COMMON STOCK PURCHASE AGREEMENT DATED AS OF OCTOBER 1, 2012 BY AND BETWEEN CYCLONE POWER TECHNOLOGIES, INC. AND GEM GLOBAL YIELD FUND LIMITED TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

This COMMON STOCK PURCHASE AGREEMENT (this “Agreement”), dated as of October 1, 2012, is made by and between Cyclone Power Technologies, Inc., a Florida corporation (the “Company”) and GEM Global Yield Fund Limited, a company incorporated under the laws of the Cayman Islands (the “Purchaser”).

 

 

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Purchaser and the Purchaser shall purchase up to a maximum of Two Million Five Hundred Thousand Dollars ($2,500,000) of the Company’s common stock, $0.0001 par value per share (the “Common Stock”).

 

NOW, THEREFORE, the parties hereto agree as follows:

 

 

 

Section 1.1   Definitions.

 

(a)            “Aggregate Limit” shall have the meaning assigned to such term in Section 2.1 hereof.

 

(b)           “Articles” shall have the meaning assigned to such term in Section 3.1(c) hereof.

 

(c)           “Bylaws” shall have the meaning assigned to such term in Section 3.1(c) hereof.

 

(d)           “Commission” shall mean the Securities and Exchange Commission or any successor entity.

 

(e)           “Commission Documents” shall mean, as of a particular date, all reports, schedules, forms, statements and other documents filed by the Company with the Commission pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange Act, and shall include all information contained in such filings and all filings incorporated by reference therein.

 

(f)           “Common Stock” shall have the meaning assigned to such term in the Recitals.

 

(g)           “Daily Closing Price” shall mean the closing bid price of the Common Stock, as recorded by the Principal Market, on a particular day.

 

(h)           “Draw Down” means the transactions contemplated under Section 6.1 of this Agreement.

 

 

(i)           “Draw Down Amount” means the actual amount of proceeds to be paid by the Purchaser and received by the Company on the Settlement Date in connection with a Draw Down.

 

(j)           “Draw Down Amount Requested” shall mean the amount of a Draw Down requested by the Company in its Draw Down Notice as provided in Section 6.1(h) hereof.

 

(k)           “Draw Down Exercise Date” shall have the meaning assigned to such term in Section 6.1(h) hereof.

 

(l)           “Draw Down Limit” shall have the meaning assigned to such term in Section 6.1(a) hereof.

 

(m)           “Draw Down Notice” shall mean a notice sent by the Company to exercise a Draw Down as provided in Section 6.1(h) hereof.

 

(n)           “Draw Down Pricing Period” shall mean a period of ten (10) consecutive Trading Days commencing with the first Trading Day designated in the Draw Down Notice, or such other period mutually agreed upon by the Purchaser and the Company.

 

(o)           “Effective Date” shall mean the date of the execution and delivery this Agreement.

 

(p)           “Environmental Laws” shall have the meaning assigned to such term in Section 3.1(r) hereof.

 

(q)           “Event Period” shall have the meaning assigned to such term in Section 7.2 hereof.

 

(r)           “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder.

 

(s)           “GAAP” shall mean generally accepted accounting principles in the United States of America as applied by the Company.

 

(t)           “Indebtedness” shall have the meaning assigned to such term in Section 3.1(k) hereof.

 

(u)           “Investment Period” shall have the meaning assigned to such term in Section 7.1 hereof.

 

(v)           “Market Capitalization” shall be calculated on the Trading Day preceding each Draw Down Pricing Period and shall be the product of (x) the number of shares of Common Stock outstanding and (y) the closing bid price of the Common Stock, both as determined by Bloomberg Financial LP using the DES and HP functions.

 

(w)           “Material Adverse Effect” shall mean any effect on the business, operations, properties or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement in any material respect.

 

 

(x)           “Material Agreements” shall have the meaning assigned to such term in Section 3.1(s) hereof.

 

(y)           “Material Change in Ownership” shall mean that (i) the owners of 5% or more of the outstanding Common Stock and (ii) the Company’s officers and directors, shall beneficially own in the aggregate less than 15% of the outstanding Common Stock.

 

(z)           “Other Financing” shall have the meaning assigned to such term in Section 4.10(b) hereof.

 

(aa)         “Plan” shall have the meaning assigned to such term in Section 3.1(y) hereof.

 

(bb)         “Principal Market” shall mean the OTC Bulletin Board or any U.S. national securities exchange on which the Common Stock is traded.

 

(cc)          “Purchase Price” shall have the meaning assigned to such term in Section 6.1(a) hereof.

 

(dd)          “Registration Statement” shall mean the registration statement on Form S-1 under the Securities Act, to be filed by the Company with the Commission with respect to the registration of the Shares to be issued under the Draw Downs, pursuant to the Registration Rights Agreement attached hereto as Exhibit A hereto (the “Registration Rights Agreement”).

 

(ee)           “Securities Act” shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder.

 

(ff)            “Settlement Date” shall have the meaning assigned to such term in Section 6.1(d) hereof.

 

(gg)          “Shares” shall mean, collectively, the registered shares of Common Stock of the Company issuable to the Purchaser upon exercise of any Draw Down and those shares of Common Stock issuable to the Purchaser upon exercise of the Warrants.

 

(hh)          “Significant Subsidiary” shall have the meaning assigned to such term in Section 3.1(g) hereof.

 

(ii)            “Subsidiary” shall mean any corporation or other entity of which at least a majority of the securities or other ownership interest having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by the Company and/or any of its other subsidiaries.

 

(jj)            Threshold Price” is the lowest price at which the Company may sell Shares during a Draw Down Pricing Period, as set forth in the Draw Down Notice.

 

 

(kk)          “Trading Day” shall mean a trading day on the Principal Market.

 

(ll)            “Warrants” shall have the meaning assigned to such term in Section 4.3 hereof.

 

 

Section 2.1   Purchase and Sale of Stock.  Subject to the terms and conditions of this Agreement, the Company shall issue and sell to the Purchaser and the Purchaser shall purchase from the Company during the Investment Period (as defined in Section 7.1) up to a maximum of $2,500,000 of Common Stock (the “Aggregate Limit”) on a firm commitment basis. The aggregate dollar amount of all Draw Down Amounts pursuant to the terms and conditions of this Agreement shall not exceed the Aggregate Limit.

 

Section 2.2   The Shares.  The Company has or will have authorized and has or will have reserved, and covenants to continue to so reserve once reserved, free of preemptive rights and other similar contractual rights of stockholders, a sufficient number of its authorized but unissued shares of its Common Stock to cover the Shares to be issued in connection with all Draw Downs requested under this Agreement and to be issued in connection with the exercise of the Warrants, in any case prior to the issuance to the Purchaser of such Shares under this Agreement.

 

Section 2.3   Registration Statement.  The Company shall prepare and file an S-1 Registration Statement with the Commission in accordance with the provisions of the Securities Act and the Registration Rights Agreement.

 

Section 2.4   Purchase Price and Effective Date.  In consideration of and in express reliance upon the representations, warranties, covenants, terms and conditions of this Agreement, the Company agrees to issue and sell to the Purchaser, and the Purchaser agrees to purchase, that number of the Shares to be issued in connection with each Draw Down in accordance with the terms and conditions of this Agreement.

 

Section 2.5   Current Report. As soon as practicable, but in any event not later than 5:30 p.m. (New York time) on the fourth Trading Day immediately following the Effective Date, the Company shall file with the Commission a report on Form 8-K relating to the transactions contemplated by, and describing the material terms and conditions of, this Agreement (the “Current Report”). The Current Report shall include a copy of this Agreement as an exhibit. The Company heretofore has provided the Purchaser a reasonable opportunity to comment on a draft of such Current Report and has given due consideration to such comments.

 

 

Section 3.1   Representations and Warranties of the Company.  The Company hereby makes the following representations and warranties to the Purchaser as of the date hereof and as of the Effective Date:

 

 

(a)           Organization, Good Standing and Power.  The Company is a corporation duly incorporated, validly existing and in good standing under the laws of Florida and has the requisite corporate power to own, lease and operate its properties and assets and to conduct its business as it is now being conducted.  Except as set forth in Schedule 3.1(a), as of the Effective Date, the Company does not have any Subsidiaries.  The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary except for any jurisdiction in which the failure to be so qualified will not have a Material Adverse Effect.

 

(b)           Authorization, Enforcement.  The Company has the requisite corporate power and authority to enter into and perform this Agreement and to issue and sell the Shares in accordance with the terms hereof.  Except for approvals of the Company’s Board of Directors  or a committee thereof as may be required in connection with any issuance and sale of Shares to the Purchaser hereunder, the execution, delivery and performance of this Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action, and, except as contemplated by Section 2.2, no further consent or authorization of the Company or its Board of Directors or stockholders is required.  This Agreement has been duly executed and delivered by the Company.  This Agreement constitutes, or shall constitute when executed and delivered, a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application.

 

(c)           Capitalization.  The authorized capital stock of the Company and the shares thereof issued and outstanding as of the Effective Date are set forth in the Commission Documents or on Schedule 3.1(c) attached hereto.  All of the outstanding shares of Common Stock have been duly and validly authorized, and are fully paid and nonassessable. Except as set forth in Schedule 3.1(c), as of the Effective Date, no shares of Common Stock are entitled to preemptive rights or registration rights and there are no outstanding options, warrants, scrip, rights to subscribe to, call or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company.  Furthermore, except as set forth in Schedule 3.1(c), there are no contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of the capital stock of the Company or options, securities or rights convertible into shares of capital stock of the Company.  Except for customary transfer restrictions contained in agreements entered into by the Company in order to sell restricted, as of the Effective Date, the Company is not a party to, and it has no knowledge of, any agreement restricting the voting or transfer of any shares of the capital stock of the Company.  The offer and sale of all capital stock, convertible securities, rights, warrants, or options of the Company issued prior to the Effective Date complied in all material respects with all applicable federal and state securities laws, and no stockholder has a right of rescission or damages with respect thereto which would have a Material Adverse Effect.  The Company has furnished or made available to the Purchaser true and correct copies of the Company’s Certificate of Incorporation as in effect on the Effective Date (the “Articles”), and the Company’s Bylaws as in effect on the Effective Date (the “Bylaws”).

 

 

(d)           Issuance of Shares.  The Shares to be issued under this Agreement have been or will be (prior to issuance to the Purchaser hereunder) duly authorized by all necessary corporate action and, when paid for or issued in accordance with the terms hereof, the Shares shall be validly issued and outstanding, fully paid and nonassessable, and the Purchaser shall be entitled to all rights accorded to a holder of Common Stock.

 

(e)           No Conflicts.  The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated herein do not (i) violate any provision of the Company’s Articles or Bylaws, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company is a party, (iii) create or impose a lien, charge or encumbrance on any property of the Company under any agreement or any commitment to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, or (iv) result in a violation of any federal, state, local or foreign statute, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries are bound or affected, except, in all cases, for such conflicts, defaults, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect.  The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement, or issue and sell the Shares to the Purchaser in accordance with the terms hereof (other than any filings which may be required to be made by the Company with the Commission or the Principal Market subsequent to the Effective Date, including the Registration Statement and any registration statement, amendment, prospectus or prospectus supplement which may be filed pursuant hereto); provided, however, that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the representations, warranties and agreements of the Purchaser herein.

 

(f)           Commission Documents, Financial Statements.  The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and, as of the Effective Date the Company has timely filed all Commission Documents.  The Company has delivered or made available to the Purchaser true and complete copies of the Commission Documents filed with the Commission since March 31, 2012 and prior to the Effective Date.  The Company has not provided to the Purchaser any information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed, other than with respect to the transactions contemplated by this Agreement.  As of their respective filing dates, the Commission Documents complied in all material respects with the requirements of the Exchange Act and other federal, state and local laws, rules and regulations applicable to it, and, as of its date, the Commission Documents did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the Commission Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto.  Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements), and fairly present in all material respects the financial position of the Company and its subsidiaries as of 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 year-end audit adjustments).

 

 

(g)           No Material Adverse Effect or Material Change in Ownership.  Since the filing of the March 31, 2012 Form 10-Q, no Material Adverse Effect or any Material Change in Ownership has occurred or exists with respect to the Company.

 

(h)           No Undisclosed Liabilities. Neither the Company nor any of its subsidiaries has any liabilities, obligations, claims or losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise) that would be required to be disclosed on a balance sheet of the Company or any Subsidiary (including the notes thereto) in conformity with GAAP and are not disclosed in the Commission Documents.

 

(i)           No Undisclosed Events or Circumstances.  No event or circumstance has occurred or exists with respect to the Company or its subsidiaries or their respective businesses, properties, prospects, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.

 

(j)           Indebtedness.  The Commission Documents as of the date hereof and the Effective Date set forth all outstanding secured and unsecured Indebtedness of the Company, or for which the Company or any Subsidiary has commitments through such date.  For the purposes of this Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed money or amounts owed in excess of $1,000,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations in respect of Indebtedness of others in excess of $1,000,000, whether or not the same are or should be reflected in the Company’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (c) the present value of any lease payments in excess of $1,000,000 due under leases required to be capitalized in accordance with GAAP.  Neither the Company nor any Subsidiary is in default with respect to any Indebtedness.

 

(k)           Title To Assets.  Except as set forth in Schedule 3.1(k), each of the Company and its Subsidiaries has good and marketable title to all of their respective real and personal property reflected in the Commission Documents, free of any mortgages, pledges, charges, liens, security interests or other encumbrances, except for those that do not or would not have a Material Adverse Effect.  All said real property leases of the Company are valid and subsisting and in full force and effect in all material respects.

 

(l)           Actions Pending.  There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary which questions the validity of this Agreement or the transactions contemplated hereby or any action taken or to be taken pursuant hereto or thereto.  There is no action, suit, claim, investigation or proceeding pending or, to the knowledge of the Company, threatened, against or involving the Company, any Subsidiary or any of their respective properties or assets and which, if determined adversely to the Company or its Subsidiary, would have a Material Adverse Effect.

 

 

(m)           Compliance With Law.  The business of the Company and the subsidiaries has been and is presently being conducted in all material respects in accordance with all applicable federal, state and local governmental laws, rules, regulations and ordinances, except as, individually or in the aggregate, do not or would not have a Material Adverse Effect.  The Company and each of its subsidiaries have all franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals necessary for the conduct of its business as now being conducted by it, except where the failure to possess such franchises, permits, licenses, consents and other governmental or regulatory authorizations and approvals, individually or in the aggregate, do not or would not have a Material Adverse Effect.

 

(n)           Certain Fees.  No brokers, finders or financial advisory fees or commissions will be payable by the Company or any Subsidiary with respect to the transactions contemplated by this Agreement; except that finder’s fee will be payable to GEMIA Inc., and Gulf Partners LLC, or their respective affiliated entities, in connection with this transaction.

 

(o)           Disclosure.  Neither this Agreement nor the Commission Documents or any other documents, certificates or instruments furnished to the Purchaser by or on behalf of the Company in connection with the transactions contemplated by this Agreement contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made herein or therein, in the light of the circumstances under which they were made herein or therein, not misleading.

 

(p)           Operation Of Business.  The Company or one or more of its subsidiaries owns or controls all patents, trademarks, service marks, trade names, copyrights, licenses and authorizations of the Company as set forth in the Commission Documents, and all rights with respect to the foregoing, which are necessary for the conduct of its business as now conducted without, to the Company’s knowledge, any conflict with the rights of others, except to the extent that any such conflict would not have a Material Adverse Effect.

 

(q)           [Intentionally Omitted].

 

(r)           Material Agreements.  The Company is not a party to any written or oral contract, instrument, agreement, commitment, obligation, plan or arrangement, a copy of which would be required to be filed with the Commission as an exhibit to an annual report on Form 10-K (collectively, “Material Agreements”) which has not been filed in the Commission Documents.  The Company has in all material respects performed all the obligations required to be performed by them to date under the Material Agreements, have received no notice of default by the Company thereunder and, to the best of the Company’s knowledge, are not in default under any Material Agreement now in effect, the result of which would have a Material Adverse Effect.

 

 

(s)           Transactions With Affiliates.  Except as set forth in the Commission Documents, there are no loans, leases, agreements, contracts, royalty agreements, management contracts or arrangements or other continuing transactions exceeding $100,000 between (a) the Company or any Subsidiary, on the one hand, and (b) any person or entity who would be covered by Item 404(a) of Regulation S-K, on the other hand.

 

(t)           Securities Act.  The Company will comply in all material respects with all applicable federal and state securities laws in connection with the offer, issuance and sale of the Shares hereunder.  The Company will comply, when so filed, in all material respects with the provisions of the Securities Act.  The Commission has not issued any order preventing or suspending the use of the Registration Statement.  The Registration Statement, in the form in which it will become effective, and also in such form as it may be amended or supplemented from time to time, will comply in all material respects with the provisions of the Securities Act and will not at any such time contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein in the light of the circumstances under which they are made, not misleading.  The Company has not distributed and, prior to the completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the related prospectus or other materials, if any, permitted by the Securities Act.

 

(u)           Employees.  As of the date hereof and as of the Effective Date, the Company does not have any collective bargaining arrangements or agreements covering any of its employees.  As of the date hereof and as of the Effective Date, no officer, consultant or key employee of the Company whose termination, either individually or in the aggregate, would have a Material Adverse Effect, has terminated or, to the knowledge of the Company, has any present intention of terminating his or her employment or engagement with the Company.

 

(v)           Use of Proceeds.  The proceeds from the sale of the Shares will be used by the Company for general corporate purposes including for acquisitions and working capital.

 

(w)           Investment Company Act Status.  The Company is not, and as a result of and immediately upon Effective Date will not be, an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

 

(x)           ERISA.  No liability to the Pension Benefit Guaranty Corporation has been incurred with respect to any Plan by the Company or any of its subsidiaries which is or would have a Material Adverse Effect.  The execution and delivery of this Agreement and the issue and sale of the Shares will not involve any transaction which is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975 of the Internal Revenue Code of 1986, as amended.  As used in this Section 3.1(y), the term “Plan” shall mean an “employee pension benefit plan” (as defined in Section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any Subsidiary or by any trade or business, whether or not incorporated, which, together with the Company or any Subsidiary, is under common control, as described in Section 414(b) or (c) of the Code.

 

(y)           (Intentionally Omitted).

 

(z)           Acknowledgment Regarding Purchaser’s Purchase of Shares.  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 hereunder.  The Company further acknowledges that the 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 hereunder and any advice given by the Purchaser or any of its representatives or agents in connection with this Agreement and the transactions contemplated hereunder is merely incidental to the Purchaser’s purchase of the Shares.

 

Section 3.2   Representatives and Warranties of the Purchaser.  The Purchaser hereby makes the following representations and warranties to the Company:

 

(a)           Organization and Standing of the Purchaser.  The Purchaser is a company duly incorporated, validly existing and in good standing under the laws of the Cayman Islands.

 

(b)           Authorization and Power.  The Purchaser has the requisite corporate power and authority to enter into and perform this Agreement and to purchase the Shares in accordance with the terms hereof.  The execution, delivery and performance of this Agreement by Purchaser and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action, and no further consent or authorization of the Purchaser, its Board of Directors or stockholders is required.  This Agreement has been duly executed and delivered by the Purchaser.  This Agreement constitutes, or shall constitute when executed and delivered, a valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership, or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of general application.

 

(c)           No Conflicts.  The execution, delivery and performance of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby and thereby or relating hereto do not and will not (i) result in a violation of such Purchaser’s charter documents or bylaws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Purchaser is a party, (iii) create or impose or lien, charge or encumbrance on any property of the Purchaser under any agreement or any commitment to which the Purchaser is party or by which the Purchaser is bound or by which any of its respective properties or assets are bound, or (iv) result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to the Purchaser or its properties, except for such conflicts, defaults and violations as would not, individually or in the aggregate, prohibit or otherwise interfere with the ability of the Purchaser to enter into and perform its obligations under this Agreement in any material respect.  The Purchaser is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or to purchase the Shares in accordance with the terms hereof; provided, however, that for purposes of the representation made in this sentence, the Purchaser is assuming and relying upon the accuracy of the representations, warranties and agreements of the Company herein.

 

 

(d)           Accredited Investor.  The Purchaser is an “accredited investor” as defined in Regulation D promulgated under the Securities Act.

 

(e)           Financial Risks. The Purchaser acknowledges that it is able to bear the financial risks associated with an investment in the Shares. The Purchaser is capable of evaluating the risks and merits of an investment in the Shares by virtue of its experience as an investor and its knowledge, experience, and sophistication in financial and business matters and the Purchaser is capable of bearing the entire loss of its investment in the Shares.

 

(f)           Information.  The Purchaser and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Shares which have been requested by the Purchaser.  The Purchaser and its advisors, if any, have been afforded the opportunity to ask questions of the Company.  The Purchaser has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Shares.  The Purchaser understands that it (and not the Company) shall be responsible for its own tax liabilities that may arise as a result of this investment or the transactions contemplated by this Agreement.

 

The Company covenants with the Purchaser, and the Purchaser covenants with the Company, as follows, which covenants of one party are for the benefit of the other party, during the Investment Period.

 

Section 4.1   Securities Compliance.

 

(a)           The Company shall notify the Commission and the Principal Market, if applicable, in accordance with their rules and regulations, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Shares to the Purchaser. The Company agrees that it shall, within the time required under the Exchange Act file a report on Form 8-K disclosing this Agreement and the transaction contemplated hereby.

 

(b)           The Company shall take such action, if any, as is reasonably necessary in order to obtain an exemption for or to qualify any subsequent resale of the Shares by the Investor, in each case, under applicable securities or “Blue Sky” laws of the states of the United States in such states as is reasonably requested by the Investor from time to time, and shall provide evidence of any such action so taken to the Investor.

 

Section 4.2   Registration and Listing.  The Company will take all action necessary to cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all material respects with its reporting and filing obligations under the Exchange Act and take all action necessary to maintain compliance with such reporting and filing obligations, and will not take any action or file any document (whether or not permitted by the Securities Act) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under the Exchange Act or Securities Act, except as permitted herein.  The Company will take all action necessary to continue the listing or trading of its Common Stock and the listing of the Shares purchased by Purchaser hereunder on Principal Market or any relevant market or system, if applicable, and will comply in all respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Principal Market or any relevant market or system.

 

 

Section 4.3   Warrant.  On the Effective Date, the Company shall deliver to the Purchaser a common stock purchase warrant, in the form attached hereto as Exhibit B (the “Warrant”), to purchase up to 5,000,000 shares of Common Stock at an exercise price per share of $0.27, with an expiration date that is the fifth anniversary of the Effective Date, subject to the terms and conditions of the Warrant, including the vesting schedule set forth therein.  The Company shall issue additional warrants to the Purchaser, pursuant to terms agreed upon by both parties, after the Company has issued, and the Purchaser has purchased, $2 million dollars worth of Common Stock through the exercise of Draw Downs.

 

Section 4.4   Registration Rights Agreement.  The Company and the Purchaser shall enter into the Registration Rights Agreement with respect to the Shares, dated the Effective Date, in the form of Exhibit A attached hereto.

 

Section 4.5   Compliance with Laws.

 

(a)           The Company shall comply with all applicable laws, rules, regulations and orders (including without limitation Rule 415(a)(4) under the Securities Act) noncompliance with which would have a Material Adverse Effect.

 

(b)           The Purchaser shall comply with all applicable laws, rules, regulations and orders in connection with this Agreement and the transactions contemplated hereby.  Without limiting the foregoing, the Purchaser shall comply with the requirements of the Securities Act and the Exchange Act including without limitation Rule 415(a)(4) under the Securities Act and Rule 10b-5 and Regulation M under the Exchange Act.

 

Section 4.6   Keeping of Records and Books of Account.  The Company shall keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied, reflecting all financial transactions of the Company, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made.

 

Section 4.7   Limitations on Holdings and Issuances.  Notwithstanding anything in this Agreement to the contrary, at no time may the Company issue, and at no time shall the Purchaser be obligated to purchase, any Shares which would result in the Purchaser beneficially owning, directly or indirectly, at the time of such proposed issuance more than 4.9% of the number of shares of Common Stock issued and outstanding as of the date of such proposed issuance; provided, however, that upon the Purchaser providing the Company with sixty-one (61) days notice (pursuant to Section 9.4 hereof) (the "Waiver Notice") that the Purchaser would like to waive this Section 4.7 with regard to any or all Shares issuable pursuant to this Agreement, this Section 4.7 will be of no force or effect with regard to all or a portion of the Shares referenced in the Waiver Notice until the date that the Purchaser notifies the Company (pursuant to Section 9.4 hereof) that the Purchaser revokes the Waiver Notice; provided, further, that during the sixty-one (61) day period prior to the expiration of the Investment Period, the Purchaser may waive this Section 4.7 by providing a Waiver Notice at any time during such sixty-one (61) day period.

 

 

Section 4.8   Registration Statement. Within 30 days of the Effective Date, the Company shall cause the Registration Statement to be filed and seek that it be declared effective pursuant to the terms of the Registration Rights Agreement.  The Registration Statement shall register with the Commission the Shares to be issued under the Draw Downs. The Purchaser shall not be obligated to accept a Draw Down request from the Company unless the Registration Statement is then effective and the prospectus included in the Registration Statement is then current and in compliance with all applicable rules.

 

Section 4.9   Other Agreements and Other Financings.

 

(a)           The Company shall not enter into any agreement in which the terms of such agreement would restrict or impair the right to perform of the Company or any Subsidiary under this Agreement or the Articles.

 

(b)           The Company shall not enter into any agreement, the principal purpose of which is to secure an Other Financing (as defined below) during the Investment Period.  “Other Financing” shall mean an “equity line” that is substantially similar to the financing provided for under this Agreement.

 

Section 4.10   Stop Orders.  The Company will advise the Purchaser promptly and, if requested by the Purchaser, will confirm such advice in writing: (i) of the Company’s receipt of notice of any request by the Commission for amendment of or a supplement to the Registration Statement, any related prospectus or for additional information; (ii) of the Company’s receipt of notice of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) of the Company becoming aware of the happening of any event, which makes any statement of a material fact made in the Registration Statement (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement (as then amended or supplemented) in order to state a material fact required by the Securities Act to be stated therein or necessary in order to make the statements therein not misleading.  If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make commercially reasonable efforts to obtain the withdrawal of such order at the earliest possible time.

 

Section 4.11   Selling Restrictions; Volume Limitations.

 

(a)           The Purchaser covenants that during the Investment Period neither the Purchaser nor any of its affiliates nor any entity managed by the Purchaser will, directly or indirectly, sell any securities of the Company except the Shares that it owns or has the right to purchase pursuant to the provisions of a Draw Down Notice.  During the Investment Period, neither the Purchaser nor any of its affiliates nor any entity managed by the Purchaser will enter into a short position with respect to shares of Common Stock of the Company, including in any account of the Purchaser’s or in any account directly or indirectly managed by the Purchaser or any affiliate of the Purchaser or any entity managed by the Purchaser.  During the Investment Period, the Purchaser shall not grant any option to purchase or acquire any right to dispose or otherwise dispose for value of any shares of Common Stock or any securities convertible into, or exchangeable for, or warrants to purchase, any shares of Common Stock, or enter into any swap, hedge or other agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, except for such sales permitted by the preceding two sentences.  In addition, on a daily Trading Day basis, the Purchaser agrees to restrict the volume of sales of Shares by the Purchaser, its affiliates and any entity managed by the Purchaser to no more than ten percent (10%) (or such other percentage based on the length of the Draw Down Pricing Period) of the Shares purchased pursuant to such Draw Down Notice.

 

 

(b)           In addition to the foregoing, in connection with any sale of the Company’s securities (including any short sale permitted by the preceding paragraph), the Purchaser shall comply in all respects with all applicable laws, rules, regulations and orders, including, without limitation, the requirements of the Securities Act and the Exchange Act, including, without limitation, Rule 415(a)(4) under the Securities Act and Regulation M and Rule 10b-5 under the Exchange Act.

 

Section 4.12   Structuring Fee.

 

(a)            The Purchaser will receive a structuring fee from the Company equal to one and one half percent (1.5%) of the Aggregate Limit. Twenty-five percent (25%) of the Fee shall be payable on the Settlement Date of the first four (4) Drawn Downs provided the full Fee is paid  within 12 months from the filing of the Registration Statement. The Company may choose to pay any Fee or portion thereof in common stock at a price equal to the Purchase Price as set forth in Section 6.1 at the time such Fee is due.

 

Section 4.13   Non-Public Information.  Neither the Company nor any of its directors, officers or agents shall disclose any material non-public information about the Company to the Purchaser.

 

Section 4.14   DWAC Eligibility.  The Company shall use its reasonable best efforts to cause the Common Stock and its transfer agent to be, at the time of each Draw Down, eligible to participate in the DWAC system (“DWAC Eligible”).

 

 

Section 5.1   Opinion of Counsel and Certificate.  In connection with the execution and delivery of this Agreement, the Purchaser has received (i) an opinion of outside counsel to the Company, dated the Effective Date, in the form of Exhibit C hereto, and (ii) a certificate from the Company, dated the Effective Date, in the form of Exhibit D hereto.

 

Section 5.2   Conditions Precedent to the Obligation of the Company to Sell the Shares.  The obligation hereunder of the Company to issue and sell the Shares to the Purchaser under any Draw Down Notice is subject to the satisfaction or waiver of each of the conditions set forth below.  These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion.

 

 

(a)           Accuracy of the Purchaser’s Representations and Warranties.  Except for representations and warranties that are expressly made as of a particular date, the representations and warranties of the Purchaser in this Agreement shall be true and correct in all material respects as of the date when made and as of each Draw Down Exercise Date and each Settlement Date as though made at that time.

 

(b)           Registration Statement.  The Company shall have the necessary amount of Shares available to be registered pursuant to the Registration Rights Agreement.  The Company shall take all reasonable steps to have the Registration Statement declared effective by the Commission. There shall be no stop order suspending effectiveness of the Registration Statement.

 

(c)           Performance by the Purchaser.  The Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser at or prior to each Draw Down Exercise Date and each Settlement Date, as applicable.

 

(d)           No Injunction.  No statute, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

(e)           No Suspension, Etc.  Trading in the Common Stock shall not have been suspended by the Commission or  Principal Market, and, at any time prior to each Draw Down Exercise Date and applicable Settlement Date, none of the events described in clauses (i), (ii) and (iii) of Section 4.11 hereof shall have occurred, trading in securities generally as reported on the Principal Market shall not have been suspended or limited, nor shall a banking moratorium have been declared either by the United States or State authorities, nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of the Company, makes it impracticable or inadvisable to issue the Shares.

 

(f)           No Proceedings or Litigation.  No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against the Company or any of the officers, directors or affiliates of the Company seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

 

Section 5.3   Conditions Precedent to the Obligation of the Purchaser To Accept a Draw Down and Purchase the Shares.  The obligation hereunder of the Purchaser to accept a Draw Down and to acquire and pay for the Shares is subject to the satisfaction or waiver, at or before each Draw Down Exercise Date and each Settlement Date, of each of the conditions set forth below.  The conditions are for the Purchaser’s sole benefit and may be waived by the Purchaser at any time in its sole discretion.

 

 

(a)           Accuracy of the Company’s Representations and Warranties.  Except for representations and warranties that are expressly made as of a particular date, each of the representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Draw Down Exercise Date, as though made at that time, including, without limitation, under Section 3.1(h) hereof.

 

(b)           Registration Statement.  The Company shall have the necessary amount of Shares registered pursuant to the Registration Rights Agreement.  The Company shall take all reasonable steps to have the Registration Statement on Form S-1 declared effective by the Commission.  There shall be no stop order suspending effectiveness of the Registration Statement.

 

(c)           No Suspension.  Trading in the Common Stock shall not have been suspended by the Commission or Principal Market, and, at any time prior to such Draw Down Exercise Date, trading in securities generally as reported on the Principal Market shall not have been suspended or limited, nor shall a banking moratorium have been declared either by the United States or State authorities, nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of the Purchaser, makes it impracticable or inadvisable to issue the Shares.

 

(d)           Performance by the Company.  The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to each Draw Down Exercise Date and each Settlement Date and shall have delivered the Compliance Certificate substantially in the form attached hereto as Exhibit E.

 

(e)           No Material Adverse Effect or Material Change in Ownership.  No Material Adverse Effect or Material Change in Ownership shall have occurred to the Company.

 

(f)           No Injunction.  No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement.

 

(g)           No Proceedings or Litigation.  No action, suit or proceeding before any arbitrator or any governmental authority shall have been commenced, and no investigation by any governmental authority shall have been threatened, against the Company or any subsidiary, or any of the officers, directors or affiliates of the Company or any subsidiary seeking to restrain, prevent or change the transactions contemplated by this Agreement, or seeking damages in connection with such transactions.

 

(h)           Aggregate Limit.  The issuance and sale of the Shares issuable pursuant to such Draw Down Notice will not violate Section 6.2 hereof.

 

(i)            Shares Authorized.  The Shares issuable pursuant to such Draw Down Notice will have been duly authorized by all necessary corporate action of the Company.

 

 

(j)            Due Diligence. Prior to each Settlement Date and from time to time as reasonably requested by the Purchaser, the Company shall make available for inspection and review by the Purchaser, its advisors and representatives, and any underwriter participating in any disposition of the Shares on behalf of the Purchaser pursuant to the Registration Statement, any amendment, prospectus or prospectus supplement thereto, or any blue sky, FINRA or other filing, all financial and other records, all documents and filings with the Commission, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review.  In addition, the Company shall cause its officers, directors and employees to supply all such information reasonably requested by the Purchaser or any such representative, advisor or underwriter and to respond to all questions and other inquiries reasonably made or submitted by any such individuals or entities.

 

(k)           Opinion of Counsel.  Subsequent to the effective date of the Registration Statement and prior to the first Draw Down under this Agreement, the Purchaser shall have received an opinion of counsel to the Company in substantially the form set forth as Exhibit F hereto or as otherwise reasonably acceptable to the Purchaser’s counsel.

 

 

Section 6.1   Draw Down Terms.  Subject to the satisfaction of the conditions set forth in this Agreement, and subject to Section 6.2 below, the parties agree (unless otherwise mutually agreed upon by the parties in writing) as follows:

 

(a)           The Company may, in its sole discretion, issue a Draw Down Notice (as defined in Section 6.1(h) hereof) for a specified Draw Down Amount Requested.  The Purchaser shall be obligated to accept the Draw Down Notice, provided that the Purchaser, in its sole discretion, shall not be obligated to accept more than fifty percent (50%) of the Draw Down Amount Requested and shall have the option to purchase up to two hundred percent (200%) of the Draw Down Amount Requested.  Subject to Section 6.1(g) below, the Purchaser shall pay a per Share amount equal to ninety percent (90%) of the weighted average Daily Closing Price during the Draw Down Pricing Period (the “Purchase Price”).  Subject to Section 4.7 hereof, the Draw Down Amount Requested shall not exceed four hundred percent (400%) (the “Draw Down Limit”) of the average daily trading volume for the ten (10) Trading Days immediately preceding the Draw Down Exercise Date.

 

(b)           Prior to commencement of the Draw Down Pricing Period, the Company shall deliver the Shares to be purchased in such Draw Down to the Purchaser.  If Shares delivered to the Purchaser prior to commencement of the Draw Down Pricing Period are delivered in certificated form and not DWAC Eligible, then the Drawing Down Pricing Period shall not begin until the Shares are cleared by an appointed clearing agent.

 

(c)           Only one Draw Down shall be allowed in each Draw Down Pricing Period.

 

(d)           Each Draw Down shall be settled on the first Trading Day after the end of each Draw Down Pricing Period (the “Settlement Date”).

 

(e)           At the end of each Draw Down Pricing Period, the Purchaser’s total Draw Down commitment under this Agreement shall be reduced by the total amount of the Draw Down Amount for such Draw Down Pricing Period.

 

 

(f)           Each Draw Down will automatically expire immediately after the last Trading Day of each Draw Down Pricing Period.

 

(g)          If the Daily Closing Price on a given Trading Day in the Draw Down Pricing Period, multiplied by ninety percent (90%), is less than the Threshold Price, then the total amount of the Draw Down Amount Requested will be reduced by 1/10th (or such other fraction based on the length of the Draw Down Pricing Period) and no Shares will be purchased or sold with respect to such Trading Day, unless otherwise agreed by the Parties.

 

(h)          As a condition to exercise of any Draw Down, the Company must (i) provide a notice to the Purchaser of the Company’s exercise of any Draw Down via facsimile transmission before commencement of trading on the first Trading Day of the Draw Down Pricing Period covered by such notice (the “Draw Down Notice”), substantially in the form attached hereto as Exhibit G and (ii) deliver the Shares to the Purchaser or its designees via DWAC, if the Company is approved for DWAC in an amount equal to the Draw Down Amount Requested (which amount shall be adjusted in the event that the amount accepted by the Purchaser pursuant to Section 6.1(a) hereof is different that the Draw Down Amount Requested).  The date the Company delivers the Draw Down Notice and the Shares in accordance with this Section 6.1(h) shall be a “Draw Down Exercise Date.”  The Draw Down Notice shall specify the Draw Down Amount Requested, set the Threshold Price for such Draw Down and designate the first Trading Day of the Draw Down Pricing Period that the Company wishes to grant to the Purchaser during the Draw Down Pricing Period.

 

(i)           On each Settlement Date, the Purchaser shall provide the Company a closing notice in the form of Exhibit G attached hereto and shall make payment for the Shares acquired pursuant to this Agreement to the Company’s designated account by wire transfer of immediately available funds, provided that the Shares were received by the Purchaser in accordance with 6.1(b) hereof.

 

(j)           If the Company tenders a Draw Down by delivering a Draw Down Notice to the Purchaser, and the Purchaser fails to make payment for the shares on the Settlement Date, the Shares issuable upon exercise of the Warrants and the structuring fee to be paid to the Purchaser pursuant to Section 4.12 shall be reduced by the percentage amount equal to the quotient of the Draw Down Amount divided by $2,000,000, but only if Purchaser does not make payment for the shares within three (3) Trading Days after notice thereof by the Company to Purchaser.

 

Section 6.2   Aggregate Limit.  Notwithstanding anything to the contrary herein, in no event may the Company issue a Draw Down Notice to the extent that the sale of shares of Common Stock pursuant thereto and pursuant to all prior Draw Down Notices issued hereunder would cause the Company to sell or the Purchaser to purchase shares of Common Stock which in the aggregate are in excess of the Aggregate Limit.  If the Company issues a Draw Down Notice that otherwise would permit the Purchaser to purchase shares of Common Stock which would cause the aggregate purchases by Purchaser hereunder to exceed the Aggregate Limit, such Draw Down Notice shall be void ab initio to the extent of the amount by which the dollar value of shares or number of shares, as the case may be, of Common Stock otherwise issuable pursuant to such Draw Down Notice or together with the dollar value of shares or number of shares, as the case may be, of all other Common Stock purchased by the Purchaser pursuant hereto would exceed the Aggregate Limit.

 

 

 

Section 7.1   Term, Termination by Mutual Consent.  Unless earlier terminated as provided hereunder, this Agreement shall terminate automatically on the earlier of (i) twenty four (24) consecutive months from the Effective Date (the “Investment Period”) and (ii) the date the Purchaser shall have purchased the Aggregate Limit.  This Agreement may be terminated at any time by mutual written consent of the parties, effective as of the date of such mutual written consent unless otherwise provided in such written consent.

 

Section 7.2    Other Termination.  The Company shall inform the Purchaser, and the Purchaser shall have the right to terminate this Agreement within the subsequent thirty (30) days (the “Event Period”), effective upon written notice to the Company under Section 9.4 in the Event Period, if during the Investment Period (x) the Company enters into a definitive agreement with any third party, the principal purpose of which is to secure any equity line financing which provides for an Other Financing as defined in 4.9(b) above, or (y) an event resulting in a Material Adverse Effect or Material Change in Ownership has occurred.  In such event, the Purchaser may terminate this Agreement upon one (1) business day’s prior written notice during the Event Period.

 

Section 7.3   Effect of Termination.  In the event of termination by the Company or the Purchaser, written notice thereof shall forthwith be given to the other party as provided in Section 9.4 and the transactions contemplated by this Agreement shall be terminated without further action by either party.  If this Agreement is terminated as provided in Section 7.1 or 7.2 herein, this Agreement shall become void and of no further force and effect, except as provided in Section 9.9 hereof.  Nothing in this Section 7.3 shall be deemed to release the Company or the Purchaser from any liability for any breach under this Agreement, or to impair the rights of the Company and the Purchaser to compel specific performance by the other party of its obligations under this Agreement.

 

 

Section 8.1 General Indemnity.

 

(a)           Indemnification by the Company.  The Company will indemnify and hold harmless the Purchaser, GEM and each person who controls the Purchaser or GEM within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act from and against any losses, claims, damages, liabilities and expenses (including reasonable costs of defense and investigation and all attorneys’ fees) to which the Purchaser, GEM and each such controlling person may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities and expenses (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained, or incorporated by reference, in the Registration Statement relating to Common Stock being sold to the Purchaser (including any prospectus relating thereto), or any amendment or supplement to it, or (ii) the omission or alleged omission to state in the Registration Statement or any document incorporated by reference in the Registration Statement, a material fact required to be stated therein or necessary to make the statements therein not misleading.  Pursuant to Section 8.2 hereof, the Company will reimburse the Purchaser, GEM and each such controlling person promptly upon demand for any legal or other costs or expenses reasonably incurred by the Purchaser, GEM or such controlling person in investigating, defending against, or preparing to defend against any such claim, action, suit or proceeding.

 

 

(b)           Indemnification by the Purchaser.  The Purchaser will indemnify and hold harmless the Company, each of its directors and officers, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act from and against any losses, claims, damages, liabilities and expenses (including reasonable costs of defense and investigation and all attorneys fees) to which the Company and each such controlling person may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities and expenses (or actions in respect thereof) arise out of or are based upon (i) an untrue statement, alleged untrue statement, omission or alleged omission, included in the Registration Statement in reliance upon, and in conformity with, written information furnished by the Purchaser to the Company for inclusion in the Registration Statement, or (ii) the omission or alleged omission to state in the Registration Statement a material fact required to be stated therein or necessary to make the statements therein not misleading, to the extent, but only to the extent, the untrue statement, alleged untrue statement, omission or alleged omission was made in reliance upon, and in conformity with, written information furnished by the Purchaser to the Company for inclusion in the Registration Statement.  Pursuant to Section 8.2 hereof, the Purchaser will reimburse the Company and each such director, officer or controlling person promptly upon demand for any legal or other costs or expenses reasonably incurred by the Company or the other person in investigating, defending against, or preparing to defend against any such loss, claim, damage, liability or expense.

 

Section 8.2   Indemnification Procedures.  Promptly after a person receives notice of a claim or the commencement of an action for which the person intends to seek indemnification under Section 8.1, the person will notify the indemnifying party in writing of the claim or commencement of the action, suit or proceeding; provided, however, that failure to notify the indemnifying party will not relieve the indemnifying party from liability under Section 8.1, except to the extent it has been materially prejudiced by the failure to give notice.  The indemnifying party will be entitled to participate in the defense of any claim, action, suit or proceeding as to which indemnification is being sought, and if the indemnifying party acknowledges in writing the obligation to indemnify the party against whom the claim or action is brought, the indemnifying party may (but will not be required to) assume the defense against the claim, action, suit or proceeding with counsel satisfactory to it.  After an indemnifying party notifies an indemnified party that the indemnifying party wishes to assume the defense of a claim, action, suit or proceeding, the indemnifying party will not be liable for any legal or other expenses incurred by the indemnified party in connection with the defense against the claim, action, suit or proceeding except that if, in the opinion of counsel to the indemnifying party, one or more of the indemnified parties should be separately represented in connection with a claim, action, suit or proceeding, the indemnifying party will pay the reasonable fees and expenses of one separate counsel for the indemnified parties.  Each indemnified party, as a condition to receiving indemnification as provided in Section 8.1, will cooperate in all reasonable respects with the indemnifying party in the defense of any action or claim as to which indemnification is sought.  No indemnifying party will be liable for any settlement of any action effected without its prior written consent.  No indemnifying party will, without the prior written consent of the indemnified party, effect any settlement of a pending or threatened action with respect to which an indemnified party is, or is informed that it may be, made a party and for which it would be entitled to indemnification, unless the settlement includes an unconditional release of the indemnified party from all liability and claims which are the subject matter of the pending or threatened action.

 

 

If for any reason the indemnification provided for in this Agreement is not available to, or is not sufficient to hold harmless, an indemnified party in respect of any loss or liability referred to in Section 8.1 as to which it is entitled to indemnification thereunder, each indemnifying party will, in lieu of indemnifying the indemnified party, contribute to the amount paid or payable by the indemnified party as a result of such loss or liability, (i) in the proportion which is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and by the indemnified party on the other from the sale of Shares which is the subject of the claim, action, suit or proceeding which resulted in the loss or liability or (ii) if that allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits of the sale of such Shares, but also the relative fault of the indemnifying party and the indemnified party with respect to the statements or omissions which are the subject of the claim, action, suit or proceeding that resulted in the loss or liability, as well as any other relevant equitable considerations.

 

 

 

 

 

If to the Company:

Cyclone Power Technologies Inc.

601 NE 26th Court

Pampano Beach, FL 33064

Attn: Christopher Nelson, President and General Counsel

With copies to:

Joel Mayersohn, Esq.

Roetzel & Andress

350 East Las Olas Boulevard

Las Olas Centre II, Suite 1150

P.O. Box 30310

Fort Lauderdale, FL ###-###-####

Direct Dial Number: 954 ###-###-####

Main Phone Number: 954 ###-###-####

Fax: 954 ###-###-####

 

If to the Purchaser:

GEM Global Yield Fund Limited

c/o CM Group

Commerce House

1 Bowring Road

Ramsey

Isle of Man

IM8 2LQ

 

With copies to:

Kramer Levin Naftalis & Frankel LLP

1177 Avenue of the Americas

New York, New York 10036

Telephone Number:   ###-###-####

Fax:   ###-###-####

Attention:  Christopher S. Auguste, Esq.

 

 

 

 

Section 9.6   Headings.  The article, section and subsection headings in this Agreement are for convenience only and shall not constitute a part of this Agreement for any other purpose and shall not be deemed to limit or affect any of the provisions hereof.

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officer as of the date first above written.

 

 

 

 

 

 

 

 

Warrants (as of June 1, 2012):

 

Total Outstanding                                           Avg. Exercise Price

 

 

 

 

 

 

 

 

(see attached)

(see attached)

 

 

Law Firm of Christopher M. Nelson

1182 Canoe Point

Delray Beach, FL 33444

October 1, 2012

Re:           $2,500,000 Aggregate Offering of Common Stock of Cyclone Power Technologies Inc.

Ladies and Gentlemen:

 

We have acted as special counsel to Cyclone Power Technologies Inc., a Florida corporation (the “Company”), in connection with the Common Stock Purchase Agreement dated as of October 1, 2012 between you and the Company (the “Purchase Agreement”).  This letter is being furnished to you pursuant to Section 5.1 of the Purchase Agreement.

 

As such counsel, we have examined such matters of fact and questions of law as we have considered appropriate for purposes of this letter.  We have examined, among other things, the following:  the Certificate of Incorporation and Bylaws of the Company and certain resolutions of the Board of Directors of the Company relating to the Purchase Agreement and the transactions contemplated thereby.

 

As to facts material to the opinions, statements and assumptions expressed herein, we have, with your consent, relied upon oral or written statements and representations of officers and other representatives of the Company and others. We have not independently verified such factual matters.

 

We are opining herein as to the effect on the subject transaction only of the Florida Corporation Law, and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or any other laws, or as to any matters of municipal law or the laws of any local agencies within any state.

 

Subject to the foregoing and the other matters set forth herein, it is our opinion that, as of the date hereof:

 

1.           The Company and each of its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary except for any jurisdiction in which the failure to be so qualified will not have a Material Adverse Effect.

 

 

2.           The execution of, and performance of the obligations under, the Purchase Agreement, and the issuance and sale of the Shares by the Company pursuant to the Purchase Agreement will not, as of the date hereof:  (i) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation to which the Company is a party, (ii) create or impose a lien, charge or encumbrance on any property of the Company under any agreement or any commitment to which the Company is a party or by which the Company is bound or by which any of its respective properties or assets are bound, (iii) to my knowledge, result in a violation of any federal or state order, judgment or decree applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries are bound or affected, except, in all cases, for such conflicts, defaults, terminations, amendments, acceleration, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect, (iv) violate the Company’s Governing Documents; (v) violate any federal or New York statute, rule or regulation applicable to the Company; or (vi) require any consents, approvals, or authorizations to be obtained by the Company, or any registrations, declarations or filings to be made by the Company, in each case, under any federal or New York statute, rule or regulation applicable to the Company that have not been obtained or made.

 

3.           There is no action, suit, claim, investigation or proceeding pending or, to my knowledge, threatened against the Company or any Subsidiary which questions the validity of the Purchase Agreement or the transactions contemplated hereby or any action taken or to be taken pursuant hereto or thereto.  There is no action, suit, claim, investigation or proceeding pending or, to my knowledge, threatened, against or involving the Company, any Subsidiary or any of their respective properties or assets and which, if determined adversely to the Company or its Subsidiary, would have a Material Adverse Effect.

 

4.           The execution, delivery and performance of the Purchase Agreement have been duly authorized by all necessary corporate action of the Company, and the Purchase Agreement has been duly executed and delivered by the Company.

 

This letter is furnished only to you in your capacity as purchaser under the Purchase Agreement and is solely for your benefit in connection with the transactions covered hereby.  This letter may not be relied upon by you for any other purpose, or furnished to, assigned to, quoted to, or relied upon by any other person, firm or other entity for any purpose (including any person, firm or other entity that acquires Shares from you) without our prior written consent, which may be granted or withheld in our sole discretion. I am a member of the Bar of the State of Florida. To the extent that New York law is stated in this letter, I am assuming that such law is materially similar to Florida law; but I make no legal opinion to New York law.

 

Very truly yours, Law Firm of Christopher M. Nelson /s/ Christopher Nelson Christopher Nelson, For the Firm

 

 

October 1, 2012

 

The undersigned, Cyclone Power Technologies Inc., a Florida corporation (the “Company”), delivers this certificate in connection with the Common Stock Purchase Agreement, dated as of October 1, 2012 (the “Agreement”), by and among the Company and GEM Global Yield Fund (the “Purchaser”), and hereby certifies on the date hereof, that (capitalized terms used herein without definition have the meanings assigned to them in the Agreement):

 

1.           Attached hereto as Exhibit A is a true, complete and correct copy of the Certificate of Incorporation of the Company as filed with the Secretary of State of the State of Florida.  The Certificate of Incorporation of the Company has not been further amended or restated, and no document with respect to any amendment to the Certificate of Incorporation of the Company has been filed in the office of the Secretary of State of the State of Florida since the date shown on the face of the state certification relating to the Company’s Certificate of Incorporation, which is in full force and effect on the date hereof, and no action has been taken by the Company in contemplation of any such amendment or the dissolution, merger or consolidation of the Company.

 

2.           Attached hereto as Exhibit B is a true and complete copy of the Bylaws of the Company, as amended and restated through, and as in full force and effect on, the date hereof, and no proposal for any amendment, repeal or other modification to the Amended and Restated By-laws of the Company has been taken or is currently pending before the Board of Directors or stockholders of the Company.

 

3.           The Board of Directors of the Company has approved the transactions contemplated by the Agreement; said approval has not been amended, rescinded or modified and remains in full force and effect as of the date hereof.

 

4.           Each person who, as an officer of the Company, or as attorney-in-fact of an officer of the Company, signed (i) the Agreement and (ii) any other document delivered prior hereto or on the date hereof in connection with the transactions contemplated by the Agreement, was duly elected, qualified and acting as such officer or duly appointed and acting as such attorney-in-fact, and the signature of each such person appearing on any such document is his genuine signature.

 

IN WITNESS WHEREOF, I have signed my name as of the date first above written.

 

In connection with the issuance of shares of common stock of Cyclone Power Technologies, Inc. (the “Company”) pursuant to the Draw Down Notice, dated ___________, delivered by the Company to GEM Global Yield Fund (the “Purchaser”) pursuant to Article VI of the Common Stock Purchase Agreement dated as of October 1, 2012, by and between the Company and GEM  Global Yield Fund (the “Agreement”), the undersigned hereby certifies as follows:

 

1.           The undersigned is the duly elected ______________ of the Company.

 

2.           Except as set forth in the attached Schedule, the representations and warranties of the Company set forth in Section 3.1 of the Agreement are true and correct in all material respects as though made on and as of the date hereof, except for representations and warranties that speak as of a particular date.

 

3.           The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Draw Down Exercise Date and the Settlement Date related to the Draw Down Notice and has complied in all material respects with all obligations and conditions contained in Section 5.3 of the Agreement.

 

Capitalized terms used but not otherwise defined herein shall have the meanings assigned to them in the Agreement.

 

The undersigned has executed this Certificate this _____ day of _________, ____.

 

By:                                                                              Name:                                                                         Title:

 

Reference is made to the Common Stock Purchase Agreement dated as of ______, 2012, (the “Purchase Agreement”) by and between Cyclone Power Technologies, Inc., a Florida corporation (the “Company”) and GEM Global Yield Fund Limited, a company incorporated under the laws of the Cayman Islands.  Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement.

 

In accordance with and pursuant to Section 6.1 of the Purchase Agreement, the Company hereby issues this Draw Down Notice to exercise a Draw Down request for the Draw Down Amount indicated below.

 

Draw Down Amount:
Draw Down Pricing Period start date:
Draw Down Pricing Period end date:
Settlement Date:
Draw Down Threshold Price:
Dollar Amount and Number of Shares of Common Stock Currently Unissued under the Registration Statement:
Dollar Amount and Number of Shares of Common Stock Currently Available under the Aggregate Limit:

 

 

To:	[The Company]

 

 

 

We refer to the common stock purchase agreement (the "Agreement") dated [●] 2012 between us, GEM Global Yield Fund Limited and yourselves and to the Draw Down Notice delivered to us on [●] 20[●].  Terms defined in the Agreement have the same meaning herein.

 

We hereby give you notice pursuant to Section 6.1(i) of the Agreement that we accept the Draw Down Notice, being [●] per cent. of the Draw Down Amount stated therein.  [The reason that such number of shares of Common Stock represents a smaller/greater number than the number of shares of Common Stock set forth in the Draw Down Notice is as follows: [●].]

 

The average of the Closing Bid Prices in the Pricing Period (excluding any Closing Bid Prices pursuant to Section 6.1(g)) is [●] and the resulting Purchase Price is [●] ([●] per cent. of such average Closing Bid Price).  The aggregate Purchase Price pursuant to this Closing Notice is therefore [●].  Copy extracts from Bloomberg showing each of the Closing Bid Prices during the Pricing Period are attached.

 

Please deliver such shares of Common Stock in accordance with the following instructions: [●].

 

Electronic book entry transfer requested (check one) (1) YES ____ NO _____

 

[CREST] Participant ID:_____________________

 

[CREST] Account ID:__________________

 

 

 

Signed by: __________________________

 

Name: _____________________________

 

Date: ______________________________

 

For and on behalf of

 

Gem Global Yield Fund Limited