Document:

f10k2010a1ex10xvii_attitude.htm

 

Exhibit 10.17 - Sublicense Agreement, Termination Agreement and Promissory Note

 

 

SUBLICENSE AGREEMENT

THIS SUBLICENSE AGREEMENT (“Agreement”) is being made effective as of August 19, 2008 (the “Effective Date”), by and between Nutraceutical Discoveries, Inc., a Tennessee corporation having an office at 2450 E.J. Chapman Drive, Knoxville, Tennessee 37996 (the “Licensor”), and Attitude Drinks Incorporated, a Delaware corporation having its principal office at 10415 Riverside Drive, Suite 101, Palm Beach Gardens, Florida 33410 (the “Licensee”).

W I T N E S S E T H:

	
A.

	
Pursuant to the terms and conditions of a license agreement dated August 1, 2008 (the “Primary License”) among Licensor, the University of Tennessee, and the University of Tennessee Research Foundation (the “UTRF”), Licensor has obtained exclusive rights to certain intellectual property which permits unique structure-function metabolic health and weight management claims for dairy functional beverages as more fully described in Exhibit “A” attached hereto and incorporated herein (the “Intellectual Property”).

	
B

	
Licensor has developed and/or discovered certain trade secrets, know-how, data and other information (whether or not patentable or qualifying as a trade secret) relating to the use and development of the Intellectual Property (collectively, the “Know How”).

	
C.

	
Licensee desires a license to use the Intellectual Property and the Know How (together, the “Licensed Technology”), for purposes of developing, marketing and selling to the public dairy functional beverage products based on the Licensed Technology (the “Licensee Developed Products”).

	
D.

	
Licensor desires to have the Licensed Technology so developed, marketed and sold in order that the Licensed Technology may be available for public and commercial use and benefit.

NOW THEREFORE, in consideration of the mutual covenants and promises set forth herein, the parties agree as follows:

1. License.

 

a. Grant of License Generally.  Subject to the terms and conditions of this Agreement, Licensor hereby grants, and Licensee hereby accepts, an exclusive, non-transferrable, limited license to the Licensed Technology for the sole purpose of developing, marketing and selling the Licensee Developed Products in the United States.  Nothing in this Agreement shall be considered as conveying any license, express or implied, by estoppel or otherwise, under any patent of Licensor in countries foreign to the United States.

 

 

  

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b. Retained Rights.  No right or license is granted by the Licensor to the Licensee under this Agreement, either expressly or by implication, except those specifically set forth herein, and the Licensor retains all rights to use the Licensed Technology for all other purposes including, without limitation, developing, marketing and/or selling to the public, either directly or through licenses with third parties, products within the United States and elsewhere in the world that are not dairy functional beverage products, and products that are dairy functional beverage products outside of the United States.

2. Term.  The initial term of this Agreement shall commence on the Effective Date and terminate on December 31, 2011 (“Initial Term”), unless earlier terminated as herein provided.  The Initial Term may be extended for consecutive one (1) year terms upon the mutual written consent of the Licensor and Licensee; provided, however, that this Agreement shall automatically extend for one (1) year after the Initial Term (the “Automatic Extension Term”) if during the Initial Term the Licensee has not breached this Agreement and has paid to Licensor either:  (i) $1,000,000 in total royalty payments as contemplated in Section 3 below, in which case Licensee shall be permitted to continue to license the Licensed Technology on an exclusive basis as provided in this Agreement; or (ii) $750,000 in total royalty payments as contemplated in Section 3 below, in which case the terms of this Agreement shall continue to apply with the exception that Licensee’s license of the Licensed Technology shall be on a non-exclusive basis only.  The Initial Term, the Automatic Extension Term (if applicable), and any other renewal terms thereafter shall be collectively referred to herein as the “Term.”

 

3. Royalties.

 

a. Generally.  During the Term, in exchange for the license granted to Licensee in Section 1 above, the Licensor shall be entitled to monthly royalty payments from Licensee equal to 5.75% of the Net Sales of any Licensee Developed Products, provided that Licensee shall pay to Licensor a minimum cash amount each month described in Section 3.c.i. (the “Minimum Monthly Cash Amount”) and shall be required to pay the Minimum Royalty Amount described in Section 3.d.

 

b. “Net Sales” Defined.  “Net Sales” shall be defined as the gross revenue received by Licensee from the sale of any Licensee Developed Products less:  (i) import, export, value-added, excise and sales taxes, and custom duties, all to the extent separately identified on each applicable invoice; (ii) the cost of insurance, transportation from the place of manufacture to the customer’s premises, in each case actually paid to third-party providers; (iii) normal and customary rebates, and cash and trade discounts, actually taken; and (iv) credits for returns, allowances, or trades actually allowed.

 

c. Payment.  Royalties computed under Section 3.a. above shall be payable partially in cash and partially in fully vested options to acquire at any time upon Licensor’s election unrestricted Licensee capital stock currently being traded on a national exchange and issued upon the terms specified in Section 3.e. below (“Licensee Stock Options”) in the following order of priority:

 

 

  

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i. First, Licensee shall pay to Licensor the Minimum Monthly Cash Amount as follows:  (1) Beginning on March 1, 2009 and ending on December 31, 2009, the amount of $18,000 per month; (2) beginning on January 1, 2010, and ending on December 31, 2010, the amount of $17,250 per month; (3) beginning on January 1, 2011, and ending on December 31, 2011, the amount of $20,000 per month; and (4) if applicable, during the Automatic Extension Term, the amount of $23,000 per month;

 

1. Second, to the extent the royalty computed under Section 3.a. above for any particular month exceeds the applicable Minimum Monthly Cash Amount, the difference shall be payable 50% in cash (the “Additional Cash Amount”) and 50% in the form of Licensee Stock Options; provided however, Licensee may elect to pay all royalty monthly amounts which exceed the applicable Minimum Monthly Cash Amount wholly in cash.

All royalty amounts calculated under this Section 3 shall be due and payable on the fifth (5th) day of each month commencing on April 5th, 2009, at which time Licensee shall deliver to Licensor by wire transfer a good faith estimate of that portion of royalties required to be paid in cash hereunder. Beginning August 5, 2009, and quarterly thereafter, an exact reconciliation of the cash and Licensee Stock Options royalty due for the quarter ending approximately 35 days previous shall be computed. Any overpayment or underpayment of cash royalty due can be adjusted in the next month’s scheduled cash payment. If the Stock Options credit balance described in Section 3.e is depleted, Licensee will pay all royalty due above the cash minimum in cash. Each quarter a report is due by email to account  of the number of units of Licensee Developed Products sold, a breakdown of the type of Licensee Developed Products sold or licensed, the number of units of such Licensee Developed Products sold or licensed by Licensee, channels by major category (i.e., grocery stores, convenience stores, retail pharmacy stores, etc.) through which such Licensee Developed Products were sold, and the royalty calculation including a statement of the Stock Options credit balance and what was depleted during the reporting period,

d. Minimum Royalty Amount.  To the extent that the aggregate royalties computed under Section 3.a. above for any year during the term of this Agreement are less than the Minimum Royalty Amount, as hereinafter defined, Licensee shall, by no later than January 15 of the following year beginning on January 15, 2010, pay to Licensor the difference between the annual royalties so paid and the applicable Minimum Royalty Amount.  The “Minimum Royalty Amount” shall be defined as follows:  (i) For that period of time beginning on the Effective Date and going through the end of calendar year 2009, $462,500; (ii) for calendar year 2010 and thereafter, an amount equal to the greater of (x) the total Minimum Monthly Cash Amount for the preceding calendar year, or (y) 6.6125% of the annual Net Sales from the sale of Licensee Developed Products by the Licensee for the immediately preceding calendar year.  Any payment hereunder shall be made in accordance with the terms of Section 3.c.ii. above.

 

 

  

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e. Options Amount.  Licensee Stock Options granted under this Section 3 shall be automatically vested in the Licensor and shall entitle the Licensor to purchase unrestricted Licensee capital stock currently being traded on a national exchange for an exercise price equal to a fixed purchase price (as applicable, the “Fixed Purchase Price”) which, except as described in Section 3.c.ii.1., shall initially be $0.65 per share and then, beginning on January 1, 2010 and for the remainder of the Term, at a price equal to the average of the high and low trading prices of such Licensees trading stock in December of the preceding calendar year, or $0.50 per share, whichever is greater.  Such options shall be exercisable in accordance with Section 5 below. Beginning January 2010 and each subsequent January during the Term, Licensee will grant a number of Stock Options (with strike price calculated as described in Section 3.e) that will credit to no more than 50% of the royalty due above the cash minimums for the year. Licensee will deliver no later than February 5 each year the Royalty options by email, documentation evidencing the grant of any Licensee Stock Options hereunder (to be immediately followed by fully executed originals of such documentation by overnight mail). These will serve as a credit balance to be reduced each month by no more than 50% of the royalty due above the cash minimum for the month. Once the credit balance of options is depleted, any more royalty due for the year above the cash minimum will be paid in cash.

4.           Other Payments.  In addition to the royalty payments provided for in Section 3 above, Licensor shall be entitled to the following:

a.           Execution of Agreement.  Upon execution of this Agreement, Licensee shall grant to Licensor Licensee Stock Options entitling Licensor to immediately purchase Three Hundred Fifty Thousand (350,000) shares of unrestricted Licensee capital stock currently being traded on a national exchange at an exercise price of $0.65 per share, exercisable in accordance with Section 5 below. This will serve as an Stock Option credit balance through December 31, 2009 in the amount of $227,500 toward the 2009 royalty minimum due of $462,500.

b.           Product Launch.  Upon the sooner of (1) Licensee raising sufficient capital to bring any Licensee Developed Product to market or (2) October 31, 2008, Licensee shall pay to Licensor in cash the sum of $55,000.

5.           Licensee Stock Options.

a.           Reserve.  Licensee shall reserve shares of its trading stock so that a sufficient amount is available for issuance to the Licensor pursuant to the Licensee Stock Options granted under this Agreement.

b.           Licensor’s Rights.  Any Licensee Stock Option granted to Licensor under this Agreement shall entitle the Licensor, in its sole discretion, to purchase the subject Licensee trading stock upon the terms and conditions provided in this Agreement and in the Grant of Option Agreement which shall be executed by Licensee at the time each Licensee Stock Option is granted hereunder in materially the same form as that attached hereto as Exhibit “B”.  Licensor may exercise any such options to purchase all or part of the optioned shares by providing Licensee three (3) days’ written notice, specifying the number of shares it wants to purchase and the proposed date of purchase.  Such options shall be exercisable at any time, both during and after the Term, for a period up to five (5) years from the date of issuance.

 

 

  

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6.           Duties of Licensor and Licensee.

a.           Licensee.

i.           Licensee shall use reasonable best efforts to diligently and continuously commercialize the Licensed Technology.

ii.           Licensee shall further use its best efforts to bring one or more Licensee Developed Products to market through a thorough, vigorous and diligent exploitation of Licensed Technology and to continue subsequent active, diligent marketing of more Licensed Technology throughout the Term.

iii.           Licensee shall in good faith consult with, and obtain the approval of, Dr. Michael Zemel prior to modifying the formulation of any Licensed Technology for purposes of any Licensee Developed Products.

b.           Licensor.

i.           Licensor shall make available to Licensee for use on the Licensee’s website and in product literature such documentation as may be reasonably necessary to describe the scientific basis of the Licensed Technology with respect to any Licensed Product.

ii.           Licensor shall cooperate with Licensee’s marketing team to make such minor modifications to Licensed Technology as may be necessary from time to time.

iii.           Licensor shall consult with Licensee to determine methods of establishing branding for the Licensed Technology that enhances the value of the brands held by Licensee and Licensor.  Without limiting the forgoing, Licensee shall include the Licensor’s “Innutria” logo reasonably acceptable to the parties on packaging for all Licensee Developed Products.  In addition to the licenses otherwise being granted under this Agreement, Licensor grants to Licensee a limited, nonexclusive and non-sublicensable license during the Term to display the Licensor’s “Innutria” logo as contemplated in this Section 6.b.iii.  Licensor reserves the right to co-brand products in categories other than dairy functional beverage products in order to build leverage across products and markets.

 

 

  

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7.           Royalty Reports and Auditing.

a.           Reports.  Beginning with the first sale of a Licensee Developed Product, Licensee shall make written reports (even if there are no further sales) of royalty payments due, if any, to Licensor within thirty-five (35) days after the end of each quarter. This report shall state the number, description, and aggregate Net Sales of Licensee Developed Products during such completed quarter by Licensee, its affiliates and permitted sublicensees, and resulting calculations of earned royalty payments due Licensor pursuant to Sections 3 and 4 for such completed quarter. Each such statement shall be certified by an officer of the Licensee as being true, correct and complete. Concurrent with the submission of each such report, Licensee shall pay Licensor any royalties due for the quarter covered by such report.

b.           Auditing.  Licensee agrees to keep and maintain records for a period of three (3) years showing the manufacture, sale, use and other disposition of products sold or otherwise disposed of under the license granted in this Agreement. Such records will include sufficient detail to enable the royalties payable under this Agreement by Licensee to be determined. Licensee further agrees to permit its books and records to be examined by an independent certified public accountant selected by Licensor and acceptable to Licensee once per calendar year during the term of this Agreement, for the sole purpose of verifying the reports and royalty payments made by Licensee. Such examination shall be made at Licensee's place of business during ordinary business hours with at least seven (7) days prior written notice. The accountant shall report to Licensor only whether there has been a royalty underpayment and, if so, the amount thereof. Such examination is to be at the expense of Licensor except in the event that the results of the audit reveal an under-reporting of royalties due Licensor of 5% or more, in which case the audit costs shall be paid by Licensee within twenty (20) days of notice by Licensor to Licensee.

8.           Representations and Warranties.

a.           LICENSOR DISCLAIMER.  LICENSOR MAKES NO REPRESENTATIONS, EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE OR NONINFRINGEMENT), AND ASSUMES NO RESPONSIBILITIES WHATSOEVER, WITH RESPECT TO THE INTELLECTUAL PROPERTY OR KNOW-HOW OR THE USE THEREOF, OR THE MANUFACTURE, POSSESSION, USE, MARKETING, SALE, OR OTHER DISPOSITION BY LICENSOR, LICENSEE, OR ANYONE ELSE, OF THE LICENSED TECHNOLOGY OR THE LICENSEE DEVELOPED PRODUCTS OR ANY OTHER PRODUCTS OR SERVICES (INCLUDING, BUT NOT LIMITED TO, PRODUCTS MADE BY LICENSOR, AND LICENSOR SERVICES THAT ARE OR WERE FURNISHED TO LICENSEE AT ANY TIME BEFORE, ON, OR AFTER THE DATE OF THIS AGREEMENT), EXCEPT ONLY AS EXPRESSLY STATED IN THIS AGREEMENT. Without limitation of the foregoing, nothing contained in this Agreement or in any disclosure of the Licensed Technology made by or on behalf of Licensor shall be construed as extending any representation or warranty with respect to the Licensed Technology or the results to be obtained by the use of the Licensed Technology, or that anything made, used, or sold by use of the Licensed Technology or any part thereof, alone or in combination, will be free from infringement of patents of third parties. LICENSOR SHALL NOT BE LIABLE TO LICENSEE, ITS AFFILIATES, ITS SUBLICENSEES, OR ANY OTHER PARTY, REGARDLESS OF THE FORM OR THEORY OF ACTION (WHETHER CONTRACT, TORT, INCLUDING NEGLIGENCE, STRICT LIABILITY, OR OTHERWISE), FOR ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR OTHER EXTRAORDINARY DAMAGES ARISING OUT OF OR RELATED TO THIS AGREEMENT, LICENSED TECHNOLOGY, THE LICENSEE DEVELOPED PRODUCTS, OR ANY PRODUCTS OR SERVICES FURNISHED OR NOT FURNISHED BY LICENSOR, EVEN IF LICENSOR HAS BEEN ADVISED OF THE POSSIBILITY THEREOF. Licensee agrees that all warranties, if any, in connection with the sale or other disposition of any Licensed Technology (or any products made by Licensor and furnished at any time to Licensee) by Licensee, its affiliates, or its sublicensees will be made by them and will not directly or impliedly obligate Licensor.

 

 

  

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b.           Licensor Representations.  Notwithstanding the first sentence of the Section 8.a. above, Licensor:

i.           Warrants to Licensee that subject to the Primary License, Licensor has good title to the Licensed Technology (but Licensor makes no infringement or other representations or warranties with respect thereto).

ii.           Represents that Licensor is a corporation incorporated and existing under the laws of the State of Tennessee and has the power and authority to enter into this Agreement and the right to grant all the rights described in this Agreement, including the rights to the Licensed Technology described in this Agreement.

iii.           Represents that Licensor has taken all necessary action to authorize its execution and delivery of this Agreement by the representatives of Licensor who carried out such execution and delivery, and to authorize the performance by Licensor of its obligations under this Agreement.

iv.           Represents that execution and delivery of this Agreement and its performance by Licensor will not result in any breach or violation of, or constitute a default under, any agreement, instrument, judgment, or order to which Licensor is a party or by which it is bound.

v.           Represents that Licensor is not aware of any other intellectual property right owned by Licensor which has not been disclosed to Licensee and for which a license is necessary to practice the rights to the Licensed Technology as set forth in this Agreement.

c.           Licensee Representations.  Licensee represents and warrants to Licensor that:

 

 

  

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i.           Licensee is a corporation organized and existing under the laws of the State of Delaware and has the power and authority to enter into this Agreement.

ii.           Licensee has taken all necessary action to authorize its execution and delivery of this Agreement by the representatives of Licensee who carried out such execution and delivery, and to authorize the performance by Licensee of its obligations under this Agreement.

iii.           Execution and delivery of this Agreement and its performance by Licensee will not result in any breach or violation of, or constitute a default under, any agreement, instrument, judgment, or order to which Licensee is a party or by which it is bound.

9.           Indemnity.

a.           Indemnity.  Licensee agrees to indemnify and hold harmless Licensor, its directors, officers, employees, affiliates, successors and assigns from any and all costs, expenses (including reasonable attorney's fees), interest, losses, obligations, liabilities, and damages paid or liability for which is incurred by any of such parties (“Losses”), and which arise out of or are in connection with or are for the purpose of avoiding any and all claims, demands, actions, causes of action, suits, appeals, and proceedings (“Claims”), all whether groundless or not, or the settlement thereof, based on any actual or alleged injuries, damages, or liability of any kind whatsoever (including but not limited to personal injury, death, property damage, breach of warranty, or breach of contract) arising, directly or indirectly, out of any one or more of: any breach by Licensee of its representations, warranties, or agreements under this Agreement; or out of any manufacture, marketing, possession, use, sale or other disposition of Licensed Technology or the Licensee Developed Products or products furnished by Licensor to Licensee in connection with this Agreement (whether same occurs during or after the License or during or after the Term) by Licensee, its affiliates, its permitted sublicensees, or anyone claiming by, through, or under any of them; or any acquisition, possession, disclosure, or use of the Licensed Technology or any thereof, by Licensee, its affiliates, its permitted sublicensees, or anyone claiming by, through, or under any of them; or the presence of Licensee's or its affiliates' or its permitted sublicensees' officers, agents, employees, invitees, or property or any thereof on Licensor's premises, provided that the obligations of Licensee under this Section 9.a. shall not apply if the Claims and any Losses resulted in whole or in part from the intentional misconduct or gross negligence of Licensor or any other party indemnified under this Section.

b.           Defense; Settlement.  Licensee shall defend and control negotiation of settlement of any Claim, as defined in Section 9.a. above. Licensor agrees to cooperate fully in the defense of any Claim and may participate in the defense with counsel of Licensor's choosing, such separate counsel to be at Licensor's expense unless a conflict of interest exists between Licensee and Licensor with respect to the defense, in which case Licensee shall pay the reasonable fees and expenses of Licensor's separate counsel. Any settlement by which Licensor would incur any obligation or liability, whether for the payment of money, the taking of any action, the refraining from any action, or otherwise, shall require the advance written consent of Licensor, which may be withheld in the sole discretion of Licensor without relieving Licensee of any of its indemnification or other obligations under this Agreement.

 

  

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c.           Insurance.  Not later than sixty (60) days before the time when Licensee, any subsidiary, or any sublicensee of Licensee shall use in humans or sell any Licensee Developed Products or any products furnished to Licensee by Licensor at any time (before, on or after the date of this Agreement) in connection with this Agreement, and at all times thereafter until the expiration of all applicable statutes of limitation pertaining to any such use, sale or other disposition of any Licensee Developed Products or the aforesaid products furnished by Licensor (whether same occurs or exists before or after the Effective Date), Licensee will at Licensee's expense, obtain and maintain in full force and effect, comprehensive general liability insurance, including product liability insurance, protecting Licensor against all claims, suits, obligations, liabilities and damages, based upon or arising out of actual or alleged bodily injury, personal injury, death, or any other damage to or loss of persons or property, caused by any such use, sale, or other disposition. Such insurance policy or policies shall be issued by companies reasonably satisfactory to Licensor, shall name Licensor as an additional named insured, shall have limits of at least $1,000,000 per occurrence with an aggregate of $2,000,000, shall be noncancelable except upon thirty (30) days' prior written notice to Licensor, and shall provide that as to any loss covered thereby and also by any policies obtained by Licensor itself, Licensee's policies shall provide primary coverage for Licensor and Licensor' policies shall be considered excess coverage for Licensor.

d.           Certificates; Policies.  Licensee will forthwith after the obtaining of such insurance required by Section 9.a. above, obtain and deliver to Licensor certificates of and copies of, and at all times thereafter deliver without further demand replacement certificates and copies of, all such insurance policies that are in force and effect, as reasonably requested by Licensor.

10.           IP Protection.  Licensee shall cooperate in good faith with Licensor to apply for such patents or take such other measures deemed necessary by Licensor to protect the Licensor’s rights in and to the Licensed Technology.

11.           Infringement.

a.           Generally.  Each party shall give to the other party, promptly after it becomes aware of the same, written notice of any suspected infringement of the Licensed Technology. Upon receipt of any such notice, the parties will promptly consult to determine whether joint action can and will be taken by the parties with respect to such infringement. Should joint action be taken, the parties shall equally share the expense and recoveries of any such action. Should the parties fail to agree on appropriate joint action, Licensor shall have the initial right to take remedial action at its own expense and with the right to retain any recoveries. If Licensor elects not to take such action, or fails to take such action within six (6) months after the parties failed to agree on appropriate joint action, Licensee shall have the right to take remedial action at its own expense and with the right to retain any recoveries. To the extent the cooperation of the other party is required in order to prosecute any such action, including any requirement that any proceeding be instituted in the name of the other party, such party will cooperate in any reasonable manner with the party deciding to take the remedial action, at the cost of the party deciding to take such action.

 

 

  

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b.           UTRF.  Nothing herein shall affect UTRF’s rights under the Primary License to pursue defense of the Licensed Patents.

12.           Sublicenses.  Licensee may grant sublicenses under this Agreement only upon the prior written consent of Licensor, which shall be given in Licensor’s sole and absolute discretion.

13.           Termination.

a.           By Mutual Consent.  This Agreement may be terminated by the parties at any time by mutual written consent.

b.           By Licensor.  Licensor shall have the right to terminate this Agreement and the license granted herein:

i.           Upon thirty (30) days written notice in the event that Licensee violates any provision of this Agreement including, but not limited to payment. Licensee shall be given five (5) days to cure any such breach.

ii.           In the event Licensee terminates or suspends its business; becomes subject to any bankruptcy or insolvency proceeding under federal or state statute or becomes insolvent or becomes subject to direct control by a trustee, receiver or similar authority.

Termination of the license shall be in addition to and not in lieu of any equitable remedies available to Licensor.  In the event of termination by reason of the Licensee’s failure to comply with any part of this Agreement which cannot be cured, Licensor shall have the right, at any time, upon notice to Licensee, to take immediate possession of the Licensed Technology and related documentation and all copies wherever located.

c.           By Licensee.  Licensee shall have the right to terminate this Agreement and the license granted herein upon thirty (30) days written notice in the event that Licensor violates any provision of this Agreement including, but not limited to, payments owed pursuant to Sections 3 and 4. Licensee shall be given five (5) days to cure any such breach.

 

 

  

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d.           Return of Technology.  Within five (5) days after termination of this Agreement, Licensee will return to Licensor the Licensed Technology in the form provided by Licensor.

e.           Effect of Termination or Expiration.  Upon any termination or expiration of this Agreement:

i.           Any amounts payable to the Licensor hereunder shall continue to be payable in accordance with the terms hereof.

ii.           Licensee shall cease manufacturing and distributing any Licensee Developed Products, except to the extent necessary to sell off its work-in-progress and finished inventory of Licensee Developed Products subject to the payment of royalties on Net Sales thereof; provided that in no event shall Licensee continue to manufacture or distribute Licensee Developed Products for more than ninety (90) days following the date of termination or expiration, as the case may be (the “Sell-Off Period”).

iii.           The license granted to Licensee hereunder shall terminate, except that such license shall continue for the duration of the Sell-Off Period.

f.           Survival.  Surviving any termination or expiration are:

i.           Licensee’s obligation to pay royalties accrued or accruable;

ii.           Any cause of action or claim of Licensee or Licensor, accrued or to accrue, because of any breach or default by the other party; and

iii.           The provisions of Sections 5, 7, 8.a., 9, 10, 13, 15, 16, and 17.

g.           Limitations on Exclusivity.  In the event Licensee is unwilling or unable to meet the minimum payment requirements imposed by Section 3, Licensor shall have the additional right, upon ten (10) days’ written notice to the Licensee, to consider the license non-Exclusive and available for other licensees who compete in the dairy functional beverage product category.

14.           Assignment.  Neither party may assign this Agreement or any part of this Agreement without the express written consent of the other, which consent shall not be unreasonably withheld; provided, however, Licensor may assign this Agreement or any portion of this Agreement to an affiliate or to a successor of all or substantially all its business relating to the Licensed Technology, to the University of Tennessee, or to the UTRF without the written consent of Licensee and shall provide Licensee notice of any such assignment.

 

 

  

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15.           Confidentiality.

a.           Each party acknowledges that it shall have access to confidential information of the other party. Each party covenants and agrees that it shall not divulge, furnish, publish or use for its benefit or for the direct or indirect benefit of any other person, whether or not for monetary gain, other than as expressly provided herein, any confidential information of the other party. Each party shall exercise a high degree of care to prevent the unauthorized dissemination, disclosure or use, other than as expressly provided herein, of any confidential information of the other party and, except as expressly provided for in this Section, shall not make or allow any disclosure of the confidential information of the other party to any other person. Each party shall restrict access to, use and disclosure of the confidential information of the other party to those of its employees, subcontractors, licensees and sublicensees, if any, requiring such access, use or disclosure and only to the extent of such requirement, and shall advise each such other person granted such access, use or disclosure that the confidential information of the other party is the proprietary property of such other party and is highly confidential and that no access, use or disclosure in respect thereof is permitted except as directly required by use thereof in connection with this Agreement. In all cases in which a party shall permit a person other than an employee of that party to have access to or use or disclosure of confidential information, such party, as a condition precedent thereto, shall obtain a confidentiality agreement in writing from such person to the effect contained herein, provided that the form of such agreement shall be reasonably acceptable to the party whose confidential information is being disclosed.

b.           The requirements of this Section 15 shall be in addition to the obligations imposed on the parties pursuant to that certain confidentiality and non-disclosure agreement executed by the parties on June 8, 2008.

16.           Attorneys Fees.  In the event of default by either party or in the event either party breaches this Agreement, the defaulting or breaching party, as the case may be, may recover all reasonable costs and expenses, including attorney fees, that shall be made or incurred by the non-defaulting or non-breaching party in enforcing the terms and conditions of this Agreement.

17.           Miscellaneous.

a.           Governing Law.  This Agreement is made under and in accordance with the laws of the State of Tennessee and the construction and performance of this Agreement shall be governed by such laws without regard to their provisions regarding choice of law.

b.           Entire Agreement. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes all prior discussions, agreements and understandings of any and every nature, whether written or oral, with respect to the same matter, including, without limitation that certain term sheet dated as of July 7, 2008. There are no representations, warranties or covenants between the parties with respect to the subject matter of this Agreement, except as set forth in this Agreement.

 

  

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c.           Modification.  This Agreement may not be modified or altered except by written instrument duly executed by both parties.

d.           Waiver.  None of the terms of this Agreement can be waived except by the written consent of the party waiving compliance.  The waiver or failure of Licensor to exercise in any respect any right provided for herein shall not be deemed a waiver of any further right hereunder.

e.           Severability.  If any provision of this Agreement shall to any extent be found to be invalid or unenforceable, the remainder of this Agreement shall not be affected thereby, and any such invalid or unenforceable provision shall be reformed so as to be valid and enforceable to the fullest extent permitted by law.

f.           Notices. Any notice or other communication given or made pursuant to this Agreement must be in writing and shall be delivered to the party to whom intended at the address set forth above (or at such other address as such party may designate by proper notice) by personal delivery, by telecopier, by nationally recognized courier (Federal Express, DHL, etc.) or by certified or registered mail, postage prepaid, and shall be deemed given when personally delivered or sent by telecopier or two (2) business days after deposit with a courier or five (5) business days after mailing.

g.           Relationship of the Parties.  Neither this Agreement, nor any transaction under or relating to this Agreement, will be deemed to create an agency, partnership or joint venture relationship between the parties hereto.

h.           Binding Effect.  This Agreement and the license granted here will inure to the benefit of each of the parties to this Agreement, their successors and the assigns of the entire business relating thereto of each of the parties.

i.           Captions. Headings contained in this Agreement have been inserted for reference purposes only and shall not be considered part of this Agreement in construing this Agreement.

j.           All Genders and Numbers Included.  Whenever the singular or plural number, or masculine, feminine or neutral gender is used in this Agreement, it shall equally apply to, extend to and include the other.

k.           Counterparts.  This Agreement may be executed in counterparts, each of which will be deemed an original and which together shall constitute one instrument.

[Signatures on following page]

  

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date.

 

 

 

	 	LICENSOR: 

Nutraceutical Discoveries, Inc.,

a Tennessee corporation

By:   /s/ Curtis Jones

Name:   Curtis Jones

Title:  CEO/President

LICENSEE:

Attitude Drinks Incorporated,

a Delaware corporation

By:     /s/ Roy G. Warren

Name:    Roy G. Warren

Title:   CEO/President

 

 

  

14

  

EXHIBIT A

Description of Intellectual Property

Licensed Patents:

	
1.

	
US Patent Application No. 11/542,703 titled, “METHODS OF REDUCING THE PRODUCTION OF REACTIVE OXYGEN SPECIES AND METHODS OF SCREENING OR IDENTIFYING COMPOUNDS AND COMPOSITIONS THAT REDUCE THE PRODUCTION OF REACTIVE OXYGEN SPECIES”

	
2.

	
US Patent Application No. 11/543,171 titled, “DIETARY CALCIUM FOR REDUCING THE PRODUCTION OF REACTIVE OXYGEN SPECIES”

	
3.

	
PCT Application No. PCT/US06/38857 titled, “DIETARY CALCIUM FOR REDUCING THE PRODUCTION OF REACTIVE OXYGEN SPECIES”

Structure-Function Claims for Metabolic Heath:

1.           Anti-Oxidant Structure-Function Claims

-  Supports the body’s own anti-oxidant function

-  Protects against oxidative stress

2.           Anti-Inflammatory Structure-Function Claims

-  Protects against inflammatory stress

-  Promotes healthy inflammatory system balance

	
3.

	
Integrated Structure-Function Claim (incorporates immune function, oxidative stress and body composition claims)

-  Promotes metabolic health

Structure-Function Claims for Weight Management:

	
1.  

	
Promotes healthy weight

	
2.  

	
Promotes healthy/optimal body composition

	
3.  

	
Controls body fat

	
4.  

	
Helps burn fat

 

 

  

15

  

 

EXHIBIT B

Form of Grant of Option Agreement

  

16

  

 

 

 

TERMINATION AGREEMENT AND RELEASE

 

THIS TERMINATION AGREEMENT AND RELEASE is effective February 24, 2010, between Attitude Drinks Incorporated ("Attitude"), a Delaware corporation having an office at 10415 Riverside Drive, Suite 101, Palm Beach Gardens, Florida 33410, and Nutraceutical Discoveries, Inc. (NM"), a Tennessee corporation having an office at 2450 E.J. Chapman Drive, Knoxville, Tennessee 37996 (collectively "The Parties").

 

RECITALS

 

	
A.  

	
The Parties entered into a sublicense agreement on August 19, 2008 ("Sublicense Agreement") (see Exhibit B).

 

	
B.  

	
NDI sent to Attitude a notice of breach letter on August 14, 2009.

 

	
C.  

	
As of September 17, 2009, the exclusive and non-exclusive right to the ingredient InnutriaTM in dairy functional beverages was relinquished by Attitude.

 

	
D.  

	
Since that letter, The Parties have negotiated the amount that Attitude still owed to NDI.

 

	
E.  

	
This Termination Agreement and Release is the final settlement between The Parties formally ending the Sublicense Agreement.

 

	
F.  

	
Prior to today's date, Attitude had paid to NDI $21,000.00 of the $55,000.00 owed under Section 4(a) of the Sublicense Agreement.

 

	
G.  

	
The Parties have agreed to terms satisfactory to both companies to release Attitude from the debt owed NDI according to the Sublicense Agreement for the minimum monthly cash payments beginning April 1, 2009 and thereafter.

 

TERMS

 

	
1.

	
Amount. Attitude will pay to NDI $34,000.00 (thirty-four thousand dollars) under the terms below and in the terms of the promissory note attached as Exhibit A ("Promissory Note"). This amount represents the balance remaining on the $55,000.00 owed NDI on October 31, 2008.

	
a. 

	
Principal. Attitude shall pay this amount by paying equal payments of $4,250.00 (four-thousand two hundred fifty dollars) each month for eight months beginning payment on May 1, 2010 and continuing through December 1, 2010, until the balance of $34,000.00 is paid.

	
b. 

	
Date. Each month's payment is due on the 1st of the month but no later than the 10th of each month.

  

1

  

 

	
c. 

	

Interest. Interest on the balance remaining will accumulate each month at a rate of 2% per month until the balance is paid.

	
  i.  

	
 However, if Attitude pays by the 10th of each and every month within the schedule outlined in section 1(a), interest will be waived.

 

	
2.

	Completion. Upon completion of the terms of the Promissory Note:

	
a.  

	
NDI will forgive all debt incurred in the Sublicense Agreement above the original payment due of $55,000.00 under Section 4(a) of the Sublicense Agreement,

	
b.  

	
NDI will consider the contract expired but paid-in-full, yet the contract will remain expired as of September 17, 2009.

 

	
3.

	
Default. If Attitude is unable to pay the balance of $34,000.00, plus interest, if any, according to the schedule set forth above, NDI retains the right to pursue the full amount due according to the Sublicensing Agreement through the contract expiration on September 17, 2009. In the event of any such default, Attitude will be credited with any monthly payment which it has made in determining the amount due NDI according to the Sublicensing Agreement.

 

	
4.

	
Release. Regardless of Attitude's compliance with Section 1, Attitude further agrees that it does hereby remise, release, acquit, satisfy, and forever discharge NDI, its subsidiaries and all of NDI's employees, directors, shareholders, insurers, reinsurers, agents, subagents and representatives (past, present and future), of and from any and all claims, demands and liabilities whatsoever, in law or in equity, which Attitude ever had, now has, or which any successor or assign hereafter can, shall or may have, against the above-named persons and entities or any of them, for, upon or by reason of any matter, cause or thing whatsoever, including, without limitation, the Sublicense Agreement or the termination thereof. It is the intent of NDI and Attitude that this be a full, complete and general release of all claims of Attitude, whether they arise under state law, federal law or otherwise.

 

	 	

Upon full performance of Section 1 by Attitude and payment in full of the $34,000.00 owed as represented by the Promissory Note, NDI agrees that it was thereby remise, release, acquit, satisfy, and forever discharge Attitude, its subsidiaries and all of Attitude's employees, directors, shareholders, insurers, reinsurers, agents, subagents and representatives (past, present and future), of or from any and all claims, demands and liabilities whatsoever, in law or in equity, which NDI ever had, now has, or which any successor or assign hereafter can, shall or may have, against the above-named persons and entities or any of them, for, upon or by reason of any matter, cause or thing whatsoever, including, without limitation the Sublicense Agreement, Termination Agreement and Release and Promissory Note. It is the intent of NDI and Attitude that this be a full, complete and general release of all claims of NDI, whether they arise under state law, federal law or otherwise.

 

  

2

  

 

	
5.  

	
Confidentiality. The Parties acknowledges that they have had access to confidential information of the other party. The Parties each covenant and agree not to divulge, furnish, publish, or use for its benefit or for the direct or indirect benefit of any other person, whether or not for monetary gain. The Parties shall exercise a high degree of care to prevent the unauthorized dissemination, disclosure or use of any confidential information of the other party, and shall not make or allow any disclosure of the confidential information of the other party to any other person The Parties shall restrict access to, use, and disclosure of the confidential information of the other party to those of its employees, subcontractors, licensees, and sub-licensees, if any, which have required such access, use, or disclosure.

 

	
6.  

	
Non-Disparagement. The Parties shall not use the existence of this Termination Agreement and Release, the matters resolved hereby, or any other matter to disparage the reputation of the other party. In the event of the breach of this provision by either party, the non.breaching party may bring an action against the breaching party seeking the greater of actual damages or liquidated damages in the amount of $5,000. The prevailing party in any such litigation shall be paid all reasonable costs and expenses including attorney's fees, that shall be made or incurred in such an action

 

	
7.  

	
Advice of Counsel. The Parties expressly acknowledge that they have read and understood this Termination Agreement and Release and the terms, significance, and effects of this Termination Agreement and Release. The Parties acknowledge that they have had an opportunity to consult their respective attorneys concerning this Termination Agreement and Release and that each of them understands and believes that the Termination Agreement and Release is in their best interest.

 

	
8.  

	
Miscellaneous

 

	
a. 

	
Governing Law. This Termination Agreement and Release is made under and in accordance with the Laws of the State of Tennessee and the construction and performance of this Agreement shall be governed by such laws with regard to their provisions regarding choice of law.

 

	
b.  

	
Venue. Any action brought regarding this Termination Agreement and Release or the Sublicense Agreement shall be brought in Knoxville, Tennessee.

 

	
c. 

	
Attorney's Fees. In the event of Attitude's default under the Termination Agreement and Release or Promissory Note, Attitude shall pay all reasonable costs and expenses, including attorney fees, that shall be made or incurred by NDI in enforcing the terms of each. In the event of NDI's breach under the Termination Agreement and Release, NDI shall pay all reasonable costs and expenses, including attorney fees, that shall be made or incurred by Attitude in enforcing the terms thereof

 

  

3

  

 

	
d. 

	
Notices. Any notice or other communication given or made pursuant to this Termination Agreement and Release must be in writing and shall be delivered to the party to whom intended at the address set forth above (or at such other address as such party may designate by proper notice) by personal delivery, by telecopier, by nationally recognized courier (Federal Express, DHL, etc.) or by certified or registered mail, postage prepaid, and shall be deemed given when personally delivered or sent by telecopier or two (2) business days after deposit with a courier or five (5) business days after mailing.

 

	
e. 

	
Integration. The Parties declare and understand that no promises, inducements, or agreements not herein express have been made to them and that this Termination Agreement and Release, and its attachments, contains the entire agreement among the parties and that the terms of this Termination Agreement and Release, and its attachments, are contractual and not merely recital.

 

	
f.   

	
Binding Effect. This Termination Agreement and Release will inure to the benefit of each of The Parties, their successors and the assigns of the entire business relating to each of The Parties.

 

	
g. 

	
Modification. This Termination Agreement and Release may not be modified or altered except by written instrument duly executed by both parties.

 

	
h. 

	
Severability. If any provision of this Termination Agreement and Release shall to any extend be found to be invalid or unenforceable, the remainder of this Termination Agreement and Release shall not be affected thereby, and any such invalid or enforceable provision shall be reformed so as to be valid and enforceable to the fullest extent permitted by law.

 

	
i. 

	
Waiver. None of the terms of this Termination Agreement and Release, and its attachments, can be waived except by written consent of the party waiving compliance The waiver or failure of NDI to exercise in any respect any right provided for herein shall not be deemed a waiver of any further right hereunder.

 

	
j. 

	

Counterparts. This Termination Agreement and Release, and its attachments, may be executed in counterparts, each of which will be deemed an original and which together shall constitute one instrument.

 

 

  

4

  

 

 

	Signed:	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	
/s/ Roy Warren

	 	Date:	
3/1/10

	 
	
Roy Warren, CEO

	 	 	 	 
	

Attitude Drinks Incorporated

	 	 	 	 
	10415 Riverside Drive, Suite 101 	 	 	 	 
	Palm Beach Gardens, Florida 33410	 	 	 	 
	 	 	 	 	 

 

 

	 	 	 	 	 
	
/s/ Curtis Jones

	 	Date:	
2/26/10

	 
	

Curtis Jones, CEO

	 	 	 	 
	
Nutraceutical Discoveries Incorporated 

	 	 	 	 
	2450 EJ Chapman Drive, Suite 211 	 	 	 	 
	Knoxville, TN 37996	 	 	 	 

 

 

  

5

  

 

Exhibit A

 

PROMISSORY NOTE

 

FOR VALUE RECEIVED, Attitude Drinks Incorporated, a Delaware corporation, whose address is 10415 Riverside Drive, Suite 101, Palm Beach Gardens, Florida 33410, ("Maker") promises to pay to the order of Nutraceutical Discoveries, Inc., a Tennessee corporation whose address is 2450 E.J. Chapman Drive, Knoxville, Tennessee 37996, ("Payee") the sum of Thirty-Four Thousand Dollars ($34,000) together with interest on the unpaid principal balance.

 

	
1.  

	
Payments. Maker shall pay this amount by paying equal payments of $4,250.00 (four-thousand two hundred fifty dollars) each month for eight months beginning payment on May 1, 2010 and continuing through December 1, 2010, until the balance of $34,000.00 is paid.

 

	
2.  

	
Date. Each month's payment is due on the 1st of the month but no later than the 10th of each month.

 

	
3.  

	
Interest.   Interest shall accrue at the rate often percent (2%) per annum. Interest shall accrue hereon from the date hereof until fully paid, and shall be due and payable which each payment.

 

	
  

	
a.   Waiver of Interest. If Maker pays by the 10th of each and every month within the schedule outlined in section 1, interest will be waived.

 

	
4.  

	
Location.  Payment of principal and interest hereon shall be made at the address of Payee, or at any other place Payee designates in writing from time to time, and shall be in lawful money of the United States of America.

 

	
5.  

	
Prepayment. This Note may be prepaid at any time, in whole or in part, without premium or penalty, but with accrued interest to the date of prepayment. All payments hereon shall be applied first to the payment of accrued interest and the balance shall be applied to principal.

 

	
6.

	
Acceleration of payment. The entire principal amount hereof, together will all accrued interest, shall immediately become due and payable (without demand for payment, notice of nonpayment, presentment, notice of dishonor, protest, notice of protest, or any other notice or demand, all of which Maker hereby waives) if:

 

	
  

	
a.   Maker has made any misrepresentation in or with respect to, or has breached any provision of, this Promissory Note;

  

1

  

 

Exhibit A

 

	
b.

	
Maker fails to pay when due any installment of principal or interest on this Promissory Note and such failure continues for a period of thirty (30) days;

 

	
c.

	
Maker defaults in the performance of, or compliance with, any other term, provision, covenant, or condition of this Promissory Note, and the default or noncompliance is not remedied to Payee's satisfaction within thirty (30) days after Payee gives Maker written notice of the default or noncomplianc e;

 

	
d.

	
Maker suspends payment of its obligations, or admits in writing its inability to pay its debts generally as they become due;

 

	
e.

	
Maker makes an assignment for the benefit of creditors, or a trustee or receiver of Maker or of a substantial portion of its assets is appointed, and the trustee or receiver is not discharged within sixty (60) days;

 

	
f.

	
Any proceeding involving Maker is voluntarily commenced by Maker under any bankruptcy, reorganization, insolvency, readjustment of debt, marshalling of assets and liabilities, dissolution, or liquidation law or statute of the United States or of any state, or a proceeding of this nature is involuntarily instituted against Maker, and Maker by any action indicates its approval of, or consent to, or acquiescence in, the proceeding, or the proceeding remains undismissed for sixty (60) days; or

 

	
g.

	
A final judgment for the payment of money is rendered against Maker, and Maker does not discharge the judgment or procure a stay of the execution thereof within thirty (30) days after the date of entry and service of a copy of the judgment, or cause execution of the judgment to be stayed during an appeal.

 

	
7.  

	
Costs of collection. If Maker fails to make timely the payments required hereby, Maker shall pay all costs of collection when incurred including, without limitation, attorneys' fees and expenses and court costs. Such costs will be added to the balance of principal and interest then due.

 

	
8.  

	
Failure or delay non-waiver. Failure of the Payee or future holder hereof to assert any right contained herein, or delay in asserting any such right, shall not be deemed a waiver of that right.

 

	
9.  

	
Waiver of defense on transfer. If this Note is transferred, assigned or pledged, Maker waives, as against the transferee, assignee or pledgee, all defenses and counterclaims of every kind and description that Maker may have against Payee.

  

2

  

 

Exhibit A

 

	
10.

	
Waiver of procedural defenses. Maker waives demand for payment, notice of nonpayment, presentment, notice of dishonor, protest, notice of protest, or any other notice or demand in connection with this Promissory Note.

 

	
11.  

	
Modifications. This Promissory Note may not be changed, modified or amended, or terminated, nor may any of its provisions be waived, except by an agreement in writing signed by the party against whom enforcement thereof is sought.

 

	
12.  

	
Choice of Law. This Promissory Note shall be govern by and construed in accordance with the laws of the state of Tennessee.

 

	
13.  

	
Venue. Any action brought regarding this Promissory Note or the Sublicense Agreement shall be brought in Rnoxville, Tennessee.

 

	
14.  

	
Notices. Any notice or other communication given or made pursuant to this Promissory Note must be in writing and shall be delivered to the party to whom intended at the address set forth above (or at such other address as such party may designate by proper notice) by personal delivery, by telecopier, by nationally recognized courier (Federal Express, DHL, etc.) or by certified or registered mail, postage prepaid, and shall be deemed given when personally delivered or sent by telecopier or two (2) business days after deposit with a courier or five (5) business days after mailing.

 

	
15.

	
Promises binding. This Promissory Note shall be binding upon Maker and Maker's successors, and assigns.

 

 

 

	 	
ATTITUDE DRINKS INCORPORATED

 

By: /s/ Roy G. Warren                         

       Roy G. Warren

 

Its Pres, CEO

 

 

  

3f10k2010a1ex10xix_attitude.htm

 

Exhibit 10.19 Subscription Agreement September 2008

 

SUBSCRIPTION AGREEMENT

 

 

THIS SUBSCRIPTION AGREEMENT (this “Agreement”), is dated as of September 29, 2008, by and among Attitude Drinks Inc., a Delaware corporation (the “Company”), and the subscribers identified on the signature page hereto (each a “Subscriber” and collectively “Subscribers”).

 

WHEREAS, the Company and the Subscribers are executing and delivering this Agreement in reliance upon an exemption from securities registration afforded by the provisions of Section 4(2), Section 4(6) and/or Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC" and/or “Commission”) under the Securities Act of 1933, as amended (the "1933 Act").

 

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Subscriber, as provided herein, and the Subscribers in the aggregate, shall purchase for up to $300,000 (the "Purchase Price") of principal amount promissory notes of the Company (“Note” or “Notes”) in the principal amount of up to $365,000 (“Note Principal”), in the form annexed hereto as Exhibit A; and share purchase warrants (the “Warrants”), in the form annexed hereto as Exhibit B, to purchase shares of Common Stock (the “Warrant Shares”).  The Notes and Shares of the Company’s Common Stock, $.001 par value (the “Common Stock”) issuable upon conversion of the Notes (“Shares”), the Warrants and the Warrant Shares issuable upon exercise of the Warrants are collectively referred to herein as the “Securities”; and

 

WHEREAS, the aggregate proceeds of the sale of the Notes contemplated hereby shall be held in escrow pursuant to the terms of a Funds Escrow Agreement to be executed by the parties, substantially in the form annexed hereto as Exhibit C (the "Escrow Agreement").

 

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

 

1.           Closing.   Subject to the satisfaction or waiver of the terms and conditions of this Agreement, on the Closing Date, Subscriber shall purchase and the Company shall sell to the Subscribers Notes in the principal amount of up to $365,000.  The “Closing Date” shall be the date that subscriber funds representing the net amount due the Company from the Purchase Price is transmitted by wire transfer or otherwise to or for the benefit of the Company.

2.           Security Interest.   On or about October 23, 2007, certain lenders were granted a security interest in the assets of the Company, including ownership of the Subsidiaries (as defined in Section 5(a) of this Agreement) and in the assets of the Subsidiaries, which security interest was memorialized in a “Security Agreement” and “Collateral Agent Agreement” dated October 23, 2007, as amended on or about January 8, 2008.  The Subsidiaries guaranteed the Company’s obligations under the Transaction Documents [as defined in Section 5(c)].   Such guaranties were memorialized in a “Subsidiary Guaranty”.  The Security Agreement and Collateral Agent Agreement are hereby amended to include the Subscribers and the Company agrees that the Subscribers are hereby made parts to the Security Agreement and Collateral Agent Agreement as Lenders therein and their interests in the Obligations (as defined in the Security Agreement) are pari pasu in proportion to their specific Obligation amounts and of equal priority with each other.   The Company will execute such other agreements, documents and financing statements reasonably requested by the Subscribers to memorialize and further protect the security interest described herein, which will be filed at the Company’s expense with the jurisdictions, states and counties designated by the Subscribers.  The Company will also execute all such documents reasonably necessary in the opinion of Subscribers to memorialize and further protect the security interest described herein.

 

 

  

1

  

 

3.           Warrants.    On the Closing Date, the Company will issue and deliver an aggregate of 850,000 Class A Warrants to the Subscribers.  The exercise price to acquire a Warrant Share upon exercise of a Class A Warrant shall be equal to $0.50, subject to reduction as described in the Class A Warrant.  Upon exercise of a Class A Warrant, the holder of the Warrant shall receive one Warrant Share and Class B Warrant.  The exercise price of such Class B Warrant shall be equal to 150% of the exercise price of the Class A Warrant in effect at the time of such exercise, subject to reduction as described in the Class B Warrant.  The Warrants shall be exercisable until five years after the issue date of the Warrants.  Each holder of the Warrants is granted the registration rights set forth in this Agreement.  The Warrant exercise price and number of Warrant Shares issuable upon exercise of the Warrants shall be equitably adjusted to offset the effect of stock splits, stock dividends, and similar events, and as otherwise described in this Agreement and the Warrant.

 

4.           Subscriber Representations and Warranties.  Each Subscriber hereby represents and warrants to and agrees with the Company only as to such Subscriber that:

(a)           Organization and Standing of the Subscribers.  If such Subscriber is an entity, such Subscriber is a corporation, partnership or other entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization.

(b)           Authorization and Power.  Such Subscriber has the requisite power and authority to enter into and perform this Agreement and the other Transaction Documents and to purchase the Notes being sold to it hereunder.  The execution, delivery and performance of this Agreement and the other Transaction Documents by such Subscriber and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate or partnership action, and no further consent or authorization of such Subscriber or its Board of Directors, stockholders, partners, members, as the case may be, is required.  This Agreement and the other Transaction Documents have been duly authorized, executed and delivered by such Subscriber and constitutes, or shall constitute when executed and delivered, a valid and binding obligation of such Subscriber enforceable against such Subscriber in accordance with the terms thereof.

(c)           No Conflicts.  The execution, delivery and performance of this Agreement and the other Transaction Documents and the consummation by such Subscriber of the transactions contemplated hereby and thereby or relating hereto do not and will not (i) result in a violation of such Subscriber’s charter documents or bylaws or other organizational documents or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument or obligation to which such Subscriber is a party or by which its properties or assets are bound, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Subscriber or its properties (except for such conflicts, defaults and violations as would not, individually or in the aggregate, have a material adverse effect on such Subscriber).  Such Subscriber is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement and the other Transaction Documents  or to purchase the Securities in accordance with the terms hereof, provided that for purposes of the representation made in this sentence, such Subscriber is assuming and relying upon the accuracy of the relevant representations and agreements of the Company herein.

(d)           Information on Company.   Such Subscriber has been furnished with or has had access at the EDGAR Website of the Commission to the Company's audited financial statements for the period ended March 31, 2008 (hereinafter referred to collectively as the "Reports").  Such financial statements were prepared pursuant to Generally Accepted Accounting Principles in the United States and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries, if any, as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject to normal, immaterial adjustments.  In addition, such Subscriber may have received in writing from the Company such other information concerning its operations, financial condition and other matters as such Subscriber has requested in writing, identified thereon as OTHER WRITTEN INFORMATION (such other information is collectively, the "Other Written Information"), and considered all factors such Subscriber deems material in deciding on the advisability of investing in the Securities.

 

 

 

2

 

(e)           Information on Subscriber.  Such Subscriber is, and will be at the time of the conversion of the Notes, an "accredited investor", as such term is defined in Regulation D promulgated by the Commission under the 1933 Act, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of United States publicly-owned companies in private placements in the past and, with its representatives, has such knowledge and experience in financial, tax and other business matters as to enable such Subscriber to utilize the information made available by the Company to evaluate the merits and risks of and to make an informed investment decision with respect to the proposed purchase, which represents a speculative investment.  Such Subscriber has the authority and is duly and legally qualified to purchase and own the Securities.  Such Subscriber is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof.  The information set forth on the signature page hereto regarding such Subscriber is accurate.

(f)           Purchase of Notes and Warrants.  On the Closing Date, such Subscriber will purchase the Notes and Warrants as principal for its own account for investment only and not with a view toward, or for resale in connection with, the public sale or any distribution thereof.

(g)           Compliance with Securities Act.   Such Subscriber understands and agrees that the Securities have not been registered under the 1933 Act or any applicable state securities laws, by reason of their issuance in a transaction that does not require registration under the 1933 Act (based in part on the accuracy of the representations and warranties of such Subscriber contained herein), and that such Securities must be held indefinitely unless a subsequent disposition is registered under the 1933 Act or any applicable state securities laws or is exempt from such registration.  Such Subscriber will comply with all applicable rules and regulations in connection with the sales of the Securities including laws relating to short sales.

(h)           Shares Legend.   The Shares, and the Warrant Shares shall bear the following or similar legend:

"THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES."

 

 

  

3

  

 

(i)           Warrants Legend.  The Warrants shall bear the following or similar legend:

"NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES."

(j)           Note Legend.  The Note shall bear the following legend:

 

"NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. "

 

(k)           Communication of Offer.  The offer to sell the Securities was directly communicated to such Subscriber by the Company.  At no time was such Subscriber presented with or solicited by any leaflet, newspaper or magazine article, radio or television advertisement, or any other form of general advertising or solicited or invited to attend a promotional meeting otherwise than in connection and concurrently with such communicated offer.

 

  

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(l)           Authority; Enforceability.  This Agreement and other agreements delivered together with this Agreement or in connection herewith have been duly authorized, executed and delivered by such Subscriber and are valid and binding agreements enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity; and such Subscriber has full power and authority necessary to enter into this Agreement and such other agreements and to perform its obligations hereunder and under all other agreements entered into by such Subscriber relating hereto.

(m)           Restricted Securities.   Such Subscriber understands that the Securities have not been registered under the 1933 Act and such Subscriber will not sell, offer to sell, assign, pledge, hypothecate or otherwise transfer any of the Securities unless pursuant to an effective registration statement under the 1933 Act, or unless an exemption from registration is available.  Notwithstanding anything to the contrary contained in this Agreement, such Subscriber may transfer (without restriction and without the need for an opinion of counsel) the Securities to its Affiliates (as defined below) provided that each such Affiliate is an “accredited investor” under Regulation D and such Affiliate agrees to be bound by the terms and conditions of this Agreement. For the purposes of this Agreement, an “Affiliate” of any person or entity means any other person or entity directly or indirectly controlling, controlled by or under direct or indirect common control with such person or entity.  Affiliate includes each Subsidiary of the Company.  For purposes of this definition, “control” means the power to direct the management and policies of such person or firm, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.

(n)           No Governmental Review.  Such Subscriber understands that no United States federal or state agency or any other governmental or state agency has passed on or made recommendations or endorsement of the Securities or the suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

(o)           Correctness of Representations.  Each Subscriber represents only as to such Subscriber that the foregoing representations and warranties are true and correct as of the date hereof and, unless such Subscriber otherwise notifies the Company prior to the Closing Date shall be true and correct as of the Closing Date.

(p)           Survival.  The foregoing representations and warranties shall survive the Closing Date.

 

(q)           Mandatory Conversion Representations.  In connection with Section 2.1 of the Note, Subscriber makes all of the customary Subscriber representations to the Company.

 

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

 

(a)           Due Incorporation.  The Company is a corporation or other entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has the requisite corporate power to own its properties and to carry on its business as presently conducted.  The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have a Material Adverse Effect.  For purposes of this Agreement, a “Material Adverse Effect” shall mean a material adverse effect on the financial condition, results of operations, prospects, properties or business of the Company and its Subsidiaries taken as a whole.  For purposes of this Agreement, “Subsidiary” means, with respect to any entity at any date, any corporation, limited or general partnership, limited liability company, trust, estate, association, joint venture or other business entity of which more than 30% of (i) the outstanding capital stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors or other managing body of such entity, (ii) in the case of a partnership or limited liability company, the interest in the capital or profits of such partnership or limited liability company or (iii) in the case of a trust, estate, association, joint venture or other entity, the beneficial interest in such trust, estate, association or other entity business is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such entity.  The Company’s Subsidiaries as of the Closing Date are set forth on Schedule 5(a).

 

  

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

 

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

 

(d)           Additional Issuances.   There are no outstanding agreements or preemptive or similar rights affecting the Company's Common Stock or equity and no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, or agreements or understandings with respect to the sale or issuance of any shares of Common Stock or equity of the Company or Subsidiaries or other equity interest in the Company except as described on Schedule 5(d).  The Common Stock of the Company on a fully diluted basis outstanding as of the last Business Day preceding the Closing Date is set forth on Schedule 5(d).

 

(e)           Consents.  No consent, approval, authorization or order of any court, governmental agency or body or arbitrator having jurisdiction over the Company, or any of its Affiliates, or the Company's shareholders is required for the execution by the Company of the Transaction Documents and compliance and performance by the Company of its obligations under the Transaction Documents, including, without limitation, the issuance and sale of the Securities.  The Transaction Documents and the Company’s performance of its obligations thereunder has been unanimously approved by the Company’s Board of Directors.

 

(f)           No Violation or Conflict.  Assuming the representations and warranties of the Subscribers in Section 4 are true and correct, neither the issuance and sale of the Securities nor the performance of the Company’s obligations under this Agreement and all other agreements entered into by the Company relating thereto by the Company will:

 

(i)           violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under (A) the articles or certificate of incorporation, charter or bylaws of the Company, (B) to the Company's knowledge, any decree, judgment, order, law, treaty, rule, regulation or determination applicable to the Company of any court, governmental agency or body, or arbitrator having jurisdiction over the Company or over the properties or assets of the Company or any of its Affiliates, (C) the terms of any bond, debenture, note or any other evidence of indebtedness, or any agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which the Company or any of its Affiliates is a party, by which the Company or any of its Affiliates is bound, or to which any of the properties of the Company or any of its Affiliates is subject, or (D) the terms of any "lock-up" or similar provision of any underwriting or similar agreement to which the Company, or any of its Affiliates is a party except the violation, conflict, breach, or default of which would not have a Material Adverse Effect; or

 

  

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(ii)           result in the creation or imposition of any lien, charge or encumbrance upon the Securities or any of the assets of the Company or any of its Affiliates except as described herein; or

 

(iii)           except as described in Schedule 5(d), result in the activation of any anti-dilution rights or a reset or repricing of any debt or security instrument of any other creditor or equity holder of the Company, nor result in the acceleration of the due date of any obligation of the Company; or

 

           (iv)           will result in the triggering of any piggy-back registration rights of any person or entity holding securities of the Company or having the right to receive securities of the Company.

 

(g)           The Securities.  The Securities upon issuance:

 

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

(ii)           have been, or will be, duly and validly authorized, and upon exercise of the Warrants, the Warrant Shares will be duly and validly issued, fully paid and non-assessable;

 

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

 

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

 

(v)           assuming the representations warranties of the Subscribers as set forth in Section 4 hereof are true and correct, will not result in a violation of Section 5 under the 1933 Act.

 

(h)           Litigation.  There is no pending or, to the best knowledge of the Company, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates that would affect the execution by the Company or the performance by the Company of its obligations under the Transaction Documents.  Except as disclosed in the Reports, there is no pending or, to the best knowledge of the Company, basis for or threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its Affiliates which litigation if adversely determined would have a Material Adverse Effect.

 

(i)           No Market Manipulation.  The Company and its Affiliates have not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Securities or affect the price at which the Securities may be issued or resold.

 

(j)           Information Concerning Company.  The Reports and Other Written Information contain all material information relating to the Company and its operations and financial condition as of their respective dates which information is required to be disclosed therein.   Since the date of the financial statements included in the Reports, and except as modified in the Other Written Information or in the Schedules hereto, there has been no Material Adverse Event relating to the Company's business, financial condition or affairs not disclosed in the Reports. The Reports and Other Written Information do 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, taken as a whole, not misleading in light of the circumstances when made.

 

 

  

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(k)           Stop Transfer.  The Company will not issue any stop transfer order or other order impeding the sale, resale or delivery of any of the Securities, except as may be required by any applicable federal or state securities laws and if so required only if contemporaneous notice of such instruction is given to the Subscriber.

 

(l)           Defaults.   The Company is not in violation of its articles of incorporation or bylaws.  The Company is (i) not in default under or in violation of any other material agreement or instrument to which it is a party or by which it or any of its properties are bound or affected, which default or violation would have a Material Adverse Effect, (ii) not in default with respect to any order of any court, arbitrator or governmental body or subject to or party to any order of any court or governmental authority arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters, or (iii) not in violation of any statute, rule or regulation of any governmental authority which violation would have a Material Adverse Effect.

 

(m)           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 of any security or solicited any offers to buy any security under circumstances that would cause the offer of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of the OTC Bulletin Board (“Bulletin Board”) which would impair the exemptions relied upon in this Offering or the Company’s ability to timely comply with its obligations hereunder.  Neither the Company nor any of its Affiliates will take any action or steps that would cause the offer or issuance of the Securities to be integrated with other offerings or issuances which would impair the exemptions relied upon in this Offering or the Company’s ability to timely comply with its obligations hereunder.  The Company will not conduct any offering other than the transactions contemplated hereby that will be integrated with the offer or issuance of the Securities that would impair the exemptions relied upon in this Offering or the Company’s ability to timely comply with its obligations hereunder.

 

(n)           No General Solicitation.  Neither the Company, nor any of its Affiliates, nor to its knowledge, any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities.

 

(o)           No Undisclosed Liabilities.  The Company has no liabilities or obligations which are material, individually or in the aggregate, other than those incurred in the ordinary course of the Company businesses since the date of the most recent financial statements of the Company contained in the Reports and which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, except as disclosed in the Reports or on Schedule 5(o).

 

(p)           No Undisclosed Events or Circumstances.  No event or circumstance has occurred or exists with respect to the Company or its businesses, properties, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the Reports.

 

(q) Capitalization.  The authorized and outstanding capital stock of the Company and Subsidiaries as of the date of this Agreement and the Closing Date (not including the Securities) are set forth in the Reports or on Schedule 5(d).  Except as set forth on Schedule 5(d), there are no options, warrants, or rights to subscribe to, securities, rights or obligations convertible into or exchangeable for or giving any right to subscribe for any shares of capital stock of the Company or any of its Subsidiaries.

 

 

  

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(r)           Dilution.   The Company's executive officers and directors understand the nature of the Securities being sold hereby and recognize that the issuance of the Securities will have a potential dilutive effect on the equity holdings of other holders of the Company’s equity or rights to receive equity of the Company.  The board of directors of the Company has concluded, in its good faith business judgment that the issuance of the Securities is in the best interests of the Company.

 

(s) No Disagreements with Accountants and Lawyers.  There are no material disagreements of any kind presently existing, or reasonably anticipated by the Company to arise between the Company and the accountants and lawyers presently employed by the Company, including but not limited to disputes or conflicts over payment owed to such accountants and lawyers, nor have there been any such disagreements during the two years prior to the Closing Date.

(t)           Investment Company.   Neither the Company nor any Affiliate of the Company is an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

 

(u)           Foreign Corrupt Practices.  Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is  in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

(v)           DTC Status.   The Company’s transfer agent is a participant in, and the Common Stock is eligible for transfer pursuant to, the Depository Trust Company Automated Securities Transfer Program. The name, address, telephone number, fax number, contact person and email address of the Company transfer agent is set forth on Schedule 5(v) hereto.

(w)           Reporting Company.  The Company is a publicly-held company subject to reporting obligations pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "1934 Act") and has a class of Common Stock registered pursuant to Section 12(g) of the 1934 Act.  The Company is not a “shell company” as that term is employed in the 1933 Act.

(x)           Solvency.  Based on the financial condition of the Company as of the Closing Date after giving effect to the receipt by the Company of the proceeds from the sale of the Notes hereunder, (i) the Company’s fair saleable value of its assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing debts and other liabilities (including known contingent liabilities) as they mature; (ii) the Company’s assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital availability thereof; and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debt when such amounts are required to be paid.  The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt).

 

 

  

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(y)           Company Predecessor and Subsidiaries.   The Company makes each of the representations contained in Sections 5(a), (b), (c), (d), (e), (f), (h), (j), (l), (o), (p), (q), (s), (t), and (u) of this Agreement, as same relate to the Subsidiary of the Company.  All representations made by or relating to the Company of a historical or prospective nature and all undertakings described in Sections 9(g) through 9(l) shall relate, apply and refer to the Company and its predecessors.  The Company represents that it owns 100% of the outstanding equity of the Subsidiaries and rights to receive equity of the Subsidiaries free and clear of all liens, encumbrances and claims, except as set forth on Schedule 5(d).  No person or entity other than the Company has the right to receive any equity interest in the Subsidiaries.

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

 

(AA)           Survival.  The foregoing representations and warranties shall survive the Closing Date.

 

6.           Regulation D Offering/Legal Opinion.  The offer and issuance of the Securities to the Subscribers is being made pursuant to the exemption from the registration provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933 Act and/or Rule 506 of Regulation D promulgated thereunder.  On the Closing Date, the Company will provide an opinion reasonably acceptable to the Subscribers from the Company's legal counsel opining on the availability of an exemption from registration under the 1933 Act as it relates to the offer and issuance of the Securities and other matters reasonably requested by Subscribers.  A form of the legal opinion is annexed hereto as Exhibit D.  The Company will provide, at the Company's expense, such other legal opinions, if any, as are reasonably necessary  in each Subscriber’s opinion for the issuance and resale of the Common Stock issuable upon exercise of the Warrants pursuant to an effective registration statement, Rule 144 under the 1933 Act or an exemption from registration.

 

7.           Redemption.    The Notes shall not be redeemable or callable by the Company except as described in the Note.

8.           Commissions/Due Diligence Fee/Legal Fees.

(a)          Commissions.   The Company on the one hand, and each Subscriber (for himself only) on the other hand, agrees to indemnify the other against and hold the other harmless from any and all liabilities to any persons claiming brokerage commissions or similar fees except as described on Schedule 8(a) on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby and arising out of such party’s actions.  Anything in this Agreement to the contrary notwithstanding, each Subscriber is providing indemnification only for such Subscriber’s own actions and not for any action of any other Subscriber.  The Company represents that there are no parties entitled to receive fees, commissions, or similar payments in connection with the offering described in this Agreement except as described on Schedule 8(a) hereto.

 

(b)           Due Diligence Fee.   The Company will pay a due diligence fee (“Due Diligence Fee”) to the lead investor or its designees (each a “Due Diligence Fee Recipient”) as described on Schedule 8(b).  The aggregate Due Diligence Fee shall be equal to ten percent (10%) of the Purchase Price.  The Due Diligence Fee will be payable in the form of a Note substantially similar to the Notes issued to Subscribers.

 

 (c)           Subscriber’s Legal Fees.   The Company shall pay to Grushko & Mittman, P.C., a cash fee of $7,500 (“Cash Legal Fees”) as reimbursement for services rendered to the Subscribers in connection with this Agreement and the purchase and sale of the Notes (the “Offering”).  The Subscribers’ Legal Fees and expenses will be payable out of funds held pursuant to the Escrow Agreement on the Closing Date.  Grushko & Mittman, P.C. will be reimbursed on the Closing Date for all lien searches, filing fees, and printing and shipping costs for the closing statements to be delivered to Subscribers.

 

  

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9.           Covenants of the Company.  The Company covenants and agrees with the Subscribers as follows:

 

(a)           Stop Orders.  The Company will advise the Subscribers, within twenty-four hours after it receives notice of issuance by the Commission, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose.

 

(b)           Listing/Quotation.  The Company shall promptly secure the quotation or listing of the Shares and Warrant Shares upon the Principal Market each national securities exchange, or automated quotation system upon which they are or become eligible for quotation or listing (subject to official notice of issuance) and shall maintain same so long as any Securities are outstanding.  The Company will maintain the quotation or listing of its Common Stock on the American Stock Exchange, Nasdaq Capital Market, Nasdaq Global Select Market, Nasdaq Global Market, the Bulletin Board, or New York Stock Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock (the “Principal Market”)), and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Principal Market, as applicable. The Company will provide the Subscribers copies of all notices it receives notifying the Company of the threatened and actual delisting of the Common Stock from any Principal Market.  As of the date of this Agreement and the Closing Date, the Bulletin Board is and will be the Principal Market.

 

(c)           Market Regulations.  The Company shall notify the Commission, the Principal Market and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to the Subscribers and promptly provide copies thereof to the Subscribers.

 

(d)           Filing Requirements.  From the date of this Agreement and until the last to occur of (i) two (2) years after the Closing Date, (ii) until all the Shares and Warrant Shares have been resold or transferred by all the Subscribers pursuant to a registration statement or pursuant to Rule 144(b)(1), or (iii) the Notes are no longer outstanding (the date of occurrence of the last such event being the “End Date”), the Company will (A) cause its Common Stock to be registered under Section 12(b) or 12(g) of the 1934 Act, (B) comply in all respects with its reporting and filing obligations under the 1934 Act, and (C) voluntarily comply with all reporting requirements that are applicable to an issuer with a class of shares registered pursuant to Section 12(g) of the 1934 Act, if Company is not subject to such reporting requirements.  The Company will not take any action or file any document (whether or not permitted by the 1933 Act or the 1934 Act or the rules thereunder) to terminate or suspend its reporting and filing obligations under said acts until the End Date.  Until the End Date, the Company will continue the listing or quotation of the Common Stock on a Principal Market and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market.  The Company agrees to timely file a Form D with respect to the Securities if required under Regulation D and to provide a copy thereof to each Subscriber promptly after such filing.

 

  

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(e)           Use of Proceeds.   The proceeds of the Offering will be employed by the Company as described on Schedule 9(e).  Except as described on Schedule 9(e), the Purchase Price may not and will not be used for accrued and unpaid officer and director salaries, payment of financing related debt, redemption of outstanding notes or equity instruments of the Company nor non-trade obligations outstanding on a Closing Date.  For so long as any Notes are outstanding, the Company will not prepay any financing related debt obligations nor redeem any equity instruments of the Company.

 

(f)           DTC Program.  At all times that Notes and Warrants are outstanding, the Company will employ as the transfer agent for the Common Stock a participant in the Depository Trust Company Automated Securities Transfer Program.

 

(g)           Taxes.  From the date of this Agreement and until the End Date, the Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefore.

 

(h)           Insurance.  From the date of this Agreement and until the End Date, the Company will keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company’s line of business, in amounts sufficient to prevent the Company from becoming a co-insurer and not in any event less than one hundred percent (100%) of the insurable value of the property insured less reasonable deductible amounts; and the Company will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated and to the extent available on commercially reasonable terms.

 

(i)           Books and Records.  From the date of this Agreement and until the End Date, the Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis.

 

(j)           Governmental Authorities.   From the date of this Agreement and until the End Date, the Company shall duly observe and conform in all material respects to all valid requirements of governmental authorities relating to the conduct of its business or to its properties or assets.

 

(k)           Intellectual Property.  From the date of this Agreement and until the End Date, the Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use intellectual property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business, unless it is sold for value.

 

(l)           Properties.  From the date of this Agreement and until the End Date, the Company will keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all necessary and proper repairs, renewals, replacements, additions and improvements thereto; and the Company will at all times comply with each provision of all leases to which it is a party or under which it occupies property if the breach of such provision could reasonably be expected to have a Material Adverse Effect.

 

 

  

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(m)           Confidentiality/Public Announcement.  From the date of this Agreement and until the End Date, the Company agrees that except in connection with a Form 8-K and the registration statement or statements regarding the Subscribers’ securities or in correspondence with the SEC regarding same, it will not disclose publicly or privately the identity of the Subscribers unless expressly agreed to in writing by a Subscriber or only to the extent required by law and then only upon five days prior notice to Subscriber.  In any event and subject to the foregoing, the Company undertakes to file a Form 10-SB, Form 8-K or make a public announcement describing the Offering not later than the business day after the Closing Date.  Prior to filing or announcement, such Form 10-SB, Form 8-K or public announcement will be provided to Subscribers for their review and approval.  In the Form 10-SB, Form 8-K or public announcement, the Company will specifically disclose the amount of Common Stock outstanding immediately after the Closing.  Upon  delivery by the Company to the Subscribers after the Closing Date of any notice or information, in writing, electronically or otherwise, and while a Note is held by such Subscribers, unless the  Company has in good faith determined that the matters relating to such notice do not constitute material, nonpublic information relating to the Company or Subsidiaries, the Company  shall within one business day after any such delivery publicly disclose such  material,  nonpublic  information on a Report on Form 10-SB, Form 8-K or otherwise. In the event that the Company believes that a notice or communication to a Subscriber contains material, nonpublic information, relating to the Company or Subsidiaries, the Company shall so indicate to such Subscriber contemporaneously with delivery of such notice or information.  In the absence of any such indication, such Subscriber shall be allowed to presume that all matters relating to such notice and information do not constitute material, nonpublic information relating to the Company or its Subsidiaries.

 

(n)           Non-Public Information.  The Company covenants and agrees that except for the Reports, Other Written Information and schedules and exhibits to this Agreement, neither it nor any other person acting on its behalf will at any time provide any Subscriber or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Subscriber shall have agreed in writing to keep such information in confidence.  The Company understands and confirms that each Subscriber shall be relying on the foregoing representations in effecting transactions in securities of the Company.

(o)           Negative Covenants.   So long as a Note is outstanding, without the consent of the Subscribers, the Company will not and will not permit any of its Subsidiaries to directly or indirectly:

(i)           create, incur, assume or suffer to exist any pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, security title, mortgage, security deed or deed of trust, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Uniform Commercial Code or comparable law of any jurisdiction) (each, a “Lien”) upon any of its property, whether now owned or hereafter acquired except for:  (A) the Excepted Issuances (as defined in Section 12 hereof), and (B) (a) Liens imposed by law for taxes that are not yet due or are being contested in good faith and for which adequate reserves have been established in accordance with generally accepted accounting principles; (b) carriers’, warehousemen’s, mechanics’, material men’s, repairmen’s and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or that are being contested in good faith and by appropriate proceedings; (c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) Liens created with respect to the financing of the purchase of new property in the ordinary course of the Company’s business up to the amount of the purchase price of such property; and (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property (each of (a) through (f), a “Permitted Lien”);

 

 

  

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(ii)           amend its certificate of incorporation, bylaws or its charter documents so as to materially and adversely affect any rights of the Subscriber;

(iii)           repay, repurchase or offer to repay, repurchase or otherwise acquire or make any dividend or distribution in respect of any of its Common Stock, preferred stock, or other equity securities other than to the extent permitted or required under the Transaction Documents.

(iv)           engage in any transactions with any officer, director, employee or any Affiliate of the Company, including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $100,000 other than (i) for payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company, and (iii) for other employee benefits, including stock option agreements under any stock option plan of the Company; or

(v)           prepay or redeem any financing related debt or past due obligations outstanding as of the Closing Date.

 

(p)           Seniority.   Except for Permitted Liens and as otherwise provided for herein, until the Notes are fully satisfied or converted, the Company shall not grant nor allow any security interest to be taken in the assets of the Company or any Subsidiary; nor issue any debt, equity or other instrument which would give the holder thereof directly or indirectly, a right in any assets of the Company or any Subsidiary, superior to any right of the holder of a Note in or to such assets.

 

(q)           Notices.   For so long as the Subscribers hold any Securities, the Company will maintain as United States address and United States fax number for notices purposes under the Transaction Documents.

 

10.           Covenants of the Company Regarding Indemnification.  The Company agrees to indemnify, hold harmless, reimburse and defend the Subscribers, the Subscribers' officers, directors, agents, Affiliates, members, managers, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Subscriber or any such person which results, arises out of or is based upon (i) any material misrepresentation by Company or breach of any representation or warranty by Company in this Agreement or in any Exhibits or Schedules attached hereto, or other agreement delivered pursuant hereto; or (ii) after any applicable notice and/or cure periods, any breach or default in performance by the Company of any covenant or undertaking to be performed by the Company hereunder, or any other agreement entered into by the Company and Subscriber relating hereto.

 

11.1.           Delivery of Unlegended Shares.

 

(a)           Within seven business days (such seventh business day being the “Unlegended Shares Delivery Date”) after the business day on which the Company has received (i) a notice that Shares or Warrant Shares, or any other Common Stock held by a Subscriber have been sold pursuant to a registration statement, if any, or Rule 144, (ii) a representation that the prospectus delivery requirements, or the requirements of Rule 144, as applicable and if required, have been satisfied, (iii) the original share certificates representing the shares of Common Stock that have been sold, and (iv) in the case of sales under Rule 144, customary representation letters of the Subscriber and/or a Subscriber’s broker regarding compliance with the requirements of Rule 144, the Company at its expense, (y) shall deliver, and shall cause legal counsel selected by the Company to deliver to its transfer agent (with copies to Subscriber) an appropriate instruction and opinion of such counsel, directing the delivery of shares of Common Stock without any legends including the legend set forth in Section 4(i) above (the “Unlegended Shares”); and (z) cause the transmission of the certificates representing the Unlegended Shares together with a legended certificate representing the balance of the submitted certificate, if any, to the Subscriber at the address specified in the notice of sale, via express courier, by electronic transfer or otherwise on or before the Unlegended Shares Delivery Date.  In the event that the Shares are sold in a manner that complies with an exemption from registration, the Company will promptly instruct its counsel to issue to the Company’s transfer agent an opinion permitting removal of the legend indefinitely if pursuant to Rule 144(b)(1).

 

 

  

14

  

 

(b)           In lieu of delivering physical certificates representing the Unlegended Shares, upon request of a Subscriber, so long as the certificates therefor do not bear a legend and the Subscriber is not obligated to return such certificate for the placement of a legend thereon, the Company will cause its transfer agent to electronically transmit the Unlegended Shares by crediting the account of Subscriber’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission system, if such transfer agent participates in such DWAC system.  Such delivery must be made on or before the Unlegended Shares Delivery Date.

(c)           The Company understands that a delay in the delivery of the Unlegended Shares pursuant to Section 11 hereof later than the Unlegended Shares Delivery Date could result in economic loss to a Subscriber.  As compensation to a Subscriber for such loss, the Company agrees to pay late payment fees (as liquidated damages and not as a penalty) to the Subscriber for late delivery of Unlegended Shares in the amount of $100 per business day after the Delivery Date for each $10,000 of purchase price of the Unlegended Shares subject to the delivery default.  In the event damages are payable pursuant to the foregoing sentence, then the Subscriber may elect to receive liquidated damages under this Section 11.1(c) or Section 12(g) below.  If during any 360 day period, the Company fails to deliver Unlegended Shares as required by this Section 11.1 for an aggregate of 30 days, then each Subscriber or assignee holding Securities subject to such default may, at its option, require the Company to redeem all or any portion of the Shares and Warrant Shares subject to such default at a price per share equal to the greater of (i) 120%, or (ii) a fraction in which the numerator is the highest closing price of the Common Stock during the aforedescribed 30 day period and the denominator of which is the purchase price of the Shares or exercise price of such Warrant Shares during such 30 day period, multiplied by the purchase price of the Shares or exercise price of such Warrant Shares (“Unlegended Redemption Amount”).  The Company shall pay any payments incurred under this Section in immediately available funds upon demand.

(d)            In addition to any other rights available to a Subscriber, if the Company fails to deliver to a Subscriber Unlegended Shares as required pursuant to this Agreement, within three business days after the Unlegended Shares Delivery Date and the Subscriber or a broker on the Subscriber’s behalf, purchases (in an open market transaction or otherwise) shares of common stock to deliver in satisfaction of a sale by such Subscriber of the shares of Common Stock which the Subscriber was entitled to receive from the Company (a "Buy-In"), then the Company shall pay in cash to the Subscriber (in addition to any remedies available to or elected by the Subscriber) the amount by which (A) the Subscriber's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate purchase price of the shares of Common Stock delivered to the Company for reissuance as Unlegended Shares together with interest thereon at a rate of 15% per annum accruing until such amount and any accrued interest thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty).  For example, if a Subscriber purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to $10,000 of purchase price of shares of Common Stock delivered to the Company for reissuance as Unlegended Shares, the Company shall be required to pay the Subscriber $1,000, plus interest. The Subscriber shall provide the Company written notice indicating the amounts payable to the Subscriber in respect of the Buy-In.

 

 

  

15

  

 

(e)           In the event a Subscriber shall request delivery of Unlegended Shares as described in Section 11.1 or Warrant Shares upon exercise of Warrants and the Company is required to deliver such Unlegended Shares pursuant to Section 11.1 or the Warrant Shares pursuant to the Warrant, the Company may not refuse to deliver Unlegended Shares or Warrant Shares based on any claim that such Subscriber or any one associated or affiliated with such Subscriber has been engaged in any violation of law, or for any other reason, unless, an injunction or temporary restraining order from a court, on notice, restraining and or enjoining delivery of such Unlegended Shares or exercise of all or part of said Warrant shall have been sought and obtained by the Company or at the Company’s request or with the Company’s assistance, and the Company has posted a surety bond for the benefit of such Subscriber in the amount of 120% of the amount of the aggregate purchase price of the Shares and Warrant Shares which are subject to the injunction or temporary restraining order, which bond shall remain in effect until the final unappealable disposition of the litigation of the dispute and the proceeds of which shall be payable to such Subscriber to the extent Subscriber obtains judgment in Subscriber’s favor.

 

11.2.           In the event commencing one hundred and eighty-one (181) days after the Closing Date and ending five years thereafter, the Subscriber is not permitted to resell any of the Shares or Warrant Shares without any restrictive legend or if such sales are permitted but subject to volume limitations or further restrictions on resale as a result of the unavailability to Subscriber of Rule 144(b)(1) under the 1933 Act or any successor rule (a “144 Default”), for any reason except for Subscriber’s status as an Affiliate or “control person” of the Company, then the Company shall pay such Subscriber as liquidated damages (“Liquidated Damages”) and not as a penalty an amount equal to one percent (1%) for the first day of such occurrence and one percent (1%) for each thirty (30) days (or such lesser pro-rata amount for any period less than thirty (30) days) thereafter of the purchase price of the Shares or Warrant Shares owned by the Subscriber during the pendency of the 144 Default.

 

12.           Miscellaneous.

 

(a)           Notices.  All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice.  Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: (i) if to the Company, to: Attitude Drinks Inc., 11300 U.S. Highway 1, Suite 207, North Palm Beach, Florida 33408, Attn: Roy Warren, CEO and President, telecopier: (561) 799-5039, with a copy by telecopier only to: Weed & Co., LLP, 4695 MacArthur Court, Suite 1430, Newport Beach, CA 92660, Attn: Rick Weed, Esq., telecopier number: (949) 475-9087, and (ii) if to the Subscriber, to: the one or more addresses and telecopier numbers indicated on the signature pages hereto, with an additional copy by telecopier only to: Grushko & Mittman, P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, telecopier: (212) 697-3575.

 

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

 

 

  

16

  

 

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

 

(d)           Law Governing this Agreement.  This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state and county of New York.  The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens.  The parties executing this Agreement and other agreements referred to herein or delivered in connection herewith on behalf of the Company agree to submit to the in personam jurisdiction of such courts and hereby irrevocably waive trial by jury.  The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs.  In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law.  Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement.  Each party hereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement 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 other manner permitted by law.

 

(e)           Specific Enforcement, Consent to Jurisdiction.  The Company and Subscriber acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.  It is accordingly agreed that the parties shall be entitled to seek an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity.  Subject to Section 12(d) hereof, the Company hereby irrevocably waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction in New York of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper.  Nothing in this Section shall affect or limit any right to serve process in any other manner permitted by law.

 

(f)           Independent Nature of Subscribers.     The Company acknowledges that the obligations of each Subscriber under the Transaction Documents are several and not joint with the obligations of any other Subscriber, and no Subscriber shall be responsible in any way for the performance of the obligations of any other Subscriber under the Transaction Documents. The Company acknowledges that each Subscriber has represented that the decision of each Subscriber to purchase Securities has been made by such Subscriber independently of any other Subscriber and independently of any information, materials, statements or opinions as to the business, affairs, operations, assets, properties, liabilities, results of operations, condition (financial or otherwise) or prospects of the Company which may have been made or given by any other Subscriber or by any agent or employee of any other Subscriber, and no Subscriber or any of its agents or employees shall have any liability to any Subscriber (or any other person) relating to or arising from any such information, materials, statements or opinions.  The Company acknowledges that nothing contained in any Transaction Document, and no action taken by any Subscriber pursuant hereto or thereto shall be deemed to constitute the Subscribers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Subscribers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents.  The Company acknowledges that each Subscriber shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of the Transaction Documents, and it shall not be necessary for any other Subscriber to be joined as an additional party in any proceeding for such purpose.  The Company acknowledges that it has elected to provide all Subscribers with the same terms and Transaction Documents for the convenience of the Company and not because Company was required or requested to do so by the Subscribers.  The Company acknowledges that such procedure with respect to the Transaction Documents in no way creates a presumption that the Subscribers are in any way acting in concert or as a group with respect to the Transaction Documents or the transactions contemplated thereby.

 

  

17

  

 

 

(g)           Damages.   In the event the Subscriber is entitled to receive any liquidated damages pursuant to the Transactions, the Subscriber may elect to receive the greater of actual damages or such liquidated damages.

 

(h)           Consent.   As used in the Agreement, “consent of the Subscribers” or similar language means the consent of holders of not less than 75% of the total of the Shares issued and issuable upon conversion of outstanding Notes owned by Subscribers on the date consent is requested.

 

(i)           Limit on Liability.   In no event shall the liability of any Subscriber or permitted successor hereunder or under any Transaction Document or other agreement delivered in connection herewith be greater in amount than the dollar amount of the net proceeds actually received by such Subscriber upon the sale of Shares.

 

(j)           Equal Treatment.   No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of the Transaction Documents unless the same consideration is also offered and paid to all the Subscribers and their permitted successors and assigns.

 

(k)           Maximum Payments.   Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law.  In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to the Subscriber and thus refunded to the Company.

 

(l)           Calendar Days.   All references to “days” in the Transaction Documents shall mean calendar days unless otherwise stated.  The terms “business days” and “trading days” shall mean days that the New York Stock Exchange is open for trading for three or more hours.  Time periods shall be determined as if the relevant action, calculation or time period were occurring in New York City.  Any deadline that falls on a non-business day in any of the Transaction Documents shall be automatically extended to the next business day and interest, if any, shall be calculated and payable through such extended period.

 

(m)           Successor Laws.  References in the Transaction Documents to laws, rules, regulations and forms shall also include successors to and functionally equivalent replacements of such laws, rules, regulations and forms.  A successor rule to 144(b)(1)(i) shall include any rule that would be available to a non-Affiliate of the Company for the sale of Common Stock not subject to volume restrictions and after a six month holding period.

 

[THIS SPACE INTENTIONALLY LEFT BLANK]

 

 

  

18

  

 

 

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (A)

 

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

 

 

	 	ATTITUDE DRINKS INC. 

a Delaware corporation

By: /s/ Roy G. Warren                   

Name: Roy G. Warren

Title: President/CEO

Dated: September 29, 2008

 

	
SUBSCRIBER

	
NOTE PRINCIPAL AMOUNT

	
PURCHASE PRICE

	
ALPHA CAPITAL ANSTALT

Pradafant 7

9490 Furstentums

Vaduz, Lichtenstein

Fax: 011-42-32323196

 

 

 

 

_______________________________________________

(Signature)

By:

 

	  	
$200,000.00

 

  

19

  

 

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT (B)

 

Please acknowledge your acceptance of the foregoing Subscription Agreement by signing and returning a copy to the undersigned whereupon it shall become a binding agreement between us.

 

	 	ATTITUDE DRINKS INC. 

a Delaware corporation

By: /s/ Roy G. Warren                        

Name: Roy G. Warren

Title: President/CEO

Dated: September 29, 2008

 

 

	
SUBSCRIBER

	
NOTE PRINCIPAL AMOUNT

	
PURCHASE PRICE

	
ALPHA CAPITAL ANSTALT

Pradafant 7

9490 Furstentums

Vaduz, Lichtenstein

Fax: 011-42-32323196

 

_______________________________________________

(Signature)

By:

 

	  	
$200,000.00

 

 

  

20

  

 

 

LIST OF EXHIBITS AND SCHEDULES

 

	
Exhibit A                                

	
Form of Note

	  	  
	
Exhibit B                               

	
Form of Warrant

	  	  
	
Exhibit C                                

	
Escrow Agreement

	  	  
	
Exhibit D                                

	
Form of Legal Opinion

	  	  
	
Schedule 5(a)   

	
Subsidiaries

	  	  
	
Schedule 5(d)    

	
Additional Issuances / Capitalization / Reset Rights

	  	  
	
Schedule 5(o)      

	
Undisclosed Liabilities

	  	  
	
Schedule 5(v)    

	
Transfer Agent

	  	  
	
Schedule 8(a)    

	
Placement Fees

	  	  
	
Schedule 8(b)        

	
Due Diligence Fee

	  	  
	
Schedule 9(e)        

	
Use of Proceeds

	  	  

 

  

21

  

SCHEDULES

 

Schedule 5(a) Subsidiaries

 

Attitude Drink Company, Inc., a Delaware corporation, is a wholly owned subsidiary and has 50,000,000 shares of common stock, $.001 par value, of which 100,000 shares are issued and outstanding and held of record by the Company

 

SCHEDULE 5(d) Additional Issuances / Capitalization / Reset Rights

Capital Structure

As of September 19, 2008, the Company has 120,000,000 shares consisting of 100,000,000 shares of common stock, $.001 par value, of which 11,065,488 shares are issued and outstanding and 20,000,000 shares of preferred stock, $.001 par value, of which no shares are issued and outstanding.

The Company created the 2007 Stock Compensation and Incentive Plan and reserved 1,000,000 shares of its common stock for issuance in the form of stock options or shares to employees, consultants and advisors that perform services for the Company.  As of September 19, 2008, 813,888 shares have been issued from this plan, leaving 186,112 shares to be issued in the future based on the approval of the Board of Directors.  In addition, the Company issued 350,000 stock options at an exercise price of $.65 to Nutraceutical Discoveries as part of a sub-license agreement.

The Company has a binding agreement with an NHRA drag race team for the 2008 NHRA racing season in which the company will pay the racing team a total of $1,300,000 with $300,000 in cash and the rest to be paid in shares of common stock.  To date, 1,000,000 shares have been issued towards payment of this commitment.  Additional shares may be issued to meet the company’s obligations at the end of the current racing season (November, 2008).

Common Stock Warrants:

 

As of September 19, 2008, the Company had the following outstanding warrants:

 

 

  

22

  

 

	  	  	
Grant Date

	  	
Expiration Date

	  	
Warrants/

Options Granted

	  	
Exercise Price

	  
	
Issued Class A Warrants:

	  	  	  	  	  	  	  	  	  
	
October, 2007 Convertible Notes Financing

	  	
10/23/2007

	  	
10/22/2012

	  	
2,818,181

	  	
0.50

	  
	
January, 2008 Investment Banker Agreement

	  	
1/1/2008

	  	
12/31/2012

	  	
125,000

	  	
0.50

	  
	
February, 2008 Convertible Notes Financing

	  	
2/15/2008

	  	
2/14/2013

	  	
1,515,151

	  	
0.50

	  
	
April, 2008 Bridge Loans Financing

	  	
4/2-15/2008

	  	
4/1-13/2011

	  	
500,000

	  	
0.50

	  
	
April, 2008 Finders Fees

	  	
4/14/2008

	  	
4/13/2013

	  	
62,500

	  	
0.50

	  
	
May, 2008 Investment Banker Fees

	  	
5/19/2008

	  	
5/18/2013

	  	
37,500

	  	
0.50

	  
	
May, 2008 Bridge Loan

	  	
5/19/2008

	  	
5/18/2011

	  	
100,000

	  	
0.50

	  
	
June, 2008 Debt Extensions

	  	
6/23/2008

	  	
6/22/2011

	  	
150,000

	  	
0.50

	  
	
June, 2008 Debt

	  	
6/26/2008

	  	
6/25/2013

	  	
303,030

	  	
0.50

	  
	
July 2008 - Steven Stock

	  	
7/14/2008

	  	
7/14/2011

	  	
100,000

	  	
0.50

	  
	
July 2008 - Allen Hawley

	  	
7/14/2008

	  	
7/14/2011

	  	
50,000

	  	
0.50

	  
	
August 2008 – H. John Buckman

	  	
8/8/2008

	  	
8/7/2011

	  	
100,000

	  	
0.50

	  
	
Total issued Class A Warrants

	  	  	  	  	  	
5,861,362 

	  	  	  
	
 

Other Issued Warrants:

	  	  	  	  	  	  	  	  	  
	
Supply Agreement

	  	
4/16/2008

	  	
4/15/2013

	  	
100,000

	  	
 0.75

	  

 

	  	  	
Warrants/

Options Granted

	  	
Exercise Price

	  
	
Unissued Class B Warrants (i):

	  	  	  	  	  
	
October, 2007 Convertible Notes Financing

	  	
2,818,181

	  	
0.75

	  
	
January, 2008 Investment Banker Financing

	  	
125,000

	  	
0.75

	  
	
February, 2008 Convertible Notes Financing

	  	
1,515,151

	  	
0.75

	  
	
April, 2008 Bridge Loans Financing

	  	
500,000

	  	
0.75

	  
	
April, 2008 Finders Fees

	  	
62,500

	  	
0.75

	  
	
May, 2008 Investment Banker Fees

	  	
37,500

	  	
0.75

	  
	
May, 2008 Bridge Loan

	  	
100,000

	  	
0.75

	  
	
June, 2008 Debt Extensions

	  	
150,000

	  	
0.75

	  
	
June, 2008 Debt

	  	
303,030

	  	
0.75

	  
	
July 2008 - Steven Stock

	  	
100,000

	  	
0.75

	  
	
July 2008 - Allen Hawley

	  	
50,000

	  	
0.75

	  
	
August 2008 – H. John Buckman

	  	
100,000

	  	
0.75

	  
	
Total issued Class B Warrants

	  	
5,861,362

	  	  	  

 

	
  

	
(i) When Class A warrants are exercised, holders of these warrants will receive an equal number of Class B warrants with an exercise price of $.75.

	
Other Unissued Warrants-Engagement fees

	  	
250,000

	  	
0.50

	  

	
TOTAL WARRANTS

	  	
12,072,724

	  

 

 

  

23

  

 

 

SCHEDULE 5(o) Undisclosed Liabilities

None

 

SCHEDULE 5(v) Transfer Agent

The current transfer agent is

Florida Atlantic Stock Transfer

Attention: Mr. Rene Garcia, President

7130 Nob Hill Road

Tamarac, FL 33321

Telephone 954-726-4954

Facsimile 954-726-6305

The transfer agent is NOT a participant in the DTC Automated Securities Transfer Program.  See Section 9(f) of the Subscription Agreement.

 

 

SCHEDULE 8(a) Placement Fees

 

None.

 

SCHEDULE 8(b) Due Diligence Fee

 

10% of Purchase Price payable in the form of the Notes issued to Subscribers.

 

 

SCHEDULE 8(c) Subscriber’s Legal Fees

 

$7,500, plus out of pocket for wires, lien search, shipping, etc.

 

 

  

24

  

 

SCHEDULE 9(e) Use of Proceeds

 

	
Gross Amount

	
Closing

	  	
$300,000

	
less Due Diligence Fee

	
$0 paid by issuance of note

	
less Subscriber’s Legal Fees

	
$7,500

	  	  
	
Net to Company

	
$292,500

	
Trade Creditors

	
$192,500

	
Working Capital

	
$100,000*

 

* This amount includes $85,000 used to redeem 850,000 warrants issued as part of the transaction.

 

  

25

  

Form of Legal Opinion

September ___, 2008

TO:           The Persons identified on Schedule A to the Subscription Agreement:

We have acted as counsel to Attitude Drinks Inc., a Delaware corporation, (the “Company”) and Attitude Drink Company, Inc., a Delaware corporation, (the “Subsidiary”) in connection with the offer and sale by the Company of up to $365,000 principal amount of promissory notes (the “Notes”) and 850,000 Class A and Class B Common Stock Purchase Warrants (the “Warrants”) to the Subscribers identified on Schedule A to the Subscription Agreement, pursuant to the exemption from the registration provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933 Act and/or Rule 506 of Regulation D (“Regulation D”) promulgated thereunder. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Subscription Agreement (the “Agreement”) by and between the Company and Subscribers entered into at or about the date hereof.  The Agreement, and the agreements described below are sometimes hereinafter referred to collectively as the “Documents”.

In connection with the opinions expressed herein, we have made such examination of law as we considered appropriate or advisable for purposes hereof.  As to matters of fact material to the opinions expressed herein, we have relied, with your permission, upon the representations and warranties as to factual matters contained in and made by the Company and the Subscribers pursuant to the Documents and upon certificates and statements of certain government officials and of officers of the Company as described below.  We have also examined originals or copies of certain corporate documents or records of the Company as described below:

(a)    Form of Subscription Agreement

(b)    Form of Secured Convertible Note

(c)   Form of Funds Escrow Agreement

(d)   Form of Class A and Class B Common Stock Purchase Warrant

(e)   Form of Modification, Waiver and Consent Agreement

(e)    Certificate of Incorporation of the Company as amended

(f)     Bylaws of the Company

(g)   Minutes of the action of the Company’s Board of Directors, including unanimous Board of Directors approval of the Documents, a copy of which is annexed hereto.

In rendering this opinion, we have, with your permission, assumed: (a) the authenticity of all documents submitted to us as originals; (b) the conformity to the originals of all documents submitted to us as copies; (c) the genuineness of all signatures; (d) the legal capacity of natural persons; (e) the truth, accuracy and completeness of the information, factual matters, representations and warranties contained in all of such documents; (f) the due authorization, execution and delivery of all such documents by Subscribers, and the legal, valid and binding effect thereof on Subscribers; and (g) that the Company and the Subscribers will act in accordance with their respective representations and warranties as set forth in the Documents.

  

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We are members of the bar of the State of California.  We express no opinion as to the laws of any jurisdiction other than Delaware and the federal laws of the United States of America.  We express no opinion with respect to the effect or application of any other laws.  Special rulings of authorities administering any of such laws or opinions of other counsel have not been sought or obtained by us in connection with rendering the opinions expressed herein.  For purposes of this Opinion we have made the assumption that the laws of the State of New York are substantially similar to the laws of the State of California.

 

1.           The Company and Subsidiary are duly incorporated, validly existing and in good standing in the State of Delaware; have qualified to do business in each state where required unless the failure to do so would not have a material impact on the Company’s operations; and have the requisite corporate power and authority to conduct its business, and to own, lease and operate its properties.

 

2.           The Company and Subsidiary have the requisite corporate power and authority to execute, deliver, and perform their obligations under the Documents.  The Documents and the issuance of the Notes have been (a) duly approved by the Board of Directors of the Company and Subsidiary, as required, and (b) any shares of the Company’s common stock issued upon conversion of the Notes shall be validly issued and outstanding, fully paid and non assessable.

 

3.           The execution, delivery and performance of the Documents by the Company and Subsidiary 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 Certificate of Incorporation or bylaws of the Company or Subsidiary; or

 

(b)           To the best of counsel's knowledge, violate any judgment, decree, order or award of any court binding upon the Company or Subsidiary.

 

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

 

5.           The Notes 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 holders of the Common Stock issuable upon conversion of the Notes and exercise of the Warrants will not be subject to the provisions of the anti-takeover statutes of Delaware and New York.

 

7.           The Company and Subsidiary have either obtained the approval of the transactions described in the Documents from its shareholders, or no such approval is required.

 

 

  

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8.           The Subscribers have been granted valid security interests in the Collateral pursuant to the Documents, enforceable against the Debtors identified therein in accordance with their respective terms and provisions, and to the extent such Collateral may be perfected 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 Delaware, those security interests will be perfected in such Collateral to the extent described in those statements.

 

9.           The Company and its Board of Directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Subscribers as a result of the Subscribers and the Company fulfilling their obligations or exercising their rights under the Documents, including without limitation as a result of the Company’s issuance of the Notes.

 

Our opinions expressed above are specifically subject to the following limitations, exceptions, qualifications, and assumptions:

 

A.           The effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting the relief of debtors or the rights and remedies of creditors generally, including without limitation the effect of statutory or other law regarding fraudulent conveyances and preferential transfers.

 

B.           Limitations imposed by state law, federal law or general equitable principles upon the specific enforceability of any of the remedies, covenants or other provisions of any applicable agreement and upon the availability of injunctive relief or other equitable remedies, regardless of whether enforcement of any such agreement is considered in a proceeding in equity or at law.

 

C.           This opinion letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the “Accord”) of the ABA Section of Business Law (1991). As a consequence, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage and other limitations, all as more particularly described in the Accord, including the General Qualifications and the Equitable Principles Limitation, and this opinion letter should be read in conjunction therewith.

 

This opinion is rendered as of the date first written above, is solely for your benefit in connection with the Agreement and may not be relief upon or used by, circulated, quoted, or referred to nor may any copies hereof by delivered to any other person without our prior written consent.  We disclaim any obligation to update this opinion letter or to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinions expressed herein.

 

Sincerely yours,

 

 

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