caused this Registration Rights Agreement to be duly executed as of the date first above written.

	  	
IDEAL POWER CONVERTERS, INC.

	  
	  	  	  	  
	  	
 

 

By:

	  	  
	  	  	
Name 

	  
	  	  	
Title 

	  
	  	  	  	  
	  	
PURCHASERS:

	  
	  	  	  	  
	
The Purchasers executing the Signature Page in the form attached hereto as Annex A and delivering the same to the Company or its agents shall be deemed to have executed this Agreement and agreed to the terms hereof.

  

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Annex A

 

Registration Rights Agreement

Purchaser Counterpart Signature Page

 

    The undersigned, desiring to: enter into this Registration Rights Agreement dated as of August __, 2012 (the “Agreement”), between the undersigned, Ideal Power Converters, Inc., a Texas corporation (the “Company”), and the other parties thereto, in or substantially in the form furnished to the undersigned, hereby agrees to join the Agreement as a party thereto, with all the rights and privileges appertaining thereto, and to be bound in all respects by the terms and conditions thereof.

 

    IN WITNESS WHEREOF, the undersigned has executed the Agreement as of August __, 2012.

 

	  	
PURCHASER:

 

	  	
Name and Address, Fax No. and Social Security No./EIN of Purchaser:

 

	  	
 

______________________________________

 

______________________________________

 

______________________________________

 

______________________________________

 

Fax No.: _______________________________

Soc. Sec. No./EIN: _______________________

 

	  	  
	  	
If a partnership, corporation, trust or other business entity:

 

	  	
By:

 

 

___________________________________                                              

	  	
       Name:

	  	
       Title:

	  	
 

If an individual:

 

 

 

_____________________________________

	  	
 

Signature

 

  

-78-

  

EXHIBIT 1

SELLING STOCKHOLDERS

 

    The shares of common stock being offered by the selling shareholders are those issuable to the selling shareholders upon conversion of the senior secured convertible promissory notes and the exercise of the warrants.  For additional information regarding the issuance of the senior secured convertible promissory notes and the warrants, see “Private Placement of Senior Secured Convertible Promissory Notes and Warrants” above.We are registering the shares of common stock in order to permit the selling shareholders to offer the shares for resale from time to time.  Except for the ownership of the senior secured convertible promissory notes and the warrants issued pursuant to the Securities Purchase Agreement, the selling shareholders have not had any material relationship with us within the past three years.

    The table below lists the selling shareholders and other information regarding the beneficial ownership (as determined under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder) of the shares of common stock beneficially held by each of the selling shareholders, based on their respective beneficial ownership of the shares of common stock as of ____________, 2012, assuming conversion of all amounts owed under the senior secured convertible promissory notes and exercise of the warrants held by each such selling shareholder on that date but taking account of any limitations on exercise set forth therein. The third column lists the number of shares of common stock being sold in this offering.  The fourth column lists the shares of common stock that will be beneficially owned by each selling shareholder following this offering.  We have assumed for purposes of preparing this table that each selling shareholder will sell all of the shares of common stock being offered.

    In accordance with the terms of a registration rights agreement with the selling shareholders, this prospectus generally covers the resale of the sum of (i) the number of shares of common stock that may be issued in connection with the conversion of all amounts owed under the senior secured convertible promissory notes, in each case determined as if all amounts owed under the senior secured convertible promissory notes were converted and (ii) 100% of the maximum number of shares of common stock issuable upon exercise of the warrants, in each case, determined as if the outstanding warrants were exercised in full.

 

	
 

 

 

 

Name of Selling Shareholder

	
 

Number of Shares

of Common Stock

Owned Prior to

Offering

	
Maximum Number

Of Shares of

Common Stock to be

Sold Pursuant to this

Prospectus

	
 

Number of Shares

of Common Stock

Owned After

Offering

	  	  	  	  
	  	  	  	  
	  	  	  	  
	  	  	  	  
	  	  	  	  

 

  

-79-

  

 

PLAN OF DISTRIBUTION

 

    We are registering the shares of common stock issuable upon conversion of all amounts due under the senior secured convertible promissory notes and the exercise of the warrants to permit the resale of these shares of common stock by the holders of these securities from time to time after the date of this prospectus.  We will not receive any of the proceeds from the sale by the selling shareholders of the shares of common stock.  We will bear all fees and expenses incident to our obligation to register the shares of common stock.

 

    The selling shareholders may sell all or a portion of the shares of common stock held by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling shareholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions, pursuant to one or more of the following methods:

 

	  	
●

	
on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

 

	  	
●

	
in the over-the-counter market;

 

	  	
●

	
in transactions otherwise than on these exchanges or systems or in the over-the-counter market;

 

	  	
●

	
through the writing or settlement of options, whether such options are listed on an options exchange or otherwise;

 

	  	
●

	
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

	  	
●

	
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

	  	
●

	
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

	  	
●

	
an exchange distribution in accordance with the rules of the applicable exchange;

 

	  	
●

	
privately negotiated transactions;

 

	  	
●

	
short sales made after the date the Registration Statement is declared effective by the SEC;

 

	  	
●

	
agreements between broker-dealers and the selling shareholders to sell a specified number of such shares at a stipulated price per share;

 

	  	
●

	
a combination of any such methods of sale; and

 

	  	
●

	
any other method permitted pursuant to applicable law.

 

    The selling shareholders may also sell shares of common stock under Rule 144 promulgated under the Securities Act of 1933, as amended, if available, rather than under this prospectus. In addition, the selling shareholders may transfer the shares of common stock by other means not described in this prospectus. If the selling shareholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling shareholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of common stock or otherwise, the selling shareholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling shareholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling shareholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

  

-80-

  

    The selling shareholders may pledge or grant a security interest in some or all of the warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending, if necessary, the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this prospectus. The selling shareholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

 

    To the extent required by the Securities Act and the rules and regulations thereunder, the selling shareholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed, which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling shareholders and any discounts, commissions or concessions allowed or re-allowed or paid to broker-dealers.

 

    Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

 

    There can be no assurance that any selling shareholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.

 

    The selling shareholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, to the extent applicable, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling shareholders and any other participating person. To the extent applicable, Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

    We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimated to be $[______] in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, a selling shareholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling shareholders against liabilities, including some liabilities under the Securities Act in accordance with the registration rights agreements or the selling shareholders will be entitled to contribution. We may be indemnified by the selling shareholders against civil liabilities, including liabilities under the Securities Act that may arise from any written information furnished to us by the selling shareholder specifically for use in this prospectus, in accordance with the related registration rights agreements or we may be entitled to contribution.

    Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.

 

  

-81-

  

EXHIBIT H

FORM OF LEGAL OPINIONS

    1.      The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted.  The Company has no direct or indirect subsidiaries.  The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect.

 

    2.      The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under the Transaction Documents.  The Transaction Documents, and the issuance of the Notes, and Warrants and the reservation and issuance of Common Stock issuable upon conversion of the Notes and exercise of the Warrants have been (a) duly approved by the Board of Directors of the Company, and (b) the Securities, when issued pursuant to the Agreement and upon delivery, shall be validly issued and outstanding, fully paid and non-assessable.

 

    3.      The execution, delivery and performance of the Transaction Documents by the Company and the consummation of the transactions contemplated thereby, will not, with or without the giving of notice or the passage of time or both: (a) violate the provisions of the Articles of Incorporation or bylaws of the Company; or (b) to our knowledge, violate any judgment, decree, order or award of any court binding upon the Company.

 

    4.      The Transaction Documents constitute the valid and legally binding obligations of the Company and are enforceable against the Company in accordance with their respective terms.

 

    5.      The Securities have not been registered under the Securities Act of 1933, as amended (the “Act”) or under the laws of any state or other jurisdiction, and are or will be issued pursuant to a valid exemption from registration.

 

    6.      The Purchaser has been granted valid security interests in the Collateral pursuant to the Security Agreement, enforceable against the Company in accordance with the respective terms and provisions of the Security Agreement, and to the extent such security interest may be perfected under the Uniform Commercial Code by the filing of financing statements, then upon the due and timely filing of Uniform Commercial Code financing statements respecting the Company, with the Secretary of State of the State of Texas, those security interests will be perfected in such Collateral to the extent described in those statements and the Security Agreement.

 

    7.      The Subordination Agreement is a valid and binding obligation of the Company and of TETF, enforceable against TETF in accordance with its respective terms and provisions.

 

  

-82-

  

IDEAL POWER CONVERTERS, INC.

 

Schedules to the

 

Securities Purchase Agreement

 

 

Dated ____________, 2012

 

The following disclosures are intended only to list those items required to be listed in the Sections of the Agreement corresponding to the number of the schedule, and to qualify and limit the representations, warranties and covenants made by IDEAL POWER CONVERTERS, INC., a Texas corporation (the “Company”), in the Securities Purchase Agreement dated ___________, 2012 (the “Agreement”) between the Company and the Purchasers listed thereto.  Unless otherwise noted herein, any capitalized term in the following schedules (the “Schedules”) shall have the same meaning assigned to such term in the Agreement.

 

  

-83-

  

Ideal Power Converters, Inc.

 

DISCLOSURE SCHEDULES

 

August [___], 2012

 

    These Disclosure Schedules are provided in connection with the representations and warranties in Section 4 of the Securities Purchase Agreement dated August [___], 2012 (the “Agreement”) by and between Ideal Power Converters, Inc., a Texas corporation (the “Company”), and the Purchasers named therein.  Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Agreement.

 

    Nothing contained herein is intended to broaden the scope of any representation or warranty contained in the Agreement or to create any covenant on the part of the Company.  Inclusion of any item in these Disclosure Schedules (a) does not represent a determination that such item is material nor shall it be deemed to establish a standard of materiality, except to the extent that the representation or warranty in the Agreement to which such item relates includes a representation or warranty as to materiality; (b) does not represent a determination that such item did not arise in the ordinary course of business, except to the extent that the representation or warranty in the Agreement to which such item relates includes a representation or warranty as to the ordinary course of business; and (c) shall not constitute, or be deemed to be, an admission to any party other than the Purchasers concerning such item.

 

    All references to “Section” or “subsection” refer to a Section or subsection in the Agreement, unless the context otherwise requires.  The headings in these Schedules are for convenience of reference only and shall not affect the disclosures contained herein.  The disclosures in any section or subsection of these Disclosure Schedules shall qualify other sections and subsections in these Disclosure Schedules only to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.  As used in these Disclosure Schedules, “Company” means Ideal Power Converters, Inc. only.

 

    These Disclosure Schedules includes descriptions of certain of the Company’s agreements or instruments.  The descriptions are qualified in their entirety by reference to the detailed terms of the applicable agreement or instrument, provided that each agreement or instrument described herein was previously delivered or made available to a counsel for the Purchasers.

 

    All of the capitalization, share and per share information in this Disclosure Schedule gives effect to the Reclassification and the Stock Split provided for in the Amended and Restated Certificate of Formation of the Company (the “Restated Certificate”).

  

-84-

  

 

Schedule 4(b)(i)  Capitalization

Outstanding Common Shareholders

 

	
IDEAL POWER CONVERTERS INC

	  
	
Outstanding Common Shareholders

	  
	  	  
	
Shareholder

	
Number of Shares Common Stock (as of July 31, 2012)

	  	  
	
William C Alexander

	
1,280,250

	
Hamo Hacopian

	
625,000

	
Dr. David Breed

	
312,500

	
Cindy D. Breed

	
312,500

	
Charles De Tarr

	
281,925

	
Battery Ventures VIII, L.P.

	
122,175

	
John Bundschuh

	
108,550

	
Paul Bundschuh

	
106,620

	
Dynamic Manufacturing Solutions LLC

	
96,150

	
Mike Barron

	
42,160

	
Herman and Ann Breed

	
40,000

	
John P. Bundschuh

	
27,469

	
Paul Rousch

	
27,195

	
Salim A. and Rita S. Momin

	
25,000

	
Thomas Ryan   (was 25,000)

	
24,000

	
Joel Sher

	
18,815

	
Peter W. Bundschuh

	
14,675

	
William D. Bundschuh

	
14,675

	
Chris Cobb (including options w/vesting) and stock7/31

	
12,809

	
Mercom Capital LLC

	
11,289

	
Total

	
3,503,757

 

Outstanding Preferred Shareholders

 

	
Shareholder

	  	
Number of Shares Preferred Stock (as of July 18, 2012)

	  	  	  
	
None

	  	
0

	  	  	  
	
TOTAL:

	  	
0

  

-85-

  

 

Schedule 4(b)(ii)  Outstanding options, warrants

	
1.  

	
The Company has issued the following warrants, copies of which have been made available to counsel for the Purchasers:

 

	
a.  

	
Common Stock Warrant, dated November 3, 2008, granting Entrepreneurs Foundation of Central Texas the right to purchase 85,950 shares of Common Stock of the Company at an exercise price of $0.0004 per share.

 

	
b.  

	
Right to Purchase Shares pursuant to that Investment Unit issued by Ideal Power Converters, Inc. to the Office of the Governor Economic Development and Tourism, dated October 1, 2010, which provides for the issuance of shares of the Company’s Common Stock or shares of the same class of capital stock or series of preferred stock as shall be issued in the First Qualifying Financing Transaction (defined therein).

 

	
2.  

	
The following agreements, copies of which have been made available to counsel for the Purchasers, provide for issuance of Common Stock:

 

	
a.  

	
In connection with an offer for full employment, Mike Barron is eligible to be granted a stock option with a 2 year vesting period for 9,407 shares with a strike price of $2.65754.

 

	
b.  

	
Services Agreement, by and between Dynamic Manufacturing Solutions, LLC and Ideal Power Converters, Inc., dated January 15, 2010, which provided that Dynamic Manufacturing Solutions, LLC would receive $65 per hour, to be paid through issuances of Common Stock of Company.  According to the Services Agreement, each share of Common Stock of the Company was valued at $31.20 (prior to the stock split), based on a valuation of approximately $4,000,000 and 128,196 issued and optioned shares.  All shares issued pursuant to this agreement shall give effect to the Reclassification and the Stock Split provided in the Restated Certificate.  Compensation to Dynamic Manufacturing in the form of Common Stock of the Company is capped at a number of shares representing 3% of the total outstanding shares of Common Stock of the Company.  As of December 31, 2010, Dynamic Manufacturing Solutions, LLC reached the cap in the contract with 1,846 hrs at the $65/hr rate valued at $120,000 and 96,150 shares were issued (after stock split).  The Company has no outstanding obligations to Dynamic Manufacturing Solutions, LLC under this agreement, except that Dynamic Manufacturing Solutions, LLC, shall be paid an hourly rate of $85 per hour, if the Company fails to provide Dynamic Manufacturing Solutions, LLC with a right of first refusal on certain future manufacturing projects.

  

-86-

  

 

The Company has issued the following options, copies of which have been made available to counsel for the Purchasers:

Outstanding Option holders

	
Option Number

	 	
Holder

	
Date

	 	
Number of Shares of Common Stock

	 	 	
Exercise Price

	 	
Acceleration?

	 	1	 	
Robert Groover

	
6/15/2007

	 	 	15,000	 	 	$	0.04	 	
Fully vested

	 	2	 	
Patrick Holmes

	
6/15/2007

	 	 	10,000	 	 	$	0.04	 	
Fully vested

	 	5	 	
Charles De Tarr

	
1/31/2009

	 	 	63,675	 	 	$	0.17452	 	
Fully vested

	 	6	 	
Paul Bundschuh

	
5/12/2009

	 	 	2,925	 	 	$	0.3416	 	
Fully vested

	 	9	 	
Paul Bundschuh

	
8/25/2009

	 	 	3,050	 	 	$	0.334	 	
Fully vested

	 	12	 	
Robert King

	
2/23/2010

	 	 	64,100	 	 	$	1.248	 	
Yes, upon a change of control

	 	13-A	 	
Mike Barron

	
6/30/2010

	 	 	34,550	 	 	$	1.248	 	
Yes, upon a change of control

	 	14	 	
Paul Bundschuh

	
6/30/2010

	 	 	28,050	 	 	$	1.248	 	
Fully vested

	 	15	 	
Donald Haygood

	
6/30/2010

	 	 	1,200	 	 	$	1.248	 	
Yes, upon a change of control

	 	16	 	
Hamid Toliyat

	
9/10/2010

	 	 	48,375	 	 	$	1.248	 	
Yes, upon a change of control

	 	17	 	
Mike Barron

	
9/30/2010

	 	 	26,350	 	 	$	1.248	 	
Yes, upon a change of control

	 	18	 	
Paul Bundschuh

	
9/30/2010

	 	 	14,025	 	 	$	1.248	 	
Fully vested

	 	19	 	
Donald Haygood

	
9/30/2010

	 	 	1,200	 	 	$	1.248	 	
Yes, upon a change of control

	 	20	 	
Paul Roush

	
9/30/2010

	 	 	3,575	 	 	$	1.248	 	
Fully vested

	 	21	 	
Paul Bundschuh

	
12/31/2010

	 	 	14,025	 	 	$	1.248	 	
Fully vested

	 	22	 	
Donald Haygood

	
12/31/2010

	 	 	1,200	 	 	$	1.248	 	
Yes, upon a change of control

	 	23	 	
Donald Haygood

	
3/31/2011

	 	 	564	 	 	$	2.65754	 	
Fully vested

	 	24	 	
Donald Haygood

	
6/30/2011

	 	 	564	 	 	$	2.65754	 	
Yes, upon a change of control

	 	25	 	
Donald Haygood

	
11/14/2011

	 	 	9,407	 	 	$	2.65754	 	
Yes, upon a change of control, unless assumed by purchaser of company

	 	26	 	
Larry Burns

	
11/14/2011

	 	 	9,407	 	 	$	2.65754	 	
Yes, upon a change of control, unless assumed by purchaser of company

	 	27	 	
Paul Roush

	
11/14/2011

	 	 	9,407	 	 	$	2.65754	 	
Yes, upon a change of control, unless assumed by  purchaser of company

	 	28	 	
Mike Barron

	
11/14/2011

	 	 	9,407	 	 	$	2.65754	 	
Yes, upon a change of control, unless assumed by purchaser of company

	 	29	 	
     Chris Cobb

	
6/01/2012 (new-2012)

	 	 	45,155	 	 	$	2.65754	 	
Yes, upon a change of control, unless assumed by purchaser of company

	 	 	 	
 

Total

	  	 	 	415,211	 	 	 	 	 	  

  

-87-

  

 

Outstanding Warrant holders

	
Name - Note holders with warrants

	  	
Note

Amount

	  	  	
warrant

conversion rate

	  	  	
Shares from

conversion of notes

	  
	
Bundschuh, John P

	  	
$

	
13,000

	  	  	
$

	
2.65754

	  	  	  	
4,892

	  
	
Bundschuh, Paul

	  	
$

	
13,000

	  	  	
$

	
2.65754

	  	  	  	
4,892

	  
	
Bundschuh, Peter W

	  	
$

	
13,000

	  	  	
$

	
2.65754

	  	  	  	
4,892

	  
	
Bundschuh, William

	  	
$

	
13,000

	  	  	
$

	
2.65754

	  	  	  	
4,892

	  
	
Charles De Tarr

	  	
$

	
150,000

	  	  	
$

	
2.65754

	  	  	  	
56,443

	  
	
Chris Cobb

	  	
$

	
200,000

	  	  	
$

	
2.65754

	  	  	  	
75,258

	  
	
Dr Breed

	  	
$

	
25,000

	  	  	
$

	
2.65754

	  	  	  	
9,407

	  
	
Joel Sher

	  	
$

	
15,000

	  	  	
$

	
2.65754

	  	  	  	
5,644

	  
	
John Mike Barron

	  	
$

	
26,575

	  	  	
$

	
2.65754

	  	  	  	
10,000

	  
	
Passel LTD

	  	
$

	
100,000

	  	  	
$

	
2.65754

	  	  	  	
37,629

	  
	
Mike Barron

	  	
$

	
26,575

	  	  	
$

	
2.65754

	  	  	  	
10,000

	  
	
Sher's family Trust

	  	
$

	
10,000

	  	  	
$

	
2.65754

	  	  	  	
3,763

	  
	
R Andrew Webb

	  	
$

	
40,000

	  	  	
$

	
2.65754

	  	  	  	
15,052

	  
	
Magnus LeVicki

	  	
$

	
50,000

	  	  	
$

	
2.65754

	  	  	  	
18,814

	  
	
new notes (w/warrants) total 

	  	
$

	
695,151

	  	  	  	  	  	  	  	
261,578

	  
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Entrepreneurs Foundation of Central Texas	 	 	 	 	 	 	 	 	 	 	85,950	 
	 	sub-total	 	 	 	 	 	 	 	347,528	 

 

	Office of the Governor Economic Development and Tourism	Number and type of shares to be issued dependent upon First Qualifying Financing Transaction (defined therein) 

 

  

-88-

  

Schedule 4 g IP status

 

	
Dkt#

	
Status

	
where?

	
App No

	
Filed

	
Priority

	
Pat No

	
Pub No

	
IPC012

	
issued

	
US

	
11/759,006

	
6/6/2007

	
6/6/2006

	
7,599,196

	
US 2008/0013351

	
IPC013

	
issued

	
US

	
11/758,970

	
6/6/2007

	
6/6/2006

	
7,778,045

	
US 2008/0031019

	    IPC011CN	pending	    CN	    200780029208.4	 	        6/6/2006	 	 
	    IPC011EP 	pending	    EP	    7795915.3 	 	        6/6/2006	 	 
	
IPC012A

	
pending

	
US

	
12/479,207

	
6/5/2009

	
6/6/2006

	
-

	
US 2010/0067272

	
IPC012E

	
pending

	
US

	
13/205,243

	
8/8/2011

	
6/6/2006

	  	
US 2012/0020129

	
IPC012F

	
pending

	
US

	
13/205,250

	
8/8/2011

	
6/6/2006

	  	
US 2012/0033464

	
IPC012G

	
pending

	
US

	
13/205,263

	
8/8/2011

	
6/6/2006

	  	
US 2012/0008353

	
IPC013B

	
pending

	
US

	
13/214,575

	
8/22/2011

	
6/6/2006

	  	
US 2012/0051100

	    IPC020BR 	pending	    BR	    PI1011551-0 	        12/28/2011	        6/29/2009	 	 
	    IPC020CN 	pending	    CN	    2010800387048 	        2/29/2012	        6/29/2009	 	 
	    IPC020EP 	pending	    EP	    10800310.4	        1/13/2012	        6/29/2009	 	 
	    IPC020KR 	pending	    KR	    2012-7000720 	        1/10/2012	        6/29/2009	 	 
	
IPC020A

	
pending

	
US

	
13/205,212

	
8/8/2011

	
6/29/2009

	  	
US 2011/0292697

	
IPC020B

	
pending

	
US

US

US

US

	
13/541,902

	
7/5/2012

	
6/29/2009

	  	  
	
IPC020C

	
pending

	
13/541,905

	
7/5/2012

	
6/29/2009

	  	  
	
IPC020D

	
pending

	
13/541,910

	
7/5/2012

	
6/29/2009

	  	  
	
IPC020E

	
pending

	
13/541,914

	
7/5/2012

	
6/29/2009

	  	  
	    IPC021BR 	    pending	    BR	    BR112012003612-2 	       2/16/2012	    8/17/2009 	 	 
	
IPC021A

	
pending

	
US

	
13/205,225

	
8/8/2011

	
8/17/2009

	  	
US 2012/0014151

	
IPC021B

	
pending

	
US

	
13/542,223

	
7/5/2012

	
8/17/2009

	  	  
	
IPC021C

	
pending

	
US

	
13/542,225

	
7/5/2012

	
8/17/2009

	  	  
	
IPC022

	
pending

	
US

	
13/308,200

	
11/30/2011

	
11/30/2010

	  	  
	
IPC022WO

	
pending

	
PCT

	
PCT/US11/62689

	
11/30/2011

	
11/30/2010

	  	
WO 2012/075172

	
IPC023

	
pending

	
US

	
13/401,771

	
2/20/2012

	
2/18/2011

	  	  
	
IPC024

	
pending

	
US

	
13/400,567

	
2/20/2012

	
2/18/2011

	  	  
	
IPC028

	
pending

	
US

	
13/308,356

	
11/30/2011

	
11/30/2010

	  	  
	
IPC028WO

	
pending

	
PCT

	
PCT/US11/62710

	
11/30/2011

	
11/30/2010

	  	
WO 2012/075189

  

-89-

  

 

Ideal Power Converters

List of Inventions

 

 William C. Alexander

 

	
No.

	 	 	
AN or Number

	 	
Title(s)

	
 Technology Description

	
Benefit

	 	 	 	 	 	  	  	  
	 	1	 	 	 	7,599,196 7,778,045	 	
UNIVERSAL POWER CONVERTER

UNIVERSAL POWER CONVERSION METHODS

 

	
A unique arrangement of passive and active circuit elements that are operated to transfer power by indirect means between input and output power ports.

	
Due to the indirect transfer method , which uses a magnetic energy storage device  referred  to as a “link inductor”, input and output ports may have significant differences in common mode voltage, allowing grounded ports to be used without an isolation transformer.  Additionally, all switching is very “soft”, resulting in very low switching stresses and loss.   Many other benefits accrue with this technology, such as multi-port capability and high current control bandwidth.

	 	2	 	 	 	13/205,212	 	
ENERGY-TRANSFER REACTANCE

POWER TRANSFER DEVICES, METHODS, AND

SYSTEMS WITH CROWBAR SWITCH SHUNTING

	
A means of shutting down the IPC converter quickly to protect it against transients

	
A low cost method to provide a high level of external transient (e.g. lightening) protection.

 

	 	3	 	 	 	13/205,225	 	
POWER CONVERSION WITH ADDED PSEUDO-PHASE

	
Provides for an “port” internal to the IPC converter for temporary storage of energy as needed to buffer the power flow from a steady power source to an unsteady power sink, or vice-versa

	
Eliminates the need for large, expensive, and dangerous electrolytic capacitors to interface a DC input to a single phase AC output

	 	4	 	 	 	61/418,144	 	
Photovoltaic String Monitoring and Diagnostic

	
A technique using an IPC inverter to monitor the current-voltage (I-V) curves of an attached solar PV array

	
Useful for detecting abnormalities in said PV array

	 	5	 	 	 	61/444,365	 	
Sealed Compartment Vent and Dehumidifier

	
Uses a desiccant and active heater to control the humidity in the power electronics compartment of an IPC PV inverter, using the diurnal heating and cooling cycle of the inverter

	
Keeps the internal humidity low even  in an environment with high humidity, which prolongs the life of the inverter

	 	6	 	 	 	61/444,385	 	
Zero Current Crossing Detection Circuit

	
A means to detect when the current through the IPC converter’s link inductor goes through zero

	
A low latency, noise free technique for finding  when the link inductor current is zero

  

-90-

  

 

Schedule 4(i)                                Financial Statements

 

1.           Attached are (A) the audited financial statements for 2011, 2010 and 2009 from Maxwell Locke & Ritter (in a separate pdf file). (B) the un-audited balance sheet as of June 30, 2012 and the un-audited income statement for the six month period ended June, 2012 (the "Income Statements" and collectively with the Balance Sheet, the "Financial Statements").

 

  

-91-

  

 

Schedule 4(m)  Material Agreements

 

Table of Notes

 

All notes convertible, some have warrants as noted in warrant section.  All at 6% interest

 

	
 

Convertible Notes

	
 

Date

	
Note Amount

	
 

Due date

	
conversion 

te or lower

	
shares given 2.65754

	
Passel LTD

	
4/26/2011

	
$

	
100,000.00

	
12/31/2013

	
2.65754

	
37,629

	
Fred Beach

	
6/21/2011

	
$

	
50,000.00

	
12/31/2013

	
2.65754

	
18,814

	
Mr Redwine

	
9/1/2011

	
$

	
70,000.00

	
12/31/2013

	
2.65754

	
26,340

	
Don Barr

	
9/29/2011

	
$

	
100,000.00

	
12/31/2013

	
2.65754

	
37,629

	
Charles De Tarr

	
10/9/2011

	
$

	
40,000.00

	
12/31/2013

	
2.65754

	
15,052

	
Bundschuh, John P

	
4/12/2012

	
$

	
13,000.00

	
12/31/2013

	
2.65754

	
4,892

	
Bundschuh, Paul

	
4/12/2012

	
$

	
13,000.00

	
12/31/2013

	
2.65754

	
4,892

	
Bundschuh, Peter W

	
4/12/2012

	
$

	
13,000.00

	
12/31/2013

	
2.65754

	
4,892

	
Bundschuh, William

	
4/12/2012

	
$

	
13,000.00

	
12/31/2013

	
2.65754

	
4,892

	
Charles De Tarr

	
(mul ti pl e)

	
$

	
150,000.00

	
12/31/2013

	
2.65754

	
56,443

	
Chris Cobb

	
5/22/2012

	
$

	
200,000.00

	
12/31/2014

	
2.65754

	
75,258

	
Dr Breed

	
2/24/2012

	
$

	
25,000.00

	
12/31/2013

	
2.65754

	
9,407

	
Joel Sher

	
3/25/2012

	
$

	
15,000.00

	
12/31/2013

	
2.65754

	
5,644

	
John Mike Barron

	
4/7/2012

	
$

	
26,575.40

	
12/31/2013

	
2.65754

	
10,000

	
Passel LTD

	
4/23/2012

	
$

	
100,000.00

	
12/31/2013

	
2.65754

	
37,629

	
Mike Barron

	
4/18/2012

	
$

	
26,575.40

	
12/31/2013

	
2.65754

	
10,000

	
Sher's family Trust

	
3/25/2012

	
$

	
10,000.00

	
12/31/2013

	
2.65754

	
3,763

	
R Andrew Webb

	
6/11/2012

	
$

	
40,000.00

	
12/31/2014

	
2.65754

	
15,052

	
Magnus Le'Vicki

	
7/17/2012

	
$

	
50,000.00

	
12/31/2013

	
2.65754

	
18,814

	
Totals

	  	
$

	
1,055,150.80

	  	  	
397,042

 

	
1.

	
Commercial Lease, by and between Ideal Power Converters, Inc. and Bee Creek Center, LLC, dated May 1, 2010 with extension dated January 3, 2012.

 

	
2

	
Promissory Note pursuant to that Investment Unit issued by Ideal Power Converters, Inc. to the Office of the Governor Economic Development and Tourism, dated October 1, 2010.

 

	
3.

	
Services Agreement, by and between Dynamic Manufacturing Solutions, LLC and Ideal Power Converters, Inc., dated January 15, 2010.

 

	
4.

	
Master Services Agreement, by and between Austin Technology Incubator and Ideal Power Converters, Inc, dated October 10, 2008.

 

	
5.

	
Research Agreement No. 10-1520, by and between the Texas Engineering Experiment Station and Ideal Power Converters, Inc., dated November 22, 2010.  Certain provisions of such agreement provide for joint title and/or license of certain jointly developed Intellectual Property.

 

	
6.

	
Consulting Services Agreement, by and between Ray Lowe and Ideal Power Converters, Inc., dated April 23, 2011.

 

	
7.

	
Consulting Services Agreement, by and between Selchau Consulting, LLC and Ideal Power Converters, Inc., dated March 1, 2011.

 

	
8.

	
Consulting Services Agreement, by and between Scott Wartha and Ideal Power Converters, Inc., dated November 12, 2010.

  

-92-

  

 

	
9.

	
Retainer Agreement by and between Comprehensive Technologies and Ideal Power Converters, Inc. dated April 1.  The Agreement covers a period of nine months at $2,000 per month, starting April 1,2011 and concluding December 31, 2011.  Expired.

 

	
10.

	
Sales Representative Agreement between Comprehensive Technologies and Ideal Power Converters, Inc. dated May 13, 2011.

 

	
11.

	
Westlake Securities d/b/a Focus Strategies.  Agreement dated March 7 and expired in July 2012 to assist in non-exclusive attempt to raise capital from a list of 5-6 financial firms.

 

	
12.

	
Amplify Capital.  Agreement dated December 6, 2011 7 and expired in July 2012 to assist in non-exclusive attempt to raise capital.

 

	
13.

	
Grant Award Notice to Ideal Power Converters, Inc. for $40,000 in Eureka Grant Funds under the American Recovery and Reinvestment Act-2009 (ARRA).  State Energy Program (Eureka Program).  Innovation Marketing Grant.  $40,000 received and spent.

 

	
14.

	
IPC Cost Share On Department of Energy ARPA-E project.  In a three year period, the Company commits to provide $127,965 in labor, while being allocated $427,590 from the $2,777,778 project budget.

 

	
15.

	
Brian Quock.  Independent sales rep agreement dated May 15th with Brian Quock.  Sales in California.

 

	
16.

	
Chris Cobb.  Signed offer of employment dated May 21, 2012.  With details of compensation.

 

	
17.

	
Todd Ritter.  Not yet finalized. Agreement with sales rep based in Hawaii (new, waiting on final copy).

 

	
18.

	
Mercom Capital.  Agreement dated May 5, 2012 for marketing and promotion services.

 

	
19.

	
Purchase Order, by and between Lockheed Martin Corporation and Ideal Power Converters, Inc., dated September 10, 2010.

 

	
20.

	
Purchase Order, by and between Lockheed Martin Corporation and Ideal Power Converters, Inc., dated June 10, 2010.

 

	
21.

	
Purchase Order, by and between Lockheed Martin Corporation and Ideal Power Converters, Inc., dated January 14, 2010.

 

	
22.

	
License Agreement, by and between Lockheed Martin Corporation and Ideal Power Converters, Inc., dated December 22, 2009, License No. 09-MC-LI-0006

 

	
23.

	
Texas Emerging Technology Fund Award and Security Agreement, by and between the State of Texas and Ideal Power Converters, Inc., dated October 1, 2010.

 

	
24.

	
Research Agreement No. 10-1520, by and between the Texas Engineering Experiment Station and Ideal Power Converters, Inc., dated November 22, 2010.  Certain provisions of such agreement provide for joint title and/or license of certain jointly developed Intellectual Property.

 

	
25.

	
Statement of Work, issued by the Company to Texas Engineering Experiment Station, governed by the Research Agreement.  Project almost completed.

 

	
26.

	
Demonstration Agreement, by and between the City of Austin and Ideal Power Converters, Inc., dated May 20, 2010.

  

-93-

  

 

Schedule 4(k)  Tax Matters

 

2011 Federal income Return and Texas Franchise Tax returns were extended and are almost completed by Maxwell Locke and Ritter, the firm that does the tax returns.

 

Schedule 4(l)  Certain Transactions

 

	
1.

	
Use of DataCorp for IT services including internet site.  Company is owned by Hamo Hacopian who is on the board.   Mr. Hamo Hacopian currently owns more than 5%.

 

	
2.

	
Convertible promissory notes held by CFO  Charles De Tarr ($190,000), Chris Cobb CEO ($200,000), and Dr Breed ($25,000).   Both Charles De Tarr and Dr Breed own more than 5%.

 

	
3.

	
Some recent payables paid by (same individuals as #2) to be repaid as part of accounts payables.

 

 

Schedule 4(r)  No Brokers

 

	
1.

	
Westlake Securities d/b/a Focus Strategies.  Agreement dated March 7 and expired in July 2012.  Used  to assist in non-exclusive attempt to raise capital from a list of 5-6 financial firms (mainly Texas “Cap-Co’s”)

 

	
2.

	
Amplify Capital.  Agreement dated December 6, 2011 and expired in July 2012 to assist in non-exclusive attempt to raise capital.

 

  

-94-

  

 

Schedule 4(t)  Risk Factors

An investment in the Securities being offered under this Securities Purchase Agreement is speculative and involves a high degree of risk.  You should purchase the Securities being offered hereby only if you can afford to sustain a total loss of your investment.  Accordingly, in analyzing this investment you should carefully consider the following risk factors, as well as the other information included in this Securities Purchase Agreement and related exhibits and disclosure schedules, as well as other information furnished by the Company. The order of the risk factors is not necessarily indicative of the relative importance of any described risk. These risk factors are not the only risks we face and this list should not be considered exhaustive.  We consider the risks described below to be material, however there may be other risks that currently are not known to us.  .  The occurrence of any one of the following events would be likely to have a material adverse effect on the Company and our business, prospects, financial condition, and/or results of operation, and you could lose all or part of your investment in the Company.

Risks Related to Our Business

We lack an established operating history on which to evaluate our business and determine if we will be able to execute our business plan, and we can give no assurance that our operations will result in profits.

We were formed in Texas on May 17, 2007 and have a limited operating history, which makes it difficult to evaluate our business.  Although we have issued patents and patent applications pending with the United States Patent and Trademark Office (“USPTO”) and equivalent offices in the European Union (the “EU”), South Korea, China, Brazil and Canada for a power converter topology and our methods of operating said topology, and have had them validated by UL certifications from Intertek, a Nationally Recognized Test Laboratory, the California Energy Commission, and three Solar PV Inverter installations fielded with a total of 13 inverters, (running without problems for more than three months each), we have only recently begun sales of our products, and we cannot say with certainty when we will begin to achieve profitability.  No assurance can be made that we will ever become profitable.

We may not be able to meet our product development and commercialization milestones.

 

We are subject to product and commercialization milestones and dates for achieving development goals related to technology and design improvements of our products, under our agreement with the Texas Emerging Technology Fund, an entity overseen by the Office of the Governor of Texas. To achieve these milestones we must complete substantial additional research, development and testing of our products and technologies, such as the grid-battery and Level III DC charger converters that we currently have under development.  Except for our Solar PV Inverter products, we anticipate that it will take at least six to twelve months to develop and ready our other products for scaled production.  Product development and testing are subject to unanticipated and significant delays, expenses and technical or other problems. We cannot guarantee that we will successfully achieve our milestones, or within the timeframe as planned.  Our plans and ability to achieve profitability depend on acceptance by key market participants, such as vendors and marketing partners, and potential end-users of our products. We continue to educate designers and manufacturers about our Solar PV inverters, grid-battery converters, and Level III DC Electric Vehicle Chargers.  More generally, the commercialization of our products may also be adversely affected by many factors not within our control, including:

 

	  	
•

	  	
willingness of market participants to try a new product and the perceptions of these market participants of the safety, reliability, functionality and cost effectiveness of our products;

 

	  	
•

	  	
emergence of newer, possibly more effective technologies;

 

	  	
•

	  	
future cost and availability of the raw materials and components needed to manufacture and use our products; and

 

	  	
•

	  	
adoption of new regulatory or industry standards which may adversely affect the use or cost of our products.

  

-95-

  

 

Accordingly, we cannot predict that our products will be accepted on a scale sufficient to support development of mass markets for those products.

A material part of our success depends on our ability to manage our suppliers and manufacturers.

We rely upon contract manufacturers to produce our products.  There can be no assurance that key manufacturers will provide products in a timely and cost efficient manner or otherwise meet our needs and expectations.  Our ability to manage such relationships and timely replace suppliers and manufacturers if necessary is critical to our success.  Our failure to timely replace our contract manufacturers and suppliers, should that become necessary, could materially and adversely affect our results of operations and relations with our customers.

We have not devoted significant resources towards the marketing and sale of our products, we expect to face intense competition in the markets in which we do business, and we continue significantly to rely on the marketing and sales efforts of third parties whom we do not control.

 

To date, we primarily focused on the sale of Solar PV Inverter products and, while we have sold increasing quantities of our products on a yearly basis, even by adding veteran industry staff, we continue to experience a learning curve in the marketing and sale of products on a commercial basis.  We expect that the marketing and sale of the Solar PV Inverter product will continue to be conducted by a combination of independent manufactures representatives, third-party strategic partners, distributors, or OEMs. Consequently, commercial success of our products will depend to a great extent on the efforts of others.  We have entered and intend to continue entering into strategic marketing and distribution agreements or other collaborative relationships to market and sell our Solar PV Inverter and Grid-Battery Converter and value added products. However, we may not be able to identify or establish appropriate relationships, in the near term or in the future. We can give no assurance that these distributors or OEMs will focus adequate resources on selling our products or will be successful in selling them. In addition, third-party distributors or OEMs have or may require us to provide volume price discounts and other allowances, customize our products or provide other concessions which could reduce the potential profitability of these relationships. Failure to develop sufficient distribution and marketing relationships in our target markets will adversely affect our commercialization schedule and to the extent we have entered or enter into such relationships, the failure of our distributors and other third parties to assist us with the marketing and distribution of our products or to meet their monetary obligations to us, may adversely affect our financial condition and results of operations.

 

We will face intense competition in the markets of our product applications for our Solar PV Inverter, Grid-Battery Converter, Level III DC Vehicle Charger and other value-added products.  We will compete directly with currently available products, some of which may be less expensive.  The companies that make these other products may have established sales relationships and more name-brand recognition in the market than we do.  In addition, some of those companies may have significantly greater financial, marketing, manufacturing and other resources.

The prototype of our new 3-Port Inverter may not provide the results we expect, may prove to be too expensive to produce and market, or may uncover problems of which we are currently not aware, any of which could harm our business and prospects.

We are currently building a prototype of a 3-Port Inverter, which is an integrated Solar PV Inverter and Battery Charger/Inverter, based on improvements on our current PV inverter products.  We will commence the design and construction of prototypes of our new 3-Port Inverter.  We do not yet know if the prototypes will produce positive results consistent with our expectations.  The prototypes may also cost significantly more than expected, and the prototype design and construction process may uncover problems of which we are currently not aware.  Theseand other prototypes of emerging products are a material part of our business plan, and if they are not proven to be successful, our business and prospects could be harmed.

  

-96-

  

We are highly dependent on certain key members of our executive management team.  Our inability to retain these individuals could impede our business plan and growth strategies, which could have a negative impact on our business and the value of your investment.

Our ability to implement our business plan depends, to a critical extent, on the continued efforts and services of Bill Alexander(Chief Technology Officer), Paul Bundschuh (Vice President of Business Development), and Michael Barron (Director or Research and Development and Firmware Engineering).  If we lose the services of any of these persons, we would be forced to expend significant time and money in the pursuit of replacements, which would result in both a delay in the implementation of our business plan and plan of operations.  We can give no assurance that we could find satisfactory replacements for these individuals or on terms that would not be unduly expensive or burdensome to us.  We have no long-term employment agreements with our executives, and we do not currently carry a key-man life insurance policy that would assist us in recouping our costs in the event of their death or disability.

We may not be able to control our warranty exposure, which could increase our expenses.

 

We currently offer and expect to continue to offer a warranty with respect to our inverter products and we expect to offer a warranty with each of our future product applications. If the cost of warranty claims exceeds any reserves we may establish for such claims, our results of operations and financial condition could be adversely affected.

We may be exposed to lawsuits and other claims if our products malfunction, which could increase our expenses, harm our reputation and prevent us from growing our business.

 

Any liability for damages resulting from malfunctions of our products could be substantial, increase our expenses and prevent us from growing or continuing our business. Potential customers may rely on our products for critical needs, such as backup power. A malfunction of our products could result in warranty claims or other product liability. In addition, a well-publicized actual or perceived problem could adversely affect the market’s perception of our products. This could result in a decline in demand for our products, which would reduce revenue and harm our business. Further, since our products are used in devices that are made by other manufacturers, we may be subject to product liability claims even if our products do not malfunction.

Our independent registered public accounting firm has issued an unqualified opinion with an explanatory paragraph in the notes to the financial statements to the effect that failure to obtain financing or collect revenue receipts in a timely manner would raise substantial doubt about our ability to continue as a going concern.

 

This unqualified opinion with an explanatory paragraph could have a material adverse effect on our business, financial condition, results of operations and cash flows. We are dependent on the proceeds of this offering of senior, secured convertible notes and following its completion will require additional financing to fund our operations. We have no committed sources of capital and do not know whether additional financing will be available when needed on terms that are acceptable, if at all. This going concern statement from our independent registered public accounting firm may discourage some investors from purchasing our securities or providing alternative capital financing. The failure to satisfy our capital requirements will adversely affect our business, financial condition, results of operations and prospects.  Unless we raise additional funds, either through the sale of our securities or one or more collaborative arrangements, we will not have sufficient funds to continue operations. No assurance can be given that any funds we obtain will prove adequate for our needs.

 

  

-97-

  

Risks Relating to the Industry

The recent economic downturn has adversely affected, and is likely to continue affecting, our operations and financial condition potentially impacting our ability to continue as a going concern.

 

The recent economic downturn has resulted in a reduction in spending on durable goods, industrial equipment and machinery, and less than favorable credit markets, all of which may adversely affect us.  Although our top-selling product is currently used primarily in the solar power industry, we expect to derive future sales from a wide range of customers for a wide range of potential applications.  If the solar power market declines or stagnates, or there is a down-turn in other industries from which we expect to derive sales, our operations and financial condition could be negatively impacted. While economic stimulus measures undertaken by federal and state governments appear favorably to have targeted clean energy products we currently are unable to project if we can translate these programs into increases in sales, further research and development support, grants or other investments.

Our industry is intensely competitive.  We cannot guarantee you that we can compete successfully.

Our business is highly competitive.  We will be competing against providers of power converter systems that are highly established and have substantially greater manufacturing, marketing, management and financial resources including very substantial market position and name recognition. These competitors include Satcon, SMA, RefuSOL, and Chint Solar.   All aspects of our businesses, including pricing, financing, servicing, as well as general quality, efficiency and reliability of our products are significant competitive factors. Our ability to successfully compete with respect to each of these factors is material to the acceptance of our products and our future profitability.  In addition the solar power industry may tend to be resistant to change and to new products from suppliers that are not major names in the field. Our competitors will use their established position to their competitive advantage. If our innovations are successful, our competitors may seek to adopt and copy our ideas, designs and features. Our competitors may develop or offer technologies and products that may be more effective or popular than our products and they may be more successful in marketing their products than we are in marketing ours. Pricing competition could result in lower margins for our products.  Although we place a high value upon our ability to develop superior products and to be more entrepreneurial than our competitors, we cannot assure you that we will be able to compete successfully in our markets, or compete effectively against current and new competitors as our industry continues to evolve.

The reduction or elimination of government subsidies and economic incentives for energy-related technologies could reduce demand for our future products, harming our operating results.

 

We believe that near-term growth of energy-related technologies, including power converter technology, relies on the availability and size of government and economic incentives and grants (including, but not limited to, the U.S. federal Investment Tax Credit and the incentive programs in South Korea, the State of Texas, and the State of California and state renewable portfolio standards programs).   In addition, these incentive programs could be challenged by utility companies, or for other reasons found to be unconstitutional, and/or could be reduced or discontinued for other reasons.  The reduction, elimination, or expiration of government subsidies and economic incentives may result in the diminished economic competitiveness of our product to our customers and could materially and adversely affect the growth of alternative energy technologies, including power converter technology, as well as our future operating results.

If our products do not provide demonstrably superior features include outstanding reliability, efficiency and cost effectiveness we will not be able to penetrate our targeted markets.

We expect to compete on the basis of our products’ significantly lower cost, smaller footprint, and higher efficiency.  Technological advances in alternative energy products or other power converter technologies may negatively affect the development of our products or make our products non-competitive or obsolete prior to commercialization or afterwards.  Other companies, some of which have substantially greater resources than ours, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, our products and technologies.

 

  

-98-

  

We may be affected by environmental and other governmental regulation.

We are subject to federal, state, provincial, and local regulation with respect to the manufacture of our power converters.  Accordingly, compliance with existing or future laws and regulations could have a material adverse effect on our business prospects and results of operations.

New technologies in the alternative energy industry may supplant Solar PV Inverter devices, including our current products for which we have patents and pending patent applications, which would harm our business and operations.

The alternative energy industry is subject to rapid technological change.  Our future success will depend on the cutting edge relevance of our technology, and thereafter on our ability to appropriately respond to changing technologies and changes in function of products and quality.  If new technologies supplant our power converter technology, we will have to revise our plans of operation.

Our intellectual property may not have been properly valued for financial statement purposes.

Our balance sheet at June 30, 2012 lists $293,005 in intangible property, an amount which reflects costs incurred to date on development of patents net of amortization.  If our auditors later determine that the proper asset value of our intellectual property in accordance GAAP is less than that amount, our asset base could be materially reduced.

Our operating system of internal controls has been inadequate.

As of August 2012, we did not have a comprehensive operating system of internal controls designed to ensure reliable financial reporting, effective and efficient operations, compliance with applicable laws and regulations as well as safeguarding our assets against theft and unauthorized use, acquisition, or disposal.  During 2012, however, we instituted a minimal control environment comprised of the: (i) identification and allocation of expenses in QuickBooks; (ii) institution of formal expense reports; (iii) improved tracking of deposits and withdrawals; (iv) forecasting and tracking of monthly expense budgets; and (v) implementation of written documentation for changes to our stock and warrant ledger entries.  Although we are a private company, our current system of internal controls is not likely to be sufficient to meet the standards required of a public reporting company under the Securities Exchange Act of 1934.  Although we intend to institute improvements in our controls and procedures, we cannot provide assurance that our controls and procedures will be implemented on a timely basis or that they will at any given time be found to meet applicable regulatory requirements.

Any failure by management to properly manage our expected rapid growth could have a material adverse effect on our business, operating results and financial condition.

We anticipate that we will grow rapidly in the near future. Our failure to properly manage our expected rapid growth could have a material adverse effect on our ability to retain key personnel and our business, operating results and financial condition. Our expansion will also place significant demands on our management, operations, systems, accounting, internal controls and financial resources. If we experience difficulties in any of these areas, we may not be able to expand our business successfully or effectively manage our growth. Any failure by management to manage growth and to respond to changes in our business could have a material adverse effect on our business, financial condition and results of operations.

We expect to incur operating losses in the foreseeable future.

We were incorporated in May 2007.  From inception through December 31, 2011, we generated relatively small operating revenues from our business.  Accordingly, we are relying on the Offering and a follow-on private placement in order to generate sufficient funds to commercialize our devices or instrumentalities embodying our proprietary intellectual property; and we are relying on this and a subsequent additional follow-on financing to fully implement our business plan.  We have sold 30 of our power converter devices through the date of this Offering. Accordingly, there is only a limited operating history upon which to evaluate our prospects. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered in the establishment of a new business in a new industry and the risks and expenses associated with our current under-capitalized financial condition. Further, there can be no assurance that we will be able to implement our business plan, generate sustainable revenue or ever achieve profitable operations. We may be unable to successfully implement our business model and strategies and we may have operating losses until such time as we develop a substantial and stable revenue base.

 

  

-99-

  

An inability to meet our capital expenditure needs could adversely affect our ability to build and maintain our business.

Our business requires substantial capital in order to effectively market, sell, and further improve our products.  We may be unable to fund our capital expenditure requirements if: (i) we are unable to generate sufficient cash from our operations or (ii) we are unable to secure additional financing on acceptable terms, or in dollar terms necessary to fund our expenditures. Furthermore, there is no assurance that we will be able to raise any necessary additional funds through bank financing or the issuances of equity or debt securities on terms acceptable to us, if at all. We may be unable to obtain adequate financing to implement our business plan which could negatively impact our liquidity and ability to continue operations.

Risks Relating to Our Securities

The Offering may not be fully subscribed and, even if the Offering is fully subscribed, we anticipate the need for additional capital in the future.  If additional capital is not available, we may not be able to continue to operate our business pursuant to our business plan or at all.

We will offer the securities on "best-efforts" basis, meaning that we may raise substantially less than the total maximum offering amounts.  If we do not raise a minimum of $750,000 in this Offering, and at least $3 million to $4.25 million in one or more future private placements within the next several months, we may lack sufficient amount of capital to execute our business plan.  Even if this Offering is fully subscribed, we expect we will need substantial additional financing in the future, which we may seek to raise through, equity, bank and other debt financing.  Any future equity financings will be dilutive to existing shareholders, and any future debt financings may involve covenants and other restrictions affecting our business activities.  Additional future financing may not be available on acceptable terms, or at all.

The concentration of ownership of our common stock gives a few individuals significant control over important policy and operating decisions and could delay or prevent changes in control.

As of August 2012, our executive officers and directors beneficially owned over 66% of the issued and outstanding shares of our common stock on a fully-diluted basis.  As a result, these persons have the ability to exert significant control over matters that could include the election of directors, changes in the size and composition of the board of directors, mergers and other business combinations involving the Company, and operating decisions affecting us.  In addition, through control of the board of directors and voting power, they may be able to control certain decisions, including decisions regarding the qualification and appointment of officers, dividend policy, access to capital (including borrowing from third-party lenders and the issuance of additional equity securities), and the acquisition or disposition of our assets.  In addition, the concentration of voting power in the hands of those individuals could have the effect of delaying or preventing a change in control of the Company, even if the change in control would benefit our shareholders.  A perception in the investment community of an anti-takeover environment at the Company could cause investors to value our securities lower than in the absence of such a perception.

There is no public market for the Company’s securities, so you will not be able to liquidate them if you need money.

Prior to this Offering, there has been no public market for the common stock or Securities.  It is not likely that an active market for the Company’s Securities will develop or be sustained soon after this Offering.  We cannot provide any assurance that we will successfully complete a public offering or become a public reporting company, or that a market for our Securities and common stock will ever develop.

 

  

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The Company has the ability to issue additional shares of its common stock or Securities without asking for shareholder approval, which could cause the investment of the Securities offered hereby to be diluted.

Our articles of incorporation currently authorize the Board of Directors to issue up to 5,000,000 shares of common stock, and up to 275,000 shares of Preferred Stock.  In the event all of the Securities offered hereby are issued and sold and assuming the conversion and exercise of all of all notes, options and warrants, including the Securities, the Company presently anticipates that it will have approximately 8 million shares of common stock outstanding on a fully-diluted basis outstanding (provided however, the total number of shares outstanding will be dependent on the per share price in a future securities offering).  Accordingly, in order to accommodate the future issuance of shares of common stock, we will be required to amend our articles of incorporation with approval of our shareholders, nonetheless, the Board of Directors has the authority to issue shares of Preferred Stock or common stock, or warrants or other rights to purchase shares of such stock up to maximum authorized in the articles of incorporation without obtaining shareholder approval.

Management will have broad discretion in using the proceeds received from this Offering.  You may not approve of the ways in which our management uses those proceeds.

We expect to use the net proceeds of this Offering contemplated by this Securities Purchase Agreement primarily for facility capital expenditures, building a prototype, the hiring of staff, the filing of additional patent applications, and for general working capital, as set forth in Section 7(b) of the Securities Purchase Agreement. Management has broad discretion in allocating proceeds of this Offering.  You will not have the authority to approve the uses to which our management allocates money.  Management’s failure to effectively use this money could have a material adverse effect on our business.

Assumptions underlying the projections in our business plan are highly speculative and may prove to be untrue.

Management may have provided certain projections to investors in connection with this Offering. These projections include, but are not limited to: forecasts, valuations, financial projections, cost and profit analysis, projected marketing expense and other prospective information (“Prospective Information”). If any of the assumptions upon which these projections are based prove to be untrue, including resumed growth of the economy in general, expected growth in the solar power industry as well as the industries in which our products and future products have application, these projections could be adversely affected and the results anticipated in the Prospective Information may not be achieved. Investors should be aware that these and other projections and predictions of future performance, whether included with the Securities Purchase Agreement or subsequently delivered to Investors, are based on certain assumptions which are highly speculative.  Such Prospective Information is not (and should not be regarded as) a representation or warranty by us or any other person that the overall objectives of our Company will ever be achieved, that the projected results in the Prospective Information will become a reality, or that we will ever achieve significant revenues or profitability. Prospective Information and these projections and any other forecasts of future performance should not be relied upon by the Investor in making an investment decision.

 

We do not intend to pay any dividends or distributions on our common stock.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Dividends, if and when paid, are subject to our financial condition, as well as other business considerations. In addition, applicable state law may limit the ability of a corporation to pay dividends.

 

  

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If we become a public reporting company, the costs of public company compliance may have a material adverse effect on the results of our operations and may make it more difficult for us to focus on the implementation of our business plan.

 

If we complete an initial public offering of our securities or otherwise are able to cause one or more classes of our securities to trade in the public securities markets, we will become subject to additional layers of governmental regulation including the Exchange Act and rules and regulations promulgated by the SEC. We may become obligated to file annual , quarterly and current reports as well as proxy statements and other filings with the SEC. These compliance obligations, will require us to incur significant legal and accounting costs which could have a material adverse effect on our results of operations. Our management will need to devote substantial time to such compliance matters, which might divert our attention from the development of the business and implementation of our business plan.

 

There are restrictions on the transfer of the Securities being offered in this Offering, and the common stock underlying the Securities.

Neither the Securities offered in this Offering nor the common stock underlying such Securities have been registered with the Securities and Exchange Commission under the Securities Act of 1933 or registered or qualified with any state or territorial securities regulatory agency.  The Securities Purchase Agreement provides that you agree that the Company will not be required to transfer your Securities on its stock transfer records or issue Shares to any person to whom you sell the Securities unless you provide the Company with documentation satisfactory to the Company that the transfer is not in violation of the registration requirements of the Securities Act of 1933, which may include an opinion of legal counsel for which you may be required to pay.  There is no assurance that our shares of common stock will become publicly traded, that your shares will be successfully registered, or that other required conditions to permit securities transfers will be met.

If you need to raise money from the sale of your shares, neither the Company nor any of its officers, directors, stockholders or agents will be under any obligation to purchase the Securities you buy in this Offering and you may not be able to liquidate your shares because there is not public market for the shares at this time and there is no assurance a public market will develop.  The Securities we are offering is unlikely to be accepted as collateral by lending institutions.

Your investment in the Securities should, therefore, be considered only if you have no immediate need for liquidity in your investment.

We are obligated under a Fund Award and Security Agreement, and related Investment Unit, dated October 1, 2010 with the Texas Emerging Technology Fund, which include certain covenants that restrict our business activities, and bind us to significant repayment obligations in the event of default.

Under our agreement with the Texas Emerging Technology Fund, we may become obligated to repay an amount equal to $1 million plus accrued interest, if we breach the terms of our agreement at any time prior to October 1, 2020, and this contingent obligation is secured by all of our assets.  Although the Office of the Governor of the State of Texas has agreed to subordinate its security interest to the security interest granted to and held by the investors in the Securities in this Offering, a breach of our agreement with the Texas Emerging Technology Fund could trigger our payment obligations, and if we are unable to perform those obligations, our business could be materially and adversely affected.

Our agreement with Texas Emerging Technology Fund requires us to, among other things, maintain our principal place of business and manufacturing center within the State of Texas, and to use reasonable efforts to use qualified Texas-based suppliers.  If we are unable to comply with these and other covenants, or they become cost-prohibitive or not cost-effective, we may have to seek waivers from the State of Texas in order to avoid default, and if such waivers are not granted then our business may be materially and adversely affected.

 

  

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Due to our limited revenue and asset base, we cannot provide assurance that we will be able to repay the principal of the Notes when due, or that the Note holders’ rights and senior security interest, if exercised by the Note holders, will be sufficient to make the note holders whole.

We are an early stage company with limited revenue, and our current asset base consists mainly of intellectual property.  Our present ability to repay the principal amount of the senior secured Notes is very limited.  Under the terms of the Notes, the principal and accrued interest under the Notes will automatically convert into common stock upon a firm commitment initial public offering of our common stock.  However, if we do not complete an initial public offering, the Notes will become due and we will be obligated to pay the principal and accrued interest on the Notes in cash.  While we plan to monetize our intellectual property and generate increasing revenue from sales of our products, we cannot provide assurance of when, or if ever, these efforts will result in profitable operations.  Accordingly, there can be no assurance that we will be able to repay the senior secured Notes when they become due.  If the holders of the senior secured Notes attempt to enforce their rights and security interest in the collateral, which currently consists mainly of intellectual property, it is uncertain whether the value of such collateral in a sale or liquidation would be sufficient to cover the total principal amount of the senior secured notes.

Upon their exercise of conversion rights under the Notes, investors will very likely suffer immediate and substantial dilution.

Upon an investor’s exercise of conversion rights under the Notes, it is very likely that the investor’s conversion price (“Conversion Price”) for the shares of common stock issuance upon conversion of the Notes (“Conversion Shares”)will be substantially higher than the average purchase price paid by certain early-stage investors in the Company for their shares of common stock.  The average price per share paid by these early stage investors for their shares of common stock in the Company may in many instances be negligible; as a result, investors who convert their Notes into Conversion Shares will very likely incur immediate and substantial dilution.

We anticipate issuing additional senior secured convertible notes, which will have a first priority security interest on par with the notes being issued in this Offering, and such issuances may increase the amount of risk, and reduce the amount of collateral available to, the investors in this Offering.

We plan to issue additional senior secured convertible notes, which will have a first priority security interest on par, with respect to payment and priority, with the notes being issued in this Offering.  The collateral, which generally consists of all of our assets (with certain exceptions), is limited in value, and will be shared with any additional first priority senior creditors.  Accordingly, an increase in the amount of first priority senior indebtedness will reduce the amount of collateral that corresponds to each dollar invested by the senior creditors, thereby increasing the amount of risk on the part of all senior creditors.   There can be no assurance that if the senior creditors exercise their rights to take or dispose of the collateral, that the total amount of collateral being provided as security in this Offering and future offerings will be sufficient to make whole the investors in this Offering together with additional senior creditors who will have a security interest on par with the investors in this Offering.

The Conversion Price of the Notes may be arbitrarily set by the terms of a future financing, which have not yet been determined.

There is no present market for the Notes and the underlying Conversion Shares.  Under the terms of the Notes, the Conversion Price for the underlying Conversion Shares depends on the price per share of an initial public offering of the Company, or a private placement financing. The price per share as agreed by investors in these future financings is not necessarily indicative of the actual or fair value of the Notes or the underlying Conversion Shares, and may not bear any relation to our net worth, earnings or other financial metrics.  We cannot assure you that the conversion price of the Notes will meet your expectations, or will result in any particular return on your investment.  In addition, we cannot provide any assurance that a subsequent initial public offering or private placement financing will occur at all, and as a result, the Notes may not become convertible into equity securities of the Company.  In such event, the holders of Notes may be limited to seeking recovery of their cash investment.

 

  

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Risks Relating to Our Intellectual Property

 

If our existing, newly developed or proposed intellectual property is not adequately protected by valid, issued patents or if we are not otherwise able to protect our proprietary information, our financial condition, operations or ability to develop and commercialize our existing, newly developed or proposed intellectual property based instrumentalities may be harmed.

 

The success of our operations will depend in part on our ability to:

 

	
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Obtain patent protection for our devices and devices or instrumentalities embodying our proprietary intellectual property, and other methods or components on which we rely, both in the United States and in other countries with substantial markets;

 

	
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Defend patents once obtained; and

 

	
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Maintain trade secrets and operate without infringing upon the patents and proprietary rights of others.

 

Our business substantially relies on our own intellectual property related to various technologies that are material to our devices or instrumentalities embodying our proprietary intellectual property and processes. It is likely that we will depend on our ability to successfully prosecute and enforce the patents, file patent applications and prevent infringement of those patents and patent applications.

 

If we are not able to maintain adequate patent protection for our devices or instrumentalities embodying our proprietary intellectual property, we may be unable to prevent our competitors from using our technology.

 

The patent positions of the technologies being developed by us involve complex legal and factual uncertainties. As a result, we cannot be certain that we will be able to obtain adequate patent protection for our devices or instrumentalities embodying our proprietary intellectual property. There can be no assurance that:

 

	
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The scope of any patent protection will be sufficient to provide us with competitive advantages;

 

	
·  

	
Any patents obtained by us will be held valid if subsequently challenged;

 

	
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Others will not claim rights in or ownership of the patents and other proprietary rights we may hold; or

 

	
·  

	
Unauthorized parties may try to copy aspects of our devices or instrumentalities embodying our proprietary intellectual property and technologies or obtain and use information we consider proprietary.

 

Policing the unauthorized use of our proprietary rights is difficult. We cannot guarantee that harm or threat to our intellectual property will not occur. In addition, changes in, or different interpretations of, patent laws in the United States and other countries may also adversely affect the scope of our patent protection and our competitive situation.

 

We cannot offer any assurance that current and potential competitors or other third parties have not filed or received, or will not file or receive applications in the future for patents or obtain additional proprietary rights relating to devices or instrumentalities embodying our proprietary intellectual property or processes used or proposed to be used by us.

 

Additionally, there is certain subject matter that is patentable in the United States but not generally patentable outside of the United States. Differences in what constitutes patentable subject matter in various countries may limit the protection we can obtain outside of the United States.

 

  

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1 Innovations in power converter technology that arise while our patent applications are pending may contain more favorable or superior technology than our power converter technology, which might render our patents irrelevant if and when they are issued.  This may harm our future operations.

2 

3 From  2007 through 2011 we filed 26 patent applications for our power converter topology and methods of operation of that topology with the USPTO and equivalent offices in the EU and China.   To date, we have two issued patents, and several pending patent applications.  While various patent offices are reviewing our pending applications and before the related patents, if any, are issued, third parties may develop an alternative catalyst with reduced costs and improved durability as compared to our methods. Although we plan to simultaneously improve our technology and file additional patents, if any such innovations by our competitors arise, our power converter topology and our methods of operating said topology may be difficult to market, which would harm our operations.

We may be subject to costly claims, and, if we are unsuccessful in resolving conflicts regarding patent rights, we may be prevented from developing, commercializing or marketing our devices or instrumentalities embodying our proprietary intellectual property.

 

Given the innovative nature and broad scope of our intellectual property, it is entirely foreseeable that we will encounter substantial litigation regarding patent and other intellectual property rights in the industries in which we presently or intend to compete. We may be subject to legal actions claiming damages and seeking to stop third party licensees from manufacturing and marketing our devices or instrumentalities embodying our proprietary intellectual property. In addition, litigation may be necessary to enforce our proprietary rights or to determine the enforceability, scope and validity of the proprietary rights of others. If we become involved in litigation, it could be costly and divert our efforts and resources. In addition, if any of our competitors file patent applications in the United States claiming technology also invented by us we may need to participate in interference proceedings held by the U.S. Patent and Trademark Office to determine priority of invention and the right to a patent for the technology. Like litigation, interference proceedings can be lengthy and often result in substantial costs and diversion of resources.

 

As more potentially competing patent applications are filed, and as more patents are actually issued, in the fields in which we presently compete, or in other fields in which we may become involved and with respect to devices or instrumentalities embodying our proprietary intellectual property, component methods or compositions that we may employ, the risk increases that we may be subjected to litigation or other proceedings that claim damages or seek to stop our licensees from manufacturing, marketing, or commercialization efforts. Even if such patent applications or patents are ultimately proven to be invalid, unenforceable or non-infringed, such proceedings are generally expensive and time consuming and could consume a significant portion of our resources and substantially impair our licensees’ marketing and product development efforts.

 

We may not have adequate protection for our unpatented proprietary information, which could adversely affect our prospects and competitive position.

 

We also rely on trade secrets, know-how and continuing technological innovations to develop and maintain our competitive position. However, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose our technology. To protect our trade secrets, we may enter into confidentiality agreements with employees, consultants and potential collaborators. However, these agreements may not provide meaningful protection of our trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information. Likewise, our trade secrets or know-how may become known through other means or be independently discovered by our competitors. Any of these events could prevent us from developing or commercializing our product candidates.

  

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If we fail to protect, or incur significant costs in defending, our intellectual property and other proprietary rights, our business, financial condition, and results of operations could be materially harmed.

 

Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. We intend to rely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. However, a significant portion of our technology is not patented, and we may be unable or may not seek to obtain patent protection for this technology. Moreover, existing U.S. legal standards relating to the validity, enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us with any competitive advantages, and may be challenged by third parties. The laws of countries other than the United States may be even less protective of intellectual property rights. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to our technology. Unauthorized third parties may try to copy or reverse engineer our devices or instrumentalities embodying our proprietary intellectual property or portions of our devices or instrumentalities embodying our proprietary intellectual property or otherwise obtain and use our intellectual property. Moreover, many of our employees have access to our trade secrets and other intellectual property. If one or more of these employees leave us to work for one of our competitors, then they may disseminate this proprietary information, which may as a result damage our competitive position. If we fail to protect our intellectual property and other proprietary rights, then our business, results of operations or financial condition could be materially harmed.

 

In addition, affirmatively defending our intellectual property rights and investigating whether we are pursuing a product or service development that may violate the rights of others may entail significant expense. We have not found it necessary to resort to legal proceedings to protect our intellectual property, but may find it necessary to do so in the future. Any of our intellectual property rights may be challenged by others or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, then the proceedings could result in significant expense to us and divert the attention and efforts of our management and technical employees, even if we prevail.

 

We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time-consuming and limit our ability to use certain technologies in the future.

 

We may become subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of third parties. Any claims, with or without merit, could be time-consuming and expensive, and could divert our management's attention away from the execution of our business plan.  Moreover, any settlement or adverse judgment resulting from these claims could require us to pay substantial amounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit our use of the technology. We cannot assure you that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected product. An adverse determination also could prevent us from offering our devices or instrumentalities embodying our proprietary intellectual property to others. Infringement claims asserted against us may have a material adverse effect on our business, results of operations or financial condition.

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