NOTE PURCHASE AGREEMENT Up To $2,500,000 13% Senior Secured Convertible Extendible Notes

 

(b) If the closing Market Price of the Common Stock is less than the Conversion Price for a period of 90 consecutive trading days, then the Conversion Price in effect shall be reduced to the closing Market Price of the Common Stock on such 90th trading day; provided that in no event shall the Conversion Price be reduced to less than $0.07 per share pursuant to the provisions of this Section 2.6(b).

 

(c) Any adjustment pursuant to Section 2.6(a) shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision or combination; provided that if the Company does not pay such dividend or distribution, the Conversion Price shall be readjusted to the Conversion Price in effect immediately prior to the declaration of such dividend or distribution.  If, after an adjustment, a Holder of Notes upon conversion of such Notes may receive shares of two or more classes of Capital Stock of the Company, the Conversion Price will thereafter be subject to adjustment upon the occurrence of an action taken with respect to any such class o f Capital Stock with respect to the Common Stock on terms comparable to those applicable to Common Stock described herein.

 

(d) If the Company makes any cash dividend or distribution payable in securities or assets of the Company (other than shares of Common Stock), then and in each such event provision shall be made so that the Holders of Notes shall receive the amount of cash, securities or assets of the Company which they would have received had their Notes been converted into Common Stock on the date of such event.

 

(e) Whenever the Conversion Price is adjusted in accordance with this Section 2.6, the Company shall:  (1) forthwith compute the Conversion Price in accordance with this Section 2.6 and prepare and transmit to the Company’s transfer agent an Officers’ Certificate setting forth the Conversion Price, the method of calculation thereof in reasonable detail, and the facts requiring such adjustment and upon which such adjustment is based; and (2) as soon as practicable following the occurrence of an event that requires an adjustment to the Conversion Price pursuant to this Section 2.6 (or if the Company is not aware of such occurrence, as soon as practicable after becoming so aware), provide a written notice to the Holders of Notes of the occurrence of such event and a statement setting forth in reasonable detail the method by which the adjustment to the Conversion Price was determined and setting forth the adjusted Conversion Price.

 

(f) After an adjustment to the Conversion Price, any subsequent event requiring an adjustment will cause a subsequent adjustment to the Conversion Price as so adjusted.

 

SECTION 2.7 Change of Control.

 

(a) In the event of a Change of Control (the date of such occurrence being the “Change of Control Date”), the Company shall notify (the “Change in Control Offer”) the Holders of the Notes in writing in advance of such occurrence in accordance with Section 2.7(b) and, in connection therewith, offer to the Holders of the Notes that the Notes shall be paid off at the then Applicable Accrued Value (such applicable purchase price being hereinafter referred to as the “ Change of Control Purchase Price”).  The Notes owned by Holders of Notes which do not accept the Change of Control Purchase Price within 20 days of the Company’s offer will automatically be converted into the kind and amount of securities, cash or other assets comprising the consideration (“Change in Control Consideration”) that such Holder would have received if such Holder had converted such Notes immediately prior to the record date for determining the holders of Common Stock entitled to receive the Change of Control Consideration.

 

(b) At least 30 days prior the Change of Control Date, the Company shall send by first class mail, postage prepaid, a notice to each Holder of Notes at such Holder’s address as it appears in the register maintained by the Company, which notice shall state:

 

(i) that a Change of Control is contemplated, that the Holders of the Notes have the right to either (i) accept the Change of Control Purchase Price or (ii) convert the Notes pursuant to this Section 2.7;

 

(ii) the form, terms and value per share to the Holders of the Notes of the Change of Control Consideration such Holder would receive if the Notes were converted;

 

(iii)            the Change of Control Purchase Price and the purchase date (which shall be a Business Day no earlier than 30 Business Days nor later than 60 Business Days from the date such notice is mailed, other than as may be required by law) (the “Change of Control Payment Date”);

 

(iv)            that any Notes not tendered and designated for payoff at the Change of Control Purchase Price will be automatically converted into the kind and amount of securities, cash or other assets comprising the Change of Control Consideration that such Holder would have received if such Holder had converted such Notes immediately prior to the record date for determining the holders of Common Stock entitled to receive the Change of Control Consideration;

 

(v)            that, unless the Company defaults in making payment of the Change of Control Purchase Price, any Notes accepted for payment shall cease to accrue interest after the Change of Control Payment Date;

 

(vi)            that Holders accepting the offer to have any Notes purchased at the Change of Control Purchase Price will be required to surrender their Notes (or if the Note is lost, stolen or destroyed, evidence of such loss, theft or destruction of such Note and indemnity, if requested, satisfactory to the Company), duly endorsed for transfer together with such customary documents as the Company may reasonably require, in the manner and at the place specified in the notice prior to the close of business on the Business Day preceding to the Change of Control Payment Date;

 

(vii)            that Holders whose Notes are purchased only in part will be issued the Change of Control Consideration for the unpurchased portion of the aggregate principal amount of Notes surrendered; and

 

(viii)            the circumstances and relevant facts regarding such Change of Control.

 

(c) The Company will comply with any securities laws and regulations, to the extent such laws and regulations are applicable to the purchase of the Notes, in connection with a Change of Control Offer.

 

(d) On the Change of Control Payment Date, the Company shall (i) accept for payment the Notes tendered pursuant to the Change of Control Offer (or if the Note is lost, stolen or destroyed, evidence of such loss, theft or destruction of such Note and indemnity, if requested, satisfactory to the Company), (ii) promptly mail to each Holder of Notes so accepted payment in an amount in cash equal to the Change of Control Purchase Price for such Notes, (iii) execute and issue the Change of Control Consideration for the aggregate principal amount of unpurchased Notes surrendered and (iv) cancel and retire each surrendered Note.  Unless the Company defaults in the payment for the Notes tendered pursuant to the Change of Control Offer, interest will cease to accrue with respect to the Notes tendered and all rights of Holders of such tendered Notes will terminate, except for the right to receive payment therefor, on the Change of Control Payment Date.

 

SECTION 2.8 Security.  The Notes are secured by a security interest in all of the assets of the Company and the Subsidiaries as evidenced by the Security Agreement and Security Documents.

 

 

 

 

The Company hereby represents and warrants to and agrees with the Purchaser as follows as of the date hereof:

 

SECTION 3.1 Incorporation; Standing; Related Matters.  The Company is duly incorporated, validly existing and in good standing under the laws of the State of Nevada and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as presently proposed to be conducted, to enter into this Agreement and the other Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder.  The Company has the corporate power and authority to issue the Notes and the Warrants and perform its obligations thereunder.  The Company has, by all necessary corporate action, duly authorized the execution and delivery of this Agreement and the other Transaction Documents to which it is a party and the performance of its obligations hereunder and thereunder.  The Company has, by all necessary corporate action, duly authorized the execution and delivery of the Notes and the Warrants and the performance of its obligations thereunder.  The Company is duly qualified and in good standing as a foreign corporation authorized to do business in each jurisdiction in which the character of the properties owned or leased by it therein or in which the transaction of its business makes such qualification necessary, except to the extent that the failure to be so qualified or in good standing would not reasonably be expected to have a Material Adverse Effect.

 

SECTION 3.2 Subsidiaries.  Except as set forth on Schedule 3.2, the Company has no subsidiaries, joint ventures, equity investments or similar arrangements, and the Company has no agreement to enter into such an arrangement.  Each Subsidiary of the Company is duly incorporated, validly existing and in good standing under the laws of the state of its incorporation and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as presently proposed to be conducted.  Except as set forth in Schedule 3.2, the Company owns, directly or indirectly, all of the Capital Stock of each Subsidiary free and clear of any liens, and all the issued and outstanding shares of Capital Stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities and no Subsidiary has any outstanding options, warrants or other securities convertible into or exchangeable or exercisable for Capital Stock.

 

SECTION 3.3 Capitalization.  The authorized, issued and outstanding Capital Stock of the Company is as set forth in Schedule 3.3 hereof under “Capitalization.”  All of the outstanding shares of Capital Stock of the Company are duly authorized, validly issued, fully paid and non-assessable.  Except as disclosed on Schedule 3.3, the Company does not have outstanding any securities convertible into or exchangeable for any of its Capital Stock nor does it have outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any of its Capital Stock or securities convertible into or exchangeable for any of its Capital Stock.  All shares of Common Stock issuable upon the conversion of the Notes and the exercise of the Warrants will be, when issued in accordance with the terms of this Agreement and the Notes or the Warrants, as the case may be, duly and validly issued, fully paid and non-assessable and free from all Liens (other than any Liens created by Purchaser).  The Company has reserved from its duly authorized Capital Stock the appropriate number of shares of Common Stock as required for conversion of the Notes and the exercise of the Warrants including the warrant to be issued to InterMerchant.  Except as disclosed on Schedu le 3.3, there are no contracts, agreements or understandings between the Company and any other Person granting such Person the right to require the Company to file a registration statement under the Securities Act with respect to any securities that the Company owned or to be owned by such a Person or to require the Company to include such securities in the securities registered pursuant to any of the registration statements filed by the Company under the Securities Act.

 

SECTION 3.4 Authorization of Agreement, Notes and Warrants.

 

(a) This Agreement has been duly executed and delivered by the Company and constitutes a valid, binding and enforceable obligation of the Company, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

 

(b) When, on a Closing Date, the Notes, the Warrants and the other Transaction Documents have been duly executed and delivered by the Company and the Notes and the Warrants have been paid for by the Purchaser in accordance with the terms of this Agreement, the Notes, the Warrants and the Transaction Documents will constitute valid, binding and enforceable obligations of the Company, subject to applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law).

 

SECTION 3.5 Absence of Defaults and Conflicts.  The Company is not in violation of its certificate of incorporation or bylaws nor is it in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which it is a party or by which it may be bound, or to which any of the property or assets of the Company is subject (collectively, “Agreements and Instruments”); and the execution, delivery and performan ce of this Agreement and the Transaction Documents by the Company, and the consummation of the transactions contemplated herein and therein (including the issuance of the Securities) and compliance by the Company with its obligations hereunder and thereunder, do not and will not, whether with or without the giving of notice or passage of time or both, (i) conflict with or constitute a breach of, or default (or an event that with notice, lapse of time or both would become a default) under, give to others any rights of repurchase, termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) or result in the creation or imposition of any Lien upon any property or assets of the Company pursuant to such Agreements and Instruments, (ii) result in any violation of the provisions of the certificate of incorporation or bylaws of the Company or (iii) result in any violation of any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, gover nment instrumentality, stock exchange or court, domestic or foreign, having jurisdiction over the Company or any of its assets or properties, except in the case of clauses (i) and (iii) as would not reasonably be expected to have a Material Adverse Effect.

 

SECTION 3.6 Absence of Proceedings.  There is no notice, action, claim, suit or proceeding before or by any court or governmental or self-regulatory agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company, any of the officers or directors of the Company in their capacity as such, or any of the property or assets of the Company, which could reasonably be expected to have (i) a Material Adverse Effect or (ii) a material adverse effect on the transactions contemplated hereby.

 

SECTION 3.7 Possession of Licenses and Permits.  Schedule 3.7 sets forth the permits, certificates, licenses, approvals, consents, orders and other authorizations (collectively, “Governmental Licenses”) issued by the appropriate federal, state, local or foreign regulatory agencies or bodies possessed by or available to the Company (in which case such Schedule sets forth the person in whose name such Governmental License has been issued).  Except as would not reasonably be expected to have a Material Adverse Effect, (i) except for the Governmental Licenses which the Company is in the process of obtaining, the Governmental Licenses set forth on Schedule 3.7 constitute all the Governmental Licenses necessary to carry out the business plan communicated to the Purchaser and to conduct the business now operated by it or planned to be conducted by it; (ii) the Company is in compliance with the terms and conditions of all of its Governmental Licenses; (iii) all of the Governmental Licenses are valid and in full force and effect; and (iv) the Company has not received any notice of, nor does it have any knowledge of any pending or threatened (or any basis therefor), proceedings relating to the revocation, withdrawal, cancellation, modification, suspension or non-renewal of any Governmental Licenses.  No consent, approval or authorization of, or registration, filing or declaration with, an y governmental authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the issuance of the Notes and the Warrants, except as have been obtained or such filings as may be required to be made with the SEC and with any state or foreign securities regulatory authority.

 

SECTION 3.8 No Violations of Laws, Etc.  The Company has not violated any law, ordinance, rule, or regulation, including, without limitation, (i) any applicable U.S. Federal or state law or regulation concerning the business of the Company currently conducted or planned to be conducted as communicated to the Purchaser, and (ii) any foreign law or regulation concerning the business of the Company currently conducted or planned to be conducted as communicated to the Purchaser, except, in each case, as would not reasonably be expected to have a Material Adverse Effect.

 

SECTION 3.9 No Undisclosed Liabilities.  Except as set forth in Schedule 3.9, the Company has no material liability except for liabilities reflected in the Company’s balance sheet as of September 30, 2009 (the “Balance Sheet”) and has incurred current liabilities only in the ordinary course of business of the Company since the date of the Balance Sheet.

 

SECTION 3.10 Tax Returns and Payments.  The Company has filed all income tax returns required by law to be filed by it and has paid all Taxes shown on such returns and all other Taxes and other governmental charges levied upon it and its respective properties, assets, income and franchises, to the extent such Taxes have become due and payable and before they have become delinquent, except for any Taxes the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company has established adequate reserves in accordance with GAAP.  The charges, accru als and reserves on the books of the Company in respect of Taxes for all fiscal periods are adequate and there are no additional assessments for such periods or any basis therefor.

 

SECTION 3.11 Indebtedness; Future Liens; Seniority.

 

(a) Schedule 3.11 sets forth a complete and correct list of all outstanding Indebtedness of the Company as of the date hereof (including a description of the obligors and obligees, principal amount outstanding and collateral therefor, if any, and guaranty thereof, if any).  The Company is not in default, and no waiver of default is currently in effect, in the payment of any interest or principal on any Indebtedness, and no event or condition exists with respect to any Indebtedness of the Company that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable befo re its stated maturity or before its regularly scheduled dates of payment.

 

(b) Except as disclosed on Schedule 3.11, the Company has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien (other than Permitted Liens).

 

(c) Except as set forth on Schedule 3.11, the Company is not a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company, any agreement relating thereto or any other agreement (including, but not limited to, its certificate of incorporation or other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company.

 

(d) As of the Closing Date, no Indebtedness or other claim against the Company is senior to the Notes in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise.

 

SECTION 3.12 Title to Property; Leases; Material Agreements.  The Company has good and marketable title to all of the properties and assets reflected on the Balance Sheet, or purported to have been acquired by the Company after the date thereof (except as sold or otherwise disposed of in the ordinary course of business and disclosed in writing to Purchaser), in each case free and clear of all Liens (other than Permitted Liens).  All leases of property used by the Company are valid and subsisting and are in full force and effect.  Schedule 3.12 sets fort h any agreement, arrangement or understanding (in each case, which is written or verbal) which is material to the conduct of the business of the Company including but not limited to any agreements required to be filed as exhibits to the Company’s SEC filings pursuant to Item 601(b) of Regulation S-K (the “Material Agreements”).  To the knowledge of the Company, each Material Agreement is valid and subsisting and in full force and effect.  Except as set forth on Schedule 3.12, the Company is not presently party to any Material Agreement with any Affiliate of the Company.

 

SECTION 3.13 Intellectual Property.

 

(a) Schedule 3.13 sets forth a list of all patents, patent applications, inventions, discoveries, trademarks, trademark applications, service marks, trade names, copyrights, licenses and authorizations which the Company owns, possesses or has the right to use (the “Intellectual Property”).  Schedule 3.13 sets forth any and all payment obligations under which the Company is obligated with respect to any of the material Intellectual Property, and identifies any material contract, agreement or understanding, written or verbal, which has been made with respect to the Intellectual Property.  The Intellectual Property is all the Intellectual Property necessary for the conduct of the business of the Company as it is currently conducted or proposed to be conducted.  The Company is the owner or licensee of all right, title and interest in the Intellectual Property, free and clear of all Liens (other than Permitted Liens).  All former and current employees of the Company have executed written agreements with the Company that assign to the Company all rights to any inventions, improvements, discoveries or information relating to the business of the Company.

 

(b) Except as disclosed on Schedule 3.13, to the knowledge of the Company, all of the issued patents are currently in compliance with formal legal requirements (including, without limitation, payment of filing, examination and maintenance fees and proof of working or use), have not been declared invalid or unenforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety days of the Closing Date.  No patent set forth on Schedule 3.13 has been or is now involved in any interference, reissue, reexamination or opposition proceeding, except as wo uld not reasonably be expected to have a Material Adverse Effect.  Except as disclosed on Schedule 3.13, to the knowledge of the Company, there is no potentially interfering patent or patent application of any other party, and, to the knowledge of the Company, no product of the Company infringes in any respect any license, permit, franchise, authorization, patent, copyright, proprietary software, service mark, trademark, trade name or other right owned by any other Person, except as would not reasonably be expected to have a Material Adverse Effect.  To the knowledge of the Company, there is no violation by any Person of any right of the Company with respect to any patent, copyright, proprietary software, service mark, trademark, trade name, or other right owned or used by the Company, except as would not reasonably be expected to have a Material Adverse Effect.

 

SECTION 3.14 Use of Proceeds.  The Company shall use and apply the proceeds of the sale of the Notes as set forth in the Confidential Private Placement Memorandum dated February [  ], 2010 (the “Private Placement Memorandum”).  The Company is not, and immediately after receipt of payment for the Notes and the Warrants, will not be required to register as an “investment company” within the meaning of the Investment Company Act of 1940, as amended.  The Company shall conduct its business in a manner so that it will not become subject to the registration requirements of the Investment Company Act.

 

SECTION 3.15 Material Events.  Except as disclosed in Schedule 3.15, since the date of the Balance Sheet, there has not been with respect to the Company:

 

(a) any event which could reasonably be expected to result in a Material Adverse Effect; or

 

(b) any damages, destruction or loss to the properties or assets of the Company, whether or not covered by insurance, that has or could reasonably be expected to have a Material Adverse Effect or that in the aggregate exceeds $25,000; or

 

(c) any loss or waiver by the Company of any right, not in the ordinary course of business, or any material debt owed to it; or

 

(d) other than the sales of assets in the ordinary course of business any sale, transfer or other disposition of, or agreements to sell, transfer or otherwise dispose of, any assets by the Company in excess of $25,000 in the aggregate, or any cancellation or agreement to cancel any debt or claims of the Company; or

 

(e) any declaration or setting aside or payment of any dividend (whether in cash, property or stock) or any distribution (whether in cash, property or stock) or other payment with respect to any of the Capital Stock of the Company, or any repurchase, purchase or other acquisition of, or agreement to repurchase, purchase or otherwise acquire, any Capital Stock of the Company; or

 

(f) any amendment or termination of any contract, agreement or license to which the Company is a party or by which it is bound, except where such amendment or termination could not be reasonably expected to have a Material Adverse Effect; or

 

(g) any resignation or termination or employment of any key employee, and to the knowledge of the Company there is no impending or threatened resignation or termination or terminations of employment of any key employee; or

 

(h) any labor dispute (including any negotiation, or request for negotiation, for any labor representation or any labor contract) affecting the Company; or

 

(i) any application of any existing (or the enactment of any new) environmental law or personnel, product safety law, food and drug act law or regulation, or other governmental regulation that has or which could reasonably be expected to have a Material Adverse Effect.

 

SECTION 3.16 SEC Reports; Financial Statements; Internal Accounting Records.

 

(a) The Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial st atements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

 

(b) The books, records and accounts of the Company accurately and fairly reflect, in all material respects, in reasonable detail, the transactions in and dispositions of the assets of the Company.  The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date.  The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accounta bility, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.  The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  The Company’s certifying officers have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s most recently filed periodic report under the Exchange Act (such date, th e “Evaluation Date”).  The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no changes in the Company’s internal control over financial reporting (as such term is defined in the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

SECTION 3.17 Private Placement.  Neither the Company nor any Person acting on the Company’s behalf has sold or offered to sell or solicited any offer to buy the Notes, the Warrants and the shares of Common Stock underlying the conversion of the Notes and the exercise of the Warrants (collectively, the “Securities”) by means of any form of general solicitation or advertising.  Neither the Company nor any of its Affiliates nor any Person acting on the Company’s behalf has, directly or indirectly, at any time within the past six months, made any offer or sale of any security or solicitation of any offer to buy any security under circumstances that would (i) eliminate the availability of an exemption from registration under the Securities Act in connection with the offer and sale of the Securities as contemplated hereby or (ii) cause the offering of the Securities pursuant to this Agreement to be integrated with other securities offerings by the Company for purposes of any applicable law, regulation or shareholder approval provisions.

 

SECTION 3.18 Acknowledgement Regarding Purchaser’s Purchase of the Securities.  The Company acknowledges and agrees that the Purchaser is acting solely in the capacity of an arm’s-length purchaser with respect to this Agreement and the transactions contemplated hereby.  The Company further acknowledges that Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by the Purchaser or its representatives or agents in connection with this Agreement and the transactions contemplated her eby is merely incidental to the Purchaser’s purchase of the Securities.  The Company further represents to Purchaser that its decision to enter into this Agreement has been based solely on its independent evaluation and the independent evaluation of its representatives.

 

SECTION 3.19 Brokers and Finders.  Except as disclosed in the Private Placement Memorandum or as set forth on Schedule 3.19, no agent, broker, Person or firm acting on behalf of the Company or its Affiliates is, or will be, entitled to any fee, commission or broker’s or finder’s fees from any of the parties hereto, or from any Person controlling, controlled by, or under common control with any of the parties hereto, in connection with this Agreement or any of the transactions contemplated hereby.

 

SECTION 3.20 True and Complete Disclosure.  The information contained in the Private Placement Memorandum and the exhibits thereto as of the date of the Private Placement Memorandum and as of the date hereof does not contain any untrue statement of a material fact and does not omit to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not misleading.

 

 

 

 

The Purchaser represents and warrants to and agrees with the Company that as of the date hereof:

 

SECTION 4.1 Risks of Investment.  The Purchaser recognizes that the purchase of the Securities involves a high degree of risk including the following:  (i) an investment in the Company is highly speculative, and only investors who can afford the loss of their entire investment should consider investing in the Company and purchasing the Securities; (ii) the Purchaser may not be able to liquidate its investment; (iii) transferability of the Securities is restricted; (iv) in the event of a disposition of the Securities, the Purchaser could sustain the loss of its entire investment; and (v) the Company does not anticipate the payment of dividends in the foreseeable future.

 

SECTION 4.2 Investment Experience.  The Purchaser has prior investment experience, including investing in securities in business enterprises similar to the Company.  To the extent it has deemed appropriate, the Purchaser has retained and relied upon professional advice regarding the investment, tax and legal merits and consequences of this Agreement and its purchase of Securities hereunder.

 

SECTION 4.3 Ability to Bear Risk.  By reason of the Purchaser’s business or financial experience, the Purchaser has the capacity to protect its own interests in connection with the transaction contemplated hereby, and is able to bear the economic risk which it hereby assumes.

 

SECTION 4.4 Receipt and Review of Documentation.  The Purchaser has been furnished by the Company during the course of this transaction with information regarding the Company which the Purchaser has requested, has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning the terms and conditions of the Securities, and has received any additional information which its management has requested.

 

SECTION 4.5 Acquisition for Its Own Account.  The Purchaser understands that the Securities have not been registered under the Securities Act or any state securities laws by reason of a claimed exemption under the provisions of the Securities Act and such state securities laws that depends, in part, upon the Subscriber’s investment intention.  The Purchaser is acquiring the Securities for its own account for investment only, and not with a view toward the resale or distribution to others.

 

SECTION 4.6 No Public Market; Rule 144.  The Purchaser understands that there currently is no public market for the Notes or the Warrants and that no market may develop for any of these Securities.  The Purchaser understands that even if a public market develops for such Securities, Rule 144 promulgated under the Securities Act requires for non-affiliates, among other conditions, a six-month holding period prior to the resale of securities acquired in a non-public offering without having to satisfy the registration requirements under the Securities Act.  Except as set forth in the Registration Rights Agreement, Purch aser understands and hereby acknowledges that the Company is under no obligation to register the Notes or the Warrants under the Securities Act or any state securities or “blue sky” laws.

 

SECTION 4.7 Organization, Good Standing, Corporate Authority.  The Purchaser has requisite legal capacity, and limited liability company power and authority to enter into this Agreement and the Transaction Documents to which it is to be a party and to consummate the transactions contemplated hereby and thereby, including the purchase of the Notes and the Warrants to be acquired by it hereunder.

 

SECTION 4.8 Due Authorization.  The execution and delivery of, and the performance by the Purchaser of its obligations under, this Agreement and the other Transaction Documents to which it is a party have been duly and validly authorized and, upon execution and delivery thereof, this Agreement and the other Transaction Documents to which it is a party will constitute the legal, valid, binding obligations of the Purchaser, enforceable against the Purchaser in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights generally, and subject , as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

 

SECTION 4.9 Accredited Investor.  The Purchaser is an Accredited Investor, and is aware that the sale of Securities to it is being made in reliance on the exemption from the registration requirements provided by Section 4(2) of the Securities Act and the regulations promulgated thereunder.

 

 

 

 

The Company hereby covenants and agrees with the Purchaser as follows:

 

SECTION 5.1 Payment of Notes and Maintenance of Office.  The Company will punctually pay or cause to be paid the principal, premium (if any) and interest due in respect of each Note according to the terms thereof and hereof and will maintain an office within the continental boundaries of the United States of America where notices, presentations and demands in respect of this Agreement and the Notes may be made upon them and will notify the Purchaser of such Notes of any change of location of such office.  Such office is presently maintained at 5601 Biscayne Blvd., Miami, Florida 33137.

 

SECTION 5.2 Payment of Taxes and Claims.  The Company shall file all tax returns required to be filed (including short period returns) in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on it or any of its properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company except as the same is contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with GAAP.

 

SECTION 5.3 Corporate Existence.  Other than in connection with a Change of Control for which the Company has or will make a Change of Control Offer, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect (i) its corporate existence in accordance with the respective organizational documents thereof (as the same may be amended from time to time) and (ii) the rights (charter and statutory), licenses and franchises thereof.

 

SECTION 5.4 Insurance.  The Company shall maintain, with financially sound and reputable insurers, insurance with respect to its properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.

 

SECTION 5.5 Compliance with Laws.  The Company shall comply in all material respects with all laws, ordinances or governmental rules or regulations to which it is subject, including, without limitation, ERISA and environmental laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of its properties or to the conduct of its business.

 

SECTION 5.6 Maintenance of Properties.  The Company shall maintain and keep its properties in good repair, working order and condition (other than ordinary wear and tear) so that the business carried on in connection therewith may be properly conducted at all times.

 

SECTION 5.7 Stay, Extension and Usury Laws.  The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Agreement; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any rights of the Purchaser, but s hall suffer and permit the execution of every such right as though no such law has been enacted.  Notwithstanding any provision to the contrary contained in any Note or Transaction Document, it is expressly agreed and provided that the total liability of the Company under the Notes for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law, and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the Notes exceed such maximum lawful rate.  It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Notes is increased or decreased by statute or any official governmental action subsequent to the date hereof, and if the maximum contract rate of interest is lesser than the interest rate otherwise in effect, the new maximum contract rate of in terest allowed by law will be the maximum lawful rate of interest applicable to the Notes from the effective date forward, unless such application is precluded by applicable law.  If under any circumstances whatsoever, interest in excess of the maximum lawful rate is paid by the Company to the Purchaser with respect to indebtedness evidenced by the Notes, such excess shall be applied by the Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at the Purchaser’s election.

 

SECTION 5.8 Transactions with Affiliates.  The Company shall not make any payment to, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an “Affiliate Transaction”), unless such Affiliate Transaction is on arms-length terms as would be obtained in a transaction with an unaffiliated third party, or the Company shall have obtained the prior written consent of the Majority Purchasers to any such Affiliate Transaction.

 

SECTION 5.9 Liens.  The Company shall not create, incur, assume or otherwise cause or suffer to exist or become effective any Lien of any kind (other than Permitted Liens) upon any of its property or assets, now owned or hereafter acquired, other than any such Liens for which the Company has received prior written consent of the Majority Purchasers.

 

SECTION 5.10 Reimbursement.

 

(a) The Company shall indemnify and hold harmless the Purchaser and any of its Affiliates or their respective officers, directors, employees and agents (“Related Parties”) from and against any and all losses, claims, damages, liabilities, settlement costs and expenses, including costs of preparation of legal action and reasonable attorneys’ fees, as incurred, arising out of or relating to any breach by the Company of any of the representations, warranties or covenants made by the Company in this Agreement or any other Transaction Document; provided, however, that the indemnity agreement contained in this Section 5.10(a) shall not ap ply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable for any such loss, claim, damage, liability, or action arising out of or relating to (i) a breach of the representation contained in Section 3.20 to the extent that such breach is based solely on statements which the Company included in the Private Placement Memorandum in reliance upon written information furnished by the Purchaser or its Affiliates expressly for use in connection with the Private Placement Memorandum or (ii) any breach by the Purchaser of any of the representations, warranties or covenants made by the Purchaser in this Agreement.  The indemnification obligations of the Company under this Section 5.10 shall be in addition to any liability that they may otherwise have and shall be binding upon and inure to the benefit of any successors, assigns , heirs and personal representatives of the Purchaser and any such Related Parties.  If the Company breaches its obligations under this Agreement or any Transaction Document, then, in addition to any other liabilities the Company may have under this Agreement or any Transaction Document or applicable law, the Company shall pay or reimburse the Purchaser on demand for all costs of collection and enforcement (including reasonable attorney’s fees and expenses).  Without limiting the generality of the foregoing, the Company specifically agrees to reimburse the Purchaser on demand for all costs of enforcing the indemnification obligations in this Section 5.10 (including, without limitation, reasonable attorney’s fees and expenses).  The rights of the Purchaser under this paragraph transfer automatically upon transfer of the Notes.

 

(b) The Purchaser shall indemnify and hold harmless the Company and any of its Related Parties from and against any and all losses, claims, damages, liabilities, settlement costs and expenses, including costs of preparation of legal action and reasonable attorneys’ fees, as incurred, arising out of or relating to any breach by the Purchaser of any of the representations, warranties or covenants made by the Purchaser in this Agreement; provided, however, that the indemnity agreement contained in this Section 5.10(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Purchaser (which consent shall not be unreasonably withhel d); provided, further, that in no event shall any indemnity under this subsection 5.10(b) exceed the aggregate principal amount of Notes purchased by the Purchaser pursuant to this Agreement.

 

SECTION 5.11 Indebtedness.  The Company shall not incur or issue any Indebtedness which ranks senior to or pari passu with the Notes, except for Permitted Indebtedness, without the prior written consent of the Majority Purchasers.

 

SECTION 5.12 Dividends.  The Company shall not authorize, declare or pay any dividend or other distribution of cash or other property, unless the Company makes such dividend or distribution to all of the Holders of the Notes such that the Holders of the Notes receive the amount per share that they would have received on an as converted basis.

 

SECTION 5.13 Financial Statements; Compliance Certificate.

 

(a) The Company shall within 45 days (or such shorter time as required by the SEC) after the close of each of the first three quarterly accounting periods in each fiscal year of the Company, deliver to the Purchaser and InterMerchant the balance sheet of the Company as at the end of such quarterly accounting period and the related statements of income and statement of cash flows for such quarterly accounting period and for the elapsed portion of the fiscal year ended with the last day of such quarterly accounting period and management’s discussion and analysis of the important operational and financial developments during such quarterly accounting period.  The timely public filing of the items described in this Section 5.13(a) on EDGAR shall satisfy the delivery requirement under this provision.

 

(b) The Company shall within 90 days (or such shorter time as required by the SEC) after the close of each fiscal year of the Company, deliver to the Purchaser and InterMerchant the balance sheet of the Company as at the end of such fiscal year and the related statements of income and retained earnings and statement of cash flows for such fiscal year certified by Malone & Bailey, PC or other independent registered accounting firm of recognized national standing, accompanied by an opinion of such accounting firm (which opinion shall be without any qualification or exception as to scope of audit) stating that in the course of its regular audit of the financial statements of the Company, which audit was conducted in accordance with GAAP, such accounting firm obtained no knowledge of any Default or an Event of Default relating to financial or accounting matters which has occurred and is continuing or, if in the opinion of such accounting firm such a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof, and management’s discussion and analysis of the important operational and financial developments during such fiscal year.  The timely public filing of the items described in this Section 5.13(a) on EDGAR shall satisfy the delivery requirement under this provision but only with respect to the financial statements but not the opinion of the independent registered public accounting firm.

 

(c) Upon delivery of the items set forth in Sections 5.13(a) and (b), the Company shall deliver to the Purchaser and InterMerchant a compliance certificate certified by the Company’s chief executive officer and chief financial officer that there exists no Default or Event of Default and that the Company has complied in all material respects with the covenants set forth in this Article 5.

 

SECTION 5.14 Conference Calls.  The Company shall hold no less than quarterly conference calls with InterMerchant and the Purchaser to update such Persons with regard to the financial and operational status of the Company.

 

SECTION 5.15 Blue Sky Filings.  The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to the Purchaser promptly after such filing.  The Company shall take such action as the Company shall reasonably determine is necessary to qualify the Securities, or obtain an exemption for the Securities for sale to the Purchaser pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of the United States, and shall provide evidence of any such action so taken to the Purchaser promptly after taking such action.

 

 

 

 

SECTION 6.1 Events of Default.  An “Event of Default” shall occur if:

 

(a) the Company defaults in the payment when due of any amount due and payable under any Note, whether on an Interest Payment Date, at maturity, by acceleration or otherwise which default continues for a period of 10 days after written notice by the Purchaser;

 

(b) any representation, warranty or statement made by the Company herein or in any other Transaction Document which would materially impact the Company’s ability to perform its obligations hereunder or under any other Transaction Document shall prove to be untrue in any material respect on the date as of which made which default continues for a period of 10 days after written notice by the Purchaser;

 

(c) the Company fails to observe or perform any other covenant or other agreement in this Agreement, the Notes or other Transaction Document which default continues for a period of 10 days after written notice by the Purchaser;

 

(d) a default occurs under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Company (or the payment of which is guaranteed by the Company) in excess of $25,000, whether such Indebtedness or guarantee now exists or is created after the date hereof, which default results in the acceleration of such Indebtedness prior to its stated maturity or is caused by a failure to pay principal of, or interest or premium, if any, on such Indebtedness prior to the expiration of the grace period provided in such Indebtedness on the date of such default, which default has, or is reasonably expected to have, a Material Adverse Effect on the Co mpany which default continues for a period of 10 days after written notice by the Purchaser;

 

(e) a final nonappealable judgment or final nonappealable judgments for the payment of money in excess of $25,000 are entered by a court or courts of competent jurisdiction against the Company and such judgment or judgments (to the extent not covered by insurance) remain undischarged for a period (during which execution shall not be effectively stayed) of 60 days; or a final nonappealable judgment or final nonappealable judgments for the payment of money or for the rescission of the sale of securities of the Company are entered by a court or courts of competent jurisdiction against the Company, or the Company enters into a settlement arrangement that includes the redemption, repurchase or cancellation of any securities of the C ompany, with respect to an action filed by a security holder of the Company alleging that the Company violated Section 5 of the Securities Act in connection with the offering and sale of the Notes and the Warrants hereunder, in each case under this subsection (e) which has, or is reasonably expected to have, a Material Adverse Effect on the Company; and/or

 

(f) the Company pursuant to or within the meaning of Bankruptcy Law:  (1) commences a voluntary case, (2) consents to the entry of an order for relief against it in an involuntary case, (3) consents to the appointment of a custodian of it or for all or substantially all of its property, (4) makes a general assignment for the benefit of its creditors, or (5) generally cannot pay its debts as they become due, and/or (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that is for relief against the Company in an involuntary case.

 

The Company shall deliver written Notice to the Purchaser within three Business Days after any Officer of the Company has knowledge of the occurrence of any event that, with the giving of notice or the lapse of time or both, would become an Event of Default under this Section 6.1.

 

SECTION 6.2 Acceleration.  If any Event of Default occurs with respect to the Company, the Applicable Accrued Value of all outstanding Notes, together with any premium and accrued interest thereon, shall be due and payable immediately without further action or notice.  The Majority Purchasers may on behalf of all of the Purchasers rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of Applicable Accrued Value, interest or premium that has become due solely because of the acceleration) have been cured or waived.< /div>