Document:

fwsi_ex41.htm

EXHIBIT 4.1

 

For U.S. Investors:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”).  THESE SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE COMPANY, (B) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (C) IN COMPLIANCE WITH RULE 144 OR 144A THEREUNDER, IF AVAILABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, (D) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR (E) IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS, AND THE HOLDER HAS, PRIOR TO SUCH SALE, FURNISHED TO THE COMPANY AN OPINION OF COUNSEL OR OTHER EVIDENCE OF EXEMPTION, IN EITHER CASE REASONABLY SATISFACTORY TO THE COMPANY.  HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE U.S. SECURITIES ACT.

For Non-U.S. Investors:

THESE SECURITIES WERE ISSUED IN AN OFFSHORE TRANSACTION TO PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATION S) PURSUANT TO REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”).  ACCORDINGLY, NONE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED UNDER THE 1933 ACT, OR ANY U.S. STATE SECURITIES LAWS, AND, UNLESS SO REGISTERED, NONE MAY BE OFFERED OR SOLD IN THE UNITED STATES OR, DIRECTLY OR INDIRECTLY, TO U.S. PERSONS EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT, AND IN EACH CASE ONLY IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.  IN ADDITION, HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE CONDUCTED UNLESS IN ACCORDANCE WITH THE 1933 ACT.

 

10% SENIOR CONVERTIBLE PROMISSORY NOTE

 

Frac Water Systems, Inc.

 

DUE __________ __, 201__

 

	
Original Issue Date: __________ __, 201__

	
US$[___________]

This Secured Convertible Promissory Note is one of a series of duly authorized and issued secured convertible promissory notes of Frac Water Systems, Inc., a Nevada corporation (the “Company”), designated its 10% Senior Convertible Promissory Notes due __________ __, 201__ (the “Note”), issued to [______________________] (together with its permitted successors and assigns, the “Holder”) in accordance with exemptions from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to a Securities Purchase Agreement, dated __________ __, 201__ (the “Purchase Agreement”) between the Company and the Holder.  Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement.

 

  

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Article I.

 

Section 1.01          Principal and Interest.  (a) For value received, the Company hereby promises to pay to the order of the Holder, in lawful money of the United States of America and in immediately available funds the principal sum of ____________________ Dollars ($__________) on __________ __, 201__ (the “Maturity Date”)

 

(b)           The Borrower further promises to pay interest on the unpaid principal amount of this Note at a rate per annum equal to ten percent (10%), commencing to accrue on the date hereof and payable on the Maturity Date.  Interest will be computed on the basis of a 360-day year of twelve 30-day months for the actual number of days elapsed.

 

(c)           Except as otherwise set forth in this Note, the Company may prepay any portion of the principal amount of this Note at any time, and from time to time, without the prior written consent of the Holder.

 

Section 1.02          Conversion.  (a) At the sole discretion of the Holder, the Holder may convert all or any portion of the outstanding principal amount of, and accrued but unpaid interest on, this Note into shares of the Company’s common stock, $0.0001 par value per share (the “Common Stock”), at a price equal to the Conversion Price (as defined below).  No fractional shares of the Company’s common stock will be issued upon conversion, but the number of shares shall be rounded to the nearest whole number of shares.

 

(b)           “Conversion Price” means a price to be agreed to by the Company and the Holder.

(c)           Notwithstanding anything to the contrary contained in this Note, this Note shall not be convertible by the Holder hereof to the extent (but only to the extent) that such conversion would cause the Holder and its affiliates (if they are not, prior to such conversion, already beneficial owners of greater than 4.99% (the “Maximum Percentage”) of the Company’s outstanding Common Stock) to beneficially own in excess of the Maximum Percentage of the Company’s outstanding Common Stock; provided, however, that the Holder may waive the limitation imposed by this subsection, and/or increase the Maximum Percentage to some other amount, upon at least sixty-one (61) days prior written notice to the Company.  For the purposes of this paragraph, beneficial ownership and all determinations and calculations (including, without limitation, with respect to calculations of percentage ownership) shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.  The limitations contained in this paragraph shall apply to a successor Holder of this Note.

 

Section 1.03          Reservation of Common Stock.  As set forth in the Purchase Agreement, the Company shall reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of conversion of this Note, that number of shares of Common Stock equal to the number of shares of Common Stock into which the Note is convertible based upon the then applicable Conversion Price.

 

Section 1.04          Absolute Obligation/Ranking.  Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and liquidated damages (if any) on, this Note at the time, place, and rate, and in the coin or currency, herein prescribed.  This Note is a direct debt obligation of the Company.  This Note ranks pari passu with all other Notes now or hereinafter issued pursuant to the Purchase Agreement.

 

Section 1.05          Paying Agent and Registrar.  Initially, the Company will act as paying agent and registrar.  The Company may change any paying agent, registrar, or Company-registrar by giving the Holder not less than ten (10) business days’ written notice of its election to do so, specifying the name, address, telephone number and facsimile number of the paying agent or registrar.  The Company may act in any such capacity.

 

  

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Section 1.06          Different Denominations.  This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same.  No service charge will be made for such registration of transfer or exchange.

 

Section 1.07          Investment Representations.  This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations.

 

Section 1.08          Reliance on Note Register.  Prior to due presentment to the Company for transfer or conversion of this Note, the Company and any agent of the Company may treat the person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

 

Article II.

 

Section 2.01          Amendments and Waiver of Default.  Except as otherwise provided herein, the Note may not be amended without the consent of the Holder.

 

Article III.

 

Section 3.01          Events of Default.  Each of the following events shall constitute a default under this Note (each an “Event of Default”), except as related to:

 

(a)           failure by the Company to pay principal amount due hereunder within five (5) days of the date such payment is due;

 

(b)           failure by the Company for five (5) days after notice to it to comply with any of its other agreements in the Note;

 

(c)           the Company shall:  (1) make a general assignment for the benefit of its creditors; (2) apply for or consent to the appointment of a receiver, trustee, assignee, custodian, sequestrator, liquidator or similar official for itself or any of its assets and properties; (3) commence a voluntary case for relief as a debtor under the United States Bankruptcy Code; (4) file with or otherwise submit to any governmental authority any petition, answer or other document seeking:  (A) reorganization, (B) an arrangement with creditors or (C) to take advantage of any other present or future applicable law respecting bankruptcy, reorganization, insolvency, readjustment of debts, relief of debtors, dissolution or liquidation; (5) file or otherwise submit any answer or other document admitting or failing to contest the material allegations of a petition or other document filed or otherwise submitted against it in any proceeding under any such applicable law, or (6) be adjudicated a bankrupt or insolvent by a court of competent jurisdiction;

 

(d)           any case, proceeding or other action shall be commenced against the Company for the purpose of effecting, or an order, judgment or decree shall be entered by any court of competent jurisdiction approving (in whole or in part) anything specified in Section 3.01(d) hereof, or any receiver, trustee, assignee, custodian, sequestrator, liquidator or other official shall be appointed with respect to the Company, or shall be appointed to take or shall otherwise acquire possession or control of all or a substantial part of the assets and properties of the Company, and any of the foregoing shall continue unstayed and in effect for any period of sixty (60) days;

 

  

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(e)           default shall occur with respect to any indebtedness for borrowed money of the Company or under any agreement under which such indebtedness may be issued by the Company and such default shall continue for more than the period of grace, if any, therein specified, if the aggregate amount of such indebtedness for which such default shall have occurred exceeds $25,000;

 

(f)           default shall occur with respect to any contractual obligation of the Company under or pursuant to any contract, lease, or other agreement to which the Company is a party and such default shall continue for more than the period of grace, if any, therein specified, if the aggregate amount of the Company’s contractual liability arising out of such default exceeds or is reasonably estimated to exceed $25,000;

          

(g)           final judgment for the payment of money in excess of $25,000 shall be rendered against the Company and the same shall remain undischarged for a period of twenty (20) days during which execution shall not be effectively stayed;

 

(h)           any event of default of the Company under any agreement, note, mortgage, security agreement or other instrument evidencing or securing indebtedness that ranks senior in priority to, or pari passu with, the obligations under this Note and the Purchase Agreement;

 

(i)            any material breach by the Company of any of its representations or warranties under the Purchase Agreement; or

 

(j)            any material default, whether in whole or in part, shall occur in the due observance or performance of any obligations or other covenants, terms or provisions to be performed under this Note or the Purchase Agreement which is not cured by the Company within five (5) days after receipt of written notice thereof.

 

Section 3.02          If any Event of Default specified in clauses 3.01(c) or (d) occurs, then the full principal amount of this Note, together with any other amounts owing in respect thereof, to the date of the Event of Default, shall become immediately due and payable without any action on the part of the Holder, and if any other Event of Default occurs, the full principal amount of this Note, together with any other amounts owing in respect thereof, to the date of acceleration shall become, at the Holder’s election, immediately due and payable in cash. Commencing five (5) days after the occurrence of any Event of Default that results in the eventual acceleration of this Note, interest on this Note shall begin to accrue at the rate of interest specified in Section 1.01(b) PLUS five percent (5%) per annum, or such lower maximum amount of interest permitted to be charged under applicable law. All Notes for which the full amount hereunder shall have been paid in accordance herewith shall promptly be surrendered to or as directed by the Company. The Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by the Holder at any time prior to payment hereunder and the Holder shall have all rights as a Note holder until such time, if any, as the full payment under this Section shall have been received by it. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.

 

  

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Article IV.

 

Section 4.01          Negative Covenants.  So long as this Note shall remain in effect and until any outstanding principal and interest and all fees and all other expenses or amounts payable under this Note and the Purchase Agreement have been paid in full, unless all Holders shall otherwise consent in writing, the Company shall not:

 

(a)           Senior or Pari Passu Indebtedness.  Incur, create, assume, guaranty or permit to exist any indebtedness that ranks senior in priority to, or pari passu with, the obligations under this Note and the Purchase Agreement, except for (i) indebtedness existing on the date hereof and set forth in Schedule A attached hereto and only to the extent that such indebtedness ranks senior in priority to or pari passu with the obligations under this Note and the Purchase Agreement on the Original Issue Date, and (ii) indebtedness created as a result of a subsequent financing if the gross proceeds to the Company of such financing are equal to or greater than the aggregate principal amount of the Notes and the Notes are repaid in full upon the closing of such financing.

 

(b)           Liens.  Create, incur, assume or permit to exist any lien on any property or assets (including stock or other securities of the Company) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except:

 

(i)            liens on property or assets of the Company existing on the date hereof and set forth in Schedule B attached hereto, provided that such liens shall secure only those obligations which they secure on the date hereof;

 

(ii)           any lien created under this Note or the Purchase Agreement;

 

(iii)          any lien existing on any property or asset prior to the acquisition thereof by the Company, provided that

 

1)           such lien is not created in contemplation of or in connection with such acquisition and

 

2)           such lien does not apply to any other property or assets of the Company;

 

(iv)          liens for taxes, assessments and governmental charges;

 

(v)           carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s, landlord’s or other like liens arising in the ordinary course of business and securing obligations that are not due and payable;

 

(vi)          pledges and deposits made in the ordinary course of business in compliance, with workmen’s compensation, unemployment insurance and other social security laws or regulations;

 

  

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(vii)         deposits to secure the performance of bids, trade contracts (other than for indebtedness), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

 

(viii)        zoning restrictions, easements, licenses, covenants, conditions, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business and minor irregularities of title that, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company;

 

(ix)          purchase money security interests in real property, improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by the Company, provided that

 

1)           such security interests secure indebtedness permitted by this Note,

 

2)           such security interests are incurred, and the indebtedness secured thereby is created, within 90 days after such acquisition (or construction),

 

3)           the indebtedness secured thereby does not exceed 85% of the lesser of the cost or the fair market value of such real property, improvements or equipment at the time of such acquisition (or construction) and

 

4)           such security interests do not apply to any other property or assets of the Company;

 

(x)           liens arising out of judgments or awards (other than any judgment that constitutes an Event of Default hereunder) in respect of which the Company shall in good faith be prosecuting an appeal or proceedings for review and in respect of which it shall have secured a subsisting stay of execution pending such appeal or proceedings for review, provided the Company shall have set aside on its books adequate reserves with respect to such judgment or award; and

 

(xi)          deposits, liens or pledges to secure payments of workmen’s compensation and other payments, public liability, unemployment and other insurance, old-age pensions or other social security obligations, or the performance of bids, tenders, leases, contracts (other than contracts for the payment of money), public or statutory obligations, surety, stay or appeal bonds, or other similar obligations arising in the ordinary course of business.

 

(c)           Dividends and Distributions.  In the case of the Company, declare or pay, directly or indirectly, any dividend or make any other distribution (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, with respect to any shares of its capital stock or directly or indirectly redeem, purchase, retire or otherwise acquire for value any shares of any class of its capital stock or set aside any amount for any such purpose.

 

  

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(d)           Limitation on Certain Payments and Prepayments.

 

(i)           Pay in cash any amount in respect of any indebtedness or preferred stock that may at the obligor’s option be paid in kind or in other securities; or

 

(ii)          Optionally prepay, repurchase or redeem or otherwise defease or segregate funds with respect to any indebtedness of the Company, other than for senior indebtedness existing on the date hereof and set forth in Schedule A attached hereto, indebtedness under this Note or the Purchase Agreement.

 

Article V.

 

Section 5.01          Adjustments.  The Conversion Price and number and kind of shares or other securities to be issued upon conversion is subject to adjustment from time to time upon the occurrence of certain events, as follows:

 

(a)           Reclassification, etc. If the Company at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, the principal amount of this Note, and any accrued and unpaid interest thereon and fees incurred hereunder, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.

 

(b)           Stock Splits, Combinations and Dividends. If the shares of Common Stock outstanding at any time after the date hereof are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Price or the Conversion Shares to be issued, as the case may be, shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event.

 

Article VI

Section 6.01          Notice.  Notices regarding this Note shall be sent to the parties at the following addresses, unless a party notifies the other parties, in writing, of a change of address:

 

	
If to the Company, to:

	
Frac Water Systems, Inc.

	  	
1266 1st Street, Suite #4

Sarasota, FL 34236

Attention:  Nadine Smith, Chief Executive Officer

Facsimile:  (___) __________

	  	  
	
With a copy to:

	
Gottbetter & Partners, LLP

	  	
488 Madison Avenue, 12th Floor

	  	
New York, NY 10022

	  	
Attention:  Adam S. Gottbetter, Esq.

	  	
Facsimile:  (212) 400-6901

	  	  
	
If to the Holder:

	
At the address set forth in the Purchase Agreement

 

  

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Section 6.02          Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof 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 Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

 

Section 6.03          Severability.  The invalidity of any of the provisions of this Note shall not invalidate or otherwise affect any of the other provisions of this Note, which shall remain in full force and effect.

 

Section 6.04          Entire Agreement and Amendments.  This Note, together with the Purchase Agreement, represents the entire agreement between the parties hereto with respect to the subject matter hereof and there are no representations, warranties or commitments, except as set forth herein.  This Note may be amended only by an instrument in writing executed by the parties hereto.

 

[Remainder of Page Intentionally Left Blank]

 

 

 

 

  

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IN WITNESS WHEREOF, with the intent to be legally bound hereby, the Company as executed this 10% Senior Convertible Promissory Note as of the date first written above.

 

	  	Frac Water Systems, Inc.	 
	  	 	  	 
	  	By:	 	 
	  	Name:	
Nadine Smith

	 
	  	Title:	
Chief Executive Officer

	 

 

  

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SCHEDULE A

SENIOR AND PARI PASSU INDEBTEDNESS

The Company owes $34,510 to its former President.  The loan bears no interest, is unsecured, is convertible, and is due on demand.

 

  

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SCHEDULE B

LIENS

None

 

 

11fwsi_ex101.htm

EXHIBIT 10.1

 

JOINT VENTURE AGREEMENT

 

THIS JOINT VENTURE AGREEMENT (the “Agreement”) is made as of the 10th day of October, 2013, by and between FRAC WATER SYSTEMS, INC., a company organized under the laws of the State of Nevada (“FWSI”), and PRODUCED WATER SOLUTIONS, INC., a company organized under the laws of the State of Colorado (“PWS”) (FWSI and PWS may hereinafter sometimes be referred to singularly as a “Party” or collectively as the “Parties”).

 

INTRODUCTION

 

WHEREAS, FWSI intends to engage in the business of providing economically and environmentally sound solutions for the treatment and recycling of wastewater resulting principally from oil and gas exploration and production activities (the “Business”); and

 

WHEREAS, PWS is presently engaged in the Business and has expertise in the Business; and

 

WHEREAS, FWSI and PWS desire to create a strategic relationship with each other and for that purpose PWS has presented FWSI with three (3) prospective “shovel ready” Business projects which are listed  in Schedule A attached hereto (each, a “PWS Project”) and FWSI may independently locate “shovel ready” Business projects (each, a “FWSI Project”); and

 

WHEREAS, FWSI desires to have PWS perform consulting services as specified herein with respect to the PWS Projects, and PWS is willing to perform such consulting services for FWSI under the terms of this agreement; and

 

WHEREAS, FWSI is under no obligation to accept more than one (1) of the PWS Projects, or to engage PWS to provide consulting services on FWSI Projects; and

 

NOW, THEREFORE, in consideration of the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, FWSI and PWS hereby agree as follows:

 

  

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ARTICLE I

 

PRESENTATION AND ACCEPTANCE OF PROJECTS

 

Section 1.1          PWS Projects.  During the term of this Agreement, PWS shall present FWSI with PWS Projects for FWSI’s consideration, as follows:

 

(a)          PWS Projects.  The three (3) initial PWS Projects are set forth on Schedule A annexed hereto (each, a “PWS Project”).  Each of the PWS Projects is a Frac Water Depot (FWD project) and each is further described on the FWD project descriptions set forth on Schedule B annexed hereto. PWS hereby grants to FWSI a right of first refusal to the PWS Projects, subject to the terms and conditions hereof.  Upon execution of this Agreement, FWSI shall be deemed to have exercised its right of first refusal as to one (1) of the PWS Projects (the “Guaranteed Project”).  FWSI has no obligation to accept more than one (1) of the PWS Projects, and shall have up to sixty (60) days following the date hereof to determine which of the PWS Projects to accept as the Guaranteed Project under this Agreement.  During such sixty (60)) day period, FWSI shall perform, with the assistance of PWS, legal, technical and financial due diligence with respect to the PWS Projects.  On or before the sixtieth (60th) day after the date hereof, FWSI shall deliver to PWS written notice of which PWS Project it has designated as the Guaranteed Project. In the event it fails to do so, the Evans, Weld County, CO project listed on Schedule A shall be deemed to be the Guaranteed Project. As part of the diligence process respecting each PWS Project, PWS shall provide FWSI with a description of customer commitments required to meet financial pro-formas.

 

At any time prior to December 31, 2013, FWSI may accept either, or both, of the other PWS Projects.  If FWSI desires to accept either, or both, of the other PWS Projects, FWSI shall deliver to PWS written notice thereof.  If PWS does not receive a written notice on or prior to December 31, 2013, or receives written notice with respect to one, but not both of the other PWS Projects on or prior to December 31, 2013, PWS shall be free to offer the unaccepted PWS Project(s) to third parties or to pursue such PWS Project(s) itself.

 

(b)           Additional PWS Projects.  During the term of this Agreement, PWS may in its sole discretion present FWSI with additional projects (each, an “Additional PWS Project”) for FWSI’s consideration by delivering to FWSI, in each case, a project description including a 24 month budget, projected project economics, a list of required equipment and the estimated cost thereof, a description of customer commitments required to meet financial pro-formas, and an operating plan. Until the earlier of December 31, 2013, or the acceptance by FWSI of three (3) projects presented by PWS (including either PWS Projects or Additional PWS Projects), FSWI may acquire an interest in any Additional PWS Project presented by PWS under the same terms and conditions as specified herein for acquisition of PWS Projects other than the Guaranteed Project.  After the earlier of December 31, 2013 or the acceptance by FWSI of three (3) projects presented by PWS, whether they be PWS Projects or a combination of PWS Projects and Additional PWS Projects, the terms and conditions under which FWSI may engage PWS to provide consultation and assistance on Additional PWS Projects shall be negotiated by the Parties on a case by case basis.

 

(c)           Accepted PWS Projects.  For the avoidance of doubt, FWSI may accept or reject any PWS Project or Additional PWS Project presented by PWS for any reason, or no reason, in its sole discretion; provided, however, that FWSI has agreed to accept and undertake at least one (1) of the PWS Projects.  Likewise, PWS shall have the right, in its sole discretion, for any reason or no reason, to determine which, if any, additional projects to present to FWSI as Additional PWS Projects under the terms of the Agreement, and, after an aggregate of three (3) projects presented by PWS have been accepted by FWSI, to determine, in its sole discretion, the terms and conditions under which it will present any additional projects to FWSI as an Additional PWS Project.  Any PWS Project or Additional PWS Project accepted by FWSI pursuant to the terms hereof shall be referred to as an “Accepted PWS Project”.  With respect to Accepted PWS Projects:

 

(i)           Promptly after delivery of written notice of acceptance of and Accepted PWS Projects to PWS by FWSI, the Parties shall execute any other documents, or take any other reasonable actions necessary to effectuate the transfer and commencement of such Accepted PWS Project.

 

  

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(ii)           All Accepted PWS Projects, at the point of written acceptance by FWSI, shall have all required contracts, leases, permits, licenses, waivers, authorizations, consents, assignments and approvals necessary for the commencement of the project shall have been obtained.

 

(iii)          PWS shall assist FWSI in the creation of a project plan for each Accepted PWS Project, which shall include projections and a proposed budget. The project plan approved by FWSI’s board of directors for any Accepted PWS Project shall be an “Approved Project Plan.”  There shall be no material modifications to or deviations from the Approved Project Plan without approval of FWSI’s board of directors; any such approved modifications or deviations shall thereafter be part of the Accepted PWS Project’s Approved Project Plan.

 

(iv)         FWSI shall engage PWS as a consultant to provide Services (as defined below) for Accepted PWS Projects in accordance with Article II below.

 

(d)           FWSI Projects.  FWSI may independently locate Projects and may, but has no obligation to, engage PWS to provide consulting services for FWSI Projects in FWSI’s sole discretion.  The terms of any such engagement shall be negotiated by the Parties on a case by case basis.

 

ARTICLE II

 

CONSULTING SERVICES

 

Section 2.1          Services.  PWS hereby agrees to provide consulting services to FWSI in connection with all aspects of the Accepted PWS Projects, which consulting services shall include designation of a PWS project manager (the “Project Manager”) for each Accepted PWS Project. The Project Manager designated by PWS for each Accepted PWS Project shall, in the reasonable determination of PWS, be qualified and have the expertise required to fulfill the obligations of PWS under the terms of this Agreement.  The services to be performed by PWS for each Accepted PWS Project, including, but not limited to, services performed by the designated Project Manager, shall include direct oversight needed to undertake and complete the Accepted PWS Projects on terms reasonably consistent with projected budgetary, equipment and other guidelines set forth on Schedule B. The services include the following:

 

(a)          Project budget preparation and management;

 

(b)          Equipment pricing, specification and sourcing;

 

(c)          Sub-contractor identification and management;

 

(d)          Preparation of an operating plan;

 

(e)          System implementation and functional testing; and

 

(f)           Operational oversight

 

For purposes of this Agreement, “Services” shall include all services provided by PWS under the terms of this Agreement, including, but not limited to, designation by PWS of a Project Manager for each Accepted PWS Project. PWS shall be responsible for the payment of all compensation payable to the Project Manager in connection with the Services.

 

  

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PWS agrees to:

 

(a)           accept assignments regarding the Services only from the Chairman or CEO of FWSI or from individuals designated by the Chairman or CEO of FWSI;

 

(b)          report only to the Chairman or CEO of FWSI or his or her designees; and

 

PWS agrees to perform the Services with the standard of care, skill and diligence of an experienced consultant with experience in performing the Services.

 

Section 2.2           Independent Contractor.  FWSI and PWS expressly acknowledge and agree that PWS is an independent contractor to FWSI, and this Agreement does not create, and will not be deemed to create, a partnership, agency, employer-employee or master-servant relationship between the Parties.  PWS acknowledges that PWS is not entitled to workers compensation or any other benefit or insurance protection provided by FWSI or its affiliates to their employees.  PWS will make all filings with local, state and federal taxing authorities required of it and make all payments required by such taxing authorities, including income tax and social security tax payments, required on the payments made to PWS by FWSI hereunder.  If FWSI determines that taxes should be withheld, FWSI reserves the right to withhold, as appropriate, and will give prior written notification of such decision to PWS.

 

ARTICLE III

 

PAYMENTS TO PWS

 

Section 3.1           Monthly Project Cash Fees.  FWSI shall pay PWS for Services performed pursuant to Section 2.1 above, which shall include the Services of the Project Manager, at a rate of $10,000 per month for the Guaranteed Project.  The initial monthly project cash fee payment for the Guaranteed Project shall be due and payable on or before October 14, 2013, and subsequent monthly payments shall be due and payable on or before the 15th of each month thereafter through the term of this Agreement. In the event FWSI elects to accept two additional projects, FWSI shall pay PWS for Services performed pursuant to Section 2.1 above, which shall include the Services of the Project Manager, at a rate of $5,000 per month for each of such Accepted Projects. At such time, if ever, that a combination of three (3) PWS Projects  (including the Guaranteed Project) and Additional PWS Projects have been accepted, the monthly cash fees due and payable by FWSI for any PWS Project or Additional PWS Project it thereafter accepts, shall be negotiated and agreed upon by the parties on a case by case basis.

 

Section 3.2           Bonus Payments.  FWSI shall pay PWS a cash bonus of $50,000 for the Guaranteed Project and for each of the other PWS Projects and Additional PWS Projects accepted by FWSI up to a maximum of three (3) projects (including the Guaranteed Project). The cash bonus due and payable with respect to the Guaranteed Project shall be due and payable in full on or before October 15, 2013. At such time, if ever, that a combination of three (3) PWS Projects (including the Guaranteed Project) and Additional PWS Projects have been accepted, the cash bonus, payable by FWSI with respect to any PWS Projects or Additional PWS Projects thereafter accepted by FWSI, shall be negotiated and agreed upon by the parties on a case by case basis.

 

Section 3.3          Stock Options.  FWSI shall issue 250,000 stock options to PWS for the Guaranteed Project and for each of the other PWS Projects accepted by FWSI. Until such time, if ever, that a combination of three (3) PWS Projects (including the Guaranteed Project) and Additional PWS Projects have been accepted, FWSI shall also issue 250,000 stock options to PWS for each of the PWS Projects and Additional PWS Projects accepted by FWSI. Each option shall have a term of ten (10) years, will vest twelve (12) months after the date of issuance, subject to Section 4.1 hereof, and will be exercisable at the fair market value for FWSI’s common stock on the date the options are granted, which shall be the date a PWS Project or Additional PWS Project, as the case may be, is accepted in writing by FWSI. As set forth in Section 4.1 hereof, upon a termination of this Agreement for Cause, all unvested stock options shall be cancelled. At such time, if ever, that a combination of three (3) PWS Projects (including the Guaranteed Project) and Additional PWS Projects have been accepted, the stock options, if any, to be granted to PWS for any PWS Project or Additional PWS Project thereafter accepted by FWSI shall be negotiated and agreed upon by the parties on a case by case basis.

 

  

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Section 3.4           Net Income Payments.  FWSI shall pay PWS ten percent (10%) of the “Net Income” (as defined below) achieved by FWSI during the term of this Agreement from the Guaranteed Project and from each of the other PWS Projects and Additional PWS Projects accepted by FWSI up to a maximum of three (3) projects (including the Guaranteed Project). Such payments will be made quarterly as projects begin operation. As used herein, “Net Income” shall mean gross PWS Project or Additional PWS Project, as applicable, operating income less PWS Project or Additional PWS Project, as applicable, direct operating expenses on PWS Projects or Additional PWS Projects, as applicable, as set forth on FWSI’s financial statements included with FWSI’s periodic reports filed with the Securities and Exchange Commission. PWS shall have the right to review and comment on the calculation of “Net Income” for the PWS Project(s) and Additional PWS Project(s), as applicable, with respect to reasonableness and completeness.  PWS Project and Additional PWS Project operating expenses shall not include general FWSI overhead. After an aggregate of three (3) projects have been accepted by FWSI (including the Guaranteed Project), the amount of Net Income payments, if any, to be paid to PWS with respect to any PWS Project or Additional PWS Project thereafter accepted by FWSI shall be negotiated and agreed upon by the parties on a case by case basis.

 

Section 3.5           Expenses.  FWSI shall be solely responsible for payment of ordinary and necessary expenses incurred, or to be incurred, by PWS in conjunction with performance of Services by PWS under the terms of this Agreement; provided, however, that PWS shall obtain prior written approval from the Chairman or CEO of FWSI for any and all expense items which are in excess of $100. To the extent PWS directly incurs ordinary and necessary expense items which are less than $100 in amount, or as to which, solely with regard to expense items of $300 or less in amount, it is unable to reasonably request prior written approval from FWSI, FWSI shall reimburse PWS for the actual cost of such items.

 

Reimbursement of expenses shall be made ten (10) days following submission by PWS of an appropriate invoice for such expenses to FWSI.  Invoices will be submitted on a monthly basis on the last day of each month.  Invoices shall include a summary of the tasks to which PWS has devoted time and the number of hours spent and amount of expenses incurred on each task.  Invoices shall itemize expenses. Such expenses shall be substantiated by receipts for expenses amounting to more than $10.  Expenses shall be paid only in accordance with FWSI’s then effective policy (if any) covering the reimbursement of expenses of employees.

 

ARTICLE IV

 

TERM AND TERMINATION

 

Section 4.1           Term and Termination.  This Agreement (and FWSI’s obligation to make payments to PWS) shall be effective on the date first above written and terminate immediately on the earlier of (a) December 31, 2014, (b) upon PWS giving FWSI sixty (60) calendar days’ prior written notice of termination; (c) upon FWSI giving PWS thirty (30) calendar days prior written notice of termination, or (d) at any time, with no notice, upon which FWSI terminates this Agreement for “Cause”.  This Agreement may be renewed by the parties for periods subsequent to December 31, 2014 by mutual agreement of the parties on terms to be negotiated.

 

As used herein, “Cause” shall be deemed to occur if any of the following events take place: (a) if, in its sole discretion, FWSI determines that PWS has not complied with the terms and conditions of this Agreement; (b) any act or omission that constitutes in FWSI’s sole discretion a material breach by PWS of any of his obligations under this Agreement; (c) the willful and continued failure or refusal of PWS to satisfactorily perform the duties reasonably required of it under this Agreement; (d) PWS’s conviction of, or plea of nolo contendere to, (i) any felony or (ii) a crime involving dishonesty or moral turpitude or which could reflect negatively upon FWSI’s or otherwise impair or impede its operations; (e) PWS’s engaging in any misconduct, negligence, act of dishonesty (including, without limitation, theft or embezzlement), violence, threat of violence or any activity that could result in any violation of United States federal securities laws, in each case, that is injurious to FWSI or any of its subsidiaries or affiliates; (f) PWS’s material breach of a written policy of FWSI or the rules of any governmental or regulatory body applicable to FWSI; (g) PWS’s refusal to follow the directions of the Chairman or CEO of FWSI or from individuals designated by the Chairman or CEO of FWSI, unless such directions are, in the written opinion of legal counsel, illegal or in violation of applicable regulations; (h) any other willful misconduct by PWS which is materially injurious to the financial condition or business reputation of FWSI or any of its subsidiaries or affiliates, or (i) PWS’s breach of its obligations under Sections 5.1, 5.3 or 5.4 hereof. As used herein, reference to PWS includes reference to all PWS employees, consultants, agents, advisors, and officers and directors performing services with respect to PWS Projects and Additional PWS Projects as well as the Project Manager.

 

  

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In the event this Agreement is terminated for Cause, FWSI shall have no obligation to make payments to PWS in accordance with the provisions of Article III hereof, except as otherwise required by law, for periods after this Agreement is terminated on account of the termination of PWS for Cause, except for PWS’s then applicable fees earned and accrued through the date of such termination. Further, if the Agreement is terminated for Cause, all unvested stock options shall be cancelled.

 

Notwithstanding any termination of this Agreement, the provisions of Sections 5.1 and 5.4 shall survive and continue.

 

ARTICLE V

 

WARANTIES, REPRESENTATION AND COVENANTS OF THE PARTIES

 

Section 5.1           Ownership and Confidentiality of Data and Work Product.  FWSI, its employees, officers, affiliates, agents and counsel, and third parties shall make information, data and documents available to PWS during the course of PWS providing the Services to FWSI (collectively, “Data”).  PWS agrees to treat all Data as proprietary to FWSI.  PWS agrees that FWSI shall have sole ownership and title to the Data, and to all, files, reports, price lists, customer lists, drawings, plans, sketches, keys, codes, software, photographs, recordings, documents, memoranda and other work products prepared, procured, produced, or worked on by PWS in the course of providing Services to FWSI with respect to the PWS Projects and any and all other projects (including but not limited to Additional PWS Projects),as to which PWS provides services to FWSI under the terms hereof (collectively, “Work Product”).  All Data and Work Product shall be accorded treatment by PWS as confidential and proprietary.  PWS agrees that (i) at any time, at FWSI’s request, and in any event on the date of termination of this Agreement by FWSI as provided herein, in sole consideration of the payments to be made pursuant to Article III above, PWS will assign and transfer, in a form acceptable to FWSI, all of its right, title and interest in and to any and all Work Product to FWSI or other entity selected by FWSI, and (ii) it will not assign or otherwise transfer any of its right, title or interest in and to the Work Product to any third party.  PWS represents and warrants that it has the capacity, power and authority to enter into this Agreement.  This Section 5.1 shall be effective for a period of one (1) year after the termination of this Agreement

 

Section 5.2           Acknowledgements.  PWS acknowledges and agrees that (a) FWSI, and any other entity designated by FWSI shall have the sole, exclusive right to use the Work Product for any purpose that, in its sole discretion, it elects, (b) FWSI shall at all times have the right, in its sole discretion and without consultation with PWS, to abandon any of the Accepted PWS Projects without further obligation or liability to PWS (except for payment of fees earned and reimbursement of reimbursable expenses incurred hereunder), (c) PWS hereby waives any and all rights it may have to make a claim against FWSI or any other joint development partner of FWSI, or any of their affiliates, directors, officers, employees, attorneys and agents for any special, indirect, consequential or punitive damages in connection with, arising out of, or in any way related to this Agreement, any of the Services or any act or omission or event occurring in connection therewith, (d) PWS hereby waives, releases and agrees not to sue upon any such claim for any such special, indirect, consequential or punitive damages, whether or not accrued and whether or not known or suspected to exist in its favor, (e) PWS agrees that during the term of this Agreement it shall not hold itself out as an employee of FWSI, and (f) PWS acknowledges and agrees that it is not authorized to, shall not, and shall not represent or imply that it has authority to, bind or obligate FWSI in any way nor, without express prior written authorization of the Chairman or CEO of FWSI or their designee, negotiate the terms or conditions of any agreement on behalf of FWSI, whether relating to the Services or otherwise.

 

Section 5.3           Conflicts.  

 

PWS hereby covenants that it shall not enter into any contract which would be violated by the performance of the Services to be provided hereunder.

 

  

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Section 5.4           Non-Solicitation.  During the term of, and for a period of one (1) year after the termination of, this Agreement, the Parties shall not:

 

(a)           In connection with or in relation to the PWS Projects, interfere with any relationship, contractual or otherwise, between the other Party or any of its affiliates and any other party, including, without limitation, any supplier, distributor, co-venturer or joint venturer of the other Party or any of its affiliates or seek to have such person discontinue or reduce its business with the other Party or any of its affiliates or otherwise interfere in any way with the business of the other Party or any of its affiliates; or

 

(b)           Take any action, including without limitation, the making of disparaging statements concerning the other Party or its officers, directors, shareholders, employees, agents, advisors and other representatives, that is reasonably likely to cause injury to the relationships between the other Party or any of its employees, customers, or clients.

 

Section 5.5           Right To Compete.   FWSI and PWS acknowledge and agree that they will be engaged in the same Business and outside of the Accepted PWS Projects may be in direct competition with each other.  FWSI and PWS further acknowledge and agree that this Agreement does not preclude them from competing with each other on any basis except with respect to the Accepted PWS Projects and as otherwise provided herein.  The Parties agree that they will not, during the term of this Agreement, take any action intended to direct the benefits of any such Accepted PWS Project, exclusive of those provided to the Parties hereunder, to themselves to the detriment of the other party.

 

ARTICLE VI

 

MISCELLANEOUS

 

Section 6.1           Severability.  If any of the provisions of this Agreement is held invalid or unenforceable, such invalidity or unenforceability shall not affect the other provisions hereof which can be given effect without the invalid provision, and to this end the provisions of this Agreement are intended to be and shall be deemed severable.

 

Section 6.2           Notices.  Any notices, consents, waivers or other communications required or permitted to be given under the terms hereof must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally; or (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); in each case properly addressed to the party to receive the same.  The addresses and facsimile numbers for such communications shall be:

 

	
If to FWSI:

	
c/o Gottbetter & Partners, LLP

	  	
488 Madison Avenue

	  	
New York, NY 10016

	  	
Attention:  Adam S. Gottbetter, Esq.

	  	
Telephone:  212.400.6900

	  	
Facsimile:  212.400.6901

	  	  
	
If to PWS:

	
Produced Water Solutions, Inc.

	  	
2425 W. I-25 Frontage Road

	  	
Erie, CO 80516

	  	
Attention:  George A. Kast, CEO

	  	
Telephone:  303.215.9595

	  	
Facsimile:  303.215.0595

 

  

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Section 6.3          Applicable Law; Jurisdiction.  THIS AGREEMENT IS MADE UNDER, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF COLORADOAPPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED SOLELY THEREIN, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.  In any action between or among any of the parties arising out of this Agreement, (i) each of the parties irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the state and federal courts having jurisdiction over Clark County, Nevada; (ii) if any such action is commenced in a state court, then, subject to applicable law, no party shall object to the removal of such action to any federal court having jurisdiction over Clark County, Nevada; (iii) each of the parties irrevocably waives the right to trial by jury; and (iv) each of the parties irrevocably consents to service of process by first class certified mail, return receipt requested, postage prepared, to the address at which such party is to receive notice in accordance with this Agreement.

 

Section 6.4           Counterparts.  This Agreement and any amendment hereto maybe executed in any number of counterparts any one of which, or a copy of any one of which, shall be admissible into evidence, and all of which shall constitute one and the same agreement. Facsimile signatures shall be acceptable and shall have the same effect as original signature.

 

Section 6.5           Further Assurances.  The parties agree to execute and deliver or cause to be executed and delivered such additional instruments, certificates or documents and take such actions as either party may reasonably request for the purpose of more fully giving effect to the terms hereof.

 

Section 6.6           No Strict Construction.  The Parties hereto have participated jointly in the negotiation and drafting of this Agreement.  In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

 

Section 6.7           Amendment. This Agreement can be amended only by a written instrument signed by both parties.

 

Section 6.8          Entire Agreement.  This Agreement constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes all prior agreements, whether oral or written between the parties hereto regarding the subject matter hereof.

 

[SIGNATURE PAGE FOLLOWS]

 

 

 

 

 

  

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IN WITNESS WHEREOF, the undersigned have duly executed this Agreement the day and year first above written.

 

	  	

FRAC WATER SYSTEMS, INC.

	 
	  	 	  	 
	  	By:	/s/ Nadine Smith	 
	  	Name:	
Nadine Smith

	 
	  	Title:	
Chief Executive Officer

	 

 

	  	

PRODUCED WATER SOLUTIONS, INC.

	 
	  	 	  	 
	  	By:	/s/ George Kast	 
	  	Name:	George Kast	 
	  	Title:	
Chief Executive Officer

	 

 

 

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