SECOND AMENDED AND RESTATED JOINT VENTURE AGREEMENT

 

THIS SECOND AMENDMENT AND RESTATED JOINT VENTURE AGREEMENT  (the “Agreement”) is made as of August 31, 2006 (the “Effective Date”), by and between Solidus Networks, Inc., a Delaware corporation (“PBT”), and WinWin Gaming, Inc., a Delaware corporation (“WinWin”). PBT and WinWin are each referred to in this Agreement as a “Party” and collectively as the “Parties.”

 

 

A. On September 30, 2005, the Parties entered into a Joint Venture Agreement (the “Original Agreement”) in order to establish a framework for cooperation through joint marketing and other efforts in order to gain mutual benefit by taking advantage of the relationships and synergies between their respective businesses.

 

B. On April 14, 2006, the Parties amended and restated the Original Agreement and entered into an Amended and Restated Joint Venture Agreement (the “Restated Agreement”).

 

C. The Parties now desire to amend and restate the Restated Agreement in order to expand the scope of the joint venture established by the Parties under the Original Agreement and the Restated Agreement.

 

D. Contemporaneously with the execution and delivery hereof, PBT entered into voting agreements with certain holders of WinWin common stock relating to the approval of the Restated Charter (as defined below) and certain other items as set forth therein. 

 

E. By agreements dated April 21, 2006 and June 13, 2006, the maturity date of the Note (as defined below) has been extended to September 30, 2006.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

 

 

1. Purchase and Sale; Authority.

 

(a) Authorization. WinWin’s Board of Directors has approved the terms of this Agreement and all exhibits attached hereto, including authorizing the issuance and sale, pursuant to the terms and conditions of this Agreement, of shares of the Series A-1 Preferred Stock of WinWin, par value $0.01 per share (the “WinWin Series A-1 Shares”), and Series A Preferred Stock of WinWin, par value $0.01 per share (the “WinWin Series A Shares and, together with the WinWin Series A-1 Shares, the “WinWin Shares”).

 

(b) Agreement to Purchase and Sell. Subject to the terms and conditions of this Agreement, PBT agrees to purchase, and WinWin agrees to sell and issue to PBT at each Closing (as defined in Section 2), that number and series of WinWin Shares to be issued and sold to PBT at each Closing, as set forth in Section 2. The purchase price of each WinWin Share at each Closing (the “Purchase Price”) shall be $79.10 for the WinWin Series A-1 Shares and $7.91 for the WinWin Series A Shares.

 

 

2. Closings.

 

(a) Initial Closing. An initial Closing (the “Initial Closing”) of the purchase and sale of WinWin Shares shall take place at the offices of Cooley Godward llp, 101 California Street, 5^th Floor, San Francisco, California, at 10:00 a.m. Pacific time, on the date that is three business days following the date on which the parties have satisfied all of the conditions to the Initial Closing (the “Initial Closing Date”); provided, that the Initial Closing shall only occur, if at all, on such date that is chosen by PBT; and provided further, that the Initial Closing shall occur, if at all, on or prior to September 30, 2006. At the Initial Closing, PBT shall purchase, and WinWin shall issue and sell, against delivery of payment therefor, a number of WinWin Shares (the “Initial Closing WinWin Shares”) such that, following the issuance of the Initial Closing WinWin Shares, PBT will hold 19% of the outstanding capital stock of WinWin on an as-converted-to-common basis, and WinWin shall authorize its transfer agent to issue to PBT a certificate registered in the name of PBT, representing the Initial Closing WinWin Shares and bearing the legend set forth in Section 4(x)(vi). The purchase price for the Initial Closing WinWin Shares will be paid by PBT’s delivery to WinWin at the Initial Closing of (i) that certain original promissory note issued by WinWin to PBT and dated as of September 30, 2005 and with a principal amount of $2.5 million (the “Note”), all principal and accrued interest on which shall be canceled in exchange for a number of Initial Closing WinWin Shares equal to the quotient obtained by dividing the principal and accrued interest under the Note by the Purchase Price and, (ii) a number of fully paid and nonassessable newly issued shares of PBT Series C Preferred Stock (the “Initial Closing PBT Shares”), each with a deemed value of $5.00, which shares will have the rights, preferences and privileges as set forth in PBT’s Amended and Restated Certificate of Incorporation as in effect as of the date of this Agreement (the “PBT Charter”). In advance of the Initial Closing the PBT Board of Directors shall have authorized the issuance and sale to WinWin of the Initial Closing PBT Shares, and shall have reserved a sufficient number of shares of the common stock of PBT (the “PBT Common Stock”) for issuance upon the conversion of the Initial Closing PBT Shares.

 

(b) Second Closing. A second Closing (the “Second Closing”) of the purchase and sale of WinWin Shares shall take place at the offices of Cooley Godward llp, 101 California Street, 5^th Floor, San Francisco, California, at 10:00 a.m. Pacific time, at PBT’s sole option, at any time after the Initial Closing Date and on or before the one-year anniversary of the date of this Agreement (the “Second Closing Date”). At the Second Closing, PBT shall purchase, and WinWin shall issue and sell, against delivery of payment therefor, a number of WinWin Shares (the “Second Closing WinWin Shares”) such that, following the issuance of the Second Closing WinWin Shares, PBT will hold, at PBT’s option, up to 35% of the capital stock of WinWin on a fully diluted, as-converted-to-common basis, and WinWin shall authorize its transfer agent to issue to PBT a certificate registered in the name of PBT, representing the Second Closing WinWin Shares and bearing the legend set forth in Section 4(x)(vi). The purchase price for the Second Closing WinWin Shares will be paid by PBT’s delivery to WinWin at the Second Closing, at PBT’s option, of (i) cash, (ii) fully paid and nonassessable newly issued shares of PBT’s Series C Preferred Stock (the “Second Closing PBT Shares”), each with a deemed value of $5.00, which shares will have the rights, preferences and privileges accorded to such shares in the PBT Charter, or (iii) a combination of cash and Second Closing PBT Shares. In advance of the Second Closing the PBT Board of Directors shall have authorized the issuance and sale to WinWin of the Second Closing PBT Shares, and shall have reserved a sufficient number of shares of PBT Common Stock for issuance upon the conversion of the Second Closing PBT Shares. In no event shall the Second Closing occur following the date on which this Agreement has terminated in accordance with Section 13 hereof. The Initial Closing PBT Shares and the Second Closing PBT Shares are referred to collectively as the “PBT Shares.” The Initial Closing and the Second Closing are referred to collectively as the “Closings” and individually as a “Closing.”

 

 

(c) Series of WinWin Shares to be Issued. The WinWin Shares issued at any Closing shall be WinWin Series A-1 Shares if such Closing occurs before the Restated Charter (as defined below) becomes effective and WinWin Series A Shares if such Closing occurs after such Restated Charter becomes effective.

 

3. Representations and Warranties of WinWin. WinWin hereby represents and warrants to PBT that, except as set forth in the SEC Documents (as defined below) or in the Disclosure Schedule delivered by WinWin to PBT as of the date of this Agreement (the “WinWin Disclosure Schedule”) (for purposes of this Section 3 (other than Sections 3(b), 3(d), 3(e), 3(k) and 3(w)), all references to “WinWin” shall include each other entity in which WinWin holds, beneficially or of record, a controlling interest, either directly or indirectly):

 

(a) Organization Good Standing and Qualification. WinWin is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all corporate power and authority required to (i) carry on its business as presently conducted and (ii) enter into this Agreement and the other agreements, instruments and documents contemplated hereby, and to consummate the transactions contemplated hereby and thereby. WinWin is qualified to do business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means a material adverse effect on, or a material adverse change in, or a group of such effects on or changes in, the business, operations, financial condition, results of operations, assets or liabilities of the relevant Party and its subsidiaries, taken as a whole.

 

(b) Capitalization. The capitalization of WinWin, assuming the issuance of no WinWin Shares at any Closing, is as follows:

 

(i) the authorized capital stock of WinWin consists of 300,000,000 shares of Common Stock, $0.01 par value per share (“WinWin Common Stock”) and 10,000,000 shares of preferred stock, $0.01 par value per share (“WinWin Preferred Stock”), of which 6,000,000 shares of WinWin Preferred Stock will be designated as Series A-1 Preferred Stock upon the filing of WinWin’s Certificate of Designation of Preferences of Series A-1 Preferred Stock, in the form attached hereto as Exhibit G (the “Designation”); upon the filing and acceptance of the Designation, shares of WinWin Series A-1 Preferred Stock shall have the rights, preferences, privileges and restrictions set forth in the Designation.

 

(ii) the issued and outstanding capital stock of WinWin consists of 63,692,171 shares of WinWin Common Stock. The shares of issued and outstanding capital stock of WinWin have been duly authorized and validly issued, are fully paid and nonassessable and have not been issued in violation of, or are not otherwise subject to, any preemptive or other similar rights.

 

 

(iii) there are no issued and outstanding shares of WinWin Preferred Stock.

 

(iv) WinWin has (A) 14,099,026 shares of WinWin Common Stock reserved for issuance upon exercise of outstanding options granted under WinWin’s 2003 Stock Plan (the “Option Plan”) and (B) 17,582,161 shares of WinWin Common Stock reserved for issuance upon exercise of outstanding warrants.

 

(v) WinWin has 5,900,974 shares of WinWin Common Stock available for future grant under the Option Plan.

 

With the exception of the foregoing in this Section 3(b), there are no outstanding subscriptions, options, warrants, convertible or exchangeable securities or other rights granted to or by WinWin to purchase shares of WinWin Common Stock or other securities of WinWin and there are no commitments, plans or arrangements to issue any shares of WinWin Common Stock or any security convertible into or exchangeable for WinWin Common Stock.

 

(c) Subsidiaries. WinWin does not have any subsidiaries, and does not own any capital stock of, assets comprising the business of, obligations of, or any other interest (including any equity or partnership interest) in, any person or entity.

 

(d) Due Authorization. All corporate actions on the part of WinWin necessary for the authorization, execution, delivery of, and the performance of all obligations of WinWin under this Agreement and the authorization, issuance, reservation for issuance and delivery of all of the WinWin Shares being sold under this Agreement have been taken, no further consent or authorization of WinWin’s Board of Directors or its stockholders is required, and this Agreement constitutes the legal, valid and binding obligation of WinWin, enforceable against WinWin in accordance with its terms, except (i) as may be limited by (A) applicable bankruptcy, insolvency, reorganization or others laws of general application relating to or affecting the enforcement of creditors’ rights generally and (B) the effect of rules of law governing the availability of equitable remedies and (ii) as rights to indemnity or contribution may be limited under federal or state securities laws or by principles of public policy thereunder.

 

(e) Valid Issuance of WinWin Shares.

 

(i) Purchased Shares. The WinWin Shares will be, upon payment therefor by PBT in accordance with this Agreement, duly authorized, validly issued, fully paid and non-assessable, free from all taxes, liens, claims and encumbrances with respect to the issuance of such WinWin Shares (other than any liens, claims or encumbrances created by or imposed upon PBT) and will not be subject to any pre-emptive rights or similar rights.

 

 

(ii) Underlying Shares of Common Stock. The issuance of the shares of WinWin Common Stock issued or issuable from time to time upon the conversion of the WinWin Shares (the “Underlying WinWin Shares”) will be, and at all times prior to such conversion, will have been, duly authorized, duly reserved for issuance upon such conversion, and will be, upon such conversion, validly issued, fully-paid and non-assessable free from all taxes, liens, claim, encumbrances with respect to the issuance of such shares and will not be subject to any pre-emptive rights or similar rights.

 

(iii) Compliance with Securities Laws. Subject to the accuracy of the representations made by PBT in Section 4(x), the WinWin Shares (assuming no change in applicable law and no unlawful distribution of the WinWin Shares by PBT or other parties) will be issued to PBT in compliance with applicable exemptions from (A) the registration and prospectus delivery requirements of the Securities Act of 1933, as amended (the “Securities Act”) and (B) the registration and qualification requirements of all applicable securities laws of the states of the United States.

 

(f) Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, or notice to, any federal, state or local governmental authority or self regulatory agency on the part of WinWin is required in connection with the issuance of the WinWin Shares to PBT, or the consummation of the other transactions contemplated by this Agreement, except (i) such filings as have been made prior to the date hereof and (ii) such additional post-Closing filings as may be required to comply with applicable state and federal securities laws.

 

(g) Non-Contravention. The execution, delivery and performance of this Agreement by WinWin, and the consummation by WinWin of the transactions contemplated hereby (including issuance of the WinWin Shares), do not: (i) contravene or conflict with the Certificate of Incorporation of WinWin, as amended and in effect as of the date of this Agreement (the “WinWin Certificate of Incorporation”), the Designation or the Bylaws of WinWin (the “WinWin Bylaws”); (ii) constitute a violation of any provision of any federal, state, local or foreign law, rule, regulation, order or decree applicable to WinWin; or (iii) constitute a default or require any consent under, give rise to any right of termination, cancellation or acceleration of, or to a loss of any material benefit to which WinWin is entitled under, or result in the creation or imposition of any lien, claim or encumbrance on any assets of WinWin under, any material mortgage, indenture, contract, agreement, permit, license or instrument to which WinWin or any of its subsidiaries is a party or by which WinWin or any of its subsidiaries is bound or subject.

 

(h) Litigation. There is no action, suit, proceeding, claim, arbitration or investigation (“Action”) pending or, to WinWin’s knowledge, threatened in writing: (i) against WinWin, its activities, properties or assets, or any officer, director or, to WinWin’s knowledge, employee of WinWin in connection with such officer’s, director’s or employee’s relationship with, or actions taken on behalf of, WinWin, that is reasonably likely to have a Material Adverse Effect on WinWin; or (ii) that seeks to prevent, enjoin, alter, challenge or delay the transactions contemplated by this Agreement (including the issuance of the WinWin Shares). WinWin is not a party to or subject to the provisions of, any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. No Action is currently pending nor does WinWin intend to initiate any Action that is reasonably likely to have a Material Adverse Effect on WinWin.

 

 

(i) Compliance with Law and Charter Documents. WinWin is not in violation or default of any provisions of the WinWin Certificate of Incorporation or the WinWin Bylaws. WinWin has complied and is currently in compliance with all applicable statutes, laws, rules, regulations and orders of the United States of America and all states thereof, foreign countries and other governmental bodies and agencies having jurisdiction over WinWin’s business or properties, except for any instance of non-compliance that has not had, and would not reasonably be expected to have, a Material Adverse Effect on WinWin. WinWin has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it and as presently proposed to be conducted, the lack of which could materially and adversely affect the business, properties or financial condition of WinWin.

 

(j) Full Disclosure.  WinWin has provided PBT with all information requested by PBT in connection with its decision to purchase the WinWin Shares. To WinWin’s knowledge, neither this Agreement, the exhibits hereto, nor any other document delivered by WinWin to PBT or its attorneys or agents in connection herewith or therewith at the Initial Closing or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor, to WinWin’s knowledge, omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading. Without limiting the foregoing, (i) WinWin has disclosed to PBT or the Representatives of PBT all significant or pending transactions with customers, vendors, stockholders, affiliates and other current and potential contracting parties and (ii) the April 4, 2006 letter regarding WinWin China Business Clarifications from Mark Galvin of WinWin to Gus Spanos of PBT is true, correct and complete in all material respects.

 

(k) SEC Documents.

 

(i) Reports. WinWin has filed in a timely manner all reports, schedules, forms, statements and other documents required to be filed by it with the Securities and Exchange Commission (the “SEC”) pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder. WinWin has made available to PBT prior to the date hereof copies of its Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the “Form 10-KSB”), its Quarterly Reports on Forms 10-QSB for the first and second quarters of the fiscal year ending December 31, 2006 (the "Forms 10-QSB") any information statement or proxy statement filed by WinWin since December 31, 2005, and any Current Report on Form 8-K for events occurring since December 31, 2005 (“Forms 8-K”) filed by WinWin with the SEC (the Form 10-KSB, the Forms 10-QSB, the information statements and proxy statements referenced above and the Forms 8-K are collectively referred to herein as the “SEC Documents”). Each of the SEC Documents, as of the respective dates thereof, did not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. Each SEC Document, as it may have been subsequently amended by filings made by WinWin with the SEC prior to the date hereof, complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Document.

 

 

(ii) Sarbanes-Oxley. The Chief Executive Officer and the Chief Financial Officer of WinWin have signed, and WinWin has furnished to the SEC, all certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 (“SOX”). Such certifications contain no qualifications or exceptions to the matters certified therein and have not been modified or withdrawn; and neither WinWin nor any of its officers has received notice from any governmental entity questioning or challenging the accuracy, completeness, form or manner of filing or submission of such certifications. WinWin is otherwise in compliance in all material respects with all applicable effective provisions of SOX and the rules and regulations issued thereunder by the SEC.

 

(iii) Financial Statements. The financial statements of WinWin in the SEC Documents present fairly, in accordance with United States generally accepted accounting principles (“GAAP”), consistently applied, the financial position of WinWin as of the dates indicated, and the results of its operations and cash flows for the periods therein specified, subject, in the case of unaudited financial statements for interim periods, to normal year-end audit adjustments. There are no material financial transactions or arrangements that are not reflected on the financial statements included in the SEC Documents.

 

(iv) Sufficiency of Disclosure. To WinWin’s knowledge, no circumstance exists that could reasonably be expected to lead to a restatement of any filing made by WinWin with the SEC.

 

(l) Absence of Certain Changes Since the Balance Sheet Date. Except as set forth in the WinWin Disclosure Schedule, since December 31, 2005, the business and operations of WinWin have been conducted in the ordinary course consistent with past practice, and there has not been:

 

(i) any declaration, setting aside or payment of any dividend or other distribution of the assets of WinWin with respect to any shares of capital stock of the WinWin or any repurchase, redemption or other acquisition by WinWin or any subsidiary of WinWin of any outstanding shares of the WinWin’s capital stock;

 

(ii) any damage, destruction or loss, whether or not covered by insurance, except for such occurrences, individually and collectively, that have not had, and would not reasonably be expected to have, a Material Adverse Effect on WinWin;

 

(iii) any waiver by WinWin of a valuable right or of a material debt owed to it, except for such waivers, individually and collectively, that have not had, and would not reasonably be expected to have, a Material Adverse Effect on WinWin;

 

(iv) any material change or amendment to, or any waiver of any material right under a material contract or arrangement by which WinWin or any of its assets or properties is bound or subject;

 

(v) any change by WinWin in its accounting principles, methods or practices or in the manner in which it keeps its accounting books and records, except any such change required by a change in GAAP or by the SEC; or

 

 

(vi) any other event or condition of any character, except for such events and conditions that have not resulted, and are not expected to result, either individually or collectively, in a Material Adverse Effect on WinWin.

 

(m) Intellectual Property.

 

(i) WinWin owns or possesses sufficient rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names, copyrights, information and other proprietary rights and processes (collectively, “Intellectual Property”) that are necessary to conduct its businesses as currently conducted or as proposed to be conducted, free and clear of all liens, encumbrances and other adverse claims, except where the failure to own or possess such Intellectual Property free and clear of all liens, encumbrances and other adverse claims would not reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect on WinWin.

 

(ii) WinWin has not received any written notice of, and has no knowledge of, any infringement of or conflict with rights of others with respect to any Intellectual Property used by WinWin to conduct its business as conducted or as proposed to be conducted and WinWin has no knowledge of any infringement, misappropriation or other violation of any Intellectual Property by any third party, which, in either case, either individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to have a Material Adverse Effect on WinWin.

 

(iii) WinWin neither owns nor licenses any patent rights.

 

(iv) Each employee, consultant and contractor of WinWin who has had access to the Intellectual Property has executed a valid and enforceable agreement to maintain the confidentiality of such Intellectual Property and assigning all rights to WinWin to any inventions, improvements, discoveries or information relating to the business of WinWin. WinWin is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to WinWin or that would conflict with WinWin’s business.

 

(v) WinWin is not subject to any “open source” or “copyleft” obligations or otherwise required to make any public disclosure or general availability of source code either used or developed by WinWin.

 

(n) Registration Rights. Except for the WinWin Registration Rights Agreement, in substantially the form attached hereto as Exhibit A (the “WinWin Registration Rights Agreement”), WinWin is not currently subject to any agreement providing any person or entity any rights (including piggyback registration rights) to have any securities of WinWin registered with the SEC or registered or qualified with any other governmental authority.

 

(o) Title to Property and Assets.  The properties and assets of WinWin are owned or leased by WinWin free and clear of all mortgages, deeds of trust, liens, charges, encumbrances and security interests except for (i) statutory liens for the payment of current taxes that are not yet delinquent and (ii) liens, encumbrances and security interests that arise in the ordinary course of business and do not in any material respect affect the properties and assets of WinWin. With respect to the property and assets it leases, WinWin is in compliance with such leases in all material respects.

 

 

(p) Taxes. WinWin has filed or has valid extensions of the time to file all necessary federal, state, local and foreign income and franchise tax returns due prior to the date hereof and has paid or accrued all taxes shown as due thereon, and WinWin has no knowledge of any material tax deficiency which has been or might be asserted or threatened against it.

 

(q) Insurance. WinWin maintains insurance of the types and in the amounts that are reasonable for companies conducting the business conducted and proposed to be conducted by WinWin, all of which insurance is in full force and effect.

 

(r) Labor Relations. No material labor dispute exists or, to the knowledge of WinWin, is imminent with respect to any of the employees of WinWin.

 

(s) Internal Accounting Controls. WinWin and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

 

(t) Transactions With Officers and Directors. None of the officers or directors of WinWin has entered into any transaction with WinWin or any subsidiary that would be required to be disclosed pursuant to Item 404(a), (b) or (c) of Regulation S-K of the SEC.

 

(u) Investment Company. WinWin is not now, and after the sale of the WinWin Shares under this Agreement and the application of the net proceeds from the sale of the WinWin Shares will not be, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

 

(v) Executive Officers.  To the knowledge of WinWin, no executive officer or person nominated to become an executive officer of WinWin (i) has been convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding minor traffic violations) or (ii) is or has been subject to any judgment or order of, the subject of any pending civil or administrative action by the SEC or any self-regulatory organization.

 

(w) Investment Representations and Warranties.

 

(i) Purchase for Own Account. WinWin represents that it is acquiring the PBT Shares solely for its own account and beneficial interest for investment and not for sale or with a view to distribution of the PBT Shares or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention.

 

 

(ii) Information and Sophistication. Without lessening or obviating the representations and warranties of PBT set forth in Section 4, WinWin hereby acknowledges that it has had an opportunity to ask questions and receive answers from PBT regarding the terms and conditions of the offering of the PBT Shares and further represents that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risk of this investment.

 

(iii) Ability to Bear Economic Risk. WinWin acknowledges that investment in the PBT Shares involves a high degree of risk, and represents that it is able, without materially impairing its financial condition, to hold the PBT Shares for an indefinite period of time and to suffer a complete loss of its investment.

 

(iv) Accredited Investor Status. WinWin is an “accredited investor” within the meaning of Regulation D promulgated under the Securities Act.

 

(v) Restricted Securities. WinWin understands that the PBT Shares have not been registered under the Securities Act and will not sell, offer to sell, assign, pledge, hypothecate or otherwise transfer any of the PBT Shares unless (A) pursuant to an effective registration statement under the Securities Act, (B) such holder provides PBT with an opinion of counsel, in form and substance reasonably acceptable to PBT, to the effect that a sale, assignment or transfer of the PBT Shares may be made without registration under the Securities Act and the transferee agrees to be bound by the terms and conditions of this Agreement, (C) such holder provides PBT with reasonable assurances (in the form of seller and broker representation letters) that the PBT Shares or the PBT Conversion Shares, as the case may be, can be sold pursuant to Rule 144 promulgated under the Securities Act (“Rule 144”) or (D) pursuant to Rule 144(k) promulgated under the Securities Act following the applicable holding period.

 

(vi) Legends. WinWin agrees that the certificates for the PBT Shares shall bear the following legend:

 

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

 

WinWin agrees that PBT may place stop transfer orders with its transfer agent with respect to such certificates in order to implement the restrictions on transfer set forth in this Agreement. The appropriate portion of the legend and the stop transfer orders will be removed promptly upon delivery to PBT of such satisfactory evidence as reasonably may be required by PBT that such legend or stop orders are not required to ensure compliance with the Securities Act.

 

4. Representations and Warranties of PBT. PBT hereby represents and warrants to WinWin that, except as set forth in the Disclosure Schedule delivered by PBT to WinWin as of the date of this Agreement (the “PBT Disclosure Schedule”):

 

(a) Organization, Good Standing and Qualification. PBT is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. PBT has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement, to issue and sell the PBT Shares and the shares of PBT common stock into which the PBT Shares convert (the “PBT Conversion Shares”), to carry out the provisions of this Agreement and to carry on its business as presently conducted. PBT is duly qualified 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 do so would not have a material adverse effect on PBT or its business.

 

(b) Subsidiaries. PBT does not own or control any equity security or other interest of any other corporation, limited partnership or other business entity. PBT is not a participant in any joint venture, partnership or similar arrangement. Since its inception, PBT has not consolidated or merged with, acquired all or substantially all of the assets of, or acquired the stock of or any interest in any corporation, partnership, association, or other business entity.

 

(c) Capitalization; Voting Rights.

 

(i) The authorized capital stock of PBT as of the date hereof consists of (A) 800,000,000 shares of Common Stock, par value $0.0001 per share, and (B) 2,300,000,000 shares of Preferred Stock, par value $0.00001 per share (“PBT Preferred Stock”), 1,900,000,000 of which have been designated Class 1 Preferred Stock, 150,000,000 of which have been designated Series B Preferred Stock, 30,000,000 of which have been designated Series B-1 Preferred Stock, 40,000 of which have been designated Series C-1 Preferred Stock, 200,000 of which have been designated Series C-2 Preferred Stock, 200,000 of which have been designated Series C-3 Preferred Stock and 75,000,000 of which have been designated Series C Preferred Stock.

 

(ii) Section 4(c) of the PBT Disclosure Schedule sets forth, as of immediately prior to the Initial Closing, the number of outstanding shares of each class and series of PBT's equity securities.

 

 

(iii) Section 4(c) of the PBT Disclosure Schedule sets forth, as of immediately prior to the Initial Closing, under PBT’s 2003 Equity Incentive Plan (the “PBT Plan”), (A) the number of shares of PBT Common Stock that have been issued and are currently outstanding pursuant to restricted stock purchase agreements and/or the exercise of options, (B) the number of shares of Class 1 Preferred that have been issued and are currently outstanding pursuant to restricted stock purchase agreements and/or the exercise of options, (C) the number of options to purchase shares of PBT Common Stock and Class 1 Preferred that have been granted and are currently outstanding and (D) the number of shares of PBT Common Stock and Class 1 Preferred that remain available for future issuance to officers, directors, employees and consultants of PBT. PBT has not made any representations regarding equity incentives to any officer, employee, director or consultant that are inconsistent with the share amounts and terms set forth in PBT’s board minutes.

 

(iv) Other than the shares reserved for issuance under the PBT Plan, and except as may be granted pursuant to this Agreement, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or agreements of any kind for the purchase or acquisition from PBT of any of its securities.

 

(v) All issued and outstanding shares of PBT Common Stock and PBT Preferred Stock (A) have been duly authorized and validly issued and are fully paid and nonassessable and (B) were issued in compliance with all applicable state and federal laws concerning the issuance of securities.

 

(vi) The rights, preferences, privileges and restrictions of the PBT Shares are as stated in the PBT Charter. Each outstanding series of PBT Preferred Stock is convertible into PBT Common Stock on a one-for-one basis as of the date hereof and the consummation of the transactions contemplated hereunder will not result in any anti-dilution adjustment or other similar adjustment to the outstanding shares of PBT Preferred Stock. The PBT Conversion Shares have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the PBT Charter, the PBT Shares and the PBT Conversion Shares will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances other than (A) liens and encumbrances created by or imposed upon WinWin and (B) any right of first refusal set forth in PBT’s Bylaws; provided, however, that the PBT Shares and the PBT Conversion Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed.

 

(d) Authorization; Binding Obligations. All corporate action on the part of PBT, its officers, directors and stockholders necessary for the authorization of this Agreement and the transactions contemplated by this Agreement, the performance of all obligations of PBT hereunder at the Initial Closing and the authorization, sale, issuance and delivery of the PBT Shares pursuant hereto and the PBT Conversion Shares pursuant to the PBT Charter has been taken. This Agreement, when executed and delivered, will be the valid and binding obligation of PBT enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, (ii) general principles of equity that restrict the availability of equitable remedies and (iii) to the extent that the enforceability of indemnification provisions may be limited by applicable laws. The sale of the PBT Shares and the subsequent conversion of the PBT Shares into PBT Conversion Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with.

 

 

(e) Financial Statements. PBT has delivered to WinWin (i) its unaudited statement of income for the year ended December 31, 2005 (the “Statement Date”), and (ii) its unaudited balance sheet as of December 31, 2005 (collectively, the “PBT Financial Statements”). The PBT Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except as disclosed therein, and present fairly the financial position of PBT as of the Statement Date in all material respects; provided, however, that the unaudited financial statements are subject to year-end audit adjustments (which are not expected to be material either individually or in the aggregate), and do not contain footnotes.

 

(f) Liabilities. PBT has no material liabilities and, to the best of its knowledge, knows of no material contingent liabilities not disclosed in the PBT Financial Statements, except current liabilities incurred in the ordinary course of business subsequent to the Statement Date which have not been, either in any individual case or in the aggregate, materially adverse.

 

(g) Agreements; Action.

 

(i) Except for agreements explicitly contemplated hereby and agreements between PBT and its employees with respect to the sale of PBT Common Stock and PBT Preferred Stock, there are no agreements, understandings or proposed transactions between PBT and any of its officers, directors, employees, affiliates or any affiliate thereof.

 

(ii) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which PBT is a party or to its knowledge by which it is bound that may involve (A) future obligations (contingent or otherwise) of, or payments to, PBT in excess of $100,000 (other than obligations of, or payments to, PBT arising from purchase or sale agreements entered into in the ordinary course of business), (B) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from PBT (other than licenses by PBT of “off the shelf” or other standard products) or (C) indemnification by PBT with respect to infringements of proprietary rights (other than indemnification obligations arising from purchase, sale or license agreements entered into in the ordinary course of business).

 

(iii) PBT has not (A) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (B) incurred or guaranteed any indebtedness for money borrowed or any other liabilities (other than with respect to dividend obligations, distributions, indebtedness and other obligations incurred in the ordinary course of business or as disclosed in the PBT Financial Statements) individually in excess of $100,000 or, in the case of indebtedness and/or liabilities individually less than $100,000, in excess of $250,000 in the aggregate, (C) made any loans or advances to any person, other than ordinary advances for travel expenses, or (D) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business.

 

(iv) For the purposes of subsections (ii) and (iii) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities PBT has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections.

 

 

(h) Obligations to Related Parties. There are no obligations of PBT to officers, directors, stockholders, or employees of PBT other than (i) for payment of salary for services rendered, (ii) reimbursement for reasonable expenses incurred on behalf of PBT and (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the PBT Board of Directors). No officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with PBT (other than such contracts as relate to any such person’s ownership of capital stock or other securities of PBT).

 

(i) Changes. Since the Statement Date, there has not been to PBT’s knowledge:

 

(i) Any change in the assets, liabilities, financial condition or operations of PBT from that reflected in the PBT Financial Statements, other than changes in the ordinary course of business, none of which individually or in the aggregate has had a material adverse effect on such assets, liabilities, financial condition or operations of PBT;

 

(ii) Any resignation or termination of any officer, key employee or group of employees of PBT;

 

(iii) Any material change, except in the ordinary course of business, in the contingent obligations of PBT by way of guaranty, endorsement, indemnity, warranty or otherwise;

 

(iv) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties, business or prospects or financial condition of PBT;

 

(v) Any waiver by PBT of a valuable right or of a material debt owed to it;

 

(vi) Any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder;

 

(vii) Any labor organization activity related to PBT;

 

(viii) Any sale, assignment, or exclusive license or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets;

 

(ix) Any change in any material agreement to which PBT is a party or by which it is bound that materially and adversely affects the business, assets, liabilities, financial condition or operations of PBT;

 

 

(x) Any other event or condition of any character that, either individually or cumulatively, has materially and adversely affected the business, assets, liabilities, financial condition or operations of PBT; or

 

(xi) Any arrangement or commitment by PBT to do any of the acts described in subsection (i) through (x) above.

 

(j) Title to Properties and Assets; Liens, Etc. PBT has good and marketable title to its properties and assets and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) those resulting from taxes which have not yet become delinquent, (ii) minor liens and encumbrances that do not materially detract from the value of the property subject thereto or materially impair the operations of PBT, and (iii) those that have otherwise arisen in the ordinary course of business. PBT is in compliance with all material terms of each lease to which it is a party or is otherwise bound.

 

(k) Intellectual Property.

 

(i) PBT owns or possesses sufficient legal rights to (A) all trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes and (B) to PBT’s knowledge, all patents, in each instance as necessary for its business as now conducted and as presently proposed to be conducted, without any known infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights, nor is PBT bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of “off the shelf” or standard products.

 

(ii) PBT has not received any communications alleging that PBT has violated or, by conducting its business as presently proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity.

 

(iii) PBT is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to PBT or that would conflict with PBT’s business as proposed to be conducted. Each employee, officer and consultant of PBT has executed a proprietary information and inventions agreement in the form(s) as delivered to WinWin. No employee, officer or consultant of PBT has excluded works or inventions made prior to his or her employment with PBT from his or her assignment of inventions pursuant to such employee, officer or consultant’s proprietary information and inventions agreement. PBT does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by PBT, except for inventions, trade secrets or proprietary information that have been assigned to PBT.

 

 

(l) Compliance with Other Instruments. PBT is not in violation or default of any term of its charter documents, each as amended, or of any provision of any mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order or writ other than any such violation that would not have a material adverse effect on PBT. The execution, delivery, and performance of and compliance with this Agreement and the issuance and sale of the PBT Shares pursuant hereto and of the PBT Conversion Shares pursuant to the PBT Charter, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a material default under any such document, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of PBT or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to PBT, its business or operations or any of its assets or properties. To its knowledge, PBT has avoided every condition, and has not performed any act, the occurrence of which would result in PBT’s loss of any right granted under any license, distribution agreement or other agreement required to be disclosed on the PBT Disclosure Schedule.

 

(m) Litigation. There is no action, suit, proceeding or investigation pending or, to PBT’s knowledge, currently overtly threatened against PBT that questions the validity of this Agreement, or the right of PBT to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or that would reasonably be expected to result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of PBT, financially or otherwise, or any change in the current equity ownership of PBT, nor is PBT aware that there is any basis for any of the foregoing. The foregoing includes, without limitation, actions pending or, to PBT’s knowledge, threatened in writing involving the prior employment of any of PBT’s employees, their use in connection with PBT’s business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. PBT is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by PBT currently pending or that PBT intends to initiate.

 

(n) Tax Returns and Payments. PBT is and always has been a subchapter C corporation. PBT has filed all tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to PBT’s knowledge all other taxes due and payable by PBT on or before the Initial Closing, have been paid or will be paid prior to the time they become delinquent. PBT has not been advised (i) that any of its returns, federal, state or other, have been or are being audited as of the date hereof, or (ii) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. PBT has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for.

 

 

(o) Employees. PBT has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to PBT’s knowledge, threatened with respect to PBT. To PBT’s knowledge, no employee of PBT, nor any consultant with whom PBT has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, PBT; and to PBT’s knowledge the continued employment by PBT of its present employees, and the performance of PBT’s contracts with its independent contractors, will not result in any such violation. PBT has not received any notice alleging that any such violation has occurred. No employee of PBT has been granted the right to continued employment by PBT or to any material compensation following termination of employment with PBT. PBT is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with PBT, nor does PBT have a present intention to terminate the employment of any officer, key employee or group of employees. There are no actions pending, or to PBT’s knowledge, threatened, by any former or current employee concerning such person’s employment by PBT.

 

(p) Obligations of Management. Each officer and key employee of the PBT currently devoting substantially all of his or her business time to the conduct of the business of PBT. PBT is not aware that any officer or key employee of PBT is planning to work less than full time at PBT in the future. No officer or key employee is currently working or, to PBT’s knowledge, plans to work for a competitive enterprise, whether or not such officer or key employee is or will be compensated by such enterprise.

 

(q) Registration Rights and Voting Rights. Except as required pursuant to the PBT Registration Rights Agreement and that certain Investor Rights Agreement, dated as of November 14, 2003, by and among PBT and the other parties thereto, PBT is presently not under any obligation, and has not granted any rights, to register any of PBT’s presently outstanding securities or any of its securities that may hereafter be issued. To PBT’s knowledge, no stockholder of PBT has entered into any agreement with respect to the voting of equity securities of PBT.

 

(r) Compliance with Laws; Permits. To its knowledge, PBT is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition, operations or prospects of PBT. No United States domestic 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 or the issuance of the PBT Shares or the PBT Conversion Shares, except such as have been duly and validly obtained or filed, or with respect to any filings that must be made after the Initial Closing, as will be filed in a timely manner. PBT has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties or financial condition of PBT and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted.

 

 

(s) Environmental and Safety Laws. To its knowledge, PBT is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. No Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by PBT or, to PBT’s knowledge, by any other person or entity on any property owned, leased or used by PBT. For the purposes of the preceding sentence, “Hazardous Materials” shall mean (i) materials that are listed or otherwise defined as “hazardous” or “toxic” under any applicable local, state, federal and/or foreign laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials, or (ii) any petroleum products or nuclear materials.

 

(t) Offering Valid. Assuming the accuracy of the representations and warranties of WinWin contained in Section 3(w), the offer, sale and issuance of the PBT Shares and the PBT Conversion Shares will be exempt from the registration requirements of the Securities Act, and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither PBT 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 PBT Shares to any person or persons so as to bring the sale of such PBT Shares by PBT within the registration provisions of the Securities Act or any state securities laws.

 

(u) Full Disclosure. PBT has provided WinWin with all information requested by WinWin in connection with its decision to purchase the PBT Shares. To PBT’s knowledge, neither this Agreement, the exhibits hereto, nor any other document delivered by PBT to WinWin or its attorneys or agents in connection herewith or therewith at the Initial Closing or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor, to PBT’s knowledge, omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading.

 

(v) Real Property Holding Corporation. PBT is not a real property holding corporation within the meaning of Section 897(c)(2) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder.

 

(w) Insurance. PBT has or will obtain promptly following the Initial Closing general commercial, product liability, fire and casualty insurance policies with coverage customary for companies similarly situated to PBT.

 

(x) Investment Representations and Warranties.

 

(i) Purchase for Own Account. PBT represents that it is acquiring the WinWin Shares solely for its own account and beneficial interest for investment and not for sale or with a view to distribution of the WinWin Shares or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention.

 

(ii) Information and Sophistication. Without lessening or obviating the representations and warranties of WinWin set forth in Section 3, PBT hereby acknowledges that it has had an opportunity to ask questions and receive answers from WinWin regarding the terms and conditions of the offering of the WinWin Shares and further represents that it has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risk of this investment.

 

 

(iii) Ability to Bear Economic Risk. PBT acknowledges that investment in the WinWin Shares involves a high degree of risk, and represents that it is able, without materially impairing its financial condition, to hold the WinWin Shares for an indefinite period of time and to suffer a complete loss of its investment.

 

(iv) Accredited Investor Status. PBT is an “accredited investor” within the meaning of Regulation D promulgated under the Securities Act.

 

(v) Restricted Securities. PBT understands that the WinWin Shares have not been registered under the Securities Act and will not sell, offer to sell, assign, pledge, hypothecate or otherwise transfer any of the WinWin Shares unless (A) pursuant to an effective registration statement under the Securities Act, (B) such holder provides WinWin with an opinion of counsel, in form and substance reasonably acceptable to WinWin, to the effect that a sale, assignment or transfer of the WinWin Shares may be made without registration under the Securities Act and the transferee agrees to be bound by the terms and conditions of this Agreement, (C) such holder provides WinWin with reasonable assurances (in the form of seller and broker representation letters) that the WinWin Shares or the Underlying WinWin Shares, as the case may be, can be sold pursuant to Rule 144 or (D) pursuant to Rule 144(k) promulgated under the Securities Act following the applicable holding period.

 

(vi) Legends. PBT agrees that the certificates for the WinWin Shares and Underlying WinWin Shares shall bear the following legend:

 

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

PBT agrees that WinWin may place stop transfer orders with its transfer agent with respect to such certificates in order to implement the restrictions on transfer set forth in this Agreement. The appropriate portion of the legend and the stop transfer orders will be removed promptly upon delivery to WinWin of such satisfactory evidence as reasonably may be required by WinWin that such legend or stop orders are not required to ensure compliance with the Securities Act.

 

 

5. No Finders or Brokers. Each of the Parties represents that, on the basis of any actions and agreements by it, there are no brokers or finders entitled to compensation in connection with the transactions contemplated hereby. WinWin hereby indemnifies PBT for any broker or finder fees or costs incurred by WinWin, and PBT hereby indemnifies WinWin for any broker or finder fees or costs incurred by PBT.

 

6. Conditions to PBT’s Obligations at Each Closing. The obligations of PBT under Section 1(b) of this Agreement at each Closing are subject to the fulfillment or waiver, on or before such Closing, of each of the following conditions:

 

(a) Securities Exemptions. The offer and sale of the WinWin Shares to PBT at such Closing pursuant to this Agreement shall be exempt from the registration requirements of the Securities Act and the registration and/or qualification requirements of all applicable state securities laws.

 

(b) No Suspension of Trading or Listing of Common Stock. The WinWin Common Stock (i) shall be designated for quotation or listed on the Over-The-Counter market and on the Pink Sheets or on any other U.S. exchange or national quotation system and (ii) shall not have been suspended from trading or quotation on either the Over-The-Counter Market or the Pink Sheets.

 

(c) Good Standing Certificates. WinWin shall have delivered to PBT a certificate of the Secretary of State of the State of Delaware, dated as of a date within five days prior to the date of such Closing, with respect to the good standing of WinWin.

 

(d) Secretary’s Certificate. WinWin shall have delivered to PBT a certificate of WinWin executed by WinWin’s Secretary and dated as of such Closing attaching and certifying to the accuracy and correctness of (i) the WinWin Certificate of Incorporation, (ii) the WinWin Bylaws and (iii) the resolutions adopted by WinWin’s Board of Directors in connection with the transactions contemplated by this Agreement.

 

(e) Opinion of WinWin Counsel. PBT shall have received an opinion, dated as of such Closing, from Thelen Reid & Priest LLP, counsel to WinWin, in the form attached as Exhibit B.

 

(f) No Statute or Rule Challenging Transaction. No statute, rule, regulation, executive order, decree, ruling, injunction, action, proceeding or interpretation shall have been enacted, entered, promulgated, endorsed or adopted by any court or governmental authority of competent jurisdiction or any self-regulatory organization or the staff of any of the foregoing, having authority over the matters contemplated hereby which questions the validity of, or challenges or prohibits the consummation of, any of the transactions contemplated by this Agreement.

 

(g) Update of Disclosure Schedule. WinWin shall have delivered to PBT an updated WinWin Disclosure Schedule, dated as of the date of such Closing.

 

 

(h) Other Actions. WinWin shall have executed such certificates, agreements, instruments and other documents, and taken such other actions as shall be customary or reasonably requested by PBT in connection with the transactions contemplated hereby.

 

7. Additional Conditions to PBT’s Obligations at the Initial Closing. The obligations of PBT under Sections 1(b) and 2(a) of this Agreement at the Initial Closing are subject to the fulfillment or waiver, on or before the Initial Closing, in addition to the conditions set forth in Section 6, of each of the following conditions:

 

(a) Accuracy of Representations and Warranties. Each of the representations and warranties of WinWin contained in Section 3 shall have been true and correct in all material respects on and as of the date of this Agreement and on and as of the date of the Initial Closing with the same effect as though such representations and warranties had been made as of the Initial Closing; provided, however that, for purposes of determining the accuracy of such representations and warranties, (i) all “Material Adverse Effect” qualifications and other materiality qualifications, and any similar qualifications, contained in such representations and warranties shall be disregarded and (ii) any update of or modification to the WinWin Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded.

 

(b) Performance. WinWin shall have performed and complied in all material respects with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Initial Closing and shall have obtained all approvals, consents and qualifications necessary to complete the purchase and sale described herein.

 

(c) Compliance Certificate. WinWin shall have delivered to PBT a certificate signed on its behalf by its Chief Executive Officer or Chief Financial Officer certifying that the conditions specified in Sections 7(a) and 7(b) hereof have been fulfilled.

 

(d) Delivery of Stock Certificates. A stock certificate registered in the name of PBT representing the Initial Closing WinWin Shares shall have been delivered to PBT.

 

(e) Option Agreement. WinWin shall have executed and delivered to PBT the Investment Option Agreement in substantially the form attached hereto as Exhibit C.

 

(f) Board of Directors. The authorized number of members of WinWin’s Board of Directors shall be seven (7), with at least two (2) vacancies.

 

(g) Registration Rights Agreement. WinWin shall have executed and delivered to PBT the WinWin Registration Rights Agreement.

 

(h) Opinion of WinWin Delaware Counsel. PBT shall have received an opinion, dated as of such Closing, from Proctor Heyman LLP, counsel to WinWin, in substantially the form attached as Exhibit F.

 

 

(i) Filing of Designation. WinWin shall have caused the Designation to be filed with the Secretary of State of the State of Delaware, and shall have provided evidence to PBT to that effect. The Designation shall be in full effect as of the Initial Closing.

 

8. Additional Conditions to PBT’s Obligations at the Second Closing. The obligations of PBT under Sections 1(b) and 2(c) of this Agreement at the Second Closing are subject to the fulfillment or waiver, on or before the Second Closing, in addition to the conditions set forth in Section 6, of the following conditions:

 

(a) Accuracy of Representations and Warranties.

 

(i) Each of the representations and warranties of WinWin contained in Section 3 shall have been true and correct in all material respects on and as of the date of this Agreement; provided, however that, for purposes of determining the accuracy of such representations and warranties, (A) all “Material Adverse Effect” qualifications and other materiality qualifications, and any similar qualifications, contained in such representations and warranties shall be disregarded and (B) any update of or modification to the WinWin Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded.

 

(ii) The representations and warranties of WinWin contained in Section 3 shall be accurate in all respects as of the Second Closing as if made on and as of the Second Closing, except that any inaccuracies in such representations and warranties will be disregarded if the circumstances giving rise to all such inaccuracies (considered collectively) do not constitute, and could not reasonably be expected to have, a Material Adverse Effect on WinWin; provided, however that, for purposes of determining the accuracy of such representations and warranties, (A) all “Material Adverse Effect” qualifications and other materiality qualifications, and any similar qualifications, contained in such representations and warranties shall be disregarded and (B) any update of or modification to the WinWin Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded.

 

(b) Performance. WinWin shall have performed and complied in all material respects with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Second Closing and shall have obtained all approvals, consents and qualifications necessary to complete the purchase and sale described herein.

 

(c) Compliance Certificate. WinWin shall have delivered to PBT a certificate signed on its behalf by its Chief Executive Officer or Chief Financial Officer, dated as of the Second Closing, certifying that the conditions specified in Sections 8(a) and 8(b) hereof have been fulfilled.

 

(d) Delivery of Stock Certificates. Stock certificate(s) registered in the name of PBT representing the Second Closing WinWin Shares shall have been delivered to PBT.

 

 

9. Conditions to WinWin’s Obligations at Each Closing. The obligations of WinWin to PBT under this Agreement are subject to the fulfillment or waiver, on or before each Closing, of each of the following conditions:

 

(a) Securities Exemptions. The offer and sale of the WinWin Shares to PBT pursuant to this Agreement shall be exempt from the registration requirements of the Securities Act and the registration and/or qualification requirements of all applicable state securities laws.

 

(b) Good Standing Certificates. PBT shall have delivered to WinWin a certificate of the Secretary of State of the State of Delaware, dated as of a date within five days prior to the date of such Closing, with respect to the good standing of PBT.

 

(c) Secretary’s Certificate. PBT shall have delivered to WinWin a certificate of PBT executed by PBT’s Secretary attaching and certifying to the accuracy and correctness of (i) the PBT Certificate of Incorporation, (ii) the PBT Bylaws and (iii) the resolutions adopted by PBT’s Board of Directors in connection with the transactions contemplated by this Agreement.

 

(d) No Statute or Rule Challenging Transaction. No statute, rule, regulation, executive order, decree, ruling, injunction, action, proceeding or interpretation shall have been enacted, entered, promulgated, endorsed or adopted by any court or governmental authority of competent jurisdiction or any self-regulatory organization or the staff of any of the foregoing, having authority over the matters contemplated hereby which questions the validity of, or challenges or prohibits the consummation of, any of the transactions contemplated by this Agreement.

 

(e) Update of Disclosure Schedule. At each Closing at which PBT Shares are issued to WinWin, PBT shall have delivered to WinWin an updated PBT Disclosure Schedule, dated as of the date of such Closing.

 

(f) Other Actions. PBT shall have executed such certificates, agreements, instruments and other documents, and taken such other actions as shall be customary or reasonably requested by WinWin in connection with the transactions contemplated hereby.

 

10. Additional Conditions to WinWin’s Obligations at the Initial Closing. The obligations of WinWin to PBT at the Initial Closing under this Agreement are subject to the fulfillment or waiver, on or before the Initial Closing, in addition to the conditions set forth in Section 9, of each of the following conditions:

 

(a) Accuracy of Representations and Warranties. Each of the representations and warranties of PBT contained in Section 4 shall have been true and correct in all material respects on and as of the date of this Agreement and on and as of the date of the Initial Closing with the same effect as though such representations and warranties had been made as of the Initial Closing; provided, however that, for purposes of determining the accuracy of such representations and warranties, (i) all “Material Adverse Effect” qualifications and other materiality qualifications, and any similar qualifications, contained in such representations and warranties shall be disregarded and (ii) any update of or modification to the PBT Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded.

 

 

(b) Performance. PBT shall have performed and complied in all material respects with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Initial Closing and shall have obtained all approvals, consents and qualifications necessary to complete the purchase and sale described herein. 

 

(c) Compliance Certificate. PBT shall have delivered to WinWin a certificate dated as of the Initial Closing signed on its behalf by an authorized officer of PBT certifying that the conditions specified in Sections 10(a) and 10(b) hereof have been fulfilled. 

 

(d) Receipt of Consideration. PBT shall have delivered to WinWin the original Note, marked cancelled and initialed by an officer of PBT, and a stock certificate registered in the name of WinWin representing the Initial Closing PBT Shares.

 

(e) Registration Rights Agreement. PBT shall have executed and delivered to WinWin the WinWin Registration Rights Agreement.

 

(f) Addition to PBT Registration Rights Agreement. PBT shall have provided a counterpart signature page to the PBT Amended and Restated Registration Rights, Agreement dated as of January 6, 2006, as in effect as of immediately prior to the Initial Closing, which, upon execution by WinWin, shall be sufficient to afford to WinWin all rights associated with being an “Investor” thereunder.

 

(g) Sales Representative Agreement. The Parties shall have entered into a sales representative agreement substantially in accordance with the terms described on Exhibit D; provided that if all other conditions to WinWin's obligations at the Initial Closing (including the conditions set forth in Section 9) have been or will be met as of the proposed date of the Initial Closing, then WinWin may not refuse to comply with its obligations at the Initial Closing unless WinWin is able to demonstrate that it has taken commercially reasonable efforts to pursue the negotiation and execution of the sales representative agreement in the period between the date of this Agreement and the intended date of the Initial Closing.

 

(h) Filing of Designation. WinWin shall have caused the Designation to be filed with the Secretary of State of the State of Delaware. The Designation shall be in full effect as of the Initial Closing.

 

11. Additional Conditions to WinWin’s Obligations at The Second Closing. The obligations of WinWin to PBT under this Agreement at the Second Closing are subject to the fulfillment or waiver, on or before the Second Closing, in addition to the conditions set forth in Section 9, of the following conditions:

 

 

(a) Accuracy of Representations and Warranties.

 

(i) If PBT is issuing PBT Shares at the Second Closing, each of the representations and warranties of PBT contained in Section 4 shall have been true and correct in all material respects on and as of the date of this Agreement; provided, however that, for purposes of determining the accuracy of such representations and warranties, (A) all “Material Adverse Effect” qualifications and other materiality qualifications, and any similar qualifications, contained in such representations and warranties shall be disregarded and (B) any update of or modification to the PBT Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded.

 

(ii) If PBT is issuing PBT Shares at the Second Closing, the representations and warranties of PBT contained in Section 4 shall be accurate in all respects as of the Second Closing as if made on and as of the Second Closing, except that any inaccuracies in such representations and warranties will be disregarded if the circumstances giving rise to all such inaccuracies (considered collectively) do not constitute, and could not reasonably be expected to have, a Material Adverse Effect on PBT; provided, however that, for purposes of determining the accuracy of such representations and warranties, (A) all “Material Adverse Effect” qualifications and other materiality qualifications, and any similar qualifications, contained in such representations and warranties shall be disregarded and (B) any update of or modification to the PBT Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded.

 

(b) Performance. PBT shall have performed and complied in all material respects with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Second Closing and shall have obtained all approvals, consents and qualifications necessary to complete the purchase and sale described herein. 

 

(c) Compliance Certificate. PBT shall have delivered to WinWin a certificate, dated as of the Second Closing, signed on its behalf by its Chief Executive Officer or Chief Financial Officer certifying that the conditions specified in Sections 11(a) and 11(b) hereof have been fulfilled. 

 

(d) Receipt of Consideration. PBT shall have delivered to WinWin a stock certificate registered in the name of WinWin representing the Second Closing PBT Shares, if any.

 

(e) Sales Representative Agreement. The Parties shall have entered into a sales representative agreement substantially in accordance with the terms described on Exhibit D (the “Sales Representative Agreement”).

 

12. Covenants.

 

(a) Securities Law Filings. The Parties shall file in a timely manner all securities filings required to be filed in connection with the issuances of securities as contemplated by this Agreement, including the filing by each Party of Forms D relating to the sale of the WinWin Shares and the PBT Shares under this Agreement, pursuant to Regulation D promulgated under the Securities Act.

 

 

(b) WinWin Stockholders Consent.

 

(i) As promptly as practicable after the date of the Initial Closing, WinWin shall prepare and cause to be filed with the SEC a preliminary information statement relating to the WinWin Stockholders’ Consent (as defined below) and shall use all commercially reasonable efforts to cause the information statement to comply with the rules and regulations promulgated by the SEC, to respond promptly to any comments of the SEC or its staff, to file a definitive information statement (the “Information Statement”) and to cause the Information Statement to be mailed to WinWin’s stockholders as promptly as practicable.

 

(ii) WinWin shall take all action necessary to obtain and give notice (pursuant to the Information Statement) of the written consent of the WinWin stockholders (the “WinWin Stockholders’ Consent”) to approve and adopt an amended and restated certificate of incorporation in the form attached hereto as Exhibit E (the “Restated Charter”) and approve the filing of the Restated Charter with the Secretary of State of the State of Delaware. The WinWin Stockholders’ Consent shall be obtained and the Information Statement shall be filed with the SEC and provided to the WinWin stockholder as promptly as practicable following the Initial Closing, in compliance with all applicable legal requirements.

 

(iii) the Information Statement shall include a statement to the effect that the WinWin Board of Directors voted to recommend that the WinWin stockholders vote to adopt the Restated Charter, including the unanimous recommendation of the disinterested members of the WinWin Board of Directors. Such recommendation shall not be withdrawn or modified, and no resolution of the WinWin Board of Directors or any committee thereof to withdraw or modify such recommendation shall be adopted or proposed.

 

(c) Board of Directors.  Promptly upon the written request of PBT, WinWin shall use its best efforts to cause WinWin’s Board of Directors to nominate the directors designated for election, if any, by the holders of the Series A Preferred Stock (the “PBT Representatives”) for election or re-election at each meeting of WinWin’s stockholders at which the composition of WinWin’s Board of Directors is subject to a proposal. During any such time that the holders of Series A Preferred Stock have the right to elect any PBT Representative(s) to the WinWin Board of Directors, but have not elected such PBT Representative(s) to the WinWin Board of Directors, WinWin will maintain sufficient authorized but vacant seats on its Board of Directors to permit the election of such PBT Representative(s).

 

(d) Access; Provision of Information.

 

(i) Each Party shall permit representatives of the other Party to have reasonable access at reasonable times and upon reasonable advance written notice, to senior management of the Party, its accountants, records (including tax and financial records), contracts and other documents of or pertaining to the Party.

 

(ii) From and after the Initial Closing, PBT shall promptly provide WinWin with information of the type that, in PBT’s reasonable judgment upon consultation with counsel, would be required to be disclosed by WinWin under Form 8-K as a result of WinWin’s ownership interest in the PBT Shares.

 

 

(iii) WinWin will provide PBT, on a monthly basis, with all financial information that PBT requires in order to meet its financial reporting obligations (to investors, regulatory authorities and otherwise) on a timely basis (the “WinWin Financial Reporting Covenant”). If WinWin breaches the WinWin Financial Reporting Covenant, PBT can obtain reimbursement from WinWin for direct and indirect costs and other damages incurred in connection with or relating to the untimely delivery of PBT financials resulting from such breach, including reimbursement of legal fees incurred by or reimbursable by PBT, and PBT may exercise any and all other remedies available under applicable law.

 

(e) Additional WinWin Financial Covenants. WinWin will comply with SOX and all applicable rules and standards promulgated under SOX. To the extent that, at any time, WinWin or its accountants determines that WinWin has material weaknesses in its internal controls over financial reporting (as such terms are defined in SOX, together with the rules and standards promulgated by the SEC relating to SOX), WinWin will promptly provide notice of such determination to PBT and, upon the written request of PBT, will remediate such material weakness within three months of such determination, provided that either (i) WinWin has Available Funds (as defined below) or (ii) PBT agrees to reimburse the reasonable, documented costs of such remediation over and above the sum of (A) the Available Funds and (B) any amounts allocated for any applicable tasks in the budget most recently approved by WinWin’s board of directors. PBT will be entitled to approve in advance any expenses requested to be reimbursed by PBT hereunder. For purposes of this Section 12(f) "Available Funds" means, as of the date of PBT’s written request, the cash and cash equivalents held by WinWin that is in excess of the greater of (1) an amount equal to the cash used in WinWin’s operations during the most recent quarter for which WinWin has filed financial results with the SEC multiplied by 3 and (2) $2,000,000.

 

(f) Cooperative Activities.

 

(i) Selling Support. During the period from the date of this Agreement through at least December 31, 2006 (the “Cooperation Term”), WinWin shall provide PBT with a reasonable amount of selling support to assist in driving PBT’s biometric authentication and payment solutions into the Chinese Video Lottery Terminal (“VLT”) solution that is being prepared for rollout across China. This support shall include, among other things (and in compliance with all applicable legal requirements), both the direct promotion of PBT’s solutions to key government officials and other decision makers/influencers and the arrangement of key meetings between these individuals/groups and PBT employees.

 

(ii) Access. During the Cooperation Term, in compliance with all applicable legal requirements, WinWin shall provide PBT with access to all senior Chinese government officials with current WinWin relationships for the purpose of promoting PBT solutions into other applications beyond VLTs.

 

(iii) Attorney Support. During the Cooperation Term, in compliance with all applicable legal requirements, WinWin shall provide PBT with the support of WinWin’s Chinese/American VP/attorney for the purpose of making introductions and helping provide tactical and strategic guidance to PBT in connection with its entry into China.

 

 

(iv) Physical and Logistical Support. During the Cooperation Term, in compliance with all applicable legal requirements, WinWin shall provide PBT with physical and logistical support for PBT’s entry into China, including providing access to WinWin’s distribution channels and making available without charge a limited amount of office space in Shanghai.

 

(v) Identification of Mutual Opportunities. During the Cooperation Term, each of WinWin and PBT shall use commercially reasonable efforts to identify and exploit opportunities for the benefit of both parties. The senior executive officers of each Party shall meet, whether telephonically or in person, on at least a monthly basis to discuss any such identified opportunities and the best means of exploiting such opportunities.

 

(vi) PBT Support. During the Cooperation Term and upon the written request of WinWin, PBT shall provide WinWin with reasonable support and assistance in promotional consideration and exposure of WinWin products, services and technologies. In addition, PBT shall provide WinWin with reasonable support and assistance in identifying sources of equity and debt financing and strategic partners and in assisting WinWin to obtain financing from such sources.

 

(vii) Sales Representative Agreement. Promptly following the Initial Closing, the Parties shall commence good faith negotiation to enter into the Sales Representative Agreement.

 

(g) Confidentiality. Neither Party shall issue, or permit any of its Subsidiaries or any Representative of itself or any subsidiary to issue, any press releases or any other public statements with respect to the transactions contemplated by this Agreement; provided, however, that either Party shall be entitled, without the prior written approval of the other Party, to make any public disclosure with respect to such transactions to the extent that (i) such Party shall have provided the other Party with at least one business day to review any such proposed press release or public statement and consulted with the other before issuing such press release or public statement, and (ii) such Party shall have been advised in writing by its outside legal counsel that such disclosure, including any specific disclosure to which the other Party has objected, is required by applicable law or regulations. The Parties acknowledge that the provisions of the letter agreement between the Parties, dated as of January 24, 2005, regarding the non-disclosure and non-use of confidential information shall remain in force.

 

(h) Negative Pledge.

 

(i) WinWin covenants and agrees that, beginning on the date of this Agreement and until the date following an initial public offering of PBT common stock on which any lockup or market standoff restrictions applicable to the PBT Shares expire:

 

(1) WinWin shall not directly or indirectly sell, assign, transfer or pledge, or otherwise take any action that could lead directly or indirectly to the creation of any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, equity, trust, equitable interest, adverse claim, proxy, option, right of first refusal, preemptive right, community property interest, legend or restriction of any nature (including any restriction on the voting or transfer of any security and any restriction on the receipt of any dividend or other payment receivable by the owner of any security, but excluding any restriction imposed under applicable securities laws) on any of WinWin’s rights in or to any of the PBT Shares or any unpaid dividends or other distributions or payments with respect to any of the PBT Shares;

 

 

(2) WinWin shall maintain, preserve and defend the title to the PBT Shares against the claim of any other person or entity;

 

(3) Each stock certificate and other instrument representing or evidencing the PBT Shares shall bear a legend in substantially the following form:

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS SET FORTH IN THAT CERTAIN SECOND AMENDED AND RESTATED JOINT VENTURE AGREEMENT DATED AS OF AUGUST 31, 2006, BY AND BETWEEN SOLIDUS NETWORKS, INC. AND WINWIN GAMING, INC. AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR ASSIGNED IN ANY MANNER.

 

(ii) Immediately following the date following an initial public offering of PBT common stock on which any lockup or market standoff restrictions applicable to the PBT Shares expire, PBT shall, at WinWin’s request and following receipt of the stock certificates and other instruments representing or evidencing the PBT Shares, issue a replacement stock certificate without the legend referred to in Section 12(h)(i)(3).

 

13. Termination. This Agreement shall terminate upon the mutual agreement of the Parties. In any event, either Party may terminate this Agreement on or after September 30, 2006 if the Initial Closing has not occurred prior to such date and such failure to close was not due to the failure of the Party electing to terminate the Agreement to perform an obligation or satisfy a condition to the Initial Closing.

 

14. Indemnification, Etc. 

 

(a) Definitions. For purposes of this Section 14, the following capitalized terms shall have the following meanings:

 

(i) A “Claim Notice” relating to a particular representation or warranty shall be deemed to have been given if any Indemnitee, acting in good faith, delivers to the Party making the representation or warranty a written notice stating that such Indemnitee believes that there is or has been an inaccuracy in such representation or warranty and containing (A) a brief description of the specific facts supporting such Indemnitee’s good faith belief that there is or has been such an inaccuracy and (B) a non-binding, preliminary estimate of the aggregate dollar amount of the Damages that have arisen and may arise as a direct or indirect result of such inaccuracy.

 

(ii) “Damages” shall include any loss, damage, injury, decline in value, lost opportunity, liability, claim, demand, settlement, judgment, award, fine, penalty, tax, fee (including any legal fee, expert fee, accounting fee or advisory fee), charge, cost (including any cost of investigation) or expense of any nature.

 

 

(iii) “Governmental Body” shall mean any: (A) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (B) federal, state, local, municipal, foreign or other government; (C) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or entity and any court or other tribunal); (D) multi-national organization or body; or (E) individual, entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature.

 

(iv) “Indemnitees” shall mean,

 

(A) with respect to WinWin, the following Persons: (I) PBT; (II) PBT’s affiliates; (III) the respective Representatives of the Persons referred to in clauses “(I)” and “(II)” above; and (IV) the respective successors and assigns of the Persons referred to in clauses “(I),” “(II)” and “(III)” above (collectively, the “WinWin Indemnitees”); and

 

(B) with respect to PBT, the following Persons: (I) WinWin; (II) WinWin’s affiliates; (III) the respective Representatives of the Persons referred to in clauses “(I)” and “(II)” above; and (IV) the respective successors and assigns of the Persons referred to in clauses “(I),” “(II)” and “(III)” above (collectively, the “PBT Indemnitees”).

 

(v) “Legal Proceeding” shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding and any informal proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation that is, has been or may in the future be commenced, brought, conducted or heard by or before, or that otherwise has involved or may involve, any Governmental Body or self regulatory agency or any arbitrator or arbitration panel.

 

(vi) “Liability” shall mean any debt, obligation, duty or liability of any nature (including any unknown, undisclosed, unmatured, unaccrued, unasserted, contingent, indirect, conditional, implied, vicarious, derivative, joint, several or secondary liability), regardless of whether such debt, obligation, duty or liability would be required to be disclosed on a balance sheet prepared in accordance with GAAP and regardless of whether such debt, obligation, duty or liability is immediately due and payable.

 

(vii) “Person” shall mean any (A) individual, (B) Governmental Body or (C) corporation, general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, cooperative, foundation, society, political party, union, company, firm or other enterprise, association, organization or entity.

 

(viii) “Representatives” shall mean officers, directors, employees, agents, attorneys, accountants, advisors and representatives.

 

 

(b) Survival of Representations and Warranties.  The representations and warranties set forth in Sections 3 and 4 shall expire one year following the Closing at which such representations and warranties are made; provided, however, that if a Claim Notice relating to any representation or warranty set forth in Section 3 or Section 4 is given on or prior to the date one year after the Closing Date to the Party making the representation or warranty, then, notwithstanding anything to the contrary contained in this Section 14(b), such representation or warranty shall not expire, but rather shall remain in full force and effect until such time as each and every claim that is based directly or indirectly upon, or that relates directly or indirectly to, any inaccuracy or alleged inaccuracy in such representation or warranty has been fully and finally resolved. The representations and warranties set forth in Sections 3 and 4 and the rights and remedies that may be exercised by the Indemnitees, shall not be limited or otherwise affected by or as a result of any information furnished or made available to, or any investigation made by or any knowledge of, any of the Indemnitees or any of their Representatives.

 

(c) Indemnification by WinWin. WinWin shall hold harmless and indemnify each of the WinWin Indemnitees from and against, and shall compensate and reimburse each of the WinWin Indemnitees for, any Damages that are directly or indirectly suffered or incurred by any of the WinWin Indemnitees or to which any of the WinWin Indemnitees may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) and that arise directly or indirectly from or as a direct or indirect result of, or are directly or indirectly connected with:

 

(i) any inaccuracy in any representation or warranty made by WinWin in this Agreement as of the date of this Agreement (without giving effect to any qualification as to materiality or any similar qualification contained in such representation or warranty, and without giving effect to any update to the WinWin Disclosure Schedule);

 

(ii) any inaccuracy in any representation or warranty made by WinWin in this Agreement as if such representation and warranty had been made on and as of each Closing (without giving effect to any qualification as to materiality or any similar qualification contained in such representation or warranty, and without giving effect to any update to the WinWin Disclosure Schedule); and

 

(iii) any Legal Proceeding relating directly or indirectly to any actual or alleged inaccuracy, breach, Liability or matter of the type referred to in clause “(i)” or “(ii)” above (including any Legal Proceeding commenced by any Indemnitee for the purpose of enforcing any of its rights under this Section 14).

 

(d) Indemnification by PBT. PBT shall hold harmless and indemnify each of the PBT Indemnitees from and against, and shall compensate and reimburse each of the PBT Indemnitees for, any Damages that are directly or indirectly suffered or incurred by any of the PBT Indemnitees or to which any of the PBT Indemnitees may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) and that arise directly or indirectly from or as a direct or indirect result of, or are directly or indirectly connected with:

 

(i) any inaccuracy in any representation or warranty made by PBT in this Agreement as of the date of this Agreement (without giving effect to any qualification as to materiality or any similar qualification contained in such representation or warranty, and without giving effect to any update to the PBT Disclosure Schedule);

 

 

(ii) any inaccuracy in any representation or warranty made by PBT in this Agreement as if such representation and warranty had been made on and as of each Closing (without giving effect to any qualification as to materiality or any similar qualification contained in such representation or warranty, and without giving effect to any update to the PBT Disclosure Schedule); and

 

(iii) any Legal Proceeding relating directly or indirectly to any actual or alleged inaccuracy, breach, Liability or matter of the type referred to in clause “(i)” or “(ii)” above (including any Legal Proceeding commenced by any Indemnitee for the purpose of enforcing any of its rights under this Section 14).

 

(e) Satisfaction of Indemnification Claims. 

 

(i) PBT shall have the right to claw back, and WinWin shall forever forfeit, that number of PBT Shares issued to WinWin, at a deemed value per share of $5.00 (as adjusted for stock splits, stock dividends, stock combinations and similar events, the “PBT Share Deemed Value”)) that are sufficient to reimburse PBT and its affiliates and Representatives for all Damages incurred, set forth in a Claim Notice and not disputed within ten business days of delivering to WinWin the notice that details such Damages, in satisfaction of WinWin’s indemnification obligations under Section 14(c). The claw back and forfeiture of such PBT Shares shall operate for all purposes as a complete discharge of PBT’s obligation to make any payment, provide any benefit or afford any right to WinWin to the extent such payment, benefit or right would be owing as a result of WinWin’s ownership of the PBT Shares that were clawed back and forfeited.

 

(ii) WinWin shall have the right to claw back, and PBT shall forever forfeit, that number of WinWin Shares issued to PBT, at a deemed value per share of $79.10 for the WinWin Series A-1 Shares and $7.91 for the WinWin Series A Shares (or, in each case, $0.791 per Underlying WinWin Share) (as adjusted for stock splits, stock dividends, stock combinations and similar events, the “WinWin Share Deemed Value”) that are sufficient to reimburse WinWin and its affiliates and Representatives for all Damages incurred, set forth in a Claim Notice and not disputed within ten business days of delivering the notice that details such Damages to PBT, in satisfaction of PBT’s indemnification obligations under Section 14(d). The claw back and forfeiture of such WinWin Shares shall operate for all purposes as a complete discharge of WinWin’s obligation to make any payment, provide any benefit or afford any right to PBT to the extent such payment, benefit or right would be owing as a result of PBT’s ownership of the WinWin Shares that were clawed back and forfeited.

 

(f) Threshold; Ceiling.

 

(i) PBT shall not have the right to claw back any PBT Shares pursuant to Section 14(e) for any inaccuracy in any of WinWin’s representations and warranties set forth in Section 3 until such time as the total amount of all Damages (including the Damages arising from such inaccuracy and all other Damages arising from any other inaccuracies in any WinWin representations or warranties) that have been directly or indirectly suffered or incurred by any one or more of the WinWin Indemnitees, or to which any one or more of the WinWin Indemnitees has or have otherwise become subject, exceeds $50,000 in the aggregate. (If the total amount of such Damages exceeds $50,000, then the WinWin Indemnitees shall be entitled to be indemnified against and compensated and reimbursed for all such Damages.)

 

 

(ii) WinWin shall not have the right to claw back any WinWin Shares pursuant to Section 14(e) for any inaccuracy in any of PBT’s representations and warranties set forth in Section 4 until such time as the total amount of all Damages (including the Damages arising from such inaccuracy and all other Damages arising from any other inaccuracies in any PBT representations or warranties) that have been directly or indirectly suffered or incurred by any one or more of the PBT Indemnitees, or to which any one or more of the PBT Indemnitees has or have otherwise become subject, exceeds $50,000 in the aggregate. (If the total amount of such Damages exceeds $50,000, then the PBT Indemnitees shall be entitled to be indemnified against and compensated and reimbursed for all such Damages.)

 

(iii) The maximum liability of WinWin under Section 14 for inaccuracies of WinWin’s representations and warranties set forth in Section 3 shall be equal to the aggregate WinWin Share Deemed Value of the WinWin Shares issued to PBT under this Agreement. The maximum liability of PBT under Section 14 for inaccuracies of PBT’s representations and warranties set forth in Section 4 shall be equal to the aggregate PBT Share Deemed Value of the PBT Shares issued to WinWin pursuant to this Agreement.

 

(iv) The limitations set forth in this Section 14(f) shall not apply to losses caused by fraud.

 

(g) Exclusivity of Indemnification Remedies. The right to indemnification provided in this Section 14 is the exclusive remedy for inaccuracies in the representations and warranties set forth in Sections 3 and 4.

 

(h) Defense of Third Party Claims.

 

(i) In the event of the assertion or commencement by any Person of any claim or Legal Proceeding (whether against PBT, against any other Indemnitee or against any other Person) with respect to which WinWin may become obligated to indemnify, hold harmless, compensate or reimburse any WinWin Indemnitee pursuant to this Section 14: (A) PBT shall have the right to control the defense of such claim or Legal Proceeding; (B) all expenses relating to the defense of such claim or Legal Proceeding (whether or not incurred by PBT) shall be borne and paid exclusively by WinWin; (C) WinWin shall make available to PBT any documents and materials in the possession or control of WinWin or its Representatives that may be necessary to the defense of such claim or Legal Proceeding; and (D) PBT shall have the right to settle, adjust or compromise such claim or Legal Proceeding with the consent of WinWin, which shall not be unreasonably withheld, delayed or conditioned.

 

(ii) In the event of the assertion or commencement by any Person of any claim or Legal Proceeding (whether against PBT, against any other Indemnitee or against any other Person) with respect to which PBT may become obligated to indemnify, hold harmless, compensate or reimburse any PBT Indemnitee pursuant to this Section 14: (A) PBT shall have the right to control the defense of such claim or Legal Proceeding; (B) all expenses incurred by PBT relating to the defense of such claim or Legal Proceeding shall be borne and paid exclusively by PBT; (C) WinWin shall make available to PBT any documents and materials in the possession or control of WinWin or its Representatives that may be necessary to the defense of such claim or Legal Proceeding; and (D) PBT shall have the right to settle, adjust or compromise such claim or Legal Proceeding without the consent of WinWin.

 

 

(i) Exercise of Remedies by Indemnitees other than the Parties. No Indemnitee (other than the Parties or any successors thereto or assigns thereof) shall be permitted to assert any indemnification claim unless the Party to which Indemnitee is related (or any successor thereto or assign thereof) shall have consented to the assertion of such indemnification claim.

 

15. Miscellaneous.

 

(a) Successors and Assigns. The terms and conditions of this Agreement will inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. Neither Party shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other Party.

 

(b) Governing Law. This Agreement will be governed by and construed and enforced under the internal laws of the State of California, without reference to principles of conflict of laws or choice of laws.

 

(c) Dispute Resolution. Any unresolved controversy or claim arising out of or relating to this Agreement, except as (i) otherwise provided in this Agreement, or (ii) any such controversies or claims arising out of either party’s intellectual property rights for which a provisional remedy or equitable relief is sought, shall be submitted to arbitration by one arbitrator mutually agreed upon by the parties, and if no agreement can be reached within 30 days after names of potential arbitrators have been proposed by the American Arbitration Association (the “AAA”), then by one arbitrator having reasonable experience in corporate finance transactions of the type provided for in this Agreement and who is chosen by the AAA. The arbitration shall take place in San Francisco, California, in accordance with the AAA rules then in effect, and judgment upon any award rendered in such arbitration will be binding and may be entered in any court having jurisdiction thereof. There shall be limited discovery prior to the arbitration hearing as follows: (A) exchange of witness lists and copies of documentary evidence and documents relating to or arising out of the issues to be arbitrated, (B) depositions of all party witnesses and (C) such other depositions as may be allowed by the arbitrators upon a showing of good cause. Depositions shall be conducted in accordance with the California Code of Civil Procedure, the arbitrator shall be required to provide in writing to the parties the basis for the award or order of such arbitrator, and a court reporter shall record all hearings, with such record constituting the official transcript of such proceedings. The prevailing party shall be entitled to reasonable attorney’s fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled. Each of the parties to this Agreement consents to personal jurisdiction for any equitable action sought in the U.S. District Court for the Northern District of California or any court of the State of California having subject matter jurisdiction.

 

 

(d) Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.

 

(e) Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs, exhibits and schedules will, unless otherwise provided, refer to sections and paragraphs hereof and exhibits and schedules attached hereto, all of which exhibits and schedules are incorporated herein by reference.

 

(f) Notices. Any notices and other communications required or permitted under this Agreement shall be in writing and shall be delivered (i) personally by hand or by courier, (ii) mailed by United States first-class mail, postage prepaid or (iii) sent by facsimile, to a Party’s address or facsimile number as follows:

 

if to WinWin:

WinWin Gaming, Inc.

 

8687 West Sahara, Suite 201

Las Vegas, NV 89117

Tel: (702) 212-4530

Fax: (702) 212-4553

Attention: Patrick Rogers

 

with a copy to:

Thelen Reid & Priest LLP

701 Eighth Street, N.W.

Washington, D.C.  20001

Tel: 202 ###-###-####

Fax: 202 ###-###-####

Attention: Louis A. Bevilacqua

 

if to PBT:

Solidus Networks, Inc.

 

101 Second Street, Suite 1100

San Francisco, California 94105

Tel: (415) 281-2200

Fax: (415) 281-2202

Attention: Gus Spanos

 

with a copy to:

Cooley Godward llp

101 California Street, 5^th Floor

San Francisco, CA 94111

Tel: (415) 693-2000

Fax: (415) 693-2222

Attention: Kenneth L. Guernsey

, or at such other address or facsimile number as a Party may designate by giving at least ten days’ advance written notice to the other Party. All such notices and other communications shall be deemed given upon (I) receipt or refusal of receipt, if delivered personally, (II) three days after being placed in the mail, if mailed, or (III) confirmation of facsimile transfer, if faxed.

 

(g) Amendments and Waivers. This Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of the Parties.

 

(h) Severability. If any provision of this Agreement is held to be unenforceable under applicable law, such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms.

 

(i) Entire Agreement. This Agreement, together with all exhibits and schedules hereto and the Confidentiality Letter, constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings, duties or obligations between the parties with respect to the subject matter hereof.

 

(j) Further Assurances. From and after the date of this Agreement, upon the request of a Party, the other Party will execute and deliver such instruments, documents or other writings, and take such other actions, as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement.

 

(k) Meanings. Whenever in this Agreement the word “include” or “including” is used, it shall be deemed to mean “include, without limitation” or “including, without limitation,” as the case may be, and the language following “include” or “including” shall not be deemed to set forth an exhaustive list. All references to “dollars” or “$” shall be deemed to mean United States dollars.

 

(l) Fees, Costs and Expenses. Except as otherwise provided for in this Agreement, all fees, costs and expenses (including attorneys’ fees and expenses) incurred by any party hereto in connection with the preparation, negotiation and execution of this Agreement and the exhibits and schedules hereto and the consummation of the transactions contemplated hereby and thereby (including the costs associated with any filings with, or compliance with any of the requirements of any governmental authorities), shall be the sole and exclusive responsibility of such party.

 

(m) Stock Splits, Dividends and other Similar Events. The provisions of this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend, reorganization or other similar event that may occur with respect to either Party after the date hereof.

 

(n) Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each Party will be entitled to specific performance under this Agreement. The Parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

 

[Signature page follows]

 

 

 

The parties hereto have executed this Agreement as of the date and year first above written.

 

	WinWin Gaming, Inc.
	/s/ Patrick Rogers
	Name: Patrick Rogers
	Title: President / CEO
	Solidus Networks, Inc.
	Name:
	Title:

The parties hereto have executed this Agreement as of the date and year first above written.

 

	WinWin Gaming, Inc.
	Name: Patrick Rogers
	Title: President / CEO
	Solidus Networks, Inc.
	/s/ Steve Zelinger
	Name: Steve Zelinger
	Title: EVP & GC

 

 

 

THIS REGISTRATION RIGHTS AGREEMENT is made as of August 31, 2006, by and between WINWIN GAMING, INC., a Delaware corporation (together with any successor thereto, the “Company”), and SOLIDUS NETWORKS, INC., dba PayByTouch Solutions, a Delaware corporation (“PBT”).

 

 

The Company and PBT have entered into a Second Amended and Restated Joint Venture Agreement, dated as of August 31, 2006 (as amended, restated, supplement or otherwise modified from time to time, the “JV Agreement”), pursuant to which, among other things, PBT has agreed to purchase shares of the Company’s Series A-1 Preferred Stock, US$0.01 par value per share (the “Series A-1 Preferred Stock”), and shares of the Company’s Series A Preferred Stock, US$0.01 par value per share (the “Series A Preferred Stock”).

 

The Company and PBT desire to provide for certain arrangements with respect to the registration of shares of capital stock of the Company under the Securities Act (as defined herein).

 

The execution and delivery of this Agreement is a condition precedent to the transaction contemplated by the JV Agreement.

 

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1. Certain Definitions. Capitalized terms used in this Agreement and not otherwise defined shall have the following respective meanings:

 

“Agreement” shall mean this Registration Rights Agreement, as amended, restated, supplemented or otherwise modified from time to time.

 

“Commission” shall mean the United States Securities and Exchange Commission or any other federal agency at the time administering the Securities Act and the Exchange Act.

 

“Common Stock” shall mean the Company’s Common Stock, US$0.01 par value per share, and any other common equity securities now or hereafter issued by the Company, and any other shares of stock issued or issuable with respect thereto (whether by way of a stock dividend or stock split or in exchange for or in replacement of or upon conversion of such shares or otherwise in connection with a combination of shares, recapitalization, merger, consolidation or other corporate reorganization).

 

 

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

 

“New Securities” shall mean equity securities of the Company, whether now authorized or not, or rights, options, or warrants to purchase said equity securities, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for said equity securities.

 

“Person” shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, other entity or government (whether federal, state, county, city, municipal, local, foreign, or otherwise, including any instrumentality, division, agency, body or department thereof).

 

“Preferred Stock” shall mean the Series A-1 Preferred Stock and the Series A Preferred Stock.

 

“Registrable Securities” shall mean (a) the shares of Common Stock issued or issuable upon conversion of any Preferred Stock, (b) any other shares of Common Stock issued or issuable pursuant to the JV Agreement or any option granted pursuant thereto, and (c) any additional shares of Common Stock issued or distributed by way of a dividend, stock split or other distribution in respect of any share of Preferred Stock or any share of Common Stock into which any share of Preferred Stock was converted, or acquired by way of any rights offering or similar offering made in respect thereof; provided, however, that notwithstanding anything to the contrary contained herein, “Registrable Securities” shall not at any time include any securities (i) registered and sold pursuant to the Securities Act, or (ii) sold pursuant to Rule 144 promulgated under the Securities Act.

 

“Securities Act” shall mean the Securities Act of 1933, as amended, or any similar successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.

 

2. Registrations.

 

(a) Demand Registration.

 

(i) If the Company shall be requested in writing by holders (the “Holders”) of a majority of the Registrable Securities to file a registration statement for Registrable Securities having an aggregate offering price to the public of not less than US$15,000,000 under the Securities Act (a “Demand Notice”) in accordance with this Section 2(a), then the Company shall use best efforts to effect such a registration statement. Upon receipt of a Demand Notice, the Company shall, within 10 days, give written notice of such proposed registration to all Holders and shall offer to include in such proposed registration any Registrable Securities requested to be included in such proposed registration by such Holders who respond in writing to the Company’s notice within 30 days after delivery of such notice (which response shall specify the number of Registrable Securities proposed to be included in such registration). The Company shall promptly use best efforts to effect such registration as soon as practicable on an appropriate form, including Form S-2 or S-3, if available, under the Securities Act of the Registrable Securities which the Company has been so requested to register; provided, however, that the Company shall not be obligated to effect any registration under the Securities Act in the following circumstances:

 

 

(A) after the Company has already filed two registration statements initiated by the Holders of Registrable Securities pursuant to this Section 2(a); or

 

(B) during any period in which any other registration statement (other than on Form S-4 or Form S-8 promulgated under the Securities Act or any successor forms thereto) pursuant to which Registrable Securities are to be or were sold has been filed and not withdrawn or has been declared effective within the prior 90 days.

 

(ii) If the Holders requesting to be included in a registration pursuant to this Section 2(a) so elect, the offering of such Registrable Securities pursuant to such registration shall be in the form of an underwritten offering. The Holders of a majority of the Registrable Securities requested to be included in such registration shall select one or more nationally recognized firms of investment bankers reasonably acceptable to the Company to act as the lead managing underwriter or underwriters in connection with such offering and shall select any additional investment bankers and managers to be used in connection with the offering, which shall also be reasonably acceptable to the Company.

 

(iii) With respect to any registration pursuant to this Section 2(a), the Company may include in such registration any Common Stock; provided, however, that if the managing underwriter advises the Company that the inclusion of all Registrable Securities and Common Stock requested to be included by the Company in such registration would interfere with the successful marketing (including pricing) of all such securities, then the number of Registrable Securities and Common Stock proposed to be included in such registration shall be included in the following order:

 

(A) first, the Registrable Securities shall be included, pro rata among the participating Holders based upon the number of Registrable Securities held by such Holders at the time of such registration; and

 

(B) second, Common Stock requested to be included by the Company.

 

 

(iv) At any time before the registration statement covering Registrable Securities becomes effective, Holders of a majority of the Registrable Securities requested to be included in such registration may request the Company to withdraw or not to file the registration statement. In that event, if such request of withdrawal shall have been caused by, or made in response to, a material adverse effect or change in the Company’s financial condition, operations, business or prospects, such Holders of Registrable Securities shall not be deemed to have used one of their demand registration rights under this Section 2(a).

 

(b) Registrations on Form S-3. Notwithstanding anything contained in Section 2 to the contrary, at such time as the Company shall have qualified for the use of Form S-3 promulgated under the Securities Act or any successor form thereto, Holders of Registrable Securities shall have the right to request in writing up to two registrations on Form S-3 or any such successor forms of Registrable Securities, which request or requests shall (i) specify the number of Registrable Securities intended to be sold or disposed of and the Holders thereof, (ii) state the intended method of disposition of such Registrable Securities, and (iii) relate to Registrable Securities having an anticipated aggregate offering price of at least US$5,000,000. A requested registration on Form S-3 or any such successor forms in compliance with this Section 2(b) shall not count as a demand registration pursuant to Section 2(a), but shall otherwise be treated as a registration initiated pursuant to and shall, except as otherwise expressly provided in this Section 2(b), be subject to Section 2(a).

 

(c) Piggyback Registration. If, at any time or times the Company shall seek to register any shares of its Common Stock under the Securities Act for sale to the public for its own account or on the account of others (except with respect to registration statements on Form S-4, S-8 or another form not available for registering the Registrable Securities for sale to the public), the Company will promptly give written notice thereof to all Holders. If within ten (10) business days after their receipt of such notice one or more Holders request in writing the inclusion of some or all of the Registrable Securities owned by them in such registration, the Company will use best efforts to effect the registration under the Securities Act of such Registrable Securities. In the case of the registration of shares of capital stock by the Company in connection with any underwritten public offering, if the principal underwriter determines that the number of Registrable Securities to be offered must be limited, the Company shall not be required to register Registrable Securities of the Holders in excess of the amount, if any, of shares of the capital stock which the principal underwriter of such underwritten offering shall reasonably and in good faith agree to include in such offering in addition to any amount to be registered for the account of the Company; provided, however, that in no event shall the Registrable Securities to be included by PBT or its designee be reduced to below 25% of the total amount of securities included in the registration.

 

(d) Obligations Subject to Existing Obligations. Notwithstanding anything contained in Section 2 to the contrary, the Company’s obligations under this Section 2 shall be subject to its obligations pursuant to Section 4(k) of the Securities Purchase Agreement by and between the Company and Van Wagoner Private Opportunities Fund, dated as of February 25, 2005 (the “Existing Obligations”). The Company will not increase, extend or otherwise amend any of the Existing Obligations without the prior written consent of the Holders of a majority of the then outstanding Registrable Securities, and will promptly notify the Holders of the expiration of the Existing Obligations.

 

3. Further Obligations of the Company. Whenever the Company is required hereunder to register any Registrable Securities, it agrees that it shall also do the following:

 

 

(a) Pay all expenses of such registrations and offerings in connection with any registrations pursuant to Section 2 hereof; provided, however, that the Company shall have no obligation to pay or otherwise bear any portion of the underwriters’ commissions or discounts attributable to the Registrable Securities being offered and sold by the Holders or the fees and expenses of any counsel for the selling Holders in connection with the registration of the Registrable Securities;

 

(b) Use its best efforts to diligently prepare and file with the Commission a registration statement and such amendments and supplements to said registration statement and the prospectus used in connection therewith as may be necessary to keep said registration statement effective until the Holder or Holders have completed the distribution described in the registration statement relating thereto (but for no more than one hundred eighty (180) days or such lesser period until all such Registrable Securities are sold) and to comply with the provisions of the Securities Act with respect to the sale of securities covered by said registration statement for such period; provided, however, that (i) such 180-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 that are intended to be offered on a continuous or delayed basis, subject to compliance with applicable Commission rules, such 180-day period shall be extended for up to an additional 120 days, if necessary, to keep the registration statement effective until all such Registrable Securities are sold;

 

(c) Furnish to each selling Holder such copies of each preliminary and final prospectus as such Holder may reasonably request to facilitate the public offering of its Registrable Securities;

 

(d) Enter into and perform its obligations under any reasonable underwriting agreement required by the proposed underwriter, if any, in such form and containing such terms as are customary;

 

(e) Use its best efforts to register or qualify the securities covered by said registration statement under the securities or “blue sky” laws of such jurisdictions as any selling Holder may reasonably request provided the Company shall not be required to qualify to do business or file a general consent to service of process in connection therewith;

 

(f) Immediately notify each selling Holder, at any time when a prospectus relating to his, her or its Registrable Securities is required to be delivered under the Securities Act, of the happening of any event (other than an event relating to a Holder or a plan of distribution delivered by a Holder) as a result of which such prospectus contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading, and, to the extent required by the Securities Act, at the request of any such selling Holder, prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading;

 

 

(g) Cause upon or immediately after the effectiveness of a registration all such Registrable Securities to be listed on each securities exchange or quotation system on which the Common Stock of the Company are then listed or quoted;

 

(h) Make available to each selling Holder, any underwriter participating in any disposition pursuant to a registration statement, and any attorney, accountant or other agent or representative retained by any such selling Holder or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, as shall be reasonably necessary to enable them to exercise their due diligence responsibility, subject to appropriate confidentiality undertakings;

 

(i) use its best efforts to furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 2, on the date on which such Registrable Securities are sold to the underwriter, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a “comfort” letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any;

 

(j) Otherwise use its best efforts to comply with the securities laws of the United States and other applicable jurisdictions and all applicable rules and regulations of the Commission and comparable governmental agencies in other applicable jurisdictions and make generally available to its Holders, in each case as soon as practicable, but not later than forty-five (45) days after the close of the period covered thereby or ninety (90) days after the closing of the fiscal year, as the case may be, an earnings statement of the Company which will satisfy the provisions of Section 11(a) of the Securities Act;

 

(k) Provide an institutional transfer agent and registrar and a CUSIP number for all Registrable Securities on or before the effective date of the registration statement; and

 

(l) Make available for inspection by any Holder, any underwriter participating in any disposition pursuant to the registration statement, and any attorney, accountant, or other agent of any Holder or underwriter, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company’s officers, directors and employees to supply all information requested by any Holder, underwriter, attorney, accountant, or agent in connection with the registration statement; provided that an appropriate confidentiality agreement is executed by any such Holder, underwriter, attorney, accountant or other agent.

 

4. Cooperation by Prospective Sellers.

 

(a) Each prospective seller of Registrable Securities shall furnish to the Company in writing such information as the Company may reasonably request from such seller in connection with any registration statement with respect to such Registrable Securities.

 

 

(b) The failure of any prospective seller of Registrable Securities to furnish any information or documents in accordance with any provision contained in this Agreement shall not affect the obligations of the Company under this Agreement to any remaining sellers who furnish such information and documents unless, in the reasonable opinion of counsel to the Company and/or the underwriters, such failure impairs or adversely affects the offering or the legality of the registration statement or causes the request not to meet the requirements of Section 2 of this Agreement.

 

(c) Upon receipt of a notice (telephonic or written) from the Company or the underwriter of the happening of an event which makes any statement made in a registration statement or related prospectus covering Registrable Securities untrue or which requires the making of any changes in such registration statement or prospectus so that they will not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading, the Holders of Registrable Securities included in such registration statement shall discontinue disposition of such Registrable Securities pursuant to such registration statement until such Holders’ receipt of copies of the supplemented or amended prospectus contemplated in Section 3(f) hereof or until advised by the Company or the underwriters that dispositions may be resumed. If the Company gives any such notice, the time period mentioned in Section 3(b) shall be extended by the number of days elapsing between the date of notice and the date that each seller receives copies of the supplemented or amended prospectus contemplated by Section 3(f).

 

(d) Each Holder of Registrable Securities included in any registration statement will effect sales of such securities in accordance with the plan of distribution given to the Company.

 

(e) At the end of any period during which the Company is obligated to keep any registration statement current and effective as provided in this Agreement, the Holders of Registrable Securities included in such registration statement shall discontinue sales of shares pursuant to such registration statement, unless it receives notice from the Company of its intention to continue effectiveness of such registration statement with respect to such shares which remain unsold and such Holders shall notify the Company of the number of shares registered which remain unsold promptly upon expiration of the period during which the Company is obligated to maintain the effectiveness of the registration statement.

 

(f) No Person may participate in any underwritten registration pursuant to this Agreement unless such Person (i) agrees to sell such Person’s securities on the basis provided in any underwriting arrangements made with respect to such registration and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required by the terms of such underwriting arrangements.

 

 

5. Indemnification; Contribution.

 

(a) Incident to any registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will, to the extent permitted by law, indemnify and hold harmless each Holder who offers or sells any such Registrable Securities in connection with such registration statement (including its partners (including partners of partners and stockholders of any such partners), and directors, officers, stockholders, affiliates, employees, representatives and agents of any of them, and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, reasonable expenses and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities arise out of or are based on (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement (including any related preliminary or definitive prospectus, or any amendment or supplement to such registration statement or prospectus), (ii) any omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading; provided, however, that the Company will not be liable to the extent that (1) such loss, claim, damage, expense or liability arises from and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information furnished in writing to the Company by or on behalf of such Holder in accordance with Section 4(a) of this Agreement for use in such registration statement, or (2) in the case of a sale directly by such Holder (including a sale of Registrable Securities through any underwriter retained by such Holder to engage in a distribution solely on behalf of such Holder), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and such Holder failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Securities to the Person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act or any state securities laws, or (iii) any violation or alleged violation by any other party hereto, of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law. With respect to such untrue statement or omission or alleged untrue statement or omission in the information furnished in writing to the Company by or on behalf of such Holder in accordance with Section 4(a) of this Agreement for use in such registration statement, such Holder will severally and not jointly indemnify and hold harmless the Company (including its directors, officers, employees, representatives and agents), each other Holder (including its partners (including partners of partners and stockholders of such partners) and directors, officers, employees, representatives and agents of any of them, and each person who controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, reasonable expenses and liabilities, joint or several (including any reasonable investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred), to which they, or any of them, may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, provided, however, that the indemnification obligations of the Holder contained in this Section 5(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided, further, that, in no event shall any indemnity under this Section 5(a) exceed the net proceeds from the offering received by such Holder, except in the case of fraud or willful misconduct by such Holder.

 

 

(b) If the indemnification provided for in Section 5(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an indemnified party in respect of any losses, claims, damages, expenses or liabilities referred to therein, then each indemnifying party under this Section 5, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the other Holders from the offering of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the other Holders in connection with the statements or omissions which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Holders shall be deemed to be in the same respective proportions that the net proceeds from the offering received by the Company and the Holders, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the Registrable Securities. The relative fault of the Company and the Holders shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by or on behalf of the Company or the Holders and the parties’ relative intent, knowledge and access to information.

 

The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 5(b) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation.

 

 

(c) The amount paid by an indemnifying party or payable to an indemnified party as a result of the losses, claims, damages and liabilities referred to in this Section 5 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim, payable as the same are incurred. The indemnification and contribution provided for in this Section 5 will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified parties or any officer, director, employee, agent or controlling person of the indemnified parties. No indemnifying party, in the defense of any such claim or litigation, shall enter into a consent of entry of any judgment or enter into a settlement without the consent of the indemnified party, which consent will not be unreasonably withheld. Any indemnified party that proposes to assert the right to be indemnified under this Section 5 will, promptly after receipt of notice of commencement or threat of any claim or action against such party in respect of which a claim is to be made against an indemnifying party under this Section 5 notify the indemnifying party in writing (such written notice, an “Indemnification Notice”) of the commencement or threat of such action, enclosing a copy of all papers served or notices received (if applicable), but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability that the indemnifying party may have to any indemnified party under the foregoing provisions of this Section 5 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. The indemnified party will have the right to retain its own counsel in any such action if (i) the employment of counsel by the indemnified party has been authorized by the indemnifying party, (ii) the indemnified party’s counsel, shall have reasonably concluded that there is a reasonable likelihood of a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense of such action or (iii) the indemnifying party shall not in fact have employed counsel to assume the defense of such action within a reasonable period of time following its receipt of the Indemnification Notice, in each of which cases the fees and expenses of the indemnified party’s separate counsel shall be at the expense of the indemnifying party; provided, however, that the indemnified party shall agree to repay any expenses so advanced hereunder if it is ultimately determined by a court of competent jurisdiction that the indemnified party to whom such expenses are advanced is not entitled to be indemnified; and provided, further, that so long as the indemnified party has reasonably concluded that no conflict of interest exists, the indemnifying party may assume the defense of any action hereunder with counsel reasonably satisfactory to the indemnified party.

 

(d) In the event of an underwritten offering of Registrable Securities under this Agreement, the Company shall enter into standard indemnification and underwriting agreements with the underwriter thereof.

 

6. Right to Delay. For one period not to exceed 90 days in any twelve (12) month period, the Company shall not be obligated to prepare and file, or prevented from delaying or abandoning, a Registration Statement pursuant to this Agreement at any time when the Company, in its good faith judgment, reasonably believes:

 

(a) that the filing thereof at the time requested, or the offering of Registrable Securities pursuant thereto, would materially and adversely affect (i) a pending or scheduled public offering of the Company’s securities, (ii) any significant acquisition, merger, recapitalization. consolidation, reorganization or other similar transaction by or of the Company, (iii) pre-existing and continuing negotiations, discussions or pending proposals with respect to any of the foregoing transactions, or (iv) the financial condition of the Company in view of the disclosure of any pending or threatened litigation, claim, assessment or governmental investigation which may be required thereby; and

 

(b) that the failure to disclose any material information with respect to the foregoing would cause a violation of the Securities Act or Exchange Act.

 

The Company shall not register any securities for the account of itself or any other stockholder during such 90-day period other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145 transaction, a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities, or a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered).

 

 

7. Transferability of Registration Rights. The registration rights set forth in this Agreement are transferable to any transferee of Registrable Securities. Each subsequent Holder of Registrable Securities must consent in writing to be bound by the terms and conditions of this Agreement in order to acquire the rights granted pursuant to this Agreement.

 

8. Rights Which May Be Granted to Subsequent Investors. Other than transferees of Registrable Securities under Section 7 hereof, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder to include such securities in any registration unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the amount of the Registrable Securities of the Holders that are included.

 

9. Right of First Offer. Subject to the terms and conditions specified in this Section 9, and applicable securities laws, in the event the Company proposes to offer or sell any New Securities, the Company shall first make an offering of such New Securities to PBT or its designee in accordance with the following provisions of this Section 9. PBT or its designee shall be entitled to apportion the right of first offer hereby granted it among itself and its partners, members and affiliates in such proportions as it deems appropriate.

 

(a) The Company shall deliver a notice, in accordance with the provisions of Section 10(a) hereof, (the “Offer Notice”) to PBT stating (i) its bona fide intention to offer such New Securities, (ii) the number of such New Securities to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such New Securities.

 

(b) By written notification received by the Company, within twenty (20) calendar days after mailing of the Offer Notice, PBT or its designee may elect to purchase or obtain, at the price and on the terms specified in the Offer Notice, up to that portion of such New Securities which equals the proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Preferred Stock (and any other securities convertible into, or otherwise exercisable or exchangeable for, shares of Common Stock) then held, by PBT bears to the total number of shares of Common Stock of the Company then outstanding (assuming full conversion and exercise of all convertible or exercisable securities).

 

(c) If all New Securities referred to in the Offer Notice are not elected to be purchased or obtained as provided in Section 9(b) hereof, the Company may, during the sixty (60) day period following the expiration of the period provided in Section 9(b) hereof, offer the remaining unsubscribed portion of such New Securities (collectively, the “Refused Securities”) to any person or persons at a price not less than, and upon terms no more favorable to the offeree than, those specified in the Offer Notice. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within sixty (60) days following the execution thereof, the right provided hereunder shall be deemed to be revived and such New Securities shall not be offered unless first reoffered to PBT or its designee in accordance with this Section 9.

 

 

(d) The right of first offer in this Section 9 shall not be applicable to New Securities issued:

 

i.

upon conversion of shares of Preferred Stock;

 

ii.

to officers, directors, employees and consultants of the Company pursuant to stock incentive plans, or other stock arrangements that have been approved by the Board of Directors of the Company including the directors elected by the holders of a majority of the Preferred Stock (the “Series A Directors”);

 

iii.

as a dividend or distribution on the Corporation’s Common Stock or Preferred Stock;

 

iv.

upon the written consent of PBT that expressly states that the right of first offer in this Section 9 shall not apply to such New Securities;

 

v.

upon the exercise or conversion of any options or other convertible securities outstanding as of the date hereof;

 

vi.

pursuant to a loan arrangement or debt financing from a bank, equipment lessor or similar financial institution approved by the Board of Directors, including the Series A Directors; or

 

vii.

in connection with strategic transactions (but excluding any merger, consolidation, acquisition or similar business combination) that have been approved by the Board of Directors of the Corporation including the Series A Directors.

 

(e) The right of first offer set forth in this Section 9 may not be assigned or transferred except that such right is assignable by PBT to any affiliate of PBT.

 

10. Miscellaneous.

 

(a) Notices. Except as otherwise expressly provided herein, all notices, requests, demands, claims, and other communications hereunder will be in writing. Any such notice, request, demand, claim, or other communication hereunder shall be deemed duly given (i) upon confirmation of facsimile, (ii) one (1) business day following the date sent when sent by overnight delivery and (iii) five (5) business days following the date mailed when mailed by registered or certified mail return receipt requested and postage prepaid at the following addresses (or such other address for a party as shall be specified by such party by like notice): All communications shall be sent to PBT at 101 Second Street, Suite 1100, San Francisco, California 94105, and to the Company at 8687 West Sahara, Suite 201, Las Vegas, NV 89117, or at such other address(es) as PBT or the Company may designate by ten (10) days advance written notice to the other parties hereto.

 

 

(b) Entire Agreement. This Agreement, together with the instruments and other documents hereby contemplated to be executed and delivered in connection herewith, contains the entire agreement and understanding of the parties hereto, and supersedes any prior agreements or understandings between or among them, with respect to the subject matter hereof.

 

(c) Successors and Assigns.  The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

 

(d) Successor Indemnification. In the event that the Company or any of its successors or assigns (i) consolidates with or merges into any other entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all of its properties and assets to any person or entity, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of the Company assume the obligations of the Company with respect to indemnification of members of the Board of Directors as in effect immediately prior to such transaction, whether in the Company’s bylaws, Certificate of Incorporation, or elsewhere, as the case may be.

 

(e) Amendments and Waivers. Except as otherwise expressly set forth in this Agreement, any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the Holders of a majority of the Preferred Stock. No waivers of or exceptions to any term, condition or provision of this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 

 

(f) Counterparts; Facsimile Execution. This Agreement may be executed in multiple counterparts, each of which shall constitute an original but all of which shall constitute but one and the same instrument. One or more counterparts of this Agreement may be delivered via telecopier, with the intention that they shall have the same effect as an original counterpart hereof. Facsimile execution and delivery of this Agreement is legal, valid and binding for all purposes.

 

(g) Captions. The captions of the sections, subsections and paragraphs of this Agreement have been added for convenience only and shall not be deemed to be a part of this Agreement. 

 

(h) Severability. Each provision of this Agreement shall be interpreted in such manner as to validate and give effect thereto to the fullest lawful extent, but if any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable under applicable law, such provision shall be ineffective only to the extent so determined and such invalidity or unenforceability shall not affect the remainder of such provision or the remaining provisions of this Agreement; provided, however, that the Company and the Holders of a majority of the Registrable Securities shall negotiate in good faith to attempt to implement an equitable adjustment in the provisions of this Agreement with a view toward effecting the purposes of this Agreement by replacing the provision that is invalid or unenforceable with a valid and enforceable provision the economic effect of which comes as close as possible to that of the provision that has been found to be invalid and unenforceable. 

 

 

(i) Governing Law. The execution, interpretation, and performance of this Agreement shall be governed by the laws of the State of California without giving effect to any choice in conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of the law of any other jurisdiction other than the State of California.

 

(j) Dispute Resolution. Any unresolved controversy or claim arising out of or relating to this Agreement, except as (i) otherwise provided in this Agreement, or (ii) any such controversies or claims arising out of either party’s intellectual property rights for which a provisional remedy or equitable relief is sought, shall be submitted to arbitration by one arbitrator mutually agreed upon by the parties, and if no agreement can be reached within 30 days after names of potential arbitrators have been proposed by the American Arbitration Association (the “AAA”), then by one arbitrator having reasonable experience in corporate finance transactions of the type provided for in this Agreement and who is chosen by the AAA. The arbitration shall take place in San Francisco, California, in accordance with the AAA rules then in effect, and judgment upon any award rendered in such arbitration will be binding and may be entered in any court having jurisdiction thereof. There shall be limited discovery prior to the arbitration hearing as follows: (a) exchange of witness lists and copies of documentary evidence and documents relating to or arising out of the issues to be arbitrated, (b) depositions of all party witnesses and (c) such other depositions as may be allowed by the arbitrators upon a showing of good cause. Depositions shall be conducted in accordance with the California Code of Civil Procedure, the arbitrator shall be required to provide in writing to the parties the basis for the award or order of such arbitrator, and a court reporter shall record all hearings, with such record constituting the official transcript of such proceedings. The prevailing party shall be entitled to reasonable attorney’s fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled.

 

(k) Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any provision of this Agreement was not performed in accordance with the terms hereof and that the parties hereto shall be entitled to seek specific performance of the terms hereof (without necessity of posting a bond in connection therewith), in addition to any other remedy at law or equity otherwise permitted hereunder.

 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed as of the date first set forth above.

 

	Solidus Networks, Inc.       By: _________________________________  Name: Title:
	WinWin Gaming, Inc.       By:_________________________________  Name: Title:

 

 

ON LETTERHEAD OF THELEN REID & PRIEST LLP

August ____ , 2006

Solidus Networks, Inc.,

dba PayByTouch Solutions

101 Second Street Suite 1100

San Francisco CA 94105

Ladies and Gentlemen:

 

We have acted as counsel to WinWin Gaming, Inc., a Delaware corporation (the “Company”), in connection with that certain Second Amended and Restated Joint Venture Agreement, dated as of August ___, 2006 (the “Agreement”), between the Company and Solidus Networks, Inc., dba PayByTouch Solutions, a Delaware corporation (“PBT”). This opinion is furnished to PBT pursuant to Section 6(e) of the Agreement. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Agreement. Items (a) through (d), below are hereinafter referred to collectively as the “Opinion Documents” and items (a) through (c) below are hereinafter referred to collectively as the “Enforceability Documents.”

 

For purposes of the opinions expressed herein, we have examined, among other documents, the following documents:

 

(a)

the Agreement;

 

(b)

that certain Amended and Restated Voting Agreement, Irrevocable Proxy and Form of Stockholders’ Written Consent, dated ____, 2006;

 

(c)

that certain Registration Rights Agreement, of even date herewith, by and between the Company and PBT;

 

(d)

the Certificate of Designation of Powers Designations, Preferences and Relative Participating, Optional or Other Special Rights and Qualifications, Limitations and Restrictions of the Series A-1 Preferred Stock of the Company (the “Certificate of Designation”);

 

(e)

the Bylaws of the Company, as certified on the date hereof by an officer of the Company (the “Bylaws”);

 

(f)

the Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on December 30, 1992 (the “Certificate of Incorporation” and, together with the Bylaws, the “Governing Documents”);

 

(g)

a Good Standing Certificate issued by the Secretary of State of the State of Delaware on August ____, 2006, certifying as to the good standing of the Company in Delaware;

 

(h)

a Good Standing Certificate issued by the Secretary of State of the State of Nevada on August ____, 2006, certifying as to the good standing of the Company in Nevada; and

 

(i)

a Certificate from the Chief Executive Officer or Chief Financial Officer of the Company, certifying as to certain factual matters, corporate documents and actions (the “Officer’s Certificate”).

 

In addition, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments, and of certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives as we have deemed relevant and necessary as the basis for the opinions hereinafter set forth. We have not searched any computer databases or the dockets of any court, governmental or administrative body, agency or other filing office in any jurisdiction or conducted any other independent investigation. In addition, the opinion expressed in paragraph 1 below as to the existence and good standing of the Company in Delaware is based solely upon the certificates and other documents referred to in paragraph (g) above; the opinion expressed in paragraph 3 below as to the qualification and good standing of the Company in Nevada is based solely upon the certificates and other documents referred to in paragraph (h) above; and the opinion expressed in paragraph 6 below as to the capitalization of the Company is based solely upon our review of the Certificate of Incorporation, the stock records of the Company and the Officer’s Certificate referred to in paragraph (i) above. As to all questions of fact material to the opinions set forth herein, we have relied solely upon certificates or other comparable documents of officers and other representatives of the Company and upon the representations and warranties of the Company contained in the Opinion Documents. While we have not conducted any independent investigation to determine facts upon which our opinions are based or to obtain information about which this letter advises you, we confirm that we do not have any knowledge which has caused us to conclude that our reliance and assumptions cited in this paragraph are unwarranted. The term “knowledge” whenever it is used in this letter with respect to our firm means the current, actual knowledge of the Thelen Reid & Priest LLP attorneys who played a material role in handling the transaction contemplated by the Agreement.

 

In such examination, we have without independent investigation relied upon and assumed the truth and accuracy of all factual matters contained in the Officer’s Certificate, a copy of which is attached hereto as Exhibit A, and the truth and accuracy of each of the representations and warranties as to factual matters contained in or made pursuant to the Opinion Documents and certificates delivered thereunder. We have also assumed, with your permission and without independent investigation, (i) the genuineness of all signatures; (ii) the legal capacity of each individual signatory to such documents; (iii) the authenticity of all documents submitted to us as originals; (iv) the conformity to originals of all documents submitted to us as certified, facsimile or photostatic copies; (v) the authenticity of the originals of such copies; (vi) the due incorporation and organization, valid existence and good standing of PBT under the laws of the State of Delaware; (vii) the due execution and delivery of the Opinion Documents by PBT; (viii) the corporate power and authority of PBT to conduct its business and own its properties and to enter into the Opinion Documents and perform its obligations thereunder; (ix) that each of the Opinion Documents has been duly authorized by all necessary corporate action of PBT and is the legal, valid and binding obligation of PBT, enforceable against PBT in accordance with its terms; (x) that, except as to the opinion in paragraph 9, each of the Company and PBT has obtained all necessary governmental permits and approvals for conducting its operations; and (xi) the identity and capacity of all individuals acting or purporting to act as public officials.

 

Based solely upon the examination described above, and subject to the comments, assumptions, qualifications, limitations and exceptions stated herein and in the Disclosure Schedule to the Agreement, we are of the opinion that:

 

1. The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the State of Delaware.

 

2. The Company has the requisite corporate power to own its property and assets and to conduct its business as it is currently being conducted.

 

3. The Company is duly qualified to do business as a foreign corporation and is in good standing in the state of Nevada.

 

4. The Company has the requisite corporate power to execute, deliver and perform its obligations under the Opinion Documents.

 

5. Each of the Enforceability Documents has been duly and validly authorized, executed and delivered by the Company and each such agreement constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its respective terms.

 

6. As of immediately prior to the Initial Closing, the Company’s authorized capital stock consists of (a) 300,000,000 shares of Common Stock, par value $0.01 per share, of which 63,692,171 shares are issued and outstanding, and (b) 10,000,000 shares of Preferred Stock, par value $0.01 per share, of which 6,000,000 have been designated Series A-1 Preferred Stock, par value $0.01, none of which are issued and outstanding. The outstanding shares of Common Stock have been duly authorized and validly issued, and are fully paid and nonassessable, and the shares of Series A-1 Preferred Stock have been duly authorized, and upon issuance in accordance with the terms of the Agreement, will be validly issued, fully paid and nonassessable. The Initial Closing WinWin Shares have been duly authorized, and upon issuance and delivery against payment therefor in accordance with the terms of the Agreement, will be validly issued, outstanding, fully paid and nonassessable. The shares of Common Stock issuable upon conversion of the Initial Closing WinWin Shares have been duly authorized, and when issued upon conversion in accordance with the terms of the Certificate of Designation, will be validly issued, outstanding, fully paid and nonassessable. To our knowledge, there are no options, warrants, conversion privileges, preemptive rights or other rights presently outstanding to purchase any of the authorized but unissued capital stock of the Company, other than the conversion privileges of the Series A-1 Preferred Stock, rights created in connection with the transactions contemplated by the Opinion Documents, warrants to purchase 17,582,161 shares of Common Stock, options to purchase 14,099,026 shares of Common Stock reserved for issuance upon exercise of outstanding options granted under the Company’s 2003 Stock Plan (the “Plan”) and 5,900,974 shares of Common Stock reserved for future issuance under the Plan.

 

7. The execution and delivery of the Opinion Documents by the Company and the issuance of the Initial Closing WinWin Shares pursuant thereto do not violate any provision of the Certificate of Incorporation or Bylaws, do not constitute a default under or a material breach of any material agreement that is listed on Annex A¹  of this opinion letter and do not violate (a) any governmental statute, rule or regulation which in our experience is typically applicable to transactions of the nature contemplated by the Opinion Documents or (b) to our knowledge, any order, writ, judgment, injunction, decree, determination or award which has been entered against the Company, in each case to the extent the violation of which would materially and adversely affect the Company and its subsidiaries, taken as a whole.

 

8. To our knowledge, there is no action, proceeding or investigation pending or overtly threatened against the Company before any court or administrative agency that questions the validity of the Agreement.

 

9. All consents, approvals, authorizations, or orders of, and filings, registrations, and qualifications with any U.S. Federal or California regulatory authority or governmental body required for the issuance of the Initial Closing WinWin Shares, have been made or obtained, except (a) for the filing of a Form D pursuant to Securities and Exchange Commission Regulation D and (b) any required filings under applicable state securities law.

 

10. The offer and sale of the Initial Closing WinWin Shares are exempt from the registration requirements of the Securities Act of 1933, as amended, subject to the timely filing of a Form D pursuant to Securities and Exchange Commission Regulation D.

 

Our opinion as to enforceability set forth in paragraph 5 above is subject to:

 

(a) limitations imposed by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditor’s rights generally, including, without limitation, laws relating to fraudulent transfers or conveyances, preferences and equitable subordination;

 

(b) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law);

 

(c) the qualification that certain rights, remedies, waivers and procedures contained in the Opinion Documents may be limited or rendered unenforceable by applicable laws or judicial decisions governing such provisions, but such laws and judicial decisions do not, in our opinion, render the Opinion Documents, as a whole, unenforceable or make the remedies and procedures that are available to the parties legally inadequate for the practical realization of the principal benefits purported to be provided to them by the Opinion Documents;

 

¹ Annex A will include a list of all of the material agreements set forth in the exhibit index of the Company’s annual report on form 10-KSB for the fiscal year ended December 31, 2005.

(d) the qualification that certain provisions contained in the Opinion Documents may be unenforceable in whole or in part if such provisions impose restrictions or burdens upon the debtor and it cannot be demonstrated that enforcement of such restrictions or burdens is reasonably necessary for the protection of the creditor or if the creditor’s enforcement of such provisions would violate the creditor’s implied covenant of good faith and fair dealing;

 

(e) the possible requirement that actions taken, or not taken, by any party pursuant to the Opinion Documents be taken, or not taken, in good faith;

 

(f) the qualification that certain provisions contained in the Opinion Documents regarding the rights or remedies available to any party for violations or breaches of any provisions which are immaterial or for violations or breaches of any provisions if such enforcement would be unreasonable under the circumstances, may be unenforceable in whole or in part;

 

(g) the unenforceability under certain circumstances of (i) waivers or provisions imposing penalties or liquidated damages and (ii) provisions purporting to release or exculpate any party from liability for its acts or omissions, or purporting to impose a duty upon any party to indemnify any other party when any claimed damages result from the negligence, gross negligence or willful misconduct of the party seeking such indemnity;

 

(h) the qualification that certain provisions of any such document to the effect that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to any other right or remedy, that the election of some particular remedy does not preclude recourse to one or more others or that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of any such right or remedy, may be unenforceable in whole or in part;

 

(i) the qualification that provisions in any such document that contain a waiver of (A) the benefits of statutory, regulatory, or constitutional rights, unless and to the extent the statute, regulation or constitution explicitly allows such waivers, (B) unknown future defenses, and (C) rights to damages, may be unenforceable in whole or in part;

 

(j) limitations imposed by California Civil Code Section 1670.5 on the enforceability of provisions which a court finds as a matter of law to have been unconscionable at the time when made;

 

(k) the qualification that certain provisions which require written amendments or waivers of documents may be unenforceable in whole or in part insofar as certain oral or other modifications, amendments or waivers may be effectively agreed upon by the parties or the doctrine of promissory estoppel may apply in certain circumstances;

 

(l) the unenforceability under certain circumstances of any provision insofar as it provides for the payment or reimbursement of costs and expenses of indemnification for claims, losses or liabilities in excess of a reasonable amount or any provision purporting to require the payment of attorneys’ fees, expenses or costs, where such provisions do not satisfy the requirements of California Civil Code Section 1717; and

 

(m) the unenforceability, in certain circumstances, of consent to jurisdiction clauses and forum selection clauses.

 

We are not opining as to the authorization, execution, delivery or enforceability of the Investment Option or the Certificate of Designation. We understand that the Company’s special Delaware counsel is rendering an opinion of even date herewith that addresses the enforceability of the Investment Option and the Certificate of Designation.

 

We are members of the bar of the State of California and we express no opinion on the laws of any jurisdiction other than the federal laws of the United States and the laws of the State of California. We also express no opinion as to (i) any governmental rule or other legal requirement relating to labor, employee rights and benefits, including without limitation the Employee Retirement Income Security Act of 1974, as amended, and taxation, (ii) any choice-of-law or conflict of laws matters, (iii) any patent, trademark or copyright statute, rules or regulations, (iv) any provision appointing one party as an attorney-in-fact of an adverse party, (v) the effect of any state or federal antitrust laws, including, without limitation, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as currently in effect, (vi) any securities laws, rules or regulations (except for the opinions set forth in paragraphs 6, 9 and 10 hereof), or (vii) the Company’s rights in or title to any property or assets.

 

The opinions expressed herein are solely for your benefit in connection with the above transactions and may not be relied upon in any manner or for any purpose by any other person. This opinion speaks only as of the date hereof, and we assume no obligation to advise you of any changes to this opinion that may come to our attention after the date hereof. This opinion is limited to the matters expressly stated herein and no opinion or other statement may be inferred or implied beyond the matters expressly stated herein.

 

	Very truly yours,
	THELEN REID & PRIEST LLP

 

1.	Stock Exchange Agreement dated December 31, 2002, regarding the acquisition of Win Win, Inc.
2.	Amended and Restated Stock Exchange Agreement dated March 31, 2003.
3.	Agreement, dated October 8, 2003, between Win Win, Inc. and Sande Stewart Television, Inc.
4.	Cooperation Agreement, dated December 15, 2003, between Win Win Consulting (Shanghai) Co. Ltd. and Shanghai Welfare Lottery Issuing Center.
5.	TV Cooperation Agreement, dated December 15, 2003, between Win Win Consulting (Shanghai) Co. Ltd. and Shanghai Welfare Lottery Issuing Center.
6.	WinWin Gaming Inc. 2003 Stock Plan.
7.	Project Cooperation Agreement, dated April 30, 2004, between Win Win Consulting (Shanghai) Co. Ltd. and Shanghai VSAT Network Systems Co. Ltd..
8.	Securities Purchase Agreement, dated February 25, 2005, among the Company and the investors who are parties thereto.
9.	Registration Rights Agreement, dated February 25, 2005, among the Company and the investors who are parties thereto.
10.	Revolving Credit Note and Agreement, dated March 16, 2005, between the Company and Art Petrie.
11.	Revolving Credit Note and Agreement, dated March 16, 2005, between the Company and John Gronvall.
12.	Co-Publishing Agreement, dated September 23, 2005 among Pixiem, Inc. and ESPN.
13.	Joint Venture Agreement, dated as of September 30, 2005, by and between Solidus Networks, Inc., d/b/a PayByTouch Solutions and WinWin Gaming, Inc.
14.	Security Agreement, dated as of September 30, 2005, by WinWin Gaming, Inc., in favor of Solidus Networks, Inc., d/b/a PayByTouch Solutions.
15.	Secured Promissory Note, dated September 30, 2005, by WinWin Gaming, Inc. to Solidus Networks, Inc., d/b/a PayByTouch Solutions.

 

 

16.	Acquisition Agreement, dated September 27, 2005, by and among WinWin Gaming, Inc., E-Bear Digital Software Co., Ltd. (“E-Bear”) and the Shareholders of E-Bear.
17.	Employment Agreement, dated December 20, 2005, between WinWin Gaming, Inc. and Peter Pang.
18.	Employment Agreement, dated December 20, 2005, between WinWin Gaming, Inc. and Patrick Rogers.
19.	Licensing Agreement, dated December 15, 2005, among Pixiem, Inc. and Yamaha Motor Company.
20.	Licensing Agreement, dated September 23, 2005 among Pixiem, Inc. and C- Valley (Beijing) Information Technology Co., Ltd.
21.	Distributorship Agreement, dated June 20, 2005 among Pixiem, Inc. and Advanced Mobile Solutions, Ltd.
22.	Agreement, dated August 3, 2005 among Pixiem, Inc. and Tira Wireless, Inc.
23.	Distributor and Revenue Share Agreement, dated November 9, 2005 among Pixiem, Inc. and Tele-Mobile Company dba Telus Mobility.
24.	License Agreement, dated November 21, 2005 among Pixiem, Inc. and Paradox Studios, Ltd.
25.	License Agreement, dated November 7, 2005, among Pixiem, Inc. and iScreen Corporation.
26.	Wireless Pass Through Distribution Agreement, dated May 27, 2005 among Pixiem, Inc and Wireless Developer, Inc. dba Wireless Developer Agency.
27.	Service Agreement, dated July 8, 2005 among Pixiem, Inc. and Cellmania, Inc.
28.	Partnership Agreement, dated September 1, 2005 among Pixiem, Inc. and 2ThumbZ Entertainment.
29.	License Agreement, dated April 1, 2005, between Pixiem, Inc. and The All England Lawn Tennis Club (Wimbledon) Limited.

 

 

 

 

This INVESTMENT OPTION AGREEMENT, dated as of August 31, 2006, by and between SOLIDUS NETWORKS, INC., a Delaware corporation (the “Optionee”) and WINWIN GAMING, INC., a Delaware corporation (the “Company”). Capitalized terms used, but not otherwise defined, herein have the meanings ascribed to those terms in the JV Agreement (as defined below).

 

 

The Optionee and the Company are parties to a Second Amended and Restated Joint Venture Agreement, dated August 31, 2006 (the “JV Agreement”). It is a condition precedent of the Initial Closing that the Company grant to the Optionee this option to acquire an additional number of shares of the Company’s Series A-1 Preferred Stock, prior to the Filing Date (as defined below), or Series A Preferred Stock, from and after the Filing Date, such that upon exercise of this option, the Optionee will be the beneficial owner of a percentage of the Company’s outstanding common stock on a Fully Diluted Basis (as defined below) indicated by the Optionee on the Option Notice (as defined below) after giving effect to the exercise of this Option (the “Election Percentage”), which Election Percentage may not be greater than eighty percent (80%).

 

The Company is issuing shares of its Series A-1 Preferred Stock to the Optionee at the Initial Closing and is seeking stockholder approval of the adoption and filing of the Restated Charter under which, among other things, its Series A Preferred Stock will be authorized, each outstanding share of Series A-1 Preferred Stock will be automatically converted into one tenth of a share of Series A Preferred Stock and additional shares of common stock will be authorized such that there will be sufficient authorized common stock for issuance upon the conversion of the Series A Preferred Stock. The date of the filing of the Restated Charter is referred to herein as the “Filing Date”.

 

NOW, THEREFORE, in consideration of the premises, mutual covenants herein set forth and other good and valuable consideration, subject to the terms and conditions herein, the Company and the Optionee hereby agree as follows:

 

1. Grant of Option; Term; Exercise Price.

 

(a) Subject to the terms and conditions herein, the Company hereby grants to the Optionee an option (the “Option”), prior to the Filing Date, to acquire a number of shares of the Company’s Series A-1 Preferred Stock, and from and after the Filing Date, to purchase a number of shares of the Company’s Series A Preferred Stock (such shares of Series A-1 Preferred Stock or Series A Preferred Stock, as applicable, being referred to herein as the “Option Shares”) that, together with other securities of the Company held by the Optionee at the time of exercise, constitute a percentage of the common stock of the Company on a Fully Diluted Basis after giving effect to the exercise of the Option equal to the Election Percentage. For purposes of this Agreement, “Fully Diluted Basis” means the number of shares of the Company’s Common Stock outstanding assuming, for such purpose, the exercise, exchange, or conversion into Common Stock of the Company of all options, warrants and other securities of the Company that are exercisable or exchangeable for, or convertible into, Common Stock at the time of the exercise of the Option.

 

(b) The Option is exercisable by Optionee’s delivery to the Company of an Exercise Notice at any time from the date of this Investment Option Agreement until Midnight Pacific Time on the date that is third anniversary of the date of this Investment Option Agreement (the “Exercise Period”); provided, however, that the Option shall automatically terminate upon the closing of the sale of all or substantially all of the assets of the Optionee, or upon the closing of a merger, consolidation or similar transaction in which the stockholders of the Optionee as of immediately prior to the transaction do not own a majority of the voting power of the surviving company as of immediately following such transaction.

 

(c) The exercise price per Option Share (the “Exercise Price”) shall be equal to the fair market value of a share of the Company’s Series A-1 Preferred Stock or Series A Preferred Stock, as applicable, as of the date of exercise as determined by an Appraisal (as defined below). Whenever this Option calls for an “Appraisal,” the fair market value of the Option Shares will be determined on the basis of the value of the percentage of the entire Company represented by the Option Shares at the time of determination in accordance with the following mechanism. A representative of the Optionee and a representative of the Company shall attempt to negotiate a mutually agreeable fair market value within thirty (30) days of the date that the Company receives an Exercise Notice from the Optionee. If the representatives are unable to reach an agreement within such time period, each of the Optionee and the Company will at its own cost appoint a nationally recognized investment banking firm as an appraiser of the value of the Option Shares. Each of the investment banking firms shall separately determine, within forty-five (45) days of the end of such thirty (30) day period, the fair market value of the shares taking into account the fact that the exercise of the Option may involve the acquisition of a controlling interest in the Company by the Optionee to the extent that the Optionee does not already own a controlling interest in the Company. Each of the investment banking firms shall express its valuation as a single number in US dollars. The mid-point of the valuations (the “Mid-Point”) will then be calculated by dividing the sum of the separate valuations by two (2). To the extent that each valuation is within the range which is 10% above or 10% below the Mid-Point (the “Range”), the Mid-Point shall be used. If either or both of the valuations falls outside of the Range, then the parties shall jointly choose (or if the parties are unable to so jointly choose within three (3) business days, the two appraisers shall choose) a disinterested nationally recognized investment banking firm as a third appraiser, at a cost to be shared on an equal basis between the parties, to complete an appraisal within an additional forty-five (45) days, which appraisal shall be equal to or somewhere between the two prior appraisals and such third appraisal shall be the final and binding determination of the fair market value.

 

(d) The Exercise Price shall be payable in cash; provided, however, that if at the time the Option is exercised there is a public trading market for the Optionee’s common stock, then, at the option of the Optionee, the Optionee may pay the Exercise Price in cash or registered (“free-trading”) shares of the Optionee’s common stock, or a combination thereof. If the Optionee elects to pay the Exercise Price, in whole or in part, by delivery of registered shares of the Optionee’s common stock, then such shares shall be valued at the average closing price of the Optionee’s common stock over a period of twenty (20) trading days prior to the exercise of the Option.

 

(e) this Investment Option Agreement shall terminate and cease to be effective on the date on which the JV Agreement is validly terminated in accordance with Section 13 thereof.

 

2. Exercise Procedure.

 

(a) Procedure.

 

(i) The Optionee may exercise the Option, in whole, but not in part, at any time during the Exercise Period, by delivering to the Company a written notice duly signed by the Optionee indicating that the Optionee is exercising the Option and the Election Percentage (the “Exercise Notice’). The Option shall not be deemed exercised, however, until full payment in an amount equal to the full purchase price for the Option Shares has been made. Optionee may withdraw the Exercise Notice and elect not to exercise the Option at any time before making full payment.

 

(ii) Following receipt by the Company of such Exercise Notice and full payment of the Exercise Price, the Company shall issue, as soon as practicable, a stock certificate for the Option Shares in the name as designated by the Optionee and deliver the certificate to the Optionee.

 

(b) Other Terms. Other than the terms regarding pricing and consideration set forth in Section 1 of this Investment Option Agreement, the issuance and sale of the Option Shares shall be subject to the same conditions of and on the same terms as the issuance and sale of the Second Closing WinWin Shares in the Second Closing.

 

(c) Legend. If the Option Shares are not then covered by a registration statement, each certificate for the Option Shares shall bear a legend that is substantially similar to the following:

 

 

3. Rights of Optionee. The Optionee shall not have any rights to dividends or any other rights of a stockholder with respect to any Option Shares until such Option Shares shall have been issued to Optionee (as evidenced by the appropriate entry on the transfer books of the Company).

 

4. Notices. Any notices and other communications required or permitted under this Agreement shall be in writing and shall be delivered (i) personally by hand or by courier, (ii) mailed by United States first-class mail, postage prepaid or (iii) sent by facsimile, to a Party's address or facsimile number as follows:

 

if to WinWin:

WinWin Gaming, Inc.

 

8687 West Sahara, Suite 201

Las Vegas, NV 89117

Tel: (702) 212-4530

Fax: (702) 212-4553

Attention: Patrick Rogers

with a copy to:

Thelen Reid & Priest LLP

701 Eighth Street, N.W.

Washington, D.C.  20001

Tel: 202 ###-###-####

Fax: 202 ###-###-####

Attention: Louis A. Bevilacqua

if to PBT:

Solidus Networks, Inc.

 

101 Second Street, Suite 1100

San Francisco, California 94105

Tel: (415) 281-2200

Fax: (415) 281-2202

Attention: Gus Spanos

with a copy to:

Cooley Godward llp

101 California Street, 5^th Floor

San Francisco, CA 94111-5800

Tel: (415) 693-2000

Fax: (415) 693-2222

Attention: Kenneth L. Guernsey

or at such other address or facsimile number as a Party may designate by giving at least ten days' advance written notice to the other Party. All such notices and other communications shall be deemed given upon (I) receipt or refusal of receipt, if delivered personally, (II) three days after being placed in the mail, if mailed, or (III) confirmation of facsimile transfer, if faxed.

 

5. Binding; Assignment. Optionee shall not assign this Agreement, or any rights hereunder, without the Company's prior written consent. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their successors and permitted assigns, if any.

 

6. Dispute Resolution. Any unresolved controversy or claim arising out of or relating to this Agreement, except as (i) otherwise provided in this Agreement, or (ii) any such controversies or claims arising out of either party’s intellectual property rights for which a provisional remedy or equitable relief is sought, shall be submitted to arbitration by one arbitrator mutually agreed upon by the parties, and if no agreement can be reached within 30 days after names of potential arbitrators have been proposed by the American Arbitration Association (the “AAA”), then by one arbitrator having reasonable experience in corporate finance transactions of the type provided for in this Agreement and who is chosen by the AAA. The arbitration shall take place in San Francisco, California, in accordance with the AAA rules then in effect, and judgment upon any award rendered in such arbitration will be binding and may be entered in any court having jurisdiction thereof. There shall be limited discovery prior to the arbitration hearing as follows: (a) exchange of witness lists and copies of documentary evidence and documents relating to or arising out of the issues to be arbitrated, (b) depositions of all party witnesses and (c) such other depositions as may be allowed by the arbitrators upon a showing of good cause. Depositions shall be conducted in accordance with the California Code of Civil Procedure, the arbitrator shall be required to provide in writing to the parties the basis for the award or order of such arbitrator, and a court reporter shall record all hearings, with such record constituting the official transcript of such proceedings. The prevailing party shall be entitled to reasonable attorney’s fees, costs, and necessary disbursements in addition to any other relief to which such party may be entitled.

 

7. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the matters herein, and cannot be amended, modified or terminated except by an agreement in writing executed by the parties hereto.

 

8. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware without regard to the conflicts of law principles thereof.

 

 

IN WITNESS WHEREOF, the parties hereto have executed this Investment Option Agreement as of the date first set forth above.

 

	SOLIDUS NETWORKS, INC.       By: _________________________________________        Name:        Title:
	WINWIN GAMING, INC.       By: _________________________________________        Name:        Title:

 

This non-binding Term Sheet, dated as of ________ __, 2006 (this “Term Sheet”), is by and among Solidus Networks, Inc. (“Pay By Touch”), a corporation organized under the laws of Delaware, and WinWin Gaming, Inc. (“WinWin”), a company organized under the laws of the state of Delaware.

 

Background:

 

· Pay By Touch and WinWin have entered into that certain Amended and Restated Joint Venture Agreement, dated as of April 14, 2006 (the "JV Agreement"), and are entering into this Term Sheet in connection with the transactions contemplated by the JV Agreement.

· Pay By Touch desires to engage WinWin to market Pay By Touch’s commercial offerings (“Pay By Touch Offerings”) within the [People’s Republic of China, including its special administrative regions of Hong Kong and Macao, and in Taiwan].

· The parties are entering into this Term Sheet as evidence of their intention to advance such a relationship.

 

This Term Sheet sets forth the principal terms and conditions upon which the parties propose to move forward with the relationship.  Under this Term Sheet the purpose set forth above shall be deemed the “Proposed Transaction.”

 

The parties intend that the specific terms of the Proposed Transaction will be contained in a complete, integrated, mutually agreeable document to be entered into by the parties on or before the Initial Closing (as defined in the JV Agreement) (a “Transaction Agreement”).

 

The parties contemplate that they would each be responsible for the following areas related to the Proposed Transaction as described below:

Term & Termination

Either party may terminate this Term Sheet by giving written notice to the other party at least thirty (30) days prior to such termination. If neither party elects to terminate the Term Sheet pursuant to the prior sentence, this Term Sheet shall terminate on the earliest to occur of (i) [insert date] or (ii) the termination of the JV Agreement.   The term of the Transaction Agreement shall be [three (3) years] or as otherwise agreed by the parties.  The Transaction Agreement will be subject to standard termination provisions.

 

Marketing Appointment

Under the terms of the Transaction Agreement Pay By Touch shall appoint WinWin as a non-exclusive marketing partner in [China]. WinWin shall, at its own expense, use best efforts to market Pay By Touch Offerings to prospective customers including, without limitation, by means of establishing relationships with such prospects, by correspondence with them, by participation in trade shows or professional meetings, or by publication online or in the print or broadcast media. Without limiting the foregoing, WinWin shall be permitted to distribute to any such prospects any marketing materials or information provided Pay By Touch, provided that WinWin may not alter or modify any such materials or information without Pay By Touch’s prior written consent. In no event will WinWin purport to make representations or warranties on Pay By Touch’s behalf, or purport to act as an agent of Pay By Touch for any purpose, and all marketing and promotional information provided or distributed by WinWin to any third party or through any media shall strictly conform to such information as Pay By Touch may have provided to WinWin pursuant to the Transaction Agreement.

 

 

	In the event that a prospect desires to obtain the Pay By Touch Offerings, WinWin shall provide to such prospect Pay By Touch’s then-current standard form of customer agreement and shall exercise best efforts to cause such prospect to execute such customer agreement. In the event that such prospect desires to negotiate such agreement, WinWin shall be responsible for negotiating the terms of such agreement with such prospect in consultation with, and at Pay By Touch’s direction. WinWin shall have no authority to execute any such customer agreement on Pay By Touch’s behalf; such decision shall rest solely with Pay By Touch. WinWin shall forward to Pay By Touch any such executed customer agreement promptly upon execution thereof. Pay By Touch shall retain the right, in its sole and absolute discretion, to refuse to offer the Pay By Touch Offerings to any third party.
Fees and Payment	In consideration for the performance of WinWin’s obligations under the Transaction Agreement, Pay By Touch shall pay to WinWin an amount to be agreed upon by the parties. WinWin shall bear all expenses incurred in the performance of its obligations under the Transaction Agreement in marketing and promoting the Pay By Touch Offerings to any prospective customer.
Governing Law; Jurisdiction and Resolution of Disputes	The Transaction Agreement will contain governing law and jurisdiction provisions for the resolution of disputes substantially similar to those set forth in the JV Agreement.
Confidentiality, Non-Disclosure	The terms of this Term Sheet and the Transaction Agreement, as well as any and all information exchanged between and among the parties in connection with the transactions provided for and described herein, shall be held strictly confidential by each of the parties and their respective agents, employees, consultants and advisors.  Such obligation of confidentiality and non-disclosure shall cover, without limitation, any and all technical information, market data and research, and other proprietary information of each of the parties hereto. The Transaction Agreement will contain standard confidentiality provisions. All information disclosed hereunder will be used solely to evaluate and effectuate the transactions described herein and for absolutely no other purpose. To preserve each parties’ respective rights and obligations hereunder, the terms of this section will survive the expiration or earlier termination hereof or of any of the Transaction Agreement.

 

 

Miscellaneous Provisions

Neither party is subject to any agreement or undertaking that is in conflict with or would be violated by, this Term Sheet or any of the Transaction Agreement.   This Term Sheet may be executed in any number of counterparts, including facsimile counterparts, each of which will be deemed an original and all of which taken together will constitute one and the same agreement.  Any amendments hereto or waivers hereunder must be in writing and signed by both parties.   It is understood that this Term Sheet is a statement of the intention of the parties to proceed as outlined herein and does not create any binding obligations, other than any provisions with respect to confidentiality, which the parties acknowledge have been given for good and valuable consideration and which will be legally binding.

 

 

THIS INSTRUMENT REPRESENTS ONLY THE EXPRESSION OF OUR CURRENT MUTUAL INTENTIONS AND IS SUBJECT TO THE PROVISIONS OF THE TRANSACTION AGREEMENT TO BE ENTERED INTO BY AND AMONG THE PARTIES HERETO UPON COMPLETION OF LEGAL AND BUSINESS DUE DILIGENCE AND THE SATISFACTION OF THE CONDITIONS CONTAINED THEREIN. THE PARTIES HAVE FURTHER AGREED THAT EACH PARTY WILL BE BEAR ALL OF ITS OWN FEES AND EXPENSES INCURRED IN CONNECTION HEREWITH AND WITH THE PREPARATION AND NEGOTIATION OF THE TRANSACTION AGREEMENT, WHETHER OR NOT THE TRANSACTION CONTEMPLATED HEREBY OR THEREBY IS CONSUMMATED AND ENTERED INTO.

*****

 

	SOLIDUS NETWORKS, INC.     By: _________________________       Name:       Title:
	WINWIN GAMING, INC.     By: _________________________       Name:              Title:

WinWin Gaming, Inc. (hereinafter referred to as the “Corporation”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: 

 

1. The current name of the Corporation is WinWin Gaming, Inc.

 

2. The name under which the Corporation was originally incorporated is Lone Star Casino Corporation, and the date of filing of the original Certificate of Incorporation of the Corporation with the Secretary of State of the State of Delaware is December 30, 1992.

 

3. The provisions of the Certificate of Incorporation of the Corporation as heretofore amended and/or supplemented, and as herein amended, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled the Amended and Restated Certificate of Incorporation of WinWin Gaming, Inc.

 

4. The resolution setting forth the amendment and restatement has been duly approved by the stockholders of the Corporation in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware and is as follows:

 

RESOLVED, that the Certificate of Incorporation of the Corporation be, and hereby is, amended and restated in its entirety as follows:

 

FIRST: The name of the corporation (hereinafter referred to as the “Corporation”) is WinWin Gaming, Inc.

 

SECOND: The address of the Corporation’s registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, 19801; and the name of the registered agent of the Corporation in the State of Delaware at such address is The Corporation Trust Company.

 

THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (hereinafter, the “DGCL”).

 

FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) Seven Hundred Fifty Million (750,000,000) shares of common stock, $0.01 par value per share (“Common Stock”) and (ii) Sixty Million (60,000,000) shares of preferred stock, $0.01 par value per share (“Preferred Stock”).

 

The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.

 

A. Common Stock.

 

1. General. The voting, dividend and liquidation rights of the holders of Common Stock are subject to and qualified by the rights of the holders of Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of Preferred Stock of any series.

 

2. Increase of Authorized Shares. Except as otherwise provided in this Article, the number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the DGCL.

 

3. Voting. The holders of Common Stock are entitled to one vote for each share held at all meetings of stockholders (and written consents in lieu of meetings). There shall be no cumulative voting.

 

4. Dividends. Dividends may be declared and paid on Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock.

 

5. Liquidation. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential rights of any then outstanding Preferred Stock.

 

6. No Redemption by Corporation. The Common Stock is not subject to redemption by the Corporation.

 

B. Preferred Stock.

 

Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided.

 

Authority is hereby expressly granted to the Board of Directors from time to time to issue Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, special voting rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the DGCL. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to Preferred Stock of any other series to the extent permitted by law. Except as otherwise specifically provided in this Amended and Restated Certificate of Incorporation, the By-laws of the Corporation or any agreement in existence from time-to-time among the stockholders of the Corporation and the Corporation, no vote of the holders of Preferred Stock or Common Stock shall be a prerequisite to the issuance of any shares of any series of Preferred Stock authorized by and complying with the conditions of this Amended and Restated Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation.

C. Series A Preferred Stock.

 

A series of Preferred Stock consisting of Sixty Million (60,000,000) shares and having the following voting powers, designations, preferences and relative, participating, optional or other rights and the following qualifications, limitations and restrictions is hereby created from the authorized but unissued shares of the Preferred Stock.

 

 

The distinctive designation of such series is “Series A Preferred Stock” (hereinafter referred to as the “Series A Preferred Stock”).

 

2. Rank.

 

The Series A Preferred Stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (a) prior to any other series of Preferred Stock hereafter established by the Board of Directors, and (b) prior to the Common Stock.

 

3. Dividends.

 

The holders of the Series A Preferred Stock shall be entitled to receive, out of any funds legally available therefor, noncumulative dividends, payable at a rate per annum equal to 8% of the Series A Original Issue Price (as defined below), when and if declared by the Corporation’s Board of Directors. No dividends on the Common Stock shall be paid unless, in addition to the amount set forth in the previous sentence, the amount of such dividend on the Common Stock is also paid on the Series A Preferred Stock on an as-converted to Common Stock basis.

 

4. Liquidation Preference.

 

Upon a Liquidation Event (as defined below), the holders of shares of Series A Preferred Stock are entitled to receive out of assets of the Corporation available for distribution to stockholders, before any distribution of assets is made to holders of Common Stock, liquidating distributions in the amount of $7.91 per share (as equitably adjusted for any stock dividends, combinations, splits, recapitalizations or similar events with respect to such shares) (the “Series A Original Issue Price”), plus (a) an additional amount equal to eight percent (8%) of the Series A Original Issue Price per year, calculated based on the number of days elapsed prior to the Liquidation Event and (b) any declared but unpaid dividends (the amount payable to a holder of Series A Preferred Stock upon a Liquidation Event as aforesaid being referred to herein as the “Liquidation Preference”).

 

If upon a Liquidation Event, the Liquidation Preference and any amounts payable upon a Liquidation Event to other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series A Preferred Stock are not paid in full, the holders of the Series A Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full respective preferential amounts to which they are entitled.

 

For purposes of this Article FOURTH, a “Liquidation Event” is any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, and unless otherwise determined by the election of the holders of a majority of the then outstanding Series A Preferred Stock, shall be deemed to be occasioned by, or to include, (a) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger, consolidation, or other transaction in which control of the Corporation is transferred, but, excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation) unless the Corporation’s capital stock of record as constituted immediately prior to such acquisition will, immediately after such acquisition, represent at least 50% of the voting power of the surviving or acquiring entity or (b) a sale, lease, transfer or other disposition, in a single transaction or series of related transactions, of all or substantially all of the assets and/or the intellectual property of the Corporation and its subsidiaries, taken as a whole.

 

5. Voting Rights.

 

5.1 General. Except as may be otherwise provided herein or by law, the Series A Preferred Stock shall vote together with all other classes and series of stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation. Each share of Series A Preferred Stock shall entitle the holder thereof to such number of votes per share on each such action as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Series A Preferred Stock is then convertible.

 

5.2 Board of Directors. The holders of the Series A Preferred Stock, voting as a separate series, shall be entitled to elect two directors of the Corporation (the “Series A Directors”). A vacancy in any directorship elected by the holders of the Series A Preferred Stock shall be filled only by vote or written consent of the holders of the Series A Preferred Stock. Any Series A Director may be removed without cause by, and only by, the affirmative vote of the holders of a majority of the Series A Preferred Stock, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. At any meeting held for the purpose of electing a Series A Director, the presence in person or by proxy of the holders of a majority of the outstanding shares of Series A Preferred Stock shall constitute a quorum for the purpose of electing such Series A Director.

 

5.3 Protective Provisions. So long as at least 85% of the shares of Series A Preferred Stock first issued to the original holders thereof remain outstanding (as adjusted for stock splits, distributions, combinations and similar events), except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or the Certificate of Incorporation of the Corporation, and in addition to any other vote required by law or the Certificate of Incorporation of the Corporation, without the approval of the holders of a majority of the then outstanding Series A Preferred Stock, given in writing or by vote at a meeting, the Corporation will not, either directly or by amendment, merger, consolidation or otherwise:

 

(a) Alter or change the rights, preferences or privileges of the Series A Preferred Stock;

 

(b) Create (by reclassification or otherwise) any new class or series of shares having rights, preferences or privileges senior to or on a parity with the Series A Preferred Stock with respect to redemption, voting, dividends or distribution of assets upon a Liquidation Event;

 

(c) Create (by reclassification or otherwise) any new class or series of shares unless such shares are subject to purchase by Solidus Networks, Inc. and repurchase by the Corporation pursuant to purchase and redemption options satisfactory to the holders of a majority of the outstanding shares of Series A Preferred Stock;

 

(d) Repurchase or redeem any shares of Common Stock (other than the repurchase of unvested shares at cost upon the termination of employment or the provision of services pursuant to equity incentive agreements with employees or service providers giving the Corporation the right to repurchase such shares);

 

(e) Effect, or consent to, a merger, other corporate reorganization, sale of controlling interest by the Corporation or any of its material subsidiaries, or any transaction in which all or substantially all of the assets of the Corporation or any of its material subsidiaries are sold;

 

(f) Effect, or consent to, a voluntary dissolution or liquidation of the Corporation or any of its material subsidiaries;

 

(g) Amend or waive any provision of the Corporation's Amended and Restated Certificate of Incorporation or Bylaws (i) relative to the Series A Preferred Stock or (ii) to increase the authorized number of shares of Common Stock;

 

(h) Pay or declare any dividend or make any other distribution on any shares of Common Stock or Preferred Stock; or

 

(i) Authorize or issue any additional shares of Series A Preferred Stock or any equity securities convertible, directly or indirectly, into additional shares of Series A Preferred Stock.

 

6. Conversion Rights.

 

The holders of the Series A Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

 

6.1 Right to Convert. Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series A Original Issue Price by the Series A Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial conversion price per share for shares of Series A Preferred Stock (“Series A Conversion Price” ) shall be $0.791; provided, however, that the Series A Conversion Price shall be subject to adjustment as set forth in this Section 6.

 

6.2 Automatic Conversion. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Series A Conversion Price at the time in effect for such stock immediately upon the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of the Series A Preferred Stock, voting as a separate class.

 

6.3 Mechanics of Conversion. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such Series A Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.

 

6.4 Fractional Shares. In lieu of any fractional shares to which the holder of Series A Preferred Stock would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the Series A Conversion Price as then in effect. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock of each holder at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion.

 

6.5 Adjustment of Conversion Price. The Series A Conversion Price shall be subject to adjustment from time to time as follows:

 

(a) Special Definitions. For purposes of this Section 6, the following definitions shall apply:

 

(1) “Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities.

 

(ii) “Original Issue Date” shall mean the date on which the first share of Series A Preferred Stock was first issued.

 

(iii) “Convertible Securities” shall mean any evidences of indebtedness, shares or other securities convertible into or exercisable or exchangeable, directly or indirectly, for Common Stock.

 

(iv) “Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Section 6.6, deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable:

 

(A) upon conversion of shares of Preferred Stock;

 

(B) to officers, directors, employees and consultants of the Corporation pursuant to stock incentive plans, or other stock arrangements that have been approved by the Board of Directors of the Corporation including the Series A Directors;

 

(C) pursuant to any event for which adjustment has already been made pursuant to Section 6.7;

 

(D) as a dividend or distribution on the Corporation’s Common Stock or Preferred Stock, where an adjustment is made pursuant to Sections 6.9, 6.10 or 6.11;

 

(E) upon the written consent of the holders of a majority of the Series A Preferred Stock that expressly states that such shares shall not constitute Additional Shares of Common Stock;

 

(F) upon the exercise of Options or conversion of any Convertible Securities outstanding as of the date hereof;

 

(G) pursuant to a loan arrangement or debt financing from a bank, equipment lessor or similar financial institution approved by the Board of Directors, including the Series A Directors;

 

(H) in connection with strategic transactions (but excluding any merger, consolidation, acquisition or similar business combination) that have been approved by the Board of Directors of the Corporation including the Series A Directors; or

 

(I) pursuant to the provisions of Section 6.12 hereof.

 

6.6 Deemed Issue of Additional Shares of Common Stock. Except as provided in Section 6.5(a)(iv) above, in the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Shares of Common Stock are deemed to be issued:

 

(a) no further adjustment in the Series A Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities;

 

(b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Series A Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and

 

(c) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Series A Conversion Price computed upon the Original Issue Date, and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if:

 

(i) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities, and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged; and

 

(ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised.

 

6.7 Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event this Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 6.6) without consideration or for a consideration per share less than the Series A Conversion Price applicable on and immediately prior to such issue, then and in such event, the Series A Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Series A Conversion Price in effect on the date of and immediately prior to such issue by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue, including any Common Stock issuable pursuant to any then outstanding options, rights or warrants for Common Stock or any class or series of stock convertible into Common Stock (including but not limited to Preferred Stock), plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Series A Conversion Price in effect on the date of and immediately prior to such issue; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue, including any Common Stock issuable pursuant to any then outstanding options, rights or warrants for Common Stock or any class or series of stock convertible into Common Stock (including but not limited to Preferred Stock) outstanding immediately prior to such issue, plus the number of such Additional Shares of Common Stock so issued.

 

6.8 Determination of Consideration. For purposes of this Section 6, the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

 

(a) Cash and Property. Such consideration shall:

 

(i) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends;

 

(ii) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and

 

(iii) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined in good faith by the Board of Directors.

 

(b) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 6.6, relating to Options and Convertible Securities, shall be determined by dividing

 

(i) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such options for Convertible Securities and the conversion or exchange of such Convertible Securities by

 

(ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

 

6.9 Adjustments for Stock Dividends, Subdivisions, or Split-ups of Common Stock. If the number of shares of Common Stock outstanding at any time after the filing of this Amended and Restated Certificate of Incorporation is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock without a corresponding increase in the number of shares of Series A Preferred Stock outstanding, then, effective at the close of business upon the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Series A Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be increased in proportion to such increase in outstanding shares of Common Stock.

 

6.10 Adjustments for Combinations of Common Stock. If the number of shares of Common Stock outstanding at any time after the filing of this Amended and Restated Certificate of Incorporation is decreased by a combination of the outstanding shares of Common Stock without a corresponding decrease in the number of shares of Series A Preferred Stock outstanding, then, effective at the close of business upon the record date of such combination, the Series A Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred Stock shall be decreased in proportion to such decrease in outstanding shares of Common Stock.

 

6.11 Adjustments for Reorganizations, Reclassifications, etc. If the Common Stock issuable upon conversion of the Series A Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock or other securities or property, whether by reclassification, a merger or consolidation of this Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of this Corporation (but only if such change is not in connection with an event that is deemed to be a Liquidation Event), or otherwise (other than a subdivision or combination of shares provided for in Section 6.9 or 6.10 above), the Series A Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Series A Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock or securities or other property equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series A Preferred Stock immediately before such event; and, in any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Series A Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Series A Conversion Price) shall thereafter be applicable, as nearly as may be reasonable, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series A Preferred Stock.

 

6.12 Special Adjustment for Issuance of Excluded Warrant Shares. Notwithstanding the provisions of Section 6.5(a)(iv)(F) hereof, if the Corporation issues shares of its Common Stock (“Excluded Warrant Shares”) upon the exercise of Excluded Warrants (as defined below), then for each Excluded Warrant Share issued, the Corporation shall issue to the holder of a share of Series A Preferred Stock upon conversion of such share, in addition to any other shares of Common Stock issuable hereunder as a result of such conversion, a number of shares of Common Stock equal to the number obtained by application of the following formula: (M x WS)/ OP, where,

 

M = the multiple, which is 66%,

 

WS = the total number of Excluded Warrant Shares issued, and

 

OP = the total number of shares of Series A Preferred Stock outstanding.

 

For purposes of this Section 6.12, “Excluded Warrants” means (i) those warrants outstanding as of the filing date of this Amended and Restated Certificate to purchase an aggregate of [8,691,181] ²  shares of Common Stock (as equitably adjusted for any stock dividends, combinations, splits, recapitalizations or similar events with respect to such shares), as they may be amended or exchanged from time to time, the majority of which have an exercise price of at least $0.25 per share (as equitably adjusted for any stock dividends, combinations, splits, recapitalizations or similar events with respect to such shares), (ii) that certain warrant issued by the Corporation pursuant to that certain Securities Purchase Agreement, dated as of February 25, 2005, by and between the Corporation and the Van Wagoner Private Opportunities Fund L.P., as it may be amended or exchanged from time to time, and (iii) those certain warrants issued by the Corporation pursuant to that certain Secured Convertible Note and Warrant Purchase Agreement, dated as of April 21, 2006, by and among the Corporation and each of the purchasers signatory thereto, as they may be amended or exchanged from time to time.

 

6.13 Minimal Adjustments. No adjustment in the Series A Conversion Price need be made if such adjustment would result in a change in the Series A Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Series A Conversion Price, or upon conversion, whichever first occurs.

 

6.14 No Impairment. The Corporation will not through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by the Corporation pursuant to this Section 6, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of Series A Preferred Stock against impairment. This provision shall not restrict the Corporation’s right to amend this Amended and Restated Certificate of Incorporation with the requisite stockholder consent or approval.

 

6.15 Notices of Record Date. In the event that the Corporation shall propose at any time:

 

(a) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus;

 

(b) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights;

 

² [To be updated at time of filing]

 

(c) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or

 

(d) to merge or consolidate with or into any other corporation, or sell all or substantially all its property or business, or to liquidate, dissolve or wind up;

 

then, in connection with each such event, the Corporation shall send to the holders of the Series A Preferred Stock:

 

(i) at least 20 days’ prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto and the amount and character of such dividend, distribution or right) or for determining rights to vote in respect of the matters referred to in clause (c) or (d) above; and

 

(ii) in the case of the matters referred to in clauses (c) or (d) above, at least 20 days’ prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event or the record date for the determination of such holders if such record date is earlier).

 

Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to each holder of Series A Preferred Stock at the address for each such holder as shown on the books of the Corporation.

 

6.16 Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Series A Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all authorized shares of Series A Preferred Stock, whether or not such shares are then outstanding; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all the authorized shares of Series A Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, whether or not such shares are then outstanding, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.

 

6.17 Status of Converted or Contributed Shares. In case any shares of Series A Preferred Stock are converted into Common Stock pursuant to Section 6 hereof or contributed back to the Corporation (through repurchase or otherwise) after the date such shares of Series A Preferred Stock were first issued, all such shares so converted or contributed shall, upon such conversion or contribution, be cancelled and shall not be issuable by the Corporation. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce accordingly the number of authorized shares of the Company’s Series A Preferred Stock.

 

6.18 No Redemption by Corporation. The Series A Preferred Stock is not subject to redemption by the Corporation.

 

 

The Corporation renounces any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, any Excluded Opportunity. An “Excluded Opportunity” is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, (a) any Series A Director who is not an employee of the Corporation or any of its subsidiaries, or (b) any holder of Series A Preferred Stock or any partner, member, director, stockholder, employee or agent of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries (collectively, “Covered Persons”), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Person’s capacity as a director of the Corporation.

FIFTH: All powers of the Corporation, insofar as the same may be lawfully vested by this Amended and Restated Certificate of Incorporation in the Board of Directors, are hereby conferred upon the Board of Directors of the Corporation. In furtherance and not in limitation of that power, the Board of Directors shall have the power to make, adopt, alter, amend and repeal from time to time By-Laws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to adopt, alter, amend and repeal By-Laws made by the Board of Directors.

 

SIXTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived any improper personal benefit. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the DGCL, as so amended. Any repeal or modification of this Article by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.

 

SEVENTH: In connection with the exercise of its judgment in determining what is in the best interest of the Corporation and of the stockholders, when evaluating a Business Combination or a proposal by another person or persons to make a Business Combination or a tender or exchange offer, the Board of Directors of the Corporation hereby is expressly authorized to consider, in addition to the adequacy of the consideration to be paid in connection with such transaction, the following factors and any other factors which it deems relevant, including, without limitation: (i) the long term interests of the Corporation’s stockholders, including among other factors, the consideration being offered in relation to (a) the then current market price of the Corporation’s equity securities and the historical range of such prices, (b) the then current value of the Corporation in a freely negotiated transaction, and (c) the Board of Directors’ then estimate of the future value of the Corporation as an independent entity; (ii) the economic, social and legal effects on the Corporation and its subsidiaries, including among other factors, such effects on the Corporation’s employees, customers, creditors, suppliers and the communities in which they operate or are located; (iii) the business and financial condition and earnings prospects of the acquiring person or persons, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the acquisition, and other likely financial obligations of the acquiring person or persons, and the possible effect of such conditions upon the Corporation, its subsidiaries, and the other elements of the communities in which the Corporation and its subsidiaries operate or are located; and (iv) the competence, experience and integrity of the acquiring person or persons, and its or their management. For the purposes of this Article, “Business Combination” is defined as (a) a tender or exchange offer for any equity securities of the Corporation, (b) a proposal to merge or consolidate the Corporation with or into another company, (c) a proposal to purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, or (d) a proposal to engage in any other form of business combination with the Corporation.

 

 

[Signature Page Follows]

 

IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its [_______________], this ____ day of _________________, 2006.

 

	WINWIN GAMING, INC.
	By: /s/
	[Name]
	[Title]

 

Direct Dial: (302) 472-7301

Email: ***@***

August ________, 2006                            

Solidus Networks, Inc.

101 Second Street, Suite 1100

San Francisco CA 94105

Ladies and Gentlemen:

 

We have been retained as special Delaware counsel to WinWin Gaming, Inc., a Delaware corporation (the “Company”), to furnish this opinion to you in connection with certain specific matters arising under the General Corporation Law of the State of Delaware (“DGCL”) and relating to that certain Second Amended and Restated Joint Venture Agreement, dated as of August ______, 2006 (the “Agreement”), between the Company and Solidus Networks, Inc.,  a Delaware corporation (“PBT”). This opinion is furnished to PBT pursuant to Section 7(i) of the Agreement. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Agreement. Items (a) and (b) below are hereinafter referred to collectively as the “Transaction Documents.”

 

For purposes of the opinions expressed herein, we have examined only the following documents:

 

(a)

the Agreement;

 

(b)

that certain Investment Option Agreement, of even date herewith (the “Investment Option Agreement”), by and between the Company and PBT;

 

(c)

the Bylaws of the Company, as certified on the date hereof by an officer of the Company (the “Bylaws”);

 

(d)

the Certificate of Incorporation of the Company, as amended to date, as certified on the date hereof by an officer of the Company (the “Original Certificate”);

 

(e)

the Certificate of Designation of Powers Designations, Preferences and Relative Participating, Optional or Other Special Rights and Qualifications, Limitations and Restrictions of the Series A-1 Preferred Stock of the Company (the “Certificate of Designation”);

 

(f)

a draft, dated August 28, 2006, of the proposed Amended and Restated Certificate of Incorporation of the Company (the “Proposed Restated Certificate” and, together with the Original Certificate, the Bylaws and the Certificate of Designation, the “Governing Documents”);

 

(g)

a Good Standing Certificate issued by the Secretary of State of the State of Delaware on [_____], 2006 certifying as to the good standing of the Company in Delaware; and

 

(h)

the Secretary’s Certificate of the Company, of even date herewith, as executed by the Secretary of the Company, certifying as to certain factual matters, corporate documents and actions (the “Secretary’s Certificate”).

 

In addition, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments, and of certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such inquiries of such officers and representatives as we have deemed relevant and necessary as the basis for the opinions hereinafter set forth. We have not searched any computer databases or the dockets of any court, governmental or administrative body, agency or other filing office in any jurisdiction or conducted any other independent investigation. As to all questions of fact material to the opinions set forth herein, we have relied solely upon the Secretary’s Certificate and upon the representations and warranties of the Company contained in the Transaction Documents. While we have not conducted any independent investigation to determine facts upon which our opinions are based or to obtain information about which this letter advises you, we confirm that we do not have any knowledge which has caused us to conclude that our reliance and assumptions cited in this paragraph are unwarranted. The term “knowledge,” whenever it is used in this letter with respect to our firm, means the current, actual knowledge of the Proctor Heyman LLP attorneys who have represented the Company in connection with the transactions contemplated by the Transaction Documents.

 

In such examination, we have assumed, with your permission and without independent investigation, (i) the genuineness of all signatures; (ii) the legal capacity of each individual signatory to the Transaction Documents and the Governing Documents; (iii) the authenticity of all documents submitted to us as originals; (iv) the conformity to originals of all documents submitted to us as certified, facsimile or photostatic copies; (v) the authenticity of the originals of such copies; (vi) the due incorporation and organization, valid existence and good standing of PBT and the Company under the laws of the State of Delaware; (vii) the due execution and delivery of the Transaction Documents by PBT and the Company; (viii) the corporate power and authority of PBT to conduct its business and own its properties and to enter into the Transaction Documents and perform its obligations thereunder; (ix) that each of the Transaction Documents has been duly authorized by all necessary corporate action of PBT and is the legal, valid and binding obligation of PBT, enforceable against PBT in accordance with its terms; (x) that each of the Company and PBT has obtained all necessary governmental permits and approvals for conducting its operations; and (xi) the identity and capacity of all individuals acting or purporting to act as public officials.

 

Based solely upon the examination described above, and subject to the comments, assumptions, qualifications, limitations and exceptions stated herein and in the Disclosure Schedule to the Agreement, and in reliance thereon, we are of the opinion that:

 

The Investment Option Agreement has been duly and validly authorized by the Company and, assuming the respective prior filing and effectiveness of the Certificate of Designation and the Proposed Restated Certificate in the form presented to us for review, will constitute a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors’ rights generally, and subject to general equity principles and to limitations on availability of equitable relief, including specific performance.

 

With respect to the opinions set forth above, we assume that the Option identified in the Investment Option Agreement will be exercised in a commercially reasonable manner. We have assumed further that, for purposes of any exercise of that Option, the Company will reserve a sufficient number of authorized but unissued shares of Common Stock of the Company, and that in no event will the Exercise Price (as defined in the Investment Option Agreement) be lower than the par value of the Company’s Common Stock.

 

We are members of the bar of the State of Delaware, and we express no opinion on the laws of any other jurisdiction or on any Delaware law other than the DGCL. We also express no opinion as to (i) any governmental rule or other legal requirement relating to labor, employee rights and benefits, including without limitation the Employee Retirement Income Security Act of 1974, as amended, and taxation, (ii) any choice-of-law or conflict of laws matters, (iii) any patent, trademark or copyright statute, rules or regulations, (iv) any provision appointing one party as an attorney-in-fact of an adverse party, (v) the effect of any state or federal antitrust laws, including, without limitation, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as currently in effect, (vi) any state or federal securities laws, rules or regulations, or (vii) the Company’s rights in or title to any property or assets.

 

The opinions expressed herein are solely for your benefit in connection with the above transactions and may not be relied upon in any manner or for any purpose by any other person. This opinion speaks only as of the date hereof, and we assume no obligation to advise you of any changes to this opinion that may come to our attention after the date hereof. This opinion is limited to the matters expressly stated herein and no opinion or other statement may be inferred or implied beyond the matters expressly stated herein.

 

Very truly yours

 

 

 

Pursuant to Section 151 of the General

Corporation Law of the State of Delaware

 

WINWIN GAMING, INC., a Delaware corporation (the “Corporation”), certifies as follows:

 

FIRST: Under the authority contained in Article FOURTH, Section (b) of the Certificate of Incorporation of the Corporation (the “Certificate of Incorporation”), the Board of Directors of the Corporation has classified 6,000,000 of the 10,000,000 authorized but unissued shares of Preferred Stock of the Corporation, par value $0.01 per share (“Preferred Stock”), as shares of “Series A-1 Preferred Stock.”

 

SECOND: The following resolution was duly adopted by the Board of Directors of the Corporation on August 31, 2006, and such resolution has not been modified and is in full force and effect on the date hereof:

 

RESOLVED, that the Board of Directors hereby creates, from the authorized but unissued shares of Preferred Stock of the Corporation, a series of Preferred Stock consisting of SIX MILLION (6,000,000) shares and having the voting powers, designations, preferences and relative, participating, optional or other rights of the Preferred Stock and the qualifications, limitations and restrictions thereof that are set forth in Article FOURTH of the Certificate of Incorporation and this resolution as follows:

 

1. Designation.

 

The distinctive designation of such series is “Series A-1 Preferred Stock” (hereinafter referred to as the “Series A-1 Preferred Stock”).

 

2. Rank.

 

The Series A-1 Preferred Stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution, rank (a) prior to any other series of Preferred Stock hereafter established by the Board of Directors, and (b) prior to the Common Stock, par value $0.01 per share, of the Corporation (the “Common Stock”).

 

3. Dividends.

 

The holders of the Series A-1 Preferred Stock shall be entitled to receive, out of any funds legally available therefor, noncumulative dividends, payable at a rate per annum equal to 8% of the Series A-1 Original Issue Price (as defined below), when and if declared by the Corporation’s Board of Directors. No dividends on the Common Stock shall be paid unless, in addition to the amount set forth in the previous sentence, the amount of such dividend on the Common Stock is also paid on the Series A-1 Preferred Stock on an as-converted to Common Stock basis.

 

4. Liquidation Preference.

 

Upon a Liquidation Event (as defined below), the holders of shares of Series A-1 Preferred Stock are entitled to receive out of assets of the Corporation available for distribution to stockholders, before any distribution of assets is made to holders of Common Stock, liquidating distributions in the amount of $79.10 per share (as equitably adjusted for any stock dividends, combinations, splits, recapitalizations or similar events with respect to such shares) (the “Series A-1 Original Issue Price”), plus (a) an additional amount equal to eight percent (8%) of the Series A-1 Original Issue Price per year, calculated based on the number of days elapsed prior to the Liquidation Event and (b) any declared, but unpaid dividends (the amount payable to a holder of Series A-1 Preferred Stock upon a Liquidation Event as aforesaid being referred to herein as the “Liquidation Preference”).

 

If upon a Liquidation Event, the Liquidation Preference and any amounts payable upon a Liquidation Event to other shares of stock of the Corporation ranking as to any such distribution on a parity with the Series A-1 Preferred Stock are not paid in full, the holders of the Series A-1 Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full respective preferential amounts to which they are entitled.

 

For purposes of these resolutions, a “Liquidation Event” is any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, and unless otherwise determined by the election of the holders of a majority of the then outstanding Series A-1 Preferred Stock, shall be deemed to be occasioned by, or to include, (a) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger, consolidation, or other transaction in which control of the Corporation is transferred, but, excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation) unless the Corporation’s capital stock of record as constituted immediately prior to such acquisition will, immediately after such acquisition represent at least 50% of the voting power of the surviving or acquiring entity or (b) a sale, lease, transfer or other disposition, in a single transaction or series of related transactions of all or substantially all of the assets and/or the intellectual property of the Corporation and its subsidiaries, taken as a whole.

5. Voting Rights.

 

5.1.

General. Except as may be otherwise provided herein or by law, the Series A-1 Preferred Stock shall vote together with all other classes and series of stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation. Each share of Series A-1 Preferred Stock shall entitle the holder thereof to such number of votes per share on each such action as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Series A-1 Preferred Stock is then convertible.

 

5.2.

Board of Directors. The holders of the Series A-1 Preferred Stock, voting as a separate series, shall be entitled to elect two directors of the Corporation (the “Series A-1 Directors”). A vacancy in any directorship elected by the holders of the Series A-1 Preferred Stock shall be filled only by vote or written consent of the holders of the Series A-1 Preferred Stock. Any Series A-1 Director may be removed without cause by, and only by, the affirmative vote of the holders of a majority of the Series A-1 Preferred Stock, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. At any meeting held for the purpose of electing a Series A-1 Director, the presence in person or by proxy of the holders of a majority of the outstanding shares of Series A-1 Preferred Stock shall constitute a quorum for the purpose of electing such Series A-1 Director.

 

5.3.

Protective Provisions. So long as at least 85% of the shares of Series A-1 Preferred Stock first issued to the original holders thereof remain outstanding (as adjusted for stock splits, distributions, combinations and similar events), except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or the Certificate of Incorporation of the Corporation, and in addition to any other vote required by law or the Certificate of Incorporation of the Corporation, without the approval of the holders of a majority of the then outstanding Series A-1 Preferred Stock, given in writing or by vote at a meeting, the Corporation will not, either directly or by amendment, merger, consolidation or otherwise, except pursuant to the Certificate of Incorporation:

 

(a)

Alter or change the rights, preferences or privileges of the Series A-1 Preferred Stock;

 

(b)

Create (by reclassification or otherwise) any new class or series of shares having rights, preferences or privileges senior to or on a parity with the Series A-1 Preferred Stock with respect to redemption, voting, dividends or distribution of assets upon a Liquidation Event;

 

(c)

Create (by reclassification or otherwise) any new class or series of shares unless such shares are subject to purchase by Solidus Networks, Inc. and repurchase by the Corporation pursuant to purchase and redemption options satisfactory to the holders of a majority of the outstanding shares of Series A-1 Preferred Stock;

 

(d)

Repurchase or redeem any shares of Common Stock (other than the repurchase of unvested shares at cost upon the termination of employment or the provision of services pursuant to equity incentive agreements with employees or service providers giving the Corporation the right to repurchase such shares);

 

(e)

Effect, or consent to, a merger, other corporate reorganization, sale of controlling interest by the Corporation or any of its material subsidiaries, or any transaction in which all or substantially all of the assets of the Corporation or any of its material subsidiaries are sold;

 

(f)

Effect, or consent to, a voluntary dissolution or liquidation of the Corporation or any of its material subsidiaries;

 

(g)

Amend or waive any provision of the Corporation’s Certificate of Incorporation or Bylaws (i) relative to the Series A-1 Preferred Stock or (ii) to increase the authorized number of shares of Common Stock;

 

(h)

Pay or declare any dividend or make any other distribution on any shares of Common Stock or Preferred Stock; or

 

(i)

Authorize or issue any additional shares of Series A-1 Preferred Stock or any equity securities convertible, directly or indirectly, into additional shares of Series A-1 Preferred Stock.

 

6. Conversion Rights.

 

Subject to the provisions of Section 8 below, the holders of the Series A-1 Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

 

6.1.

Right to Convert. Each share of Series A-1 Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series A-1 Original Issue Price by the Series A-1 Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion. The initial conversion price per share for shares of Series A-1 Preferred Stock (“Series A-1 Conversion Price” ) shall be $0.791; provided, however, that the Series A-1 Conversion Price shall be subject to adjustment as set forth in this Section 6.

 

6.2.

Automatic Conversion. Each share of Series A-1 Preferred Stock shall automatically be converted into shares of Common Stock at the Series A-1 Conversion Price at the time in effect for such stock immediately upon the date specified by written consent or agreement of the holders of a majority of the then outstanding shares of the Series A-1 Preferred Stock, voting as a separate class.

 

6.3.

Mechanics of Conversion. Before any holder of Series A-1 Preferred Stock shall be entitled to convert the same into shares of Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such Series A-1 Preferred Stock, and shall give written notice to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A-1 Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A-1 Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.

 

6.4.

Fractional Shares. In lieu of any fractional shares to which the holder of Series A-1 Preferred Stock would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the Series A-1 Conversion Price as then in effect. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Series A-1 Preferred Stock of each holder at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion.

 

6.5.

Adjustment of Conversion Price. The Series A-1 Conversion Price shall be subject to adjustment from time to time as follows:

 

(a)

Special Definitions. For purposes of this Section 6, the following definitions shall apply:

 

(i)

“Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities.

 

(ii)

“Original Issue Date” shall mean the date on which the first share of Series A-1 Preferred Stock was first issued.

 

(iii)

“Convertible Securities” shall mean any evidences of indebtedness, shares or other securities convertible into or exercisable or exchangeable, directly or indirectly, for Common Stock.

 

(iv)

“Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Section 6.6, deemed to be issued) by the Corporation after the Original Issue Date, other than shares of Common Stock issued or issuable:

 

(A)

upon conversion of shares of Preferred Stock;

 

(B)

to officers, directors, employees and consultants of the Corporation pursuant to stock incentive plans, or other stock arrangements that have been approved by the Board of Directors of the Corporation including the Series A-1 Directors;

 

(C)

pursuant to any event for which adjustment has already been made pursuant to Section 6.7;

 

(D)

as a dividend or distribution on the Corporation’s Common Stock or Preferred Stock, where an adjustment is made pursuant to Sections 6.9, 6.10 or 6.11;

 

(E)

upon the written consent of the holders of a majority of the Series A-1 Preferred Stock that expressly states that such shares shall not constitute Additional Shares of Common Stock;

 

(F)

upon the exercise of Options or conversion of any Convertible Securities outstanding as of the date hereof;

 

(G)

pursuant to a loan arrangement or debt financing from a bank, equipment lessor or similar financial institution approved by the Board of Directors, including the Series A-1 Directors;

 

(H)

in connection with strategic transactions (but excluding any merger, consolidation, acquisition or similar business combination) that have been approved by the Board of Directors of the Corporation including the Series A-1 Directors; or

 

(I)

pursuant to the provisions of Section 6.12 hereof.

 

6.6.

Deemed Issue of Additional Shares of Common Stock. Except as provided in Section 6.5(a)(iv) above, in the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Shares of Common Stock are deemed to be issued:

 

(a)

no further adjustment in the Series A-1 Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities;

 

(b)

if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Series A-1 Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; and

 

(c)

upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Series A-1 Conversion Price computed upon the Original Issue Date, and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if:

 

(i)

in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities, and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged; and

 

(ii)

in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised.

 

6.7.

Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event this Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 6.6) without consideration or for a consideration per share less than the Series A-1 Conversion Price applicable on and immediately prior to such issue, then and in such event, the Series A-1 Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Series A-1 Conversion Price in effect on the date of and immediately prior to such issue by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue, including any Common Stock issuable pursuant to any then outstanding options, rights or warrants for Common Stock or any class or series of stock convertible into Common Stock (including but not limited to Preferred Stock), plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Series A-1 Conversion Price in effect on the date of and immediately prior to such issue; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue, including any Common Stock issuable pursuant to any then outstanding options, rights or warrants for Common Stock or any class or series of stock convertible into Common Stock (including but not limited to Preferred Stock) outstanding immediately prior to such issue, plus the number of such Additional Shares of Common Stock so issued.

 

6.8.

Determination of Consideration. For purposes of this Section 6, the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

 

(a)

Cash and Property. Such consideration shall:

(b)

Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 6.6, relating to Options and Convertible Securities, shall be determined by dividing

 

(i)

the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such options for Convertible Securities and the conversion or exchange of such Convertible Securities by

 

(ii)

the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

 

6.9.

Adjustments for Stock Dividends, Subdivisions, or Split-ups of Common Stock. If the number of shares of Common Stock outstanding at any time after the filing of this Certificate of Designation is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split-up of shares of Common Stock without a corresponding increase in the number of shares of Series A-1 Preferred Stock outstanding, then, effective at the close of business upon the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Series A-1 Conversion Price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series A-1 Preferred Stock shall be increased in proportion to such increase in outstanding shares of Common Stock.

 

6.10.

Adjustments for Combinations of Common Stock. If the number of shares of Common Stock outstanding at any time after the filing of this Certificate of Designation is decreased by a combination of the outstanding shares of Common Stock without a corresponding decrease in the number of shares of Series A-1 Preferred Stock outstanding, then, effective at the close of business upon the record date of such combination, the Series A-1 Conversion Price shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of Series A-1 Preferred Stock shall be decreased in proportion to such decrease in outstanding shares of Common Stock.

 

6.11.

Adjustments for Reorganizations, Reclassifications, etc. If the Common Stock issuable upon conversion of the Series A-1 Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock or other securities or property, whether by reclassification, a merger or consolidation of this Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of this Corporation (but only if such change is not in connection with an event that is deemed to be a Liquidation Event), or otherwise (other than a subdivision or combination of shares provided for in Section 6.9 or 6.10 above), the Series A-1 Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Series A-1 Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock or securities or other property equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series A-1 Preferred Stock immediately before such event; and, in any such case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Series A-1 Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Series A-1 Conversion Price) shall thereafter be applicable, as nearly as may be reasonable, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series A-1 Preferred Stock.

 

6.12.

Special Adjustment for Issuance of Excluded Warrant Shares. Notwithstanding the provisions of Section 6.5(a)(iv)(F) hereof, if the Corporation issues, directly or indirectly, shares of its Common Stock (“Excluded Warrant Shares”) upon the exercise of Excluded Warrants (as defined below), then for each Excluded Warrant Share issued, the Corporation shall issue to the holder of a share of Series A-1 Preferred Stock upon conversion of such share, in addition to any other shares of Common Stock issuable hereunder as a result of such conversion, a number of shares of Common Stock equal to the number obtained by application of the following formula: (M x WS)/ OP, where,

 

M = the multiple, which is 66%,

 

WS = the total number of Excluded Warrant Shares issued, and

 

OP = the total number of shares of Series A-1 Preferred Stock outstanding.

 

For purposes of this Section 6.12, “Excluded Warrants” means (i) those warrants outstanding as of the filing date of this Certificate of Designation to purchase an aggregate of 8,691,181 shares of Common Stock (as equitably adjusted for any stock dividends, combinations, splits, recapitalizations or similar events with respect to such shares), as they may be amended or exchanged from time to time, the majority of which have an exercise price of at least $0.25 per share (as equitably adjusted for any stock dividends, combinations, splits, recapitalizations or similar events with respect to such shares), (ii) that certain warrant issued by the Corporation pursuant to that certain Securities Purchase Agreement, dated as of February 25, 2005, by and between the Corporation and the Van Wagoner Private Opportunities Fund L.P., as it may be amended or exchanged from time to time, and (iii) those certain warrants issued by the Corporation pursuant to that certain Secured Convertible Note and Warrant Purchase Agreement, dated as of April 21, 2006, by and among the Corporation and each of the purchasers signatory thereto, as they may be amended or exchanged from time to time.

 

6.13.

Minimal Adjustments. No adjustment in the Series A-1 Conversion Price need be made if such adjustment would result in a change in the Series A-1 Conversion Price of less than $0.01. Any adjustment of less than $0.01 which is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment which, on a cumulative basis, amounts to an adjustment of $0.01 or more in the Series A-1 Conversion Price, or upon conversion, whichever first occurs.

 

6.14.

No Impairment. The Corporation will not through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by the Corporation pursuant to this Section 6, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of Series A-1 Preferred Stock against impairment. This provision shall not restrict the Corporation’s right to amend this Certificate of Designation with the requisite stockholder consent or approval.

 

6.15.

Notices of Record Date. In the event that the Corporation shall propose at any time:

 

(a)

to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus;

 

(b)

to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights;

 

(c)

to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or

 

(d)

to merge or consolidate with or into any other corporation, or sell all or substantially all its property or business, or to liquidate, dissolve or wind up;

 

then, in connection with each such event, the Corporation shall send to the holders of the Series A-1 Preferred Stock:

 

(i)

at least 20 days’ prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto and the amount and character of such dividend, distribution or right) or for determining rights to vote in respect of the matters referred to in clause (c) or (d) above; and

 

(ii)

in the case of the matters referred to in clauses (c) or (d) above, at least 20 days’ prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event or the record date for the determination of such holders if such record date is earlier).

 

Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to each holder of Series A-1 Preferred Stock at the address for each such holder as shown on the books of the Corporation.

 

6.16.

Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Series A-1 Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all authorized shares of Series A-1 Preferred Stock, whether or not such shares are then outstanding; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all the authorized shares of Series A-1 Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, whether or not such shares are then outstanding, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. Notwithstanding the foregoing, from the date of the initial issuance of shares of Series A-1 Preferred Stock until the date of a subsequent issuance of shares of Series A-1 Preferred Stock, if any, the Corporation shall only be required to reserve twenty million (20,000,000) shares of its authorized but unissued Common Stock for the purpose of effecting the conversion of shares of Series A-1 Preferred Stock.

 

6.17.

Status of Converted or Contributed Shares. In case any shares of Series A-1 Preferred Stock are converted into Common Stock pursuant to Section 6 hereof or contributed back to the Corporation (through repurchase or otherwise) after the date such shares of Series A-1 Preferred Stock were first issued, all such shares so converted or contributed shall, upon such conversion or contribution, be cancelled and shall not be issuable by the Corporation. The Corporation may from time to time take such appropriate corporate action as may be necessary to reduce accordingly the number of authorized shares of the Company’s Series A-1 Preferred Stock.

 

6.18.

No Redemption by Corporation. The Series A-1 Preferred Stock is not subject to redemption by the Corporation.

 

6.19.

Limitation on Ability to Convert. No shares of Series A-1 Preferred Stock may be converted hereunder into Common Stock unless and until the Corporation has available sufficient authorized but unissued shares of Common Stock for the purpose of effecting such a conversion.

 

7. Excluded Opportunities.

 

The Corporation renounces any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, any Excluded Opportunity. An “Excluded Opportunity” is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, (a) any Series A-1 Director who is not an employee of the Corporation or any of its subsidiaries, or (b) any holder of Series A-1 Preferred Stock or any partner, member, director, stockholder, employee or agent of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries (collectively, “Covered Persons”), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Person’s capacity as a director of the Corporation.

 

8. Automatic Conversion upon Filing of Restated Charter.

 

8.1.

Rate of Conversion to Series A Preferred Stock. Notwithstanding the provisions of Section 6 above, on the Restated Charter Effective Date (as hereinafter defined), each outstanding share of Series A-1 Preferred Stock shall be automatically converted into a number of shares of Series A Preferred Stock (as hereinafter defined) equal to one-tenth of the number of shares of Common Stock into which such share of Series A-1 Preferred Stock could then be converted pursuant to Section 6.1 above. As used herein, the term “Restated Charter Effective Date” means the date on which an Amended and Restated Certificate of Incorporation of the Corporation (the “Restated Charter”) is filed and becomes effective that increases the authorized capital stock of the Corporation to Seven Hundred Fifty Million (750,000,000) shares of Common Stock and Sixty Million (60,000,000) shares of Preferred Stock, of which all shares are designated “Series A Preferred Stock” having substantially identical rights to the Series A-1 Preferred Stock created hereby, subject to the exception set forth in the next sentence of this Section 8.1 (the “Series A Preferred Stock”). For purposes of the Series A Preferred Stock to be created pursuant to the Restated Charter, references herein to the Series A-1 Original Issue Price shall mean $7.91 per share (as equitably adjusted for any stock dividends, combinations, splits, recapitalizations or similar events with respect to such shares), and references herein to the Series A-1 Conversion Price shall mean the Series A-1 Conversion Price reflecting any adjustments thereto through the Restated Charter Effective Date.

 

8.2.

Mechanics of Conversion. On the Restated Charter Effective Date, all certificates theretofore representing shares of Series A-1 Preferred Stock shall be deemed to represent the number of shares of Series A Preferred Stock provided in Section 8.1 above. On or after the Restated Charter Effective Date, each holder or holders of such certificates shall deliver such certificates, duly endorsed, to the office of the Corporation for reissuance in accordance with the provisions of this Section 8. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder, a certificate or certificates for the number of shares of Series A Preferred Stock to which such holder shall then be entitled as aforesaid. Such conversion shall be deemed to have occurred effective as of the Restated Charter Effective Date.

 

 

[Signature Page Follows]

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be signed in its name and on its behalf this ____ day of August, 2006 by an officer of the Corporation who acknowledges that this Certificate of Designation is the act of the Corporation and that to the best of his or her knowledge, information and belief and under penalties for perjury, all matters and facts contained in this Certificate of Designation are true in all material respects.

	/s/Patrick O. Rogers
	Name: Patrick O. Rogers
	Title: President and CEO