Document:

EXHIBIT 10.1

 

FRANCHISE HOLDINGS INTERNATIONAL

 

INVESTOR SUBSCRIPTION AGREEMENT (the "Subscription Agreement") dated February 10, 2015 between FRANCHISE HOLDINGS INTERNATIONAL, INC., a Nevada corporation (the "Company") and the person or persons executing this Agreement on the last page (the "Subscriber"). All documents mentioned herein are incorporated by reference.

 

1. Description of the Offering. This Subscription Agreement is for shares of the Company’s common stock, par value $.001 per share (the “Common Stock”). This Offering (the “Offering”) is made only to accredited investors who qualify as accredited investors pursuant to the suitability standards for investors described under Regulation S of the Securities Act of 1933, as amended (the “Securities Act”) and who have no need for liquidity in their investments. As of this Offering, there is a limited public market for the Common Stock and no assurance can be given that the market will further develop, or that it will be maintained so that any subscribers in this Offering may avail any benefit from the same. The Common Stock is currently quoted on the OTCQB under the symbol “FNHI.”

 

THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT, OR THE SECURITIES LAWS OF ANY STATE, OR OTHER JURISDICTION AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS. THESE SECURITIES MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR ASSIGNED EXCEPT AS PERMITTED UNDER SUCH ACT OR SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.

 

2. Terms of the Subscription. The subscription is for shares of Common Stock (the “Shares”) at a purchase price of $0.138 per Share for an aggregate offering amount of Two Hundred Thousand Dollars ($200,000).

 

3. Other Terms of the Offering. The execution of this Subscription Agreement shall constitute an offer by the Subscriber to subscribe for the Shares in the amount and on the terms specified herein. The Subscriber must also complete and execute the Subscriber Questionnaire attached hereto. The Company reserves the right, in its sole discretion, to reject in whole or in part, any subscription offer. If the Subscriber's offer is accepted, the Company will execute a copy of this Subscription Agreement and return it to Subscriber.

 

4. Subscription Payment. Subscription for the Shares requires a cash investment and the subscription price will be payable in full upon acceptance of the subscription. The Company reserves the right, in its sole discretion, to accept fractional subscriptions.

 

	 
	
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5. The Company's Representations and Warranties. The Company hereby represents and warrants as follows:

 

(a) The Company is a corporation duly formed and in good standing under the laws of the State of Nevada with full power and authority to conduct its business as presently contemplated;

 

(b) The Company warrants and covenants that there are no material misstatements or omissions in this Subscription Agreement or any information provided of the Offering documents herein;

 

(c) The Company has the power to execute, deliver and perform this Subscription Agreement and any other agreement contemplated herein; and

 

(d) All of the Company’s operations are undertaken by and through our wholly-owned subsidiary, Truxmart Ltd (“Truxmart”), an Ontario (Canada) corporation located at 1895 Clements Road, Suite 155, Pickering, Ontario CANADA L1W 3R8

 

6. Subscriber's Representations, Warranties and Covenants. The undersigned understands and acknowledges that the Shares subscribed for herein are being offered and sold under one or more of the exemptions from registration provided for in Section 3(b), 4(2) and 4(6) of the Securities Act including, Regulation S and/or Regulation D promulgated thereunder, that the undersigned acknowledges that the Shares are being purchased without the undersigned being offered or furnished any offering literature, prospectus or other material, financial or otherwise, and that this action has not been scrutinized by the United States Securities and Exchange Commission or by any regulatory authority charged with the administration of the securities laws of any state. The undersigned hereby further represents and warrants as follows:

 

(a) The undersigned confirms that he understands and has fully considered, for purposes of this investment, the risks of an investment in the Shares and understands that: (i) this investment is suitable only for an investor who is able to bear the economic consequences or losing his entire investment, (ii) the purchase of the Shares is a speculative investment which involves a high degree of risk of loss by the undersigned of his entire investment, and (iii) that there will be no public market for the Shares and accordingly, it may not be possible for the undersigned to liquidate an investment in the Shares in case of an emergency.

 

(b) The Subscriber is an "Accredited Investor" as defined in Rule 501(a) of Regulation D under the Securities Act. This representation is based on the fact that the Subscriber, inter alia, is an accredited individual who, together with the Subscriber’s spouse, have a net worth of at least $1,000,000, exclusive of the value of your primary residence and less any indebtedness secured by your primary residence in excess of the fair value of such residence and less any loss in value of your primary residence in the last 60 days or the Subscriber, individually, has had net income of not less than $200,000 during the last two years, and reasonably anticipates that the Subscriber will have an income of at least $200,000 during the present year and the next year, or joint income with your spouse in excess of $300,000 in each of those years, and reasonably expects to reach the same income level in the current year.;

 

(c) If the Subscriber is a corporation, partnership, trust or any unincorporated association: (i) the person executing this Subscription Agreement does so with full right, power and authority to make this investment; (ii) that such entity was not formed for the specific purpose of making an investment in the Company; and (iii) that all further representations and warranties made herein are true and correct with respect to such corporation, partnership, trust and unincorporated association;

 

(d) The address set forth below is the Subscriber's true and correct residence or place of business, and the Subscriber has no present intention of becoming a resident of any other state or jurisdiction;

 

	 
	
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(e) The Subscriber understands and agrees that the Company prohibits the investment of funds by any persons or entities that are acting, directly or indirectly, (i) in contravention of any U.S. or international laws and regulations, including anti-money laundering regulations or conventions, (ii) on behalf of terrorists or terrorist organizations, including those persons or entities that are included on the List of Specially Designated Nationals and Blocked Persons maintained by the U.S. Treasury Department's Office of Foreign Assets Control[1] ("OFAC"), as such list may be amended from time to time, (iii) for a senior foreign political figure, any member of a senior foreign political figure’s immediate family or any close associate of a senior foreign political figure[2], unless the Company, after being specifically notified by the Subscriber in writing that it is such a person, conducts further due diligence, and determines that such investment shall be permitted, or (iv) for a foreign shell bank[3] (such persons or entities in (i) – (iv) are collectively referred to as "Prohibited Persons").

 

(f) The Subscriber represents, warrants and covenants that: (i) it is not, nor is any person or entity controlling, controlled by or under common control with the Subscriber, a Prohibited Person, and (ii) to the extent the Subscriber has any beneficial owners[4], (a) it has carried out thorough due diligence to establish the identities of such beneficial owners, (b) based on such due diligence, the Subscriber reasonably believes that no such beneficial owners are Prohibited Persons, (c) it holds the evidence of such identities and status and will maintain all such evidence for at least five years from the date of the Subscriber's complete withdrawal from the Company, and (d) it will make available such information and any additional information requested by the Company that is required under applicable regulations.

 

(g) If any of the foregoing representations, warranties or covenants cease to be true or if the Company no longer reasonably believes that it has satisfactory evidence as to their truth, notwithstanding any other agreement to the contrary, the Company may, in accordance with applicable regulations, freeze the Subscriber's investment, either by prohibiting additional investments, declining or suspending any withdrawal requests and/or segregating the assets constituting the investment, or the Subscriber's investment may immediately be involuntarily withdrawn by the Company, and the Company may also be required to report such action and to disclose the Subscriber's identity to OFAC or other authority. In the event that the Company is required to take any of the foregoing actions, the Subscriber understands and agrees that it shall have no claim against the Company, and its respective affiliates, directors, members, partners, shareholders, officers, employees and agents for any form of damages as a result of any of the aforementioned actions.

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1 The OFAC list may be accessed on the web at http://www.treas.gov/ofac.

 

2 Senior foreign political figure means a senior official in the executive, legislative, administrative, military or judicial branches of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned corporation.  In addition, a senior foreign political figure includes any corporation, business or other entity that has been formed by, or for the benefit of, a senior foreign political figure.  The immediate family of a senior foreign political figure typically includes the political figure’s parents, siblings, spouse, children and in-laws.  A close associate of a senior foreign political figure is a person who is widely and publicly known internationally to maintain an unusually close relationship with the senior foreign political figure, and includes a person who is in a position to conduct substantial domestic and international financial transactions on behalf of the senior foreign political figure.

 

3 Foreign shell bank means a foreign bank without a physical presence in any country, but does not include a regulated affiliate.  A post office box or electronic address would not be considered a physical presence.  A regulated affiliate means a foreign shell bank that: (1) is an affiliate of a depository institution, credit union, or foreign bank that maintains a physical presence in the United States or a foreign country, as applicable; and (2) is subject to supervision by a banking authority in the country regulating such affiliated depository institution, credit union, or foreign bank.

 

4 Beneficial owners will include, but not be limited to: (i) shareholders of a corporation; (ii) partners of a partnership; (iii) members of a limited liability company; (iv) investors in a fund-of-funds; (v) the grantor of a revocable or grantor trust; (vi) the beneficiaries of an irrevocable trust; (vii) the individual who established an IRA; (viii) the participant in a self-directed pension plan; (ix) the sponsor of any other pension plan; and (x) any person being represented by the Subscriber in an agent, representative, intermediary, nominee or similar capacity.  If the beneficial owner is itself an entity, the information and representations set forth herein must also be given with respect to its individual beneficial owners.  If the Subscriber is a publicly-traded company, it need not conduct due diligence as to its beneficial owners.

 

	 
	
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(h) The Subscriber agrees to indemnify and hold harmless the Company, its respective affiliates, directors, members, partners, shareholders, officers, employees and agents from and against any and all losses, liabilities, damages, penalties, costs, fees and expenses (including legal fees and disbursements) which may result, directly or indirectly, from any inaccuracy in or breach of any representation, warranty, covenant or agreement set forth in this Agreement.

 

(i) The Subscriber has received and read or reviewed, is familiar with and fully understands the documents furnished by the Company. The Subscriber also fully understands this Subscription Agreement and the risks associated with this interest and confirms that all documents, records and books pertaining to the Subscriber’s investment in the Shares and requested by the Subscriber have been made available or delivered to the Subscriber by the Company;

 

(j) The Subscriber has had an opportunity to ask questions of and receive answers from, the Company or a person or persons acting on its behalf, concerning the terms and conditions of this investment and confirms that all documents, records and books pertaining to the investment in the Shares and requested by the Subscriber has been made available or delivered to the Subscriber;

 

(k) The Subscriber will be acquiring the Shares, solely for the Subscriber's own account, for investment and not with a view toward the resale, distribution, subdivision or fractionalization thereof; and the Subscriber has no present plans to enter into any such contract, undertaking, agreement or arrangement;

 

(l) The Subscriber acknowledges and understands that as of this Offering there is a limited public market for the Shares and no assurance can be given that the public market will continue to exist or further develop for the Shares offered hereby, or if it will be maintained so that any subscribers in this Offering may avail any benefit from the same;

 

(m) The Subscriber's compliance with the terms and conditions of this Subscription Agreement will not conflict with any instrument or agreement pertaining to the Shares or the transactions contemplated herein; and will not conflict in, result in a breach of, or constitute a default under any instrument to which the Subscriber is a party;

 

(n) The Subscriber will seek its own legal, tax and investment advice concerning tax implications attendant upon the purchase of the Shares and understands and accepts that the Company is relying upon this representation insofar as disclosure of tax matters is concerned;

 

(o) The Subscriber hereby acknowledges and represents that the Subscriber is aware of the information set forth in this document and in any exhibits attached hereto; and

 

(p) The foregoing representations and warranties are true and accurate as of the date hereof and shall be true and accurate as of the date of delivery of the subscription to the Company and shall survive such delivery. If, in any respect, such representations and warranties shall not be true and accurate, the Subscriber shall give written notice of such fact to the Company, specifying which representations and warranties are not true and accurate and the reasons therefor.

 

7. Risk Factors. THE SUBSCRIBER ACKNOWLEDGES THAT THERE ARE SIGNIFICANT RISKS ASSOCIATED WITH THE PURCHASE OF THE SHARES AND THAT SUCH SHARES ARE HIGHLY SPECULATIVE AND SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD A TOTAL LOSS OF HIS OR HER ENTIRE INVESTMENT. The Subscriber represents and warrants that he or she has carefully considered and reviewed the following risks in reaching a determination to purchase the Shares:

 

	 
	
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Risks of Purchasing Shares:

 

Shares eligible for future sale under Rule 144 may adversely affect the market for our securities.

 

From time to time, certain of our stockholders who hold restricted securities may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. Although current stockholders may have no current intention or ability to sell their shares, any substantial sales by holders of our common stock in the future pursuant to Rule 144 may have a material adverse effect on the market price of our securities.

 

The price of our common stock is subjected to volatility.

 

The market for FNHI’s common stock is highly volatile. The trading price of FNHI’s common stock is subject to wide fluctuations in response to, among other things, quarterly variations in operating and financial results, and general economic and market conditions. In addition, statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to their markets or relating to FNHI could result in an immediate and adverse effect on the market price of our common stock. The highly volatile nature of FNHI’s stock prices may cause investment losses for their shareholders. If securities class action litigation is brought against FNHI, such litigation could result in substantial costs while diverting management's attention and resources.

 

Disruptions in global financial markets and deteriorating global economic conditions could cause lower returns to investors.

 

Disruptions in global financial markets and deteriorating global economic conditions could adversely affect the value of FNHI’s common stock. The current state of the economy and the implications of future potential weakening may negatively impact market fundamentals, resulting in lower revenues and values for FNHI’s business opportunities and investments.

 

If securities or industry analysts do not publish research or reports about FNHI’s business or if they issue an adverse or misleading opinion regarding FNHI stock, its price and trading volume could decline.

 

The trading market for FNHI’s common stock will be influenced by the research and reports that industry or securities analysts publish about FNHI or its business, if any.

 

	 
	
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Our shares will be deemed to be "penny stocks" as defined in the Securities Exchange Act of 1934, as amended, and, as a result, will be subject to various eligibility and disclosure requirements on broker-dealers engaged in the resale of these shares.

 

The shares offered in this prospectus will be "penny stocks" as that term is defined in the Securities Exchange Act of 1934, as amended, (the ‘Exchange Act”) to mean, among other definitions, equity securities with a price of less than $5.00 per share.

 

Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or an accredited investor must make a special suitability determination regarding the purchaser and provide special disclosure documents to the purchaser. The imposition of these suitability standards and special disclosures could reduce an investor's ability to resale the shares at a time or price desired. See the section "Market for Common Equity and Related Stockholder Matters."

 

If we fail to remain current on our reporting requirements, we could be removed from quotation by the OTCQB, which would limit the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.

 

Companies quoted on the OTCQB must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the OTCQB. If we fail to remain current on our reporting requirements, we could be removed from the OTCQB. As a result, the market liquidity for our securities could be adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.

 

Risks Related to Our Business:

 

We have limited operating history, our financial position is not robust, and we lack profitable operations to date. 

 

TruXmart has incurred net losses since inception and may continue to incur net losses while it builds its business and as such it may not achieve or maintain profitability. The Company’s limited operating history makes it difficult to evaluate its business and prospects, and there is no assurance that the business of the Company will grow or that it will become profitable.

 

TruXmart has been in existence for approximately three years, which is relatively short compared to our competitors. While the Company has experienced recent substantial growth in our revenues in 2014 over 2013, there is no assurance that our revenues will continue to experience such a trend line, nor even that our revenues will continue to grow. Because of our limited operating history it is difficult to extrapolate any meaningful projections about the Company’s future. We do not have significant assets with which to press our plans forward.

 

Our competitors are significantly better funded than we are. This could prove detrimental in that we may not have the funds with which to procure a sufficient supply of product to meet demand at some point. Our competitors could engage in predatory pricing or other tactics in an attempt to eliminate our market share. The Company has incurred net losses since inception, and may continue to incur net losses while it builds its business, and as such it may not achieve or maintain profitability.

 

	 
	
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Our future growth may be limited. 

 

The Company’s ability to achieve its expansion objectives and to manage its growth effectively depends upon a variety of factors, including the Company’s ability to internally develop products, to attract and retain skilled employees, to successfully position and market its products, to protect its existing intellectual property, to capitalize on the potential opportunities it is pursuing with third parties, and sufficient funding. To accommodate growth and compete effectively, the Company will need working capital to maintain adequate inventory levels, develop additional procedures and controls and increase, train, motivate and manage its work force. There is no assurance that the Company’s personnel, systems, procedures and controls will be adequate to support its potential future operations. There is no assurance that the Company will generate revenues from its prospective sales partners and be able to capitalize on additional third party manufacturers.

 

We rely on third parties. 

 

Suppliers: Currently, the Company relies on two third party manufacturers to produce its products in China. These products are only available from a limited group of manufacturers, because of our product development alliances with these manufacturers. Under this alliance arrangement, each of the Company’s products are designed and engineered in co-operation with one of our two contract manufactures in China and, accordingly, each tonneau (a hard or soft cover for the bed of a pick-up truck designed to increase mileage and to protect items from inclement weather and potential theft) cover product can only be manufactured by the specific manufacturer with which they have been developed. Moreover, the tools, molds, specific grade of materials and assembly techniques are exclusive to the manufacture with which the product was developed. Manufacturing could be switched, but it would take time and there are no guarantees the product would be identical or that the Company would have sufficient inventory in the given product(s).

 

The Company’s reliance on outside manufacturers generally involves several risks, including: an inability to obtain an adequate supply of required products; the discontinuance of a product by a third-party contract manufacturer; an acquisition of the manufacturer by one of the Company’s competitors; delays or long lead times in receiving products from manufacturers; constraints on the ability of the supplier to operate as efficiently and quickly as required and less control over quality and pricing of components. There is no assurance that the Company’s manufacturers will continue to produce the products it requires in order to conduct business, which in turn would materially adversely affect its ability to generate revenue and profits.

 

Distribution: The Company relies on third party distribution entities (wholesale and retail) to sell its products. The Company relies on third party wholesalers to distribute its products to retail locations, over which the Company has little to no control in the wholesale or retail pricing and product placement and other marketing issues. Its products could be priced higher to the end user than its competition, which would have a detrimental effect on the Company’s sales. The Company relies on a third party online retailer to sell its products directly to the retail market. The Company has little to no control over pricing and other retail issues such as product placement, which could have a direct effect on the Company’s revenues.

 

In its desire to maintain a competitive position in the market, we have implemented and enforce a strict “MAP” (Manufacturers Authorized Price). MAP typically refers to the definite retail pricing of each of our products and differs between the Canadian and U.S. markets. Our products’ MAP pricing is set to be competitive in relation to competing products while allowing our distributor, dealer and retailer customer base to generate respectable margins of profit.

 

	 
	
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Moreover, if our MAP pricing is violated by a product being advertised or sold above or below the then current MAP price, we take necessary steps with our customer(s) to remediate pricing to continue and maintain our competitive position in the marketplace. There are no guarantees that MAP pricing and other various forms of pricing and product control measures can be effectively monitored and enforced, especially as the Company’s market saturation grows.

 

There are risks associated with outsourced production. 

 

As outlined above, the Company outsources the manufacture of products to two contract manufacturers in China. In doing so, the Company selects its manufacturers, screened in advance based on their capabilities, supply capacity, reputation and other relevant traits. Nonetheless, the possibility of delivery delays, product defects and other production-side risks stemming from outsourcers cannot be eliminated. In particular, inadequate production capacity among outsourced manufacturers could result in the Company being unable to supply enough product amid periods of high product demand, the opportunity costs of which could be substantial.

 

There are risks associated with outsourced production in China. 

 

Changes in Chinese laws and regulations, or their interpretation, or the imposition of confiscatory taxation or restrictions are matters over which the Company has no control. While the current leadership, (and the Chinese government), have been pursuing economic reform policies that encourage private economic activity and greater economic decentralization, there is no assurance, however, that the Chinese government will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

 

For example, the Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited and, in turn, our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. If our business ventures with Chinese manufacturers were unsuccessful, or other adverse circumstances arise from these transactions, we face the risk that the parties to these ventures may seek ways to terminate the transactions regardless of any purchasing contracts or agreements we may have entered into. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination.

 

Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations, in such guises as currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises.

 

	 
	
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In that context, we may have to evaluate the feasibility of acquiring alternative or fallback manufacturing capabilities to support the production of our existing and future tonneau cover products. Such development could adversely affect our cost structure inasmuch as we would be required to support sales at an acceptable cost—and might have relatively limited time to so adapt. We have not manufactured these products in the past—and are not expecting to do so in the foreseeable future. That is because developing these technological capabilities and building or purchasing a facility will increase our expenses with no guarantee that we will be able to recover our investment in our manufacturing capabilities.

 

We engage in cross border sales transactions. 

 

Cross border sales transactions carry a risk of changes in import tax and/or duties related to the import and export of our product, which can result in pricing changes, which will affect revenues and earnings. Cross border sales transactions carry other risks including, but not limited to, changing regulations, wait times, customs inspection and lost or damaged product

 

We will need additional financing. 

 

From time to time, in order to expand operations to meet customer demand, the Company will need to incur additional capital expenditures. These capital expenditures are intended to be funded from third party sources, including the incurring of debt and/or the sale of additional equity securities. In addition to requiring additional financing to fund capital expenditures, the Company may require additional financing to fund working capital, research and development, sales and marketing, general and administrative expenditures and operating losses. The incurrence of debt creates additional financial leverage and therefore an increase in the financial risk of the Company’s operations. The sale of additional equity securities will be dilutive to the interests of current equity holders. In addition, there can be no assurance that such additional financing, whether debt or equity, will be available to the Company or that it will be available on acceptable commercial terms. Any inability to secure such additional financing on appropriate terms could have a materially adverse impact on the business, financial condition and operating results of the Company.

 

We rely on key personnel. 

 

The Company’s success also will depend in large part on the continued service of its key operational and management personnel, including executive staff, research and development, engineering, marketing and sales staff Most specifically, this includes its President/CEO Steven Rossi and its Chief Operating Officer Steven Raivio who oversee new product development (in lieu of a research and development department) as well as implementation of new products developed, key customer acquisition and retention, overall management and future growth. The Company faces intense competition for these professionals from its competitors, customers and other companies throughout the industry. Any failure on the Company’s part to hire, train and retain a sufficient number of qualified professionals could impair the business of the Company.

 

	 
	
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We depend on intellectual property rights. 

 

The Company’s success depends to a significant degree upon its ability to develop, maintain and protect proprietary products and technologies. The Company has one patent through a licensing agreement with its President and CEO at no cost to the Company. The Company intends to file additional patent applications in the U.S. and Canada as part of its strategy to protect its proprietary products and technologies. However, patents provide only limited protection of the Company’s intellectual property. The assertion of patent protection involves complex legal and factual determinations and is therefore uncertain and potentially expensive. The Company cannot provide assurance that patents will be granted with respect to its pending patent application, that the scope of any patents it might obtain will be sufficiently broad to offer meaningful protection, or that it will develop additional proprietary products that are patentable. In fact, any patents which might issue from the Company’s two pending provisional patent applications with the USPTO could be successfully challenged, invalidated or circumvented. This could result in the Company’s pending patent rights failing to create an effective competitive barrier. Losing a significant patent or failing to get a patent issued from a pending patent application the Company considers significant, could have a material adverse effect on the Company’s business.

 

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. 

 

In order to protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our employees, consultants, outsource manufacturers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

We are subject to foreign currency risk. 

 

The Company is subject to foreign exchange risk as it has two manufacturing facilities in China, markets extensively in both Canadian and U.S. markets, most of the Company’s employees reside in Canada and, to date, the Company has raised funds in Canadian Dollars. Meanwhile, the Company reports results of operations in U.S. Dollars (USD or US$). Since our Canadian customers pay in Canadian Dollar, the Company is subject to gains and losses due to fluctuations in the USD relative to the Canadian Dollar. While having our products manufactured in China, our manufacturers are paid in USD to better avoid the relatively greater fluctuation of the Chinese Yuan (RMB). Any large fluctuations in the exchange between the RMB and USD may cause product costs to increase, therefore affecting revenues and profits, potentially adversely.

 

	 
	
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We may not be successful in our potential business combinations. 

 

The Company may, in the future, pursue acquisitions of other complementary businesses and technology licensing arrangements. For example, we intend to seek out a joint venture with one or both of our Chinese manufacturers. In addition, we have been approached by competitors to license one or more of our tonneau cover products. The Company may also pursue strategic alliances and joint ventures that leverage its core products and industry experience to expand its product offerings and geographic presence. The Company has limited experience with respect to acquiring other companies and limited experience with respect to forming collaborations, strategic alliances and joint ventures.

 

If the Company were to make any acquisitions, it may not be able to integrate these acquisitions successfully into its existing business and could assume unknown or contingent liabilities. Any future acquisitions the Company makes, could also result in large and immediate write-offs or the incurrence of debt and contingent liabilities, any of which could harm the Company’s operating results. Integrating an acquired company also may require management resources that otherwise would be available for ongoing development of the Company’s existing business.

 

We have competition for our market share. 

 

We participate in the automotive aftermarket equipment industry which is highly competitive for a relatively limited customer base. New pickup truck sales (our principal market) are estimated to be 2,270,000 units for the year 2014, based on sales through November 30, 2014, (source: Wall Street Journal online) which should translate (using an approximate 75% of new truck sales) into approximately 1,700,000 new tonneau covers during the year. (source: Frost & Sullivan) With 3,457 of our tonneau covers sold during the same period, we believe the Company represents 2-tenths of one percent of this market. We consider 5-tenths of one percent of the market to be a break-even market share for us but there is no assurance that we will reach this market share objective.

 

In addition, some of our competitors sell their products at prices lower than ours and we compete primarily on the basis of product quality, features, value, service, and customer relationships. Our competitive success also depends on our ability to maintain a strong brand and the belief that customers will need our products and services to meet their growth requirements. The competition that we face in our market — which varies depending on the particular business segment, product lines and customers — may prevent us from achieving sales, product pricing and income goals, which could affect our financial condition and results of operations. In addition, our current competitors are significantly better funded and have a longer operating history than us and, for example, we currently do not have sufficient funding to allow for separately marketing the TruXmart “brand.”

 

We may not have sufficient product liability insurance. 

 

The existence of any defects, errors or failures in our products or the misuse of our products could also lead to product liability claims or lawsuits against us. We plan to acquire product liability insurance in both the U.S. and Canada over the next 3 to 6 months to cover such claims. Assuming that we will be able to acquire such coverage at reasonable cost, we have no assurance this insurance will be adequate to protect us from all material judgments and expenses related to potential future claims or that these levels of insurance will be available at economical prices, if at all. To that extent, product liability insurance is conditional and up for further investigation. A successful product liability claim could result in substantial cost to us. Even if we are fully insured as it relates to a claim, a claim could nevertheless diminish our brand and divert management's attention and resources, which could have a negative impact on our business, financial condition and results of operations. (See also the “Product Quality” discussion below and the associated recall insurance.)

 

	 
	
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We may produce products of inferior quality. 

 

Although the Company makes an effort to ensure the quality of our light truck tonneau cover products, they could from time to time contain defects, anomalies or malfunctions that are undetectable at the time of shipment. These defects, anomalies or malfunctions could be discovered after the Company’s products are shipped to customers, resulting in the return or exchange of the Company’s products, claims for compensatory damages or discontinuation of the use of the Company's products, which could negatively impact the profits and operating results of the Company. The Company does not presently have product recall, (or similar function), insurance, namely, (in contrast to product liability), insurance that protects a company against broad-scale product manufacturing defects, engineering defects and the costs related to a broad product recall such as shipping, replacement or repairs. Even if in place, there is no guarantee that the full costs of any reimbursements or claims, law suits or litigation would be covered by such insurance. (See also the “Product Liability Insurance” discussion above.)

 

We may experience patent enforcement and infringement. 

 

The automotive aftermarket has been characterized by significant litigation and other proceedings regarding patents, patent applications and other intellectual property rights. The situations in which we may become parties to such litigation or proceedings may include:

 

1. litigation or other proceedings we may initiate against third parties to enforce our patent rights or other intellectual property rights;

 

2. litigation or other proceedings we or our licensee(s) may initiate against third parties seeking to invalidate the patents held by such third parties or to obtain a judgment that our products do not infringe such third parties’ patents; and

 

3. litigation or other proceedings, third parties may initiate against us to seek to invalidate our patents.

 

If third parties initiate litigation claiming that our products infringe their patent or other intellectual property rights, we will need to defend against such proceedings.

 

The costs of resolving any patent litigation or other intellectual property proceeding, even if resolved in our favor, could be substantial. Many of our potential competitors will be able to sustain the cost of such litigation and proceedings more effectively than we can because of their substantially greater resources. In some instances competitors may proceed with litigation or other proceedings pertaining to infringement of their intellectual property as a means to hinder or devaluate the target defendant company, with no intention of the matter being resolved in their favor. Uncertainties resulting from the initiation and continuation of patent litigation or other intellectual property proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other intellectual property proceedings may also consume significant management time and costs. Substantial additional costs may be evident in the event that litigation or other proceedings were initiated against the Company because TruXmart would have to seek legal defense or counsel in the province (Canada) or state (U.S.) where the litigation or legal proceedings were filed.

 

	 
	
12

	

  

Global economic conditions may adversely affect our industry, business and results of operations. 

 

Our overall performance depends, in part, on worldwide economic conditions which historically is cyclical in character. The U.S. has largely worked its way out of an economic recession while other key international economies continue to be impacted by a recession, characterized by falling demand for a variety of goods and services, restricted credit, going concern threats to financial institutions, major multinational companies and medium and small businesses, poor liquidity, declining asset values, reduced corporate profitability, extreme volatility in credit, equity and foreign exchange markets and bankruptcies. By way of example, the automotive aftermarket, specifically fuel saving add-ons such as light-truck tonneau covers, is typically not as affected by economic slow-down or recession as other industries or market segments. Currently, these conditions, (since the Company’s sales are exclusively made in North America while production occurs in China), can be expected to change. In markets where our sales occur and go into recession, these conditions affect the rate of spending and could adversely affect our customers’ ability or willingness to purchase our products, and delay prospective customers’ purchasing decisions, all of which could adversely affect our operating results. In addition, in a weakened economy, companies that have competing products may reduce prices which could also reduce our average selling prices and harm our operating results.

 

The Company faces intense competition from new products. 

 

The Company’s tonneau cover products face intense competition from its competitors. This competition may increase as new products enter the market, especially those made overseas and marketed and sold directly into the North American market by overseas manufactures. In such an event, the competitors’ products may be of similar or better quality compared to the Company’s products. Alternatively, in the case of generic competition, they may be of equal or better quality and are sold at substantially lower prices than the Company’s products. At times, competitors may also release a generic or re-branded version of a current and successful product at a substantially reduced price in efforts to increase revenues or market share. As a result, if the Company fails to maintain its competitive position, this could have a material adverse effect on its business, cash flow, results of operations, financial position and prospects.

 

Risks Related to Our Stockholders and Shares of Common Stock

 

We have not voluntarily implemented various corporate governance measures. 

 

Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of the corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges are those that address board of directors' independence, audit committee oversight and the adoption of a Code of Ethics. Our Board of Directors expects to adopt a Code of Ethics at its next Board meeting. The Company has not adopted exchange-mandated corporate governance measures and, since our securities are not listed on a national securities exchange, we are not required to do so. It is possible that if we were to adopt some or all of these corporate governance measures, stockholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.

 

	 
	
13

	

  

We may be exposed to potential risks relating to our internal control over financial reporting. 

 

As directed by Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), the SEC has adopted rules requiring public companies to include a report of management on the Company's internal control over financial reporting in its annual reports. While we expect to expend significant resources in developing the necessary documentation and testing procedures required by SOX 404, there is a risk that we will not comply with all of the requirements imposed thereby. At present, there is no precedent available with which to measure compliance adequately. In the event we identify significant deficiencies or material weaknesses in our internal control over financial reporting that we cannot remediate in a timely manner, investors and others may lose confidence in the reliability of our financial statements and our ability to obtain equity or debt financing could suffer.

 

We have a large number of authorized but unissued shares of our common stock.

 

We have a large number of authorized but unissued shares of common stock, which our management may issue without further stockholder approval, thereby causing dilution of your holdings of our common stock. Our management will continue to have broad discretion to issue shares of our common stock in a range of transactions, including capital-raising transactions, mergers, acquisitions and other transactions, without obtaining stockholder approval, unless stockholder approval is required. If our management determines to issue shares of our common stock from the large pool of authorized but unissued shares for any purpose in the future, your ownership position would be diluted without your further ability to vote on that transaction.

 

Shares of our common stock may continue to be subject to illiquidity because our shares may continue to be thinly traded and may never become eligible for trading on a national securities exchange.

 

While we may at some point be able to meet the requirements necessary for our common stock to be listed on a national securities exchange, we cannot assure you that we will ever achieve a listing of our common stock on a national securities exchange. Our shares are currently only eligible for quotation on the OTCQB, which is not an exchange. Initial listing on a national securities exchange is subject to a variety of requirements, including minimum trading price and minimum public “float” requirements, and could also be affected by the general skepticism of such markets concerning companies that are the result of mergers with inactive publicly-held companies. There are also continuing eligibility requirements for companies listed on public trading markets. If we are unable to satisfy the initial or continuing eligibility requirements of any such market, then our stock may not be listed or could be delisted. This could result in a lower trading price for our common stock and may limit your ability to sell your shares, any of which could result in you losing some or all of your investments.

 

	 
	
14

	

  

If the price of the shares of our common stock falls, we may lose eligibility for quotation on the OTCQB, which could result in investors losing their investment and would prohibit the Company from further accessing the equity line of credit.

 

Our shares are currently only eligible for quotation on the OTCQB, which is not an exchange. Since May 1, 2014, there has been continuing eligibility requirements for OTCQB, whereby the price of our common stock can’t fall below $0.01 for thirty consecutive days. If we are unable to satisfy this continuing eligibility requirement of the OTCQB, the quotation of our common stock could be moved to the OTC Pink Sheets. This could result in a lower trading price for our common stock and may limit your ability to sell your shares, any of which could result in you losing some or all of your investments. More importantly, however, this would prohibit the Company from having further access to the equity line of credit, as quotation on the OTC Pink Sheets is insufficient for any such equity lines of credit.

 

The market valuation of our business may fluctuate due to factors beyond our control and the value of your investment may fluctuate correspondingly.

 

The market valuation of emerging growth companies, such as us, frequently fluctuate due to factors unrelated to the past or present operating performance of such companies. Our market valuation may fluctuate significantly in response to a number of factors, many of which are beyond our control, including:

 

	 	
i.

	
changes in securities analysts’ estimates of our financial performance, although there are currently no analysts covering our stock;

	 	
ii.

	
fluctuations in stock market prices and volumes, particularly among securities of emerging growth companies;

	 	
iii.

	
changes in market valuations of similar companies;

	 	
iv.

	
announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;

	 	
v.

	
variations in our quarterly operating results;

	 	
vi.

	
fluctuations in related commodities prices; and

	 	
vii.

	
additions or departures of key personnel.

 

As a result, the value of your investment in us may fluctuate.

 

	 
	
15

	

  

We have never paid dividends on our common stock.

 

We have never paid cash dividends on our common stock and do not presently intend to pay any dividends in the foreseeable future. Investors should not look to dividends as a source of income.

 

In the interest of reinvesting initial profits back into our business, we do not intend to pay cash dividends in the foreseeable future. Consequently, any economic return will initially be derived, if at all, from appreciation in the fair market value of our stock, and not as a result of dividend payments.

 

We expect to issue more shares in an equity financing, which will result in substantial dilution.

 

Our Articles of Incorporation authorize the Company to issue 100,000,000 shares of common stock. Any equity financing effected by the Company may result in the issuance of additional securities without stockholder approval and may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. Moreover, our stock issued in any equity financing transaction may be valued on an arbitrary or non-arm’s-length basis by our management, resulting in an additional reduction in the percentage of common stock held by our then existing stockholders. Our board of directors has the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock or preferred stock are issued in connection with a business combination or otherwise, dilution to the interests of our stockholders will occur and the rights of the holders of common stock might be materially adversely affected.

 

IT IS NOT POSSIBLE TO FORESEE ALL RISK FACTORS WHICH MAY AFFECT THE COMPANY. MOREOVER, THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL SUCCESSFULLY EFFECTUATE ITS BUSINESS PLAN. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY ANALYZE THE RISKS AND MERITS OF AN INVESTMENT IN THE SHARES AND SHOULD TAKE INTO CONSIDERATION WHEN MAKING SUCH ANALYSIS, AMONG OTHERS, THE RISK FACTORS DISCUSSED ABOVE.

 

8. Registration Rights. Within sixty (60) days of the completion of this Offering, the Company will file a registration statement on Form S-1 (the “S-1”), which shall include the Shares. The Company shall use commercially reasonable efforts to cause the S-1 to be declared effective by the United States Securities and Exchange Commission, and the Shares to be effectively registered thereunder.

 

9. Responsibility. The Company or its officers and directors shall not be liable, responsible or accountable for damages or otherwise to any Subscriber for any act or omission performed or omitted by them in good faith and in a manner reasonably believed by them to be within the scope of the authority granted to them by this Subscription Agreement and in the best interests of the Company, provided they were not guilty of gross negligence, willful or wanton misconduct, fraud, bad faith or any other breach of fiduciary duty with respect to such acts or omissions.

 

10. Miscellaneous.

 

(a) The Company and the Subscriber hereby covenant that this Subscription Agreement is intended to and does contain and embody herein all of the understandings and agreements, both written or oral, of the Company and the Subscriber with respect to the subject matter of this Subscription Agreement, and that there exists no oral agreement or understanding, express or implied liability, whereby the absolute, final and unconditional character and nature of this Subscription Agreement shall be in any way invalidated, empowered or affected. There are no representations, warranties or covenants other than those set forth herein.

 

	 
	
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(b) The headings of this Subscription Agreement are for convenient reference only and they shall not limit or otherwise affect the interpretation or effect of any terms or provisions hereof.

 

(c) This Subscription Agreement shall not be changed or terminated except as set forth herein. All of the terms and provisions of this Subscription Agreement shall be binding upon and inure to the benefit of and be enforceable by and against the successors and assigns of the Company and the heirs, executors, administrators and assigns of the Subscriber.

 

(d) A modification or waiver of any of the provisions of this Subscription Agreement shall be effective only if made in writing and executed with the same formality as this Subscription Agreement. The failure of either the Company or the Subscriber to insist upon strict performance of any of the provisions of this Subscription Agreement shall not be construed as a waiver of any subsequent default of the same or similar nature, or of any other nature or kind.

 

(e) The various provisions of this Subscription Agreement are severable from each other and from the other provisions of this Agreement, and in the event that any provision in this Subscription Agreement shall be held invalid or unenforceable by a court of competent jurisdiction, the remainder of this Subscription Agreement shall be fully effective, operative and enforceable.

 

(f) Pronouns used herein are to be interpreted as referring to both the masculine and feminine gender.

 

(g) This Subscription Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without reference to conflict of laws principle. The parties agree that in the event of a laws controversy arising out of the interpretation, construction, performance or breach of this Subscription Agreement, any and all claims arising out of, or relating to, this Subscription Agreement shall be submitted by arbitration according to the Commercial Arbitration Rules of the American Arbitration Association located in New York City before a single arbitrator. Notwithstanding the prior sentence, any other action commenced by either party herein shall be venued in the appropriate court of competent jurisdiction located in the county of New York, State of New York.

 

(h) This Subscription Agreement may be executed in one or more counterparts each of which shall be deemed an original and all of which together shall be deemed to be one and the same instrument.

 

THE SUBSCRIBER ACKNOWLEDGES THAT, EXCEPT AS SET FORTH IN THIS AGREEMENT, NO REPRESENTATIONS OR WARRANTIES HAVE BEEN MADE TO IT, OR TO ITS ADVISORS, BY THE COMPANY, OR BY ANY PERSON ACTING ON BEHALF OF THE COMPANY, WITH RESPECT TO THE INTERESTS, THE PROPOSED BUSINESS OF THE COMPANY, THE DEDUCTIBILITY OF ANY ITEM FOR TAX PURPOSES, AND/OR THE ECONOMIC, TAX, OR ANY OTHER ASPECTS OR CONSEQUENCES OF A PURCHASE OF AN INTEREST AND/OR ANY INVESTMENT IN THE COMPANY, AND THAT IT HAS NOT RELIED UPON ANY INFORMATION CONCERNING THE OFFERING, WRITTEN OR ORAL, OTHER THAN THAT CONTAINED IN THIS AGREEMENT. 

 

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17

	

  

SIGNATURE PAGE

 

The Subscriber hereby offers to purchase ________ Shares and encloses payment of $0.138 per Share for an aggregate investment of $_____.

 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
AN INDIVIDUAL

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Name of Subscriber

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Name and Title of Authorized Signatory

(If Applicable)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
(Print) Street Address - Residence

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
(Print) City, State and Zip Code

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Social Security/Taxpayer I.D. Number:

	
 

 

AGREED TO AND ACCEPTED:

 

As of February 10, 2015

 

FRANCHISE HOLDINGS INTERNATIONAL, INC.

 

By: ___________________________________

Steven Rossi, President

 

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18

	

 

COMPLETE “SUBSCRIBER QUESTIONNAIRE” BELOW;

PROVIDE REQUISITE ADDITIONAL INFORMATION

 

SUBSCRIBER QUESTIONNAIRE

 

PERSONAL DATA.

 

	
 

	
 

	
 

	
 

	
Full Name 

	
 

	
Residence Telephone (Area Code Number)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Business Telephone (Area Code Number)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Residence or Principal Address (Street/City/State/Zip Code)

	
 

	
Birth Date

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Mailing Address (if other than residence)

	
 

	
Citizenship (U.S./Other)

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Marital Status

	
 

	
Social Security/Taxpayer I.D. Number

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Spouse’s Full Name

	
 

	
E-mail Address

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
Spouse’s Social Security Number

	
 

	
Facsimile Number (Area Code/Number)

	
 

 

	 
	
19

	

 

ACCREDITED INVESTOR. If Subscriber (or the entity on behalf of which Subscriber is acting) is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D promulgated under the Act, and, as such, falls within at least one of the following categories, then please INITIAL each applicable category.

 

______ (a) A bank or savings and loan association or other institution (acting either in an individual or fiduciary capacity), registered broker-dealer, insurance company, registered investment company, or business development company, or licensed “small business investment company,” or an employee benefit plan which either is represented in a fiduciary capacity by a bank, savings and loan association, insurance company or registered investment advisor, has total assets in excess of $5,000,000 or is self-directed and the plan’s business investments are made solely by accredited investors.

 

 ______ (b) A trust (i) with total assets in excess of $5,000,000, (ii) which was not formed for the specific purpose of acquiring the subject securities, and (iii) whose purchase is directed by a person who has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment.

 

 ______ (c) An organization described in Section 501(c)(3) of the Internal Revenue Code, corporation or similar business trust, or partnership, not formed for the specific purpose of acquiring the subject securities, with total assets in excess of $5,000,000.

 

 ______ (d) An entity in which all of the equity owners are “accredited investors.”

 

 ______ (e) A director or an executive officer of the Company.

 

 ______ (f) A natural person whose individual net worth, or joint net worth with spouse (if any), exceeds $1,000,000, exclusive of the value of your primary residence and less any indebtedness secured by your primary residence in excess of the fair value of such residence and less any loss in value of your primary residence in the last 60 days.

 

 ______ (g) A natural person whose income in each of the two most recent calendar years exceeded $200,000 individually, or $300,000 jointly with spouse (if any), and who reasonably expects to reach that income level in the current year.

 

 

20EX-4.01

 Exhibit 4.01 

FIRST AMENDMENT TO TAX BENEFITS PRESERVATION PLAN 

THIS FIRST AMENDMENT (this “Amendment”) to the Tax Benefits Preservation Plan (the “Plan”), dated as of
July 11, 2014 between Bank of the Carolinas Corporation, a corporation organized under the laws of the State of North Carolina (the “Company”) and Broadridge Corporate Issuer Solutions, Inc. (the “Rights Agent”) is effective
as of 12:00 p.m., eastern time on May 6, 2015. All capitalized terms not otherwise defined in this Amendment shall have the respective meanings ascribed to them in the Plan. 

WHEREAS, the Company proposes to enter into a definitive Agreement and Plan of Merger and Reorganization, by and among Bank of the
Ozarks, Inc. and its wholly owned subsidiary, Bank of the Ozarks, and the Company and its wholly owned subsidiary, Bank of the Carolinas (as amended or supplemented from time to time, the “Merger Agreement”), pursuant to which, among other
things, and contingent upon the satisfaction or waiver of all applicable conditions to closing, the Company would be merged with and into Bank of the Ozarks, Inc.; and 

WHEREAS, in connection with the Merger Agreement, Bank of the Ozarks, Inc., Derek Ferber, FJ Capital Management, LLC, Anton Schutz,
Mendon Capital Master Fund Ltd., and certain of their respective Affiliates propose to enter into one or more voting agreements (each, as amended or supplemented from time to time, the “Voting Agreement”); and 

WHEREAS, the Board has determined, in connection with its consideration of the Merger Agreement, the Voting Agreement and the
transactions contemplated thereby, that it is necessary and desirable to amend the Rights Agreement as set forth herein; and 

WHEREAS, no person has yet become an Acquiring Person and, subject to and in accordance with the terms of this Amendment, the Company
has directed and the Rights Agent has agreed to amend the Plan in certain respects, as more particularly set forth herein; and 

WHEREAS, Section 27 of the Plan provides that the Company may from time to time supplement or amend the Plan without the approval
of any holders of Right Certificates to make any provision with respect to the Rights that the Company may deem necessary or desirable; and 

WHEREAS, Section 29 of the Plan provides that the Board of Directors of the Company is vested with exclusive power and authority
to administer the Plan and to exercise all rights and powers specifically granted to the Board or to the Company, or as may be necessary or advisable in the administration of the Plan, including the right and power to (i) interpret the
provisions of the Plan and (ii) make all determinations deemed necessary or advisable for the administration of the Plan (including a determination to redeem or exchange or not to redeem or exchange the Rights or to amend the Plan); and 

WHEREAS, the Company desires to clarify and make explicit, among other things provided for herein, that neither the execution,
delivery, and/or announcement of the Merger Agreement or any Voting Agreement shall make any person an “Acquiring Person” nor constitute a “Shares Acquisition Date,” a “Distribution Date,” or otherwise cause any
“Rights” to become exercisable pursuant to the Plan. 

 NOW, THEREFORE, the parties hereby agree as follows: 

 

	 	1.	That Section 1(aa) of the Plan is hereby amended by appending the following sentence at the end of Section 1(aa): 

“Notwithstanding anything in this Plan to the contrary, neither the execution, delivery, and/or announcement of the Merger Agreement, nor
the entry into a voting agreement between Bank of the Ozarks, Inc. and Derek Ferber, FJ Capital Management, LLC, Anton Schutz, Mendon Capital Master Fund Ltd., or any of their respective Affiliates regarding the voting of shares of common stock of
the Company in connection with the proposed shareholder approval of the Merger Agreement shall constitute, trigger or cause to occur a “Shares Acquisition Date” for purposes of this Plan. 

 

	 	2.	That a new Section 1(ii) shall be added to the Plan, which shall read as follows: 

“Merger Agreement” shall mean the definitive Agreement and Plan of Merger and Reorganization between and among Bank of the Ozarks,
Inc., Bank of the Ozarks, the Company and Bank of the Carolinas, as that agreement may be supplemented or amended from time to time pursuant to its terms. 
  

	 	3.	That a new Section 35 shall be added to the Plan, which shall read as follows: 

“Section 35. Exception For Merger Agreement. Notwithstanding any provision of this Plan to the contrary, as long as the Merger
Agreement shall not have been validly terminated pursuant to its terms, neither a Distribution Date or a Shares Acquisition Date shall be deemed to have occurred, none of Bank of the Ozarks, Inc. nor Bank of the Ozarks nor any of their respective
Affiliates, nor Derek Ferber, FJ Capital Management, LLC, Anton Schutz, Mendon Capital Master Fund Ltd., nor any of their respective Affiliates shall be deemed to have become an Acquiring Person, none of the Rights shall become exercisable and no
holder of any Rights shall be entitled to exercise such Rights under, or be entitled to any adjustments or rights pursuant to, any provision of this Plan, in any such case by reason of (a) the Company’s or Bank of the Carolinas’
approval, execution, delivery of, or performance under, the Merger Agreement or the consummation of any of the transactions contemplated thereby or (b) the entry into any voting agreement between or among Bank of the Ozarks, Inc. and Derek
Ferber, FJ Capital Management, LLC, Anton Schutz, Mendon Capital Master Fund Ltd., and/or any of their respective Affiliates in connection with the Merger Agreement. Nothing in this Plan shall be construed to give any

 
holder of Rights or any other Person any legal or equitable rights, remedies or claims under this Plan by virtue of (x) the Company’s or Bank of the Carolinas’ approval, execution,
delivery of, or performance under, the Merger Agreement or the consummation of any of the transactions contemplated thereby or (y) the entry into or performance of any of the aforementioned voting agreements between or among Bank of the Ozarks,
Inc. and Derek Ferber, FJ Capital Management, LLC, Anton Schutz, Mendon Capital Master Fund Ltd., and/or any of their respective Affiliates.” 
 No
other terms or provisions of the Plan shall be altered or affected by this Amendment. This Amendment is dated and effective as of the date and time first written above. 

 

			
	BANK OF THE CAROLINAS CORPORATION
		
	By:		 /s/ Megan W. Patton

	Name:		Megan W. Patton
	Title:		SVP/CFO
	
	BROADRIDGE CORPORATE ISSUER SOLUTIONS, INC.
		
	By:		 /s/ John Dunn

	Name:		John Dunn
	Title:		Vice President

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