Securities Exchange Agreement between NextPhase Wireless, Inc. and Investors (Series A Preferred Stock)

1.1 Exchange of Securities for the Consideration.  Upon the terms and subject to the conditions set forth herein, and in reliance upon the respective representations and warranties of the parties set forth herein, the Company hereby agrees to issue to each Investor at Closing (as defined herein) that number of shares of the Preferred Stock set forth in the column entitled “Preferred Stock Amount” opposite such Investor’s name on Schedule I attached hereto, aggregating that total number of shares of the Preferred Stock set forth in the column entitled “Preferred Stock Amount” on Schedule I attached hereto for all Investors (the “Shares”) for a purchase price per share of $10.00 (the “Purchase Price”), and such Investor agrees to transfer, assign and deliver to the Company that amount of the Consideration set forth on the column entitled “Total Consideration” opposite such Investor’s name on Schedule I attached hereto.

1.2 Closing.  The closing of the exchange of the Consideration for the Preferred Stock hereunder (the “Closing”) will take place at the principal office of the Company or another place as shall be mutually agreed by the Company and the Investors.  The Closing shall take place on September 30, 2008 at 11:59 pm local time (“Closing Date”).  Documents requiring a party's signature may be delivered electronically at or prior to the Closing, and each Investor covenants to promptly after the Closing forward originally-signed copies of such documents to the Company.  Each party agrees to, and not to contest, the validity and enforceability of all documents delivered electronically.  Each party agrees that all deliveries made in connection with the Closing pursuant to this Section 1.2 shall be deemed to occur and be exchanged simultaneously, even if the Investors and the Company may make such deliveries by means other than in person.  At the Closing:

 

(a) the Company will deliver to each Investor (i) a certificate representing shares of the Preferred Stock in the amount set forth opposite such Investor's name in the column entitled “Preferred Stock Amount” on Schedule 1 attached hereto, and, if applicable, such amount shall reflect interest accrued to and including the Closing Date; (ii) a copy of the Certificate of Designation of the Preferred Stock certified by an officer of the Company (to be followed within two business days by a file-stamped by the office of the Nevada Secretary of State); (iii) certified resolutions of the Board of Directors of the Company authorizing the transactions contemplated by this Agreement and the execution and delivery of the documents contemplated by this Agreement, and (iv) such further documents and instruments as may be reasonably requested by such Investor in order to carry out the terms and provisions of this Agreement; and

 

(b) each Investor will deliver or will have delivered to the Company (i) the Notes, if any, or Cash; (ii) an instrument executed by such Investor cancelling the Notes or Payables, as the case may be, and waiving any interest accruing after the Closing Date, substantially in the form attached hereto as Exhibit B, (iii) releases and terminations of any security for the Notes or Payables in form and substance reasonably acceptable to the Company, (iv) certification on Form W-9 of the Investor's taxpayer identification number, (v) such information as is acceptable to the Company to document and confirm the Investor's investor qualifications; and (vi) such further documents and instruments as may be reasonably requested by the Company in order to carry out the terms and provisions of this Agreement.  The Company's making of the deliveries under Section 1.2(a) shall be deemed not to waive any of the deliveries required by this Section 1.2(b); and each Investor shall make all such deliveries either at or promptly after the Closing and, in any case, immediately upon request of the Company.

The obligation of each Investor to exchange its portion of the Consideration for its portion of the Preferred Stock at the Closing is subject to the fulfillment of each of the following conditions:

 

2.1 Representations and Warranties Correct.  The representations and warranties made by the Company in Article III shall be true and correct when made and shall be true and correct as of the Closing as if made at the Closing.

 

2.2 Performance.  All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Company at or prior to the Closing shall have been performed or complied with.

 

2.3 Approval.  The Company's Board of Directors shall have approved and adopted resolutions authorizing the execution, delivery and performance by the Company of this Agreement, the issuance of the Securities and the transactions contemplated hereby and thereby.

 

2.4 Due Diligence.  The Investor shall have become satisfied with (a) the information received from or made available by the Company and all other relevant information obtained by the Investor relevant to a decision to invest in the Company's Securities and (b) the extent and scope of the information made available by the Company at the Investor's request.

 

2.5 No Material Adverse Change.  There shall not have occurred any material adverse change in the Company's business or financial condition, exclusive of any changes in the general economy or business environment that do not selectively affect the Company.

 

2.6 Invention Assignments and Confidentiality Agreements.  The Company shall have entered into assignment of inventions and confidentiality agreements with each of its key employees.

 

2.7 Consent to Amendment of Articles.  The Board of Directors of the Company shall have approved and recommended to the Company's shareholders, and Thomas Hemingway (“Hemingway”) and Robert Ford (“Ford”) shall have consented in writing and granted to an acceptable representative of the Investors, an irrevocable proxy to consent in writing or by vote, to approve and adopt an amendment of the Articles of Incorporation of the Company (the “Amendment”) that changes the number of authorized shares of Common Stock from ten million (10,000,000) to fifty million (50,000,000) and makes no other change.  The voting power of Hemingway and Ford shall be sufficient to approve the Amendment if voted in favor of the Amendment together with the voting power of the holders of the Preferred Stock immediately after the Closing.

3.1 Organization, Good Standing and Qualification.  The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada.  The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to so qualify, individually or in the aggregate, would not have, or would not reasonably be expected to have, a Material Adverse Effect.  The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement and the other Transaction Agreements, and to issue and sell the Shares and the Conversion Shares, to carry out the provisions of this Agreement and the other Transaction Agreements and to carry on its business as presently conducted and as presently proposed to be conducted.

 

3.2 Authorization; Binding Obligations.  All corporate action on the part of the Company, its stockholders, officers and directors necessary for the authorization of this Agreement and the other Transaction Agreements, the performance of all obligations of the Company hereunder and thereunder at the Closing and as contemplated thereafter, and the authorization, sale, issuance and delivery of the Shares pursuant hereto and the Conversion Shares pursuant to the Charter shall have been taken on or prior to the Closing.  This Agreement is, and the Transaction Agreements, when executed and delivered, will be, valid and binding obligations of the Company, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, and (b) general principles of equity that restrict the availability of equitable remedies.  The offer and sale of the Shares, and the Common Stock issuable upon conversion of the Shares, are not subject to any preemptive rights or rights of first refusal.

(a) The authorized capital stock of the Company immediately prior to the Closing consists of 10,000,000 shares of Common Stock, $0.001 par value per share, and 20,000,000 shares of Preferred Stock, $0.001 par value per share, of which 600,000 shares are designated Series A Preferred Stock.

 

(b) There are 6,571,181 shares of Common Stock outstanding as of September 29, 2008.  After giving effect to the filing of the Charter and immediately after the Closing, there will be outstanding not more than 600,000 shares of Series A Preferred Stock.  There are 36,778 shares of Common Stock reserved for issuance under outstanding stock options (the “Current Options”), 38,000 shares of Common Stock reserved for issuance upon exercise of outstanding warrants and 223,034 shares of Common Stock reserved for issuance under outstanding convertible promissory notes, including interest accrued as of September 30, 2008.  The Company has reserved 2,000,000 shares of Common Stock for issuance under the Plan.  The Company has no other shares of capital stock authorized, issued or outstanding.

 

(c) All issued and outstanding shares of Common Stock (i) have been duly authorized and validly issued, (ii) are fully paid and non-assessable, and (iii) were issued in compliance with all applicable state and federal laws concerning the issuance of such securities.  All other securities, including convertible notes and warrants, were issued in compliance with all applicable state and federal laws concerning the issuance of such securities.

 

(d) Other than as set forth in Section 3.3(b) above and on Section 3.3 of the Schedule of Exceptions, there are no (i) outstanding options, warrants, rights (including conversion, exchange or preemptive rights or rights of first refusal) or Contracts of any kind for the purchase or acquisition from the Company of any of its securities, (ii) Contracts for acceleration or other changes in the vesting provisions or other terms of such Contract as the result of any merger, consolidation, sale of stock or assets, change in control or any other transaction(s) by or involving the Company or (iii) proxy or shareholder voting agreements with respect to the voting of equity securities of the Company.

 

(e) When issued pursuant to this Agreement and the Charter, the Shares and the Conversion Shares will be validly issued, fully paid and non-assessable, and will be free of any liens or encumbrances and any preemptive rights or rights of first refusal; provided, however, that the Shares and the Conversion Shares may be subject to restrictions on transfer under state and/or federal securities laws at the time a transfer is proposed.  The rights, preferences, privileges and restrictions of the Series A Preferred Stock, including the Shares, are as stated in the Charter.

 

(f) Except as required pursuant to the Registration Rights Agreement, the Company is presently not under any obligation, and has not granted any rights, to register under the Securities Act of 1933, as amended (the “Securities Act”), any of the Company’s presently outstanding securities or any of its securities that may hereafter be issued.

 

(g) Section 3.3(g) contains a list of all convertible securities that are subject to anti-dilution protection and the current conversion price.  Since the inception of the Company, there are no convertible securities outstanding, the conversion price of which has been or should have been adjusted pursuant to anti-dilution protection (except for proportional adjustments in the event of stock splits, stock dividends, or other customary adjustments for mergers and the like).  There are no convertible securities outstanding that will be subject to an anti-dilution conversion price adjustment in connection with the transactions contemplated by this Agreement.

 

(h) As of the date of this Agreement, all equity incentive plans of the Company previously implemented have been modified such that no further grants thereunder are permitted and, except as to any previously outstanding awards, there are no equity incentive plans currently in place.  Substantially all of the options issued under such previous equity incentive plans have been cancelled or terminated prior to exercise and only the Current Options are outstanding.  A list of such Current Options and the related option holder, as well as the date of termination or expiration of each such Current Option is set forth on Section 3.3(h) of the Schedule of Exceptions.

 

(i) As of the date of this Agreement, Thomas Hemingway is the only executive officer of the Company who holds shares of capital stock of the Company.

 

3.4 Offering Valid.  Assuming the accuracy of the representations of the Investors in Article IV of this Agreement and subject to the filings described in Section 3.8 below, the Shares and the Conversion Shares will be issued in compliance with all registration, qualification or similar requirements of applicable federal and state securities laws.  Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Shares to any person or persons so as to bring the sale of such Shares by the Company to the Investors within the registration provisions of the Securities Act or any state securities laws.

 

3.5 Corporate Records; Minute Books.  True, correct and complete copies of the Company's Charter (prior to adoption of the Certificate of Designation), Bylaws and all amendments thereto are available to each Investor for review on the SEC web site at http://www.sec.gov.  Such Charter and By-laws are in full force and effect.  The minute books of the Company have been made available to the Investors or their counsel and contain a complete summary of all meetings and actions by written consent of directors and stockholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects.  The stock ledger of the Company has been made available to the Investors or their counsel and is complete and reflects all insurances, transfers, repurchases and cancellations of shares of capital stock of the Company.

 

3.6 Subsidiaries.  The Company does not own or control, directly or indirectly, any interest in any other corporation, association, partnership, limited liability company or other entity. The Company is not a participant in any joint venture, partnership or similar arrangement.

 

 

 

3.7 Compliance with Other Instruments.  The Company is not in violation or default (a) of any term of its certificate of incorporation or by-laws, (b) of any provision of any Contract to which it is party or by which it is, or any of its properties or assets are, bound or (c) of any judgment, decree, order, writ, statute, rule or regulation applicable to the Company or any of its properties or assets.  The execution, delivery, and performance of and compliance with this Agreement and the other Transaction Agreements, and the issuance and sale of the Shares pursuant hereto and the Conversion Shares pursuant to the Charter, will not, with or without the passage of time or giving of notice, result in any such violation, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or non-renewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties.

 

3.8 Consents.  No consent, approval, order, or authorization of, or registration, qualification, designation, declaration, or filing with, any federal, state, or local governmental authority or any other Person on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for (a) the filing of the Charter with the Secretary of State of the State of Nevada; (b) any filings or compliance required under applicable state “blue sky” laws, which filings or compliance will be effected in accordance with such laws; and (c) any filings under the Securities Act of 1933, including the filing of a Form D.

 

3.9 Litigation.  There is no action, suit, proceeding or investigation pending or, to the Company’s knowledge, currently threatened against or directly affecting the Company that questions the validity of this Agreement or the other Transaction Agreements or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result in, either individually or in the aggregate, an adverse effect on the assets (including intangible assets), condition (financial or otherwise), affairs, business, property, prospects or results of operations of the Company, nor is the Company aware that there is any basis for the foregoing.  There is no action, suit, proceeding or investigation by the Company pending or which the Company intends to initiate.

 

3.10 Compliance with Laws.  No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and or the other Transaction Agreements and the issuance of the Shares or the Conversion Shares except such as have been duly and validly obtained or filed, or with respect to any filings that must be made after each Closing, as will be filed in a timely manner.  The Company is in compliance with and has not violated, in any material respect, any applicable provisions of any laws, statutes, ordinances or regulations, and the Company is in compliance with the terms of any judgments, orders, decrees, injunctions or writs applicable to the Company or its properties or assets.

 

3.11 Financial Statements.  The audited financial statements of the Company contained in its Form 10-KSB filed with the Securities and Exchange Commission (“SEC”) on July 15, 2008 and unaudited financial statements of the Company contained in its Form 10-Q filed with the SEC on August 19, 2008 (“Financial Statements”) are available to Investor for review on the SEC web site at http://www.sec.gov.  The Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods indicated, except that the unaudited Financial Statements may not contain all footnotes required by GAAP.  The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject in the case of the unaudited Financial Statements to normal year-end audit adjustments. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with GAAP.

 

3.12 Absence of Undisclosed Liabilities.  Except as and to the extent reflected or reserved against in the Financial Statements and except for liabilities or obligations arising in the ordinary course of business since June 30, 2008, there are no liabilities or obligations of the Company of any kind whatsoever, whether interest-bearing indebtedness or liabilities or obligations accrued, contingent, absolute, determined, determinable, known, unknown or otherwise.

 

3.13 Changes.  Since June 30, 2008, there has not been any event or condition of any type that has caused or would reasonably be expected to cause a Material Adverse Effect, excluding general economic conditions.

 

3.14 Material Contracts.  True, correct and complete copies of each Material Contract are available to each Investor for review on the SEC web site at http://www.sec.gov.  Each such Material Contract is the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, and (b) general principles of equity that restrict the availability of equitable remedies.  The Company has not assigned, mortgaged, pledged, encumbered or otherwise hypothecated any of its rights, title and interest under any Material Contract.  There has not occurred any material breach, violation or default or any event that, with the lapse of time, the giving of notice or the election of any Person, or any combination thereof, would constitute a material breach, violation or default by the Company under any such Material Contract or by any other Person to any such Material Contract.  The Company has not been notified that any party to any Material Contract intends to amend, cancel, terminate, not renew or exercise an option under any Material Contract, whether in connection with the transactions contemplated hereby or otherwise.

 

 

 

3.15 Intellectual Property.  The Company owns or possesses sufficient legal rights to all Company Intellectual Property without any known conflict with, or infringement of, the rights of others.  To the Company's knowledge, no product or service marketed or sold (or proposed to be marketed or sold) by the Company violates or will violate any license or infringes or will infringe any Intellectual Property of any other Person.  Other than with respect to commercially available software products under standard end-user object code license agreements and commercially available hardware products under patent or contractual restrictions, there are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the Company Intellectual Property, nor is the Company bound by or a party to any Contracts with respect to the Intellectual Property of any other Person.  The Company has not received any communications alleging that the Company has violated or, by conducting its business as presently conducted or as presently proposed to be conducted, would violate any of the Intellectual Property of any other Person.  The Company is not aware that any of its employees is obligated under any Contract (including, without limitation, any licenses, covenants or commitments of any nature) or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company’s business as presently conducted or as presently proposed to be conducted.  Neither the execution nor delivery of this Agreement or the other Transaction Agreements, nor the carrying on of the Company’s business by the employees of the Company, nor the conduct of the Company’s business as presently conducted or as presently proposed to be conducted, will conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, any Contract, under which any of such employees is now obligated.  The Company has obtained and possesses valid licenses to use all of the software programs present on the computers and other software-enabled electronic devices that it owns or leases or that it has otherwise provided to its employees for their use in connection with the Company’s business.  To the Company’s knowledge, it will not be necessary to use any inventions of any of its employees, consultants or independent contractors (or Persons it currently intends to hire) made prior to their employment by or performance of services for, the Company.  Each employee, consultant and independent contractor has assigned to the Company all Intellectual Property he, she or it owns that are related to the Company’s business as presently conducted and as presently proposed to be conducted.

(a) Subject to Section 3.16 of the Schedule of Exceptions, the Company has good and marketable title to its properties and assets necessary for its business as presently conducted and as presently proposed to be conducted clear of any defects in title which could materially impair the Company’s ownership or use of such property or assets and free of any liens, claims or encumbrances.  With respect to the property and assets it leases, the Company is in material compliance with such leases and holds a valid leasehold interest, free of any liens, claims or encumbrances.  The Company does not own any real property.

 

(b) All machinery, equipment, furniture, fixtures and other personal property and all buildings, structures and other facilities, if any, including, without limitation, office or other space used by the Company in the conduct of its business, are in good operating condition and fit for operation in the ordinary course of business (subject to normal wear and tear) except for any defects which will not interfere with the conduct of normal operations of the Company.

 

3.17 Permits.  The Company has, and is in material compliance with, the terms of, all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as presently conducted by it, the lack of which, individually or in the aggregate, could have a Material Adverse Effect, and the Company reasonably believes it can obtain any such franchises, permits, licenses or any similar authority for the conduct of its business as presently proposed to be conducted.

 

3.18 Environmental and Safety Laws.  The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety.  No material expenditures are or will be required in order to comply with any such existing statute, law or regulation.

 

3.19 Tax Returns and Payments.  The Company has duly and timely filed all returns and reports with respect to Taxes (“Tax Returns”) as required by law.  These Tax Returns, if any, are true and correct in all material respects.  The Company has paid all Taxes due and has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, stockholder or other Person.  All other Taxes due and payable by the Company on or before the Closing, have been paid or will be paid prior to the time they become delinquent.  The Company has delivered to each Investor correct and complete copies of all income Tax Returns of the Company since its inception.  The Company has no knowledge (a) that any of its Tax Returns have been or are being audited as of the date hereof, or (b) of any material dispute or claim concerning any Tax liability of the Company.  The Company has no knowledge of any liability for any Tax to be imposed upon it or its properties or assets as of the date of this Agreement that is not adequately provided for.  No claim has been made by a Tax authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to Tax in that jurisdiction, and to the knowledge of the Company, there is no valid basis for any such claim.

 

3.20 Insurance.  The Company has in full force and effect general commercial, product liability, fire and casualty insurance policies with extended coverage, in amounts and coverage reasonable for companies engaged in similar businesses as the Company.

 

 

 

3.21 Labor Agreements, Employment Terms and Relations.

 

(a) No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company.  To the Company’s knowledge, no employee of the Company or consultant or independent consultant with whom the Company has contracted, is in violation of any term of any employment or consulting contract, proprietary information agreement or any other Contract relating to the right of any such individual to be employed by, or to contract with, the Company.

 

(b) The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any Contract, with any labor union, and no labor union has requested or, to the Company’s knowledge, has sought to represent any of the employees, representatives or agents of the Company.  There is no strike or other labor dispute involving the Company pending, or to the Company’s knowledge, threatened, that could have a Material Adverse Effect, nor is the Company aware of any labor organization activity involving its employees or the employees of the Company.

 

(c) The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company.  The employment of each officer and employee of the Company is terminable at the will of the Company.  The Company has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment.

 

3.22 Employee Benefit Plans.  The Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.

 

3.23 Related Party Transactions.  Except as set forth in Section 3.23 of the Schedule of Exceptions, which provides a list of such indebtedness and a related description, including, but not limited to, the principal, interest and other material terms, no employee, officer, director, stockholder or consultant of the Company or member of his or her immediate family (i) is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them or (ii) has any direct or indirect ownership interest in any Person with which the Company is affiliated or with which the Company has a business relationship, or any Person that competes with the Company.

 

3.24 Executive Officers.  None of the employees of the Company has been (a) subject to voluntary or involuntary petition under the federal bankruptcy laws or any state insolvency law or the appointment of a receiver, fiscal agent or similar officer by a court for his business or property; (b) convicted in a criminal proceeding or named as a subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (c) subject to any order, judgment, or decree (not subsequently reversed, suspended, or vacated) of any court of competent jurisdiction permanently or temporarily enjoining him from engaging, or otherwise imposing limits or conditions on his engagement in any securities, investment advisory, banking, insurance, or other type of business or acting as an officer or director of a public company; or (d) found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any federal or state securities or unfair trade practices law, which such judgment or finding has not been subsequently reversed, suspended, or vacated.

 

3.25 Confidential Information and Invention Assignment Agreements.  Each current employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms made available to the counsel for the Investors (the “Confidential Information Agreements”).  No current or former employee has excluded works or inventions from his or her assignment of inventions pursuant to such key employee’s Confidential Information Agreement.  The Company is not aware that any of its key employees is in violation thereof.

3.26 Illegal Payments.  Neither the Company nor any director, officer, agent or employee of the Company has paid, caused to be paid, or agreed to pay, directly or indirectly, in connection with the Company: i) to any government or agency thereof, any agent or any supplier or customer, any bribe, kickback or other similar payment; ii) any contribution to any political party or candidate (other than from personal funds of directors, officers or employees not reimbursed by their respective employers or as otherwise permitted by applicable law); or iii) intentionally established or maintained any unrecorded fund or asset or made any false entries on any books or records for any purpose.

 

3.27 Brokers.  There is no investment banker, broker, finder, financial advisor or other Person which has been retained by or is authorized by the Company to act on behalf of the Company who is entitled to any fee or commission in connection with the transactions contemplated by this Agreement.  The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible.

 

3.28 Full Disclosure.  The Company provided the Investors with, or made available to them, all information requested by the Investors in connection with its decision to purchase the Shares, including all information the Company believes is reasonably necessary to make such investment decision.  Neither this Agreement, the attached schedules and exhibits, the other Transaction Agreements nor any other document delivered by the Company to the Investors or their attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, taken as a whole with all other disclosures given or made available, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.  There are no facts that (individually or in the aggregate) result in a Material Adverse Effect on the Company which have not been disclosed in the Schedule of Exceptions.

 

 

 

3.29 Definitions.  For purposes of Article III, the following terms have the respective meanings set forth below:

 

“Charter” means the Company's Articles of Incorporation as heretofore amended and as amended by the Certificate of Designation.

 

“Company Intellectual Property” means all Intellectual Property that is used in connection with the business of the Company as presently conducted or as presently proposed to be conducted and all Intellectual Property owned or licensed by the Company.

As a material inducement to the Company to enter into the transactions contemplated by this Agreement, each Investor, for itself and not for any other Investors, hereby represents and warrants to the Company:

 

4.1 Authorization; Power.  The Investor has all requisite legal power to enter into this Agreement and to carry out and perform its obligations under the term of this Agreement. All action on the part of the Investor necessary for the authorization, execution, delivery and performance by it of this Agreement and the consummation by it of the transactions contemplated hereby has been taken. This Agreement is the legal, valid and binding obligation of the Investor, enforceable against such Investor in accordance with its terms.

 

4.2 No Violation.  The execution and delivery of this Agreement by the Investor, the consummation by the Investor of the transactions provided for herein or contemplated hereby, and the fulfillment by the Investor of the terms hereof, will not (with or without notice or passage of time or both): (a) result in a default, give rise to any right of termination, cancellation or acceleration, or require any consent or approval under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, loan, license, agreement, lease or other instrument or obligation to which the Investor is a party or by which it or any of its assets may be bound, or (b) violate any law, judgment, order, writ, injunction, decree, statute, rule or regulation of any court, administrative agency, bureau, board, commission, office, authority, department or other governmental entity applicable to the Investor or any of its assets.

 

4.3 Acquiring Securities for Investment.

 

(a) The Investor will acquire the Securities for investment and not with a view to distributing all or any part thereof in any transaction that would constitute a “distribution” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”).

 

(b) The Investor acknowledges that (i) the Securities have not been registered under the Securities Act, and (ii) the Securities (and any other stock or securities issuable upon conversion or exercise thereof) may not be transferred without registration under the Securities Act or an exemption therefrom.

 

(c) The Investor is able to bear the complete loss of the Investor's investment in the Securities.

 

(d) The Investor has had the opportunity to ask questions of, and receive answers from, the Company and its management concerning its investment in the Securities, and has received information satisfactory to the Investor.  The Investor has had the opportunity to review all filings by the Company with the SEC, and the Investor is familiar with the risk factors described therein.

 

(e) The Investor is an “accredited investor” as defined under Regulation D of the Securities Act and, if the Investor is an entity, it is not an entity formed solely to make this investment.

 

(f) The Investor has the business and financial experience necessary to protect the Investor's interests in connection with this transaction and to evaluate the merits and risks of an investment in the Securities (and the Common Stock of the Company issuable upon conversion or exercise thereof).

 

4.4 Fees and Commissions.  The Investor has not made any agreement obligating the Company to pay any compensation to any finder, broker, advisor or representative (each, an “Intermediary”)in connection with the transactions contemplated by this Agreement, and the Investor agrees to indemnify and hold harmless the Company and each other Investor from any liability for any compensation to any Intermediary and any fees and expenses of defending against such liability or alleged liability that arises from the Investor's breach of this Section 4.4.

 

4.5 Consent to Amendment.  This Agreement and surrender of the Notes shall constitute consent in writing of the Investor to the approval, authorization and adoption of the Amendment.  This consent is intended to be as valid as if given by vote at a duly held meeting of the holders of the Preferred Stock.

5.1 Rights of Participation in Future Offerings.  Each Investor holding Preferred Stock or Common Stock issuable upon conversion thereof shall have the right to participate in future equity offerings of the Company in order to have an opportunity to maintain its equity interest in proportion to the number of shares of Common Stock it received or could acquire on conversion of Preferred Stock (“As-Converted Amount”) before the future equity offering divided by the sum of the number of shares of Common Stock outstanding before the future equity offering on a fully-diluted basis (not including convertible securities that have been reserved but are not issued and outstanding).  The Company shall provide each such Investor written notice of the terms of the future equity offering at least fifteen (15) calendar days prior to the last business day on which the Investor may elect to invest, and such notice shall specify the price and terms of the future equity offering and the maximum amounts of equity to which the holder can subscribe.  The right shall be exercised, if at all, by such Investor's delivery of payment and executed agreements in the same form as applicable to other investors in the offering.  The right shall expire as to an Investor as to a particular future equity offering if the purchase price and agreements shall not have been tendered by the Investor within fifteen (15) days after notice in writing in given to such Investor.  The right to participate in any future equity offering shall exclude the issuances under and in accordance with presently outstanding options, warrants or convertible notes, future equity compensation under and in accordance with the Plan (as defined below) and with the relevant provisions of this Agreement, bona fide acquisitions, commercial financings, or strategic business arrangements (as approved by the Board of Directors of the Company, which includes the Series A Directors (as defined in the Charter), and the holders of a majority of the outstanding shares of Preferred Stock in accordance with the Charter), and stock splits and stock dividends.  All rights to participate under this Section 5.1 will terminate on the first date when not more than twenty-five percent (25%) of the “Preferred Stock Amount” as listed on Schedule I attached hereto remain issued and outstanding.

 

5.2 Co-Sale Agreement.  Hemingway, by his execution of this Agreement, hereby covenants to provide each other Investor with ten (10) days' advance written notice of any proposed sale by Hemingway or his affiliates of any shares of Preferred Stock and/or Common Stock, or any rights therein, and such notice will specify the price, terms, date of sale and the purchaser; provided, however, the Hemingway shall be permitted to sell shares of Common Stock to unaffiliated third parties without such requirement only to the extent such shares exceed that number of shares bearing the legend pursuant to the following provisions.  Each other Investor shall have the right to sell on such price and terms, on such date and to such purchaser a respective number of shares of Preferred Stock equal to the total number of shares proposed to be sold multiplied by a fraction with a numerator equal to the number of shares of Preferred Stock that such Investor holds and the denominator is equal to the total number of then outstanding shares of Preferred Stock.  Any transfer by Hemingway without first complying with this Section 5.2 shall be void and of no force or effect whatsoever.  The Preferred Stock and at least that number of shares of Common Stock equal to the greater of (i) 500,000 shares of Common Stock and (i) the majority of shares of Common Stock held by Hemingway from time to time shall bear an appropriate legend to that effect.  All co-sale rights under this Section 5.2 will terminate on the first date when not more than twenty-five percent (25%) of the “Preferred Stock Amount” as listed on Schedule I attached hereto remain issued and outstanding.

 

5.3 Expenses.  On or about November 5, 2008, the Company shall reimburse up to $5,000 of the documented fees and costs of one special legal counsel in connection with the negotiation of this Agreement and the transactions contemplated at the Closing, and such counsel shall be selected by and serve as counsel to the Investor acquiring a majority of the Preferred Stock being issued at Closing.

 

5.4 Vesting of Employee Stock.  All stock incentive agreements of the Company with its or its subsidiaries' employees, consultants, directors or officers shall provide for periodic vesting, subject to continuation of service, not more accelerated than ratably over a period of at least three (3) years.

 

5.5 Registration Rights.  From and after June 15, 2009, any Investors (except for Tom) who are not permitted to sell all Preferred Stock held by such Investors pursuant to Rule 144 within a period of 90 days shall have the right to (a) demand of registration of the Common Stock receivable or received on conversion of their Preferred Stock, by written notice to the Company given by a majority in interest of such, and upon receiving such notice the Company shall use commercially reasonable efforts to cause a registration statement to register all such shares for resale to be filed with the Securities and Exchange Commission under the Securities Act of 1933, to become effective and to remain effective for a reasonable period of time, not exceeding 20 trading days and (b) to elect to include their shares on each or any registration statement (other than a registration statement for an employee equity incentive plan or an acquisition or other form inappropriate for including their shares) filed by the Company with the Securities and Exchange Commission.  The Company shall indemnify, defend and hold harmless each Investor from any loss, claim, cause of action or demand arising from any allegedly false or misleading statement in the registration statement, other than regarding any allegedly false or misleading information provided by any Investor for inclusion in the registration statement.  The Company shall enter into a registration rights agreement, substantially in the form attached hereto as Exhibit C with each Investor who purchases more than thirty percent (30%) of the shares of Preferred Stock at Closing, and such registration rights agreement shall supersede the obligations of the Company with respect to such Investor contained in this Section 5.5.

 

5.6 Information Rights.  The Company shall file its annual and quarterly reports with the Securities and Exchange Commission on a timely basis, after the effects of any extensions permitted by applicable rules.  So long as an Investor holds at least fifteen percent (15%) of the then outstanding shares of the Preferred Stock (a “Major Investor”), the Company shall deliver to such Major Investor such information relating to the financial condition, business, prospects or corporate affairs of the Company as such Investor may reasonably request from time to time; provided, that the Company shall not be obligated to provide written documentation to such Major Investor more than ten (10) times in each fiscal year.  Each Major Investor shall also have rights of inspection, in person or through representatives, of the Company's financial books and records and access to the Company's financial officers at reasonable times to ask questions and receive answers concerning the Company's periodic financial statements.  All information rights under this Section 5.6 will terminate on the first date when not more than twenty-five percent (25%) of the “Preferred Stock Amount” as listed on Schedule I attached hereto remain issued and outstanding.

5.7 Availability of Information and Management.  Prior to the Closing, the Company shall make available to each Investor its facilities, management personnel (including Hemingway and Ford) and records for purposes of due diligence by such Investor or such Investor's representatives or advisors.  Each Investor, on behalf of itself and its representatives or advisors, agrees to hold all information provided or made available by the Company in strict confidence, not to use or disclose, and not to permit the use or disclosure, of such information except for the purpose of determining whether to invest under this Agreement and for purposes reasonably necessary to enforcement of this Agreement after the Closing.

 

5.8 Stock Incentive Plan.  The Company shall not amend any previously adopted equity incentive plans (“Prior Plans”) or any grants made under any previously adopted equity incentive plans (“Prior Grants”) and shall allow all outstanding Prior Grants to expire in accordance with their terms or earlier.  The Company shall prepare and submit, after the Closing, a 2008 Stock Incentive Plan for consideration of the Investors holding a majority of the outstanding Preferred Stock (in such form as may be approved by holders of a majority of the outstanding Preferred Stock, the “Plan”).  The Company shall not approve any amendment of the Plan that increases the amount of Common Stock issuable under the Plan, accelerates the vesting of the awards under the Plan or makes the Plan materially more burdensome to the Company, and the Company shall not adopt or approve any other equity incentive plan or equity awards for employees, consultants, directors or officers, except, in each such case, with prior specific approval of holders of the majority of then outstanding shares of Preferred Stock. All restrictions under Section 5.8 shall terminate when not more than fifteen percent (15%) of the “Preferred Stock Amount” as listed on Schedule I attached hereto remain issued and outstanding.

 

5.9 Cancellation of Prior Grants and Voting Agreement.  Hemingway hereby agrees that all Prior Grants to Hemingway are hereby released, terminated and cancelled.  Each of Hemingway and Ford, by their signatures on this Agreement, hereby irrevocably grant to the Investors holding a majority of the outstanding Preferred Stock the right and proxy to vote and give written consent on behalf of Hemingway and Ford respectively in favor of the Amendment.  Such right and proxy is coupled with an interest.

 

5.10 No Shop Clause.  The Company shall not, prior to the Closing, publicize this Agreement or the terms for purposes of obtaining or seeking to obtain similar financing on terms more favorable to the Company than those provided in this Agreement.

 

5.11 Amendment.  The Company shall use best efforts to carry out all necessary corporate action to put into effect promptly after the Closing an increase from 10,000,000 to 50,000,000 in the authorized number of shares of Common Stock.  In the event such approval shall not have been received by March 31, 2009, the Company shall offer the Investors an exchange of the Preferred Stock for the Cash, Notes or Payables, as the case may be, exchanged hereunder for the Preferred Stock, with interest, if any, accrued from the Closing Date.

 

5.12 Indemnification.

 

(a) In addition to all of the rights and remedies available to each Investor a law or in equity, the Company shall indemnify each Investor and such subsequent holder of the Preferred Stock, and their respective affiliates, stockholders, officers, directors, employees, agents, representatives, successors and permitted assigns (collectively, the “Indemnified Parties”) and save and hold each of them harmless against and pay on behalf of or reimburse such party as and when incurred, for any loss (including without limitation, diminution in value), liability, demand, claim, action, cause of action, cost, damage, deficiency, tax, penalty, fine or expense, whether or not arising out of any claims by or on behalf of any third party, including interest, penalties, reasonable attorneys’ fees and expenses and all reasonable amounts paid in investigation, defense or settlement of any of the foregoing (collectively, “Losses”) which any such party may suffer, sustain or become subject to, as a result of, in connection with, relating or incidental to or by virtue of: (i) any misrepresentation or breach of a representation or warranty on the part of the Company under Article III; (i) without duplication of Section 5.12(a)(i), any misrepresentation in or omission from any of the representations or warranties contained in the Transaction Agreements, or any of the Schedules thereto, or any of the certificates or other documents furnished to such Investor by the Company and contemplated by the Transaction Agreement;  (iii) any non-fulfillment or breach of any covenant or agreement on the part of the Company under the Transaction Agreements; or  (iv) any action, demand, proceeding, investigation or claim by any third party (including, without limitation, governmental agencies) against or affecting the Company and/or its affiliates or subsidiaries which, if successful, would give rise to or evidence the existence of or relate to a breach of (A) any of the representations or warranties at the time made or (B) covenants of the Company.

(b) The liability of the Company for indemnification shall not exceed the Consideration.  The Company shall have no obligation or liability for indemnification unless the claim exceeds ten percent (10%) of the Consideration.  The representations and warranties in Section 3.9 and 3.11 through 3.28, inclusive, shall expire on the fourth anniversary of the Closing Date and the balance shall survive indefinitely, subject to any applicable statute of limitations.

6.1 Survival of Representations and Warranties.  All representations and warranties contained herein, or made pursuant hereto, will survive the execution and delivery of this Agreement.

 

6.2 Severability.  Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law and to carry out the intent of the parties, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement.

 

6.3 Counterparts.  This Agreement may be executed in any number of counterparts, each of which when so executed and delivered will be deemed an original, and such counterparts taken together will constitute one and the same agreement.

 

6.4 Descriptive Headings.  The descriptive headings of this Agreement are inserted for convenience of reference only and do not constitute a part of this Agreement.

 

6.5 Interpretation of Agreement.  Neither this Agreement, nor any other agreement, document or instrument referred to herein or executed and delivered in connection herewith, shall be construed against any party as the principal draftsperson hereof or thereof.

 

6.6 Governing Law.  All questions concerning the construction, validity and interpretation of, and performance of the obligations imposed by, this Agreement shall be governed by and construed in accordance with the internal laws of the State of California applicable to contracts made and wholly to be performed in that state.

 

6.7 Waivers and Amendments.  Except as otherwise expressly provided herein, the provisions of this Agreement (a) that are for the benefit of the Investor, may only be waived by the holders of a majority of the Securities then outstanding on an as-if converted basis, and (b) may be amended only by the written agreement of the Company and the holders of a majority of the Securities then outstanding on an as-if converted basis.

 

6.8 Successors and Assigns.  Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not. In addition, and whether or not any express assignment has been made, the provisions of this Agreement that are for the benefit of each Investor or any holder of the Securities are also for the benefit of, and enforceable by, any subsequent holders of such Securities.

 

6.9 Notices.  Any notices required, permitted or desired to be given hereunder shall be delivered personally, or sent by overnight courier or mailed, registered or certified mail, return receipt requested, to the following addresses, and shall be deemed to have been received on the day of personal delivery, one business day after deposit with an overnight courier or three business days after deposit in the mail:

If to an Investor, to the address set forth on the respective Investor Signature Page.

 

6.10 Delays or Omissions.  No failure to exercise or delay in the exercise of any right, power or remedy accruing to any holder of a Securities, upon any breach or default of the Company under this Agreement will impair any such right, power or remedy of such holder; nor will it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor will any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring.

 

6.11 Remedies Cumulative.  All remedies, under this Agreement, the Securities, by law or otherwise afforded to the holder of the Securities, will be cumulative and not alternative.

 

6.12 Time of Essence.  Time is of the essence under this Agreement, and each deadline herein is subject to strict enforcement

 

 

 

 

6.13 Hemingway Employment.  Hemingway acknowledges that the Preferred Stock to be received by Hemingway as set forth on Schedule I includes payment in full of all unpaid compensation for his services for the Company or any affiliates to June 30, 2008 and any and all loans extended to the Company through June 30, 2008.  Upon receipt of such Preferred Stock, Hemingway releases the Company and each affiliate, its respective directors, officers, employees and other agents, from any claim for unpaid compensation and loans for periods to June 30, 2008 or for any related breach of the Employment Agreement, dated as of  November 5, 2007, by and between the Company and Hemingway.  In the event of any conflict or inconsistency between the express provisions of this Agreement and the Employment Agreement, dated as of  November 5, 2007, by and between the Company and Hemingway, the terms of this Agreement shall control.

 

6.14 Ford Agreement.  Ford acknowledges that the Preferred Stock to be received by Ford as set forth on Schedule I includes payment in full of all unpaid compensation for his services for the Company or any affiliates and any and all loans extended to the Company.  Upon receipt of such Preferred Stock, Ford releases the Company and each affiliate, its respective directors, officers, employees and other agents, from any claim for compensation, loans, severance or any other claims whatsoever on account of or related to his employment, termination of employment, or for any breach of the Employment Agreement, dated as of  November 5, 2007, by and between the Company and Ford; provided, the Company's obligation to reimburse Ford for expenses as previously approved by the Company shall survive this release.  In the event of any conflict or inconsistency between the express provisions of this Agreement and the Employment Agreement, dated as of November 5, 2007, by and between the Company and Ford, the terms of this Agreement shall control.