SourceCapital Group, Inc. Proposed Offering Engagement Letter

The purpose of this engagement letter is to set forth the terms pursuant to which Source Capital Group, Inc. whose address is 276 Post Road West, Westport, CT 06880 (hereinafter referred to as “Source” or “SCG” or “Dealer Manager”) will act as the sole exclusive placement agent and financial advisor for a proposed issuance, or series of issuances, of registered or unregistered equity and/or debt securities (“Proposed Offering”) of Reed’s, Inc., 13000 South Spring Street, Los Angeles, California  90061 (collectively, with its subsidiaries and affiliates), (hereinafter referred to as the “Issuer” or the “Company”), in connection with a “Registered Direct Offering” and/or sale of up to $1,500,000 from an effective Form S-3 registration statement.

 

The terms of our agreement are as follows:

 

1.   The Issuer hereby retains and engages Source, for the period beginning on the date hereof and ending on September 30, 2009, unless sooner terminated pursuant to the terms of this engagement letter agreement (the “Engagement Period”), to act as the Issuer’s sole exclusive placement agent, financial advisor and/or dealer-manager in connection with the Proposed Offering.  The compensation for acting as the exclusive sole placement agent to the Issuer and conditions of Source’s engagement is stated hereunder.  During the Engagement Period and as long as Source is proceeding in good faith with activities in connection with the Proposed Offering, the Issuer agrees not to solicit, negotiate with or enter into any agreement with any other source of financing (whether equity, debt or otherwise other than bank financings or financings in connection with strategic alliances), any placement agent, financial advisor, dealer manager or any other person or entity in connection with  the Proposed Offering, as the case may be.

 

2.   In consideration for its services in the Proposed Offering, Source shall be entitled to a cash fee equal to 8% of the dollar amount received by the Issuer in connection with a Proposed Offering (the “Financial Advisory Fee”).

 

3.   The Issuer shall be responsible for and pay all expenses relating to the Proposed Offering, including, without limitation, all filing fees relating to any registration statement required by be filed as part of the Proposed Offering of and any filing fees relating to the review of the Proposed Offering materials by the Financial Industry Regulatory Authority, Inc. (“FINRA”); all fees and expenses relating to the listing of such Shares on the exchange where the Common Stock is (or will be) listed; all fees, expenses and disbursements relating to the registration or qualification of the Shares under the “blue sky” securities laws of any states or other jurisdictions; the costs of  mailing and printing all of the Proposed Offering documents, Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as Source may reasonably deem necessary; the fees and expenses of the Issuer’s accountants and the fees and expenses of the Issuer’s legal counsel and other agents and representatives.

 

4.   During the 45-day period prior to the filing of the Registration Statement, if applicable, with the Securities and Exchange Commission (“Commission”), and at all times thereafter prior and following the effectiveness of such Registration Statement, the Issuer and its officers, directors and related parties will abide by all rules and regulations of the Commission relating to public Proposed Offerings, including, without limitation, those relating to public statements (i.e., “gun jumping”) and disclosures of material non-public information.

 

5.   The Issuer shall supply Source and its counsel, at the Issuer’s cost, with bound volumes of the Proposed Offering materials within a reasonable time after the closing of the Proposed Offering (the “Closing”).

 

6.   The Proposed Offering shall be conditioned upon, among other things, the following:

 

(a)   Satisfactory completion by Source of its due diligence investigation and analysis of: (i) the Issuer’s arrangements with its officers, directors, employees, affiliates, customers and suppliers, (ii) the audited historical financial statements of the Issuer as may be required by the Act and rules and regulations of the Commission thereunder for inclusion in the Registration Statement, if applicable, and (iii) the Issuer’s projected financial results for the fiscal years ending December 31, 2009 and December 31, 2010;

 

(b)   The continued listing of the Common Stock on its current exchange or migration to a higher exchange (“Trading Market”);

 

(c)   Source shall have received from outside counsel to the Issuer such counsel’s written opinion, addressed to Source, dated as of the Closing, in customary form and substance reasonably satisfactory to Source;

 

(d)   FINRA shall have raised no objection to the fairness and reasonableness of the terms and arrangements of this Agreement. In addition, the Company shall, if requested by Source, make or authorize Source’s counsel to make on the Company’s behalf, an Issuer Filing with the FINRA Corporate Financing Department pursuant to FINRA Rule 5110 and pay all filing fees required in connection therewith.

 

(e)   Prior to the Closing, the Company shall have furnished to Source such further information, certificates and documents as Source may reasonably request, including customary audit comfort letters (all opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for Source);

 

(f)   Any Proposed Offering shall fund through an escrow account established by Source and paid for by the Issuer; and

7.   Upon consummation of a Proposed Offering, if any, Source shall not be granted the right of first refusal (“Right of First Refusal”) on any and all subsequent offerings by the Issuer.

 

8.   The Issuer represents and warrants to Source as follows:

 

(a)   The Issuer has the requisite corporate power and authority to enter into and to consummate the transactions contemplated hereunder and otherwise to carry out its obligations hereunder. The execution and delivery of this Agreement by the Issuer and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action on the part of the Issuer and no further action is required by the Issuer, its board of directors or its stockholders in connection herewith.  This Agreement has been duly authorized and executed by the Issuer and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Issuer enforceable against the Issuer in accordance with its terms except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) that rights to indemnification and contribution thereunder may be limited by federal or state securities laws or public policy relating thereto.

 

(b)   The execution, delivery and performance of this Agreement by the Issuer do not and will not (i) conflict with or violate any provision of the Issuer’s or any subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Issuer or any subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Issuer or subsidiary debt or otherwise) or other understanding to which the Issuer or any subsidiary is a party or by which any property or asset of the Issuer or any subsidiary is bound or affected (except as may have been consented to or waived), or (iii)  conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Issuer or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Issuer or a Subsidiary is bound or affected.

 

(c)   The Issuer is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other “Person” (defined as an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability Issuer, joint stock Issuer, government (or an agency or subdivision thereof) or other entity of any kind) in connection with the execution, delivery and performance by the Issuer of this Agreement, other than such filings as are required to be made under applicable Federal and state securities laws, by the Trading Market.

 

(d)   Except as otherwise provided in this Agreement, no brokerage or finder’s fees or commissions are or will be payable by the Issuer to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the this Agreement. Source shall  have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the offer and sale of the Securities contemplated by the this Agreement.

 

(e)   The Issuer has not, and to its knowledge none of its officers or directors have, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Issuer to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Securities (other than Source’s placement of the Securities), or (iii) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Issuer other than pursuant to this Agreement.

 

(f)   To the knowledge of the Issuer, there are no affiliations with any FINRA member firm among the Issuer’s officers, directors or any five percent (5%) or greater stockholder of the Issuer.

 

(g)   Source shall be a third party beneficiary of any representations and warranties given to any investors in the Proposed Offering, which representation and warranties shall be reasonably acceptable to Source.

9.   Source reserves the right to reduce any item of its compensation or adjust the terms thereof as specified herein in the event that a determination and/or suggestion shall be made by FINRA to the effect that Source’s aggregate compensation is in excess of FINRA rules or that the terms thereof require adjustment; provided, however, the aggregate compensation otherwise to be paid to Source by the Issuer may not be increased above the amounts stated herein without the approval of the Issuer.

 

10.   The Issuer agrees that no solicitation material apart from, if applicable, the Registration Statement will be used by it in connection with the Proposed Offering or filed with the Commission or any federal, state or local governmental or regulatory authority by or on behalf of the Issuer without Source’s prior approval, which approval may not be unreasonably delayed, withheld or denied.

 

11.   The Issuer agrees that it will not issue press releases or engage in any other publicity, without Source’s prior written consent, commencing on the date hereof and continuing for a period of forty  (40) days from the Closing of the Proposed Offering, other than normal and customary releases issued in the ordinary course of the Issuer’s business.  The Issuer covenants to adhere to all “gun jumping” and “quiet period” rules and regulations of the Commission prior to, during and following the filing of the Registration Statement, if applicable, and the consummation of the Proposed Offering.

 

12.   During the Engagement Period or until the Closing, the Issuer agrees to cooperate with Source and to furnish, or cause to be furnished, to Source, any and all information and data concerning the Issuer, its subsidiaries and the Proposed Offering that Source deems appropriate, including, without limitation, the Issuer’s acquisition plans and plans for raising capital or additional financing (the “Information”).  The Issuer shall provide Source reasonable access during normal business hours from and after the date of execution of this Agreement until the date of the Closing to all of the Issuer’s and its subsidiaries assets, properties, books, contracts, commitments and records and to the Issuer’s and its subsidiaries officers, directors, employees, appraisers, independent accountants, legal counsel and other consultants and advisors.  The Issuer represents and warrants to Source that all Information: (i) made available by the Issuer to Source or its agents and representatives, (ii) contained in any preliminary or final Prospectus prepared by the Issuer in connection with the Proposed Offering, and (iii) contained in any filing by the Issuer with any court or governmental regulatory agency, commission or instrumentality, will be complete and correct in all material respects and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading in light of the circumstances under which such statements are made.  The Issuer further represents and warrants to Source that all such Information will have been prepared by the Issuer in good faith and will be based upon assumptions which, in light of the circumstances under which they were made, are reasonable.  The Issuer acknowledges and agrees that in rendering its services hereunder, Source will be using and relying on such information (and information available from public sources and other sources deemed reliable by Source) without independent verification thereof by Source or independent appraisal by Source of any of the Issuer’s assets.  The Issuer acknowledges and agrees that this engagement letter and the terms hereof are confidential and will not be disclosed to anyone other than the officers and directors of the Issuer and the Issuer’s accountants, advisors and legal counsel.  Except as contemplated by the terms hereof or as required by applicable law, Source shall keep strictly confidential all non-public Information concerning the Issuer provided to Source.  No obligation of confidentiality shall apply to Information that: (a) is in the public domain as of the date hereof or hereafter enters the public domain without a breach by Source, (b) was known or became known by Source prior to the Issuer’s disclosure thereof to Source, (c) becomes known to Source from a source other than the Issuer, and other than by the breach of an obligation of confidentiality owed to the Issuer, (d) is disclosed by the Issuer to a third party without restrictions on its disclosure or (e) is independently developed by Source.  Source’s obligations of confidentiality hereunder shall extend to its employees.

 

13.   This engagement letter shall be deemed to have been made and delivered in New York City and both this engagement letter and the transactions contemplated hereby shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of New York, without regard to the conflict of laws principles thereof.

 

 

 

14.   Each of Source and the Issuer: (i) agrees that any legal suit, action or proceeding arising out of or relating to this engagement letter and/or the transactions contemplated hereby shall be instituted exclusively in New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (ii) waives any objection which it may have or hereafter to the venue of any such suit, action or proceeding, and (iii) irrevocably consents to the jurisdiction of the New York Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding.  Each of Source and the Issuer further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Issuer mailed by certified mail to the Issuer’s address shall be deemed in every respect effective service of process upon the Issuer, in any such suit, action or proceeding, and service of process upon Source mailed by certified mail to Source’s address shall be deemed in every respect effective service process upon Source, in any such suit, action or proceeding.  Notwithstanding any provision of this engagement letter to the contrary, the Issuer agrees that neither Source nor its affiliates, and the respective officers, directors, employees, agents and representatives of Source, its affiliates and each other person, if any, controlling Source or any of its affiliates, shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Issuer for or in connection with the engagement and transaction described herein except for any such liability for losses, claims, damages or liabilities incurred by us that are finally judicially determined to have resulted from the bad faith or gross negligence of such individuals or entities.  Source will act under this engagement letter as an independent contractor with duties to the Issuer.  Because Source will be acting on the Issuer’s behalf in this capacity, it is Source’s practice to receive indemnification.  A copy of Source’s standard indemnification form is attached to this engagement letter as Exhibit A.

We are delighted at the prospect of working with you and look forward to a successful Proposed Offering.  If you are in agreement with the foregoing, please execute and return two copies of this engagement letter to the undersigned.  This engagement letter may be executed in counterparts and by facsimile transmission.